Salton, Inc.
Filed 9/28/01
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30, 2001 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
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1955 W. FIELD CT.,
LAKE FOREST, ILLINOIS 60045
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(Address of Principal Executive Offices) (Zip Code)
(847) 803-4600
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(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant To Section 12(b) Of The Act:
None
Securities Registered Pursuant To Section 12(g) Of The Act:
Common Stock, $.01 Par Value
(Title Of Class)
Indicate by check mark whether this registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of September 25, 2001 was approximately $92,659,000 computed on the basis of the last reported sale price per share ($9.60) of such stock on the NYSE. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The number of shares of the Registrant's Common Stock outstanding as of September 17, 2001 was 11,081,680.
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DOCUMENTS INCORPORATED BY REFERENCE:
PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE
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Part III (Items 10, 11, 12 and Portions of the Registrant's Definitive Proxy
13) Statement to be used in connection with its
2001 Annual Meeting of Stockholders.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation the statements under "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The words "believes," "anticipates," "plans," "expects," "intends," "estimates" and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:
o Our degree of leverage;
o Economic conditions and the retail environment;
o The timely development, introduction and customer acceptance of our products;
o Competitive products and pricing;
o Dependence on foreign suppliers and supply and manufacturing constraints;
o Our relationship and contractual arrangements with key customers, suppliers and licensors;
o Cancellation or reduction of orders;
o International business activities;
o Availability and success of future acquisitions;
o The risks relating to legal proceedings;
o The risks relating to intellectual property matters;
o The risks relating to regulatory matters; and
o Other risks detailed from time to time in our Commission filings.
All forward looking statements included in this annual report on Form 10-K are based on information available to us on the date of this annual report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this annual report on Form 10-K.
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PART I
ITEM 1. BUSINESS
As used in this annual report on Form 10-K, "we," "our," "us", "the Company", and "Salton" refer to Salton and our subsidiaries, unless the context otherwise requires.
GENERAL
We are a leading domestic designer, marketer and distributor of a broad range of branded, high quality small appliances under well-recognized brand names such as Salton(R), George Foreman(TM), Toastmaster(R), Breadman(R), Juiceman(R), Juicelady(R), White-Westinghouse(R), Farberware(R), Melitta(R), Welbilt(R), Aircore(R), Russell Hobbs(R), Tower(R), Haden(R) and Pifco(R). We believe that we have the leading domestic market share in indoor grills, toasters, juice extractors, bread makers, griddles, waffle makers and buffet ranges/hotplates and a significant market share in other product categories. We also design and market tabletop products, time products, lighting products and personal care and wellness products under brand names such as Block China(R), Atlantis(R) Crystal, Sasaki(R), Calvin Klein(R), Timex(R), Ingraham(R), Westclox(R), Big Ben(R), Spartus(R), Stiffel(R), Ultrasonex(R), Relaxor(R), Carmen(R), Hi-Tech(R), Mountain Breeze(R) and Salton(R). We believe that our strong market position results from our well-known brand names, the breadth, quality and innovation of our product offerings, our strong relationships with retailers and our focused outsourcing strategy.
We develop and introduce a wide selection of new products and enhance existing products to satisfy the various tastes, preferences and budgets of consumers and to service the needs of a broad range of retailers. Our product categories include:
PRODUCT CATEGORY SAMPLE PRODUCTS
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SMALL APPLIANCES
Health Conscious.................. o Thermal grills o Rice cookers
o Juice extractors o Vegetable steamers
o Juicers o Ice cream makers
o Smoothie makers o Yogurt and soy milk makers
Thermal and Cooking............... o Toasters o Electric and gas outdoor
o Bread makers grills
o Waffle makers o Sandwich makers
o Griddles o Irons
o Countertop ovens o Deep fryers
o Buffet ranges/hotplates o Electric pressure cookers
o Electric woks
Coffee and Tea.................... o Drip coffee makers and percolators o Iced tea and iced coffee
o Espresso and cappuccino makers makers
o Tea kettles o Latte makers
o Coffee grinders
Food Preparation and Serving...... o Electric knives o Blenders
o Crepe makers o Choppers
o Mixers o Pizza makers
o Can openers o Warming trays
SALTON AT HOME
Tabletop Products................. o Crystal products o Ceramic products
o Fine china and basic dinnerware o Flatware
Time Products..................... o Electric and analog alarm clocks o LED digital clocks
o Electric and quartz wall clocks o Household timers
Lighting Products................. o Table lamps o Floor lamps
o Wall sconces o Function lighting
PERSONAL CARE AND WELLNESS PRODUCTS... o Massagers o Curling irons and brushes
o Indoor calming pools o Make-up mirrors
o Ultrasonic toothbrushes o Manicure systems
o Aroma therapy products o Shower radios
o Hair dryers o Magnetic therapy products
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We currently market and sell our products primarily in North America through an internal sales force and a network of independent commissioned sales representatives. We predominantly sell our products to mass merchandisers, department stores, specialty stores and mail order catalogs. Our customers include many premier domestic retailers, including Wal-Mart, Kmart, Sears, Target Corporation, Federated Department Stores, QVC, May Company Department Stores, J.C. Penney Company, Lowe's, Linens 'n Things, Bed Bath & Beyond and Kohl's Department Stores. We also sell certain of our products directly to consumers through paid half-hour television programs referred to as "infomercials" and through our Internet website.
We outsource most of our production to more than 25 independent manufacturers, located primarily in the Far East, and we believe that we are the largest purchaser of electric small appliances from unaffiliated parties in the Far East. We employ both internal and independent inspection agents to ensure that products meet our rigorous quality standards.
THE INDUSTRY
Based on data compiled from the National Housewares Manufacturers Association, the small household appliance industry in which we compete was approximately a $14 billion retail business in the United States in 1999. Historically, this industry has been characterized as mature, fragmented and highly competitive. However, it has been consolidating recently in response to the merger activity and changes within the retail industry. We expect that retailers will continue to consolidate their vendor base by dealing primarily with a smaller number of suppliers that can offer a broad array of innovative, differentiated and quality products and comprehensive levels of customer service. We believe that with our broad array of innovative and quality product offerings, high level of customer service and strong brand name recognition, we are well positioned to benefit from this environment.
COMPETITIVE STRENGTHS
We believe that the following competitive strengths contribute to our position as a leading domestic designer and marketer in the small household appliance industry and serve as a foundation for our business strategy:
MARKET LEADERSHIP. We believe that we have the leading domestic market share in indoor grills, toasters, juice extractors, bread makers, griddles, waffle makers and buffet ranges/hotplates and a significant market share in other product categories. We believe that our leading market share in these product lines provides us with a competitive advantage in terms of demand from major retailers and enhanced brand awareness. Through internal and joint product development and acquisitions of businesses and product lines, we have enhanced our position as a leading supplier in the U.S. housewares industry.
STRONG BRAND NAMES. We have built a portfolio of strong brand names which we use to gain retail shelf space and introduce new products. The Salton(R) brand name has been in continuous use since 1947, the Ingraham brand name since 1831 and the Toastmaster brand
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name since 1926. These names are widely recognized in the housewares industry. In addition, we have licensed the right to use the White-Westinghouse(R) brand name for certain small household electrical appliances, such as toasters, coffee makers, espresso/cappuccino makers and bread makers, and distribute certain products under the Farberware(R) brand name. We believe that White-Westinghouse(R) and Farberware(R) are time-honored traditions throughout the world for certain home appliances and benefit from strong consumer recognition. We also market products under other owned and licensed brand names, such as George Foreman(TM), Melitta(R), Timex(R), Calvin Klein(R), Stiffel(R), Relaxor(R), Ultrasonex(TM), Aircore(R), Russell Hobbs(R), Carmen(R), Hi-Tech(R), Tower(R), Haden(R), Mountain Breeze(R), Pifco(R), Westclox(R), Big Ben(R) and Spartus(R), and under private-label brand names such as Kenmore(R) (Sears), Cook's Essentials(R) (QVC) and Magic Chef(R) (Wal-Mart).
INNOVATION IN PRODUCT DESIGN AND PACKAGING. We have a reputation among retailers and consumers for innovative product design and packaging. We design our products in many contemporary styles and with a wide variety of functional and aesthetic features. We work closely with both retailers and suppliers to identify consumer needs and preferences and to develop new products to satisfy consumer demand. Our product innovations have included the first triple function (espresso, cappuccino and latte) coffee maker in the United States, George Foreman(TM) Grills, Toastmaster(R) ovens with removable liners and the Wet Tunes(R) shower radios. During fiscal 2001, we introduced 1,973 new stock keeping units, or SKUs, excluding 1,622 acquired in the Pifco transaction (See Pifco transaction in the Business Strategy section). Several of our products, including the Breadman(R) Plus, the Breadman(R) Ultimate, the Salton(R) Pro Steam iron and the George Foreman(TM) Lean Mean Fat Reducing Grilling machine, have been selected by various consumer organizations and magazines as top rated or best buys.
We also package our products to increase their appeal to consumers and to stand out among other brands on retailers' shelves. We believe that the distinctive packaging, designed to answer customers' questions concerning our products, has resulted in increased retail shelf space and greater sales.
BROAD RANGE OF PRODUCTS. We currently sell over 8,848 SKUs, including 1,622 SKUs acquired in the Pifco transaction, across multiple housewares categories using our portfolio of more than 60 owned and licensed brand names. Our products meet the needs of a broad range of retailers and satisfy the different tastes, preferences and budgets of consumers. Our diverse product offerings enable us to help retailers differentiate themselves because we can offer them exclusive rights for designated periods of time to sell certain of our products. We believe that as the retail industry continues to consolidate, our ability to serve retailers with an extensive array of product lines under a portfolio of strong brand names will continue to become increasingly important for maintaining shelf space and for introducing new products into the retail market. For example, we have recently added to our product offerings the Ultrasonex(TM) line of electrically operated toothbrushes and related products and the Toastmaster(R) UltraVection(TM) countertop oven.
ESTABLISHED RELATIONSHIPS WITH DIVERSE CUSTOMER BASE. We have been able to establish strong relationships with our retail customers based on our frequent product innovation, high level of customer service, breadth of product offerings, reputation for quality products and established brand names. In addition, we have been able to secure long-term supply agreements with customers such as Kmart and Zellers. We have also expanded our
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distribution of private-label products with certain major retailers under brand names such as Kenmore(R) (Sears), Cook's Essentials(R) (QVC) and Magic Chef(R) (Wal-Mart). The broad distribution of products through the mass merchant, department store and specialty retailer channels, together with sales made through infomercials and the Internet, provides us with access to a diversified group of customers and multiple channels of distribution.
Our geographically diverse customer base covers a wide cross-section of retail and distribution channels. For fiscal 2001, no one customer accounted for more than 12% of our net sales, with our top five customers accounting for approximately 47% of our net sales.
FOCUSED OUTSOURCING STRATEGY. Our strong relationships with our suppliers provide us with a low-cost, comparable quality alternative to domestic manufacturing. We believe that we are the largest purchaser of small electric appliances from unaffiliated parties in the Far East. We source products from more than 25 different suppliers and believe that we are the largest customer of many of our suppliers. We work closely with our suppliers to develop new products and improvements to existing products to satisfy changing consumer preferences. Our outsourcing strategy provides us with low-cost manufacturing capabilities and allows us to bring new products to the market quickly and respond rapidly to changes in consumer tastes and preferences.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY OWNERSHIP. Our management team has a wide range of experience in the development and marketing of housewares. This management team, consisting of Leonhard Dreimann, Chief Executive Officer, David C. Sabin, Chairman, William B. Rue, President and Chief Operating Officer, and John E. Thompson, Senior Vice President and Chief Financial Officer, has an average of more than 20 years of industry experience. Since our inception, management has successfully integrated over 12 acquisitions of companies and/or product lines.
BUSINESS STRATEGY
Our primary business objective is to increase net sales, profitability and cash flow by continuing to execute the following key elements of our business strategy:
INTRODUCE NEW PRODUCTS AND PRODUCT LINE EXTENSIONS. We plan to manage our existing and new brands through strong product development initiatives, including introducing new products, modifying existing products and extending existing product lines. Our product managers strive to develop and acquire new products and product line extensions which offer added value to consumers through enhanced functionality and improved aesthetics. During fiscal 2001, excluding SKUs added by the Pifco transaction, we introduced 389 new SKUs in the small appliance category, 1,434 new SKUs in the Salton At Home products category and 150 new SKUs in the personal care and wellness products category. In addition, as a result of the Pifco transaction, we introduced 1,024 new SKUs in the small appliance category, 200 new SKUs in the Salton At Home products category and 398 in the personal care and wellness products category. For example, we recently introduced:
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o George Foreman(TM) Portable Outdoor Gas Grills for tailgates, picnic and camping use;
o George Foreman(TM) Indoor Grills with dual cooking sections for preparing multiple items at the same time;
o the George Foreman(TM) translucent colored indoor grills, which we advertised with a thirty-second commercial during Super Bowl XXXV on January 28, 2001;
o Three sizes of George Foreman(TM) Rotisserie Ovens, which cook up to a 16-pound turkey and have six temperature settings and a countdown timer;
o Toastmaster(R) oil free deep fryers, which dry fry, roast and air bake snack foods;
o Toastmaster(R) UltraVection(TM) ovens, which combine convection, conductive and radiant heat to cook faster than conventional ovens; and
o the Ultrasonex(TM) line of electrically operated toothbrushes, which use ultra high frequency sonic waves for cleaning.
INCREASE SALES TO NEW AND EXISTING CUSTOMERS. We believe that retail merchants will continue to consolidate their vendor bases and focus on a smaller number of suppliers that can (1) provide a broad array of differentiated, quality products, (2) efficiently and consistently fulfill logistical requirements and volume demands and (3) provide comprehensive product and marketing support. We believe that we can increase sales to our existing customers by continuing to introduce new products and new product categories. While we currently sell to a diversified base of premier retail customers, we believe that we can penetrate additional channels of distribution such as grocery stores and e-commerce outlets.
PURSUE LICENSING AGREEMENTS AND STRATEGIC ALLIANCES. We have entered into licensing agreements and strategic alliances in order to further differentiate our products and to accelerate our growth. For example, we supply products to Kmart, Sears and Wal-Mart, which they sell under the White-Westinghouse(R), Kenmore(R) and Magic Chef(R) brand names, respectively. We also have a joint marketing alliance with Kellogg USA. As part of this alliance, we have both agreed to launch print and broadcast advertising, joint trade and on-line consumer promotions and couponing and to collaborate with Kellogg on creating Pop-Tarts(R) and Eggo(R) branded toasters. In addition, we have licensing rights to market certain products under the Farberware(R), Melitta(R), Sasaki(R), Timex(R), Indiglo(R), Marilyn Monroe(R), LooneyTunes(R) and Calvin Klein(R) brands. We also recently entered into a worldwide exclusive licensing agreement to market and distribute the UltraVection(TM) oven and the "spin fryer" home appliance and became the exclusive distributor in North America of Welbilt(R) small kitchen appliances.
CONTINUE DEVELOPING ALTERNATIVE DISTRIBUTION CHANNELS. We expect to continue selling products through infomercials and our Internet website. These alternative distribution channels increase our product sales and provide us with direct contact with consumers, assist us in creating and building brand and product awareness and stimulate traditional retail channel demand. We currently use these alternative channels to sell certain of our products, primarily George Foreman(TM) Grills, Juiceman(R) and Juicelady(R) fresh juice machines and the Rejuvenique(R) facial toning system, as well as Aircore(R) (walk-away cookware), electric woks, pizza makers, George Foreman(TM) Rotisserie Ovens, Ultrasonex(TM) line of electrically
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operated toothbrushes and related products, the Toastmaster(R) UltraVection(TM) oven and George Foreman(TM) Outdoor Grills. We plan on developing additional new products which will also be sold on infomercials.
PURSUE STRATEGIC ACQUISITIONS. We anticipate that the fragmented small household appliance industry will provide significant growth opportunities through strategic acquisitions. We will focus our acquisition strategy on businesses or brands which (1) offer expansion into related or existing categories, (2) can be marketed through our existing distribution channels or
(3) provide a platform for growth into new distribution channels including expanding our international sales of products. Our recent acquisitions include:
o the Westclox(R), Big Ben(R) and Spartus(R) trademarks, molds, intellectual property, rights and patents related to these brands;
o Pifco Holdings PLC, a United Kingdom producer and marketer of a broad range of branded personal care appliances, electrical hardware, cookware and battery operated products;
o the Aircore(R) cookware brand and certain inventory;
o the Relaxor(R) brand and certain inventory, including personal massagers and other personal care and wellness items;
o certain assets and intellectual property of The Stiffel Company, a designer of lamps and related products; and
o Sonex International Corporation, a designer and distributor of electric toothbrushes which employ ultra high frequency sonic waves for cleaning.
EXPAND INTERNATIONAL PRESENCE. We intend to expand our international sales by developing international distribution channels for certain of our products and by pursuing acquisitions of complementary businesses. In June 2001, we acquired Pifco Holdings PLC, a United Kingdom producer and marketer of a broad range of branded kitchen and small appliances, personal care and wellness products, cookware and battery operated products. We believe that Pifco's strong product lines and European distribution channels will enable us to expand our international distribution channels and cross-market our products in Europe. In March 1999 we entered into a five-year supply agreement with Zellers, the leading national chain of discount department stores in Canada, to supply a broad range of small appliances under the White-Westinghouse(R) brand name. We also recently began marketing George Foreman(TM) Grills through QVC Germany and the Rejuvenique(R) facial mask and cosmetics through QVC Marco Polo Housewares in the United Kingdom. In addition, we recently increased our ownership of Amalgamated Appliance Holdings Limited, a public company located in South Africa which manufactures and distributes appliances and electrical accessories, to approximately 31% of its outstanding equity. We have begun marketing certain of our products in South Africa through Amalgamated Appliance Holdings Limited.
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PRODUCTS
Our portfolio of strong brand names enables us to service the needs of a broad range of retailers and satisfy the different tastes, preferences and budgets of consumers. Our products include full-featured and upscale models or designs as well as those which are marketed to budget conscious consumers. Our product categories include:
PRODUCT CATEGORY SAMPLE PRODUCTS
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SMALL APPLIANCES
Health Conscious.................. o Thermal grills o Rice cookers
o Juice extractors o Vegetable steamers
o Juicers o Ice cream makers
o Smoothie makers o Yogurt and soy milk makers
Thermal and Cooking............... o Toasters o Electric and gas outdoor
o Bread makers grills
o Waffle makers o Sandwich makers
o Griddles o Irons
o Countertop ovens o Deep fryers
o Buffet ranges/hotplates o Electric pressure cookers
o Electric woks
Coffee and Tea.................... o Drip coffee makers and percolators o Iced tea and iced coffee
o Espresso and cappuccino makers makers
o Tea kettles o Latte makers
o Coffee grinders
Food Preparation and Serving...... o Electric knives o Blenders
o Crepe makers o Choppers
o Mixers o Pizza makers
o Can openers o Warming trays
SALTON AT HOME
Tabletop Products................. o Crystal products o Ceramic products
o Fine china and basic dinnerware o Flatware
Time Products..................... o Electric and analog alarm clocks o LED digital clocks
o Electric and quartz wall clocks o Household timers
Lighting Products................. o Table lamps o Floor lamps
o Wall sconces o Function lighting
PERSONAL CARE AND WELLNESS PRODUCTS... o Massagers o Curling irons and brushes
o Indoor calming pools o Make-up mirrors
o Ultrasonic toothbrushes o Manicure systems
o Aroma therapy products o Shower radios
o Hair dryers o Magnetic therapy products
The following table sets forth the approximate amounts and percentages of our net sales by product category during the periods shown.
FISCAL YEARS ENDED
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JUNE 30, 2001(2) JULY 1, 2000 JUNE 26, 1999(1)
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NET SALES % OF TOTAL NET SALES % OF TOTAL NET SALES % OF TOTAL
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Small Appliances $714,125 90.2% $742,774 88.7% $459,621 90.8%
Salton At Home 59,793 7.5% 60,709 7.3% 34,875 6.9%
Personal Care and Wellness Products 18,196 2.3% 33,819 4.0% 11,620 2.3%
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$792,114 100.0% $837,302 100.0% $506,116 100.0%
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(1) Includes the sales of Toastmaster from its acquisition date of January 7, 1999.
(2) Includes the sales of Pifco from June 1, 2001 through June 30, 2001.
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SMALL APPLIANCES
We design and market an extensive line of small appliances under the Salton(R), George Foreman(TM), Toastmaster(R), Breadman(R), Juiceman(R), Juicelady(R), White-Westinghouse(R), Farberware(R), Melitta(R) Welbilt(R), Aircore(R), Russell Hobbs(R), Tower(R), Haden(R) and Pifco(R) brand names. At the end of fiscal 2001, we marketed approximately 2,673 SKUs under our brand names in this category, including 1,024 acquired in the Pifco transaction. Growth within this product category has historically been driven primarily by the introduction of new or enhanced products and the development of the George Foreman(TM), White-Westinghouse(R), Farberware(R) and other product lines. For example, our line of George Foreman(TM) products, which began as a single grill in 1995, included 160 SKUs as of June 30, 2001.
Our small appliances product category includes:
o products for health conscious consumers, including thermal grills, juice extractors, juicers, smoothie makers, rice cookers, vegetable steamers, ice cream makers and yogurt and soy milk makers;
o thermal and cooking products, including toasters, bread makers, waffle makers, griddles, countertop ovens, buffet ranges/hotplates, sandwich makers, irons, deep fryers, electric and gas outdoor grills, electric pressure cookers and electric woks;
o coffee and tea related products, including combination coffee makers, espresso/cappuccino/drip coffee makers, coffee percolators, tea kettles, iced tea/iced coffee makers, latte makers, coffee grinders, and a broad range of coffee related accessories; and
o food preparation and serving products, including electric knives, crepe makers, mixers, can openers, blenders, choppers, pizza makers and warming trays.
We enhanced our small appliance offerings in January 1999 by acquiring Toastmaster Inc. Toastmaster markets and distributes a wide array of small appliances under the Toastmaster(R) brand name.
We further enhanced our small appliance offerings in June 2001 by acquiring Pifco Holdings, PLC. In addition to small appliance offerings, Pifco also markets products under the Salton At Home and Personal Care and Wellness categories.
SALTON AT HOME
We design and market an extensive line of tabletop products, time products and lighting products. At the end of fiscal 2001, we marketed approximately 5,488 SKUs under our brand names in this category, including 200 acquired in the Pifco transaction. Tabletop products include crystal products offered under the Block(R), Atlantis(R), Sasaki(R) and Jonal(R) brand names, fine china and basic dinnerware in various designs and patterns under the Block(R), Calvin Klein(R), Sasaki(R) and Hi-Tech(R) brand names, and ceramic products under the Block(R) brand name.
We began offering tabletop products in fiscal 1997. We enhanced our tabletop product offerings on April 5, 1999 by acquiring certain assets of Sasaki, Inc., a designer of
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high-quality tabletop products and accessories for the home. The Sasaki(R) product lines which we acquired include dinnerware, barware, flatware and crystal giftware designed by well-known tabletop and domestic designers.
In the fourth quarter of fiscal 2000, we entered into an exclusive licensing agreement for the manufacture and distribution of tabletop and giftware items under the Calvin Klein(R) tabletop label.
Our time products are comprised of electric and analog alarm clocks, electric and quartz wall clocks with plastic, wood and/or metal cases, imported key-wound clocks and L.E.D. digital clocks. We market our time products under the Ingraham(R), Farberware(R), Salton(R) Time, Timex(R), Timex(R) Indiglo, Westclox(R), Big Ben(R) and Spartus(R) brand names. We also market household (electromechanical and electronic) timers, which are used for, among other purposes, switching electric lights and other appliances on and off at pre-determined times.
We recently began offering table lamps, wall sconces, floor lamps and function lighting after our acquisition of the trademarks, other intellectual property assets and molds of The Stiffel Company, a designer of lamps and related products. We offer our lighting products under the Decor by Stiffel(TM), Expressions by Stiffel(TM) and Stiffel(R) brand names.
PERSONAL CARE AND WELLNESS PRODUCTS
We design and market a broad range of personal care and wellness products under brand names such as Wet Tunes(R), Salton(R), White-Westinghouse(R), Rejuvenique(R), Ultrasonex(TM), Relaxor(R) and Carmen(R). At the end of fiscal 2001, we marketed approximately 687 SKUs in the personal care and wellness products category, including 398 acquired in the Pifco transaction.
Our personal and beauty care appliances marketed under the Salton(R) brand name include hair dryers, curling irons and brushes, make-up mirrors, massagers, manicure systems and shower radios. Our Wet Tunes(R) series of shower radios are sold under the Salton(R) brand name and feature AM/FM radio with waterproof mylar speakers and wall mount brackets. Our personal and beauty care appliances also include the Rejuvenique(R) system, which we began marketing through infomercials in early 1999.
We enhanced our personal and beauty care appliances offerings on July 19, 2000 through our acquisition of Sonex International Corporation, a designer and distributor of electrically operated toothbrushes which employ ultra high frequency sonic waves for cleaning, flossers and related products.
On September 21, 2000, we further enhanced this product category through our acquisition of the Relaxor(R) business and certain inventory, including personal massagers, aromatherapy products, indoor calming pools, magnetic therapy products and other personal care items, from JB Research, Inc.
We also have a "gifts" program designed for department stores. Under this program, we provide department stores with practical, special occasion and small gift products. Our gifts
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programs include the mini tool, calcutape, travel smoke alarm, emergency auto flasher, deluxe art and the 7-piece gardening kits.
NEW PRODUCT DEVELOPMENT
We believe that the enhancement and extension of our existing products and the development of new products are necessary for our continued success and growth. We design the style, features and functionality of our products to meet customer requirements for quality, performance, product mix and pricing. We work closely with both retailers and suppliers to identify consumer needs and preferences and to generate new product ideas. We evaluate new ideas and seek to develop and acquire new products and improve existing products to satisfy industry requirements and changing consumer preferences.
During fiscal 2001, excluding SKUs added by the Pifco transaction, we introduced 389 new SKUs in the small appliance category, 1,434 new SKUs in the Salton At Home products category and 150 new SKUs in the personal care and wellness products category. In addition, as a result of the Pifco transaction, we introduced 1,024 new SKUs in the small appliance category, 200 new SKUs in the Salton At Home products category and 398 in the personal care and wellness products category.
MARKETING AND DISTRIBUTION
We currently market and sell our products primarily in North America through an internal sales force and a network of independent commissioned sales representatives. We predominantly sell our products to mass merchandisers, department stores, specialty stores and mail order catalogs. Our customers include many premier domestic retailers, including Wal-Mart, Kmart, Sears, Target Corporation, Federated Department Stores, QVC, May Company Department Stores, J.C. Penney Company, Lowe's, Linens 'n Things, Bed Bath & Beyond and Kohl's Department Stores.
In addition to directing our marketing efforts toward retailers, we sell certain of our products, primarily George Foreman(TM) Grills, Juiceman(R) and Juicelady(R) fresh juice machines and the Rejuvenique(R) facial toning system, as well as Aircore(R) (walk-away cookware), electric woks, pizza makers, George Foreman(TM) Rotisserie Ovens, Ultrasonex line of electrically operated toothbrushes and related products, the Toastmaster(R) UltraVection(TM) oven and George Foreman(TM) Outdoor Grills, directly to consumers through infomercials and our Internet website. We provide promotional support for our products with the aid of national television, radio and print advertising, cooperative advertising with retailers, and in-store displays and product demonstrations. We believe that these promotional activities are important to strengthening our brand name recognition.
We rely on our management's ability to determine the existence and extent of available markets for our products. Our management has an extensive marketing and sales background and devotes a significant portion of its time to marketing-related activities. We market our products primarily through our own sales force and independent sales representatives. Our representatives are located throughout the United States and Canada and are paid a commission based upon sales in their respective territories. Our sales representative agreements are generally terminable by either party upon 30 days' notice.
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We direct our marketing efforts toward retailers and believe that obtaining favorable product placement at the retail level is an important factor in our business, especially when introducing new products. In an effort to provide our retail customers with the highest level of customer service, we have an advanced electronic data interchange system to receive customer orders and transmit shipping and invoice information electronically. Our management also uses this system to monitor point-of-sale information at certain accounts. We also maintain an Internet site which enables our retail customers to access on-line shipment information.
We emphasize the design and packaging of our products to increase their appeal to consumers and to stand out among other brands on retailers' shelves. We believe that distinctive packaging, designed to answer consumers' questions concerning our products, has resulted in increased shelf space and greater sales. We also have a consumer relations department with over 50 persons to answer consumer questions about our products.
Our total net sales to our five largest customers during fiscal 2001 were approximately 47% of net sales, with Wal-Mart representing approximately 12% of our net sales and Kmart representing approximately 11% of our net sales. Our total net sales to our five largest customers during fiscal 2000 were approximately 46% of net sales, with Wal-Mart representing approximately 13% of our net sales and Kmart representing approximately 12% of our net sales.
In 1997, we entered into a seven-year supply agreement with Kmart for Kmart to purchase, distribute, market and sell a broad range of small appliances under the White-Westinghouse(R) brand name. Kmart is the exclusive United States mass merchant to market these White-Westinghouse(R) products. The supply agreement provides Kmart sole distribution rights to the White-Westinghouse(R) brand name for the mass merchandiser market, but allows distribution through other retail channels under certain conditions. Sales to Kmart approximated 11% and 12% of our total net sales for fiscal years 2001 and 2000, respectively.
The supply agreement with Kmart provides for minimum purchases by Kmart, which increase through the term of the supply agreement, and for the payment of penalties for shortfalls. If the aggregate United States retail sales in the consumer electronics industry for any specified category decrease by more than 10% in any year from that sold in the prior year, Kmart has the right to reduce the minimum purchase requirements for that category to an amount not less than 80% of the minimum for that period. We have paid Applica, Inc. (formerly known as Windmere-Durable Holdings, Inc.) a fee based upon our net sales less specified costs and expenses relating to the Kmart supply agreement in consideration of Applica's guarantee of our obligations under the supply agreement. See "Item 3--Legal Proceedings".
In 1999, we entered into a five-year supply agreement with Zellers, the leading national chain of discount department stores in Canada, to supply a broad range of small appliances under the White-Westinghouse(R) brand name. We also have expanded our distribution of private-label products with certain major retailers under brand names such as Kenmore(R) (Sears), Cook's Essentials(R) (QVC) and Magic Chef(R) (Wal-Mart).
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SOURCES OF SUPPLY
Most of our products are manufactured to our specifications by over 25 unaffiliated manufacturers located primarily in Far East locations, such as Hong Kong, the People's Republic of China and Taiwan, and in Europe. Many of these suppliers are ISO 9000 certified. We believe that we maintain good business relationships with our overseas manufacturers.
We do not maintain long-term purchase contracts with manufacturers and operate principally on a purchase order basis. We believe that we are not currently dependent on any single manufacturer for any of our products. However, one supplier located in China, accounted for approximately 35.2% of our product purchases during fiscal 2001. During fiscal 2000, one supplier also located in China, which acted as our purchasing agent from several other suppliers, accounted for approximately 38.0% of our product purchases. We believe that the loss of any one manufacturer would not have a long term material adverse effect on our business because other manufacturers with which we do business would be able to increase production to fulfill our requirements. However, the loss of a supplier could, in the short term, adversely effect our business until alternative supply arrangements are secured.
Our purchase orders are generally made in United States dollars in order to maintain continuity in our pricing structure and to limit exposure to currency fluctuations. Our policy is to maintain an inventory base to service the seasonal demands of our customers. In certain instances, we place firm commitments for products from six to twelve months in advance of receipt of firm orders from customers.
Quality assurance is particularly important to us and our product shipments are required to satisfy quality control tests established by our internal product design and engineering department. We employ both internal and independent agents to perform quality control inspections at the manufacturers' factories during the manufacturing process and prior to acceptance of goods.
Salton Hong Kong, Ltd. (Salton Hong Kong), our wholly-owned subsidiary, has been granted status in Hong Kong and the People's Republic of China as a manufacturing company. Salton Hong Kong has developed a key relationship with one of its suppliers whereby the supplier produces certain products for us using materials purchased by Salton Hong Kong and certain assets provided by Salton Hong Kong. The purpose of this relationship is to secure for us a long term supply relationship at favorable pricing.
COMPETITION
Our industry is mature and highly fragmented. Competition is based upon price, access to retail shelf space, product features and enhancements, brand names, new product introductions and marketing support and distribution approaches.
In the sale of small appliances, we compete with, among others, Applica, Inc., Braun, Hamilton Beach, Holmes/Rival, Krups, National Presto, Rowenta and Sunbeam. In the sale of Salton At Home products, we compete with, among others, Baccarat Crystal, Lenox, Mikasa, Miller Rogaska, Villeroy Boch, Waterford Crystal, Wedgewood, Westwood Lighting, Robert Abbey, Advance Corp. and M.Z. Berger. In the sale of personal care and wellness products, we compete with, among others, Andis, Applica, Clairol, Inc. (a
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wholly-owned subsidiary of Bristol-Myers Squibb Company), Conair Corporation, Helen of Troy and Sunbeam. We believe that our success is dependent on our ability to offer a broad range of existing products and to continually introduce new products and enhancements of existing products which have substantial consumer appeal based upon price, design, performance and features. We also believe that our brand names are important to our ability to compete effectively and give us the capability to provide consumers with appealing, well priced products to meet competition.
EMPLOYEES
As of June 30, 2001, we employed approximately 1,326 persons, including over 500 employees from our acquisition of Pifco. Approximately 80 employees, who work at our Kenilworth, New Jersey facility and approximately 80 employees at our recently acquired Pifco Holdings, PLC, Wolverhampton, England facility, were covered by collective bargaining agreements. The Kenilworth, New Jersey agreement expires on February 28, 2002 and the Wolverhampton, England agreement is ongoing and has no expiration date. We generally consider our relationship with our employees to be satisfactory and have never experienced a work stoppage.
REGULATION
We are subject to federal, state and local regulations concerning consumer products safety. Foreign jurisdictions also have regulatory authorities overseeing the safety of consumer products. In general, we have not experienced difficulty complying with such regulations and compliance has not had an adverse effect on our business. Most of our products are listed by Underwriters Laboratory, Inc.
In July 2000, we received a letter from the Food and Drug Administration warning that our marketing and sale of the Rejuvenique(R) facial mask violates certain FDA rules and regulations. On August 8, 2001, the FDA granted us clearance to market our Rejuvenique(R) facial toning system directly to consumers.
BACKLOG
Our backlog consists of commitments to order and orders for our products, which are typically subject to change and cancellation until shipment. Customer order patterns vary from year to year, largely because of annual differences in consumer acceptance of product lines, product availability, marketing strategies, inventory levels of retailers and differences in overall economic conditions. As a result, comparisons of backlog as of any date in a given year with backlog at the same date in a prior year are not necessarily indicative of sales for that entire given year. As of June 30, 2001, we had a backlog of approximately $346.8 million, including approximately $4.6 million from our Pifco acquisition, compared to approximately $426.4 million as of July 1, 2000. We do not believe that backlog is necessarily indicative of our future results of operations or prospects.
TRADEMARKS, PATENTS AND LICENSING ARRANGEMENTS
We hold numerous patents and trademarks registered in the United States and foreign countries for various products and processes. We have registered certain of our trademarks
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with the United States Patent and Trademark Office. We consider these trademarks to be of considerable value and of material importance to our business.
During 1996, we entered into license agreements with White Consolidated Industries, Inc. for use of the White-Westinghouse(R) trademark for small kitchen appliances, personal care products, fans, heaters, air cleaners and humidifiers. The license agreements grant us the exclusive right and license to use the White-Westinghouse(R) trademark in the United States and Canada in exchange for certain license fees and royalties. The license agreements also contain minimum sales requirements which, if not satisfied, may result in the termination of the agreements. Each of these license agreements is also terminable on or after the fifth anniversary of the agreement upon one-year's notice or upon a breach by us.
In the second quarter of fiscal 1997, we obtained the exclusive, worldwide right to distribute Farberware(R) small electric appliances. Farberware(R) is a time-honored trade name in the cookware and small electric appliance industry.
We entered into a license agreement with Aesthetics, Inc. in the third quarter of fiscal 1999. The license covers the manufacturing, marketing and distributing of the Rejuvenique(R) facial product lines.
In the fourth quarter of fiscal 1999, we obtained the exclusive right to manufacture, market and distribute throughout the United States small electrical coffee preparation products, including drip coffee makers, percolators, espresso machines, coffee grinders, and coffee mills, under the Melitta(R) brand name.
On November 9, 1999, we entered into an exclusive worldwide licensing agreement with UltraVection International to market ovens using UltraVection(TM)'s patented technology.
On December 9, 1999, we acquired from George Foreman and other venture participants the right to use in perpetuity and worldwide the name George Foreman, including pictures and the likeness of George Foreman, in connection with the marketing and sale of food preparation and non-alcoholic drink preparation and serving appliances. This transaction terminated as of July 1, 1999 our obligation to pay royalties based on the sale of George Foreman products. The aggregate purchase price was $113.75 million in cash, payable in five annual installments of $22.75 million commencing on the closing date, and 779,191 shares of our common stock.
On September 7, 2000, we entered into agreements with George Foreman and other venture participants pursuant to which we satisfied $22.75 million of payment obligations we incurred in connection with our acquisition of the "George Foreman" name by issuing 621,161 shares of our common stock to George Foreman and other venture participants. Under the terms of the transaction we guaranteed under certain circumstances the value of these 621,161 shares. We registered for resale the shares of common stock issued in connection with the transaction.
On July 2, 2001, we took back 456,175 of the 546,075 shares issued to George Foreman on September 7, 2000 and paid him $18 million. This payment, which represented $20 million less the proceeds George Foreman received from the sale of shares on the open market previously issued to him, terminated our guarantee obligation with respect to the shares issued to him and satisfied the third annual installment due under the note payable to George Foreman. As a result of this transaction, we now have only two installments remaining under the note as well as our outstanding guarantee obligation to the other venture participants.
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In the fourth quarter of fiscal 2000, we entered into an exclusive licensing agreement for the manufacture and distribution of tabletop and giftware items under the Calvin Klein(R) Tabletop label.
On July 20, 2000, we entered into a joint marketing alliance with Kellogg USA. We have both agreed as part of this alliance to launch print and broadcast advertising, joint trade and on-line consumer promotions and couponing and to collaborate with Kellogg on creating Pop-Tarts(R) and Eggo(R) branded toasters.
On September 8, 2000, we entered into a worldwide exclusive licensing agreement to market and distribute the "spin fryer" home appliance.
On January 12, 2001, Appliance Co. of America LLC appointed us as its exclusive distributor in North America of Welbilt(R) small kitchen electric appliances. In connection with the distribution agreement, we agreed to offer China Resources Electrical Appliance (Zuhai Co.) Ltd., one of our suppliers located in the Far East and the parent company of Appliance Co. of America LLC, orders to manufacture an aggregate of at least $200 million of small kitchen electric appliances by the end of 2006 (with minimum offered orders of $25 million per year). If we offer China Resources an order but fail to reach an agreement on delivery, payment and other terms, our offered order counts against the minimum offered orders requirement if we place the order with a third party on terms which are more favorable to us, in our sole discretion, than those offered by China Resources to us.
On August 7, 2001 we acquired all of the trademarks, molds, intellectual property, rights and patents related to the Westclox(R), Big Ben(R) and Spartus(R) brands for $9.8 million.
We have other licensing arrangements with various other companies to market products bearing the trademark or likeness of the subject matter of the license. These licenses include the right to market various products under Sasaki(R), Timex(R), Indiglo(R), Hershey Kiss(R), LooneyTunes(R) and Marilyn Monroe(R). We believe that these other license arrangements help to demonstrate our creativity and versatility in product design and the enhancement of existing products.
In general, our joint venture and licensing arrangements place marketing obligations on us and require us to pay fees and royalties based upon net sales or profits. Typically, each of these agreements may be terminated within 30 to 180 days if we do not satisfy minimum sales obligations or breach the agreement.
WARRANTIES
Our products are generally sold with a limited one-to-three year warranty from the date of purchase. A limited number of products are sold with a lifetime warranty. In the case of defects in material or workmanship, we agree to replace or repair the defective product without charge.
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RISK FACTORS
Prospective investors should carefully consider the following risk factors, together with the other information contained in this annual report on Form 10-K, in evaluating us and our business before purchasing our securities. In particular, prospective investors should note that this annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and that actual results could differ materially from those contemplated by such statements. See "Special Note Regarding Forward-Looking Statements." The factors listed below represent certain important factors which we believe could cause such results to differ. These factors are not intended to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR PAYMENT OBLIGATIONS.
We have a significant amount of indebtedness relative to our equity size. As of June 30, 2001, we had total consolidated indebtedness of $423.4 million, including $148.3 million of the 12 1/4% senior subordinated notes due 2008 and $125.0 million of 10 3/4% senior subordinated notes due 2005, and total stockholders' equity of $211.5 million. We also had additional availability under our revolving credit facility of $97.3 million. We may incur additional indebtedness in the future, including through additional borrowings under our amended and restated credit agreement, subject to the satisfaction of certain financial tests.
Our ability to service our debt obligations, including the notes, and to fund planned capital expenditures will depend upon our future operating performance, which will be affected by prevailing economic conditions in the markets we serve and financial, business and other factors, certain of which are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available under our amended and restated credit agreement in an amount sufficient to enable us to service our indebtedness, including the notes, or to fund our other liquidity needs. We may need to refinance all or a portion of the principal of the notes on or prior to maturity. We cannot assure you that we will be able to effect any refinancing on commercially reasonable terms or at all.
Our high level of debt could have important consequences for you, such as:
o our debt level makes us more vulnerable to general adverse economic and industry conditions;
o our ability to obtain additional financing for acquisitions, or to fund future working capital, capital expenditures or other general corporate requirements may be limited;
o we will need to use a substantial portion of our cash flow from operations for the payment of principal of, and interest on, our indebtedness, which will reduce the amount of money available to fund working capital, capital expenditures or other general corporate purposes;
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o our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete may be limited; and
o our debt level may place us at a competitive disadvantage to our less leveraged competitors.
OUR DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT COULD ADVERSELY AFFECT OUR BUSINESS BY LIMITING OUR FLEXIBILITY.
Our amended and restated credit agreement and the indentures governing the 12 1/4% senior subordinated notes and the 10 3/4% senior subordinated notes impose restrictions that affect, among other things, our ability to incur debt, pay dividends, sell assets, create liens, make capital expenditures and investments, merge or consolidate, enter into transactions with affiliates, and otherwise enter into certain transactions outside the ordinary course of business. Our amended and restated credit agreement also requires us to maintain specified financial ratios, including a minimum fixed charge coverage ratio and a maximum leverage ratio, and meet certain financial tests. Our ability to continue to comply with these covenants and restrictions may be affected by events beyond our control. A breach of any of these covenants or restrictions would result in an event of default under our amended and restated credit agreement and the indentures. Upon the occurrence of a breach, the lenders under our amended and restated credit agreement could elect to declare all amounts borrowed thereunder, together with accrued interest, to be due and payable, foreclose on the assets securing our amended and restated credit agreement and/or cease to provide additional revolving loans or letters of credit, which could have a material adverse effect on us. A failure to comply with the restrictions in the indentures could result in an event of default under the indentures.
IF WE WERE TO LOSE ONE OR MORE OF OUR MAJOR CUSTOMERS, OUR FINANCIAL RESULTS WOULD SUFFER.
Our success depends on our sales to our significant customers. Our total net sales to our five largest customers during fiscal 2001 were approximately 47% of net sales, with Wal-Mart representing approximately 12% of our net sales and Kmart representing approximately 11% of our net sales. Our total net sales to our five largest customers during fiscal 2000 were approximately 46% of net sales, with Wal-Mart representing approximately 13% of our net sales and Kmart representing approximately 12% of our net sales. Except for our supply agreements with Kmart and Zellers, we do not have long-term agreements with our major customers, and purchases are generally made through the use of individual purchase orders. A significant reduction in purchases by any of these major customers or a general economic downturn in retail sales could have a material adverse effect on our business, financial condition and results of operations.
THE TERMINATION OF OUR SUPPLY AGREEMENT WITH KMART WOULD ADVERSELY AFFECT OUR NET SALES.
In January 1997, we entered into a seven-year supply agreement with Kmart. Under this agreement, Kmart is the exclusive discount department store in the United States to market and sell a broad range of small appliances under the White-Westinghouse(R) brand name.
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The initial term of our agreement with Kmart expires on June 30, 2004. However, Kmart may terminate the agreement without cause after June 30, 2002. Kmart may also terminate our agreement on the basis of any claim which Kmart reasonably believes impairs or would impair Kmart's ability to receive the benefits of its supply agreement with Applica, Inc. (formerly known as Windmere-Durable Holdings, Inc.) or us.
Sales to Kmart of White-Westinghouse products, approximated 3.8%, and
7.3% of our total net sales for fiscal years 2001 and 2000 , respectively. The termination or any significant modification of our supply agreement with Kmart could have a material adverse effect on our business, financial condition and results of operations.
IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS, OUR ABILITY TO GROW OUR BUSINESS WILL BE LIMITED.
We believe that our future success will depend in part upon our ability to continue to introduce innovative designs in our existing products and to develop, manufacture and market new products. We may not successfully introduce, market and manufacture any new products or product innovations or develop and introduce in a timely manner innovations to our existing products which satisfy customer needs or achieve market acceptance. Our failure to develop products and introduce them successfully and in a timely manner would harm our ability to grow our business.
WE DEPEND HEAVILY ON OUR FOREIGN SUPPLIERS, WHICH SUBJECTS US TO THE RISKS OF DOING BUSINESS ABROAD.
We depend upon unaffiliated foreign companies for the manufacture of most of our products. One supplier located in China, accounted for approximately 35.2% of our product purchases during fiscal 2001. During fiscal 2000, one supplier also located in China, which acted as our purchasing agent from several other suppliers, accounted for approximately 38.0% of our product purchases. We believe that the loss of any one supplier would not have a long term material adverse effect on our business because other suppliers with which we do business would be able to increase production to fulfill our requirements however, the loss of a supplier could, in the short term, adversely effect our business until alternative supply arrangements are secured.
Our arrangements with our suppliers are subject to the risks of doing business abroad, including:
o import duties;
o trade restrictions;
o production delays due to unavailability of parts or components;
o increase in transportation costs and transportation delays;
o work stoppages;
o foreign currency fluctuations; and
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o political and economic instability.
The small household appliance industry is highly competitive and we may not be able to compete effectively.
We believe that competition is based upon several factors, including:
o price;
o access to retail shelf space;
o product features and enhancements;
o brand names;
o new product introductions; and
o marketing support and distribution approaches.
The current general slowdown in the retail sector has resulted in, and we expect it to continue to result in, additional pricing pressures on us.
We compete with established companies, some of which have substantially greater facilities, personnel, financial and other resources than we have. Significant new competitors or increased competition from existing competitors may adversely affect our business, financial condition and results of operations.
IF THE RETAIL INDUSTRY EXPERIENCES AN ECONOMIC SLOWDOWN, OUR FINANCIAL RESULTS WILL BE ADVERSELY AFFECTED.
We sell our products to consumers through major retail channels, primarily mass merchandisers, department stores, specialty stores and mail order catalogs. As a result, our business and financial results can fluctuate with the financial condition of our retail customers and the retail industry. As we have previously announced, the current general slowdown in the retail sector has adversely impacted our net sales of products. If such conditions continue or worsen, it could have a material adverse effect on our business, financial condition and results of operations.
Certain of our retail customers have filed for bankruptcy protection in recent years. We continually monitor and evaluate the credit status of our customers and attempt to adjust sales terms as appropriate. Despite these efforts, a bankruptcy filing by, or other adverse change in the financial condition of, a significant customer could adversely affect our financial results.
ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE AND MAY DISRUPT OUR BUSINESS.
We continue to seek opportunities to acquire businesses and product lines that fit within our acquisition strategy, including the expansion of our international sales through the acquisition of complementary businesses. We may not successfully identify acceptable acquisition candidates or integrate any acquired operations. For instance, we cannot assure
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you that the anticipated benefits of our recent acquisitions of the Westclox(R), Big Ben(R) and Spartus(R) brands, Pifco Holdings PLC, Sonex International Corporation, certain assets and intellectual property of The Stiffel Company and the Relaxor(R) brand and certain inventory will be realized. Opportunities for growth through acquisitions, future operating results and the success of acquisitions may be subject to the effects of, and changes in, U.S. and foreign trade and monetary policies, laws and regulations, political and economic developments, inflation rate and tax laws.
Our acquisitions of additional businesses and product lines may require additional capital and the consent of our lenders and may have a significant impact on our business, financial condition and results of operations. We may finance acquisitions with internally generated funds, bank borrowings, public offerings or private placements of debt or equity securities, or through a combination of these sources. This may have the effect of increasing our debt and reducing our cash available for other purposes.
Acquisitions may also require substantial attention from, and place substantial additional demands upon, our senior management. This may divert senior management's attention away from our existing businesses, making it more difficult to manage effectively. In addition, unanticipated events or liabilities relating to these acquisitions or the failure to retain key personnel could have a material adverse effect on our business, results of operations and financial condition.
EXPANDING OUR INTERNATIONAL SALES WILL SUBJECT US TO ADDITIONAL BUSINESS RISKS AND MAY CAUSE OUR PROFITABILITY TO DECLINE DUE TO INCREASED COSTS.
We intend to pursue growth opportunities internationally. Our international sales accounted for less than 7% of our total net sales for fiscal 2001. We expect international sales will increase in fiscal 2002 as we include a full year of results from Pifco Holdings PLC. Our pursuit of international growth opportunities may require significant investments for an extended period before returns on these investments, if any, are realized. International operations are subject to a number of other risks and potential costs, including:
o the risk that because our brand names may not be locally recognized, we must spend significant amounts of time and money to build a brand identity without certainty that we will be successful;
o unexpected changes in regulatory requirements;
o inadequate protection of intellectual property in foreign countries;
o foreign currency fluctuations;
o transportation costs;
o adverse tax consequences; and
o political and economic instability.
We cannot assure you that we will not incur significant costs in addressing these potential risks.
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IF WE HAVE TO EXPEND SIGNIFICANT AMOUNTS TO REMEDIATE ENVIRONMENTAL LIABILITIES, OUR FINANCIAL RESULTS WILL SUFFER.
Prior to January 2001, we manufactured certain of our products at our owned plants in Laurinburg, North Carolina, Macon, Missouri, Boonville, Missouri, Moberly, Missouri and Kirksville, Missouri. Our previous manufacturing of products at these sites, which have been converted to warehouse and distribution facilities, exposes us to potential liabilities for environmental damage that these facilities may have caused or may cause nearby land owners. During the ordinary course of our operations, we have received, and we expect that we may in the future receive, citations or notices from governmental authorities asserting that our facilities are not in compliance with, or require investigation or remediation under, applicable environmental statutes and regulations. Any citations or notices could have a material adverse effect on our business, results of operations and financial condition.
THE SEASONAL NATURE OF OUR BUSINESS COULD ADVERSELY IMPACT OUR OPERATIONS.
Our business is highly seasonal, with operating results varying from quarter to quarter. We have historically experienced higher sales during the months of August through November primarily due to increased demand by customers for our products attributable to holiday sales. This seasonality has also resulted in additional interest expense for us during this period due to an increased need to borrow funds to maintain sufficient working capital to finance product purchases and customer receivables for the seasonal period. Lower sales than expected by us during this period, a lack of availability of product, a general economic downturn in retail sales or the inability to service additional interest expense due to increased borrowings could have a material adverse effect on our business, financial condition and results of operations.
PRODUCT RECALLS OR LAWSUITS RELATING TO DEFECTIVE PRODUCTS COULD ADVERSELY IMPACT OUR FINANCIAL RESULTS.
We face exposure to product recalls and product liability claims in the event that our products are alleged to have manufacturing or safety defects or to have resulted in injury or other adverse effects. We cannot assure you that we will be able to maintain our product liability insurance on acceptable terms, if at all, or that product liability claims will not exceed the amount of our insurance coverage. As a result, we cannot assure you that product recalls and product liability claims will not adversely affect our business.
THE INFRINGEMENT OR LOSS OF OUR PROPRIETARY RIGHTS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
We regard our copyrights, trademarks, service marks and similar intellectual property as important to our success. We rely on copyright and trademark laws in the United States and other jurisdictions to protect our proprietary rights. We seek to register our trademarks in the United States and elsewhere. These registrations could be challenged by others or invalidated through administrative process or litigation. If any of these rights were infringed or invalidated, our business could be materially adversely affected.
We license various trademarks and tradenames from third parties for use on our products. These licenses generally place marketing obligations on us and require us to pay
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fees and royalties based on net sales or profits. Typically, each license may be terminated if we fail to satisfy minimum sales obligations or if we breach the license. The termination of these licensing arrangements could adversely affect our business, financial condition and results of operations.
WE MAY BE SUBJECT TO LITIGATION AND INFRINGEMENT CLAIMS, WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING OUR PRODUCTS.
We cannot assure you that others will not claim that our proprietary or licensed products are infringing their intellectual property rights or that we do not in fact infringe those intellectual property rights. If someone claimed that our proprietary or licensed products infringed their intellectual property rights, any resulting litigation could be costly and time consuming and would divert the attention of management and key personnel from other business issues. We also may be subject to significant damages or an injunction against use of our proprietary or licensed products. A successful claim of patent or other intellectual property infringement against us could harm our financial condition.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS COULD SIGNIFICANTLY INCREASE OUR OPERATING COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.
Most federal, state and local authorities require certification by Underwriters Laboratory, Inc., an independent, not-for-profit corporation engaged in the testing of products for compliance with certain public safety standards, or other safety regulation certification prior to marketing electrical appliances. Foreign jurisdictions also have regulatory authorities overseeing the safety of consumer products. Our products, or additional electrical appliances which may be developed by us, may not meet the specifications required by these authorities. A determination that we are not in compliance with these rules and regulations could result in the imposition of fines or an award of damages to private litigants.
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, OUR ABILITY TO GROW AND DEVELOP OUR BUSINESS WILL SUFFER.
Our continued success will depend significantly on the efforts and abilities of David C. Sabin, Chairman; Leonhard Dreimann, Chief Executive Officer; and William B. Rue, President and Chief Operating Officer. The loss of the services of one or more of these individuals could have a material adverse effect on our business. In addition, as our business develops and expands, we believe that our future success will depend greatly on our ability to attract and retain highly qualified and skilled personnel. We do not have, and do not intend to obtain, key-man life insurance on our executive officers.
THE INTERESTS OF OUR SIGNIFICANT STOCKHOLDER MAY CONFLICT WITH YOUR INTERESTS.
As of June 30, 2001, Centre Partners Management LLC and entities directly or indirectly controlled by Centre Partners beneficially owned in the aggregate approximately 26% of our common stock. Centre Partners is able to exercise significant influence with respect to the election of directors or major corporate transactions such as a merger or sale of all or substantially all of our assets. Centre Partners generally has the right to designate two directors as long as it and its affiliates own at least 12.5% of the total voting power of our outstanding common stock and one director as long as it and its affiliates own at least 7.5% of
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the total voting power of our outstanding common stock. The interests of Centre Partners may conflict with your interests in certain circumstances.
TAKEOVER DEFENSE PROVISIONS WHICH WE HAVE IMPLEMENTED MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Various provisions of Delaware corporation law and of our corporate governance documents may inhibit changes in control not approved by our board of directors and may have the effect of depriving stockholders of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile takeover or may deter takeover attempts by third parties. In addition, the existence of these provisions may adversely affect the market price of our common stock. These provisions include:
o a classified board of directors;
o a prohibition on stockholder action through written consents;
o a requirement that special meetings of stockholders be called only by the board of directors;
o availability of "blank check" preferred stock.
WE DO NOT ANTICIPATE PAYING DIVIDENDS.
We have not paid dividends on our common stock and we do not anticipate paying dividends in the foreseeable future. We intend to retain future earnings, if any, to finance the expansion of our operations and for general corporate purposes, including future acquisitions. In addition, our credit agreement and senior subordinated notes prohibit us from paying dividends on our capital stock.
ITEM 2. PROPERTIES
A summary of our leased properties is as follows:
LOCATION DESCRIPTION AREA (SQ. FT.) LEASE EXPIRATION
-------- ----------- -------------- ----------------
Rancho Dominguez, CA...... Warehouse 340,672 October 31, 2002
Mira Loma, CA............. Warehouse and distribution facility 216,300 October 30, 2007
Elizabeth, NJ ............ Warehouse 188,000 October 31, 2004
Harrison, NJ ............. Warehouse and sales office 146,555 May 31, 2002
Lake Forest, IL........... Corporate offices and showrooms 58,680 September 30, 2011
McColl, SC ............... Warehouse 52,628 October 15, 2001
Maxton, NC ............... Warehouse 50,000 March 14, 2002
Gurnee, IL ............... Retail outlet and warehouse 34,649 November 30, 2006
Laurinburg, NC ........... Warehouse 18,000 Month to month
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Kenilworth, NJ ........... Marketing and sales office 12,309 September 30, 2007
New York, NY ............. Sales office 6,959 August 31, 2004
New York, NY ............. Sales office 6,802 December 31, 2001
High Point, NC ........... Showroom 4,500 Month to month
Westend, NJ .............. Retail outlet 2,400 May 31, 2004
Mississauga, Ontario...... Sales Office 2,158 April 30, 2002
Troy, MI ................. Sales office 1,435 May 31, 2004
Eden Prairie, MN ......... Sales office 1,262 April 30, 2005
Laurinburg, NC ........... Showroom 1,000 Month to month
Chicago, IL .............. Retail store 560 October 31, 2007
We own all of the facilities listed below, which we acquired in connection with the acquisition of Pifco Holdings PLC in June 2001 and Toastmaster in January 1999. These facilities have been pledged as collateral to secure payment of our senior debt obligations. The following table sets forth the location and approximate square footage of each of our significant owned facilities.
LOCATION DESCRIPTION AREA (SQ. FT.)
-------- ----------- --------------
Wolverhampton, England.... Manufacturing and warehouse 323,306
Laurinburg, NC............ Sales and warehouse facility 223,000
Macon, MO................. Warehouse and service center 171,000
Boonville, MO............. Warehouse and service center 169,000
Manchester, England....... Administrative offices and warehouse 168,000
Moberly, MO............... Warehouse 134,000
Staffordshire, England.... Warehouse 115,000
Kirksville, MO............ Warehouse 114,000
Columbia, MO.............. Warehouse 107,000
Columbia, MO.............. Warehouse 65,000
Columbia, MO.............. Administrative offices 62,000
Boonville, MO............. Warehouse 58,000
Manchester, England....... Factory Store 2,000
We believe that our facilities generally are suitable and adequate for our current level of operations and provide sufficient capacity for our foreseeable needs without the need for material capital expenditures.
In addition to the facilities mentioned above, we acquired 6.3 acres of vacant land located in Manchester, England as part of our acquisition of Pifco Holdings PLC in June 2001.
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ITEM 3. LEGAL PROCEEDINGS
GENERAL
In September 1999, Linda Evans Fitness Centers, Inc. (the "Fitness Centers"), Mark Golub and Thomas Gergley filed suit against us and our principal executive officers in the Superior Court of Contra Costa County, California alleging that we tortiously interfered with a contract between the Fitness Centers and Ms. Evans by hiring Ms. Evans to act as a spokesperson for the Rejuvenique(R) facial toning system. Before Ms. Evans was hired by us, Ms. Evans had brought suit against the Fitness Centers seeking a determination that her contract with the Fitness Centers had been terminated on the basis of fraud and the failure of the Fitness Centers to make certain payments. We believe that we have valid defenses against the claims made against us by the Fitness Centers.
On January 23, 2001, we filed a lawsuit against Applica, Inc. (formerly known as Windmere-Durable Holdings, Inc.) and its affiliate in the United States District Court for the Northern District of Illinois. The lawsuit alleges that Applica intentionally, willfully and maliciously breached its noncompetition agreement with us, attempted to conceal the breach, tortiously interfered with our business and contractual relationships and breached its duty of good faith and fair dealing. The lawsuit seeks compensatory damages, punitive damages and attorneys' fees and costs. As a result of Applica's actions, we have terminated an agreement which requires us to pay Applica a fee based upon our net sales less specified costs and expenses relating to our supply agreement with Kmart. The terms of the agreement between the Company and Applica expressly provide for termination upon a violation by Applica of its noncompetition provisions. In March 2001, Applica filed an answer with the court.
On July 2, 2001, we were served with a complaint for patent infringement alleged by AdVantage Partners LLC in the United States District Court for the Central District of California. In this complaint, AdVantage alleged that we and retailers that sell our "George Foreman Jr." rotisserie grills were infringing two of AdVantage's patents. AdVantage sought a permanent injunction against sale of George Foreman rotisserie grills utilizing the inventions claimed by those patents and unspecified monetary damages including a request for treble damages. These patents relate to accessory products for rotisserie ovens including spit rod and basket assemblies. We filed an answer and counterclaim denying the allegations of the complaint and asserting a number of affirmative defenses and request for declaratory relief. AdVantage had also sought preliminary injunctive relief; however, on August 24, 2001, the court denied AdVantage's motion. On August 28, 2001, AdVantage filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit to review the preliminary injunction.
On August 9, 2001, AdVantage Partners LLC filed a second complaint against us for patent infringement in the United States District Court for the Central District of California. In this complaint, AdVantage alleges that we have infringed a patent assigned to AdVantage, and seeks a permanent injunction against our sale of the "Baby George Foreman" rotisserie grill, which purportedly utilizes an invention claimed by that patent, and unspecified monetary damages including a request for treble damages. The patent relates to a gear driven spit assembly for rotisserie ovens. We filed an answer and counterclaim denying the allegations of the complaint and asserting a number of affirmative defenses and request for declaratory relief.
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We are a party to various other actions and proceedings incident to our normal business operations. We believe that the outcome of any litigation will not have a material adverse effect on our business, financial condition or results of operations. We also have product liability and general liability insurance policies in amounts we believe to be reasonable given our current level of business. Although historically we have not had to pay any material product liability claims, it is conceivable that we could incur claims for which we are not insured.
ENVIRONMENTAL
We are participating in environmental remediation activities at four sites which we own or operate. As of June 30, 2001, we have accrued approximately $150,000 for the anticipated costs of investigation, remediation and/or operation and maintenance costs at these sites. Although the costs could exceed that amount, we believe that any excess will not have a material adverse effect on our financial condition or results of operations.
REGULATORY
In July 2000, we received a letter from the Food and Drug Administration warning that our marketing and sale of the Rejuvenique(R) facial mask violates certain FDA rules and regulations. On August 8, 2001, the FDA granted us clearance to market our Rejuvenique(R) facial toning system directly to consumers.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The registrant's common stock has traded on the New York Stock Exchange under the symbol "SFP" since February 26, 1999. From October 1991 until February 25, 1999, our common stock traded on the Nasdaq National Market under the symbol "SALT". The following table sets forth, for the periods indicated, the high and low sales prices for the common stock as reported on the Nasdaq National Market prior to February 26, 1999 and on the New York Stock Exchange after such date, in each case adjusted for the three-for-two stock split effected on July 28, 1999.
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HIGH LOW
---- ----
FISCAL 2001
First Quarter $41.50 $28.63
Second Quarter $33.38 $16.56
Third Quarter $23.00 $14.96
Fourth Quarter $21.80 $12.85
FISCAL 2000
First Quarter $50.00 $21.69
Second Quarter $39.44 $24.25
Third Quarter $60.88 $27.69
Fourth Quarter $49.81 $26.88
FISCAL 1999
First Quarter $11.17 $ 7.67
Second Quarter $15.50 $ 5.92
Third Quarter $22.83 $14.00
Fourth Quarter $33.58 $14.67
We have not paid dividends on our common stock and we do not anticipate paying dividends in the foreseeable future. We intend to retain future earnings, if any, to finance the expansion of our operations and for general corporate purposes, including future acquisitions. We are also prohibited from declaring or paying cash dividends on our capital stock under our terms of our credit agreement and senior subordinated notes. As of September 20, 2001, there were approximately 347 holders of record of our common stock.
PREFERRED STOCK
We have 40,000 outstanding shares of the convertible preferred stock. The convertible preferred stock is generally non-dividend bearing; however, if we breach in any material respect any of our material obligations in the preferred stock agreement or the certificate of incorporation relating to the convertible preferred stock, the holders of convertible preferred stock are entitled to receive quarterly cash dividends on each share of convertible preferred stock from the date of such breach until it is cured at a rate per annum equal to 12 1/2% of the Liquidation Preference (as defined below). The payment of dividends is limited by the terms of our credit agreement.
Each holder of the convertible preferred stock is generally entitled to one vote for each share of Salton common stock which such holder could receive upon the conversion of the convertible preferred stock. Each share of convertible preferred stock is convertible at any time into that number of shares of Salton common stock obtained by dividing $1,000 by the Conversion Price in effect at the time of conversion. The "Conversion Price" is equal to $11.33, subject to certain anti-dilution adjustments.
In the event of a Change of Control (as defined), each holder of shares of convertible preferred stock has the right to require us to redeem such shares at a redemption price equal to the Liquidation Preference plus an amount equivalent to interest accrued thereon at a rate of 7% per annum compounded annually on each anniversary date of July 28, 1998 for the period from July 28, 1998 through the earlier of the date of such redemption or July 28, 2003.
In the event of a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, holders of the Convertible Preferred Stock are entitled to be paid out
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of the assets of the Company available for distribution to its stockholders an amount in cash equal to $1,000 per share, plus the amount of any accrued and unpaid dividends thereon (the "Liquidation Preference"), before any distribution is made to the holders of any Salton common stock or any other of Salton's capital stock ranking junior as to liquidation rights to the convertible preferred stock.
We may optionally convert in whole or in part, the convertible preferred stock at any time on and after July 15, 2003 at a cash price per share of 100% of the then effective Liquidation Preference per share, if the daily closing price per share of Salton's common stock for a specified 20 consecutive trading day period is greater than or equal to 200% of the then current Conversion Price. On September 15, 2008, we will be required to exchange all outstanding shares of convertible preferred stock at a price equal to the Liquidation Performance per share, payable at the Company's option in cash or shares of Salton common stock.
As of September 21, 2001, there were 40,000 shares of the convertible preferred stock outstanding held by 7 shareholders of record. There is no established market for the convertible preferred stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data as of and for the fiscal years ended June 30, 2001, July 1, 2000, June 26, 1999, June 27, 1998 and June 28, 1997 have been derived from, and should be read in conjunction with, our audited consolidated financial statements, including the notes thereto. All of the following information is qualified in its entirety by, and should be read in conjunction with our audited consolidated financial statements, including the notes thereto.
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Fiscal Years Ended
-----------------------------------------------------------------------------
June 30, July 1, June 26, June 27, June 28,
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
STATEMENT OF EARNINGS:
Net sales $ 792,114 $ 837,302 $ 506,116 $ 305,599 $ 182,806
Cost of goods sold 474,256 467,250 285,526 179,376 121,590
Distribution expenses 49,395 37,639 21,621 12,327 7,809
--------- --------- --------- --------- ---------
Gross profit 268,463 332,413 198,969 113,896 53,407
Selling, general and administrative expenses 156,885 156,749 129,588 84,216 42,944
--------- --------- --------- --------- ---------
Operating income 111,578 175,664 69,381 29,680 10,463
Interest expense,net (37,732) (28,761) (15,518) (5,333) (4,063)
Cost associated with refinancing -- -- -- (1,133) --
Realized gain on sale of marketable securities -- -- -- 8,972 --
--------- --------- --------- --------- ---------
Income before income taxes 73,846 146,903 53,863 32,186 6,400
Income tax expense 27,692 55,087 19,320 12,205 2,001
--------- --------- --------- --------- ---------
Net income $ 46,154 $ 91,816 $ 34,543 $ 19,981 $ 4,399
========= ========= ========= ========= =========
Weighted average common shares outstanding 11,750 11,221 10,760 19,594 19,260
Net income per share:
Basic $ 3.93 $ 8.18 $ 3.21 $ 1.02 $ 0.23
Weighted average common shares and common
equivalent shares outstanding 16,065 15,526 14,562 20,259 19,623
Net income per share:
Diluted $ 2.87 $ 5.91 $ 2.37 $ 0.99 $ 0.22
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 310,648 $ 197,671 $ 165,936 $ 44,768 $ 17,996
Total assets 722,884 564,276 328,316 141,397 102,343
Total debt 423,366 327,220 214,558 50,475 43,410
Stockholders' equity 211,497 173,808 50,739 57,710 38,622
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations may be deemed to include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve risk and uncertainty. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. The important factors that could cause actual results to differ materially from those in the forward-looking statements herein (the "Cautionary Statements") include, without limitation: our degree of leverage; economic conditions and the retail environment; the timely development, introduction and customer acceptance of our products; competitive products and pricing; dependence on foreign suppliers and supply and manufacturing constraints; our relationship and contractual arrangements with key customers, suppliers and licensors; cancellation or reduction of orders; international business activities; the risks relating to legal proceedings, the risks relating to intellectual property rights; the risks relating to regulatory matters, as well as other risks referenced from time to time in our filings with the commission. All subsequent written and oral forward-looking statements attributable to us or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
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OVERVIEW
We are a leading domestic designer, marketer and distributor of a broad range of branded, high quality small appliances under well-recognized brand names such as Salton(R), George Foreman(TM), Toastmaster(R), Breadman(R), Juiceman(R), Juicelady(R), White-Westinghouse(R), Farberware(R), Melitta(R), Welbilt(R), Aircore(R), Russell Hobbs(R), Tower(R), Haden(R) and Pifco(R). We believe that we have the leading domestic market share in indoor grills, toasters, juice extractors, bread makers, griddles, waffle makers and buffet ranges/hotplates and a significant market share in other product categories. We outsource most of our production to independent manufacturers, primarily in the Far East. We also design and market tabletop products, time products, lighting products and personal care and wellness products under brand names such as Block China(R), Atlantis(R) Crystal, Sasaki(R), Calvin Klein(R), Timex(R), Ingraham(R), Westclox(R), Big Ben(R), Spartus(R), Stiffel(R), Ultrasonex(TM), Relaxor(R), Carmen(R), Hi-Tech(R), Mountain Breeze(R) and Salton(R).
We predominantly sell our products to mass merchandisers, department stores, specialty stores and mail order catalogs. We also sell certain of our products directly to consumers through infomercials and our Internet website. We market and sell our products primarily in the United States through our own sales force and a network of independent commissioned sales representatives.
The general slowdown in the retail sector which began during our second fiscal quarter of 2001 has continued to have an adverse effect on our sales. During our fourth fiscal quarter of 2001 we experienced a shift in our customers' buying patterns from higher-priced products to lower price point products. Our wide range of products at different price points has allowed us to adapt to this shift in buying patterns. This shift to lower priced products also lowered gross margins as opening and mid-price point products generally have lower gross margins than our higher price point products. Our products, and our market leading position in so many categories, gives us a solid foundation to actively face the difficult economic environment.
With the assumption that the economic climate and customer buying patterns will remain unchanged, we expect that sales over the first two quarters of fiscal 2002 will range between $450 million and $475 million in an operating environment that will be highly promotional and price sensitive. At these levels, we currently anticipate that fully diluted earnings per share will range between $1.80 and $2.20 per share for this period.
On January 7, 1999, we acquired Toastmaster, a Columbia, Missouri based marketer of kitchen and small appliances and time products. Through Toastmaster, we design, market and service a wide array of kitchen and small appliances and time products under the brand names Toastmaster(R) and Ingraham(R).
Our operating results for fiscal 1999 include the operating results of Toastmaster from our acquisition date of January 7, 1999.
In July 2000, we received a letter from the Food and Drug Administration warning us that our marketing and sale of the Rejuvenique(R) facial mask violates certain FDA rules and regulations. Our sales of the Rejuvenique(R) facial mask have been adversely impacted because many of our retail customers decided to stop selling the product pending the resolution of this matter. On August 8, 2001, the FDA granted us clearance to market the Rejuvenique(R) facial
33
toning system directly to consumers. We are working with our retail customers to restore their inventories of the Rejuvenique(R) facial toning system.
On June 4, 2001, we acquired Pifco Holdings PLC, a United Kingdom based producer and marketer of a broad range of branded kitchen and small appliances, personal care and wellness products, cookware and battery operated products. Our operating results for fiscal 2001 include the operating results of Pifco from June 1, 2001 through June 30, 2001.
On July 9, 2001 we announced the appointment of Dr. Bruce J. Walker to our Board of Directors, increasing the board to eight members. Dr. Walker currently serves as Dean and Professor of Marketing at the College of Business at the University of Missouri-Columbia.
In August 2001 we appointed Martin Burns to oversee the operations of Salton Europe (formerly Pifco Holdings PLC). Martin most recently served as Managing Director of Morphy Richards at the Glen Dimplex Group, a manufacturer of electrical heating and small kitchen appliances in the United Kingdom.
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The following table sets forth our results of operations as a percentage of net sales for the periods indicated:
FISCAL YEARS ENDED
-------------------------------------------------------
JUNE 30, 2001 JULY 1, 2000 JUNE 26, 1999
------------- ------------ -------------
Net sales 100% 100.0% 100.0%
Cost of Goods sold 59.9 55.8 56.4
Distribution expenses 6.2 4.5 4.3
------ ------ ------
Gross profit 33.9 39.7 39.3
Selling, general and
administrative expenses 19.8 18.7 25.6
------ ------ ------
Operating income 14.1% 21.0% 13.7%
====== ====== ======
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JULY 1, 2000
NET SALES. Net sales in the fifty-two weeks ended June 30, 2001 ("fiscal 2001") were $792.1 million, a decrease of approximately $45.2 million or 5.4%, compared to net sales of $837.3 million in the fifty-three weeks ended July 1, 2000 ("fiscal 2000"). This decrease is primarily attributable to reduced sales of products under the White-Westinghouse(R) product line, primarily sold to Kmart, and reduced sales of products under the Rejuvenique(R) brand, which was subject to a warning letter from the FDA during the period. We were additionally impacted by reduced sales of products under the brands of Juiceman(R), Farberware(R), Breadman(R), Magic Chef(R), and Ingraham(R). These decreases in sales were partially offset by an increase in sales of products under the Melitta(R) brand, Toastmaster(R) brand, the George Foreman(R) brand and the Kenmore(R) brand. Sales of new product lines, primarily under the Relaxor(R), Sonex(R), Aircore(R), Welbilt(R) and Stiffel(R) brands and the addition of one month's results of newly acquired Pifco Holdings PLC, also helped offset the sales decreases. Net sales of the White-Westinghouse(R) brand to Kmart approximated 3.8% of net sales in fiscal 2001 compared to 7.3% of net sales in fiscal 2000.
GROSS PROFIT. Gross profit in fiscal 2001 was $268.5 million or 33.9% of net sales as compared to $332.4 million or 39.7% of net sales in fiscal 2000. Cost of goods sold during fiscal 2001 increased to 59.9% of net sales compared to 55.8% in fiscal 2000. Gross profit decreased primarily from a reduction in sales of higher priced items with higher gross margins, particularly large and extra large size George Foreman(TM) indoor grills, Rejuvenique(R), Juiceman(R) and Juicelady(R) brand products. We also had increased sales of products with lower gross margins, primarily Toastmaster(R) brand products. Distribution expenses were $49.4 million or 6.2% of net sales in fiscal 2001 compared to $37.6 million or 4.5% of net sales in fiscal 2000. Distribution expenses increased, as a percentage of sales, due to higher costs for shipping to customers, primarily due to higher fuel costs and an increase in sales to customers purchasing on prepaid freight terms that ordered in smaller quantities on a more frequent basis, thereby increasing our freight costs. Additionally we incurred a full year of expenses in fiscal 2001 related to the addition of two warehouses during fiscal 2000 and two former manufacturing facilities were converted to distribution centers and are now carried in distribution costs.
35
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to 19.8% of net sales or $156.9 million in fiscal 2001 compared to 18.7% of net sales or $156.7 million for fiscal 2000. Expenditures for television, royalty expense, certain other media and cooperative advertising and trade show expenses were 9.9% of net sales or $78.5 million in fiscal 2001 compared to 10.7% of net sales or $89.7 million in fiscal 2000. This reduction was primarily from less spending on infomercials, as well as lower royalties on White-Westinghouse products, partially offset by increased spending on cooperative and direct advertising. The remaining selling, general and administrative costs increased to $78.4 million or 9.9% of net sales in fiscal 2001 compared to $67.0 million or 8.0% of net sales in fiscal 2000. This was primarily attributable to increased salaries, rent, travel and product development costs to support our sales activities, increased legal expenses and settlement costs, primarily related to Rejuvenique(R) and the FDA, patent infringement claims and other corporate activities and increases in certain other administrative expenses to support the activities of the company.
OPERATING INCOME. As a result of the foregoing, operating income decreased by $64.1 million or 36.5%, to $111.6 million in fiscal 2001 from $175.7 million in fiscal 2000. Operating income as a percentage of net sales decreased to 14.1% in fiscal 2001 from 21.0% in fiscal 2000.
NET INTEREST EXPENSE. Net interest expense was $37.7 million for fiscal 2001 compared to $28.8 million in fiscal 2000. The increase is primarily attributable to interest paid of $5.1 million on increased borrowings under our revolver and term debt, interest of $3.0 million related to the $150.0 million senior subordinated debt offering completed in April, 2001 and a reduction in interest income of $1.8 million for funds kept on deposit during fiscal 2000. Salton's rate of interest on amounts outstanding under the revolver, term loan and senior subordinated debt was a weighted average annual rate of 9.8% in fiscal 2001 compared to 10.0% in fiscal 2000. The average amount of all debt outstanding was $369.8 million for fiscal 2001 compared to $279.5 million for fiscal 2000. These increases contributed to higher interest expense and the increased borrowings were used to make acquisitions and provide working capital necessary to support the business.
INCOME TAX EXPENSE. Salton had tax expense of $27.7 million in fiscal 2001 as compared to tax expense of $55.1 million in fiscal 2000.
NET INCOME. Net income decreased 49.7% to $46.2 million in fiscal 2001, compared to $91.8 million in fiscal 2000.
EARNINGS PER SHARE. Basic earnings per common share were $3.93 per share on weighted average common shares outstanding of 11,750,206 in fiscal 2001 compared to earnings of $8.18 per share on weighted average common shares outstanding of 11,221,379 in fiscal 2000. Diluted earnings per common share were $2.87 per share on weighted average common shares outstanding, including dilutive common stock equivalents, of 16,065,036 in fiscal 2001 compared to earnings of $5.91 per share on weighted average common shares outstanding, including dilutive common stock equivalents, of 15,525,991 in fiscal 2000. All
36
share counts reflect a 3-for-2 split of Salton's common stock effective July 28, 1999, for stockholders of record at the close of business on July 14, 1999.
YEAR ENDED JULY 1, 2000 COMPARED TO YEAR ENDED JUNE 26, 1999
NET SALES. Net sales in the fifty-three weeks ended July 1, 2000 ("fiscal 2000") were $837.3 million, an increase of approximately $331.2 million or 65.4%, compared to net sales of $506.1 million in the fifty-two weeks ended June 26, 1999 ("fiscal 1999"). This increase is primarily attributable to increased sales of products within the George Foreman(R) product line, including the initial shipments of the George Foreman indoor/outdoor electric grills, sales of Toastmaster(R) products for a full fiscal year, and sales of Farberware(R), Juicelady(R) and Juiceman(R) products. Net sales of the White-Westinghouse(R) brand and other products to Kmart approximated 12% of net sales in fiscal 2000 compared to 16% of net sales in fiscal 1999.
GROSS PROFIT. Gross profit in fiscal 2000 was $332.4 million or 39.7% of net sales as compared to $199.0 million or 39.3% of net sales in fiscal 1999. Cost of goods sold during fiscal 2000 decreased to 55.8% of net sales compared to 56.4% in fiscal 1999. Distribution expenses were $37.6 million or 4.5% of net sales in fiscal 2000 compared to $21.6 million or 4.3% of net sales in fiscal 1999. Distribution expenses increased slightly as a percentage of sales due to higher costs for shipping to customers, primarily due to higher fuel costs and expenses related to the addition of two warehouses during fiscal 2000. Gross profit in fiscal 2000 as a percentage of net sales increased primarily due to a more favorable mix of sales with lower costs in their respective channels of distribution when compared to fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased to 18.7% of net sales or $156.7 million in fiscal 2000 compared to 25.6% of net sales or $129.6 million for fiscal 1999. Expenditures for television, royalty expense, certain other media and cooperative advertising and trade show expenses were 10.7% of net sales or $89.7 million in fiscal 2000 when compared to 17.4% of net sales or $88 million in fiscal 1999. The effect of the acquisition of the George Foreman name related to fiscal 2000 was the elimination of royalty payments partially offset by amortization expense of $8.1 million and imputed interest of $6.3 million, compared to payments of royalties of $38.3 million in fiscal 1999. The remaining selling, general and administrative costs increased to $67 million or 8% of net sales in fiscal 2000 compared to $41.6 million or 8.2% of net sales in fiscal 1999, primarily attributable to higher costs related to the higher level of sales.
OPERATING INCOME. As a result of the foregoing, operating income increased by $106.3 million or 153.2%, to $175.7 million in fiscal 2000 from $69.4 million in fiscal 1999. Operating income as a percentage of net sales increased to 21.0% in fiscal 2000 from 13.7% in fiscal 1999.
NET INTEREST EXPENSE. Net interest expense was approximately $28.8 million for fiscal 2000 compared to $15.5 million in fiscal 1999. The increase is primarily attributable to imputed interest of $6.3 million on the George Foreman note payable and a full year of actual interest of $11.1 million on debt incurred to complete the Toastmaster acquisition compared to $5.1 million of interest expense from the January 7, 1999 completion date of the Toastmaster acquisition. Salton's rate of interest on amounts outstanding under the revolver, term loan and senior subordinated debt was a weighted average annual rate of 10.0% in fiscal
37
2000 compared to 9.2% in fiscal 1999. The average amount of all debt outstanding was $279.5 million for fiscal 2000 compared to $155.7 million for fiscal 1999. These increases contributed to higher interest expense and the increased borrowings were used to provide working capital necessary to support the growth in sales.
INCOME TAX EXPENSE. Salton had tax expense of $55.1 million in fiscal 2000 as compared to tax expense of $19.3 million in fiscal 1999.
NET INCOME. Net income increased 165.8% to $91.8 million in fiscal 2000, compared to $34.5 million in fiscal 1999.
EARNINGS PER SHARE. Basic earnings per common share were $8.18 per share on weighted average common shares outstanding of 11,221,379 in fiscal 2000 compared to earnings of $3.21 per share on weighted average common shares outstanding of 10,760,455 in fiscal 1999. Diluted earnings per common share were $5.91 per share on weighted average common shares outstanding, including dilutive common stock equivalents, of 15,525,991 in fiscal 2000 compared to earnings of $2.37 per share on weighted average common shares outstanding, including dilutive common stock equivalents, of 14,561,964 in fiscal 1999. All share counts reflect a 3-for-2 split of Salton's common stock effective July 28, 1999, for stockholders of record at the close of business on July 14, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2001, we provided net cash of $44.1 million in operating activities and used net cash of $98.0 million in investing activities. The cash provided from operating activities resulted primarily from net income, the reduction of inventory levels in fiscal 2001, as compared to fiscal 2000, as well as lower anticipated sales levels during the next several quarters and non cash expenses for depreciation, amortization and imputed interest on notes that carry lower than market interest charges. These sources of cash were partially offset by an increase in accounts receivable. This increase was caused by a significant reduction of sales of White-Westinghouse(R) brand products, generally sold to K-Mart on 10 day terms, and sales made to certain credit worthy customers on longer terms, generally 30 days to 60 days longer than their normal sales terms, as an inducement to keep stores stocked with merchandise. In addition, we experienced a shift in sales mix to customers that generally receive longer terms on a regular basis. Income tax payments also were higher as estimated payments made earlier in the year did not anticipate the loss experienced in the fourth quarter. These prepaid taxes of $14.9 million will be used to offset taxes for the year ended June 29, 2002 ("fiscal 2002") or will be refunded in fiscal 2002. Cash used in investing activities included $63.6 million related to the acquisitions of Pifco Holdings PLC and Sonex International Corp., and $11.4 million for certain ongoing product development activities, the buyout for $5.3 million of the Juiceman(R) brand name, cash payments related to the acquisition of Stiffel lamps, as well as increased investments in capital assets, primarily tooling. Additional cash of approximately $10 million will be expended in fiscal 2002 to complete the acquisition of Pifco Holdings PLC. Financing activities provided net cash of $76.4 million.
At June 30, 2001, we had debt outstanding of $423.4 million, including $148.3 million of 12 1/4% senior subordinated notes due 2008, $125.0 million of 10 3/4% senior subordinated notes due 2005, $85.6 million outstanding under our amended and restated credit agreement
38
(exclusive of unused commitments of up to $97.3 million under the revolving credit facility) and $17.7 million related to the loan notes issued in the Pifco Holdings PLC acquisition. The loan notes are shown on the balance sheet at a present value of $11.3 million to reflect the below market interest on the loan notes. The loan notes are cash collateralized at a bank in the United Kingdom. At June 30, 2001, we had the ability to borrow up to an additional $97.3 million under our revolving credit facility. Typically, given the seasonal nature of our business, our borrowings tend to be the highest in mid-fall and early winter.
In the quarter ended December 25, 1999, we acquired, effective July 1, 1999, the right to use in perpetuity and worldwide the name George Foreman(TM) in connection with the marketing and sale of food preparation and non-alcoholic drink preparation and serving appliances. The aggregate purchase price payable to George Foreman and other venture participants was $137.5 million, of which $22.75 million was paid in cash and the remainder was paid through the issuance by us of 779,191 shares of our common stock and a $91.0 million non-interest bearing subordinated promissory note. We paid the first installment in cash to George Foreman during fiscal 2001, as well as issued stock to the other venture participants as described in the following paragraph. The note, as of June 30, 2001, has a face amount of $48.3 million, and is recorded at its present value of $43.2 million. The effect of the George Foreman transaction was an elimination of substantial royalty expense.
On September 7, 2000 we announced that we had reached an agreement to satisfy payment obligations of $22.75 million under the note by issuing 621,161 shares of our common stock to George Foreman and other venture participants. We agreed, under certain circumstances, to guarantee the value of these shares. We registered for resale the shares of common stock issued to George Foreman and the other venture participants.
On July 2, 2001, we took back 456,175 of the 546,075 shares issued to George Foreman on September 7, 2000 and paid him $18 million. This payment, which represented $20 million less the proceeds George Foreman received from the sale of shares on the open market previously issued to him, terminated our guarantee obligation with respect to the shares issued to him and satisfied the third annual installment due under the note payable to George Foreman. As a result of this transaction, we now have only two installments remaining under the note as well as our outstanding guarantee obligation to the other venture participants.
During the fiscal quarter ended December 25, 1999, we amended and restated our credit agreement among us, Lehman Brothers Inc., as arranger, Lehman Commercial Paper Inc., as administrative agent, and a syndicate of banks. We increased our existing revolving credit facility from $80.0 million to $115.0 million. The amended and restated credit agreement provided for $160.0 million in a senior secured credit facility consisting of a $45.0 million term loan at an established base rate (equivalent to the prime rate of interest) plus an applicable margin of 225 basis points or, at our election, a eurodollar rate (equivalent to the LIBOR rate) plus an applicable margin of 325 basis points maturing in twenty-four consecutive quarterly installments commencing on March 26, 1999; and a $115.0 million revolving credit facility at an established base rate (equivalent to the prime rate of interest) plus an applicable margin or, at our election, a eurodollar rate (equivalent to the LIBOR rate) plus an applicable margin based on a range of ratios of total debt to earnings before interest, taxes, depreciation and amortization maturing on January 7, 2004. The amended and restated credit agreement is secured by a first lien on substantially all of our assets. Credit availability
39
is based on a formula related to trade accounts receivable, inventories and outstanding letters of credit.
During the fiscal quarter ended September 30, 2000, we further amended and restated our credit agreement. The amended and restated credit agreement increased the senior secured credit facilities to an aggregate of $235.0 million, consisting of a $75.0 million term loan amortizing over sixteen consecutive quarterly installments commencing on March 31, 2001 and a $160.0 million revolving credit facility maturing on January 7, 2004. The term loan and revolving credit facility bear interest at an established base rate (equivalent to the prime rate of interest) or, at our election, a eurodollar rate (equivalent to the LIBOR rate), plus in either case an applicable margin based on total debt to earnings before interest, taxes, depreciation and amortization.
Our principal uses of liquidity will be to meet debt service requirements, pay royalties and other fees under our license and other agreements, finance our capital expenditures and possible acquisitions and fund working capital. We expect that ongoing requirements for debt service, royalty payments, capital expenditures, potential acquisitions and working capital will be funded by internally generated cash flow and borrowings under our amended and restated credit agreement. We anticipate capital expenditures of approximately $16 million and $18 million for fiscal years 2002 and 2003. We incurred approximately $9.6 million for capital expenditures during fiscal 2001.
Our senior credit facilities contain a number of significant covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, prepay other indebtedness, pay dividends, repurchase or redeem capital stock, enter into certain investments, enter into sale and lease-back transactions, make certain acquisitions, engage in mergers and consolidations, create liens, or engage in certain transactions with affiliates, and otherwise restrict our corporate and business activities. In addition, under the senior credit facilities, we are required to comply with specified financial ratios and tests, including a minimum net worth test, a minimum fixed charge coverage ratio, a minimum interest coverage ratio and a maximum leverage ratio.
The indenture governing our 12 1/4% senior subordinated notes and 10 3/4% senior subordinated notes 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.
Our ability to make scheduled payments of principal of, or to pay the interest or liquidated damages, if any, on, or to refinance, indebtedness (including the notes), to pay royalties and other fees under our license and other agreements or to fund planned capital expenditures and/or possible acquisitions, will depend upon our future performance, which, in turn, is subject to general economic, financial, competitive and other factors that are beyond our control. Based upon our current level of operations and anticipated growth, we believe that future cash flow from operations, together with available borrowings under our amended and restated credit agreement, and other sources of debt fundings, will be adequate to meet our anticipated requirements for capital expenditures, potential acquisitions, royalty payments, working capital, interest payments and scheduled principal payments. We cannot assure you
40
that our business will continue to generate sufficient cash flow from operations in the future to service our debt and make necessary capital expenditures after satisfying certain liabilities arising in the ordinary course of business. If unable to do so, we may be required to refinance all or a portion of our existing debt, including the notes, sell assets or obtain additional financing. We cannot assure you that any refinancing would be available or that any sales of assets or additional financing could be obtained.
SEASONALITY
Our business is highly seasonal, with operating results varying from quarter to quarter. We have historically experienced higher sales during the months of August through November primarily due to increased demand by customers for our products attributable to holiday sales. This seasonality has also resulted in additional interest expense to us during this period due to an increased need to borrow funds to maintain sufficient working capital to finance product purchases and customer receivables for the seasonal period.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE
Our results of operations for the periods discussed have not been significantly affected by inflation or foreign currency fluctuation. We generally negotiate our purchase orders with our foreign manufacturers in United States dollars. Thus, our cost under any purchase order is not subject to change after the time the order is placed due to exchange rate fluctuations. However, the weakening of the United States dollar against local currencies could result in certain manufacturers increasing the United States dollar prices for future product purchases.
ACCOUNTING PRONOUNCEMENTS
During the first quarter of fiscal year 2001, we adopted Statement of Financial Accounting Standards Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 sets forth accounting and reporting standards for derivative instruments and hedging activities, requiring recognition of all derivative instruments (including certain derivatives embedded in other contracts) as either assets or liabilities in the balance sheet measured at fair value. SFAS No. 133 also establishes criteria for a derivative to qualify as a hedge for accounting purposes. The adoption of SFAS No. 133 did not affect our consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and other Intangible Assets". The guidance in SFAS No. 141 supersedes Accounting Principles Board Opinion No. 16, "Business Combinations" and is applicable to business combinations initiated after June 30, 2001. Upon adoption of SFAS No. 142, goodwill will cease to be amortized and will instead be subject to periodic impairment reviews as set forth in the new standard. We are currently evaluating the Statement's impairment provisions and have not yet determined what effect, if any, they might have on our consolidated financial position and results of operations.
We have approximately $43.3 million in goodwill recorded in our consolidated balance sheet as of June 30, 2001. Under the provisions of SFAS No. 142, goodwill will cease to be amortized for fiscal years beginning after December 15, 2001 (fiscal year 2003 for the
41
Company.) We recorded approximately $.7 million in amortization expense related to goodwill in fiscal 2001. We will also assess the useful lives of our patents and trademarks for indefinite economic useful lives, which will also cease to be amortized under SFAS No. 142. We have $132.1 million of patents and trademarks as of June 30, 2001 and recorded $9.8 million of related amortization expense. We intend to adopt SFAS No. 142 for the 2003 fiscal year.
ITEM 7A. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISKS
Our major market risk exposure is changing interest rates in the United States. Our policy is to manage interest rates through the use of a combination of fixed and variable rate debt.
On June 4, 2001 we entered into a $150 million Notional Amount fixed-for-floating interest rate swap agreement for First Union National Bank, related to our $150 million 12 1/4% senior subordinated notes due 2008. The interest rate swap agreement provides that floating rate payments of LIBOR plus an agreed upon spread will be exchanged for fixed payments at a rate of 12 1/4% with the floating rate payments initially set at approximately 10.5%. The floating rate will be reset at each semi-annual interest payment date of the 12 1/4% senior subordinated notes. After execution of the interest rate swap, approximately 30% of the outstanding indebtedness will be fixed rate debt at a rate of 10 3/4% through December 15, 2005.
The following tables provide information about our market sensitive financial instruments and constitutes a "forward-looking statement." Our major risk exposure is changing interest rates in the United States. Our policy is to manage interest rates through the use of a combination of fixed and variable rate debt. The fair value of our long-term, fixed rate debt was estimated based on dealer quotes. The carrying amount of short-term debt and long-term variable-rate debt approximates fair value. All items described in the tables are non-trading.
42
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
(DOLLARS IN THOUSANDS)
FISCAL YEAR 2001
Liabilities:
Revolver $ 20,000 $ 20,000 $ 20,000
Average interest rates 8.79%
Jr. subordinated note
payable $ 13,406 $ 13,406 $ 9,864
Average interest rate 8.00%
Foreman note payable $ 2,750 $ 22,750 $ 22,750 $ 48,250 $ 43,246
Average interest rate 8.5% 8.5% 8.5%
Other notes payable $ 30 $ 5 $ 35 $ 35
Average interest rate 5.37% 5.37%
Long-term debt including
current portion fixed
rate amount $125,000 $ 150,000 $275,000 $273,325
Average interest rate 10.75% 12.25%
Variable rate amount $ 18,750 $ 18,750 $ 18,750 9,375 (3) $ 65,622 $ 65,625
Average interest rates 8.91% (2) (2) (2)
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
FISCAL YEAR 2000
Liabilities:
Revolver $ 68,000 $ 68,000 $ 68,000
Average interest rates 8.73%
Jr. subordinated note
payable $ 13,406 $ 13,406 $ 9,015
Average interest rate 8.0%
Foreman note payable $ 45,500 $ 22,750 $ 22,750 $ 91,000 $ 80,854
Average interest rate 8.5% 8.5% 8.5%
Other notes payable $ 62 $ 35 $ 4 $ 101 $ 101
Average interest rate 5.37% 5.37% 5.37%
Long-term debt including
current portion fixed
rate amount $ 125,000 $125,000 $125,000
Average interest rate 10.75%
Variable rate amount $ 375 $ 500 $ 500 $ 11,000 $ 31,875 $ 44,250 $ 44,250
Average interest rates 9.77% (1) (1) (1) (1)
(1) The variable rate $45.0 million Term Loan is set quarterly at an established base rate (equivalent to the prime rate of interest) plus an applicable margin of 225 basis points or, at the Company's election, a Eurodollar rate (equivalent to the LIBOR rate) plus an applicable margin of 325 basis points.
(2) The variable rate $75.0 million Term Loan is set periodically at an established base rate (equivalent to the prime rate of interest) plus an applicable margin of 125 basis points or, at the Company's election, a Eurodollar rate plus an applicable margin of 225 basis points.
(3) At June 30, 2001 the Company had an interest rate swap contract to pay a variable-rate interest of three-month LIBOR plus 6.13% and receive fixed-rate interest of 12.25% on $150 million notional amount of indebtedness.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following pages contain the Financial Statements and Supplementary Data as specified by Item 8 of Part II of Form 10-K
44
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Salton, Inc.
Lake Forest, Illinois
We have audited the accompanying consolidated balance sheets of Salton, Inc. (the "Company") as of June 30, 2001 and July 1, 2000 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14 of the Annual Report on Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2001 and July 1, 2000 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
September 10, 2001
45
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and July 1, 2000
(In thousands except share data)
2001 2000
ASSETS
Current Assets:
Cash $ 30,097 $ 7,606
Accounts receivable, less allowance:
2001 - $9,223; 2000 - $7,111 185,881 129,850
Inventories 192,502 219,230
Prepaid expenses and other current assets 10,100 10,146
Prepaid income taxes 14,907 --
Deferred income taxes 4,419 3,713
--------- ---------
Total current assets 437,906 370,545
Property, Plant and Equipment:
Land 3,768 1,625
Buildings 14,169 8,079
Molds and tooling 41,715 35,749
Warehouse equipment 8,939 7,061
Office furniture and equipment 16,116 9,373
--------- ---------
84,707 61,887
Less accumulated depreciation (36,983) (27,244)
--------- ---------
Net Property, Plant and Equipment 47,724 34,643
Patents and Trademarks, Net of
Accumulated Amortization 132,128 127,074
Cash in Escrow for Pifco Loan Notes 17,748 --
Other Intangibles, Net of Accumulated Amortization,
and Other Non-current Assets 87,378 32,014
--------- ---------
TOTAL ASSETS $ 722,884 $ 564,276
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 41,530 $ 112,155
Accounts payable 33,450 35,113
Accrued expenses 32,908 21,028
Foreman guarantee 19,370 --
Income taxes payable -- 4,578
--------- ---------
Total current liabilities 127,258 172,874
Non-Current Deferred Income Taxes 2,293 2,529
Senior Subordinated Notes due 2005 125,000 125,000
Senior Subordinated Notes due 2008 148,325 --
Loan Notes to Pifco Shareholders 11,271 --
Term Loan and Other Notes Payable 97,240 90,065
--------- ---------
Total liabilities 511,387 390,468
Stockholders' Equity:
Preferred stock, $.01 par value; authorized,
2,000,000 shares, 40,000 shares issued
Common stock, $.01 par value; authorized,
40,000,000 shares; shares issued and outstanding:
2001 - 11,363,934 shares, 2000 - 11,351,927 144 135
Treasury stock - at cost (47,865) (30,211)
Additional paid-in capital 72,932 62,572
Accumulated other comprehensive income (loss) (1,174) 6
Retained earnings 187,460 141,306
--------- ---------
Total stockholders' equity 211,497 173,808
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 722,884 $ 564,276
========= =========
See notes to consolidated financial statements.
46
SALTON, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended June 30, 2001, July 1, 2000, and June 26, 1999
(In thousands except per share data)
2001 2000 1999
Net Sales $ 792,114 $ 837,302 $ 506,116
Cost of Goods Sold 474,256 467,250 285,526
Distribution Expenses 49,395 37,639 21,621
--------- --------- ---------
Gross Profit 268,463 332,413 198,969
Selling, General and Administrative Expenses 156,885 156,749 129,588
--------- --------- ---------
Operating Income 111,578 175,664 69,381
Interest Expense, Net (37,732) (28,761) (15,518)
--------- --------- ---------
Income Before Income Taxes 73,846 146,903 53,863
Income Tax Expense 27,692 55,087 19,320
--------- --------- ---------
Net Income $ 46,154 $ 91,816 $ 34,543
========= ========= =========
Weighted Average Common Shares Outstanding 11,750 11,221 10,760
Weighted Average Common and Common
Equivalent Shares Outstanding 16,065 15,526 14,562
Net Income Per Common Share: Basic $ 3.93 $ 8.18 $ 3.21
========= ========= =========
Net Income Per Common Share: Diluted $ 2.87 $ 5.91 $ 2.37
========= ========= =========
See notes to consolidated financial statements.
47
SALTON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 26, 1999 through June 30, 2001
(In thousands)
COMMON PREFERRED ADDITIONAL
SHARES SHARES COMMON PREFERRED PAID IN RETAINED
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL EARNINGS
----------- ----------- --------- --------- ---------- ---------
BALANCE, JUNE 27, 1998 13,100 $ 130 $ 53,481 $ 14,947
Net income 34,543
Other comprehensive income:
Minimum pension liability
net of tax of $28
Foreign currency translation
Total comprehensive income
Issuance of preferred stock 40 37,000
Purchase of treasury stock (6,535)
Stock options exercised 270 3 1,487
--------- --------- --------- --------- --------- ---------
BALANCE, JUNE 26, 1999 6,835 40 133 91,968 49,490
Net income 91,816
3 for 2 stock split effective 7/28/99 3,417 (47,496)
Other comprehensive income:
Minimum pension liability
net of tax of $28
Foreign currency translation
Total comprehensive income
Issuance of common stock 942 16,625
Stock options exercised 158 2 1,475
--------- --------- --------- --------- --------- ---------
BALANCE, JULY 1, 2000 11,352 40 135 62,572 141,306
Net income 46,154
Other comprehensive income:
Minimum pension liability
net of tax of $314
Foreign currency translation
--------- --------- --------- --------- --------- ---------
Total comprehensive income
Issuance of common stock 930 9 29,465
Stock options exercised 24 265
Foreman Additional Liability (19,370)
Treasury Stock Repurchase (942)
--------- --------- --------- --------- --------- ---------
BALANCE, JUNE 30, 2001 11,364 40 $ 144 -- $ 72,932 $ 187,460
========= ========= ========= ========= ========= =========
ACCUMULATED
OTHER LESS TOTAL TOTAL
TREASURY COMPREHENSIVE NOTE STOCKHOLDERS' COMPREHENSIVE
STOCK INCOME (LOSS) RECEIVABLE EQUITY INCOME
--------- ------------- ----------- ------------- -------------
BALANCE, JUNE 27, 1998 $ -- $ (10,848) $ 57,710
Net income 34,543 34,543
Other comprehensive income:
Minimum pension liability
net of tax of $28 (50) (50) (50)
Foreign currency translation 2 2 2
---------
Total comprehensive income $ 34,495
=========
Issuance of preferred stock 37,000
Purchase of treasury stock $ (90,804) 10,848 (79,956)
Stock options exercised 1,490
--------- --------- --------- ---------
BALANCE, JUNE 26, 1999 (90,804) (48) -- 50,739
Net income 91,816 $ 91,816
3 for 2 stock split effective 7/28/99 47,496
Other comprehensive income:
Minimum pension liability
net of tax of $28 50 50 50
Foreign currency translation 4 4 4
---------
Total comprehensive income $ 91,870
=========
Issuance of common stock 13,097 29,722
Stock options exercised 1,477
--------- --------- --------- ---------
BALANCE, JULY 1, 2000 (30,211) 6 -- 173,808
Net income 46,154 $ 46,154
Other comprehensive income:
Minimum pension liability
net of tax of $314 (523) (523) (523)
Foreign currency translation (657) (657) (657)
--------- --------- --------- --------- ---------
Total comprehensive income $ 44,974
=========
Issuance of common stock 29,474
Stock options exercised 265
Foreman Additional Liability (19,370)
Treasury Stock Repurchase (17,654) (17,654)
--------- --------- --------- ---------
BALANCE, JUNE 30, 2001 $ (47,865) $ (1,174) $ -- $ 211,497
========= ========= ========= =========
See notes to consolidated financial statements.
48
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2001, July 1, 2000, and June 26, 1999
(In thousands)
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,154 $ 91,816 $ 34,543
Adjustments to reconcile net income
to net cash from operating activities:
Imputed interest on note payable 6,033 6,336
Deferred income tax provision 1,524 1,793 4,109
Depreciation and amortization 23,594 19,075 7,301
Loss on disposal of equipment 423
Equity in net income of investees (292) (321)
Purchase reduction of note payable and
other noncash items 2,777 1,662 (208)
Changes in assets and liabilities, net
of acquisitions:
Accounts receivable (46,259) (33,671) (12,176)
Inventories 42,757 (75,106) (26,406)
Prepaid expenses and other current assets 238 (3,796) (1,365)
Accounts payable (4,977) (5,884) 14,716
Taxes payable (23,448) 4,578 (4,290)
Accrued expenses (4,451) (837) (1,032)
--------- --------- ---------
Net cash from operating activities 44,073 5,645 15,192
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,557) (13,976) (5,390)
Increase in other non-current assets (13,422)
Acquisition of George Foreman Trademark (22,750)
Additional payment for patents and trademarks (2,043)
Additions to patents and trademarks (9,382) (737)
Equity investment (9,615)
Acquisition of businesses, net of cash acquired (63,561) (108,126)
--------- --------- ---------
Net cash from investing activities (97,965) (47,078) (113,516)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment) proceeds from revolving line of
credit and other debt (48,065) 36,367 (20,475)
Repayment of long-term debt (73,624) (625) (90,125)
Proceeds from long-term debt 75,000 260,000
Repayment of other debt (125)
Proceeds from senior subordinated debt 148,284
Costs associated with refinancing (7,798) (616) (8,065)
Common stock issued 265 2,669 1,489
Preferred stock issued 40,000
Purchase of treasury stock (17,654) (70,799)
Costs associated with preferred stock issuance (2,999)
--------- --------- ---------
Net cash from financing activities 76,408 37,795 108,901
--------- --------- ---------
The effect of exchange rate changes on cash (25) 4 2
--------- --------- ---------
NET CHANGE IN CASH 22,491 (3,634) 10,579
CASH, BEGINNING OF YEAR 7,606 11,240 661
--------- --------- ---------
CASH, END OF YEAR $ 30,097 $ 7,606 $ 11,240
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 28,039 $ 22,257 $ 14,046
Income taxes 50,716 50,509 25,022
(Continued)
See notes to consolidated financial statements.
49
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2001, July 1, 2000, and June 26, 1999
(In thousands except share data)
Supplemental Disclosure of Noncash Investing and Financing Activities:
In the quarter ended June 30, 2001, the company authorized the issuance of 167,229 shares of common stock out of treasury for payment of executive bonuses.
In the quarter ended September 30, 2000, Salton acquired trademarks, other intellectual property and molds of the Stiffel Company for $6,500. The purchase was paid by the issuance of 200,000 shares of Salton, Inc. common stock. In addition, the Company reached an agreement to satisfy $22,750 of payment obligations incurred in connection with its acquisition of the "George Foreman" name by issuing 621,161 shares of Salton, Inc. common stock. In the quarter ended December 30, 2000, the Company increased its investment in an unconsolidated affiliate approximately 10% by issuing 109,000 shares of Salton, Inc. common stock. In the quarter ended March 31, 2001, in accordance with the Stiffel purchase agreement, Salton paid $2,043 under the guarantee provision to make up for the shortfall between the $6,500 purchase price and the proceeds from the sale of the 200,000 shares. In addition, the Company agreed to satisfy the $20.0 million guarantee to George Foreman by taking back 456,175 of the 546,075 shares issued to him on September 30, 2000 and paying him cash less the proceeds from the sale of the remaining shares previously issued to him. Also, the Company determined it intends to pay the other venture participants in cash for the stock price guarantee related to the 75,086 shares issued to them on September 30, 2000. As of June 30, 2001, the guarantee liability to George Foreman and the other venture participants was $19.4 million.
In the quarter ended March 25, 2000, the Company authorized the issuance of 53,977 shares of common stock out of treasury for payment of executive bonuses.
In the quarter ended December 25, 1999, the Company acquired, effective July 1, 1999, the right to use in perpetuity and worldwide the name "George Foreman" in connection with the marketing and sale of food preparation and non-alcoholic drink preparation and serving appliances. The aggregate purchase price payable to George Foreman and other participants was $137,500, of which $113,750 is payable in five annual cash installments, and the remaining $23,750 was paid through the issuance of 779,191 shares of Salton, Inc. common stock issued out of treasury. The first cash installment of $22,750 was paid during the first half of fiscal 2000. In connection with the transaction the Company issued a five-year $91,000 non-interest bearing subordinated promissory note which as of June 30, 2001, has a face amount of $48,250, and is recorded at its present value of $43,245.
In the quarter ended December 25, 1999, the Company retired a $4.0 million note payable associated with the acquisition of Toastmaster Inc. by issuing 109,090 shares common stock out of treasury. The Company received $1.2 million in cash related to the subsequent sale of this stock by the holder, per terms of the note payable retirement.
In the quarter ended September 26, 1998, the Company repurchased 6,535 shares of the Company's common stock from Applica, Inc. (formerly known as Windmere-Durable Holdings Inc.) ("Applica") for a total purchase price of $90,804. The purchase price included the issuance of six and one-half year $15,000 subordinated promissory note which bears interest at 4% per annum which is recorded at its fair value of $9,864 as of June 30, 2001 and the effective repayment of Applica's promissory note to the Company for the principal amount of $10,544.
See notes to consolidated financial statements. (Concluded)
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SALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001, JULY 1, 2000, AND JUNE 26, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Salton, Inc. ("Salton" or the "Company") is a domestic designer, marketer, manufacturer and distributor of a broad range of branded, high quality small appliances, tabletop, time and lighting products and personal care and wellness products.
The Company's portfolio of well-recognized owned and licensed brand names includes Salton(R), Toastmaster(R), Breadman(R), Juiceman(R), JuiceLady(R), Calvin Klein(R), George Foreman(TM), White-Westinghouse(R), Farberware(R), Melitta(R), Welbilt(R), Aircore(R) , Russell Hobbs(R), Carmen(R), Hi-Tech(R), Tower(R), Haden(R), Mountain Breeze(R), Pifco(R), Westclox(R), Big Ben(R), Spartus(R) , Block(R) China, Atlantis(R) Crystal, Sasaki(R), Rejuvenique(R), Marilyn Monroe(TM), Looney Tunes(R), Stiffel(R), Ingraham(R), Timex(R), Westclox(R), Big Ben(R), Ultrasonex(R), and Relaxor(R).
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of all majority-owned subsidiaries. Investments in affiliates, in which the Company has the ability to exercise significant influence, but not control, are accounted for by the equity method. Intercompany balances and transactions are eliminated in consolidation.
USE OF ESTIMATES - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, reserve for returns and allowances, and depreciation and amortization, among others.
ACCOUNTING PERIOD - The Company's fiscal year ends on the Saturday closest to June 30. The fiscal year ended June 30, 2001 consisted of 52 weeks and is referred to as "fiscal 2001." The fiscal years ended July 1, 2000 and June 26, 1999 consisted of 53 and 52 weeks, respectively, and are referred to as "fiscal 2000" and "fiscal 1999", respectively.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 30% and 29% of the Company's inventories as of June 30, 2001 and July 1, 2000. All remaining inventory cost is determined on the first-in, first-out basis. See Note 3 "Inventories."
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Expenditures for maintenance costs and repairs are charged against income. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets, which range from three to forty years. For tax purposes, assets are depreciated using accelerated methods.
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INTANGIBLES AND OTHER NON-CURRENT ASSETS - Intangible assets, which are amortized over their estimated useful lives, and other non-current assets consist of:
USEFUL LIFE JUNE 30 JULY 1,
(IN THOUSANDS) (In Years) 2001 2000
Patents and trademarks, net 5-20 $132,128 $127,074
======== ========
Goodwill 10-40 43,317 12,807
Financing costs 2-7 14,625 9,152
Other non-current assets 29,436 10,055
-------- --------
Other intangibles, net, and other noncurrent assets $ 87,378 $ 32,014
======== ========
Accumulated amortization of intangible assets and patents and trademarks was $30.8 million and $17.3 million at June 30, 2001 and July 1, 2000, respectively.
LONG-LIVED ASSETS - Long-lived assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to the estimated recoverable value.
REVENUE RECOGNITION - The Company recognizes revenues when goods are shipped to its customers. Provision is made for estimated cost of returns, warranties, and product liability claims.
DISTRIBUTION EXPENSES - Distribution expenses consist primarily of freight, warehousing, and handling costs of products sold.
ADVERTISING - The Company sponsors various programs under which it participates in the cost of advertising and other promotional efforts for Company products undertaken by its retail customers. Advertising and promotion costs associated with these programs are expensed in the period in which the advertising or other promotion by the retailer occurs.
The Company's tradenames and, in some instances, specific products, also are promoted from time to time through direct marketing channels, primarily television. Advertising and promotion costs are expensed in the period in which the advertising and promotion occurs.
SELF-INSURANCE - The Company maintains a self-insurance program for health claims and workers' compensation claims for certain covered employees. The Company accrues estimated future costs that will be incurred for existing employee claims. The Company does not provide any post-retirement health care benefits.
INCOME TAXES - The Company accounts for income taxes using the asset and liability approach. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, management does not expect to be realized.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE - On June 28, 1999, the Company's Board of Directors authorized a 3-for-2 split of its common stock effective July 28, 1999, for stockholders of record at the close of business on July 14, 1999. All earnings per-share data in the accompanying consolidated financial statements give effect to the split.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of financial instruments included in current assets and liabilities approximate fair values due to the short-term maturities of these instruments. The fair
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value of the Company's long-term, fixed rate debt was estimated based on dealer quotes and approximates the carrying value recorded. The carrying amount of short-term debt and long-term variable-rate debt approximates fair value.
ACCOUNTING PRONOUNCEMENTS - During the first quarter of fiscal 2001, the Company adopted Statement of Financial Accounting Standards Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 sets forth accounting and reporting standards for derivative instruments and hedging activities, requiring recognition of all derivative instruments (including certain derivatives embedded in other contracts) as either assets or liabilities in the balance sheet measured at fair value. SFAS No. 133 also establishes criteria for a derivative to qualify as a hedge for accounting purposes. The adoption of SFAS No. 133 did not affect the Company's consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". The guidance in SFAS No. 141 supersedes Accounting Principles Board Opinion No. 16, "Business Combinations," and is applicable to business combinations initiated after June 30, 2001. Upon adoption of SFAS No. 142, goodwill will cease to be amortized and will instead be subject to periodic impairment reviews as set forth in the new standard. The Company is currently evaluating the Statement's impairment provisions and has not yet determined what effect, if any, they might have on the consolidated financial position and results of operations of the Company.
The Company has approximately $43.3 million in goodwill recorded in its consolidated balance sheet as of June 30, 2001. Under the provisions of SFAS No. 142, goodwill will cease to be amortized for fiscal years beginning after December 15, 2001 (fiscal year 2003 for the Company.) The Company recorded $.7 million in amortization expense related to goodwill in fiscal 2001. The Company will also assess the useful lives of its patents and trademarks for indefinite economic useful lives, which will also cease to be amortized under SFAS No. 142. The Company has $132.1 million of patents and trademarks as of June 30, 2001 and recorded $9.8 million of related amortization expense in fiscal 2001. The Company intends to adopt SFAS No. 142 for the 2003 fiscal year.
2. ACQUISITIONS AND ALLIANCES
On May 2, 2001, the Company acquired the stock of Pifco Holdings PLC ("Pifco"), a United Kingdom based producer and marketer of kitchen and small appliances, personal care and wellness products, cookware and battery operated products (the "Pifco Acquisition"). The Company paid Pifco shareholders $4 per share, for a total purchase price of approximately $75 million. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair values of the net assets acquired has been recorded as goodwill and is being amortized on a straight-line basis over forty years. The Company is completing the review and determination of the fair values of the assets acquired and liabilities assumed. Accordingly, the allocation of the purchase price is subject to revision based on the final determination of the appraised and other fair values.
Approximately $17.7 million of the purchase price was paid by issuing loan notes (the "Loan Notes") in accordance with the purchase offer, with the remainder paid in cash. The Loan Notes have been fully funded by the Company and recorded as an escrow asset as of June 30, 2001. The notes bear interest at 1% below LIBOR per annum, payable semi-annually, and are due June 30, 2006. The Loan Notes have been
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recorded at their net present value, or $11.3 million as of June 30, 2001. The Loan Notes may be prepaid, at the option of the holder, after June 30, 2002.
The operating results of Pifco have been included in the consolidated statements of earnings from the date of acquisition and included sales of approximately $7.2 million and net income of approximately $.3 million
On January 7, 1999, the Company acquired the stock of Toastmaster Inc. ("Toastmaster"), a Columbia, Missouri based manufacturer and marketer of kitchen and small household electrical appliances and time products (the "Toastmaster Acquisition"). The Company paid Toastmaster shareholders $7.00 per share in cash, for a total purchase price of approximately $53.2 million. In addition, Toastmaster's outstanding debt of $57.8 million was paid by the Company in connection with the acquisition. The acquisition was accounted for as a purchase. The purchase price has been allocated based upon estimated fair market values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired has been recorded as goodwill and is being amortized on a straight-line basis over forty years.
The operating results of Toastmaster have been included in the consolidated statements of earnings from the date of acquisition. The following unaudited pro forma results of operations assume the transaction occurred at the beginning of the period presented:
(IN THOUSANDS) JUNE 26, 1999
Net sales $597,140
Operating income 67,350
Net income 27,052
Net income per share:
Basic 2.51
Diluted 1.86
The pro forma results are for informational purposes only and do not purport to represent what the Company's results of operations would have actually been had the transaction been consummated for the period indicated.
On March 31, 1999, the Company bought certain assets of Sasaki, Inc., a well-known designer and manufacturer of high-quality tabletop products and accessories for the home, from Sasaki Glass Company Ltd. Under the terms of the transaction, Salton purchased Sasaki's inventory, except for the Christian Dior tabletop product line, in addition to licensing the Sasaki(R) brand name for a period of twenty years, with an option to renew on mutually agreed upon terms. As part of the transaction, Salton agreed to assume certain minor liabilities.
On October 6, 1999, Salton purchased approximately 21% of the outstanding shares of Amalgamated Appliance Holdings Limited ("Amalgamated"), a leading manufacturer and distributor of a wide range of branded consumer electronics and appliances in South Africa, for approximately $6 million. In the quarter ended December 30, 2000, the Company increased its investment to approximately 31% by issuing 109,000 shares of Salton, Inc. common stock. The investment is being accounted for under the equity method of accounting, and is included in the consolidated financial statements in other assets. Based in South Africa, Amalgamated is a publicly held company, listed on the Johannesburg Stock Exchange, which owns the rights to the Salton brand name in South Africa. In conjunction with this transaction, the Chief Executive Officer of Salton, Inc., was added to Amalgamated's Board of Directors.
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In the quarter ended December 25, 1999, Salton acquired, effective July 1, 1999, the right to use in perpetuity and worldwide the name "George Foreman" in connection with the marketing and sale of food preparation and non-alcoholic drink preparation and serving appliances. The aggregate purchase price payable to George Foreman and other venture participants was $137.5 million, of which $113.75 million is payable in five annual cash installments, and the remaining $23.75 million was paid through the issuance of 779,191 shares of Salton, Inc. common stock issued out of treasury. The first cash installment of $22.75 million was paid during the first half of fiscal 2000. In connection with the transaction Salton issued a five-year $91.0 million non-interest bearing subordinated promissory note which as of June 30, 2001, has a face amount of $48.3 million, and is recorded at its present value of $43.2 million and $80.8 million as of June 30, 2001 and July 1, 2000, respectively.
The following pro forma results of operations assumed the transaction occurred at the beginning of the period presented:
(IN THOUSANDS) JUNE 26, 1999
Net sales $506,116
Operating income 99,409
Net income 47,310
Net income per share:
Basic 4.40
Diluted 3.25
The proforma results are for informational purposes only and do not purport to represent what the Company's results of operations would have actually been had the transaction been consummated for the period indicated.
In the quarter ended September 30, 2000, the Company reached an agreement to satisfy $22.75 million of payment obligations incurred in connection with its acquisition of the "George Foreman" name by issuing 621,161 shares of Salton common stock to George Foreman and other venture participants. The Company determined, in the quarter ended March 31, 2001, that it intends to pay George Foreman and other venture participants in cash for the stock price guarantee related to the 621,161 shares. As of June 30, 2001, this liability was $19.4 million. See Note 18, Subsequent Events, for satisfaction of the guarantee obligation.
In fiscal 2001, the Company acquired Sonex International Corporation, a designer and distributor of electrically operated toothbrushes, flossers and related products; acquired the trademarks, other intellectual property, assets and molds of the Stiffel Company, a designer of lamps and related products; acquired the Relaxor brand business and inventory, including a line of personal massagers and other personal care items from J.B. Research, Inc.; acquired the right to use the Juiceman brand name on a royalty-free basis and acquired the assets of ePods, Inc. at a public foreclosure sale.
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3. INVENTORIES
A summary of inventories is as follows:
(In thousands) JUNE 30, 2001 JULY 1, 2000
Raw materials $ 5,986 $ 6,392
Work-in-process 1,293 447
Finished goods 185,223 212,391
-------- --------
Total $192,502 $219,230
======== ========
If the first-in, first-out (FIFO) method of inventory valuation had been used to determine cost for 100% of the Company's inventories at June 30, 2001 and July 1, 2000, they would have been approximately $ .5 million and $2.9 million lower than reported. During the fourth quarter of fiscal year 2001, the Company recorded a reduction in inventory of approximately $8.2 million for inventory losses and an additional $5.1 million in LIFO and other valuation adjustments.
4. APPLICA TRANSACTION
On July 28, 1998, Salton repurchased (the "Stock Repurchase") 6,535,072 shares of Salton common stock owned by Applica, Inc. pursuant to a Stock Agreement dated as of May 6, 1998 (the "Applica Stock Agreement") by and among Salton, Applica and the executive officers of Salton. Prior to the Stock Repurchase, Applica owned approximately 50% of Salton's outstanding common stock. The price for the Stock Repurchase was $12 per share in cash plus a $15.0 million subordinated promissory note (the "Junior Subordinated Note"). The Junior Subordinated Note, which has a term of six and one-half years and bears interest at 4.0% per annum payable annually, is subject to offsets of 5% of the total purchase price paid by Salton for product purchases from Applica and its affiliates during the term of the note. During fiscal 2001 and fiscal 2000, the Company reduced this debt and interest by approximately $.3 and $1.5 million , respectively, for related purchases of products from Applica. The principal amount of the Junior Subordinated Note is also subject to cancellation in the event Salton's supply agreement with Kmart is terminated for any reason. Effective upon the closing of the Repurchase, each of the persons who had been designated by Applica to serve on Salton's Board of Directors resigned from Salton's Board of Directors.
5. REVOLVING LINE OF CREDIT, LETTERS OF CREDIT AND LONG-TERM DEBT
On December 16, 1998, the Company issued $125.0 million of 10 3/4% Senior Subordinated Notes ("the 2005 Subordinated Notes") due 2005. Proceeds of the 2005 Subordinated Notes were used to repay outstanding indebtedness and for working capital and general corporate purposes. The 2005 Subordinated Notes contain a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, prepay other indebtedness, pay dividends, repurchase or redeem capital stock, enter into certain investments, enter into sale and lease-back transactions, make certain acquisitions, engage in mergers and consolidations, create liens, or engage in certain transactions with affiliates, and will otherwise restrict corporate and business activities. In addition, under the 2005 Subordinated Notes, the Company is required to comply with a specified financial fixed charge coverage ratio. At June 30, 2001, the Company was in compliance with all the covenants described above.
The Company amended and restated their Credit Agreement and replaced it with the Third Amended and Restated Credit Agreement ("Credit Agreement") during the quarter ended September 30, 2000. Salton
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increased its existing revolving credit facility from $115.0 million to $160.0 million. The Credit Agreement, among Salton, Lehman Brothers Inc., as arranger, Firstar Bank, N.A., as syndication agent, Lehman Commercial Paper Inc., as administrative agent, Fleet National Bank, as documentation agent, and a syndicate of banks, provides for $235.0 million in a senior secured credit facility consisting of a $75.0 million Term Loan (the "Term Loan") at an established base rate (equivalent to the prime rate of interest) plus an applicable margin of 125 basis points or, at the company's election, a Eurodollar rate plus an applicable margin of 225 basis points amortizing in sixteen consecutive quarterly installments commencing on March 31, 2001; and a $160.0 million revolving credit facility (the "Revolving Credit Facility") at an established base rate (equivalent to the prime rate of interest) plus an applicable margin or, at the Company's election, a Eurodollar rate plus an applicable margin based on a range of ratios of total debt to earnings before interest, taxes, depreciation and amortization, maturing on January 7, 2004. The Credit Agreement is secured by a first lien on substantially all the Company's assets. Credit availability is based on a formula related to trade accounts receivable, inventories and outstanding letters of credit.
The Credit Agreement contains a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, prepay other indebtedness, pay dividends, repurchase or redeem capital stock, enter into certain investments, enter into sale and lease-back transactions, make certain acquisitions, engage in mergers and consolidations, create liens, or engage in certain transactions with affiliates, and will otherwise restrict corporate and business activities. In addition, under the Credit Agreement, the Company is required to comply with specified financial ratios and tests, including a net average debt ratio, a net average senior debt ratio, a consolidated fixed charge coverage ratio, and a consolidated interest coverage ratio. At June 30, 2001, the Company was in compliance with all of the covenants described above. At June 30, 2001, the Eurodollar rate plus applicable margin on the Term Loan was 7.0% and the Eurodollar rate plus applicable margin on the Revolving Credit Facility was 6.66%.
Information regarding short-term borrowings under the Revolving Credit Facility is:
(IN THOUSANDS) JUNE 30, 2001 JULY 1, 2000
Balance at end of fiscal period $ 20,000 $ 68,000
Interest rate at end of fiscal period 6.66% 8.96%
Maximum amount outstanding at any month-end 153,000 93,000
Average amount outstanding 91,607 52,974
Weighted average interest rate during fiscal period 8.79% 8.73%
Outstanding letters of credit at end of fiscal period 4,632 17,863
Unused letters of credit at end of the fiscal period 20,368 7,137
On April 23, 2001, the Company issued $150 million of 12 1/4% Senior Subordinated notes ("the 2008 Subordinated Notes) due 2008. Proceeds of the 2008 Subordinated Notes were used to repay outstanding indebtedness and for the acquisition of Pifco Holdings PLC (see Note 2). The 2008 Subordinated Notes contain a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, prepay other indebtedness, pay dividends, repurchase or redeem capital stock, enter into certain investments, enter into sale and lease-back transactions, make certain acquisitions, engage in mergers and consolidations, create liens, or engage in certain transactions with affiliates, and will otherwise restrict corporate and business activities. In addition, under the 2008 Subordinated Notes, the Company is required to comply with a specified fixed charge coverage ratio. At June 30, 2001, the Company was in compliance with all the covenants described above.
Notes payable consist of the Junior Subordinated Note to Applica, Inc. (see Note 4), the long term portion of the note payable associated with the acquisition of the George Foreman trademarks (see Note 2), and the long term portion of the Term Loan.
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Long-term debt matures as follows:
FISCAL JUNIOR OTHER FOREMAN
YEAR SUBORDINATED TERM PIFCO LOAN SUBORDINATED NOTES NOTE
ENDED NOTES LOAN NOTES NOTE PAYABLE PAYABLE TOTAL
2002 $ 18,750 $ 30 $ 2,750 $ 21,530
2003 18,750 5 21,037 39,792
2004 18,750 $ 9,864 19,459 48,073
2005 $125,000 9,375 134,375
2006 $ 11,271 11,271
Thereafter 148,325 148,325
-------- -------- -------- -------- -------- -------- --------
$273,325 $ 65,625 $ 11,271 $ 9,864 $ 35 $ 43,246 403,366
======== ======== ======== ======== ======== ========
Less current maturities (21,530)
--------
$381,836
========
In addition to the preceding maturity schedules, the Company is required to make additional mandatory payments of 50% of the defined annual excess cash flow of the Company, 100% of the net proceeds of any sale or disposition of certain assets, and 100% of the net proceeds of the incurrence of certain indebtedness. All such amounts are first applied to the prepayment of outstanding term loans and secondly to the reduction of the Revolving Credit Facility. All required payments have been made.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, principally an interest rate swap, to manage the interest rate risk associated with its borrowings and to manage the Company's allocation of fixed and variable-rate debt.
At June 30, 2001, the Company had an interest rate swap contract to pay a variable-rate interest of three-month LIBOR plus 6.13% and receive fixed-rate interest of 12.25% on $150 million notional amount of indebtedness. This resulted in approximately 70% of the Company's underlying debt being subject to variable interest rates. The $150 million notional amount of the outstanding contract will mature in 2008. The underlying hedged debt instrument is callable by the Company at certain dates and premiums during the term of the debt. The interest rate swap contract is also callable by the counterparty at the same dates and premiums. The Company has determined that the call feature is clearly and closely related to the hedged debt instrument as the amount paid at settlement is not based on changes in an index and the debt instrument was not issued at a substantial discount. As of June 30, 2001, the Company's balance sheet included approximately $376,000 representing the fair value of the swap and call feature. As the terms of the swap and call feature match those of the designated underlying hedged debt instrument, the change in fair value of this swap and call feature was offset by a corresponding change in fair value recorded on the hedged debt, and resulted in no net earnings impact.
7. CAPITAL STOCK
On June 28, 1999, the Company's Board of Directors authorized a 3-for-2 split of its common stock effective July 28, 1999, for stockholders of record at the close of business on July 14, 1999. All earnings per-share data in the accompanying financial statements and notes thereto give effect to the split.
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On July 28, 1998, the Company issued $40 million of convertible preferred stock in connection with a Stock Purchase Agreement dated July 15, 1998. The convertible preferred stock is non-dividend bearing and is convertible into 3,529,411 shares of Salton common stock (reflecting a $11.33 per share conversion price). The holders of the convertible preferred stock are entitled to one vote for each share of Salton common stock that the holder would receive upon conversion of the convertible preferred stock. In connection with the convertible preferred stock issuance, two individuals representing the purchasers of the preferred stock were appointed to serve on the Company's Board of Directors.
On December 6, 1999, the Company's Board of Directors approved the amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of $.01 par value common stock from 20,000,000 to 40,000,000.
8. EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT YEAR ENDED YEAR ENDED YEAR ENDED
EARNINGS PER SHARE) JUNE 30, 2001 JULY 1, 2000 JUNE 26, 1999
Net Income* $ 46,154 $ 91,816 $ 34,543
Average common shares outstanding 11,750 11,221 10,760
Earnings per share-basic $ 3.93 $ 8.18 $ 3.21
Dilutive stock equivalents 4,315 4,305 3,802
Average common and common equivalent
shares outstanding 16,065 15,526 14,562
Earnings per share-diluted $ 2.87 $ 5.91 $ 2.37
* Net income is the same for purposes of calculating basic and diluted EPS
Options to purchase 270,000 shares at a price of $29.25 per share were outstanding at June 30, 2001 and July 1, 2000, but were not included in the computation of diluted EPS because the options are contingent upon certain external factors. Options to purchase 486,293 shares of common stock were outstanding at June 30, 2001, but were not included in the computation of diluted EPS because the exercise prices were greater than the average market price of the common shares.
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan that covers eligible employees. This plan combined and replaced the former Salton and Toastmaster 401(k) plans. The employees are eligible for benefits upon completion of one year of service. Under the terms of the plan, the Company may elect to match a portion of the employee contributions. The Company's discretionary matching contribution is based on a portion of participants' eligible wages, as defined, up to a maximum amount ranging typically from two percent to six percent. A higher matching percentage was approved in fiscal 2000 for Toastmaster employees affected by the freeze of the Toastmaster defined pension plans. The Company's total matching contributions were approximately $585,000, $307,000, and $95,000, in fiscal 2001, 2000, and 1999, respectively. In fiscal 2000, the Company amended the former Toastmaster 401(k) plan to allow for discretionary employer contributions to all employees, whether or not the employees contribute individually to the plan, in connection with the freeze of the Toastmaster defined pension plans. A discretionary employer contribution of approximately $287,000 was made in fiscal 2000.
The Company has two defined benefit plans that were assumed in the 1999 acquisition of Toastmaster and cover substantially all of the employees of Toastmaster as of the date the plans were curtailed. The plans' assets consist of a balanced portfolio of investments in money market, common stock, bond and real estate funds. The Company uses March 31 as the measurement date for determining pension plan assets and
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obligations. Effective October 30, 1999, the Company's Board of Directors approved the freezing of benefits under the Company's two defined benefit plans. Beginning October 31, 1999, no further benefits were accrued under the plans. Effective June 26, 1999, the Company adopted SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits" SFAS No. 132 requires the disclosure of the information presented below:
(IN THOUSANDS) JUNE 30, 2001 JULY 1, 2000
Change in benefit obligation:
Benefit obligation at beginning of year $ 9,806 $ 11,748
Service cost -- 322
Interest cost 737 788
Actuarial (gain)/loss 814 (1,217)
Curtailment gain -- (1,009)
Benefits paid and expenses (1,222) (826)
-------- --------
Benefit obligation at end of year $ 10,135 $ 9,806
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 12,694 $ 11,050
Actual return on plan assets (1,564) 1,792
Employer contribution 285 678
Benefits paid from plan assets (1,222) (826)
-------- --------
Fair value of plan assets at end of year $ 10,193 $ 12,694
======== ========
(IN THOUSANDS) JUNE 30, 2001 JULY 1, 2000
Funded status $ 58 $ 2,888
Unrecognized net actuarial (gain)/loss 1,666 (1,896)
Unrecognized transitional asset --
Unrecognized prior service cost --
Additional pension liability in excess of
unrecognized prior service cost (837) --
---------- ----------
Prepaid pension cost recorded in prepaid
expenses in the accompanying consolidated balance sheet $ 887 $ 992
========== ==========
Weighted average assumptions:
Discount rate 7.50% 7.75%
Rate of increase in compensation 5.00% 5.00%
Expected return on plan assets 9.00% 9.00%
Components of net periodic pension cost:
Service cost benefits earned during the year $ -- $ 323
Interest cost on projected benefit obligation 737 788
Actuarial return on plan assets (1,136) (1,021)
Curtailment gain -- (1,009)
Net amortization and deferral (49) --
---------- ----------
Net pension benefit $ (448) $ (919)
========== ==========
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The Company recorded a $1.0 million curtailment gain in fiscal 2000 as a result of a freeze in pension plan benefits. Under the requirements of SFAS No. 87, "Employers' Accounting for Pensions," an additional minimum pension liability for one plan, representing the excess of accumulated benefits over the plan assets and accrued pension costs, was recognized at June 30, 2001, with the balance recorded as a separate reduction of stockholders' equity, net of deferred tax effect.
10. STOCK OPTION PLANS
In October 1995, SFAS No. 123, "Accounting For Stock-Based Compensation," was issued and is effective for financial statements for fiscal years beginning after December 15, 1995. As permitted by the statement, the Company continues to measure compensation cost for stock option plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees." Accordingly, no compensation cost has been recognized for the Company's fixed stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with the fair value method outlined in SFAS No. 123, the impact on the Company's net income and earnings per common share would have been as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999
Net income:
As reported $ 46,154 $ 91,816 $ 34,543
Pro forma 40,647 85,266 33,241
Net income per common share: Basic
As reported $ 3.93 $ 8.18 $ 3.21
Pro forma 3.46 7.60 3.09
Net income per common share: Diluted
As reported 2.87 5.91 2.37
Pro forma 2.53 5.49 2.28
Options to purchase common stock of the Company have been granted to employees under the 1992, 1995, 1998, 1999, and 2001 stock option plans at prices equal to the fair market value of the stock on the dates the options were granted. Options have also been granted to non-employee directors of the Company, which are exercisable one year after the date of grant. All options granted expire 10 years from the date of grant.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used during the respective years to estimate the fair value of options granted:
2001 2000 1999
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 64.15% 61.45% 60.60%
Risk-free interest rate 5.07% 6.50% 6.16%
Expected life of options 7.56 years 7.98 years 7.81 years
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A summary of the Company's fixed stock options for the fiscal years ended June 30, 2001, July 1, 2000, and June 26, 1999, is as follows:
2001 2000 1999
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
Outstanding at
beginning of year 1,688 $ 17.88 1,101 $ 7.83 1,126 $ 6.06
Granted 501 17.18 745 30.36 337 16.74
Exercised (24) 10.91 (158) 6.64 (270) 5.47
Expired or Canceled (1) (459)
------- ------- -------
Outstanding at
end of year 2,164 17.77 1,688 17.88 734 11.75
======= ======= =======
Options exercisable at
end of year 1,599 16.12 1,038 9.39 461 5.99
Weighted-average fair value of
options granted during the year 11.37 24.05 12.09
The shares outstanding at the beginning of the year for fiscal 2000 reflect the three-for-two stock split that was effective on July 28,1999. The remaining activity in fiscal 2000 occurred on a post-split basis.
The following information summarizes the stock options outstanding at June 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES (000) LIFE (YEARS) PRICE (000) PRICE
$0.583 - $1.667 234 3.86 $ 1.63 234 $ 1.63
$2.292 - $5.833 38 5.94 5.23 38 5.23
$6.333 - $8.167 378 5.54 7.73 378 7.73
$13.917 - $17.50 758 8.77 15.64 488 15.35
$27.375 - $37.00 756 8.47 31.01 461 32.06
------ ------ ------
$0.583 - $37.00 2,164 N/A $17.77 1,599 $16.12
====== ======
11. RELATED PARTY TRANSACTIONS
The Company purchased inventory from Applica, Inc. of approximately $6,953,000, $26,408,000, and $32,340,000, in fiscal years ended June 30, 2001, July 1, 2000, and June 26, 1999, respectively. Applica owned shares of Salton common stock until July 1998 at which time the Company repurchased the shares (see Note 4).
The Company purchased inventory from Markpeak, Ltd. ("Markpeak"), a Hong Kong company, including commissions, of approximately $3,579,000, $184,955,000, and $187,925,000, in fiscal years 2001, 2000, and 1999, respectively. The Company had a receivable from Markpeak of approximately $19,117,000 and $9,881,000 at June 30, 2001 and July 1, 2000, respectively. The Company owed Markpeak approximately $3,683,000 and $473,000 at June 30, 2001 and July 1, 2000, respectively. Markpeak acted as a buying agent
62
on behalf of the Company with certain suppliers in the Far East. A director of the Company is the former managing director of Markpeak.
The Company paid Shapiro, Devine and Craparo, Inc. ("SDC"), a manufacturers representation firm, commissions of approximately $502,000, $413,000, and $498,000 in fiscal 2001, 2000, and 1999, respectively. A director of the Company was a co-founder of SDC. The Company owed approximately $81,000 and $90,000 for current commissions at June 30, 2001 and July 1, 2000, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under long-term operating leases. Rental expense under all leases was approximately $8,386,000, $5,769,000, and $3,474,000 for the fiscal years ended June 30, 2001, July 1, 2000, and June 26, 1999, respectively.
The future minimum rental commitments as of June 30, 2001 were as follows:
FISCAL YEAR ENDED
(DOLLARS IN THOUSANDS)
2002 $ 7,017
2003 5,050
2004 4,034
2005 2,968
2006 2,674
Thereafter 8,201
-------
Total $29,944
=======
The Company has employment agreements with its four executive officers that are in effect until December 30, 2002. Such agreements provide for minimum salary levels as well as for incentive bonuses that are payable if the Company achieves specified target performance goals. The agreements also provide for lump sum severance payments upon termination of employment under certain circumstances. The Company's aggregate annual commitment for future salaries at June 30, 2001, excluding bonuses, was approximately $1,870,000.
The Company has license agreements with White Consolidated Industries, Inc. ("White Consolidated"), which require minimum royalty payments through the year 2011. In fiscal 2001, 2000 and 1999, royalty payments were in excess of the minimum requirements. The Company also has various license agreements with other parties for periods usually not exceeding three years. The agreements are then typically renewable upon mutual consent. These license agreements require royalty payments based on the sales of licensed product in the period. Total royalties paid under these agreements, including the White Consolidated Industries, Inc. agreement, were $8,012,000 in fiscal 2001, $24,779,000 in fiscal 2000 and $43,918,000 in fiscal 1999. Royalties paid in fiscal 2000 decreased from fiscal 1999 due to the acquisition of the George Foreman Trademark (see Note 2).
13. LEGAL PROCEEDINGS
LITIGATION - In September 1999, Linda Evans Fitness Centers, Inc. (the "Fitness Centers"), Mark Golub and Thomas Gergley filed suit against the Company and its principal executive officers alleging that the Company tortuously interfered with a contract between the Fitness Centers and Ms. Evans by hiring Ms. Evans to act as a spokesperson for the Rejuvenique(TM) facial toning system. Before Ms. Evans was
63
hired by the Company, Ms. Evans had brought suit against the Fitness Centers seeking a determination that her contract with the Fitness Centers had been terminated on the basis of fraud and the failure of the Fitness Centers to make certain payments. The Company believes that it has valid defenses against the claims made against it by the Fitness Centers. Ms. Evans has agreed to indemnify the Company against matters relating to her services to the Company.
On January 23, 2001, the Company filed a lawsuit against Applica, Inc. (formerly known as Windmere-Durable Holdings, Inc.) and its affiliate in the United States District Court for the Northern District of Illinois. The lawsuit alleges that Applica intentionally, willfully and maliciously breached its noncompetition agreement with us, attempted to conceal the breach, tortuously interfered with our business and contractual relationships and breached its duty of good faith and fair dealing. The lawsuit seeks compensatory damages, punitive damages and attorneys' fees and costs. As a result of Applica's actions, we have terminated an agreement which requires us to pay Applica a fee based upon our net sales less specified costs and expenses relating to our supply agreement with Kmart. The terms of the agreement between the Company and Applica expressly provide for termination upon a violation by Applica of its noncompetition provisions. In March 2001, Applica filed an answer with the court.
On July 2, 2001, the Company was served with a complaint for patent infringement alleged by AdVantage Partners LLC in the United States District Court for the Central District of California. In this complaint, AdVantage alleged that the Company and retailers that sell our "George Foreman Jr." rotisserie grills were infringing two of AdVantage's patents. AdVantage sought a permanent injunction against sale of George Foreman rotisserie grills utilizing the inventions claimed by those patents and unspecified monetary damages including a request for treble damages. These patents relate to accessory products for rotisserie ovens including spit rod and basket assemblies. The Company filed an answer and counterclaim denying the allegations of the complaint and asserting a number of affirmative defenses and request for declaratory relief. AdVantage had also sought preliminary injunctive relief; however, on August 24, 2001, the court denied AdVantage's motion. On August 28, 2001, AdVantage filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit to review the preliminary injunction.
On August 9, 2001, AdVantage Partners LLC filed a second complaint against the Company for patent infringement in the United States District Court for the Central District of California. In this complaint, AdVantage alleges that the Company has have infringed a patent assigned to AdVantage, and seeks a permanent injunction against our sale of the "Baby George Foreman" rotisserie grill, which purportedly utilizes an invention claimed by that patent, and unspecified monetary damages including a request for treble damages. The patent relates to a gear driven spit assembly for rotisserie ovens. The Company filed an answer and counterclaim denying the allegations of the complaint and asserting a number of affirmative defenses and request for declaratory relief.
ENVIRONMENTAL - The Company is participating in environmental remediation activities at four sites, which it owns or operates. As of June 30, 2001, the Company has accrued approximately $150,000 for the anticipated costs of investigation, remediation and/or operation and maintenance costs at these sites. Although such costs could exceed that amount, the Company believes that 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 its normal business operations. The Company believes that the outcome of such litigation will not have a material adverse effect on the financial condition or annual results of operations of the Company. The Company also has product liability and general liability insurance policies in amounts it believes to be reasonable given its current level of business.
64
14. OPERATING SEGMENTS
The Company consists of a single operating segment that designs, markets and distributes housewares, including small appliances, Salton at Home and personal care and wellness products. This segmentation is appropriate because the Company makes operating decisions and assesses performance based upon brand management, and such brand management encompasses a wide variety of products and types of customers. Most of the Company's products are procured through independent manufacturers, primarily in the Far East, and are distributed through similar distribution channels.
PRODUCT INFORMATION - NET SALES -
(IN THOUSANDS) JUNE 30, 2001 JULY 1, 2000 JUNE 26, 1999
Small appliances $ 714,125 $ 742,774 $ 459,621
Salton at Home 59,793 60,709 34,875
Personal care and wellness products 18,196 33,819 11,620
----------- ----------- -----------
Total $ 792,114 $ 837,302 $ 506,116
=========== =========== ===========
MAJOR CUSTOMERS AND SUPPLIERS - The Company entered into a major supply contract with Kmart Corporation ("Kmart") on January 31, 1997. Under the contract, the Company supplies Kmart with small kitchen appliances, personal care products, heaters, fans and electrical air cleaners and humidifiers under the White-Westinghouse(R) brand name. Sales to Kmart approximated 11%, 12%, and 16%, of total net sales of the Company in fiscal 2001, 2000, and 1999, respectively.
On March 30, 1999, the Company entered into a five-year supply agreement with Zellers, the leading national chain of discount department stores in Canada. Under the contract, the Company supplies Zellers with small kitchen appliances under the White-Westinghouse(R) brand name. The agreement has a minimum purchase requirement by Zellers of approximately $17 million, over an initial period of five years, with rights to extend the contract for additional one-year periods.
The Company's net sales in the aggregate to its five largest customers during the fiscal years ended June 30, 2001, July 1, 2000, and June 26, 1999 were 47%, 46%, and 50% of total net sales in these periods, respectively. In addition to Kmart, one customer accounted for 12%, 13%, and 9% of total net sales during the fiscal years ended June 30, 2001, July 1, 2000, and June 26, 1999, respectively, while another customer accounted for 9%, 7%, and 10%, for the same respective years.
Although the Company has long-established relationships with many of its customers, with the exception of Kmart Corporation and Zellers, it does not have long-term contracts with any of its customers. A significant concentration of the Company's business activity is with department stores, upscale mass merchandisers, specialty stores, and warehouse clubs whose ability to meet their obligations to the Company is dependent upon prevailing economic conditions within the retail industry.
During fiscal 2001, 2000 and 1999, one supplier located in China accounted for approximately 35%, 38.0% and 57.3% of our product purchases.
65
15. INCOME TAXES
Federal, state and foreign taxes were approximately as follows:
FISCAL YEARS ENDED
--------------------------------------------
(In Thousands) JUNE 30, 2001 JULY 1,2000 JUNE 26,1999
Federal
Current $ 19,039 $ 44,514 $ 9,778
Deferred 1,271 1,521 3,605
State
Current 3,999 7,954 2,529
Deferred 253 272 504
Foreign
Current 3,130 826 2,904
Deferred
----------- ----------- -----------
Total $ 27,692 $ 55,087 $ 19,320
=========== =========== ===========
Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consisted of:
(IN THOUSANDS) JUNE 30, 2001 JULY 1,2000
Allowance for doubtful accounts $ 2,015 $ 1,945
Interest 1,452
Depreciation and amortization (2,388) (2,529)
Other deferred items, net (780) 53
Net operating loss carry-forward 0 1,109
Accrued liabilities 3,063 317
Inventory reserves and capitalization (1,359) 64
AMT credit carryforward 123 225
----------- -----------
Net deferred tax asset $ 2,126 $ 1,184
=========== ===========
A reconciliation of the statutory federal income tax rate to the effective rate is as follows:
FISCAL YEARS ENDED
-------------------------------------------------
(IN THOUSANDS) JUNE 30, 2001 JULY 1, 2000 JUNE 26, 1999
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effective state tax rate 4.2 3.9 3.5
Permanent differences 1.2 0.4 0.2
Effect of foreign tax rate (3.8) (1.4) (1.9)
Other 0.9 (0.4) (0.9)
----------- ----------- -----------
Effective income tax rate 37.50% 37.50% 35.90%
=========== =========== ===========
66
U.S. income taxes were not provided on certain unremitted earnings of Salton Hong Kong, Ltd. which the Company considers to be permanent investments. The cumulative amount of U.S. income taxes which have not been provided totaled approximately $7,354,000.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly financial data is as follows (amounts in thousands, except per share data).
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
2001
Net Sales $ 207,246 $ 262,197 $ 153,558 $ 169,113
Gross Profit 79,270 97,852 57,203 34,138
Net income 21,502 26,579 9,485 (11,412)
Earning per share: Basic 1.85 2.19 0.81 (0.99)
Earning per share: Diluted 1.35 1.60 0.60 (0.99)
2000
Net Sales $ 196,340 $ 292,767 $ 172,100 $ 176,095
Gross Profit 78,819 116,011 67,831 69,751
Net income 13,898 47,558 15,047 15,313
Earning per share: Basic 1.35 4.25 1.33 1.35
Earning per share: Diluted 0.95 3.08 0.95 0.98
* During the fourth quarter of fiscal year 2001, the Company recorded a reduction in inventory of approximately $8.2 million for inventory losses and an additional $5.1 million in LIFO and other valuation adjustments.
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The payment obligations of the Company under the 12 1/4% senior subordinated notes (see Note 5) 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 earnings and statements of cash flows for the Subsidiary Guarantors, the Company's non-guarantor subsidiaries and for Salton, Inc.
67
CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
------------ ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash $ 8,242 $ 15,615 $ 6,240 $ -- $ 30,097
Accounts receivable 39,474 30,729 115,678 -- 185,881
Inventories 57,034 23,906 111,562 -- 192,502
Prepaid expenses and other current assets 3,281 460 6,359 -- 10,100
Intercompany (58,561) (42,910) 101,471 -- --
Prepaid income taxes 4,940 (4,930) 14,897 -- 14,907
Deferred income taxes 2,299 (426) 2,546 -- 4,419
--------- --------- --------- --------- ---------
Total current assets 56,709 22,444 358,753 -- 437,906
Property, Plant and Equipment,
Net of Accumulated Depreciation 13,629 17,134 16,961 -- 47,724
Investments in Subsidiaries (141) -- 127,448 (127,307) --
Patents and Trademarks, Net of Accumulated Amortization 11,169 3,702 117,257 -- 132,128
Cash in escrow for Pifco loan notes -- 17,748 -- -- 17,748
Other Intangibles, Net of Accumulated Amortization, and
Other Non-current Assets 14,275 118,600 37,557 (83,054) 87,378
--------- --------- --------- --------- ---------
Total Assets $ 95,641 $ 179,628 $ 657,976 $(210,361) $ 722,884
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 38,780 $ -- $ 2,750 $ -- $ 41,530
Accounts payable 3,569 23,131 6,750 -- 33,450
Accrued expenses 10,345 13,299 9,264 -- 32,908
Foreman guarantee -- -- 19,370 -- 19,370
--------- --------- --------- --------- ---------
Total current liabilities 52,694 36,430 38,134 -- 127,258
Non-current Deferred Income Taxes 474 212 1,607 -- 2,293
Senior subordinated notes due 2005 -- -- 125,000 -- 125,000
Senior subordinated notes due 2008 -- -- 148,325 -- 148,325
Loan notes to Pifco shareholders -- 11,271 -- -- 11,271
Other notes payable 46,881 -- 50,359 -- 97,240
--------- --------- --------- --------- ---------
Total liabilities 100,049 47,913 363,425 -- 511,387
Stockholders' Equity (4,408) 131,715 294,551 $(210,361) 211,497
--------- --------- --------- --------- ---------
Total Liabilities and Stockholders' Equity $ 95,641 $ 179,628 $ 657,976 $(210,361) $ 722,884
========= ========= ========= ========= =========
68
CONSOLIDATING BALANCE SHEET AS OF JULY 1, 2000
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
------------ ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash $ 125 $ 951 $ 6,530 -- $ 7,606
Accounts receivable 27,038 12,224 90,588 -- 129,850
Inventories 62,569 7,313 149,348 -- 219,230
Prepaid expenses and other current assets 3,088 262 6,796 10,146
Intercompany (17,506) 41,023 (23,517) -- --
Deferred income taxes 1,985 -- 1,728 3,713
--------- --------- --------- --------- ---------
Total current assets 77,299 61,773 231,473 -- 370,545
Property, Plant and Equipment, Net of
Accumulated Depreciation 17,463 2,899 14,281 -- 34,643
Investments in Subsidiaries (225) -- 49,524 (49,299) --
Patents and Trademarks, Net of
Accumulated Amortization 12,025 -- 115,049 -- 127,074
Other Intangibles, Net of Accumulated Amortization,
and Other Non-current Assets 12,935 6,348 12,731 -- 32,014
--------- --------- --------- --------- ---------
Total Assets $ 119,497 $ 71,020 $ 423,058 $ (49,299) $ 564,276
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 68,437 $ -- $ 43,718 $ -- $ 112,155
Accounts payable 5,904 7,382 21,827 -- 35,113
Accrued expenses 10,540 1,548 8,940 -- 21,028
Income taxes payable (5,705) 8,419 1,864 -- 4,578
--------- --------- --------- --------- ---------
Total current liabilities 79,176 17,349 76,349 -- 172,874
Non-current Deferred Income Taxes 779 -- 1,750 -- 2,529
Senior subordinated notes due 2005 -- -- 125,000 -- 125,000
Other notes payable 43,914 -- 46,151 -- 90,065
--------- --------- --------- --------- ---------
Total liabilities 123,869 17,349 249,250 -- 390,468
Stockholders' Equity (4,372) 53,671 173,808 $ (49,299) 173,808
--------- --------- --------- --------- ---------
Total Liabilities and Stockholders' Equity $ 119,497 $ 71,020 $ 423,058 $ (49,299) $ 564,276
========= ========= ========= ========= =========
69
CONSOLIDATING STATEMENT OF EARNINGS FOR THE YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
------------ ------------ ------------ ------------ ------------
Net Sales $ 202,331 $ 242,689 $ 565,009 $(217,915) $ 792,114
Cost of Goods Sold 158,345 213,075 314,751 (211,915) 474,256
Distribution Expenses 15,521 633 33,241 49,395
--------- --------- --------- --------- ---------
Gross Profit 28,465 28,981 217,017 (6,000) 268,463
Selling, General and Administrative expenses 32,217 7,641 123,027 (6,000) 156,885
--------- --------- --------- --------- ---------
Operating Income (Loss) (3,752) 21,340 93,990 -- 111,578
Interest Expense, Net 817 (379) (38,170) -- (37,732)
Equity in Earnings of Subsidiaries 101 -- 15,698 (15,799) --
--------- --------- --------- --------- ---------
Income (Loss) Before Income Taxes (2,834) 20,961 71,518 (15,799) 73,846
Income Tax Expense (Benefit) (802) 3,130 25,364 27,692
--------- --------- --------- --------- ---------
Net Income (Loss) $ (2,032) $ 17,831 $ 46,154 $ (15,799) $ 46,154
========= ========= ========= ========= =========
CONSOLIDATING STATEMENT OF EARNINGS FOR THE YEAR ENDED JULY 1, 2000
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
------------ ------------ ------------ ------------ ------------
Net Sales $ 151,326 $ 141,117 $ 648,181 $(103,322) $ 837,302
Cost of Goods Sold 121,165 98,651 344,756 (97,322) 467,250
Distribution Expenses 10,681 310 26,648 -- 37,639
--------- --------- --------- --------- ---------
Gross Profit 19,480 42,156 276,777 (6,000) 332,413
Selling, General and Administrative expenses 23,085 7,377 132,287 (6,000) 156,749
--------- --------- --------- --------- ---------
Operating Income (Loss) (3,605) 34,779 144,490 -- 175,664
Interest Expense, Net 122 1,917 (30,800) -- (28,761)
Equity in Earnings of Subsidiaries (298) -- 28,241 (27,943) --
--------- --------- --------- --------- ---------
Income (Loss) Before Income Taxes (3,781) 36,696 141,931 (27,943) 146,903
Income Tax Expense (Benefit) (956) 5,928 50,115 -- 55,087
--------- --------- --------- --------- ---------
Net Income (Loss) $ (2,825) $ 30,768 $ 91,816 $ (27,943) $ 91,816
========= ========= ========= ========= =========
70
CONSOLIDATING STATEMENT OF EARNINGS FOR THE YEAR ENDED JUNE 26, 1999
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
------------ ------------ ------------ ------------ ------------
Net Sales $ 53,513 $ 35,528 $ 433,865 $ (16,790) $ 506,116
Cost of Goods Sold 41,060 12,196 243,060 (10,790) 285,526
Distribution Expenses 4,158 173 17,290 -- 21,621
--------- --------- --------- --------- ---------
Gross Profit 8,295 23,159 173,515 (6,000) 198,969
Selling, General and Administrative expenses 10,493 4,483 120,612 (6,000) 129,588
--------- --------- --------- --------- ---------
Operating Income (Loss) (2,198) 18,676 52,903 -- 69,381
Interest Expense, Net 14 114 (15,646) -- (15,518)
Equity in Earnings of Subsidiaries 9 -- 14,324 (14,333) --
--------- --------- --------- --------- ---------
Income (Loss) Before Income Taxes (2,175) 18,790 51,581 (14,333) 53,863
Income Tax Expense (Benefit) (622) 2,904 17,038 -- 19,320
--------- --------- --------- --------- ---------
Net Income (Loss) $ (1,553) $ 15,886 $ 34,543 $ (14,333) $ 34,543
========= ========= ========= ========= =========
71
CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,032) $ 17,831 $ 46,154 $ (15,799) $ 46,154
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Imputed interest on note payable -- -- 6,033 -- 6,033
Deferred income tax provision -- -- 1,524 -- 1,524
Depreciation and amortization 4,699 1,112 17,783 -- 23,594
Loss on disposal of equipment 423 -- 423
Equity in net income of investees and
consolidated subsidiaries (101) (545) (15,445) 15,799 (292)
Purchase reduction of note payable
and other non cash items -- -- 2,777 -- 2,777
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (12,371) (8,799) (25,089) -- (46,259)
Inventories 5,957 (986) 37,786 -- 42,757
Prepaid expenses and other current assets (149) (50) 437 -- 238
Intercompany 41,055 83,933 (124,988) -- --
Accounts payable (2,368) 12,468 (15,077) -- (4,977)
Taxes payable 751 (4,894) (19,305) -- (23,448)
Accrued expenses (1,064) (1,236) (2,151) -- (4,451)
--------- --------- --------- --------- ---------
NET CASH FROM OPERATING ACTIVITIES 34,800 98,834 (89,561) -- 44,073
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,072) (1,024) (7,461) -- (9,557)
Increase in other non-current assets -- -- (13,422) -- (13,422)
Acquisition of businesses, net of cash acquired -- (60,741) (2,820) -- (63,561)
Additional payment for patents and trademarks -- -- (2,043) -- (2,043)
Additions to intangibles, patents and trademarks -- -- (9,382) -- (9,382)
--------- --------- --------- --------- ---------
NET CASH FROM INVESTING ACTIVITIES (1,072) (61,765) (35,128) -- (97,965)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) of revolving line of credit
and other debt (48,065) -- -- -- (48,065)
Repayment of long-term debt (53,621) -- (20,003) -- (73,624)
Proceeds from long-term debt 75,000 -- -- -- 75,000
Proceeds from senior subordinated notes 148,284 -- 148,284
Costs associated with refinancing -- -- (7,798) -- (7,798)
Common stock issued -- -- 265 -- 265
Treasury stock purchase -- -- (17,654) -- (17,654)
--------- --------- --------- --------- ---------
NET CASH FROM FINANCING ACTIVITIES (26,686) -- 103,094 -- 76,408
--------- --------- --------- --------- ---------
The effect of exchange rate changes on cash -- (25) -- -- (25)
Cash, beginning of the period 125 951 6,530 -- 7,606
Net Change in Cash 7,042 37,044 (21,595) -- 22,491
--------- --------- --------- --------- ---------
Cash, end of period $ 7,167 $ 37,995 $ (15,065) $ -- $ 30,097
========= ========= ========= ========= =========
72
CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JULY 1, 2000
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,825) $ 30,768 $ 91,816 $ (27,943) $ 91,816
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Imputed interest on note payable -- -- 6,336 -- 6,336
Deferred income tax provision (1,057) -- 2,850 -- 1,793
Depreciation and amortization 4,272 468 14,335 -- 19,075
Equity in net income of investees and
consolidated subsidiaries 298 (321) (28,241) 27,943 (321)
Purchase reduction of note payable
and other non cash items -- -- 1,662 -- 1,662
Changes in assets and liabilities:
Accounts receivable (2,987) 4,232 (34,916) -- (33,671)
Inventories (16,747) (5,892) (52,467) -- (75,106)
Prepaid expenses and other current assets (1,206) (134) (2,456) -- (3,796)
Intercompany (15,729) (37,392) 53,121 -- --
Accounts payable 2,510 6,423 (14,817) -- (5,884)
Taxes payable 146 5,102 (670) -- 4,578
Accrued expenses (1,321) 69 415 -- (837)
---------- ---------- ---------- ---------- ----------
NET CASH FROM OPERATING ACTIVITIES (34,646) 3,323 36,968 -- 5,645
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,042) (3,099) (9,835) -- (13,976)
Acquisition of the George Foreman Trademark -- -- (22,750) (22,750)
Additions to intangibles, patents and trademarks -- -- (737) -- (737)
Equity Investment -- (6,027) (3,588) (9,615)
---------- ---------- ---------- ---------- ----------
NET CASH FROM INVESTING ACTIVITIES (1,042) (9,126) (36,910) -- (47,078)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit 36,367 -- -- -- 36,367
Repayment of long-term debt (591) -- (34) -- (625)
Costs associated with refinancing -- -- (616) -- (616)
Common stock issued -- -- 2,669 -- 2,669
---------- ---------- ---------- ---------- ----------
NET CASH FROM FINANCING ACTIVITIES 35,776 -- 2,019 -- 37,795
---------- ---------- ---------- ---------- ----------
The effect of exchange rate changes on cash -- 4 -- -- 4
Cash, beginning of the period 37 6,750 4,453 -- 11,240
Net Change in Cash 88 (5,799) 2,077 -- (3,634)
---------- ---------- ---------- ---------- ----------
Cash, end of period $ 125 $ 951 $ 6,530 $ -- $ 7,606
========== ========== ========== ========== ==========
73
CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 26, 1999
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,553) $ 15,886 $ 34,543 $ (14,333) $ 34,543
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Imputed interest on note payable -- -- -- --
Deferred income tax provision 3,209 -- 900 -- 4,109
Depreciation and amortization 2,283 75 4,943 -- 7,301
Equity in net income of investees and
consolidated subsidiaries (9) -- (14,324) 14,333 --
Purchase reduction of note payable
and other non cash items -- -- (208) -- (208)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 14,605 (14,208) (12,573) -- (12,176)
Inventories (5,807) (222) (20,377) -- (26,406)
Prepaid expenses and other current assets (52) (64) (1,249) -- (1,365)
Intercompany 13,687 586 (14,273) -- --
Accounts payable (3,928) 959 17,685 -- 14,716
Taxes payable (3,853) 3,317 (3,754) -- (4,290)
Accrued expenses (3,519) (116) 2,603 -- (1,032)
---------- ---------- ---------- ---------- ----------
NET CASH FROM OPERATING ACTIVITIES 15,063 6,213 (6,084) -- 15,192
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (895) (28) (4,467) -- (5,390)
Acquisition of business, net of cash acquired 6,119 65 (114,310) -- (108,126)
---------- ---------- ---------- ---------- ----------
NET CASH FROM INVESTING ACTIVITIES 5,224 37 (118,777) -- (113,516)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) of revolving line of credit (20,000) -- (475) -- (20,475)
Repayment of long-term debt (125) -- (90,000) -- (90,125)
Proceeds from long-term debt -- -- 260,000 -- 260,000
Repayment of other debt (125) -- -- (125)
Costs associated with refinancing -- -- (8,065) -- (8,065)
Common stock issued -- -- 1,489 -- 1,489
Preferred stock issued -- -- 40,000 40,000
Costs associated with preferred stock issuance -- -- (2,999) (2,999)
Treasury stock purchase -- -- (70,799) -- (70,799)
---------- ---------- ---------- ---------- ----------
NET CASH FROM FINANCING ACTIVITIES (20,250) -- 129,151 -- 108,901
---------- ---------- ---------- ---------- ----------
The effect of exchange rate changes on cash -- 2 -- -- 2
Cash, beginning of the period -- 498 163 -- 661
Net Change in Cash 37 6,252 4,290 -- 10,579
---------- ---------- ---------- ---------- ----------
Cash, end of period $ 37 $ 6,750 $ 4,453 $ -- $ 11,240
========== ========== ========== ========== ==========
74
18. SUBSEQUENT EVENTS
WESTCLOX, BIG BEN AND SPARTUS BRANDS - On Aug. 7, 2001 Salton announced that it acquired the trademarks, other intellectual property assets and molds, intellectual property, rights and patents related to these brands for $9.8 million of the Westclox(R), Big Ben(R), and Spartus(R) brands from the bankrupt General Time Corporation, until recently, the largest producer and marketer of alarm, wall and occasional clocks in North America.
On July 2, 2001, we took back 456,175 of the 546,075 shares issued to George Foreman on September 7, 2000 and paid him $18 million. This payment, which represented $20.0 million less the proceeds George Foreman received from the sale of shares on the open market previously issued to him, terminated our guarantee obligation with respect to the shares issued to him and satisfied the third annual installment due under the note payable to George Foreman. As a result of this transaction, we now have only two installments remaining under the note as well as our outstanding guarantee obligation to the other venture participants.
75
PART II
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to the Directors of the Company is incorporated herein by reference to the information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement for the 2001 Annual Meeting of Stockholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year pursuant to Regulation 14A. Information required by this Item 10 as to the executive officers of the Company is included in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the information set forth under the caption "Compensation of Directors and Executive Officers" in the Company's definitive Proxy Statement for the 2001 Annual Meeting of Stockholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to the information set forth under the caption "Stock Ownership of Principal Holders and Management" in the Company's definitive Proxy Statement for the 2001 Annual Meeting of Stockholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information required by this Item 13 is incorporated by reference to the information set forth under the caption "Certain Transactions" in the Company's definitive Proxy Statement for the 2001 Annual Meeting of Stockholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON REPORT 8-K(A)(1) FINANCIAL STATEMENTS
The following Financial Statements of the registrant and its subsidiaries are included in Part II, Item 8:
76
Page
SALTON
Independent Auditors' Report 45
Consolidated Balance Sheets as of June 30, 2001 and July 1, 2000 46
Consolidated Statements of Earnings for the Years Ended
June 30, 2001, July 1, 2000 and June 26, 1999 47
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2001, July 1, 2000 and June 26, 1999 48
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2001, July 1, 2000 and June 26, 1999 49
Notes to the Consolidated Financial Statements 51
(a)(2) FINANCIAL STATEMENTS SCHEDULES
The following Financial Statement Schedules of the Registrant are included in Item 14 hereof.
Page
Schedule VIII - Valuation and Qualifying Accounts 80
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a)(3) EXHIBITS
See Exhibit Index for the Exhibits filed as part of or incorporated by reference into this Report.
(b) REPORTS ON FORM 8-K
(i) Current Report on Form 8-K dated September 13, 2001 reporting under Item 5 Other Events the announcement of our fiscal 2001 financial results.
(ii) Current Report on Form 8-K dated June 4, 2001 reporting under Item 5 Other Events the Company's acquisition of Pifco Holdings PLC and our execution of a $150 million interest rate swap agreement
(iii) Current Report on Form 8-K dated May 10, 2001 reporting under Item 5 Other Events the announcement of our third quarter results.
(iv) Current Report on Form 8-K dated May 2, 2001 reporting under Item 5 Other Events our recommended cash offer to acquire the entire issued capital of Pifco Holdings PLC.
(v) Current Report on Form 8-K dated April 9, 2001 reporting under Item 5 Other Events our preliminary third quarter estimates and our intention to issue $150 million of senior subordinated notes.
(vi) Current Report on Form 8-K dated February 6, 2001 reporting under Item 5 Other Events the announcement of our financial results for second quarter.
(vii) Current Report on Form 8-K dated January 8, 2001 reporting under Item 5 Other Events the announcement of our preliminary expectations for the second quarter.
77
(viii) Current Report on Form 8-K dated November 8, 2000 reporting under Item 5 Other Events the announcement of our fiscal 2001 first quarter earnings results.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 25th day of September, 2001.
SALTON, INC.
By: /s/ Leonard Dreimann
----------------------------------
Leonard Dreimann
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on September 25, 2001.
Signature
/s/ LEONHARD DREIMANN Chief Executive Officer and Director
----------------------------------------------- (Principal Executive Officer)
Leonhard Dreimann
/s/ WILLIAM B. RUE President and Chief Operating Officer and Director
-----------------------------------------------
William B. Rue
/s/ JOHN E. THOMPSON Senior Vice President and Chief Financial Officer
----------------------------------------------- (Principal Accounting and Financial Officer)
John E. Thompson
/s/ DAVID C. SABIN Chairman of the Board and Director
-----------------------------------------------
David C. Sabin
/s/ FRANK DEVINE Director
-----------------------------------------------
Frank Devine
/s/ BERT DOORNMALEN Director
-----------------------------------------------
Bert Doornmalen
Director
-----------------------------------------------
Robert A. Bergmann
Director
-----------------------------------------------
Bruce G. Pollack
Director
-----------------------------------------------
Bruce J. Walker
79
The following pages contain the Financial Statement Schedules as specified by 12(a) and 14(a)(2) of Part IV of Form 10-K. The report of Deloitte & Touche LLP with respect to the schedule required by 14(a)(2) appears at page 45 of this Form 10-K
EXHIBIT 12(a)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SALTON, INC.
YEAR ENDED
(THOUSANDS, EXCEPT RATIOS) 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Fixed Charges
Interest and amortization of debt issuance costs on
all indebtedness $ 39,043 $ 31,102 $ 15,864 $ 7,336 $ 4,967
Add interest element implicit in rentals 3,724 1,923 1,158 521 394
-------- -------- -------- -------- --------
Total fixed charges $ 42,767 $ 33,025 $ 17,022 $ 7,857 $ 5,361
Income
Income before income taxes $ 73,846 $146,903 $ 53,863 $ 32,186 $ 6,400
Add fixed charges 42,767 33,025 17,022 7,857 5,361
-------- -------- -------- -------- --------
Income before fixed charges and income taxes $116,613 $179,928 $ 70,885 $ 40,043 $ 11,761
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.73 5.45 4.16 5.10 2.19
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JUNE 30, 2001
SALTON, INC.
CHARGED TO
NET SALES,
BEGINNING COSTS AND ENDING
BALANCE EXPENSES DEDUCTIONS BALANCE
--------------- --------------- --------------- ---------------
Year Ended June 27, 1998:
Allowance for returns,
allowances and doubtful accounts $ 2,400,000 $ 21,752,000 $ (21,152,000) $ 3,000,000
Year Ended June 26, 1999:
Allowance for returns,
allowances and doubtful accounts $ 3,000,000 $ 31,606,000 $ (28,504,000) $ 6,102,000
Year Ended July 1, 2000:
Allowance for returns,
allowances and doubtful accounts $ 6,102,000 $ 45,593,000 $ (44,584,000) $ 7,111,000
Year Ended June 30, 2001:
Allowance for returns,
allowances and doubtful accounts $ 7,111,000 $ 47,854,000 $ (45,742,000) $ 9,223,000
80
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of Registrant. Incorporated
by reference to the Registrant's Registration Statement on Form S-1
(Registration No. 33-42097).
3.2 By-laws of the Registrant. Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-42097).
3.3 Certificate of Designation for the Series A Convertible Preferred Stock of the
Registrant. Incorporated by reference to the Registrant's Current Report on
Form 8-K dated July 28,1998.
4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the
Registrant. Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-42097).
4.2 Form of Note for Registrant's 10 3/4% Senior Subordinated Notes. Incorporated
by reference to the Registrant's Registration Statement on Form S-4
(Registration No. 333-70169)
4.3 Indenture dated December 16,1998 between Norwest Bank National Association, as
Issuer, and the Registrant relating to the Registrant's 10 3/4% Senior
Subordinated Notes. Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-70169)
4.4 Indenture, dated as of April 23, 2001, amount Salton, Inc., the Guarantors (as
defined therein), and Wells Fargo Bank Minnesota, N.A., as trustee, relating to
$250,000,000 in aggregate principal amount and maturity of 12 1/4% senior subordinated
notes due 2008. Incorporated by Reference to the Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2001.
4.5 Form of Note for Registrant's 12 1/4% senior subordinated notes due April 15,
2008. Incorporated by Reference to the Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2001.
10.1 Salton/Maxim Housewares, Inc. Stock Option Plan. Incorporated by reference to
the Registrant's Registration Statement on form S-1 (Registration No.
33-42097).
10.2 Stockholders Agreement, dated August 6, 1991, by and among the Registrant,
Braddock Financial Corporation, Financo Investors Fund, L.P., and Mesirow
Private Equity, Inc. (successor to Mesirow Venture Capital, Inc.) as the
authorized representative of Mesirow Capital Partners III, Mesirow Capital
Partners IV, Mesirow Capital Partners V and Allied Investment Corporation.
Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-42097).
81
10.3 Form of Sales Representative Agreement generally used by and between the
Registrant and its sales representatives. Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Registration No. 33-42097).
10.4 Stock Registration Rights Agreement, dated as of August 6, 1991, by and
between the Registrant, Braddock Financial Corporation, Financo Investors
Fund, L.P., Mesirow Capital Partners II, Mesirow Capital Partners IV, Mesirow
Capital Partners V and Allied Investment Corporation. Incorporated by
reference to the Registrant's Registration Statement on Form S-1 (Registration
No. 33-42097).
10.5 Salton/Maxim Housewares, Inc. 1995 Employee Stock Option Plan. Incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 30, 1995.
10.6 Salton/Maxim Housewares, Inc. Non-Employee Directors Stock Option Plan.
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 30, 1995.
10.7 Asset Purchase Agreement dated July 1, 1996 by and among the Registrant, Block
China Corporation and Robert C. Block Incorporated by reference from the
Company's Current Report on Form 8-K dated July 1, 1996.
10.8 License Agreement dated as of February 1, 1996 by and between White
Consolidated Industries Inc. and the Registrant. Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q/A for the fiscal quarter ended
December 28, 1996.
10.9 License Agreement dated as of May 21, 1996 by and between White Consolidated
Industries Inc. and the Registrant. Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q/A for the fiscal quarter ended
December 28, 1996.
10.10 Purchase, Distribution and Marketing Agreement dated as of January 27, 1997
between the Registrant and Kmart Corporation. Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q/A for the fiscal quarter ended
December 28, 1996.
10.11 Employment Agreement dated as of December 19, 1997 between the Registrant and Leonhard
Dreimann. Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 27, 1998.
82
10.12 Employment Agreement dated as of December 19, 1997 between the Registrant and
David C. Sabin. Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 27, 1998.
10.13 Employment Agreement dated as of December 19, 1997 between the Registrant and
William B. Rue. Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 27, 1998.
10.14 Stock Agreement, dated as of May 6, 1998, by and between the Registrant, Windmere-Durable
Holdings, Inc. and the Salton Executive Related Parties (as defined therein).
Incorporated by reference to the Registrant's Current Report on Form 8-K
dated May 6, 1998.
10.15 Note, dated July 27, 1998, issued by the Registrant to Windmere-Durable
Holdings, Inc. Incorporated by reference to the Registrant's Current Report on
Form 8-K dated July 28, 1998.
10.16 Agreement dated July 27, 1998, between the Registrant to Windmere-Durable
Holdings, Inc. Incorporated by reference to the Registrant's Current Report on
Form 8-K dated July 28, 1998.
10.17 Credit Agreement dated July 27, 1998 among the Registrant, the several lenders
from time to time parties thereto, Lehman Brothers Inc., as arranger, Lehman
Commercial Paper Inc., as syndication agent, and Lehman Commercial Paper Inc.,
as administrative agent. Incorporated by reference to the Registrant's Current
Report on Form 8-K dated July 28, 1998.
10.18 Stock Purchase Agreement dated July 15, 1998 by and among the Registrant and
Centre Capital Investors III, L.P.,Centre Capital Tax-Exempt Investors II,
L.P., Centre Capital Offshore Investors, L.P., The State Board of
Administration of Florida, Centre Parallel Management Partners, L.P. and
Centre Partners Coinvestment, L.P. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 15, 1998.
10.19 Registration Rights Agreement dated July 15, 1998 by and among the Registrant
and Centre Capital Investors II, L.P.,Centre Capital Tax-Exempt Investors II,
L.P., Centre Capital Offshore Investors II, L.P., The State Board of
Administration of Florida, Centre Parallel Management Partners, L.P. and
Centre Partners Coinvestment, L.P. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 28, 1998.
10.20 The Salton, Inc. 1998 Employee Stock Option Plan. Incorporated by reference to
the Registrant's Definitive Proxy Statement on Schedule 14A filed on December 2,
1998.
83
10.21 Agreement effective as of July 1, 1999 between Salton and George Foreman.
Incorporated by reference to the Registrant's, Current Report on Form 8-K
dated December 9, 1999.
10.22 Agreement effective as July 1, 1999 between Salton and Sam Perlmutter.
Incorporated by reference to the Registrant's, Current Report on Form 8-K
dated December 9, 1999.
10.23 Agreement effective as of July 1, 1999 between Salton and Michael Srednick
Incorporated by reference to the Registrant, Current Report on Form 8-K dated
December 9, 1999.
10.24 Second amended and restated credit agreement, among Salton, Inc., as borrower,
the several lenders from time to time parties hereto, Lehman Brothers Inc., as
arranger, Lehman Commercial Paper Inc., as syndication agent, and
administration agent and Fleet National Bank as documentation agent dated as
of December 10, 1999. Incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 25, 1999.
10.25 Agreement effective January 12, 2000, between Salton, Inc. and William B.
Rue. Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 28, 2000.
10.26 Agreement effective January 12, 2000, between Salton, Inc. and Leonard
Dreimann. Incorporated by reference to Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 28, 2000.
10.27 Agreement effective January 12, 2000, between Salton, Inc. and David Sabin.
Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 28, 2000.
10.28 Agreement effective January 12, 2000, between Salton, Inc. and John E.
Thompson. Incorporated by reference to Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 28, 2000.
10.29 Agreement dated as of September 7, 2000 between Salton and George Foreman.
Incorporated by reference to the Current Report on Form 8-K dated September 7, 2000.
10.30 Agreement dated as of September 7, 2000 between Salton and Sam Perlmutter.
Incorporated by reference to Registrant's Current Report on Form 8-K dated September 7, 2000.
10.31 Agreement dated as of September 7, 2000 between Salton and Michael Srednick.
Incorporated by reference to Registrant's Current Report on Form 8-K dated September 7, 2000.
10.32 The Salton, Inc. 1999 Employee Stock Option Plan. Incorporated by reference to
the Registrant's Definitive Proxy Statement on Schedule 14A filed December 9, 1999.
84
10.33 Salton, Inc. 2001 Employee Stock Option Plan
10.34 Third amended and restated credit agreement among Salton, as borrower, the
several lenders from time to time parties thereto, Lehman Brothers, Inc., as
arranger, Firstar Bank, N.A. as syndication agent, Lehman Commercial Paper
Inc., as syndication agent, and Fleet National Bank, as documentation agent
dated as of September 26, 2000. Incorporated by reference to the Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2001.
10.35 First Amendment, dated as of April 13, 2001, to the third amended and restated
credit agreement, dated as of September 26, 2000 among the Registrant, the
several banks and financial institutions or entities parties thereto, Lehman
Brothers Inc., as advisor and book runner, Firstar Bank, N.A., as syndication
agent, Lehman Commercial Paper Inc., as administrative agent, and Fleet
National Bank, N.A., as documentation agent. Incorporated by reference to
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001.
21.1 Subsidiaries of the Company. Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-63296).
23.1 Consent of Deloitte & Touche LLP
85
EXHIBIT 10.33
SALTON, INC.
2001 EMPLOYEE STOCK OPTION PLAN
THE PLAN. Salton, Inc. (the "Company") hereby establishes the Salton, Inc. 2001 Employee Stock Option Plan (the "Plan") as set forth in this document, as it may be amended from time to time. The Plan is effective as of the Effective Date.
SECTION 1. PURPOSE. The purposes of the Plan are to encourage employees of the Company and its Affiliates to acquire a proprietary and vested interest in the growth and performance of the Company and to increase their incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of shareowners, and enhancing the ability of the Company and its Affiliates to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below:
(a) "Affiliate" shall mean (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company or (ii) any entity in which the Company has a significant equity interest, as determined by the Committee.
(b) "Alternative Tandem SAR" shall mean a SAR issued in connection with a related Option and (i) which is exercisable only within such time and to the extent that the related Option is exercisable, (ii) under which exercise of the SAR or applicable portion thereof will terminate the related Option or applicable portion thereof, and (iii) which will terminate upon and to the extent of exercise or termination of the related Option, except that an Alternative Tandem SAR granted with respect to less than the full number of Shares covered by the related Option shall not be reduced until the exercise or termination of the related Option exceeds the number of Shares not covered by the Alternative Tandem SAR.
(c) "Award" shall mean any Option, SAR, Restricted Stock Award, Performance Share, Performance Unit, Other Stock Unit Award, or any other right, interest, or option relating to Shares granted pursuant to the provisions of the Plan.
(d) "Award Agreement" shall mean the written agreement, contract, or other instrument or document by which every Award shall be evidenced.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.
(g) "Committee" shall mean the Compensation Committee of the Board.
(h) "Company" shall mean Salton, Inc.
(i) "Cumulative Tandem SAR" shall mean a SAR issued in connection with a related Option and (i) which is exercisable only within such time and to the extent that the related Option is exercisable, (ii) which is exercised automatically upon and to the extent of exercise of the related Option, and
(iii) which provides payment in addition to the Shares delivered upon exercise of the related Option.
(j) "Effective Date" means December 13, 2000 the date this Plan is adopted by the Board.
(k) "Employee" shall mean any employee of the Company or of any Affiliate.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
(m) "Fair Market Value" shall mean, with respect to a Share, (i) the closing price of the Shares on the New York Stock Exchange, or any other national stock exchange on which the Shares are then traded, or if no such reported sale of Shares shall have occurred on such date, on the next preceding date on which there was such a reported sale; or (ii) if the Shares are not listed for trading on a national securities exchange or authorized for quotation on the NASDAQ Stock Market's National Market, the average of the closing bid and asked prices as reported by the National Association of Securities Dealers Automated Quotation System or, if no such prices shall have been reported for such date, on the next preceding date for which such prices were so reported.
(n) "Freestanding SAR" shall mean a SAR other than a Cumulative Tandem SAR or an Alternative Tandem SAR.
(o) "Limited Right" shall mean an Alternative Tandem SAR which is exercisable only for a limited period after a Change in Control as provided in
Section 7(f).
(p) "Mature Shares" shall mean Shares to which the holder thereof has good title, free and clear of all liens and encumbrances, and which such holder either (i) has held for at least six months or (ii) has purchased on the open market.
(q) "Option" shall mean any right granted to a Participant under the Plan allowing such Participant to purchase Shares at such price or prices and during such period or periods as the Committee shall determine.
(r) "Optionee" shall mean any Participant to whom an Option has been granted under the Plan.
(s) "Option Price" shall mean the per share purchase price of Shares subject to an Option.
(t) "Other Stock Unit Award" shall mean any right granted to a Participant by the Committee pursuant to Section 10 hereof.
(u) "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan.
(v) "Performance Award" shall mean any Award of Performance Shares or Performance Units pursuant to Section 9 hereof.
(w) "Performance Period" shall mean that period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are to be measured.
(x) "Performance Share" shall mean any grant pursuant to Section 9 hereof of a unit valued by reference to a designated number of Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter.
(y) "Performance Unit" shall mean any grant pursuant to Section 9 hereof of a unit valued by reference to a designated amount of property other than Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter.
(z) "Permitted Transferee" shall mean any member of the Immediate Family of the Participant, any trust of which all of the primary beneficiaries are the Participant or members of the Immediate Family of a Participant, or any partnership of which all of the partners are the Participant or members of the Immediate Family of the Participant. For purposes of this definition, the "Immediate Family" of the Participant consists of the Participant's spouse, children, stepchildren, grandchildren, parents, stepparents, siblings, grandparents, nieces and nephews.
(aa) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, or government or political subdivision thereof.
(bb) "Reload Option" shall mean an Option granted pursuant to Section
6(k) hereof.
(cc) "Restricted Stock" shall mean any Share issued with the restriction that the holder may not sell, transfer, pledge, or assign such Share and with such other restrictions as the Committee, in its sole discretion, may impose (including, without limitation, any restriction on the right to vote such Share, and the right to receive any cash dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate.
(dd) "Restricted Stock Award" shall mean an Award of Restricted Stock pursuant to Section 8 hereof.
(ee) "SAR" shall mean any right granted to a Participant pursuant to
Section 7 hereof to receive, upon exercise by the Participant, an amount equal to the number of Shares with respect to which the right is granted multiplied by the excess of (i) the Fair Market Value of one Share on the date of exercise or, if the Committee shall so determine in the case of any such right, at any time during a specified period before the date of exercise, over (ii) the grant price of the right as specified by the Committee.
(ff) "Shares" shall mean shares of the common stock of the Company.
(gg) "Tandem SAR" shall mean an Alternative Tandem SAR or a Cumulative Tandem SAR.
SECTION 3. ADMINISTRATION.
(a) General. The Plan shall be administered by the Committee. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings. The Committee may appoint agents (who may be employees of the Company) to assist in the administration of the Plan, and may authorize such persons to execute agreements or other documents on its behalf. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan, and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. All expenses incurred in the administration of the Plan, including for the engagement of any counsel, consultant or agent, shall be paid by the Company. No member of the Committee shall be liable for any action or determination made with respect to the Plan or any Award.
(b) Power and Authority of Committee. The Committee shall have full power and authority, in its sole discretion subject to the provisions of the Plan, to:
(i) determine the Employees of the Company and its Affiliates to whom Awards may from time to time be granted hereunder;
(ii) determine the type or types of Award to be granted to each Participant hereunder;
(iii) determine the number of Shares or other amount to be covered by each Award granted hereunder, subject to the limitations of Section 4.
(iv) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder;
(v) determine whether, to what extent and under what circumstances Awards may be settled in cash, Shares or other property or canceled or suspended;
(vi) determine whether, to what extent and under what circumstances cash, Shares and other property and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the Participant;
(vii) determine the existence or nonexistence of any fact or status relevant to Awards or the rights of Participants thereunder, including without limitation whether a Termination of Employment occurs by reason of cause, retirement, death or disability;
(viii) construe and interpret the Plan, any Award Agreement, and any other instrument or agreement entered into under the Plan;
(ix) adjust performance award criteria or the terms and conditions of other Awards in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in applicable laws, regulations or accounting principles;
(x) make such other determinations and waive such requirements as may be required or permitted by Sections 6, 7, 8, 9, 10 and 11 or other provisions of the Plan;
(xi) administer the Plan and establish such rules and regulations, approve and prescribe such forms, and appoint such agents as it shall deem appropriate for the proper administration of the Plan;
(xii) correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry it into effect;
(xiii) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan.
In making such determinations, the Committee may take into consideration the value of the services rendered by the respective individuals, their present and potential contributions to the success of the Company and its Affiliates and such other factors which the Committee may deem relevant in accomplishing the purposes of the Plan. The Committee's determinations under the Plan need not be uniform. The Committee may make such determinations selectively among persons who receive, or are eligible to receive, Awards (whether or not such persons are similarly situated). Decisions of the Committee shall be final, conclusive and binding upon all Persons, including the Company, any Participant, any stockholder, and any employee of the Company or of any Affiliate.
SECTION 4. SHARES SUBJECT TO THE PLAN.
(a) Aggregate Limit. Subject to adjustment as provided in Section 15(h) a total of 900,000 Shares are reserved for grant pursuant to Awards under the Plan. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued Shares or treasury Shares. Shares shall be charged against the foregoing limit upon the grant of each Award (other than a Performance Unit or Other Stock Unit not denominated in Shares) but if such Shares are thereafter forfeited or such Award otherwise terminates without the issuance of such Shares or of other consideration in lieu of such Shares, the Shares so forfeited or related to the terminated portion of such Award shall be restored to the foregoing limit and shall again be available for Awards under the Plan. If Shares are applied to pay the Option Price upon exercise of an Option or to pay federal, state and local taxes upon exercise of an Option or other receipt of payment under an Award, the Shares so applied shall be added to the foregoing limit and shall be available for Awards under the Plan.
(b) Individual Annual Limits. Awards to any one individual in any one calendar year shall be subject to the following limits:
(i) Options. The maximum number of Shares with respect to which Options may be granted during a calendar year to any Participant is 100,000 Shares; provided, however, that if Reload Options are granted, the limitation of this subsection shall be equal to the sum of 100,000 Shares plus the number of Shares subject to Reload Options granted to the Participant in such year, but in no event more than 200,000 Shares;
(ii) SARs. The maximum number of SARs (other than Alternative Tandem SARs) that may be granted during a calendar year to any Participant is 100,000;
(iii) Aggregate Options and SARs. The sum of the number of Shares with respect to which Options may be granted and the number of SARs (other than Alternative Tandem
SARs) that may be granted in total during a calendar year to any Participant is 100,000; provided, however, that if Reload Options are granted and if Cumulative Tandem SARs are granted with respect to the Reload Options, the limitation of this subsection shall be equal to the sum of 100,000 plus the number of Cumulative Tandem SARs granted with respect to Reload Options to the Participant in such year, but in no event more than 200,000;
(iv) Other Share-Denominated Awards. The maximum number of Shares with respect to which Restricted Stock, Performance Shares, and Other Stock Units denominated in Shares in total may be granted during a calendar year to any Participant is 100,000 Shares;
(v) Dollar-Denominated Awards. The maximum dollar amount of compensation that may be represented by Performance Units and Other Stock Units not denominated in Shares awarded during calendar year to any Participant is 150% of the Participant's annual base salary in effect on the date of the award multiplied by the number of years (and fractions thereof) in the Performance Period for Performance Units; and
(vi) Alternative Tandem SARs. Alternative Tandem SARs shall be subject to the limit on the Shares covered by the Options to which the Alternative Tandem SARs relate.
SECTION 5. ELIGIBILITY. The Committee may grant Awards to any Employee (excluding any member of the Committee), provided, that at least a majority of the shares of stock or shares of stock underlying options awarded pursuant to the Plan during the three-year period commencing on the date the Plan is adopted by the Company must be awarded to employees who are not officers or directors of the Company. An Employee may be granted more than one Award, but only on the terms and subject to the restrictions hereinafter set forth.
SECTION 6. STOCK OPTIONS.
(a) Issuance. The Committee may grant Options hereunder to Participants either alone or in addition to other Awards granted under the Plan. All Options shall be nonstatutory stock options.
(b) Award Agreements. Any Option granted to a Participant under the Plan shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. The Committee may require that any Participant shall, as consideration for the grant of the Option, agree in writing to remain in the employ of the Company or of one of Affiliates, at the pleasure of the Company or of such Affiliate, for at least one (1) year from the date of the granting of such Option or until earlier termination of the Participant's employment effected or approved by the Company or by such Affiliate, in which event if the Participant violates such agreement, any Options still held by such person at the time of such violation shall automatically terminate. The Committee may waive this requirement in the case of any Participant. Any Option shall also be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable.
(c) Date of Granting of Options. The date of grant of a Reload Option shall be determined in accordance with Section 6(j)(v). The date of grant of all other Options shall be the date designated by the Committee as the date of grant, provided that in no event shall the date of grant be earlier than the date on which the Committee approves the grant.
(d) Option Price. The Option Price per Share shall be determined by the Committee in its sole discretion; provided that the Option Price shall not be less than 100% of the Fair Market Value of a Share on the date of the grant of the Option. The proceeds received by the Company from the sale of Shares subject to an Option shall be added to the general funds of the Company and used for its corporate purposes.
(e) Option Period. The term of each Option shall be fixed by the Committee in its sole discretion and set forth in the Award Agreement, provided that the Option and any related SAR shall not be exercisable after the expiration of ten years from the date the Option was granted.
(f) Exercisability. Options shall be exercisable either in full or in installments at such time or times as determined by the Committee at or subsequent to grant, and set forth in the Award Agreement; provided that the Committee may in its sole discretion subsequent to grant waive any restriction on the exercise of an Option.
(g) Method of Exercise. An Option shall be exercised by the delivery to the Company (or an agent of the Company) during the period in which such Option is exercisable of (x) written notice of exercise in a form acceptable to the Committee for a specific number of Shares subject to the Option and (y) payment in full of the Option Price of such specific number of Shares. Payment for the Shares with respect to which an Option is exercised may be made by any one or more of the following means:
(i) cash, negotiable personal check or electronic funds transfer;
(ii) the Committee in its sole discretion may permit payment through tender of Mature Shares, valued at their Fair Market Value on the date of exercise; provided that the Committee may impose whatever restrictions it deems necessary or desirable with respect to such method of payment;
(iii) the Committee in its sole discretion may permit payment by submitting acceptable certification to the Committee of the ownership of Mature Shares, valued at their Fair Market Value on the date of exercise; in which event the Shares issued to the Optionee for the portion of any Option so exercised shall not exceed the number of Shares covered by such portion of the Option less the number of Shares for which proof of ownership is submitted in full or partial payment; or
(iv) the Committee in its sole discretion may permit payment through the sale of the Shares acquired on exercise of the Option through a broker-dealer to whom the Optionee has submitted an irrevocable notice of exercise and irrevocable instructions to deliver promptly to the Company the amount of sale or loan proceeds sufficient to pay for such Shares, together with, if requested by the Committee, the amount of federal, state, local or foreign withholding taxes payable by Optionee by reason of such exercise.
(h) Form of Settlement. In its sole discretion, the Committee may provide, at the time of grant, that the Shares to be issued upon an Option's exercise shall be in the form of Restricted Stock or other similar securities, or may reserve the right so to provide after the time of grant.
(i) Discretionary Share Withholding. The Committee in its sole discretion may provide that when taxes are to be withheld in connection with the exercise of an Option by delivering Shares
in payment of the exercise price, or an exercise of an SAR for stock, or upon the lapse of restrictions on Restricted Stock received upon the exercise of an Option (the date on which such exercise occurs or such restrictions lapse hereinafter referred to as the "Tax Date"), the Optionee may elect to make payment for the withholding of federal, state and local taxes, including Social Security and Medicare ("FICA") taxes, up to the Optionee's marginal tax rate, by one or both of the following methods:
(i) delivering part or all of the payment in previously-owned Mature Shares (which shall be valued at their Fair Market Value on the Tax Date);
(ii) requesting the Company to withhold from those Shares that would otherwise be received upon exercise of the Option, upon exercise of an SAR for stock, or upon the lapse of restrictions on Restricted Stock, a number of Shares having a Fair Market Value on the Tax Date equal to the amount to be withheld.
The Committee in its sole discretion may provide that the amount of tax withholding to be satisfied by withholding Shares from the Option exercise shall be the minimum amount of taxes, including FICA taxes, required to be withheld under federal, state and local law, or shall be the entire amount of taxes, including FICA taxes, required to be paid by Optionee under federal, state and local law. An election by Optionee under this subsection is irrevocable. Any fractional share amount and any additional withholding not paid by the withholding or surrender of Shares must be paid in cash. If no timely election is made, cash must be delivered to satisfy all tax withholding requirements.
(j) Reload Options. In connection with Options, including newly-granted Options or outstanding Options granted under the Plan, the Committee may provide that an Optionee has the right to a Reload Option, which except as otherwise provided by the Committee shall be subject to the following terms and conditions:
(i) Grant of the Reload Option; Number of Shares, Price. Subject to paragraphs (ii) and (iii) of this subsection and to the availability of Shares to be optioned under the Plan, if a Participant has an Option (the "Original Option") with reload rights and pays the Option Price by surrendering Shares or certifying to the ownership of Shares, or if Shares are withheld or surrendered for tax withholding, the Participant shall receive a Reload Option for the number of Shares so surrendered, certified or withheld with an Option Price equal to the Fair Market Value of a Share on the date of the exercise of the Original Option.
(ii) Minimum Purchase and Other Requirements. A Reload Option will be granted only if the exercise of the Original Option is an exercise of at least 25% of the total number of Shares granted under the original option (or an exercise of all the Shares remaining under the original option if less than 25% of the Shares remain to be exercised), and the Participant is an employee of the Company or an Affiliate on the date of exercise of the Original Option.
(iii) Term of Option. The Reload Option shall expire on the same date as the Original Option.
(iv) Date of Grant, Vesting. The date of grant of the Reload Option shall be the date of the exercise of the Original Option. The Reload Option shall be exercisable in full beginning one year from date of grant.
(v) Other Terms and Conditions. Except as otherwise provided in this subsection, all the provisions of the Plan shall apply to Reload Options.
SECTION 7. STOCK APPRECIATION RIGHTS.
(a) Issuance. The Committee may grant SARs hereunder to Participants either alone or in addition to other Awards granted under the Plan. Such SARs may, but need not, be Tandem SARs relating to a specific Option granted under
Section 6. Any Tandem SAR related to an Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. The Committee may impose such conditions or restrictions on the exercise of any SAR as it shall deem appropriate.
(b) Award Agreements. Any SAR granted to a Participant under the Plan shall be evidenced by an Award Agreement in such form as the Committee may approve (and which in the case of a Tandem SAR may be combined with the Award Agreement under which the related Option is granted) and shall contain such terms and conditions not inconsistent with other provisions of the Plan as shall be determined from time to time by the Committee.
(c) Grant Price. The grant price of a SAR shall be determined by the Committee in its sole discretion; provided that the grant price shall not be less than the lesser of 100% of the Fair Market Value of a Share on the date of the grant of the SAR, or the Option Price under the Option to which the SAR relates.
(d) Exercise and Payment. Upon the exercise of SARs, an Optionee shall be entitled to receive the value thereof. The Fair Market Value of a Share on the date of exercise of SARs shall be determined in the same manner as the Fair Market Value of a Share on the date of grant of an Option is determined. SARs shall be deemed exercised on the date written notice of exercise in a form acceptable to the Committee is received by the Secretary of the Company. Unless the Award Agreement provides otherwise or reserves to the Committee or the Participant or both the right to defer payment, the Company shall make payment in respect of any SAR within five (5) days of the date the SAR is exercised. Any payment by the Company in respect of a SAR may be made in cash, Shares, other property, or any combination thereof, as the Committee, in its sole discretion, shall determine.
(e) Tandem SARs. Each Award Agreement evidencing Tandem SARs shall clearly identify the Options to which it relates and the Tandem SAR shall be subject to the following terms and conditions unless the Committee determines otherwise:
(i) A Tandem SAR shall expire no later than the expiration of the related Option.
(ii) A Tandem SAR shall be transferable only to the extent that the related Option is transferable pursuant to Section 12.
(iii) A Tandem SAR shall be exercisable at such time or times and only to the extent that the related Option is exercisable, and may be subject to further limitations on exercise as determined by the Committee.
(f) Grant of Limited Rights.
(i) The Committee in its sole discretion may grant Limited Rights upon or after the grant of any Option under the Plan. Each Limited Right shall be identified with a share of Stock subject to an Option of the Optionee. The number of Limited Rights granted to a Optionee shall equal the number of Shares subject to the Option with which such Limited Rights are identified. Upon the exercise, expiration, termination, forfeiture, or cancellation of an Optionee's Option, the Optionee's associated Limited Rights shall terminate.
(ii) Limited Rights shall become exercisable upon the occurrence of a Change of Control. Limited Rights shall be exercised by delivery to the Company, within 90 days after the date of such Change of Control, of written notice of intent to exercise specific Limited Rights. The exercise of Limited Rights shall result in the cancellation of the Option with which such Limited Rights are identified, to the extent of such exercise.
(iii) The Company shall notify all Optionees of the occurrence of a Change of Control promptly after its occurrence, but any failure of the Company so to notify shall not deprive any Optionee of any rights accruing hereunder by virtue of a Change of Control. Any such failure of the Company shall, if an Optionee does not otherwise know of the Change of Control, automatically extend the 90-day period specified above until 90 days after the Company notifies such Optionee or such Optionee otherwise knows of the Change of Control, whichever first occurs, but in no event beyond the maximum term of the identified Option specified in the applicable Award Agreement.
(iv) Within five business days after the exercise of any Limited Rights, the Company shall pay to the Optionee, in cash (except that the Committee may cause the Company to pay such amount in Shares if it determines that a payment in cash would cause transaction to be ineligible for pooling of interests accounting), an amount equal to the difference between (A) the Change of Control Value, and (B) the Option Price of the Option.
(v) "Change of Control Value" shall mean the greater of (A) the highest Fair Market Value of a Share during the 180-day period preceding the date of the Company's receipt of notice of exercise of Limited Rights, or (B) the cash amount (or fair cash value, as determined by the Committee in its sole discretion, of consideration other than cash), payable in respect of a Share to holders of Shares in connection with the Change of Control.
(g) Other Limitations. The Committee may at any time impose any other limitations upon the exercise of SARs which, in the Committee's sole discretion, are necessary or desirable in order to comply with Section 16(b) of the Exchange Act and the rules and regulations thereunder, or in order to obtain any exemption therefrom.
SECTION 8. RESTRICTED STOCK.
(a) Issuance. The Committee may issue Restricted Stock Awards hereunder to Participants, for no cash consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The granting of Restricted Stock shall take place on the date the Committee determines to grant the Restricted Stock.
(b) Registration. Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee in its sole discretion shall deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock
certificate is issued in respect of shares of Restricted Stock awarded under the Plan, such certificate shall be registered in the name of the Participant, shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, and shall be held in escrow by the Company. The Participant shall execute a stock power or powers assigning the Shares of Restricted Stock back to the Company, which stock powers shall be held in escrow by the Company and used only in the event of the forfeiture of any of the Shares of Restricted Stock.
(c) Forfeiture. Except as otherwise determined by the Committee, no Restricted Stock shall become free of restrictions prior to the date of the first anniversary of the grant of the Restricted Stock. Unrestricted Shares, evidenced in such manner as the Committee shall deem appropriate, shall be issued to the Optionee promptly upon lapse of the period of forfeiture, as determined or modified by the Committee.
(d) Share Withholding. The Committee in its sole discretion may provide that a Participant who recognizes income under the federal income tax by reason of the lapsing of restrictions on Shares of Restricted Stock may elect Share withholding pursuant to Section 6(j).
SECTION 9. PERFORMANCE AWARDS.
(a) Issuance. The Committee may issue Performance Awards hereunder to Participants, for no cash consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. Except as provided in Section 13, Performance Awards will be paid only after the end of the relevant Performance Period. Performance Awards may be paid in cash, Shares, other property or any combination thereof, in the sole discretion of the Committee at the time of payment. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or, in accordance with procedures established by the Committee, on a deferred basis.
(b) Performance Measures. Unless and until the Committee proposes for stockholder vote and stockholders approve a change in the general performance measures set forth in this Section, the attainment of which shall determine the degree of payout and/or vesting with respect to Awards, the performance measure(s) to be used for purposes of such Awards shall be chosen from among the following:
(i) Earnings either in the aggregate or on a per-share basis, before or after taxes, before or after depreciation and amortization, and before or after interest expense;
(ii) Net income (before or after taxes);
(iii) Operating income;
(iv) Cash flow;
(v) Return measures (including return on assets, equity, or sales);
(vi) Share price (including growth measures and total stockholder return or attainment by the Shares of a specified value for a specified period of time);
(vii) Reductions in expense levels in each case where applicable determined either in a Company-wide basis or in respect of any one or more business units;
(viii) Net economic value; or
(ix) Economic value added
The degree of attainment of the preestablished performance goals required for an Award and the amounts of Awards may not be adjusted after the Award is granted, except that the Committee may retain the discretion to decrease the amount of an Award.
SECTION 10. OTHER STOCK UNIT AWARDS.
(a) Stock and Administration. The Committee may grant other Awards of Shares and other Awards that are valued in whole or in part by reference to, or are otherwise based on, Shares or other property ("Other Stock Unit Awards") hereunder to Participants, either alone or in addition to other Awards granted under the Plan. Other Stock Unit Awards may be paid in Shares, cash or any other form of property as the Committee shall determine. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees of the Company and its Affiliates to whom and the time or times at which such Awards shall be made, the number of Shares to be granted pursuant to such Awards, and all other conditions of the Awards, which may include, without limitation, attainment of goals based upon the performance measures set forth in
Section 9(b). The provisions of Other Stock Unit Awards need not be the same with respect to each recipient.
(b) Terms and Conditions. Subject to the provisions of this Plan and any applicable Award Agreement, Shares subject to Awards made under this Section 10 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. Shares granted under this Section 10 may be issued for no cash consideration or for such minimum consideration as may be required by applicable law.
SECTION 11. TERMINATION OF EMPLOYMENT.
Except as otherwise provided in this Section, all Awards not vested shall terminate upon a Participant's Termination of Employment. For purposes of this Section, a Participant's Termination of Employment occurs on the last day on which the Participant performs services for the Company or an Affiliate as an employee; or earlier on the date on which an Affiliate which employs the Participant ceases to be an Affiliate (unless the Participant continues to be employed by the Company or an Affiliate which continues to be an Affiliate).
(a) Options and SARs.
(i) Except as otherwise provided in this Section, upon a Participant's Termination of Employment, all Options and SARs not vested and exercisable immediately before such Termination of Employment shall terminate and no Option or SAR may be exercised after such Termination of Employment.
(ii) If Termination of Employment occurs for a reason other than retirement, death, disability or cause, Options and SARS which were vested and exercisable immediately before such Termination of Employment shall remain exercisable for a period of 90 days following such Termination of Employment (but not for more than ten years from the grant date of the Option) and shall then terminate.
(iii) If Termination of Employment occurs by reason of retirement, death or disability, Options and SARS which were vested and exercisable immediately before such Termination of Employment shall remain exercisable for a period of one year following such Termination of Employment (but not for more than ten years from the grant date of the Option) and shall then terminate.
(b) Restricted Stock. Except as otherwise provided in this Section, upon a Participant's Termination of Employment, all Shares of Restricted Stock still subject to restrictions shall be forfeited by the Participant (and the Participant shall sign any document and take any other action required to assign such Shares back to the Company) and reacquired by the Company.
(c) Performance Awards:
(i) If Termination of Employment occurs during a Performance Period for a reason other than retirement, disability or death, all Performance Awards shall be forfeited upon such Termination of Employment.
(ii) If Termination of Employment occurs during a Performance Period by reason of retirement, disability or death, the Participant shall be entitled to payment at or after conclusion of the Performance Period in accordance with the terms of the Award of that portion of the Performance Award equal to the amount that would be payable if the Participant continued in employment for the remainder of the Performance Period multiplied by a fraction, the numerator of which is the number of days in the Performance Period preceding such Termination of Employment and the denominator of which is the total number of days in the Performance Period.
(d) Waiver by Committee. Notwithstanding the foregoing provisions of this Section, the Committee may in its sole discretion as to all or part of any Award as to any Participant, at the time the Award is granted or thereafter, determine that Awards shall become exercisable or vested upon a Termination of Employment, determine that Awards shall continue to become exercisable or vested in full or in installments after Termination of Employment, extend the period for exercise of Options or SARs following Termination of Employment (but not beyond ten years from the date of grant of the Option or SAR), or provide that any Performance Award shall in whole or in part not be forfeited upon such Termination of Employment.
SECTION 12. TRANSFERABILITY OF AWARDS
(a) No Award shall be transferable by the Participant otherwise than upon death by will or under the applicable laws of descent and distribution; except that a Participant may, by written instrument in a manner specified by the Committee in the Award Agreement or thereafter, designate in writing a beneficiary to exercise an Option or otherwise receive payment under any Award after
the death of the Participant. The Committee in its sole discretion may authorize the transfer of an Option for no consideration to a Permitted Transferee. If an Option is transferred under this Section, any Tandem SAR related to such Option shall be automatically transferred together with such Option.
(b) Following the transfer of an Option to a Permitted Transferee, the Permitted Transferee shall have all of the rights and obligations of the Participant to whom the Option was granted and such Participant shall not retain any rights with respect to the transferred Option, except that (i) the payment of any tax attributable to the exercise of the Option shall remain the obligation of the Participant, and (ii) the period during which the Option shall become exercisable or remain exercisable under Section 11 shall depend on the employment status of the original Optionee.
(c) If for any reason an Option or SAR is exercised by a person other than the original Participant, or payment or distribution under any other Award is to be made to a person other than the original Participant, the person exercising or receiving payment or distribution under such Award shall, as a condition to such exercise or receipt, supply the Committee with such evidence as the Committee may reasonably require to establish the identity of such person and such person's right to exercise or receive payment or distribution under such Award.
(d) No Award shall be assigned, negotiated or pledged in any way (whether by operation of law or otherwise) except as permitted by Section 12(a), and no Award shall be subject to execution, attachment or similar process.
SECTION 13. CHANGE IN CONTROL.
(a) In order to maintain the Participants' rights in the event of any Change in Control of the Company, as hereinafter defined, the Committee, as constituted before such Change in Control, may, in its sole discretion, as to any Award, either at the time an Award is made hereunder or any time thereafter, take any one or more of the following actions: (i) provide for the acceleration of any time periods relating to the exercise or realization of any such Award so that such Award may be exercised or realized in full on or before a date fixed by the Committee; (ii) provide for the purchase of any such Award with or without the Participant's consent for an amount of cash equal to the amount that could have been attained upon the exercise of such Award or realization of the Participant's rights had such Award been currently exercisable or payable or exercisable or payable during a stipulated period prior to the Change of Control; (iii) make such adjustment to any such Award then outstanding as the Committee deems appropriate to reflect such Change in Control; or (iv) cause any such Award then outstanding to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation after such Change in Control. The Committee may, in its discretion, include such further provisions and limitations respecting a Change in Control in any Award Agreement as it may deem equitable and in the best interests of the Company.
(b) A "Change in Control" shall be deemed to have occurred if:
(i) for any reason at any time less than seventy-five percent (75%) of the members of the Board shall be individuals who fall into any of the following categories: (A) individuals who were members of the Board on the Effective Date; or (B) individuals whose election, or nomination for election by the Company's stockholders (other than an election or nomination of an individual (an "Excluded Individual") whose initial assumption of office in connection with an actual or threatened "election contest" relating to the election of the directors of the Company
(as such term is used in Rule 14a-11 under the Exchange Act), a "tender officer" (as such term is used in Section 14(d) of the Exchange Act) or a proposed transaction described in (iii) below) was approved by a vote of at least seventy-five percent (75%) of the members of the Board then still in office who were members of the Board on the Effective Date; or
(C) individuals (other than Excluded Individuals) whose election, or nomination for election, by the Company's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the Board then still in office who were elected in the manner described in (A) or (B) above; or
(ii) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) or "group" (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) shall have become after the Effective Date, according to a public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of the Company's then outstanding voting securities; or
(iii) the stockholders of the Company shall have approved a merger, consolidation or dissolution of the Company, or a sale, lease, exchange or disposition of all or substantially all of the Company's assets, if persons who were the beneficial owners of the combined voting power of the Company's voting securities immediately before any such merger, consolidation, dissolution, sale, lease, exchange or disposition do not immediately thereafter beneficially own, directly or indirectly, in substantially the same proportions, more than 60% of the combined voting power of the corporation resulting from any such transaction.
(c) Notwithstanding any other provision of the Plan to the contrary,
(i) in the event that the consummation of a Change in Control is contingent on using pooling of interests accounting methodology, the Committee may take any action necessary to preserve the use of pooling of interests accounting, and
(ii) if the Committee determines, in its discretion exercised prior to a sale or merger of the Company (whether or not in connection with a Change in Control) that in the Committee's judgment is reasonably likely to occur, that the exercise of Awards would preclude the use of pooling-of-interests accounting ("pooling") after the consummation of such sale or merger and that such preclusion of pooling would have a material adverse effect on such sale or merger, the Committee may (A) unilaterally cancel such Awards prior to the sale or merger in consideration for reasonably equivalent value, (B) cause the Company to pay the benefit attributable to such Awards in the form of Shares if the Committee determines that such payment would not cause the transaction to become ineligible for pooling, (C) defer the payment, distribution or exercise date of any Award, or (D) substitute another form of Award of reasonably equivalent value; in each case to the extent that the Committee determines that such cancellation, payment, deferral or substitution would not cause the transaction to become ineligible for pooling; and only in each case to the minimum extent reasonably necessary to cause the transaction to become eligible for pooling.
SECTION 14. AMENDMENTS AND TERMINATION. The Board may amend, alter or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made that would impair the rights of a Participant under an Award theretofore granted without the Participant's consent except as required to comply with securities, tax or other laws.
The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall adversely affect the rights of any Participant without the Participant's consent, except as provided in subsection 9(b) or subsection 12(c) or except as required to comply with securities, tax or other laws. The Committee may also substitute new Awards for Awards previously granted to Participants, including without limitation previously granted Options having higher Option prices.
SECTION 15. GENERAL PROVISIONS.
(a) The term of each Award shall be for such period of months or years from the date of its grant as may be determined by the Committee; provided that in no event shall the term of any Option or any SAR exceed a period of ten (10) years from the date of its grant.
(b) No Employee or Participant shall have any claim to be granted any Award under the Plan and there is no obligation for uniformity of treatment of Employees or Participants under the Plan.
(c) The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless the Committee shall have executed an Award Agreement evidencing the Award and delivered a fully executed copy thereof to the Participant.
(d) Nothing contained in the Plan or in any Award Agreement shall confer upon any Participant any right with respect to continuance of employment by the Company or its Affiliates, nor interfere in any way with the right of the Company or its Affiliates to terminate the Participant's employment or change the Participant's compensation at any time.
(e) All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.
(f) Receipt of an Option or other Award shall not entitle any Participant (or Permitted Transferee) to any rights as a shareholder of the Company unless and until such Option has been exercised or such other Award shall have been paid and the Shares purchased or paid thereunder shall have been duly issued and recorded in the name of the Participant (or Permitted Transferee) on the stock transfer books of the Company; provided, however, that:
(i) Subject to the provisions of this Plan and any Award Agreement, the recipient of an Award (including, without limitation, any deferred Award) may, if so determined by the Committee, be entitled to receive, currently or on a deferred basis, dividends with respect to the number of Shares covered by the Award or interest on the amount of an Award not
denominated in Shares as determined by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested; and
(ii) The recipient of a Restricted Stock Award shall be entitled to all rights of a shareholder of the Company upon issuance of such Restricted Stock pursuant to Section 8(b) except to the extent otherwise provided in the restrictions or other provisions of the Award Agreement pursuant to which such Restricted Stock Award is made.
(g) Except as otherwise required in any applicable Award Agreement or by the terms of the Plan, recipients of Awards under the Plan shall not be required to make any payment or provide consideration other than the rendering of services.
(h) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, spin-off or other change in corporate structure affecting the Shares, such adjustment shall be made in the aggregate number and class of Shares which may be delivered under the Plan, in the number, class and option price of Shares subject to outstanding Options granted under the Plan, and in the value of, or number or class of Shares subject to, Awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of Shares subject to any Award shall always be a whole number. The grant of Awards stock pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes in its capital or business structure or to merge or to consolidate or to dissolve, liquidate, or sell or transfer all or any part of its business or assets.
(i) The Company shall be authorized to withhold from any Award granted or payment due under the Plan or any other amount owing from the Company to the Participant (whether or not for payment of compensation) the amount of withholding taxes due with respect to an Award or payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Company shall also be authorized to accept the delivery of shares by a Participant in payment for the withholding of federal, state and local taxes up to the Participant's marginal tax rates.
(j) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements.
(k) The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable Federal law.
(l) If any provision of this Plan is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, it shall be stricken and the remainder of the Plan shall remain in full force and effect.
(m) All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company. Successor is the result of a direct or indirect merger, consolidation, or otherwise of all the business of the Company.
(n) The adoption of this Plan shall not be construed to amend or terminate the Company's 1995 Employee Stock Option Plan, 1998 Stock Option Plan or 1999 Employee Stock Option Plan (the "Prior Plans") or any outstanding option or other award thereunder; and the aggregate number of Shares available under
Section 4 of the Plan shall not be increased or reduced by Shares available under the Prior Plans as of the Effective Date.
SECTION 16. TERM OF PLAN. No Award shall be granted pursuant to the Plan after 10 years from the Effective Date, but any Award theretofore granted may extend beyond that date.
This Plan is adopted this 13th day of December, 2000. In witness whereof, the Company has caused this Plan to be executed by a duly authorized officer.
SALTON, INC.
By:
Its:
EXH. 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-63296 on Form S-4, Registration Statement No. 333-72903 on Form S-8, Registration Statement No. 333-93893 on Form S-8, and Registration Statement No. 333-31692 on Form S-3, of Salton, Inc. of our report dated September 10, 2001, appearing in the Annual Report on Form 10-K of Salton, Inc. for the year ended June 30, 2001, and to the reference to us under the heading "Experts" in the Prospectus, which is part of the Registration Statements.
DELOITTE & TOUCHE LLP
Chicago, Illinois
September 28, 2001