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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934 For the Quarterly Period Ended January 1, 2005 or
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934 For the Transition Period From ________ to _________.
Commission file number: 0-19557
Salton, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3777824
-------- ----------------
(State of other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1955 Field Court 60045
Lake Forest, IL (Zip Code)
(Address of principal executive offices)
(847) 803-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by the check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of February 4, 2005,
11,376,297 shares of its $0.01 par value Common Stock.
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - January 1, 2005 and December 27, 2003 3
Consolidated Statements of Income - Thirteen weeks ended
January 1, 2005 and December 27, 2003 and Twenty-six
weeks ended January 1, 2005 and December 27, 2003
Consolidated Statements of Cash Flows - Twenty-six weeks ended 5
January 1, 2005 and December 27, 2003
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and 20
Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk 28
Controls and Procedures
Item 4: 29
PART II OTHER INFORMATION
Item 1: Legal Proceedings 29
Item 4: Submission of Matters to a Vote of Security Holders 32
Signature 33
Item 6: Exhibits 34
2
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA) JANUARY 1, 2005 JULY 3, 2004
--------------- ------------
ASSETS
CURRENT ASSETS:
Cash $ 37,370 $ 46,847
Compensating balances on deposit 34,465 34,000
Accounts receivable, less allowances 279,734 180,391
Inventories 277,861 253,627
Prepaid expenses and other current assets 19,001 21,267
Deferred income taxes 24,104 25,742
--------- ---------
Total Current Assets 672,535 561,874
Property, Plant and Equipment, net 78,985 81,152
Tradenames 186,484 184,421
Non-Current Deferred Tax Asset 17,668 11,589
Other Assets 14,439 15,516
--------- ---------
TOTAL ASSETS $ 970,111 $ 854,552
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit and other current debt $ 127,570 $ 48,667
Senior subordinated notes due 2005 - current 125,000 --
Accounts payable 133,258 137,671
Accrued expenses 85,004 60,627
Income taxes payable 14,134 8,805
--------- ---------
Total Current Liabilities 484,966 255,770
Senior Subordinated Notes Due 2005 -- 125,000
Senior Subordinated Notes due 2008, including an adjustment of
$8,332 and $9,581 to the carrying value related
to interest rate swap agreements, respectively 157,515 158,642
Term Loan and Other Notes Payable 101,943 100,761
Other Long Term Liabilities 17,683 17,288
--------- ---------
762,107 657,461
Minority Interest 26,347 23,515
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value; authorized, 2,000,000
shares; 40,000 shares issued -- --
Common Stock, $0.01 par value; authorized, 40,000,000
shares; issued and outstanding: 2005-11,376,297 shares;
2004-11,370,282 shares 148 148
Treasury Stock - at cost (65,793) (65,793)
Additional Paid-In Capital 96,107 96,147
Accumulated Other Comprehensive Income 21,219 12,668
Retained Earnings 129,976 130,406
--------- ---------
Total Stockholders' Equity 181,657 173,576
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 970,111 $ 854,552
========= =========
See Notes to Consolidated Financial Statements.
3
SALTON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA) 13 WEEKS ENDED 26 WEEKS ENDED
---------------------------------- ------------------------------------
January 1, 2005 December 27, 2003 January 1, 2005 December 27, 2003
-------------- ----------------- --------------- -----------------
NET SALES $ 376,976 $ 397,103 $ 651,111 $ 635,642
Cost of Goods Sold 256,090 252,674 450,940 410,630
Distribution Expenses 21,330 21,051 37,098 37,451
------------ ------------ ------------ ------------
GROSS PROFIT 99,556 123,378 163,073 187,561
Selling, General and Administrative Expenses 77,462 90,514 130,549 142,306
Restructuring Costs 118 -- 790 --
------------ ------------ ------------ ------------
OPERATING INCOME 21,976 32,864 31,734 45,255
Interest Expense, net 13,807 10,333 26,845 20,011
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 8,169 22,531 4,889 25,244
Income Tax Expense 2,835 7,411 1,686 8,293
Minority Interest, net of tax 2,577 2,774 3,633 3,864
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 2,757 $ 12,346 $ (430) $ 13,087
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,372,138 11,189,836 11,371,542 11,188,496
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 15,138,664 15,307,519 11,371,542 15,206,259
Net Income (Loss) per Common Share: Basic $ 0.24 $ 1.10 $ (0.04) $ 1.17
Net Income (Loss) per Common Share: Diluted $ 0.18 $ 0.81 $ (0.04) $ 0.86
See Notes to Consolidated Financial Statements.
4
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS) 26 WEEKS ENDED
---------------------------
JANUARY 1, DECEMBER 27,
2005 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $ (430) $ 13,087
Adjustments to Reconcile Net (Loss) Income to Net Cash from Operating Activities:
Imputed interest on notes payable and other non-cash items (910) (908)
Deferred income tax provision (5,878) 134
Depreciation and amortization 12,125 10,877
Bad debt (recovery) provision (1,468) 1,063
Loss on disposal of equipment 38 63
Inventory valuation adjustment (899) 1,262
Foreign currency gains and losses (925) 344
Minority interest, net of tax 3,633 3,864
Changes in assets and liabilities:
Accounts receivable (90,087) (139,222)
Inventories (15,386) (20,173)
Prepaid expenses and other current assets 2,164 (4,333)
Other non-current assets (715) (372)
Accounts payable (9,769) 55,540
Income taxes payable 4,579 16,440
Accrued expenses 22,268 21,900
--------- ---------
NET CASH FROM OPERATING ACTIVITIES (81,660) (40,434)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,962) (9,058)
Proceeds from sale of property and equipment 136 --
Additional payment for tradenames (251) (21,666)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES (6,077) (30,724)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit and other debt 79,080 70,976
Repayment of long term debt (486) (429)
Distributions to minority shareholders (2,296) --
Costs associated with refinancing (217) (575)
Common stock issued 27 42
Increase in compensating balances on deposit (465) (5,600)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES 75,643 64,414
--------- ---------
Effect of Exchange Rate Changes on Cash 2,617 338
--------- ---------
Net Change in Cash (9,477) (6,406)
Cash, Beginning of Period 46,847 35,702
--------- ---------
Cash, End of Period $ 37,370 $ 29,296
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid (Received) During the Period for:
Interest $ 23,190 $ 19,018
Income taxes, net of (refunds) $ 3,964 $ (8,376)
See Notes to Consolidated Financial Statements.
5
SALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying consolidated balance sheets
and related interim consolidated statements of income and cash flows
include all adjustments, consisting only of normal recurring items,
necessary for their fair presentation in conformity with principles,
generally accepted in the United States of America. Preparing financial
statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses.
Actual results may differ from these estimates. Our business is highly
seasonal, with operating results varying from quarter to quarter. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and consolidated financial statements
and notes thereto included in the Salton, Inc. 2004 Annual Report on Form
10-K. Certain reclassifications have been made for consistent presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share Based Payment", which replaces Statement No.
123, "Accounting for Stock-Based Compensation," and APB No. 25, "Accounting
for Stock Issued to Employees." This statement requires compensation
expense to be measured based on fair value of the stock options, and to be
recognized as an expense on the financial statements. This statement is
effective for fiscal periods beginning after June 15, 2005. The Company
will be adopting this statement for the first quarter of fiscal 2006,
beginning July 3, 2005, and is currently evaluating the impact on its
financial statements.
On October 22, 2004, the American Jobs Creation Act ("the AJCA") was signed
into law. The AJCA provides for a deduction of 85% of certain foreign
earnings that are repatriated, as defined in the AJCA. The Company has
completed its evaluation of the repatriation provision of the Act and does
not intend to apply this provision to qualifying earnings repatriations.
The Company currently has options to employ lower tax alternatives for
potential future foreign earnings repatriations, including accumulated
foreign earnings that were previously taxed in the U.S., as well as the use
of the Company's U.S. net operating loss carryforward.
3. FINANCING ARRANGEMENTS
On September 28, 2004 Salton Europe, Limited ("Salton Europe"), the
Company's wholly owned subsidiary, amended its facility (the "Facility
Letter") agreement with Hong Kong Shanghai Bank. The amended Facility
Letter includes an overdraft facility of up to (pound)8 million ($15.3
million) and a money market borrowing facility of up to (pound)7 million
($13.4 million). In addition, Salton Europe has an invoice finance facility
of between (pound)15 and (pound)40 million ($28.7 million and $76.6
million) depending on seasonality and accounts receivable levels. As of
January 1, 2005, there was $41.4 million outstanding under the facility,
which is included in other current debt.
The Company has $125.0 million of 10 3/4% senior subordinated notes
outstanding with a maturity date of December 15, 2005. As of January 1,
2005, the notes have been reclassified to current debt.
6
4. STOCK-BASED COMPENSATION
At January 1, 2005, the Company had various stock-based employee
compensation plans, which are described more fully in Note 10 of the
Company's 2004 Annual Report on Form 10-K. The Company accounts for those
plans in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as no
options granted under those plans had an exercise price less than the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation."
13 WEEKS ENDED 26 WEEKS ENDED
-------------------------- -------------------------
January 1, December 27, January 1, December 27,
(In thousands except earnings per share) 2005 2003 2005 2003
--------- ----------- --------- -----------
Net income (loss) - as reported $ 2,757 $ 12,346 $ (430) $ 13,087
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related taxes 287 427 572 854
------- -------- ------- --------
Net income (loss) - pro forma $ 2,470 $ 11,919 $(1,002) $ 12,233
======= ======== ======= ========
Earnings (Loss) per share - basic
As reported $ 0.24 $ 1.10 $ (0.04) $ 1.17
Pro forma 0.22 1.07 (0.09) 1.09
Earnings (Loss) per share - diluted
As reported $ 0.18 $ 0.81 $ (0.04) $ 0.86
Pro forma 0.16 0.78 (0.09) 0.80
5. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Basic net income per common share is computed based upon the weighted
average number of common shares outstanding. Diluted net income per common
share is computed based upon the weighted average number of common shares
outstanding, adjusted for dilutive common stock equivalents applying the
treasury stock method for options and warrants and the if-converted method
for convertible securities.
Options and warrants to purchase 2,524,372 shares of common stock at a
price range of $5.83 to $37.00 per share and 1,155,070 shares of common
stock at a price range of $13.92 to $37.00 per share were outstanding at
January 1, 2005 and December 27, 2003, respectively, but were not included
in the computation of diluted shares because the exercise prices were
greater than the average market price of the common shares. Options to
purchase 270,000 common shares at a price of $29.25 per share were not
included in the computation of diluted shares for the twenty-six weeks
ended December 27, 2003 because the options were contingent upon the
Company's share price reaching specified targets for a specified period of
time.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage foreign
currency risk. The Company does not enter into derivative financial
instruments for trading purposes. The Company uses forward exchange
contracts to hedge foreign currency payables for periods consistent with
the expected cash flow of the underlying transactions. The contracts
generally mature within one year and are designed to limit exposure to
exchange rate fluctuations, primarily related to the Great Britain Pound
and the South Africa Rand to the U.S. Dollar.
7
All foreign exchange contracts have been recorded in the consolidated
balance sheets within accrued expenses at a fair value of $5.7 million and
$8.7 million at January 1, 2005 and July 3, 2004, respectively. The change
in the fair value of contracts in the second quarter was $4.2 million.
There was $(2.3) million and $(6.0) million at January 1, 2005 and July 3,
2004, respectively, recorded in accumulated other comprehensive income, net
of tax, related to these contracts. The Company anticipates that all gains
and losses deferred in accumulated other comprehensive income related to
foreign exchange contracts will be reclassified into earnings within the
next twelve months as the related inventories are sold. At January 1, 2005,
the Company had foreign exchange forward contracts for the purchase of 70.7
million U.S. dollars. Contracts for the purchase of 25.9 million U.S.
dollars were entered into during the second quarter of fiscal 2005.
7. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
For the thirteen weeks ended January 1, 2005 and December 27, 2003,
components of other comprehensive income include foreign currency
translation adjustments of $9.4 million and $8.3 million, respectively and
derivative liability adjustments of $(1.9) million and $(5.2) million,
respectively. For the twenty-six weeks ended January 1, 2005 and December
27, 2003, components of other comprehensive income include foreign currency
translation adjustments of $4.9 million and $10.9 million, respectively and
derivative liability adjustments of $3.7 million and $(5.2) million,
respectively.
13 Weeks Ended 26 Weeks Ended
----------------------------- ---------------------------
(In thousands) January 1, December 27, January 1, December 27,
2005 2003 2005 2003
---------- ------------ ---------- -----------
Net Income (Loss) $ 2,757 $ 12,346 $ (430) $ 13,087
Other Comprehensive Income, net of tax of
$(594) and $1,564, $1,157 and $1,568, respectively 7,492 3,104 8,551 5,732
-------- -------- ------- --------
Comprehensive Income $ 10,249 $ 15,450 $ 8,121 $ 18,819
======== ======== ======= ========
Accumulated other comprehensive income is comprised of the following:
As Of
------------------------------
(In thousands) January 1, 2005 July 3, 2004
--------------- ------------
Minimum Pension Liability, net of tax of $5,041 and $4,888, respectively $ (10,530) $ (10,172)
Unrealized Loss on Derivative, net of tax of $1,014 and $2,663, respectively (2,297) (6,030)
Foreign Currency Translation 34,046 28,870
-------- --------
$ 21,219 $ 12,668
======== ========
8. PENSION BENEFIT PLANS
The components of net periodic pension cost are as follows:
(In thousands) Domestic Salton Europe Total
13 Weeks Ended: 1/1/2005 12/27/2003 1/1/2005 12/27/2003 1/1/2005 12/27/2003
-------- ---------- -------- ---------- -------- ----------
Service cost-benefits earned during the year $ 42 $ 42 $ 79 $ 73 $ 121 $ 115
Interest cost on projected benefit obligation 176 179 559 466 735 645
Actuarial return on plan assets (156) (166) (433) (346) (589) (512)
Net amortization and deferral 65 99 188 177 253 276
----- ----- ----- ----- ----- -----
Net pension cost $ 127 $ 154 $ 393 $ 370 $ 520 $ 524
===== ===== ===== ===== ===== =====
8
(In thousands) Domestic Salton Europe Total
26 Weeks Ended: 1/1/2005 12/27/2003 1/1/2005 12/27/2003 1/1/2005 12/27/2003
-------- ---------- -------- ---------- ---------------------
Service cost-benefits earned during the year $ 84 $ 84 $ 156 $ 147 $ 240 $ 231
Interest cost on projected benefit obligation 353 357 1,100 932 1,453 1,289
Actuarial return on plan assets (311) (331) (852) (693) (1,163) (1,024)
Net amortization and deferral 129 197 370 353 499 550
----- ----- ------ ----- ------- -------
Net pension cost $ 255 $ 307 $ 774 $ 739 $ 1,029 $ 1,046
===== ===== ====== ===== ======= =======
The Company previously disclosed in its financial statements for the year
ended July 3, 2004, that it expected to contribute $0.7 million to its
domestic pension plans and $0.3 million to the Salton Europe pension plan
in fiscal 2005. As of January 1, 2005, $0.5 million and $0.2 million of
contributions have been made to the domestic and Europe plans,
respectively.
9. OPERATING SEGMENTS AND MAJOR CUSTOMERS
Salton consists of a single operating segment which designs, sources,
markets and distributes a diversified product mix for use in the home. The
product mix consists of small kitchen and home appliances, 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.
Major Customers - For the thirteen weeks ended January 1, 2005, one
customer accounted for 13.4% of total net sales. During the same period of
fiscal 2004, one customer accounted for 11.5% of total net sales. For the
first half of fiscal 2005, two customers accounted for 13.0% and 10.1% of
total net sales, respectively. During the first half of fiscal 2004, no one
customer accounted for more than 10.0% of net sales.
10. 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. The plaintiffs have voluntarily dismissed the Mariss Partners
lawsuit.
9
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.
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 alleges that the software on the electronic controller
of the One:One infringes Philips copyright and seeks unspecified money
damages and injunctive relief. At issue were the 55,624 units initially
introduced into the United Kingdom; Salton has discontinued the sales of
these units. This case is currently pending in the United Kingdom. E&E has
intervened in this action, and E&E's motion to dismiss or in the
alternative stay this action in favor of the Hong Kong action described
above was denied. On October 14, 2004, Salton offered to submit to judgment
in this action, and in the event the parties cannot agree on a royalty for
the use of this software in the 55,624 units, a judicial determination will
have to be made of any monetary award.
PRODUCT LIABILITY
On or about October 27, 2004, a lawsuit entitled DiNatale vs. Salton was
filed in the New York State Supreme Court against the Company. The
plaintiffs, who seek unspecified damages, allege that they were injured by
water contaminated with lead taken from a tea kettle sold by the Company
under its Russell Hobbs brand. The plaintiffs' attorney is seeking to
convert the lawsuit into a class action suit.
10
The manufacturer of the product and its insurer are defending this lawsuit.
The Company's attorneys and its insurers are cooperating in the defense of
the lawsuit.
Shortly after receiving notice of the lawsuit, the Company voluntarily
suspended selling the product. The Company believes that at substantially
the same time, the two retailers who had purchased the kettle from the
Company also suspended selling the product. Based on information received
from the two retailers, the Company believes that only a limited number of
the kettles were sold to consumers. The Company voluntarily contacted the
U.S. Food and Drug Administration and has shared its information and test
results concerning the product with the agency.
The Company is reviewing the status of any other similar products, which
the same manufacturer has sold to the Company in recent years.
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 to filing for bankruptcy. Homeplace's total
claimed preferences are approximately $3.5 million. The trial started the
first week of November 2004 in the U.S. Bankruptcy Court for the District
of Delaware. Settlement discussions to date have not, in Salton's view,
been meaningful. 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.
11
11. 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).
12
CONSOLIDATING BALANCE SHEET AS OF JANUARY 1, 2005
(IN THOUSANDS)
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS TOTAL
---------------------------------------------------
ASSETS
Current Assets:
Cash $ 1 $ 700 $ -- $ 701
Compensating balances on deposits -- -- -- --
Accounts receivable, net of allowances -- 127,318 -- 127,318
Inventories 12,350 156,078 (23,702) 144,726
Prepaid expenses and other current assets 2,793 3,820 -- 6,613
Intercompany 114,711 (69,484) (170) 45,057
Deferred income taxes 1,314 16,577 -- 17,891
------------------------------------------------
Total Current Assets 131,169 235,009 (23,872) 342,306
Property, Plant and Equipment, net 8,611 13,482 -- 22,093
Investments in Subsidiaries 412,759 53,674 (466,433) --
Tradenames 134,974 10,313 -- 145,287
Non-current deferred tax asset -- -- -- --
Other Assets 10,414 861 -- 11,275
------------------------------------------------
Total Assets $ 697,927 $ 313,339 $(490,305) $ 520,961
================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ -- $ 81,507 $ -- $ 81,507
Senior subordinated notes due 2005 125,000 -- -- 125,000
Accounts payable 2,068 4,039 2 6,109
Accrued expenses 9,665 14,071 -- 23,736
Income taxes payable 4,438 (1,469) -- 2,969
------------------------------------------------
Total current liabilities 141,171 98,148 2 239,321
Non-current Deferred Income Taxes (12,237) (9,167) -- (21,404)
Senior subordinated notes due 2008,
including an adjustment of $8,332 to the carrying
value related to interest rate swap agreements 157,515 -- -- 157,515
Term loan and other notes payable -- 100,082 -- 100,082
Other Long Term Liability 486 3,651 -- 4,137
------------------------------------------------
Total liabilities 286,935 192,714 2 479,651
Minority interest -- -- -- --
Stockholders' Equity 410,992 120,625 (490,307) 41,310
------------------------------------------------
Total Liabilities and Stockholders' Equity $ 697,927 $ 313,339 $(490,305) $ 520,961
================================================
OTHER CONSOLIDATED CONSOLIDATED
SUBSIDIARIES ELIMINATIONS TOTALS
--------------------------------------------
Current Assets:
Cash $ 36,669 $ -- $ 37,370
Compensating balances on deposits 34,465 -- 34,465
Accounts receivable, net of allowances 152,416 -- 279,734
Inventories 133,135 -- 277,861
Prepaid expenses and other current assets 12,388 -- 19,001
Intercompany (45,057) -- --
Deferred income taxes 6,213 -- 24,104
-----------------------------------------
Total Current Assets 330,229 -- 672,535
Property, Plant and Equipment, net 56,892 -- 78,985
Investments in Subsidiaries -- -- --
Tradenames 41,197 -- 186,484
Non-current deferred tax asset -- 17,668 17,668
Other Assets 3,164 -- 14,439
-----------------------------------------
Total Assets $ 431,482 $ 17,668 $ 970,111
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 46,063 $ -- $ 127,570
Senior subordinated notes due 2005 -- -- 125,000
Accounts payable 127,149 -- 133,258
Accrued expenses 61,268 -- 85,004
Income taxes payable 11,165 -- 14,134
-----------------------------------------
Total current liabilities 245,645 -- 484,966
Non-current Deferred Income Taxes 3,736 17,668 --
Senior subordinated notes due 2008,
including an adjustment of $8,332 to the carrying
value related to interest rate swap agreements -- -- 157,515
Term loan and other notes payable 1,861 -- 101,943
Other Long Term Liability 13,546 -- 17,683
-----------------------------------------
Total liabilities 264,788 17,668 762,107
Minority interest 26,347 -- 26,347
Stockholders' Equity 140,347 -- 181,657
-----------------------------------------
Total Liabilities and Stockholders' Equity $ 431,482 $ 17,668 $ 970,111
=========================================
13
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 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 $9,581 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
======================================================
OTHER CONSOLIDATED CONSOLIDATED
SUBSIDIARIES ELIMINATIONS TOTALS
------------------------------------------
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 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 $9,581 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
==========================================
14
CONSOLIDATING STATEMENT OF INCOME FOR THE THIRTEEN WEEKS ENDED JANUARY 1, 2005
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
------------------------------------------------------------------------------------------------
Net Sales $ 70,297 $ 191,908 $(109,824) $ 152,381 $ 306,357 $ (81,762) $ 376,976
Cost of Goods Sold 57,147 161,976 (112,679) 106,444 226,025 (76,379) 256,090
Distribution Expenses -- 10,110 -- 10,110 11,220 21,330
------------------------------------------------------------------------------------------------
Gross Profit 13,150 19,822 2,855 35,827 69,112 (5,383) 99,556
Selling, General and
Administrative expenses 16,641 12,380 -- 29,021 53,824 (5,383) 77,462
Restructuring Costs (102) 220 -- 118 -- 118
------------------------------------------------------------------------------------------------
Operating Income (3,389) 7,222 2,855 6,688 15,288 -- 21,976
Interest Expense, net 7,028 4,042 -- 11,070 2,737 -- 13,807
Income (Loss) from Subsidiary (8,509) (20) 8,529 -- -- -- --
------------------------------------------------------------------------------------------------
(Loss) Income Before Income Taxes (1,908) 3,200 (5,674) (4,382) 12,551 -- 8,169
Income Tax (Benefit) Expense (1,830) -- -- (1,830) 4,665 -- 2,835
Minority Interest, net of tax -- -- -- -- 2,577 -- 2,577
------------------------------------------------------------------------------------------------
Net (Loss) Income $ (78) $ 3,200 $ (5,674) $ (2,552) $ 5,309 $ -- $ 2,757
------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF INCOME FOR THE THIRTEEN WEEKS ENDED DECEMBER 27, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------------------------------------------------------------------------------------------
Net Sales $ 94,317 $ 265,320 $(152,655) $ 206,982 $ 289,853 $ (99,732) $ 397,103
Cost of Goods Sold 72,454 221,949 (155,770) 138,633 211,573 (97,532) 252,674
Distribution Expenses -- 12,859 -- 12,859 8,192 -- 21,051
-------------------------------------------------------------------------------------------
Gross Profit 21,863 30,512 3,115 55,490 70,088 (2,200) 123,378
Selling, General and
Administrative expenses 14,139 37,508 -- 51,647 40,367 (1,500) 90,514
-------------------------------------------------------------------------------------------
Operating Income (Loss) 7,724 (6,996) 3,115 3,843 29,721 (700) 32,864
Interest Expense, net 6,933 1,571 -- 8,504 1,829 -- 10,333
Income (Loss) from Subsidiary (10,177) 216 9,961 -- -- -- --
-------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 10,968 (8,783) (6,846) (4,661) 27,892 (700) 22,531
Income Tax (Benefit) Expense 1,252 (1,274) -- (22) 7,433 -- 7,411
Minority Interest, net of tax -- -- 2,774 -- 2,774
-------------------------------------------------------------------------------------------
Net Income (Loss) $ 9,716 $ (7,509) $ (6,846) $ (4,639) $ 17,685 $ (700) $ 12,346
===========================================================================================
15
CONSOLIDATING STATEMENT OF INCOME FOR THE TWENTY SIX WEEKS ENDED JANUARY 1, 2005
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
----------------------------------------------------------------------------------------------
Net Sales $ 118,377 $ 341,466 $(191,974) $ 267,869 $ 543,170 $(159,928) $ 651,111
Cost of Goods Sold 96,488 286,266 (196,613) 186,141 415,060 (150,261) 450,940
Distribution Expenses -- 18,763 -- 18,763 18,335 -- 37,098
----------------------------------------------------------------------------------------------
Gross Profit 21,889 36,437 4,639 62,965 109,775 (9,667) 163,073
Selling, General and
Administrative expenses 30,984 22,665 -- 53,649 86,567 (9,667) 130,549
Restructuring Costs 354 436 -- 790 -- 790
----------------------------------------------------------------------------------------------
Operating Income (9,449) 13,336 4,639 8,526 23,208 -- 31,734
Interest Expense, net 14,335 7,521 -- 21,856 4,989 -- 26,845
Income (Loss) from Subsidiary (14,943) (27) 14,970 -- -- -- --
----------------------------------------------------------------------------------------------
(Loss) Income Before Income Taxes (8,841) 5,842 (10,331) (13,330) 18,219 -- 4,889
Income Tax (Benefit) Expense (3,799) -- -- (3,799) 5,485 -- 1,686
Minority Interest, net of tax -- -- -- -- 3,633 -- 3,633
----------------------------------------------------------------------------------------------
Net (Loss) Income $ (5,042) $ 5,842 $ (10,331) $ (9,531) $ 9,101 $ -- $ (430)
==============================================================================================
CONSOLIDATED STATEMENT OF INCOME FOR THE TWENTY-SIX WEEKS ENDED
DECEMBER 27, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
----------------------------------------------------------------------------------------------
Net Sales $ 166,957 $ 441,197 $(273,429) $ 334,725 $ 496,680 $(195,763) $ 635,642
Cost of Goods Sold 128,352 373,004 (272,346) 229,010 373,683 (192,063) 410,630
Distribution Expenses -- 23,840 23,840 13,611 -- 37,451
----------------------------------------------------------------------------------------------
Gross Profit 38,605 44,353 (1,083) 81,875 109,386 (3,700) 187,561
Selling, General and
Administrative expenses 25,385 60,827 -- 86,212 59,094 (3,000) 142,306
----------------------------------------------------------------------------------------------
Operating Income (Loss) 13,220 (16,474) (1,083) (4,337) 50,292 (700) 45,255
Interest Expense, net 14,166 2,486 -- 16,652 3,359 -- 20,011
Income (Loss) from Subsidiary (16,091) 608 15,483 -- -- -- --
----------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 15,145 (19,568) (16,566) (20,989) 46,933 (700) 25,244
Income Tax (Benefit) Expense 883 (4,113) -- (3,230) 11,523 8,293
Minority Interest, net of tax -- -- -- -- 3,864 3,864
----------------------------------------------------------------------------------------------
Net Income (Loss) $ 14,262 $ (15,455) $ (16,566) $ (17,759) $ 31,546 $ (700) $ 13,087
==============================================================================================
16
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED
JANUARY 1, 2005
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
---------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,042) $ 5,842 $(10,331) $ (9,531) $ 9,101 $ -- $ (430)
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Imputed interest on notes payable
and other non-cash items (1,127) -- -- (1,127) 217 -- (910)
Deferred income tax provision (3,798) -- -- (3,798) (2,080) -- (5,878)
Foreign currency gains and losses -- (925) -- (925) -- -- (925)
Depreciation and amortization 4,894 1,645 -- 6,539 5,586 12,125
Bad debt (recovery) provision (1,476) -- (1,476) 8 (1,468)
Loss on disposal of equipment -- 70 -- 70 (32) -- 38
Inventory valuation adjustment -- (730) -- (730) (169) (899)
Equity in net income of unconsolidated
affiliate/consolidated subsidiaries (14,943) (28) 14,971 -- -- -- --
Minority interest -- -- -- 3,632 -- 3,632
Changes in assets and liabilities:
Accounts receivable 311 (28,012) -- (27,701) 62,386) -- (90,087)
Inventories (7,217) 9,842 (4,640) (2,015) 13,371) (15,386)
Prepaid expenses and other current
assets 2,261 (1,222) -- 1,039 1,125 -- 2,164
Other non-current assets 0 (588) -- (588) (127) (715)
Accounts payable (854) 2,587 -- 1,733 (11,502) -- (9,769)
Taxes payable 6,774 28 -- 6,802 (2,223) -- 4,579
Accrued expenses 19,384 (35,178) -- (15,794) 38,063 -- 22,269
--------------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES 643 (48,145) -- (47,502) (34,158) -- (81,660)
--------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (202) (376) -- (578) (5,384) -- (5,962)
Proceeds from sale of property and
equipment -- 93 -- 93 43 -- 136
Additional payment for patents and
trademarks (251) -- -- (251) -- -- (251)
---------------------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (453) (283) -- (736) (5,341) -- (6,077)
---------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of
credit and other debt -- 48,562 -- 48,562 30,518 -- 79,080
Repayment of long-term debt -- (337) -- (337) (149) -- (486)
Distributions to minority shareholders -- -- -- -- (2,296) (2,296)
Costs associated with refinancing (217) -- -- (217) -- -- (217)
Common stock issued 27 -- -- 27 -- -- 27
Increase in compensating balances on
deposit -- -- (465) (465)
---------------------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES (190) 48,225 -- 48,035 27,608 -- 75,643
---------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash -- -- -- -- 2,617 -- 2,617
---------------------------------------------------------------------------------------
Net Change in Cash -- (203) -- (203) (9,274) -- (9,477)
Cash, Beginning of Period 1 903 -- 904 45,943 -- 46,847
---------------------------------------------------------------------------------------
Cash, End of Period $ 1 $ 700 $ -- $ 701 $ 36,669 $ -- $ 37,370
=======================================================================================
17
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED
DECEMBER 27, 2003
(IN THOUSANDS)
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS TOTAL
---------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 14,262 $(15,455) $(16,566) $(17,759)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Imputed interest on notes payable and
other non-cash items (1,127) -- -- (1,127)
Deferred income tax provision -- -- -- --
Foreign currency gains and losses -- 344 -- 344
Depreciation and amortization 4,805 1,877 -- 6,682
Bad debt (recovery) provision -- (22) -- (22)
Loss on disposal of equipment -- -- -- --
Equity in income of unconsolidated
affiliate/consolidated subsidiaries (16,090) 607 15,483 --
Inventory valuation adjustment 0 1,262 -- 1,262
Minority interest -- -- -- --
Changes in assets and liabilities:
Accounts receivable (312) (55,859) -- (56,171)
Inventories (7,046) (4,711) 1,083 (10,674)
Prepaid expenses and other current assets (496) (596) -- (1,092)
Increase in other non-current assets -- 6 -- 6
Accounts payable 878 795 -- 1,673
Taxes payable 16,417 (5,127) -- 11,290
Accrued expenses 12,382 24,614 -- 36,996
--------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES 23,673 (52,265) -- (28,592)
--------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,472) (1,983) -- (3,455)
Additional payment for patents and trademarks (21,666) -- -- (21,666)
--------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (23,138) (1,983) -- (25,121)
--------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit
and other debt -- 59,000 -- 59,000
Repayment of long-term debt -- (429) -- (429)
Costs associated with refinancing (575) -- -- (575)
Common stock issued 42 -- -- 42
Increase in compensating balances on deposit -- -- -- --
--------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES (533) 58,571 -- 58,038
--------------------------------------------------
Effect of Exchange Rate Changes on Cash -- -- -- --
--------------------------------------------------
Net Change in Cash 2 4,323 -- 4,325
Cash, Beginning of Period -- 8,971 -- 8,971
--------------------------------------------------
Cash, End of Period $ 2 $ 13,294 $ -- $ 13,296
==================================================
OTHER CONSOLIDATED CONSOLIDATED
SUBSIDIARIES ELIMINATIONS TOTALS
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 31,546 $ (700) $ 13,087
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Imputed interest on notes payable and
other non-cash items 219 -- (908)
Deferred income tax provision 134 -- 134
Foreign currency gains and losses -- -- 344
Depreciation and amortization 4,195 10,877
Bad debt (recovery) provision 1,085 1,063
Loss on disposal of equipment 63 -- 63
Equity in income of unconsolidated
affiliate/consolidated subsidiaries -- -- --
Inventory valuation adjustment -- -- 1,262
Minority interest 3,864 -- 3,864
Changes in assets and liabilities:
Accounts receivable (83,051) -- (139,222)
Inventories (10,199) 700 (20,173)
Prepaid expenses and other current assets (3,241) -- (4,333)
Increase in other non-current assets (378) -- (372)
Accounts payable 53,867 -- 55,540
Taxes payable 5,150 -- 16,440
Accrued expenses (15,096) -- 21,900
----------------------------------------
NET CASH FROM OPERATING ACTIVITIES (11,842) -- (40,434)
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,603) -- (9,058)
Additional payment for patents and trademarks -- -- (21,666)
----------------------------------------
NET CASH FROM INVESTING ACTIVITIES (5,603) -- (30,724)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit
and other debt 11,976 -- 70,976
Repayment of long-term debt -- -- (429)
Costs associated with refinancing -- -- (575)
Common stock issued -- -- 42
Increase in compensating balances on deposit (5,600) -- (5,600)
----------------------------------------
NET CASH FROM FINANCING ACTIVITIES 6,376 -- 64,414
----------------------------------------
Effect of Exchange Rate Changes on Cash 338 -- 338
----------------------------------------
Net Change in Cash (10,731) -- (6,406)
Cash, Beginning of Period 26,731 -- 35,702
----------------------------------------
Cash, End of Period $ 16,000 $ -- $ 29,296
=======================================
18
12. SUBSEQUENT EVENTS
On January 31, 2005, the Company entered into a sale agreement, whereby it
sold a distribution warehouse in Europe for $15.2 million, which
approximated book value at the date of sale. The Company subsequently
entered into an operating lease agreement for this distribution warehouse.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used in this quarterly report on Form 10-Q, "we," "us," "our," "Salton"
and "the Company" refer to Salton, Inc. and our subsidiaries, unless the
context otherwise requires.
INTRODUCTION
Salton designs, sources, markets and distributes small 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, alliances and internal international growth.
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 intangible assets having indefinite lives,
cooperative advertising accruals, valuation reserves against deferred tax
assets, 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. We calculate additional accounts receivable allowances
for anticipated future customer returns and claims. This additional accrual
covers defective product (warranty), sales returns and other customer
allowances. The amounts and trends are analyzed to develop appropriate
percentages that are applied against future sales. Based on the procedures
outlined herein, and the fact that only one customer accounted for 14.0% of
the gross accounts receivable at January 1, 2005 and no customer accounted
for 10.0% or more of the gross accounts receivable at July 3, 2004, 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 terms of one year or less.
20
INVENTORY VALUATION - The Company's domestic inventories are generally
determined using the last-in, first-out (LIFO) method. These inventories
account for approximately 47.5% and 53.7% of the Company's inventories as
of January 1, 2005 and July 3, 2004, respectively. All remaining inventory
cost is determined on the first-in, first-out basis. The Company records
inventory at the lower of its cost or net realizable value. Management
regularly evaluates the composition of inventory to identify slow-moving
and obsolete inventories and for items that we are unable to sell at prices
above their original cost. When such items are identified, a charge to
operations results to reduce the book value to the net amount expected to
be realized upon the sale of such items. There is inherent subjectivity and
uncertainty in this estimation process.
COMMITMENTS AND CONTINGENCIES - We are subject to lawsuits and other claims
related to product and other matters that are being defended and handled in
the ordinary course of business. We maintain reserves and or accruals for
such costs that may be incurred, which are determined on a case-by-case
basis, taking into consideration the likelihood of adverse judgments or
outcomes, as well as the potential range of probable loss. The reserves and
accruals are monitored on an ongoing basis and are updated for new
developments or new information as appropriate.
INTANGIBLE ASSETS - We record intangible assets through transactions and
acquisitions. The cost of acquisitions are allocated to the assets and
liabilities acquired, including identifiable intangible assets, with the
remaining amount being classified as goodwill. Goodwill and other
intangible assets that have an indefinite life are assessed annually for
impairment during the fourth quarter. 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.
INCOME TAXES - Significant management estimates and judgments are required
in determining income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain deferred tax
assets and liabilities, which arise from differences in the timing of
recognition of revenue and expense for tax and financial statement
purposes. We must assess the likelihood that we will be able to recover our
deferred tax assets. If recovery is not likely, we must increase our
provision for taxes by recording a valuation allowance against the deferred
tax assets that we estimate will not ultimately be recoverable. As changes
occur in our assessments regarding our ability to recover our deferred tax
assets, the valuation allowance and the tax provision are adjusted
accordingly.
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 included in distribution expenses.
Provision is made for estimated cost of returns, warranties and product
liability claims.
21
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share Based Payment", which replaces Statement No.
123, "Accounting for Stock-Based Compensation," and APB No. 25, "Accounting
for Stock Issued to Employees." This statement requires compensation
expense to be measured based on fair value of the stock options, and to be
recognized as an expense on the financial statements. This statement is
effective for fiscal periods beginning after June 15, 2005. The Company
will be adopting this statement for the first quarter of fiscal 2006,
beginning July 3, 2005, and is currently evaluating the impact on its
financial statements.
On October 22, 2004, the American Jobs Creation Act ("the AJCA") was signed
into law. The AJCA provides for a deduction of 85% of certain foreign
earnings that are repatriated, as defined in the AJCA. The Company has
completed its evaluation of the repatriation provision of the Act and does
not intend to apply this provision to qualifying earnings repatriations.
The Company currently has options to employ lower tax alternatives for
potential future foreign earnings repatriations, including accumulated
foreign earnings that were previously taxed in the U.S., as well as the use
of the Company's U.S. net operating loss carryforward.
QUARTER IN REVIEW
For the second quarter of fiscal 2005 (thirteen weeks ended January 1,
2005), Salton continued its focus on increasing international
opportunities, increasing domestic pricing to offset rising product costs,
and reducing domestic operating costs in an effort to align U.S. costs with
current sales levels and return the domestic business to profitability.
During the second quarter, Salton invested approximately $7.0 million of
selling, advertising, general and administrative costs to expand sales into
Spain, Italy and Germany, which resulted in beginning sales results of $5.8
million for the quarter.
Domestic price increases are underway within the industry to offset rising
product costs to the domestic market. Although the Company believes the
industry-wide cost drivers will ultimately result in the acceptance of the
price increases, existing industry inventories built under lower cost
structures could delay full acceptance of the price increases in the
immediate future.
We continued to implement the U.S. restructuring plan with additional
headcount reductions and facility closures in the domestic operations. Our
U.S. restructuring plan is on-target and, when fully implemented this
fiscal year, is expected to generate in excess of $40.0 million in annual
cost savings.
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
net sales for the periods indicated:
13 WEEKS ENDED
--------------------------------------
JANUARY 1, 2005 DECEMBER 27, 2003
--------------- -----------------
Net sales 100.0% 100.0%
Cost of goods sold 67.9 63.6
Distribution expenses 5.7 5.3
----- -----
Gross profit 26.4% 31.1%
Selling, general administrative expense 20.6 22.8
Restructuring costs -- --
----- -----
Operating income 5.8% 8.3%
===== =====
22
SECOND QUARTER FISCAL 2005 COMPARED TO SECOND QUARTER FISCAL 2004
NET SALES AND GROSS PROFIT
Sales for the second quarter of 2005 were $377.0 million compared to $397.1
million in the second quarter of 2004. The $20.1 million or 5.1% decrease
was primarily a result of a $49.0 million domestic sales decline, partially
offset by $28.9 million of foreign sales increases, which includes $20.3
million of foreign currency fluctuation gain.
The Company experienced a decline in domestic volumes primarily driven by
product shortages and lower retail purchases over the prior year. The prior
year included higher then normal sales activity due to retailer concerns
about supply chain interruptions at West Coast ports.
International growth from AMAP, Brazil and Mexico and new growth from our
start-up operations in Spain, Italy and Germany, was partially offset by
softer sales in the United Kingdom as a result of a weak retail
environment. Several retailers in the United Kingdom instituted temporary
purchasing freezes during the period.
Gross profit, as a percent of net sales, was 26.4% in second quarter of
2005 as compared to 31.1% in second quarter of 2004, a decrease of 4.7%.
This decrease was a result of a higher volume of AMAP sales at
substantially lower margins due to the nature of their business in the
electronics industry, the movement of excess and discontinued product in
the domestic market as a result of inventory reduction plans and warehouse
closures, promotional pricing to launch the Company's coffee pod
initiatives and higher industry wide product costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to 20.6% of net
sales or $77.5 million in the second quarter of 2005 compared to 22.8% of
net sales or $90.5 million for the second quarter of 2004. The decrease was
a result of domestic cost reductions partially offset by approximately $7.0
million of start-up expenses associated with our launch in Spain, Italy and
Germany and $4.3 million of foreign currency fluctuations.
For the second quarter of 2005, as a percent of sales, expenditures for
television, royalty expense, certain other media and cooperative
advertising and promotional activities decreased to 9.7% from 12.9% of net
sales for second quarter of 2004. Advertising expenses associated with the
launch of several new product categories in the prior year were not
repeated in the same quarter this year, resulting in more normalized rates
of expenditure.
NET INTEREST EXPENSE
Net interest expense was $13.8 million for the second quarter of 2005
compared to $10.3 million in the second quarter of 2004. Our annualized
weighted average rate of interest on average borrowings was 10.8% in the
second quarter of 2005 compared to 9.7% in the same period in 2004. The
average amount of all debt outstanding was $512.8 million for the second
quarter of 2005 compared to $427.7 million for the same period in 2004.
INCOME TAXES
The Company's provision for income taxes is based upon estimated annual tax
rates for the year applied to federal, state, and foreign income. The
Company expects its effective tax rate of 34.7% for fiscal 2005 to differ
from the prior year rate of 32.9% due to a shift in income mix from foreign
jurisdictions to the U.S. in 2005 as well as non-deductible goodwill
impairment charges and the establishment of deferred tax asset valuation
allowances recorded in 2004.
23
FIRST HALF IN REVIEW
For the first half of fiscal 2005 (twenty-six weeks ended January 1, 2005),
Salton continued its focus on increasing international opportunities and
reducing domestic operating costs in an effort to align U.S. costs with
current sales levels and return the domestic business to profitability.
Salton continued its international expansion and opened operations in
Spain, Italy and Germany, generating $5.8 million in new international
business.
We continued to implement the U.S. restructuring plan with additional
headcount reductions and facility closures in the domestic operations. Our
U.S. restructuring plan is on-target and, when fully implemented this
fiscal year, is expected to generate at least $40.0 million in annual cost
savings.
In connection with the U.S. restructuring, we recorded pretax charges of
$0.8 million in the first half of fiscal 2005 for consulting and legal fees
and termination and severance costs associated with the headcount reduction
in the U.S. Although the dollar amount is minimal, these costs do impact
the overall comparability of reported operating income, net income and
earnings per share for the first half of fiscal 2005.
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
net sales for the periods indicated:
26 WEEKS ENDED
--------------------------------------
JANUARY 1, 2005 DECEMBER 27, 2003
--------------- -----------------
Net sales 100.0% 100.0%
Cost of goods sold 69.3 64.6
Distribution expenses 5.7 5.9
----- -----
Gross profit 25.0% 29.5%
Selling, general administrative expense 20.0 22.4
Restructuring costs 0.1 --
----- -----
Operating income 4.9% 7.1%
===== =====
FIRST HALF FISCAL 2005 COMPARED TO FIRST HALF FISCAL 2004
NET SALES AND GROSS PROFIT
Salton's net sales for the twenty-six weeks ended January 1, 2005 were
$651.1 million. This represented an increase in revenues of 2.4% compared
to $635.6 million for the same period in 2004. This increase was primarily
the result of foreign sales increases of $64.8 million, which includes
$30.7 million of foreign currency fluctuation gain, substantially offset by
decreases in the domestic market.
Gross profit in first half of 2005 decreased to $163.1 million compared to
$187.6 million in the first half of 2004. As a percent of net sales, gross
profit decreased from 29.5% in the first half of 2004 to 25.0% of net sales
in the first half of 2005. The percentage decline was primarily a result of
a higher volume of lower margin electronic sales from AMAP, higher
industry-wide product costs, promotional pricing to launch the Company's
coffee pod initiatives combined with a large volume of lower margin sales
in the domestic market in an effort to move discontinued product under our
inventory reduction plans and warehouse closures.
24
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to 20.0% of net
sales or $130.5 million in first half of 2005 compared to 22.4% of net
sales or $142.3 million for first half of 2004. Cost reductions achieved
under the U.S. restructuring plan were partially offset by foreign
increases of $7.0 million, which included international expansion, and $6.3
million related to foreign currency fluctuations.
For first half of 2005, as a percent of sales, expenditures for television,
royalty expense, certain other media and cooperative advertising and
promotional activities decreased to 8.9% from 11.1% of sales for first half
of 2004. While first quarter product launches increased direct advertising
expenditures, second quarter promotional and advertising expenditures were
reduced, returning the Company to more normalized levels for the first half
of 2005 compared to those of the same period for 2004.
RESTRUCTURING COSTS
In connection with the U.S. restructuring, we recorded pretax charges of
$0.8 million in the first half of fiscal 2005 for consulting and legal fees
and termination and severance costs associated with the headcount reduction
in the U.S.
NET INTEREST EXPENSE
Net interest expense was $26.8 million for the first half of fiscal 2005
compared to $20.0 million in the first half of fiscal 2004. Our annualized
weighted average rate of interest on average borrowings was 11.0% in the
first half of 2005 compared to 9.8% in the same period in 2004. The average
amount of all debt outstanding was $489.1 million for the first half of
2005 compared to $409.3 million for the same period in 2004.
INCOME TAXES
The Company's provision for income taxes is based upon estimated annual tax
rates for the year applied to federal, state, and foreign income. The
Company expects its effective tax rate of 34.5% for fiscal 2005 to differ
from the prior year rate of 32.9% due to a shift in income mix from foreign
jurisdictions to the U.S. in 2005 as well as non-deductible goodwill
impairment charges and the establishment of deferred tax asset valuation
allowances recorded in 2004.
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 the first
half of fiscal 2005, Salton's operations used $81.7 million in cash flow,
compared with $40.4 million in the first half of fiscal 2004. The increase
in cash requirements were a result of $16.8 million in higher working
capital needs and $13.5 million in lower net income. The remaining change
was a result of $11.0 million in non-cash items. Given the seasonal nature
of our business, borrowings and availability tend to be highest in mid-Fall
and early Winter.
Our cash flow from operations for the periods discussed have not been
materially 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 and
expects this trend could continue.
25
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 Great
Britain Pound and South Africa Rand against United States Dollars.
INVESTING ACTIVITIES
We incurred approximately $6.0 million for capital expenditures during the
first half of fiscal 2005, including approximately $2.7 million in
construction-in-progress for a warehouse renovation in Europe.
FINANCING ACTIVITIES
We had net proceeds from worldwide credit facilities of $79.1 million. The
increase in facility usage represents a seasonal increase in working
capital that was financed through our credit facilities in the U.S. and the
UK.
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.
As of January 1, 2005, we had borrowed $181.3 million under the senior
secured revolving credit facility, $100.0 million of which is included in
long-term liabilities. We had approximately $3.6 million available under
this facility for future borrowings.
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 7.3% at January 1, 2005; or
the Base Rate (prime rate), plus 3.0%, equaling 8.25% at January 1, 2005.
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.
26
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 $8.3 million
related to the fair value of interest rate swap agreements that have been
monetized).
Under the terms of our senior secured revolving credit facility, our senior
lenders in their discretion may establish a reserve against our
availability under such facility at any time during the 90-day period
before the maturity date of the 10-3/4% senior subordinated notes in an
amount equal to the lesser of $50.0 million or the amount due and payable
under such notes upon maturity. We may incur additional debt, or may issue
debt or equity securities, to repay and/or refinance the 10-3/4% senior
subordinated notes. 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. In the event that we are unable to repay and/or refinance the
10-3/4% senior subordinated notes, we may be required to pursue strategic
options including a restructuring of our debt and capital structure through
sale of assets or businesses, exchange offers and/or consent solicitations
of our outstanding securities. We cannot assure you that any of these
strategic options will be consummated.
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.
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.
27
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.
On September 28, 2004 Salton Europe, Limited ("Salton Europe"), the
Company's wholly owned subsidiary, amended their facility agreement with
Hong Kong Shanghai Bank. As of January 1, 2005, there was $41.4 million
utilized under the facility included in other current debt.
FORWARD LOOKING
We anticipate capital expenditures on an ongoing basis to be at historical
levels in relation to net sales.
One or more of our overseas manufacturers, including some of our major
suppliers, have recently been experiencing financial difficulties due to
challenging business and economic conditions. If we are required to, or
decide to, transition some of our production to different suppliers, the
cost and availability of certain of our products during such a transition
could be adversely affected.
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 and/or 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We use derivative financial instruments to manage interest rate and foreign
currency risk. Our objectives in managing our exposure to interest rate
changes are to limit the impact of interest rate changes on earnings and
cash flows and to lower our overall borrowing costs through the use of
interest rate swaps. Our objectives in managing our exposure to foreign
currency fluctuations is to reduce the impact of changes in foreign
exchange rates on consolidated results of operations and future foreign
currency denominated cash flows. We do not enter into derivative financial
instruments for trading purposes. Our policy is to manage interest rate
risk through the use of a combination of fixed and variable rate debt and
hedge foreign currency commitments of future payments and receipts by
purchasing foreign currency forward contracts.
28
All foreign exchange contracts have been recorded in the consolidated
balance sheets within accrued expenses at a fair value of $5.7 million and
$8.7 million at January 1, 2005 and July 3, 2004, respectively. The change
in the fair value of contracts in the second quarter was $4.2 million.
There was $(2.3) million and $(6.0) million at January 1, 2005 and July 3,
2004, respectively, recorded in accumulated other comprehensive income, net
of tax, related to these contracts. The Company anticipates that all gains
and losses deferred in accumulated other comprehensive income related to
foreign exchange contracts will be reclassified into earnings within the
next twelve months as the related inventories are sold. At January 1, 2005,
the Company had foreign exchange forward contracts for the purchase of 70.7
million U.S. dollars. Contracts for the purchase of 25.9 million U.S.
dollars were entered into during the second quarter of fiscal 2005.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on
Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to
ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
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. The plaintiffs have
voluntarily dismissed the Mariss Partners lawsuit.
29
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.
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 alleges that the software on the electronic controller
of the One:One infringes Philips copyright and seeks unspecified money
damages and injunctive relief. At issue were the 55,624 units initially
introduced into the United Kingdom; Salton has discontinued the sales of
these units. This case is currently pending in the United Kingdom. E&E has
intervened in this action, and E&E's motion to dismiss or in the
alternative stay this action in favor of the Hong Kong action described
above was denied. On October 14, 2004, Salton offered to submit to judgment
in this action, and in the event the parties cannot agree on a royalty for
the use of this software in the 55,624 units, a judicial determination will
have to be made of any monetary award.
30
PRODUCT LIABILITY
On or about October 27, 2004, a lawsuit entitled DiNatale vs. Salton was
filed in the New York State Supreme Court against the Company. The
plaintiffs, who seek unspecified damages, allege that they were injured by
water contaminated with lead taken from a tea kettle sold by the Company
under its Russell Hobbs brand. The plaintiffs' attorney is seeking to
convert the lawsuit into a class action suit. The manufacturer of the
product and its insurer are defending this lawsuit. The Company's attorneys
and its insurers are cooperating in the defense of the lawsuit.
Shortly after receiving notice of the lawsuit, the Company voluntarily
suspended selling the product. The Company believes that at substantially
the same time, the two retailers who had purchased the kettle from the
Company also suspended selling the product. Based on information received
from the two retailers, the Company believes that only a limited number of
the kettles were sold to consumers. The Company voluntarily contacted the
U.S. Food and Drug Administration and has shared its information and test
results concerning the product with the agency.
The Company is reviewing the status of any other similar products, which
the same manufacturer has sold to the Company in recent years.
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 to filing for bankruptcy. Homeplace's total
claimed preferences are approximately $3.5 million. The trial started the
first week of November 2004 in the U.S. Bankruptcy Court for the District
of Delaware. Settlement discussions to date have not, in Salton's view,
been meaningful. 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.
31
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on December 9, 2004.
The following proposal was adopted by the margins indicated:
1. To elect three Class I Directors for a term expiring in 2007.
Number of Shares
-------------------------
For Withheld
---------- ---------
David C. Sabin 13,981,078 159,274
William B. Rue 13,980,258 160,094
Robert A. Bergmann 13,986,933 153,419
The following proposal was adopted by the margins indicated:
2. To ratify the appointment of Deloitte & Touche LLP as the auditors
for the 2005 fiscal year.
For 13,999,998
Against 134,321
Abstain 6,033
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 10, 2005 SALTON, INC.
/s/ DAVID M. MULDER
David M. Mulder
Executive Vice President,
Chief Administrative Officer and
Senior Financial Officer
(Duly Authorized Officer of the Registrant)
33
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
12(A) Computation of Ratio of Earnings to Fixed Charges
31.1 Certification By The Chief Executive Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2 Certification By The Senior Financial Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1 Certification of The Chief Executive Officer Pursuant to 18
U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of The Senior Financial Officer Pursuant to 18.
U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
34