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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Fiscal Year Ended July 3, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From ________ To ________
Commission file number 0-19557
SALTON, INC.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 36-3777824
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1955 FIELD COURT
LAKE FOREST, ILLINOIS 60045
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (847) 803-4600
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
- -------------- -----------------------------------------
Common Stock, $0.01 par value New York Stock Exchange
Rights to Purchase Series A New York Stock Exchange
Junior Participating Preferred Stock
Securities registered pursuant to section 12(g) of the act: None
Indicate by check mark whether this 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 check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of December 27, 2003 was approximately $123,500,000 computed on
the basis of the last reported sale price per share $12.95 of such stock on the
NYSE. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
September 10, 2004 was 11,371,197.
Documents Incorporated By Reference
-----------------------------------
Part III of this Form 10-K incorporates by reference certain information from
the Registrant's proxy statement relating to its 2004 Annual Meeting of
Stockholders (the "2004 Proxy Statement").
SALTON, INC.
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 3, 2004
PAGE
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PART I
Item 1. Business 4
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 4A. Executive Officers of the Registrant 21
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 21
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operation 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 37
Item 8. Consolidated Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 38
Item 9A. Controls and Procedures 39
Item 9B. Other Information 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters 40
Item 13. Certain Relationships and Related Transactions 40
Item 14. Principal Accounting Fees and Services 40
PART IV
Item 15. Exhibits and Financial Statement Schedules 40
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This annual report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including without limitation the statements
under "Risk Factors," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The words "believes," "anticipates,"
"plans," "expects," "intends," "estimates" and similar expressions are intended
to identify forward-looking statements. These forward-looking statements involve
known and unknown risks, uncertainties and other factors, which may cause our
actual results, performance or achievements, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following:
- our ability to realize the benefits we expect from our U.S.
restructuring plan;
- our substantial indebtedness and restrictive covenants in our debt
instruments;
- our ability to access the capital markets on attractive terms or at
all;
- our relationship and contractual arrangements with key customers,
suppliers, strategic partners and licensors;
- pending legal proceedings;
- cancellation or reduction of orders;
- the timely development, introduction and customer acceptance of our
products;
- dependence on foreign suppliers and supply and marketing
constraints;
- competitive products and pricing;
- economic conditions and the retail environment;
- the availability and success of future acquisitions;
- international business activities;
- the risks related to intellectual property rights;
- the risks relating to regulatory matters and other risks and
uncertainties detailed from time to time in our Securities and
Exchange Commission Filings.
All forward looking statements included in this annual report on Form 10-K are
based on information available to us on the date of this annual report. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this annual report on Form 10-K.
3
PART I
As used in this annual report on Form 10-K, "we," "us," "our," "Salton" and "the
Company" refer to Salton, Inc and our subsidiaries, unless the context otherwise
requires.
ITEM 1. BUSINESS
Salton, Inc. is a leading designer, marketer and distributor of branded, high
quality small appliances, home decor and personal care products. Our product mix
includes a broad range of small kitchen and home appliances, electronics for the
home, tabletop products, time products, lighting products, picture frames and
personal care and wellness products. We sell our products under our portfolio of
well recognized brand names such as Salton(R), George Foreman(R),
Westinghouse(TM), Toastmaster(R), Melitta(R), Russell Hobbs(R), Farberware(R),
Ingraham(R) and Stiffel(R). We believe our strong market position results from
our well-known brand names, our high quality and innovative products, our strong
relationships with our customer base and our focused outsourcing strategy.
We currently market and sell our products in North America, South Africa,
Europe, Asia, Australia, New Zealand, South America and the Middle East through
an internal sales force and a network of independent commissioned sales
representatives. We predominantly sell our products to mass merchandisers,
department stores, specialty stores and mail order catalogs. Our customers
include many premier retailers, such as JD Group, Target Corporation, Wal-Mart,
Argos Limited, Sears, Masstores, J.C. Penney Company, Bed, Bath & Beyond, May
Company Department Stores, Dixon Stores Group Limited and Kohl's Department
Stores. We also sell certain of our products directly to consumers through paid
half-hour television programs referred to as infomercials, our Internet websites
and our retail outlets.
We outsource most of our production to independent manufacturers, located
primarily in the Far East. The Company has substantial experience with and
expertise in managing production relationships with third-party suppliers. We
work with our suppliers to provide the lowest possible cost for our customers
while maintaining reasonable gross margins for us.
Salton was incorporated in Delaware in October 1991. Our common stock traded on
the NASDAQ National market under the symbol "SALT" until February 1999. The
Company moved to the New York Stock Exchange at that time and our common stock
has traded under the symbol "SFP" since. Our principal corporate offices are
located at 1955 Field Court, Lake Forest, Illinois 60045.
On May 16, 2003 we increased our 30.8% interest in Amalgamated Appliance
Holdings Limited (AMAP), a South African Company, to a 52.6% interest for $7.5
million. Due to the increase in ownership, AMAP's results from May 16, 2003
onward have been consolidated with Salton in accordance with accounting
principles generally accepted in the United States of America (GAAP) for
financial statement presentation. Prior to May 16, 2003, our investment in AMAP
was accounted for under the equity method and was included in consolidated
assets.
Our fiscal year ends on the Saturday closest to June 30. Unless otherwise
stated, references to years in this report relate to fiscal years rather than
calendar years. The effect of the extra week in 2004 had an insignificant impact
on results.
FISCAL YEAR YEAR ENDED WEEKS
----------- ------------- -----
2004 July 3, 2004 53
2003 June 28, 2003 52
2002 June 29, 2002 52
4
BUSINESS SEGMENT AND PRODUCT INFORMATION
Salton consists of a single operating segment which designs, sources, markets
and distributes a diversified product mix for use in the home. Our product mix
consists of small kitchen and home appliances, electronics for the home,
tabletop products, time products, lighting products, picture frames and personal
care and wellness products. We believe this segmentation is appropriate based
upon Management's operating decisions and performance assessment. Nearly all of
our products are consumer goods within the housewares market, procured through
independent manufacturers, primarily in the Far East. Our products are
distributed through similar distribution channels and customer base using the
marketing efforts of our Global Marketing Team.
BRAND PORTFOLIO
Our brand portfolio contains many time-honored traditions as well as recently
established names within the international housewares industry. We believe this
brand portfolio contains many brands with strong consumer recognition throughout
the world. While many of our brands are owned, we continue to enhance our
portfolio through licensing agreements and strategic alliances. Our brands
include:
Salton(R) Westinghouse(TM) Toastmaster(R) Sansui(TM)
George Foreman(R) One:One(TM) Westclox(R) Atlantis(TM)
Russell Hobbs(R) Breadman(R) Stiffel(R) Big Ben(R)
Melitta(R) Calvin Klein(R) Carmen(R) Pifco(R)
Farberware(R) Ingraham(R) Relaxor(R) Pioneer(TM)
Beyond(TM) Carmengirls.com(TM) Juiceman(R) Pineware(TM)
Andrew Collinge(TM) Block(R) iCEBOX(R) Haden(TM)
We develop and introduce a wide selection of new products and enhance existing
products to satisfy the various tastes, preferences and budgets of consumers and
to service the needs of a broad range of customers. Our product divisions
include Small Appliances and Electronics for the home, Home Decor, and Personal
Care and Wellness.
The following table sets forth the approximate amounts of our net sales by
product division during the periods shown.
(IN THOUSANDS)
JULY 3, 2004 (1) JUNE 28, 2003(1) JUNE 29, 2002
---------------- ---------------- -------------
Small Appliances and Electronics for the Home $ 948,309 $ 778,636 $ 807,799
Home Decor 85,164 87,605 85,957
Personal Care and Wellness Products 43,262 28,667 28,723
---------- ---------- ----------
Total $1,076,735 $ 894,908 $ 922,479
========== ========== ==========
(1) Includes the results of AMAP since May 16, 2003.
5
SMALL APPLIANCES AND ELECTRONICS FOR THE HOME
We design, market and distribute an extensive line of small appliances and
electronics for the home. These products consist of heating appliances, motor
driven appliances, beverage makers, cookware and floor care. In addition, this
division includes products offered by AMAP. These products consist primarily of
electronic devices such as televisions, music and video equipment.
Within our small appliance and electronics division, Salton is known for the
George Foreman branded product line which started as a single grill in 1995.
Since 1995, Salton has sold over 50 million units of the George Foreman line
worldwide. We have established the George Foreman name as a significant product
brand, representing approximately 32.0%, 44.0% and 47.0%, of our sales, in the
fiscal year ended July 3, 2004, June 28, 2003 and June 29, 2002, respectively.
Salton plans to launch the Next Grilleration in the first half of fiscal 2005.
This new line of George Foreman grills will feature removable grilling plates
for easier cleaning.
We also have a joint product relationship with the Columbian Coffee Federation,
the non-profit organization behind the Juan Valdez brand, and Italian
manufacturer Rossi Corporation SRL. Under this relationship, we have agreed to
market and distribute a new coffee brewing system utilizing single-serve pods of
Columbian specialty coffee as well as the pods in the United States and major
global markets. We expect that the coffee brewing system and pods will be
available in the fall of 2004.
HOME DECOR
This broad range of products consist of tabletop products, picture frames, time
and lighting products marketed by our Salton At Home Division.
Salton has an exclusive licensing agreement with Calvin Klein and Thomas O'Brien
for tabletop and picture frame products. Our time products include a variety of
clocks and timers under well recognized brand names such as Ingraham, Westclox
and Timex. Salton also markets lighting products under the Stiffel name acquired
in August 2001.
PERSONAL CARE AND WELLNESS
Salton offers a broad range of personal care and wellness products. These
products include health and fitness equipment, massagers, hair care, beauty,
oral health care and relaxation items.
During fiscal 2004, we launched Walk-Run-Fly-Faster ("WRFF"), a trick bike
geared toward kids and young adults and Walkmill, a lightweight, portable
treadmill.
NEW PRODUCT DEVELOPMENT
We believe that the enhancement and extension of our existing products and the
development of new products are necessary for our continued success and growth.
We design style, features and functionality of our products to meet customer
requirements for quality, performance, product mix and pricing. We work closely
with both retail customers and suppliers to identify consumer needs and
preferences and to generate new product ideas. We evaluate new ideas and seek to
develop and acquire new products and improve existing products to satisfy
industry requirements and changing consumer preferences.
6
STRATEGIC ALLIANCES
We continue to pursue strategic alliances which enable us to (a) further expand
the scope of our product offerings and (b) benefit from the manufacturing
expertise and strong brand names of our strategic partners. During fiscal 2004,
we entered into joint product development relationships with several third
parties to develop, market and distribute new products.
One of our joint product relationships is with Melitta North America, Inc.
Together with Melitta, we have developed the Melitta One:One Coffeemaker which
uses Melitta coffee pods to make an individual mug of fresh coffee in less than
60 seconds. We began marketing and distributing the coffee maker and the pods,
which are manufactured by Melitta, in fiscal 2004.
We also have a joint product relationship with the Columbian Coffee Federation,
the non-profit organization behind the Juan Valdez brand, and Italian
manufacturer Rossi Corporation SRL. Under this relationship, we have agreed to
market and distribute a new coffee brewing system utilizing single-serve pods of
Columbian specialty coffee in the United States and major global markets. We
expect that the coffee brewing system and pods will be available in the first
half of fiscal 2005.
The foregoing strategic alliances provide the opportunity for recurring revenues
through the sale of pods. There are arrangements for sharing the profits derived
from each of these strategic alliances once all expenses incurred by Salton
and/or the other members of the alliance, are reimbursed from cash flow
generated by such alliances. Each of these strategic alliances generally
provides for certain license fees and royalties to our strategic partners and
contain minimum sales requirements and other obligations that, if not satisfied,
may result in termination of the strategic alliance.
CUSTOMERS AND DISTRIBUTION CHANNELS
We currently market and sell our products in North America, South Africa,
Europe, Asia, Australia, New Zealand, South America and the Middle East through
an internal sales force and a network of commissioned sales representatives to
mass merchandisers, department stores, specialty stores and mail order catalogs.
We also sell products directly to consumers through infomercials, Internet
websites and our own retail outlets.
We provide promotional support for our products with the aid of television,
radio and print advertising, cooperative advertising with retailers and in-store
displays and product demonstrations. We believe that these promotional
activities are important to strengthening our brand name recognition.
Our total net sales to our five largest customers during fiscal 2004 were 36.1%
of net sales, with JD Group representing 10.4% of our net sales, Target
Corporation representing 9.1 % of our net sales and Wal-Mart representing 8.1%
of our net sales. Our total net sales to our five largest customers during
fiscal 2003 were 39.3% of net sales, with Wal-Mart representing 12.5% of our net
sales and Target Corporation representing 11.9% of our net sales. In fiscal
2002, our five largest customers were 43.0% of net sales, with Wal-Mart
representing 13.9% of our net sales and Target Corporation representing 12.0% of
our net sales.
During fiscal 2004, 2003 and 2002, sales recorded outside of North America
accounted for 50.6%, 30.7%, 16.6% of total net sales, respectively. These
figures include shipments directly imported to customers in North America. See
Note 13 of the Notes to Consolidated Financial Statements for information
regarding revenues of the Company's geographic areas for each of the three
fiscal years ended July 3, 2004, June 28, 2003 and June 29, 2002.
7
SOURCES OF SUPPLY
Most of our products are manufactured to our specifications by manufactures
located primarily in the Far East. We believe that we maintain good business
relationships with our overseas manufacturers.
We do not maintain long-term purchase contracts with manufacturers and operate
principally on a purchase order basis. We believe we are not currently dependent
on any single manufacturer. However, one supplier located in China, accounted
for 23.7% of our product purchases during 2004, 33.2% of our product purchases
in 2003 and 32.5% of purchases in 2002. We believe that the loss of any one
supplier would not have a long term material adverse effect on our business
because other suppliers with which we do business would be able to increase
production to fulfill our requirements. However, the loss of a supplier could,
in the short term, adversely effect our business until alternative supply
arrangements are secured.
BACKLOG
Our backlog consists of orders for our products, which may be subject to change
and cancellation until shipment. The dollar amount of backlog as of September
10, 2004 was approximately $40.0 million. At September 10, 2003, we had backlog
of approximately $48.0 million. Customer order patterns vary from year to year,
largely because of annual differences in consumer acceptance of product lines,
product availability, marketing strategies, inventory levels of retailers and
differences in overall economic conditions. As a result, comparisons of backlog
as of any date in a given year with backlog at the same date in a prior year are
not necessarily indicative of future results of operations or prospects.
COMPETITION
We compete in the global housewares market. While the Domestic and Western
European markets are strongly developed, the remainder of the global market is
less developed and offers, we believe, significant opportunities for business
expansion. We compete with established companies, some of which have
substantially greater facilities, personnel, financial and other resources than
we have. Competition is based upon price, access to retail shelf space, product
features and enhancements, brand names, new product introductions and marketing.
The retail industry continues to consolidate leaving fewer retail outlets and
increased competition for shelf space. We expect retailers will continue to
consolidate their vendor base by dealing primarily with a smaller number of
suppliers that can offer a diversified product mix, meet logistical and volume
requirements and offer comprehensive levels of customer service and marketing
support. We believe our competitive pricing, high level of customer service,
strategic acquisitions and alliances, as well as our portfolio of well
recognized brand names, new technology and innovative products, position us to
compete and benefit from this environment.
SEASONALITY
Due to holiday buying patterns, sales are traditionally higher in the second
fiscal quarter than in the other quarterly periods and the Company typically
earns a disproportionate share of operating income in this quarter.
8
TRADEMARKS, PATENTS AND LICENSING ARRANGEMENTS
We hold numerous patents and trademarks registered in the United States and
foreign countries for various products and processes. We have registered certain
of our trademarks with the United States Patent and Trademark Office and we
consider these trademarks to be of considerable value and of material importance
to our business. The Company's right to use these trademarks continues as long
as it uses these names.
Salton maintains many licensing and contractual relationships to market and
distribute products under specific names and designs. These licensing
arrangements generally require certain license fees and royalties. Some of our
agreements contain minimum sales requirements that, if not satisfied, may result
in the termination of the agreements.
On April 22, 2002, we entered into an exclusive licensing agreement with
Westinghouse Electric Corporation to use its marquis Westinghouse brand name,
Circle W trademark, and the brand awareness statement "You can be sure . . . if
it's a Westinghouse" on the following product categories: kitchen electrics,
microwaves, fans and heaters, personal care, table top air cleaners and
humidifiers, clocks and vacuums. The agreement, which covers North America,
South America, Africa, Europe, Asia and Australia-New Zealand, has a term ending
in June 2008. Upon completion of the six-year term, the agreement is renewable
at the option of both parties for five additional five year terms. We are
subject to pay minimum royalty payments to Westinghouse beginning in the third
year of the agreement.
REGULATION
We are subject to federal, state and local regulations concerning consumer
products safety. Foreign jurisdictions also have regulatory authorities
overseeing the safety of consumer products. In general, we have not experienced
difficulty complying with such regulations and compliance, with them, has not
had an adverse effect on our business. Our small electric appliance products
sold in the United States are listed by Underwriters Laboratory, Inc. (UL) or
ETL; and similar products sold in other countries are listed with local
organizations similar to UL if required.
PRODUCT WARRANTIES
Our products are generally sold with a limited one-to-three year warranty from
the date of purchase. In the case of defects in material workmanship, we agree
to replace or repair the defective product without charge while under the
warranty time frame.
EMPLOYEES
As of September 10, 2004, we employed approximately 2,600 persons, including
approximately 1,500 persons employed in South Africa by Amalgamated Appliance
Holdings Limited.
ADDITIONAL INFORMATION
We file annual, quarterly and periodic reports, proxy statements and other
information with the SEC. You may obtain and copy any document we file with the
SEC at the SEC's public reference room at 450 Fifth Street, NW., Washington,
D.C. 20549. You may obtain information on the operation of the SEC's public
reference facilities by calling the SEC at 1-800-SEC-0330. You can request
copies of these documents, upon payment of a duplicating fee, by writing to the
SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549-1004. The SEC maintains an Internet website at http://www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. Our SEC filings are
accessible through the Internet at that website.
9
Our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, are
available for download, free of charge, as soon as reasonably practicable after
these reports are filed with the SEC, at our website at
http://www.saltoninc.com. The content of our website is not a part of this
report. You may request a copy of our SEC filings, at no cost to you, by writing
or telephoning us at: Salton, Inc., 1955 Field Court, Lake Forest, Illinois
60045, attention: Marc Levenstein, Assistant Secretary, telephone: (847)
803-4600. We will not send exhibits to the documents, unless the exhibits are
specifically requested and you pay our fee for duplication and delivery.
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
together with the other information contained in this annual report on Form
10-K, in evaluating us and our business before purchasing our securities. In
particular, prospective investors should note that this annual report on Form
10-K contains forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act and that actual results
could differ materially from those contemplated by such statements. See
"Cautionary Statement Regarding Forward-Looking Information." The factors listed
below represent certain important factors which we believe could cause such
results to differ. These factors are not intended to represent a complete list
of the general or specific risks that may affect us. It should be recognized
that other risks may be significant, presently or in the future, and the risks
set forth below may affect us to a greater extent than indicated.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR PAYMENT OBLIGATIONS.
We have a significant amount of indebtedness relative to our equity size. As of
July 3, 2004 we had total consolidated indebtedness of $419.0 million, including
$149.1 million of 12 1/4% senior subordinated notes due 2008 and $125.0 million
of 10 3/4% senior subordinated notes due 2005, excluding $9.6 million related
to the fair value of a monetized fixed to floating interest rate swap on the
notes due 2008 and $4.5 million for the loan notes to Pifco shareholders that
are fully cash collateralized, and total stockholders' equity of $173.6 million.
We also had additional availability under our senior secured revolving credit
facility of $26.5 million. We may incur additional indebtedness in the future,
including through additional borrowings under our credit agreement, subject to
availability.
Our ability to service our debt obligations, including the notes, and to fund
planned working capital needs and planned capital expenditures will depend upon
our future operating performance, which will be affected by prevailing economic
conditions in the markets we serve and financial, business and other factors,
certain of which are beyond our control. We cannot assure you that our business
will generate sufficient cash flow from operations or that future borrowings
will be available under our senior secured revolving credit facility in an
amount sufficient to enable us to service our indebtedness, including the notes,
or to fund our other liquidity needs. If we are unable to satisfy such liquidity
needs, we could be required to adopt one or more alternatives, such as reducing
or delaying capital expenditures, borrowing additional funds, restructuring
indebtedness, selling other assets or operations and/or reducing expenditures
for new product development, cutting other costs, and some or such actions would
require the consent of our senior lenders and/or the holders of our senior
subordinated notes. We cannot assure you that any of such actions could be
effected, or if so, on terms favorable to us, that such actions would enable us
to continue to satisfy our liquidity needs, that such actions would not dilute
the ownership interest of stockholders and/or that such actions would be
permitted under the terms of our senior secured revolving credit facility or the
indentures governing our senior subordinated notes.
10
Our high level of debt could have important consequences for you, such as:
- our debt level makes us more vulnerable to general adverse economic
and industry conditions;
- our ability to obtain additional financing for acquisitions, or to
fund future working capital, capital expenditures or other general
corporate requirements may be limited;
- we will need to use a substantial portion of our cash flow from
operations for the payment of principal of, and interest on, our
indebtedness, which will reduce the amount of money available to
fund working capital, capital expenditures or other general
corporate purposes;
- our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete may be limited;
- our debt level could limit our ability or increase the costs to
refinance indebtedness; and
- our debt level may place us at a competitive disadvantage to our
less leveraged competitors.
OUR DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT COULD ADVERSELY AFFECT
OUR BUSINESS BY LIMITING OUR FLEXIBILITY.
Our senior secured revolving credit agreement and the indentures governing the
12 1/4% senior subordinated notes and the 10 -3/4% senior subordinated notes
impose restrictions that affect, among other things, our ability to incur debt,
pay dividends, sell assets, create liens, make capital expenditures and
investments, merge or consolidate, enter into transactions with affiliates, and
otherwise enter into certain transactions outside the ordinary course of
business. Our senior secured revolving credit agreement also requires us to
maintain specified financial ratios, including a minimum EBITDA, a consolidated
fixed charge coverage ratio and a foreign leverage ratio, and meet certain other
financial tests. Our ability to continue to comply with these covenants and
restrictions may be affected by events beyond our control. If we are unable to
comply with the terms of our senior secured revolving credit agreement and
indentures, or if we fail to generate sufficient cash flow from operations, or
to refinance our debt as described below, we may be required to refinance all or
a portion of our indebtedness or to obtain additional financing. If cash flow is
insufficient and refinancing or additional financing is unavailable because of
our high levels of debt and the debt incurrence restrictions under our senior
secured revolving credit agreement and indentures, we may be forced to default
on our senior secured revolving credit agreement and senior subordinated notes.
In the event of a default under the terms of any of our indebtedness, the debt
holders may accelerate the maturity of our obligations, which could cause
defaults under our other obligations.
For example, during fiscal 2004 we failed to comply with the consolidated and
U.S. fixed charge coverage ratios under our previous senior secured revolving
credit facility. Our previous senior lenders agreed to forbear for a specified
period of time from exercising any of their remedies as a result of our
non-compliance, and we were able to refinance the senior secured revolving
credit agreement with new senior lenders and more flexible financial covenants.
We cannot assure you that we will be able to comply with the financial covenants
and other covenants in our debt instruments or that, if we fail to so comply,
our debt holders would waive our compliance or forbear from exercising their
remedies.
11
WE MUST REFINANCE OUR 10 3/4% SENIOR SUBORDINATED NOTES MATURING IN DECEMBER
2005.
We have $125.0 million of 10 3/4% senior subordinated notes outstanding with a
maturity date of December 15, 2005. We may incur additional debt, or may issue
debt or equity securities, to repay and/or refinance the 10 3/4% senior
subordinated notes on or before maturity. The availability and attractiveness of
any outside sources of funds will depend on a number of factors, some of which
relate to our financial condition and performance, and some of which are beyond
our control, such as prevailing interest rates and general economic conditions.
We cannot assure you that such additional funds will be available, or if
available, that such funds will be on terms we find acceptable.
WE HAVE EXPERIENCED A DECLINE IN DOMESTIC MARKET SALES AND HAVE IMPLEMENTED A
U.S. RESTRUCTURING PLAN.
Although our consolidated sales have increased during fiscal 2004 due to our
international expansion, our domestic sales declined during fiscal 2004. While
our domestic sales improved slightly during the fourth quarter of fiscal 2004,
they are still not sufficient to cover our domestic operating expenses. We are
in the process of implementing a U.S. restructuring plan in the domestic market
in order to align domestic operating expenses with current sales levels.
Although the restructuring of our domestic operations through workforce layoffs,
consolidation of facilities and reduction of certain marketing and advertising
programs will reduce our operating expenses, such actions may also have an
adverse effect on our domestic sales. In addition, our current and prospective
customers and suppliers may decide to delay or not purchase or supply our
products due to the perceived uncertainty caused by our U.S. restructuring plan.
In connection with our U.S. restructuring plan, fiscal 2004 fourth quarter
included a $23.6 million pre-tax charge consisting of $20.2 million related to
the write-down of certain inventory identified for liquidation as part of the
Company's decision to rationalize warehouse and distribution facilities; $1.7
million for the discontinuation of several marketing programs; $1.2 million of
consulting and legal costs directly associated with the development and
implementation of the restructuring plans and $0.5 million in severance.
The fourth quarter also reflected pre-tax charges taken related to the
restructuring efforts and subsequent valuation reviews in light of those
decisions, which include a $6.5 million intangible asset impairment charge and a
$3.8 million fixed asset charge primarily related to tooling.
Other items impacting the 2004 fourth quarter results include a $6.9 million
charge for the establishment of a valuation allowance against certain foreign
income tax credits and a $5.0 million pre-tax loss on the early extinguishment
of debt.
We may be required to take additional similar charges in the future, which could
have a material and adverse effect on our operating results. We cannot assure
you that the U.S. restructuring plan will allow us to better align our domestic
cost structure with our current sales levels.
IF WE WERE TO LOSE ONE OR MORE OF OUR MAJOR CUSTOMERS, OUR FINANCIAL RESULTS
WOULD SUFFER.
Our success depends on our sales to our significant customers. Our total net
sales to our five largest customers during fiscal 2004 were 36.1% of net sales,
with JD Group representing 10.4% of our net sales, Target Corporation
representing 9.1 % of our net sales and Wal-Mart representing 8.1% of our net
sales. Our total net sales to our five largest customers during fiscal 2003 were
39.3% of net sales, with Wal-Mart representing 12.5% of our net sales and Target
Corporation representing 11.9% of our net sales. In fiscal 2002, our five
largest customers were 43.0% of net sales, with Wal-Mart representing 13.9% of
our net sales and Target Corporation representing 12.0% of our net sales. We do
not have long-term agreements with our major customers, and purchases are
generally made through the use of individual purchase orders. A significant
reduction in purchases by any of these
12
major customers or a general economic downturn in retail sales could have a
material adverse effect on our business, financial condition and results of
operations.
OUR DEPENDENCE ON FOREIGN SUPPLIERS SUBJECTS US TO THE RISKS OF DOING BUSINESS
ABROAD.
We depend upon unaffiliated foreign companies for the manufacture of most of our
products. Our arrangements with our suppliers are subject to the risks of doing
business abroad, including:
- import duties;
- trade restrictions;
- production delays due to unavailability of parts or components;
- increase in transportation costs and transportation delays;
- work stoppages;
- foreign currency fluctuations; and
- political and economic instability which could lead to the business
failure of major suppliers.
THE SMALL HOUSEHOLD APPLIANCE INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY.
We believe that competition is based upon several factors, including:
- price;
- access to retail shelf space;
- product features and enhancements;
- brand names;
- new product introductions; and
- marketing support and distribution approaches.
We compete with established companies, some of which have substantially greater
facilities, personnel, financial and other resources than we have. Significant
new competitors or increased competition from existing competitors may adversely
affect our business, financial condition and results of operations.
13
IF THE RETAIL INDUSTRY CONTINUES TO EXPERIENCE AN ECONOMIC SLOWDOWN, OUR
FINANCIAL RESULTS WILL BE ADVERSELY AFFECTED.
We sell our products to consumers through major retail channels, primarily mass
merchandisers, department stores, specialty stores and mail order catalogs. As a
result, our business and financial results can fluctuate with the financial
condition of our retail customers and the retail industry. The current general
slowdown in the retail sector has adversely impacted our net sales of products,
our operating margins and our net income. If such conditions continue or worsen,
it could have a material adverse effect on our business, financial condition and
results of operations.
The current general slowdown in the retail sector has resulted in, and we expect
it to continue to result in, additional pricing and marketing support pressures
on us. Certain of our retail customers have filed for bankruptcy protection in
recent years. We continually monitor and evaluate the credit status of our
customers and attempt to adjust sales terms as appropriate. Despite these
efforts, a bankruptcy filing by, or other adverse change in the financial
condition of, a significant customer could adversely affect our financial
results.
OUR CREDIT RATINGS HAVE BEEN DOWNGRADED AND COULD BE DOWNGRADED FURTHER.
On February 11, 2004, Standard & Poor's downgraded our senior subordinated notes
rating to CCC+.
On May 11, 2004, Standard & Poor's downgraded our senior subordinated notes
rating to CCC-.
On April 13, 2004, Moody's downgraded our senior subordinated notes rating to
Caa2.
On May 14, 2004, Moody's downgraded our senior subordinated notes rating to Ca.
Such downgrades can have a negative impact on our liquidity by reducing
attractive financing opportunities. We cannot assure you that Standard & Poor's
and Moody's will not further downgrade our credit ratings in the future. If our
credit rating is downgraded, it could make our efforts to raise capital more
difficult and have an adverse impact on our financial condition and results of
operation.
ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE AND MAY DISRUPT OUR BUSINESS.
We continue to seek opportunities to acquire businesses and product lines that
fit within our acquisition strategy, including the expansion of our
international sales through the acquisition of complementary businesses. We may
not successfully identify acceptable acquisition candidates or integrate any
acquired operations. For instance, we cannot assure you that the anticipated
benefits of our recent acquisition of a majority interest in Amalgamated
Appliance Holdings Limited will be realized. Opportunities for growth through
acquisitions, future operating results and the success of acquisitions may be
subject to the effects of, and changes in, U.S. and foreign trade and monetary
policies, laws and regulations, political and economic developments, inflation
rate and tax laws.
Our acquisitions of additional businesses and product lines may require
additional capital and the consent of our lenders and may have a significant
impact on our business, financial condition and results of operations. We may
finance acquisitions with internally generated funds, bank borrowings, public
offerings or private placements of debt or equity securities, or through a
combination of these sources. This may have the effect of increasing our debt
and reducing our cash available for other purposes. Our senior secured revolving
credit facility contains restrictions on our ability to do acquisitions.
14
Acquisitions may also require substantial attention from, and place substantial
additional demands upon, our senior management. This may divert senior
management's attention away from our existing businesses, making it more
difficult to manage effectively. In addition, unanticipated events or
liabilities relating to these acquisitions or the failure to retain key
personnel could have a material adverse effect on our business, results of
operations and financial condition.
EXPANDING OUR INTERNATIONAL SALES WILL SUBJECT US TO ADDITIONAL BUSINESS RISKS
AND MAY CAUSE OUR PROFITABILITY TO DECLINE DUE TO INCREASED COSTS.
We intend to pursue growth opportunities internationally. During fiscal 2004,
2003 and 2002, sales recorded outside of North America accounted for 50.6%,
30.7%, 16.6% of total net sales, respectively. Our pursuit of international
growth opportunities may require significant investments for an extended period
before returns on these investments, if any, are realized. International
operations are subject to a number of other risks and potential costs,
including:
- the risk that because our brand names may not be locally recognized,
we must spend significant amounts of time and money to build a brand
identity without certainty that we will be successful;
- unexpected changes in regulatory requirements;
- inadequate protection of intellectual property in foreign countries;
- foreign currency fluctuations;
- transportation costs;
- adverse tax consequences; and
- political and economic instability.
We cannot assure you that we will not incur significant costs in addressing
these potential risks.
LONG LEAD TIMES, POTENTIAL MATERIAL PRICE INCREASES AND CUSTOMER DEMANDS MAY
CAUSE US TO PURCHASE MORE INVENTORY THAN NECESSARY.
Due to manufacturing lead times and a strong concentration of our sales
occurring during the second fiscal quarter, as well as potential material price
increases, may lead us to purchase products and thereby increase inventories
based on anticipated sales and forecasts provided by our customers and our sales
personnel. In an extended general economic slowdown, we cannot assure you that
our customers will order these inventories as anticipated.
IF WE HAVE TO EXPEND SIGNIFICANT AMOUNTS TO REMEDIATE ENVIRONMENTAL LIABILITIES,
OUR FINANCIAL RESULTS WILL SUFFER.
Prior to 2003, we manufactured certain of our products at our owned plants in
the United States and Europe. Our previous manufacturing of products at these
sites exposes us to potential liabilities for environmental damage that these
facilities may have caused or may cause nearby landowners. During the ordinary
course of our operations, we have received, and we expect that we may in the
future receive, citations or notices from governmental authorities asserting
that our facilities are not in compliance with, or require investigation or
remediation under, applicable environmental statutes and regulations. Any
citations or notices could have a material adverse effect on our business,
results of operations and financial condition.
15
THE SEASONAL NATURE OF OUR BUSINESS COULD ADVERSELY IMPACT OUR OPERATIONS.
Our business is highly seasonal, with operating results varying from quarter to
quarter. We have historically experienced higher sales during the second fiscal
quarter primarily due to increased demand by customers for our products
attributable to holiday sales. This seasonality has also resulted in additional
interest expense for us during this period due to an increased need to borrow
funds to maintain sufficient working capital to finance product purchases and
customer receivables for the seasonal period. Lower sales than expected by us
during this period, a lack of availability of product, a general economic
downturn in retail sales or the inability to service additional interest expense
due to increased borrowings could have a material adverse effect on our
business, financial condition and results of operations.
PRODUCT RECALLS OR LAWSUITS RELATING TO DEFECTIVE PRODUCTS COULD ADVERSELY
IMPACT OUR FINANCIAL RESULTS.
We face exposure to product recalls and product liability claims in the event
that our products are alleged to have manufacturing or safety defects or to have
resulted in injury or other adverse effects. We cannot assure you that we will
be able to maintain our product liability insurance on acceptable terms, if at
all, or that product liability claims will not exceed the amount of our
insurance coverage. As a result, we cannot assure you that product recalls and
product liability claims will not adversely affect our business.
THE INFRINGEMENT OR LOSS OF OUR PROPRIETARY RIGHTS COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS.
We regard our copyrights, trademarks, service marks and similar intellectual
property as important to our success. We rely on copyright and trademark laws in
the United States and other jurisdictions to protect our proprietary rights. We
seek to register our trademarks in the United States and elsewhere. These
registrations could be challenged by others or invalidated through
administrative process or litigation. If any of these rights were infringed or
invalidated, our business could be materially adversely affected.
We license various trademarks and trade names from third parties for use on our
products. These licenses generally place marketing obligations on us and require
us to pay fees and royalties based on net sales or profits. Typically, each
license may be terminated if we fail to satisfy minimum sales obligations or if
we breach the license. The termination of these licensing arrangements could
adversely affect our business, financial condition and results of operations.
WE MAY BE SUBJECT TO LITIGATION AND INFRINGEMENT CLAIMS, WHICH COULD CAUSE US TO
INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING OUR PRODUCTS.
We cannot assure you that others will not claim that our proprietary or licensed
products are infringing their intellectual property rights or that we do not in
fact infringe those intellectual property rights. If someone claimed that our
proprietary or licensed products infringed their intellectual property rights,
any resulting litigation could be costly and time consuming and would divert the
attention of management and key personnel from other business issues. We also
may be subject to significant damages or an injunction against use of our
proprietary or licensed products. A successful claim of patent or other
intellectual property infringement against us could harm our financial
condition.
16
COMPLIANCE WITH GOVERNMENTAL REGULATIONS COULD SIGNIFICANTLY INCREASE OUR
OPERATING COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.
Most federal, state and local authorities require certification by Underwriters
Laboratory, Inc., an independent, not-for-profit corporation engaged in the
testing of products for compliance with certain public safety standards, or
other safety regulation certification prior to marketing electrical appliances.
Foreign jurisdictions also have regulatory authorities overseeing the safety of
consumer products. Our products, or additional electrical appliances which may
be developed by us, may not meet the specifications required by these
authorities. A determination that we are not in compliance with these rules and
regulations could result in the imposition of fines or an award of damages to
private litigants.
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, OUR ABILITY TO GROW AND
DEVELOP OUR BUSINESS WILL SUFFER.
Our continued success will depend significantly on the efforts and abilities of
David C. Sabin, Chairman; Leonhard Dreimann, Chief Executive Officer; William B.
Rue, President and Chief Operating Officer and David Mulder, Executive Vice
President, Chief Administrative Officer and Senior Financial Officer. The loss
of the services of one or more of these individuals could have a material
adverse effect on our business. In addition, as our business develops and
expands, we believe that our future success will depend greatly on our ability
to attract and retain highly qualified and skilled personnel. We do not have,
and do not intend to obtain, key-man life insurance on our executive officers.
THE INTERESTS OF OUR SIGNIFICANT STOCKHOLDER MAY CONFLICT WITH YOUR INTERESTS.
As of July 3, 2004 Centre Partners Management LLC and entities directly or
indirectly controlled by Centre Partners beneficially owned in the aggregate
27.0% of our common stock. Centre Partners is able to exercise significant
influence with respect to the election of directors or major corporate
transactions such as a merger or sale of all or substantially all of our assets.
Centre Partners generally has the right to designate two directors as long as it
and its affiliates own at least 12.5% of the total voting power of our
outstanding common stock and one director as long as it and its affiliates own
at least 7.5% of the total voting power of our outstanding common stock. The
interests of Centre Partners may conflict with your interests in certain
circumstances.
TAKEOVER DEFENSE PROVISIONS WHICH WE HAVE IMPLEMENTED MAY ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
Various provisions of Delaware corporation law and of our corporate governance
documents may inhibit changes in control not approved by our board of directors
and may have the effect of depriving stockholders of an opportunity to receive a
premium over the prevailing market price of our common stock in the event of an
attempted hostile takeover or may deter takeover attempts by third parties. In
addition, the existence of these provisions may adversely affect the market
price of our common stock. These provisions include:
- a classified board of directors;
- a prohibition on stockholder action through written consents;
- a requirement that special meetings of stockholders be called only
by the board of directors;
- availability of "blank check" preferred stock.
17
WE DO NOT ANTICIPATE PAYING DIVIDENDS.
We have not paid dividends on our common stock and we do not anticipate paying
dividends in the foreseeable future. We intend to retain future earnings, if
any, to finance the expansion of our operations and for general corporate
purposes, including future acquisitions. In addition, our senior secured
revolving credit agreement and senior subordinated notes contain restrictions on
our ability to pay dividends on our capital stock.
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE
The trading price of our common stock is subject to significant fluctuations in
response to variations in quarterly operating results; changes in earnings
estimates by analysts; announcements of new products by us or our competitors;
changes in the domestic and international economic, political and business
conditions; general conditions in the housewares industry; the recent lack of
confidence in corporate governance and accounting practices; the open short
interest in our common stock; and other events or factors. In addition, the
stock market in general has experienced extreme price and volume fluctuations
that have affected the market prices for many companies that have been unrelated
to the operating performance of these companies. These market fluctuations have
adversely affected and may continue to adversely affect the market price of our
common stock.
ITEM 2. PROPERTIES
Salton leases its principal executive offices based in Lake Forest, Illinois. In
addition, Salton also leases the following:
SALES &
ADMINISTRATIVE WAREHOUSE RETAIL OUTLETS FACTORY
-------------- --------- -------------- -------
North America 12 8 3 0
European Union 4 1 0 0
Africa 2 1 2 1
Asia 1 1 0 0
Australia and New Zealand 3 1 0 0
In addition, Salton also owns the following:
SALES &
ADMINISTRATIVE WAREHOUSE RETAIL OUTLETS FACTORY
-------------- --------- -------------- -------
North America 2 6 0 0
European Union 1 3 0 0
Africa 0 0 0 1
As part of our U.S. Restructuring Plan introduced on May 11, 2004, we continue
to consolidate facilities in an effort to reduce costs and restore profitability
to the domestic operations. We anticipate the following changes to our domestic
properties subsequent to year end:
The Company has identified two leased distribution facilities and three leased
sales/administrative offices to be closed during fiscal 2005.
In addition, the Company also plans to close an owned sales/administrative
office during fiscal 2005.
To accommodate international expansion, we are currently in the process of
renovating a warehouse in Europe. This renovation is scheduled to be complete
during the first half of the 2005 fiscal year.
18
We believe the reduced number of facilities and renovation projects will be
suitable and adequate for our current level of operations, as well as support
future growth.
ITEM 3. LEGAL PROCEEDINGS
SECURITIES CLASS ACTION LAWSUITS
In May, 2004, two stockholder lawsuits, named Mariss Partners, LLP v. Salton,
Inc., Leonhard Dreimann and David M. Mulder and Warren Beeler v. Salton, Inc.,
Leonhard Dreimann and David Mulder, were filed in the United States District
Court for the Northern District of Illinois against us and certain Salton
executives. The complaints allege that the defendants violated the federal
securities laws, specifically Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission,
by making certain alleged false and misleading statements. The plaintiffs seek
unspecified damages on behalf of a purported class of purchasers of our
securities during the period from November 11, 2002 through May 11, 2004. We
believe that these lawsuits are without merit and that we have compelling
defenses to the allegations contained in the complaints. We intend to vigorously
defend against these cases. The outcome of the class action lawsuits cannot be
predicted with certainty, however, we do not believe that this matter will have
a material adverse affect on our business, financial condition or results of
operations. Therefore, no amounts have been accrued for such claims.
PHILIPS
In June, 2003, we received a letter from Philips Domestic Appliances and
Personal Care B.V. (Philips) accusing us of interfering in a contractual
relationship between Philips and a manufacturing source for Salton, Electrical
and 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, we filed
a complaint in the United States District Court for the Northern District of
Illinois seeking a declaratory judgment that we had not infringed the alleged
trade secret rights of Philips and had not tortiously interfered with the
contractual relationship between Philips and E&E.
Philips response has been to file a series of lawsuits against us. On October
23, 2003, Philips filed a counterclaim against us in the Northern District of
Illinois, Declaratory Judgment case, reiterating the allegations of Philips'
June letter and adding a claim for copyright infringement. The counterclaim
sought to enjoin the distribution of the One:One in the United States and money
damages. 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, we 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.
On January 6, 2004, Philips filed a new action in the United States District
Court for the Northern District of Illinois, against us alleging violations of
U.S. Copyright Law seeking to enjoin us 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 ground that it was barred by the Court's dismissal
decision in the prior action. Philips appealed this dismissal and the appeal was
consolidated with the appeal of the earlier case in the United States Court of
Appeals for the Seventh Circuit.
19
On November 24, 2003, Philips and Sara Lee NV also filed a patent infringement
suit against us asserting that the One:One infringed a U.S. patent. Like the
other actions, this case seeks damages and injunctive relief. The case is
pending as in the United States District Court for the Northern District of
Illinois.
Philips has also filed an action for copyright infringement in the United
Kingdom. This suit seeks unspecified money damages and injunctive relief. This
case currently pends in the United Kingdom. E&E has intervened in that
litigation, and it is anticipated E&E will seek to have the suit dismissed in
favor of the Hong Kong action where the issue is already being litigated.
The outcome of the foregoing legal matters cannot be predicted with certainty,
however we do not believe that these actions will have a material adverse affect
on our business, financial condition or results of operations. Therefore, no
amounts have been accrued for such claims.
HOMEPLACE OF AMERICA
Homeplace of America, a company in liquidation under the United States
Bankruptcy Code, brought a lawsuit for recovery of preferential payments made to
Salton and its subsidiary, Toastmaster, during the 90 day "preference" period
prior to filing for bankruptcy. Homeplace's total claimed preferences are
approximately $3.5 million. Salton believes that it has meritorious defenses to
all of the preference claims. The lawsuit is scheduled for trial in the U.S.
Bankruptcy Court for the District of Delaware, during the first week of November
2004. Salton does not believe that this matter will have a material adverse
affect on its business, financial condition or results of operations. Therefore,
no material amounts have been accrued for such claims.
ENVIRONMENTAL
The Company has accrued approximately $0.2 million for the anticipated costs of
environmental remediation at four of our sites. Although such costs could exceed
that amount, we believe any such excess will not have a material adverse effect
on the financial condition or annual results of operations of the Company.
OTHER
We are a party to various other actions and proceedings incident to our normal
business operations. We believe that the outcome of any litigation will not have
a material adverse effect on our business, financial condition or results of
operations. We also have product liability and general liability insurance
policies in amounts we believe to be reasonable given our current level of
business. Although historically we have not had to pay any material product
liability claims, it is conceivable that we could incur claims for which we are
not insured.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
20
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their respective ages as of September 10, 2004, are
as follows:
NAME AGE POSITION
---- --- --------
David C. Sabin 54 Chairman
Leonhard Dreimann 56 Chief Executive Officer
William B. Rue 57 President and Chief Operating Officer
David M. Mulder 43 Executive Vice President, Chief Administrative
Officer and Senior Financial Officer
DAVID C. SABIN has served as Chairman of the Company since September 1991 and
has served as Secretary and a director of the Company since its inception in
August 1988 and is a founder of the Company.
LEONHARD DREIMANN has served as Chief Executive Officer and a director of the
Company since its inception in August 1988 and is a founder of the Company. From
1988 to July 1998, Mr. Dreimann served as President of the Company. From 1987 to
1988, Mr. Dreimann served as president of the Company's predecessor Salton,
Inc., a wholly-owned subsidiary of SEVKO, Inc. Prior to 1987, Mr. Dreimann
served as managing director of Salton Australia Pty. Ltd., a distributor of
Salton brand kitchen appliances.
WILLIAM B. RUE has been a director of the Company since August 1998. Mr. Rue has
served as President of the Company since August 1998, as Chief Operating Officer
of the Company since December 1994 and as Chief Financial Officer and Treasurer
of the Company from September 1988 to January 1999. He is also a founder of the
Company. From 1985 to 1988, he was Treasurer of SEVKO, Inc. and from 1982 to
1984 he was Vice President-Finance of Detroit Tool Industries Corporation. Prior
to that time, Mr. Rue had been employed since 1974 by the accounting firm of
Touche Ross & Co.
DAVID M. MULDER serves as the Executive Vice President, Chief Administrative
Officer and Senior Financial Officer. Mr. Mulder is responsible for overseeing
corporate finance, U.S. operations, U.S. information technology and U.S. human
resources. Prior to joining the Company, Mr. Mulder recently served as Chief
Financial and Administrative Officer of KoSa, an international manufacturing
company in Houston, Texas. From 1995 to 2000, he held a number of senior level
positions at Fruit of the Loom, a consumer products company. Mr. Mulder's most
recent position at Fruit of the Loom was a corporate Executive Vice President
and the Chief Executive Officer of their European division.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The registrant's common stock has traded on the New York Stock Exchange under
the symbol "SFP" since February 26, 1999. From October 1991 until February 25,
1999, our common stock traded on the NASDAQ National Market under the symbol
"SALT." The following table sets forth, for the periods indicated, the high and
low sales prices for the common stock as reported on the New York Stock
Exchange.
21
HIGH LOW
----- ----
FISCAL 2004
First Quarter 11.75 8.92
Second Quarter 14.13 9.25
Third Quarter 15.20 8.46
Fourth Quarter 10.00 2.50
FISCAL 2003
First Quarter 14.43 7.61
Second Quarter 14.40 8.01
Third Quarter 11.60 8.60
Fourth Quarter 13.50 8.13
DIVIDENDS
We have not paid dividends on our common stock and we do not anticipate paying
dividends in the foreseeable future. We intend to retain future earnings, if
any, to finance the expansion of our operations and for general corporate
purposes, including future acquisitions. In addition, our senior secured
revolving credit agreement and senior subordinated notes contain restrictions on
our ability to pay dividends on our capital stock.
STOCKHOLDER RIGHTS PLAN
On June 28, 2004, the Board of Directors of Salton adopted a stockholder rights
plan (the "Rights Plan") pursuant to which a dividend consisting of one
preferred stock purchase right (a "Right") was distributed for each share of
Common Stock held as of the close of business on July 9, 2004, and is to be
distributed to each share of Common Stock issued thereafter until the earlier of
(i) the Distribution Date (as defined in the Rights Plan), (ii) the Redemption
Date (as defined in the Rights Plan) or (iii) June 28, 2014. The Rights Plan is
designed to deter coercive takeover tactics and to prevent an acquirer from
gaining control of us without offering fair value to our stockholders. The
Rights will expire on June 28, 2014, subject to earlier redemption or exchange
as provided in the Rights Plan. Each Right entitles the holder thereof to
purchase from us one one-thousandth of a share of a new series of Series B
Junior Participating Preferred Stock at a price of $45.00 per one one-thousandth
of a share, subject to adjustment. The Rights are generally exercisable only if
a Person (as defined) acquires beneficial ownership of 20 percent or more of our
outstanding Common Stock.
A complete description of the Rights, the Rights Agreement between us and UMB
Bank, N.A., as Rights Agent, and the Series B Junior Participating Preferred
Stock is hereby incorporated by reference from the information appearing under
the caption "Item 1. Description of the Registrant's Securities to be
Registered" contained in the Registration Statement on Form 8-A filed on June
28, 2004.
COMMON STOCK
The Certificate of Incorporation authorizes the issuance of 40,000,000 common
shares, par value $0.01 per share. As of September 10, 2004, there were
approximately 317 holders of record of our common stock.
PREFERRED STOCK
The Certificate of Incorporation authorizes the issuance of 2,000,000 preferred
shares, par value $0.01 per share.
22
We have 40,000 outstanding shares of convertible preferred stock. The
convertible preferred stock is generally non-dividend bearing; however, if we
breach in any material respect any of our material obligations in the preferred
stock agreement or the Certificate of Incorporation relating to the convertible
preferred stock, the holders of convertible preferred stock are entitled to
receive quarterly cash dividends on each share of convertible preferred stock
from the date of such breach until it is cured at a rate per annum equal to 12
- -1/2% of the Liquidation Preference as defined below. The payment of dividends
is limited by the terms of our credit agreement.
Each holder of the convertible preferred stock is generally entitled to one vote
for each share of Salton common stock which such holder could receive upon the
conversion of the convertible preferred stock. Each share of convertible
preferred stock is convertible at any time into that number of shares of Salton
common stock obtained by dividing $1,000 by the Conversion Price in effect at
the time of conversion. The "Conversion Price" is equal to $11.33, subject to
certain anti-dilution adjustments.
In the event of a Change of Control (as defined), each holder of shares of
convertible preferred stock has the right to require us to redeem such shares at
a redemption price equal to the Liquidation Preference plus an amount equivalent
to interest accrued thereon at a rate of 7% per annum compounded annually on
each anniversary date of July 28, 1998 for the period from July 28, 1998 through
the earlier of the date of such redemption or July 28, 2003.
In the event of a liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, holders of the Convertible Preferred Stock are
entitled to be paid out of the assets of the Company available for distribution
to its stockholders an amount in cash equal to $1,000 per share, plus the amount
of any accrued and unpaid dividends thereon (the "Liquidation Preference"),
before any distribution is made to the holders of any Salton common stock or any
other of our capital stock ranking junior as to liquidation rights to the
convertible preferred stock.
We may optionally convert in whole or in part, the convertible preferred stock
at any time on and after July 15, 2003 at a cash price per share of 100% of the
then effective Liquidation Preference per share, if the daily closing price per
share of our common stock for a specified 20 consecutive trading day period is
greater than or equal to 200% of the then current Conversion Price. On September
15, 2008, we will be required to exchange all outstanding shares of convertible
preferred stock at a price equal to the Liquidation Preference per share,
payable at the Company's option in cash or shares of Salton common stock.
As of September 10, 2004 there were 40,000 shares of the convertible preferred
stock outstanding, held by 7 shareholders of record. There is no established
market for the convertible preferred stock.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data as of and for the fiscal years ended July 3, 2004,
June 28, 2003, June 29, 2002, June 30, 2001 and July 1, 2000 have been derived
from and should be read in conjunction with, our audited consolidated financial
statements, including the notes thereto.
23
FIVE-YEAR SUMMARY OF FINANCIAL DATA
---------------------------------------------------------------------------------
(IN THOUSANDS) JULY 3, 2004(1) JUNE 28, 2003 JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
--------------- ------------- ------------- ------------- ------------
STATEMENT OF INCOME:
Net sales(2) $ 1,076,735 $ 894,908 $ 922,479 $ 792,114 $ 837,302
Cost of goods sold 751,012 578,826 544,147 474,256 467,250
Distribution expenses 72,088 58,475 60,831 49,395 37,639
--------------- ------------- ------------- ------------- ------------
Gross profit 253,635 257,607 317,501 268,463 332,413
Selling, general, and administrative expenses 273,257 208,203 223,577 156,885 156,749
Lawsuit settlements, net - - 2,580 - -
Impairment loss on goodwill and intangible assets 40,855 800 - - -
Restructuring costs 1,798 - - - -
--------------- ------------- ------------- ------------- ------------
Operating (loss) income (62,275) 48,604 91,344 111,578 175,664
Interest expense, net 40,192 40,204 44,431 37,732 28,761
Loss on early extinguishment of debt 5,049 - - - -
Fair market value adjustment on derivatives - (2,516) 2,372 - -
--------------- ------------- ------------- ------------- ------------
(Loss) Income before income taxes (107,516) 10,916 44,541 73,846 146,903
Income tax (benefit) expense (20,089) 2,685 14,394 27,692 55,087
Minority interest, net of tax 7,745 260 - - -
--------------- ------------- ------------- ------------- ------------
Net (loss) income $ (95,172) $ 7,971 $ 30,147 $ 46,154 $ 91,816
=============== ============= ============= ============= ============
Weighted average common shares outstanding 11,258 11,152 11,005 11,750 11,221
Net (loss) income per share:
Basic $ (8.45) $ 0.71 $ 2.74 $ 3.93 $ 8.18
Weighted average common shares and common
Equivalent shares outstanding 11,258 15,114 15,042 16,065 15,526
Net (loss) income per share:
Diluted $ (8.45) $ 0.53 $ 2.00 $ 2.87 $ 5.91
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 306,104 $ 353,492 $ 279,519 $ 310,648 $ 197,671
Total assets 854,552 812,372 823,927 722,884 564,276
Total debt(3) 418,991 374,152 460,066 402,713 327,220
Stockholders' equity 173,576 253,904 245,036 211,497 173,808
Dividends Paid - - - - -
(1) Includes the effect of costs related to our U.S. restructuring plan and
other items excluded from senior management's assessment of the operating
performance of Salton's business (See "Year in Review" in Management's
Discussion and Analysis of Financial Condition and Results of Operations) which
on a combined basis, decreased income before income taxes $73.2 million, $57.0
million after tax ($5.06 per basic share).
(2) AMAP's results from May 16, 2004 onward have been consolidated with Salton's
financial statements.
(3) Excludes $4.5 million in fiscal 2004, $4.6 million in fiscal 2003, and $18.2
million in fiscal 2002 related to the loan notes to Pifco shareholders which
were fully cash collateralized and excludes $9.6 million in fiscal 2004, $12.1
million in fiscal 2003, and $8.4 million in fiscal 2002 related to the fair
value of a monetized fixed to floating interest rate swap on the notes due 2008.
Certain prior year information has been reclassified to conform with current
year presentation.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Salton designs, markets and distributes small home appliances and electronics
for the home, home decor and personal care products under recognized brand names
in the International Housewares Industry. Our product mix consists of kitchen
and home appliances, electronics, tabletop products, time products, lighting
products, picture frames and personal care and wellness products. In recent
years, we have expanded our international presence and strengthened our product
offerings through strategic acquisitions and alliances as well as internal
international growth.
ACQUISITIONS
On May 16, 2003 we increased our 30.8% interest in Amalgamated Appliance
Holdings Limited (AMAP), a South African Company, to a 52.6% interest for $7.5
million. Due to the increase in ownership, AMAP's results from May 16, 2003
onward have been consolidated with Salton in accordance with accounting
principles generally accepted in the United States of America (GAAP) for
financial statement presentation. Prior to May 16, 2003, our investment in AMAP
was accounted for under the equity method and was included in consolidated
assets.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," which amends and clarifies financial accounting and reporting for
derivative instruments. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The provisions of SFAS 149 did not have any impact on the
Company's Consolidated Financial Statements.
In December 2003, the FASB issued a revision to SFAS No. 132, "Employer's
Disclosures About Pensions and Other Postretirement Benefits" (SFAS No. 132R).
SFAS No. 132R changes employers' disclosures about pension plans and other
postretirement benefits and requires additional disclosures about assets,
obligations, cash flows and net periodic benefit cost. The Statement is
effective for annual periods ending after December 15, 2003, and interim periods
beginning after December 15, 2003. The Company adopted SFAS No. 132R as of March
27, 2004, resulting in additional disclosures in the Company's Consolidated
Financial Statements (See Note 9 "Employee Benefit Plans").
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities (VIEs). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46 (FIN
46R) to clarify some of the provisions of the interpretation and to defer the
effective date of implementation for certain entities. Under the guidance of FIN
46R, public companies that have interests in VIE's that are commonly referred to
as special purpose entities are required to apply the provisions of FIN 46R for
periods ending after December 15, 2003. A public company that does not have any
interests in special purpose entities but does have a variable interest in a VIE
created before February 1, 2003, must apply the provisions of FIN 46R by the end
of the first interim or annual reporting period ending after March 14, 2004. The
Company adopted FIN 46 and FIN 46R during the year ended July 3, 2004. The
adoption of FIN 46 had no impact on the financial condition or results of
operations since the Company does not have investments in VIE's.
25
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, 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
ALLOWANCE FOR DOUBTFUL ACCOUNTS - We calculate allowances for estimated losses
resulting from the inability of our customers to make required payments. We
utilize a number of tools to evaluate and mitigate our customer credit risk.
Management evaluates each new customer account using a combination of some or
all of the following sources of information: credit bureau reports, industry
credit group reports, customer financial statement analysis, customer supplied
credit references and bank references. Appropriate credit limits are set in
accordance with our credit risk policy and monitored on an on-going basis.
Existing customers are monitored and credit limits are adjusted according to
changes in their financial condition. Based on the procedures outlined herein,
and the fact that no customer accounted for 10.0% or more of the gross accounts
receivable at July 3, 2004 and June 28, 2003, we believe there is no
concentration of credit risk.
Our exposure to credit loss on our foreign currency forward contracts in the
event of non-performance by the counterparties is believed to be remote due to
the requirements that the counterparties consist only of major financial
institutions that have a long-term credit rating of single-A or better from both
Moody's and Standard& Poor's. Additionally, our foreign currency forward
contracts generally have a term of one year or less.
INVENTORY VALUATION - The Company values inventory at the lower of cost or
market, and regularly reviews 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, the Company writes down the related inventory to
the estimated net realizable value. The Company regularly evaluates the
composition of inventory to identify slow-moving and obsolete inventories to
determine if additional write-downs are required. The Company's domestic
inventories are generally determined by the last-in, first-out (LIFO) method.
These inventories account for approximately 53.7% and 67.6% of the Company's
inventories as of 2004 and 2003, respectively. All remaining inventory cost is
determined on the first-in, first-out basis. See Note 4 "Inventories."
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.
26
INTANGIBLE ASSETS - We record intangible assets through transactions and
acquisitions. The cost of acquisitions are 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 assessed for annually for
impairment. Other intangible assets that have an indefinite life are also
assessed annually 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 a variety of techniques including discounted future cash flows,
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.
YEAR IN REVIEW
In 2004, Salton continued its focus on increasing international opportunities
and during the fourth quarter, launched an effort to return its domestic
business to profitability. Fiscal year 2004 was our first full year of
consolidating the financial results of AMAP. We also started expansion into
Brazil, Italy, Spain and Germany. However, our international growth was offset
by the continued decline in sales and profitability of the domestic operations.
As part of an effort to improve profitability in our domestic operations, we
announced a U.S. restructuring plan in the domestic market in order to better
align domestic operating costs with current sales levels. We expect to generate
at least $40.0 million in annual cost savings from our U.S. restructuring plan
when fully implemented in fiscal 2005 through a reduction in operating expenses
and a consolidation of U.S. operations.
We completed the initial phase of this U.S. restructuring plan by reducing
headcount in the domestic operations by approximately 25.0% in the fourth
quarter of fiscal 2004. The salaried headcount reduction is expected to reduce
annualized costs by $11.5 million.
In connection with the U.S. restructuring plan and subsequent valuation reviews
in light of those decisions, we recorded certain pretax charges in the fourth
quarter as follows:
- $20.2 million write-down of certain inventory identified for
liquidation as part of the Company's decision to rationalize
warehouse and distribution facilities
- $6.5 million of intangible asset impairment charge associated with
trademarks effected by the restructuring plan
- $3.8 million fixed assets charge related primarily to tooling
- $1.7 million write-down of costs associated with several marketing
programs that were discontinued
- $1.2 million in consulting and legal costs directly associated with
the development and implementation of the U.S. restructuring plan;
and
- $0.5 in termination and severance costs associated with the
headcount reduction in the U.S.
27
Other items impacting the 2004 third quarter results include:
- $34.3 million impairment charge consisting of consolidated goodwill
and certain other indefinite lived intangible assets (See
"Impairment Loss on Goodwill and Intangible Assets").
Other items impacting the 2004 fourth quarter and fiscal year-end results
include:
- $6.9 million valuation allowance against certain foreign income tax
credits
- $5.0 million pre-tax loss on the early extinguishment of debt
The restructuring costs and other items listed above affected comparability of
reported operating income, net income and earnings per share for the fourth
quarter and fiscal year 2004.
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of net
sales for the years ended:
JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
------------ ------------- -------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 69.8(1) 64.7 59.0
Distribution expenses 6.7 6.5 6.6
----- ----- -----
Gross profit 23.5 28.8 34.4
Selling, general and administrative expense 25.4 23.3 24.2
Lawsuit settlements, net 0.0 0.0 0.3
Impairment loss on goodwill and intangible assets 3.8(2) 0.1 0.0
Restructuring costs 0.2 0.0 0
----- ----- -----
Operating (loss) income (5.9)% 5.4% 9.9%
===== ===== =====
(1) Includes $ 24.0 million (2.2% of net sales ) of fourth quarter
restructuring costs (See "Year in Review").
(2) Consists of an aggregate of $40.9 million of impairment charges (See
"Impairment Loss on Goodwill and Intangible Assets").
2004 COMPARED TO 2003
NET SALES AND GROSS PROFIT
Salton reached $1.1 billion in net sales for 2004 compared to the $894.9 million
reported in 2003. The largest increase was the inclusion of a full year of
AMAP's results which amounted to $206.4 million of additional sales. In
addition, Salton had $29.2 million of exchange rate gain and $12.6 million of
other foreign sales increases. The other foreign sales increases were primarily
driven by the George Foreman and Russell Hobbs product lines. While Foreman
sales continued to increase internationally, domestic volume decline in the
first half of the year was the primary reason for a $66.5 million decrease in
domestic sales for the fiscal year. Management believes Foreman will continue
its success overseas as we expand our foreign operations and introduce the
Foreman Grill in new markets. In addition, the launch of the new George Foreman
Grills with removable plates (The Next Grilleration) is expected to help
accelerate the replacement cycle among existing customers in North America, a
factor in further stabilizing domestic sales volumes.
28
Gross profit for 2004 declined $4.0 million from $257.6 million in 2003 to
$253.6 million in 2004. As a percent of net sales, it was 23.5% in 2004 compared
to 28.8% in 2003, a decrease of 5.3%. These decreases are attributed to a $65.2
million decline in domestic gross profit associated with a volume and mix shift
from higher margin George Foreman products to lower margin new products such as
the Westinghouse electrics, Melitta One:One and various other new products
introduced at the International Housewares Show. As part of the $65.2 million of
domestic decline in operations, we incurred $24.0 million of fourth quarter
charges in connection with the U.S. restructuring plan announced on May 11,
2004. These costs included inventory and tooling write-downs associated with the
Company's decision to rationalize warehouse and distribution facilities and exit
certain marketing programs. The decreases caused by domestic gross profit
declines and U.S. restructuring costs were partially offset by a $44.7 million
increase due to the inclusion of a full year of AMAP's gross profit, $9.6
million in foreign currency gains and $6.9 million in other foreign gross profit
increases associated with growth and expansion of our international
subsidiaries.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 25.4% of net sales or
$273.3 million in 2004 compared to 23.3% of net sales or $208.2 million for
2003. The $65.1 million increase in selling, general and administrative was due
to increases of $39.7 million driven by international growth from expansion,
including $22.4 million from AMAP and $9.8 million from other foreign increases
as the Company launched new products internationally and expanded operations on
the European Continent and in Brazil. The remaining $7.5 million were of
international increases attributed to foreign currency fluctuations.
Selling, general and administrative expenses for domestic operations increased
$25.4 million. As a result of approximately $30.0 million of additional
expenditures for television, royalty expense, certain other media and
cooperative advertising and trade show expenses. Of the $30.0 million,
approximately $8.0 million related to cooperative advertising and promotional
activities associated with an aggressive retailer position following product
shortages during the holidays. It was management's intention to drive additional
sales through significant new product introductions. We had varied success on
the new product launches and continued to experience declines in overall
domestic sales in the first three quarters, which was the primary driver of the
U.S. restructuring plans, launched in the fourth quarter. As part of those
plans, we incurred a $1.7 million charge associated with the termination of
certain advertising and marketing programs as part of our U.S. restructuring
plan. These increases from domestic operations were offset by $6.3 million of
various other insignificant decreases in other selling, general and
administrative expense categories.
IMPAIRMENT LOSS ON GOODWILL AND INTANGIBLE ASSETS
Effective with the beginning of fiscal year 2003, we adopted SFAS No. 142,
"Goodwill and Other Intangible Assets". Upon adoption of SFAS No. 142, we
discontinued the amortization of goodwill and indefinite lived intangible
assets. Goodwill and intangible assets that are not amortized are subject to a
fair-value based impairment test on an annual basis or more frequently if
circumstances indicate a potential impairment.
The annual test for impairment of goodwill and other intangible assets is
conducted during the fourth quarter of each fiscal year. At the beginning of
2004, management believed that projected operating results would validate the
amount of goodwill and other intangible assets on the financial statements. As
discussed in our 2003 Annual Report on Form 10-K filed with the Securities and
Exchange Commission, shortfalls in future operating results or the application
of more conservative market assumptions could have an adverse affect on the
comparison of fair value to carrying value for goodwill and other intangible
assets. Management determined that the combination of the shortfall beginning in
the third quarter in meeting projected operating results along with the our
inability to meet financial debt covenants required for the senior secured
revolving credit facility for two consecutive quarters and a downgrade in the
debt rating could have such an adverse effect, and as such, an interim
impairment test was necessary. A valuation of goodwill and other intangible
assets
29
was conducted. The valuation incorporated performance through the third quarter.
The valuation did not incorporate the future U.S. restructuring plan that
management started in the fourth quarter of fiscal 2004.
As a result, we determined that the implied fair value of goodwill and the fair
value of certain other indefinite lived intangible assets were less than their
carrying values. We recorded a non-cash impairment charge totaling $34.3 million
pre-tax or $29.9 million net of tax, consisting of consolidated goodwill of
$28.2 million and certain other indefinite lived intangible assets associated
with iCEBOX of $6.1 million.
In conjunction with the U.S. restructuring plan and extensive individual product
line reviews, we completed our annual test for impairment of indefinite lived
intangible assets as of the end of the fourth quarter. As a result, we
determined that an additional charge of $6.5 million was necessary against
trademarks impacted by the U.S. restructuring plan.
RESTRUCTURING COSTS
As a result of our U.S. restructuring plan, we incurred $1.7 million in
restructuring costs consisting of $1.2 million for consulting and legal costs
directly associated with the development and implementation of the restructuring
plan and $0.5 million associated with the termination and severance cost as a
result of a 25.0% U.S. headcount reduction in the fourth quarter.
NET INTEREST EXPENSE
Net interest expense was $40.2 million for both fiscal 2004 and 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 9.7% in fiscal 2004
compared to 8.9% in fiscal 2003. The average amount of all debt outstanding was
$381.3 million for fiscal 2004 compared to $428.3 million for fiscal 2003. This
was a result of lower average borrowings under the current and former revolver
and term loan agreement and our repayment of certain other obligations.
LOSS ON EARLY EXTINGUISHMENT OF DEBT
During the fourth quarter, the Company incurred a non-cash pretax charge of $5.0
million for the write-off of unamortized financing costs under the previous
credit agreement. (See Liquidity discussion surrounding new financing
arrangements).
FAIR MARKET VALUE ADJUSTMENT ON DERIVATIVES
The Company 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. Unrealized pre-tax losses resulting from foreign exchange
contracts that qualified as cash flow hedges were $7.6 million.
INCOME TAXES
Income tax expense was a tax benefit of $20.1 million in fiscal 2004 as compared
to income tax expense of $2.7 million in fiscal 2003. The effective tax rate
(benefit) for federal, state, and foreign income taxes was approximately (18.7)%
in 2004 versus approximately 24.6% in 2003. The effective tax rate (benefit) in
2004 is less than the statutory U.S. Federal tax rate primarily because of $13.3
million of non-deductible goodwill that was written off as a result of an
impairment charge in 2004 and $6.9 million of tax reserves provided as a
valuation allowance against certain foreign income tax credits that have a five
year life for U.S. tax purposes.
30
2003 COMPARED TO 2002
NET SALES AND GROSS PROFIT
Salton's net sales for 2003 were $894.9 million. This represented a decrease of
6.4% compared to 2002. While overall sales in the domestic market decreased, our
strong portfolio of brand names contributed to our success internationally. We
experienced significant volume decreases in the domestic market as a result of a
disappointing holiday season at retail. This left retailers overstocked during
the third quarter of fiscal 2003 further depressing sales. In addition, we
experienced a decrease of approximately $37.0 million in net sales attributable
to domestic price reductions in an effort to gain long term market presence, an
initiative to reduce domestic inventory levels and reduce the number of stock
keeping units (SKUs) the Company carries in inventory. These actions occurred
primarily in the second half of 2003. These decreases were offset by just over
$110.0 million in international sales increases primarily associated with the
George Foreman and Russell Hobbs brands, foreign currency fluctuations of $19.2
million, the inclusion of approximately $22.0 million of sales from AMAP for the
period of May 16, 2003 through June 28, 2003 and the inclusion of approximately
$13.0 million of sales from the Look For acquisition, now renamed Salton France.
Gross profit in 2003 decreased to $257.6 million or 28.8% of net sales as
compared to $317.5 million or 34.4% of net sales in 2002 primarily as a result
of approximately $37.0 million in domestic price reductions, $38.0 million in
domestic volume reductions and approximately $12.0 million in product mix
changes. These reductions were partially offset by approximately $27.3 million
in volume increases internationally and $5.7 million of foreign currency
exchange rate fluctuations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administration expense decreased $15.4 million in fiscal
year 2003 compared to fiscal year 2002. Amortization expense decreased $15.8
million as amortization of goodwill and certain intangible assets ceased in
fiscal year 2003 due to the adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets". Expenditures for television, royalty expense, certain other
media and cooperative advertising and trade show expenses were 9.8% of net sales
or $88.1 million in fiscal 2003 compared to 10.8% of net sales or $99.7 million
in fiscal 2002. This decrease is primarily associated with a $12.3 million
decline in infomercial advertising partially offset by a $6.6 million increase
in direct advertising. In addition, changes in foreign currency exchange rates
decreased selling, general and administration expense $4.5 million. These
decreases in selling, general and administrative expenses were partially offset
by an $8.4 million increase in salary expense, $5.6 million bad debt provision,
and $2.3 million from the inclusion of AMAP for the period May 16, 2003 through
June 28, 2003.
LAWSUIT SETTLEMENTS NET
The $2.6 million recorded in fiscal year 2002 for lawsuit settlements, net is
comprised of the following items:
- A $8.9 million charge related to the September 5, 2002 settlement
and related legal expenses associated with the Attorney Generals of
New York and Illinois regarding the Company's future conduct with
retailers relating to the Company's indoor electric grills.
- A $2.0 million charge related to the June 28, 2002 settlement and
related legal expenses associated with the patent infringement
alleged by AdVantage Partners LLC regarding the Company's "George
Foreman Jr." rotisserie grills.
- A $8.3 million gain related to the September 5, 2002 settlement
reached with Applica, Inc regarding the Company's lawsuit filed
against Applica in January 2001 for breach of its noncompetition
agreement. The gain primarily related to cancellation of the $15.0
million dollar promissory note issued by the Company to Applica in
1998 as partial consideration for the repurchase of the Company's
common stock from Applica. As part of the settlement, the
31
Company agreed to pay Applica $2.0 million on or before June 30,
2004. The gain associated with the carrying value of the note upon
cancellation of $10.8 million was partially offset by the present
value of the $2.0 million payment due to Applica and legal expenses
related to the litigation.
All legal expenses included in the $8.9 million charge related to the Attorney
Generals of New York and Illinois settlement were either incurred prior to June
29, 2002 or were legally required within the terms of the settlement agreement.
The cost legally required per the statement agreement included reimbursement of
Plaintiff States attorneys' fees and other administrative cost, the amount of
which was stated in the agreement, as well as estimated costs to provide public
notice as ordered by the Court. All legal expenses were recorded as incurred and
were included in the $2.0 million charge related to the AdVantage Partners LLC
settlement in fiscal 2002. Legal expenses associated with the Applica lawsuit
described above were expensed as incurred and netted against the related gain
for purposes of income statement presentation. No legal expenses were deferred.
In accordance with SFAS No. 5, the Company recorded a liability for those
amounts that were probable and could be reasonably estimated.
IMPAIRMENT LOSS ON GOODWILL AND INTANGIBLE ASSETS
During the first quarter of fiscal year 2003, the Company recorded an impairment
charge of $0.8 million related to the Company's decision to abandon the Welbilt
tradename and discontinue the related product line.
NET INTEREST EXPENSE
Net interest expense was $40.2 million for fiscal 2003 compared to $44.4 million
in fiscal 2002. The decrease is primarily attributable to lower average
borrowings under the current and former revolver and term loan agreement and our
repayment of certain other obligations existing in 2002. Our rate of interest on
amounts outstanding under the revolver, term loan and senior subordinated debt
was a weighted average annual rate of 8.9% in fiscal 2003 compared to 8.2% in
fiscal 2002. The average amount of all debt outstanding was $428.3 million for
fiscal 2003 compared to $485.2 million for fiscal 2002.
FAIR MARKET VALUE ADJUSTMENT ON DERIVATIVES
Salton Europe 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. We recognized a pre-tax benefit for an increase in the fair
market value of the derivatives of $2.5 million, or $1.8 million net of tax,
from foreign exchange contracts that did not qualify as cash flow hedges for
accounting purposes in accordance with U.S. GAAP. Certain foreign exchange
contracts entered into by Salton Europe in fiscal 2002 did not qualify as cash
flow hedges because their terms failed to meet the cash flow hedge definition
requirements within SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended (SFAS No. 133). Such contracts were
marked-to-market through their respective settlement dates. All subsequent
foreign exchange contracts entered into by Salton Europe met the conditions of
SFAS No. 133 to qualify as cash flow hedges and were recorded as such. All
foreign exchange contracts are related to the purchase of inventory in U.S.
dollars from an affiliate, Salton Hong Kong, Ltd. Unrealized pre-tax losses
resulting from foreign exchange contracts that qualified as cash flow hedges
were de minimis.
INCOME TAXES
The effective tax rate for federal, state and foreign income taxes were
approximately 24.6% in 2003 versus approximately 32.3% in 2002. The Company's
income tax rate for 2003 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. The Company anticipates that in future years, its
effective income tax rate will return to that of historical rates.
32
NET INCOME
The Company reported net income of $8.0 million or basic earnings per common
share of $0.71 per share for the fiscal year 2003 compared with net income of
$30.1 million or basic earnings per common share of $2.74 per share for the
fiscal year 2002. Net income for 2003 was primarily reduced by a pricing
transition in the domestic market partially offset by expansion and internal
growth in the international markets. Pricing transition refers to the domestic
price reductions granted by the Company to its customers in advance of product
cost reductions that were later realized from the Company's suppliers.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
Our primary sources of liquidity are our cash flow from operations and
borrowings under our senior secured revolving credit facility. In 2004, Salton's
operations provided $23.4 million in cash flow, compared with $130.6 million in
2003. This decrease is primarily a result of decreased profits and higher
international inventories, offset by decreases in accounts receivable and
increases in accounts payable. Given the seasonal nature of our business,
borrowings and availability tend to be highest in mid-Fall and early Winter.
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. In addition, the Company has recently experienced an upward trend in
raw material prices. As a result, the Company may use working capital to build
inventories to take advantage of current lower prices.
The Company also 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 and South
African Rand against United States dollars.
INVESTING ACTIVITIES
We incurred approximately $33.1 million for capital expenditures during fiscal
2004 including approximately $12.0 million in construction-in-progress for a
warehouse renovation in Europe.
During fiscal 2004, we made our final $21.9 million installment payment
associated with the acquisition of the George Foreman tradename.
FINANCING ACTIVITIES
We had net proceeds from worldwide credit facilities of $61.0 million. These
proceeds were offset by $16.1 million of additional compensating balances on
deposit and $4.3 million of financing costs associated with refinancing
activities.
REVOLVING CREDIT FACILITY
On June 15, 2004, we entered into an amended and restated $275.0 million senior
secured revolving credit facility, which initially provides us with the ability
to borrow up to $207.0 million (including $10.0 million for letters of credit).
Advances under the senior secured revolving credit facility are primarily based
upon percentages of eligible accounts receivable and inventories. The facility
has a maturity date of June 15, 2007 and is subject to a prepayment premium of
3.0% of $275.0 million if the facility is repaid by June 15, 2005, 2.0% if the
facility is repaid between June 16, 2005 and June 15, 2006 and 1.0% if the
facility is repaid between June 16, 2006 and June 15, 2007.
33
As of July 3, 2004, we had borrowed $132.7 under the senior secured revolving
credit facility and had approximately $26.5 million available under this
facility for future borrowings.
Our senior secured revolving credit facility replaced a $275.0 million senior
credit agreement we had with our previous senior lenders. We had failed to
comply with certain consolidated and U.S. fixed charge coverage ratios contained
in our prior senior secured revolving credit facility starting with the fiscal
month ending December 27, 2003. Our previous senior lenders had waived our
compliance with certain of these ratios during December, 2003 and January, 2004
and subsequently agreed to forbear from exercising their remedies with respect
to our non-compliance with these ratios through June 10, 2004 and, subject to
certain conditions, September 30, 2004. We replaced our prior senior secured
revolving credit agreement with our existing senior secured revolving credit
facility on June 15, 2004 in order to provide us with more flexible financial
covenants.
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
EBITDA, consolidated fixed charge coverage ratio and foreign leverage ratio. We
are also required to deposit all proceeds from collection of accounts receivable
and sale of collateral with an account under the exclusive dominion and control
of the senior lenders.
Borrowings under our senior secured credit facility accrue interest, at our
option, at either: LIBOR, plus 5.0%, equaling 7.0% at July 3, 2004; or the Base
Rate (prime rate), plus 3.0%, equaling 7.25% at July 3, 2004. The Company has
the option to convert any base rate loan to LIBOR rate loan, which includes an
applicable margin of 5.0%. LIBOR rate loans are to be no lower than a rate of
7.0%.
Events of default under our senior secured revolving credit facility include,
but are not limited to: (a) our failure to pay principal or interest when due;
(b) our material breach of any representation or warranty; (c) covenant
defaults; (d) our default with respect to any other debt with an outstanding
principal amount in excess of $1.0 million if the effect thereof is to
accelerate or permit the acceleration of such debt; and (e) events of
bankruptcy.
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.
SENIOR SUBORDINATED NOTES
In addition to borrowings under our senior secured revolving credit facility, we
have $125.0 million of 10-3/4% senior subordinated notes due December 15, 2005
outstanding and $150.0 million of 12-1/4% senior subordinated notes due April
15, 2008 outstanding (excluding $9.6 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.
34
Interest is payable on the 10-3/4% senior subordinated notes on June 15th and
December 15th of each year in an amount equal to approximately $6.7 million on
each payment date. Interest is payable on the 12-1/4% senior subordinated notes
on April 15th and October 15th of each year in an amount equal to approximately
$9.2 million on each payment date.
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.
Events of default under our senior subordinated notes include, but are not
limited to: (a) our default for 30 days in the payment when due of interest; (b)
our default in payment when due of principal or premium; (c) covenant defaults;
(d) default under any indebtedness that (1) is caused by a failure to pay
principal or interest or (2) results in the acceleration of such indebtedness
and, in each of clause (1) and (2), the principal amount of such indebtedness
exceeds $2.5 million; and (e) events of bankruptcy.
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.
OTHER CREDIT FACILITIES
We maintain credit facilities outside 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.
35
COMMITMENTS AND CONTINGENCIES
To facilitate an understanding of the Company's contractual obligations and
commercial commitments, the following data is provided:
Payments Due by Period
-----------------------------------------------------
Within After 5
(IN THOUSANDS) Total 1 Year 2-3 years 4-5 years years
--------- -------- --------- --------- --------
Long-Term Debt $ 412,151 $ 37,151 (1) $ 225,000 $ 150,000 $ -
Short-Term Debt 10,980 10,980 - - -
Capital Lease Obligations 1,297 536 761 - -
Operating Leases 58,694 10,715 17,423 11,933 18,623
--------- -------- --------- --------- --------
Total Contractual Cash Obligations $ 483,122 $ 59,382 $ 243,184 $ 161,933 $ 18,623
========= ======== ========= ========= ========
(1) Includes $4.5 million by loan notes. These notes are fully funded in cash
held in escrow. Also, includes $32.7 million of borrowings as of July 3, 2004
under the senior secured revolving credit facility that is classified as short
term because the agreement includes a subjective acceleration clause and the
Company's lockbox account is currently under the exclusive dominion and control
of the senior lenders.
Amount of Commitment Expiration Per Period
-----------------------------------------------------
Total
Amounts Within After 5
(IN THOUSANDS) Total 1 Year 2-3 years 4-5 years years
--------- -------- --------- --------- --------
License Agreements(1) $ 20,712 $ 6,968 $ 9,669 $ 3,690 $ 385
Pension Plan Contributions(2) 1,060 1,060 - - -
Executive Compensation(3) 3,900 2,100 1,800 - -
Foreman Agreement(4) 3,750 3,000 750 - -
--------- -------- --------- --------- --------
Total Commercial Commitments $ 29,422 $ 13,128 $ 12,219 $ 3,690 $ 385
========= ======== ========= ========= ========
(1) Includes non-cancelable license agreements. Several of these commitments
have the option to be extended at the option of management. Payments beyond the
original agreement have not been included above.
(2) Contributions to the Company's defined benefit plans are determined annually
based on actuarial valuations. Future period contribution reflect known
commitments.
(3) Executive salaries and bonuses under employment agreements expiring in 2005
and 2006. Does not take into account the voluntary reduction of salaries by
David Sabin, Chairman, Leon Dreimann, Chief Executive Officer and William B.
Rue, President and Chief Operating Officer, which was effective June 7, 2004 and
will continue until such members of management determine that the U.S.
restructuring plan has been successfully implemented.
(4) Agreement with George Foreman for professional appearances associated with
the promotion of the George Foreman product line.
FORWARD LOOKING
We anticipate capital expenditures on an ongoing basis to be at historical
levels in relation to net sales.
We believe that future cash flow from operations based on our current level of
operations and anticipated growth, available borrowings under our senior secured
revolving credit facility and other sources of debt funding and sale or
monetization of certain assets, 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 for the next twelve months. Our anticipated earnings and
growth are subject to general economic, financial, competitive and other factors
that are beyond our control. If we are unable to satisfy such liquidity needs,
we could be required to adopt one or more alternatives, such as reducing or
delaying capital expenditures, borrowing additional funds, restructuring
indebtedness, selling other assets or operations and/or reducing expenditures
for new product development, cutting other costs, and some
36
or such actions would require the consent of our senior lenders and/or the
holders of our senior subordinated notes. We cannot assure you that any of such
actions could be effected, or if so, on terms favorable to us, that such actions
would enable us to continue to satisfy our liquidity needs and/or that such
actions would be permitted under the terms of our senior secured revolving
credit facility or the indentures governing our senior subordinated notes.
Factors that could affect our liquidity and capital resources are also discussed
in Item 1. "Business - Risk Factors."
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. The following
tables provide information about our market sensitive financial instruments and
constitutes a "forward-looking statement." Our major risk exposures are changing
interest rates in the United States and foreign currency commitments in Europe.
The fair values of our long-term, fixed rate debt and foreign currency forward
contracts were estimated based on dealer quotes. The carrying amount of
short-term debt and long-term variable-rate debt approximates fair value. All
items described in the tables are non-trading.
37
2005 2006 2007 2008 2009 THEREAFTER TOTAL FAIR VALUE
-------- --------- --------- --------- ----------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
FISCAL YEAR 2004
Liabilities:
Short-term loan $ 10,980 $ 10,980 $ 10,980
Average interest rate 4.40%
Long-term debt:
Fixed rate amount $ 125,000 $ 150,000 $ 275,000 $ 225,250
Average interest rate 10.75% 12.25%
Variable rate amount $ 32,653 $ 100,000 $ 132,653 $ 132,653
Average interest rates(1) 7.25% 7.25%
2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
-------- --------- --------- --------- ----------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
FISCAL YEAR 2003
Liabilities:
Foreman note payable $ 22,750 $ 22,750 $ 22,750
Average interest rate(2) 8.50%
Long-term debt:
Fixed rate amount $ 125,000 $ 150,000 $ 275,000 $ 274,875
Average interest rate 10.75% 12.25%
Variable rate amount $ 76,119 $ 76,119 $ 76,119
Average interest rates(1) 3.50%
(1) The variable rate senior secured revolving credit facility is set
periodically at an established base rate (equivalent to the prime rate of
interest) plus an applicable margin or, at our election, a LIBOR rate plus
an applicable margin.
(2) The Foreman note does not include an interest element. The 8.5% is the
estimated interest rate used for calculating the net present value.
We use foreign currency forward contracts with terms of less than one year, to
hedge our exposure to changes in foreign currency exchange rates. In managing
our foreign currency exposures, we identify and aggregate naturally occurring
offsetting positions and then hedges residual balance sheet exposures. At July
3, 2004, we had forward contracts outstanding for the purchase of $135.7 million
over the course of the next twelve months, which had an aggregate fair value of
$8.9 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes to all
such statements and other supplementary data are included in this report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
38
ITEM 9A. CONTROLS AND PROCEDURES
Salton carried out an evaluation, under the supervision and with the
participation of Salton's management, including Salton's Chief Executive Officer
and Senior Financial Officer, of the effectiveness of the design and operation
of Salton's disclosure controls and procedures pursuant to Rule 13a-15 under the
Exchange Act of 1934 as of the end of the year. Based upon that evaluation, the
Chief Executive Officer and Senior Financial Officer concluded that Salton's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in Salton's periodic SEC filings
relating to Salton (including its consolidated subsidiaries).
There was no change in internal control over financial reporting that occurred
in the fourth quarter of fiscal 2004 that has materially affected or is
reasonably likely to materially affect Salton's internal controls over financial
reporting.
ITEM 9B. OTHER INFORMATION
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year in Review" for a discussion of charges and impairments
recorded in the fourth quarter of fiscal 2004 related to the Company's U.S.
restructuring plan. Cash expenditures of $1.2 million in consulting and legal
costs and approximately $0.2 million in termination and severance costs were
made in the fourth quarter of fiscal 2004 in connection with such charges and
impairments. The remaining approximately $0.3 million in cash expenditures for
termination and severance costs will be made in the first quarter of fiscal
2005.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to the Directors of the Company is
incorporated herein by reference to the information set forth under the caption
"Election of Directors" in the Company's definitive Proxy Statement for the 2004
Annual Meeting of Stockholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
our fiscal year pursuant to Regulation 14A. Information required by this Item 10
as to the executive officers of the Company is included in Part I of this Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the
information set forth under the caption "Compensation of Directors and Executive
Officers" in the Company's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of our
fiscal year pursuant to Regulation 14A.
39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to the
information set forth under the caption "Stock Ownership of Principal Holders
and Management" in the Company's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of our
fiscal year pursuant to Regulation 14A.
EQUITY COMPENSATION PLAN INFORMATION
This table shows information about the securities authorized for issuance under
our equity compensation plans as of July 3, 2004.
(a) (b) (c)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO EXERCISE PRICE OF EQUITY COMPENSATION PLANS
BE ISSUED UPON EXERCISE OUTSTANDING (EXCLUDING SECURITIES
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS REFLECTED
WARRANTS AND RIGHTS AND RIGHTS IN COLUMN (a))
----------------------- ----------------- -------------------------
Equity compensation plans approved by
security holders (1) 1,559,850 $ 8.55 660,777
Equity compensation plans not approved by
security holders (2) 1,206,042 $ 19.89 598,211
--------- ---------
Total 2,765,892 $ 13.50 1,258,988
(1) Includes: 1992 Stock Option Plan, 1995 Stock Option Plan, 1995
Non-Employee Directors Stock Option Plan, 1998 Stock Option Plan, 2002
Stock Option Plan.
(2) Includes our: 1999 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock
Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to the
information set forth under the caption "Certain Transactions" in the Company's
definitive Proxy Statement for the 2004 Annual Meeting of Stockholders, since
such Proxy Statement will be filed with the Securities and Exchange Commission
not later than 120 days after the end of our fiscal year pursuant to Regulation
14A.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
This information is in the Proxy Statement under the heading "Independent
Auditor Information" and is incorporated by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1 and 2 - An "Index to Financial Statements and Financial Statement
Schedules" has been filed as a part of this Report beginning on page F-1 hereof.
(a)(3) Exhibits:
An "Exhibit Index" has been filed as part of this Report beginning on page E-1
hereof and is incorporated herein by reference.
40
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended (the "Exchange Act") the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized on the
15th day of September, 2004.
SALTON, INC.
By: /s/ Leonhard Dreimann
-----------------------
Leonhard Dreimann
Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
indicated on September 15, 2004.
Signature
/s/ LEONHARD DREIMANN Chief Executive Officer and Director
- ----------------------------------------- (Principal Executive Officer)
Leonhard Dreimann
/s/ WILLIAM B. RUE President and Chief Operating Officer and Director
- -----------------------------------------
William B. Rue
/s/ DAVID M. MULDER Executive Vice President, Chief Administrative Officer and
- ----------------------------------------- Senior Financial Officer
David M. Mulder (Principal Accounting and Financial Officer)
/s/ DAVID C. SABIN Chairman of the Board and Director
- -----------------------------------------
David C. Sabin
/s/ FRANK DEVINE Director
- -----------------------------------------
Frank Devine
Director
- -----------------------------------------
Bert Doornmalen
Director
- -----------------------------------------
Robert A. Bergmann
Director
- -----------------------------------------
Bruce G. Pollack
/s/ BRUCE J. WALKER Director
- -----------------------------------------
Bruce J. Walker
/s/ STEVEN M. OYER Director
- -----------------------------------------
Steven M. Oyer
41
SALTON, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED JULY 3, 2004
PAGE
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Salton, Inc.
Lake Forest, Illinois
We have audited the accompanying consolidated balance sheets of Salton, Inc.
(the "Company") as of July 3, 2004 and June 28, 2003 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended July 3, 2004. Our audits also included
the financial statement schedule listed in the Index at Item 15 of the Annual
Report on Form 10-K. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Salton, Inc. as of July 3, 2004 and
June 28, 2003 and the results of its operations and its cash flows for each of
the three years in the period ended July 3, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Notes 1 and 2 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and certain identifiable
intangible assets in 2003.
Deloitte & Touche LLP
Chicago, IL
September 15, 2004
F-2
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
JULY 3, 2004 AND JUNE 28, 2003
(IN THOUSANDS EXCEPT SHARE DATA)
2004 2003
ASSETS
Current Assets:
Cash $ 46,847 $ 35,702
Compensating balances on deposit 34,000 17,400
Accounts receivable, less allowance:
2004 - $15,839; 2003 - $8,095 180,391 198,511
Inventories 253,627 217,317
Prepaid expenses and other current assets 21,267 18,203
Prepaid income taxes - 9,606
Deferred income taxes 25,742 12,825
--------- ---------
Total current assets 561,874 509,564
Property, Plant and Equipment:
Land 8,023 8,585
Buildings 17,120 16,403
Molds and tooling 46,038 65,519
Equipment and office furniture 48,707 40,330
Construction in progress 12,634 -
--------- ---------
132,522 130,837
--------- ---------
Less accumulated depreciation (51,370) (60,867)
--------- ---------
Net Property, Plant and Equipment 81,152 69,970
Tradenames 184,421 191,963
Goodwill - 26,953
Non-Current Deferred Tax Asset 11,589 -
Other Assets 15,516 13,922
--------- ---------
TOTAL ASSETS $ 854,552 $ 812,372
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 48,667 $ 27,911
Accounts payable 137,671 73,548
Accrued expenses 60,627 54,613
Income taxes payable 8,805 -
--------- ---------
Total current liabilities 255,770 156,072
Non-Current Deferred Income Taxes - 8,311
Senior Subordinated Notes due 2005 125,000 125,000
Senior Subordinated Notes due 2008, including an adjustment of $9,581 and
$12,081 to the carrying value related to interest rate swap agreements, respectively 158,642 160,896
Long Term Debt-Revolving Credit Agreement - 76,119
Term Loan and Other Notes Payable 100,761 873
Other Long Term Liabilities 17,288 16,240
--------- ---------
Total liabilities 657,461 543,511
Minority Interest 23,515 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; shares issued and
outstanding:
2004 - 11,370,282; 2003 - 11,186,905 148 148
Treasury stock - at cost (65,793) (67,019)
Additional paid-in capital 96,147 96,179
Accumulated other comprehensive income 12,668 (982)
Retained earnings 130,406 225,578
--------- ---------
Total stockholders' equity 173,576 253,904
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 854,552 $ 812,372
========= =========
See notes to consolidated financial statements.
F-3
SALTON, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JULY 3, 2004, JUNE 28, 2003, AND JUNE 29, 2002
(IN THOUSANDS EXCEPT PER SHARE DATA)
2004 2003 2002
Net sales $ 1,076,735 $ 894,908 $ 922,479
Cost of goods sold 751,012 578,826 544,147
Distribution expenses 72,088 58,475 60,831
--------------- --------------- ---------------
Gross profit 253,635 257,607 317,501
Selling, general and administrative expenses 273,257 208,203 223,577
Lawsuit settlements, net - - 2,580
Impairment loss on goodwill and intangible assets 40,855 800 -
Restructuring costs 1,798 - -
--------------- --------------- ---------------
Operating (loss) income (62,275) 48,604 91,344
Interest expense, net 40,192 40,204 44,431
Loss on early extinguishment of debt 5,049 - -
Fair market value adjustment on derivatives - (2,516) 2,372
--------------- --------------- ---------------
(Loss) income before income taxes (107,516) 10,916 44,541
Income tax (benefit) expense (20,089) 2,685 14,394
Minority interest, net of tax 7,745 260 -
--------------- --------------- ---------------
Net (loss) income $ (95,172) $ 7,971 $ 30,147
=============== =============== ===============
Weighted average common shares outstanding 11,258 11,152 11,005
Weighted average common and common
equivalent shares outstanding 11,258 15,114 15,042
Net (loss) income per common share: basic $ (8.45) $ 0.71 $ 2.74
=============== =============== ===============
Net (loss) income per common share: diluted $ (8.45) $ 0.53 $ 2.00
=============== =============== ===============
See notes to consolidated financial statements.
F-4
SALTON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 29, 2002, JUNE 28, 2003 AND JULY 3, 2004
(IN THOUSANDS)
COMMON PREFERRED ADDITIONAL
SHARES SHARES COMMON PREFERRED PAID IN RETAINED
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL EARNINGS
BALANCE, June 30, 2001 11,364 40 $ 144 $ - $ 72,932 $ 187,460
Net income 30,147
Other comprehensive income:
Minimum pension liability
net of tax of $(719) - - - - - -
Derivative liability
net of tax of $(339) - - - - - -
Foreign currency translation - - - - - -
Total comprehensive income - - - - - -
Issuance of common stock 167 - 2 - 2,473 -
Stock options exercised 17 - - - 175 -
Foreman Additional Liability (456) - - - 17,977 -
Treasury Stock Repurchase (99) - - - - -
----------- --------- ------------ ---------- ------------ ------------
BALANCE, JUNE 29, 2002 10,993 40 $ 146 $ - $ 93,557 $ 217,607
Net income - - - - - 7,971
Other comprehensive income:
Minimum pension liability
net of tax of $(4,546) - - - - - -
Derivative liability
net of tax of $(4) - - - - - -
Foreign currency translation - - - - - -
Total comprehensive income - - - - - -
Issuance of common stock 185 - 2 - 1,648 -
Stock options exercised 9 - - - 72 -
Stock warrants issued - - - - 136 -
Foreman Additional Liability - - - - 766 -
----------- --------- ------------ ---------- ------------ ------------
BALANCE, JUNE 28, 2003 11,187 40 $ 148 $ - $ 96,179 $ 225,578
Net loss - - - - - (95,172)
Other comprehensive income:
Minimum pension liability
net of tax of $692 - - - - - -
Derivative liability
net of tax of $(2,268) - - - - - -
Foreign currency translation - - - - - -
Total comprehensive income - - - - - -
Stock options exercised 36 - - - 223 -
Issuance of common stock 147 - - - 163 -
Foreman additional liability - - - - (418) -
----------- --------- ------------ ---------- ------------ ------------
BALANCE, JULY 3, 2004 11,370 40 $ 148 $ - $ 96,147 $ 130,406
=========== ========= ============ ========== ============ ============
ACCUMULATED
OTHER TOTAL TOTAL
TREASURY COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
STOCK INCOME (LOSS) EQUITY INCOME
BALANCE, June 30, 2001 $ (47,865) $ (1,174) $ 211,497
Net income 30,147 $ 30,147
Other comprehensive income:
Minimum pension liability
net of tax of $(719) - (1,198) (1,198) (1,198)
Derivative liability -
net of tax of $(339) - (639) (639) (639)
Foreign currency translation - 3,756 3,756 3,756
--------------
Total comprehensive income - - - $ 32,066
==============
Issuance of common stock - 2,475
Stock options exercised - 175
Foreman Additional Liability (18,029) - (52)
Treasury Stock Repurchase (1,125) - (1,125)
----------- -------------- -------------
BALANCE, JUNE 29, 2002 $ (67,019) $ 745 $ 245,036
Net income - - 7,971 $ 7,971
Other comprehensive income: -
Minimum pension liability -
net of tax of $(4,546) - (10,351) (10,351) (10,351)
Derivative liability -
net of tax of $(4) - (10) (10) (10)
Foreign currency translation - 8,634 8,634 8,634
--------------
Total comprehensive income - - - $ 6,244
==============
Issuance of common stock - - 1,650
Stock options exercised - - 72
Stock warrants issued - - 136
Foreman Additional Liability - - 766
----------- -------------- -------------
BALANCE, JUNE 28, 2003 $ (67,019) $ (982) $ 253,904
Net loss - - (95,172) $ (95,172)
Other comprehensive income:
Minimum pension liability
net of tax of $692 - 1,900 1,900 1,900
Derivative liability
net of tax of $(2,268) - (5,381) (5,381) (5,381)
Foreign currency translation - 17,131 17,131 17,131
--------------
Total comprehensive income - - - $ (81,522)
==============
Stock options exercised - - 223
Issuance of common stock 1,226 - 1,389
Foreman additional liability - - (418)
----------- -------------- -------------
BALANCE, JULY 3, 2004 $ (65,793) $ 12,668 $ 173,576
=========== ============== =============
See notes to consolidated financial statements.
F-5
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 3, 2004, JUNE 28, 2003, AND JUNE 29, 2002
(IN THOUSANDS)
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (95,172) $ 7,971 $ 30,147
Adjustments to reconcile net income
to net cash from operating activities:
Imputed interest on note payable and other non-cash items (2,254) (148) 6,045
Deferred income tax (benefit) provision (31,284) 5,846 (3,779)
Inventory valuation adjustment 20,532 1,200 (655)
Fair value adjustment for derivatives - (2,516) 2,372
Foreign currency gains and losses 678 (675) 450
Bad debt provision 3,352 5,584 3,454
Loss on early extinguishment of debt 5,049 - -
Legal settlements - - 2,580
Depreciation and amortization 22,934 17,830 30,649
Impairment loss on goodwill and intangible assets 40,855 800 -
Gain on sale of investment - - (200)
Loss on disposal of property and equipment 5,304 650 -
Equity in net income of investees, net of tax - (983) (761)
Minority interest, net of tax 7,746 260 -
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 23,977 33,555 (32,281)
Inventories (45,411) 58,715 (46,962)
Prepaid expenses and other current assets (4,385) 994 (2,942)
Accounts payable 54,848 25,074 (11,782)
Income taxes payable 17,669 (6,096) 12,870
Accrued expenses (1,024) (17,501) 16,123
----------- ----------- -----------
Net cash from operating activities 23,414 130,560 5,328
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (33,108) (23,009) (16,252)
Decrease (increase) in other non-current assets 180 167 (974)
Proceeds from sale of property and equipment 1,041 - -
Proceeds from sale of investment - - 501
Additional payment for tradenames (21,875) (23,873) (38,746)
Acquisition of majority interest/businesses, net of cash acquired - (1,637) (7,314)
----------- ----------- -----------
Net cash from investing activities (53,762) (48,352) (62,785)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from revolving line of credit and other debt 61,047 (18,881) 72,231
Repayment of terminated credit agreement (105,928) - -
Proceeds from amended and restated credit agreement 105,928 - -
Repayment of long-term debt (869) (47,445) (18,807)
Costs associated with refinancing (4,338) (2,807) (1,115)
Increase in compensating balances on deposit (16,600) (12,900) (4,500)
Common stock issued 223 74 175
Proceeds from termination of swap transaction - 8,058 8,146
Purchase of treasury stock - - (1,125)
----------- ----------- -----------
Net cash from financing activities 39,463 (73,901) 55,005
----------- ----------- -----------
The effect of exchange rate changes on cash 2,030 840 (1,090)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,145 9,147 (3,542)
CASH, BEGINNING OF YEAR 35,702 26,555 30,097
----------- ----------- -----------
CASH, END OF YEAR $ 46,847 $ 35,702 $ 26,555
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $ 38,450 $ 38,381 $ 37,407
Income taxes, net of refunds (5,731) 2,964 6,640
See notes to consolidated financial statements.
F-6
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 3, 2004, JUNE 28, 2003, AND JUNE 29, 2002
(IN THOUSANDS EXCEPT SHARE DATA)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In the quarter ended July 3, 2004, the Company entered into an amended and
restated senior secured revolving credit facility ("amended agreement").
Concurrently with the repayment of the terminated credit agreement, the Company
recorded $5,925 in financing fees, funded by proceeds from the amended
agreement.
In the quarter ended March 27, 2004, the Company issued 146,902 shares of common
stock purchase out of treasury in lieu of cash for the final payment to one of
the venture participants under the Foreman obligation.
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. (Concluded)
F-7
SALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 3, 2004, JUNE 28, 2003, AND JUNE 29, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Salton, Inc. is a leading designer, marketer and distributor of branded,
high quality small home appliances and electronics for the home, home
decor and personal care products. Our product mix includes a broad range
of kitchen and home appliances, electronics, tabletop products, time
products, lighting products, picture frames and personal care and wellness
products. We sell our products under our portfolio of well recognized
brand names such as Salton(R), George Foreman(R), Westinghouse(TM),
Toastmaster(R), Melitta(R), Russell Hobbs(R), Farberware(R), Ingraham(R)
and Stiffel(R). We believe our strong market position results from our
well-known brand names, our high quality and innovative products, our
strong relationships with our customer base and our focused outsourcing
strategy.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of all majority-owned subsidiaries. Investments in
affiliates, in which the Company has the ability to exercise significant
influence, but not control, are accounted for by the equity method.
Intercompany balances and transactions are eliminated in consolidation.
FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to
June 30. Unless otherwise stated, references to years in this report
relate to fiscal years rather than calendar years. The effect of the extra
week in 2004 had an insignificant impact on results.
FISCAL YEAR YEAR ENDED WEEKS
----------- ------------- -----
2004 July 3, 2004 53
2003 June 28, 2003 52
2002 June 29, 2002 52
CURRENCY- Salton's reporting currency is the U.S. Dollar. Salton's foreign
subsidiaries functional currencies are their local currencies.
RECLASSIFICATIONS - Certain reclassifications have been made to prior year
financial statements and the notes to conform with current year
presentation.
USE OF ESTIMATES - In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates include the
allowance for doubtful accounts, reserve for inventory valuation, 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.
COMPENSATING BALANCES ON DEPOSIT- The Company utilizes a facility with a
bank to provide short-term documentary credits to conduct business with
its suppliers in certain countries. These arrangements require that funds
be held on deposit as security for this facility.
F-8
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company calculates allowances for
estimated losses resulting from the inability of customers to make
required payments. The Company utilizes a number of tools to evaluate and
mitigate customer credit risk. Management evaluates each new customer
account using a combination of some or all of the following sources of
information: credit bureau reports, industry credit group reports,
customer financial statement analysis, customer supplied credit references
and bank references. Appropriate credit limits are set in accordance with
company credit risk policy and monitored on an on-going basis. Existing
customers are monitored and credit limits are adjusted according to
changes in their financial condition. Based on the procedures outlined
herein, and the fact that no customer accounted for 10.0% or more of the
gross accounts receivable at July 3, 2004 and June 28, 2003, the Company
believes there is no concentration of credit risk.
The Company's exposure to credit loss on its foreign currency forward
contracts in the event of non-performance by the counterparties is
believed to be remote due to the Company's requirement that the
counterparties consist only of major financial institutions that have a
long-term credit rating of single-A or better from both Moody's and
Standard& Poor's. Additionally, its foreign currency forward contracts
generally have a term of one year or less.
INVENTORIES - The Company values inventory at the lower of cost or market,
and regularly reviews 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, the Company writes down the
related inventory to the estimated net realizable value. The Company
regularly evaluates the composition of inventory to identify slow-moving
and obsolete inventories to determine if additional write-downs are
required. The Company's domestic inventories are generally determined by
the last-in, first-out (LIFO) method. These inventories account for
approximately 53.7% and 67.6% of the Company's inventories as of 2004 and
2003, respectively. All remaining inventory cost is determined on the
first-in, first-out basis. See Note 4 "Inventories."
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
at cost. Expenditures for maintenance costs and repairs are charged
against income. Depreciation, which includes amortization of assets under
capital leases, as well as depreciation for leasehold improvements, is
based on the straight-line method over the useful lives of the assets (see
table below). For tax purposes, assets are depreciated using accelerated
methods.
USEFUL LIFE
(IN YEARS)
-----------
ASSET CATEGORY
Buildings 10 to 50
Molds and tooling 3 to 5
Equipment and office furniture 3 to 10
PATENTS, TRADEMARKS AND OTHER IDENTIFIABLE INTANGIBLE ASSETS - The
identifiable intangible assets of the Company are primarily trademarks
acquired in transactions and business combinations. The Company adopted
the provisions of Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" at the beginning of 2003.
Under the provisions of SFAS No. 142, identifiable intangibles with finite
lives are amortized and those with indefinite lives are not amortized. The
estimated useful life of an identifiable intangible asset to the Company
is based upon a number of factors including the effects of demand,
competition and the level of maintenance expenditures required to obtain
future cash flows. Prior to the start of 2002, the Company followed the
provisions of Accounting Principles Board Opinion (APB) No. 17, which
required that all identifiable intangibles be amortized by systematic
charges to income over the period of expected benefit.
F-9
The Company tests identifiable intangible assets with an indefinite life
for impairment, at a minimum on an annual basis, relying on a number of
factors including operating results, business plans and projected future
cash flows. Identifiable intangible assets that are subject to
amortization are evaluated for impairment using a process similar to that
used to evaluate other long-lived assets. The impairment test for
identifiable intangible assets not subject to amortization consists of a
comparison of the fair value of the intangible asset with its carrying
amount. An impairment loss is recognized for the amount by which the
carrying value exceeds the fair value of the asset. Currently, the Company
does not have material definite-lived intangible assets that are
amortized.
GOODWILL - Under the provisions of SFAS No. 142, goodwill is no longer
amortized. Prior to the start of 2002, the Company followed the provisions
of APB Opinion No. 17, which required that goodwill be amortized by
systematic charges to income over the period of expected benefit. That
period ranged from 10 to 40 years. Goodwill is tested for impairment on an
annual basis, or earlier when facts and circumstances indicate that there
may be a potential impairment. The test for impairment is based upon a
number of factors including operating results, business plans and
projected future cash flows.
LONG-LIVED ASSETS - Long-lived assets are reviewed for possible impairment
whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. If such review indicates
that the carrying amount of long-lived assets is not recoverable, the
carrying amount of such assets is reduced to the estimated recoverable
value.
REVENUE RECOGNITION - The Company recognizes revenue at FOB shipping point
which corresponds to when title and risks and rewards of ownership
transfer to its customers. Fees charged for shipping and handling are
included in net sales and the associated costs are include in distribution
expenses. Provision is made for estimated cost of returns, warranties and
product liability claims.
DISTRIBUTION EXPENSES - Distribution expenses consist primarily of
freight, warehousing, and handling costs of products sold.
ADVERTISING - The Company sponsors various programs under which it
participates in the cost of advertising and other promotional efforts for
Company products undertaken by its retail customers. Advertising and
promotion costs associated with these programs are expensed in the period
in which the advertising or other promotion by the retailer occurs.
The Company's tradenames and, in some instances, specific products, also
are promoted from time to time through direct marketing channels,
primarily television. Advertising and promotion costs are expensed in the
period in which the advertising and promotion occurs.
SELF-INSURANCE - The Company maintains a self-insurance program for health
claims and workers' compensation claims for certain covered employees. The
Company accrues estimated future costs that will be incurred for existing
employee claims. The Company does not provide any post-retirement health
care benefits.
INCOME TAXES - The Company accounts for income taxes using the asset and
liability approach. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available
evidence, management believes will not be realized.
STOCK BASED COMPENSATION - The Company has various stock-based
compensation plans, which are described more fully in Note 10. The Company
accounts for those plans in accordance with APB No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based
compensation 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 SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
No. 123."
F-10
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2002
--------- --------- ----------
Net (loss) income - as reported $(95,172) $ 7,971 $ 30,147
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related taxes (1,517) (1,994) (2,728)
-------- -------- ---------
Net income - pro forma $(96,689) $ 5,977 $ 27,419
======== ======== =========
Net income per common share: Basic
As reported $ (8.45) $ 0.71 $ 2.74
Pro forma (8.59) 0.54 2.49
Net income per common share: Diluted
As reported (8.45) 0.53 2.00
Pro forma (8.59) 0.40 1.82
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of financial
instruments included in current assets and liabilities approximate fair
values due to the short-term maturities of these instruments. The fair
value of the Company's long-term, fixed rate debt was estimated based on
dealer quotes. As of July 3, 2004, the fair value of the senior
subordinated notes was $225.3 million versus a carrying value of $283.6
million. As of June 28, 2003, the fair value of the senior subordinated
notes was $274.9 million versus a carrying value of $285.9 million. The
carrying amount of short-term debt and long-term variable-rate debt
approximates fair value.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," which amends and clarifies financial accounting and reporting
for derivative instruments. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The provisions of SFAS 149
did not have any impact on the Company's Consolidated Financial
Statements.
In December 2003, the FASB issued a revision to SFAS No. 132, "Employer's
Disclosures About Pensions and Other Postretirement Benefits" (SFAS No.
132R). SFAS No. 132R changes employers' disclosures about pension plans
and other postretirement benefits and requires additional disclosures
about assets, obligations, cash flows and net periodic benefit cost. The
Statement is effective for annual periods ending after December 15, 2003,
and interim periods beginning after December 15, 2003. The Company adopted
SFAS No. 132R as of March 27, 2004, resulting in additional disclosures in
the Company's Consolidated Financial Statements (See Note 9 "Employee
Benefit Plans").
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities (VIEs). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are
effective for reporting periods ending after December 15, 2003, for VIEs
created prior to February 1, 2003. In December 2003, the FASB published a
revision to FIN 46 (FIN 46R) to clarify some of the provisions of the
interpretation and to defer the effective date of implementation for
certain entities. Under the guidance of FIN 46R, public companies that
have interests in VIE's that are commonly referred to as special purpose
entities are required to apply the provisions of FIN 46R for periods
ending after December 15, 2003. A public company that does not have any
interests in special purpose entities but does have a variable interest in
a VIE created before February 1, 2003, must apply the provisions of FIN
46R by the end of the first interim or annual reporting period ending
after March 14, 2004. The Company adopted FIN 46 and FIN 46R during the
year ended July 3, 2004. The adoption of FIN 46 had no impact on the
financial condition or results of operations since the Company does not
have investments in VIE's.
F-11
2. GOODWILL AND INTANGIBLE ASSETS
Effective with the beginning of fiscal year 2003, the Company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets". Upon adoption of SFAS No.
142, the Company discontinued the amortization of goodwill and indefinite
lived intangible assets. Goodwill and intangible assets that are not
amortized are subject to a fair-value based impairment test on an annual
basis or more frequently if circumstances indicate a potential impairment.
The annual test for impairment of goodwill and other intangible assets is
conducted during the fourth quarter of each fiscal year. At the beginning
of 2004, management believed that the projected operating results of the
Company would validate the amount of goodwill and other intangible assets
on the financial statements. As the Company discussed in its 2003 Annual
Report on Form 10-K filed with the Securities and Exchange Commission,
shortfalls in future operating results or the application of more
conservative market assumptions could have an adverse affect on the
comparison of fair value to carrying value for goodwill and other
intangible assets. Management determined that the combination of the
shortfall beginning in the third quarter in meeting projected operating
results along with the Company's inability to meet its financial debt
covenant requirement for its senior secured revolving credit facility for
two consecutive quarters and a downgrade in the debt rating could have
such an adverse effect, and as such, an interim impairment test was
necessary. A valuation of goodwill and other intangible assets was
conducted. The valuation incorporated performance through the third
quarter. The valuation did not incorporate the future U.S. restructuring
plan that management started in the fourth quarter of fiscal 2004.
As a result, the Company determined that the implied fair value of
goodwill and the fair value of certain other indefinite lived intangible
assets were less than their carrying values. The Company recorded a
non-cash impairment charge totaling $34.3 million pre-tax or $29.9 million
net of tax, consisting of consolidated goodwill of $28.2 million and
certain other indefinite lived intangible assets associated with iCEBOX of
$6.1 million.
In conjunction with the U.S. restructuring plan and extensive individual
product line reviews, the Company completed its annual test for impairment
of indefinite lived intangible assets as of the end of the fourth quarter.
As a result, the Company determined that an additional charge of $6.5
million was necessary against trademarks impacted by the U.S.
restructuring plan.
In accordance with SFAS No. 142, the effect of the standard is to be
reflected prospectively. Supplemental comparative disclosures as if the
standard had been adopted retroactively is as follows:
F-12
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
------------ ------------- -------------
Net income:
Reported net (loss) income $ (95,172) $ 7,971 $ 30,147
Goodwill amortization, net of tax - - 2,155
Indefinite-life intangibles amortization, net of tax - - 8,213
---------- ---------- ----------
Adjusted net income $ (95,172) $ 7,971 $ 40,515
========== ========== ==========
Basic (loss) income per share:
Reported (loss) income per basic share $ (8.45) $ 0.71 $ 2.74
Add: Goodwill amortization,
net of tax, per basic share - - 0.20
Indefinite-life intangibles amortization,
net of tax, per basic share - - 0.75
---------- ---------- ----------
Adjusted basic (loss) income per share $ (8.45) $ 0.71 $ 3.69
========== ========== ==========
Diluted income per share:
Reported (loss) income per diluted share $ (8.45) $ 0.53 $ 2.00
Add: Goodwill amortization,
net of tax, per basic share - - 0.14
Indefinite-life intangibles amortization,
net of tax, per basic share 0.00 0.00 0.55
---------- ---------- ----------
Adjusted diluted (loss) income per share $ (8.45) $ 0.53 $ 2.69
========== ========== ==========
The following tables summarize the goodwill and intangible asset activity and
balances:
Impairment Currency
(IN THOUSANDS) 6/28/2003 Additions Charges Fluctuations 7/3/2004
----------- ---------- ------------ ------------ ----------
Goodwill $ 26,953 $ (28,274) $ 1,321 $ -
Tradenames 191,963 500 (12,581) 4,539 184,421
----------- ---------- ----------- ---------- ----------
Total $ 218,916 $ 500 $ (40,855) $ 5,860 $ 184,421
=========== ========== =========== ========== ==========
Impairment Currency
(IN THOUSANDS) 6/29/2002 Additions Charges Fluctuations 6/28/2003
-------------- ------------- -------------- --------------- -------------
Goodwill $ 24,394 $ 2,184 $ - $ 375 $ 26,953
Tradenames 188,120 1,985 (800) 2,658 191,963
-------------- ------------- ------------- --------------- -------------
Total $ 212,514 $ 4,169 $ (800) $ 3,033 $ 218,916
============== ============= ============= =============== =============
F-13
3. ACQUISITIONS AND ALLIANCES
AMAP ACQUISITION
On May 16, 2003 the Company increased its 30.8% interest in Amalgamated
Appliance Holdings Limited (AMAP) to a 52.6% interest. AMAP is a leading
manufacturer and distributor of a wide range of branded consumer
electronics and appliances in South Africa. AMAP is a publicly held
company, listed on the Johannesburg Stock Exchange, which owns the rights
to the Salton brand name in South Africa. This acquisition offers Salton
the alliance to enter developing markets on the African continent and
introduce them to our brands and product lines. The Chief Executive
Officer and the President and Chief Operating Officer of Salton, Inc. are
members of the board of directors for AMAP.
AMAP's results since May 16, 2003 have been consolidated with Salton for
financial statement presentation. Prior to this increase, the investment
was accounted for under the equity method of accounting, and is included
in the consolidated financial statements in other assets.
The purchase price of the most recent acquisition was $7.5 million and the
cost of the previous 30.8% was $8.2 million. Salton now holds 111,544,628
shares of AMAP stock as of July 3, 2004. The purchase price was based on
the market price at the time of the purchase and no premiums were paid. As
a result of the business combination, Salton recorded $2.0 million of
goodwill.
This step acquisition qualified as a business combination, and therefore
the accounts of AMAP have been included in the consolidated financial
statements since May 16, 2003. 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 PER SHARE AMOUNTS) JUNE 28, 2003
-------------
Revenues $ 1,004,329
Net income $ 8,627
Earnings per share:
Basic $ 0.77
Diluted $ 0.57
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.
ACQUISITION OF THE GEORGE FOREMAN NAME
In the quarter ended December 25, 1999, Salton acquired effective July 1,
1999, the right to use in perpetuity and worldwide the name George Foreman
in connection with the marketing and sale of food preparation and
non-alcoholic drink preparation and serving appliances. The aggregate
purchase price payable to George Foreman and other participants was $137.5
million, of which $113.8 million was payable in five annual cash
installments, and the remaining $23.7 million was paid through the
issuance of 779,191 shares of Salton, Inc. common stock issued out of
treasury. Salton issued a five-year $113.8 million non-interest bearing
subordinated promissory note associated with the annual cash installments.
The initial cash installment of $22.8 million was paid during the first
half of fiscal year 2000 and the remaining principal of the note of $91.0
was recorded at its present value. Imputed interest expense of $0.0, $1.6
and $3.4 million was recorded in connection with this note in fiscal years
2004, 2003 and 2002, respectively. As of July 3, 2004, all amounts due
under the note had been paid.
F-14
In September 2000, Salton prepaid the third installment of $20 million due
July 2001 to George Foreman and paid the second installment of $2.75
million to the other participants by issuing 621,161 shares of common
stock (546,075 to Foreman and 75,086 to other participants) at $36.625 per
share, which was the market value of the common stock on the date of
issuance. In connection with this stock payment, Salton agreed to pay cash
or issue additional shares, at Salton's election, if the price of the
stock should decline in the next year ("guarantee obligation") based on
the average share price in the 90-day period preceding the first
anniversary of the payment. The guarantee obligation recorded at June 30,
2001 was approximately $19.37 million.
In July 2001, Salton took back 456,175 of the 546,075 shares of common
stock originally issued to George Foreman in September 2000 and paid him
$18.0 million. This payment, which represented the original cash
installment amount of $20 million less proceeds that Foreman received from
the sale on the open market of 89,900 of the 546,075 shares previously
issued, terminated the guarantee obligation with respect to the shares
issued to him and satisfied the third annual installment due under the
note payable.
The guarantee obligation as of June 29, 2002 related to the shares issued
to the other participants in September 2000 was $1.4 million. During
fiscal 2003, $0.6 million of the guarantee obligation was paid out in cash
and the remaining guarantee obligation of $0.8 million was extinguished as
the requirements for payment, per the terms of the guarantee obligation,
were not met by the other participant.
As of July 1, 2003, Salton settled the final installment to one of the
other participants by issuing 146,902 shares of common stock at $9.36 per
share, which was the market value of the common stock on the date of
issuance. In connection with this stock payment, Salton agrees to pay cash
or issue additional shares, at the Company's election, if the price of the
stock should decline within a two year period ("new guarantee obligation")
based on the average share price during the 90-day period preceding the
second anniversary of the agreement. The new guarantee obligation was $0.4
million as of July 3, 2004, recorded in other long-term liabilities.
4. INVENTORIES
A summary of inventories is as follows:
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003
Raw materials $ 9,644 $ 11,943
Work-in-process 70 81
Finished goods 243,913 205,293
-------- --------
Total $253,627 $217,317
======== ========
At July 3, 2004 and June 28, 2003, domestic inventories determined by the
last in, first out (LIFO) inventory method amounted to $136.3 million and
$147.0 million, respectively. If the first-in, first-out (FIFO) inventory
method, which approximates replacement cost had been used to determine
cost for 100.0% of the Company's inventories, they would have been $0.6
million higher at July 3, 2004. FIFO would have approximated the LIFO, or
carrying value at June 28, 2003.
F-15
5. REVOLVING LINE OF CREDIT, LETTERS OF CREDIT AND LONG-TERM DEBT
On June 15, 2004, the Company entered into an amended and restated $275.0
million senior secured revolving credit facility, which initially provides
for the ability to borrow up to $207.0 million (including $10.0 million
for letters of credit). Advances under the senior secured revolving credit
facility are primarily based upon percentages of eligible accounts
receivable and inventories. The facility has a maturity date of June 15,
2007. As of July 3, 2004, the Company had borrowings of $132.7 million
outstanding under this facility and $26.5 million available for future
borrowings. Of the amount outstanding, $100 million is under a term loan
arrangement due in 2007; and the remaining $32.7 million is under a
revolving credit facility. Typically, given the seasonal nature of
Salton's business, borrowings and availability tend to be highest in the
second fiscal quarter. The Credit Agreement is secured by all of the
tangible and intangible assets of domestic entities and 65.0% of the
capital stock of certain foreign subsidiaries. At July 3, 2004, the rate
plus applicable margin on the Credit Agreement was 7.25% for Base (Prime)
rate loans. The Company has the option to convert any base rate loan to a
LIBOR rate loan, which includes an applicable margin of 5%. LIBOR rate
loans are to be no lower than a rate of 7.0%.
The Credit Agreement contains a number of significant covenants that,
among other things, restrict the ability of the Company 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 may otherwise restrict
corporate and business activities. In addition, under our senior secured
revolving credit facility, we are required to comply with a minimum
EBITDA, consolidated fixed charge coverage ratio and foreign leverage
ratio. At July 3, 2004, the Company was in compliance with the covenants
described above. As July 3, 2004 the revolving credit facility of $32.7
million was classified as current because the agreement includes a
subjective acceleration clause and the Company is required to deposit all
proceeds from collection of accounts receivable and sale of collateral
with an account under the exclusive dominion and control of the senior
lenders.
Information regarding borrowings under the Credit Agreement and the
previous revolving credit agreement is as follows:
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003
Balance at end of fiscal period $ 132,653 $ 76,119
Interest rate at end of fiscal period 7.25% 3.50%
Maximum amount outstanding at any month-end 150,119 145,000
Average month-end amount outstanding 116,687 99,788
Weighted average interest rate during fiscal period 4.88% 4.99%
Outstanding letters of credit at end of fiscal period - 4,884
Unused letters of credit at end of the fiscal period 10,000 5,116
SENIOR SUBORDINATED NOTES - On December 16, 1998, the Company issued
$125.0 million of 10-3/4% Senior Subordinated Notes (the 2005
Subordinated Notes) due December 15, 2005. Proceeds of the 2005
Subordinated Notes were used to repay outstanding indebtedness and for
working capital and general corporate purposes. The 2005 Subordinated
Notes contain a number of significant covenants that, among other things,
restrict the ability of the Company 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 may otherwise restrict corporate and business activities.
At July 3, 2004, the Company was in compliance with all the provisions
described above. If the Company incurs additional indebtedness, the
Company is required to comply with a specified financial fixed charge
coverage ratio.
F-16
On April 23, 2001, the Company issued $150.0 million of 12-1/4% Senior
Subordinated notes (the 2008 Subordinated Notes) due April 15, 2008.
Proceeds of the 2008 Subordinated Notes were used to repay outstanding
indebtedness and for the acquisition of Pifco Holdings PLC (see Note 3
Acquisitions and Alliances). The 2008 Subordinated Notes contain a number
of significant covenants that, among other things, restrict the ability of
the Company 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 may otherwise restrict corporate and business activities.
At July 3, 2004, the Company was in compliance with all the provisions
described above. If the Company incurs additional indebtedness, the
Company is required to comply with a specified financial fixed charge
coverage ratio.
LOAN NOTES -Approximately $17.7 million of the purchase price of Salton
Europe was paid by issuing loan notes (the Loan Notes) in accordance with
the purchase offer, with the remainder paid in cash. The Loan Notes have
been fully funded by the Company and recorded as an escrow asset as of
July 3, 2004 and June 28, 2003. The notes bear interest at 1% below LIBOR
per annum, payable semi-annually, and are due June 30, 2006. The remaining
Loan Notes have been recorded at their net present value, or $4.5 million
as of July 3, 2004 and $4.6 million as of June 28, 2003. The Loan Notes
may be prepaid, at the option of the holder, after June 30, 2002. On July
1, 2002, $13.3 million of the Loan Notes were redeemed by shareholders. It
is assumed that the balance will be redeemed on their fourth anniversary,
June 30, 2005.
Long-term debt matures as follows:
(IN THOUSANDS)
FISCAL
YEAR SUBORDINATED LOAN CREDIT CAPITAL
ENDED NOTES NOTES AGREEMENT LEASES OTHER TOTAL
2005 $ - $ 4,498 $ 32,653 $ 536 $ 10,980 $ 48,667
2006 125,000 - - 761 - 125,761
2007 - - 100,000 - - 100,000
2008 150,000 - - - - 150,000
2009
Thereafter - - - - - -
--------- ------- --------- ------- -------- ---------
$ 275,000 $ 4,498 $ 132,653 $ 1,297 $ 10,980 $ 424,428
========= ======= ========= ======= ======== =========
The recorded balance of the 2008 Subordinated Notes includes the following
components:
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003
Principal balance $ 150,000 $ 150,000
Fair value adjustment for terminated swap 9,581 12,081
Unamortized discount (939) (1,185)
--------- ---------
Recorded balance $ 158,642 $ 160,896
========= =========
In addition to the preceding maturity schedules, the Company is required
to make additional mandatory payments of 100% of insurance and
condemnation proceeds (over $1.0 million with regard to proceeds relating
to fixed assets). All such amounts are applied to the reduction of loans
under the Credit Agreement.
F-17
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage interest rate
and foreign currency risk. The Company does not enter into derivative
financial instruments for trading purposes. Interest rate swap agreements
are used as part of the Company's program to manage the fixed and floating
interest rate mix of its 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 American dollar.
When entered into, these financial instruments are designated as hedges of
underlying exposures. When a high correlation between the hedging
instrument and the underlying exposure being hedged exists, fluctuations
in the value of the instruments are offset by changes in the value of the
underlying exposures.
The estimated fair values of derivatives used to hedge or modify the
Company's risks fluctuate over time. These fair value amounts should not
be viewed in isolation, but rather in relation to the fair values of the
underlying hedging transactions and investments and to the overall
reduction in the Company's exposure to adverse fluctuations in interest
rates and foreign exchange rates. The notional amounts of the derivative
financial instruments do not necessarily represent amounts exchanged by
the parties and, therefore, are not a direct measure of the Company's
exposure from its use of derivatives. The amounts exchanged are calculated
by reference to the notional amounts and by other terms of the
derivatives, such as interest rates or exchange rates.
INTEREST RATE MANAGEMENT - At June 30, 2001, the Company had an interest
rate swap contract to pay a variable-rate interest on $150.0 million
notional amount of indebtedness. This contract was terminated in June 2002
resulting in a gain of $8.1 million. At June 29, 2002, the Company had an
interest rate swap contract to pay a variable-rate interest on $150.0
million notional amount of indebtedness. This contract was terminated in
the first quarter of fiscal 2003 resulting in the receipt of $6.1 million,
including a gain of $4.4 million. The Company simultaneously entered into
another interest rate swap contract to pay a variable-rate interest on
$150.0 million notional amount of indebtedness. This contract was
terminated in the second quarter of fiscal 2003, resulting in the receipt
of $2.0 million, including a gain of $1.8 million. The gains from early
termination of the swap contracts were deferred as adjustments to the
carrying amount of the outstanding debt and are being amortized as an
adjustment to interest expense related to the debt over the remaining
period originally covered by the terminated swap. The Company did not have
any interest rate swap agreements in effect as of July 3, 2004.
FOREIGN CURRENCY MANAGEMENT - All foreign exchange contracts have been
recorded on the balance sheet at fair value of $8.7 million classified
within accrued expenses. The change in the fair value of contracts that
qualify as foreign currency cash flow hedges and are highly effective was
$7.6 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 during fiscal year 2005. At July 3, 2004, the
Company had foreign exchange contracts for the purchase of 135.7 million
U.S. dollars.
F-18
7. SHAREHOLDERS' EQUITY
On July 28, 1998, the Company issued $40.0 million of convertible
preferred stock in connection with a Stock Purchase Agreement dated July
15, 1998. The convertible preferred stock is non-dividend bearing except
if the Company breaches, in any material respect, any of the material
obligations in the preferred stock agreement or the certificate of
incorporation relating to the convertible preferred stock, the holders of
the convertible preferred stock are entitled to receive quarterly cash
dividends on each share from the date of the breach until it is cured at a
rate per annum to 12-1/2% of the Liquidation Preference (defined below).
The preferred shares are convertible into 3,529,411 shares of Salton
common stock (reflecting a $11.33 per share conversion price). The holders
of the convertible preferred stock are entitled to one vote for each share
of Salton common stock that the holder would receive upon conversion of
the convertible preferred stock. In connection with the convertible
preferred stock issuance, two individuals representing the purchasers of
the preferred stock were appointed to serve on the Company's Board of
Directors.
In the event of a change in control of the Company, each preferred
shareholder has the right to require the Company to redeem the shares at a
redemption price equal to the Liquidation Preference (defined below) plus
interest accrued thereon at a rate of 7% per annum compounded annually
each anniversary date from July 28, 1998 through the earlier of the date
of such redemption or July 28, 2003.
In the event of a liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, holders of the Convertible Preferred
Stock are entitled to be paid out of the assets of the Company available
for distribution to its stockholders an amount in cash equal to $1,000 per
share, plus the amount of any accrued and unpaid dividends thereon (the
Liquidation Preference), before any distribution is made to the holders of
any Salton common stock or any other of its capital stock ranking junior
as to liquidation rights to the convertible preferred stock.
The Company may optionally convert in whole or in part, the convertible
preferred stock at any time on and after July 15, 2003 at a cash price per
share of 100% of the then effective Liquidation Preference per share, if
the daily closing price per share of the Company common stock for a
specified 20 consecutive trading day period is greater than or equal to
200% of the then current Conversion Price. On September 15, 2008, the
Company will be required to exchange all outstanding shares of convertible
preferred stock at a price equal to the Liquidation Preference per share,
payable at the Company's option in cash or shares of Salton common stock.
On June 28, 2004, the Board of Directors of Salton adopted a stockholder
rights plan (the "Rights Plan") pursuant to which a dividend consisting of
one preferred stock purchase right (a "Right") was distributed for each
share of Common Stock held as of the close of business on July 9, 2004,
and is to be distributed to each share of Common Stock issued thereafter
until the earlier of (i) the Distribution Date (as defined in the Rights
Plan), (ii) the Redemption Date (as defined in the Rights Plan) or (iii)
June 28, 2014. The Rights Plan is designed to deter coercive takeover
tactics and to prevent an acquirer from gaining control of the Company
without offering fair value to our stockholders. The Rights will expire on
June 28, 2014, subject to earlier redemption or exchange as provided in
the Rights Plan. Each Right entitles the holder thereof to purchase from
us one one-thousandth of a share of a new series Series B Junior
Participating Preferred Stock at a price of $45.00 per one one-thousandth
of a share, subject to adjustment. The Rights are generally exercisable
only if a Person (as defined) acquires beneficial ownership of 20 percent
or more of our outstanding Common Stock.
F-19
On April 3, 2003, Salton issued warrants to purchase 50,000 shares of
Common Stock to a third party as partial consideration for serving as the
Company's public relations firm. The exercise price of $10.50 was equal to
the fair market value of the Common Stock on April 3, 2003. The warrant
can be exercised in full at any time prior to the expiration date of April
3, 2005. The fair value of the common stock purchase warrant was estimated
on the date of grant using the Black-Scholes option pricing model. The
following assumptions were used:
Dividend yield 0.0%
Expected volatility 65%
Risk-free interest rate 1.24%
Expected life of warrant 1 year
Accumulated other comprehensive income is comprised of the following:
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003
------------ -------------
Minimum pension liability $ (10,172) $ (12,072)
Derivative liability (6,030) (649)
Foreign currency translation 28,870 11,739
------------ -------------
Accumulated other comprehensive income $ 12,668 $ (982)
============ =============
8. EARNINGS PER SHARE
YEAR ENDED YEAR ENDED YEAR ENDED
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
Net (loss) income(1) $ (95,172) $ 7,971 $ 30,147
Average common shares outstanding 11,258 11,152 11,005
Earnings per share-basic $ (8.45) $ 0.71 $ 2.74
Dilutive stock equivalents -- 3,962 4,037
Average common and common equivalent
shares outstanding 11,258 15,114 15,042
Earnings per share-diluted $ (8.45) $ 0.53 $ 2.00
(1) Net income is the same for purposes of calculating basic and diluted
EPS.
For the year ended 2004 (1) For the year ended 2003
----------------------------- ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) Loss Shares EPS Income Shares EPS
-------- -------- -------- -------- -------- --------
Basic EPS $(95,172) 11,258 $ (8.45) $ 7,971 11,152 $ 0.71
Preferred Stock 3,529
Stock Options 433
-------- -------- -------- -------- -------- --------
Diluted EPS $(95,172) 11,258 $ (8.45) $ 7,971 15,114 $ 0.53
For the year ended 2002
----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) Income Shares EPS
-------- -------- --------
Basic EPS $ 30,147 11,005 $ 2.74
Preferred Stock 3,529
Stock Options 508
-------- -------- --------
Diluted EPS $ 30,147 15,042 $ 2.00
(1) Due to the losses included in 2004, the denominator does not include
the effects of convertible preferred stock or stock options as the effect
would have been anti-dilutive. Had the Company recognized net income in
2004, incremental shares attributable to the assumed conversion of
preferred stock and exercise of outstanding options would have increased
diluted shares outstanding by 3,931,070 shares.
Options to purchase 270,000 shares at a price of $29.25 per share were
outstanding at June 28, 2003 and June 29, 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. These stock options were cancelled in June 2004 at management's
request.
Options and warrants to purchase 1,288,010 shares of common stock at a
price range of $10.44 to $37.00 per share, and 643,572 shares of common
stock at a price range of $17.50 to $37.00 per share were outstanding at
June 28, 2003 and June 29, 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.
F-20
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan that covers eligible
domestic employees. The employees are eligible for benefits upon
completion of one year of service. Under the terms of the plan, the
Company may elect to match a portion of the employee contributions. The
Company's discretionary matching contribution is based on a portion of
participants' eligible wages, as defined, up to a maximum amount ranging
typically from two percent to six percent. The Company's total matching
contributions were approximately $0.5 million, $0.5 million, and $0.5
million, in fiscal 2004, 2003 and 2002, respectively.
The Company has two defined benefit plans that cover substantially all of
the domestic employees of Toastmaster as of the date the plans were
curtailed. Pension benefits are based on length of service, compensation,
and, in certain plans, Social Security or other benefits. The Company uses
March 31 as the measurement date for the Toastmaster plans for determining
pension plan assets and obligations. Effective October 30, 1999, the
Company's Board of Directors approved the freezing of benefits under the
two Toastmaster defined benefit plans. Beginning October 31, 1999, no
further benefits were accrued under the Toastmaster plans.
Salton Europe operates a funded defined benefit pension plan and a defined
contribution plan. The assets of the defined benefit plan are held in
separate trustee administered funds. The plan is subject to valuation by
independent, professionally qualified actuaries. The measurement date of
the Salton Europe plan is June 30. The defined benefit plan was closed to
new entrants in November 2000. New employees starting after this date can
now participate in a defined contribution plan, which is open to all
employees. The Company matches employee contributions up to and including
5.0% of gross salary. The total matching contributions were approximately
$0.1 million, $0.1 million, and $0.1 million, in fiscal 2004, 2003 and
2002, respectively.
AMAP has defined contribution plans covering substantially all employees.
Total matching contributions were approximately $ 0.4 million in fiscal
2004.
F-21
Domestic Salton Europe Total
---------------------- ---------------------- ----------------------
(IN THOUSANDS) 7/3/04 6/28/03 7/3/04 6/28/03 7/3/04 6/28/03
--------- --------- --------- --------- --------- ---------
Change in benefit obligation:
Benefit obligation at beginning of year $ 12,151 $ 10,544 $ 32,016 $ 26,685 $ 44,167 $ 37,229
Service cost 168 168 293 777 461 945
Interest cost 715 750 1,864 1,603 2,579 2,353
Actuarial (gain)/loss (70) 1,489 826 1,635 756 3,124
Plan participant contributions - - 540 - 540 -
Foreign exchange impact - - 3,636 2,305 3,636 2,305
Benefits paid and expenses (912) (800) (885) (988) (1,797) (1,788)
--------- --------- --------- --------- --------- ---------
Benefit obligation at end of year $ 12,052 $ 12,151 $ 38,290 $ 32,017 $ 50,342 $ 44,168
========= ========= ========= ========= ========= =========
Change in plan assets:
Fair value of plan assets at beginning of year $ 7,623 $ 9,433 $ 18,692 $ 19,021 $ 26,315 $ 28,454
Actual return on plan assets 1,954 (1,037) 2,021 (1,338) 3,975 (2,375)
Employer contribution 328 27 346 452 674 479
Plan participant contributions - - 540 62 540 62
Benefits paid from plan assets (912) (800) (885) (988) (1,797) (1,788)
Foreign exchange impact - - 2,145 1,484 2,145 1,484
--------- --------- --------- --------- --------- ---------
Fair value of plan assets at end of year $ 8,993 $ 7,623 $ 22,859 $ 18,693 $ 31,852 $ 26,316
========= ========= ========= ========= ========= =========
Funded status $ (3,059) $ (4,528) $ (15,431) $ (13,324) $ (18,490) $ (17,852)
Unrecognized net actuarial loss 4,184 5,939 13,369 12,534 17,553 18,473
--------- --------- --------- --------- --------- ---------
Net amount recognized $ 1,125 $ 1,411 $ (2,062) $ (790) $ (937) $ 621
========= ========= ========= ========= ========= =========
Accrued benefit cost $ (3,059) $ (4,528) $ (12,938) $ (11,713) $ (15,997) $ (16,241)
Accumulated other comprehensive income 4,184 5,939 10,876 10,923 15,060 16,862
--------- --------- --------- --------- --------- ---------
Net amount recognized $ 1,125 $ 1,411 $ (2,062) $ (790) $ (937) $ 621
========= ========= ========= ========= ========= =========
Domestic Salton Europe Total
------------------------ -------------------------- -------------------------
7/3/04 6/28/03 6/29/02 7/3/04 6/28/03 06/29/02 7/3/04 6/28/03 6/29/02
------ ------- ------- ------- ------- -------- ------- ------- -------
Components of net periodic pension cost:
Service cost-benefits earned during the year $ 168 $ 168 $ 168 $ 293 $ 777 $ 840 $ 461 $ 945 $ 1,008
Interest cost on projected benefit obligation 715 750 747 1,864 1,603 1,591 2,579 2,353 2,338
Actuarial return on plan assets (663) (816) (887) (1,385) (1,442) (1,906) (2,048) (2,258) (2,793)
Settlement gain - - - - - (163) - - (163)
Net amortization and deferral 394 155 54 706 300 - 1,100 455 54
------ ------- ------- ------- ------- -------- ------- ------- -------
$ 614 $ 257 $ 82 $ 1,478 $ 1,238 $ 362 $ 2,092 $ 1,495 $ 444
====== ======= ======= ======= ======= ======== ======= ======= =======
Domestic Salton Europe
--------------------- ----------------------
7/3/2004 6/28/2003 7/3/2004 6/28/2003
-------- --------- -------- ---------
Weighted average assumptions used to
determine net benefit obligation:
Discount rate 6.00% 6.00% 5.70% 5.70%
Rate of increase in compensation N/A N/A 4.50% 4.50%
Domestic Salton Europe
--------------------------------- ---------------------------------
7/3/2004 6/28/2003 6/29/2002 7/3/2004 6/28/2003 6/29/2002
-------- --------- --------- -------- --------- ---------
Weighted average assumptions used to determine
net periodic benefit cost:
Discount rate 6.00% 6.00% 7.25% 5.70% 5.50% 5.80%
Rate of increase in compensation N/A N/A N/A 4.50% 4.10% 4.20%
Expected return on plan assets 9.00% 9.00% 9.00% 7.40% 7.00% 8.10%
F-22
Domestic Salton Europe
---------------------- ----------------------
7/3/2004 6/28/2003 7/3/2004 6/28/2003
---------- ---------- ---------- ----------
Information for pension plans with an
accumulated benefit obligation in excess of
plan assets:
Projected benefit obligation $ 12,052 $ 12,151 $ 38,290 $ 32,017
Accumulated benefit obligation 12,052 12,151 35,797 30,405
Fair value of plan assets 8,993 7,623 22,859 18,693
Domestic Salton Europe
---------------------- ----------------------
3/31/04 3/31/03 7/3/04 6/28/03
---------- ---------- ---------- ----------
Allocation of Plan Assets:
Equity securities 62% 59% 81% 76%
Debt securities 37% 39% 12% 17%
Other 1% 2% 7% 7%
Total 100% 100% 100% 100%
The Company uses March 31 as the measurement date for the Domestic plans
for determining pension plan assets and obligations. Domestic plan assets
will be held in an investment portfolio with an active, strategic asset
allocation strategy. This portfolio will be invested exclusively in mutual
funds and will be highly liquid. Investments shall be diversified with the
intent to minimize the risk of large losses to the Fund. Consequently, the
total portfolio will be constructed and maintained to provide prudent
diversification with regard to the concentration of holdings in individual
issues, corporations, or industries. Over the long-term, the investment
objectives for this portfolio shall be to achieve an average total annual
rate of return of 9.0% for the aggregate investments.
The investment strategy for the Europe plan is determined by the Trustees
of the Pifco (Salton Europe) Group Pension and Life Assurance Plan ("the
Plan") in consulting with the Company. The aim of the Trustees of the Plan
is to ensure that while the Plan continues to operate on an ongoing basis
there are enough assets in the Plan to pay the benefits as they fall due
with a stable contribution rate. The overall expected rate of return of
7.4% pa (7.0% pa) is based on the weighted average of the expected returns
on each asset class. The Trustees aim to reduce equity investment and
increase debt security investment when they feel the time is right. The
target allocation at any point in time is therefore equal to the actual
allocation.
Domestic Salton Europe
---------------------- ----------------------
7/3/2004 6/28/2003 7/3/2004 6/28/2003
---------- ---------- ---------- ----------
Additional Information:
Increase (decrease) in minimum liability
included in other comprehensive income, $ (1,755) $ 3,185 $ (837) $ 11,713
Under the requirements of SFAS No. 87, "Employers' Accounting for
Pensions," an additional minimum pension liability for all plans,
representing the excess of accumulated benefits over the plan assets and
accrued pension costs, was recognized at July 3, 2004 and June 28, 2003,
with the balance recorded as a separate reduction of stockholders' equity,
net of deferred tax effect.
Domestic Salton Europe Total
-------- ------------- --------
Contributions:
Expected contributions in fiscal 2005 $ 718 $ 342 $ 1,060
Expected Future Benefit Payments:
Fiscal 2005 $ 746 $ 955 $ 1,701
Fiscal 2006 746 985 1,731
Fiscal 2007 752 1,014 1,766
Fiscal 2008 770 1,045 1,815
Fiscal 2009 791 1,076 1,867
Fiscal 2010-2014 4,160 5,882 10,042
F-23
10. STOCK-BASED COMPENSATION
Options to purchase common stock of the Company have been granted to
employees under the 1992, 1995, 1998, 1999, 2000, 2001 and 2002 stock
option plans at prices equal to the fair market value of the stock on the
dates the options were granted. Options have also been granted to
non-employee directors of the Company, which are exercisable one year
after the date of grant. All options granted expire 10 years from the date
of grant, and can vest immediately or up to 3 years from the date of
grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following assumptions
were used during the respective years to estimate the fair value of
options granted:
2004 2003 2002
---------- ---------- ----------
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 63.86% 65.78% 65.36%
Risk-free interest rate 3.96% 3.53% 4.39%
Expected life of options 8.00 years 8.00 years 8.00 years
A summary of the Company's fixed stock options for the fiscal years ended
July 3, 2004, June 28, 2003, and June 29, 2002, is as follows:
2004 2003 2002
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------ -------- ------ -------- ------ --------
Outstanding at
beginning of year 3,155 $ 15.00 2,276 $ 17.23 2,164 $ 17.77
Granted 48 10.60 904 9.28 156 9.84
Exercised (36) 6.50 (9) 8.37 (17) 10.29
Expired or Canceled (401) 25.62 (16) 14.14 (27) 21.88
----- ------ ------
Outstanding at
end of year 2,766 $ 13.50 3,155 $ 15.00 2,276 $ 17.23
===== ======== ====== ======== ====== ========
Options exercisable at
end of year 2,242 $ 13.14 1,991 $ 15.67 1,848 $ 16.04
Weighted-average fair value of
options granted during the year $ 7.30 $ 6.46 $ 7.22
F-24
The following information summarizes the stock options outstanding at July
3, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES (000) LIFE (YEARS) PRICE (000) PRICE
------ ------------ --------- ------ ----------
$0.583 - $1.667 223 0.92 $ 1.67 223 $ 1.67
$2.292 - $5.833 30 2.72 5.18 30 5.18
$6.333 - $10.60 1,362 6.95 8.79 846 8.62
$ 13.917-$17.50 698 5.69 14.97 698 14.97
$ 18.95-$37.00 453 5.19 31.71 445 31.95
----- ---- ------ ----- ---------
$0.583 - $37.00 2,766 5.81 $13.50 2,242 $ 14.49
===== ==== ====== ===== =========
11. COMMITMENTS AND CONTINGENCIES
LEASES- The Company leases certain facilities and equipment under
long-term operating leases. Rental expense under all leases was
approximately $10.8 million, $11.5 million and $9.1 million for the fiscal
years ended July 3, 2004, June 28, 2003, and June 29, 2002, respectively.
Leased equipment meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability.
Amortization of capitalized leased assets is computed on the straight-line
method of the term of the lease.
The future minimum rental commitments as of July 3, 2004 were as follows:
FISCAL YEAR ENDED (IN THOUSANDS)
OPERATING
LEASES CAPITAL LEASES
--------- --------------
2005 $ 10,715 $ 550
2006 9,153 773
2007 8,270 -
2008 6,504 -
2009 5,429 -
Thereafter 18,623 -
--------- -------
Total minimum lease payments $ 58,694 1,323
=========
Less amounts representing interest (26)
-------
Present value of minimum lease payments $ 1,297
=======
Present value of net minimum capital lease obligations:
Current portion $ 536
Long term portion 761
------
Total obligations $1,297
======
F-25
Assets recorded under capital leases are included in Property, Plant and
Equipment as follows:
(IN THOUSANDS) 2004 2003
------ ------
Machinery and equipment $1,297 $1,469
OTHER COMMITMENTS - The Company has employment agreements with its four
executive officers. The first of these agreements to be reviewed for
renewal is in June 2005 with the remaining reviews in June 2006. Such
agreements provide for minimum salary levels as well as for incentive
bonuses that are payable if the Company achieves specified target
performance goals. The agreements also provide for lump sum severance
payments upon termination of employment under certain circumstances. The
Company's aggregate commitment for future salaries at July 3, 2004,
excluding bonuses, was approximately $3.9 million. However, this amount
does not take into account the voluntary reduction of salaries by David
Sabin, Chairman, Leon Dreimann, Chief Executive Officer and William B.
Rue, President and Chief Operating Officer, which was effective June 7,
2004 and will continue until such members of management determine that the
U.S. restructuring plan has been successfully implemented.
Salton maintains various licensing and contractual relationships to market
and distribute products under specific names and designs. These licensing
arrangements generally require certain license fees and royalties. Some of
the agreements contain minimum sales requirements that, if not satisfied,
may result in the termination of the agreements. Total royalties paid
under these agreements, were $6.1 million, $4.0 million and $8.2 million
in fiscal 2004, 2003 and 2002, respectively.
WARRANTIES AND OTHER CLAIMS - The Company generally warrants its products
against defects for a period of one to three years. Additionally, credits
are issued to customers for damages sustained during shipment, claimed
shortages, certain returns of undamaged product, and other general
allowances. Segregating all allowances granted by discrete category for
domestic operations at times require substantial judgment. Accordingly, a
single accrual covering all estimated future claims, returns, and account
allowances are recorded for domestic operations when products are shipped.
Thus, revenue is recognized based upon management's best estimate of
future returns and warranty claims considering historical experience.
Management also periodically reviews doubtful accounts and makes changes
to the allowance accordingly. The following table summarizes the changes
in the Company's aggregate accrual for returns, allowances and doubtful
accounts:
CHARGED TO
NET SALES,
BEGINNING COSTS AND ENDING
(IN THOUSANDS) BALANCE EXPENSES DEDUCTIONS BALANCE
---------- ---------- ---------- ----------
Year Ended June 29, 2002:
Allowance for returns,
allowances and doubtful accounts $ 9,223 $ 56,903 $ (56,780) $ 9,346
Year Ended June 28, 2003:
Allowance for returns,
allowances and doubtful accounts $ 9,346 $ 32,303 $ (33,554) $ 8,095
Year Ended July 3, 2004:
Allowance for returns,
allowances and doubtful accounts $ 8,095 $ 35,588 $ (27,844) $ 15,839
F-26
The Company's foreign operations maintain a separate warranty reserve. The
following table summarizes the changes in these warranty reserves:
CHARGED TO
NET SALES,
BEGINNING COSTS AND ENDING
(IN THOUSANDS) BALANCE EXPENSES DEDUCTIONS BALANCE
---------- ---------- ---------- ----------
Year Ended June 29, 2002:
Warranty reserve $ 1,381 $ 2,574 $ (1,780) $ 2,175
Year Ended June 28, 2003:
Warranty reserve $ 2,175 $ 2,224 $ (2,543) $ 1,856
Year Ended July 3, 2004:
Warranty reserve $ 2,559 $ 8,303 $ (7,277) $ 3,585
12. LEGAL PROCEEDINGS
SECURITIES CLASS ACTION LAWSUITS
In May, 2004, two stockholder lawsuits, named Mariss Partners, LLP v.
Salton, Inc., Leonhard Dreimann and David M. Mulder and Warren Beeler v.
Salton, Inc., Leonhard Dreimann and David Mulder, were filed in the United
States District Court for the Northern District of Illinois against the
Company and certain Salton executives. The complaints allege that the
defendants violated the federal securities laws, specifically Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of
the Securities and Exchange Commission, by making certain alleged false
and misleading statements. The plaintiffs seek unspecified damages on
behalf of a purported class of purchasers of our securities during the
period from November 11, 2002 through May 11, 2004. The Company believes
that these lawsuits are without merit and that it has compelling defenses
to the allegations contained in the complaints. Salton intends to
vigorously defend the Company. The outcome of the class action lawsuits
cannot be predicted with certainty, however, Salton does not believe that
this matter will have a material adverse affect on its business, financial
condition or results of operations. Therefore, no amounts have been
accrued for such claims.
PHILIPS
In June, 2003, 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 and 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, Salton 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 tortuously interfered with the
contractual relationship between Philips and E&E.
Philips response has been to file a series of lawsuits against Salton. On
October 23, 2003, Philips filed a counterclaim against Salton in the
Northern District of Illinois, Declaratory Judgment case, reiterating the
allegations of Philips' June letter and adding a claim for copyright
infringement. The counterclaim sought to enjoin the distribution of the
One:One in the United States and money damages. 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.
F-27
On January 6, 2004, Philips filed a new action in the United States
District Court for the Northern District of Illinois, against Salton
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. Philips appealed this dismissal and the appeal was
consolidated with the appeal of the earlier case in the United States
Court of Appeals for the Seventh Circuit.
On November 24, 2003, Philips and Sara Lee NV also filed a patent
infringement suit against Salton asserting that the One:One infringed a
U.S. patent. Like the other actions, this case seeks damages and
injunctive relief. The case is pending as in the United States District
Court for the Northern District of Illinois.
Philips has also filed an action for copyright infringement in the United
Kingdom. This suit seeks unspecified money damages and injunctive relief.
This case currently pends in the United Kingdom. E&E has intervened in
that litigation, and it is anticipated E&E will seek to have the suit
dismissed in favor of the Hong Kong action where the issue is already
being litigated.
The outcome of the foregoing legal matters cannot be predicted with
certainty, however Salton does not believe that these actions will have a
material adverse affect on its business, financial condition or results of
operations. Therefore, no amounts have been accrued for such claims.
HOMEPLACE OF AMERICA
Homeplace of America, a company in liquidation under the United States
Bankruptcy Code, brought a lawsuit for recovery of preferential payments
made to Salton and its subsidiary, Toastmaster, during the 90 day
"preference" period prior filing for bankruptcy. Homeplace's total claimed
preferences are approximately $3.5 million. Salton believes that it has
meritorious defenses to all of the preference claims. The lawsuit is
scheduled for trial in the U.S. Bankruptcy Court for the District of
Delaware, during the first week of November 2004. Salton does not believe
that this matter will have a material adverse affect on its business,
financial condition or results of operations. Therefore, no material
amounts have been accrued for such claims.
ENVIRONMENTAL
The Company has accrued approximately $0.2 million for the anticipated
costs of environmental remediation at four of our sites. Although such
costs could exceed that amount, Salton believes any such excess will not
have a material adverse effect on the financial condition or annual
results of operations of the Company.
OTHER
The Company is a party to various other actions and proceedings incident
to our normal business operations. The Company believes that the outcome
of any litigation will not have a material adverse effect on our business,
financial condition or results of operations. The Company also has product
liability and general liability insurance policies in amounts believed to
be reasonable given its current level of business. Although historically
the Company has not had to pay any material product liability claims, it
is conceivable that we could incur claims for which we are not insured.
F-28
13. OPERATING SEGMENTS
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, electronics for
the home, 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.
PRODUCT INFORMATION - NET SALES
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
------------- ------------- -------------
Small Appliances and Electronics for the Home $ 948,309 $ 778,636 $ 807,799
Home Decor 85,164 87,605 85,957
Personal Care and Wellness Products 43,262 28,667 28,723
------------- ------------- -------------
Total $ 1,076,735 $ 894,908 $ 922,479
============= ============= =============
GEOGRAPHIC INFORMATION - NET SALES
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
------------- ------------- -------------
North America $ 531,509 $ 620,109 $ 769,307
South Africa 231,975 22,098 -
European Union 216,796 197,710 123,346
Other Foreign Countries* 96,455 54,991 29,826
------------- ------------- -------------
Total $ 1,076,735 $ 894,908 $ 922,479
============= ============= =============
*Other Foreign Countries contains shipments directly imported to customers
including customers of North America and European Union.
GEOGRAPHIC INFORMATION - LONG-LIVED ASSETS
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003
------------- -------------
North America $ 38,666 $ 43,732
South Africa 7,884 6,346
European Union 23,577 11,665
Other Foreign Countries 26,541 22,152
------------- -------------
Total $ 96,668 $ 83,895
============= =============
MAJOR CUSTOMERS AND SUPPLIERS - The Company's net sales in the aggregate
to its five largest customers during the 2004, 2003 and 2002 were 36.1%,
39.3% and 43.0% of total net sales in these periods, respectively. One
customer accounted for 9.1%, 11.9% and 12.0% of total net sales during the
years ended 2004, 2003 and 2002, respectively, while another customer
accounted for 8.1%, 12.5% and 13.9%, for the same respective years. An
additional customer accounted for 10.4% of our net sales in 2004 and
accounted for less than 10.0% in 2003 and 2002.
F-29
Although the Company has long-established relationships with many of its
customers, it does not have any significant long-term contracts with them.
A significant concentration of the Company's business activity is with
department stores, mass merchandisers, specialty stores, home shopping
networks and warehouse clubs whose ability to meet their obligations to
the Company is dependent upon prevailing economic conditions within the
retail industry.
During 2004, 2003 and 2002, one supplier located in China accounted for
23.7%,33.2%, and 32.5% of the Company's product purchases.
14. INCOME TAXES
Income before income taxes is as follows:
FISCAL YEARS ENDED
-----------------------------------------------
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
------------ ------------- -------------
Domestic $ (135,772) $ (33,254) $ 15,251
Foreign 28,256 44,170 29,290
------------ ------------ ------------
Total $ (107,516) $ 10,916 $ 44,541
============ ============ ============
Federal, state and foreign taxes were approximately as follows:
FISCAL YEARS ENDED
-----------------------------------------------
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
------------ ------------- -------------
Current:
Federal $ (1,757) $ (8,436) $ 12,678
State 195 246 1,503
Foreign 15,131 5,029 3,992
------------ ------------ ------------
Total current 13,569 (3,161) 18,173
Deferred:
Federal (24,408) 1,895 (3,623)
State (6,455) 338 (156)
Foreign (2,795) 3,613
------------ ------------ ------------
Total deferred (33,658) 5,846 (3,779)
Total $ (20,089) $ 2,685 $ 14,394
============ ============ ============
Deferred taxes based upon differences between the financial statement and
tax bases of assets and liabilities and available tax carryforwards
consisted of:
F-30
(IN THOUSANDS) JULY 3, 2004 JUNE 28, 2003
------------ -------------
DEFERRED TAX ASSETS
Net operating loss carryforwards $ 18,899 $ 607
Inventory reserves and capitalization 12,362 5,555
Foreign tax credit carryforwards 6,947 -
Other comprehensive income 7,327 4,128
Allowance for doubtful accounts 2,072 1,066
Other deferred tax assets 6,258 1,839
Valuation allowance (6,947) -
------------ -------------
Total deferred tax assets 46,918 13,195
DEFERRED TAX LIABILITIES
Fixed assets, goodwill and tradenames 7,256 7,136
Other Deferred Tax Liabilities 2,331 1,545
------------ -------------
Total deferred tax liabilities 9,587 8,681
------------ -------------
NET DEFERRED TAX ASSETS $ 37,331 $ 4,514
============ =============
At July 3, 2004, the Company has domestic net operating loss carryforwards
of approximately $18.9 million, of which $4.3 million will expire in
fiscal 2019, $14 million will expire in fiscal 2024, and the remainder
will expire in various periods beginning in fiscal 2009 through fiscal
2020. In addition, the Company has unused foreign tax credits of $6.9
million which expire in fiscal 2009. A valuation allowance has been
provided related to these foreign tax credits as it is more likely than
not that they may expire unused.
A reconciliation of the statutory federal income tax rate to the effective
rate is as follows:
FISCAL YEARS ENDED
-------------------------------------------------
JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
------------ ------------- -------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effective state tax rate 3.8 3.8 1.0
Earnings of foreign subsidiaries (4.5) (21.9) (5.9)
Meals and entertainment (0.3) 1.8 0.4
Impairment of non-deductible goodwill (4.3)
Deferred tax asset valuation allowance (6.5)
Other permanent differences (4.5) 6.0 1.8
-------- -------- --------
Effective income tax rate 18.7% 24.7% 32.3%
======== ======== ========
The company has not provided for U.S. deferred income taxes or foreign
withholding taxes on approximately $100 million of undistributed earnings
of its non-U.S. subsidiaries as of July 3, 2004 as these earnings are
intended to be permanently reinvested.
F-31
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly financial data is as follows (amounts in thousands,
except per share data).
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(1) QUARTER QUARTER(2)
---------- ---------- ---------- ----------
2004(3)
Net sales $ 238,539 $ 397,103 $ 191,376 $ 249,717
Gross profit 64,183 123,378 38,592 27,482
Net (loss) income 741 12,346 (58,017) (50,242)
Earning per share: Basic $ 0.07 $ 1.10 $ (5.14) $ (4.42)
Earning per share: Diluted 0.05 0.81 (5.14) (4.42)
2003(3)
Net sales $ 200,052 $ 339,252 $ 166,364 $ 189,240
Gross profit 66,341 111,375 37,341 42,550
Net (loss) income 3,900 24,970 (12,075) (8,824)
Earning per share: Basic $ 0.35 $ 2.23 $ (1.08) $ (0.79)
Earning per share: Diluted 0.26 1.64 (1.08) (0.79)
2002(3)
Net sales $ 198,350 $ 318,489 $ 188,095 $ 217,545
Gross profit 67,855 113,782 66,793 69,071
Net (loss) income 7,365 21,186 3,933 (2,337)
Earning per share: Basic $ 0.67 $ 1.93 $ 0.36 $ (0.21)
Earning per share: Diluted 0.49 1.42 0.26 (0.21)
(1) The Company has historically experienced higher sales in the August
through November months due to holiday sales, which primarily impact the
second quarter.
(2) Includes the effect of costs related to the U.S. restructuring plan
and other items excluded from senior management's assessment of the
operating performance of Salton's business (See "Year in Review" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations) which on a combined basis, decreased income before income
taxes $38.9 million, $31.0 million after tax ($2.73 per basic share).
(3) Total quarterly earnings per common share may not equal the annual
amount because net income per common share is calculated independently for
each quarter. Common stock equivalents can change on a quarter-to-quarter
basis due to their dilutive impact on the independent quarterly EPS
calculation.
16. RESTRUCTURING COSTS
On May 11, 2004, in response to declining domestic sales volumes in 2004,
the Company announced a U.S. restructuring plan to better align domestic
operating costs with current sales levels. The Company completed the
initial phase of this U.S. restructuring plan by reducing salaried
headcount in the domestic operations by approximately 25.0% in the fourth
quarter of fiscal 2004. Additionally, the Company made decisions to reduce
the capacity of its warehousing and distribution network through the
rationalization of existing facilities, which will be closed in the first
half of 2005. In connection with the U.S. restructuring plan and
subsequent valuation reviews in light of those decisions, the Company
recorded certain pretax charges in the fourth quarter totaling $33.9
million.
Of the total costs recorded, $20.2 million was associated with the
write-down of certain inventory identified for liquidation as part of the
Company's decision to rationalize warehouse and distribution facilities
and $3.8 million related to the write-off of tooling. These amounts were
included in cost of goods sold in the Consolidated Statement of Income.
F-32
The total restructuring costs also included a $1.7 million write-down
associated with several marketing programs that were canceled or
discontinued, which were included in selling, general and administrative
expenses. Included within restructuring costs on the Consolidated
Statement of Income are $1.2 million in consulting and legal costs
directly associated with the development and implementation of the U.S.
restructuring plan and $0.5 million in termination and severance costs
associated with the headcount reduction. Also in connection with the U.S.
restructuring plan, the company recorded a $6.5 million intangible asset
impairment charge for trademarks associated with products that will no
longer be sold. Such charge is included in impairment loss on goodwill and
intangible assets in the Consolidated Statement of Income.
Amounts accrued as of July 3, 2004 for these restructuring activities
related solely to severance and were approximately $0.3 million. Such
amounts are expected to be paid out in the first quarter of fiscal 2005.
17. 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).
F-33
CONSOLIDATING BALANCE SHEET AS OF JULY 3, 2004
(IN THOUSANDS)
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash $ 1 $ 903 $ - $ 904
Compensating balances on deposit - - - -
Accounts receivable, net of allowances 311 96,905 - 97,216
Inventories 5,133 165,189 (28,341) 141,981
Prepaid expenses and other current assets 5,054 2,597 - 7,651
Intercompany 131,818 (104,380) (756) 26,682
Deferred income taxes 913 16,577 - 17,490
------------ ------------ ------------ ------------
Total current assets 143,230 177,791 (29,097) 291,924
Property, Plant and Equipment,
Net of Accumulated Depreciation 11,016 14,910 - 25,926
Investments in Subsidiaries 390,773 53,646 (444,419) -
Tradenames 134,723 10,313 - 145,036
Non-current deferred tax asset - - - -
Other Assets, net 12,442 274 - 12,716
------------ ------------ ------------ ------------
Total Assets $ 692,184 $ 256,934 $ (473,516) $ 475,602
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ - $ 33,189 $ - $ 33,189
Accounts payable 2,922 2,039 (584) 4,377
Accrued expenses 9,491 13,478 - 22,969
Income taxes payable (2,336) (1,496) - (3,832)
------------ ------------ ------------ ------------
Total current liabilities 10,077 47,210 (584) 56,703
Non-current Deferred Income Taxes (8,840) (9,167) - (18,007)
Senior subordinated notes due 2005 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 158,642 - - 158,642
Long-term debt-revolving credit agreement - 100,000 - 100,000
Other notes payable - 175 - 175
Other long term liabilities 418 3,932 - 4,350
------------ ------------ ------------ ------------
Total liabilities 285,297 142,150 (584) 426,863
Minority Interest - - - -
Stockholders' Equity 406,887 114,784 (472,932) 48,739
------------ ------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 692,184 $ 256,934 $ (473,516) $ 475,602
============ ============ ============ ============
CONSOLIDATED
OTHER SUBSIDIARIES ELIMINATIONS CONSOLIDATED TOTALS
------------------ ------------- -------------------
ASSETS
Current Assets:
Cash $ 45,943 $ - $ 46,847
Compensating balances on deposit 34,000 34,000
Accounts receivable, net of allowances 83,175 - 180,391
Inventories 111,646 - 253,627
Prepaid expenses and other current assets 13,616 - 21,267
Intercompany (26,682) - -
Deferred income taxes 8,252 - 25,742
------------ ------------- ------------
Total current assets 269,950 - 561,874
Property, Plant and Equipment,
Net of Accumulated Depreciation 55,226 - 81,152
Investments in Subsidiaries - - -
Tradenames 39,385 - 184,421
Non-current deferred tax asset - 11,589 11,589
Other Assets, net 2,800 - 15,516
------------ ------------- ------------
Total Assets 367,361 11,589 $ 854,552
============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 15,478 - $ 48,667
Accounts payable 133,294 - 137,671
Accrued expenses 37,658 - 60,627
Income taxes payable 12,637 - 8,805
------------ ------------- ------------
Total current liabilities 199,067 - 255,770
Non-current Deferred Income Taxes 6,418 11,589 -
Senior subordinated notes due 2005 - - 125,000
Senior subordinated notes due 2008, including
an adjustment of $12,081 to the carrying value
related to interest rate swap agreements - - 158,642
Long-term debt-revolving credit agreement - - 100,000
Other notes payable 586 - 761
Other long term liabilities 12,938 - 17,288
------------ ------------- ------------
Total liabilities 219,009 11,589 657,461
Minority Interest 23,515 - 23,515
Stockholders' Equity 124,837 - 173,576
------------ ------------- ------------
Total Liabilities and Stockholders' Equity $ 367,361 $ 11,589 $ 854,552
============ ============= ============
F-34
CONSOLIDATING BALANCE SHEET AS OF JUNE 28, 2003
(IN THOUSANDS)
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash $ - $ 8,972 $ - $ 8,972
Compensating balances on deposit - - - -
Accounts receivable, net of allowances 66 127,888 - 127,954
Inventories 2,110 187,078 (39,676) 149,512
Prepaid expenses and other current assets 3,358 3,958 - 7,316
Intercompany 184,039 (152,539) - 31,500
Prepaid income taxes 27,197 (10,494) - 16,703
Deferred income taxes 1,938 6,774 - 8,712
------------ ------------ ------------ ------------
Total current assets 218,708 171,637 (39,676) 350,669
Property, Plant and Equipment,
Net of Accumulated Depreciation 15,547 16,854 32,401
Investments in Subsidiaries 441,521 52,585 (494,106) -
Tradenames 140,106 16,359 156,465
Goodwill - 18,093 18,093
Other Assets, net 11,152 172 (11) 11,313
------------ ------------ ------------ ------------
Total Assets $ 827,034 $ 275,700 $ (533,793) $ 568,941
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 22,750 $ 595 $ - $ 23,345
Accounts payable (789) 5,272 - 4,483
Accrued expenses 16,246 11,862 - 28,108
------------ ------------ ------------ ------------
Total current liabilities 38,207 17,729 - 55,936
Non-current Deferred Income Taxes 3,899 (662) - 3,237
Senior subordinated notes due 2005 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
Long-term debt-revolving credit agreement - 76,119 - 76,119
Other notes payable - 281 - 281
Other long term liabilities - 4,528 - 4,528
------------ ------------ ------------ ------------
Total liabilities 328,002 97,995 - 425,997
Minority Interest - - - -
Stockholders' Equity 499,032 177,705 (533,793) 142,944
------------ ------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 827,034 $ 275,700 $ (533,793) $ 568,941
============ ============ ============ ============
CONSOLIDATED
OTHER SUBSIDIARIES ELIMINATIONS CONSOLIDATED TOTALS
------------------ ------------- -------------------
ASSETS
Current Assets:
Cash $ 26,730 $ - $ 35,702
Compensating balances on deposit 17,400 - 17,400
Accounts receivable, net of allowances 70,557 - 198,511
Inventories 67,805 - 217,317
Prepaid expenses and other current assets 10,887 - 18,203
Intercompany (31,500) - -
Prepaid income taxes (7,097) - 9,606
Deferred income taxes 4,113 - 12,825
------------ ------------- ------------
Total current assets 158,895 - 509,564
Property, Plant and Equipment,
Net of Accumulated Depreciation 37,569 - 69,970
Investments in Subsidiaries - - -
Tradenames 35,498 - 191,963
Goodwill 8,860 - 26,953
Other Assets, net 2,609 - 13,922
------------ ------------- ------------
Total Assets 243,431 - $ 812,372
============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 4,566 - $ 27,911
Accounts payable 69,065 - 73,548
Accrued expenses 26,505 - 54,613
------------ ------------- ------------
Total current liabilities 100,136 - 156,072
Non-current Deferred Income Taxes 5,074 - 8,311
Senior subordinated notes due 2005 - - 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
Long-term debt-revolving credit agreement - - 76,119
Other notes payable 592 - 873
Other long term liabilities 11,712 - 16,240
------------ ------------- ------------
Total liabilities 117,514 - 543,511
Minority Interest 14,957 - 14,957
Stockholders' Equity 110,960 - 253,904
------------ ------------- ------------
Total Liabilities and Stockholders' Equity $ 243,431 $ - $ 812,372
============ ============= ============
F-35
CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JULY 3, 2004
(IN THOUSANDS)
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- -------------
Net Sales $ 246,937 $ 682,125 $ (386,935) $ 542,127
Cost of Goods Sold 211,464 580,454 (398,270) 393,648
Distribution Expenses - 45,338 45,338 26,750
------------- ------------- ------------- -------------
Gross Profit 35,473 56,333 11,335 103,141
Selling, General and Administrative expenses 58,052 109,236 - 167,288
Impairment loss on intangible assets 5,883 24,791 - 30,674
Restructuring costs 1,255 543 - 1,798
------------- ------------- ------------- -------------
Operating (loss) Income (29,717) (78,237) 11,335 (96,619)
Interest Expense, Net 28,562 5,541 - 34,103
Loss on early extinguishment of debt 5,049 - - 5,049
Equity in earnings of subsidiaries 52,261 822 (53,083) -
------------- ------------- ------------- -------------
(Loss) Income Before Income Taxes (115,589) (84,600) 64,418 (135,771)
Income Tax (Benefit) Expense (13,938) (18,488) - (32,426)
Minority Interest, net of tax - - - -
------------- ------------- ------------- -------------
Net (Loss) Income $ (101,651) $ (66,112) $ 64,418 $ (103,345)
============= ============= ============= =============
OTHER CONSOLIDATED CONSOLIDATED
SUBSIDIARIES ELIMINATIONS TOTALS
------------- ------------- -------------
Net Sales $ 846,405 $ (311,797) $ 1,076,735
Cost of Goods Sold 649,311 (291,947) 751,012
Distribution Expenses - 72,088
------------- ------------- -------------
Gross Profit 170,344 (19,850) 253,635
Selling, General and Administrative expenses 125,819 (19,850) 273,257
Impairment loss on intangible assets 10,181 40,855
Restructuring costs - - 1,798
------------- ------------- -------------
Operating (loss) Income 34,344 - (62,275)
Interest Expense, Net 6,089 - 40,192
Loss on early extinguishment of debt - - 5,049
Equity in earnings of subsidiaries - - -
------------- ------------- -------------
(Loss) Income Before Income Taxes 28,255 - (107,516)
Income Tax (Benefit) Expense 12,337 - (20,089)
Minority Interest, net of tax 7,745 - 7,745
------------- ------------- -------------
Net (Loss) Income $ 8,173 $ - (95,172)
============= ============= =============
CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JULY 28, 2003
(IN THOUSANDS)
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- -------------
Net Sales $ 265,173 $ 795,847 $ (442,185) $ 618,835
Cost of Goods Sold 196,032 621,447 (402,084) 415,395
Distribution Expenses - 46,903 - 46,903
------------- ------------- ------------- -------------
Gross Profit 69,141 127,497 (40,101) 156,537
Selling, General and Administrative expenses 54,385 98,255 (425) 152,215
Lawsuit Settlements, Net 800 - - 800
------------- ------------- ------------- -------------
Operating Income (Loss) 13,956 29,242 (39,676) 3,522
Interest Expense, Net 30,317 5,645 - 35,962
Fair Market Value Adjustment on Derivatives - - - -
Equity in Earnings of Subsidiaries 57,737 (816) (56,921) -
------------- ------------- ------------- -------------
Income (Loss) Before Income Taxes 41,376 22,781 (96,597) (32,440)
Income Tax Expense (Benefit) (13,479) 7,522 - (5,957)
Minority Interest - - - -
------------- ------------- ------------- -------------
Net Income (Loss) $ 54,855 $ 15,259 $ (96,597) $ (26,483)
============= ============= ============= =============
OTHER CONSOLIDATED CONSOLIDATED
SUBSIDIARIES ELIMINATIONS TOTALS
------------- ------------- -------------
Net Sales $ 575,354 $ (299,281) $ 894,908
Cost of Goods Sold 456,712 (293,281) 578,826
Distribution Expenses 11,572 - 58,475
------------- ------------- -------------
Gross Profit 107,070 (6,000) 257,607
Selling, General and Administrative expenses 61,988 (6,000) 208,203
Lawsuit Settlements, Net - - 800
------------- ------------- -------------
Operating Income (Loss) 45,082 - 48,604
Interest Expense, Net 4,242 - 40,204
Fair Market Value Adjustment on Derivatives (2,516) - (2,516)
Equity in Earnings of Subsidiaries - - -
------------- ------------- -------------
Income (Loss) Before Income Taxes 43,356 - 10,916
Income Tax Expense (Benefit) 8,642 - 2,685
Minority Interest 260 - 260
------------- ------------- -------------
Net Income (Loss) $ 34,454 $ - 7,971
============= ============= =============
CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 29, 2002
(IN THOUSANDS)
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- -------------
Net Sales $ 386,156 $ 989,913 $ (609,488) $ 766,581
Cost of Goods Sold 263,727 806,859 (608,687) 461,899
Distribution Expenses 956 54,425 - 55,381
------------- ------------- ------------- -------------
Gross Profit 121,473 128,629 (801) 249,301
Selling, General and Administrative expenses 93,007 99,490 (801) 191,696
Lawsuit Settlements, Net 2,580 - - 2,580
------------- ------------- ------------- -------------
Operating Income (Loss) 25,886 29,139 - 55,025
Interest Expense, Net 33,664 5,368 - 39,032
Fair Market Value Adjustment on Derivatives - - - -
Equity in Earnings of Subsidiaries 36,296 (743) (35,553) -
------------- ------------- ------------- -------------
Income (Loss) Before Income Taxes 28,518 23,028 (35,553) 15,993
Income Tax Expense (Benefit) (1,629) 12,031 - 10,402
Minority Interest - - - -
------------- ------------- ------------- -------------
Net Income (Loss) $ 30,147 $ 10,997 $ (35,553) $ 5,591
============= ============= ============= =============
OTHER CONSOLIDATED CONSOLIDATED
SUBSIDIARIES ELIMINATIONS TOTALS
------------- ------------- -------------
Net Sales $ 438,547 $ (282,649) $ 922,479
Cost of Goods Sold 358,897 (276,649) 544,147
Distribution Expenses 5,450 - 60,831
------------- ------------- -------------
Gross Profit 74,200 (6,000) 317,501
Selling, General and Administrative expenses 37,881 (6,000) 223,577
Lawsuit Settlements, Net - - 2,580
------------- ------------- -------------
Operating Income (Loss) 36,319 - 91,344
Interest Expense, Net 5,399 - 44,431
Fair Market Value Adjustment on Derivatives 2,372 - 2,372
Equity in Earnings of Subsidiaries - - -
------------- ------------- -------------
Income (Loss) Before Income Taxes 28,548 - 44,541
Income Tax Expense (Benefit) 3,992 - 14,394
Minority Interest - -
------------- ------------- -------------
Net Income (Loss) $ 24,556 $ - 30,147
============= ============= =============
F-36
CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JULY 3, 2004
(IN THOUSANDS)
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(101,651) $ (66,112) $ 64,418 $(103,345)
Adjustments to reconcile net income to net cash -
from operating activities:
Imputed interest on note payable and other non-cash items (2,254) - - (2,254)
Deferred income tax (benefit) provision (11,712) (18,749) - (30,461)
Inventory valuation adjustment - 20,532 - 20,532
Fair value adjustment for derivatives - - - -
Foreign currency gains and losses - 678 - 678
Bad debt provision - 2,239 - 2,239
Los on early extinguishment of debt 4,469 580 - 5,049
Equity in income of unconsolidated affilate/
consolidated subsidiaries 52,261 821 (53,082) -
Legal settlements - - - -
Depreciation and amortization 9,511 4,050 - 13,561
Impairment loss on intangible assets 5,883 24,791 - 30,674
Gain on sale of investment - - - -
Loss on disposal of property and equipment 928 1,834 - 2,762
Equity in net income of investees, net of tax - - - -
Minority Interest, net of tax - - - -
Changes in assets and liabilities, net of acquisitions: - - - -
Accounts receivable (246) 28,067 - 27,821
Inventories (3,025) 1,361 (11,336) (13,000)
Prepaid expenses and other current assets (1,697) 1,120 - (577)
Accounts payable 3,173 (3,609) - (436)
Income taxes payable 24,860 (11,990) - 12,870
Accrued expenses 47,323 (40,489) - 6,834
--------- --------- --------- ---------
NET CASH FROM OPERATING ACTIVITIES 27,823 (54,876) - (27,053)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,412) (2,437) - (4,849)
Decrease (increase) in other non-current assets - - - -
Proceeds from sale of property and equipment - 84 - 84
Proceeds from sale of investment - - - -
Additional payment for tradenames (21,875) - - (21,875)
Acquisition of majority interest/businesses,
net of cash acquired - - - -
--------- --------- --------- ---------
NET CASH FROM INVESTING ACTIVITIES (24,287) (2,353) - (26,640)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from revolving line of credit
and other debt - 50,609 - 50,609
Repayment of terminated credit agreement - (105,928) - (105,928)
Proceeds from ameded and restated credit agreement - 105,928 105,928
Repayment of long-term debt - (869) - (869)
Costs associated with refinancing (3,758) (580) - (4,338)
Increase in compensating balances on deposit - - - -
Common stock issued 223 - - 223
Proceeds from termination of swap transaction - - - -
Proceeds of treasury stock - - - -
--------- --------- --------- ---------
NET CASH FROM FINANCING ACTIVITIES (3,535) 49,160 - 45,625
--------- --------- --------- ---------
The effect of exchange rate changes on cash - - - -
Net increase(decrease) in cash and cash equivalents 1 (8,069) - (8,068)
Cash, beginning of year 0 8,972 - 8,972
--------- --------- --------- ---------
Cash, end of year $ 1 $ 903 $ - $ 904
========= ========= ========= =========
OTHER CONSOLIDATED CONSOLIDATED
SUBSIDIARIES ELIMINATIONS TOTALS
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ 8,173 $ - $ (95,172)
Adjustments to reconcile net income to net cash
from operating activities:
Imputed interest on note payable and other non-cash items - - (2,254)
Deferred income tax (benefit) provision (823) - (31,284)
Inventory valuation adjustment - - 20,532
Fair value adjustment for derivatives - - -
Foreign currency gains and losses - - 678
Bad debt provision 1,113 - 3,352
Los on early extinguishment of debt - - 5,049
Equity in income of unconsolidated affilate/
consolidated subsidiaries - - -
Legal settlements - - -
Depreciation and amortization 9,373 - 22,934
Impairment loss on intangible assets 10,181 - 40,855
Gain on sale of investment - - -
Loss on disposal of property and equipment 2,542 - 5,304
Equity in net income of investees, net of tax - - -
Minority Interest, net of tax 7,746 - 7,746
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (3,844) - 23,977
Inventories (32,411) - (45,411)
Prepaid expenses and other current assets (3,808) - (4,385)
Accounts payable 55,284 - 54,848
Income taxes payable 4,799 - 17,669
Accrued expenses (7,858) - (1,024)
--------- -------- ---------
NET CASH FROM OPERATING ACTIVITIES 50,467 - 23,414
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (28,259) - (33,108)
Decrease (increase) in other non-current assets 180 - 180
Proceeds from sale of property and equipment 957 - 1,041
Proceeds from sale of investment - - -
Additional payment for tradenames - - (21,875)
Acquisition of majority interest/businesses,
net of cash acquired - - -
--------- -------- ---------
NET CASH FROM INVESTING ACTIVITIES (27,122) - (53,762)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from revolving line of credit
and other debt 10,438 - 61,047
Repayment of terminated credit agreement - - (105,928)
Proceeds from ameded and restated credit agreement - 105,928
Repayment of long-term debt - - (869)
Costs associated with refinancing - - (4,338)
Increase in compensating balances on deposit (16,600) (16,600)
Common stock issued - - 223
Proceeds from termination of swap transaction - - -
Proceeds of treasury stock - - -
--------- -------- ---------
NET CASH FROM FINANCING ACTIVITIES (6,162) - 39,463
--------- -------- ---------
The effect of exchange rate changes on cash 2,030 - 2,030
Net increase(decrease) in cash and cash equivalents 19,213 - 11,145
Cash, beginning of year 26,730 - 35,702
--------- -------- ---------
Cash, end of year $ 45,943 $ - $ 46,847
========= ======== =========
F-37
CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 28, 2003
(IN THOUSANDS)
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS TOTAL
---------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ 54,855 $ 15,259 $ (96,597) $ (26,483)
Adjustments to reconcile
net income to net cash
from operating activities:
Imputed interest on note payable
and other non-cash items (200) - - (200)
Deferred income tax (benefit) provision 3,571 (1,652) - 1,919
Fair value adjustment for derivatives - - - -
Foreign currency gains & losses - (675) - (675)
Bad debt provision - 5,584 - 5,584
Inventory valuation adjustment - 1,200 - 1,200
Depreciation and amortization 8,397 3,672 - 12,069
Impairment loss on intangible assets 800 - - 800
Loss on disposal of property
and equipment - 348 - 348
Equity in net income of investees,
net of tax (57,737) 816 56,921 -
Minority Interest, net of tax - - - -
Changes in assets and liabilities, net
of acquisitions:
Accounts receivable 708 32,649 - 33,357
Inventories 285 5,573 39,676 45,534
Prepaid expenses and other
current assets 1,142 (2,308) - (1,166)
Intercompany 27,993 17,088 - 45,081
Accounts payable (6,997) 1,815 - (5,182)
Income taxes payable (3,568) (1,854) - (5,422)
Accrued expenses (11,921) (3,841) - (15,762)
---------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES 17,328 73,674 - 91,002
---------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,327) (6,307) - (7,634)
Decrease (increase) in other
non-current assets (250) - - (250)
Acquisition of majority
interest/businesses,
net of cash acquired - - - -
Additional payment for patents
and tradenames (23,873) - - (23,873)
---------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (25,450) (6,307) - (31,757)
---------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from
revolving line of credit
and other debt - (18,881) - (18,881)
Repayment of long-term debt - (47,445) - (47,445)
Proceeds from termination
of swap transaction 8,058 - - 8,058
Costs associated with refinancing (2,807) - - (2,807)
Increase in compensating
balances on deposit 0 - - -
Common stock issued 74 - - 74
---------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 5,325 (66,326) - (61,001)
---------------------------------------------------
The effect of exchange rate changes
on cash - - -
Net increase(decrease) in cash and
cash equivalent (2,797) 1,041 - (1,756)
Cash, beginning of year 2,797 7,931 - 10,728
---------------------------------------------------
Cash, end of year $ - $ 8,972 $ - $ 8,972
===================================================
OTHER CONSOLIDATED CONSOLIDATED
SUBSIDIARIES ELIMINATIONS TOTAL
---------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ 34,454 $ - $ 7,971
Adjustments to reconcile
net income to net cash -
from operating activities: -
Imputed interest on note payable
and other non-cash items 52 - (148)
Deferred income tax (benefit) provision 3,927 - 5,846
Fair value adjustment for derivatives (2,516) - (2,516)
Foreign currency gains & losses - - (675)
Bad debt provision - - 5,584
Inventory valuation adjustment - - 1,200
Depreciation and amortization 5,761 - 17,830
Impairment loss on intangible assets - - 800
Loss on disposal of property
and equipment 302 - 650
Equity in net income of investees,
net of tax (983) - (983)
Minority Interest, net of tax 260 - 260
Changes in assets and liabilities, net
of acquisitions:
Accounts receivable 198 - 33,555
Inventories 13,181 - 58,715
Prepaid expenses and other
current assets 2,160 - 994
Intercompany (45,081) - -
Accounts payable 30,256 - 25,074
Income taxes payable (674) - (6,096)
Accrued expenses (1,739) - (17,501)
-----------------------------------------------
NET CASH FROM OPERATING ACTIVITIES 39,558 - 130,560
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,375) - (23,009)
Decrease (increase) in other
non-current assets 417 - 167
Acquisition of majority
interest/businesses,
net of cash acquired (1,637) - (1,637)
Additional payment for patents
and tradenames - - (23,873)
-----------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (16,595) - (48,352)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from
revolving line of credit
and other debt - - (18,881)
Repayment of long-term debt - - (47,445)
Proceeds from termination
of swap transaction - - 8,058
Costs associated with refinancing - - (2,807)
Increase in compensating
balances on deposit (12,900) - (12,900)
Common stock issued - - 74
-----------------------------------------------
NET CASH FROM FINANCING ACTIVITIES (12,900) - (73,901)
-----------------------------------------------
The effect of exchange rate changes
on cash 840 - 840
Net increase(decrease) in cash and
cash equivalent 10,903 - 9,147
Cash, beginning of year 15,827 - 26,555
-----------------------------------------------
Cash, end of year $ 26,730 $ - $35,702
===============================================
F-38
CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 29, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 30,147 $ 10,997 $(35,553) $ 5,591 $ 24,556 $ - $ 30,147
Adjustments to reconcile net
income (loss) to net cash -
used in operating activities: -
Imputed interest on note payable
and other non-cash items 4,517 - - 4,517 1,528 - 6,045
Gain on sale of investment - - - - (200) - (200)
Deferred income tax (benefit) provision (1,415) (2,927) - (4,342) 563 - (3,779)
Fair value adjustment for derivatives - - - - 2,372 - 2,372
Foreign currency gains & losses - 1,135 - 1,135 (685) - 450
Bad debt provision - 3,454 - 3,454 - - 3,454
Inventory valuation adjustment - (655) - (655) - - (655)
Legal settlements 2,580 - - 2,580 - - 2,580
Depreciation and amortization 20,605 4,938 - 25,543 5,106 - 30,649
Equity in net income of investess,
net of tax (36,296) 743 35,553 - (761) - (761)
Changes in assets and liabilities,
net of acquisitions: -
Accounts receivable 113,770 (129,426) - (15,656) (16,625) - (32,281)
Inventories (1,831) (25,164) - (26,995) (19,967) - (46,962)
Prepaid expenses and other
current assets 1,860 301 - 2,161 (5,103) - (2,942)
Intercompany (91,147) 56,883 - (34,264) 34,264 - -
Accounts payable (1,838) (112) - (1,950) (9,832) - (11,782)
Income taxes payable (7,402) 17,288 - 9,886 2,984 - 12,870
Accrued expenses 8,114 7,150 - 15,264 859 - 16,123
--------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES 41,664 (55,395) - (13,731) 19,059 - 5,328
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,169) (1,877) - (10,046) (6,206) - (16,252)
Increase in other non-current assets 4,303 792 - 5,095 (6,069) - (974)
Proceeds from sale of investment - - - - 501 - 501
Acquisition of majority
interest/businesses,
net of cash acquired (5,300) - - (5,300) (2,014) - (7,314)
Additional payment for patents
and tradenames (38,746) - - (38,746) - - (38,746)
--------------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (47,912) (1,085) - (48,997) (13,788) - (62,785)
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayment) from
revolving line of credit
and other debt (2,745) 74,976 - 72,231 - - 72,231
Repayment of long-term debt - (18,807) - (18,807) - - (18,807)
Proceeds from termination of
swap transaction 8,146 - - 8,146 - - 8,146
Costs associated with refinancing (1,115) - - (1,115) - - (1,115)
Increase in compensating
balances on deposit - - - - (4,500) (4,500)
Common stock issued 175 - - 175 - - 175
Treasury stock purchase (1,125) - - (1,125) - - (1,125)
--------------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 3,336 56,169 - 59,505 (4,500) - 55,005
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The effect of exchange rate changes on cash (531) - - (531) (559) - (1,090)
Net increase(decrease) in cash
and cash equivalents (3,443) (311) - (3,754) 212 - (3,542)
Cash, beginning of year 6,240 8,242 - 14,482 15,615 - 30,097
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Cash, end of year $ 2,797 $ 7,931 $ - $10,728 $ 15,827 $ - $ 26,555
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F-39
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
3.1 Second Amended and Restated Certificate of Incorporation
of Registrant, as amended.
3.2 Certificate of Designation for the Series A Convertible
Preferred Stock of the Registrant.
3.3 Certificate of Amendment to Second Amended and Restated
Certificate of Incorporation.
3.4 Certificate of Amendment to Second Amended and Restated
Certificate of Incorporation.
3.5 Certificate of Designation of Series B Junior
Participating Preferred Stock.
3.6 By-laws of the Registrant. Incorporated by reference to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-42097).
4.1 Specimen Certificate for shares of Common Stock, $.01
par value, of the Registrant. Incorporated by reference
to the Registrant's Registration Statement on Form S-1
(Registration No. 33-42097).
4.2 Form of Note for Registrant's 10 3/4% Senior
Subordinated Notes. Incorporated by reference to the
Registrant's Registration Statement on Form S-4
(Registration No. 333-70169)
4.3 Indenture dated December 16, 1998 between Norwest Bank
National Association, as Issuer, and the Registrant
relating to the Registrant's 10 3/4% Senior Subordinated
Notes. Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Registration No.
333-70169)
4.4 Indenture, dated as of April 23, 2001, amount Salton,
Inc., the Guarantors (as defined therein), and Wells
Fargo Bank Minnesota, N.A., as trustee, relating to
$250,000,000 in aggregate principal amount and maturity
of 12 1/4% senior subordinated notes due 2008.
Incorporated by Reference to the Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 2001.
4.5 Form of Note for Registrant's 12 1/4% senior
subordinated notes due April 15, 2008. Incorporated by
Reference to the Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2001.
4.6 Rights Agreement dated as of June 28, 2004 between the
registrant and UMB Bank, N.A., as Rights Agreement
Incorporated by reference to the Registrant's Current
Report on Form 8-K dated June 28, 2004.
4.7 Letter to Stockholders relating to the adoption of a
stockholder rights plan with attachment. Incorporated by
reference to the Registrant's Current Report on Form 8-K
dated June 28, 2004.
10.1 Salton/Maxim Housewares, Inc. Stock Option Plan.
Incorporated by reference to the Registrant's
Registration Statement on form S-1 (Registration No.
33-42097).
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10.2 Form of Sales Representative Agreement generally used by
and between the Registrant and its sales
representatives. Incorporated by reference to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-42097).
10.3 Salton/Maxim Housewares, Inc. 1995 Employee Stock Option
Plan. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended December 30, 1995.
10.4 Salton/Maxim Housewares, Inc. Non-Employee Directors
Stock Option Plan. Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 30, 1995.
10.5 Stock Purchase Agreement dated July 15, 1998 by and
among the Registrant and Centre Capital Investors III,
L.P., Centre Capital Tax-Exempt Investors II, L.P.,
Centre Capital Offshore Investors, L.P., The State Board
of Administration of Florida, Centre Parallel Management
Partners, L.P. and Centre Partners Coinvestment, L.P.
Incorporated by reference to the Registrant's Current
Report on Form 8-K dated July 15, 1998.
10.6 Registration Rights Agreement dated July 15, 1998 by and
among the Registrant and Centre Capital Investors II,
L.P., Centre Capital Tax-Exempt Investors II, L.P.,
Centre Capital Offshore Investors II, L.P., The State
Board of Administration of Florida, Centre Parallel
Management Partners, L.P. and Centre Partners
Coinvestment, L.P. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 28,
1998.
10.7 The Salton, Inc. 1998 Employee Stock Option Plan.
Incorporated by reference to the Registrant's Definitive
Proxy Statement on Schedule 14A filed on December 2,
1998.
10.8 Agreement effective as of July 1, 1999 between Salton
and George Foreman. Incorporated by reference to the
Registrant's, Current Report on Form 8-K dated December
9, 1999.
10.9 Agreement effective as July 1, 1999 between Salton and
Sam Perlmutter. Incorporated by reference to the
Registrant's, Current Report on Form 8-K dated December
9, 1999.
10.10 Agreement effective as of July 1, 1999 between Salton
and Michael Srednick Incorporated by reference to the
Registrant, Current Report on Form 8-K dated December 9,
1999.
10.11 The Salton, Inc. 1999 Employee Stock Option Plan.
Incorporated by reference to the Registrant's Definitive
Proxy Statement on Schedule 14A filed December 9, 1999.
10.12 Salton, Inc. 2001 Employee Stock Option Plan.
Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30,
2001.
10.13 Salton, Inc. 2002 Stock Option Plan. Incorporated by
reference to Quarterly Report on Form 10-Q for the
fiscal quarter ended March 30, 2002.
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10.14 License agreement between Westinghouse Electric
Corporation and Salton, Inc. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 29, 2002.
10.15 Employment Agreement effective as of January 1, 2003
between Salton, Inc. and David C. Sabin Incorporated by
reference to the Registrant's Current Report on Form 8-K
dated October 23, 2002
10.16 Employment Agreement effective as of January 1, 2003
between Salton, Inc. and Leonhard Dreimann Incorporated
by reference to the Registrant's Current Report on Form
8-K dated October 23, 2002
10.17 Employment Agreement effective as of January 1, 2003
between Salton, Inc. and William B. Rue Incorporated by
reference to the Registrant's Current Report on Form 8-K
dated October 23, 2002
10.18 Employment Agreement effective as of January 1, 2003
between Salton, Inc. and David M. Mulder Incorporated by
reference to the Registrant's Current Report on Form 8-K
dated October 23, 2002
10.19 Credit Agreement, dated as of May 9, 2003, among the
lenders thereto, Wachovia Bank, National Association, as
administrative agent and collateral agent and as a
co-agent, Bank of America, N.A., as syndication agent
and co- documentation agent and as a co-agent, Banc of
America Securities LLC, as co-arranger and co-book
runner and Wachovia Securities, Inc, as co-arranger and
co-book runner, Bank One, N.A. and Fleet Capital
Corporation each as co-documentation agents, Salton,
Inc., each of Salton's subsidiaries listed on the
signature pages thereto and each of Salton's other
subsidiaries listed on the signature pages thereto as
guarantors. Incorporated by reference to the Quarterly
Report on Form 10-Q for the fiscal quarter ended March
29, 2003.
10.20 Agreement dated as of May 28, 2003, between Salton, Inc.
and George Foreman. Incorporated by reference to the
Current Report on Form 8K dated May 29, 2003.
10.21 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.
10.22 Forbearance Agreement and Amendment dated as May 10,
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 to the Form 8-K
filed on May 11, 2004.
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10.23 First Amendment to Forbearance Agreement dated as of
June 10, 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 to the Form 8-K filed on June 10, 2004.
10.24 Amended and Restated Credit Agreement dated as of June
15, 2004 among the financial institutions named therein,
Wachovia Bank, as the Agent, and Silver Point Finance,
LLC, as the Co-Agent, Syndication Agent, Documentation
Agent, Arranger and Book Runner, and Salton, Inc, each
of its subsidiaries that are signatories thereto as the
Borrowers and each of its other subsidiaries that are
signatories thereto as Guarantors. Incorporated by
reference to the Form 8-K filed on June 15, 2004.
12(A) Computation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
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 by the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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