Salton, Inc.
Filed 9/27/02
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 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From to
COMMISSION FILE NUMBER 0-19557
SALTON, INC.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 36-3777824
(State or other jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
1955 FIELD COURT 60045
LAKE FOREST, ILLINOIS (Zip Code)
(Address of Principal Executive Offices)
(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)
[X] YES
[ ] NO 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.
The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of September 19, 2002 was
approximately $80,000,000 computed on the basis of the last reported sale price per share $8.35 of such stock on the NYSE.
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 19, 2002 was 10,993,077
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE
---------------------------------------------------------------------------------------------------
Part III (Items 10, 11, 12 and 13) Portions of the Registrant's Definitive Proxy Statement to
be used in connection with its 2002 Annual Meeting of
Stockholders.
SALTON, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 29, 2002
INDEX
PAGE
PART I
ITEM 1. Business 3
ITEM 2. Properties 20
ITEM 3. Legal Proceedings 21
ITEM 4. Submission of Matters to a Vote of Security Holders 22
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder
Matters 23
ITEM 6. Selected Financial Data 24
ITEM 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operation 25
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 37
ITEM 8. Consolidated Financial Statements and Supplementary Data 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 74
PART III
ITEM 10. Directors and Executive Officers of the Registrant 75
ITEM 11. Executive Compensation 75
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 75
ITEM 13. Certain Relationships and Related Transactions 76
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 76
SIGNATURES 77
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PART I
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:
- 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;
- Availability and success of future acquisitions;
- The risks relating to legal proceedings;
- The risks relating to intellectual property matters;
- The risks relating to regulatory matters; and
- 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.
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 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), Russell Hobbs(R), Juiceman(R),
Farberware(R), Melitta(R), White-Westinghouse(R), Kenmore(R), Breadman(R), Haden(R), Maxim(R) and
Westinghouse(R). We believe that we have the leading domestic market share in indoor grills, toasters, juice extractors,
breadmakers, 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 Ingraham(R), Block China(R), Stiffel(R), Westclox(R), Rejuvenique(R), Carmen(R), Pifco(R),
Ultrasonex(TM), Relaxor(R) and Calvin Klein(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.
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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
Kitchen Electrics Motor driven appliances Heating appliances
Beverage appliances Cookware
Home Appliances Heaters Floor care
Fans Steam cleaners
Humidifiers Outdoor grills
Air cleaners Web-enabled TV
Garment care Novelty lighting
SALTON AT HOME
Tabletop Products Dinnerware Frames
Flatware Glassware
Fountains Serve/Giftware
Time Products Alarm clocks Decorative tabletop clocks
Decorative wall clocks Safe home
Lighting Products Floor lamps Table lamps
Other lamps Lighting accessories
PERSONAL CARE AND
WELLNESS PRODUCTS Health equipment Bath/shower
Hair care Aroma therapy
Grooming Sound/light therapy
Dental Calming pools
Beauty Shower radios
Massage Fitness and recreation
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,
Target Corporation, Sears, Kmart, Federated Department Stores, J.C. Penney Company, Argos Limited, Kohl's Department
Stores, May Company Department Stores, Bed, Bath & Beyond, Lowe's and Linens 'n Things. 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 household industry categories in which
we currently compete were approximately a $19 billion retail business in the United States in 2000. 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
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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(R) brand name since 1831 and
the Toastmaster(R) brand name since 1926. These names are widely recognized in the housewares industry. Since the
introduction of the first George Foreman(TM) product in 1995, we have established the George Foreman(TM) name as a
significant product brand, representing approximately 47% of our sales in the fiscal year ended June 29, 2002. 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. In April 2002 we obtained the exclusive right to use the Westinghouse(R) brand name and its
trademarks for kitchen electrics, fans and heaters, personal care, tabletop air cleaners and humidifiers, clocks and vacuums.
We believe that White-Westinghouse(R), Farberware(R) and Westinghouse(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 Russell Hobbs(R), Juiceman(R), Melitta(R), Breadman(R), Haden(R), Maxim(R),
Ingraham(R), Block China(R), Stiffel(R), Westclox(R), Calvin Klein(R), Hi-Tech(R), Timex(R) Timers, Rejuvenique(R),
Carmen(R), Pifco(R), Ultrasonex(TM), Relaxor(R) and under private-label brand names such as Kenmore(R) (Sears) and
Cook's Essentials(R) (QVC).
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 both contemporary and traditional 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, the Icebox(TM) product line of kitchen entertainment centers and the Wet Tunes(TM) shower radios. During fiscal
2002, we introduced 2,635 new stock keeping units, or SKUs. 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 10,028 SKUs across multiple housewares categories using our portfolio of
more than 66 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.
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
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offerings, reputation for quality products and established brand names. In addition, we have been able to secure long-term
supply agreements with certain customers such as Kmart and Zellers. We have also expanded our distribution of private-label
products with certain major retailers under brand names such as Kenmore(R) (Sears) and Cook's Essentials(R) (QVC). 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.
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, David Mulder, Executive Vice
President and Chief Administrative 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 14
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 2002, we introduced 326 new SKUs in the
small appliance category, 2,189 new SKUs in the Salton At Home products category and 120 new SKUs in the personal care
and wellness products category. For example, we recently introduced:
- the George Foreman(TM) Lean, Mean Contact Roasting Machine, a countertop appliance capable of roasting whole
chickens, beef and pork roasts, vegetables and other foods;
- the Phillipe Starck personal care product line under the Starck(R) brand name;
- the ICEBOX(TM) FlipScreen 2002, the latest addition to the Icebox(TM) product line consisting of kitchen entertainment
centers offering one-touch access to cable TV, FM radio, broadband Internet and e-mail, DVDs, audio CDs and security
video monitoring;
- Additionally, we plan to begin shipments in calendar 2003 of the following products we introduced late in fiscal 2002;
+ Westinghouse(R) wireless, upright vacuum cleaners, which vacuum cleaners are bagless and eliminate the need for cord while
vacuuming;
+ Westinghouse(R) corded upright vacuum cleaners that feature bagless technology and HEPA filtration; and
+ Westinghouse(R) new line of smart, networked home appliances, including the gateway device, bread makers, convection
ovens and coffee makers.
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
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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 further 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, Zellers
and Sears, which they sell under the White-Westinghouse(R), and Kenmore(R) brand names, respectively. We also have a
joint marketing alliance with Kellogg USA. We recently entered into a worldwide agreement with designer, inventor and
architect Phillipe Starck to design a series of kitchen appliances, which will include a Phillipe Starck designed George
Foreman(TM) grill. In addition, we have licensing rights to market certain products under the Farberware(R), Melitta(R),
Sasaki(R), Timex(R) Timers, Looney Tunes(TM) and Calvin Klein(R) brands.
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 electric woks, pizza makers, George
Foreman(TM) Rotisserie Ovens, Ultrasonex(TM) line of electrically operated toothbrushes and related products, and George
Foreman(TM) Portable 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, clock, tabletop, and home lighting
industries 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:
- the Look For Group, a small household appliance distributor located in France;
- the Westclox(R), Big Ben(R) and Spartus(R) trademarks, molds, intellectual property, rights and patents related to these
brands;
- Pifco Holdings PLC, a United Kingdom producer and marketer of a broad range of branded small electric household
appliances, personal care appliances, electrical hardware, cookware and battery operated products;
- the Relaxor(R) brand and certain inventory, including personal massagers and other personal care and wellness items;
- certain assets and intellectual property of The Stiffel Company, a designer of lamps and related products; and
- 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 fiscal 2003 we expect to expand out European distribution to include sales in Ireland and the Netherlands, as well as Spain
and Italy, through certain exclusive distributorship agreements.
In February 2002 we acquired Look For, a small household appliance distributor located in France, to enhance our European
distribution system. 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 renamed Pifco in fiscal 2002 to Salton Europe. We believe that Salton Europe'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 market
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 have a 31% ownership
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interest in Amalgamated Appliance Holdings Limited, a public company located in South Africa, which manufactures and
distributes appliances and electrical accessories. We market certain of our products in South Africa through Amalgamated
Appliance Holdings Limited. We also market our products in Australia and New Zealand through our subsidiaries formed in
fiscal 2000.
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
Kitchen Electrics Motor driven appliances Heating appliances
Beverage appliances Cookware
Home Appliances Heaters Floor care
Fans Steam cleaners
Humidifiers Outdoor grills
Air cleaners Web-enabled TV
Garment care Novelty lighting
SALTON AT HOME
Tabletop Products Dinnerware Frames
Flatware Glassware
Fountains Serve/Giftware
Time Products Alarm clocks Decorative tabletop clocks
Decorative wall clocks Safe home
Lighting Products Floor lamps Table lamps
Other lamps Lighting accessories
PERSONAL CARE AND WELLNESS PRODUCTS Health equipment Bath/shower
Hair care Aroma therapy
Grooming Sound/light therapy
Dental Calming pools
Beauty Shower radios
Massage Fitness and recreation
The following table sets forth the approximate amounts and percentages of our net sales by product category during the periods
shown.
JUNE 29, 2002(1) JUNE 30, 2001(1) JULY 1, 2000
------------------------------------------------------------ --------------------- ---------------------
% OF % OF % OF
FISCAL YEAR ENDED NET SALES TOTAL NET SALES TOTAL NET SALES TOTAL
------------------------------------------------------------ --------------------- ---------------------
Small Appliances $807,799 87.6% $714,125 90.2% $742,774 88.7%
Salton At Home 85,957 9.3 59,793 7.5 60,709 7.3
Personal Care and Wellness Products 28,723 3.1 18,196 2.3 33,819 4.0
============================================================================================================
$922,479 100.0% $792,114 100.0% $837,302 100.0%
(1) For fiscal 2001, the table includes the sales of Salton Europe from June 1, 2001 through June 30, 2001. For fiscal 2002,
the table includes the sales of Salton Europe from July 1, 2001 through June 29, 2002.
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APPLIANCES
We design and market an extensive line of small appliances under the Salton(R), George Foreman(TM), Toastmaster(R),
Russell Hobbs(R), Juiceman(R), Farberware(R), Melitta(R), White-Westinghouse(R), Kenmore(R), Breadman(R), Haden(R),
Maxim(R), Westinghouse(R) and other brand names. At the end of fiscal 2002, we marketed approximately 2,548 SKUs
under our brand names in this category. 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 173 SKUs as of June 29, 2002.
Our appliances product category includes:
- kitchen electrics products including thermal grills, toasters, bread makers, waffle makers, tea kettles,
espresso/cappuccino/drip coffee makers, waffle makers, juicers, can openers, blenders, mixers, and electric knives; and
- home appliances including heaters, fans, vacuums, steam cleaners, irons, steamers;
We enhanced our appliance offerings in January 1999 by acquiring Toastmaster Inc. Toastmaster markets and distributes a
wide array of appliances under the Toastmaster(R) brand name.
We further enhanced our appliance offerings in June 2001 by acquiring Pifco Holdings, PLC, now renamed Salton Europe. In
addition to appliance offerings, Salton Europe 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 2002, we
marketed approximately 6,807 SKUs under our brand names in this category. Tabletop products include crystal products
offered under the Block China(R), Atlantis(R), Sasaki(R), Jonal(R) and other brand names, fine china and basic dinnerware in
various designs and patterns under the Block China(R), Calvin Klein(R), Sasaki(R) and other 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 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 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),
Westclox(R), Big Ben(R), Spartus(R), and other brand names. We also market household (electromechanical and electronic)
timers under both the Ingraham(R) and Timex(R) brand names, which are used for, among other purposes, switching electric
lights and other appliances on and off at pre-determined times.
We began offering table lamps, floor lamps, other lamps and lighting accessories after our acquisition in August 2001 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), Reflections by Stiffel(TM), Studio by
Stiffel(TM), Stiffel(R) and other 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(TM),
Salton(R), White-Westinghouse(R), Rejuvenique(R), Ultrasonex(TM), Starck(R), Relaxor(R), Carmen(R) and others. At the
end of fiscal 2002, we marketed approximately 673 SKUs in the personal care and wellness products category.
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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(TM) 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 programs include the mini tool, calcutape, travel smoke alarm,
emergency auto flasher 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 2002, we introduced 326 new SKUs in the small appliance category, 2,189 new SKUs in the Salton At Home
products category, and 120 new SKUs in the personal care and wellness products category.
MARKETING AND DISTRIBUTION
We currently market and sell our products primarily in North America and Europe 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 and international
retailers, including Wal-Mart, Target Corporation, Sears, Kmart, Federated Department Stores, J.C. Penney Company, Argos
Limited, Kohl's Department Stores, May Company Department Stores, Bed, Bath & Beyond, Lowe's and Linens 'n Things.
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 electric woks,
pizza makers, George Foreman(TM) Rotisserie Ovens, Ultrasonex(TM) line of electrically operated toothbrushes and related
products and George Foreman(TM) Portable 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.
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
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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 uses this system to
monitor point-of-sale information at certain accounts. We 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. In addition, we 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 2002 were approximately 43% of net sales, with Wal-Mart
representing approximately 14% of our net sales and Target Corporation representing approximately 12% of our net sales. 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.
In 1997, we entered into a seven-year supply agreement with Kmart, which is currently in Chapter 11 bankruptcy, 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 of White-Westinghouse products to Kmart
approximated
0.9% and 3.8% of our total net sales for fiscal years 2002 and 2001, 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 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. Kmart, currently in Chapter 11
bankruptcy proceedings, has not reaffirmed its rights under the contract on a post petition basis. We are currently in
negotiations with Kmart to resolve both pre- and post-petition issues under this contract.
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) and
Cook's Essentials(R) (QVC).
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 and ISO 9002 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 32.5% of our product purchases during fiscal 2002 and for approximately 35.2% of our
product purchases in fiscal 2001. 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 affect 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. Salton Europe currently uses foreign exchange contracts to hedge anticipated foreign
currency transactions, primarily U.S. dollar inventory purchases. The contracts generally mature within one year and are
designed to limit exposure to exchange rate fluctuations, primarily the British Pound Sterling against United States dollars. Our
policy is to maintain an inventory base to service the seasonal demands of
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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, Delonghi, Hamilton Beach/Proctor Silex,
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, 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 29, 2002, we employed approximately 1400 persons. Approximately 90 employees, who work at our Elizabeth,
New Jersey facility and approximately 70 employees at our Salton Europe, Wolverhampton, England facility, were covered by
collective bargaining agreements. The Elizabeth, New Jersey agreement expires on February 28, 2005 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.
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 29, 2002, we had a backlog of
approximately $298.2 million compared to approximately $346.8 million as of June 30, 2001. We do not believe that backlog
is necessarily indicative of our future results of operations or prospects.
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TRADEMARKS, PATENTS AND LICENSING ARRANGEMENTS
We hold numerous patents and trademarks registered in the United States and foreign countries for various products and
processes. We have registered certain of our trademarks with the United States Patent and Trademark Office. 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 that, 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 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.
In 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. We also entered into a license agreement with Aesthetics, Inc. in fiscal 1999.
The license covers the manufacturing, marketing and distributing of the Rejuvenique(R) facial product lines. Also in fiscal 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(TM), 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(TM) products. The aggregate purchase
price was $113.75 million in cash, a note 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. Upon completion of this transaction,
we had only two installments of $22.75 million remaining under the note as well as our outstanding guarantee obligation to the
other venture participants. In the first quarter of fiscal 2003, we paid the first of the remaining installments under the note.
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. This product continues in development and we expect to introduce the first version in January 2003.
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
13
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. In the third quarter of fiscal 2002 we elected to discontinue use of the Welbilt(R) name after
disappointing results in the first year. We continue to purchase other products from China Resources to fulfill our obligation.
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.
On April 22, 2002, we entered into an exclusive licensing agreement with Westinghouse Electric Corporation to use its marquis
Westinghouse(R) brand name, Circle W trademark, and the brand awareness statement "You can be sure . . . if it's a
Westinghouse(R)" on the following product categories: kitchen electrics, fans and heaters, personal care, table top air cleaners
and humidifiers, clocks and vacuums. The agreement, which covers North America, South America, Africa, Europe, Asia and
Australia-New Zealand, has a term ending on March 31, 2008. Upon completion of the six-year term, the agreement is
renewable for additional five year terms. We are subject to pay minimum royalty payments to Westinghouse beginning in the
third year of the agreement.
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) for
timers, Hershey Kiss(R), Looney Tunes(TM) and Starck(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.
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 29, 2002, we had total consolidated
indebtedness of $460.1 million, including $148.6 million of 12 1/4% senior subordinated notes due 2008 and $125.0 million of
10 3/4% senior subordinated notes due 2005, excluding $8.1 million related to the fair value of a monetized fixed to floating
interest rate swap on the notes due 2008 and $18.2 million for the loan notes to Pifco shareholders that are fully cash
collateralized, and total stockholders' equity of $245.0 million. We also had additional
14
availability under our revolving credit facility of $62.2 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:
- our debt level makes us more vulnerable to general adverse economic and industry conditions;
- our ability to obtain additional financing for acquisitions, or to fund future working capital, capital expenditures or other
general corporate requirements may be limited;
- we will need to use a substantial portion of our cash flow from operations for the payment of principal of, and interest on, our
indebtedness, which will reduce the amount of money available to fund working capital, capital expenditures or other general
corporate purposes;
- our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete may be limited; and
- our debt level may place us at a competitive disadvantage to our less leveraged competitors.
OUR DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT COULD ADVERSELY AFFECT
OUR BUSINESS BY LIMITING OUR FLEXIBILITY.
Our 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
2002 were approximately 43% of net sales, with Wal-Mart representing approximately 14% of our net sales and Target
Corporation representing approximately 12% of our net sales. 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. 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.
15
IF WE EXPERIENCE A WORK STOPPAGE AT OUR MAJOR PORTS OF ENTRY CAUSED BY A DOCK
STRIKE OUR ABILITY
TO SERVICE OUR CUSTOMERS MAY BE AFFECTED.
We purchase almost all of our product from foreign suppliers. These products are shipped to us on ocean vessels, which land
at various ports. A work stoppage at any or all of these ports could have a material adverse impact on our ability to obtain and
deliver products to our warehouses or our customers.
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 32.5% of our product purchases during fiscal 2002 and accounted for approximately 35.2% of
our product purchases in fiscal 2001. 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:
- import duties;
- trade restrictions;
- production delays due to unavailability of parts or components;
- increase in transportation costs and transportation delays;
- work stoppages;
- foreign currency fluctuations; and
- political and economic instability.
THE SMALL HOUSEHOLD APPLIANCE INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY.
We believe that competition is based upon several factors, including:
- price;
- access to retail shelf space;
- product features and enhancements;
- brand names;
- new product introductions; and
- marketing support and distribution approaches.
We compete with established companies, some of which have substantially greater facilities, personnel, financial and other
resources than we have. Significant new competitors or increased competition from existing competitors may adversely affect
our business, financial condition and results of operations.
16
IF THE RETAIL INDUSTRY CONTINUES TO EXPERIENCE AN ECONOMIC SLOWDOWN, OUR
FINANCIAL RESULTS WILL BE ADVERSELY AFFECTED.
We sell our products to consumers through major retail channels, primarily mass merchandisers, department stores, specialty
stores and mail order catalogs. As a result, our business and financial results can fluctuate with the financial condition of our
retail customers and the retail industry. The current general slowdown in the retail sector has adversely impacted our net sales
of products, our operating margins and our net income. The risks of terrorist attacks and potential hostilities could prolong or
worsen the current economic downturn. If such conditions continue or worsen, it could have a material adverse effect on our
business, financial condition and results of operations.
The current general slowdown in the retail sector has resulted in, and we expect it to continue to result in, additional pricing and
marketing support pressures on us.
Certain of our retail customers, including Kmart, have filed for bankruptcy protection in recent years. Kmart represented 6%
and 11% of total net sales in fiscal 2002 and 2001, respectively. 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 you that the anticipated
benefits of our recent acquisitions of Look For, a distributor located in France, the Westclox(R), Big Ben(R) and Spartus(R)
brands and Pifco Holdings PLC (renamed Salton Europe) 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 20% of our total net
sales for fiscal 2002. Our pursuit of international growth opportunities may require significant investments for an extended
period before returns on these investments, if any, are realized. International operations are subject to a number of other risks
and potential costs, including:
- the risk that because our brand names may not be locally recognized, we must spend significant amounts of time and money
to build a brand identity without certainty that we will be successful;
- unexpected changes in regulatory requirements;
- inadequate protection of intellectual property in foreign countries;
- foreign currency fluctuations;
- transportation costs;
17
- adverse tax consequences; and
- political and economic instability.
We cannot assure you that we will not incur significant costs in addressing these potential risks.
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 landowners. During the ordinary course of our operations,
we have received, and we expect that we may in the future receive, citations or notices from governmental authorities asserting
that our facilities are not in compliance with, or require investigation or remediation under, applicable environmental statutes and
regulations. Any citations or notices could have a material adverse effect on our business, results of operations and financial
condition.
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.
LONG LEAD TIMES AND CUSTOMER DEMANDS MAY CAUSE US TO PURCHASE MORE INVENTORY
THAN NECESSARY.
Manufacturing lead times and a strong concentration of our sales occurring during the September through December time
period require that we purchase products and thereby increase inventories based on anticipated sales and forecasts provided
by our customers and our sales personnel. In an extended general economic slowdown we cannot assure you that our
customers will order these inventories as anticipated.
PRODUCT RECALLS OR LAWSUITS RELATING TO DEFECTIVE PRODUCTS COULD ADVERSELY
IMPACT OUR FINANCIAL RESULTS.
We face exposure to product recalls and product liability claims in the event that our products are alleged to have
manufacturing or safety defects or to have resulted in injury or other adverse effects. We cannot assure you that we will be able
to maintain our product liability insurance on acceptable terms, if at all, or that product liability claims will not exceed the
amount of our insurance coverage. As a result, we cannot assure you that product recalls and product liability claims will not
adversely affect our business.
THE INFRINGEMENT OR LOSS OF OUR PROPRIETARY RIGHTS COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS.
We regard our copyrights, trademarks, service marks and similar intellectual property as important to our success. We rely on
copyright and trademark laws in the United States and other jurisdictions to protect our proprietary rights. We seek to register
our trademarks in the United States and elsewhere. These registrations could be challenged by others or invalidated through
administrative process or litigation. If any of these rights were infringed or invalidated, our business could be materially
adversely affected.
We license various trademarks and trade names from third parties for use on our products. These licenses generally place
marketing obligations on us and require us to pay fees and royalties based on net sales or profits. Typically, each license may
be terminated if we fail to satisfy minimum sales obligations or if we breach the license. The termination of these licensing
arrangements could adversely affect our business, financial condition and results of operations.
18
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; William B. Rue, President and Chief Operating Officer and David Mulder, Executive Vice President
and Chief Administrative 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 29, 2002, Centre Partners Management LLC and entities directly or indirectly controlled by Centre Partners
beneficially owned in the aggregate approximately 27% of our common stock. Centre Partners is able to exercise significant
influence with respect to the election of directors or major corporate transactions such as a merger or sale of all or substantially
all of our assets. Centre Partners generally has the right to designate two directors as long as it and its affiliates own at least
12.5% of the total voting power of our outstanding common stock and one director as long as it and its affiliates own at least
7.5% of the total voting power of our outstanding common stock. The interests of Centre Partners may conflict with your
interests in certain circumstances.
TAKEOVER DEFENSE PROVISIONS WHICH WE HAVE IMPLEMENTED MAY ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK.
Various provisions of Delaware corporation law and of our corporate governance documents may inhibit changes in control not
approved by our board of directors and may have the effect of depriving stockholders of an opportunity to receive a premium
over the prevailing market price of our common stock in the event of an attempted hostile takeover or may deter takeover
attempts by third parties. In addition, the existence of these provisions may adversely affect the market price of our common
stock. These provisions include:
- a classified board of directors;
- a prohibition on stockholder action through written consents;
19
- a requirement that special meetings of stockholders be called only by the board of directors;
- availability of "blank check" preferred stock.
ITEM 2. Properties
A summary of our leased properties is as follows:
AREA
LOCATION DESCRIPTION (SQ. FT.) LEASE EXPIRATION
------------------------------------------------------------------------------------------------------------------
Compton, CA Warehouse 414,967 December 31, 2003
Rancho Dominguez, CA Warehouse 340,672 August 31, 2003
Mira Loma, CA Warehouse and distribution facility 216,300 October 31, 2007
Elizabeth, NJ Warehouse 220,000 October 31, 2004
Harrison, NJ Warehouse and sales office 146,555 May 31, 2007
Cheraw, SC Warehouse 127,070 September 30, 2003
Lake Forest, IL Corporate offices and showrooms 58,680 September 30, 2011
Gurnee, IL Retail outlet and warehouse 34,649 November 30, 2006
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 August 31, 2004
Kenosha,WI Retail outlet 6,000 December 31, 2002
Prince William, VA Retail outlet 4,386 December 31, 2004
Westend, NJ Retail outlet 2,400 May 31, 2004
Mississsagua, Ontario Sales office 2,158 April 30, 2004
Mississsagua, Ontario Sales office 1,647 July 31, 2005
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
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.
AREA
LOCATION DESCRIPTION (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 168,178
Moberly, MO Warehouse 134,000
Staffordshire, England Warehouse 122,938
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 2,578
20
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.
ITEM 3. Legal Proceedings
GENERAL
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 alleged that Applica intentionally,
willfully and maliciously breached its noncompetition agreement with us, attempted to conceal the breach, tortuously interfered
with our business and contractual relationships and breached its duty of good faith and fair dealing. We reached a settlement
agreement with Applica, effective as of June 21, 2002, which resulted in the following:
- The cancellation of the obligations on our balance sheet with respect to the promissory note which we issued to Applica in
1998, which note has a face value of $15.0 million and a carrying value prior to the settlement of approximately $10.8 million
and an accounts payable balance of $1.3 million;
- The termination of our obligation to pay Applica a fee based upon our net sales of White-Westinghouse(R) products to
Kmart;
- The agreement by Applica to be responsible for the payment of any losses or settlements relating to claims made by a former
sales representative of Salton;
- The grant by a subsidiary of Applica to Salton of a royalty-free license to use certain technology relating to electric toasters;
- The payment by Salton to Applica of $1.8 million on or before December 31, 2002 and $2.0 million on or before June 30,
2004; and
- A mutual release by the parties.
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(TM) rotisserie grills utilizing the inventions claimed by those patents and unspecified
monetary damages including a request for treble damages.
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 alleged that we have infringed a patent
assigned to AdVantage, and sought 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.
In the first quarter of fiscal 2003, we settled the aforementioned patent infringement litigations as well as those suits involving
some of our retail customers. The resolution provides us with the right to distribute and sell certain rotisserie products, including
our current versions of the George Jr. and Baby George Rotisseries, and retailers the right to resell those products, without fear
of future patent litigation. The resolution also preserves to Popeil Inventions Inc. the exclusive license in countertop rotisseries to
the rotisserie patents developed by Ron Popeil.
On May 6, 2002, Philips Oral Healthcare, Inc. ("Philips") filed suit against us in the federal court of the Western District of
Washington. In its Complaint, Philips challenges various advertising claims made by us about the Ultrasonex(TM) electric
toothbrush. Philips alleges causes of action for false advertising and seeks to enjoin us from using various claims in its
advertising of the product.
21
On August 28, 2002, the Court entered an order granting Philips' motion for preliminary injunction. As a result of this order, we
are preliminarily enjoined from airing two commercials or developing new advertising for the Ultrasonex(TM) using one of the
specific advertising claims at issue. The preliminary order does not enjoin the sale of the toothbrush or require that we modify
the product's packaging in any way. Under the current scheduling order, a trial on the merits is scheduled for October 2003.
On September 5, 2002, we entered into an agreement with the Attorney Generals of New York and Illinois governing our
future conduct with retailer relating to our indoor electric grills. We expect all, or nearly all, other states will join this agreement.
This agreement provides for us to make a payment of $1.2 million upon final approval of the agreement and two additional
payments of $3.5 million each on March 1, 2003 and 2004, respectively. All of our payments are contingent on states
representing at least 80% of the national population entering into the settlement agreement.
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 29, 2002, we
have accrued approximately $0.2 million 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.
ITEM 4. Submission Of Matters To Vote Of Security Holders
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
22
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 New York Stock Exchange adjusted for the three-for-two stock split effected on July 28, 1999.
HIGH LOW
-----------------------------------------------------------------------------
FISCAL 2002
First Quarter $19.35 $ 8.24
Second Quarter $20.20 $ 7.96
Third Quarter $23.60 $16.76
Fourth Quarter $20.66 $12.16
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
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, 2002 there were approximately 337 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 non-dividend bearing
except 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.
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In the event of a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, holders of the
Convertible Preferred Stock are entitled to be paid out of the assets of the Company available for distribution to its
stockholders an amount in cash equal to $1,000 per share, plus the amount of any accrued and unpaid dividends thereon (the
"Liquidation Preference"), before any distribution is made to the holders of any Salton common stock or any other of our
capital stock ranking junior as to liquidation rights to the convertible preferred stock.
We may optionally convert in whole or in part, the convertible preferred stock at any time on and after July 15, 2003 at a cash
price per share of 100% of the then effective Liquidation Preference per share, if the daily closing price per share of our
common stock for a specified 20 consecutive trading day period is greater than or equal to 200% of the then current
Conversion Price. On September 15, 2008, we will be required to exchange all outstanding shares of convertible preferred
stock at a price equal to the Liquidation Performance per share, payable at the Company's option in cash or shares of Salton
common stock.
As of September 20, 2002 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 29, 2002, June 30, 2001, July 1, 2000,
June 26, 1999 and June 27, 1998 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.
24
FISCAL YEARS ENDED
JUNE 29, JUNE 30, JULY 1, JUNE 26, JUNE 27,
2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS
Net sales $922,479 $792,114 $837,302 $506,116 $305,599
Cost of goods sold 544,147 474,256 467,250 285,526 179,376
Distribution expenses 60,831 49,395 37,639 21,621 12,327
--------------------------------------------------------------------------------------------------------
Gross profit 317,501 268,463 332,413 198,969 113,896
Selling, general, and administrative expenses 223,577 156,885 156,749 129,588 84,216
Legal settlements, net 2,580 -- -- -- --
--------------------------------------------------------------------------------------------------------
Operating income 91,344 111,578 175,664 69,381 29,680
Interest expense, net (44,431) (37,732) (28,761) (15,518) (5,333)
Fair market value adjustment on derivatives (2,372) -- -- -- --
Cost associated with refinancing -- -- -- -- (1,133)
Realized gain on sale of marketable securities -- -- -- -- 8,972
--------------------------------------------------------------------------------------------------------
Income before income taxes 44,541 73,846 146,903 53,863 32,186
Income tax expense 14,394 27,692 55,087 19,320 12,205
--------------------------------------------------------------------------------------------------------
Net income $ 30,147 $ 46,154 $ 91,816 $ 34,543 $ 19,981
========================================================================================================
Weighted average common shares outstanding 11,005 11,750 11,221 10,760 19,594
Net income per share:
Basic $ 2.74 $ 3.93 $ 8.18 $ 3.21 $ 1.02
Weighted average common shares and common
Equivalent shares outstanding 15,042 16,065 15,526 14,562 20,259
Net income per share:
Diluted $ 2.00 $ 2.87 $ 5.91 $ 2.37 $ 0.99
BALANCE SHEET DATA (at period end)
Working capital $278,407 $310,648 $197,671 $165,936 $ 44,768
Total assets 825,568 722,884 564,276 328,316 141,397
Total debt(1) 460,066 402,713 327,220 214,558 50,475
Stockholders' equity 245,036 211,497 173,808 50,739 57,710
(1) Excluding $18.2 million in fiscal 2002 and $11.3 million in fiscal 2001 related to the loan notes to Pifco shareholders which
were fully cash collateralized and excluding $8.1 million in fiscal 2002 and $(0.5) million in fiscal 2001 related to the fair value
of a monetized fixed to floating interest rate swap on the notes due 2008.
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 our behalf are expressly qualified in their entirety by the Cautionary Statements. We do
not
25
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.
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), Westinghouse(R), Farberware(R), Melitta(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) timers, 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 and Europe 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, operating profit and net income. We continue to experience a shift in our customers' buying patterns
from higher-priced products to lower price point promotional products. Although this was somewhat abated in the fourth
quarter of fiscal 2002 we are unsure of the longer term pattern of purchases of our customers. 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.
Also, we have had to spend additional promotion and advertising dollars to maintain our market presence. Our products, and
our market leading position in so many categories, gives us a solid foundation to actively face the difficult economic
environment.
The results for the fiscal year 2002 include pre-tax charges of $2.6 million related to three legal settlements discussed below,
$5.3 million in reserve increases related to certain trade and royalty receivables, and $6.8 million associated with exiting certain
product lines. These lines include cookware and large outdoor gas grills. The results for fiscal 2001 include pre-tax charges of
$8.2 million related to inventory losses, $5.1 million in LIFO charges, and $2.0 million related to the bankruptcy of Ames
Department Stores.
As a result of complaints from a few retailers concerning our allocation in 1998 and 1999 of certain George Foreman(TM)
grills, we have entered into an agreement with the Attorney Generals of New York and Illinois governing our future conduct
with retailers relating to our indoor electric grills. We expect all, or nearly all, of the other states to join in this agreement.
Although we believe that we acted in compliance with longstanding antitrust principles, we entered into this agreement to
resolve this matter without the distractions and costs of a lengthy investigation and likely litigation.
The agreement with the Attorney Generals provides for us to make a payment of $1.2 million upon final approval of the
agreement and two additional payments of $3.5 million each on March 1, 2003 and 2004, respectively. All of these payments
are contingent on States representing at least 80% of the national population entering into the settlement agreement.
We also entered into a settlement agreement with Applica, Inc. to settle all outstanding claims against each other. The principal
features of the settlement are:
- The cancellation of the obligations on our balance sheet with respect to the promissory note which we issued to Applica in
1998, which note has a face value of $15.0 million and a carrying value prior to the settlement of approximately $10.8 million
and an accounts payable balance of $1.3 million;
26
- The termination of our obligation to pay Applica a fee based upon our net sales of White-Westinghouse(R) products to
Kmart;
- The agreement by Applica to be responsible for the payment of any losses or settlements relating to claims made by a former
sales representative of Salton;
- The grant by a subsidiary of Applica to Salton of a royalty-free license to use certain technology relating to electric toasters;
- The payment by Salton to Applica of $1.8 million on or before December 31, 2002 and $2.0 million on or before June 30,
2004; and
- A mutual release by the parties.
We also settled the litigation brought by AdVantage Partners, the licensee of Popeil Inventions. AdVantage Partners claimed
that our Foreman(TM) rotisserie ovens infringed certain patents held by AdVantage. The settlement we entered into entitles
Salton and all of our retail customers to sell the rotisserie ovens without fear of future litigation and effectively grants to us the
right to use all of the patents on rotisserie ovens held by AdVantage Partners.
In April 2002, we announced we had signed an exclusive licensing agreement with Westinghouse Electric Corporation to use its
Westinghouse(R) brand name, Circle W trademark, and the brand awareness statement "You can be sure . . . if it's
Westinghouse(R)" on certain product categories in North America, South America, Africa, Europe, Asia, and Australia-New
Zealand.
The agreement commenced immediately and will last six years, ending on March 31, 2008. Upon completion of the six-year
term, the agreement will be renewable for an additional five 5-year terms. Under the agreement, no initial capital investment is
required from Salton. We are subject to minimum royalty payments to Westinghouse beginning in the third year of the
agreement. The terms of the agreement give Salton the exclusive right to use the Westinghouse brand name and its trademarks
on the following product categories: kitchen electrics, fans and heaters, personal care, table top air cleaners and humidifiers,
clocks, and vacuums.
We intend to launch a new line of Westinghouse(R) branded innovative vacuum cleaners. The launch includes a series of
innovative, technologically advanced vacuums under the Westinghouse(R) brand and will feature a wireless upright vacuum
cleaner. This product will be bagless, eliminate the need for a cord while vacuuming, and provide comparable suction power to
a corded vacuum cleaner. We also plan to introduce two corded upright vacuum cleaners that feature bagless technology and
HEPA filtration.
Additionally, we announced the introduction of a new line of smart, networked home appliances, under the Westinghouse(R)
brand, that will interface with the internet via a information center called a gateway device designed by Salton and powered by
Microsoft Windows CE .NET. The new line of products will include the gateway device, breadmakers, convection ovens, and
coffee makers, among other planned future products. Initial shipments of these products are expected to occur in calendar year
2003.
In March 2002, we announced the acquisition by Salton Europe of the Look For Group in France. Look For is a distributor of
small electric appliances in mainland Europe, primarily France, under the brand names Suntai(R), Orgalys(R) and Orva(R)
brands. Look For also distributes Russell Hobbs(R) for Salton Europe in its existing markets. For the year ended December
31, 2001, Look For recorded annual sales of approximately US$10 million.
In March 2002, we announced the appointment of David M. Mulder to the newly created position of Executive Vice President
and Chief Administrative Officer. Mr. Mulder is responsible for overseeing corporate finance, U.S. operations, U.S.
information technology and U.S. human resources.
In August 2001, we announced the acquisition of the Westclox(R), Big Ben(R) and Spartus(R) brands from the bankrupt
General Time Corporation, until recently the largest producer and marketer of alarm, wall and occasional clocks in North
America. Under the terms of the acquisition, we agreed to purchase all of the trademarks, molds, intellectual property, rights
and patents related to these select brands for $9.8 million. In addition, we agreed to purchase certain inventory related to these
brands held in the U.S., Europe and Canada.
27
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.
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.
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. In fiscal 2002
we renamed Pifco Holdings PLC to Salton Europe Ltd.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States,
which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. We regularly evaluate these estimates, including those
related to our allowance for doubtful accounts, inventory reserves and intangible assets. We base these estimates on historical
experience and on assumptions that are believed by management to be reasonable under the circumstances. Actual results may
differ from these estimates, which may impact the carrying value of assets and liabilities.
The following critical accounting policies affect the most significant estimates used in the preparation of our consolidated
financial statements:
Allowance for Doubtful Accounts. We record allowances for estimated losses resulting from the inability of our customers to
make required payments. We assess the credit worthiness of our customers based on multiple sources of information and
analyze such factors as our historical bad debt experiences, publicly available information regarding our customers and the
inherent credit risk related to them, information from subscription based credit reporting companies, trade association data and
reports, current economic trends and changes in customer payment terms or payment patterns. This assessment requires
significant judgment. If the financial condition of our customers were to worsen, additional write-offs may be required, resulting
in write-offs that are not included in the allowance for doubtful accounts at June 29, 2002.
Inventory Valuation. Our inventories are generally determined using the last-in, first-out (LIFO) cost method. We value our
inventory at the lower of cost or market, and regularly review the book value of discontinued product lines and stock keeping
units (SKUs) to determine if these items are properly valued. If market value is less than cost, we write down the related
inventory to the lower of market or net realizable value. We regularly evaluate the composition of our inventory to determine
slow-moving and obsolete inventories to determine if additional write-offs are required. Changes in consumer purchasing
patterns, however, could result in the need for additional write-offs.
Commitments and Contingencies: We are subject to lawsuits and other claims related to product and other matters that are
being defended and handled in the ordinary course of business. We maintain reserves and or accruals for such costs that may
be incurred, which are determined on a case-by-case basis, taking into consideration the likelihood of adverse judgments or
outcomes, as well as the potential range of probable loss. The reserves and accruals are monitored on an ongoing basis and are
updated for new developments or new information as appropriate.
Intangible Assets. We record intangible assets when we acquire other companies. The cost of acquisition is allocated to the
assets and liabilities acquired, including identifiable intangible assets, with the remaining amount being classified as goodwill.
Under current accounting guidelines that became effective on July 1, 2001, goodwill arising from transactions occurring after
July 1, 2001 and any existing goodwill as of February 1, 2002 are not
28
amortized to expense but rather periodically assessed for impairment. Intangible assets that have an indefinite life are also
periodically assessed for impairment.
The allocation of the acquisition cost to intangible assets and goodwill therefore has a significant impact on our future operating
results. The allocation process requires the extensive use of estimates and assumptions, including estimates of future cash flows
expected to be generated by the acquired assets. Independent valuation consultants are employed by us to assist in determining
if and when intangible assets might be impaired. Further, when impairment indicators are identified with respect to previously
recorded intangible assets, the values of the assets are determined using discounted future cash flow techniques, which are
based on estimated future operating results. Significant management judgment is required in the forecasting of future operating
results which are used in the preparation of projected discounted cash flows and should different conditions prevail, material
write downs of net intangible assets and/or goodwill could occur.
In fiscal 2003, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets became effective
and, as a result, we will cease to amortize approximately $30 million of goodwill as well as, $180.3 million of intangible assets
with indefinite lives. In lieu of amortization, we are required to perform at least an initial impairment review of goodwill and other
intangible assets with indefinite lives in fiscal 2003 and an annual impairment review thereafter. We periodically review the
estimated remaining useful lives of our intangible assets. A reduction in our estimate of remaining useful lives, if any, could result
in increased amortization expense in future periods.
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of net sales for the periods indicated:
FISCAL YEARS ENDED JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
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Net sales 100.0% 100.0% 100.0%
Cost of goods sold 59.0 59.9 55.8
Distribution expenses 6.6 6.2 4.5
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Gross profit 34.4 33.9 39.7
Selling, general and administrative expenses 24.2 19.8 18.7
Legal expenses, net 0.3 0.0 0.0
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Operating income 9.9% 14.1% 21.0%
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YEAR ENDED JUNE 29, 2002 COMPARED TO YEAR ENDED JUNE 30, 2001
Net Sales. Net sales in the fifty-two weeks ended June 29, 2002 ("fiscal 2002") were $922.5 million; an increase of
approximately $130.4 million or 16.5%, compared to net sales of $792.1 million in the fifty-two weeks ended June 30, 2001
("fiscal 2001"). This increase is primarily attributable to increased sales of products under the George Foreman(TM), Stiffel(R),
Toastmaster(R), Aircore(R), Farberware(R), Melitta(R) and other brands. These increases in sales were partially offset by
decreases in sales of products under the White-Westinghouse(R) product line, primarily sold to Kmart, as well as reductions
primarily in sales of Juiceman(R), Salton(R), Maxim(R) and Magic Chef(R) brands. Sales of new product lines, primarily under
the Westclox(R), Spartus(R), Big Ben(R) and Look For brands and the addition of a full year of sales of product and brand
names acquired in connection with Salton Europe, also helped offset the sales decreases. Much of the sales increases occurred
in the second and fourth quarters of fiscal 2002 with particularly strong sales of products under the George Foreman(TM),
Toastmaster(R), Stiffel(R) and Farberware(R) brands, as well as strong sales of products and brand names acquired in
connection with Salton Europe and Westclox(R). The fourth quarter of fiscal 2001 only included one month of results from
Salton Europe. Net sales of the White-Westinghouse(R) brand to Kmart approximated 0.9% of net sales in fiscal 2002
compared to 3.8% of net sales in fiscal 2001.
Gross Profit. Gross profit in fiscal 2002 was $317.5 million or 34.4% of net sales as compared to $268.5 million or 33.9% of
net sales in fiscal 2001. Cost of goods sold during fiscal 2002 decreased to 59.0% of net sales compared to 59.9% in fiscal
2001. Gross profit increased slightly, primarily from an improvement in sales of higher priced items with higher gross margins,
particularly George Foreman(TM) products, Russell Hobbs(R) products and
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Rejuvenique(R) products and a reduction in sales of White-Westinghouse(R) products which generally have lower gross
margins, partially offset by an increase in distribution expenses, $5.3 million for reserve increases related to certain trade and
royalty receivables and $5.3 million associated with the exiting of certain product lines. Gross profit for fiscal 2001 was
reduced by $8.1 million related to inventory losses, $5.1 million in LIFO charges and $2.0 million related to trade receivables.
Distribution expenses increased, as a percentage of sales, due to higher costs of operating our warehouses and increased
outside warehouse space added during the year. Plans are in place to consolidate U.S. west coast warehousing into a leased
facility, to be built late in fiscal 2003. Additionally we incurred a full year of expenses in fiscal 2002 related to the operation of
Salton Europe. The increase was partially offset by a reduction in freight costs from changing certain customers from prepaid
freight to collect freight during the year.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to 24.2% of net sales or
$223.6 million in fiscal 2002 compared to 19.8% of net sales or $156.9 million for fiscal 2001. Selling, general and
administrative expenses include a full year of Salton Europe or $29.5 million compared to one month of Salton Europe or $1.3
million in fiscal 2001.
Expenditures for television, royalty expense, certain other media and cooperative advertising and trade show expenses were
10.8% of net sales or $99.7 million in fiscal 2002 compared to 8.9% of net sales or $70.2 million in fiscal 2001. This increase
was primarily from increased spending on cooperative advertising, direct advertising, royalty expenses and trade show
expenses, partially offset by decreased spending on infomercial advertising. These expenditures were driven primarily to
penetrate new brands into the European market, and to increase sales in a promotionally driven domestic market. The
remaining selling, general and administrative costs increased to $123.9 million or 13.4% of net sales in fiscal 2002 compared to
$86.6 million or 10.9% of net sales in fiscal 2001. This was primarily attributable to increased salaries, amortization on goodwill
and other intangibles, increased legal and other professional expenses related to legal matters and a domestic corporate
restructuring for improved reporting purposes, rent, travel, product development costs to support our sales activities, and
increases in certain other administrative expenses to support the activities of the company. The increases in salaries, product
development and other administrative expense were primarily related to the integration of new or acquired product lines and
businesses, and infrastructure and systems improvements. These expenses are primarily anticipated to benefit future periods.
Legal Settlements, Net. We recorded a $2.6 million expense for three legal settlements. The settlement with Applica, the
settlement with AdVantage partners and the settlement with the Attorney Generals were all recorded in the fourth quarter of
fiscal 2002.
Operating Income. As a result of the foregoing, operating income decreased by $20.3 million to $91.3 million in fiscal 2002
from $111.6 million in fiscal 2001.
Fair Market Value Adjustment on Derivatives. Salton Europe entered into foreign exchange contracts to hedge anticipated
foreign currency transactions, primarily U.S. dollar inventory purchases. The contracts generally mature within one year and are
designed to limit exposure to exchange rate fluctuations. We recognized a pre-tax charge for a decrease in the fair market value
of the derivatives of $2.4 million, or $1.5 million net of tax, from foreign exchange contracts that did not qualify as cash flow
hedges for accounting purposes in accordance with U.S. GAAP. Unrealized pre-tax losses of $1.0 million or $0.6 million net of
tax, from foreign exchange contracts that qualified as cash flow hedges were included as a separate component of accumulated
other comprehensive income. The fair market value adjustment occurred primarily in the fourth quarter as the dollar weakened
against the pound sterling.
Net Interest Expense. Net interest expense was $44.4 million for fiscal 2002 compared to $37.7 million in fiscal 2001. The
increase is primarily attributable to interest expense of $10.5 million related to the $150.0 million senior subordinated debt
offering completed in April, 2001, interest expense of $1.4 related to the accretion of the Pifco loan notes and a reduction in
interest income of $1.0 million for funds kept on deposit during fiscal 2002, partially offset by a reduction of interest paid of
$4.8 million on reduced borrowings under our revolver and term debt and lower rates during fiscal 2002. Our rate of interest
on amounts outstanding under the revolver, term loan and senior subordinated debt was a weighted average annual rate of
8.24% in fiscal 2002 compared to 9.8% in fiscal 2001. The average amount of all debt outstanding was $485.2 million for
fiscal 2002 compared to $369.8 million for fiscal 2001. These increases contributed to higher interest expense and the
increased borrowings were used to provide working capital necessary to support the business and make acquisitions.
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Income Tax Expense. Salton had tax expense of $14.4 million in fiscal 2002 as compared to tax expense of $27.7 million in
fiscal 2001. The overall tax rate for fiscal 2002 was 32.3% of pretax income compared to 37.5% in fiscal 2001. This reduction
was primarily due to certain initiatives implemented in fiscal 2002 that reduced our state taxes and by the impact of certain legal
settlements, which were not taxable. We expect the tax rate to be approximately 35.0% in the future.
Net Income. Net income decreased to $30.1 million in fiscal 2002, compared to $46.2 million in fiscal 2001.
Earnings Per Share. Basic earnings per common share were $2.74 per share on weighted average common shares outstanding
of 11,005,238 in fiscal 2002 compared to earnings of $3.93 per share on weighted average common shares outstanding of
11,750,206 in fiscal 2001. Diluted earnings per common share were $2.00 per share on weighted average common shares
outstanding, including dilutive common stock equivalents, of 15,041,710 in fiscal 2002 compared to earnings of $2.87 per
share on weighted average common shares outstanding, including dilutive common stock equivalents, of 16,065,036 in fiscal
2001. The reduction in share counts at the end of fiscal 2002 compared to the end of fiscal 2001 is primarily due to the
repurchase of 456,175 shares related to the George Foreman guarantee and a decrease in the number of shares related to
employee stock options, primarily from the dilutive effect of the current price of our common stock. All share counts reflect a
3-for-2 split of our common stock effective July 28, 1999, for stockholders of record at the close of business on July 14,
1999.
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(TM) brand and
the Kenmore(R) brand. Sales of new product lines, primarily under the Relaxor(R), Ultrasonex(TM), 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.
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 8.9% of net sales or $70.2
million in fiscal 2001 compared to 9.6% of net sales or $80.5 million in fiscal 2000. This reduction was primarily from less
spending on infomercials, as well as lower royalties on White-Westinghouse(R) products, partially offset by increased spending
on cooperative and direct advertising. The remaining selling, general and administrative costs increased to $86.6 million or
10.9% of net sales in fiscal 2001 compared to $76.2 million or 9.1% 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
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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. Our 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 share counts reflect a 3-for-2 split of our common stock effective July 28, 1999, for stockholders of record at the
close of business on July 14, 1999. The average stock price is used in determining the common stock equivalents to be
included in the calculation of the diluted earnings per share amounts.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2002, we provided net cash of $5.3 million in operating activities and used net cash of $62.8 million in investing
activities. The cash provided from operating activities resulted primarily from net income, non cash expenses for depreciation,
amortization and imputed interest on notes that carry lower than market interest charges, an increase in accrued expenses and a
decrease in prepaid income taxes. These sources of cash were partially offset by an increase in accounts receivable, an increase
in inventories, and a reduction in accounts payable. The increase in accounts receivable was primarily from strong sales in the
fourth quarter of fiscal 2002 and a continued reduction of sales of White-Westinghouse(R) brand products, generally sold to
K-Mart on 10 day sales terms which were replaced by sales made to customers on generally 30 day to 90 day normal sales
terms. Kmart filed for bankruptcy protection in fiscal 2002. The increase in inventories was primarily from an increase in Salton
Europe to better service our customers and to support the large sales growth there, an increase in U.S. based inventories as
retailers require us to hold more inventory to satisfy their order patterns and an increase in inventory due to the threat of a
longshoreman's strike in California where over 90% of our inventories are received. Income tax payments were lower as
estimated payments made in the prior year were recovered in the current year, as well as lower taxes payable on lower income
in the current year and the reduction in the overall tax rate. Cash used in investing activities included additions to intangibles,
patents and trademarks, capital expenditures and acquisitions of businesses. The additions to intangibles, patents and
trademarks included the additional payment on the George Foreman transaction related to the repurchase of our common
stock, the purchase of the Westclox(R), Big Ben(R) and Spartus(R) brand names and the purchase of manufacturing,
distribution and intellectual property rights of certain food grilling products. Capital expenditures are primarily for tooling for
new products, leasehold improvements and furniture, fixtures, office equipment, computer hardware and software to operate
the business. Financing activities provided net cash of $59.5 million.
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At June 29, 2002, we had debt outstanding of $460.1 million, including $148.6 million of 12 1/4% senior subordinated notes
due 2008, (excluding $8.1 million related to the fair value of a monetized fixed to floating interest rate swap on the notes due
2008), $125.0 million of 10 3/4% senior subordinated notes due 2005, $95.0 million outstanding under our amended and
restated credit agreement (exclusive of unused commitments of up to $62.2 million under the revolving credit facility), $46.9
million related to the term note outstanding under our amended and restated credit agreement, $43.9 million related to amounts
still due under the George Foreman agreement and excluding $18.2 million related to the loan notes issued in the Pifco Holdings
PLC acquisition. The loan notes are cash collateralized at a bank in the United Kingdom. At June 29, 2002, we had the ability
to borrow up to an additional $62.2 million under our revolving credit facility. Typically, given the seasonal nature of our
business, our borrowings tend to be the highest in mid-fall and early winter.
In the quarter ended December 25, 1999, we acquired, effective July 1, 1999, the right to use in perpetuity and worldwide the
name George Foreman(TM) in connection with the marketing and sale of food preparation and non-alcoholic drink preparation
and serving appliances. The aggregate purchase price payable to George Foreman and other venture participants was $137.5
million, of which $22.75 million was paid in cash and the remainder was paid through the issuance by us of 779,191 shares of
our common stock and a $91.0 million non-interest bearing subordinated promissory note. We paid the first installment in cash
to George Foreman during fiscal 2001, as well as issued stock to the other venture participants as described in the following
paragraph. The note, as of June 29, 2002, has a face amount of $45.5 million, and is recorded at its present value of $43.9
million. The effect of the George Foreman transaction was an elimination of substantial royalty expense.
On September 7, 2000 we announced that we had reached an agreement to satisfy payment obligations of $22.75 million
under the note by issuing 621,161 shares of our common stock to George Foreman and other venture participants. We agreed,
under certain circumstances, to guarantee the value of these shares. We registered for resale the shares of common stock
issued to George Foreman and the other venture participants.
On July 2, 2001, we took back 456,175 of the 546,075 shares issued to George Foreman on September 7, 2000 and paid
him $18 million. This payment, which represented $20 million less the proceeds George Foreman received from the sale of
shares on the open market previously issued to him, terminated our guarantee obligation with respect to the shares issued to him
and satisfied the third annual installment due under the note payable to George Foreman. Upon completion of this transaction
we had only two installments remaining under the note, as well as our outstanding guarantee obligation to the other venture
participants. In the first quarter of fiscal 2003, we paid one of the two remaining installments under the note.
During the fiscal quarter ended December 25, 1999, we amended and restated our credit agreement among us, Lehman
Brothers Inc., as arranger, Lehman Commercial Paper Inc., as administrative agent, and a syndicate of banks. We increased
our existing revolving credit facility from $80.0 million to $115.0 million. The amended and restated credit agreement provided
for $160.0 million in a senior secured credit facility consisting of a $45.0 million term loan at an established base rate
(equivalent to the prime rate of interest) plus an applicable margin of 225 basis points or, at our election, a eurodollar rate
(equivalent to the LIBOR rate) plus an applicable margin of 325 basis points maturing in twenty-four consecutive quarterly
installments commencing on March 26, 1999; and a $115.0 million revolving credit facility at an established base rate
(equivalent to the prime rate of interest) plus an applicable margin or, at our election, a eurodollar rate (equivalent to the
LIBOR rate) plus an applicable margin based on a range of ratios of total debt to earnings before interest, taxes, depreciation
and amortization maturing on January 7, 2004. The amended and restated credit agreement is secured by a first lien on
substantially all of our assets. Credit availability is based on a formula related to trade accounts receivable, inventories and
outstanding letters of credit.
During the fiscal quarter ended September 30, 2000, we further amended and restated our credit agreement. The amended and
restated credit agreement increased the senior secured credit facilities to an aggregate of $235.0 million, consisting of a $75.0
million term loan amortizing over sixteen consecutive quarterly installments commencing on March 31, 2001 and a $160.0
million revolving credit facility maturing on January 7, 2004. The term loan and revolving credit facility bear interest at an
established base rate (equivalent to the prime rate of interest) or, at our election, a eurodollar rate (equivalent to the LIBOR
rate), plus in either case an applicable margin based on total debt to earnings before interest, taxes, depreciation and
amortization.
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Under our settlement agreement with the Attorney Generals of New York and Illinois we are required to make a payment of
$1.2 million upon final approval of the agreement and two additional payments of $3.5 million each on March 1, 2003 and
2004, respectively.
In fiscal 1998 we had issued a promissory note to Applica, Inc in the face amount of $15.0 million. We have entered into a
settlement agreement with Applica. As a result, we cancelled the promissory note, having a carrying value prior to the
settlement of approximately $10.8 million and an accounts payable balance of $1.3 million. We agreed to pay to Applica an
amount of $1.8 million on or before December 31, 2002 and $2.0 million on or before June 30, 2004. This settles all claims
with Applica, including future amounts that would have been due under the earlier arrangement to pay Applica a fee based
upon our net sales of White-Westinghouse(R) products to Kmart.
Our principal uses of liquidity will be to meet debt service requirements, pay royalties and other fees under our license and
other agreements, finance our capital expenditures and possible acquisitions and fund working capital. We expect that ongoing
requirements for debt service, royalty payments, capital expenditures, potential acquisitions and working capital will be funded
by internally generated cash flow and borrowings under our amended and restated credit agreement. We anticipate capital
expenditures of approximately $18 million and $20 million for fiscal years 2003 and 2004. We incurred approximately $16.2
million for capital expenditures during fiscal 2002.
Our senior credit facilities contain a number of significant covenants that, among other things, restrict our ability to dispose of
assets, incur additional indebtedness, prepay other indebtedness, pay dividends, repurchase or redeem capital stock, enter into
certain investments, enter into sale and lease-back transactions, make certain acquisitions, engage in mergers and
consolidations, create liens, or engage in certain transactions with affiliates, and otherwise restrict our corporate and business
activities. In addition, under the senior credit facilities, we are required to comply with specified financial ratios and tests,
including a minimum net worth test, a minimum fixed charge coverage ratio, a minimum interest coverage ratio and a maximum
leverage ratio.
The indenture governing our 12 1/4% senior subordinated notes due 2008 and 10 3/4% senior subordinated notes due 2005
contains, covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make certain other restricted payments, create certain liens, enter into
certain transactions with affiliates, enter into sale and lease-back transactions, sell assets or enter into certain mergers and
consolidations.
Our ability to make scheduled payments of principal of, or to pay the interest or liquidated damages, if any, on, or to refinance,
indebtedness (including the notes), to pay royalties and other fees under our license and other agreements or to fund planned
capital expenditures and/or possible acquisitions, will depend upon our future performance, which, in turn, is subject to general
economic, financial, competitive and other factors that are beyond our control. Based upon our current level of operations and
anticipated growth, we believe that future cash flow from operations, together with available borrowings under our amended
and restated credit agreement, and other sources of debt funding, will be adequate to meet our anticipated requirements for
capital expenditures, potential acquisitions, royalty payments, working capital, interest payments and scheduled principal
payments. We cannot assure you that our business will continue to generate sufficient cash flow from operations in the future to
service our debt and make necessary capital expenditures after satisfying certain liabilities arising in the ordinary course of
business. If unable to do so, we may be required to refinance all or a portion of our existing debt, including the notes, sell assets
or obtain additional financing. We cannot assure you that any refinancing would be available or that any sales of assets or
additional financing could be obtained.
As of June 29, 2002, the Company is in compliance with all debt covenants.
SEASONALITY
Our business is highly seasonal, with operating results varying from quarter to quarter. We have historically experienced higher
sales during the months of August through November primarily due to increased demand by customers for our products
attributable to holiday sales. This seasonality has also resulted in additional interest expense to us during this period due to an
increased need to borrow funds to maintain sufficient working capital to finance product purchases and customer receivables
for the seasonal period.
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EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE
Our results of operations for the periods discussed have not been significantly affected by inflation or foreign currency
fluctuation. We generally negotiate our purchase orders with our foreign manufacturers in United States dollars. Thus, our cost
under any purchase order is not subject to change after the time the order is placed due to exchange rate fluctuations.
However, the weakening of the United States dollar against local currencies could result in certain manufacturers increasing the
United States dollar prices for future product purchases.
Salton Europe currently uses foreign exchange contracts to hedge anticipated foreign currency transactions, primarily U.S.
dollar inventory purchases. The contracts generally mature within one year and are designed to limit exposure to exchange rate
fluctuations, primarily the British Pound Sterling against United States dollars.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
To facilitate an understanding of the Company's contractual obligations and commercial commitments, the following data is
provided:
PAYMENTS DUE BY PERIOD
-------------------------------------------------
WITHIN AFTER 5
TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
-----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
Long-Term Debt $385,607 $ 54,824 $ 180,783 $ -- $150,000
Short-Term Debt 95,000 95,000 -- -- --
Capital Lease Obligations 812 300 512 -- --
Operating Leases 32,686 9,868 11,033 6,061 5,724
-----------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $514,105 $159,992 $ 192,328 $ 6,061 $155,724
=====================================================================================================
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
TOTAL -------------------------------------------------
AMOUNTS WITHIN AFTER 5
TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
OTHER COMMERCIAL COMMITMENTS
Guarantees(1) $ 1,393 1,393 -- -- --
Legal Settlements(2) 12,000 6,500 5,500 -- --
Import Letters of Credit(3) 2,789 2,789 -- -- --
Executive Compensation(4) 2,325 2,325 -- -- --
----------------------------------------------------------------------------------------------------
Total Commercial Commitments $18,507 $13,007 $ 5,500 $ -- $ --
====================================================================================================
(1) Represents the additional Foreman liability for other venture participants.
(2) Payments required under Applica and Attorney Generals settlement.
(3) Outstanding letters of credit for inventory purchases.
(4) Executive salaries and bonuses under employment agreements expiring December 31, 2002, which are being renegotiated.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets", superceding Accounting Principles Board ("APB") Opinion No.
17, "Intangible Assets". This statement addresses how intangible assets that are acquired individually or with a group of other
assets (excluding assets acquired in a business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. In accordance with this statement, goodwill and certain other intangible
assets with indefinite lives will no longer be amortized, but evaluated for impairment based upon financial tests related to the
current value for the related assets. As a result there
35
may be more volatility in reported income than under the previous standards because impairment losses are likely to occur
irregularly and in varying amounts. We intend to adopt this statement in the first quarter of fiscal 2003. The Company has
determined that no impairment of goodwill or other intangible assets has occurred. Goodwill of $30 million and other intangible
assets (patents and trademarks) of $160.5 million are recorded in the Company's balance sheet as of June 29, 2002. The
Company recorded $3.3 million and $10.6 million in amortization expense in fiscal 2002 related to goodwill and patents and
trademarks, respectively.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations". This statement addresses
financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated
asset retirement costs, and requires that such costs be recognized as a liability in the period in which incurred. This statement is
effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not expect the adoption of this
statement to have a material impact to the financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 supercedes SFAS No. 121 and requires that one accounting model be used for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired and by broadening the presentation of discontinued operations to
include more disposal transactions. This statement is effective for financial statements issued for fiscal years beginning after
December 15, 2001. We do not expect the adoption of this statement to have a material impact to the financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements SFAS 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections." SFAS No. 145 eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified
as extraordinary items only if they are deemed to be unusual and infrequent. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes related to lease accounting will be effective for
transactions occurring after May 15, 2002; however, early application is encouraged. The Company early adopted this
statement as it relates to the rescission of SFAS No. 4, "Reporting Gains & Losses from Extinguishment of Debt." The
Company had a debt extinguishment in the current year related to the Applica transaction.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is
generally before an actual liability has been incurred. This statement is effective for financial statements issued for fiscal years
beginning after December 31, 2002. We do not expect the adoption of this statement to have a material impact to the financial
statements.
36
ITEM 7A. Quantitative And Qualitative Disclosures About Market Risks
We use derivative financial instruments to manage interest rate and foreign currency risk. Our objectives in managing our
exposure to interest rate changes are to limit the impact of interest rate changes on earnings and cash flows and to lower our
overall borrowing costs through the use of interest rate swaps. Our objectives in managing our exposure to foreign currency
fluctuations is to reduce the impact of changes in foreign exchange rates on consolidated results of operations and future foreign
currency denominated cash flows. We do not enter into derivative financial instruments for trading purposes. Our policy is to
manage interest rate risk through the use of a combination of fixed and variable rate debt, and hedge foreign currency
commitments of future payments and receipts by purchasing foreign currency forward contracts. The following tables provide
information about our market sensitive financial instruments and constitutes a "forward-looking statement." Our major risk
exposures are changing interest rates in the United States and foreign currency commitments in Europe. The fair values of our
long-term, fixed rate debt and foreign currency forward contracts were estimated based on dealer quotes. The carrying amount
of short-term debt and long-term variable-rate debt approximates fair value. All items described in the tables are non-trading.
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
-------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
FISCAL YEAR 2002
Liabilities:
Revolver $95,000 $ 95,000 $ 95,000
Average interest rate 5.55%
Foreman note payable $22,750 $22,750 $ 45,500 $ 43,853
Average interest rate(3) 8.50% 8.50%
Long-term debt(2) $125,000 $150,000 $275,000 $281,954
Average interest rate 10.75% 12.25%
Variable rate amount $18,750 $18,750 $ 9,375 $ 46,875 $ 46,875
Average interest
rates(1) 5.68%
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE
-------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
FISCAL YEAR 2001
Liabilities:
Revolver $20,000 $ 20,000 $ 20,000
Average interest rates 8.79%
Jr. subordinated note
payable $ 13,406 $ 13,406 $ 9,864
Average interest rate 8.00%
Foreman note payable $ 2,750 $22,750 $ 22,750 $ 48,250 $ 43,246
Average interest rate(3) 8.5% 8.5% 8.5%
Other notes payable $ 30 $ 5 $ 35 $ 35
Average interest rate 5.37% 5.37%
Long-term debt(2) $125,000 $150,000 $275,000 $273,325
Average interest rate 10.75% 12.25%
Variable rate amount $18,750 $18,750 $ 18,750 $ 9,375 $ 65,625 $ 65,625
Average interest
rates(1) 8.91%
(1) The variable rate $75.0 million Term Loan is set periodically at an established base rate (equivalent to the prime rate of
interest) plus an applicable margin of 225 basis points or, at our election, a Eurodollar rate plus an applicable margin of 325
basis points.
(2) In June 2002, we terminated an interest rate swap contract to pay a variable-rate interest of three-month LIBOR plus
6.13% and receive fixed- rate interest of 12.25% on $150 million notional amount of indebtedness. The resulting gain from
early termination of this contract of $8.1 million was deferred as an adjustment to the carrying amount of the outstanding debt
and is being amortized as an adjustment to interest expense related to the debt over the remaining period originally covered by
the terminated swap. We simultaneously entered into another interest rate swap contract to pay a variable-rate interest of
six-month LIBOR plus 7.02% and receive fixed-rate interest of 12.25% on $150 million notional amount of indebtedness,
which had a fair value of $0.2 million at June 29, 2002.
(3) The Foreman note does not include an interest element. The 8.5% is the estimated interest rate used for calculating the net
present value.
37
We use foreign currency forward contracts with terms of less than one year, to hedge our exposure to changes in foreign
currency exchange rates. In managing our foreign currency exposures, we identify and aggregate naturally occurring offsetting
positions and then hedges residual balance sheet exposures. At June 29, 2002, we had forward contracts outstanding for the
sale of 67.4 million GBP and the purchase of $39.0 million over the course of the next twelve months, which had an aggregate
fair value of ($3.3) million.
ITEM 8. Financial Statements And Supplementary Data
The following pages contain the Financial Statements and Supplementary Data as specified by Item 8 of Part II of Form 10-K.
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Salton, Inc. Lake Forest, Illinois
We have audited the accompanying consolidated balance sheets of Salton, Inc. (the "Company") as of June 29, 2002 and June
30, 2001 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years
in the period ended June 29, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14 of the
Annual Report on Form 10-K. These financial statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of June 29, 2002 and June 30, 2001 and the results of its operations and its cash flows for each of the three years
in the period ended June 29, 2002 in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 in the consolidated financial statements, in 2002 the Company changed its method of accounting for
inventory.
DELOITTE & TOUCHE LLP
Chicago, Illinois
September 16, 2002
39
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 29, 2002 AND JUNE 30, 2001
(IN THOUSANDS EXCEPT SHARE DATA)
2002 2001
---------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 31,055 $ 30,097
Accounts receivable, less allowance:
2002 -- $9,346; 2001 -- $9,223 217,468 185,881
Inventories 244,160 192,502
Prepaid expenses and other current assets 12,889 10,100
Prepaid income taxes 2,781 14,907
Deferred income taxes 7,906 4,419
---------------------------------------------------------------------------------
Total current assets 516,259 437,906
Property, Plant and Equipment:
Land 8,058 3,768
Buildings 15,210 14,169
Molds and tooling 49,564 41,715
Warehouse equipment 13,024 8,939
Office furniture and equipment 17,949 16,116
---------------------------------------------------------------------------------
103,805 84,707
Less accumulated depreciation (47,255) (36,983)
---------------------------------------------------------------------------------
Net Property, Plant and Equipment 56,550 47,724
Patents and Trademarks, Net of Accumulated Amortization 160,530 132,128
Cash in Escrow for Pifco Loan Notes 18,676 17,748
Other Intangibles, Net of Accumulated Amortization, and
Other Non-current Assets 73,553 87,378
---------------------------------------------------------------------------------
TOTAL ASSETS $825,568 $722,884
=================================================================================
See notes to consolidated financial statements.
40
2002 2001
---------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $150,101 $ 41,530
Accounts payable 25,364 33,450
Accrued expenses 60,994 32,908
Foreman guarantee 1,393 19,370
---------------------------------------------------------------------------------
Total current liabilities 237,852 127,258
Non-Current Deferred Income Taxes 1,076 2,293
Senior Subordinated Notes due 2005 125,000 125,000
Senior Subordinated Notes due 2008 156,954 148,325
Loan Notes to Pifco Shareholders 4,908 11,271
Term Loan and Other Notes Payable 49,721 97,240
Other Long Term Liabilities 5,021 --
---------------------------------------------------------------------------------
Total liabilities 580,532 511,387
Stockholders' Equity:
Preferred stock, $.01 par value; authorized, 2,000,000
shares, 40,000 shares issued
Common stock, $.01 par value; authorized, 40,000,000
shares; shares issued and outstanding:
2002 -- 10,992,582, 2001 -- 11,363,934 146 144
Treasury stock -- at cost (67,019) (47,865)
Additional paid-in capital 93,557 72,932
Accumulated other comprehensive income (loss) 745 (1,174)
Retained earnings 217,607 187,460
---------------------------------------------------------------------------------
Total stockholders' equity 245,036 211,497
---------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $825,568 $722,884
=================================================================================
41
SALTON, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JUNE 29, 2002, JUNE 30, 2001, AND JULY 1, 2000
(IN THOUSANDS EXCEPT PER SHARE DATA)
2002 2001 2000
--------------------------------------------------------------------------------------------
Net Sales $922,479 $792,114 $837,302
Cost of Goods Sold 544,147 474,256 467,250
Distribution Expenses 60,831 49,395 37,639
--------------------------------------------------------------------------------------------
Gross Profit 317,501 268,463 332,413
Selling, General and Administrative Expenses 223,577 156,885 156,749
Lawsuit Settlements, Net 2,580 -- --
--------------------------------------------------------------------------------------------
Operating Income 91,344 111,578 175,664
Interest Expense, Net (44,431) (37,732) (28,761)
Fair Market Value Adjustment on Derivatives (2,372) -- --
--------------------------------------------------------------------------------------------
Income Before Income Taxes 44,541 73,846 146,903
Income Tax Expense 14,394 27,692 55,087
--------------------------------------------------------------------------------------------
Net Income $ 30,147 $ 46,154 $ 91,816
============================================================================================
Weighted Average Common Shares Outstanding 11,005 11,750 11,221
Weighted Average Common and Common Equivalent Shares
Outstanding 15,042 16,065 15,526
Net Income Per Common Share: Basic $ 2.74 $ 3.93 $ 8.18
============================================================================================
Net Income Per Common Share: Diluted $ 2.00 $ 2.87 $ 5.91
============================================================================================
See notes to consolidated financial statements.
42
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43
SALTON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JULY 1, 2000 THROUGH
JUNE 29, 2002
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------------
COMMON PREFERRED
SHARES SHARES COMMON PREFERRED
OUTSTANDING OUTSTANDING STOCK STOCK
---------------------------------------------------------------------------------------------------------
BALANCE, JUNE 26, 1999 6,835 40 $133
Net income
3 for 2 stock split effective 7/28/99 3,417
Other comprehensive income:
Minimum pension liability net of tax of $28
Foreign currency translation
Total comprehensive income
Issuance of common stock 942
Stock options exercised 158 2
---------------------------------------------------------------------------------------------------------
BALANCE, JULY 1, 2000 11,352 40 135
Net income
Other comprehensive income:
Minimum pension liability net of tax of $314
Foreign currency translation
Total comprehensive income
Issuance of common stock 930 9
Stock options exercised 24
Foreman Additional Liability
Treasury Stock Repurchase (942)
---------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 11,364 40 144
Net income
Other comprehensive income:
Minimum pension liability net of tax of $719
Derivative liability net of tax of $339
Foreign currency translation
Total comprehensive income
Issuance of common stock 167 2
Stock options exercised 17
Foreman Additional Liability (456)
Treasury Stock Repurchase (99)
---------------------------------------------------------------------------------------------------------
BALANCE, JUNE 29, 2002 10,993 40 $146
=========================================================================================================
See notes to consolidated financial statements.
44
-----------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL TOTAL
PAID IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY INCOME
-----------------------------------------------------------------------------------------
$ 91,968 $ 49,490 $(90,804) $ (48) $ 50,739
91,816 91,816 $91,816
(47,496) 47,496
50 50 50
4 4 4
-------
$91,870
=======
16,625 13,097 29,722
1,475 1,477
-----------------------------------------------------------------------------------------
62,572 141,306 (30,211) 6 173,808
46,154 46,154 $46,154
(523) (523) (523)
(657) (657) (657)
-------
$44,974
=======
29,465 29,474
265 265
(19,370) (19,370)
(17,654) (17,654)
-----------------------------------------------------------------------------------------
72,932 187,460 (47,865) (1,174) 211,497
30,147 30,147 $30,147
(1,198) (1,198) (1,198)
(639) (639) (639)
3,756 3,756 3,756
-------
$32,066
=======
2,473 2,475
175 175
17,977 (18,029) (52)
(1,125) (1,125)
-----------------------------------------------------------------------------------------
$ 93,557 $217,607 $(67,019) $ 745 $245,036
=========================================================================================
45
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 29, 2002, JUNE 30, 2001, AND JULY 1, 2000
(IN THOUSANDS)
2002 2001 2000
--------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,147 $ 46,154 $ 91,816
Adjustments to reconcile net income to net cash from
operating activities:
Imputed interest on note payable 6,045 6,033 6,336
Deferred income tax (benefit) provision (3,779) 1,524 1,793
Fair value adjustment for derivatives 2,372 -- --
Foreign currency gains and losses 450 -- --
Legal settlements 2,580 -- --
Depreciation and amortization 30,649 23,594 19,075
Gain on sale of investment (200) -- --
Loss on disposal of equipment -- 423 --
Equity in net income of investees (761) (292) (321)
Purchase reduction of note payable and other noncash
items -- 2,777 1,662
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (28,827) (46,259) (33,671)
Inventories (47,617) 42,757 (75,106)
Prepaid expenses and other current assets (2,942) 238 (3,796)
Accounts payable (11,782) (4,977) (5,884)
Taxes payable 12,870 (23,448) 4,578
Accrued expenses 16,123 (4,451) (837)
--------------------------------------------------------------------------------------------
Net cash from operating activities 5,328 44,073 5,645
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (16,252) (9,557) (13,976)
Increase in other non-current assets (974) (13,422) --
Proceeds from sale of investment 501 -- --
Acquisition of George Foreman Trademark -- -- (22,750)
Additional payment for patents and trademarks (18,029) (2,043) --
Additions to intangibles, patents and trademarks (20,717) (9,382) (737)
Equity investment -- -- (9,615)
Acquisition of businesses, net of cash acquired (7,314) (63,561) --
--------------------------------------------------------------------------------------------
Net cash from investing activities (62,785) (97,965) (47,078)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayment) from revolving line of credit and
other debt 72,231 (48,065) 36,367
Repayment of long-term debt (18,807) (73,624) (625)
Proceeds from long-term debt -- 75,000 --
Proceeds from senior subordinated debt -- 148,284 --
Costs associated with refinancing (1,115) (7,798) (616)
Common stock issued 175 265 2,669
Proceeds from termination of Swap transaction 8,146 -- --
Purchase of treasury stock (1,125) (17,654) --
--------------------------------------------------------------------------------------------
Net cash from financing activities 59,505 76,408 37,795
--------------------------------------------------------------------------------------------
The effect of exchange rate changes on cash (1,090) (25) 4
--------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 958 22,491 (3,634)
CASH, BEGINNING OF YEAR 30,097 7,606 11,240
--------------------------------------------------------------------------------------------
CASH, END OF YEAR $ 31,055 $ 30,097 $ 7,606
============================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 37,407 $ 28,039 $ 22,257
Income taxes 10,304 50,716 50,509
See notes to consolidated financial statements.
46
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 29, 2002, JUNE 30, 2001, AND JULY 1, 2000
(IN THOUSANDS EXCEPT SHARE DATA)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In the quarter ended June 29, 2002, the Company incurred a capital lease obligation of $812.
In the quarter ended June 30, 2001, the Company authorized the issuance of 167,229 shares of common stock for payment of
executive bonuses.
In the quarter ended September 30, 2000, Salton acquired trademarks, other intellectual property and molds of the Stiffel
Company for $6,500. The purchase was paid by the issuance of 200,000 shares of Salton, Inc. common stock. In addition, the
Company reached an agreement to satisfy $22,750 of payment obligations incurred in connection with its acquisition of the
George Foreman(TM) name by issuing 621,161 shares of Salton, Inc. common stock. In the quarter ended December 30,
2000, the Company increased its investment in an unconsolidated affiliate approximately 10% by issuing 109,000 shares of
Salton, Inc. common stock. In the quarter ended March 31, 2001, in accordance with the Stiffel purchase agreement, Salton
paid $2,043 under the guarantee provision to make up for the shortfall between the $6,500 purchase price and the proceeds
from the sale of the 200,000 shares. In July 2001, to satisfy the $20,000 guarantee to George Foreman, the Company took
back 456,175 of the 546,075 shares issued to him on September 30, 2000 and paid him cash of $18,000 which was net of the
proceeds from the sale of the remaining shares previously issued to him. Also, the Company determined it intends to pay the
other venture participants in cash for the stock price guarantee related to the 75,086 shares issued to them on September 30,
2000. As of June 29, 2002, the guarantee liability to the other venture participants was $1.4 million.
In the quarter ended March 25, 2000, the Company authorized the issuance of 53,977 shares of common stock out of treasury
for payment of executive bonuses.
In the quarter ended December 25, 1999, the Company acquired, effective July 1, 1999, the right to use in perpetuity and
worldwide the name George Foreman(TM) in connection with the marketing and sale of food preparation and non-alcoholic
drink preparation and serving appliances. The aggregate purchase price payable to George Foreman and other participants was
$137,500, of which $113,750 is payable in five annual cash installments, and the remaining $23,750 was paid through the
issuance of 779,191 shares of Salton, Inc. common stock issued out of treasury. The first cash installment of $22,750 was paid
during the first half of fiscal 2000. In connection with the transaction the Company issued a five-year $91,000 non-interest
bearing subordinated promissory note which as of June 29, 2002, has a face amount of $45,500, and is recorded at its present
value of $43,853.
In the quarter ended December 25, 1999, the Company retired a $4.0 million note payable associated with the acquisition of
Toastmaster Inc. by issuing 109,090 shares common stock out of treasury. The Company received $1.2 million in cash related
to the subsequent sale of this stock by the holder, per terms of the note payable retirement.
See notes to consolidated financial statements. (Concluded)
47
SALTON, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 29, 2002, JUNE 30, 2001, AND JULY 1, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Salton, Inc. ("Salton" or the "Company") is a designer, marketer, manufacturer and distributor of a broad range of branded,
high quality small appliances, tabletop, time and lighting products and personal care and wellness products.
The Company's portfolio of well-recognized owned and licensed brand names includes Salton(R), George Foreman(TM),
Toastmaster(R), Russell Hobbs(R), Juiceman(R), Farberware(R), Melitta(R), White-Westinghouse(R), Kenmore(R),
Breadman(R), Haden(R), Maxim(R), Westinghouse(R), Ingraham(R), Block China(R), Stiffel(R), Westclox(R),
Rejuvenique(R), Carmen(R), Pifco(R), Ultrasonex(TM), Relaxor(R) and Calvin Klein(R).
Principles of Consolidation -- The consolidated financial statements include the accounts of all majority-owned subsidiaries.
Investments in affiliates, in which the company has the ability to exercise significant influence, but not control, are accounted for
by the equity method. Intercompany balances and transactions are eliminated in consolidation.
Use of Estimates -- In preparing financial statements in conformity with accounting principles generally accepted in the United
States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for
doubtful accounts, reserve for returns and allowances, and depreciation and amortization, among others.
Accounting Period -- The Company's fiscal year ends on the Saturday closest to June 30. The fiscal year ended June 29, 2002
consisted of 52 weeks and is referred to as "fiscal 2002." The fiscal years ended June 30, 2001 and July 1, 2000 consisted of
52 and 53 weeks, respectively, and are referred to as "fiscal 2001" and "fiscal 2000", respectively.
Allowance for Doubtful Accounts -- The Company records allowances for estimated losses resulting from the inability of
customers to make required payments. The Company assesses the credit worthiness of customers based on multiple sources of
information and analyzes such factors as our historical bad debt experiences, publicly available information regarding customers
and the inherent credit risk related to them, information from subscription based credit reporting companies, trade association
data and reports, current economic trends and changes in customer payment terms or payment patterns.
Inventories -- The Company's inventories are generally determined using the last-in, first-out (LIFO) cost method. The
Company values inventory at the lower of cost or market, and regularly reviews the book value of discontinued product lines
and stock keeping units (SKUs) to determine if these items are properly valued. If market value is less than cost, the Company
writes down the related inventory to the lower of market or net realizable value. The Company regularly evaluates the
composition of inventory to determine slow-moving and obsolete inventories to determine if additional write-offs are required.
Cost is determined by the last-in, first-out (LIFO) method for approximately 80% and 30% of the Company's inventories as of
June 29, 2002 and June 30, 2001, respectively. All remaining inventory cost is determined on the first-in, first-out basis. See
Note 2 "Change in Accounting Method" and Note 4 "Inventories."
Property, Plant and Equipment -- Property, plant and equipment are stated at cost. Expenditures for maintenance costs and
repairs are charged against income. Depreciation, which includes amortization of assets under capital
48
leases, as well as depreciation for leasehold improvements, is based on the straight-line method over the useful lives of the
assets (see Table below). For tax purposes, assets are depreciated using accelerated methods.
ASSET CATEGORY USEFUL LIVES (IN YEARS)
-------------------------------------------------------------------------------
Buildings 10 to 50
Molds and tooling 3 to 5
Warehouse equipment 3 to 10
Office furniture and equipment 3 to 10
===============================================================================
Intangibles and Other Non-current Assets -- Intangible assets, which are amortized over their estimated useful lives, and other
non-current assets consist of:
USEFUL LIFE (IN YEARS) JUNE 29, 2002 JUNE 30, 2001
------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Patents and trademarks, net 5-20 $ 160,530 $ 132,128
Goodwill 10-40 29,976 43,317
Financing and organization costs 2-7 12,417 14,625
Other non-current assets 31,160 29,436
------------------------------------------------------------------------------------------------------
Other intangibles, net, and other noncurrent
assets $ 73,553 $ 87,378
======================================================================================================
Accumulated amortization of intangible assets was $50.0 million and $30.8 million at June 29, 2002 and June 30, 2001,
respectively.
The Company records intangible assets when acquiring other companies. The cost of acquisition is allocated to the assets and
liabilities acquired, including identifiable intangible assets, with the remaining amount being classified as goodwill. The allocation
of the acquisition cost to intangible assets and goodwill therefore has a significant impact on our future operating results. The
allocation process requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to
be generated by the acquired assets. Independent valuation consultants are employed by the Company to assist in determining
if and when intangible assets might be impaired. Further, when impairment indicators are identified with respect to previously
recorded intangible assets, the values of the assets are determined using discounted future cash flow techniques, which are
based on estimated future operating results.
Long-Lived Assets -- Long-lived assets are reviewed for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of
long-lived assets is not recoverable, the carrying amount of such assets is reduced to the estimated recoverable value.
Revenue Recognition -- The Company recognizes revenues when goods are shipped to its customers. Provision is made for
estimated cost of returns, warranties, and product liability claims.
Distribution Expenses -- Distribution expenses consist primarily of freight, warehousing, and handling costs of products sold.
Advertising -- The Company sponsors various programs under which it participates in the cost of advertising and other
promotional efforts for Company products undertaken by its retail customers. Advertising and promotion costs associated with
these programs are expensed in the period in which the advertising or other promotion by the retailer occurs.
The Company's tradenames and, in some instances, specific products, also are promoted from time to time through direct
marketing channels, primarily television. Advertising and promotion costs are expensed in the period in which the advertising
and promotion occurs.
Self-insurance -- The Company maintains a self-insurance program for health claims and workers' compensation claims for
certain covered employees. The Company accrues estimated future costs that will be incurred for existing employee claims. The
Company does not provide any post-retirement health care benefits.
49
Income Taxes -- The Company accounts for income taxes using the asset and liability approach. The measurement of deferred
tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, management believes is
more likely than not to be realized.
Net Income Per Common and Common Equivalent Share -- On June 28, 1999, the Company's Board of Directors authorized
a 3-for-2 split of its common stock effective July 28, 1999, for stockholders of record at the close of business on July 14,
1999. All earnings per-share data in the accompanying consolidated financial statements have been restated to give effect to the
split.
Fair Value of Financial Instruments -- The carrying values of financial instruments included in current assets and liabilities
approximate fair values due to the short-term maturities of these instruments. The fair value of the Company's long-term, fixed
rate debt was estimated based on dealer quotes and approximates the carrying value recorded. The carrying amount of
short-term debt and long-term variable-rate debt approximates fair value.
Accounting Pronouncements -- In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets", superceding APB Opinion No.
17, "Intangible Assets". This statement addresses how intangible assets that are acquired individually or with a group of other
assets (excluding assets acquired in a business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. In accordance with this statement, goodwill and certain other intangible
assets with indefinite lives will no longer be amortized, but evaluated for impairment based upon financial tests related to the
current value for the related assets. The Company will adopt this statement in the first quarter of fiscal 2003. The Company has
determined that no impairment of goodwill or other intangible assets has occurred. Goodwill of $30.0 million and other
intangible assets (patents and trademarks) of $160.5 million are recorded in the Company's balance sheet as of June 29, 2002.
The Company recorded $3.3 million and $10.6 million in amortization expense in fiscal 2002 related to goodwill and patents
and trademarks, respectively.
In accordance with SFAS No. 142, the effect of this accounting standard is to be reflected prospectively. Supplemental
comparative disclosures as if the standard had been adopted retroactively is as follows:
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income:
Reported net income $30,147 $46,154 $91,816
Goodwill amortization, net of tax 2,155 438 658
Indefinite-life intangibles amortization, net of tax 8,213 6,455 5,271
----------------------------------------------------------------------------------------------------
Adjusted net income $40,515 $53,047 $97,745
====================================================================================================
Basic income per share:
Reported income per basic share $ 2.74 $ 3.93 $ 8.18
Add: Goodwill amortization, net of tax per basic share 0.20 0.04 0.06
Indefinite-life intangibles amortization net of
tax per basic share 0.75 0.55 0.47
----------------------------------------------------------------------------------------------------
Adjusted basic income per share $ 3.69 $ 4.52 $ 8.71
====================================================================================================
Diluted income per share:
Reported income per diluted share $ 2.00 $ 2.87 $ 5.91
Add: Goodwill amortization, net of tax per basic share 0.14 0.03 0.04
Indefinite-life intangibles amortization net of
tax per basic share 0.55 0.40 0.34
----------------------------------------------------------------------------------------------------
Adjusted diluted income per share $ 2.69 $ 3.30 $ 6.29
====================================================================================================
50
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." This statement addresses
financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated
asset retirement costs, and requires that such costs be recognized as a liability in the period in which incurred. This statement is
effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect the
adoption of this statement to have a material impact to the financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 supercedes SFAS No. 121 and requires that one accounting model be used for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to
include more disposal transactions. This statement is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company does not expect the adoption of this statement to have a material impact to the financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements SFAS 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections." SFAS No. 145 eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified
as extraordinary items only if they are deemed to be unusual and infrequent. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes related to lease accounting will be effective for
transactions occurring after May 15, 2002; however, early application is encouraged. The Company early adopted this
statement as it relates to the rescission of SFAS No. 4 , "Reporting Gains & Losses from Extinguishment of Debt." The
Company had a debt extinguishment in the current year related to the Applica transaction. See Note 5 "Applica Transaction."
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is
generally before an actual liability has been incurred. This statement is effective for financial statements issued for fiscal years
beginning after December 31, 2002. The Company does not expect the adoption of this statement to have a material impact to
the financial statements.
2. CHANGE IN ACCOUNTING METHOD
During the fourth quarter of fiscal year 2002, the Company changed its method of accounting for certain inventories (principally
Salton branded products) from the first-in, first-out method ("FIFO") to the last-in, last-out ("LIFO") method, retroactively
effective as of July 1, 2001. The Company believes the new method is preferable because the LIFO method of valuing
inventories more closely matches current costs and revenues in periods of price level changes. This change was also made to
apply a consistent method of inventory valuation for all U.S. inventories. During fiscal 2002, the integration of processes and
systems for Toastmaster and other U.S. inventories was completed. As such, continued separate tracking for FIFO and LIFO
valuation purposes would be without business or economic substance. The change results in substantially all of the Company's
inventories being accounted for on the LIFO method.
The net effect of this change was to decrease net income by $0.4 million, or $.03 per diluted share. It is not possible to
determine the cumulative effect of the change on retained earnings at July 1, 2001 or the pro forma effect of retroactive
application of the change for prior periods. The impact on quarterly financial results during fiscal year 2002 was de minimis.
3. ACQUISITIONS AND ALLIANCES
On May 2, 2001, the Company acquired the stock of Pifco Holdings PLC ("Pifco"), a United Kingdom based producer and
marketer of personal care appliances, electrical hardware, cookware and battery operated products (the "Pifco Acquisition").
The Company paid Pifco shareholders $4 per share, for a total purchase price of approximately $75 million. In addition,
acquisition related expenses of $4.3 million were included in the purchase price. The acquisition was accounted for as a
purchase. The excess of the purchase price over the fair values of the net assets acquired has been recorded as goodwill. The
aggregate purchase price has been allocated to the assets of the Company, based upon an estimate of their respective fair
market values. The purchase price included intangibles of
51
approximately $31.3 million of acquired trademarks. The acquisition also included inventories and the related payables; trade
receivables; property, plant and equipment; other long-term assets and accrued obligations. The fair market value of the net
assets acquired exceeded the purchase price by approximately $4.3 million.
Approximately $17.7 million of the purchase price was paid by issuing loan notes (the "Loan Notes") in accordance with the
purchase offer, with the remainder paid in cash. The Loan Notes have been fully funded by the Company and recorded as an
escrow asset as of June 29, 2002. The notes bear interest at 1% below LIBOR per annum, payable semi-annually, and are due
June 30, 2006. The Loan Notes have been recorded at their net present value, or $18.2 million as of June 29, 2002. The Loan
Notes may be prepaid, at the option of the holder, after June 30, 2002. On July 1, 2002, $13.3 million of the Loan Notes were
redeemed by shareholders. It is assumed that the balance will be redeemed on their second anniversary, June 30, 2003.
The operating results of Pifco have been included in the consolidated statements of earnings from the date of acquisition and
included sales of approximately $7.2 million and net income of approximately $0.3 million for fiscal 2001.
In fiscal 2002, Pifco was renamed Salton Europe.
Salton owns approximately 31% of the outstanding shares of Amalgamated Appliance Holdings Limited ("Amalgamated"), a
leading manufacturer and distributor of a wide range of branded consumer electronics and appliances in South Africa. The
investment is being accounted for under the equity method of accounting, and is included in the consolidated financial statements
in other assets. The equity in Amalgamated net income of $0.8 million, $0.3 million and $0.3 million was included in the
consolidated income statement and selling, general and administrative expenses for fiscal 2002, fiscal 2001 and fiscal 2000,
respectively. Based in South Africa, Amalgamated is a publicly held company, listed on the Johannesburg Stock Exchange,
which owns the rights to the Salton brand name in South Africa. In conjunction with this transaction, the Chief Executive Officer
of Salton, Inc., was added to Amalgamated's Board of Directors.
In the quarter ended December 25, 1999, Salton acquired, effective July 1, 1999, the right to use in perpetuity and worldwide
the name George Foreman(TM) in connection with the marketing and sale of food preparation and non-alcoholic drink
preparation and serving appliances. The aggregate purchase price payable to George Foreman and other participants was
$137.5 million, of which $113.75 million is payable in five annual cash installments, and the remaining $23.75 million was paid
through the issuance of 779,191 shares of Salton, Inc. common stock issued out of treasury. The first cash installment of
$22.75 million was paid during the first half of fiscal 2000. In connection with the transaction Salton issued a five-year $91.0
million non-interest bearing subordinated promissory note which as of June 29, 2002, has a face amount of $45.5 million, and is
recorded at its present value of $43.9 million and $43.2 million as of June 29, 2002 and June 30, 2001, respectively. In the
quarter ended December 25, 1999, the effect of the George Foreman transaction was an elimination of $16.6 million in royalty
expense, partially offset by the recording of amortization of $4.0 million and imputed interest of $3.2 million.
On July 2, 2001, the Company took back 456,175 of the 546,075 shares issued to George Foreman on September 7, 2000
and paid him $18.0 million. This payment, which represented $20.0 million less the proceeds George Foreman received from
the sale on the open market of shares previously issued to him, terminated the guarantee obligation with respect to the shares
issued to him and satisfied the third annual installment due under the note payable to George Foreman. Upon completion of this
transaction, the Company had only two installments remaining under the note as well as the outstanding guarantee obligation to
the other participants.
In fiscal 2002, the Company acquired the trademarks, certain rights and patents and other intellectual property, assets and
molds of the Westclox(R), Big Ben(R) and Spartus(R) brands for $9.8 million; acquired the worldwide manufacturing,
distribution and intellectual property rights in connection with certain food grilling products for $15.0 million; and formed a
wholly-owned subsidiary, Icebox, LLC, to design and develop next generation kitchen products and e-commerce solutions.
Icebox, LLC took title to tangible and intangible assets of Coachmaster International Corporation (CMI), which were pledged
as collateral by CMI in connection with $12.5 million of loans made by the Company, and upon which the Company had
foreclosed.
In fiscal 2001, the Company acquired Sonex International Corporation, a designer and distributor of electrically operated
toothbrushes, flossers and related products for $2.9 million; acquired the trademarks, other intellectual
52
property, assets and molds of the Stiffel Company, a designer of lamps and related products for $5.4 million; acquired the
Relaxor(R) brand business and inventory, including a line of personal massagers and other personal care items from J.B.
Research, Inc. for $4.5 million; acquired the right to use the Juiceman(R) brand name on a royalty-free basis for $5.3 million;
and acquired the assets of ePods, Inc. at a public foreclosure sale.
4. INVENTORIES
A summary of inventories is as follows:
JUNE 29, 2002 JUNE 30, 2001
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
Raw materials $ 4,545 $ 5,986
Work-in-process 3,391 1,293
Finished goods 236,224 185,223
-------------------------------------------------------------------------------------------
Total $244,160 $192,502
===========================================================================================
If the first-in, first-out (FIFO) method of inventory valuation had been used to determine cost for 100% of the Company's
inventories at June 29, 2002 and June 30, 2001, they would have been approximately $0.4 million higher and $0.5 million
lower than reported, respectively. During the fourth quarter of fiscal year 2002, the Company recorded a reduction in inventory
of approximately $4.6 million associated with exiting certain product lines. During the fourth quarter of fiscal year 2001, the
Company recorded a reduction in inventory of approximately $8.2 million for inventory losses identified through the physical
inventory count and an additional $5.1 million in LIFO and other valuation adjustments.
5. APPLICA TRANSACTION
On July 28, 1998, Salton repurchased (the "Stock Repurchase") 6,535,072 shares of Salton common stock owned by
Applica, Inc. pursuant to a Stock Agreement dated as of May 6, 1998 (the "Applica Stock Agreement") by and among Salton,
Applica and the executive officers of Salton. Prior to the Stock Repurchase, Applica owned approximately 50% of Salton's
outstanding common stock. The price for the Stock Repurchase was $12 per share in cash plus a $15.0 million subordinated
promissory note (the "Junior Subordinated Note"). The Junior Subordinated Note, which had a term of six and one-half years
and bore interest at 4.0% per annum payable annually, was subject to offsets of 5% of the total purchase price paid by Salton
for product purchases from Applica and its affiliates during the term of the note. During fiscal 2001, the Company reduced this
debt and interest by approximately $0.3 million, for related purchases of products from Applica. The principal amount of the
Junior Subordinated Note was also subject to cancellation in the event Salton's supply agreement with Kmart is terminated for
any reason. Effective upon the closing of the Repurchase, each of the persons who had been designated by Applica to serve on
Salton's Board of Directors resigned from Salton's Board of Directors.
On January 23, 2001, the Company filed a lawsuit against Applica, Inc. and its affiliate in the United States District Court for
the Northern District of Illinois. The lawsuit alleged that Applica intentionally, willfully and maliciously breached its
noncompetition agreement with Salton, attempted to conceal the breach, tortiously interfered with Salton's business and
contractual relationships and breached its duty of good faith and fair dealing. On September 5, 2002, the Company finalized a
settlement agreement effective on June 21, 2002 with Applica, which resulted in the following:
- The termination of the Company's obligation to pay Applica a fee based upon net sales of White-Westinghouse(R) products
to Kmart and the payment by the Company to Applica of $1.8 million on or before December 31, 2002, primarily for amounts
previously accrued and outstanding under this obligation.
- The payment by the Company to Applica of $2 million on or before June 30, 2004, and the cancellation of the $15 million
Junior Subordinated note that the Company issued to Applica in 1998 as a partial consideration for the repurchase of the
Company's common stock from Applica. The Junior Subordinated note, which had a carrying value prior to the settlement of
$10.8 million, was cancelled in view of the harm to the Company's business enterprise value and the underlying Salton common
stock repurchased.
53
6. REVOLVING LINE OF CREDIT, LETTERS OF CREDIT AND LONG-TERM DEBT
On December 16, 1998, the Company issued $125.0 million of 10 3/4% Senior Subordinated Notes ("the 2005 Subordinated
Notes") due 2005. Proceeds of the 2005 Subordinated Notes were used to repay outstanding indebtedness and for working
capital and general corporate purposes. The 2005 Subordinated Notes contain a number of significant covenants that, among
other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, prepay other indebtedness,
pay dividends, repurchase or redeem capital stock, enter into certain investments, enter into sale and lease-back transactions,
make certain acquisitions, engage in mergers and consolidations, create liens, or engage in certain transactions with affiliates,
and will otherwise restrict corporate and business activities. In addition, under the 2005 Subordinated Notes, the Company is
required to comply with a specified financial fixed charge coverage ratio. At June 29, 2002, the Company was in compliance
with all the covenants described above.
The Company amended and restated their Credit Agreement and replaced it with the Third Amended and Restated Credit
Agreement ("Credit Agreement") during the quarter ended September 30, 2000. Salton increased its existing revolving credit
facility from $115.0 million to $160.0 million. The Credit Agreement, among Salton, Lehman Brothers Inc., as arranger, Firstar
Bank, N.A., as syndication agent, Lehman Commercial Paper Inc., as administrative agent, Fleet National Bank, as
documentation agent, and a syndicate of banks, provides for $235.0 million in a senior secured credit facility consisting of a
$75.0 million Term Loan (the "Term Loan") at an established base rate (equivalent to the prime rate of interest) plus an
applicable margin of 225 basis points or, at the Company's election, a Eurodollar rate plus an applicable margin of 325 basis
points amortizing in sixteen consecutive quarterly installments commencing on March 31, 2001; and a $160.0 million revolving
credit facility (the "Revolving Credit Facility") at an established base rate (equivalent to the prime rate of interest) plus an
applicable margin or, at the Company's election, a Eurodollar rate plus an applicable margin based on a range of ratios of total
debt to earnings before interest, taxes, depreciation and amortization, maturing on January 7, 2004. The Credit Agreement is
secured by a first lien on substantially all the Company's assets. Credit availability is based on a formula related to trade
accounts receivable, inventories and outstanding letters of credit.
The Credit Agreement contains a number of significant covenants that, among other things, restrict the ability of the Company to
dispose of assets, incur additional indebtedness, prepay other indebtedness, pay dividends, repurchase or redeem capital
stock, enter into certain investments, enter into sale and lease-back transactions, make certain acquisitions, engage in mergers
and consolidations, create liens, or engage in certain transactions with affiliates, and will otherwise restrict corporate and
business activities. In addition, under the Credit Agreement, the Company is required to comply with specified financial ratios
and tests, including a net average debt ratio, a net average senior debt ratio, a consolidated fixed charge coverage ratio, and a
consolidated interest coverage ratio. At June 29, 2002, the Company was in compliance with all of the covenants described
above. At June 29, 2002, the Eurodollar rate plus applicable margin on the Term Loan was 5.63% and the Eurodollar rate plus
applicable margin on the Revolving Credit Facility was 5.09%.
Information regarding short-term borrowings under the Revolving Credit Facility is:
JUNE 29, 2002 JUNE 30, 2001
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
Balance at end of fiscal period $ 95,000 $ 20,000
Interest rate at end of fiscal period 5.09% 6.66%
Maximum amount outstanding at any month-end 151,000 153,000
Average amount outstanding 96,154 91,607
Weighted average interest rate during fiscal period 5.55% 8.79%
Outstanding letters of credit at end of fiscal period 2,789 4,632
Unused letters of credit at end of the fiscal period 22,211 20,368
On April 23, 2001, the Company issued $150.0 million of 12 1/4% Senior Subordinated notes ("the 2008 Subordinated
Notes) due 2008. Proceeds of the 2008 Subordinated Notes were used to repay outstanding indebtedness and for the
acquisition of Pifco Holdings PLC (see Note 3). The 2008 Subordinated Notes contain a number of
54
significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional
indebtedness, prepay other indebtedness, pay dividends, repurchase or redeem capital stock, enter into certain investments,
enter into sale and lease-back transactions, make certain acquisitions, engage in mergers and consolidations, create liens, or
engage in certain transactions with affiliates, and will otherwise restrict corporate and business activities. In addition, under the
2008 Subordinated Notes, the Company is required to comply with a specified fixed charge coverage ratio. At June 29, 2002,
the Company was in compliance with all the covenants described above.
Notes payable consist of the long term portion of the note payable associated with the acquisition of the George Foreman
trademarks and the long term portion of the term loan. See Note 3 "Acquisitions and Alliances."
Long-term debt matures as follows (in thousands):
FISCAL YEAR ENDED FOREMAN
SUBORDINATED TERM PIFCO LOAN CAPITAL NOTE
NOTES LOAN NOTES LEASES PAYABLE TOTAL
------------------------------------------------------------------------------------------------------
2003 $ -- $18,750 $ 13,325 $ 277 $22,749 $ 55,101
2004 -- 18,750 4,908 268 21,104 45,030
2005 125,000 9,375 -- 224 -- 134,599
2006 -- -- -- -- -- --
2007 -- -- -- -- -- --
Thereafter 150,000 -- -- -- -- 150,000
------------ ------- ---------- ------- ------- --------
$ 275,000 $46,875 $ 18,233 $ 769 $43,853 384,730
============ ======= ========== ======= =======
Less current maturities (55,101)
--------
$329,629
========
The recorded balance of the 2008 Subordinated Notes includes the following components (in thousands):
JUNE 29, 2002 JUNE 30, 2001
-------------------------------------------------------------------------------------------
Principal balance $150,000 $150,000
Fair value adjustment for terminated swap 8,146
Fair value adjustment for current swap 238
Unamortized discount (1,430) (1,675)
-------------------------------------------------------------------------------------------
Recorded balance $156,954 $148,325
===========================================================================================
In addition to the preceding maturity schedules, the Company is required to make additional mandatory payments of 50% of
the defined annual excess cash flow of the Company, 100% of the net proceeds of any sale or disposition of certain assets, and
100% of the net proceeds of the incurrence of certain indebtedness. All such amounts are first applied to the prepayment of
outstanding term loans and secondly to the reduction of the Revolving Credit Facility. No additional payments were required in
fiscal 2002 and 2001.
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage interest rate and foreign currency risk. The Company does not
enter into derivative financial instruments for trading purposes. Interest rate swap agreements are used as part of our program
to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. The
Company's European subsidiary uses forward exchange contracts to hedge foreign currency payables for periods consistent
with the expected cash flow of the underlying transactions. The contracts generally mature within one year and are designed to
limit exposure to exchange rate fluctuations, primarily related to the British pound.
When entered into, these financial instruments are designated as hedges of underlying exposures. When a high correlation
between the hedging instrument and the underlying exposure being hedged exists, fluctuations in the value of the instruments are
offset by changes in the value of the underlying exposures.
55
The estimated fair values of derivatives used to hedge or modify our risks fluctuate over time. These fair value amounts should
not be viewed in isolation, but rather in relation to the fair values of the underlying hedging transactions and investments and to
the overall reduction in our exposure to adverse fluctuations in interest rates and foreign exchange rates. The notional amounts
of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a
direct measure of our exposure from our use of derivatives. The amounts exchanged are calculated by reference to the notional
amounts and by other terms of the derivatives, such as interest rates or exchange rates.
INTEREST RATE MANAGEMENT
At June 30, 2001, the Company had an interest rate swap contract to pay a variable-rate interest of three-month LIBOR plus
6.13% and receive fixed-rate interest of 12.25% on $150.0 million notional amount of indebtedness. This contract was
terminated in June 2002 resulting in a gain of $8.1 million. The gain from early termination of this contract was deferred as an
adjustment to the carrying amount of the outstanding debt and is being amortized as an adjustment to interest expense related to
the debt over the remaining period originally covered by the terminated swap. The Company simultaneously entered into
another interest rate swap contract to pay a variable-rate interest of six-month LIBOR plus 7.02% and receive fixed-rate
interest of 12.25% on $150.0 million notional amount of indebtedness. This resulted in approximately 65% of the Company's
underlying debt being subject to variable interest rates. The $150.0 million notional amount of the outstanding contract will
mature in 2008. The underlying hedged debt instrument is callable by the Company at certain dates and premiums during the
term of the debt. The interest rate swap contract is also callable by the counterparty at the same dates and premiums. The
Company has determined that the call feature is clearly and closely related to the hedged debt instrument as the amount paid at
settlement is not based on changes in an index and the debt instrument was not issued at a substantial discount. As of June 29,
2002, the Company's balance sheet included approximately $0.2 million representing the fair value of the swap and call feature.
As the terms of the swap and call feature match those of the designated underlying hedged debt instrument, the change in fair
value of this swap and call feature was offset by a corresponding change in fair value recorded on the hedged debt, and
resulted in no net earnings impact.
FOREIGN CURRENCY MANAGEMENT
All foreign exchange contracts have been recorded on the balance sheet at fair value of ($3.3) million classified within accrued
expenses. The change in the fair value of contracts that qualify as foreign currency cash flow hedges and are highly effective was
($0.9) million. This amount was recorded in other comprehensive income, net of tax. The changes in the fair value of contracts
that do not qualify as foreign currency cash flow hedges of ($2.4) million were recorded through earnings. The Company
anticipates that all gains and losses in accumulated other comprehensive income related to foreign exchange contracts will be
reclassified into earnings during fiscal year 2003. At June 29, 2002, the Company's European subsidiary had foreign exchange
contracts for the purchase of 39.0 million U.S. dollars.
8. CAPITAL STOCK
On June 28, 1999, the Company's Board of Directors authorized a 3-for-2 split of its common stock effective July 28, 1999,
for stockholders of record at the close of business on July 14, 1999. All earnings per-share data in the accompanying financial
statements and notes thereto have been restated to give effect to the split.
On July 28, 1998, the Company issued $40.0 million of convertible preferred stock in connection with a Stock Purchase
Agreement dated July 15, 1998. The convertible preferred stock is non-dividend bearing except if the Company breaches, in
any material respect, any of the material obligations in the preferred stock agreement or the certificate of incorporation relating
to the convertible preferred stock, the holders of the convertible preferred stock are entitled to receive quarterly cash dividends
on each share from the date of the breach until it is cured at a rate per annum to 12 1/2% of the Liquidation Preference (defined
below). The preferred shares are convertible into 3,529,411 shares of Salton common stock (reflecting a $11.33 per share
conversion price). The holders of the convertible preferred stock are entitled to one vote for each share of Salton common
stock that the holder would receive upon conversion of the convertible preferred stock. In connection with the convertible
preferred stock
56
issuance, two individuals representing the purchasers of the preferred stock were appointed to serve on the Company's Board
of Directors.
In the event of a change in control of the Company, each preferred shareholder has the right to require the Company to redeem
the shares at a redemption price equal to the Liquidation Preference (defined below) plus interest accrued thereon at a rate of
7% per annum compounded annually each anniversary date from July 28, 1998 through the earlier of the date of such
redemption or July 28, 2003.
In the event of a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, holders of the
Convertible Preferred Stock are entitled to be paid out of the assets of the Company available for distribution to its
stockholders an amount in cash equal to $1,000 per share, plus the amount of any accrued and unpaid dividends thereon (the
"Liquidation Preference"), before any distribution is made to the holders of any Salton common stock or any other of our
capital stock ranking junior as to liquidation rights to the convertible preferred stock.
The Company may optionally convert in whole or in part, the convertible preferred stock at any time on and after July 15, 2003
at a cash price per share of 100% of the then effective Liquidation Preference per share, if the daily closing price per share of
the Company common stock for a specified 20 consecutive trading day period is greater than or equal to 200% of the then
current Conversion Price. On September 15, 2008, the Company will be required to exchange all outstanding shares of
convertible preferred stock at a price equal to the Liquidation Performance per share, payable at the Company's option in cash
or shares of Salton common stock.
On December 6, 1999, the Company's Board of Directors approved the amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of $.01 par value common stock from 20,000,000 to 40,000,000.
9. EARNINGS PER SHARE
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net Income(1) $ 30,147 $ 46,154 $ 91,816
Average common shares outstanding 11,005 11,750 11,221
Earnings per share -- basic $ 2.74 $ 3.93 $ 8.18
Dilutive stock equivalents 4,037 4,315 4,305
Average common and common equivalent shares
outstanding 15,042 16,065 15,526
Earnings per share -- diluted $ 2.00 $ 2.87 $ 5.91
====================================================================================================
(1) Net income is the same for purposes of calculating basic and diluted EPS.
Options to purchase 270,000 shares at a price of $29.25 per share were outstanding at June 29, 2002, June 30, 2001 and July
1, 2000 but were not included in the computation of diluted EPS because the options are contingent upon the Company's share
price reaching specified targets for a specified period of time. Options to purchase 643,572 shares of common stock at a price
range of $17.50 to $37.00 per share, 486,293 shares of common stock at a price range of $27.38 to $37.00 per share, and
212,160 shares of common stock at a price of $8.17 per share were outstanding at June 29, 2002, June 30, 2001 and July 1,
2000, respectively, but were not included in the computation of diluted EPS because the exercise prices were greater than the
average market price of the common shares.
10. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan that covers eligible employees. This plan combined and replaced the
former Salton and Toastmaster
401(k) plans. The employees are eligible for benefits upon completion of one year of service. Under the terms of the plan, the
Company may elect to match a portion of the employee contributions. The Company's discretionary matching contribution is
based on a portion of participants' eligible
57
wages, as defined, up to a maximum amount ranging typically from two percent to six percent. A higher matching percentage
was approved in fiscal 2000 for Toastmaster employees affected by the freeze of the Toastmaster defined pension plans. The
Company's total matching contributions were approximately $0.5 million, $0.6 million and $0.3 million, in fiscal 2002, 2001
and 2000, respectively. In fiscal 2000, the Company amended the former Toastmaster 401(k) plan to allow for discretionary
employer contributions to all employees, whether or not the employees contribute individually to the plan, in connection with the
freeze of the Toastmaster defined pension plans. A discretionary employer contribution of approximately $0.3 million was made
in fiscal 2000.
The Company has two defined benefit plans that cover substantially all of the employees of Toastmaster as of the date the plans
were curtailed. The plans' assets consist of a portfolio of investments in money market, common stock, bond and real estate
funds. The Company uses March 31 as the measurement date for determining pension plan assets and obligations. Effective
October 30, 1999, the Company's Board of Directors approved the freezing of benefits under the Company's two defined
benefit plans. Beginning October 31, 1999, no further benefits were accrued under the plans. Effective June 26, 1999, the
Company adopted SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits." SFAS No.
132 requires the disclosure of the information presented below:
JUNE 29, 2002 JUNE 30, 2001
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year $10,135 $ 9,806
Service cost 168 --
Interest cost 747 737
Actuarial loss 300 814
Curtailment gain -- --
Benefits paid and expenses (806) (1,222)
-------------------------------------------------------------------------------------------
Benefit obligation at end of year $10,544 $10,135
===========================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $10,193 $12,694
Actual return on plan assets 46 (1,564)
Employer contribution -- 285
Benefits paid from plan assets (806) (1,222)
-------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 9,433 $10,193
===========================================================================================
Funded status $(1,112) $ 58
Unrecognized net actuarial loss 2,753 1,666
Unrecognized transitional asset -- --
Unrecognized prior service cost -- --
Additional pension liability in excess of unrecognized prior
service cost (2,753) (837)
-------------------------------------------------------------------------------------------
(Accrued)/Prepaid pension cost $(1,112) $ 887
===========================================================================================
58
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Weighted average assumptions:
Discount rate 7.25% 7.50% 7.75%
Expected return on plan assets 9.00% 9.00% 9.00%
====================================================================================================
Components of net periodic pension cost:
Service cost benefits earned during the year $ 168 $ -- $ 323
Interest cost on projected benefit obligation 747 737 788
Actuarial return on plan assets (887) (1,136) (1,021)
Curtailment gain -- -- (1,009)
Net amortization and deferral 54 (49) --
----------------------------------------------------------------------------------------------------
Net pension expenses (benefit) $ 82 $ (448) $ (919)
====================================================================================================
The Company recorded a $1.0 million curtailment gain in fiscal 2000 as a result of a freeze in pension plan benefits. Under the
requirements of SFAS No. 87, "Employers' Accounting for Pensions," an additional minimum pension liability for both plans,
representing the excess of accumulated benefits over the plan assets and accrued pension costs, was recognized at June 29,
2002, with the balance recorded as a separate reduction of stockholders' equity, net of deferred tax effect.
11. STOCK OPTION PLANS
In October 1995, SFAS No. 123, "Accounting For Stock-Based Compensation," was issued and is effective for financial
statements for fiscal years beginning after December 15, 1995. As permitted by the statement, the Company continues to
measure compensation cost for stock option plans in accordance with Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued to Employees." Accordingly, no compensation cost has been recognized for the Company's
fixed stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with the fair
value method outlined in SFAS No. 123, the impact on the Company's net income and earnings per common share would have
been as follows:
2002 2001 2000
-----------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income:
As reported $30,147 $46,154 $91,816
Pro forma 27,419 40,647 85,266
Net income per common share: Basic
As reported $ 2.74 $ 3.93 $ 8.18
Pro forma 2.49 3.46 7.60
Net income per common share: Diluted
As reported 2.00 2.87 5.91
Pro forma 1.82 2.53 5.49
Options to purchase common stock of the Company have been granted to employees under the 1992, 1995, 1998, 1999, and
2001 stock option plans at prices equal to the fair market value of the stock on the dates the options were granted. Options
have also been granted to non-employee directors of the Company, which are exercisable one year after the date of grant. All
options granted expire 10 years from the date of grant, and can vest immediately or up to 3 years from the date of grant.
59
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The
following assumptions were used during the respective years to estimate the fair value of options granted:
2002 2001 2000
--------------------------------------------------------------------------------------------------
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 65.36% 64.15% 61.45%
Risk-free interest rate 4.39% 5.07% 6.50%
Expected life of options 8.00 years 7.56 years 7.98 years
A summary of the Company's fixed stock options for the fiscal years ended June 29, 2002, June 20, 2001, and July 1, 2000, is
as follows:
2002 2001 2000
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
-------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,164 $ 17.77 1,688 $ 17.88 1,101 $ 7.83
Granted 156 9.84 501 17.18 745 30.36
Exercised (17) 10.29 (24) 10.91 (158) 6.64
Expired or Canceled (27) (1)
------ ------ ------
Outstanding at end of year 2,276 17.23 2,164 17.77 1,688 17.88
====== ====== ======
Options exercisable at end of year 1,848 16.04 1,599 16.12 1,038 9.39
Weighted-average fair value of options
granted during the year 7.22 11.37 24.05
The shares outstanding at the beginning of the year for fiscal 2000 have been restated to reflect the three-for-two stock split
that was effective on July 28, 1999. The remaining activity in fiscal 2000 occurred on a post-split basis.
The following information summarizes the stock options outstanding at June 29, 2002:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
RANGE OF EXERCISE PRICES --------------------- ------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
(000) LIFE (YEARS) PRICE (000) PRICE
----------------------------------------------------------------------------------------------------
$0.583-$1.667 234 2.86 $ 1.63 234 $ 1.63
$2.292-$5.833 34 4.89 5.21 34 5.21
$6.333-$10.44 521 6.10 8.38 369 7.77
$13.917-$17.50 746 7.69 15.12 746 15.30
$27.375-$37.00 741 7.46 31.08 465 31.04
------ ------
$0.583-$37.00 2,276 N/A 1,848
====== ======
12. RELATED PARTY TRANSACTIONS
The Company purchased inventory from Applica, Inc. of approximately $3.0 million, $7.0 million and $26.4 million, in fiscal
years ended June 29, 2002, June 30, 2001 and July 1, 2000, respectively. Applica owned shares of Salton common stock until
July 1998 at which time the Company repurchased the shares. See Note 5 "Applica Transaction".
The Company purchased inventory from Markpeak, Ltd. ("Markpeak"), a Hong Kong company, including commissions, of
approximately $0.1 million, $3.6 million and $185.0 million, in fiscal years 2002, 2001 and 2000, respectively. The Company
had a receivable from Markpeak of approximately $19.2 million and $19.1 million at
60
June 29, 2002 and June 30, 2001, respectively. The Company owed Markpeak approximately $3.6 million and $3.7 million at
June 29, 2002 and June 30, 2001, respectively. Markpeak acts as a buying agent on behalf of the Company with certain
suppliers in the Far East. A director of the Company is the former managing director of Markpeak.
The Company paid Shapiro, Devine and Craparo, Inc. ("SDC"), a manufacturers representation firm, commissions of
approximately $0.5 million, $0.5 million and $0.4 million, in fiscal 2002, 2001 and 2000, respectively. A director of the
Company was a co-founder of SDC. The Company owed approximately $0.1 million for current commissions at June 29,
2002 and June 30, 2001.
13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment under long-term operating leases. Rental expense under all leases was
approximately $9.1 million, $8.4 million and $5.8 million for the fiscal years ended June 29, 2002, June 30, 2001 and July 1,
2000, respectively. Leased equipment meeting certain criteria is capitalized and the present value of the related lease payments
is recorded as a liability. Amortization of capitalized leased assets is computed on the straight-line method of the term of the
lease.
The future minimum rental commitments as of June 29, 2002 were as follows:
OPERATING CAPITAL
LEASES LEASES
----------------------------------------------------------------------------------------
(IN THOUSANDS)
2003 $ 9,868 $300
2004 6,967 293
2005 4,066 219
2006 3,195 --
2007 2,866 --
Thereafter 5,724 --
----------------------------------------------------------------------------------------
Total 32,686 812
Less amounts representing interest -- (43)
----------------------------------------------------------------------------------------
Present value of future and minimum lease payments $32,686 $769
========================================================================================
Present value of net minimum capital lease obligations:
==================================================================
Current portion $277
Long term portion 492
------------------------------------------------------------------
Total obligations $769
==================================================================
Assets recorded under capital leases are included in Property, Plant and Equipment as follows:
-----------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------
(IN THOUSANDS)
Machinery and equipment $812 $--
OTHER COMMITMENTS
The Company has employment agreements with its five executive officers that are in effect until December 30, 2002. These are
currently being reviewed for renewal. Such agreements provide for minimum salary levels as well as for incentive bonuses that
are payable if the Company achieves specified target performance goals. The agreements also provide for lump sum severance
payments upon termination of employment under certain circumstances. The
61
Company's aggregate annual commitment for future salaries at June 29, 2002, excluding bonuses, was approximately $2.2
million.
The Company has license agreements with White Consolidated Industries, Inc. ("White Consolidated"), which require minimum
royalty payments through the year 2011. In fiscal 2002, 2001 and 2000, royalty payments were at or above the minimum
requirements. The Company also has various license agreements with other parties for periods usually not exceeding three
years. The agreements are then typically renewable upon mutual consent. These license agreements require royalty payments
based on the sales of licensed product in the period. Total royalties paid under these agreements, including the White
Consolidated Industries, Inc. agreement, were $8.2 million in fiscal 2002, $8.0 million in fiscal 2001 and $24.8 million in fiscal
2000.
14. LEGAL PROCEEDINGS
APPLICA
On January 23, 2001, the Company filed a lawsuit against Applica, Inc and its affiliate in the United States District Court for
the Northern District of Illinois. The lawsuit alleged that Applica intentionally, willfully and maliciously breached its
noncompetition agreement with us, attempted to conceal the breach, tortiously interfered with the Company business and
contractual relationships and breached its duty of good faith and fair dealing. On September 5, 2002, the Company finalized a
settlement agreement effective on June 21, 2002 with Applica, which resulted in the following:
The termination of the Company's obligation to pay Applica a fee based upon the Company's net sales of White-Westinghouse
products to Kmart and the payment by the Company to Applica of $1.8 million on or before December 31, 2002, primarily for
amounts previously accrued and outstanding under this obligation.
The payment by the Company to Applica of $2.0 million on or before June 30, 2004, and the cancellation of the $15.0 million
promissory note that the Company issued to Applica in 1998 as a partial consideration for the repurchase of the Company's
common stock from Applica. The promissory note, which had a carrying value prior to the settlement of $10.8 million, was
cancelled in view of the harm to the Company's business enterprise value and the underlying Salton common stock
repurchased.
ADVANTAGE PARTNERS LLC
On July 2, 2001, the Company was served with a complaint for patent infringement alleged by AdVantage Partners LLC in the
United States District Court for the Central District of California. In this complaint, AdVantage alleged that the Company and
retailers that sell the Company's "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.
On August 9, 2001, AdVantage Partners LLC filed a second complaint against the Company for patent infringement in the
United States District Court for the Central District of California. In this complaint, AdVantage alleged that the Company had
infringed a patent assigned to AdVantage, and sought a permanent injunction against the Company's 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.
In the first quarter of fiscal 2003, the Company settled the aforementioned patent infringement litigations as well as those suits
involving some of the Company's retail customers. The resolution provides the Company with the right to distribute and sell
certain rotisserie products, including the Company's current versions of the George Jr. and Baby George Rotisseries, and
retailers the right to resell those products, without fear of future patent litigation. The resolution also preserves to Popeil
Inventions Inc. the exclusive license in countertop rotisseries to the rotisserie patents developed by Ron Popeil.
62
PHILIPS ORAL HEALTHCARE, INC.
On May 6, 2002, Philips Oral Healthcare, Inc. ("Philips") filed suit against the Company in the federal court of the Western
District of Washington. In its Complaint, Philips challenges various advertising claims made by the Company about the
Ultrasonex electric toothbrush. Phillips alleges causes of action for false advertising and seeks to enjoin the Company from
using various claims in its advertising of the product.
On August 28, 2002, the Court entered an order granting Philips' motion for preliminary injunction. As a result of this order, the
Company is preliminarily enjoined from airing two commercials or developing new advertising for the Ultrasonex using one of
the specific advertising claims at issue. The preliminary order does not enjoin the sale of the toothbrush or require that the
Company modify the product's packaging in any way. Under the current scheduling order, a trial on the merits is scheduled for
October 2003. The outcome of this suit is indeterminable as of June 29, 2002.
ATTORNEY GENERALS OF NEW YORK AND ILLINOIS
On September 5, 2002, the Company entered into an agreement with the Attorney Generals of New York and Illinois
governing the Company's future conduct with retailers relating to the Company's indoor electric grills. The Company expects
all, or nearly all, other states will join this agreement. This agreement provides the Company to make a payment of $1.2 million
upon final approval of the agreement and two additional payments of $3.5 million each on March 1, 2003 and 2004,
respectively. All of the Company's payments are contingent on states representing at least 80% of the national population
entering into the settlement agreement.
ENVIRONMENTAL
The Company is participating in environmental remediation activities at four sites, which it owns or operates. As of June 29,
2002, the Company has accrued approximately $0.2 million for the anticipated costs of investigation, remediation and/or
operation and maintenance costs at these sites. Although such costs could exceed that amount, the Company believes that any
such excess will not have a material adverse effect on the financial condition or annual results of operations of the Company.
OTHER
The Company is a party to various other actions and proceedings incident to the Company's normal business operations. The
Company believes that the outcome of such litigation will not have a material adverse effect on the Company's business,
financial condition or annual results of operations. The Company also has product liability and general liability insurance policies
in amounts the Company believes to be reasonable given its current level of business. Although historically the Company has
not had to pay any material product liability claims, it is conceivable that the Company could incur claims for which the
Company is not insured.
63
15. OPERATING SEGMENTS
The Company consists of a single operating segment that designs, markets and distributes housewares, including appliances,
Salton at Home and personal care and wellness products. This segmentation is appropriate because the Company makes
operating decisions and assesses performance based upon brand management, and such brand management encompasses a
wide variety of products and types of customers. Most of the Company's products are procured through independent
manufacturers, primarily in the Far East, and are distributed through similar distribution channels.
PRODUCT INFORMATION -- NET SALES -
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Small appliances $807,799 $714,125 $742,774
Salton At Home 85,957 59,793 60,709
Personal care and wellness products 28,723 18,196 33,819
----------------------------------------------------------------------------------------------------
Total $922,479 $792,114 $837,302
====================================================================================================
GEOGRAPHIC INFORMATION -
LONG-LIVED ASSETS
NET SALES AS OF
------------- -----------------------------
JUNE 29, 2002 JUNE 29, 2002 JUNE 30, 2001
---------------------------------------------------------------------------------------------------
(IN THOUSANDS)
United States $740,150 $219,721 $208,032
Great Britain 123,346 71,248 64,202
Other foreign countries 58,983 18,340 12,744
---------------------------------------------------------------------------------------------------
Total $922,479 $309,309 $284,978
===================================================================================================
Net sales by geographic area are based upon revenues generated from each country's operations. Sales generated from any
one foreign geographic area did not exceed 10% of net sales for fiscal 2001 and 2000.
MAJOR CUSTOMERS AND SUPPLIERS --
The Company entered into a major supply contract with Kmart Corporation ("Kmart") on January 31, 1997. Under the
contract, the Company supplies Kmart with small kitchen appliances, personal care products, heaters, fans and electrical air
cleaners and humidifiers under the White-Westinghouse(R) brand name. Sales to Kmart approximated 6%, 11% and 12%, of
total net sales of the Company in fiscal 2002, 2001 and 2000, respectively.
On March 30, 1999, Salton entered into a five-year supply agreement with Zellers, the leading national chain of discount
department stores in Canada. Under the contract, the Company supplies Zellers with small kitchen appliances under the
White-Westinghouse(R) brand name. The agreement has a minimum purchase requirement by Zellers of approximately $17.0
million, over an initial period of five years, with rights to extend the contract for additional one-year periods.
The Company's net sales in the aggregate to its five largest customers during the fiscal years ended June 29, 2002, June 30,
2001 and July 1, 2000 were 43%, 47% and 46% of total net sales in these periods, respectively. In addition to Kmart, one
customer accounted for 14%, 12% and 13% of total net sales during the fiscal years ended June 29, 2002, June 30, 2001 and
July 1, 2000, respectively, while another customer accounted for 12%, 9% and 7%, for the same respective years.
Although the Company has long-established relationships with many of its customers, with the exception of Kmart Corporation
and Zellers, it does not have long-term contracts with any of its customers. A significant concentration of the Company's
business activity is with department stores, upscale mass merchandisers, specialty
64
stores, and warehouse clubs whose ability to meet their obligations to the Company is dependent upon prevailing economic
conditions within the retail industry.
During fiscal 2002, 2001 and 2000, one supplier located in China accounted for approximately 33%, 35% and 38% of the
Company's product purchases.
16. INCOME TAXES
Income before income taxes is as follows:
JUNE 29, 2002 JUNE 20, 2001 JULY 1, 2000
----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Domestic $15,251 $52,987 $109,909
Foreign 29,290 20,859 36,994
----------------------------------------------------------------------------------------------------
Total $44,541 $73,846 $146,903
====================================================================================================
Federal, state and foreign taxes were approximately as follows:
FISCAL YEARS ENDED
--------------------------------------------
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Federal
Current $12,678 $19,039 $44,514
Deferred (3,623) 1,271 1,521
State
Current 1,503 3,999 7,954
Deferred (156) 253 272
Foreign
Current 3,992 3,130 826
Deferred
----------------------------------------------------------------------------------------------------
Total $14,394 $27,692 $55,087
====================================================================================================
Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax
carryforwards consisted of:
JUNE 29, 2002 JUNE 30, 2001
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
Allowance for doubtful accounts $ 1,382 $ 2,015
Interest 1,129 1,452
Depreciation and amortization (1,353) (2,388)
Other deferred items, net (297) (657)
Net operating loss carry-forward 635 0
Accrued liabilities 1,404 3,063
Inventory reserves and capitalization 3,930 (1,359)
-------------------------------------------------------------------------------------------
Net deferred tax asset $ 6,830 $ 2,126
===========================================================================================
Tax benefits from net operating loss carry-forwards will expire by 2019.
65
A reconciliation of the statutory federal income tax rate to the effective rate is as follows:
FISCAL YEARS ENDED
--------------------------------------------
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
----------------------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effective state tax rate 1.0 4.2 3.9
Permanent differences 1.7 1.2 0.4
Effect of foreign tax rate (6.5) (3.8) (1.4)
Other 1.1 0.9 (0.4)
----------------------------------------------------------------------------------------------------
Effective income tax rate 32.30% 37.50% 37.50%
====================================================================================================
U.S. income taxes were not provided on certain unremitted earnings of Salton Hong Kong, Ltd. and Salton Europe which the
Company considers to be permanent investments. The cumulative amount of U.S. income taxes which have not been provided
totaled approximately $8.8 million at June 29, 2002.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly financial data is as follows (amounts in thousands, except per share data).
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(1) QUARTER QUARTER
----------------------------------------------------------------------------------------------------
2002(2)
Net Sales $198,350 $ 318,489 $188,095 $217,545
Gross Profit 67,855 113,782 66,793 69,071
Net income 7,365 21,186 3,933 (2,337)
Earning per share: Basic 0.67 1.93 0.36 (0.21)
Earning per share: Diluted 0.49 1.42 0.26 (0.21)
2001(2)
Net Sales $207,246 $ 262,197 $153,558 $169,113
Gross Profit 79,270 97,852 57,203 34,138
Net income 21,502 26,579 9,485 (11,412)
Earning per share: Basic 1.85 2.19 0.81 (0.99)
Earning per share: Diluted 1.35 1.60 0.60 (0.99)
2000(2)
Net Sales $196,340 $ 292,767 $172,100 $176,095
Gross Profit 78,819 116,011 67,831 69,751
Net income 13,898 47,558 15,047 15,313
Earning per share: Basic 1.35 4.25 1.33 1.35
Earning per share: Diluted 0.95 3.08 0.95 0.98
====================================================================================================
(1) The Company has historically experienced higher sales in the August through November months due to holiday sales, which
primarily impacts the second quarter.
(2) Total quarterly earnings per common share may not equal the annual amount because net income per common share is
calculated independently for each quarter. Common stock equivalents can change on a quarter-to-quarter basis due to their
dilutive impact on the independent quarterly EPS calculation.
18. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The payment obligations of the Company under the 12 1/4% senior subordinated notes (see Note 6) are guaranteed by certain
of the Company's wholly-owned domestic subsidiaries (Subsidiary Guarantors). Such guarantees are full, unconditional and
joint and several. Separate financial statements of the Subsidiary Guarantors are not presented because the Company's
management has determined that they would not be material to investors. The following supplemental financial information sets
forth, on a combined basis, balance sheets, statements of earnings and statements of cash flows for the Subsidiary Guarantors,
the Company's non-guarantor subsidiaries and for Salton, Inc.
66
CONSOLIDATING BALANCE SHEET AS OF JUNE 29, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 7,931 $ 20,327 $ 2,797 $ -- $ 31,055
Accounts receivable 165,446 51,249 773 -- 217,468
Inventories 193,851 47,914 2,395 -- 244,160
Prepaid expenses and other current
assets 3,061 5,329 4,499 -- 12,889
Intercompany (135,451) (76,536) 211,987 -- --
Prepaid income taxes (12,348) (7,170) 22,299 -- 2,781
Deferred income taxes 3,846 625 3,435 -- 7,906
-----------------------------------------------------------------------------------------------------------------
Total current assets 226,336 41,738 248,185 -- 516,259
Property, Plant and Equipment, Net of
Accumulated Depreciation 14,205 23,282 19,063 -- 56,550
Investments in Subsidiaries (833) 79,742 375,521 (454,430) --
Patents and Trademarks, Net of
Accumulated Amortization 10,781 31,347 118,402 -- 160,530
Cash in escrow for Pifco loan notes -- 18,676 -- -- 18,676
Other Intangibles, Net of Accumulated
Amortization, and -- -- -- --
Other Non-current Assets 24,209 16,307 33,037 -- 73,553
-----------------------------------------------------------------------------------------------------------------
Total Assets $274,698 $211,092 $794,208 $(454,430) $825,568
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other
current debt $114,026 $ 13,325 $ 22,750 $ -- $150,101
Accounts payable 3,457 13,504 8,403 -- 25,364
Accrued expenses 18,789 21,202 21,003 -- 60,994
Foreman guarantee -- -- 1,393 -- 1,393
-----------------------------------------------------------------------------------------------------------------
Total current liabilities 136,272 48,031 53,549 -- 237,852
Non-current Deferred Income Taxes (906) 1,487 495 -- 1,076
Senior subordinated notes due 2005 -- -- 125,000 -- 125,000
Senior subordinated notes due 2008 -- -- 156,954 -- 156,954
Loan notes to Pifco shareholders -- 4,908 -- -- 4,908
Term loans and other notes payable 28,617 -- 21,104 -- 49,721
Other long term liabilities 5,021 5,021
-----------------------------------------------------------------------------------------------------------------
Total liabilities 163,983 54,426 362,123 -- 580,532
Stockholders' Equity 110,715 156,666 432,085 (454,430) 245,036
-----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $274,698 $211,092 $794,208 $(454,430) $825,568
=================================================================================================================
67
CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 8,242 $ 15,615 $ 6,240 $ -- $ 30,097
Accounts receivable 39,474 30,729 115,678 -- 185,881
Inventories 57,034 23,906 111,562 -- 192,502
Prepaid expenses and other
current assets 3,281 460 6,359 -- 10,100
Intercompany (58,561) (42,910) 101,471 -- --
Prepaid income taxes 4,940 (4,930) 14,897 -- 14,907
Deferred income taxes 2,299 (426) 2,546 -- 4,419
-------------------------------------------------------------------------------------------------------------
Total current assets 56,709 22,444 358,753 -- 437,906
Property, Plant and Equipment, Net
of Accumulated Depreciation 13,629 17,134 16,961 -- 47,724
Investments in Subsidiaries (141) -- 127,448 (127,307) --
Patents and Trademarks, Net of
Accumulated Amortization 11,169 3,702 117,257 -- 132,128
Cash in escrow for Pifco loan notes -- 17,748 -- -- 17,748
Other Intangibles, Net of
Accumulated Amortization, and
Other Non-current Assets 14,275 118,600 37,557 (83,054) 87,378
-------------------------------------------------------------------------------------------------------------
Total Assets $ 95,641 $ 179,628 $ 657,976 $ (210,361) $ 722,884
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and
other current debt $ 38,780 $ -- $ 2,750 $ -- $ 41,530
Accounts payable 3,569 23,131 6,750 -- 33,450
Accrued expenses 10,345 13,299 9,264 -- 32,908
Foreman guarantee -- -- 19,370 -- 19,370
-------------------------------------------------------------------------------------------------------------
Total current liabilities 52,694 36,430 38,134 -- 127,258
Non-current Deferred Income Taxes 474 212 1,607 -- 2,293
Senior subordinated notes due 2005 -- -- 125,000 -- 125,000
Senior subordinated notes due 2008 -- -- 148,325 -- 148,325
Loan notes to Pifco shareholders -- 11,271 -- -- 11,271
Other notes payable 46,881 -- 50,359 -- 97,240
-------------------------------------------------------------------------------------------------------------
Total liabilities 100,049 47,913 363,425 -- 511,387
Stockholders' Equity (4,408) 131,715 294,551 (210,361) 211,497
-------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $ 95,641 $ 179,628 $ 657,976 $ (210,361) $ 722,884
=============================================================================================================
68
CONSOLIDATING STATEMENT OF EARNINGS FOR THE YEAR ENDED JUNE 29, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-------------------------------------------------------------------------------------------------------
Net Sales $ 989,913 $ 505,824 $ 386,156 $ (959,414) $ 922,479
Cost of Goods Sold 806,859 426,174 263,727 (952,613) 544,147
Distribution Expenses 54,425 5,450 956 -- 60,831
-------------------------------------------------------------------------------------------------------
Gross Profit 128,629 74,200 121,473 (6,801) 317,501
Selling, General and
Administrative expenses 99,490 37,881 93,007 (6,801) 223,577
Lawsuit Settlements, Net -- -- 2,580 -- 2,580
-------------------------------------------------------------------------------------------------------
Operating Income (Loss) 29,139 36,319 25,886 -- 91,344
Interest Expense, Net (5,368) (5,399) (33,664) (44,431)
Fair Market Value Adjustment
on Derivatives -- (2,372) -- -- (2,372)
Equity in Earnings of
Subsidiaries (743) -- 36,296 (35,553) --
-------------------------------------------------------------------------------------------------------
Income (Loss) Before Income
Taxes 23,028 28,548 28,518 (35,553) 44,541
Income Tax Expense (Benefit) 12,031 3,992 (1,629) -- 14,394
-------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 10,997 $ 24,556 $ 30,147 $ (35,553) $ 30,147
=======================================================================================================
CONSOLIDATING STATEMENT OF EARNINGS FOR THE YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-------------------------------------------------------------------------------------------------------
Net Sales $ 202,331 $ 242,689 $ 565,009 $ (217,915) $ 792,114
Cost of Goods Sold 158,345 213,075 314,751 (211,915) 474,256
Distribution Expenses 15,521 633 33,241 49,395
-------------------------------------------------------------------------------------------------------
Gross Profit 28,465 28,981 217,017 (6,000) 268,463
Selling, General and
Administrative expenses 32,217 7,641 123,027 (6,000) 156,885
-------------------------------------------------------------------------------------------------------
Operating Income (Loss) (3,752) 21,340 93,990 -- 111,578
Interest Expense, Net 817 (379) (38,170) -- (37,732)
Equity in Earnings of
Subsidiaries 101 -- 15,698 (15,799) --
-------------------------------------------------------------------------------------------------------
Income (Loss) Before Income
Taxes (2,834) 20,961 71,518 (15,799) 73,846
Income Tax Expense (Benefit) (802) 3,130 25,364 27,692
-------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (2,032) $ 17,831 $ 46,154 $ (15,799) $ 46,154
=======================================================================================================
69
CONSOLIDATING STATEMENT OF EARNINGS FOR THE YEAR ENDED JULY 1, 2000
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-------------------------------------------------------------------------------------------------------
Net Sales $ 151,326 $ 141,117 $ 648,181 $ (103,322) $ 837,302
Cost of Goods Sold 121,165 98,651 344,756 (97,322) 467,250
Distribution Expenses 10,681 310 26,648 -- 37,639
-------------------------------------------------------------------------------------------------------
Gross Profit 19,480 42,156 276,777 (6,000) 332,413
Selling, General and
Administrative expenses 23,085 7,377 132,287 (6,000) 156,749
-------------------------------------------------------------------------------------------------------
Operating Income (Loss) (3,605) 34,779 144,490 -- 175,664
Interest Expense, Net 122 1,917 (30,800) -- (28,761)
Equity in Earnings of
Subsidiaries (298) -- 28,241 (27,943) --
-------------------------------------------------------------------------------------------------------
Income (Loss) Before Income
Taxes (3,781) 36,696 141,931 (27,943) 146,903
Income Tax Expense (Benefit) (956) 5,928 50,115 -- 55,087
-------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (2,825) $ 30,768 $ 91,816 $ (27,943) $ 91,816
=======================================================================================================
70
CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 29, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,997 $ 24,557 $ 30,146 $ (35,553) $ 30,147
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Imputed interest on note payable -- 1,528 4,517 -- 6,045
Gain on sale of investment -- (200) 0 -- (200)
Deferred income tax provision (2,927) 563 (1,415) -- (3,779)
Fair value adjustment for derivatives -- 2,372 0 -- 2,372
Foreign currency transaction gains & losses 1,135 (685) 0 -- 450
Legal settlements -- -- 2,580 -- 2,580
Depreciation and amortization 4,938 5,105 20,606 -- 30,649
Loss on disposal of equipment 0
Equity in income of unconsolidated affiliate/
consolidated subsidiary 743 (761) (36,296) 35,553 (761)
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (125,972) (16,624) 113,769 -- (28,827)
Inventories (25,819) (19,967) (1,831) -- (47,617)
Prepaid expenses and other current assets 301 (5,104) 1,861 -- (2,942)
Intercompany 56,883 34,264 (91,147) -- --
Accounts payable (112) (9,832) (1,838) -- (11,782)
Taxes payable 17,288 2,984 (7,402) -- 12,870
Accrued expenses 7,149 858 8,116 -- 16,123
------------------------------------------------------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (55,396) 19,058 41,666 -- 5,328
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,877) (6,206) (8,169) -- (16,252)
Increase in other non-current assets 792 (6,069) 4,303 -- (974)
Proceeds from sale of investment -- 501 0 501
Acquisition of businesses, net of cash
acquired -- (2,014) (5,300) -- (7,314)
Additional payment for patents and trademarks -- -- (18,029) -- (18,029)
Additions to intangibles, patents and
trademarks -- -- (20,717) -- (20,717)
------------------------------------------------------------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (1,085) (13,788) (47,912) -- (62,785)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit and
other debt 74,976 -- (2,745) -- 72,231
Repayment of long-term debt (18,807) -- -- -- (18,807)
Proceeds from long-term debt -- -- -- 0
Proceeds from termination of Swap transaction -- -- 8,146 -- 8,146
Costs associated with refinancing -- -- (1,115) -- (1,115)
Common stock issued -- -- 175 -- 175
Treasury stock purchase -- -- (1,125) -- (1,125)
------------------------------------------------------------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 56,169 -- 3,336 -- 59,505
------------------------------------------------------------------------------------------------------------------------------
The effect of exchange rate changes on cash -- (559) (531) -- (1,090)
Cash, beginning of the period 8,242 15,615 6,240 -- 30,097
Net Change in Cash (312) 4,711 (3,441) -- 958
------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 7,930 $ 20,326 $ 2,799 $ -- $ 31,055
==============================================================================================================================
71
CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,032) $ 17,831 $ 46,154 $ (15,799) $ 46,154
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Imputed interest on note payable -- -- 6,033 -- 6,033
Deferred income tax provision -- -- 1,524 -- 1,524
Depreciation and amortization 4,699 1,112 17,783 -- 23,594
Loss on disposal of equipment 423 -- 423
Equity in net income of investees
and consolidated subsidiaries (101) (545) (15,445) 15,799 (292)
Purchase reduction of note payable
and other non cash items -- -- 2,777 -- 2,777
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable (12,371) (8,799) (25,089) -- (46,259)
Inventories 5,957 (986) 37,786 -- 42,757
Prepaid expenses and other
current assets (149) (50) 437 -- 238
Intercompany 41,055 83,933 (124,988) -- --
Accounts payable (2,368) 12,468 (15,077) -- (4,977)
Taxes payable 751 (4,894) (19,305) -- (23,448)
Accrued expenses (1,064) (1,236) (2,151) -- (4,451)
-----------------------------------------------------------------------------------------------------------------
NET CASH FROM OPERATING
ACTIVITIES 34,800 98,834 (89,561) -- 44,073
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,072) (1,024) (7,461) -- (9,557)
Increase in other non-current
assets -- -- (13,422) -- (13,422)
Acquisition of businesses, net of
cash acquired -- (60,741) (2,820) -- (63,561)
Additional payment for patents
and trademarks -- -- (2,043) -- (2,043)
Additions to intangibles, patents
and trademarks -- -- (9,382) -- (9,382)
-----------------------------------------------------------------------------------------------------------------
NET CASH FROM INVESTING
ACTIVITIES (1,072) (61,765) (35,128) -- (97,965)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) of revolving
line of credit and other debt (48,065) -- -- -- (48,065)
Repayment of long-term debt (53,621) -- (20,003) -- (73,624)
Proceeds from long-term debt 75,000 -- -- -- 75,000
Proceeds from senior subordinated
notes 148,284 -- 148,284
Costs associated with refinancing -- -- (7,798) -- (7,798)
Common stock issued -- -- 265 -- 265
Treasury stock purchase -- -- (17,654) -- (17,654)
-----------------------------------------------------------------------------------------------------------------
NET CASH FROM FINANCING
ACTIVITIES (26,686) -- 103,094 -- 76,408
-----------------------------------------------------------------------------------------------------------------
The effect of exchange rate changes on
cash -- (25) -- -- (25)
Cash, beginning of the period 125 951 6,530 -- 7,606
Net Change in Cash 7,042 37,044 (21,595) -- 22,491
-----------------------------------------------------------------------------------------------------------------
Cash, end of period $ 7,167 $ 37,995 $ (15,065) $ -- $ 30,097
=================================================================================================================
72
CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JULY 1, 2000
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,825) $ 30,768 $ 91,816 $ (27,943) $ 91,816
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Imputed interest on note payable -- -- 6,336 -- 6,336
Deferred income tax provision (1,057) -- 2,850 -- 1,793
Depreciation and amortization 4,272 468 14,335 -- 19,075
Equity in net income of investees
and consolidated subsidiaries 298 (321) (28,241) 27,943 (321)
Purchase reduction of note payable
and other non cash items -- -- 1,662 -- 1,662
Changes in assets and liabilities:
Accounts receivable (2,987) 4,232 (34,916) -- (33,671)
Inventories (16,747) (5,892) (52,467) -- (75,106)
Prepaid expenses and other
current assets (1,206) (134) (2,456) -- (3,796)
Intercompany (15,729) (37,392) 53,121 -- --
Accounts payable 2,510 6,423 (14,817) -- (5,884)
Taxes payable 146 5,102 (670) -- 4,578
Accrued expenses (1,321) 69 415 -- (837)
-----------------------------------------------------------------------------------------------------------------
NET CASH FROM OPERATING
ACTIVITIES (34,646) 3,323 36,968 -- 5,645
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,042) (3,099) (9,835) -- (13,976)
Acquisition of the George Foreman
Trademark -- -- (22,750) (22,750)
Additions to intangibles, patents
and trademarks -- -- (737) -- (737)
Equity Investment -- (6,027) (3,588) (9,615)
-----------------------------------------------------------------------------------------------------------------
NET CASH FROM INVESTING
ACTIVITIES (1,042) (9,126) (36,910) -- (47,078)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line
of credit 36,367 -- -- -- 36,367
Repayment of long-term debt (591) -- (34) -- (625)
Costs associated with refinancing -- -- (616) -- (616)
Common stock issued -- -- 2,669 -- 2,669
-----------------------------------------------------------------------------------------------------------------
NET CASH FROM FINANCING
ACTIVITIES 35,776 -- 2,019 -- 37,795
-----------------------------------------------------------------------------------------------------------------
The effect of exchange rate changes on
cash -- 4 -- -- 4
Cash, beginning of the period 37 6,750 4,453 -- 11,240
Net Change in Cash 88 (5,799) 2,077 -- (3,634)
-----------------------------------------------------------------------------------------------------------------
Cash, end of period $ 125 $ 951 $ 6,530 $ -- $ 7,606
=================================================================================================================
73
19. SUBSEQUENT EVENTS
See Note 5 "Applica Transaction" and Note 14 "Legal Proceedings" under the caption Applica.
See Note 14 "Legal Proceedings" under the caption AdVantage Partners LLC.
See Note 14 "Legal Proceedings" under the caption Attorneys General New York and Illinois.
See Note 3 "Acquisitions and Alliances" for Pifco Loan Notes redemption.
On August 15, 2002, the existing interest rate swap contract was terminated resulting in a gain of $6.1 million. The gain from
early termination of this contract will be deferred as an adjustment to the carrying amount of the outstanding debt and will be
amortized as an adjustment to interest expense related to the debt over the remaining period originally covered by the
terminated swap. The Company simultaneously entered into another interest rate swap contract to pay a variable-rate interest
of six-month LIBOR plus 7.78% and receive fixed-rate interest of 12.25% on $150.0 million notional amount of indebtedness.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not applicable.
74
PART III
ITEM 10. Directors And Executive Officers Of The Registrant
The information required by this Item 10 as to the Directors of the Company is incorporated herein by reference to the
information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than
120 days after the end of our fiscal year pursuant to Regulation 14A. Information required by this Item 10 as to the executive
officers of the Company is included in Part I of this Annual Report on Form 10-K.
ITEM 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to the information set forth under the caption
"Compensation of Directors and Executive Officers" in the Company's definitive Proxy Statement for the 2002 Annual Meeting
of Stockholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days
after the end of our fiscal year pursuant to Regulation 14A.
ITEM 12. Security Ownership Of Certain Beneficial Owners And Management
The information required by this Item 12 is incorporated by reference to the information set forth under the caption "Stock
Ownership of Principal Holders and Management" in the Company's definitive Proxy Statement for the 2002 Annual Meeting
of Stockholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days
after the end of our fiscal year pursuant to Regulation 14A.
EQUITY COMPENSATION PLAN INFORMATION
This table shows information about the securities authorized for issuance under our equity compensation plans as of June 29,
2002.
----------------------------------------------------------------------------
(A) (B)
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS WARRANTS AND RIGHTS
----------------------------------------------------------------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY
HOLDERS(1) 1,288,510 $13.90
EQUITY COMPENSATION PLANS
NOT APPROVED BY SECURITY
HOLDERS(2) 987,826 $21.59
------------------------
TOTAL 2,276,336 $17.23
--------------------------- -----------------------
(C)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
EQUITY COMPENSATION
PLANS (EXCLUDING
SECURITIES REFLECTED
IN COLUMN (A))
--------------------------- -----------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY
HOLDERS(1) 647,346
EQUITY COMPENSATION PLANS
NOT APPROVED BY SECURITY
HOLDERS(2) 388,029
-----------------------
TOTAL 1,035,375
(1) Includes our:
- 1991 Stock Option Plan
- 1995 Stock Option Plan
- 1995 Non-Employee Directors Stock Option Plan
- 1998 Stock Option Plan
- 2002 Stock Option Plan
75
(2) Includes our:
- 1999 Stock Option Plan
- 2001 Stock Option Plan
ITEM 13. Certain Relationships And Transactions
The information required by this Item 13 is incorporated by reference to the information set forth under the caption "Certain
Transactions" in the Company's definitive Proxy Statement for the 2002 Annual Meeting of Stockholders, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year
pursuant to Regulation 14A.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, And Reports On Report 8-K(A)(1) Financial Statements
The following Financial Statements of the registrant and its subsidiaries are included in Part II, Item 8:
PAGE
-------------------------------------------------------------------
Salton
Independent, Auditors' Report 39
Consolidated Balance Sheets as of June 29, 2002 and June 30,
2001 40
Consolidated Statement of Earnings for the Years Ended
June 29, 2002, June 30, 2001, and July 1, 2000 41
Consolidated Statement of Stockholders' Equity for the Years
Ended
June 29, 2002, June 30, 2001, and July 1, 2000 42
Consolidated Statement of Cash Flows for the Years Ended
June 29, 2002, June 30, 2001, and July 1, 2000 43
Notes to the Consolidated Financial Statements 45
(A)(2) FINANCIAL STATEMENTS SCHEDULES
The following Financial Statement Schedules of the Registrant are included in Item 14 hereof.
PAGE
-------------------------------------------------------------------
Schedule VIII -- Valuation and Qualifying Accounts 76
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(A)(3) EXHIBITS
See Exhibit Index for the Exhibits filed as part of or incorporated by reference into this Report.
(B) REPORTS ON FORM 8-K
The following current reports on Form 8-K were filed during the fourth fiscal quarter of 2002
(i) Current Report on Form 8-K dated May 7, 2002 reporting under Item 5 Other Events the announcement of our third
quarter results.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized on the 26(th) day of September, 2002.
SALTON, INC.
By: /s/ LEONARD DREIMANN
------------------------------------
Leonard Dreimann
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated on September 26, 2002.
SIGNATURE
---------
/s/ LEONHARD DREIMANN Chief Executive Officer and Director
------------------------------------------ (Principal Executive Officer)
Leonhard Dreimann
/s/ WILLIAM B. RUE President and Chief Operating Officer and Director
------------------------------------------
William B. Rue
/s/ JOHN E. THOMPSON Senior Vice President and Chief Financial Officer
------------------------------------------ (Principal Accounting and Financial Officer)
John E. Thompson
/s/ DAVID C. SABIN Chairman of the Board and Director
------------------------------------------
David C. Sabin
/s/ FRANK DEVINE Director
------------------------------------------
Frank Devine
/s/ BERT DOORNMALEN Director
------------------------------------------
Bert Doornmalen
Director
------------------------------------------
Robert A. Bergmann
Director
------------------------------------------
Bruce G. Pollack
Director
------------------------------------------
Bruce J. Walker
77
CERTIFICATIONS
I, Leonhard Dreimann, Chief Executive Officer of Salton, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Salton, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this annual report.
Date: September 26(th), 2002
Leonhard Dreimann Chief Executive Officer
I, John E. Thompson, Senior Vice President and Chief Financial Officer of Salton, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Salton, Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this annual report.
Date: September 26(th), 2002
John E. Thompson Senior Vice President and Chief Financial Officer
78
The following pages contain the Financial Statement Schedules as specified by 12(a) and 14(a)(2) of Part IV of Form 10-K.
EXHIBIT 12(A)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SALTON, INC.
YEAR ENDED 2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------------------
(THOUSANDS, EXCEPT RATIOS)
Fixed Charges
Interest and amortization of debt issuance costs
on all indebtedness $43,357 $ 39,043 $ 31,102 $15,864 $ 7,336
Add interest element implicit in rentals 3,040 3,724 1,923 1,158 521
-------------------------------------------------------------------------------------------------------
Total fixed charges $46,397 $ 42,767 $ 33,025 $17,022 $ 7,857
Income
Income before income taxes $44,541 $ 73,846 $146,903 $53,863 $32,186
Add fixed charges 46,367 42,767 33,025 17,022 7,857
-------------------------------------------------------------------------------------------------------
Income before fixed charges and income taxes $90,908 $116,613 $179,928 $70,885 $40,043
=======================================================================================================
Ratio of earnings to fixed charges 1.96 2.73 5.45 4.16 5.10
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JUNE 29, 2002
SALTON, INC.
CHARGED TO
NET SALES,
BEGINNING COSTS AND ENDING
BALANCE EXPENSES DEDUCTIONS BALANCE
------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Year Ended July 1, 2000:
Allowance for returns, allowances and doubtful accounts $ 6,102 $ 45,593 $ (44,584) $ 7,111
Year Ended June 30, 2001:
Allowance for returns, allowances and doubtful accounts $ 7,111 $ 47,854 $ (45,742) $ 9,223
Year Ended June 29, 2002:
Allowance for returns, allowances and doubtful accounts $ 9,223 $ 56,903 $ (56,780) $ 9,346
79
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of
Registrant, as amended.
3.2 By-laws of the Registrant. Incorporated by reference to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-42097).
3.3 Certificate of Designation for the Series A Convertible
Preferred Stock of the Registrant. Incorporated by reference
to the Registrant's Current Report on Form 8-K dated July
28, 1998.
4.1 Specimen Certificate for shares of Common Stock, $.01 par
value, of the Registrant. Incorporated by reference to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-42097).
4.2 Form of Note for Registrant's 10 3/4% Senior Subordinated
Notes. Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Registration No.
333-70169)
4.3 Indenture dated December 16,1998 between Norwest Bank
National Association, as Issuer, and the Registrant relating
to the Registrant's 10 3/4% Senior Subordinated Notes.
Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-70169)
4.4 Indenture, dated as of April 23, 2001, amount Salton, Inc.,
the Guarantors (as defined therein), and Wells Fargo Bank
Minnesota, N.A., as trustee, relating to $250,000,000 in
aggregate principal amount and maturity of 12 1/4% senior
subordinated notes due 2008. Incorporated by Reference to
the Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2001.
4.5 Form of Note for Registrant's 12 1/4% senior subordinated
notes due April 15, 2008. Incorporated by Reference to the
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2001.
10.1 Salton/Maxim Housewares, Inc. Stock Option Plan.
Incorporated by reference to the Registrant's Registration
Statement on form S-1 (Registration No. 33-42097).
10.2 Stockholders Agreement, dated August 6, 1991, by and among
the Registrant, Braddock Financial Corporation, Financo
Investors Fund, L.P., and Mesirow Private Equity, Inc.
(successor to Mesirow Venture Capital, Inc.) as the
authorized representative of Mesirow Capital Partners III,
Mesirow Capital Partners IV, Mesirow Capital Partners V and
Allied Investment Corporation. Incorporated by reference to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-42097).
10.3 Form of Sales Representative Agreement generally used by and
between the Registrant and its sales representatives.
Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-42097).
10.4 Stock Registration Rights Agreement, dated as of August 6,
1991, by and between the Registrant, Braddock Financial
Corporation, Financo Investors Fund, L.P., Mesirow Capital
Partners II, Mesirow Capital Partners IV, Mesirow Capital
Partners V and Allied Investment Corporation. Incorporated
by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-42097).
10.5 Salton/Maxim Housewares, Inc. 1995 Employee Stock Option
Plan. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 30, 1995.
10.6 Salton/Maxim Housewares, Inc. Non-Employee Directors Stock
Option Plan. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 30, 1995.
10.7 Asset Purchase Agreement dated July 1, 1996 by and among the
Registrant, Block China Corporation and Robert C. Block
Incorporated by reference from the Company's Current Report
on Form 8-K dated July 1, 1996.
10.8 License Agreement dated as of February 1, 1996 by and
between White Consolidated Industries Inc. and the
Registrant. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q/A for the fiscal quarter ended
December 28, 1996.
10.9 License Agreement dated as of May 21, 1996 by and between
White Consolidated Industries Inc. and the Registrant.
Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q/A for the fiscal quarter ended December
28, 1996.
80
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.10 Purchase, Distribution and Marketing Agreement dated as of
January 27, 1997 between the Registrant and Kmart
Corporation. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q/A for the fiscal quarter ended
December 28, 1996.
10.11 Employment Agreement dated as of December 19, 1997 between
the Registrant and Leonhard Dreimann. Incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 27, 1998.
10.12 Employment Agreement dated as of December 19, 1997 between
the Registrant and David C. Sabin. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 27, 1998.
10.13 Employment Agreement dated as of December 19, 1997 between
the Registrant and William B. Rue. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 27, 1998.
10.14 Stock Agreement, dated as of May 6, 1998, by and between the
Registrant, Windmere-Durable Holdings, Inc. and the Salton
Executive Related Parties (as defined therein). Incorporated
by reference to the Registrant's Current Report on Form 8-K
dated May 6, 1998.
10.15 Note, dated July 27, 1998, issued by the Registrant to
Windmere-Durable Holdings, Inc. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.16 Agreement dated July 27, 1998, between the Registrant to
Windmere-Durable Holdings, Inc. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.17 Credit Agreement dated July 27, 1998 among the Registrant,
the several lenders from time to time parties thereto,
Lehman Brothers Inc., as arranger, Lehman Commercial Paper
Inc., as syndication agent, and Lehman Commercial Paper
Inc., as administrative agent. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.18 Stock Purchase Agreement dated July 15, 1998 by and among
the Registrant and Centre Capital Investors III, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., Centre Capital
Offshore Investors, L.P., The State Board of Administration
of Florida, Centre Parallel Management Partners, L.P. and
Centre Partners Coinvestment, L.P. Incorporated by reference
to the Registrant's Current Report on Form 8-K dated July
15, 1998.
10.19 Registration Rights Agreement dated July 15, 1998 by and
among the Registrant and Centre Capital Investors II, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., Centre Capital
Offshore Investors II, L.P., The State Board of
Administration of Florida, Centre Parallel Management
Partners, L.P. and Centre Partners Coinvestment, L.P.
Incorporated by reference to the Registrant's Current Report
on Form 8-K dated July 28, 1998.
10.20 The Salton, Inc. 1998 Employee Stock Option Plan.
Incorporated by reference to the Registrant's Definitive
Proxy Statement on Schedule 14A filed on December 2, 1998.
10.21 Agreement effective as of July 1, 1999 between Salton and
George Foreman. Incorporated by reference to the
Registrant's, Current Report on Form 8-K dated December 9,
1999.
10.22 Agreement effective as July 1, 1999 between Salton and Sam
Perlmutter. Incorporated by reference to the Registrant's,
Current Report on Form 8-K dated December 9, 1999.
10.23 Agreement effective as of July 1, 1999 between Salton and
Michael Srednick Incorporated by reference to the
Registrant, Current Report on Form 8-K dated December 9,
1999.
10.24 Second amended and restated credit agreement, among Salton,
Inc., as borrower, the several lenders from time to time
parties hereto, Lehman Brothers Inc., as arranger, Lehman
Commercial Paper Inc., as syndication agent, and
administration agent and Fleet National Bank as
documentation agent dated as of December 10, 1999.
Incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 25, 1999.
81
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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10.25 Agreement effective January 12, 2000, between Salton, Inc.
and William B. Rue. Incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 28, 2000.
10.26 Agreement effective January 12, 2000, between Salton, Inc.
and Leonard Dreimann. Incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 28, 2000.
10.27 Agreement effective January 12, 2000, between Salton, Inc.
and David Sabin. Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 28, 2000.
10.28 Agreement effective January 12, 2000, between Salton, Inc.
and John E. Thompson. Incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 28, 2000.
10.29 Agreement dated as of September 7, 2000 between Salton and
George Foreman. Incorporated by reference to the Current
Report on Form 8-K dated September 7, 2000.
10.30 Agreement dated as of September 7, 2000 between Salton and
Sam Perlmutter. Incorporated by reference to Registrant's
Current Report on Form 8-K dated September 7, 2000.
10.31 Agreement dated as of September 7, 2000 between Salton and
Michael Srednick. Incorporated by reference to Registrant's
Current Report on Form 8-K dated September 7, 2000.
10.32 The Salton, Inc. 1999 Employee Stock Option Plan.
Incorporated by reference to the Registrant's Definitive
Proxy Statement on Schedule 14A filed December 9, 1999.
10.33 Salton, Inc. 2001 Employee Stock Option Plan. Incorporated
by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2001.
10.34 Third amended and restated credit agreement among Salton, as
borrower, the several lenders from time to time parties
thereto, Lehman Brothers, Inc., as arranger, Firstar Bank,
N.A. as syndication agent, Lehman Commercial Paper Inc., as
syndication agent, and Fleet National Bank, as documentation
agent dated as of September 26, 2000. Incorporated by
reference to the Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2001.
10.35 First Amendment, dated as of April 13, 2001, to the third
amended and restated credit agreement, dated as of September
26, 2000 among the Registrant, the several banks and
financial institutions or entities parties thereto, Lehman
Brothers Inc., as advisor and book runner, Firstar Bank,
N.A., as syndication agent, Lehman Commercial Paper Inc., as
administrative agent, and Fleet National Bank, N.A., as
documentation agent. Incorporated by reference to Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31,
2001.
10.36 Third Amendment, dated as October 16, 2001, to the Third
Amended and Restated Credit Agreement, dated as of September
26, 2000 among the Registrant, the several banks and
financial institutions or entities parties thereto, Lehman
Brothers Inc., as advisor, arranger and book runner, Firstar
Bank, N.A., as syndication agent, Lehman Commercial Paper
Inc., as administrative agent, and Fleet National Bank,
N.A., as documentation agent. Incorporated by reference to
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 29, 2001.
10.37 Salton, Inc. 2002 Stock Option Plan. Incorporated by
reference to Quarterly Report on Form 10-Q for the fiscal
quarter ended March 30, 2002.
10.38* License agreement between Westinghouse Electric Corporation
and Salton, Inc.
18.1 Letter re: Change in Accounting Principle
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
* Confidential treatment has been requested with respect to portions of this document. The omitted portions of this document
were filed separately with the Securities and Exchange Commission.
82
EXHIBIT 3.1
SECOND AMENDED AND RESTATED CERTIFICATE OF
SALTON/MAXIM HOUSEWARES, INC.
SALTON/MAXIM HOUSEWARES, INC., a corporation organized and existing under the laws of the State of Delaware,
hereby certifies as follows:
1. The name of the corporation is SALTON/MAXIM HOUSEWARES, INC. (the "Corporation"). The Corporation was
incorporated under the same name, and the original Certificate of Incorporation of the Corporation was filed with the Secretary
of State of the State of Delaware on June 25, 1991. The Amended and Restated Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on August 6, 1991, and amended on August 13, 1991.
2. This Second Amended and Restated Certificate of Incorporation amends and restates the provisions of the Certificate of
Incorporation of the Corporation, and has been duly adopted in accordance with the provisions of Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
3. The text of the Certificate of Incorporation of the Corporation as heretofore amended or supplemented is hereby restated to
read in its entirety as follows:
FIRST: The name of the corporation (the "Corporation") is:
SALTON/MAXIM HOUSEWARES, INC.
SECOND: The address of the Corporation's current registered office in the State of Delaware is 1209 Orange Street in the
City of Wilmington, County of New Castle. The name of the Corporation's registered agent at that address, upon whom legal
process against the Corporation may be served, is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized
under the General Corporation Law of the State of Delaware. The Corporation is to have perpetual existence.
FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue in the aggregate is
Twenty-Two Million (22,000,000), of which Twenty Million (20,000,000) shares shall be common stock with a par value of
$0.01 per share, and Two Million (2,000,000) shares shall be preferred stock with a par value of $0.01 per share.
(1) Common Stock
(a) Each holder of record of shares of Common Stock shall be entitled to vote at all meetings of the stockholders and shall have
one vote for each share held by him of record.
(b) Subject to the prior rights of the holders of all classes or series of stock at the time outstanding having prior rights as to
dividends, the holders of shares of Common Stock shall be entitled to receive, when and as declared by the Board of Directors
out of the assets of the
Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors.
(2) Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed by law, to provide from time-to-time for the issuance
of the shares of preferred stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to
establish the characteristics of each series including the following:
(a) the number of shares of that series, which may subsequently be increased or decreased (but not below the number of shares
of that series then outstanding) by resolution of the Board of Directors, and the distinctive designation thereof;
(b) the voting powers, full or limited, if any, of the shares of that series;
(c) the rights in respect of dividends on the shares of that series, whether dividends shall be cumulative and, if so, from which
date or dates and the relative rights or priority, if any, of payment of dividends on shares of that series and any limitations,
restrictions or conditions on the payment of dividends;
(d) the relative amounts, and the relative rights or priority, if any, of payment in respect of shares of that series, which the
holders of the shares of that series shall be entitled to receive upon any liquidation, dissolution or winding up of the Corporation;
(e) the terms and conditions (including the price or prices, which may vary under different conditions and at different
redemption dates), if any, upon which all or any part of the shares of that series may be redeemed, and any limitations,
restrictions or conditions on such redemption;
(f) the terms, if any, of any purchase, retirement or sinking fund to be provided for the shares of that series;
(g) the terms, if any, upon which the shares of that series shall be convertible into or exchangeable for shares of any other class,
classes or series, or other securities, whether or not issued by the Corporation;
(h) the restrictions, limitations and conditions, if any, upon issuance of indebtedness of the Corporation so long as any shares of
that series are outstanding; and
(i) any other preferences and relative, participating, optional or other rights and limitations not inconsistent with law, the
provisions of this ARTICLE FOURTH or any resolution of the Board of Directors pursuant hereto.
FIFTH: The business and affairs of the Corporation shall be managed by a Board of Directors. The directors shall be divided
into three classes, designated Class I, Class II, and Class III. At the 1992 annual meeting of stockholders, Class I directors
shall be elected for a term expiring at the 1993 annual meeting of stockholders, Class II directors for a term expiring at the
1994
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annual meeting of stockholders and Class III directors for a term expiring at the 1994 annual meeting of stockholders. At each
succeeding annual meeting of stockholders, successors to directors whose terms expire at that annual meeting shall be of the
same class as the directors they succeed and shall be elected for three-year terms.
A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor
shall be elected and shall qualify, subject, however, to prior death, resignation, retirement or removal from office. Any newly
created directorship resulting from an increase in the number of directors and any other vacancy on the Board of Directors,
however caused, may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining
director. Any director elected by one or more directors to fill a newly created directorship or other vacancy shall, without
regard to the class in which the vacancy occurred, hold office until the next succeeding annual meeting of stockholders and until
his or her successor shall have been elected and qualified. The term of a director elected by stockholders to fill a newly created
directorship or other vacancy shall expire at the same time as the terms of the other directors of the same class.
Advance notice of nominations for the election of directors other than nominations by the Board of Directors or a committee
thereof, shall be given to the Corporation in the manner provided in the Bylaws.
Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at
least 66-2/3 percent of the outstanding shares of stock generally entitled to vote, voting together as a single class, shall be
required to amend or repeal, or adopt any provision inconsistent with, this ARTICLE FIFTH.
SIXTH: No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except to the extent required by applicable law (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. If the General Corporation Law of the State of Delaware is amended to authorize
corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so
amended. No amendment or repeal of this ARTICLE SIXTH shall adversely affect any right or protection of a director of the
Corporation existing hereunder immediately prior to such amendment or repeal.
SEVENTH: Each person who is or was a director or officer of the Corporation, and each such person who is or was serving at
the request of the Corporation as a director or officer of another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans maintained or sponsored by the Corporation (including the
heirs, executors, administrators and estate of such person) shall be indemnified by the Corporation, in accordance with the
Bylaws of the Corporation, to the fullest extent permitted from time-to-time by the General Corporation Law of the State of
Delaware or any other applicable laws as presently or hereafter in effect. The Corporation may, to the extent authorized from
time-to-time by the Board of Directors, grant rights to indemnification and to the
-3-
advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article with
respect to the indemnification and advancement of expenses of directors and officers of the Corporation. Without limiting the
generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide
for indemnification greater or different than that provided in this ARTICLE SEVENTH. No amendment or repeal of this
ARTICLE SEVENTH shall adversely affect any right or protection existing hereunder or pursuant hereto immediately prior to
such amendment or repeal.
EIGHTH: Any action required or permitted to be taken by the stockholders of the Corporation must be taken at a duly called
annual or special meeting of the stockholders of the Corporation and may not be taken by consent in writing or otherwise.
Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at
least 66-2/3 percent of the outstanding shares of stock generally entitled to vote, voting together as a single class, shall be
required to amend or repeal, or adopt any provision inconsistent with, this ARTICLE EIGHTH.
NINTH: Except as otherwise required by law, and subject to the rights of the holders of any class or series of shares issued by
the Corporation having a preference over the Common Stock as to dividends or upon liquidation to elect directors in certain
circumstances, special meetings of the stockholders of the Corporation may be called only by the Board of Directors pursuant
to a resolution approved by the affirmative vote of a majority of the directors then in office.
Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at
least 66-2/3 percent of the outstanding shares of stock generally entitled to vote, voting together as a single class, shall be
required to amend or repeal, or adopt any provision inconsistent with, this ARTICLE NINTH.
TENTH: The corporation expressly elects not to be governed by Section 203 of the General Corporation Law of the State of
Delaware.
ELEVENTH: The Board of Directors shall have the power to adopt, alter, amend or repeal the Bylaws of the Corporation by
vote or not less than a majority of the directors then in office. The holders of shares of capital stock of the Corporation entitled
at the time to vote for the election of directors shall, to the extent such power is at the time conferred on them by applicable
law, also have the power to adopt, alter, amend or repeal the Bylaws of the Corporation provided, that any proposal by a
stockholder to adopt, alter, amend or repeat the Bylaws shall require for adoption the affirmative vote of the holders of at least
66-2/3 percent of the outstanding shares of stock generally entitled to vote, voting together as a single class.
Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at
least 66-2/3 percent of the outstanding shares of stock generally entitled to vote, voting together as a single class, shall be
required to amend or repeal, or adopt any provision inconsistent with, this ARTICLE ELEVENTH.
TWELFTH: The Corporation reserves the right to amend, change or repeal any provision contained in this Certificate of
Incorporation in any manner now or hereafter permitted or prescribed by statute; provided, that no amendment shall change,
repeal or make inoperative
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any of the provisions of ARTICLE FIFTH, ARTICLE EIGHTH, ARTICLE NINTH or ARTICLE ELEVENTH, except in
accordance with the terms of that ARTICLE.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed this 6th day of October, 1991.
SALTON/MAXIM HOUSEWARES, INC.
/s/ Leonhard Dreimann
----------------------------
Name:
Title:
Attest:
Name:
Title:
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Salton/Maxim Housewares, Inc.
CERTIFICATE OF DESIGNATION OF SERIES A VOTING CONVERTIBLE PREFERRED STOCK SETTING
FORTH THE POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF
SUCH SERIES OF PREFERRED STOCK
Salton/Maxim Housewares, Inc. (hereinafter referred to as the "Corporation"), a corporation organized and existing under the
General Corporation Law of the State of Delaware, in accordance with the provisions of
Section 151 of the General Corporation Law of the State of Delaware, as amended (the "Delaware Code"), does HEREBY
CERTIFY:
That, pursuant to authority conferred by Article IV of the Second Amended and Restated Certificate of Incorporation of the
Corporation, the Board of Directors of the Corporation has adopted a resolution providing for the issuance of a series of
Preferred Stock consisting of 40,000 shares designated "Series A Voting Convertible Preferred Stock", which resolution is as
follows:
RESOLVED, that pursuant to the authority vested in the Board of Directors (the "Board") of Salton/Maxim Housewares, Inc.,
a Delaware corporation (the "Corporation"), by Article IV of the Second Amended and Restated Certificate of Incorporation
of the Corporation (the "Second Restated Certificate"), the Board does hereby create, provide for and approve a series of
Preferred Stock, par value $.01 per share (herein called "Preferred Stock"), of the Corporation to be designated "Series A
Voting Convertible Preferred Stock" (such series being herein called the "Convertible Preferred Stock"), consisting of 40,000
shares of the presently authorized but unissued shares of Preferred Stock, and does hereby fix and herein state and express the
designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations
and restrictions of the Convertible Preferred Stock as follows (all terms used herein which are defined in the Second Restated
Certificate shall have the meaning provided in said Second Restated Certificate):
Section 1. Dividends.
(a) Upon the occurrence and during the continuation of a Restriction Event described in Section 5(a)(i) or (ii), the holders of
shares of Convertible Preferred Stock shall be entitled to
receive, out of funds legally available therefor, cumulative dividends on the shares of Convertible Preferred Stock at the
Restriction Event Dividend Rate (as defined below) computed as a percentage of the liquidation preference per share per year,
payable quarterly on the 15th day of each of January, April, July and October, respectively (each, a "Quarterly Dividend
Payment Date"), commencing on the first such Quarterly Dividend Payment Date after the occurrence of such Restriction Event
(except that if any such date is a Saturday, Sunday or legal holiday, then such dividend shall be payable on the next day that is
not a Saturday, Sunday or legal holiday). Such dividends shall be payable in cash. The amount of dividends payable per share
of Convertible Preferred Stock for each quarterly dividend period shall be computed by dividing the annual amount by four.
The amount of dividends payable for the initial dividend period and any period shorter than a full quarterly dividend period shall
be computed on a pro rata basis, based on the number of days elapsed. For purposes hereof, "Restriction Event Dividend
Rate" means a rate per annum equal to 12 1/2%.
(b) On each Quarterly Dividend Payment Date all dividends which shall have accrued on each share of Convertible Preferred
Stock outstanding on such date shall accumulate and shall be deemed to have become due. Additional dividends shall be paid
to reflect amounts equivalent to interest on accrued but unpaid dividends at the Restriction Event Dividend Rate from the
Quarterly Dividend Payment Date with respect to which such dividend was not paid until the date such dividend is paid.
(c) In addition to the dividend provided hereinabove, in the event the Board of Directors of the Corporation shall determine to
pay any cash or non-cash dividends or distributions on its Common Stock (other than dividends payable in shares of its
Common Stock, as to which the provisions of Section
3(a) below shall apply), the holders of shares of Convertible Preferred Stock shall be entitled to receive cash and non-cash
dividends or
2
distributions in an amount and of kind equal to the dividends or distributions that would have been payable to each such holder
if the Convertible Preferred Stock held by such holder had been converted into Common Stock immediately prior to the record
date for the determination of the holders of Common Stock entitled to each such dividend or distribution; provided, however,
that if the Corporation shall dividend or otherwise distribute rights to all holders of Common Stock entitling the holders thereof
to subscribe for or purchase shares of capital stock of the Corporation, which rights (i) until the occurrence of a specified event
or events are deemed to be transferred with such shares of Common Stock and are not exercisable and (ii) are issued in
respect of future issuances of Common Stock, the holders of shares of the Convertible Preferred Stock shall not be entitled to
receive any such rights until such rights separate from the Common Stock or become exercisable, whichever is sooner.
(d) No dividends or other distributions, other than dividends payable solely in shares of Common Stock or other capital stock
of the Corporation ranking junior as to dividends and as to any distribution of assets other than by way of dividends to the
Convertible Preferred Stock, shall be paid, or declared and set apart for payment by the Corporation, and no purchase,
redemption or other acquisition shall be made by the Corporation or any of its subsidiaries of, any shares of Common Stock or
other capital stock of the Corporation ranking junior as to dividends or as to any distribution of assets other than by way of
dividends to the Convertible Preferred Stock (the "Junior Stock") unless and until all accrued and unpaid dividends and
distributions on the Convertible Preferred Stock, if any, including the full dividend for the then current dividend period, shall
have been paid or declared and set apart for payment.
Section 2. Voting Rights.
3
In addition to any voting rights provided by law, the holders of shares of Convertible Preferred Stock shall have the following
voting rights:
(a) So long as the Convertible Preferred Stock is outstanding, each share of Convertible Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of the capital stock of the Corporation into which such share of Convertible
Preferred Stock is convertible, voting together as a single class with the other shares entitled to vote, at all meetings of the
stockholders of the Corporation. With respect to any such vote, each share of Convertible Preferred Stock shall entitle the
holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the
number of shares of capital stock of the Corporation into which such share of Convertible Preferred Stock is convertible on the
record date for such vote.
(b) So long as any shares of Convertible Preferred Stock are outstanding, subject to the provisions of Section 275(c) of the
Delaware Code, the Corporation shall not, without consent of the holders of at least a majority of the number of shares of
Convertible Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by vote at a special
meeting called for the purpose, enter into any plan of complete liquidation or dissolution or otherwise effect the voluntary
liquidation, dissolution or winding up of the Corporation unless, as a result of such liquidation, dissolution or winding-up, the
liquidation preference on the Convertible Preferred Stock is satisfied in full pursuant to Section 6 herein.
(c) Except as otherwise required by applicable law, the consent of a majority of the number of shares of Convertible Preferred
Stock at the time outstanding, given in person or by proxy, either in writing or by vote, at a special or annual meeting, shall be
4
necessary to (i) authorize or issue, or obligate the Corporation to issue, any other capital stock or security or right convertible
or exchangeable for capital stock of the Corporation that is senior to or on a parity with the Convertible Preferred Stock as to
rights on liquidation or which is not Junior Stock for purposes of Section 1(d) herein; (ii) increase the authorized number of
shares of the Convertible Preferred Stock; (iii) enter any agreement, contract or understanding or otherwise incur any obligation
which by its terms would violate or be in conflict with the holders of Convertible Preferred Stock hereunder or the
Corporation's performance of the terms of its Second Amended and Restated Articles of Incorporation; (iv) amend the Second
Amended and Restated Articles of Incorporation or By-laws of the Corporation, if such amendment would adversely affect the
rights of the holders of the Convertible Preferred Stock in any material respect; or (v) amend or waive any provision of this
Certificate of Designation.
Section 3. Conversion.
At the option of the holder thereof and upon surrender thereof for conversion to the Corporation at the office of the Transfer
Agent of the Corporation s Common Stock (or to the Corporation's principal executive offices), each share of Convertible
Preferred Stock shall be convertible at any time (or if such share is called or surrendered for redemption, then in respect of
such share to and including, but not after, the close of business on the redemption date, unless the Corporation shall default in
the payment of the redemption price, in which case such right shall not terminate at such time and date) into that number of fully
paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100 of a share) obtained
by dividing $1,000.00 by the Conversion Price (as defined below) in effect at such time.
5
Each holder that desires to convert Convertible Preferred Stock into Common Stock pursuant to this Section 3 shall surrender
the certificate or certificates therefor, duly endorsed, at the office of the Transfer Agent (or to the Corporation's principal
executive offices) as aforesaid, and shall give notice to the Corporation at such office that such holder elects to convert the
same and shall state therein the number of shares of Convertible Preferred Stock being converted. Thereupon the Corporation
shall promptly issue and deliver at such office to such holder certificates for the number of shares of Common Stock to which
such holder is entitled upon conversion. Such conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the certificate representing the shares of Convertible Preferred Stock to be converted,
and the person entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the
record holder of such Common Stock on such date.
The "Conversion Price" shall mean and be $17.00, subject to adjustment from time to time by the Corporation as follows:
(a) In case the Corporation shall, at any time or from time to time while any of the shares of Convertible Preferred Stock are
outstanding, (i) pay a dividend or make a distribution on its Common Stock in shares of its Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares or (iv) issue by reclassification of its shares of Common Stock any shares of its capital stock
(each such transaction being called a "Stock Transaction"), then and in each such case, the Conversion Price in effect
immediately prior thereto shall be adjusted so that the holder of a share of Convertible Preferred Stock surrendered for
conversion after the record date fixing stockholders to be affected by such Stock Transaction shall be entitled to receive upon
conversion the number of such shares of Common Stock or other capital
6
stock of the Corporation that he would have owned or been entitled to receive after the happening of such event had such
share of Convertible Preferred Stock been converted immediately prior to such record date (or, if no record date, the effective
date). Such adjustment shall be made whenever any of such events shall happen, but shall also be effective retroactively as to
shares of Convertible Preferred Stock converted between such record date and the date of the happening of any such event.
(b) (i) In case the Corporation shall, at any time or from time to time while any of the shares of Convertible Preferred Stock are
outstanding, issue, sell or exchange shares of Common Stock (other than (w) pursuant to any right or warrant to purchase or
acquire shares of Common Stock (including as such a right or warrant any security convertible into or exchangeable for shares
of Common Stock), (x) pursuant to any employee or director incentive or benefit plan or arrangement, including any
employment, severance or consulting agreement but excluding any employee stock ownership plan within the meaning of
Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended (an "ESOP"), whether presently existing or, subject to
approval by a majority of the disinterested members of the Board of Directors of the Corporation, to be established in the
future, of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted, (y) pursuant to a Minor
Acquisition (as defined below) and
(z) in a Permitted Secondary Offering (as defined below)) for a consideration having a Fair Market Value (as defined below)
on the date of such issuance, sale or exchange that is less than the Market Price (as defined below) of such shares on the date
of such issuance, sale or exchange, then and in each case, the Conversion Price shall be adjusted by multiplying such
Conversion Price by a fraction (which shall not be greater than 1), the numerator of which shall be the sum of (x) the Current
Market Price per share of Common Stock as of the trading day immediately preceding the date of the public announcement of
the actual terms (including the
7
pricing terms) of such issuance, sale or exchange (or if there is no such public announcement prior to the effective date of such
issuance, sale or exchange, such effective date) multiplied by the number of shares of Common Stock outstanding immediately
prior to such issuance, sale or exchange plus (y) the aggregate Fair Market Value of the consideration received by the
Corporation in respect of such issuance, sale or exchange of shares of Common Stock, and the denominator of which shall be
the product of (x) the Current Market Price per share of Common Stock referred to in the immediately preceding clause (x)
multiplied by (y) the sum of the number of shares of Common Stock outstanding on such day plus the number of shares of
Common Stock so issued, sold or exchanged by the Corporation. For purposes of the preceding sentence, the aggregate
consideration receivable by the Corporation in connection with the issuance, sale or exchange of shares of Common Stock shall
be deemed to be equal to the sum of the aggregate offering price (before deduction of reasonable underwriting discounts or
commissions and expenses) of all such shares.
(ii) In the event the Corporation shall, at any time or from time to time while any shares of Convertible Preferred Stock are
outstanding, issue, sell or exchange any right or warrant to purchase or acquire shares of Common Stock (including as such a
right or warrant any security convertible into or exchangeable for shares of Common Stock) (other than (x) any issuance, sale
or exchange to holders of shares of Common Stock as a dividend or distribution (including by way of a reclassification of
shares or a recapitalization of the Corporation), and (y) pursuant to any employee or director incentive or benefit plan or
arrangement (excluding any ESOP), of the Corporation or any subsidiary of the Corporation heretofore or, subject to approval
by a majority of the disinterested members of the Board of Directors of the Corporation, hereafter adopted), for a
consideration having a Fair Market Value on the date of such issuance, sale or exchange less than the Fair Market Value of
such rights or warrants on the date of such
8
issuance, sale or exchange, then and in each case, the Conversion Price shall be adjusted by multiplying such Conversion Price
by a fraction (which shall not be greater than 1), the numerator of which shall be the sum of (a) the Current Market Price per
share of Common Stock as of the trading date immediately preceding the date of the public announcement of the actual terms
(including the price terms) of such issuance, sale or exchange (or if there is no such public announcement prior to the effective
date of such issuance, sale or exchange, such effective date) multiplied by the number of shares of Common Stock outstanding
immediately prior to such issuance, sale or exchange plus (b) the aggregate Fair Market Value of the consideration received by
the Corporation in respect of such issuance, sale or exchange of such right or warrant, and the denominator of which shall be
the sum of (i) the Current Market Price per share of Common Stock referred to in the preceding clause (a) multiplied by the
number of shares of Common Stock outstanding immediately prior to such issuance, sale or exchange plus (ii) the aggregate
Fair Market Value of such rights or warrants at the time of such issuance. For the purposes of the preceding sentence, the
aggregate consideration receivable by the Corporation in connection with the issuance, sale or exchange of any such right or
warrant shall be deemed to be equal to the sum of the aggregate offering price (before deduction of reasonable underwriting
discounts or commissions and expenses) of all such rights or warrants.
(c) In the event the Corporation or any of its subsidiaries shall, at any time or from time to time while any shares of Convertible
Preferred Stock are outstanding, repurchase or redeem any of the Corporation s outstanding capital stock at a premium over
the average Market Price per share on the trading day immediately preceding such repurchase or redemption (a "Repurchase"),
then and in the case of each Repurchase the Conversion Price in effect immediately prior thereto shall be adjusted by
multiplying such Conversion Price by a fraction, the numerator of which is (i) the product of (x) the number of shares of
Common Stock
9
outstanding immediately before such repurchase or redemption multiplied by (y) the average Market Price per share of
Common Stock on the five (5) trading days immediately following the consummation of such Repurchase minus (ii) the
aggregate purchase price of the Repurchase and the denominator of which shall be the product of (x) the number of shares of
Common Stock outstanding immediately before such Repurchase minus the number of shares of Common Stock repurchased
or redeemed by the Corporation multiplied by (y) the average Market Price per share of Common Stock on such five trading
days referred to in the preceding clause
(i)(y); provided, however, that the conversion price shall not be so adjusted with respect to any Repurchase of the Convertible
Preferred Stock pursuant to
Section 6 or 7 hereof.
(d) For the purposes of any computation under paragraphs (a) through
(c) of this Section 3, the following definitions shall apply:
(i) "Closing Price" of publicly traded shares of Common Stock or any other class of capital stock or other security of the
Corporation or any other issuer for a day shall mean the average of the reported closing bid and asked prices, in either case as
reported by the NASDAQ National Market System or, if such security is not listed or admitted to trading on the NASDAQ
National Market System, the last reported sales price, regular way, on the principal national securities exchange on which such
security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the average of
the closing bid and asked prices on each such day in the over-the-counter market as reported by NASDAQ or, if bid and
asked prices for such security on each such day shall not have been reported through NASDAQ, the average of the bid and
asked prices of such day as furnished by any New York Stock Exchange member firm regularly making a market in such
security selected for such purpose by the Board of Directors of the Corporation or a committee thereof. If the Common Stock
or
10
other class of capital stock or security in question is not publicly held, or so listed, or publicly traded, "Closing Price" shall mean
the Fair Market Value thereof.
(ii) "Current Market Price" per share of Common Stock as of any date shall be deemed to be the average of the daily Closing
Price per share for the ten (10) consecutive trading days ending on and including the day in question.
(iii) "Fair Market Value" of any consideration other than cash or of any securities shall mean the amount which a willing buyer
would pay to a willing seller in an arm s length transaction as determined by an independent investment banking or appraisal
firm experienced in the valuation of such securities or property selected in good faith by the Board of Directors of the
Corporation or a committee thereof.
(iv) "Market Price" per share at any date shall be the Closing Price on the specified date; provided, that, in the case of the
issuance, sale or exchange of shares of Common Stock pursuant to paragraph (b) of this Section 3 that are not registered under
the Securities Act of 1933 Market Price shall be reduced by an amount, if any (as determined by an independent investment
banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board of
Directors of the Corporation or a committee thereof), to compensate for the fact that such shares are not so registered, and in
making such determination any registration rights granted by the Company shall be taken into account.
(v) "Minor Acquisition" means any acquisition of the stock or assets of an unaffiliated third party by the Corporation by merger,
purchase, joint venture or other reorganization or business combination in consideration for the issuance of Common Stock
having a Fair Market Value not greater than $5,000,000.
11
(vi) "Permitted Secondary Offering" means any firmly underwritten public offering of the Common Stock at a price to the public
equal to or greater than the Conversion Price then in effect.
(e) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at
least $.01 in such price; provided, however, that any adjustments which by reason of this paragraph (e) are not required to be
made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 3 shall
be made to the nearest one-hundredth of a share.
(f) No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon the conversion of any
share of Convertible Preferred Stock. If the conversion thereof results in a fraction, an amount equal to such fraction multiplied
by the Current Market Price per share of Common Stock (as defined above) as of the conversion date shall be paid to such
holder in cash by the Corporation.
(g) In the event of any capital reorganization or reclassification of outstanding shares of Common Stock (other than a
reclassification covered by paragraph (a) of this Section 3), or in case of any merger, consolidation or other corporate
combination of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation
of the property of the Corporation as an entirety or substantially as an entirety (each of the foregoing being referred to as a
"Transaction"), each share of Convertible Preferred Stock shall continue to remain outstanding if the Corporation is the
Surviving Person (as defined below) of such Transaction, and shall be subject to all the provisions of the Certificate of
Designation of Series A Convertible Preferred Stock which embodies this resolution, as in effect prior to such Transaction
(including, without limitation, the provisions of Section 4 hereof if such Transaction
12
also constitutes a Change of Control (as hereinafter defined)), or if the Corporation is not the Surviving Person in such
Transaction, then each holder of shares of Convertible Preferred Stock may elect (which election shall be made within twenty
days (20) of the Transaction) to either (1) have Section 4 hereof be applicable to such holder s shares of Convertible Preferred
Stock or (2) if the consideration to be received by stockholders of the Corporation in the Transaction does not consist entirely
of cash, have each share of Convertible Preferred Stock be exchanged for a new series of senior preferred stock of the
Surviving Person, or in the case of a Surviving Person other than a corporation, comparable securities of such Surviving Person,
in either case having economic terms as nearly equivalent as possible to, and with the same voting and other rights as, the
Convertible Preferred Stock (including the right to convert into Survivor Common Stock); provided, however, that, at the
option of the holder of any shares of Convertible Preferred Stock (which election shall be made within such twenty days), each
share of Convertible Preferred Stock then outstanding or deemed to be outstanding, as the case may be, shall entitle the holder
thereof to receive, upon presentation of the certificate therefor to the Surviving Person subsequent to the consummation of such
Transaction the kind and amount of shares of stock and other securities and property receivable (including cash) upon the
consummation of such Transaction by a holder of that number of shares of Common Stock into which one share of Convertible
Preferred Stock was convertible immediately prior to such Transaction; provided, further, that if in connection with the
Transaction a tender or exchange offer shall have been made and there shall have been acquired pursuant thereto more than
50% of the outstanding shares of Common Stock, and if the holder of shares of Convertible Preferred Stock so designates in
the notice given to the Corporation which specifies such holder s selection of this alternative, such holder of such shares shall be
entitled to receive upon conversion thereof, the amount of securities or other property to which such holder would actually have
been entitled as
13
a holder of shares of Common Stock if such holder had converted such shares of Convertible Preferred Stock prior to the
expiration of such tender or exchange offer and accepted such offer and had sold therein the percentage of all the shares of
Common Stock issuable upon conversion of its shares of Convertible Preferred Stock equal to the percentage of shares of the
then outstanding Common Stock so purchased in the tender or exchange offer, with the remaining portion of its shares of
Convertible Preferred Stock thereafter being convertible into the amount of securities or other property to which such holder
would actually have been entitled upon the consummation of the Transaction as a holder of shares of Common Stock if such
holder had converted such shares of Convertible Preferred Stock immediately prior to such Transaction (subject to adjustments
from and after the consummation of the Transaction as nearly equivalent as possible to the adjustments provided for in this
Section 3). In any such case, if necessary, appropriate adjustment (as determined by the Board of Directors in good faith) shall
be made in the application of the provisions set forth in this
Section 3 with respect to the rights and interests thereafter of the holders of shares of Convertible Preferred Stock to the end
that the provisions set forth herein for the protection of the conversion rights of the Convertible Preferred Stock shall thereafter
be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable
upon conversion of the shares of Convertible Preferred Stock remaining outstanding (with such adjustments in the conversion
price and number of shares issuable upon conversion and such other adjustments in the provisions hereof as the Board of
Directors in good faith shall determine to be appropriate). In case securities or property other than Common Stock shall be
issuable or deliverable upon conversion as aforesaid, then all references in this Section 3 shall be deemed to apply, so far as
appropriate and as nearly as may be, to such other securities or property.
14
Notwithstanding anything contained herein to the contrary, the Corporation will not effect any Transaction unless, prior to the
consummation thereof, (i) proper provision is made to ensure that the holders of shares of Convertible Preferred Stock will be
entitled to receive the benefits afforded by this paragraph (i) of Section 3, and (ii) if, following the Transaction, one or more
entities other than the Corporation shall be required to deliver securities or other property upon the conversion of the
Convertible Preferred Stock, such entity or entities shall assume, by written instrument delivered to each holder of shares of
Convertible Preferred Stock, if such shares are held by 10 or fewer holders or group of affiliated holders, or to each Transfer
Agent for the shares of Convertible Preferred Stock, if such shares are held by a greater number of holders, the obligation to
deliver to such holder the amounts in cash to which, in accordance with the foregoing provisions, such holder is entitled.
For purposes of this paragraph (i) of Section 3, the following terms shall have the meanings ascribed to them below:
(i) "Surviving Person" shall mean the continuing or surviving Person of a merger, consolidation or other corporate combination,
the Person receiving a transfer of all or a substantial part of the properties and assets of the Corporation, or the Person
consolidating with or merging into the Corporation in a merger, consolidation or other corporate combination in which the
Corporation is the continuing or surviving Person, but in connection with which the Convertible Preferred Stock or Common
Stock of the Corporation is exchanged, converted or reclassified into the securities of any other Person or cash or any other
property.
(ii) "Survivor Common Stock" with respect to any Person shall mean shares of such Person of any class or series which has no
preference or priority in the payment of dividends or in the distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding
15
up of such Person and which is not subject to redemption by such Person provided, however, that if (x) the shares of such class
or series are not (or upon consummation of such Transaction will not be) listed on the New York Stock Exchange or the
American Stock Exchange or quoted by the NASDAQ National Market System or any successor thereto or comparable
system, and (y) the Surviving Person is a direct or indirect subsidiary of a Qualified Person, the Survivor Common Stock shall
be the common stock (or equivalent equity securities referred to in the definition of "Qualified Person") of such Qualified
Person.
(iii) "Qualified Person" shall mean any Person that, immediately after giving effect to the applicable Transaction, is a solvent
corporation or other entity organized under the laws of any state of the United States of America having its common stock or,
in the case of an entity other than a corporation, equivalent equity securities, listed on the New York Stock Exchange or the
American Stock Exchange or quoted by the NASDAQ National Market System or any successor thereto or comparable
system.
(iv) "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or
otherwise) of such entity.
(v) "Current Market Price" shall have the meaning set forth in paragraph (d) of this Section 3.
(h) In case at any time or from time to time, the Corporation shall pay any dividend or make any other distribution to the
holders of its Common Stock of, or shall offer for subscription pro rata to the holders of its Common Stock, any additional
shares of stock of any class or any other right, or there shall be any capital reorganization or reclassification of the Common
Stock of the Corporation or merger, consolidation or other corporate combination of the Corporation with or into another
corporation, or any sale or conveyance to another
16
corporation of the property of the Corporation as an entirety or substantially as an entirety, or there shall be a voluntary or
involuntary dissolution, liquidation or winding up the Corporation, then, in any one or more of said cases the Corporation shall
give written notice at the same time as, or as soon as practicable after, such event is first communicated (including by
announcement of a record date in accordance with the rules of any stock exchange on which the Common Stock is listed or
admitted to trading) to holders of Common Stock, but in any event at least 10 days prior to the record date for such event
specified below (the time of mailing of such notice shall be deemed to be the time of delivery thereof) to the registered holders
of the Convertible Preferred Stock at the addresses of each as shown on the books of the Corporation maintained by the
Transfer Agent thereof of the date on which (x) the books of the corporation shall close or a record shall be taken for such
stock dividend, distribution or subscription rights or (y) such reorganization, reclassification, merger, consolidation, corporate
combination, sale or conveyance, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall
also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution,
subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such
reorganization, reclassification, merger, consolidation, corporate combination, sale or conveyance or participate in such
dissolution, liquidation or winding up, as the case may be, as well as the conversion price and the number of shares into which
each share of Convertible Preferred Stock may be converted at such time. Failure to give such notice shall not invalidate any
action so taken.
(i) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued shares of Common Stock or its issued shares of Common Stock held in its treasury, or
both, for the purpose of effecting conversions of shares of Convertible Preferred Stock, the full number of shares of
17
Common Stock deliverable upon the conversion of all outstanding shares of Convertible Preferred Stock not theretofore
converted. For purposes of this
Section 3(i), the number of shares of Common Stock which shall be deliverable upon the conversion of all outstanding shares of
Convertible Preferred Stock shall be computed as if at the time of computation all outstanding shares of Convertible Preferred
Stock were held by a single holder.
Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value (if any) of
the shares of Common Stock deliverable upon conversion of the shares of Convertible Preferred Stock, the Corporation will
take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and
legally issue fully paid and non-assessable shares of Common Stock at such adjusted Conversion Price.
(j) The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Common Stock upon conversions of shares of Convertible Preferred Stock pursuant hereto.
(k) Upon any adjustment of the Conversion Price, then, and in each such case, the Corporation shall promptly deliver to the
transfer agent of the Convertible Preferred Stock and the Common Stock, a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation setting
forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and
specifying the Conversion Price then in effect following such adjustment. The Corporation shall also promptly after the making
of such adjustment give written notice to the registered holders of the Convertible Preferred Stock at the address of each
holder as shown on the books of the Corporation maintained by the transfer agent thereof, which
18
notice shall state the Conversion Price then in effect, as adjusted, and shall set forth in reasonable detail the method of
calculation of the same and a brief statement of the facts requiring such adjustment. Where appropriate, such notice to holders
of the Convertible Preferred Stock may be given in advance and included as part of the notice required under the provisions of
Section 3(i).
Section 4. Change of Control.
(a) (i) In the event that any Change of Control (as hereinafter defined) shall occur at any time and from time to time while any
shares of Convertible Preferred Stock are outstanding, each holder of Convertible Preferred Stock shall have the right to give
notice that it is exercising a Change of Control election (a "Change of Control Election"), with respect to all or any number of
such holder s shares of Convertible Preferred Stock, during the period (the "Exercise Period") beginning on the 30th day and
ending on the 90th day after the date of such Change of Control. Upon any such election, the Corporation shall redeem each
such holder s shares for which such an election is made, to the extent the Corporation shall have capital and surplus lawfully
available therefor, at a redemption price per share equal to the liquidation preference per share plus an amount equivalent to
interest accrued thereon at a rate of 7% per annum compounded annually on each anniversary date of the original issuance of
the Convertible Preferred Stock for the period from the date of such original issuance through the earlier of the date of such
redemption or the fifth (5th) anniversary of the date of such original issuance.
(b) As used herein, "Change of Control" shall mean:
(i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934) (the "Acquiring Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
19
such Act) of 50% or more of the combined voting power of the then outstanding voting securities of the Corporation entitled to
vote generally in the election of directors, but excluding, for this purpose, any such action by (x) the Corporation or any of its
subsidiaries, (y) any Purchaser (as defined in Section 5) or (z) any corporation or other entity with respect to which, following
such acquisition, more than 50% of the combined voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors (or if another entity, more than 50% of the equivalent controlling interests) is
then beneficially owned, directly or indirectly, by individuals and entities who were the beneficial owners of voting securities of
the Corporation immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior
to such acquisition, of the combined voting power of the then outstanding voting securities of the Corporation entitled to vote
generally in the election of directors; or
(ii) consummation of a reorganization, merger or consolidation involving the Corporation, in each case, with respect to which
the individuals and entities who were the respective beneficial owners of at least 80% of the voting securities of the Corporation
immediately prior to such reorganization, merger or consolidation do not or will not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more than 50% of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors of the corporation resulting from such reorganization,
merger or consolidation; or
(iii) the sale or other disposition of all or substantially all the assets of the Corporation in one transaction or series of related
transactions; or
20
(iv) individuals who would constitute a majority of the members of the Board of Directors elected at any meeting of
stockholders or by written consent (without regard to any members of the Board of Directors elected pursuant to the terms of
any series of Preferred Stock) shall be elected to the Board of Directors and the election or the nomination for election by the
Corporation s Stockholders of such directors was not approved by a vote of at least a majority of the directors in office
immediately prior to such election or nomination.
(c) On or before the fourteenth (14th) day after a Change of Control, the Corporation shall mail to all holders of record of the
Convertible Preferred Stock at their respective addresses as the same shall appear on the books of the Corporation as of such
date, a notice disclosing (i) the Change of Control, (ii) the redemption price per share of the Convertible Preferred Stock
applicable hereunder and (iii) the procedure which the holder must follow to exercise the redemption right provided above. To
exercise such redemption right, if applicable, a holder of the Convertible Preferred Stock must deliver during the Exercise
Period written notice to the Corporation (or an agent designated by the Corporation for such purpose) of the holder s exercise
of such redemption right, and, to be valid, any such notice of exercise must be accompanied by each certificate evidencing
shares of the Convertible Preferred Stock with respect to which the redemption right is being exercised, duly endorsed for
transfer. On or prior to the fifth (5th) business day after receipt of such written notice, the Corporation shall accept for payment
all shares of Convertible Preferred Stock properly surrendered to the Corporation (or an agent designated by the Corporation
for such purpose) during the Exercise Period for redemption in connection with the valid exercise of such redemption right and
shall cause payment to be made in cash for such shares of Convertible Preferred Stock. If at the time of any Change of
Control, the Corporation does not have sufficient capital and surplus legally available to purchase all of
21
the outstanding shares of Convertible Preferred Stock, the Corporation shall take all measures permitted under the Delaware
Code to increase the amount of its capital and surplus legally available, and the Corporation shall offer in its written notice of
such Change of Control to purchase as many shares of Convertible Preferred Stock as it has capital and surplus legally
available therefor, ratably from the holders thereof in proportion to the total number of shares tendered, and shall thereafter,
whenever it shall have capital and surplus legally available therefor, offer to purchase as many shares of Convertible Preferred
Stock as it has capital and surplus available therefor until it has offered to purchase all of the outstanding shares of Convertible
Preferred Stock.
(d) In the event of any Change of Control, proper provision shall be made to ensure that the holders of shares of Convertible
Preferred Stock will be entitled to receive the benefits afforded by this Section 4; provided, however, that in the event of any
Change of Control effected with the Corporation's consent, such provision to ensure the benefits of this Section 4 shall be made
prior to such Change of Control. If, following the Change of Control, one or more entities other than the Corporation shall be
required to deliver securities or other property upon the conversion of the Convertible Preferred Stock, such entity or entities
shall assume, by written instrument delivered to each holder of shares of Convertible Preferred Stock, if such shares are held by
ten (10) or fewer holders or group of affiliated holders, or to each Transfer Agent for the shares of Convertible Preferred
Stock, if such shares are held by a greater number of holders; the obligation to deliver to such holder the amounts in cash to
which, in accordance with the foregoing provisions, such holder is entitled.
Section 5. Certain Restrictions.
22
(a) In case of the happening of any of the following events ("Restriction Events"): (i) the Corporation breaches in any material
respect (x) any of its obligations under Section 6(d) of the Stock Purchase Agreement (the "Stock Purchase Agreement") dated
as of July 15, 1998, among the Corporation and the purchasers named therein (the "Purchasers"), and such breach shall have
continued for ten (10) days after notice thereof by any holder to the Corporation or (y) any of its other material obligations
under the Stock Purchase Agreement or under the Registration Rights Agreement or this Certificate of Designation, and such
breach shall have continued for twenty days
(20) after notice thereof by any holder; (ii) the Corporation shall not have redeemed any shares of the Convertible Preferred
Stock when required pursuant to this Certificate; (iii) a default or breach shall occur and be continuing under any other
agreement, document or instrument to which the Corporation is a party relating to indebtedness for borrowed money incurred
by it which is not cured within any applicable grace period, and such default or breach (x) involves the failure to make any
payment of principal, premium or interest when due in respect of such indebtedness or (y) results in the acceleration of such
indebtedness prior to its express meaning and, in each case the principal amount of such indebtedness, together with the
principal amount of any other indebtedness as to which there has been such a payment default or the maturity of which has been
accelerated, aggregates $1,000,000 or more; and (iv) a case or proceeding shall have been commenced against the
Corporation seeking a decree or order in respect of the Corporation (x) under Title 11 of the United States Code, as now
constituted or hereafter amended or any other applicable federal, state or foreign bankruptcy or other similar law, (y)
appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for the Corporation or of any
substantial part of the Corporation's assets, or
(z) ordering the winding-up or liquidation of the affairs of the Corporation, and such case or proceeding shall remain
undismissed or unstayed for sixty (60) days or more or such court shall enter a decree or
23
order granting the relief sought in such case or proceeding, then, until such breach is cured or until such redemption occurs: (x)
in the case of any Restriction Event described in Section 5(a)(i) or (ii), dividends shall accrue as set forth in Section 1; and (y) in
the case of any Restriction Event, the Corporation shall not:
(1) declare or pay dividends on, or make any other distributions of cash, properties or securities of the Corporation on or with
respect to any shares of capital stock ranking junior (as to any distribution of assets) to the Convertible Preferred Stock;
(2) redeem or purchase or otherwise acquire for consideration (or make any sinking fund, purchase fund or other similar
payments in respect of) any shares of capital stock ranking (as to any distribution of assets) junior to, or on parity with, the
Convertible Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of
capital stock ranking on parity with the Convertible Preferred Stock in exchange for shares of any capital stock ranking junior
to the Convertible Preferred Stock, or permit any subsidiary of the Corporation to purchase or otherwise acquire for
consideration any shares of capital stock of the Corporation unless the Corporation could, pursuant to this Section 5, purchase
such shares at such time and in such manner;
(3) make, or permit to remain outstanding after such time when pursuant to its terms such loan or advance would be due, any
loan or advance (including any guarantee of a loan or advance by a third party) by the Corporation or a subsidiary to any
person who beneficially owns any capital stock ranking junior (as to any distribution of assets) to the Convertible Preferred
Stock, or any affiliate or associate of such Person; or
24
(4) without the consent of the holders of at least a majority of the number of shares of the Convertible Preferred Stock at the
time outstanding, given in person or by proxy, either in writing or by vote at a special meeting called for the purpose, redeem or
purchase or otherwise acquire for consideration or offer to redeem, purchase or acquire for consideration any shares of
Convertible Preferred Stock except as provided in Section 4 and Section 7.
Section 6. Liquidation Preference.
In the event of a liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of
Convertible Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets are stated
capital or surplus of any nature, an amount equal to $1,000.00 per share, plus the amount of any accrued and unpaid dividends
or distributions payable pursuant to Section 1 hereinabove. Such payments shall be made before any payment shall be made or
any assets distributed to the holders of Common Stock or any other class or series of the Corporation s capital stock ranking
junior as to liquidation rights to the Convertible Preferred Stock. Neither a consolidation, merger or other business combination
of the Corporation s assets for cash, securities or other property shall be considered a liquidation, dissolution or winding up of
the Corporation for purposes of this Section 6 (unless in connection therewith the liquidation of the Corporation is specifically
approved).
Section 7. Optional and Mandatory Redemption.
(a) The Corporation may not redeem the Convertible Preferred Stock prior to July 15, 2003.
25
(b) The Corporation, at its option, may at any time on and after July 15, 2003 redeem the Convertible Preferred Stock in
whole or in part, at a cash redemption price per share equal to 100% of the liquidation preference, if the daily Closing Price (as
defined in Section 3(c)) per share of the Common Stock for the 20 consecutive trading days ending two days preceding the
mailing of the redemption notice provided in Section 7(d) is greater than or equal to 200% of the then current Conversion
Price.
(c) On September 15, 2008, the Corporation shall redeem all outstanding shares of Convertible Preferred Stock at a
redemption price equal to the liquidation preference per share. The redemption price shall be paid, at the Corporation s option,
in cash or in shares of Common Stock which shall be registered for resale pursuant to a permanent shelf registration statement
or for which any subsequent public distribution shall not require registration or qualification of such shares under applicable
federal and state securities laws. If the redemption price is paid in shares of freely tradeable Common Stock, each share of
Common Stock shall be valued at the product of (1) .95 and (2) the average of the daily Closing Prices per share of the
Common Stock for the twenty
(20) consecutive trading days immediately ending two (2) days preceding the redemption date.
(d) Not more than sixty (60) nor less than thirty (30) days prior to the redemption date, notice by first class mail, postage
prepaid, shall be given to each holder of record of the Convertible Preferred Stock to be redeemed, at such holder s address
as it shall appear upon the stock transfer books of the Corporation. Each such notice of redemption shall be irrevocable and
shall specify the date fixed for redemption, the Redemption Price (or the method by which such price will be determined),
whether such redemption price shall be paid in cash or in shares of Common Stock, the identification of the shares to be
redeemed (if fewer than all the outstanding shares are to be redeemed), the place or places of payment, that payment will be
made upon
26
presentation and surrender of the certificate(s) evidencing the shares of Convertible Preferred Stock to be redeemed, the then
effective Conversion Price pursuant to Section 3 and that the right of holders to convert shares called for redemption shall
terminate at the close of business on the redemption date (unless the Corporation defaults in the payment of the Redemption
Price).
(e) Any notice that is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the
holder of the Convertible Preferred Stock receives such notice; and failure to give such notice by mail, or any defect in such
notice, to the holders of any shares designated for redemption shall not affect the validity of the proceedings for the redemption
of any other shares of Convertible Preferred Stock. On or after the date fixed for redemption as stated in such notice, each
holder of the shares called for redemption shall surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of the Redemption Price in the manner set forth in
the notice. If fewer than all the shares represented by any such surrendered certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares. If, on the date fixed for redemption, funds (or shares of Common Stock) necessary
for the redemption shall be available therefor and shall have been irrevocably deposited or set aside, then, notwithstanding that
the certificates evidencing any shares so called for redemption shall not have been surrendered, the shares shall no longer be
deemed outstanding, the holders thereof shall cease to be stockholders, and all rights whatsoever with respect to the shares so
called for redemption (except the right of the holders to receive the Redemption Price without interest upon surrender of their
certificates therefor) shall terminate.
(f) In the event that any shares of Convertible Preferred Stock shall be converted into Common Stock pursuant to Section 3,
then (i) the Corporation shall not have the right to redeem such shares and (ii) any funds which shall have been deposited for the
payment of the
27
Redemption Price for such shares shall be returned to the Corporation immediately after such conversion.
(i) If fewer than all the shares outstanding are to be redeemed, the Corporation shall select the shares to be redeemed pro rata.
Section 8. Rank.
All shares of Convertible Preferred Stock shall rank, as to distribution of assets upon liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, prior to all classes and series of the Corporation s Preferred Stock, par
value $.01 per share, and prior to all of the Corporation s now or hereafter issued Common Stock. The term "Common Stock"
shall mean the Common Stock, $.01 par value per share, of the Corporation as the same exists at the date hereof or as such
stock may be constituted from time to time, except that for the purpose of Section 3, the term "Common Stock" shall also mean
and include stock of the Corporation of any class, whether now or hereafter authorized, which shall have the right to participate
in the distribution of either dividends or assets of the Corporation upon liquidation, dissolution or winding up, without limit as to
the amount or percentage.
Section 9. Notice. All notices hereunder shall be in writing.
Section 10. Reacquired Shares. Any shares of Convertible Preferred Stock converted, purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares of
Convertible Preferred Stock shall upon their cancellation, and upon the filing of an appropriate certificate with the Secretary of
the State of Delaware, become authorized but unissued shares of Preferred Stock, par value $.01 per share, of the
Corporation, undesignated as to series, and may be reissued as
28
part of another series of Preferred Stock, par value $.01 per share, of the Corporation subject to the conditions of restrictions
on issuance set forth therein.
Signed on July 27, 1998.
SALTON/MAXIM HOUSEWARES, INC.
/s/ William B. Rue
-----------------------------
AMENDMENT TO THE
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SALTON/MAXIM HOUSEWARES, INC.
(PURSUANT TO SECTION 242 OF THE
GENERAL CORPORATION LAW OF DELAWARE)
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation") is:
SALTON/MAXIM HOUSEWARES, INC.
2. This Amendment to the Second Amended and Restated Certificate of Incorporation hereby amends Article FIRST of the
Second Amended and Restated Certificate of Incorporation of the corporation as set forth herein.
3. Article First is hereby deleted in its entirety and the following shall be inserted herein:
FIRST: THE NAME OF THE CORPORATION IS SALTON, INC.
4. This Amendment to the Second Amended and Restated Certificate of Incorporation has been duly adopted by the required
vote of stockholders in accordance with Section 242 of the General Corporation Law of Delaware.
Signed and attested to on January 13, 1999.
By: /s/ Willam B. Rue
---------------------------------
Title:
------------------------------
Attest:
/s/ Neal Aizenstein
--------------------------------------
AMENDMENT TO THE
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SALTON, INC.
(PURSUANT TO SECTION 242 OF THE
GENERAL CORPORATION LAW OF DELAWARE)
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation") is:
SALTON, INC.
2. This Amendment to the Second Amended and Restated Certificate of Incorporation hereby amends the first paragraph of
Article Fourth of the Second Amended and Restated Certificate of Incorporation of the corporation as set forth herein.
3. The first paragraph of Article Fourth is hereby deleted in its entirety and the following first paragraph of Article Fourth shall
be inserted herein:
FOURTH: the total number of shares of capital stock which the corporation shall have authority to issue in the aggregate is
Forty-Two Million (42,000,000), of which Forty Million (40,000,000) shares shall be common stock with a par value of $0.01
per share, and Two Million (2,000,000) shares shall be preferred stock with a par value of $0.01 per share.
4. This Amendment to the Second Amended and Restated Certificate of Incorporation has been duly adopted by the required
vote of stockholders in accordance with Section 242 of the General Corporation Law of Delaware.
Signed and attested to on January 13, 2000.
By: /s/ William B. Rue
-----------------------------------
Title:
--------------------------------
Attest:
/s/ Marc Levenstein
---------------------------------------
EXHIBIT 10.38
LICENSE AGREEMENT
This Agreement is made by and between Westinghouse Electric Corporation, a Delaware corporation, having a principal place
of business at 1515 Broadway, New York, NY 10036 (hereinafter referred to as "Westinghouse"), and Salton, Inc., a
Delaware corporation, having a principal place of business at 1955 W. Field Court, Lake Forest, IL 60045 (hereinafter
referred to as "Salton").
WHEREAS, Westinghouse is the owner of certain valuable and famous trademarks;
WHEREAS, Salton and its subsidiaries and affiliates are in the business of sourcing the manufacture of, manufacturing,
marketing, distributing and selling, primarily to retailers certain Products as herein defined; and
WHEREAS, Salton currently is a sublicensee of the White Westinghouse trademark from White Consolidated Industries, Inc.,
as a sublicensor.
WHEREAS, Salton desires to become licensed under certain Westinghouse trademarks and Westinghouse is willing to grant
such license under the following terms and conditions.
NOW, THEREFORE, in consideration of the premises and the covenants herein contained, the parties hereto agree as follows.
1.0 - DEFINITIONS
In this Agreement the following expressions have the following meanings:
1.1 Categories - the categories of Products identified in Appendix A attached hereto and made a part hereof.
1.2 Licensing Manual - The Westinghouse Corporate Identity and Licensing Manual attached hereto and made a part hereof as
Appendix B.
1.3 Marks - The trademarks "Westinghouse" and "Circle W" as shown in Appendix C attached hereto and made a part hereof.
1.4 NS - "Net Sales" - The aggregate of the gross receipts from sales of Products less (a) returned goods, refunds, credits and
allowances actually made or allowed to a customer with respect to those Products, (b) freight or handling charges charged to
customers or incurred on returned goods, and (c) sales and excise taxes actually paid.
1.5 Products - The articles described and listed in Appendix A attached hereto and made a part hereof.
1.6 Territory - North America, South America, Europe, Africa, Asia and Australia-New Zealand (each of such areas are
called "Subterritories").
1.7 White Westinghouse Agreement - The licenses agreement between White Consolidated Industries, Inc. and Salton/Maxim
Housewares Inc. dated February 6, 1996, as amended.
-1-
2.0 - LICENSE GRANT
2.1 Unless sooner terminated, Westinghouse hereby grants Salton an exclusive license, without the right to grant sublicenses
(except as set forth herein), to use the Marks during the Term (as defined in Section 9.2) solely on or in connection with the
Products and solely in the Territory. Westinghouse reserves to itself all other rights in and to the Marks. Notwithstanding the
foregoing, Salton may grant sublicenses to use the Mark consistent with the terms of this Agreement to a wholly-owned
subsidiary provided that such subsidiary agrees to be bound by the terms of this Agreement and that such subsidiary remains a
wholly-owned subsidiary of Salton.
2.2 Salton shall use the Marks only in the form approved in writing by Westinghouse and with no departures in appearance or
treatment. Salton shall use its best efforts to ensure that the Marks used under this Agreement comply in every respect with the
Licensing Manual.
2.3 Salton shall not use nor authorize others to use the Marks outside the Territory or on any other goods or merchandise of
any kind other than as specifically set forth in this Agreement or as otherwise agreed to by the parties in writing. Salton shall
have the right to source the manufacture of Products in the Subterritory of Asia and any other Subterritory from which it
sources material amounts of Products which it markets regardless of whether Salton has retained the right to sell Products in
such Subterritory pursuant to this Agreement. Salton may request, in writing, Westinghouse's consent solely to manufacture in
other Subterritories, which consent may not be unreasonably denied.
2.4 Salton shall not sell any Products nor authorize others to sell any Products outside the Territory nor to any party where they
reasonably believe Products will be sold outside the Territory.
2.5 No rights are granted for the distribution of Products as premiums, promotions or giveaways.
2.6 The license granted is personal to Salton and is not assignable for any reason without Westinghouse's prior written consent.
2.7 Nothing in this Agreement is to be construed as an assignment or grant to Salton of any right, title or interest in the Marks
or in any copyright, design, trade name, trademarks, trade dress or other property right beyond the limited license expressly
granted hereby. Salton agrees not to assert any rights in the Marks, contrary to the provisions of this Agreement.
2.8 Salton acknowledges that White Consolidated Industries, Inc. has licensed certain parties to use the White-Westinghouse
marks in Spain, Portugal, Argentina and Mexico as identified in Appendix D to this Agreement and that such licenses shall not
constitute or be deemed a breach of the grant of the license to Salton by Westinghouse to use the Marks as set forth in this
Agreement or of any other provision of this Agreement.
3.0 - RESPONSIBILITY OF SALTON
3.1 Prior to any use of any Marks, Salton shall, at Salton's expense, submit to Westinghouse, for Westinghouse's written
approval, the following: (a) two (2) specimens of each design of Product on which said Marks are to appear (the "Specimens");
(b) clearance from Underwriters Laboratories, Inc. or a similar recognized independent consumer product safety testing
company for each Specimen ("Test Reports"); (c) all artwork which Salton intends to use in connection with the Marks; and (d)
all packaging, advertising and promotional literature which Salton intends to use in the marketing or merchandising of the
Products. Westinghouse shall give Salton written notice of approval or disapproval
-2-
within ten (10) business days from its receipt of the Specimens, and should Westinghouse disapprove, its written notice shall
explain in detail the reasons for disapproval so that Salton may prepare and submit new Specimens. After Westinghouse has
given its written approval of said Specimens, then the approved product, quality, packaging, advertising and promotional
literature shall be the standard for the relevant design of Product produced thereafter (the "Approved Quality"). Thereafter,
consecutively at twelve (12) month intervals, Salton shall, at Salton's expense, submit to Westinghouse not less than two (2)
randomly selected production run samples ("Sample") of each design of the Products and Test Reports (if any) respecting such
Products that are prepared during the previous 12 month period. Notwithstanding the foregoing, Westinghouse understands
and agrees that once a design of Product is approved by Westinghouse, Salton shall not be required by this provision to obtain
additional testing of such Product design. Salton shall obtain Westinghouse's prior approval on any new design of Product on
which the Marks will be used. Without the prior written approval of Westinghouse, Salton shall not sell or distribute any design
of Product which deviates from the Approved Quality. Products or any component thereof not meeting the Approved Quality,
including "second and irregulars," are not to be sold or distributed under any circumstances without Westinghouse's prior
written consent. Notwithstanding the foregoing, provided Salton gives Westinghouse prior notice, Salton may from time to time
revise packaging for the Products solely to include or change statements or other information which may be required by the
rules of the Underwriters' Laboratories, Inc. or laws or regulations of any jurisdiction where the Products are sold.
3.2 Westinghouse, at its own expense, has the right at reasonable times on notice to Salton to: (i) inspect Salton's manufacturing
facilities, warehouses and other facilities directly related to the Products and (ii) request and cause Salton to arrange for
Westinghouse's inspection of manufacturing facilities from which Salton sources the manufacture of Products. Salton agrees to
cooperate with Westinghouse in carrying out such inspections.
3.3 Salton shall design, manufacture, source the manufacture of, advertise, promote (through dealers co-op funding or
otherwise), sell and ship the Products, in a diligent and professional manner. Salton shall procure and maintain facilities and
trained personnel sufficient and adequate to accomplish the foregoing. Salton shall design, cause the manufacture of, advertise
and promote the Products so that each of the Products fulfills the following criteria: (i) they are not designed, manufactured or
marketed as lowest price point products; (ii) they are priced to customers as above the lowest price points for such products
and are so called mid level products; (iii) they have manufacturing, design, quality, and additional features that are similar to the
products marketed by others that are commonly perceived in the small kitchen electrics or houseware product business as mid
level products (but not, except as agreed to by Salton, highest quality or most expensive)and, for example, are approximately
equivalent in quality to and expected to be approximately as expensive in the consumer market as other branded Products in
the same product category that might compete with the Products marketed under the Marks. Salton shall not create a retail
exclusive arrangement respecting Products bearing the Marks without the prior written consent of Westinghouse.
3.4 Salton agrees to inform Westinghouse of the details of the use of the Marks, including graphics, position, size, color, script
and the like, and Westinghouse reserves the right to inspect and to approve the use of the Marks.
3.5 Salton shall refrain from and shall not authorize others to use or misuse the Marks so as to bring discredit to Westinghouse.
3.6 Salton agrees that all use of the Marks by Salton under this Agreement inures to the benefit of Westinghouse. Salton agrees
that at the termination or expiration of this Agreement, Salton will be deemed to have assigned, transferred and conveyed to
Westinghouse any rights, equities, good
-3-
will, titles or other rights in and to the Marks which may have been obtained by Salton or which may have vested in Salton in
pursuance of endeavors covered hereby, and that Salton will execute any instrument requested by Westinghouse to accomplish
or confirm the foregoing. Any such assignment, transfer or conveyance shall be without other consideration than the mutual
covenants and considerations of this Agreement.
3.7 Salton shall comply with any laws, rules and/or regulations, including, but not limited to, any county, state and/or federal
law, with regard to the use of the Marks and the design, manufacture, and, to the extent controlled by Salton, the
advertisement, promotion, sale and shipment of the Products.
3.8 Salton shall not apply for the registration of, or cause the filing of an application for the registration of, a trade name,
trademark or service mark which is identical to or confusingly similar to the Marks; provided that Salton shall have the right to
continue the use of the "White Westinghouse" trademark as set forth in this Agreement.
3.9 Salton shall promptly notify Westinghouse of any infringement or potential infringement of the Marks that come to its
attention. Salton will cooperate with Westinghouse, at Westinghouse's request, in taking steps to terminate such infringement.
However, Salton shall not take any legal action to protect against any infringement of the Marks without Westinghouse's
permission. Westinghouse will take action against infringers to defend the Marks but shall not be required to bring or prosecute
actions or suits. Any and all damages recovered in any action or proceeding commenced by Westinghouse shall belong solely
and exclusively to Westinghouse. To the extent that Salton incurs reasonable out of pocket legal fees and other costs in
connection with Westinghouse requests under this Section 3.9, Westinghouse shall reimburse Salton within forty-five (45) days
following a request therefor accompanied by reasonable documentation.
3.10 Salton acknowledges and agrees that any unauthorized use or misuse of the Marks by or for Salton will result in
irreparable harm to Westinghouse and that Westinghouse, in addition to any other rights or remedies specified in this
Agreement, shall be entitled to any remedy, legal or equitable, including without limitation preliminary injunctive relief, to correct
any harm which results from such violation.
3.11 Salton shall use its best efforts to maximize use of the Marks consistent with reasonable marketing plans.
3.12 Salton agrees to meet with Westinghouse at least once per year to review and discuss advertising and promotion plans for
the Products.
3.13 Salton shall adopt a mechanism by which it will respond to inquiries from customers and other third parties respecting the
operation and repair of the Products.
3.1.4 During the Term of this Agreement, Licensee shall not (i) enter into an agreement with a third party for products or (ii)
design, manufacture, source the manufacture, advertise, sell or ship products, that would compete with those Products in the
Category identified as "Vacuum Cleaners," except that this Section 3.1.4 shall not apply to the retailer-owned house brands,
such as Kenmore, marketed by Sears Roebuck & Company.
-4-
4.0 - COMPENSATION
4.1 Salton agrees to pay Westinghouse a royalty at the rate of *% of the NS of all sales of Products through television
response sales and infomercials and a royalty at the rate of *% of all the NS of all other sales of Products. If a NS is not
available for such Products, a commercially equivalent amount shall apply.
4.2 Commencing with the third twelve (12) month period of this Agreement ("Contract Year") and for each Contract Year
thereafter, subject to adjustment as set forth in Section 4.3, below, Salton agrees to pay Westinghouse the minimum royalty
payments for each Category ("Category Minimum Annual Royalty") as set forth below:
Category Category Minimum Annual Royalty ($US)
-------- ------------------------------------
Kitchen Electronics $*
Fans/Heaters $*
Personal Care $*
Table Top Cleaners $*
Clocks $*
Vacuums $*
Each twelve month period shall correspond to the fiscal year of Salton. Salton uses a 52/53 week fiscal year; each fiscal year of
Salton ends at the close of business on the Saturday of the last calendar week that begins in June, regardless of whether the
Saturday of such week falls in June or July. The first day of the next fiscal year will begin on a Sunday. Consequently, the first
Contract Year of this Agreement begins on Sunday, June 30, 2002. The second Contract Year and all succeeding Contract
Years shall begin on the next day following the end of the next preceding Contract Year.
4.3 Commencing with the fourth Contract Year and for each Contract Year thereafter during the Term, the Category Minimum
Annual Royalty for each Category of Products shall be increased by *%.
4.4 All Category Minimum Annual Royalties shall be payable in equal quarterly installments commencing with the initial quarter
of the third (3rd) Contract Year; however, amounts paid by Salton to Westinghouse pursuant to
Section 4.1 for each Category shall be credited against the applicable Category Minimum Annual Royalty for the quarter in
which it accrued.
4.5 Salton shall keep full, true and accurate books of account containing all particulars which may be necessary for the purpose
of determining the amount payable to Westinghouse under this Agreement. Said books and the supporting data shall be open at
all reasonable times, for three (3) years following the end of the calendar year to which they pertain, to an inspection, on a
confidential basis, by an independent certified public accountant retained by Westinghouse, at Westinghouse's expense, for the
purposes of verifying Salton's payments, and Salton's compliance in other respects with this Agreement; provided however, that
Westinghouse shall not have the right to audit the books and records of Salton during a period beginning six (6) full calendar
weeks before the end of Salton's fiscal year and ending at the end of the sixth
(6th) full calendar week after such fiscal year. If such inspection and resulting report indicate an underpayment by Salton which
extends beyond the forty-fifth (45th) day next following the end of the last quarter of each fiscal year of Salton, Salton shall
immediately pay such amount to Westinghouse with interest at prime rate as established by Mellon Bank, N.A. or any
successor, at the time of the inspection, and should such under-payment be in excess of $5,000 Salton shall also bear all costs
of the inspection.
* Confidential Treatment Requested
-5-
4.6 By the forty-fifth (45th) day next following the end of each quarter of each fiscal year of Salton, Salton shall deliver to
Westinghouse a true and accurate report certified by an officer or the Controller of Salton, giving such particulars of the
business conducted by Salton hereunder, during the preceding calendar quarter under this Agreement as are pertinent to an
accounting under this Agreement. These shall include at least the following:
(1) the number and type of Products sold by country;
(2) minimum annual payments due; and
(3) total payments due.
Concurrently with the delivery of each such report, Salton shall pay to Westinghouse the amounts due for the period covered
by such report. If no payments are due, it shall be so reported. In addition, within thirty (30) days of execution of this
Agreement, Salton shall report and pay over to Westinghouse all amounts due under this Agreement from the Effective Date.
4.7 Sales of Products in currencies other than United States dollars shall be converted to United States dollars at the
conversion rate stated in the Wall Street Journal for the day prior to the date payment is made by Salton.
4.8 All payments made hereunder by Salton shall be made payable to "Westinghouse Electric Corporation" by check or by
immediately available United States funds and delivered to:
President
Westinghouse Electric Corporation c/o Viacom Inc.
Controller's Office - 53rd Floor
1515 Broadway
New York, NY 10036
with a copy of the notice of payment to:
Jo Ann Haller
Assistant General Counsel Westinghouse Electric Corporation 11 Stanwix Street
Pittsburgh, PA 15222
and to:
Allan Feldman, President
Leveraged Marketing Corporation of America 156 West 56th Street
New York, New York 10019
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5.0 - OWNERSHIP OF THE LICENSED MARKS
5.1 Salton acknowledges that the Marks, worldwide, are the property of Westinghouse and that Westinghouse has substantial
and valuable goodwill in the Marks. Salton shall take all reasonable measures to maintain and protect Westinghouse's
proprietary rights including placing any reasonable notice of such ownership that Westinghouse shall reasonably require. Salton
shall cooperate fully and in good faith with Westinghouse for the purpose of securing and preserving Westinghouse's rights in
and to the Marks. Salton shall execute any documents reasonably required by Westinghouse to protect the Marks. To the
extent that Licensee incurs any out of pocket expense, including legal fees and costs, Westinghouse shall reimburse Salton
within forty-five (45) days after Salton submits a statement for such fees and costs accompanied by reasonable documentation.
Salton shall not take any action, or by its knowing inaction allow any event to occur, which would injure or impair
Westinghouse's proprietary rights in and to the Marks. Salton shall not contest the validity of the Marks or any rights of
Westinghouse therein, nor shall Salton willingly become an adverse party in litigation in which others shall contest the Marks or
Westinghouse's said rights. In addition thereto, Salton shall not in any way seek to avoid its obligations hereunder because of
the assertion or allegation by any persons, entities or government agencies, bureaus, or instrumentalities that the Marks, or any
of them, are invalid or ineffective or by reason of any contest concerning the rights of Westinghouse therein; provided however,
that, if there is a final determination by a court or arbitration panel that a third party owns the Marks and/or the rights granted
under this Agreement to Salton, Licensee shall have no obligations under this Agreement if its use of the Marks under this
Agreement is impaired or Salton is required to make additional royalty payments to such third party for continued use of the
Marks.
5.2 Salton shall indicate on all Product packaging and related advertising materials intended to be delivered to consumers that
the Products are manufactured and distributed by or for Salton.
5.3 Salton shall comply with proper use instructions as Westinghouse may issue from time to time with respect to the Marks;
provided that, to the extent that there is packaging, advertising or other materials or Product Inventory already in inventory
which has been approved by Westinghouse, Salton shall have the right to use up such inventory before making changes in such
packaging, advertising or other materials or Product Inventory.
6.0 REPRESENTATIONS, WARRANTIES AND COVENANTS
6.1 Salton represents warrants and covenants to Westinghouse as follows:
6.1.1 Salton will not use the Marks and has not and will not grant any right or license to use the Marks other than as authorized
under this Agreement.
6.1.2 Salton is a corporation duly organized, validly existing and in good standing under the laws of Delaware. Salton has all
corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder.
6.1.3 The execution, delivery and performance by Salton of this Agreement and the consummation of the transaction
contemplated hereby has been duly and validly authorized by all requisite corporate action, and no other corporate act or
proceeding on the part of Salton is necessary to authorize the execution, delivery and performance of this Agreement and the
consummation of the transaction contemplated hereby.
6.1.4 Salton is not subject to nor obligated under its certificate of incorporation or bylaws, any applicable law, rule or regulation
of any governmental authority, or any agreement (except as
-7-
set forth in Schedule 6.1.4), instrument, license or permit, or subject to any order, writ, injunction or decree, which would be
breached or violated by its execution, delivery or performance of this Agreement.
6.1.5 Salton's execution and delivery of this Agreement and performance of its obligations hereunder, including the obligation of
payments hereunder, do not and will not conflict with, violate, or result in any default under any agreement, instrument or other
contract to which Salton is a party or by which it is bound except as set forth in Schedule 6.1.4.
6.1.6 There are no claims, actions, suits, or other proceedings pending, or to the knowledge of Salton, threatened, which, if
adversely determined, would adversely affect the ability of Salton to consummate the transactions contemplated by this
Agreement or perform its obligations hereunder.
6.1.7 Salton: (i) has received no notice from any governmental authority to the effect that it is not in compliance with and is now
in compliance with and (ii) shall comply with all applicable laws and regulations relating to the manufacture (to the extent, if any,
that it is a manufacturer), sale and distribution of the Products and shall require its subcontractors to comply with applicable
laws and regulations relating to the manufacture of the Products.
6.1.8 Without cost to Westinghouse, Salton shall maintain insurance that protects Westinghouse, its officers, directors,
employees, agents, and its parent, affiliates and their officers, employees and agents against any and all liability regardless of the
basis, including punitive or exemplary damages in connection with (a) Salton's use of the Marks in violation of this Agreement,
(b) any alleged defect(s) in the Products, and (c) the design, use, manufacture (to the extent, if any, that Salton is a
manufacturer), distribution, marketing, sale or servicing of the Products including but not limited to product liability and any
alleged contractual liability of Westinghouse in connection with such actions concerning the Products. The kinds and amounts of
insurance shall be as Salton and Westinghouse from time to time agree, and at a minimum shall include the following:
6.1.8.1 Salton shall maintain in effect for at least the life of all the Products manufactured, distributed or serviced by or for
Salton, liability insurance, written on an occurrence basis, with limits of at least Five Million U.S. Dollars ($5,000,000) per
occurrence, or in years 2004 and later, such higher amount as may be reasonable considering legal or economic changes as
well as deteriorating loss experience. The insurance will cover at least the liabilities typically insured by commercial general
liability policies (including products/completed operations, advertising liability) issued in the year this Agreement is signed.
Westinghouse shall be an additional insured on such policies, which shall contain severability of interest or cross liability clauses.
6.1.8.2 All insurance shall be provided by insurance companies, on policy forms, and with deductibles and retentions
acceptable to Westinghouse, such acceptance not to be unreasonably withheld. Any such deductible or retention shall be the
responsibility of Salton.
6.1.8.3 Such insurance or risk financing arrangements shall be primary with no rights of contribution equitable or otherwise,
with any other insurance afforded Westinghouse.
6.1.8.4 Salton shall furnish Westinghouse with certificates of insurance within thirty (30) days after execution of this Agreement,
and annually thereafter. Such certificates will stipulate that coverage will not be canceled, reduced, or modified without thirty
(30) days prior written notice to Westinghouse. Any cancellation, reduction or modification, without the prior written consent of
Westinghouse, which results in there not being in force insurance coverage which satisfies all the requirements of Section 6.1.8,
including all its subsections, shall be deemed a material breach of this Agreement.
-8-
6.1.8.5 At reasonable times on advance written notice to Salton, Westinghouse may review the insurance policies at Salton's
offices.
6.1.8.6 The requirements of this clause will survive this Agreement, and will remain in effect for at least the life of the Products
manufactured, distributed, or serviced by or for Salton.
6.2 Westinghouse represents, warrants and covenants to Salton as follows:
6.2.1 Westinghouse is a corporation duly organized, validly existing and in good standing under the laws of the State of
Delaware. Westinghouse has all corporate power and authority to execute and deliver this Agreement and to perform its
obligations hereunder.
6.2.2 The execution, delivery and performance by Westinghouse of this Agreement and the consummation of the transaction
contemplated hereby has been duly and validly authorized by all requisite corporate action, and no other corporate act or
proceeding on the part of Westinghouse is necessary to authorize the execution, delivery and performance of this Agreement
and the consummation of the transaction contemplated hereby.
6.2.3 Westinghouse is not subject to nor obligated under its certificate of incorporation or bylaws, any applicable law, rule or
regulation of any governmental authority, or any agreement, instrument, license or permit, or subject to any order, writ,
injunction or decree, which would be breached or violated by its execution, delivery or performance of this Agreement.
6.2.4 Westinghouse is the owner of the Marks and, to Westinghouse's knowledge, the use of the Marks in the manufacture,
advertising, sale and promotion of any of the Products will not infringe any intellectual property or any other rights of any third
party.
6.2.5 Westinghouse has the full right, power and authority to grant the license as set forth in Article 2.0 hereof.
6.2.6 Licensor is not subject to nor obligated under its certificate of incorporation or bylaws, any applicable law, rule or
regulation of any governmental authority, or any agreement, instrument, license or permit, or subject to any order, writ,
injunction or decree, which would be breached or violated by its execution, delivery or performance of this Agreement except
as set forth in Schedule 6.1.4.
6.2.7 Licensor's execution and delivery of this Agreement and performance of its obligations hereunder, including the obligation
of payments hereunder, do not and will not conflict with, violate, or result in any default under any agreement, instrument or
other contract to which Licensor is a party or by which it is bound except as set forth in Schedule 6.1.4.
6.2.8 There are no claims, actions, suits, or other proceedings pending, or to the knowledge of Licensor, threatened, which, if
adversely determined, would adversely affect the ability of Licensor to consummate the transactions contemplated by this
Agreement or perform its obligations hereunder.
-9-
7.0 - INDEMNIFICATION
7.1 Salton shall indemnify and hold Westinghouse and its affiliates, as well as their respective officers, directors, agents,
employees, successors and assigns, harmless from and against any and all claims, suits, damages, liabilities, costs and expenses
including, but not limited to, court costs and reasonable attorneys fees, arising out of, based on or in any other manner related
to:
7.1.1 the breach of any representation, warranty, covenant or obligation of Salton under this Agreement;
7.1.2 any use by Salton of the Marks which is not permitted by or not in accordance with the terms of this Agreement;
7.1.3 any defect or alleged defect in the Products including, without limitation, any injuries to persons or property arising
therefrom; or
7.1.4 the design, manufacture, distribution, promotion or sale of the Products including, without limitation, infringement of
patents or misappropriation of trade secrets;
7.1.5 any claims by third parties against Westinghouse arising out of this Agreement, except to the extent such claims directly
result from Westinghouse's breach of its warranties in Section 6.2.
7.2 Westinghouse shall indemnify and hold harmless Salton from and against the cost and expenses (including, without
limitation, reasonable attorneys fees and costs) of any and all claims, suits, losses, damages, costs, demands, obligations,
investigations, causes of action, and judgments arising out of any assertion or allegation by any persons, entities or government
agencies that the Marks used by Salton under this Agreement infringe any trademark, trade name or any other personal
property right of a third party.
7.3 A party (the "Notifying Party") shall promptly notify the other party (the "Indemnifying Party") of the existence of any claim,
demand or other action giving rise to a claim for indemnification under this Agreement which involves a third party (a "Third
Party Claim") and shall give the Indemnifying Party a reasonable opportunity to defend the same at its own expense and with its
own counsel, provided that the Notifying Party shall at all times have the right to participate in such defense at its own expense.
7.4 Each party shall make available to the other, at the other's expense, such information and assistance as the other shall
reasonably request in connection with the defense of a Third Party Claim threatened or filed in connection with any activities
conducted hereunder.
8.0 - DISCLAIMERS
8.1 Nothing contained in this Agreement shall be constructed as:
8.1.1 (Except as provided in Section 3.1 and Article 6.0) A WARRANTY WHETHER STATUTORY, EXPRESSED OR
IMPLIED, A WARRANTY OF MERCHANTABILITY, A WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE, OR A WARRANTY ARISING FROM COURSE OF DEALING OR USAGE OF TRADE;
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8.1.2 an agreement to bring or prosecute actions or suits against third parties or conferring any right to bring or prosecute
actions or suits against third parties; and
8.1.3 conferring any right to use in advertising, publicity, or otherwise, any trademarks, service marks, trade name or name of
Westinghouse, or any contraction, abbreviation or simulation thereof, except as specifically permitted in this Agreement.
9.0 - TERM, TERMINATION AND EXPIRATION
9.1 The Base Term of this Agreement shall be for six (6) year(s) commencing March 31, 2002 and ending on March 31, 2008
at midnight Eastern Standard Time, unless sooner terminated.
9.2 This Agreement shall automatically renew for five (5) 5-year increments (each an "Extension Term"). In the event Salton
chooses not to extend the term of the Agreement, Salton shall so notify Westinghouse in writing no later than 120 days prior to
the end of the Base Term or then-current Extension Term, as applicable and in such case, this Agreement shall terminate
effective the last day of such Base Term or Extension Term. The Base Term and any exercised Extension Term are referred to
as the Term of the Agreement.
9.3 Westinghouse may elect to terminate this Agreement upon thirty (30) days' prior written notice to Salton if:
9.3.1 Salton does not meet the quality standards for the Products as established pursuant to the terms of this Agreement;
9.3.2 Salton's use or misuse of the Marks in violation of this Agreement may bring discredit to Westinghouse;
9.3.3 Salton fails to make payments due Westinghouse when due under this Agreement;
9.3.4 any proceeding is instituted by or for Salton for bankruptcy, reorganization or other relief for debtors; or
9.3.5 any proceeding is instituted by or for Salton to dissolve its corporate structure or for winding-up.
9.3.6 Salton directly or indirectly, merges or otherwise comes under the shared or sole control or direction of any other party
contrary to the terms of Section 14.1.
9.4 In the event of an alleged material breach by either party of any of the terms of this Agreement, the party suffering such
breach shall give notice to the other, in writing, thereof, specifying the type and circumstances pertaining to such breach in form
sufficient to enable opportunity for correction thereof by the party allegedly in breach. If such breach shall not have been
remedied during a ninety (90) day period immediately following the receipt of such notice, the party giving said notice shall have
the right to notify the other in writing of its decision to terminate this Agreement. In the event that the breach is remedied within
such ninety (90) day period, this Agreement shall continue in full force and effect the same as if no notice had been given.
Waiver by any party of its right to terminate because of any one breach shall not constitute a waiver of any subsequent breach
of the same or of a different nature. No termination of this Agreement by expiration or otherwise shall relieve or release any
party from any of its obligations hereunder with respect to royalties due or acts committed under this Agreement.
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9.5 Upon any expiration or termination of this Agreement:
9.5.1 all rights granted to Salton hereunder terminate at such expiration or termination;
9.5.2 Salton shall immediately discontinue any and all use of the Marks but shall be permitted to sell remaining stock within six
(6) months. Salton shall continue to abide by the terms of this Agreement respecting the Products during the six (6) month
period. Westinghouse shall be entitled to receive royalties on the sale of such stock in accordance with Article 4.0. After the
expiration of the aforesaid six (6) month period, Salton shall destroy all Product and packaging and promotional material
remaining in Salton's possession which are identified in any manner by or with the Marks. Notwithstanding the above,
Westinghouse shall have the right to purchase such excess stock of Licensed Items, in whole or in part, prior to any sale or
offer of sale by Salton to any third party, for an amount equal to the wholesale cost of such Licensed Items. It is specifically
understood and agreed that the Salton's right to dispose of stock shall be conditioned upon the absence of harm to the Marks
and/or the reputation of Westinghouse arising from the Salton's use of the Marks, as determined by Westinghouse in its sole
discretion.
9.5.3 the expiry or withdrawal of Salton's right to use the Marks shall not entitle Salton to compensation or damages of any
description other than as provided in Section 9.4;
9.5.4 all accrued payments to Westinghouse shall be paid to Westinghouse within thirty (30) days of such expiration or
termination;
9.5.5 all monies previously paid to Westinghouse pursuant to this Agreement will be retained by Westinghouse; and
9.5.6 the provisions of Article 7.0 and 9.0 shall survive.
10.0 - MINIMUM SALES
10.1 Beginning in the fifth Contract Year, Westinghouse, upon ninety days written notice to Salton, may elect to amend the
definition of Territory to delete therefrom the following jurisdictions should the NS of all Products sold by or for Salton not
exceed the respective minimums indicated below for the preceding calendar year.
Jurisdiction NS ($US)
------------ --------
North America $*
South America $*
Europe $*
Africa $*
Asia $*
Australia - New Zealand $*
From and after such deletion from the definition of Territory, Salton's license under this Agreement for those jurisdictions shall
be terminated.
10.2 Beginning in the third Contract Year, Westinghouse, upon ninety days written notice to Salton, may elect to amend the
definition of Products to delete therefrom a Category should the NS of Products sold by or for Salton within such Category not
exceed the respective minimums indicated below
* Confidential Treatment Requested
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for the immediately preceding calendar year:
Category NS ($US)
-------- --------
Kitchen Electronics $*
Fans/Heaters $*
Personal Care $*
Table Top Cleaners $*
Clocks $*
Vacuums $*
11.0 - EFFECTIVE DATE
11.1 Upon execution by both parties, the Effective Date of this Agreement shall be March 31, 2002.
12.0 - CHOICE OF LAW
12.1 This Agreement shall be construed, interpreted and governed in accordance with the laws of the State of New York.
13.0 - NOTICE
13.1 Any notice, request or statement hereunder shall be deemed to be sufficiently given or rendered when sent by certified
mail, telex, or telegram, and if given or rendered to Salton addressed to:
David Sabin
Chairman
Salton, Inc.
1955 West Field Court
Lake Forest, IL 60045
with a copy to:
Marc Levenstein
Senior Vice President and General Counsel Salton, Inc.
1955 West Field Court
Lake Forest, IL 60045
or, if given or rendered to Westinghouse addressed to:
President
Westinghouse Electric Corporation c/o Viacom Inc.
Controller's Office - 53rd Floor
1515 Broadway
New York, NY 10036
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with a copy to:
Jo Ann Haller
Assistant General Counsel Westinghouse Electric Corporation 11 Stanwix Street
Pittsburgh, PA 15222
and a copy to:
Allan Feldman, President
Leveraged Marketing Corporation of America 156 West 56th Street
New York, New York 10019
or, in any case, to such changed address or person as Westinghouse or Salton shall have specified by written notice pursuant
hereto.
14.0 - ASSIGNMENT/SUBCONTRACTING
14.1 Salton shall not assign this Agreement in whole or in part without the prior written consent of Westinghouse, except that
Salton shall have the right to assign this Agreement as in connection with (1) the merger of Salton into or the consolidation of
Salton with another company that becomes the surviving entity or (2) the acquisition of all or substantially all of the assets and
business of Salton by another company (each an "Acquisition" for purposes of this Section 14.1), provided that: a. the business
of Salton is continued and b. the net worth of the surviving entity immediately following any such Acquisition is not less than the
net worth of Salton immediately prior to any such transaction. Notwithstanding the right granted to Salton in this
Section 14.1 to assign this Agreement in the case of an Acquisition of Salton, Salton shall not have such right unless Salton first
receives the advance written consent of Westinghouse if the assignee is a person, company or other entity that, at the time of
such Acquisition of Salton, owns or controls through a subsidiary or is owned or controlled by a person, company or other
entity that owns or controls, a "Significant Rival Trademark". As used in this Section 14.1, a Significant Rival Trademark is a
trademark that is nationally known in both the United States and the large countries of Western Europe; (ii) is used to market a
variety of small kitchen electric products and other home use and non home use products both in the United States and in the
large countries of Western Europe and (iii) also refers to the name of a well known company. Salton and Westinghouse agree
that: (x) two current examples of a Significant Rival Trademark are the trademarks "General Electric" and "GE" and (y) current
examples of trademarks that are not, at the date hereof, Significant Rival Trademarks are Cuisinart and Moulinex.
14.2 Westinghouse may assign this Agreement in whole or in part.
14.3 Salton is responsible for the work of any of its contractors or subcontractor and for any debts, obligations or liabilities
incurred by any such contractors or subcontractor in connection with the Products. Salton shall discontinue using any contractor
or subcontractor who shall fail to comply with quality standards and/or delivery schedules required by Salton or Westinghouse
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15.0 - SEVERABILITY
15.1 The provisions of this Agreement are severable, and in the event that any provision of this Agreement is determined to be
invalid or unenforceable under any controlling body of law, such invalidity or unenforceability shall not in any way affect the
validity or enforceability of the remaining provisions hereof.
16.0 - MERGER
16.1 This instrument sets forth the entire and only agreement between the parties hereto as to the subject matter hereof; reflects
and merges all pertinent prior discussions and correspondence pertaining thereto, and supersedes and cancels all pre-existing
agreements pertaining thereto between them. Any representation, promise, definition, warranty or condition pertaining thereto
and not incorporated herein, shall not be binding upon either party. This instrument shall not become effective unless and until
dated and signed below on behalf of each of the parties by their duly authorized officers or representatives. This instrument and
its appendices may not be modified, enlarged, or changed in any way hereafter except by an instrument signed by each of the
parties hereto.
17.0 - REPORTING OF ADVERSE EVENTS
17.1 Salton shall report to Westinghouse, within forty-eight [48] hours from receipt of the information, any materially adverse
event that is reported to occur as a result of use of any of the Products. Such events must be reported in as much detail as
possible, whether or not there is proof of a causal connection between the events and use of the Products. A materially adverse
event includes any experience relating to the Products which is reasonably regarded to be seriously detrimental to person or
property in any manner.
18.0 - FINANCIAL STANDARDS
18.1 Salton shall provide its annual financial statements to Westinghouse annually or its quarterly financial statements as
requested by Westinghouse. So long as Salton remains a publicly held company, Westinghouse shall be entitled only to such
statements as are required to be filed with the U.S. Securities and Exchange Commission under the Securities Act of 1933, as
amended, and the Securities and Exchange Act of 1934, as amended. Such financial statements shall be prepared in
accordance with U.S. GAAP. Salton must promptly notify Westinghouse of a termination of any significant line of credit of or
guarantee of indebtedness by personal guarantor. Should Salton's net worth fall below $25,000,000 in the aggregate,
Westinghouse may terminate this Agreement. Likewise, Licensor may terminate this Agreement immediately if any of the
following occur: (1) Salton is in default under the provisions of any line of credit or debt agreement with financing institutions;
(2) a sale or transfer of Salton's assets which, in Westinghouse's opinion, may affect the ability of Salton to operate its business
pursuant to this Agreement; or (3) Salton incurs net operating losses in the aggregate for two or more consecutive years.
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19.0 - RELATIONSHIP OF PARTIES
19.1 The relationship hereby established between Salton and Westinghouse is solely that of independent contractors. This
Agreement shall not create an agency, partnership, joint venture or employer/employee relationship, and nothing hereunder shall
be deemed to authorize either party to act for, represent or bind the other except as expressly provided in this Agreement.
20.0 - AGENTS, FINDERS AND BROKERS
20.1 Each of the parties to this Agreement shall be responsible for the payment of any and all agent, brokerage and/or finder
commissions, fees and related expenses incurred by it in connection with this Agreement or the transactions contemplated
hereby and agrees to indemnify the other and hold it harmless from any and all liability (including, without limitation, reasonable
attorney's fees and disbursements paid or incurred in connection with any such liability) for any agent, brokerage and/or finder
commissions, fees and related expenses claimed by its agent, broker or finder, if any, in connection with this Agreement or the
transactions contemplated hereby. Westinghouse's sole agent/finder/broker in connection with this Agreement is Leveraged
Marketing Corporation of America ("LMCA") with offices at 156 West 56th Street, New York, New York 10019. As
between Westinghouse and Salton, any and all commissions, fees and/or other monies due LMCA in connection with this
Agreement shall the responsibility of Westinghouse.
IN WITNESS WHEREOF and intending to be legally bound, the parties hereto have caused these presents to be signed by
their proper officers thereunto duly authorized.
SALTON INC. WITNESS:
BY: /s/ David Sabin
------------------ --------------------------
David Sabin
Chairman
DATE:
WESTINGHOUSE ELECTRIC CORPORATION WITNESS:
BY: /s/ James F. Davis --------------------------
------------------
James F. Davis
Vice President
DATE:
EXHIBIT 18.1
September 16, 2002
Board of Directors
Salton, Inc.
1955 Field Court
Lake Forest, Illinois
We have audited the consolidated financial statements of Salton, Inc. as of June 29, 2002 and June 30, 2001, and for each of
the three years in the period ended June 29, 2002, included in your Annual Report on Form 10-K to the Securities and
Exchange Commission and have issued our report thereon dated September 16, 2002, which expresses an unqualified opinion
and includes an explanatory paragraph concerning the Company's change in its method of accounting for certain inventories
from the first-in, first-out method to the last-in, first-out ("LIFO") method. Note 2 to such financial statements contains a
description of your adoption during the year ended June 29, 2002 of the LIFO method for valuing certain inventories. In our
judgment, such change is to an alternative accounting principle that is preferable under the circumstances.
Yours truly,
DELOITTE & TOUCHE LLP
Exhibit 21.1
SUBSIDIARIES OF SALTON, INC.
NAME OF SUBSIDIARY JURISDICTION OF ORGANIZATION
Toastmaster, Inc. Missouri
Salton Europe PLC United Kingdom
Salton UK United Kingdom
Salton/Toastmaster Logistics LLC Delaware
Salton Hong Kong Ltd. Hong Kong
Salton International CV Netherlands
Salton S.a.r.l. Luxembourg
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-63296 on Form S-4, Registration Statement
No. 333-72903 on Form S-8, Registration Statement No. 333-93893 on Form S-8, and Registration Statement No.
333-21692 on Form S-3 of Salton, Inc. of our report dated September 16, 2002, appearing in the Annual Report on Form
10-K of Salton, Inc. for the year ended June 29, 2002.
Chicago, Illinois
September 23, 2002