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2: EX-12.(A) Computation of Ratio of Earnings to Fixed Charges HTML 13K
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4: EX-23.1 Consent of Grant Thornton LLP HTML 8K
5: EX-23.2 Consent of Deloitte & Touche LLP HTML 8K
6: EX-31.1 302 Certification of Interim Chief Executive HTML 14K
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7: EX-31.2 302 Certification of Chief Financial Officer HTML 14K
8: EX-32.1 906 Certification of Interim Chief Executive HTML 9K
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9: EX-32.2 906 Certification of Chief Financial Officer HTML 9K
Securities registered pursuant to Section 12(b) of the
Act:
Title of Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
None
Rights to Purchase Series B
Junior Participating Preferred Stock
None
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark of the registrant is well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. Yes o No ž
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No ž
Indicate by check mark whether this registrant (1) has
filed all reports required to be filed by section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes ž No o
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. o
Indicate by check mark whether the registrant is large
accelerated filer, an accelerated filer or a non-accelerated
filer.
Large Accelerated
Filer o Accelerated
Filer o Non-Accelerated
Filer ž
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No ž
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant as of December 30, 2006
was approximately $33,942,353 computed on the basis of the last
reported sale price per share $2.25 of such stock on the NYSE.
This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Cautionary
Statement Regarding Forward-Looking Information
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 ability to repay or refinance our indebtedness as it matures
and satisfy the redemption obligations under our preferred stock;
•
our ability to continue to realize the benefits we expect from
our U.S. restructuring plan;
•
our substantial indebtedness and our ability to comply with
restrictive covenants in our debt instruments;
•
our ability to access the capital markets on attractive terms or
at all;
•
our relationship and contractual arrangements with key
customers, suppliers, strategic partners and licensors;
•
unfavorable outcomes from pending legal proceedings;
•
cancellation or reduction of orders;
•
the timely development, introduction and customer acceptance of
our products;
•
dependence on foreign suppliers and supply and marketing
constraints;
•
competitive products and pricing;
•
economic conditions and the retail environment;
•
international business activities;
•
the cost and availability of raw materials and purchased
components for our products;
•
the risks related to intellectual property rights; and
•
the risks relating to regulatory matters and other risks and
uncertainties detailed from time to time in our Securities and
Exchange Commission Filings.
As discussed in Recent Developments in Item 1.
“Business,”the Company entered into an Agreement and
Plan of Merger with APN Holding Company, Inc. on October 1,2007. Uncertainties regarding the merger include, but are not
limited to those described under Item 1A, “Risk
Factors,” including:
•
the failure to obtain approval of the merger and other related
proposals from Salton stockholders;
•
the ability of the two businesses to be integrated successfully;
•
the ability of the combined company to fully realize the cost
savings and synergies from the proposed transaction within the
proposed time frame;
•
disruption from the merger may make it more difficult to
maintain relationships with customers, employees or suppliers;
completion of the merger may result in dilution of future
earnings per share to the stockholders of Salton;
•
the combined company’s net operating loss carryforwards may
be limited as a result of the merger; and
•
costs associated with the merger are difficult to estimate, may
be higher than expected and may harm the financial results of
the combined company.
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.
As used in this annual report on
Form 10-K,
“we,”“us,”“our,”“Salton” and “the Company” refer to Salton,
Inc. and our subsidiaries, unless the context otherwise
requires. On September 29, 2005, we completed the sale of
our 52.6% ownership interest in Amalgamated Appliance Holdings
(“AMAP”), a leading distributor and marketer of small
appliances and other products in South Africa, to a group of
investors led by Interactive Capital (Proprietary) Limited.
Accordingly, we have reported the sale of AMAP as discontinued
operations in the financial statements and all statistical data
reported excludes AMAP for the periods presented.
Item 1.
Business
General
Salton, Inc. is a leading designer, marketer and distributor of
branded, high quality small appliances, home décor and
personal care products. Our product mix includes a broad range
of small kitchen and home appliances, electronics for the home,
time products, lighting products and personal care and wellness
products. We sell our products under our portfolio of well
recognized brand names such as
Salton®,
George
Foreman®,
Westinghousetm,
Toastmaster®,
Melitta®,
Russell
Hobbs®,
Farberware®
and
Stiffel®.
We believe our strong market position results from our
well-known brand names, our high quality and innovative
products, our strong relationships with our customer base and
our focused outsourcing strategy.
We currently market and sell our products in North America,
Europe, Asia, Australia, New Zealand, South America and the
Middle East 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 retailers, such as
Wal-Mart ,
Target Corporation, Argos Limited, Sears, Kohl’s Department
Stores, J.C. Penney Company, Bed, Bath & Beyond,
Federated Department Stores, Dixon Stores Group Limited, Linens
’N Things and Comet Group, Plc. We also sell certain of our
products directly to consumers through paid
half-hour
television programs referred to as infomercials and our Internet
websites.
We outsource most of our production to independent
manufacturers, located primarily in the Far East. The Company
has substantial experience with and expertise in managing
production relationships with third-party suppliers. We work
with our suppliers to provide the lowest possible cost for our
customers while maintaining reasonable gross margins for us.
Salton was incorporated in Delaware in October 1991. Our
principal corporate offices are located at 1955 Field Court,
Lake Forest, Illinois60045.
Our fiscal year ends on the Saturday closest to June 30.
Unless otherwise stated, references to years in this report
relate to fiscal years rather than calendar years.
On August 1, 2007, we received from APN Holding Company,
Inc. (“APN Holdco”) written notice of termination of
the merger agreement dated February 7, 2007 between Salton
and APN Holdco, the parent company of Applica Incorporated.
On August 1, 2007, the New York Stock Exchange suspended
trading on our common stock and disclosed that application to
the Securities and Exchange Commission to delist our common
stock from the NYSE is pending completion of applicable
procedures. The NYSE disclosed that the decision to suspend and
delist our common stock was reached due to failure to maintain
NYSE continued listing standards regarding average global market
capitalization. Since August 6, 2007, our common stock has
been quoted under the symbol “SFPI.PK” as an Over The
Counter (“OTC”) security on The Pink Sheets Electronic
Quotation Service.
On August 13, 2007, we announced that we entered into an
amendment to our senior credit facility that provides us with
additional borrowing capacity and, subject to certain
conditions, extends the date on which we must repay the
outstanding overadvances under the facility to November 10,2007.
On October 1, 2007, we entered into an Agreement and Plan
of Merger with APN Holding Company, Inc. (“APN
Holdco”), the parent company of Applica Incorporated,
pursuant to which Applica will become a wholly-owned subsidiary
of Salton. APN Holdco is owned by Harbinger Capital Partners
Master Fund I, Ltd. and Harbinger Capital Partners Special
Situations Fund, L.P., (collectively, “Harbinger Capital
Partners”). Upon consummation of the proposed merger and
the related transactions, Harbinger Capital Partners would
beneficially own 92% of the outstanding common stock of Salton,
and existing holders of Salton’s Series A Voting
Convertible Preferred Stock (excluding Harbinger Capital
Partners), Series C Nonconvertible (NonVoting) Preferred
Stock (excluding Harbinger Capital Partners) and common stock
(excluding Harbinger Capital Partners) would own approximately
3%, 3% and 2%, respectively, of the outstanding common stock of
Salton immediately following the merger and related transactions.
In addition to the merger, the definitive merger agreement
contemplates the consummation of the following transactions
simultaneously with the closing of the merger: (1) the
mandatory conversion of all outstanding shares of Salton’s
Series A Voting Convertible Preferred Stock, including
those held by Harbinger Capital Partners, into shares of
Salton’s common stock; (2) the mandatory conversion of
all outstanding shares of Salton’s Series C
Nonconvertible (NonVoting) Preferred Stock, including those held
by Harbinger Capital Partners, into shares of Salton’s
common stock; and (3) the exchange by Harbinger Capital
Partners of approximately $90 million principal amount of
Salton’s second lien notes and approximately
$15 million principal amount of Salton’s 2008 senior
subordinated notes, for shares of a new series of
non-convertible (non voting) preferred stock of Salton, bearing
a 16% cumulative preferred dividend.
We intend to complete this transaction within the next three to
four months. The consummation of the merger and related
transactions is subject to various conditions, including the
approval by the Salton stockholders and the absence of legal
impediments. The merger and related transactions are not subject
to any financing condition.
Concurrently with the execution and delivery of the Merger
Agreement, Salton, its subsidiaries, Silver Point Finance, LLC,
(“Silver Point”) as co-agent for the lenders under
Salton’s senior secured credit facility and Harbinger
Capital Partners entered into a Loan Purchase Agreement. The
Loan Purchase Agreement provides that at any time (1) from
and after the date any party to the Merger Agreement has, or
asserts, the right to terminate the Merger Agreement or the
Merger Agreement is terminated
and/or
(2) on or after November 10, 2007 and prior to
February 1, 2008 (provided, in each case, no insolvency
proceeding with respect to Salton or its subsidiaries is then
proceeding), at the request of Silver Point, Harbinger Capital
Partners shall purchase from Silver Point certain overadvance
loans outstanding under Salton’s senior secured credit
facility having an aggregate principal amount of up to
approximately $68.5 million. The purchase price shall be
equal to 100% of the outstanding principal amount of the
overadvance loans, plus all accrued and unpaid interest thereon
through and including the date of purchase.
In the event that Harbinger Capital Partners purchase the
overadvance loans pursuant to the Loan Purchase Agreement, the
amount of the purchased overadvance loans will be deemed
discharged under our senior secured credit facility and the
principal amount of such over advance loans, plus all accrued
and unpaid interest thereon and a $5 million drawdown fee
payable to Harbinger Capital Partners as a result of such
purchase, will be automatically converted to loans under a new
Reimbursement and Senior Secured Credit Agreement dated as of
October 1, 2007 among Harbinger Capital Partners, Salton
and its subsidiaries that are signatories thereto as borrowers
and guarantors.
The Loan Purchase Agreement also provides that under certain
circumstances, including the commencement of an insolvency
proceeding with respect to Salton or its subsidiaries, at the
request of Silver Point, Harbinger Capital Partners shall
purchase from Silver Point all of the outstanding obligations
under Salton’s senior secured credit facility (and
Harbinger Capital Partners Special Situations Fund, L.P. shall
become the agent and co-agent thereunder).
The Reimbursement and Senior Secured Credit Agreement has a
maturity date of January 30, 2008. The interest rate with
respect to loans under the Reimbursement and Senior Secured
Credit Agreement is the six month LIBOR plus 10.5%, payable in
cash on the last business day of each month. The default rate is
LIBOR plus 12.5%.
On October 1, 2007 and in connection with the Loan Purchase
Agreement: (a) we entered into a waiver, consent,
forbearance and seventeenth amendment to its senior secured
credit agreement pursuant to which Silver Point (1) permits
the transactions contemplated by the Loan Purchase Agreement and
related documents, (2) waives any event of default
resulting from a going concern qualification in the report by
Salton’s independent auditors accompanying Salton’s
audited financial statements as of and for the period ending
June 30, 2007, and (3) subject to certain conditions,
forbears from exercising remedies with respect to certain
existing events of default relating to, among other things, the
filing of Salton’s annual report on
Form 10-K
for the fiscal year ended June 30, 2007 and the delivery of
foreign stock pledge agreements and blocked account control
agreements; (b) we entered into a waiver, consent and first
amendment to its second lien credit agreement which, among other
things, permits the transactions contemplated by the Loan
Purchase Agreement and related documents; (c) the agent and
co-agent for our senior secured credit agreement, the agent for
the Reimbursement and Senior Secured Credit Agreement and the
second lien agent for our second lien credit agreement entered
into an Amended and Restated Intercreditor Agreement which,
among other things, governs the priority of rights among the
lenders; and (d) the agent for the Reimbursement and Senior
Secured Credit Agreement and the second lien agent for the
second lien credit agreement entered into a Junior Intercreditor
Agreement governing the priority of rights among the lenders
thereunder.
Business
Segment and Product Information
Salton consists of a single operating segment which designs,
sources, markets and distributes a diversified product mix for
use in the home. Our product mix consists of small kitchen and
home appliances, electronics for the home, time products,
lighting products and personal care and wellness products. We
believe this segmentation is appropriate based upon
Management’s operating decisions and performance
assessment. Nearly all of our products are consumer goods within
the housewares market, procured through independent
manufacturers, primarily in the Far East. Our products are
distributed through similar distribution channels and customer
base using the marketing efforts of our Global Marketing Team.
Brand
Portfolio
Our brand portfolio contains many time-honored traditions as
well as recently established names within the international
housewares industry. We believe this brand portfolio contains
many brands with strong consumer recognition throughout the
world. While many of our brands are owned, we continue to
enhance our portfolio through licensing agreements and strategic
alliances. Our brands include:
Salton®
Santa
FeTM
HadenTM
George
Foreman®
WestinghouseTM
Toastmaster®
Russell
Hobbs®
One:OneTM
Stiffel®
Melitta®
Breadman®
Carmen®
Farberware®
Andrew
CollingeTM
Juiceman®
iCEBOX®
Carmengirls.comTM
UltrasonexTM
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 customers. Our product groups include Small
Appliances and Electronics for the Home, Home Décor, and
Personal Care and Wellness. In an effort to focus the Company on
its core products, we made certain planned reductions in all
product groups as part of our actions to return to
profitability. However, such actions do not completely eliminate
or preclude future product innovations in any product group.
We design, market and distribute an extensive line of small
appliances and electronics for the home. These products consist
of heating appliances, motor driven appliances, beverage makers,
cookware and floor care.
Within our small appliance and electronics group, Salton is
known for the George Foreman branded product line which started
as a single grill in 1995. Since 1995, Salton has sold over
90 million units of the George Foreman line worldwide. We
have established the George Foreman name as a significant
product brand, representing approximately 41.7%, 39.9%, and
38.4% of our sales in the fiscal years ended June 30, 2007,
July 1, 2006, and July 2, 2005, respectively. In
recognition of the continued success of the George Foreman line,
Salton shipped to retailers the 10th Anniversary George
Foreman grill during the first quarter of fiscal 2006. In the
second quarter of fiscal 2006, Salton made its first shipment of
the “G5” Next Grilleration grills, the first series of
new George Foreman Grills with removable plates. The
“G5” features five interchangeable, dishwasher safe
plates which can be used as a grill or griddle and for baking as
well as making waffles.
In addition to Foreman, the Company sells appliances using time
honored brands such as Russell Hobbs, Toastmaster, Juiceman,
Breadman, Melitta, Farberware, Westinghouse, Haden and Salton.
Home
Décor
This range of products consists of time and lighting products.
Our time products include a variety of clocks and timers. Salton
also markets lighting products under the Stiffel brand.
Personal
Care and Wellness
Salton offers a broad range of personal care and wellness
products including hair care, beauty and oral health care items.
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 style, features and
functionality of our products to meet customer requirements for
quality, performance, product mix and pricing. We work closely
with both retail customers 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.
Customers
and Distribution Channels
We currently market and sell our products in North America,
Europe, Asia, Australia, New Zealand, South America and the
Middle East through an internal sales force and a network of
commissioned sales representatives. We predominately sell our
products to mass merchandisers, department stores, specialty
stores
and mail order catalogs. We also sell products directly to
consumers through infomercials and Internet websites.
We provide promotional support for our products with the aid of
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.
Our total net sales to our five largest customers during fiscal
2007 were 30.5% of net sales, with
Wal-Mart
Stores Inc. representing 10.1% of our net sales, Target Inc.
representing 7.1% of our net sales and Argos Ltd. representing
6.2% of our net sales. Our total net sales to our five largest
customers during fiscal 2006 were 33.6% of net sales, with
Target Inc. representing 9.8% of our net sales, Wal-Mart Stores
Inc. representing 9.3% of our net sales and Argos Ltd.
representing 5.9% of our net sales. In fiscal 2005, our total
net sales to our five largest customers were 37.3% of net sales,
with Target Inc. representing 12.6% of our net sales, Wal-Mart
Stores Inc. representing 8.5% of our net sales and Argos Ltd.
representing 7.1% of our net sales.
During fiscal 2007, 2006, and 2005, sales recorded outside of
North America accounted for 49.1%, 42.1%, and 43.2% of total net
sales, respectively. These figures include shipments directly
imported to customers in North America. See Note 17 of the
Notes to Consolidated Financial Statements for information
regarding revenues of the Company’s geographic areas for
each of the three fiscal years ended June 30, 2007,
July 1, 2006, and July 2, 2005.
Sources
of Supply
Most of our products are manufactured to our specifications by
manufacturers located primarily in the Far East. 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 we are not currently dependent on any single
manufacturer. However, one supplier located in China accounted
for approximately 43% of our product purchases during 2007, 37%
of our product purchases during 2006, and 32% of our product
purchases during 2005. 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 affect our business until alternative
supply arrangements are secured.
Backlog
Although we obtain firm purchase orders from our customers,
customers typically do not make firm orders for delivery of
products more than 30 to 90 days in advance. In addition,
customers may reschedule or cancel firm orders. Therefore, we do
not believe that the backlog of expected product sales covered
by firm purchase orders is a meaningful measure of future sales.
Competition
We compete in the global housewares market. While the Domestic
and Western European markets are strongly developed, the
remainder of the global market is less developed and we believe
offers significant opportunities for business expansion. We
compete with established companies, some of which have
substantially greater facilities, personnel, financial and other
resources than we have. Competition is based upon price, access
to retail shelf space, product features and enhancements, brand
names, new product introductions and marketing.
The retail industry continues to consolidate leaving fewer
retail outlets and increased competition for shelf space. We
expect retailers will continue to consolidate their vendor base
by dealing primarily with a smaller number of suppliers that can
offer a diversified product mix, meet logistical and volume
requirements and offer comprehensive levels of customer service
and marketing support. We believe our competitive pricing, high
level of customer service as well as our portfolio of well
recognized brand names, new technology and innovative products,
position us to compete and benefit from this environment.
Due to holiday buying patterns, sales are traditionally higher
in the second fiscal quarter than in the other quarterly periods
and the Company typically earns a disproportionate share of
operating income in this quarter.
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 and we consider these
trademarks to be of considerable value and of material
importance to our business. The Company’s right to use
these trademarks continues as long as it uses these names.
Salton maintains many licensing and contractual relationships to
market and distribute products under specific names and designs.
These licensing arrangements generally require certain license
fees and royalties. Some of our agreements contain minimum sales
requirements that, if not satisfied, may result in the
termination of the agreements. Some of our agreements contain
minimum royalty payments, which are reflected in the Contractual
Obligations table in Management’s Discussion and Analysis
of Financial Conditions and Results of Operations.
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, with them, has
not had an adverse effect on our business. Our small electric
appliance products sold in the United States are listed by
Underwriters Laboratory, Inc. (UL) or ETL. Similar products sold
in other countries are listed with local organizations similar
to UL if required.
Product
Warranties
Our products are generally sold with a limited one year warranty
from the date of purchase. In the case of defects in material
workmanship, we agree to replace or repair the defective product
without charge while under the warranty time frame.
Employees
As of June 30, 2007, we employed approximately
897 persons. None of the Company’s employees are
covered by a collective bargaining agreement. We have never
experienced a work stoppage and we believe that we have
satisfactory working relations with our employees.
Additional
Information
We file annual, quarterly and periodic reports, proxy statements
and other information with the SEC. You may obtain and copy any
document we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the
operation of the SEC’s public reference facilities by
calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet website
at http://www.sec.govthat contains reports, proxy and information statements, and
other information regarding issuers that file electronically
with the SEC. Our SEC filings are accessible through the
Internet at that website.
Our reports on
Forms 10-K,
10-Q and
8-K, and
amendments to those reports, are available for download, free of
charge, as soon as reasonably practicable after these reports
are filed with the SEC, at our website at
http://www.saltoninc.com.
The content of our website is not a part of this report. You may
request a copy of our SEC filings, at no cost to you, by writing
or telephoning us at: Salton, Inc., 1955 Field Court, LakeForest, Illinois60045, attention: Marc Levenstein, Assistant
Secretary, telephone:
(847) 803-4600.
We will not send exhibits to the documents, unless the exhibits
are specifically requested and you pay our fee for duplication
Nominating and Corporate Governance Committee Charter
•
Corporate Governance Guidelines, and
•
Code of Business Conduct and Ethics.
Item 1A.
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 “Cautionary
Statement Regarding Forward-Looking Information.” 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.
We
have a history of net losses, we expect to continue to incur net
losses, and our ability to continue as a going concern is
dependent on our ability to consummate the merger agreement with
APN Holding Company, Inc. (“APN
Holdco”).
We have incurred significant operating losses over the past
several years and have an accumulated deficit of
$80.5 million as of June 30, 2007. Our senior secured
credit facility requires the repayment of outstanding
overadvances of approximately $62.0 million by
November 10, 2007. In addition, we have approximately
$161.5 million of debt maturing in fiscal 2008. On
October 1, 2007, we signed an Agreement and Plan of Merger
with APN Holdco. We believe that without the consummation of the
merger, we will not have sufficient cash to fund our activities
in the near future, and we will not be able to continue
operating. We cannot assure you that we will be able to complete
the merger. As such, our continuation as a going concern is
uncertain. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty. Based upon the foregoing, our independent
registered accounting firm has included an explanatory paragraph
in their report on our financial statements related to the
uncertainty in our ability to continue as a going concern.
Our
substantial indebtedness continues to adversely affect our
financial health and may prevent us from fulfilling our payment
obligations.
We have a significant amount of indebtedness relative to our
equity size. As of September 7, 2007, we had total
consolidated indebtedness of approximately $316.4 million,
including approximately $118.7 million under our senior
secured credit facility, $103.3 million of Second Lien
Notes, approximately $58.1 million of 2008 Notes, excluding
$0.6 million related to the fair value of a monetized fixed
to floating interest rate swap on the 2008 Notes, and
$25.2 million under our European facility agreement. We may
incur additional indebtedness in the future, including through
additional borrowings under the second lien credit agreement
(which permits the issuance of up to an additional
$6.7 million principal amount of Second Lien Notes), our
senior secured credit agreement and our European facility
agreement, subject to availability.
Based on our fiscal year 2008 operating plan, we do not believe
that our business will generate sufficient cash flow from
operations or that future borrowings will be available under our
senior secured credit facility or other sources of funds in an
amount sufficient to enable us to service our indebtedness or to
fund our other
liquidity needs. We are actively pursuing various alternatives
to improve our liquidity position, including reducing or
delaying capital expenditures, borrowing additional funds,
restructuring indebtedness, selling assets or operations
and/or
reducing expenditures for new product development, cutting other
costs, and some of such actions would require the consent of our
senior lenders, the holders of the Second Lien Notes, the
holders of the 2008 Notes
and/or the
lenders under our European facility agreement. We can not assure
you that any of such actions could be effected, or if so, on
terms favorable to us, that such actions would enable us to
continue to satisfy our liquidity needs, that such actions would
not dilute the ownership interest of stockholders
and/or that
such actions would be permitted under the terms of our senior
secured credit facility, the second lien credit agreement, the
indenture governing the 2008 Notes or the European facility
agreement.
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 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 the principal of, and interest on,
our indebtedness (thereby reducing 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;
our debt level could impact our ability to maintain favorable
credit terms with our suppliers;
•
our debt level could limit our ability or increase the costs to
refinance indebtedness; 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 senior secured credit agreement, the second lien credit
agreement, the indenture governing the 2008 Notes and the
European facility agreement 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 senior secured
credit agreement, the second lien credit agreement and the
European facility agreement also require us to maintain
specified financial ratios. Our ability to comply with these
covenants and restrictions may be affected by events beyond our
control. If we are unable to comply with the terms of our senior
secured credit agreement, the second lien credit agreement,
indenture governing the 2008 Notes or the European facility
agreement, or if we fail to generate sufficient cash flow from
operations, or to refinance our debt as described below, we may
be required to refinance all or a portion of our indebtedness or
to obtain additional financing. If cash flow is insufficient and
refinancing or additional financing is unavailable because of
our high levels of debt and the debt incurrence restrictions
under our debt instruments, we may default on our debt
instruments. In the event of a default under the terms of any of
our indebtedness, the debt holders may accelerate the maturity
of our obligations, which could cause defaults under our other
obligations.
We
must either repay or refinance significant debt obligations due
in November 2007 and during the next twelve
months.
We must repay up to approximately $62 million of
overadvances under our senior secured credit agreement on or
before November 10, 2007. In addition, we have significant
maturities of debt during the next twelve months. These
maturities are March 31, 2008 under the second lien credit
agreement, April 15, 2008 under the indenture governing the
2008 Notes and December 22, 2008 under the European
facility agreement. We are also required to exchange all of the
outstanding shares of Series A convertible preferred stock
for an aggregate of $40.0 million in cash or shares of our
common stock on September 15, 2008. We will not have
sufficient cash flow from operations to repay all of our
indebtedness when due, satisfy our redemption obligations under
our preferred stock agreement and fund our other liquidity needs.
We
have experienced a decline in domestic market sales and continue
to implement a domestic restructuring plan.
Our domestic sales have decreased in fiscal 2007 as compared to
fiscal 2006. A portion of that decline is attributable to our
sale of the tabletop business in September 2005, discontinued
product lines and delays in production from suppliers. We
continue to implement our domestic cost reduction plan, and we
expect additional cost reductions in fiscal 2008. The cost
savings will principally come from a rationalization of
operations, brands and SKUs and the costs related to them.
Although the restructuring of our domestic operations through
workforce layoffs, consolidation of facilities and reduction of
certain marketing and advertising programs has reduced our
operating expenses, such actions may have an adverse effect on
our domestic sales. In addition, our current and prospective
customers and suppliers may decide to delay or not purchase or
supply our products due to the perceived uncertainty caused by
our indebtedness and the domestic restructuring plan.
We may be required to take charges in the future relating to our
restructuring plan, which could have a material and adverse
effect on our operating results. We cannot assure you that the
domestic restructuring plan will allow us to better align our
domestic cost structure with our current sales levels.
As a result of our declining sales, we have taken, and may have
to take in the future, impairment charges to certain of our
trade names.
Our
international operations, and expansion of these operations,
subjects us to additional business risks and may cause our
profitability to decline due to increased costs.
During fiscal 2007, 2006 and 2005, sales recorded outside of
North America accounted for 49.1%, 42.1%, and 43.2% of total net
sales, respectively. 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;
•
local and economic conditions;
•
unexpected changes in regulatory requirements;
•
inadequate protection of intellectual property in foreign
countries;
•
foreign currency fluctuations;
•
transportation costs;
•
adverse tax consequences; and
•
political and economic instability, as a result of terrorist
attacks, natural disasters or otherwise.
We cannot assure you that we will not incur significant costs in
addressing these potential risks.
Our
margins have been adversely impacted by increases in raw
material prices.
The cost of our products has been impacted by global increases
in the price of petroleum based plastic materials, steel, copper
and corrugated materials. Although we have increased the prices
of certain of our goods to our customers, we cannot assure you
that we will be able to pass all of these cost increases on to
our customers. As a result, our margins may continue to be
adversely impacted by such cost increases.
Our
ability to obtain products may be adversely impacted by
worldwide demand on raw material.
Our products are predominately made from petroleum based plastic
materials, steel, copper and corrugated materials. Our suppliers
contract separately for the purchase of them. We can provide no
assurance that our sources of supply will not be interrupted
should our suppliers not be able to obtain these materials due
to worldwide demand or other events that interrupt material flow.
If we
were to lose one or more of our major customers, or suffer a
major reduction of orders from them, 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
2007 were 30.5% of net sales with Wal-Mart Stores Inc.
representing 10.1% of our net sales and Target Inc. representing
7.1% of our net sales. Our total net sales to our five largest
customers during fiscal 2006 were 33.6% of net sales, with
Target representing 9.8% of our net sales and Wal-Mart
representing 9.3% of our net sales. Our total net sales to our
five largest customers during fiscal 2005 were 37.3% of net
sales, with Target representing 12.6% of our net sales and
Wal-Mart representing 8.5% of our net sales. 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.
Our
dependence on foreign suppliers subjects us to the risks of
doing business abroad.
We depend upon unaffiliated foreign companies for the
manufacture of most of our products. 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,
including those resulting from terrorist activity;
•
work stoppages;
•
foreign currency fluctuations; and
•
political and economic instability and civil unrest, which could
lead to the business failure of major suppliers.
Any reduction in trade credit from our suppliers could
materially adversely affect our operations and financial
condition.
We depend on the continuing willingness of our suppliers to
extend credit to us to finance our inventory purchases. If
suppliers become concerned about our ability to generate
liquidity and service our debt, they may delay shipments to us
or require payment in advance. Because of our limited access to
sources of liquidity, any such actions by our suppliers could
have a material adverse effect on our ability to continue our
business.
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:
We compete with established companies, some of which have
substantially greater facilities, personnel, financial and other
resources than we have. Significant new competitors or increased
competition from existing competitors may adversely affect our
business, financial condition and results of operations.
If the
housewares sector of 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.
If such conditions continue or worsen, including any further
weakness in consumer confidence as a result of terrorist
activity, or otherwise, 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 have filed for bankruptcy protection in recent
years. We continually monitor and evaluate the credit status of
our customers and attempt to adjust sales terms as appropriate.
Despite these efforts, a bankruptcy filing by, or other adverse
change in the financial condition of, a significant customer
could adversely affect our financial results.
Long
lead times, potential material price increases and customer
demands may cause us to purchase more inventory than
necessary.
Due to manufacturing lead times and a strong concentration of
our sales occurring during the second fiscal quarter, as well as
potential material price increases, we may 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.
Our
ability to successfully pursue strategic and operational
initiatives will depend on the continued efforts of our Chief
Executive Officer.
Our ability to successfully pursue strategic and operational
initiatives will depend significantly on the efforts and
abilities of William M. Lutz, our interim Chief Executive
Officer and Chief Financial Officer. The loss of the services of
Mr. Lutz could have a material adverse effect on our
business. We do not have, and do not intend to obtain, key-man
life insurance on Mr. Lutz.
Our
outstanding convertible preferred stock contains redemption and
other provisions which could have a material adverse effect on,
and significantly dilute, the interests of holders of our common
stock.
On July 28, 1998, we issued 40,000 shares 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 we breach, in any
material respect, any of the material obligations in the
preferred stock agreement or our restated 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 equal to
121/2%
of the Liquidation Preference (defined below). The preferred
shares are convertible into 3,529,411 shares of our common
stock (reflecting an $11.33 per share conversion price). The
holders of the convertible preferred stock are entitled to one
vote for each share of our common stock that the holder would
receive upon conversion of the convertible preferred stock.
In the event of a change in control, each preferred shareholder
has the right to require us 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. The satisfaction of this redemption obligation would have
to be satisfied before any proceeds from a change in control are
available to holders of common stock.
In the event of a liquidation, dissolution or winding up,
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 our common stock or any other of its 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 Preference per share (or an aggregate
of $40.0 million), payable at our option in cash or shares
of our common stock. Our inability to satisfy this redemption
obligation in cash could result in significant dilution of the
ownership interest of holders of common stock.
Our
credit ratings have been downgraded and could be downgraded
further.
Our credit ratings on our senior subordinated debt have been
downgraded several times during the last two years. On
July 14, 2005, Standard & Poor’s withdrew
its “D” corporate credit and “D”
subordinated debt ratings.
Such downgrades can have a negative impact on our liquidity by
reducing attractive financing opportunities and could make our
efforts to raise capital more difficult and have an adverse
impact on our financial condition and results of operations.
If we
have to expend significant amounts to remediate environmental
liabilities, our financial results will suffer.
Prior to 2003, we manufactured certain of our products at our
owned plants in the United States and Europe. Our previous
manufacturing of products at these sites 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 second fiscal quarter primarily due to
increased demand by customers for our products attributable to
holiday sales. This seasonality has also resulted in additional
interest expense for us during this period due to an increased
need to borrow funds to maintain sufficient working capital to
finance product purchases and customer receivables for the
seasonal period. Lower sales than expected by us during this
period, a lack of availability of product, a general economic
downturn in retail sales or the inability to service additional
interest expense due to increased borrowings could have a
material adverse effect on our business, financial condition and
results of operations.
Product
recalls or lawsuits relating to defective products could
adversely impact our financial results.
We face exposure to product recalls and product liability claims
in the event that our products are alleged to have manufacturing
or safety defects or to have resulted in injury or other adverse
effects. We cannot assure you that we will be able to maintain
our product liability insurance on acceptable terms, if at all,
or that product liability claims will not exceed the amount of
our insurance coverage. As a result, we cannot assure you that
product recalls and product liability claims will not adversely
affect our business.
The
infringement or loss of our proprietary rights could have an
adverse effect on our business.
We regard our copyrights, trademarks, service marks and similar
intellectual property as important to our success. We rely on
copyright and trademark laws in the United States and other
jurisdictions to protect our proprietary rights. We seek to
register our trademarks in the United States and elsewhere.
These registrations could be challenged by others or invalidated
through administrative process or litigation. If any of these
rights were infringed or invalidated, our business could be
materially adversely affected.
We license various trademarks and 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.
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.
The
requirements of complying with the Sarbanes-Oxley Act may strain
our resources, and our internal control over financial reporting
may not be sufficient to ensure timely and reliable external
financial reports.
We are subject to various regulatory requirements, including the
Sarbanes-Oxley Act of 2002. We have incurred, and expect to
continue to incur, substantial costs related to our compliance
with the Sarbanes-Oxley Act. The Sarbanes-Oxley Act requires,
among other things, that we maintain effective disclosure
controls and procedures, corporate governance standards and
internal control over financial reporting and that our auditors
provide an attestation relative to management’s assessment
process and conclusions. Due to market capitalization levels, we
are not currently required to comply with Section 404.
However, we must continue to maintain and assess our system of
internal controls over financial reporting, and under current
regulations, compliance with Section 404 will be required
in fiscal 2008. In order to maintain and improve the
effectiveness of our
disclosure controls and procedures and internal control over
financial reporting, significant resources and management
oversight have been, and will continue to be, required. We have
devoted additional financial resources, time and personnel to
legal, financial and accounting activities to ensure our ongoing
compliance with public company reporting requirements. In the
future, if our management identifies one or more material
weaknesses in our internal control over financial reporting, we
may be unable to assert that our internal control over financial
reporting is effective as of the end of the preceding year or
our auditors may be unable to express an opinion on the
effectiveness of our internal controls, even if our auditors
issue an unqualified opinion on our financial statements for the
preceding fiscal year. If the auditors are unable to provide an
unqualified opinion on the effectiveness of our internal control
over financial reporting, it could result in a loss of investor
confidence in our financial reports, adversely affect our stock
price and our ability to access the capital markets or borrow
money, and may subject us to sanctions or investigation by
regulatory authorities.
Our
stock price may continue to be volatile.
The trading price of our common stock is subject to significant
fluctuations in response to variations in quarterly operating
results; announcements of new products by us or our competitors;
changes in the domestic and international economic, political
and business conditions; general conditions in the housewares
industry; the recent lack of confidence in corporate governance
and accounting practices; and other events or factors. In
addition, the stock market in general has experienced extreme
price and volume fluctuations that have affected the market
prices for many companies that have been unrelated to the
operating performance of these companies. These market
fluctuations have adversely affected and may continue to
adversely affect the market price of our common stock.
Our
common stock was recently delisted from the New York Stock
Exchange and currently trades on the Pink Sheets Electronic
Quotation Service.
Our common stock was delisted from the New York Stock Exchange
(NYSE) on August 6, 2007 and has traded on the Pink Sheets
Electronic Quotation Service since that time. The market for our
common stock has changed since it was delisted from the NYSE. In
addition, the delisting of our common stock from the NYSE may
make it more difficult for us to raise capital in the future.
Takeover
defense provisions which we have implemented may adversely
affect the market price of our common stock.
Our stockholder rights plan and 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 consent;
•
a requirement that special meetings of stockholders be called
only by the board of directors;
•
availability of “blank check” preferred stock.
We do
not anticipate paying dividends.
We have not paid dividends on our common stock and we do not
anticipate paying dividends in the foreseeable future. We intend
to retain future earnings, if any, to finance the expansion of
our operations and for general corporate purposes, including
future acquisitions. In addition, our senior secured credit
facility, the second lien credit agreement and the Europe credit
facility contain restrictions on our ability to pay dividends on
our capital stock.
As discussed in Recent Developments in Item 1.
“Business,”the Company entered into an Agreement and
Plan of Merger with APN Holding Company, Inc. (”APN
Holdco”) on October 1, 2007. Uncertainties regarding
the merger include, but are not limited to the following:
The
failure to integrate the businesses and operations of Salton and
Applica in a timely and efficient manner could adversely affect
the business of the combined company and the ability of the
combined company to realize expected synergies.
The merger involves risks related to the integration and
management of technology, operations and personnel of two
companies. The integration of the businesses of Salton and
Applica will be a complex, time-consuming and expensive process
and may disrupt their respective businesses if not completed in
a timely and efficient manner. Following the merger, Salton and
Applica must operate as a combined organization utilizing common
information and communications systems, operating procedures,
financial controls and human resources practices.
We may encounter substantial difficulties, costs and delays
involved in integrating operations, including:
•
potential conflicts between business cultures;
•
adverse changes in business focus perceived by third-party
constituencies;
•
potential conflicts in distribution, marketing or other
important relationships;
•
potential resource constraints for accounting personnel;
•
inability to implement uniform standards, controls, procedures
and policies;
•
integration of the research and development and product
development efforts; and
•
loss of key employees
and/or the
diversion of management’s attention from other ongoing
business concerns.
We may not be successful in overcoming these risks or any other
problems encountered in connection with the integration of the
companies.
The
merger consideration is based in part on the expectation that
Applica will significantly contribute to the combined
company’s financial performance and if we do not realize
the expected synergies or perform as well as we expect
financially following the merger, we will effectively have paid
too much in merger consideration.
The success of the merger will depend, in part, on our ability
to realize the anticipated synergies, cost savings and growth
opportunities from integrating the businesses of Applica with
those of Salton. It is possible that the integration process
could result in the loss of key employees, the disruption of
each company’s ongoing business, or inconsistencies in
standards, controls, procedures, and policies that adversely
affect the combined company’s ability to maintain
relationships with suppliers, customers, and employees or to
achieve the anticipated benefits of the merger. In addition,
successful integration of the companies will require the
dedication of significant management resources, which will
temporarily detract attention from the day-to-day businesses of
the combined company. Even if we are able to integrate our
business operations with Applica successfully, this integration
may not result in the realization of the level of synergies,
cost savings and growth opportunities that we currently expect
or that these benefits will be achieved within the anticipated
time frame. For example, the elimination of duplicative costs
may not be possible or may take longer than anticipated and the
benefits from the merger may be offset by costs incurred in
integrating the companies.
The
costs associated with the merger are difficult to estimate, may
be higher than estimated and may harm the financial results of
the combined company to an unexpected degree.
We believe we will incur direct transaction costs associated
with the merger. In addition, the combined company will incur
financing fees and debt redemption costs (assuming all
redemption rights are exercised in full) in connection with the
merger. The combined company will also incur costs associated
with consolidation and integration of operations, which cannot
be estimated accurately at this time. Additional costs may
include:
•
costs of employee redeployment, relocation and retention,
including salary increases or bonuses;
•
accelerated amortization of deferred equity compensation and
severance payments;
•
costs of reorganization or closure of facilities;
•
costs of relocation and disposition of excess equipment; and
•
costs of termination of contracts that provide redundant or
conflicting services.
Some of these costs may have to be accounted for as expenses by
us that would decrease the combined company’s net income
and earnings per share for the periods in which those
adjustments are made. If the total costs of the merger exceed
estimates or the benefits of the merger do not exceed the total
costs of the merger, the financial results of the combined
company could be adversely affected. In addition, the closing of
the merger could be delayed beyond our expected timeline, adding
costs and diverting management resources, which could adversely
affect the combined company’s business, operations and
financial results.
Completion
of the merger and related transactions will result in dilution
of future earnings per share to our stockholders.
The completion of the merger may not result in improved earnings
per share of Salton or a financial condition superior to that
which would have been achieved by Salton on a stand-alone basis.
The merger could fail to produce the benefits that the companies
anticipate, or could have other adverse effects that the
companies currently do not foresee. In addition, some of the
assumptions that either company has made, such as the
achievement of operating synergies, cost savings and growth
opportunities may not be realized. If anticipated synergies,
savings, growth opportunities and other anticipated benefits are
not realized, the merger could result in a reduction of earnings
per share of Salton as compared to the earnings per share that
would have been achieved by Salton if the merger had not
occurred.
Neither
entity has completed its analysis of how much of its net
operating loss carryforwards will be available to the combined
company, and the combined company’s net operating loss
carryforwards may be limited as a result of the
merger.
As of June 30, 2007, we had net operating loss
carryforwards for federal income tax purposes of
$95.5 million. As of March 31, 2007, Applica had net
operating loss carryforwards for federal income tax purposes of
approximately $119.0 million. Both entities have provided full
valuation allowances for the tax benefit of such losses as well
as certain tax credit carryforwards. Utilization of these net
operating loss and credit carryforwards are dependent upon the
combined company achieving profitable results following the
merger. As a consequence of the merger, as well as earlier
business combinations and issuances of common stock consummated
by both companies, utilization of the tax benefits of these
carryforwards are subject to limitations imposed by
Section 382 of the Internal Revenue Code. The determination
of the limitations is complex and requires significant judgment
and analysis of past transactions. Neither entity has completed
the analyses required to determine what portion, if any, of
these carryforwards will have their availability restricted or
eliminated by that provision. Accordingly, some portion of these
carryforwards may not be available to offset future taxable
income, if any.
Uncertainty
with respect to the completion of the merger could cause
customers or suppliers to delay or defer purchases or other
decisions and could make it more difficult for us to attract and
retain key personnel.
In response to the announcement of the merger, our customers or
suppliers may delay or defer purchases or other decisions. Any
delay or deferral in purchases or other decisions by customers
or suppliers could harm our business, regardless of whether the
merger is completed. Similarly, our current and prospective
employees may experience uncertainty about their future roles
with the Company until the merger is completed. As a result, our
ability to attract and retain key management, sales, marketing,
and technical personnel could suffer.
Item 2.
Properties
Salton leases its principal executive offices based in Lake
Forest, Illinois. A summary of Salton’s principal leased
operating facilities is as follows:
Area
Location
Description
(Sq. Feet)
Redlands, CA
Warehouse
983,986
Wolverhampton, England
Warehouse
136,750
Victoria, Australia
Sales and administrative office and warehouse
75,348
Lake Forest, IL
Corporate offices and showrooms
58,680
Barueri, Brazil
Warehouse
23,465
Hong Kong, China
Sales and administrative office and warehouse
14,990
Shenzhen, China
Sales and administrative office, warehouse, and factory
14,375
In addition, Salton owns the following properties:
Area
Location
Description
(Sq. Feet)
Wolverhampton, England
Warehouse
312,000
Laurinburg, NC
Warehouse
223,000
Macon, MO
Warehouse and repair facility
171,000
Manchester, England
Sales and administrative office and warehouse
170,756
Boonville, MO
Warehouse
169,000
Columbia, MO
Administrative offices
62,000
We believe our facilities will be suitable and adequate for our
current level of operations, as well as support future growth.
Item 3.
Legal
Proceedings
Product
Liability
On or about October 27, 2004, a lawsuit entitled DiNatale
vs. Salton was filed in the New York State Supreme Court against
the Company. The plaintiffs, who seek unspecified damages,
allege that they were
injured by water contaminated with lead taken from a tea kettle
sold by the Company under its Russell Hobbs brand. The
plaintiffs’ attorney had been seeking to convert the
lawsuit into a class action suit; no class action suit has been
filed to date. The manufacturer of the product and its insurer
are defending this lawsuit. The Company’s attorneys and its
insurers are cooperating in the defense of the lawsuit.
Jay
Kordich v. Salton, Inc.
On October 19, 2005, a lawsuit named Jay Kordich v. Salton,
Inc. was filed in the United States District Court for the
Southern District of California. The plaintiff in this action is
seeking a judicial determination that a covenant not to compete
in an agreement between him and Salton is invalid and
unenforceable against him plus attorneys’ fees and costs.
Salton believes that the lawsuit is without merit.
Arbitration
BRX Ltd. has given notice under a contract between BRX and
Salton dated December 11, 2000 of BRX’s election to
have mandatory arbitration of a claim by BRX for
$2.0 million plus expenses of $0.3 million owing under
the contract. BRX claims the Company owes the amounts under the
terms of the agreement, which gave Salton the rights to use the
trademark “Vitantonio” for a period of five fiscal
years ending July 1, 2006 and to acquire permanent
ownership of the trademarks. The Company believes that it has
valid defenses to and will be contesting all of the BRX claims.
The outcome of the foregoing legal matters cannot be predicted
with certainty, however Salton does not believe that these
actions will have a material adverse affect on its business,
financial condition or results of operations. Therefore, no
amounts have been accrued for such claims.
Environmental
The Company has accrued approximately $0.2 million for the
anticipated costs of environmental remediation at four of our
current and previously owned sites. Although such costs could
exceed that amount, Salton believes any such excess will not
have a material adverse effect on the financial condition or
annual results of operations of the Company.
Other
The Company is a party to various other actions and proceedings
incident to its normal business operations. The Company believes
that the outcome of any such litigation will not have a material
adverse effect on our business, financial condition or results
of operations. The Company also has product liability and
general liability insurance policies in amounts believed to be
reasonable given its current level of business. Although
historically the Company has not had to pay any material product
liability claims, it is conceivable that the Company could incur
claims for which we are not insured.
Item 4.
Submissions
of Matters to a Vote of Security Holders
None
PART II
Item 5.
Market
for the Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
The registrant’s common stock has traded on the New York
Stock Exchange (“NYSE”) 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
NYSE.
High
Low
Fiscal 2007
First Quarter
2.72
1.95
Second Quarter
3.00
1.90
Third Quarter
3.25
2.08
Fourth Quarter
2.49
1.44
Fiscal 2006
First Quarter
4.40
1.00
Second Quarter
3.29
1.87
Third Quarter
4.13
1.26
Fourth Quarter
3.75
1.56
On August 1, 2007, the NYSE suspended trading on our common
stock and disclosed that application to the Securities and
Exchange Commission to delist our common stock from the NYSE is
pending completion of applicable procedures. The NYSE disclosed
that the decision to suspend and delist our common stock was
reached due to failure to maintain NYSE continued listing
standards regarding average global market capitalization. Since
August 6, 2007, our common stock has been quoted under the
symbol “SFPI.PK” as an Over The Counter
(“OTC”) security on The Pink Sheets Electronic
Quotation Service.
Dividends
We have not paid dividends on our common stock and we do not
anticipate paying dividends in the foreseeable future. We intend
to retain future earnings, if any, to finance the expansion of
our operations and for general corporate purposes, including
future acquisitions. In addition, our senior secured credit
agreement, the second lien credit agreement and the Europe
credit facility contain restrictions on our ability to pay
dividends on our capital stock.
Stockholder
Rights Plan
The Board of Directors of Salton adopted a stockholder rights
plan (the “Rights Plan”) dated as of June 28,2004, as amended June 7, 2006, February 7, 2007 and
October 1, 2007 pursuant to which a dividend consisting of
one preferred stock purchase right (a “Right”) was
distributed for each share of Common Stock held as of the close
of business on July 9, 2004, and is to be distributed to
each share of Common Stock issued thereafter until the earlier
of (i) the Distribution Date (as defined in the Rights
Plan), (ii) the Redemption Date (as defined in the
Rights Plan) or (iii) June 28, 2014. The Rights Plan
is designed to deter coercive takeover tactics and to prevent an
acquirer from gaining control of us without offering fair value
to our stockholders. The Rights will expire on June 28,2014, subject to earlier redemption or exchange as provided in
the Rights Plan. Each Right entitles the holder thereof to
purchase from us one one-thousandth of a share of a new series
of Series B Junior Participating Preferred Stock at a price
of $45.00 per one one-thousandth of a share, subject to
adjustment. The Rights are generally exercisable only if a
Person (as defined) acquires beneficial ownership of
25 percent or more of our outstanding Common Stock.
A complete description of the Rights, the Rights Agreement
between us and UMB Bank, N.A., as Rights Agent, and the
Series B Junior Participating Preferred Stock is hereby
incorporated by reference from the information appearing under
the caption “Item 1. Description of the
Registrant’s Securities to be Registered” contained in
the Registration Statement on
Form 8-A
filed on June 28, 2004, as amended June 7, 2006,
February 7, 2007 and October 1, 2007.
Common
Stock
The Certificate of Incorporation authorizes the issuance of
40,000,000 common shares, par value $0.01 per share. As of
September 13, 2007, there were approximately 351 holders of
record of our common stock.
The Certificate of Incorporation authorizes the issuance of
2,000,000 Series A preferred shares, par value $0.01 per
share.
We have 40,000 outstanding shares of convertible preferred
stock. The convertible preferred stock is generally non-dividend
bearing; however, if we breach in any material respect any of
our material obligations in the preferred stock agreement or the
Certificate of Incorporation relating to the convertible
preferred stock, the holders of convertible preferred stock are
entitled to receive quarterly cash dividends on each share of
convertible preferred stock from the date of such breach until
it is cured at a rate per annum equal to
121/2%
of the Liquidation Preference as defined below. The payment of
dividends is limited by the terms of our senior secured credit
agreement, the second lien credit agreement and the Europe
credit facility.
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 7.0% per annum compounded annually
on each anniversary date of July 28, 1998 for the period
from July 28, 1998 through the earlier of the date of such
redemption or July 28, 2003.
In the event of a liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of the
Convertible Preferred Stock are entitled to be paid out 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 Preference
per share, payable at the Company’s option in cash or
shares of Salton common stock.
As of September 11, 2007 there were 40,000 shares of
the convertible preferred stock outstanding, held by
8 shareholders of record. There is no established market
for the convertible preferred stock.
The merger agreement disclosed in Recent Developments requires
the mandatory conversion of all outstanding shares of the
Series A preferred stock into shares of Salton’s common
stock, effective upon consummation of the merger.
Series C
Preferred Stock
On August 26, 2005, we issued 135,217 shares of
Series C preferred stock with a total liquidation
preference of $13.5 million. Salton’s restated
certificate of incorporation authorizes the Company to issue up
to 150,000 shares of Series C preferred stock.
The Series C preferred stock is non-dividend bearing and
ranks, as to distribution of assets upon the Company’s
liquidation, dissolution or winding up, whether voluntary or
involuntary, (a) prior to all shares of convertible
preferred stock from time to time outstanding, (b) senior,
in preference of, and prior to all other classes and series the
Company’s preferred stock and (c) senior, in
preference of, and prior to all of the Company’s now or
hereafter issued common stock.
Except as required by law or by certain protective provisions in
the Company’s restated certificate of incorporation, the
holders of shares of Series C preferred stock, by virtue of
their ownership thereof, have no voting rights.
In the event of the Company’s liquidation, dissolution or
winding up, whether voluntary or involuntary, holders of the
Series C preferred stock will be paid out of the
Company’s assets available for distribution to the
Company’s stockholders an amount in cash equal to $100 per
share (the “Series C Preferred Liquidation
Preference”), before any distribution is made to the
holders of the Company’s convertible preferred stock,
common stock or any other capital stock ranking junior as to
liquidation rights to the Series C preferred stock.
In the event of a change of control (as defined in the
Company’s restated certificate of incorporation), each
holder of shares of Series C preferred stock will have the
right to require the Company to redeem such shares at a
redemption price equal to the Series C Preferred
Liquidation Preference plus an amount equivalent to interest
accrued thereon at a rate of 5% per annum compounded annually on
each anniversary date of the issuance date for the period from
the issuance date through the change of control. The redemption
price is payable on a date after a change of control that is
91 days after the earlier of (x) the date on which
specified debt (including indebtedness under the Company’s
senior secured credit facility, the second lien credit
agreement, the indentures under which the Subordinated Notes
were issued, and restatements and refinancings of the foregoing)
matures and (y) the date on which all such specified debt
is repaid in full, in an amount equal to the Series C
Preferred Liquidation Preference plus an amount equivalent to
interest accrued thereon at a rate of 5% per annum compounded
annually on each anniversary date of the issuance date for the
period from the issuance date through such change of control
payment date. The certificate of designation for the
Series C preferred stock provides that, in the event of a
change of control, the Company shall purchase all outstanding
shares of Series C preferred stock with respect to which
the holder has validly exercised the redemption right before any
payment with respect to the redemption of convertible preferred
stock upon such change of control.
The Company may optionally redeem, in whole or in part, the
Series C preferred stock at any time at a cash price per
share of 100% of the then effective Series C Preferred
Liquidation Preference per share. On the fifth anniversary of
the issuing date, we will be required to redeem all outstanding
shares of Series C preferred stock at a price equal to the
Series C Preferred Liquidation Preference per share,
payable in cash.
The merger agreement disclosed in Recent Developments requires
the mandatory conversion of all outstanding shares of the Series
C preferred stock into shares of Salton’s common stock,
effective upon consummation of the merger.
The following financial data as of and for the fiscal years
ended June 30, 2007, July 1, 2006, July 2, 2005,
July 3, 2004, and June 28, 2003 have been derived from
and should be read in conjunction with, our audited consolidated
financial statements, including the notes thereto. All years
represent a fifty-two week year except fiscal year 2004 which
included an extra week.
Gain on sale of discontinued operations, net of tax
—
32,332
—
—
—
Net (loss) income
$
(91,156
)
$
(67,967
)
$
(51,787
)
$
(95,172
)
$
7,971
Weighted average common shares outstanding
14,814
13,393
11,374
11,258
14,682
Net (loss) income per share: Basic
(Loss) income from continuing operations
$
(6.15
)
$
(7.62
)
$
(4.74
)
$
(9.22
)
$
0.52
Income from discontinued operations, net of tax
—
0.13
0.19
0.77
0.02
Gain of sale of discontinued operation, net of tax
—
2.41
—
—
—
Net (loss) income per share: Basic(2)
$
(6.15
)
$
(5.08
)
$
(4.55
)
$
(8.45
)
$
0.54
Weighted average common shares and common Equivalent shares
outstanding
14,814
13,393
11,374
11,258
15,114
Net (loss) income per share: Diluted
(Loss) income from continuing operations
$
(6.15
)
$
(7.62
)
$
(4.74
)
$
(9.22
)
$
0.51
Income from discontinued operations, net of tax
—
0.13
0.19
0.77
0.02
Gain of sale of discontinued operation, net of tax
—
2.41
—
—
—
Net (loss) income per share: Diluted
$
(6.15
)
$
(5.08
)
$
(4.55
)
$
(8.45
)
$
0.53
Balance Sheet Data (at period end):
Working capital (deficit)
(150,310
)
182,647
205,882
$
299,993
$
353,492
Total assets
435,796
553,532
813,243
855,822
812,372
Total debt(3)
310,317
335,457
444,159
418,405
373,560
Convertible preferred stock
40,000
40,000
40,000
40,000
40,000
Stockholders’ (deficit)/equity
(59,683
)
19,188
79,928
133,576
213,904
Dividends Paid
—
—
—
—
—
(1)
Includes the effect of costs related to our U.S. restructuring
plan and other items excluded from senior management’s
assessment of the operating performance of Salton’s
business.
(2)
Includes the effect of participation rights of our convertible
preferred stock, when that effect is not anti-dilutive, in
accordance with EITF Issue
No. 03-6.
See Note 12 to our audited financial statements.
(3)
Excludes $0.9 million in fiscal 2005, $4.5 million in
fiscal 2004, and $4.6 million in fiscal 2003 related to the
loan notes to Pifco shareholders which were fully cash
collateralized and excludes $0.8 million in fiscal 2007,
$1.8 million in fiscal 2006, $7.1 million in fiscal
2005, $9.6 million in fiscal 2004, and $12.1 million
in fiscal 2003 related to the fair value of a monetized fixed to
floating interest rate swap on the notes due in 2008.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
Salton designs, markets and distributes small home appliances
and electronics for the home, home décor and personal care
products under recognized brand names in the International
Housewares Industry. Our product mix consists of kitchen and
home appliances, electronics, time products, lighting products
and personal care and wellness products.
Liquidity
and Strategic Alternatives
The accompanying consolidated financial statements have been
prepared and are presented assuming the Company’s ability
to continue as a going concern. The Company has incurred
significant operating losses over the past several years and has
an accumulated deficit of $80.5 million as of June 30,2007. The Company’s Senior Secured Credit Facility requires
the repayment of outstanding overadvances of approximately
$62.0 million by November 10, 2007. In addition, the
Company has approximately $161.5 million of debt maturing
in fiscal 2008. The Company’s projected cash flows will not
be sufficient to fund these payments. On October 1, 2007, the
Company signed an Agreement and Plan of Merger with APN Holdco.
The Company believes that without the consummation of the
merger, it will not have sufficient cash to fund its activities
in the near future, and will not be able to continue operating.
There can be no assurance that the Company will be able to
complete the merger. As such, the Company’s continuation as
a going concern is uncertain. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
Discontinued
Operations
We report discontinued operations in accordance with the
guidance from SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” Accordingly,
we have reported the sale of Amalgamated Appliance Holdings
(“AMAP”) as discontinued operations for the periods
presented.
Recent
Developments
On August 1, 2007, we received from APN Holding Company,
Inc. (“APN Holdco”) written notice of termination of
the merger agreement dated February 7, 2007 between Salton
and APN Holdco, the parent company of Applica Incorporated.
On August 1, 2007, the New York Stock Exchange suspended
trading on our common stock and disclosed that application to
the Securities and Exchange Commission to delist our common
stock from the NYSE is pending completion of applicable
procedures. The NYSE disclosed that the decision to suspend and
delist our common stock was reached due to failure to maintain
NYSE continued listing standards regarding average global market
capitalization. Since August 6, 2007, our common stock has
been quoted under the symbol “SFPI.PK” as an Over The
Counter (“OTC”) security on The Pink Sheets Electronic
Quotation Service.
On August 13, 2007, we announced that we entered into an
amendment to our senior credit facility that provides us with
additional borrowing capacity and, subject to certain
conditions, extends the date on which we must repay the
outstanding overadvances under the facility to November 10,2007.
On October 1, 2007, we entered into an Agreement and Plan
of Merger with APN Holdco, pursuant to which Applica will become
a wholly-owned subsidiary of Salton. APN Holdco is owned by
Harbinger Capital Partners Master Fund I, Ltd. and
Harbinger Capital Partners Special Situations Fund, L.P.,
(collectively, “Harbinger Capital Partners”). Upon
consummation of the proposed merger and the related
transactions, Harbinger Capital Partners would beneficially own
92% of the outstanding common stock of Salton, and existing
holders of Salton’s Series A Voting Convertible
Preferred Stock (excluding Harbinger Capital Partners),
Series C Nonconvertible (NonVoting) Preferred Stock
(excluding Harbinger Capital Partners) and common stock
(excluding Harbinger Capital Partners) would own approximately
3%, 3% and 2%, respectively, of the outstanding common stock of
Salton immediately following the merger and related transactions.
In addition to the merger, the definitive merger agreement
contemplates the consummation of the following transactions
simultaneously with the closing of the merger: (1) the
mandatory conversion of all outstanding shares of Salton’s
Series A Voting Convertible Preferred Stock, including
those held by Harbinger Capital Partners, into shares of
Salton’s common stock; (2) the mandatory conversion of
all outstanding shares of Salton’s Series C
Nonconvertible (NonVoting) Preferred Stock, including those held
by Harbinger Capital Partners, into shares of Salton’s
common stock; and (3) the exchange by Harbinger Capital
Partners of approximately $90 million principal amount of
Salton’s second lien notes and approximately
$15 million principal amount of Salton’s 2008 senior
subordinated notes, for shares of a new series of
non-convertible (non voting) preferred stock of Salton, bearing
a 16% cumulative preferred dividend.
We intend to complete this transaction within the next three to
four months. The consummation of the merger and related
transactions is subject to various conditions, including the
approval by the Salton stockholders and the absence of legal
impediments. The merger and related transactions are not subject
to any financing condition.
Concurrently with the execution and delivery of the Merger
Agreement, Salton, its subsidiaries, Silver Point Finance, LLC,
(“Silver Point”) as co-agent for the lenders under
Salton’s senior secured credit facility and Harbinger
Capital Partners entered into a Loan Purchase Agreement. The
Loan Purchase Agreement provides that at any time (1) from
and after the date any party to the Merger Agreement has, or
asserts, the right to terminate the Merger Agreement or the
Merger Agreement is terminated
and/or
(2) on or after November 10, 2007 and prior to
February 1, 2008 (provided, in each case, no insolvency
proceeding with respect to Salton or its subsidiaries is then
proceeding), at the request of Silver Point, Harbinger Capital
Partners shall purchase from Silver Point certain overadvance
loans outstanding under Salton’s senior secured credit
facility having an aggregate principal amount of up to
approximately $68.5 million. The purchase price shall be
equal to 100% of the outstanding principal amount of the
overadvance loans, plus all accrued and unpaid interest thereon
through and including the date of purchase.
In the event that Harbinger Capital Partners purchase the
overadvance loans pursuant to the Loan Purchase Agreement, the
amount of the purchased overadvance loans will be deemed
discharged under our senior secured credit facility and the
principal amount of such over advance loans, plus all accrued
and unpaid interest thereon and a $5 million drawdown fee
payable to Harbinger Capital Partners as a result of such
purchase, will be automatically converted to loans under a new
Reimbursement and Senior Secured Credit Agreement dated as of
October 1, 2007 among Harbinger Capital Partners, Salton
and its subsidiaries that are signatories thereto as borrowers
and guarantors.
The Loan Purchase Agreement also provides that under certain
circumstances, including the commencement of an insolvency
proceeding with respect to Salton or its subsidiaries, at the
request of Silver Point, Harbinger Capital Partners shall
purchase from Silver Point all of the outstanding obligations
under Salton’s senior secured credit facility (and
Harbinger Capital Partners Special Situations Fund, L.P. shall
become the agent and co-agent thereunder).
The Reimbursement and Senior Secured Credit Agreement has a
maturity date of January 30, 2008. The interest rate with
respect to loans under the Reimbursement and Senior Secured
Credit Agreement is the six month LIBOR plus 10.5%, payable in
cash on the last business day of each month. The default rate is
LIBOR plus 12.5%.
On October 1, 2007 and in connection with the Loan Purchase
Agreement: (a) we entered into a waiver, consent,
forbearance and seventeenth amendment to its senior secured
credit agreement pursuant to which Silver Point (1) permits
the transactions contemplated by the Loan Purchase Agreement and
related documents, (2) waives any event of default
resulting from a going concern qualification in the report by
Salton’s independent auditors accompanying Salton’s
audited financial statements as of and for the period ending
June 30, 2007, and (3) subject to certain conditions,
forbears from exercising remedies with respect to certain
existing events of default relating to, among other things, the
filing of Salton’s annual report on
Form 10-K
for the fiscal year ended June 30, 2007 and the delivery of
foreign stock pledge agreements and blocked account control
agreements; (b) we entered into a waiver, consent and first
amendment to its second lien credit agreement which, among other
things, permits the transactions contemplated by the Loan
Purchase
Agreement and related documents; (c) the agent and co-agent
for our senior secured credit agreement, the agent for the
Reimbursement and Senior Secured Credit Agreement and the second
lien agent for our second lien credit agreement entered into an
Amended and Restated Intercreditor Agreement which, among other
things, governs the priority of rights among the lenders; and
(d) the agent for the Reimbursement and Senior Secured
Credit Agreement and the second lien agent for the second lien
credit agreement entered into a Junior Intercreditor Agreement
governing the priority of rights among the lenders thereunder.
Private
Debt Exchange
On August 26, 2005, we completed a private debt exchange
offer for the outstanding 2005 Notes and the outstanding 2008
Notes. We accepted for exchange an aggregate of approximately
$75.2 million in principal amount of 2005 Notes
(approximately 60.1% of the then outstanding 2005 Notes) and
approximately $90.1 million in principal amount of 2008
Notes (approximately 60.1% of the outstanding 2008 Notes) that
were validly tendered in the debt exchange offer.
Upon closing of the debt exchange offer, we issued an aggregate
of approximately $99.2 million in principal amount of
senior second lien notes (the “Second Lien Notes”),
2,041,420 shares of Salton common stock and
135,217 shares of Series C preferred stock with a
total liquidation preference of $13.5 million. The Second
Lien Notes mature on March 31, 2008 and bear interest at
LIBOR plus 7.0%, payable in cash on January 15th and
July 15th of each year, beginning in January 2006. The
Series C preferred stock is generally non-dividend bearing
and is mandatorily redeemable by us in cash at the liquidation
amount on August 26, 2010. We also granted certain
registration rights for approximately 1,837,455 shares of
Salton common stock and 121,707 shares of Series C
preferred stock received by certain former holders of
Subordinated Notes.
In connection with the debt exchange offer, we obtained the
consent of the holders of a majority of the outstanding 2005
Notes and a majority of the outstanding 2008 Notes to amend the
indentures governing such Subordinated Notes to eliminate
substantially all of the restrictive covenants and certain
events of default contained in such indentures. We have entered
into supplements to the indentures governing the 2005 Notes and
the 2008 Notes to reflect such amendments.
As a consequence of the debt exchange offer:
•
We reduced our total interest-bearing debt by approximately
$66.0 million;
•
We reduced the aggregate principal amount of 2005 Notes
outstanding immediately after the closing of the debt exchange
offer to approximately $50 million;
•
We increased the aggregate number of outstanding shares of
common stock by 2,041,420 or approximately 18% of the
11,376,292 shares of common stock outstanding immediately
prior to the debt exchange offer;
•
We issued 135,217 shares of Series C preferred stock
with a total liquidation preference of $13.5 million;
•
Mr. Lester C. Lee, a new independent director designated by
certain former holders of the Subordinated Notes, was elected to
serve on our board of directors; and
•
In the first quarter of fiscal 2006 we recorded a pre-tax gain
on cancellation of indebtedness of approximately
$21.7 million, net of approximately $9.2 million of
expenses.
Sale of
AMAP and Tabletop Assets
On September 29, 2005, we completed the sale of our 52.6%
ownership interest in AMAP, a leading distributor and marketer
of small appliances and other products in South Africa, to a
group of investors led by Interactive Capital (Proprietary)
Limited. In the first quarter of fiscal 2006, we received
proceeds, net of expenses, of approximately $81.0 million
in connection with the transaction and recorded a gain of
approximately $32.3 million, net of tax. We licensed our
George
Foreman®,
Russell
Hobbs®
and
Carmen®
branded products to AMAP following the transaction.
On September 16, 2005, we completed the sale of certain
tabletop assets at cost to Lifetime Brands, Inc. for
$14.2 million. In connection with this transaction, we
divested our
Block®
and
Sasaki®
brands, licenses to Calvin
Klein®
and Napa
Styletm
tabletop products and distribution of upscale crystal products
under the
Atlantis®
brand.
Private
Exchange
On September 28, 2005, we completed a private exchange
transaction in which we issued $4.1 million of Second Lien
Notes in exchange for $4.0 million of 2005 Notes.
Fiscal
Year 2007
We recorded certain pretax charges as follows:
•
$2.9 million of merger related costs and $2.8 million
of U.S. severance costs
•
$4.1 million increase to the accounts receivable reserve
due to a change in management’s estimate of the
collectability of certain disputed retailer deductions and
chargebacks
•
$33.5 million impairment loss on trade names
Fiscal
Year 2006
We recorded certain pretax charges as follows:
•
$0.9 million of restructuring charges comprised of
$0.3 million for continued U.S. warehouse
rationalization and severance costs, as well as
$0.6 million for closure costs related to a Salton Europe
subsidiary.
•
$22.0 million impairment loss on trade names
Fiscal
Year 2005
We recorded certain pretax charges as part of the finalization
of the (fiscal 2004) initial U.S. Restructuring Plan
as follows:
•
$1.0 million for consulting and legal fees, termination and
severance costs and costs involved in the closure of certain
distribution facilities.
Results
of Operations
The following table sets forth our results of operations as a
percentage of net sales for the years ended:
Consists of $2.8 million of restructuring expense for U.S.
severance costs
2007
COMPARED TO 2006
Net Sales
and Gross Profit
Salton’s annual worldwide sales were $523.3 million in
2007 compared to $636.0 million in 2006, a decline of
$112.7 million. Net sales decreased domestically by
$120.9 million. This decrease includes $17.2 million
of planned reductions of discontinued non-core products,
including reductions associated with the sale of the tabletop
business in September 2005 and the discontinuation of the
U.S. personal care product lines. In addition, we
experienced product shortages during the first quarter of fiscal
2007 when liquidity constraints caused inventory shortages,
followed by acceptance issues associated with price increases
that occurred due to higher raw material costs at our suppliers.
In the U.S., the George Foreman brand declined
$26.0 million from a decrease in consumer demand related to
the aforementioned pricing issues and liquidity constraints. The
Toastmaster brand declined $31.0 million due primarily to
pricing issues which led to the loss of the opening price point
business at Target and other retailers. Additionally, the
Company was impacted from an overall slowdown in orders from
customers as they awaited the outcome of the Company’s
potential merger with APN Holding Company, Inc. Domestic net
sales were further impacted by the need to increase the
provision for returns and allowances by $4.1 million. This
increase to the accounts receivable reserve resulted from a
change in management’s estimate of the collectability of
certain disputed retailer deductions and chargebacks. The
uncertainty associated with the potential merger has resulted in
more cautious buying decisions and more resistance to settlement
relative to chargebacks by our domestic customers. This recent
action has caused management to revise its estimates of the
collectability of disputed items downward. In spite of the
additional provision, we will continue to pursue collection of
all disputed charges.
Foreign net sales showed a net increase of $8.2 million,
which consisted of $17.8 million in favorable foreign
currency fluctuations, offset by $9.6 million in actual
sales decline. A decline in the United Kingdom was offset by
modest increases in the remaining foreign markets. Revenues of
the George Foreman brand declined in Europe by approximately
$16.3 million primarily due to product shortages in the
holiday selling season. In addition, regular and significant
price increases from the supplier reduced and curtailed the
level of customer promotional activity that the Company
undertook in the grill category.
The Company continued the implementation of its strategy to move
away from non core brands and product lines at the entry price
point. In the foreign markets, the Company focused on Russell
Hobbs as the premier European brand where sales and market share
continued to grow, showing an increase in revenues of
$29.9 million worldwide.
Gross profit for 2007 declined $29.2 million from
$144.4 million in 2006 to $115.2 million in 2007. As a
percent of net sales, gross profit was 22.0% in fiscal 2007,
compared to 22.7% for the same period of 2006. Lower sales
volumes resulted in declining gross profit, offset by a more
favorable product mix including fewer closeouts and a higher
percentage of core products in 2007. Gross profit was further
impacted by approximately 1% due to the increase in the accounts
receivable reserve. These decreases in gross profit were
partially offset by a $5.5 million decline in distribution
expense resulting from lower sales and inventory levels. The
outlook for material costs remains volatile. Although we have
implemented price increases on certain products to compensate
for higher material costs in the past, there remains are
uncertainty due to potential reactions of our retailers and of
consumer acceptance.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses decreased to
$139.7 million in 2007 compared to $172.1 million for
2006. U.S. operations reduced selling, general and
administrative expenses by $22.4 million, due to a
$10.0 million decline in promotional expenditures such as
television and certain other media, trade show expense and
cooperative advertising expenses, a $7.3 million decline in
salaries and benefits due to lower average headcount, and a
decline in other operating expenses due to cost cutting
initiatives. Foreign operations reduced selling, general and
administrative expenses by $10.0 million, net of
$4.9 million caused by foreign
exchange rate differences. The primary reduction in the foreign
entities was due to a $5.1 million decline in promotional
spending, as well as lower salaries and benefits due to lower
average headcount in Europe.
Impairment
Loss on Trade Names
Intangible assets comprised entirely of the Company’s brand
names are subject to a fair value impairment test on an annual
basis, or more frequently if circumstances indicate a potential
impairment. Each quarter management performs a review to
determine if events would require an interim evaluation. In the
third quarter of fiscal 2007, management determined that the
uncertainty associated with the pending merger, along with the
drop in domestic sales represented a triggering event, and an
interim evaluation of the George Foreman brand was performed.
This interim evaluation was done on a stand alone basis, and did
not consider potential changes in the use or performance of the
brand that may result.
As a result of this interim evaluation, the Company determined
that the implied fair value of the George Foreman trade name was
less than its carrying value, and recorded a non-cash impairment
charge totaling $12.5 million. The Company completed its
independent annual test on the indefinite lived intangible
assets, as required by SFAS No. 142, “Goodwill
and Other Intangible Assets” at the end of the fourth
quarter of fiscal 2007. The results of this test resulted in an
additional impairment charge of $15.2 million for the
George Foreman trade name. The Company also recorded an
impairment of $5.8 million in the fourth quarter of fiscal
2007 on the Toastmaster trade name as a result of the annual
test.
At the end of the fourth quarter of fiscal year 2006, we
performed the annual impairment test on the indefinite lived
intangible assets. Upon completion of the test, it was
determined that a pre-tax impairment charge of
$21.1 million was necessary to reflect an expectation of
lower future cash flows from certain trade names that are
considered outside of the Company’s core business and had
experienced recent declines. In addition, the Company also
recorded a $0.8 million impairment charge against certain
patents that were being amortized, to reflect management’s
decisions regarding discontinuing these product lines.
Restructuring
Costs
As a result of our U.S. restructuring plan, we incurred
$2.8 million of restructuring charges related to severance
costs in fiscal 2007. In fiscal 2006, we incurred
$0.9 million of restructuring charges comprised of
$0.3 million for continued U.S. warehouse
rationalization and severance costs, as well as
$0.6 million for closure costs related to a Salton Europe
subsidiary. Payments of $1.8 million were made in fiscal
2007, including $0.5 million of stock-based compensation.
Accrued restructuring costs were $1.1 million as of
June 30, 2007.
Net
Interest Expense
Net interest expense was $38.2 million for fiscal 2007 and
$37.0 million for fiscal 2006. Excluding amortization of
fees, interest expense as a percent of the average carrying
value of debt outstanding was a weighted average annual rate of
8.5% in fiscal 2007 compared to 8.0% in fiscal 2006. The average
amount of all debt outstanding was $332.0 million for
fiscal 2007 compared to $381.9 million for fiscal 2006.
Income
Taxes
Income tax expense was a tax benefit of $7.8 million in
fiscal 2007, compared to tax expense of $36.2 million in
fiscal 2006. The effective tax rate for federal, state, and
foreign income taxes was a tax benefit of 7.9% in fiscal 2007
versus tax expense of (55.0)% in fiscal 2006. The effective tax
rate in fiscal 2007 is different than the statutory
U.S. federal rate mainly due to the establishment of
valuation allowances against domestic and certain foreign net
deferred tax asset balances as well as the impairment of
non-deductible trade names.
In fiscal 2006, the tax rate of (55.0)% differed from the
statutory U.S. federal rate primarily due to the
establishment of valuation allowances against domestic and
certain foreign net deferred tax asset balances, as well as
U.S. taxes on deemed foreign subsidiaries’ dividends.
In addition, approximately $16.8 million of
U.S. federal and state income tax expense was incurred as a
result of the sale of the Company’s South African
subsidiary. This income tax expense was netted against the gain
on the sale of discontinued operations in fiscal 2006.
2006
COMPARED TO 2005
Net Sales
and Gross Profit
Salton’s annual worldwide sales were $636.0 million in
2006 compared to $781.7 million in 2005, a decline of
$145.7 million. Domestic sales were reduced by
$33.5 million in lost sales due to inventory shortages,
$21.4 million from planned product discontinuations and
$16.6 million in lower sales due to the sale of the
tabletop business in September 2005. The remaining decline in
sales was due to negative customer reaction from price
increases, as well as uncertainty due to the Company’s
restructuring in the first quarter of fiscal 2006. While we
maintained our market share position in the United Kingdom, our
foreign sales continued to be impacted by a continuing weak
retail market. The total decline of $16.1 million was due
largely to the reluctance of the retail customers to build
inventory levels for the holiday peak season due to a lack of
confidence caused by their experience in the prior year of
overstocks following the holiday season. In addition, Salton
incurred $5.5 million in unfavorable foreign currency
fluctuation. In order to focus on core business, Salton
continues with its efforts to rationalize SKU’s, move less
attractive inventory and have better utilization of working
capital.
Gross profit for 2006 declined $43.1 million from
$187.5 million in 2005 to $144.4 million in 2006. As a
percent of net sales, gross profit was 22.7% in 2006 compared to
24.0% in 2005, a decrease of 1.3%. The fiscal 2006 decreases are
primarily a result of global material cost increases in
plastics, copper, steel and corrugated materials. These costs
were offset by a $10.6 million domestic decline in
distribution expenses primarily as a result of our
U.S. cost reduction programs.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses decreased to
$172.1 million in 2006 compared to $207.8 million for
2005. U.S. operations reduced selling, general and
administrative expenses by $23.9 million. We reduced
foreign selling, general and administrative expenses, primarily
in the United Kingdom, by $4.6 million. In addition, we had
$7.1 million in favorable foreign currency fluctuations.
Domestic selling, general and administrative expense decreases
for fiscal year 2006 were primarily driven by a
$10.0 million decline in promotional expenditures for
television, royalty expense, certain other media and cooperative
advertising, and trade show expenses. The $10.0 million
decrease included a $7.0 million reduction in direct and
infomercial advertising expenditures. In addition, we reduced
selling, general and administrative salary expenses by
$4.8 million. These decreases were primarily from the
efforts of our cost reduction programs.
Impairment
Loss on Trade Names
At the end of the fourth quarter of fiscal year 2006, we
performed the annual impairment test on the indefinite lived
intangible assets, as required by SFAS No. 142,
“Goodwill and Other Intangible Assets.” Upon
completion of the test, it was determined that a pre-tax
impairment charge of $21.1 million was necessary to reflect
an expectation of lower future cash flows from certain trade
names that are considered outside of the Company’s core
business and had experienced recent declines. In addition, the
Company also recorded a $0.8 million impairment charge
against certain patents that were being amortized, to reflect
management’s decisions regarding discontinuing these
product lines.
At the end of the fourth quarter of fiscal year 2005, we
performed the annual impairment test required by
SFAS No. 142, “Goodwill and Other Intangible
Assets.” Upon completion of the test, it was determined
that a pre-tax impairment charge of $3.2 million was
necessary to reflect management’s decisions regarding
certain underperforming product lines and related trademarks.
As a result of our U.S. restructuring plan, we incurred
$0.9 million of restructuring charges comprised of
$0.3 million for continued U.S. warehouse
rationalization and severance costs, as well as
$0.6 million for closure costs related to a Salton Europe
subsidiary. See “U.S. Restructuring Plan” for a
discussion of certain pretax charges in fiscal 2005 in
connection with our U.S. restructuring plan.
Net
Interest Expense
Net interest expense was $37.0 million for fiscal 2006 and
$51.7 million for fiscal 2005. Excluding amortization of
fees, interest expense as a percent of the average carrying
value of debt outstanding was a weighted average annual rate of
8.0% in fiscal 2006 compared to 9.5% in fiscal 2005. The average
amount of all debt outstanding was $381.9 million for
fiscal 2006 compared to $473.9 million for fiscal 2005.
Gain on
Early Settlement of Debt
In the first quarter of fiscal 2006, the Company recorded a
pre-tax gain on cancellation of indebtedness of approximately
$21.7 million, net of approximately $9.2 million of
expenses, in a private debt exchange (see “Private Debt
Exchange”).
Income
Taxes
Income tax expense was $36.2 million in fiscal 2006,
compared to a tax benefit of $22.3 million in fiscal 2005.
The effective tax rate for federal, state, and foreign income
taxes was approximately (55.0)% in fiscal 2006 versus a tax
benefit rate of 29.2% in fiscal 2005. The effective tax rate in
fiscal 2006 is different than the statutory U.S federal rate
mainly due to the establishment of valuation allowances against
domestic and certain foreign net deferred tax asset balances as
well as U.S. taxes on deemed foreign subsidiaries’
dividends.
In addition, approximately $16.8 million of federal and
state income tax expense was incurred as a result of the sale of
the Company’s South African subsidiary, AMAP. This income
tax expense was netted against the gain on the sale of
discontinued operations.
In fiscal 2005, the tax benefit of 29.2% differed from the
statutory U.S. federal and state rates due to
$2.4 million of additional tax adjustments to certain
deferred tax accounts related to various prior periods, and
foreign tax rates that differ from those in the U.S.
LIQUIDITY
AND CAPITAL RESOURCES
Cash Flow
from Operations
Our primary sources of liquidity are our cash flow from
operations and borrowings under our senior secured credit
facility and European facility agreement. In 2007, Salton’s
operations provided $31.4 million in cash flow, compared
with a use of $8.0 million in 2006. This improvement was
primarily the result of planned inventory reductions associated
with the planned exit of certain product lines, improved
inventory turns on core product lines and reductions through the
sell off of excess and obsolete inventory, in an effort to focus
on the core business and improve utilization of working capital.
As disclosed in the discussion above, we do face foreign
currency fluctuation, however, we believe 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. Given the
seasonal nature of our business, borrowings and availability
tend to be highest in mid-fall and early winter.
The Company also currently uses foreign exchange contracts to
hedge anticipated foreign currency transactions, primarily
U.S. dollar inventory purchases. The contracts generally
mature within one year and are
designed to limit exposure to exchange rate fluctuations,
primarily the Australian Dollar against United States dollars.
Investing
Activities
In 2007, we had $8.2 million in capital expenditures,
primarily for tooling for new and existing products. We received
$4.4 million of proceeds from sales of land and warehouses
in the U.K. and the U.S. In 2006, we had $69.9 million
in proceeds, net of cash sold, from the sale of discontinued
operations as a result of the AMAP transaction and
$14.2 million in proceeds from the sale of the tabletop
assets.
Financing
Activities
In 2007, we repaid a net amount of $10.6 million on our
worldwide revolving credit facilities. The Company’s
payments of long-term debt consisted primarily of
$11.1 million of interest payments on the second lien
notes, which was capitalized as part of the debt balance in
accordance with SFAS No. 15, “Accounting by
Debtors and Creditors for Troubled Debt Restructurings” in
fiscal 2006, as well as repayments of the Europe term loans. In
addition, we incurred $3.3 million of financing costs
associated with amendments to our U.S. and Salton Europe
credit facilities.
Senior
Secured Credit Facility
On June 15, 2004, we entered into an amended and restated
senior secured credit facility with Silver Point Finance, LLC
which currently provides us with the ability to borrow up to
approximately $188 million pursuant to a revolving line of
credit, letters of credit and a $100.0 million term loan.
Advances under the revolving line of credit are primarily based
upon percentages of eligible accounts receivable and
inventories. The facility, as amended, has a maturity date of
December 31, 2008 and requires the repayment of outstanding
overadvances of approximately $62.0 million by
November 10, 2007.
As of September 7, 2007, we had borrowed
$118.7 million under the senior secured credit facility and
had approximately $4.9 million available under this
facility for future borrowings.
Borrowings under our senior secured credit facility accrue
interest, at our option, at either: LIBOR, plus 8.5% (effective
August 8, 2007) equaling 13.86% at September 7,2007; or the Base Rate (prime rate), plus 6.5% (effective
August 8, 2007) equaling 14.75% at September 7,2007. The Company has the option to convert any base rate loan
to LIBOR rate loan.
Our senior indebtedness contains a number of significant
covenants that, among other things, restrict our ability to
dispose of assets, incur additional indebtedness, prepay other
indebtedness, pay dividends, repurchase or redeem capital stock,
enter into certain investments, enter into sale and lease-back
transactions, make certain acquisitions, engage in mergers and
consolidations, create liens, or engage in certain transactions
with affiliates and otherwise restrict our corporate and
business activities. We are also required to deposit all
proceeds from collection of accounts receivable and sale of
collateral with an account under the exclusive dominion and
control of the senior lenders
The Senior Secured Credit Facility was amended several times
during fiscal 2007 which resulted in suspension of the
consolidated fixed charge coverage ratio and EBITDA covenants
beginning with the twelve months ending July 1, 2006
through and including the twelve months ending June 2007,
addition of a monthly cash flow covenant beginning with August
2006, and extension of the allowed overadvance time period.
Subsequent to June 30, 2007, the Company entered into
further amendments which provide additional borrowing capacity,
extend the termination date of the facility to December 31,2008 and, subject to certain conditions, extend the date on
which the Company must repay the outstanding overadvances under
the facility to November 10, 2007. (See Note 23,
“Subsequent Events”)
Events of default under our senior secured credit facility
include, but are not limited to: (a) our failure to pay
principal or interest when due; (b) our material breach of
any representation or warranty; (c) covenant defaults;
(d) our default with respect to any other debt with an
outstanding principal amount in excess of
$1.0 million if the effect thereof is to accelerate or
permit the acceleration of such debt; and (e) events of
bankruptcy. As of June 30, 2007, the Company was in
violation of one of its reporting covenants. The Company
obtained a waiver of this violation. (See Note 23,
“Subsequent Events”)
The senior secured credit facility is secured by all of our
tangible and intangible assets and all of the tangible and
intangible assets of our domestic subsidiaries and a pledge of
the capital stock of our domestic subsidiaries and the capital
stock of certain of our foreign subsidiaries. The senior secured
credit facility is unconditionally guaranteed by each of our
direct and indirect domestic subsidiaries.
Loan
Purchase Agreement
Concurrently with the execution and delivery of the Merger
Agreement, Salton, its subsidiaries, Silver Point Finance, LLC,
(“Silver Point”) as co-agent for the lenders under
Salton’s senior secured credit facility and Harbinger
Capital Partners entered into a Loan Purchase Agreement. The
Loan Purchase Agreement provides that at any time (1) from
and after the date any party to the Merger Agreement has, or
asserts, the right to terminate the Merger Agreement or the
Merger Agreement is terminated
and/or
(2) on or after November 10, 2007 and prior to
February 1, 2008 (provided, in each case, no insolvency
proceeding with respect to Salton or its subsidiaries is then
proceeding), at the request of Silver Point, Harbinger Capital
Partners shall purchase from Silver Point certain overadvance
loans outstanding under Salton’s senior secured credit
facility having an aggregate principal amount of up to
approximately $68.5 million. The purchase price shall be
equal to 100% of the outstanding principal amount of the
overadvance loans, plus all accrued and unpaid interest thereon
through and including the date of purchase.
In the event that Harbinger Capital Partners purchase the
overadvance loans pursuant to the Loan Purchase Agreement, the
amount of the purchased overadvance loans will be deemed
discharged under Salton’s senior secured credit facility
and the principal amount of such over advance loans, plus all
accrued and unpaid interest thereon and a $5 million
drawdown fee payable to Harbinger Capital Partners as a result
of such purchase, will be automatically converted to loans under
a new Reimbursement and Senior Secured Credit Agreement dated as
of October 1, 2007 among Harbinger Capital Partners, Salton
and its subsidiaries that are signatories thereto as borrowers
and guarantors.
The Loan Purchase Agreement also provides that under certain
circumstances, including the commencement of an insolvency
proceeding with respect to Salton or its subsidiaries, at the
request of Silver Point, Harbinger Capital Partners shall
purchase from Silver Point all of the outstanding obligations
under Salton’s senior secured credit facility (and
Harbinger Capital Partners Special Situations Fund, L.P. shall
become the agent and co-agent thereunder).
Reimbursement
and Senior Secured Credit Agreement
The Reimbursement and Senior Secured Credit Agreement has a
maturity date of January 30, 2008. The interest rate with
respect to loans under the Reimbursement and Senior Secured
Credit Agreement is the six month LIBOR plus 10.5%, payable in
cash on the last business day of each month. The default rate is
LIBOR plus 12.5%.
The Reimbursement and Senior Secured Credit Agreement contains
covenants that are substantially the same as the covenants
contained in Salton’s senior secured credit facility except
there are no financial maintenance covenants. Under the terms of
the Reimbursement and Senior Secured Credit Agreement, to the
extent that the lenders under Salton’s senior secured
credit facility amend or modify the covenants under such
facility, the parallel covenants under the Reimbursement and
Senior Secured Credit Agreement shall be automatically deemed
amended or modified; provided that the lenders under
Salton’s senior secured credit facility may not amend or
modify the covenant limiting the maximum amount of Salton’s
senior secured credit facility.
Subject to the Amended and Restated Intercreditor Agreement, if
an event of default (other than an event of default resulting
from certain events of bankruptcy, insolvency or reorganization)
occurs and is continuing, the agent under the Reimbursement and
Senior Secured Credit Agreement and the holders of at least
662/3%
in
principal amount of loans thereunder then outstanding may
declare the principal of and accrued but unpaid interest on all
of such loans to be due and payable. If an event of default
relating to certain events of bankruptcy, insolvency or
reorganization occurs and is continuing, the principal of and
interest on all of the loans thereunder shall automatically
become immediately due and payable without notice or demand of
any kind.
The loans under the Reimbursement and Senior Secured Credit
Agreement are secured by a second-priority lien on substantially
all of Salton’s domestic assets and a pledge of the capital
stock of our domestic subsidiaries and certain of our foreign
subsidiaries. The loans are also unconditionally guaranteed by
each of Salton’s direct and indirect domestic subsidiaries.
Second
Lien Credit Agreement
On August 26, 2005, in connection with the closing of our
debt exchange offer, we entered into a second lien credit
agreement with The Bank of New York, as agent, which provides
for the issuance of up to $110 million aggregate principal
amount of Second Lien Notes. We issued approximately
$99.2 million of Second Lien Notes in connection with our
debt exchange offer. We subsequently issued an additional
$4.1 million of Second Lien Notes in connection with our
private exchange. A gain of $21.7 million (approximately
$1.52 per share) was realized on the debt exchange. We may add
additional lenders under the second lien credit agreement
through the issuance of additional Second Lien Notes as long as
the aggregate principal amount of the Second Lien Notes does not
exceed $110 million.
The second lien credit agreement and the Second Lien Notes have
a maturity date of March 31, 2008. The interest rate with
respect to the Second Lien Notes is the six month LIBOR plus 7%,
equaling 12.38% as of June 30, 2007, payable in cash on
January 15th and July 15th of each year. The
default rate is LIBOR plus 10%.
The second lien credit agreement contains covenants that are
substantially the same as the covenants contained in our senior
secured credit facility. Under the terms of the second lien
credit agreement, to the extent that the lenders under our
senior secured credit facility amend or modify the covenants
under such facility, the parallel covenants under the second
lien credit agreement shall be automatically deemed amended or
modified; provided that the lenders under our senior secured
credit facility may not amend or modify the covenant limiting
the maximum amount of our senior secured credit facility to the
difference between (x) $287 million and (y) the
aggregate principal amount of Second Lien Notes issued in
connection with our debt exchange offer.
The second lien credit agreement allows us, subject to the
conditions in our senior secured credit facility, to purchase,
prepay or redeem Subordinated Notes at any time after the debt
exchange offer; provided that, with respect to 2008 Notes,
(1) we must have a minimum level of availability under our
senior secured credit facility of at least $4 million after
giving effect to any such purchases and (2) the aggregate
amount spent by us to purchase 2008 Notes does not exceed
$11 million.
Notwithstanding the foregoing, we may spend more than
$11 million in the aggregate to purchase 2008 Notes if we
meet the foregoing conditions and we optionally prepay or redeem
on a ratable basis a cumulative
portion of the Second Lien Notes as follows (percentages and
amounts assume that we issued $110 million of aggregate
principal amount of Second Lien Notes in connection with the
debt exchange offer):
Permitted Additional
Cumulative Percentage
Amounts Available to
of the Second Lien Notes Redeemed
Purchase 2008 Notes
9%
$
2 million
18%
$
5 million
27%
$
9 million
36%
$
14 million
45%
$
20 million
54%
$
27 million
63%
$
35 million
72%
$
44 million
81%
$
54 million
90%
$
66 million
100%
$
78 million
Subject to the Intercreditor Agreement described below, if an
event of default (other than an event of default resulting from
certain events of bankruptcy, insolvency or reorganization)
occurs and is continuing, the second lien agent and the holders
of at least
662/3%
in principal amount of Second Lien Notes then outstanding may
declare the principal of and accrued but unpaid interest on all
of the Second Lien Notes to be due and payable. If an event of
default relating to certain events of bankruptcy, insolvency or
reorganization occurs and is continuing, the principal of and
interest on all of the Second Lien Notes shall automatically
become immediately due and payable without notice or demand of
any kind.
The Second Lien Notes are our senior secured obligations and
rank: (a) senior in right of payment to all of our existing
and future subordinated debt, including the Subordinated Notes;
and (b) equal in right of payment with all of our other
existing and future senior debt, including indebtedness
outstanding under our senior secured credit facility.
The Second Lien Notes are secured by a second-priority lien on
substantially all of our domestic assets and a pledge of the
capital stock of our domestic subsidiaries and certain of our
foreign subsidiaries. The Second Lien Notes are also
unconditionally guaranteed by each of direct and indirect
domestic subsidiaries.
Intercreditor
Agreement
The agent and co-agent for our senior secured credit facility,
on the one hand, and the second lien agent for our second lien
credit agreement entered into an intercreditor agreement dated
as of August 26, 2005 which provides that, among other
things, any lien on collateral held by or on behalf of the
second lien agent or any holder of the Second Lien Notes that
secures all or any portion of the Second Lien Notes will in all
respects be junior and subordinate to all liens granted to the
lenders under our senior secured credit facility. At any time
that the agent or co-agent under our senior secured credit
facility notifies the second lien agent in writing that an event
of default has occurred and is continuing under such facility,
then the second lien agent and the holders of the Second Lien
Notes will not have any right to exercise any secured creditor
remedies (including without limitation, foreclosing or otherwise
realizing upon collateral) or take certain other actions
(including, without limitation, commencing or causing to be
commenced or joining with any creditor in commencing any
insolvency proceeding) until the first to occur of
(a) payment in full in cash of all obligations under our
senior secured credit facility after or concurrently with
termination of all commitments to extend credit thereunder,
(b) the date upon which the agent or co-agent under our
senior secured credit facility shall have waived or acknowledged
in writing the termination of such event of default or
(c) 270 days following receipt of such notice by the
second lien agent (a “standstill period”). Only two
standstill periods may be commenced within any 360 day
period, and no subsequent standstill period may be commenced
within 60 days after the termination of the immediately
preceding standstill period.
The intercreditor agreement also substantially limits the rights
of the second lien agent and the holders of the Second Lien
Notes in an insolvency proceeding. The intercreditor agreement
requires the net proceeds from the sale of collateral to be
applied first to our obligations under our senior secured credit
facility and then to our obligations under the second lien
credit agreement.
Senior
Subordinated Notes
On April 23, 2001, the Company issued $150.0 million
of
121/4% Senior
Subordinated notes (the “2008 Notes”) due
April 15, 2008. Proceeds of the 2008 Notes were used to
repay outstanding indebtedness and for the acquisition of Pifco
Holdings PLC (Salton Europe). On August 26, 2005, the
Company completed a private debt exchange for approximately
$90.1 million of the 2008 Notes (See “Private Debt
Exchange”).
In connection with our debt exchange offer, we obtained the
consent of the holders of a majority of the outstanding 2008
Notes to amend the indenture governing such Subordinated Notes
to eliminate substantially all of the substantive covenants
(other than these dealing with certain asset sales and the
application of proceeds therefrom and changes of control) and
certain events of default (other than these dealing with the
payment of interest and principal when due) contained in such
indentures. We have entered into supplements to the indentures
governing the 2008 Notes to reflect such amendments.
Our Subordinated Notes are general unsecured obligations and are
subordinated to all our current and future senior debt,
including all borrowings under our senior secured credit
facility and the Second Lien Notes. The Subordinated Notes rank
equally with all our other existing and future senior
subordinated indebtedness.
Our current and future domestic restricted subsidiaries jointly
and severally guarantee our payment obligations under the
Subordinated Notes on a senior subordinated basis. The
guarantees rank junior to all senior debt of the guarantors
(including guarantees under our senior secured credit facility)
and equally with all other senior subordinated indebtedness of
the guarantors.
Salton
Europe Facility Agreement
On December 23, 2005, Salton Holdings Limited, Salton
Europe Limited and certain affiliates entered into a Facility
Agreement with Burdale Financial Limited, as agent and security
trustee, and a financial institution group as lender. The
provisions of the Facility Agreement allow certain of the
Company’s European subsidiaries to borrow funds as needed
in an aggregate amount not to exceed £61.0 million
(approximately $122.4 million). The Facility Agreement
matures on December 22, 2008 and bears a variable interest
rate of LIBOR plus 7% on term loans and LIBOR plus 2.75% on
revolver loans, payable on the last business day of each month.
At June 30, 2007, these rates for borrowings denominated in
the Great Britain Pound were approximately 12.71% and 8.46% for
term and revolver loans, respectively. The rate for revolver
loan borrowings denominated in the U.S. Dollar was 8.06%.
The Facility Agreement consists of a Revolving Credit Facility
with an aggregate maximum availability of
£50.0 million (approximately $100.3 million) and
two Term Loan Facilities of £5.0 million and
£6.0 million (approximately $10.0 million and
$12.0 million, respectively). The Company has used
borrowings under these facilities to repay existing debt and for
working capital purposes. As of June 30, 2007, under the
Revolving Credit Facility, the Company had outstanding
borrowings denominated in the Great Britain Pound of
£4.5 million (approximately $9.0 million) and
borrowings denominated in the U.S. Dollar of
$1.3 million. Under the Term Loan Facilities, the Company
had £7.4 million (approximately $14.9 million) of
borrowings outstanding.
The Facility Agreement contains a number of significant
covenants that, among other things, restrict the ability of
certain of the Company’s European subsidiaries to dispose
of assets, incur additional indebtedness, prepay other
indebtedness, pay dividends, repurchase or redeem capital stock,
enter into certain investments, make certain acquisitions,
engage in mergers and consolidations, create liens, or engage in
certain transactions with affiliates and otherwise restrict
corporate and business activities. In addition, the Company is
required to comply with a fixed charge coverage ratio. The
Company was in compliance with all covenants as of June 30,2007.
We maintain credit facilities outside of the United States that
locally support our foreign subsidiaries operations and working
capital requirements. These facilities are at current market
rates in those localities and at certain peak periods of the
year, are secured by various assets.
Series C
Preferred Stock
On August 26, 2005, we issued 135,217 shares of our
Series C preferred stock with a total liquidation
preference of $13.5 million. Our restated certificate of
incorporation authorizes us to issue up to 150,000 shares
of Series C preferred stock.
The Series C preferred stock is non-dividend bearing and
ranks, as to distribution of assets upon our liquidation,
dissolution or winding up, whether voluntary or involuntary,
(a) prior to all shares of convertible preferred stock from
time to time outstanding, (b) senior, in preference of, and
prior to all other classes and series of our preferred stock and
(c) senior, in preference of, and prior to all of our now
or hereafter issued common stock.
Except as required by law or by certain protective provisions in
our restated certificate of incorporation, the holders of shares
of Series C preferred stock, by virtue of their ownership
thereof, have no voting rights.
In the event of our liquidation, dissolution or winding up,
whether voluntary or involuntary, holders of the Series C
preferred stock will be paid out of our assets available for
distribution to our stockholders an amount in cash equal to $100
per share (the “Series C Preferred Liquidation
Preference”), before any distribution is made to the
holders of our convertible preferred stock, our common stock or
any other of our capital stock ranking junior as to liquidation
rights to the Series C preferred stock.
In the event of a change of control (as defined in our restated
certificate of incorporation), each holder of shares of
Series C preferred stock will have the right to require us
to redeem such shares at a redemption price equal to the
Series C Preferred Liquidation Preference plus an amount
equivalent to interest accrued thereon at a rate of 5% per annum
compounded annually on each anniversary date of the issuance
date for the period from the issuance date through the change of
control. The redemption price is payable on a date after a
change of control that is 91 days after the earlier of
(x) the date on which specified debt (including
indebtedness under our senior secured credit facility, the
second lien credit agreement, the indentures under which the
Subordinated Notes were issued, and restatements and
refinancings of the foregoing) matures and (y) the date on
which all such specified debt is repaid in full, in an amount
equal to the Series C Preferred Liquidation Preference plus
an amount equivalent to interest accrued thereon at a rate of 5%
per annum compounded annually on each anniversary date of the
issuance date for the period from the issuance date through such
change of control payment date. The certificate of designation
for the Series C preferred stock provides that, in the
event of a change of control, we shall purchase all outstanding
shares of Series C preferred stock with respect to which
the holder has validly exercised the redemption right before any
payment with respect to the redemption of convertible preferred
stock upon such change of control.
We may optionally redeem, in whole or in part, the Series C
preferred stock at any time at a cash price per share of 100% of
the then effective Series C Preferred Liquidation
Preference per share. On August 25, 2010, the Company will
be required to redeem all outstanding shares of Series C
preferred stock at a price equal to the Series C Preferred
Liquidation Preference per share, payable in cash.
The merger agreement disclosed in Recent Developments requires
the mandatory conversion of all outstanding shares of the Series
C preferred stock into shares of Salton’s common stock,
effective upon consummation of the merger.
Convertible
Series A Preferred Stock
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
121/2%
of the Liquidation Preference (defined below). In addition to
the dividend provided above, in the event the Board of Directors
of the Corporation shall determine to pay any cash or non-cash
dividends or distributions on its Common Stock (other than
dividends payable in shares of its Common Stock) the holders of
shares of Convertible Preferred Stock shall be entitled to
receive cash and non-cash dividends or distributions in an
amount and of a kind equal to the dividends or distributions
that would have been payable to each such holder as if the
Convertible Preferred Stock held by such holder had been
converted into Common Stock immediately prior to the record date
for the determination of the holders of Common Stock entitled to
each such dividend or distribution; provided, however, that if
the Corporation shall dividend or otherwise distribute rights to
all holders of Common Stock entitling the holders thereof to
subscribe for or purchase shares of capital stock of the
Corporation, which rights (i) until the occurrence of a
specified event or events are deemed to be transferred with such
shares of Common Stock and are not exercisable and (ii) are
issued in respect of future issuances of Common Stock, the
holders of shares of the Convertible Preferred Stock shall not
be entitled to receive any such rights until such rights
separate from the Common Stock or become exercisable, whichever
is sooner.
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 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 its 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 Preference per share, payable at the Company’s
option in cash or shares of Salton common stock.
In accordance with Emerging Issues Task Force Topic
No. D-98
“Classification and Measurement of Redeemable
Securities”, the convertible preferred stock is classified
as a separate line item apart from permanent equity on the
Company’s balance sheet, as redemption thereof in shares of
common stock is outside of the Company’s control.
The merger agreement disclosed in Recent Developments requires
the mandatory conversion of all outstanding shares of the Series
A preferred stock into shares of Salton’s common stock,
effective upon consummation of the merger.
New
Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109” to clarify
the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in
accordance with FASB Statement No. 109, “Accounting
for Income Taxes.” This interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognization,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation is
effective for fiscal years beginning after December 15,2006 and is effective for the Company in the first quarter of
fiscal 2008. The Company has not been able to complete its
evaluation of the impact of adopting Interpretation No. 48
and as a result, is not able to estimate the effect the adoption
will have on its financial position and results of operations.
In June 2006, Emerging Issues Task Force Issue
No. 06-3,
“How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)”
(EITF 06-3)
was issued.
EITF 06-3
requires disclosure of the presentation of taxes on either a
gross (included in revenues and costs) or a net (excluded from
revenues) basis as an accounting policy decision. The provisions
of this standard are effective for interim and annual reporting
periods beginning after December 15, 2006. The adoption of
EITF 06-3
did not have a material impact on our consolidated financial
statements.
In September 2006, the FASB issued Statement No. 157,
“Fair Value Measurements.” This statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and is effective for the
Company in the first quarter of fiscal 2009. The Company is
currently evaluating the impact of this statement on its
consolidated results of operations, cash flows, and financial
position.
In September 2006, the SEC Office of the Chief Accountant and
Divisions of Corporation Finance and Investment Management
released SAB No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB No. 108”), which provides interpretive
guidance on how the effects of the carryover or reversal of
prior year misstatements should be considered in quantifying a
current year misstatement. The SEC staff believes that
registrants should quantify errors using both a balance sheet
and an income statement approach and evaluate whether either
approach results in quantifying a misstatement that, when all
relevant quantitative and qualitative factors are considered, is
material. This guidance is effective for fiscal years ending
after November 15, 2006. The adoption of
SAB No. 108 did not have a material impact on our
financial position, results of operations, or cash flows.
In February 2007, the FASB issued Statement No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities.” FASB Statement No. 159 provides
companies with an option to report selected financial assets and
liabilities at fair value that are not currently required to be
measured at fair value. Accordingly, companies would then be
required to report unrealized gains and losses on these items in
earnings at each subsequent reporting date. The objective is to
improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently. FASB
Statement No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and is effective for the
Company in the first quarter of fiscal 2009. The Company is
currently evaluating the impact of this statement on its
consolidated results of operations, cash flows, and financial
position.
Discussion
of Critical Accounting Policies
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America, which require us to make estimates and judgments that
significantly affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. We regularly evaluate these
estimates, including those related to our allowance for doubtful
accounts, reserve for inventory valuation, reserve for returns
and allowances, valuation of intangible assets
having indefinite lives, cooperative advertising accruals,
pension benefits and depreciation and amortization. We base
these estimates on historical experience and on assumptions that
are believed by management to be reasonable under the
circumstances. Actual results may differ from these estimates,
which may impact the carrying value of assets and liabilities.
The following critical accounting policies required the most
significant estimates used in the preparation of our
consolidated financial statements:
Allowance for Doubtful
Accounts —The Company calculates
allowances for estimated losses resulting from the inability of
customers to make required payments. The Company utilizes a
number of tools to evaluate and mitigate customer credit risk.
Management evaluates each new customer account using a
combination of some or all of the following sources of
information: credit bureau reports, industry credit group
reports, customer financial statement analysis, customer
supplied credit references and bank references. Appropriate
credit limits are set in accordance with company credit risk
policy and monitored on an on-going basis. Existing customers
are monitored and credit limits are adjusted according to
changes in their financial condition. No customer accounted for
greater than 10% of the gross accounts receivable at
June 30, 2007 and July 1, 2006.
Estimates of Credits to be Issued to
Customers — Salton regularly receives
requests for credits from retailers for returned products or in
connection with sales incentives, such as cooperative
advertising, volume rebate agreements, product markdown
allowances and other promotional allowances. The Company reduces
sales or increases selling, general, and administrative
expenses, depending on the nature of the credits, for estimated
future credits to customers. Estimates of these amounts are
based either on historical information about credits issued,
relative to total sales, or on specific knowledge of incentives
offered to retailers. This process entails a significant amount
of inherent subjectivity and uncertainty.
These incentives are accounted for in accordance with Emerging
Issues Task Force Issue
No. 01-9,
“Accounting for Consideration Given by a Vendor to a
Customer”
(“EITF 01-9”).
In instances where there is an agreement with the customer to
provide advertising funds, reductions in amounts received from
customers as a result of cooperative advertising programs are
included in the consolidated statement of operations on the line
entitled “Selling, general, and administrative
expenses.” Returns, markdown allowances, cash discounts,
and volume rebates are all recorded as reductions of net sales.
Specifically, per paragraph 9 of EITF Issue
No. 01-9,
cooperative advertising is to be characterized as a reduction of
revenue unless two conditions are met. The Company believes that
its processes meet these criteria
1. The Company receives an identifiable benefit (i.e.
advertising placement) in exchange for the consideration. In
order to meet this condition, the identified benefit must be
sufficiently separable from the customer’s purchase of
Salton’s products such that Salton could have entered into
an exchange transaction with a party other than a purchaser of
its products or services in order to receive that benefit.
2. The Company can reasonably estimate the fair value of
the benefit identified above (e.g. estimate of the value of
advertising placement).
The Company currently receives an identifiable benefit, such as
newspaper, radio and television advertising, and requires a
combination of verification, customer agreements and
determination of value, in support of its inclusion of
cooperative advertising in selling, general and administrative
expense.
Inventories — 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 estimated net realizable value. The
Company regularly evaluates the composition of inventory to
identify slow-moving and obsolete inventories to determine if
additional write-downs are required. The Company’s domestic
inventories are generally determined by the
last-in,
first-out (LIFO) method. These inventories account for
approximately 37.8% and 49.6% of the Company’s inventories
as of June 30, 2007 and July 1, 2006, respectively.
Salton Europe and Salton Hong Kong inventory is valued at the
lower of cost, calculated on a
moving average basis, and net realizable value. All remaining
inventory cost is determined on the
first-in,
first-out basis. See Note 7, “Inventories.”
Trade names — The Company trade names were
acquired in transactions and business combinations. Identifiable
intangibles with finite lives are amortized and those with
indefinite lives are not amortized. The estimated useful life of
an identifiable intangible asset is based upon a number of
factors including the effects of demand, competition and the
level of maintenance expenditures required to obtain future cash
flows.
The Company tests identifiable intangible assets with an
indefinite life for impairment, at a minimum on an annual basis,
relying on a number of factors including operating results,
business plans and projected future cash flows. Identifiable
intangible assets that are subject to amortization are evaluated
for impairment using a process similar to that used to evaluate
other long-lived assets. The impairment test for identifiable
intangible assets not subject to amortization consists of a
comparison of the fair value of the intangible asset with its
carrying amount. An impairment loss is recognized for the amount
by which the carrying value exceeds the fair value of the asset.
Currently, the Company does not have material definite-lived
intangible assets that are amortized.
Income Taxes — The Company accounts for
income taxes using the asset and liability approach. If
necessary, the measurement of deferred tax assets is reduced,
based on available evidence, by the amount of any tax benefits
that management believes is more likely than not to not be
realized.
Contractual
Obligations
To facilitate an understanding of the Company’s contractual
obligations and commercial commitments, the following data is
provided:
Payments Due by Period
Within
After 5
Total
1 Year
2-3 Years
4-5 Years
Years
(In thousands)
Long-Term Debt(1)
$
302,874
$
276,126
$
13,226
$
13,522
$
—
Short-Term Debt
11,009
702
10,307
—
—
Operating Leases
61,813
7,735
13,630
11,048
29,400
Total Contractual Cash Obligations
$
375,696
$
284,563
$
37,163
$
24,570
$
29,400
Projected Interest(2)
$
17,420
$
15,990
$
1,430
$
—
$
—
(1)
Includes accrued interest of $13.0 million due within
1 year.
(2)
Interest was projected based on average borrowings on credit
facilities through their maturities at rates in effect at
June 30, 2007.
Payments Due by Period
Total
Within
After 5
Amounts
1 Year
2-3 Years
4-5 Years
Years
(In thousands)
License Agreements(1)
$
12,995
$
6,652
$
4,693
$
270
$
1,380
Pension Plan Contributions(2)
2,318
2,318
—
—
—
Lawsuit Settlement(3)
500
500
—
—
—
Foreman Agreement(4)
1,000
1,000
—
—
—
Sonex Earn-Out Consideration(5)
—
—
—
—
—
Total Commercial Commitments
$
16,813
$
10,470
$
4,693
$
270
$
1,380
(1)
Includes non-cancelable license agreements. Several of these
commitments have the option to be extended at the option of
management. Payments beyond the original agreement have not been
included above.
Contributions to the Company’s defined benefit plans are
determined annually based on actuarial valuations. Future period
contributions reflect known commitments.
(3)
Settlement relating to securities class action lawsuit.
(4)
Agreement with George Foreman for professional appearances
associated with the promotion of the George Foreman product line.
(5)
Additional contingent consideration to be paid to Sonex
International Corporation based on net sales after allowances,
commencing after net sales of Sonex products exceed
$20.0 million. As of June 30, 2007, the Company may
owe up to an additional $2.4 million.
Forward
Looking
We anticipate capital expenditures on an ongoing basis to be at
historical levels in relation to net sales.
As more fully described in Risk Factors and Note 2 of the
Notes to Consolidated Financial Statements, we signed an
Agreement and Plan of Merger with APN Holdco on October 1,2007. We believe that without the consummation of the merger, we
will not have sufficient cash to fund our activities in the near
future, and we will not be able to continue operating. If we are
unable to satisfy our liquidity needs, we could be required to
adopt one or more alternatives, such as reducing or delaying
capital expenditures, borrowing additional funds, restructuring
indebtedness, selling other assets or operations
and/or
reducing expenditures for new product development, cutting other
costs, and some or such actions would require the consent of our
senior lenders, holders of Second Lien Notes
and/or the
holders of our Subordinated Notes. We cannot assure you that any
of such actions could be effected, or if so, on terms favorable
to us, that such actions would enable us to continue to satisfy
our liquidity needs
and/or that
such actions would be permitted under the terms of our senior
secured credit facility, the second lien credit agreement or the
indentures governing our Subordinated Notes.
In addition, we have required amendments and waivers to our
senior debt during recent periods due to our failure to remain
in compliance with financial covenants in our senior debt. We
cannot assure you that we will be able to comply with the
financial covenants and other covenants in our debt instruments
or that, if we fail to comply, our debt holders would waive our
compliance or forbear from exercising their remedies.
Item 7A.
Quantitative
and Qualitative Disclosures about Market Risk
We use derivative financial instruments to manage foreign
currency risk. 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 constitute a “forward-looking
statement.” Our major risk exposures are changing interest
rates in the United States and foreign currency commitments in
our foreign subsidiaries.
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.
The long-term fixed rate debt amount consists of Sr.
Subordinated Notes due April 15, 2008 and Series C
preferred stock that is mandatorily redeemable by the Company in
cash on August 26, 2010. The carrying amount of the
Series C preferred stock was $10.0 million as of
June 30, 2007(see Note 8, “Senior Secured Credit
Facility, Letters of Credit and Long-Term Debt”).
(2)
The variable rate amount due fiscal 2008 includes accrued
interest of $13.0 million related to the Second Lien Notes,
$100.0 million senior secured credit facility,
$103.3 million of Second Lien Notes and $1.7 million
of the Salton Europe Term Loan (see Note 8, “Senior
Secured Credit Facility, Letters of Credit and Long-Term
Debt”).
(3)
The average interest rate on the variable rate debt due fiscal
2008 is the weighted average rate of the senior secured credit
facility, the Second Lien Notes, and the Salton Europe Term
Loans. The variable rate senior secured credit facility is set
periodically at an established base rate (equivalent to the
prime rate of interest) plus an applicable margin or, at our
election, a LIBOR rate plus an applicable margin. The variable
rate on the Second Lien Notes is set at a LIBOR rate plus an
applicable margin.
(4)
The variable rate amount due fiscal 2007 includes accrued
interest of $11.0 million related to the Second Lien Notes.
The variable rate amount due fiscal 2008 includes
$100.0 million senior secured credit facility,
$103.3 million of Second Lien Notes,$13.1 million of
accrued interest related to the Second Lien Notes and
$1.5 million of the Salton Europe Term Loan (see
Note 8, “Senior Secured Credit Facility, Letters of
Credit and Long-Term Debt”).
(5)
The average interest rate on the variable rate debt due fiscal
2008 is the weighted average rate of the senior secured credit
facility and the Second Lien Notes. The variable rate senior
secured credit facility is set periodically at an established
base rate (equivalent to the prime rate of interest) plus an
applicable margin or, at our election, a LIBOR rate plus an
applicable margin. The variable rate on the Second Lien Notes is
set at a LIBOR rate plus an applicable margin.
The average interest rate on our outstanding debt was
approximately 12.02% at June 30, 2007 compared to 11.66% at
July 1, 2006, or an increase of 36 basis points, or
3.1%. An increase of 100 basis points in our
average interest rate could impact us by adding
$2.3 million of additional interest cost annually (based
upon our debt outstanding at June 30, 2007).
We are exposed to foreign currency transaction risk associated
with certain sales transactions being denominated in British
Pounds, Australian Dollars, Brazilian Reals, or Canadian Dollars
and foreign currency translation risk as the financial position
and operating results of the Company’s foreign subsidiaries
are translated into U.S. dollars for consolidation.
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 hedge residual balance sheet
exposures. At June 30, 2007, we had forward contracts
outstanding for the purchase of $3.0 million over the
course of the next twelve months.
During fiscal year 2007, average monthly foreign exchange rates
changed as follows:
Weighted-Average Monthly Exchange Rate:
Increase
FY2006
FY2007
(Decrease)
%
British Pound
1.7762
1.9365
0.1603
9.02
Australian Dollar
0.7489
0.7848
0.0359
4.79
Brazilian Real
0.4531
0.4759
0.0228
5.03
For the year ended June 30, 2007 our net sales denominated
originally in currencies other than the U.S. Dollar totaled
approximately $265.4 million, and stockholders’ equity
includes a current increase of approximately $5.6 million
due to the positive impact of foreign currency exchange rates as
compared to the prior year. A 10% change from the 2007 average
foreign currency exchange rates would have resulted in an
increase or decrease in our annual net sales and
stockholders’ equity of 4.6% and 14.0%, respectively.
The risk analyses provided above do not represent actual gains
or losses in fair value that we will incur. It is important to
note that the changes in value represent the potential for
change in fair value under certain assumptions, and actual
results may be materially different.
Item 8.
Financial
Statements and Supplementary Data
The consolidated financial statements of the Company, including
the notes to all such statements and other supplementary data
are included in this report beginning on
page F-1.
Item 9.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
At a meeting on April 13, 2007, the Audit Committee
appointed Grant Thornton LLP (“Grant Thornton”) to
serve as independent public accountants to audit the financial
statements of Salton for fiscal 2007, and has directed that
management submit the selection of the independent public
accountants for ratification by the stockholders at the Annual
Meeting of Stockholders. The Audit Committee made this decision
after evaluating the qualifications, performance and
independence of Grant Thornton, including considering whether
Grant Thornton’s quality controls are adequate and whether
the performance of permitted non-audit services by Grant
Thornton are compatible with maintaining its independence.
At the same meeting on April 13, 2007, the Audit Committee
dismissed Deloitte & Touche LLP (“Deloitte”)
as Salton’s independent accountant effective on that date.
Deloitte had audited Salton’s financial statements for each
fiscal year since the fiscal year ended July 1, 1989. The
reports of Deloitte on Salton’s consolidated financial
statements for the fiscal years ended July 2, 2005 and
July 1, 2006 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. During those
fiscal years and for fiscal year 2007 through April 13,2007 there were no (a) disagreements with Deloitte on any
matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Deloitte,
would have caused Deloitte to make reference to such
disagreements in its reports provided to Salton; or
(b) reportable events as defined in Item 304(a)(1)(v)
of
Regulation S-K.
During the fiscal years ended July 2, 2005 and July 1,2006 and during the interim period through the date of Grant
Thornton’s engagement on April 13, 2007, neither
Salton nor anyone on behalf of Salton consulted with Grant
Thornton regarding either: (a) the application of
accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might
be rendered on Salton’s financial statements, and neither
was a written report nor oral advice provided to Salton that
Grant Thornton concluded was an important factor considered by
Salton in reaching a decision as to the accounting, auditing or
financial reporting issue; or (b) any matter that was
either the subject of a disagreement, as that term is defined in
paragraph 304(a)(1)(iv) of
Regulation S-K
and the related instructions to Item 304 of
Regulation S-K,
or a reportable event required to be reported under
paragraph 304(a)(1)(v) of
Regulation S-K.
Item 9A.
Controls
and Procedures
Salton carried out an evaluation, under the supervision and with
the participation of Salton’s management, including
Salton’s principal executive officer and principal
financial officer, of the effectiveness of the design and
operation of Salton’s disclosure controls and procedures
pursuant to
Rule 13a-15
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of June 30, 2007. Based upon
that evaluation, the principal executive officer and principal
financial officer concluded that Salton’s disclosure
controls and procedures were effective to ensure that
information required to be disclosed by the Company (including
its consolidated subsidiaries) in the reports the Company files
or submits under the Exchange Act, is recorded, processed,
summarized and reported within the periods specified in the
SEC’s rules and forms.
Internal
Control over Financial Reporting
In fiscal year 2006, Salton exited from accelerated filer status
as a result of its total market capitalization falling below the
required threshold of $50 million as of the end of the
second fiscal quarter. As a result, Salton is not required to
provide the prescribed management report on internal control
over financial reporting otherwise required by the Sarbanes
Oxley Act, section 404. In addition, the Company’s
auditors are not required to audit the internal control over
financial reporting, and have not done so. Management, however,
recognizes its responsibility for establishing and maintaining
adequate internal control over financial reporting, and has
continued to conduct its testing and assessment accordingly.
Changes
in Internal Control Over Financial Reporting
The Company previously reported an internal control deficiency
related to the preparation and review of its tax provision and
related accounting procedures at the end of fiscal 2005.
Management had determined that this control deficiency
constituted a material weakness as defined by the Public Company
Accounting Oversight Board’s Auditing Standard No. 2.
The timing of the implementation of a number of changes,
including additional staffing, training, policies and
procedures, along with the complexity of certain tax positions
did not allow management adequate time to complete its testing
and assessment process as of July 1, 2006. However, as of
June 30, 2007, the process was fully tested and assessed
and management has concluded there is no longer a material
weakness in the tax processes and procedures.
There were no other changes in internal control over financial
reporting that occurred in the fourth quarter of fiscal 2007
that has materially affected, or is reasonably likely to
materially affect, Salton’s internal controls over
financial reporting.
The Board of Directors is divided into three classes, having
three-year terms that expire in successive years. The Board is
comprised of two Class I Directors (Jason B. Mudrick and
William M. Lutz), two Class II Directors (Daniel J. Stubler
and Bruce J. Walker) and three Class III Directors
(Leonhard Dreimann, Steven Oyer and Lester C. Lee).
Harbinger Capital Partners Master Fund I, Ltd., which
currently beneficially owns approximately 18% of our common
stock, has the right to designate one director as long as they
beneficially own the aggregate of at least 20,000 shares of
our outstanding Series A voting convertible preferred
stock. David M. Maura was designated a director by Harbinger in
June 2006. Mr. Maura resigned January 23, 2007 in
light of Harbinger’s acquisition of Applica Incorporated.
Class I
Directors
Jason M. Mudrick was appointed as a director by the Board in
October 2006. Mr. Mudrick was suggested as a board
candidate by Contrarian Capital Management, LLC, an investment
firm based in Greenwich, CT, which as of September 7,2007 may be deemed to beneficially own approximately
2.6 million shares of our outstanding common stock.
Mr. Mudrick is a Portfolio Manager at Contrarian. Prior to
joining Contrarian in 2001, Mr. Mudrick was an associate in
the Mergers & Acquisitions Investment Banking Group at
Merrill Lynch & Co from 2000 to 2001. Mr. Mudrick
is admitted to the New York State Bar. Mr. Mudrick is a
member of the Board of Directors of Safety-Kleen Holdco., Inc.,
a private company in the industrial waste services industry,
Rotech Healthcare Inc., a public company in the healthcare
industry and was formerly a member of the Board of Directors of
Integrated Alarm Services Group, Inc., a publicly-held alarm
monitoring and dealer service company.
William M. Lutz was appointed as a director by the Board in
September 2007. Mr Lutz was appointed interim Chief Executive
Officer effective April 30, 2007 while retaining his
current title of Chief Financial Officer of Salton.
Mr. Lutz has served as Chief Financial Officer since
December 2005. From March 2003 to December 2005, Mr. Lutz
served as Salton’s Vice President, Finance. Mr. Lutz
also oversees all Corporate Accounting and Finance functions.
Prior to joining Salton, Mr. Lutz served as head of
corporate consolidation and subsidiary accounting at Capital One
Financial since February 2002. Prior to that time, he held
various senior finance positions with manufacturing, consumer
products and service companies.
Daniel J. Stubler has been a director of the Company since
October 2004 and has served as Lead Director since May 2007.
Mr. Stubler is the retired President and Chief Operating
Officer of Toastmaster Inc., a Columbia, Missouri based
manufacturer and marketer of kitchen and small household
electrical appliances and time products. Mr. Stubler served
as President and Chief Operating Officer of Toastmaster from
1987 to 1999 and Senior Vice President, Marketing and
Administration from 1980 to 1987. Prior to joining Toastmaster,
Mr. Stubler served as Vice President, Industrial Relations
of McGraw-Edison Co. from 1976 to 1980 and as Group Director,
Industrial Relations of The General Tire & Rubber
Company from 1968 to 1976.
Bruce J. Walker has been a Director of the Company since June
2001. Dr. Walker has been Dean of the College of Business
and Professor of Marketing at the University of
Missouri-Columbia since 1990. Previously, he was a marketing
faculty member and department chair at Arizona State University.
Dr. Walker serves as a director of Boone County National
Bank, headquartered in Columbia, Missouri.
Class III
Directors
Leonhard Dreimann has served as a director of Salton since its
inception in August 1988 and is a founder of Salton.
Mr. Dreimann served as Chief Executive Officer of Salton
from its inception until April 2007. From 1988 to July 1998,
Mr. Dreimann served as President of Salton. From 1987 to
1988, Mr. Dreimann served as president of Salton’s
predecessor Salton, Inc., a wholly-owned subsidiary of SEVKO,
Inc. Prior to 1987, Mr. Dreimann served as managing
director of Salton Australia Pty. Ltd., a distributor of Salton
brand kitchen appliances. Mr. Dreimann serves on the board
of directors of Amalgamated Appliance Holdings Limited, a South
African publicly-held company that is a manufacturer and
distributor of branded consumer electronics and appliances in
South Africa.
Steven Oyer has been a director of the Company since March 2003.
Mr. Oyer is president and principal of Capital Placement
Holdings, Inc., a New York advisory firm. On September 28,2006, Mr. Oyer agreed to serve as interim chief executive
officer of Saflink Corporation, a publicly traded biometric
software company. From 2001 through 2005, Mr. Oyer served
as managing director of Standard & Poor’s
Investment Services, responsible for global business
development. He served as Saflink’s interim chief financial
officer in 2001. From 1995 to 2000, Mr. Oyer served as the
vice president regional director for Murray Johnstone
International Ltd., a Scottish investment firm. Mr. Oyer is
a member of the board of directors of Saflink Corporation. He
has been active in financial industry associations such as
Family Office Exchange and has served on the leadership council
of the Institute of Private Investors.
Lester Lee has been a director of the Company since September
2005. Mr. Lee has served as Chief Executive Officer of the
oneCARE Company since March 2006. Mr. Lee served as
President, North America of Rayovac Corporation from November
2003 to April 2005. From August 1977 to November 2003,
Mr. Lee served in several management positions at Remington
Consumer Products, most recently as President, North America
from January 2001 to November 2003. Prior to that time,
Mr. Lee served in management positions at Pacific Bell
Mobile Services from 1995 to 1997 and at Norelco Consumer
Products Company from 1989 to 1995.
Corporate
Governance Principles and Board Matters
Salton is committed to having sound corporate governance
policies. Having such principles is essential to running
Salton’s business efficiently and to maintaining
Salton’s integrity in the marketplace. The Board of
Directors has adopted a Code of Business Conduct and Ethics and
a Whistleblowing and Whistlebower Protection Policy which apply
to all our directors and officers. Salton’s Corporate
Governance Guidelines, as well as our Code of Ethics, and the
charters of the Audit Committee, Compensation Committee, and
Nominating and Corporate Governance Committee are available
under the “Corporate Governance” heading of the
investor relations page of our website at the following
address:http://www.saltoninc.com
and are also available in print upon written request addressed
to the Assistant Secretary of Salton at the corporate
headquarters at the following address: Salton, Inc., 1955 Field
Court, Lake Forest, Illinois60045.
The Board of Directors has determined that a majority of the
members of Salton’s Board of Directors has no material
relationship with Salton (either directly or as partners,
stockholders or officers of an organization that has a
relationship with Salton) and is “independent” within
the meaning of the NYSE director independence standards. William
M. Lutz, interim Chief Executive Officer and Chief Financial
Officer of Salton, and Leonhard Dreimann, former Chief Executive
Officer of Salton, are not considered to be independent.
Furthermore, the Board has determined that each of the members
of the Audit Committee, the Compensation Committee, the
Nominating and Governance Committee and the Special Independent
Committee has no material relationship to Salton (either
directly or as a partner, stockholder or officer of an
organization that has a relationship with Salton) and is
“independent” within the meaning of Salton’s
director independence standards.
Board of
Directors Meetings and Committees
Salton’s Board of Directors held 15 meetings in fiscal 2007
and did not act by unanimous written consent in fiscal 2007. The
Board of Directors has an Audit Committee, a Compensation
Committee, a Nominating and Governance Committee and a Special
Independent Committee.
The following table provides the current membership information
for each of the Board Committees:
Nominating
and
Special
Name
Audit
Compensation
Governance
Independent
Jason B. Mudrick
X
Steven Oyer
X
*
X
X
Daniel J. Stubler
X
X
*
X
X
*
Bruce J. Walker
X
X
X
*
X
*
Committee Chairperson
Except for Mr. Lester C. Lee, each director attended at
least 75% of all Board and applicable Committee meetings.
Below is a description of each committee of the Board of
Directors.
Audit Committee. The Audit Committee meets
with Salton’s Chief Financial Officer and its independent
public accountants to review the adequacy of internal controls
and the results and scope of the audit and other services
provided by the independent auditors. The Audit Committee is
currently comprised of Steven Oyer (Chair), Bruce Walker and
Daniel J. Stubler.
The Audit Committee held 14 meetings and did not act by
unanimous written consent in fiscal 2007. Further information
concerning the Audit Committee is set forth below under the
heading “Audit Committee Report.”
Compensation Committee. The Compensation
Committee administers salaries, incentives and other forms of
compensation for executive officers of Salton. The Compensation
Committee also: oversees Salton’s compensation and benefit
plans for the chief executive officer and other executive
officers of Salton; oversees Salton’s management
development planning process, including executive succession
plans for key executive officer positions; and produces an
annual report on executive compensation for inclusion in
Salton’s proxy statement. The Compensation Committee is
currently comprised of Daniel J. Stubler (Chair), Steven Oyer
and Bruce J. Walker. The Compensation Committee held three
meetings and did not act by unanimous written consent in fiscal
2007.
Nominating and Governance Committee. The
Nominating and Governance Committee is responsible for assessing
corporate governance guidelines, evaluating Board performance,
setting eligibility requirements for candidates for election to
the Board of Directors and evaluating and making recommendations
for new director
candidates. The Nominating and Governance Committee is
responsible for reviewing with the Board the appropriate skills
and experience required of Board members in light of the current
skills, experience and backgrounds existing on the Board. The
Board assessment includes a review of the age and diversity of
candidates, in addition to their skills and experience. In case
of new director candidates, the Nominating and Governance
Committee also determines whether the nominee must be
independent, which determination is made based on applicable
NYSE listing standards, applicable SEC rules and regulations and
under the advice of counsel, if necessary. Board members are
expected to make sure that other commitments do not interfere
with the devotion of time needed to understand Salton’s
business and to review materials for, attend and fully
participate in each meeting. The Nominating and Governance
Committee regularly assesses the appropriate size of the Board,
and whether any vacancies on the Board are expected due to
retirement or otherwise. In the event that vacancies are
anticipated, or otherwise arise, the Nominating and Governance
Committee considers various potential candidates for director.
Candidates may come to the attention of the Nominating and
Governance Committee through current Board members, professional
search firms, stockholders or other persons. These candidates
are evaluated at regular or Annual Meetings of the Nominating
and Governance Committee, and may be considered at any point
during the year.
The Nominating and Governance Committee will consider properly
submitted recommendations for director candidates from
stockholders of Salton. A stockholder interested in making such
a recommendation should submit a written recommendation
identifying the candidate and explaining his or her
qualifications. The recommendation should be mailed to the
Assistant Secretary of Salton at the corporate headquarters at
Salton, Inc., 1955 Field Court, Lake Forest, Illinois60045. The
Nominating and Governance Committee is comprised of Bruce J.
Walker (Chair), Steven Oyer and Daniel J. Stubler. The
Nominating and Governance Committee held three meetings and did
not act by unanimous written consent in fiscal 2007.
Special
Independent Committee
During fiscal 2007, the Board formed a Special Independent
Committee consisting of three independent directors to analyze
various strategic options, including but not limited to, a
possible sale or merger of Salton. The Special Independent
Committee currently consists of Daniel J. Stubler (Chair), Jason
B. Mudrick and Bruce J. Walker. Salton has retained an
investment banking firm to assist the Board and the Special
Independent Committee in evaluating strategic alternatives.
Executive
Sessions
The non-management directors of Salton meet in executive session
of the Board without management at each regular board meeting
and at each regular meeting of the Audit Committee, Compensation
Committee and Nominating and Governance Committee, and as
otherwise scheduled from time to time. The Lead Director or the
Chair of the Nominating and Governance Committee presides at all
executive sessions of the Board. The Chair of each of the Audit
Committee, Compensation Committee, the Nominating and Governance
Committee and the Special Independent Committee presides at the
executive sessions of his or her respective committee.
Interested parties who would like to communicate with the
non-management directors or any individual non-management
director may do so by sending a letter to the Chair of the
Nominating and Governance Committee in care of the General
Counsel of Salton at the corporate headquarters at the following
address: Salton, Inc., 1955 Field Court, Lake Forest, Illinois60045.
Lead
Director
On April 30, 2007, our Board established the position of
lead independent director (“Lead Director”) and
elected Daniel J. Stubler to serve as our Lead Director. The
duties and responsibilities of the Lead Director include the
following:
•
assuming a primary role with board-related matters, including
approving board meeting agendas, board meeting schedules and
various information sent to the board;
•
serving as the principal liaison between the independent
directors and senior management, including with respect to the
then pending merger with APN Holdco;
presiding at meetings of the independent directors or at
meetings of the board at which senior management is not
present; and
•
any other duties or responsibilities that may be requested by
the independent directors, including, as the Lead Director deems
appropriate, calling any meetings of the independent directors
or meeting with any of Salton’s executive officers,
stockholders or other constituents.
Communications
with the Board
Individuals may communicate with the Board in writing by
submitting a letter addressed to the “Board of
Directors” or to any of the directors by name in care of
the General Counsel of Salton at the corporate headquarters at
Salton, Inc., 1955 Field Court, Lake Forest, Illinois60045. The
communication should indicate the name(s) of any specific
director(s) for whom it is intended, or the “Board of
Directors” as a whole. All communications will be compiled
by the General Counsel of Salton and submitted as appropriate to
the Board or specified directors on a periodic basis.
Annual
Meeting of Stockholders
Directors are encouraged to attend Salton’s annual meetings
of stockholders.
Compliance
With Section 16(a) Of The Securities Exchange Act Of
1934.
Section 16(a) of the Securities Exchange Act of 1934
requires our officers and directors, and persons who own more
than 10% of the outstanding common stock, to file reports of
ownership and changes in ownership of such securities with the
Securities and Exchange Commission. Officers, directors and
greater-than-10% beneficial owners are required to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely upon our review of the copies of the forms
furnished to the Company and other information, we believe that
all of these reporting persons complied with their filing
requirement for fiscal 2007.
Item 11.
Executive
Compensation
Introduction
The following Compensation Discussion and Analysis describes the
material elements of compensation paid to our interim chief
executive officer, who also serves as our chief financial
officer, our former chief executive officer and certain other
persons who served as executive officers during the fiscal year
ended June 30, 2007. We refer to these individuals as our
“Named Executive Officers.” As more fully described
below, the Compensation Committee of our Board of Directors (the
“Compensation Committee”) makes all decisions for the
total direct compensation, consisting of base salary, annual
bonus awards and long-term incentive awards, of all of our Named
Executive Officers.
Our Compensation Committee administers salaries, incentives and
other forms of compensation for executive officers of Salton.
The Compensation Committee also: oversees compensation and
benefit plans for the chief executive officer and our other
executive officers; and oversees our management development
planning process, including executive succession plans for key
executive officer positions. The Compensation Committee is
currently comprised of Daniel J. Stubler (Chair), Steven Oyer
and Bruce J. Walker. The Compensation Committee held three
meetings and did not act by unanimous written consent during the
fiscal year ended June 30, 2007. The charter of the
Compensation Committee is available on our website at
http://www.saltoninc.com
and is also available in print upon written request addressed to
the Assistant Secretary of Salton at the corporate headquarters
at the following address: Salton, Inc., 1955 Field Court, LakeForest, Illinois60045.
Objective
and Policies
Our executive compensation program is designed to enable us to
recruit, retain and motivate the high quality employees we need.
As a result, the Compensation Committee has determined that the
executive
compensation opportunities, including those for our chief
executive officer, should create incentives for superior
performance and consequences for below target performance.
Our executive compensation mix includes a base salary, annual
bonus awards and long-term compensation in the form of stock
options. Through this compensation structure, we aim to:
•
attract and retain highly qualified and talented executives;
•
provide appropriate incentives to motivate those individuals to
maximize stockholder returns by producing sustained superior
performance; and
•
reward our executive officer for outstanding individual
contributions to the achievement our near-term and long-term
business objectives.
We have been engaged in a domestic cost-cutting program and have
had numerous changes in management during the past
12 months. As a result of these operational and management
changes, the Compensation Committee has not established a
uniform compensation policy for our executive officers.
Compensation
Determination and Implementation
Compensation packages for our executive officers are recommended
and administered by our Compensation Committee, considering
competitive market data on salaries, target annual bonus
incentives and long-term incentives, as well as internal equity
and each executive’s individual responsibility, experience
and overall performance. The Compensation Committee does not
give any specific weighting to any of these factors, and has not
adopted any formal plan or policies for allocating compensation
between long-term and current compensation, between cash and
non-cash compensation, or among other forms of different
compensation. This is due in part to the changes in our
management team over the last several months and the need to
tailor each executive’s compensation package to attract and
retain that executive. Our Compensation Committee has not
identified a set of peer companies against which we benchmark
our executive compensation, and has not yet decided if it will
so identify a set of peer companies for the next fiscal year.
Neither our chief executive officer nor any other executive
officer has made recommendations to our Compensation Committee
or been involved in any manner with the compensation decisions
of our Compensation Committee.
Elements
of Compensation
Base
Salary.
Named Executive Officer base salaries provide a fixed element of
pay based on an individual’s job responsibility and
individual contribution. The Compensation Committee reviews the
base salaries of our Named Executive Officers, considering
factors such as corporate progress toward achieving objectives
and individual performance experience and expertise.
Except as noted below, we provide base salary to our executive
officers in accordance with the terms of employment agreements
individually negotiated with each of them. In April, 2007,
following the departure of Leonhard Dreimann as our chief
executive officer, William M. Lutz was appointed to act as our
interim chief executive officer, while retaining his title of
chief financial officer. In connection with his appointment as
interim chief executive officer, the Board of Directors of the
Company, upon the recommendation of the Compensation Committee,
increased the annual salary of Mr. Lutz by $100,000 to
$325,000. Further details regarding Mr. Lutz’s
employment agreement are provided below.
Annual
Bonus and Incentives.
We do not have a formal bonus plan. Annual bonuses, if any, for
our Named Executive Officers are granted at the discretion of
the Compensation Committee. In light of the Company’s
domestic cost-cutting program, the Compensation Committee
determined that no bonuses would be paid with respect to the
fiscal year ended June 30, 2007.
In connection with Mr. Lutz’s appointment as interim
chief executive officer, the Board of Directors of the Company,
upon the recommendation of the Compensation Committee,
established a bonus of $100,000 payable to Mr. Lutz upon
consummation of the merger contemplated by the merger agreement
dated February 7, 2007 by and among Salton, SFP MergerSub,
Inc. and APN Holding Company, Inc. Shortly after that merger
agreement was terminated in July 2007, the Board, upon the
recommendation of the Compensation Committee, revised the
$100,000 bonus to be payable at the earlier of
(x) December 31, 2007 and (y) the recommendation
to the Board by Mr. Lutz and successful implementation of a
strategic alternative. This bonus is intended as incentive
performance that will increase our value to our stockholders.
Long-Term
Incentive Compensation.
The Compensation Committee supports awards of equity based
compensation in order to align the interests of our executives
with those of our stockholders. The objective of these awards is
to advance the longer term interests of Salton and our
stockholders and complement incentives tied to annual
performance. These awards provide rewards to executives upon the
creation of incremental stockholder value and the attainment of
long-term earnings goals.
Our long-term incentives have historically been primarily in the
form of stock option awards. Stock options only produce value
for our executives if the price of our stock appreciates, and
thereby directly link the interests of our executives with those
of our stockholders.
In light of the Company’s domestic cost-cutting program, we
did not grant any stock options to our Named Executive Officers
with respect to the fiscal year ended June 30, 2007.
Perquisites.
We provide, on a conservative basis, perquisites typically
provided at companies against which we compete for executive
talent, including reimbursement of automobile expenses, and such
other perquisites as may be provided for in an executive’s
individual employment agreement
Benefits.
401(k) Plan (the “401(k) Plan”). Our
401(k) Plan is a qualified defined contribution plan. Eligible
employees, including our Named Executive Officers, may elect to
make pre-tax deferral contributions, called 401(k)
contributions, to the 401(k) Plan of up to a specified
percentage of their compensation, subject to certain limits
under the Internal Revenue Code. Under the terms of the 401(k)
Plan, we may elect to match a portion of the participant’s
401(k) contributions. Our discretionary matching contribution is
based on a portion of the participant’s eligible wages (as
defined in the 401(k) Plan documents), up to a maximum amount
ranging typically from 2% to 6%. For the fiscal year ended
June 30, 2007, our total matching contributions to our
Named Executive Officers under the 401(k) Plan were
approximately $13,700.
Other Benefits. Our Named Executive Officers
who are currently employed by us are entitled to participate in
health, life and disability benefit programs that are generally
available to all of our employees.
Stock
Ownership Guidelines
There is not a stock ownership policy for our executive officers.
Severance
Compensation and Change in Control Benefits
Our Named Executive Officers, pursuant to the terms of their
respective employment agreements, may be eligible for certain
benefits and payments if their employment terminates under
certain circumstances or if there is a change in control, as
more fully described below under “Potential Payments on
Termination or Change in Control.” During the fiscal
year ended June 30, 2007, we paid severance compensation to
Leonhard Dreimann, our former chief executive officer, David
Sabin, our former chairman and secretary, and William Rue, our
former president and chief operating officer, in accordance with
the terms of their respective
employment and separation agreements. These agreements are more
fully described below under “Potential Payments on
Termination or Change in Control.”
Tax and
Accounting Considerations
The Compensation Committee considers certain U.S. tax and
accounting issues when forming compensation packages, including
the potential consequences for the Company of
Section 162(m) of the Internal Revenue Code.
Section 162(m) imposes a limit on tax deductions for annual
compensation in excess of $1 million paid to any of the
five most highly compensated executive officers. The
Compensation Committee reviews from time to time the potential
impact of Section 162(m) on the deductibility of executive
compensation. However, the Compensation Committee intends to
maintain the flexibility to take actions that we consider to be
in the best interest of the Company and our stockholders, and
which may be based on other consideration in addition to tax
deductibility.
Compensation
Committee Report
Our Compensation Committee has reviewed and discussed the
Compensation Discussion and Analysis required by
Item 402(b) of
Regulation S-K
with management and based on such review and discussions, the
Compensation Committee recommended to our Board of Directors
that the Compensation Discussion and Analysis be included in
this annual report on
Form 10-K.
Compensation Committee of the Board of Directors
Bruce Walker, Chairman
Steven Oyer
Daniel J. Stubler
Summary
Compensation Table
The following table shows the total compensation for the fiscal
year ended June 30, 2007 received by (1) William Lutz,
our Interim Chief Executive Officer and Chief Financial Officer,
(2)Leonhard Dreimann, our former Chief Executive Officer,
(3) David C. Sabin, who served as Chairman of the Board
until August 24, 2006 and (4) William B. Rue, who
served as President and Chief Operating Officer until
October 18, 2006 as a group, the “named executive
officers”).
All Other
Name and Principal Position
Year
Salary(5)
Stock Awards
Compensation(6)
Total
$
$
$
$
William Lutz,
Interim Chief Executive Officer and Chief Financial Officer(1)
2007
238,462
3,850
24,447
266,759
Leonhard Dreimann,
Former Chief Executive Officer(2)
2007
521,539
—
1,556,179
2,077,718
David C. Sabin,
Former Chairman and Secretary(3)
2007
113,077
—
648,006
761,083
William B. Rue,
Former President and Chief Operating Officer(4)
2007
203,077
—
798,557
1,001,634
(1)
Mr. Lutz was appointed our Interim Chief Executive Officer
on April 30, 2007, and served as our Chief Financial
Officer for the entire fiscal year.
Mr. Sabin’s employment terminated on August 24,2006. Under the terms of Mr. Sabin’s separation
agreement, his stock options expired 90 days after the date
of the agreement:
Number of
Securities
Option
Original
Underlying
Exercise
Expiration
Date of Grant
Forfeited Options
Price
Date
5/1/1998
70,720
$
8.17
5/1/2008
12/18/1998
94,768
$
13.92
12/18/2008
12/17/1999
94,768
$
34.25
12/17/2009
4/2/2001
90,000
$
14.80
4/2/2011
10/7/2002
200,000
$
9.00
10/7/2012
(4)
Mr. Rue’s employment terminated on October 16,2006. Under the terms of Mr. Rue’s separation
agreement, his stock options expired 90 days after the date
of the agreement:
Number of
Securities
Option
Original
Underlying
Exercise
Expiration
Date of Grant
Forfeited Options
Price
Date
5/1/1998
70,719
$
8.17
5/1/2008
12/18/1998
94,768
$
13.92
12/18/2008
12/17/1999
94,768
$
34.25
12/17/2009
4/2/2001
90,000
$
14.80
4/2/2011
10/7/2002
200,000
$
9.00
10/7/2012
(5)
Reflects actual salary received.
(6)
This column reports all other compensation that the Company
could not properly report in any other column of the Summary
Compensation Table. Details of amounts in this column are
provided in the table entitled, “Executive
Compensation — All Other” set forth below.
In fiscal 2007, the following compensation was paid to our named
executive officers, which comprises “All Other
Compensation.”
EXECUTIVE
COMPENSATION — ALL OTHER
FISCAL YEAR ENDED JUNE 30, 2007
Separation Agreement
All Other
Vehicle
Total-
Allowance
Cash
Stock
Option
Consulting
Separation
with Tax
401K
Group Term
Payments
Award
Extensions
Services
Other
Agreement
Gross Up
Contribution
Life Ins
Total
$
$
$
$
$
$
$
$
$
$
William Lutz
—
—
—
—
—
—
16,573
7,154
720
24,447
Leonhard Dreimann(1)
1,200,000
—
165,158
75,000
63,027
1,503,185
44,787
5,885
2,322
1,556,179
David C. Sabin(2)
300,000
311,322
—
—
8,103
619,425
26,664
346
1,571
648,006
William B. Rue(3)
285,000
301,450
—
150,000
5,854
742,304
53,944
346
1,963
798,557
(1)
In connection with his resignation as Chief Executive Officer on
April 30, 2007, Salton entered into a separation agreement
with Mr. Dreimann. Pursuant to such agreement,
Mr. Dreimann’s employment agreement dated
January 1, 2003, as amended, was terminated and Salton
agreed to pay him $450,000 on the eighth day after execution of
such agreement and $750,000 plus interest on the first day
following the sixth month anniversary of the first payment. The
agreement also provided for existing stock options to remain
exercisable for a period of two years after the date of the
agreement. This provision was treated as a modification of the
awards and the incremental compensation cost was calculated in
accordance with SFAS No. 123(R). Mr. Dreimann
will also be entitled to certain health insurance benefits for a
period of 36 months, which was estimated at a present value
of $63,027. Salton also agreed to pay Mr. Dreimann at
an annual rate of $450,000 per year ($37,500 per month), plus
reimbursement of expenses, for certain consulting services until
the earlier of (1) six months from the date of the
agreement and (2) the date on which the merger is
consummated.
(2)
In connection with his resignation as Chairman of the Board on
August 24, 2006, Salton entered into a separation agreement
with Mr. Sabin. Pursuant to such agreement,
Mr. Sabin’s employment agreement dated January 1,2003, as amended, was terminated and Salton agreed to pay him
$300,000 and issue 141,510 shares of common stock of Salton
to Mr. Sabin. The value of this award was determined in
accordance with SFAS No. 123(R). Mr. Sabin was
also entitled to certain health care and other benefits for six
months past termination of employment.
(3)
In connection with his resignation as President and Chief
Operating Officer on October 18, 2006, Salton entered into
a separation agreement with Mr. Rue. Pursuant to such
agreement, Mr. Rue’s employment agreement dated
January 1, 2003, as amended, was terminated and Salton
agreed to pay him $285,000 and issue 144,928 shares of
common stock of Salton to Mr. Rue. The value of this award
was determined in accordance with SFAS No. 123(R).
Mr. Rue was also entitled to certain health care and other
benefits for six months past termination of employment.
Mr. Rue agreed to provide consulting services for up to six
months to the Company for an amount equal to $25,000 per month.
Narrative
to Summary Compensation Table
Employment
Agreements
William Lutz. William Lutz, our interim Chief
Executive Officer and Chief Financial Officer, and Salton are
parties to an employment agreement, effective as of
December 10, 2005 and as amended on September 13,2007. The term of the agreement is automatically extended each
day by one day to create a new one-year term unless a
12-month
written notice of an intention not to extend the employment
agreement is given by either party.
Mr. Lutz is entitled to an annual salary of $325,000.
Mr. Lutz is also entitled to a bonus of $100,000 payable
upon the earlier of: (x) December 31, 2007; and
(y) the date the Board determines that the Company has
successfully implemented a strategic alternative (the
“Payment Date”); provided that the Board, in its
discretion, may pay a portion of the bonus prior to the Payment
Date based on Mr. Lutz’s efforts in recommending to
the Board and implementing a strategic alternative. Under the
terms of the employment agreement, as amended, if Mr. Lutz
is terminated without cause or resigns with good reason, he is
entitled to receive: (1) immediately upon such termination
a lump sum payment in an amount equal to accrued and unpaid
salary and any accrued bonus; and (2) a continued payment
of his annual salary for eighteen months; provided that, in the
event such termination occurs with the two-year period after a
Change of Control, the amount payable in clause (2) shall
be paid in a single lump sum payment within five days.
Mr. Lutz would also be allowed continuation of welfare
benefits for one year and to a lump sum payment within sixty
(60) days of termination of the total amount of his
unvested benefits (if any) under any Company sponsored plan or
program which is forfeited on account of his being terminated.
Mr. Lutz is subject to a confidentiality agreement and a
12-month
non-solicitation and non-competition covenant following any
termination of employment.
Separation
Agreements
Leonhard Dreimann. In connection with his
resignation as Chief Executive Officer on April 30, 2007,
we entered into a separation agreement with Leonhard Dreimann.
Pursuant to such agreement, Mr. Dreimann’s employment
agreement dated January 1, 2003, as amended, was terminated
and we agreed to pay him $450,000 on the eighth day after
execution of such agreement and $750,000 plus interest on the
first day following the sixth month anniversary of the first
payment. We also agreed to pay Mr. Dreimann at an annual
rate of $450,000 per year, plus reimbursement of expenses, for
certain consulting services until the earlier of (1) six
months from the date of the agreement and (2) the date on
which the pending merger with APN Holdco is consummated.
Mr. Dreimann will also be entitled to certain health
insurance benefits for a period of
36 months. The agreement also contains mutual releases and
restrictive covenants, including confidentiality, non-solicit
and non-compete provisions.
David Sabin and William Rue. We entered into
Separation Agreements dated August 24, 2006 and
October 16, 2006, respectively, with each of David C. Sabin
(Former Chairman of the Board) and William B. Rue (Former
President and Chief Operating Officer) (the “Separation
Agreements”). Pursuant to the Separation Agreements, we:
(a) paid Mr. Sabin $300,000 and Mr. Rue $285,000,
in each case minus appropriate and customary payroll deductions;
and (b) issued to Mr. Sabin and Mr. Rue 141,510
and 144,928, respectively, shares of our common stock. Each of
Mr. Sabin and Mr. Rue is also entitled to certain
health care and other benefits for six months past termination
of employment. The Separation Agreements also contain mutual
releases and confidentiality and non interference
Grants of
Plan Based Awards
No options were granted to any Named Executive Officer during
the fiscal year ended June 30, 2007.
The following table sets forth certain information with respect
to outstanding equity awards at June 30, 2007 of our named
executive officers.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR ENDED JUNE 30, 2007
Stock Awards
Number of
Number of
Number
Market
Securities
Securuties
of Shares
Value of
Underlying
Underlying
of Stock
Shares of
Unexercised
Unexercised
that
Stock that
Options
Options
Option
Expiration
have not
have not
Name
Exercisable
Unexercisable
Exercise Price
Date
Vested
Vested
#
#
$
#
$
William Lutz
4,000
—
$
8.87
3/3/2013
2,750
$
5,143
Leonhard Dreimann(1)
200,000
—
$
9.00
4/30/2009
—
—
94,768
—
$
8.87
4/30/2009
—
—
94,768
—
$
8.87
4/30/2009
—
—
90,000
—
$
8.87
4/30/2009
—
—
70,720
—
$
8.87
4/30/2009
—
—
(1)
Per the terms of Mr. Dreimann’s separation agreement
dated April 30, 2007, his options remain exercisable for a
period of two years after the date of the agreement.
STOCK
VESTED IN FISCAL YEAR 2007
Stock Awards
Number of Shares
Value Realized on
Name
Acquired on Vesting
Vesting
#
$
William Lutz(1)
2,750
$
6,875
(1)
Restricted stock grant was made in fiscal 2006.
2,750 shares vested March 9, 2007.
POTENTIAL
PAYMENTS ON TERMINATION OR CHANGE IN CONTROL
William
Lutz.
Benefits. Pursuant to the terms of his
employment agreement, if we terminate Mr. Lutz’s
employment during the term of the agreement for
“cause”, or if Mr. Lutz terminates his employment
other than for good reason, then Mr. Lutz shall be entitled
to immediate payment equal to the amount of his then-current
base salary accrued and unpaid as of the date of such
termination. If, during the term of his employment agreement,
Mr. Lutz’s employment is terminated by us without
cause or by Mr. Lutz with “good reason,” then
Mr. Lutz shall be entitled to the following:
•
immediate payment of an amount equal to all accrued and unpaid
base salary as of the date of such termination;
•
in accordance with the Company’s regular payroll practices,
the remaining unpaid installments of base salary owing to
Mr. Lutz for eighteen months (an aggregate of $487,500);
•
within 60 days of such termination, a lump sum payment
equal to the amount (if any) of unvested benefits (if any) under
any Company-sponsored plan or program that is forfeited as a
result of such termination; and
•
continuation of certain benefits (or if such continuation is not
available, the economic equivalent of such benefits) for the
remainder of the year in which such termination occurred.
If Mr. Lutz’s employment is terminated during the term
of his employment agreement due to his death or disability, he
(or his designated beneficiaries) shall be entitled to the
remaining unpaid installments of base salary owing to
Mr. Lutz for the remainder of the contract year, in
accordance with the Company’s regular payroll practices,
and any accrued and unpaid bonus (if any).
If a change in control occurs during the term of the agreement
and Mr. Lutz’s employment is terminated by us or any
successor company, or if Mr. Lutz terminates his employment
for good reason following such change in control, Mr. Lutz
shall be entitled to the same benefits as he would receive upon
a termination without cause or with good reason in a single
lump-sum payment.
Definitions of “cause” and “good
reason.”As used in Mr. Lutz’s
employment agreement, the following constitute a termination for
“cause”:
•
commission of a felony or other crime involving
dishonesty; or
•
willful or intentional breach of his employment agreement,
including any intentionally or willfully wrongful conduct in
performing or refusing to perform his duties.
In addition, we must provide Mr. Lutz with written notice
and an opportunity to cure any wrongful conduct at least
60 days prior to effecting and termination for cause.
As used in Mr. Lutz’s employment agreement, the
following constitute a termination for “good reason”:
•
any material breach of the employment agreement by us;
•
requirement that Mr. Lutz report to anyone other than our
chief executive officer;
•
assignment of duties materially inconsistent with the duties
described in the employment agreement;
•
failure by us to assign the employment contract to any successor
company following a change in control;
•
requirement that Mr. Lutz be based at any office or
location more than 50 miles from our offices as of the date
of the agreement; and
•
any termination by Mr. Lutz during the one-year period
immediately following a change in control.
Events Triggering a Change in Control. The
following events constitute a “change in control”:
•
any person (as such term is used in
Rule 13d-5
of the Securities Exchange Act of 1934 (the
“1934 Act”) or group (as such term is defined in
Section 13(d) of the 1934 Act), other than a
subsidiary or any employee benefit plan (or any related trust)
of the Company becomes the beneficial owner of thirty-five
percent (35%) or more of our common stock or of other securities
entitled to vote generally in the election of our board
directors (“Voting Securities”) representing
thirty-five percent (35%) or more of the combined voting power
of all of our Voting Securities;
within a period of 24 months or less, the individuals who,
as of any date on or after December 1, 2005, constitute the
Board (the “Incumbent Directors”) cease for any reason
to constitute at least seventy five percent (75%) of the Board
unless at the end of such period, seventy five percent (75%) of
individuals then constituting the Board are persons who are
Incumbent Directors or were nominated upon the recommendation of
seventy five percent (75%) of the Incumbent Directors;
•
approval by the stockholders of the Company of either of the
following:
•
a merger, reorganization or consolidation (“Merger”)
with respect to which the individuals and entities who were the
respective beneficial owners of Common Stock and Voting
Securities of the Company immediately before such Merger do not,
after such Merger, beneficially own, directly or indirectly,
more than fifty percent (50%) of, respectively, the common stock
and the combined voting power of the Voting Securities of the
corporation resulting from such Merger in substantially the same
proportion as their ownership immediately before such
Merger, or
•
the sale of all or substantially all of the assets of the
Company.
Notwithstanding the foregoing, there shall not be a Change in
Control if, in advance of such event, Mr. Lutz agrees in
writing that such event shall not constitute a Change in Control.
DIRECTOR
COMPENSATION
Non-employee members of the Board of Directors are each paid an
annual retainer fee of $40,000 and are reimbursed for all
expenses incurred in attending meetings of the Board of
Directors or any committee thereof. The chairs of the
Compensation Committee and the Nominating and Governance
Committee receive an additional annual fee of $2,000. The chair
of the Audit Committee receives an additional annual fee of
$4,000. The Lead Director receives an additional monthly fee of
$20,000. Additionally, each non-employee Board member receives
$1,000 for attendance in person of each Board and committee
meeting. Fees are generally not paid for special telephonic
Board or Committee meetings except as otherwise specifically
approved by the Chairperson of the Board or Committee, as
applicable, and notice of the same is provided to the Board.
Mr. Mudrick does not receive any compensation for serving
on the Board.
The following table summarizes the compensation paid to
non-employee directors during fiscal 2007.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of September 7,2007 by (1) each person known to Salton to beneficially own
5% or more of the common stock, (2) each of the directors
of Salton, (3) each of the current and former named
executive officers appearing in the Summary Compensation Table
below and (4) all current executive officers and directors
of Salton as a group. The number of shares of common stock shown
as owned by the persons and group named below assumes the
exercise of all currently exercisable options and the conversion
of all shares of Series A Preferred Stock held by such
persons and group, and the percentage shown assumes the exercise
of such options and the conversion of such shares and assumes
that no options held by others are exercised.
Number of Shares
Percentage of
Beneficially
Shares Beneficially
Name of Beneficial Holder
Owned(1)
Owned
Harbinger Capital Partners Master Fund I, Ltd.(2)
3,348,667
17.7
%
Contrarian Capital Management, L.L.C.(3)
2,584,000
16.8
Dimensional Fund Advisors Inc.(4)
1,145,900
7.5
Centre Partners II LLC(5)
1,070,302
5.7
Angelo, Gordon & Co., L.P.(6)
756,601
5.0
Mr. Leonhard Dreimann(7)
1,106,706
7.0
Mr. David C. Sabin(8)
608,288
3.9
Mr. William B. Rue
411,161
2.7
Mr. William Lutz(9)
10,437
*
Mr. Lester C. Lee
—
*
Mr. Jason B. Mudrick(3)
—
*
Mr. Steven Oyer(10)
2,000
*
Mr. Daniel J. Stubler
—
*
Mr. Bruce J. Walker(10)
10,000
*
All Directors and executive officers as a group
(7 persons)(11)
1,129,143
7.1
%
*
Less than 1%.
(1)
Unless otherwise indicated below, the persons named in the table
above have sole voting and investment power with respect to the
number of shares set forth opposite their names. Beneficially
owned shares include shares subject to options exercisable
within 60 days of June 15, 2007.
(2)
Based on a Schedule 13D/A filed on July 31 2007, consists
of an aggregate of (i) 30,000 shares of Series A
Preferred Stock, which are convertible into
2,647,067 shares of common stock, and
(ii) 701,600 shares acquired by Harbinger Capital
Partners Master Fund I (the “Master Fund”) from
Salton on December 28, 2006. The Master Fund may be deemed
to beneficially own 3,348,667 shares of common stock with
shared voting and dispositive power.
(3)
Based on a Schedule 13D/A filed on October 24, 2006.
Contrarian Capital Management, L.L.C. may be deemed to
beneficially own 2,584,000 shares of common stock, with
shared voting and dispositive power of 2,502,422 shares
held by Contrarian Equity Fund, L.P., a Delaware limited
partnership that invests and trades in securities and financial
instruments and sole voting and dispositive power of
81,578 shares held in a client account managed by
Contrarian Capital Management, L.L.C. Mr. Mudrick is the
Portfolio Manager of Contrarian Equity Fund, L.P. and a Senior
Vice President of Contrarian Capital Management, L.L.C.
Contrarian Capital Management, L.L.C. disclaims beneficial
ownership of the shares of common stock held by its clients.
Mr. Mudrick is not a beneficial owner of the shares of
common stock held by clients of Contrarian Capital Management,
L.L.C.
(4)
Based on Schedule 13G/A filed on February 1, 2007,
Dimensional Fund Advisors Inc. has sole voting and dispositive
power of 1,145,900 shares of common stock.
Based on Schedule 13D/A filed on July 6, 2006, Centre
Partners II LLC, as general partner and pursuant to certain
investment management arrangements, may be deemed to
beneficially own 1,070,302 shares with shared voting and
dispositive power. Consists of an aggregate of
187,949 shares of common stock and 10,000 shares of
Series A Preferred Stock, which are convertible into
882,353 shares of common stock.
(6)
Based on Schedule 13G/A filed on February 8, 2007,
Angelo, Gordon & Co., L.P. has shared voting and
dispositive power of 756,601 shares of common stock.
(7)
Includes, with respect to Mr. Dreimann, 550,256 shares
of common stock which may be acquired upon the exercise of
immediately exercisable options.
(8)
Includes 204,701 shares owned by Duquesne Financial
Corporation (“Duquesne”), a corporation which is owned
by Susan Sabin. Susan Sabin is David Sabin’s wife.
Mr. Sabin disclaims beneficial ownership of all shares
owned by Duquesne.
(9)
Includes, with respect to Mr. Lutz, 4,000 shares of
common stock which may be acquired upon the exercise of
immediately exercisable options.
(10)
Includes, with respect to each of Messrs. Oyer, and Walker,
2,000 and 6,000 shares, respectively, of common stock which
may be acquired upon the exercise of immediately exercisable
options.
(11)
Includes an aggregate of 562,256 shares which may be
acquired by directors and officers of Salton upon the exercise
of immediately exercisable options. See footnotes 7, 9 and 10
above.
The addresses of the persons shown in the table above who are
beneficial owners of more than five percent of Salton’s
common stock are as follows: Harbinger Capital Partners Master
Fund I, Ltd., 555 Madison Avenue, 16th Floor, NewYork, New York10022; Contrarian Capital Management, L.L.C.,
411 West Putman Avenue, Suite 225, Greenwich, CT06830; Centre Partners II, LLC, 30 Rockefeller Plaza,
Suite 5050, New York, New York10020; Dimensional
Fund Advisors Inc., 1299 Ocean Avenue, 11th Floor,
Santa Monica, CA90401; and Leonhard Dreimann 1285 Loch Lane,
Lake Forest, Illinois60045
Equity
Compensation Plan Information
This table shows information about the securities authorized for
issuance under our equity compensation plans as of June 30,2007.
(a)
(b)
(c)
Number of
Securities
Remaining Available
for Future Issuance
Under Equity
Number of Securities
Compensation Plans
to be Issued Upon
Weighted-Average
(Excluding
Exercise of Outstanding
Exercise Price of
Securities
Options, Warrants
Outstanding Options,
Reflected in Column
and Rights
Warrants and Rights
(a)
Equity compensation plans approved by security holders(1)
454,242
$
9.94
1,218,816
Equity compensation plans not approved by security holders(2)
In July 2006, William B. Rue, the Company’s former
President and Chief Operating Officer, reimbursed the Company
for $382,415.65 withholding taxes paid by the Company in fiscal
2002.
Harbinger Capital Partners owns 30,000 shares of
Salton’s Series A Preferred Stock and owns
47,164 shares of Salton’s Series C Preferred
Stock. Harbinger Capital Partners owns approximately
$15.0 million principal amount of 2008 senior subordinated
notes and approximately $89.6 million principal amount of
second lien notes.
David Maura, Vice President and Director of Investments at
Harbinger Capital Partner and its affiliates, served on the
Salton board of directors from June 2006 until his resignation
on January 23, 2007. Mr. Maura resigned in light of
Harbinger’s acquisition of Applica Incorporated.
On December 28, 2006, we (a) issued
701,600 shares of our common stock to Harbinger Capital
Partners Master Fund I, Ltd. for an aggregate purchase
price of $1,754,000 or $2.50 per share and (b) used the
proceeds therefrom to repurchase from Harbinger $1,754,000 of
our outstanding senior subordinated notes due 2008. We granted
Harbinger certain registration rights in connection with the
stock issuance.
On February 7, 2007, Salton, our wholly-owned subsidiary
SFP Merger Sub, Inc. and APN Holding Company, Inc. entered into
a definitive merger agreement pursuant to which SFP Merger Sub
was to merge with and into APN Holding Company, the entity that
acquired all of the outstanding common shares of Applica
Incorporated on January 23, 2007. The merger would have
resulted in Applica and its subsidiaries becoming subsidiaries
of Salton and the stockholders of APN Holding
Company — Harbinger Capital Partners Master
Fund I, Ltd. and Harbinger Capital Partners Special
Situations Fund, LP — receiving in the aggregate
approximately 83% of the outstanding common stock of Salton
immediately following the merger. On August 1, 2007, APN
Holding Company delivered to Salton written notice terminating
the merger agreement.
On October 1, 2007, the Company entered into an Agreement
and Plan of Merger with APN Holdco, pursuant to which Applica
will become a wholly-owned subsidiary of Salton. APN Holdco is
owned by Harbinger Capital Partners Master Fund I, Ltd. and
Harbinger Capital Partners Special Situations Fund, L.P.,
(collectively, “Harbinger Capital Partners”). Upon
consummation of the proposed merger and the related
transactions, Harbinger Capital Partners would beneficially own
92% of the outstanding common stock of Salton, and existing
holders of Salton’s Series A Voting Convertible Preferred
Stock (excluding Harbinger Capital Partners), Series C
Nonconvertible (NonVoting) Preferred Stock (excluding Harbinger
Capital Partners) and common stock (excluding Harbinger Capital
Partners) would own approximately 3%, 3% and 2%, respectively,
of the outstanding common stock of Salton immediately following
the merger and related transactions.
Item 14.
Principal
Accounting Fees and Services
At a meeting on April 13, 2007, the Audit Committee
appointed Grant Thornton LLP (“GT”) to serve as
independent public accountants to audit the financial statements
of Salton for fiscal 2007. At the same meeting, the Audit
Committee dismissed Deloitte & Touche LLP
(“D&T”) as Salton’s independent accountant
effective on that date. D&T had audited Salton’s
financial statements for each fiscal year since the fiscal year
ended July 1, 1989.
The aggregate fees billed by D&T and GT for professional
services for each of the last two fiscal years are as follows:
Audit fees paid for 2007 and 2006 are for professional services
for the audit of the Company’s consolidated financial
statement included in the Annual Report of
Form 10-K,
review of financial statements included in the Company’s
Quarterly Reports on
Form 10-Q,
statutory and regulatory audits of foreign entities, and
required letters for SEC filings.
(2)
Audit related fees for fiscal 2007 were for review of
preliminary proxy filing.
(3)
Tax fees paid for fiscal 2007 and 2006 were primarily for tax
compliance and tax planning and advice services. Tax compliance
services are rendered primarily in connection with U.S. and
foreign tax filings. Tax planning and advice services include
consultation regarding tax planning strategies.
The Audit Committee reviews audit and non-audit services
performed by the principal accountant, as well as the fees
charged by the principal accountant for such services. In its
review of non-audit service fees, the Audit Committee considers,
among other things, the possible effect of the performance of
such services on the auditor’s independence.
We have, as required by SEC regulations which became effective
in May 2003, put into place a policy which outlines procedures
intended to ensure that our Audit Committee pre-approves all
audit and non-audit services provided to the Company by our
auditors. The policy provides for (a) general pre-approval
of certain specified services, and (b) specific
pre-approval of all other permitted services, as well as
proposed services exceeding pre-approved cost levels.
For both types of pre-approval, the Audit Committee will
consider whether such services are consistent with the
SEC’s rules on auditor independence. The Audit Committee
will also consider whether the independent auditor may be best
positioned to provide the most effective and efficient services,
for reasons such as its familiarity with the Company’s
business, people, culture, accounting systems, risk profile and
other factors, and whether the service might enhance the
Company’s ability to manage or control risk or improve
audit quality. All such factors will be considered as a whole,
and no one factor is necessarily determinative.
The Audit Committee is also mindful of the relationship between
fees for audit and non-audit services, in deciding whether to
re-approve any such services. It may determine, for each fiscal
year, the appropriate ratio between the total amount of fees for
audit, audit-related and tax services and the total amount of
fees for certain permissible non-audit services classified as
“all other services.”
The appendices to the policy describe the audit, audit-related,
tax and all other services that have the general pre-approval of
the Audit Committee. The term of any general pre-approval is
twelve months from the date of pre-approval, unless the Audit
Committee considers a different period and states otherwise. The
Audit Committee will annually review and pre-approve a dollar
amount for each category of services that may be provided by our
auditors without requiring further approval from the Audit
Committee. The Audit Committee may add to, or subtract from, the
list of general pre-approved services from time to time.
PART IV
Item 15.
Exhibits
and Financial Statement Schedules
(a)1 and 2 — An “Index to Financial Statements
and Financial Statement Schedules” has been filed as a part
of this Report beginning on
page F-1
hereof.
Pursuant to the requirements of Section 13 of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”) the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized on the ninth day of October, 2007.
SALTON, INC.
By:
/s/ WILLIAM
M. LUTZ
William M. Lutz
Interim Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on October 9,2007.
Signature
/s/ WILLIAM
M.
LUTZ
William
M. Lutz
Interim Chief Executive Officer Chief Financial Officer and
Director
(Principal Accounting and Financial Officer)
/s/ BRUCE
J.
WALKER
Bruce
J. Walker
Director
/s/ STEVEN
M.
OYER
Steven
M. Oyer
Director
/s/ DANIEL
J.
STUBLER
Daniel
J. Stubler
Director
Lester
C. Lee
Director
Jason
Mudrick
Director
Leonhard
Dreimann
Director
66
SALTON,
INC.
INDEX TO
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Salton, Inc.
We have audited the accompanying consolidated balance sheet of
Salton, Inc. and subsidiaries as of June 30, 2007, and the
related consolidated statements of operations,
stockholders’ equity (deficit) and cash flows for the year
then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on
our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Salton, Inc. and subsidiaries
as of June 30, 2007, and the consolidated results of their
operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 13 to the consolidated financial
statements, on June 30, 2007the Company adopted Statement
of Financial Accounting Standard No. 158
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans: an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the
Company has recurring losses. In addition, as of June 30,2007, the Company has an accumulated deficit of
$80.5 million and current liabilities exceed current assets
by $150.3 million. These factors, among others, as
discussed in Note 2 to the financial statements, raise
substantial doubt about the Company’s ability to continue
as a going concern. Management’s plans in regard to these
matters are also described in Note 2. These financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Salton, Inc.
Lake Forest, Illinois
We have audited the accompanying consolidated balance sheet of
Salton, Inc. and subsidiaries (the “Company”) as of
July 1, 2006, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each
of the two years in the period ended July 1, 2006. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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
Salton, Inc. and subsidiaries as of July 1, 2006, and the
results of their operations and their cash flows for each of the
two years in the period ended July 1, 2006, in conformity
with accounting principles generally accepted in the United
States of America.
Supplemental
Disclosure of Noncash Investing and Financing
Activities:
In the quarter ended December 30, 2006, the Company agreed
to issue to William Rue, the former President and Chief
Operating Officer, common stock of the Company pursuant to his
Separation Agreement. As of June 30, 2007, the Company had
issued the total award of 144,928 shares in fulfillment of
its agreement with Mr. Rue.
In the quarter ended September 30, 2006, the Company agreed
to issue to David Sabin, the former Chairman of the Board,
common stock of the Company pursuant to his Separation
Agreement. As of June 30, 2007, the Company had issued the
total award of 141,510 shares in fulfillment of its
agreement with Mr. Sabin.
In the quarter ended September 30, 2006, the Company issued
a warrant for the purchase of 719,320 shares of common
stock of the Company at an exercise price of $2.12 per share to
the Agent of the Senior Secured Credit Facility which resulted
in additional paid-in capital of $640,000.
In the quarter ended July 1, 2006, the Company issued
500,000 shares of restricted common stock in lieu of cash
under an agreement with one of the venture participants under
the Foreman obligation.
In the quarter ended April 1, 2006, the Company issued
171,428 shares of restricted common stock to the Agent of
the Senior Secured Credit Facility.
In the quarter ended December 31, 2005, the Company entered
into a facility agreement allowing the Company’s European
subsidiaries to borrow funds in accordance with the terms of the
agreement. Concurrently with the repayment of the previous
credit agreement, the Company recorded $1.3 million in
financing fees, funded by proceeds from the new agreement.
In the quarter ended October 1, 2005, the Company issued
2,041,420 shares of its common stock, and
135,217 shares of its Series C preferred stock with a
total liquidation preference of $13.5 million as part of
the Debt Exchange more fully described in Note 8,
“Senior Secured Credit Facility, Letters of Credit and
Long-Term Debt.”
In fiscal 2005, the Company incurred capital lease obligations
of $0.7 million
Organization and Basis of Presentation —
Salton, Inc. (the “Company” or
“Salton”) is a leading designer, marketer and
distributor of branded, high quality small appliances and
electronics for the home, home décor and personal care and
wellness products. Salton’s product mix includes a broad
range of kitchen and home appliances, electronics, time
products, lighting products and personal care and wellness
products. Salton sells its products under its portfolio of well
recognized brand names such as
Salton®,
George
Foreman®,
Westinghousetm,
Toastmaster®,
Melitta®,
Russell
Hobbs®,
Farberware®
and
Stiffel®.
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.
Fiscal Year — The Company’s fiscal
year ends on the Saturday closest to June 30. Unless
otherwise stated, references to years in this report relate to
fiscal years rather than calendar years.
Foreign Currency — Salton’s
reporting currency is the U.S. Dollar. Salton’s
foreign subsidiaries functional currencies are their local
currencies. Translation adjustments resulting from translating
the functional currency financial statements into
U.S. Dollars are reported separately in accumulated other
comprehensive income in the consolidated statements of
stockholders’ equity. Gains and losses from foreign
currency transactions are recognized in the consolidated
statements of operations. The Company recorded net foreign
currency transaction gains in selling, general and
administrative expense of $1.0 million, $2.2 million,
and $3.9 million in fiscal 2007, 2006, and 2005,
respectively.
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 inventory valuation, reserve for returns
and allowances, valuation of intangible assets having indefinite
lives, cooperative advertising accruals, pension benefits and
estimated lives of fixed assets and intangibles.
Cash and Cash Equivalents — Salton
considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
Compensating Balances on Deposit — The
Company utilizes a facility with a bank to provide short-term
documentary credits to conduct business with its suppliers in
certain countries. These arrangements require that funds be held
on deposit as security for this facility.
Allowance for Doubtful Accounts — The
Company calculates allowances for estimated losses resulting
from the inability of customers to make required payments. The
Company utilizes a number of tools to evaluate and mitigate
customer credit risk. Management evaluates each new customer
account using a combination of some or all of the following
sources of information: credit bureau reports, industry credit
group reports, customer financial statement analysis, customer
supplied credit references and bank references. Appropriate
credit limits are set in accordance with company credit risk
policy and monitored on an on-going basis. Existing customers
are monitored and credit limits are adjusted according to
changes in their financial condition. The Company does not
require collateral on credit sales and reviews its accounts
receivable aging
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
on a regular basis to determine if any of the receivables are
past due. The Company writes off all uncollectible trade
receivables against its allowance for doubtful accounts. No
customer accounted for greater than 10% of the gross accounts
receivable at June 30, 2007 and July 1, 2006.
Estimates of Credits to be Issued to Customers —
Salton regularly receives requests for credits from
retailers for returned products or in connection with sales
incentives, such as cooperative advertising, volume rebate
agreements, product markdown allowances and other promotional
allowances. The Company reduces sales or increases selling,
general, and administrative expenses, depending on the nature of
the credits, for estimated future credits to customers.
Estimates of these amounts are based either on historical
information about credits issued, relative to total sales, or on
specific knowledge of incentives offered to retailers. This
process entails a significant amount of inherent subjectivity
and uncertainty.
These incentives are accounted for in accordance with Emerging
Issues Task Force Issue
No. 01-9,
“Accounting for Consideration Given by a Vendor to a
Customer”
(“EITF 01-9”).
In instances where there is an agreement with the customer to
provide advertising funds, reductions in amounts received from
customers as a result of cooperative advertising programs are
included in the consolidated statement of operations on the line
entitled “Selling, general, and administrative
expenses.” Returns, markdown allowances, cash discounts,
and volume rebates are all recorded as reductions of net sales.
Specifically, per paragraph 9 of EITF Issue
No. 01-9,
cooperative advertising is to be characterized as a reduction of
revenue unless two conditions are met. The Company believes that
its processes meet these criteria:
1. The Company receives an identifiable benefit (i.e.
advertising placement) in exchange for the consideration. In
order to meet this condition, the identified benefit must be
sufficiently separable from the customer’s purchase of
Salton’s products such that Salton could have entered into
an exchange transaction with a party other than a purchaser of
its products or services in order to receive that benefit.
2. The Company can reasonably estimate the fair value of
the benefit identified above (e.g. estimate of the value of
advertising placement).
The Company currently receives an identifiable benefit, such as
newspaper, radio and television advertising, and requires a
combination of verification, customer agreements and
determination of value, in support of its inclusion of
cooperative advertising in selling, general and administrative
expense.
Inventories — 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 estimated net realizable value. The
Company regularly evaluates the composition of inventory to
identify slow-moving and obsolete inventories to determine if
additional write-downs are required. The Company’s domestic
inventories are generally determined by the
last-in,
first-out (LIFO) method. These inventories account for
approximately 37.8% and 49.6% of the Company’s inventories
as of June 30, 2007 and July 1, 2006, respectively.
Salton Europe and Salton Hong Kong inventory is valued at the
lower of cost, calculated on a moving average basis, and net
realizable value. All remaining inventory cost is determined on
the
first-in,
first-out basis. See Note 7, “Inventories.”
Property, Plant and Equipment —
Property, plant and equipment are stated at cost.
Expenditures for maintenance costs and repairs are charged
against income as incurred. Depreciation is based on the
straight-line method over the estimated useful lives of the
assets and leasehold improvements are amortized over the shorter
of the remaining period of the lease or the estimated useful
lives of the improvements (see table below).
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Useful Life
Asset Category
(In Years)
Buildings and improvements
10 to 50
Molds and tooling
5
Equipment and office furniture
2 to 10
Depreciation expense charged to continuing operations was
$12.1 million in 2007, $12.8 million in 2006, and
$14.3 million in 2005.
Trade names — The Company trade names
were acquired in transactions and business combinations.
Identifiable intangibles with indefinite lives are not amortized.
The Company tests identifiable intangible assets with an
indefinite life for impairment, at a minimum on an annual basis,
relying on a number of factors including operating results,
business plans and projected future cash flows. Identifiable
intangible assets that are subject to amortization are evaluated
for impairment using a process similar to that used to evaluate
other long-lived assets. The impairment test for identifiable
intangible assets not subject to amortization consists of a
comparison of the fair value of the intangible asset with its
carrying amount. An impairment loss is recognized for the amount
by which the carrying value exceeds the fair value of the asset.
Currently, the Company does not have material definite-lived
intangible assets that are amortized.
Long-Lived Assets — The Company reviews
long-lived assets and certain identifiable intangibles held and
used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Whenever events or changes in circumstances
indicate potential impairment, the expected undiscounted cash
flows generated by the tested asset or asset group are compared
to their net book value. If the expected undiscounted future
cash flows are less than the net book value of the assets, the
excess of the book value over the estimated fair value is
recognized in current earnings.
Revenue Recognition — The Company
principally recognizes revenue at FOB shipping point which
corresponds to when title and risks and rewards of ownership
transfer to its customers. When fees are charged to the customer
for shipping and handling costs, these revenues are included in
net sales. Provision is made for the estimated cost of returns
and warranties.
Distribution Expenses — Distribution
expenses consist primarily of freight, warehousing, and handling
costs of products sold. For financial statement presentation,
distribution expenses are included in the distribution line of
the statement of operations.
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 trade names 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. Advertising expense charged to
continuing operations was $45.9 million in 2007,
$59.8 million in 2006, and $81.0 million in 2005 and
is reflected as a component of Selling, General and
Administrative Expenses.
Self-Insurance — The Company maintains a
self-insurance program for health claims for Domestic 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.
Deferred Financing Costs — The Company
has incurred debt issuance costs in connection with its
long-term debt. These costs are capitalized as deferred
financing costs and amortized using the effective interest
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
method over the term of the related debt. Deferred financing
costs of $4.9 million, net of accumulated amortization of
$20.3 million, and $9.5 million, net of accumulated
amortization of $11.5 million, as of June 30, 2007 and
July 1, 2006, respectively, are carried on the balance
sheet within other assets.
Income Taxes — The Company accounts for
income taxes using the asset and liability approach. If
necessary, the measurement of deferred tax assets is reduced,
based on available evidence, by the amount of any tax benefits
that management believes is more likely than not to not be
realized.
Net Income (Loss) per Common and Common Equivalent
Share — Net income (loss) per common and
common equivalent share is computed in accordance with FASB
Statement No. 128, “Earnings Per Share,” and
Emerging Issues Task Force (EITF) Statement
No. 03-6,
“Participating Securities and the Two Class Method
Under FASB Statement No. 128, Earnings Per Share.”
Basic net income per common share is calculated by allocating
income from continuing operations to common stock and
participating securities to the extent each security may share
in the earnings, based on participation rights, as if all of the
earnings for the period had been distributed. A convertible
participating security is included in the computation of basic
net income per common share if the effect is dilutive.
Diluted net income per common and common equivalent share
reflects the potential dilution that would occur if any
outstanding options or warrants were exercised and participating
securities were converted in accordance with the “if
converted” method, if the effect of including these
options, warrants and securities is dilutive. The two-class
method of calculating diluted net income per common and common
equivalent share is used in the event the “if
converted” method is anti-dilutive.
Stock Based Compensation — The Company
has various stock-based compensation plans, which are described
more fully in Note 14, “Stock Based
Compensation.” Effective July 3, 2005, the Company
adopted FASB Statement No. 123(R), “Share-Based
Payment,” which revises Statement No. 123 and
supersedes APB 25. Statement No. 123(R) requires all
share-based payments to employees to be recognized in the
financial statements based on their fair value using an
option-pricing model at the date of grant. The Company has
elected to use the modified prospective method for adoption,
which requires compensation expense to be recorded for all
unvested stock options beginning in the first year of adoption.
For all unvested options outstanding as of July 3, 2005,
the previously measured but unrecognized compensation expense,
based on the fair value at the original grant date, was
recognized over the remaining vesting period which concluded in
fiscal 2006. For share-based payments granted subsequent to
July 3, 2005, compensation expense, based on the fair value
on the date of grant, will be recognized from the date of grant
over the applicable vesting period. The Company uses the
Black-Scholes option-pricing model to determine fair value of
awards on the date of grant. There were no stock option awards
granted in fiscal 2007 and 2006.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
For the period prior to July 3, 2005, the Company used the
intrinsic value method in accordance with APB No. 25,
“Accounting for Stock Issued to Employees,” and
related Interpretations. No stock-based compensation is
reflected in net income, as no options granted under those plans
had an exercise price less than the market value of the
underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition
provisions of Statement No. 123(R).
2005
(In thousands,
except per share data)
Net loss from continuing operations — as reported
$
(53,925
)
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
taxes
(1,473
)
Net loss from continuing operations — pro forma
$
(55,398
)
Net loss — as reported
$
(51,787
)
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
taxes
(1,473
)
Net loss — pro forma
$
(53,260
)
Net loss from continuing operations per common share: Basic
As reported
$
(4.74
)
Pro forma
(4.87
)
Net loss from continuing operations per common share: Diluted
As reported
$
(4.74
)
Pro forma
(4.87
)
Net loss per common share: Basic
As reported
$
(4.55
)
Pro forma
(4.68
)
Net loss per common share: Diluted
As reported
$
(4.55
)
Pro forma
(4.68
)
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. As of July 1, 2006, the fair value
of the senior subordinated notes was $47.3 million versus a
carrying value of $59.9 million. The Series C
preferred stock was originally recorded at its fair value of
$8.0 million, using an effective interest rate of 11.06%
(see Note 8, “Senior Secured Credit Facility, Letters
of Credit and Long-Term Debt”). The associated discount is
being accreted to interest expense through the maturity date in
2010. As of June 30, 2007, the carrying value of
$10.0 million of Series C preferred stock was included
in long-term debt.
It is not practicable to estimate the fair value of the Series A
and Series C Preferred stock as there have been no recent
transactions related to these instruments and there is no
readily available market for these instruments. However, the
Company believes the fair value of these instruments is
significantly less than the carrying value.
The carrying value of the other short-term and long-term
variable rate debt approximates fair value as the current terms
are comparable to current market instruments.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
New Accounting Pronouncements — In June
2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109” to clarify
the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.”
This interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. This interpretation also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This
interpretation is effective for fiscal years beginning after
December 15, 2006 and is effective for the Company in the
first quarter of fiscal 2008. The Company has not been able to
complete its evaluation of the impact of adopting Interpretation
No. 48 and as a result, is not able to estimate the effect
the adoption will have on its financial position and results of
operations.
In June 2006, Emerging Issues Task Force Issue
No. 06-3,
“How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)”
(EITF 06-3)
was issued.
EITF 06-3
requires disclosure of the presentation of taxes on either a
gross (included in revenues and costs) or a net (excluded from
revenues) basis as an accounting policy decision. The provisions
of this standard are effective for interim and annual reporting
periods beginning after December 15, 2006. The adoption of
EITF 06-3
did not have a material impact on our consolidated financial
statements.
In September 2006, the FASB issued Statement No. 157,
“Fair Value Measurements.” This statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and is effective for the
Company in the first quarter of fiscal 2009. The Company is
currently evaluating the impact of this statement on its
consolidated results of operations, cash flows, and financial
position.
In September 2006, the SEC Office of the Chief Accountant and
Divisions of Corporation Finance and Investment Management
released SAB No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB No. 108”), which provides interpretive
guidance on how the effects of the carryover or reversal of
prior year misstatements should be considered in quantifying a
current year misstatement. The SEC staff believes that
registrants should quantify errors using both a balance sheet
and an income statement approach and evaluate whether either
approach results in quantifying a misstatement that, when all
relevant quantitative and qualitative factors are considered, is
material. This guidance is effective for fiscal years ending
after November 15, 2006. The adoption of
SAB No. 108 did not have a material impact on our
financial position, results of operations, or cash flows.
In February 2007, the FASB issued Statement No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities.” FASB Statement No. 159 provides
companies with an option to report selected financial assets and
liabilities at fair value that are not currently required to be
measured at fair value. Accordingly, companies would then be
required to report unrealized gains and losses on these items in
earnings at each subsequent reporting date. The objective is to
improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently. FASB
Statement No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and is effective for the
Company in the first quarter of fiscal 2009. The Company is
currently evaluating the impact of this statement on its
consolidated results of operations, cash flows, and financial
position.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2.
GOING
CONCERN
The accompanying consolidated financial statements have been
prepared and are presented assuming the Company’s ability
to continue as a going concern. The Company has incurred
significant operating losses over the past several years and has
an accumulated deficit of $80.5 million as of June 30,2007. The Company’s Senior Secured Credit Facility requires
the repayment of outstanding overadvances of approximately
$62.0 million by November 10, 2007. In addition, the
Company has approximately $161.5 million of debt maturing
in fiscal 2008. The Company’s projected cash flows will not
be sufficient to fund these payments. On October 1, 2007, the
Company signed an Agreement and Plan of Merger with APN Holdco.
The Company believes that without the consummation of the
merger, it will not have sufficient cash to fund its activities
in the near future, and will not be able to continue operating.
There can be no assurance that the Company will be able to
complete the merger. As such, the Company’s continuation as
a going concern is uncertain. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
3.
INTANGIBLE
ASSETS
In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets,” intangible assets that are not
amortized are subject to a fair-value based impairment test on
an annual basis or more frequently if circumstances indicate a
potential impairment. The annual test for impairment of
intangible assets is conducted at the end of the fourth quarter
of each fiscal year. In addition, the Company may perform
interim assessments if conditions indicate that a potential
impairment may exist. Salton’s indefinite lived intangible
assets are comprised of trade names utilized in the marketing of
its products on a worldwide basis.
The Company utilizes several methods in determining fair value
of its intangible assets, with primary reliance placed on the
relief from royalty method. This method assumes that a third
party owns the trade name and the Company must pay a royalty for
the privilege of using it. Since the Company owns the asset, it
is relieved of having to pay the royalties (relief-from-royalty)
and thus has a cost savings. The methodology is based on the
premise that free cash flow to the trade name asset is a more
valid criterion for measuring value than “book” or
accounting profits. The fair value of the trade name is the
present value of the after-tax free cash flows associated with
the trade name, based on its value as an avoided licensing cost,
discounted at an appropriate rate of return.
In fiscal year 2005, the Company determined that a pre-tax
impairment charge against trade names of $3.2 million was
necessary to reflect management’s decisions regarding
discontinuing certain underperforming product lines associated
with further restructuring activities.
In the fourth quarter of fiscal year 2006, the annual impairment
test was conducted for the Company’s trade names. Upon
completion of the assessment, it was determined that the
carrying value of certain trade names exceeded their fair value.
As a result, the Company recorded a $21.1 million
impairment charge. The impairment occurred primarily among trade
names that are considered outside of the Company’s core
business and had experienced recent declines, resulting in lower
expectations regarding future cash flows. In addition, the
Company also recorded a $0.8 million impairment charge
against certain patents that were being amortized, to reflect
management’s decisions regarding discontinuing these
product lines.
In the third quarter of fiscal 2007, management determined that
the uncertainty associated with the potential pending merger,
along with the drop in domestic sales represented a triggering
event, and an interim evaluation of the Company’s trade
names was performed. This interim evaluation was done on a stand
alone basis, and did not consider potential changes in the use
or performance of the brands that may result following the
pending merger.
As a result of this interim evaluation, the Company determined
that the implied fair value of the George Foreman trade name was
less than its carrying value, and recorded a non-cash impairment
charge totaling $12.5 million.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In the fourth quarter of fiscal year 2007, the annual impairment
test was conducted for the Company’s trade names. Upon
completion of the assessment, it was determined that the
carrying value of certain trade names exceeded their fair value.
The results of this test showed an additional impairment charge
of $15.2 million for the George Foreman trade name. The
Company also recorded an impairment charge of $5.8 million
in the fourth quarter of fiscal 2007 on the Toastmaster trade
name as a result of the annual test. The continued sales decline
under these trade names, coupled with the uncertainty
surrounding the Company’s ability to satisfy the liquidity
needed to promote and develop new products and launch
promotional campaigns, introduces significant future forecast
risk. The Company believes that it has strong brand recognition
and that if it is able to invest in the brands as planned, the
forecasted growth is achievable. The lack of certainty, however,
has resulted in valuations that are below the carrying values of
the trade names and resulted in the recording of an impairment
loss.
The following tables summarize the intangible asset activity and
balances:
Impairment
Currency
7/1/2006
Additions
Charges
Amortization
Fluctuations
6/30/2007
(In thousands)
Trade names — indefinite lived
$
159,675
$
142
$
(33,515
)
$
—
$
3,232
$
129,534
Trade names — definite lived
—
—
—
—
—
—
Total
$
159,675
$
142
$
(33,515
)
$
—
$
3,232
$
129,534
Impairment
Currency
7/2/2005
Additions
Charges
Amortization
Fluctuations
7/1/2006
(In thousands)
Trade names — indefinite lived
$
178,995
$
216
$
(21,145
)
$
—
$
1,609
$
159,675
Trade names — definite lived
1,046
—
(822
)
(224
)
—
—
Total
$
180,041
$
216
$
(21,967
)
$
(224
)
$
1,609
$
159,675
4.
DISCONTINUED
OPERATIONS
On September 29, 2005, the Company completed the sale of
its 52.6% ownership interest in Amalgamated Appliances Holdings
Limited (“AMAP”), a leading distributor and marketer
of small appliances and other products in South Africa, to a
group of investors led by Interactive Capital (Proprietary)
Limited. In the first quarter of fiscal 2006, the Company
received proceeds, net of expenses, of approximately
$81.0 million in connection with the transaction and
recorded a gain of $32.3 million net of tax. Also, the
Company licensed its George
Foreman®,
Russell
Hobbs®
and
Carmen®
branded products to AMAP following the transaction.
Income from discontinued operations before income taxes
—
5,477
$
20,760
Income taxes
—
2,338
12,233
Minority interest
—
1,404
6,389
Income from discontinued operations, net of tax
$
—
$
1,735
$
2,138
5.
SALE OF
TABLETOP ASSETS
On September 16, 2005, the Company completed the sale of
certain tabletop assets at cost to Lifetime Brands, Inc. for
approximately $14.2 million. With this transaction, Salton
divested the
Block®
and
Sasaki®
brands, licenses to Calvin
Klein®
and Napa
Styletm
tabletop products and distribution of crystal products under the
Atlantis®
brand.
6.
ACQUISITIONS
AND ALLIANCES
Acquisition
of the George Foreman Name
In the quarter ended December 25, 1999, Salton acquired
effective July 1, 1999, the right to use in perpetuity and
worldwide the name George Foreman in connection with the
marketing and sale of food preparation and non-alcoholic drink
preparation and serving appliances. The aggregate purchase price
payable to George Foreman and other participants was
$137.5 million. The company has an agreement with George
Foreman for professional appearances to promote this product
line. This agreement expires in December 2007 and requires
payments totaling $2.0 million.
At June 30, 2007 and July 1, 2006, domestic
inventories determined by the last in, first out (LIFO)
inventory method amounted to $43.8 million and
$71.5 million, respectively. If the
first-in,
first-out (FIFO) inventory method had been used to determine
cost for 100.0% of the Company’s inventories, they would
have been $3.7 million and $4.0 million higher at
June 30, 2007 and July 1, 2006, respectively, and net
loss would have been $91.4 million ($6.17 per share) and
$67.1 million ($5.01 per share) for fiscal 2007 and 2006,
respectively. Obsolescence and valuation reserves included in
inventories were $10.9 million at June 30, 2007 and
$13.2 million at July 1, 2006, respectively.
8.
SENIOR
SECURED CREDIT FACILITY, LETTERS OF CREDIT AND LONG-TERM
DEBT
Senior Secured Credit Facility — On
June 15, 2004, the Company entered into an amended and
restated senior secured credit facility (“Credit
Facility”) consisting of a $100.0 million term loan
and a revolving line
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of credit. Since June 15, 2004, the Company amended the
Credit Facility to, among other things: (1) extend the
maturity date to December 31, 2007; (2) increase the
maximum size of the facility from $275.0 million to the
difference between $287.0 million and the principal amount
of the new second lien notes which are discussed below;
(3) increase the letter of credit subfacility from
$10.0 million to $15.0 million; (4) modify
financial covenants including the elimination of the foreign
leverage ratio; (5) eliminate the pledges of stock of
foreign subsidiaries of the Company other than the
662/3%
of the stock of Salton International CV; (6) suspend the
consolidated fixed charge coverage ratio and minimum EBITDA
covenants beginning with the twelve months ending July 1,2006 through and including the twelve months ending June 2007
and adds a monthly cash flow covenant beginning with August 2006
and (7) increase the amount of overadvance and extend the
date upon which the Company must repay the outstanding
overadvances. The Credit Facility is secured by all of the
tangible and intangible assets of domestic entities and is
unconditionally guaranteed by each of the Company’s direct
and indirect domestic subsidiaries.
The Credit Facility 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 may otherwise restrict corporate and
business activities. As of June 30, 2007, the Company was
in violation of one of its reporting covenants. The Company
obtained a waiver of this violation. (See Note 23,
“Subsequent Events”).
Subsequent to June 30, 2007, the Company entered into
further amendments which provide additional borrowing capacity,
extend the termination date of the facility to December 31,2008 and, subject to certain conditions, extends the date on
which the Company must repay the outstanding overadvances, which
totaled $48.4 million as of June 30, 2007, under the
facility to November 10, 2007. (See Note 23,
“Subsequent Events”)
Information regarding borrowings under the Credit Agreement is
as follows:
Weighted average interest rate during fiscal period
12.06
%
9.96
%
Outstanding letters of credit at end of fiscal period
1,059
289
Unused letters of credit at end of the fiscal period
13,941
14,711
Revolving
Line of Credit and Other Current Debt
Revolving Credit Facility — The
revolving line of credit of the Credit Facility provides
advances based primarily upon percentages of eligible accounts
receivable and inventories. On June 30, 2007 and
July 1, 2006, the Company had no outstanding balance under
the revolving facility and had $5.0 million and
$5.1 million, respectively, available for future
borrowings. Typically, given the seasonal nature of
Salton’s business, borrowings and availability tend to be
highest in the second fiscal quarter.
At June 30, 2007, the rate plus applicable margin on the
Credit Facility was 12.75% for Base (Prime) rate loans. The
Company has the option to convert any base rate loan to a LIBOR
rate loan, which includes an applicable margin of 8.5%,
effective August 8, 2007.
Letters of Credit — As of June 30,2007, the Company had outstanding letters of credit of
$1.1 million under the letter of credit subfacility of
$15.0 million.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Salton Europe Facility Agreement — On
December 23, 2005, Salton Holdings Limited, Salton Europe
Limited and certain affiliates entered into a Facility Agreement
with Burdale Financial Limited, as agent and security trustee,
and a financial institution group as lender. The provisions of
the Facility Agreement allow certain of the Company’s
European subsidiaries to borrow funds as needed in an aggregate
amount not to exceed £61.0 million (approximately
$122.4 million). The Facility Agreement matures on
December 22, 2008 and bears a variable interest rate of
LIBOR plus 7% on term loans and LIBOR plus 2.75% on revolver
loans, payable on the last business day of each month. At
June 30, 2007, these rates for borrowings denominated in
the Great Britain Pound were approximately 12.71% and 8.46% for
term and revolver loans, respectively. The rate for revolver
loan borrowings denominated in the U.S. Dollar was 8.06%.
The Facility Agreement consists of a Revolving Credit Facility
with an aggregate maximum availability of
£50.0 million (approximately $100.4 million) and
two Term Loan Facilities of £5.0 million and
£6.0 million (approximately $10.0 million and
$12.0 million, respectively). The Company has used
borrowings under these facilities to repay existing debt and for
working capital purposes. As of June 30, 2007, under the
Revolving Credit Facility, the Company had outstanding
borrowings denominated in the Great Britain Pound of
£4.5 million (approximately $9.0 million) and
borrowings denominated in the U.S. Dollar of
$1.3 million. As of that date, $2.7 million was
available for future borrowings. Under the Term Loan Facilities,
the Company had outstanding borrowings of £7.4 million
(approximately $14.9 million).
The Facility Agreement is secured by all of the tangible and
intangible assets of certain foreign entities, a pledge of the
capital stock of certain of our subsidiaries, and is
unconditionally guaranteed by certain of the Company’s
foreign subsidiaries.
The Facility Agreement contains a number of significant
covenants that, among other things, restrict the ability of
certain of the Company’s European subsidiaries to dispose
of assets, incur additional indebtedness, prepay other
indebtedness, pay dividends, repurchase or redeem capital stock,
enter into certain investments, make certain acquisitions,
engage in mergers and consolidations, create liens, or engage in
certain transactions with affiliates and otherwise restrict
corporate and business activities. In addition, the Company is
required to comply with a fixed charge coverage ratio. The
Company was in compliance with all covenants as of June 30,2007.
The revolving line of credit of the Facility Agreement is
classified as current because the agreement includes a
subjective acceleration clause requiring the Company to deposit
all proceeds from collection of accounts receivable and sale of
collateral with an account under the exclusive dominion and
control of the lender.
Term
Loan, Second Lien Notes and Other Long-Term Debt
Term Loan — At June 30, 2007 and
July 1, 2006, the Company had $100.0 million
outstanding under the term loan portion of the senior secured
credit facility, as amended on August 8, 2007 to extend the
due date to December 31, 2008. The amendment also requires
the repayment of all existing overadvances up to
$62.0 million under the senior secured credit facility. The
Company has classified the term loan as current due to the
required repayment of overadvances on November 10, 2007, as
well as the Company’s liquidity and operational concerns
discussed in Note 2, “Going Concern.”
Senior Subordinated Notes — On
April 23, 2001, the Company issued $150.0 million of
121/4% Senior
Subordinated notes (the “2008 Notes”) due
April 15, 2008. Proceeds of the 2008 Notes were used to
repay outstanding indebtedness and for the acquisition of Pifco
Holdings PLC (Salton Europe). On August 26, 2005, the
Company completed a private debt exchange for approximately
$90.1 million of the 2008 Notes (see “Debt
Exchange”).
Debt Exchange — On August 26, 2005,
the Company completed a private debt exchange offer for
outstanding Senior Subordinated Notes due December 15, 2005
(“2005 Notes”) and outstanding Senior
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Subordinated Notes due April 15, 2008 (“2008
Notes”). The Company accepted for exchange an aggregate of
approximately $75.2 million in principal amount of 2005
Notes (approximately 60.1% of the then outstanding 2005 Notes)
and approximately $90.1 million in principal amount of 2008
Notes (approximately 60.1% of the then outstanding 2008 Notes)
that were validly tendered in the debt exchange offer.
Upon closing of the debt exchange offer, the Company issued an
aggregate of approximately $99.2 million of senior second
lien notes (the “Second Lien Notes”),
2,041,420 shares of its common stock, and
135,217 shares of its Series C preferred stock with a
total liquidation preference of $13.5 million. A gain of
$21.7 million (approximately $1.52 per share) was realized
on the debt exchange in fiscal 2006. The Second Lien Notes
mature on March 31, 2008 and bear interest at LIBOR plus
7%, payable in cash on January 15th and
July 15th of each year, beginning in January 2006. The
Series C preferred stock is generally non-dividend bearing
and is mandatorily redeemable by the Company in cash at the
liquidation amount on August 26, 2010. The Company also
granted certain registration rights for approximately
1,837,455 shares of Salton common stock and
121,707 shares of Series C preferred stock received by
certain former holders of Subordinated Notes.
The debt exchange has been accounted for as a troubled debt
restructuring in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 15. Under
SFAS No. 15, the Second Lien Notes were recorded at
their principal amount plus the total estimated future interest
payments. As of June 30, 2007, future interest payments of
$13.0 million were accrued and included in current debt.
In connection with the debt exchange offer, the Company obtained
the consent of the holders of a majority of the outstanding 2005
Notes and a majority of the outstanding 2008 Notes to amend the
indentures governing such Subordinated Notes to eliminate
substantially all of the restrictive covenants and certain
events of default contained in such indentures. The Company
entered into supplements to the indenture governing the 2008
Notes to reflect such amendments.
On September 28, 2005, the Company completed a private
exchange transaction in which the Company issued an additional
$4.1 million of Second Lien Notes in exchange for
$4.0 million of 2005 Notes. There were no common or
preferred shares issued in connection with this exchange.
Series C Preferred Stock — In
connection with the debt exchange (see “Debt
Exchange”), the Company issued 135,217 shares of
Series C preferred stock with a total liquidation
preference of $13.5 million. The Company’s restated
certificate of incorporation authorizes the Company to issue up
to 150,000 shares of Series C preferred stock.
The Series C preferred stock was recorded at its fair value
of $8.0 million, using an effective interest rate of
11.06%. The associated discount is being accreted to interest
expense through the maturity date in 2010. As of June 30,2007, the carrying value of $10.0 million of Series C
preferred stock was included in long-term debt.
The Series C preferred stock is non-dividend bearing and
ranks, as to distribution of assets upon the Company’s
liquidation, dissolution or winding up, whether voluntary or
involuntary, (a) prior to all shares of convertible
preferred stock from time to time outstanding, (b) senior,
in preference of, and prior to all other classes and series of
the Company’s preferred stock and (c) senior, in
preference of, and prior to all of the Company’s now or
hereafter issued common stock.
Except as required by law or by certain protective provisions in
the Company’s restated certificate of incorporation, the
holders of shares of Series C preferred stock, by virtue of
their ownership thereof, have no voting rights.
In the event of the Company’s liquidation, dissolution or
winding up, whether voluntary or involuntary, holders of the
Series C preferred stock will be paid out of the
Company’s assets available for distribution to the
Company’s stockholders an amount in cash equal to $100 per
share (the “Series C Preferred Liquidation
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Preference”), before any distribution is made to the
holders of the Company’s convertible preferred stock,
common stock or any other capital stock ranking junior as to
liquidation rights to the Series C preferred stock.
In the event of a change of control (as defined in the
Company’s restated certificate of incorporation), each
holder of shares of Series C preferred stock will have the
right to require the Company to redeem such shares at a
redemption price equal to the Series C Preferred
Liquidation Preference plus an amount equivalent to interest
accrued thereon at a rate of 5% per annum compounded annually on
each anniversary date of the issuance date for the period from
the issuance date through the change of control. The redemption
price is payable on a date after a change of control that is
91 days after the earlier of (x) the date on which
specified debt (including indebtedness under the Company’s
senior secured credit facility, the second lien credit
agreement, the indentures under which the Subordinated Notes
were issued, and restatements and refinancings of the foregoing)
matures and (y) the date on which all such specified debt
is repaid in full, in an amount equal to the Series C
Preferred Liquidation Preference plus an amount equivalent to
interest accrued thereon at a rate of 5% per annum compounded
annually on each anniversary date of the issuance date for the
period from the issuance date through such change of control
payment date. The certificate of designation for the
Series C preferred stock provides that, in the event of a
change of control, the Company shall purchase all outstanding
shares of Series C preferred stock with respect to which
the holder has validly exercised the redemption right before any
payment with respect to the redemption of convertible preferred
stock upon such change of control.
The Company may optionally redeem, in whole or in part, the
Series C preferred stock at any time at a cash price per
share of 100% of the then effective Series C Preferred
Liquidation Preference per share. On August 26, 2010, the
Company will be required to redeem all outstanding shares of
Series C preferred stock at a price equal to the Series C
Preferred Liquidation Preference per share, payable in cash.
The merger agreement disclosed in Note 23, “Subsequent
Events” requires the mandatory conversion of all
outstanding shares of the Series C preferred stock into shares
of Salton’s common stock, effective upon consummation of
the merger.
As of June 30, 2007 long-term debt matures as follows:
The revolving line of credit of the Facility Agreement is
classified as current because the agreement includes a
subjective acceleration clause requiring the Company to deposit
all proceeds from collection of accounts receivable and sale of
collateral with an account under the exclusive dominion and
control of the lender.
Included in interest expense are amortized financing costs of
$8.7 million, $4.9 million, and $4.6 million for
the fiscal years 2007, 2006 and 2005, respectively.
9.
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 were used in the past as
part of the Company’s program to manage the fixed and
floating interest rate mix of its total debt portfolio and
related overall cost of borrowing. The Company uses forward
exchange contracts to hedge foreign currency payables for
periods consistent with the expected cash flow of the underlying
transactions. The contracts generally mature within one year and
are designed to limit exposure to exchange rate fluctuations,
primarily related to the Australian dollar to the
U.S. dollar.
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.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The estimated fair values of derivatives used to hedge or modify
the Company’s 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 the
Company’s 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 the Company’s exposure from its 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 — The Company
did not have any interest rate swap agreements in effect as of
June 30, 2007 or July 1, 2006. Gains from early
termination of prior swap contracts were deferred as adjustments
to the carrying amount of the outstanding debt and are being
amortized as an adjustment to interest expense related to the
debt over the remaining period originally covered by the
terminated swap. (See Note 8, “Senior Secured Credit
Facility, Letters of Credit and Long-term Debt.”)
Foreign Currency Management — All
foreign exchange contracts have been recorded on the balance
sheet at $0.1 million fair value within accrued expenses.
The change in the fair value of contracts that qualify as
foreign currency cash flow hedges and are highly effective was
de minimis. This amount was recorded in other comprehensive
income net of tax. 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 2008. At June 30, 2007, the Company had
foreign exchange contracts for the purchase of 3.0 million
U.S. dollars.
10.
CONVERTIBLE
SERIES A PREFERRED STOCK
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
121/2%
of the Liquidation Preference (defined below). In addition to
the dividend provided above, in the event the Board of Directors
of the Corporation shall determine to pay any cash or non-cash
dividends or distributions on its Common Stock (other than
dividends payable in shares of its Common Stock) the holders of
shares of Convertible Preferred Stock shall be entitled to
receive cash and non-cash dividends or distributions in an
amount and of a kind equal to the dividends or distributions
that would have been payable to each such holder as if the
Convertible Preferred Stock held by such holder had been
converted into Common Stock immediately prior to the record date
for the determination of the holders of Common Stock entitled to
each such dividend or distribution; provided, however, that if
the Corporation shall dividend or otherwise distribute rights to
all holders of Common Stock entitling the holders thereof to
subscribe for or purchase shares of capital stock of the
Corporation, which rights (i) until the occurrence of a
specified event or events are deemed to be transferred with such
shares of Common Stock and are not exercisable and (ii) are
issued in respect of future issuances of Common Stock, the
holders of shares of the Convertible Preferred Stock shall not
be entitled to receive any such rights until such rights
separate from the Common Stock or become exercisable, whichever
is sooner.
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 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)
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 its 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 Preference per share, payable at the Company’s
option in cash or shares of Salton common stock.
In accordance with Emerging Issues Task Force Topic
No. D-98
“Classification and Measurement of Redeemable
Securities”, the convertible preferred stock is classified
as a separate line item apart from permanent equity on the
Company’s balance sheet, as redemption thereof in shares of
common stock is outside of the Company’s control.
The merger agreement disclosed in Note 23, “Subsequent
Events” requires the mandatory conversion of all
outstanding shares of the Series A preferred stock into
shares of Salton’s common stock, effective upon
consummation of the merger.
11.
SHAREHOLDERS’
EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
The Board of Directors of Salton adopted a stockholder rights
plan (the “Rights Plan”) dated as of June 28,2004, as amended June 7, 2006 and February 7, 2007,
pursuant to which a dividend consisting of one preferred stock
purchase right (a “Right”) was distributed for each
share of Common Stock held as of the close of business on
July 9, 2004, and is to be distributed to each share of
Common Stock issued thereafter until the earlier of (i) the
Distribution Date (as defined in the Rights Plan), (ii) the
Redemption Date (as defined in the Rights Plan) or
(iii) June 28, 2014. The Rights Plan is designed to
deter coercive takeover tactics and to prevent an acquirer from
gaining control of the Company without offering fair value to
its stockholders. The Rights will expire on June 28, 2014,
subject to earlier redemption or exchange as provided in the
Rights Plan. Each Right entitles the holder thereof to purchase
from Salton one one-thousandth of a share of a new
series Series B Junior Participating Preferred Stock
at a price of $45.00 per one one-thousandth of a share, subject
to adjustment. The Rights are generally exercisable only if a
Person (as defined) acquires beneficial ownership of
25 percent or more of the Company’s outstanding Common
Stock.
Comprehensive income is the change in equity of a company during
a period from transactions and events other than investments by
and distributions to shareholders. Comprehensive income includes
both net income or loss and other comprehensive income or loss.
Other comprehensive income was $10.4 million in 2007 and a
loss of $1.2 million 2006. Accumulated other comprehensive
income is comprised of the following:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During fiscal year 2006, the Company recognized income of
$1.4 million and $5.2 million related to foreign
currency cash flow hedges and cumulative foreign currency
translation adjustment amounts, respectively, upon the sale of
discontinued operations.
12.
NET LOSS
PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per share is computed in accordance with FASB Statement
No. 128, “Earnings Per Share,” and Emerging
Issues Task Force Statement (“EITF”)No.
03-6,
“Participating Securities and the Two Class Method
Under FASB Statement No. 128, Earnings per Share.”
Under
EITF 03-06,
the Series A Preferred Stock is included in both basic and
diluted net loss per share using the “two-class”
method, if the effect is dilutive. Due to the losses in 2007,
2006 and 2005, the Company’s Series A Preferred Stock
was not dilutive and was excluded from the calculation of basic
and diluted earnings per share. Additionally, the dilutive
effect of the Company’s outstanding common stock
equivalents, options and warrants was excluded from the
computation of diluted earnings per share as the effect would
have been anti-dilutive.
Had the Company recognized net income in 2007, 2006 and 2005,
basic shares outstanding would have increased by
3,529,411 shares with the inclusion of the Series A
Preferred Stock under the two-class method.
The following table shows potential common stock equivalents
outstanding to purchase shares of common stock that were
excluded in the computation of diluted (loss) earnings per
share. For 2007, 2006 and 2005, all common stock equivalents
were excluded because their inclusion would have been
anti-dilutive.
The Company has a 401(k) defined contribution plan that covers
eligible domestic employees. The employees are eligible for
benefits upon completion of one year of service. Under the terms
of the plan, the Company may elect to match a portion of the
employee contributions. The Company’s discretionary
matching contribution is based on a portion of
participants’ eligible wages, as defined, up to a maximum
amount ranging typically from two percent to six percent. The
Company’s total matching contributions were approximately
$0.3 million, $0.4 million, and $0.4 million, in
fiscal 2007, 2006 and 2005, respectively.
The Company has two defined benefit plans that cover
substantially all of the domestic employees of Toastmaster
(“Domestic plan”) as of the date the plans were
curtailed. Pension benefits are based on length of service,
compensation, and, in certain plans, Social Security or other
benefits. The Company uses March 31 as the measurement date for
the Toastmaster plans for determining pension plan assets and
obligations. Effective October 30, 1999, the Company’s
Board of Directors approved the freezing of benefits under the
two Toastmaster defined benefit plans. Beginning
October 31, 1999, no further benefits were accrued under
the Toastmaster plans.
Salton Europe operates a funded defined benefit pension plan and
a defined contribution plan. The assets of the defined benefit
plan are held in separate trustee administered funds. The
measurement date of the Salton Europe plan is June 30. The
defined benefit plan was closed to new entrants in November
2000. New employees starting after this date can now participate
in a defined contribution plan, which is open to all employees.
The Company matches employee contributions up to and including
5.0% of gross salary. The total matching contributions were
approximately $0.1 million, $0.1 million, and
$0.2 million, in fiscal 2007, 2006 and 2005, respectively.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On June 30, 2007, the Company adopted FASB Statement
No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Benefit Plans”
(FAS 158). This statement requires the Company to recognize
the funded status of its defined benefit postretirement plan in
its Consolidated Balance Sheet as of June 30, 2007, with a
corresponding adjustment to accumulated other comprehensive
income. The statement also will require entities to measure the
funded status of the plans as of the date of the year-end
statement of financial position. Adoption of this pronouncement
was effective for the Company in fiscal 2007. The recognition
provision was adopted by the Company in the fourth quarter of
fiscal 2007. The measurement provision is not required to be
adopted by the Company until fiscal 2009. The Company has not
determined the impact of the adoption of the measurement
provision requirements of FAS 158.
The incremental effects of adopting the provisions of Statement
No. 158 on the Company’s Consolidated Balance Sheet as
of June 30, 2007 are presented in the following table. The
adoption of this statement had no effect on the Company’s
Consolidated Statement of Operations and it will not affect the
Company’s operating results in subsequent periods. Had the
Company not been required to adopt Statement No. 158 at
June 30, 2007, it would have recognized an additional
minimum liability pursuant to the provisions of FASB Statement
No. 87, “Employers’ Accounting for Pensions.”
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Domestic
Salton Europe
Total
6/30/07
7/1/06
6/30/07
7/1/06
6/30/07
7/1/06
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
$
11,966
$
12,016
$
45,846
$
42,088
$
57,812
$
54,104
Service cost
168
168
483
424
651
592
Interest cost
699
703
2,490
2,158
3,189
2,861
Actuarial (gain)/loss
92
81
(3,312
)
(130
)
(3,220
)
(49
)
Plan participant contributions
—
—
278
292
278
292
Foreign exchange impact
—
—
3,852
1,929
3,852
1,929
Benefits paid and expenses
(905
)
(1,002
)
(1,256
)
(915
)
(2,161
)
(1,917
)
Benefit obligation at end of year
$
12,020
$
11,966
$
48,381
$
45,846
$
60,401
$
57,812
Change in plan assets:
Fair value of plan assets at beginning of year
$
9,871
$
9,301
$
32,165
$
25,825
$
42,036
$
35,126
Actual return on plan assets
918
1,127
4,975
4,221
5,893
5,348
Employer contribution
486
445
1,572
1,416
2,058
1,861
Plan participant contributions
—
—
278
292
278
292
Benefits paid from plan assets
(905
)
(1,002
)
(1,256
)
(915
)
(2,161
)
(1,917
)
Foreign exchange impact
—
—
2,922
1,326
2,922
1,326
Fair value of plan assets at end of year
$
10,370
$
9,871
$
40,656
$
32,165
$
51,026
$
42,036
Funded status
$
(1,650
)
$
(2,095
)
$
(7,725
)
$
(13,681
)
$
(9,375
)
$
(15,776
)
Amounts recognized in Consolidated Balance Sheets:
Noncurrent liabilities
$
(1,650
)
$
(2,095
)
$
(7,725
)
$
(11,851
)
$
(9,375
)
$
(13,946
)
Amounts recognized in Accumulated Other Comprehensive Income:
Net actuarial loss
$
3,036
$
3,386
$
5,128
$
9,096
$
8,164
$
12,482
The estimated net loss that will be amortized from accumulated
other comprehensive income into periodic benefit cost over the
next fiscal year is approximately $0.2 million for the
Domestic plan and de minimis for the Europe plan.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Domestic plan assets will be held in an investment portfolio
with an active, strategic asset allocation strategy. This
portfolio will be invested exclusively in mutual funds and will
be highly liquid. Investments shall be diversified with the
intent to minimize the risk of large losses to the Fund.
Consequently, the total portfolio will be constructed and
maintained to provide prudent diversification with regard to the
concentration of holdings in individual issues, corporations, or
industries. Over the long-term, the investment objectives for
this portfolio shall be to achieve an average total annual rate
of return of 9.0% for the aggregate investments.
The investment strategy for the Europe plan is determined by the
Trustees of the Pifco (Salton Europe) Group Pension and Life
Assurance Plan (“the Plan”) in consulting with the
Company. The aim of the Trustees of the Plan is to ensure that
while the Plan continues to operate on an ongoing basis there
are enough assets in the Plan to pay the benefits as they fall
due with a stable contribution rate. The overall expected rate
of return of 7.0% is based on the weighted average of the
expected returns on each asset class. The Trustees aim to reduce
equity investment and increase debt security investment when
they feel the time is right. The target allocation at any point
in time is therefore equal to the actual allocation.
Under the requirements of SFAS No. 87,
“Employers’ Accounting for Pensions,” an
additional minimum pension liability for all plans, representing
the excess of accumulated benefits over the plan assets and
accrued pension costs, was recognized at July 1, 2006 and
July 2, 2005 with the balance recorded as a separate
reduction of stockholders’ equity, net of deferred tax
effect.
Domestic
Salton Europe
Total
Contributions:
Expected contributions in fiscal 2008
$
693
$
1,625
$
2,318
Expected Future Benefit Payments:
Fiscal 2008
$
839
$
1,412
$
2,251
Fiscal 2009
852
1,513
2,365
Fiscal 2010
862
1,633
2,495
Fiscal 2011
869
1,729
2,598
Fiscal 2012
869
1,832
2,701
Fiscal
2013-2017
4,420
11,540
15,960
14.
STOCK-BASED
COMPENSATION
Stock Options — Options to purchase
common stock of the Company have been granted to employees under
the 1992, 1995, 1998, 1999, 2000, 2001 and 2002 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.
As of June 30, 2007, 4,713,999 shares were authorized
with 2,278,925 shares available for issue, and 1,006,136
options were outstanding under these plans.
Effective July 3, 2005, the Company adopted FASB Statement
No. 123(R), “Share-Based Payment,” which revises
FASB Statement 123 and supersedes APB No. 25,
“Accounting for Stock Issued to Employees” (APB
No. 25). Statement No. 123(R) requires all share-based
payments to employees to be recognized in the financial
statements based on their fair value using an option-pricing
model at the date of grant. The Company has elected to use the
modified prospective method for adoption, which requires
compensation expense to be recorded for all unvested stock
options beginning in the first year of adoption. For all
unvested options outstanding as of July 3, 2005, the
previously measured but unrecognized compensation expense, based
on the fair value at the original grant date, was recognized
over the remaining vesting period which concluded in fiscal
2006. For share-based payments granted subsequent to
July 3, 2005, compensation expense, based on
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the fair value on the date of grant, will be recognized from the
date of grant over the applicable vesting period. The Company
uses the Black-Scholes option-pricing model to determine fair
value of awards on the date of grant.
There were no stock option awards granted and no compensation
expense related to these plans in fiscal 2007. There is no
compensation cost related to nonvested awards not yet recognized
as of June 30, 2007.
For fiscal 2006, total stock-based employee compensation expense
related to these plans was $0.4 million, net of related
income tax of $0. The impact on basic and diluted earnings per
share for fiscal 2006 was $(0.03).
For periods prior to July 3, 2005, the Company used the
intrinsic value method in accordance with APB No. 25, and
related Interpretations. No stock-based compensation is
reflected in net income, as no options granted under those plans
had an exercise price less than the market value of the
underlying common stock on the date of grant.
The 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:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following information applies to options outstanding at
June 30, 2007:
Options Outstanding and Exercisable
Weighted-
Average
Weighted-
Remaining
Average
Shares
Contractual
Exercise
Range of Exercise Prices
(000)
Life (Yrs)
Price
$ 6.333 - $10.60
542
4.17
$
8.87
$13.917 - $17.50
276
2.33
15.34
$ 18.95 - $37.00
188
2.21
31.65
$ 6.333 - $37.00
1,006
3.29
$
14.91
On April 30, 2007, the Company signed a Separation
Agreement and General Release (the “Agreement”) with
Leon Dreimann, the former Chief Executive Officer (see
Note 20, “Restructuring Costs”). As part of the
Agreement, Dreimann’s existing stock options are to remain
exercisable for a period of two years from the date of the
Agreement. This was treated as a modification of existing awards
in accordance with FASB Statement No. 123(R),
“Share-Based Payment,” and EITF Issue
No. 96-18,
“Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services”
(EITF 96-18).
Salton’s stock option plans give employees 90 days
from their employment end date to exercise any outstanding
options. This period was used to determine the fair value of the
existing awards immediately prior to the modification of the
term of the awards. Two years was used as the expected life in
determining the fair value of the modified awards.
Based upon the above, the fair value of the options was
calculated as of April 30, 2007, using the remaining life
and volatility periods both before and after the agreement. The
fair value of the options was established using the
Black-Scholes model.
Dividend yield
0.00
%
Expected volatility — 90 days
42.66
%
Expected volatility — 2 years
97.04
%
Risk-free interest rate
4.84
%
For the fiscal year ended June 30, 2007, the Company has
recognized $0.2 million of incremental stock-based
compensation resulting from the modification of the option
awards in the Agreement.
Stock Grants — On March 9,2006, the Company granted certain employees common stock of the
Company. A total of 192,250 shares were granted, of which
101,250 vested upon issuance. The remaining 91,000 shares
have a two year vesting, with 50% vesting after one year and the
remaining 50% vesting after two years. There were 32,000
unvested shares remaining as of June 30, 2007.
The Company has previously recognized compensation cost for
these stock grants at the fair value of the stock at the date of
grant. As of June 30, 2007, a minimal amount of
compensation cost related to nonvested awards not yet recognized
is being recognized over the remainder of the requisite two year
service period.
On August 24, 2006, the Company agreed to issue to David
Sabin, the former Chairman of the Board, common stock of the
Company pursuant to his Separation Agreement. As of
June 30, 2007, the Company issued the total award of
141,510 shares. In fiscal 2007, the Company recognized
severance cost at fair value of the stock as of the date of the
Agreement of $0.3 million.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the Company issued the total award of 144,928 shares in
fulfillment of its agreement with Mr. Rue. In fiscal 2007,
the Company recognized severance cost at fair value of the stock
as of the date of the Agreement of $0.3 million.
Warrants — As partial consideration
for the Ninth Amendment to the Senior Secured Credit Facility
entered into on August 15, 2006, the Company issued a
warrant to purchase 719,320 shares of common stock of the
Company at an exercise price of $2.12 per share. The warrant may
be exercised any time before the later of December 31, 2007
and the Stated Termination Date (as defined in the senior
secured credit facility). The Company granted registration
rights with respect to the shares issuable upon exercise of the
warrant.
The Company has recognized deferred financing cost for the
warrant at fair value as of the date of issue of
$0.6 million, which is being amortized over the related
remaining loan term.
The fair value of the warrant was estimated on the date of issue
using the Black-Scholes option-pricing model. The following
assumptions were used to estimate the fair value of the warrant:
Dividend yield
0.00%
Expected volatility
97.20%
Risk-free interest rate
5.0%
Expected life of warrant
1.4 years
15.
COMMITMENTS
AND CONTINGENCIES
Leases — The Company leases certain
facilities and equipment under long-term operating leases.
Rental expense for continuing operations under all leases was
approximately $8.9 million, $9.0 million, and
$10.0 million for the fiscal years ended June 30,2007, July 1, 2006, and July 2, 2005, respectively.
The future minimum rental commitments as of July 1, 2007
were as follows:
Operating
Fiscal Year Ended
leases
(In thousands)
2008
$
7,735
2009
7,101
2010
6,529
2011
6,307
2012
4,741
Thereafter
29,400
Total minimum lease payments
$
61,813
Other commitments — The Company has an
employment agreement with its executive officer. Such agreement
provides for minimum salary levels as well as for incentive
bonuses that are payable if the Company achieves specified
target performance goals. The agreement also provides for lump
sum severance payments upon termination of employment under
certain circumstances.
Salton maintains various licensing and contractual relationships
to market and distribute products under specific names and
designs. These licensing arrangements generally require certain
license fees and royalties. Some of the agreements contain
minimum sales requirements that, if not satisfied, may result in
the termination of the agreements. Total royalties under these
agreements charged to operations, were $6.1 million,
$6.7 million, and $6.7 million in fiscal 2007, 2006,
and 2005, respectively.
The Company has a licensing agreement with Westinghouse Electric
Corporation (“Westinghouse”) under which minimum
royalty payments are required. Royalty payments of
$0.6 million were made during fiscal
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2007. The agreement was amended , effective April 1, 2007,
to provide clarification to the minimum annual royalty for the
various products sold and to provide a minimum payment schedule
for the remaining life of the agreement. Approximately
$3.7 million will be paid in equal monthly installments,
beginning in July 2007 and ending with the contract expiration
on March 31, 2008. Salton has chosen not to extend the term
of the agreement beyond the expiration date.
In fiscal 2001, the Company acquired Sonex International
Corporation, a designer and distributor of electrically operated
toothbrushes, flossers and related products. In connection with
that acquisition, the Company agreed to separate, additional
consideration (“Earn-Out Consideration”) to commence
after net sales of Sonex products exceed $20.0 million. In
fiscal 2007, the Company paid $0.1 million under the
Earn-Out Consideration and as of June 30, 2007, the Company
may owe up to an additional $2.4 million.
In fiscal 2003, the Company entered into an agreement with
George Foreman for professional appearances associated with the
promotion of the George Foreman product line. The contract
required payments in installments over the life of the contract
that totaled $9.0 million. In fiscal 2007, the Company
extended the personal appearances agreement with George Foreman.
This extension expires in December 2007 and requires payments
totaling $2.0 million. In fiscal 2007, the Company paid a
total of $1.8 million, consisting of the remaining
$0.8 million due on the original agreement and
$1.0 million on the extension. As of June 30, 2007,
the Company owed an additional $1.0 million under the terms
of the extension.
In May 2004, two stockholder lawsuits were filed in the United
States District Court for the Northern District of Illinois
against the Company and certain Salton executives. The
complaints alleged that the defendants violated the federal
securities laws, specifically Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and
Rule 10b-5
of the Securities and Exchange Commission, by making certain
alleged false and misleading statements. On March 17, 2006,
the Court approved a settlement of the lawsuits and granted a
final order of dismissal and judgment of the lawsuits. Under the
terms of the settlement, the Company’s insurers paid
$2.5 million and the remaining $0.5 million of the
settlement fund was payable no later than July 16, 2007.
The Company accrued the payment in current accrued liabilities
for $0.5 million as of June 30, 2007. As of
September 30, 2007, this amount has not yet been paid.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Warranties and other claims — The
Company generally warrants its products against defects for a
period of one year. Additionally, credits are issued to
customers for damages sustained during shipment, claimed
shortages, certain returns of undamaged product, and other
general allowances. Segregating all allowances granted by
discrete category for domestic operations at times require
substantial judgment. Accordingly, a single accrual covering all
estimated future claims, returns, and account allowances are
recorded for domestic operations when products are shipped.
Thus, revenue is recognized based upon management’s best
estimate of future returns and warranty claims considering
historical experience. Management also periodically reviews the
adequacy of the reserve and makes changes to the allowance
accordingly. The following table summarizes the changes in the
Company’s aggregate accrual for returns, allowances and
doubtful accounts for continuing operations:
Allowance for returns, allowances and doubtful accounts
$
9,440
$
28,594
$
(26,488
)
$
191
$
11,737
The Company’s continuing foreign operations maintain a
separate warranty reserve. The following table summarizes the
changes in these warranty reserves:
On or about October 27, 2004, a lawsuit entitled DiNatale
vs. Salton was filed in the New York State Supreme Court against
the Company. The plaintiffs, who seek unspecified damages,
allege that they were injured by water contaminated with lead
taken from a tea kettle sold by the Company under its Russell
Hobbs brand. The plaintiffs’ attorney had been seeking to
convert the lawsuit into a class action suit; no class action
suit has been filed to date. The manufacturer of the product and
its insurer are defending this lawsuit. The Company’s
attorneys and its insurers are cooperating in the defense of the
lawsuit.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Jay
Kordich v. Salton, Inc.
On October 19, 2005, a lawsuit named Jay Kordich v. Salton,
Inc. was filed in the United States District Court for the
Southern District of California. The plaintiff in this action is
seeking a judicial determination that a covenant not to compete
in an agreement between him and Salton is invalid and
unenforceable against him plus attorneys’ fees and costs.
Salton believes that the lawsuit is without merit.
Arbitration
BRX Ltd. has given notice under a contract between BRX and
Salton dated December 11, 2000 of BRX’s election to
have mandatory arbitration of a claim by BRX for
$2.0 million plus expenses of $0.3 million owing under
the contract. BRX claims the Company owes the amounts under the
terms of the agreement, which gave Salton the rights to use the
trademark “Vitantonio” for a period of five fiscal
years ending July 1, 2006 and to acquire permanent
ownership of the trademarks. The Company believes that it has
valid defenses to and will be contesting all of the BRX claims.
The outcome of the foregoing legal matters cannot be predicted
with certainty, however Salton believes that the likelihood of a
material adverse outcome is less than probable. Therefore, no
amounts have been accrued for such claims.
Environmental
The Company has accrued approximately $0.2 million for the
anticipated costs of environmental remediation at four of our
current and previously owned sites. Although such costs could
exceed that amount, Salton believes any such excess will not
have a material adverse effect on the financial condition or
annual results of operations of the Company.
Other
The Company is a party to various other actions and proceedings
incident to its normal business operations. The Company believes
that the outcome of any such litigation will not have a material
adverse effect on our business, financial condition or results
of operations. The Company also has product liability and
general liability insurance policies in amounts believed to be
reasonable given its current level of business. Although
historically the Company has not had to pay any material product
liability claims, it is conceivable that the Company could incur
claims for which we are not insured.
17.
OPERATING
SEGMENTS
Salton consists of a single operating segment which designs,
sources, markets and distributes a diversified product mix for
use in the home. The product mix consists of small kitchen and
home appliances, electronics for the home, time products,
lighting products and personal care and wellness products. The
Company believes this segmentation is appropriate based upon
Management’s operating decisions and performance
assessment. Nearly all of the Company’s products are
consumer goods within the housewares market, procured through
independent manufacturers, primarily in the Far East.
Salton’s products are distributed through similar
distribution channels and customer base using the marketing
efforts of its Global Marketing Team. The Company has
established the George Foreman name as a significant product
brand, representing approximately 41.7%, 39.9%, and 38.4% of its
sales in the fiscal years ended June 30, 2007, July 1,2006, and July 2, 2005, respectively.
All revenues are derived from sales to unaffiliated customers.
Sales are allocated to geographic areas based on point of
shipment. Other Foreign Countries includes shipments directly
imported to customers including customers of North America and
European Union. In the opinion of management, the three-year
financial data for geographic areas may not be indicative of
current or future operations.
Major Customers and Suppliers — The
Company’s net sales from continuing operations in the
aggregate to its five largest customers during 2007, 2006 and
2005 were 30.5%, 33.6% and 37.3% of total net sales from
continuing operations in these periods, respectively. One
customer accounted for 10.1% of total net sales from continuing
operations in 2007. No one customer accounted for more than
10.0% of net sales from continuing operations in 2006. One
customer accounted for 12.6% of total net sales from continuing
operations in 2005.
Although the Company has long-established relationships with
many of its customers, it does not have any significant
long-term contracts with them. A significant concentration of
the Company’s business activity is with department stores,
mass merchandisers, specialty stores, home shopping networks and
warehouse clubs whose ability to meet their obligations to the
Company is dependent upon prevailing economic conditions within
the retail industry.
During 2007, 2006, and 2005, one supplier located in China
accounted for approximately 43%, 37%, and 32% of the
Company’s product purchases from continuing operations.
Deferred taxes based upon differences between the financial
statement and tax bases of assets and liabilities and available
tax carryforwards consisted of:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During fiscal 2007, the Company increased its valuation
allowance against its U.S. deferred income tax asset
balance and increased its valuation allowance on certain foreign
entity deferred tax balances resulting in an increase of
$18.2 million. The need for the additional valuation
allowances recorded in fiscal 2007 was based primarily as a
result of additional net operating losses in fiscal 2007. This
valuation allowance does not limit the Company’s ability to
realize future tax benefits associated with its net operating
loss carryforwards to the extent that future profits result in
taxable income during the carryforward period.
At June 30, 2007, the Company had federal net operating
loss carryforwards of approximately $95.5 million. A
majority of these carryforwards will expire in fiscal years 2025
and 2027. The remainder will expire in various periods beginning
in fiscal 2009 through fiscal 2024. At June 30, 2007 the
Company had state net operating loss carryforwards of
approximately $103.0 million. These carryforwards will
begin to expire in fiscal 2008, with the remainder expiring on
or before fiscal 2027. The Company had foreign net operating
loss carryforwards of approximately $43.8 million. Of these
carryforwards, $10.2 million have limited utilization
periods, and will begin to expire in fiscal 2012. The remaining
$33.2 million have unlimited utilization periods. In
addition, the Company has unused AMT and foreign tax credits of
$16.6 million which will begin to expire in fiscal 2012. A
valuation allowance has been provided related to these tax
credits as it is more likely than not that they may expire
unused.
A reconciliation of the statutory federal income tax rate to the
effective rate is as follows:
The Company has not provided for U.S. deferred income taxes
or foreign withholding taxes on approximately $35.4 million
of undistributed earnings of its
non-U.S. subsidiaries
as of June 30, 2007 as these earnings are intended to be
permanently reinvested.
19.
QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly financial data is as follows (amounts in
thousands, except per share data).
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(1)
The Company has historically experienced higher sales in the
August through November months due to holiday sales, which
primarily impact the second quarter.
(2)
Total quarterly earnings per common share (EPS) 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 indepenedent quarterly EPS
calculation.
(3)
Includes impairment charge of $12.6 million.
(4)
Includes impairment charges of $20.9 million,
$2.9 million of merger related expenses and
$1.9 million of restructuring costs.
First
Second
Third
Fourth
Quarter
Quarter(2)(4)
Quarter
Quarter(5)
2006(3)
Net sales
$
148,416
$
230,388
$
127,657
$
129,499
Gross profit
29,497
64,403
25,849
24,602
Net income (loss) from continuing operations
113
(27,813
)
(19,064
)
(55,270
)
Income from discontinued operations, net of tax
1,735
—
—
—
Gain on sale of discontinued operations, net of tax
27,816
—
—
4,516
Net income (loss)
$
29,664
$
(27,813
)
$
(19,064
)
$
(50,754
)
Net income (loss) per share: basic
From continuing operations
$
0.01
$
(2.06
)
$
(1.40
)
$
(3.89
)
From discontinued operations
0.11
—
—
—
Gain on sale of discontinued operations
1.76
—
—
0.32
Net income (loss) per share: basic(1)
$
1.88
$
(2.06
)
$
(1.40
)
$
(3.57
)
Net income (loss) per share: diluted
From continuing operations
$
0.01
$
(2.06
)
$
(1.40
)
$
(3.89
)
From discontinued operations
0.11
—
—
—
Gain on sale of discontinued operations
1.71
—
—
0.32
Net income (loss) per share: diluted
$
1.83
$
(2.06
)
$
(1.40
)
$
(3.57
)
(1)
The previously reported weighted average common shares
outstanding used in the calculation of basic earnings per share
did not include the dilutive effect of the Company’s
convertible Series A Preferred Stock, as required under the
“two-class” method.
(2)
The Company has historically experienced higher sales in the
August through November months due to holiday sales, which
primarily impact the second quarter.
(3)
Total quarterly earnings per common share (EPS) 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.
(4)
Includes one-time income tax charges of $4.6 million on an
intercompany foreign exchange gain with no related pretax
income, the establishment of a valuation allowance of
$26.6 million against the U.S. net deferred tax asset
balance offsetting tax benefits provided for U.S. net operating
loss carryforwards, and $1.5 million of valuation
allowances against foreign deferred tax assets related to
certain foreign net operating losses.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
20.
RESTRUCTURING
COSTS
As a result of our U.S. restructuring, the Company incurred
$2.8 million in restructuring costs during fiscal 2007
related to severance costs. Payments of $1.8 million were
made in fiscal 2007, including $0.5 million of stock-based
compensation. Accrued restructuring costs were $1.1 million
as of June 30, 2007.
On August 24, 2006, the Company agreed to issue to David
Sabin, the former Chairman of the Board, 141,510 shares of
common stock of the Company pursuant to his Separation
Agreement. The Company has recognized severance cost at fair
value of the stock as of the date of the Agreement of
$0.3 million.
On April 30, 2007, the Company signed a Separation
Agreement and General Release (the “Agreement”) with
Leon Dreimann, the former Chief Executive Officer. The Company
agreed to pay Dreimann, in lieu of any other severance or
termination pay, (a) $450,000 on the eighth day following
his execution of the Agreement (the “Effective Date”);
and (b) $750,000 plus interest six months from the
Effective Date. Dreimann’s existing stock options are to
remain exercisable for a period of two years from the date of
the Agreement. The Company also agreed to provide welfare
benefits (including medical, dental, and life insurance) as if
Dreimann had remained employed during the three-year period
following the date of the Agreement. The Company has recognized
severance cost related to the Agreement totaling
$1.4 million, including $0.2 million of incremental
stock-based compensation resulting from the modification of the
option awards.
Restructuring costs of $0.3 million in fiscal 2006
consisted of warehouse rationalization, as well as
$0.6 million for closure costs related to a Salton Europe
subsidiary.
In fiscal 2005, the Company incurred $1.0 million related
to the U.S. restructuring plan primarily for consulting and
legal costs directly associated with the implementation of the
plan, severance costs related to the domestic headcount
reduction and other expenses related to the warehouse
rationalization.
21.
SUPPLEMENTAL
CONSOLIDATING FINANCIAL INFORMATION
The payment obligations of the Company under the senior secured
credit facility, the second lien notes and the senior
subordinated notes are guaranteed by certain of the
Company’s 100% owned domestic subsidiaries (Subsidiary
Guarantors). Such guarantees are full, unconditional and joint
and several.
In December 2005, the Company entered into a facility agreement
which is guaranteed by certain of the Company’s foreign
subsidiaries (see Note 8, “Senior Secured Credit
Facility, Letters of Credit and Long-Term Debt”). As a
result of the foreign borrowing facility, primarily all of the
assets in these foreign subsidiaries are restricted as to the
transfer of funds to the parent in the form of cash dividends,
loans, or advances. The column titled “Foreign Borrowers
and Guarantor Subsidiaries” represents the financial
position, results operations and cash flows of these foreign
subsidiaries.
The following condensed consolidating financial information sets
forth, on a combined basis, balance sheets, statements of income
and statements of cash flows for Salton, Inc. (Parent), the
Guarantor Subsidiaries under the domestic facility, the
Guarantor Subsidiaries under the foreign facility and the
Company’s Non-Guarantor subsidiaries (Other Subsidiaries).
Investments in subsidiaries are accounted for using the equity
method for purposes of the consolidating presentation. The
principal elimination entries eliminate investments in
subsidiaries and intercompany transactions.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
22.
RELATED
TRANSACTIONS
In July 2006, William B. Rue, the Company’s former
President and Chief Operating Officer, reimbursed the Company
for $382,415.65 withholding taxes paid by the Company in fiscal
2002, which was included in accounts receivable as of
July 1, 2006.
Harbinger Capital Partners owns 30,000 shares of
Salton’s Series A Preferred Stock and owns
47,164 shares of Salton’s Series C Preferred
Stock. Harbinger Capital Partners owns approximately
$15.0 million principal amount of 2008 senior subordinated
notes and approximately $89.6 million principal amount of
second lien notes.
David Maura, Vice President and Director of Investments at
Harbinger Capital Partner and its affiliates, served on the
Salton board of directors from June 2006 until his resignation
on January 23, 2007. Mr. Maura resigned in light of
Harbinger’s acquisition of Applica Incorporated.
On December 28, 2006, the Company (a) issued
701,600 shares of Salton common stock to Harbinger Capital
Partners Master Fund I, Ltd. for an aggregate purchase
price of $1,754,000 or $2.50 per share and (b) used the
proceeds therefrom to repurchase from Harbinger $1,754,000 of
the Company’s outstanding senior subordinated notes due
2008.
On February 7, 2007, Salton, the Company’s
wholly-owned subsidiary SFP Merger Sub, Inc. and APN Holding
Company, Inc. entered into a definitive merger agreement
pursuant to which SFP Merger Sub was to merge with and into APN
Holding Company, the entity that acquired all of the outstanding
common shares of Applica Incorporated on January 23, 2007.
The merger would have resulted in Applica and its subsidiaries
becoming subsidiaries of Salton and the stockholders of APN
Holding Company — Harbinger Capital Partners Master
Fund I, Ltd. and Harbinger Capital Partners Special
Situations Fund, LP — receiving in the aggregate
approximately 83% of the outstanding common stock of Salton
immediately following the merger. On August 1, 2007, APN
Holding Company delivered to Salton written notice terminating
the merger agreement.
As a result of this merger agreement, the Company incurred
$2.9 million in merger related expenses in fiscal 2007,
which are included in selling, general and administrative
expenses in the accompanying statement of operations.
On October 1, 2007, the Company entered into an Agreement
and Plan of Merger with APN Holdco, pursuant to which Applica
will become a wholly-owned subsidiary of Salton. APN Holdco is
owned by Harbinger Capital Partners Master Fund I, Ltd. and
Harbinger Capital Partners Special Situations Fund, L.P.,
(collectively, “Harbinger Capital Partners”). Upon
consummation of the proposed merger and the related
transactions, Harbinger Capital Partners would beneficially own
92% of the outstanding common stock of Salton, and existing
holders of Salton’s Series A Voting Convertible Preferred
Stock (excluding Harbinger Capital Partners), Series C
Nonconvertible (NonVoting) Preferred Stock (excluding Harbinger
Capital Partners) and common stock (excluding Harbinger Capital
Partners) would own approximately 3%, 3% and 2%, respectively,
of the outstanding common stock of Salton immediately following
the merger and related transactions.
23.
SUBSEQUENT
EVENTS
Sixteenth Amendment to Senior Secured Credit
Facility — On August 10, 2007, the
Company entered into a sixteenth amendment to the senior secured
credit facility. The amendment amends the definition of
borrowing base to increase the existing overadvance amount of
approximately $32 million by approximately $9 million.
In addition, subject to satisfaction of certain conditions prior
to August 13, 2007, the overadvance amount is increased
further by approximately $11 million. The amendment
provides that all overadvance amounts, totaling up to
approximately $68.0 million, must be repaid prior to
November 10, 2007. The amendment sets the stated
termination date of the facility as December 31, 2008 and
sets the applicable margin with respect to base rate loans at
6.50% and with respect to LIBOR rate loans at 8.50%.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The amendment amends certain covenants and adds certain
covenants, including that (a) the Company enter into
control agreements with respect to certain bank accounts and
(b) the Company enter into pledge agreements with respect
to the securities of certain foreign subsidiaries.
Merger Agreement — On October 1,2007, the Company entered into an Agreement and Plan of Merger
with APN Holding Company, Inc. the parent company of Applica
Incorporated, pursuant to which Applica will become a
wholly-owned subsidiary of Salton. APN Holding Company is owned
by Harbinger Capital Partners Master Fund I, Ltd. and
Harbinger Capital Partners Special Situations Fund, L.P.,
(collectively, “Harbinger Capital Partners”). Upon
consummation of the proposed merger and the related transactions
described below, Harbinger Capital Partners would beneficially
own 92% of the outstanding common stock of Salton, and existing
holders of Salton’s Series A Voting Convertible
Preferred Stock (excluding Harbinger Capital Partners),
Series C Nonconvertible (NonVoting) Preferred Stock
(excluding Harbinger Capital Partners) and common stock
(excluding Harbinger Capital Partners) would own approximately
3%, 3% and 2%, respectively, of the outstanding common stock of
Salton immediately following the merger and related transactions.
In addition to the merger, the definitive merger agreement
contemplates the consummation of the following transactions
simultaneously with the closing of the merger: (1) the
mandatory conversion of all outstanding shares of Salton’s
Series A Voting Convertible Preferred Stock, including
those held by Harbinger Capital Partners, into shares of
Salton’s common stock; (2) the mandatory conversion of
all outstanding shares of Salton’s Series C
Nonconvertible (NonVoting) Preferred Stock, including those held
by Harbinger Capital Partners, into shares of Salton’s
common stock; and (3) the exchange by Harbinger Capital
Partners of approximately $90 million principal amount of
Salton’s second lien notes and approximately
$15 million principal amount of Salton’s 2008 senior
subordinated notes, for shares of a new series of
non-convertible (non voting) preferred stock of Salton, bearing
a 16% cumulative preferred dividend.
The Company intends to complete this transaction within the next
three to four months. The consummation of the merger and related
transactions is subject to various conditions, including the
approval by the Company’s stockholders and the absence of
legal impediments. The merger and related transactions are not
subject to any financing condition.
Financing Related Agreements —
Concurrently with the execution and delivery of the
Merger Agreement, Salton, its subsidiaries, Silver Point
Finance, LLC, (“Silver Point”) as co-agent for the
lenders under Salton’s senior secured credit facility and
Harbinger Capital Partners entered into a Loan Purchase
Agreement. The Loan Purchase Agreement provides that at any time
(1) from and after the date any party to the Merger
Agreement has, or asserts, the right to terminate the Merger
Agreement or the Merger Agreement is terminated
and/or
(2) on or after November 10, 2007 and prior to
February 1, 2008 (provided, in each case, no insolvency
proceeding with respect to Salton or its subsidiaries is then
proceeding), at the request of Silver Point, Harbinger Capital
Partners shall purchase from Silver Point certain overadvance
loans outstanding under Salton’s senior secured credit
facility having an aggregate principal amount of up to
approximately $68.5 million. The purchase price shall be
equal to 100% of the outstanding principal amount of the
overadvance loans, plus all accrued and unpaid interest thereon
through and including the date of purchase.
In the event that Harbinger Capital Partners purchase the
overadvance loans pursuant to the Loan Purchase Agreement, the
amount of the purchased overadvance loans will be deemed
discharged under Salton’s senior secured credit facility
and the principal amount of such over advance loans, plus all
accrued and unpaid interest thereon and a $5 million
drawdown fee payable to Harbinger Capital Partners as a result
of such purchase, will be automatically converted to loans under
a new Reimbursement and Senior Secured Credit Agreement dated as
of October 1, 2007 among Harbinger Capital Partners, Salton
and its subsidiaries that are signatories thereto as borrowers
and guarantors.
The Loan Purchase Agreement also provides that under certain
circumstances, including the commencement of an insolvency
proceeding with respect to Salton or its subsidiaries, at the
request of Silver Point,
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Harbinger Capital Partners shall purchase from Silver Point all
of the outstanding obligations under Salton’s senior
secured credit facility (and Harbinger Capital Partners Special
Situations Fund, L.P. shall become the agent and co-agent
thereunder).
The Reimbursement and Senior Secured Credit Agreement has a
maturity date of January 30, 2008. The interest rate with
respect to loans under the Reimbursement and Senior Secured
Credit Agreement is the six month LIBOR plus 10.5%, payable in
cash on the last business day of each month. The default rate is
LIBOR plus 12.5%.
Waiver, Consent, Forebearance and Seventeenth Amendment to
Senior Secured Credit Facility; Waiver, Consent and First
Amendment to Second Lien Credit Agreement; Amended and Restated
Intercreditor Agreement and Junior Intercreditor
Agreement — In connection with the Loan
Purchase Agreement: (a) Salton entered into a waiver,
consent, forbearance and seventeenth amendment to its senior
secured credit agreement pursuant to which Silver Point
(1) permits the transactions contemplated by the Loan
Purchase Agreement and related documents, (2) waives any
event of default resulting from a going concern qualification in
the report by Salton’s independent auditors accompanying
Salton’s audited financial statements as of and for the
period ending June 30, 2007, and (3) subject to
certain conditions, forbears from exercising remedies with
respect to certain existing events of default relating to, among
other things, the filing of Salton’s annual report on
Form 10-K
for the fiscal year ended June 30, 2007 and the delivery of
foreign stock pledge agreements and blocked account control
agreements; (b) Salton entered into a waiver, consent and
first amendment to its second lien credit agreement which, among
other things, permits the transactions contemplated by the Loan
Purchase Agreement and related documents; (c) the agent and
co-agent for Salton’s senior secured credit agreement, the
agent for the Reimbursement and Senior Secured Credit Agreement
and the second lien agent for Salton’s second lien credit
agreement entered into an Amended and Restated Intercreditor
Agreement which, among other things, governs the priority of
rights among the lenders; and (d) the agent for the
Reimbursement and Senior Secured Credit Agreement and the second
lien agent for the second lien credit agreement entered into a
Junior Intercreditor Agreement governing the priority of rights
among the lenders thereunder.
Certificate of Designation of Series B Junior Participating
Preferred Stock. Incorporated by reference to the
Registrant’s Annual Report on Form 10-K for the fiscal year
ended July 3, 2004.
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
103/4% Senior
Subordinated Notes. Incorporated by reference to the
Registrant’s Registration Statement on Form S-4
(Registration No. 333-70169).
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
121/4% Senior
Subordinated Notes due 2008. Incorporated by reference to the
Quarterly Report on Form 10-Q for the fiscal quarter ended March31, 2001.
Letter to Stockholders relating to the adoption of a stockholder
rights plan with attachment. Incorporated by reference to the
Registrant’s Current on Form 8-K dated June 28, 2004.
4
.8
Agreement of Resignation, Appointment and Acceptance dated June27, 2005 by and among Salton, Inc., Wells Fargo Bank, National
Association, successor by merger to Wells Fargo Bank Minnesota,
National Association, formerly known as Norwest Bank Minnesota,
National Association and SunTrust Bank, a national association.
Incorporated by reference to the Registrant’s Current on
Form 8-K dated June 27, 2005.
4
.9
Agreement of Resignation, Appointment and Acceptance dated June27, 2005 by and among Salton, Inc., Wells Fargo Bank, National
Association, successor by merger to Wells Fargo Bank Minnesota,
National Association, formerly known as Norwest Bank Minnesota,
National Association and SunTrust Bank, a national association.
Incorporated by reference to the Registrant’s Current on
Form 8-K dated June 27, 2005.
4
.10
First Supplement to Indenture dated as of August 26, 2005
between Salton, Inc. and SunTrust Bank, as trustee, with respect
to the
103/4% Senior
Subordinated Notes due 2005. Incorporated by reference to the
Registrant’s Current on Form 8-K dated August 26, 2005.
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
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).
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
.6
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
.7*
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.
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
.12*
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.
Credit Agreement, dated as of May 9, 2003, among the lenders
thereto, Wachovia Bank, National Association, as administrative
agent and collateral agent and as a co-agent, Bank of America,
N.A., as syndication agent and co-documentation agent and as a
co-agent, Banc of America Securities LLC, as co-arranger and
co-book runner and Wachovia Securities, Inc, as co-arranger and
co-book runner, Bank One, N.A. and Fleet Capital Corporation
each as co- documentation agents, Salton, Inc., each of
Salton’s subsidiaries listed on the signature pages thereto
and each of Salton’s other subsidiaries listed on the
signature pages thereto as guarantors. Incorporated by reference
to the Quarterly Report on Form 10-Q for the fiscal quarter
ended March 29, 2003.
First Amendment to Credit Agreement dated as of February 4, 2004
by and among Salton, Inc., Toastmaster Inc., Salton Toastmaster
Logistics LLC, each of Salton’s Subsidiaries that are
signatories thereto as Guarantors, the Lenders that are
signatories thereto and Wachovia Bank, National Association in
its capacity as Administrative Agent for the Lenders.
Incorporated by reference to the Registrant’s Current
Report on Form 8-K, dated February 10, 2004.
10
.22
Forbearance Agreement and Amendment dated as May 10, 2004 by and
among Salton, Inc., Toastmaster Inc., Salton Toastmaster
Logistics LLC, each of Salton’s Subsidiaries that are
signatories thereto as Guarantors, the Lenders that are
signatories thereto and Wachovia Bank, National Association in
its capacity as Administrative Agent for the Lenders.
Incorporated by reference to the Form 8-K filed on May 11, 2004.
10
.23
First Amendment to Forbearance Agreement dated as of June 10,2004 by and among Salton, Inc., Toastmaster Inc., Salton
Toastmaster Logistics LLC, each of Salton’s Subsidiaries
that are signatories thereto as Guarantors, the Lenders that are
signatories thereto and Wachovia Bank, National Association in
its capacity as Administrative Agent for the Lenders.
Incorporated by reference to the Form 8-K filed on June 10, 2004.
10
.24
Amended and Restated Credit Agreement dated as of June 15, 2004
among the financial institutions named therein, Wachovia Bank,
as the Agent, and Silver Point Finance, LLC, as the Co-Agent,
Syndication Agent, Documentation Agent, Arranger and Book
Runner, and Salton, Inc, each of its subsidiaries that are
signatories thereto as the Borrowers and each of its other
subsidiaries that are signatories thereto as Guarantors.
Incorporated by reference to the Form 8-K filed on June 15, 2004.
10
.25
Second Amendment to Amended and Restated Credit Agreement dated
as of May 11, 2005 by and among the Lenders that are signatories
thereto, Wells Fargo Foothill, Inc., as administrative agent and
collateral agent for the Lenders, Silver Point Finance, LLC, as
the co-agent, syndication agent, documentation agent, arranger
and book runner, Salton, Inc., a Delaware corporation, each of
its subsidiaries that are signatories thereto as the Borrowers
and each of its other subsidiaries that are signatories thereto
as Guarantors. Incorporated by reference to the Form 10-Q for
the fiscal quarter ended April 2, 2005.
Third Amendment to, and Waiver under, Amended and Restated
Credit Agreement dated as of July 8, 2005 by and among the
Lenders, Wells Fargo Foothill, Inc., as administrative agent and
collateral agent for the Lenders, Silver Point Finance, LLC, as
co-agent, syndication agent, documentation agent, assigner and
book runner, Salton, Inc., each of Salton’s Subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated July 11, 2005.
10
.28
Waiver Under Second Amendment to Amended and Restated Credit
Agreement dated as of July 14, 2005 by and among the Lenders,
Wells Fargo Foothill, Inc., as administrative agent and
collateral agent for the lenders, Silver Point Finance, LLC, as
co-agent, syndication agents documentation agent, assigner and
book runner, Salton, Inc., each of Salton’s Subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated July 19,2005.
Amendment to Support Agreement dated August 1, 2005 among
Salton, Inc. and certain beneficial owners of Salton
103/4% Senior
Subordinated Notes due 2005 and
121/4% Senior
Subordinated Notes due 2008. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated
August 1, 2005.
10
.30
Credit Agreement dated as of August 26, 2005 among the financial
institutions named therein, as the lenders, The Bank of New
York, as the agent, Salton, Inc. and each of its subsidiaries
that are signatories thereto, as the borrowers, and each of its
other subsidiaries that are signatories thereto, as guarantors.
Incorporated by reference to the Registrant’s Current on
Form 8-K dated August 26, 2005.
10
.31
Intercreditor Agreement dated as of August 26, 2005 by and
between Silver Point Finance, LLC, Wells Fargo Foothill, Inc.
and The Bank of New York. Incorporated by reference to the
Registrant’s Current on Form 8-K dated August 26, 2005.
Sale Agreement between Interactive Capital (Proprietary)
Limited, in its own right and on behalf of each member of a
consortium, and Salton, Inc., on behalf of Pifco Overseas
Limited. Incorporated by reference to the Registrant’s
Current Report on Form 8-K dated August 29, 2005.
Asset Purchase Agreement dated as of September 15, 2005 among
Salton, Inc., SAH Acquisition Corp. and Lifetime Brands, Inc.
Incorporation by reference to the Registrant’s Current
Report on 8-K dated September 19, 2005.
10
.36
Waiver and Consent under Amended and Restated Credit Agreement
dated as of September 16, 2005 by and among the financial
institutions identified on the signature pages thereof (the
“Lenders”), Wells Fargo Foothill, Inc., as
administrative agent and collateral agent for the Lenders,
Silver Point Finance, LLC, as the co-agent, syndication agent,
documentation agent, arranger and book runner, Salton, Inc.,
each of Salton’s Subsidiaries identified on the signature
pages thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on 8-K dated September 23, 2005.
10
.37
Waiver and Consent under Amended and Restated Credit Agreement
dated as of September 22, 2005 by and among the financial
institutions on the signature pages thereof (the
“Lenders”), Wells Fargo Foothill, Inc., as
administrative agent, syndication agent, documentation agent,
arranger and book runner, Salton, Inc., each of Salton’s
Subsidiaries identified on the signature pages thereof as
Borrowers and each of Salton’s Subsidiaries identified on
the signature pages thereof as Guarantors. Incorporated by
reference to the Registrant’s Current Report on 8-K dated
September 19, 2005.
10
.38
Fourth Amendment to, and Waiver Under, Amended and Restated
Credit Agreement dated as of September 22, 2005 by and among the
Lenders, Wells Fargo Foothill, Inc., as administrative agent,
and collateral agent for the Lenders, Silver Point Finance, LLC,
as co-agent, syndication agent, documentation agent, assigner
and book runner, Salton, Inc., each of Salton’s
Subsidiaries identified on the signature pages thereof as
Borrowers and each of Salton’s Subsidiaries identified on
the signature pages thereof as Guarantors. Incorporated by
reference to the Registrant’s Current Report on 8-K dated
September 23, 2005.
Summary of Non-employee Director Compensation. Incorporated by
reference to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended July 2, 2005.
Fifth Amendment to Amended and Restated Credit Agreement dated
as of October 7, 2005 by and among the Lenders, Wells Fargo
Foothill, Inc., as administrative agent, and collateral agent
for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s Subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated
October 7, 2005.
10
.42
Sixth Amendment to Amedment to, and Waiver Under, Amended and
Restated Credit Agreement dated as of November 9, 2005 by and
among the Lenders, Wells Fargo Foothill, Inc., as administrative
agent, and collateral agent for the Lenders, Silver Point
Finance, LLC, as co-agent, syndication agent, documentation
agent, arranger and book runner, Salton, Inc., each of
Salton’s Subsidiaries identified on the signature pages
thereof as Borrowers and each of Salton’s Subsidiaries
identified on the signature pages thereof as Guarantors.
Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated November 9, 2005.
Facility Agreement dated as of December 23, 2005 by and among
Salton Holdings Limited, Salton Europe Limited, certain
affiliates of Salton Holdings Limited, Burdale Financial
Limited, as agent and security trustee, and the financial
institutions party thereto as lenders. Incorporated by reference
to the Registrant’s Current Report on Form 8-K dated
December 23, 2005.
10
.45
Waiver and Consent Under Amended and Restated Credit Agreement
dated as of December 20, 2005 by and among the Lenders, Wells
Fargo Foothill, Inc., as administrative agent, and collateral
agent for the Lenders, Silver Point Finance, LLC,as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated December 23,2005.
10
.46
Seventh Amendment to, and Waiver Under, Amended and Restated
Credit Agreement dated as of February 8, 2006 by and among the
Lenders, Wells Fargo Foothill, Inc., as administrative agent,
and collateral agent for the Lenders, Silver Point Finance, LLC,
as co-agent, syndication agent, documentation agent, arranger
and book runner, Salton, Inc., each of Salton’s
Subsidiaries identified on the signature pages thereof as
Borrowers and each of Salton’s Subsidiaries identified on
the signature pages thereof as Guarantors. Incorporated by
reference to the Registrant’s Current Report on Form 8-K
dated February 8, 2006.
Eighth Amendment to, and Waiver Under, Amended and Restated
Credit Agreement dated as of May 10, 2006 by and among the
Lenders, Wells Fargo Foothill, Inc., as administrative agent,
and collateral agent for the Lenders, Silver Point Finance, LLC,
as co-agent, syndication agent, documentation agent, arranger
and book runner, Salton, Inc., each of Salton’s
Subsidiaries identified on the signature pages thereof as
Borrowers and each of Salton’s Subsidiaries identified on
the signature pages thereof as Guarantors. Incorporated by
reference to the Registrant’s Current Report on Form 8-K
dated May 10, 2006.
10
.50
Ninth Amendment to, and Waiver Under, Amended and Restated
Credit Agreement dated as of August 15, 2006, by and among the
Lenders, Wells Fargo Foothill, Inc., as administrative agent,
and collateral agent for the Lenders, Silver Point Finance, LLC,
as co-agent, syndication agent, documentation agent, arranger
and book runner, Salton, Inc., each of Salton’s
Subsidiaries identified on the signature pages thereof as
Borrowers and each of Salton’s Subsidiaries identified on
the signature pages thereof as Guarantors. Incorporated by
reference to the Registrant’s Current Report on Form 8-K
dated August 15, 2006.
Amendment and Restatement dated as of October 10, 2006 to the
Facility Agreement by and among Salton Holdings Limited, Salton
Europe Limited, certain affiliates of Salton Holdings Limited,
Burdale Financial Limited, as agent and security trustee, and
the financial institutions party thereto as lenders.
Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated October 10, 2006.
10
.54
Waiver and Consent Under Amended and Restated Credit Agreement
dated as October 10, 2006 by and among the Lenders, Wells Fargo
Foothill, Inc., as administrative agent, and collateral agent
for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated
October 10, 2006.
Commitment Agreement dated as of February 7, 2007 by and between
Salton, Inc., Harbinger Capital Partners Master Fund I,
Ltd., and Harbinger Capital Partners Special Situations Fund,
L.P. Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated February 7, 2007.
Tenth Amendment to Amended and Restated Credit Agreement dated
as of February 12, 2007 by and among the Lenders, Wells Fargo
Foothill, Inc., as administrative agent, and collateral agent
for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s Subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated February12, 2007.
10
.66
Eleventh Amendment to Amended and Restated Credit Agreement
dated as of April 13, 2007 by and among the Lenders, Wells Fargo
Foothill, Inc., as administrative agent, and collateral agent
for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s Subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated
April 13, 2007.
10
.67
Separation Agreement and General Release dated as of April 30,2007 by and between Leon Dreimann and Salton, Inc. Incorporated
by reference to the Registrant’s Current Report on
Form 8-K
dated April 30, 2007.
10
.68
Twelfth Amendment to Amended and Restated Credit Agreement dated
as of June 28, 2007 by and among the Lenders, Wells Fargo
Foothill, Inc., as administrative agent, and collateral agent
for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated June 28,2007.
10
.69
Thirteenth Amendment to Amended and Restated Credit Agreement
dated as of July 20, 2007 by and among the Lenders, Wells Fargo
Foothill, Inc., as administrative agent, and collateral agent
for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors.
10
.70
Fourteenth Amendment to Amended and Restated Credit Agreement
dated as of July 31, 2007 by and among the Lenders, Wells Fargo
Foothill, Inc., as administrative agent, and collateral agent
for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated July 31,2007.
10
.71
Fifteenth Amendment to Amended and Restated Credit Agreement
dated as of August 6, 2007 by and among the Lenders, Wells Fargo
Foothill, Inc., as administrative agent, and collateral agent
for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated
August 6, 2007.
10
.72
Sixteenth Amendment to Amended and Restated Credit Agreement
dated as of August 8, 2007 by and among the Lenders, Wells Fargo
Foothill, Inc., as administrative agent, and collateral agent
for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book
runner, Salton, Inc., each of Salton’s subsidiaries
identified on the signature pages thereof as Borrowers and each
of Salton’s Subsidiaries identified on the signature pages
thereof as Guarantors. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated
August 10, 2007.
Form of Certificate of Amendment to Certificate of Designation
of Series A Voting Convertible Preferred Stock. Incorporated by
reference to the Registrant’s Current Report on Form 8-K
dated October 1, 2007.
Form of Certificate of Designation of Series D Nonconvertible
(NonVoting) Preferred Stock. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated October 1,2007.
10
.78
Commitment Agreement dated as of October 1, 2007 by and between
Salton, Inc., Harbinger Capital Partners Master Fund I,
Ltd., and Harbinger Capital Partners Special Situations Fund,
L.P. Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated October 1, 2007.
Loan Purchase Agreement dated as of October 1, 2007 by and
between Silver Point Finance, as co-agent for the Lenders (as
defined therein), Harbinger Capital Partners Master Fund I,
Ltd., Harbinger Capital Partners Special Situations Fund, L.P.,
Salton and each of Salton’s subsidiaries identified on the
signature pages thereof as Borrowers and Guarantors.
Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated October 1, 2007.
10
.83
Reimbursement and Senior Secured Credit Agreement dated as of
October 1, 2007 by and among Harbinger Capital Partners Master
Fund I, Ltd. and Harbinger Capital Partners Special
Situations Fund, L.P., as the lenders, Harbinger Capital
Partners Master Fund I, Ltd., as the agent, Salton, Inc.
and each of its subsidiaries that are signatories thereto, as
the borrowers, and each of its other subsidiaries that are
signatories thereto, as guarantors. Incorporated by reference to
the Registrant’s Current Report on Form 8-K dated October1, 2007.
10
.84
Waiver, Consent, Forbearance and Seventeenth Amendment to
Amended and Restated Credit Agreement dated as of October 1,2007 by and among the Lenders, Wells Fargo Foothill, Inc., as
administrative agent, and collateral agent for the Lenders,
Silver Point Finance, LLC, as co-agent, syndication agent,
documentation agent, arranger and book runner, Salton, Inc., and
each of Salton’s subsidiaries identified on the signature
pages thereof as Borrowers and each of Salton’s
Subsidiaries identified on the signature pages thereof as
Guarantors. Incorporated by reference to the Registrant’s
Current Report on Form 8-K dated October 1, 2007.
10
.85
Waiver, Consent and First Amendment to Credit Agreement dated as
of October 1, 2007 among the financial institutions named
therein, as the lenders, The Bank of New York, as the agent,
Salton, Inc. and each of its subsidiaries that are signatories
thereto, as the borrowers, and each of its other subsidiaries
that are signatories thereto, as guarantors. Incorporated by
reference to the Registrant’s Current Report on Form 8-K
dated October 1, 2007.
10
.86
Amended and Restated Intercreditor Agreement dated as of October1, 2007 by and between Silver Point Finance, LLC, Wells Fargo
Foothill, Inc., The Bank of New York and Harbinger Capital
Partners Master Fund I, Ltd. Incorporated by reference to
the Registrant’s Current Report on Form 8-K dated October1, 2007.
Junior Intercreditor Agreement dated as of October 1, 2007 by
and between The Bank of New York and Harbinger Capital Partners
Master Fund I, Ltd. Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated October 1,2007.
Certification by the Interim Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31
.2
Certification by the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32
.1
Certification by the Interim Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32
.2
Certification by the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
*
These exhibits are management contracts or compensatory plans or
arrangements.
The following pages contain the Financial Statement Schedules as
specified by Item 15(b) of Part IV of
Form 10-K.
E-9
Dates Referenced Herein and Documents Incorporated by Reference