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Salton Inc – ‘10-K’ for 6/29/02

On:  Friday, 9/27/02, at 12:11pm ET   ·   For:  6/29/02   ·   Accession #:  950137-2-4991   ·   File #:  1-14857

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/27/02  Salton Inc                        10-K        6/29/02    6:402K                                   Bowne Boc/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         82    489K 
 2: EX-3.1      Amended and Restated Certificate of Incorporation     36     92K 
 3: EX-10.38    License Agreement                                     16     67K 
 4: EX-18.1     Letter Re: Change in Accounting Principle              1      7K 
 5: EX-21.1     Subsidiaries of the Company                            1      5K 
 6: EX-23.1     Consent of Deloitte & Touche LLP                       1      6K 


10-K   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Special Note Regarding Forward-Looking Statements
"Item 1. Business
14Risk Factors
20Item 2. Properties
21Item 3. Legal Proceedings
22Item 4. Submission Of Matters To Vote Of Security Holders
23Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
"Fiscal 2002
"Fiscal 2001
"Fiscal 2000
24Item 6. Selected Financial Data
25Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
28Intangible Assets
38Item 8. Financial Statements And Supplementary Data
74Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
75Item 10. Directors and Executive Officers of the Registrant
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management
76Item 13. Certain Relationships And Transactions
"Item 14. Exhibits, Financial Statement Schedules, And Reports On Report 8-K(A)(1) Financial Statements
"Salton
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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) [Download Table] 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 [Enlarge/Download Table] 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.
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SALTON, INC. FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 29, 2002 INDEX [Download Table] 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 2
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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. 3
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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: [Enlarge/Download Table] 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 4
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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 5
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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 6
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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 7
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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: [Enlarge/Download Table] 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. [Enlarge/Download Table] 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. 8
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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. 9
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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 10
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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 11
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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. 12
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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
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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
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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
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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
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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
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- 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
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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
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- 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: [Enlarge/Download Table] 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. [Download Table] 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
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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
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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
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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. [Download Table] 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. 23
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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
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[Enlarge/Download Table] 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
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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
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- 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
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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
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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: [Enlarge/Download Table] FISCAL YEARS ENDED JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000 -------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------- Operating income 9.9% 14.1% 21.0% ================================================================================================== 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 29
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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. 30
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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 31
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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. 32
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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. 33
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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. 34
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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: [Enlarge/Download Table] 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 ===================================================================================================== [Enlarge/Download Table] 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
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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
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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. [Enlarge/Download Table] 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% [Enlarge/Download Table] 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
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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
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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
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SALTON, INC. CONSOLIDATED BALANCE SHEETS JUNE 29, 2002 AND JUNE 30, 2001 (IN THOUSANDS EXCEPT SHARE DATA) [Download Table] 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
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[Download Table] 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
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SALTON, INC. CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED JUNE 29, 2002, JUNE 30, 2001, AND JULY 1, 2000 (IN THOUSANDS EXCEPT PER SHARE DATA) [Enlarge/Download Table] 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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SALTON, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JULY 1, 2000 THROUGH JUNE 29, 2002 (IN THOUSANDS) [Enlarge/Download Table] --------------------------------------------------------------------------------------------------------- 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
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[Enlarge/Download Table] ----------------------------------------------------------------------------------------- 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
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SALTON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 29, 2002, JUNE 30, 2001, AND JULY 1, 2000 (IN THOUSANDS) [Enlarge/Download Table] 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
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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
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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
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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: [Enlarge/Download Table] 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
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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: [Enlarge/Download Table] 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
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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
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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
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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: [Enlarge/Download Table] 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
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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: [Enlarge/Download Table] 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
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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): [Enlarge/Download Table] 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): [Enlarge/Download Table] 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
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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
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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 [Enlarge/Download Table] 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
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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: [Enlarge/Download Table] 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
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[Enlarge/Download Table] 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: [Enlarge/Download Table] 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
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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: [Enlarge/Download Table] 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: [Enlarge/Download Table] 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: [Enlarge/Download Table] 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
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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: [Enlarge/Download Table] 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: [Download Table] ================================================================== Current portion $277 Long term portion 492 ------------------------------------------------------------------ Total obligations $769 ================================================================== Assets recorded under capital leases are included in Property, Plant and Equipment as follows: [Download Table] ----------------------------------------------------------------------------- 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
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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
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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
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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 - [Enlarge/Download Table] 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 - [Enlarge/Download Table] 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
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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: [Enlarge/Download Table] 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: [Enlarge/Download Table] 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: [Enlarge/Download Table] 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
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A reconciliation of the statutory federal income tax rate to the effective rate is as follows: [Enlarge/Download Table] 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). [Enlarge/Download Table] 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
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CONSOLIDATING BALANCE SHEET AS OF JUNE 29, 2002 (IN THOUSANDS) [Enlarge/Download Table] 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
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CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2001 (IN THOUSANDS) [Enlarge/Download Table] 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
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CONSOLIDATING STATEMENT OF EARNINGS FOR THE YEAR ENDED JUNE 29, 2002 (IN THOUSANDS) [Enlarge/Download Table] 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) [Enlarge/Download Table] 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
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CONSOLIDATING STATEMENT OF EARNINGS FOR THE YEAR ENDED JULY 1, 2000 (IN THOUSANDS) [Enlarge/Download Table] 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
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CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 29, 2002 (IN THOUSANDS) [Enlarge/Download Table] 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
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CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 30, 2001 (IN THOUSANDS) [Enlarge/Download Table] 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
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CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JULY 1, 2000 (IN THOUSANDS) [Enlarge/Download Table] 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
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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
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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. [Download Table] ---------------------------------------------------------------------------- (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
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(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: [Download Table] 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. [Download Table] 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
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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. [Enlarge/Download Table] 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
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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
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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. [Enlarge/Download Table] 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. [Enlarge/Download Table] 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
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[Download Table] 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
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[Download Table] 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
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[Download Table] EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 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

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Filing Submission 0000950137-02-004991   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

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