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 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 1955 W. FIELD CT., LAKE FOREST, ILLINOIS 60045 --------------------- ----- (Address of Principal Executive Offices) (Zip Code) (847) 803-4600 -------------- (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. 1 DOCUMENTS INCORPORATED BY REFERENCE: PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE ----------------- ---------------------------------- 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. 2 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.3
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
---------------- ---------------
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
4
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
5
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
6
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:
7
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
8
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.
9
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
---------------- ---------------
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
------------------------
JUNE 30, 2001(2) JULY 1, 2000 JUNE 26, 1999(1)
------------------------- ------------------------ ------------------------
NET SALES % OF TOTAL NET SALES % OF TOTAL NET SALES % OF TOTAL
--------- ---------- --------- --------- --------- ----------
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%
-------- ----- -------- ----- -------- -----
$792,114 100.0% $837,302 100.0% $506,116 100.0%
======== ===== ======== ===== ======== =====
(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.
10
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
11
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
12
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.
13
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).
14
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
15
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
16
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.
17
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.
18
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;
19
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.
20
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
21
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
22
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.
23
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
24
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
25
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
26
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.
27
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.
28
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.
29
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
30
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.
31
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.
32
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.
34
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 1