Document/Exhibit Description Pages Size
1: 10-K Annual Report Dated June 27,1998 58 290K
2: EX-10.11 Employee Agreement L. Dreimann 20 88K
3: EX-10.12 Employee Agreement D.C. Sabin 21 86K
4: EX-10.13 Employee Agreement 21 86K
5: EX-21.1 Subsidiaries of Company 1 4K
6: EX-27.1 Financial Data Schedule 1 6K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE - ACT OF 1934
For The Fiscal Year Ended June 27, 1998 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From ________ to ________
Commission File number 0-19557
SALTON/MAXIM HOUSEWARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3777824
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
MOUNT PROSPECT, ILLINOIS 60056
(Address of principal executive offices (Zip Code)
(847) 803-4600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether this registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of September 18, 1998 was approximately $64,835,357 computed on
the basis of the last reported sale price per share ($14.469) of such stock on
the NASDAQ National Market. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The number of shares of the Registrant's Common Stock outstanding as of
September 21, 1998 was 6,568,872.
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Documents Incorporated by Reference:
Part of Form 10-K Document Incorporated by Reference
----------------- ----------------------------------
Part III (Items 10, 11, 12 and Portions of the Registrant's Definitive Proxy
13) Statement to be used in connection with its
1998 Annual Meeting of Stockholders.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included
in this Annual Report on Form 10-K, including without limitation the statements
under "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are, or may be, forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Without limiting the foregoing, (i) the words
"believes," "anticipates," "plans," "expects," "intends," "estimates" and
similar expressions are intended to identify forward-looking statements and (ii)
forward-looking statements include any statements with respect to the possible
future results of the Company or Toastmaster (as defined), including any
projections or descriptions of anticipated revenue enhancements or cost savings.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, 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: the Company's degree of leverage; economic conditions and the retail
environment; the timely development, introduction and customer acceptance of the
Company's products; competitive products and pricing; dependence on foreign
suppliers and supply and manufacturing constraints; the Company's relationship
and contractual arrangements with key customers, suppliers and licensors;
cancellation or reduction of orders; the integration of Toastmaster if the
Toastmaster Acquisition (as defined) is consummated, including the failure to
realize anticipated revenue enhancements and cost savings; the risks relating to
pending legal proceedings and other factors both referenced and not referenced
in this Annual Report on Form 10-K, including those set forth under "Risk
Factors." All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements contained throughout
this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Salton/Maxim Housewares, Inc. (the "Company" or "Salton") is a
leading domestic designer and marketer of a broad range of kitchen and small
household electrical appliances under such brand names as Salton(R), Maxim(R),
Breadman(R), Juiceman(R), White-Westinghouse(R) and Farberware(R). The Company
believes that it has the leading U.S. market share in juice extractors and
indoor grills and a significant U.S. market share in bread bakers and espresso
makers. Salton also designs and markets personal and beauty care appliances
under the Salton Creations(R) brand name, tabletop glass and crystal products
under the Block(R) China, Atlantis(R) Crystal and Gear(R) brand names, and
clocks under the Salton Time(R) brand name. The Company believes that its strong
market position and success are attributable to its continuous product
innovation, strong relationships with retailers, breadth of product offerings,
reputation for quality products and established brand names.
The Company continuously develops and introduces a wide selection of
new products and enhances existing products to satisfy the various tastes,
preferences and budgets of
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consumers and to service the needs of a broad range of retailers. Salton's
kitchen and small household electrical appliances are comprised of five major
product subcategories: (i) health conscious products, including thermal
household grill products such as George Foreman's Lean Mean Fat Reducing
Grilling Machine(R), fresh fruit and vegetable juicers such as the Juiceman(R)
line, and rice cookers; (ii) thermal products, including bread bakers, such as
the Breadman Plus(R) automatic bread baker, waffle makers, toasters, toaster
ovens and irons; (iii) coffee and tea related products, including
espresso/cappuccino makers and coffee makers; (iv) food preparation products,
including electric woks, crepe makers, mixers, can openers and blenders; and (v)
home comfort products, including fans, fan heaters and humidifiers.
The Company markets and sells its products throughout the United
States through its own sales force and a network of approximately 190
independent commissioned sales representatives. The Company sells its products
primarily to mass merchandisers, department stores, specialty stores, direct
mail catalogs and showrooms and other direct distribution channels.
Representative customers include Kmart, Sears, Target, Federated Department
Stores, Wal-Mart, May Co. Department Stores and QVC. Further, the Company sells
certain of its products, primarily Juiceman(R) fresh juice extractors and George
Foreman Grills(R), directly to consumers via the internet and through the use of
paid half-hour television programs commonly referred to as "infomercials." The
Company contracts for the manufacture of most of its products with independent
manufacturers located overseas, primarily in the Far East and Europe. The
Company also assembles certain appliances in its plant located in Kenilworth,
New Jersey.
THE RECAPITALIZATION
On July 28, 1998, Salton repurchased (the "Stock Repurchase")
6,535,072 shares of Salton common stock owned by Windmere-Durable Holdings, Inc.
("Windmere") pursuant to a Stock Agreement dated as of May 6, 1998 (the
"Windmere Stock Agreement") by and among Salton, Windmere and the executive
officers of Salton. Prior to the Stock Repurchase, Windmere owned approximately
50% of Salton's outstanding common stock. The price for the Stock Repurchase was
$12 per share in cash plus a $15.0 million subordinated promissory note (the
"Junior Subordinated Note"). The Junior Subordinated Note, which has a term of
six and one-half years and bears interest at 4.0% per annum payable annually, is
subject to offsets of 5% of the total purchase price paid by Salton for product
purchases from Windmere and its affiliates during the term of the note. During
fiscal 1998, the Company purchased approximately $27.1 million of products from
Windmere. The principal amount of the Junior Subordinated Note is also subject
to reduction in the event Salton's supply agreement with Kmart is terminated for
any reason.
In connection with the Stock Repurchase: (i) Windmere effectively
repaid (the "Note Repayment") in full its promissory note (the "Windmere Note")
in the principal amount of approximately $10.8 million. Note was issued to
Salton in July, 1996; (ii) Salton repurchased (the "Option Repurchase") for
approximately $3.3 million Windmere's option to purchase up to 458,500 shares of
Salton. Which option was granted to Windmere in July, 1996; and (iii) Windmere
and Salton agreed to continue various commercial and other arrangements,
including an agreement relating to Salton's supply agreement with Kmart, subject
to certain modifications. The Stock Repurchase, the Option Repurchase and the
Note Repayment are collectively referred to herein as the "Repurchase."
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On July 28, 1998, Salton entered into a Credit Agreement dated as of
July 27, 1998 (the "New Credit Agreement") among Salton, Lehman Brothers Inc.,
as arranger, and Lehman Commercial Paper Inc., as syndication agent. The New
Credit Agreement provides for $215.0 million in senior secured credit facilities
(the "Senior Credit Facilities") consisting of a $90.0 million Tranche A Term
Loan (the "Tranche A Term Loan"), a $75.0 million Delayed Draw Term Loan (the
"Delayed Draw Term Loan") and a $50.0 million revolving credit facility (the
"Revolving Credit Facility").
On July 28, 1998, Salton also issued (the "Convertible Preferred
Stock Issuance") $40.0 million of Series A Voting Convertible Preferred Stock of
the Company (the "Convertible Preferred Stock") to affiliates of Centre Partners
Management LLC ("Centre Partners") in connection with a Stock Purchase Agreement
dated July 15, 1998 (the "Preferred Stock Agreement"). The Convertible Preferred
Stock is generally non-dividend bearing and is currently convertible into
2,352,941 shares of Salton common stock (reflecting a $17 per share conversion
price). Centre Partners is a private investment firm that manages the
commitments and assets of Centre Capital Investors II, L.P. and related
entities. Centre Capital Investors II, L.P. is a $450 million private equity
fund raised in 1995. Since its inception in 1986, Centre Partners and its
predecessors have invested more than $1.8 billion in nearly 50 separate
investments. The Repurchase, borrowings under the New Credit Agreement and the
Convertible Preferred Stock Issuance are collectively referred to herein as the
"Recapitalization."
PENDING TOASTMASTER ACQUISITION
On August 26, 1998, the Company entered into a definitive merger
agreement to acquire Toastmaster Inc. ("Toastmaster"), a Columbia, Missouri
based manufacturer and marketer of kitchen and small household electrical
appliances and time products (the "Toastmaster Acquisition"). Toastmaster
designs, manufactures, markets and services a wide array of kitchen and small
household electrical appliances and time products under the brand names of
Toastmaster(R) and Ingraham(R).
The consummation of the pending Toastmaster Acquisition is subject
to the satisfaction or waiver of certain conditions, including expiration or
termination of the Hart-Scott-Rodino Act waiting period and the approval of the
holders of 66 2/3% of the outstanding shares of Toastmaster common stock. The
Company currently expects the pending Toastmaster Acquisition to be completed
during the last quarter of calendar 1998. However, there can be no assurance as
to if or when the pending Toastmaster Acquisition will be completed, or that it
will be completed on the terms described herein.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths
contribute to Salton's position as a leading domestic designer and marketer
of small household electrical appliances in the U.S. Housewares industry and
serve as a foundation for the Company's business strategy.
Market Leadership Salton believes that it has the leading U.S.
market share in juice extractors and indoor grills and a significant U.S. market
share in bread bakers and espresso makers. The Company believes that its leading
market share in these product lines provides Salton with a competitive advantage
in terms of demand from major retailers and
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enhanced brand awareness. Through internal and joint product development and
acquisitions of businesses and product lines, the Company has enhanced its
position as a leading supplier in the small household appliance industry.
STRONG BRAND NAMES The Company has built a portfolio of strong brand
names which it utilizes to gain retail shelf space and to introduce new
products. The Salton(R) brand name has been in continuous use since 1947 and the
Maxim(R) brand name since 1970. These names are widely recognized in the small
household appliance industry. In addition, the Company has licensed the right to
use the White-Westinghouse(R) brand name for certain small household electrical
appliances, such as toasters, coffee makers, espresso/cappuccino makers and
bread makers, and distributes certain products under the Farberware(R) brand
name. The Company believes that White-Westinghouse(R) and Farberware(R) are
time-honored traditions throughout the world for certain home appliances and
benefit from strong consumer recognition. Salton also markets products under
other owned and licensed brand names and under private-label brand names such as
Magic Chef(R), Chefmate(R) and Kenmore(R).
BROAD RANGE OF PRODUCTS The Company provides its customers with an
extensive array of product lines across product categories within the small
household appliance industry. Salton designs its products to meet the needs of a
broad range of customers across a breadth of price points. With its breadth of
product offerings, the Company services the needs of a wide range of retailers
and satisfies the different tastes, preferences and budgets of consumers. The
Company believes that as the retail industry continues to consolidate, its
ability to serve retailers with an extensive array of product lines under a
portfolio of strong brand names will continue to become increasingly important
for maintaining shelf space and for introducing new products into the retail
market.
INNOVATION IN PRODUCT DESIGN AND PACKAGING The Company believes that
it has a reputation among its retail customers and consumers for innovation in
product design and packaging, incorporating functional enhancements as well as
aesthetic improvements. The Company designs its products in many contemporary
styles with a wide variety of features. Salton works closely with both retailers
and suppliers to identify consumer needs and preferences and to develop new
products to satisfy such consumer demand. Salton product introductions have
included the first triple function coffee maker in the United States (the Three
For All(R), an espresso/cappuccino/drip coffee maker), George Foreman Grills(R)
and the Wet Tunes(R) shower radios. Various consumer organizations and magazines
have selected a number of the Company's products, including the Breadman(R)
Plus, the Breadman Ultimate(R) and the Kenmore(R) four slice toaster, as top
rated or best buy. The Company also packages its products to increase their
appeal to consumers and to stand out among other brands on retailers' shelves.
Salton believes that distinctive packaging, designed to answer customers'
questions concerning the Company's products, has resulted in increased shelf
space and greater sales.
PRODUCTS
Salton is a leading domestic designer and marketer of kitchen and
small household electrical appliances, tabletop products (including china,
crystal and glassware), time products, gift products, and personal and beauty
care appliances. The Company's portfolio of strong brand names enables the
Company to service the needs of a broad range of retailers and satisfy the
different tastes, preferences and budgets of consumers. Salton designs its
products to meet the needs of a broad range of consumers at a wide range of
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price points. These products include full-featured or upscale models or designs
as well as those which are marketed to budget conscious consumers.
The following table sets forth the approximate amounts and percentages
of the Company's net sales by product category during the periods shown.
[Enlarge/Download Table]
FISCAL YEAR ENDED
(DOLLARS IN THOUSANDS)
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- -------------
PERCENT PERCENT PERCENT
NET SALES OF TOTAL NET SALES OF TOTAL NET SALES OF TOTAL
--------- -------- --------- -------- --------- --------
Kitchen and Home
Appliances $280,607 91.8% $155,972 85.3% $91,479 92.2%
Tabletop Products(1) 18,597 6.1% 16,756 9.2%
Personal and Beauty
Care Appliances, Gifts
and Time Products 6,395 2.1% 10,078 5.5% 7,723 7.8%
-------- ----- -------- ----- ------- -----
$305,599 100.0% $182,806 100.0% $99,202 100.0%
======== ===== ======== ===== ======= =====
(1)The Company entered this category of business in fiscal year 1997
upon the acquisition of substantially all of the assets and certain
liabilities of Block China Corporation, a tabletop product company, on
July 1, 1996. The Block product line was further augmented on June 19,
1997 with the acquisition of the assets of Jonal Crystal Ltd.
KITCHEN AND SMALL HOUSEHOLD ELECTRICAL APPLIANCES
The Company designs and markets an extensive line of kitchen and
small household electrical appliances under the Salton(R), Maxim(R), Breadman(R)
Juiceman(R), George Foreman Grills(R), White-Westinghouse(R) and Farberware(R)
brand names. The Company currently markets approximately 618 stock keeping units
("SKUs") under its brand names in this category. Growth within this product
category has historically been driven primarily by the introduction of new or
enhanced products and the development of the White-Westinghouse(R),
Farberware(R) and other product lines.
The Company's kitchen and small household electrical appliance
product category includes: (i) health conscious products; (ii) thermal products;
(iii) coffee and tea related products; (iv) food preparation products; and (v)
home comfort products.
HEALTH CONSCIOUS PRODUCTS. The Company currently markets
approximately 137 SKUs in its health conscious product subcategory, including a
wide assortment of food preparation products targeted to health conscious
consumers who are interested in preparing foods in a healthy fashion or from
healthy ingredients, ice cream from natural ingredients. These products include
thermal indoor grills, juicers, juice extractors, rice cookers, vegetable
steamers, ice cream makers and yogurt makers.
Representative health conscious products include:
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George Foreman's Lean Mean Fat Reducing Grilling Machines(R), which
grill meat, fish, chicken and vegetables evenly in minutes. The grills are
double non-stick coated and the sloped cooking surfaces with patented grooves
channel away measurable amounts of greasy fats into a separate tray. These
grills are offered in three different sizes.
Juiceman(R) health conscious products include:
The Juiceman(R) Jr, a l/4 horsepower juicer offered at a
competitive price. The machine is designed for fresh and healthy juicing using a
wide variety of fruits and vegetables.
The Juiceman(R) II, a juicer used by many serious health, fitness
and juicing advocates. It has a 1/2 horsepower, 690 watt motor, built-in speed
control, and an extra large feed tube and pulp receptacle.
The Juiceman(R)210 and the Juiceman(R)410 are elite professional
series models with patented dual electronic speed controls.
The Yogurt Maker, a thermostatically controlled unit for producing
homemade yogurt.
The Big Chill(R), a frozen yogurt and ice cream maker.
The Nutritionist(R) line of cool touch sealed environment rice
cookers.
THERMAL PRODUCTS. The Company currently markets approximately 192
SKUs in its thermal products subcategory, including bread bakers, sandwich
makers, toasters, waffle makers, toaster ovens and irons.
Representative thermal products include:
Breadman(R) automatic bread bakers, which are offered in the l-l/2
pound capacity Breadman(R), the 2 pound capacity Breadman Plus(R) and the
Breadman Ultimate(R). These bread machines are computer-chip controlled and
pre-programmed to automatically control the entire bread making process based on
preferences selected by the consumer, including cycle times for mixing,
kneading, rising and baking healthy, whole grain breads. The consumer just needs
to add the ingredients and set the proper cycle to bake the bread. A window
allows the consumer to see the entire bread making process without opening the
lid. The machines have a programmable timer that allows a preset bake time up to
twelve hours in advance. Additionally, the Breadman Ultimate(R) has advanced
software and patented features. It includes over 100 programs, pause buttons and
a patented integrated fruit, nut and herb dispenser.
Thermal products also include the Salton Snack 'N' Sandwich maker
series as well as a range of toasters, including Cool Touch toasters and toaster
ovens offered under the Salton(R), Maxim(R), White-Westinghouse(R) and
Farberware(R) brand names.
COFFEE AND TEA RELATED PRODUCTS. The Company currently markets
approximately 178 SKUs in its coffee and tea related product subcategory,
including combination espresso/cappuccino/drip coffee makers, coffee makers,
coffee urns, coffee percolators, ice tea/ice coffee makers and a broad range of
coffee related accessories.
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Representative coffee and tea related products include:
1,2,3 Spresso(R), a patented, easy to use espresso/cappuccino coffee
maker. This machine has a vertical brewing system and operates cleanly,
utilizing espresso coffee pods that are vacuum packed for freshness. The pods
are fully bio-degradable. The product is simple to operate and a novice maker of
espresso/cappuccino can operate the product in minutes.
The Three For All(R), a combination espresso/cappuccino/drip coffee
maker with a patented 2 cup adapter for direct cappuccino-espresso brewing. The
Company believes that the Three For All(R) coffee/cappuccino maker resulted in
the creation of a new product category in the small kitchen appliance industry.
The Cappuccino Espresso(R), a line of cappuccino espresso makers
which make two to four cups of espresso in minutes. The patented steam jet
froths milk for cappuccino while the coffee brews.
In addition, the Company offers coffee urns providing up to 55 cups
of coffee and percolators under the well recognized Farberware(R) brand name.
Coffee related accessories include coffee mills and grinders, mug warmer sets,
electric kettles and replacement carafes.
FOOD PREPARATION PRODUCTS. The Company currently markets
approximately 97 SKUs in its food preparation product subcategory, including
electric woks, crepe makers, mixers, can openers, blenders, hand-held blenders,
choppers and warming trays.
Representative food preparation products include:
The Professional Wok, consisting of a 6-1/2 quart capacity die-cast
aluminum body with a heavy gauge aluminum dome cover. A patented 1600 watt
heating element design allows for even heat distribution for successful cooking
with an electric wok.
The Electric Brunch Pan, an electric pan with thick aluminum for
uniform heat distribution, an easy to clean non-stick coating and a ready light
to indicate proper cooking temperatures.
The Donut Bites(R), an electric donut maker, makes six light, crispy
baked donuts, and other dessert creations. It has a cool touch housing and
non-stick surface for easy use.
Food preparation products have been expanded to offer a range of
these type of basic appliances under the White-Westinghouse(R) and Farberware(R)
brand names.
HOME COMFORT PRODUCTS. The Company currently markets approximately
14 SKUs in its home comfort products subcategory, consisting of fans, fan
heaters and humidifiers marketed under the White-Westinghouse(R) brand name.
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TABLETOP PRODUCTS
The Company currently markets approximately 2,218 SKUs under its
brand names in this product category.
The Company entered this category of business in fiscal year 1997 to
add a complementary product line to its kitchen and home small appliances. The
Block(R) China division of the Company designs and markets tabletop products
including china, crystal and glassware. The Block product line was further
augmented on June 19, 1997 with the acquisition of the assets of Jonal Crystal
Ltd. Jonal products include the Crystal Kiss(R) line of glassware and giftware
featuring the famous shape of the Hershey's Chocolate Kiss.
Tabletop products include crystal products offered under the
Block(R), Atlantis(R) and Jonal(R) brand names, fine china and basic dinnerware
in various designs and patterns under the Block(R) brand name and ceramic
products under the Block(R) brand name. In addition, Block(R) provides the
Gear(R) line of products including Father Christmas(R), Country Farm(TM),
Country Orchard(TM), and Country Village(TM).
PERSONAL AND BEAUTY CARE APPLIANCES, GIFTS AND TIME PRODUCTS
The Company currently markets approximately 129 SKUs in the personal
and beauty care appliances, gifts and time products category. Salton
Creations(R) hair dryers feature high quality materials, long life motors and
high air flow systems. Hair dryers are offered in various sizes, shapes and
colors, and are designed to mix form and function to enable consumers to
correctly address power and heat to hair type and styling needs.
The Company designs and markets a variety of other personal and
beauty care appliances under the Salton Creations(R) brand name, including
curling irons and brushes, make-up mirrors, massagers, manicure systems and
shower radios. The Wet Tunes(R) series of shower radios, introduced under the
Salton(R) brand name in 1984, features an AM/FM radio with waterproof mylar
speakers and wall mount brackets. Wet Tunes(R) radios are offered in several
different shapes, sizes and colors. Also included in this series are the Wet
Reflections(R), which has a light and fog-free mirror, the Wet Cassette(R) and
the Wet Lantern(R). In addition to Salton Creations(R), the Company began
offering the appliances under the White-Westinghouse(R) brand name in fiscal
year 1997.
The Company also has a "gifts" program designed for department
stores. Under this program, the Company provides department stores with
practical, special occasion, small gift products. The Company's gifts programs
include the mini tool kit, calcutape, travel smoke alarm, emergency auto
flasher, deluxe art kit and the 7-piece gardening kit.
The Company's Salton Time(R) products include decorative quartz wall
and alarm clocks and have approximately 203 SKUs. Salton Time(R) has introduced
a number of innovative products such as the waterproof Wet Times(R)
indoor/outdoor clock.
NEW PRODUCT DEVELOPMENT
The Company believes that the enhancement and extension of the
Company's existing products and the development of new products are necessary
for the Company's continued success and growth. The Company directs the style,
features and functionality of its products to meet customer requirements for
quality, performance, product mix and pricing.
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Salton works closely with both retailers and suppliers to identify consumer
needs and preferences and to generate new product ideas. Salton's product design
and engineering department evaluates new ideas and seeks to develop new products
and improvements to existing products to satisfy industry requirements and
changing consumer preferences.
During fiscal 1998, the Company introduced 175 new SKUs in the
kitchen and small household electrical appliance products category, 65 in the
personal and beauty care, gifts and time products category and 635 new SKUs in
the tabletop products category.
During fiscal 1997, the Company introduced 173 new SKUs in the
kitchen and small household electrical appliance household products category and
59 SKUs in the personal and beauty care, gifts and time products category. The
introduction of products under the White-Westinghouse(R) and Farberware(R)
brands added approximately 74 of these new SKUs.
MARKETING AND DISTRIBUTION
The Company markets its products throughout the United States under
its brand names of Salton(R), Maxim(R), Breadman(R), Juiceman(R), Salton
Creations(R) Salton Time(R), George Foreman Grills(R), White Westinghouse(R),
Farberware(R), Block(R) China, Atlantis(R) and Gear(R), primarily to mass
merchandisers, department stores, direct mail catalogs and showrooms and other
direct distribution channels. The Company is also expanding its retailer base
for certain of its products to include drug stores and other mass merchandisers,
as well as additional retailers within its existing channels of distribution.
In addition to directing its marketing efforts toward retailers, the
Company sells certain of its products, primarily Juiceman(R) fresh juice
extractors and the George Foreman Grills(R), direct to consumers via the
internet and through the use of paid half-hour television programs commonly
referred to as "infomercials." The Company also provides promotional support for
its products with the aid of national television, radio and print advertising,
cooperative advertising with retailers, and in-store displays and product
demonstrations. The Company believes that these promotional activities are
important to strengthening the Company's brand name recognition.
The Company's products are sold to consumers through major
retail channels, primarily mass merchandisers, department stores, specialty
stores, direct mail catalogs and showrooms and other direct distribution
channels. The Company continually monitors and evaluates the credit status of
its customers and attempts to adjust sales terms as appropriate. Certain of the
Company's retail customers, such as HomePlace Stores, Inc. and Venture, have
filed for bankruptcy protection in fiscal 1998. However, a significant
concentration of the Company's business activity is with entities whose ability
to meet their obligations with the Company is dependent upon prevailing
economic conditions within the retail industry.
The Company relies on its management's ability to determine the
existence and extent of available markets for its products. The Company's
management has extensive marketing and sales backgrounds and devotes a
significant portion of its time to marketing-related activities. The Company
markets its products primarily through its own sales force and approximately 190
independent sales representatives. The Company's representatives are located
throughout the United States and Canada and are paid a
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commission based upon sales in their respective territories. The Company's sales
representative agreements are generally terminable by either party upon 30 days
notice.
The Company directs its marketing efforts toward retailers and
believes that obtaining favorable product placement at the retail level is an
important factor in its business, especially when introducing new products. In
an effort to provide its retail customers with the highest level of customer
service, the Company has an advanced electronic data interchange system to
receive customer orders and transmit shipping and invoice information
electronically. This system is also used by management to monitor point-of sale
information at certain accounts.
The Company also emphasizes the design and packaging of its products
in order to increase their appeal to consumers and to stand out among other
brands on retailers' shelves. The Company believes that distinctive packaging,
designed to answer consumers' questions concerning the Company's products, has
resulted in increased shelf space and greater sales. Some of the Company's
products are sold with recipe books and VHS Video Manuals(R) to provide step by
step guidelines for the use and care of such products.
The Company's total net sales to its five largest customers during
fiscal 1998 and 1997 were 47% and 47%, respectively, of its net sales. In 1997,
the Company entered into a seven-year supply agreement with Kmart for Kmart to
purchase, distribute, market and sell a broad range of kitchen and small
household electrical appliances under the White-Westinghouse(R) brand name.
Kmart is the exclusive United States discount department store to market these
White-Westinghouse(R) products. The supply agreement provides Kmart sole
distribution rights to the White-Westinghouse(R) brand name for the mass
merchandiser market, but does allow distribution through other retail channels
under certain conditions. During fiscal 1998, Kmart purchased approximately
$58.9 million of products from Salton pursuant to the supply agreement, which
accounted for approximately 19% of Salton's net sales.
The supply agreement with Kmart provides for minimum purchases by
Kmart, which increase through the term of the supply agreement, and for the
payment of penalties for shortfalls. In the event that aggregate U.S. retail
sales in the consumer electronics industry for any specified category decrease
by more than 10% in any year from that sold in the prior year, Kmart has the
right to reduce the minimum purchase requirements for such category to an amount
not less than 80% of the minimum for such period. The Company pays Windmere a
fee based upon the Company's net sales less specified costs and expenses
relating to the Kmart supply agreement in consideration of Windmere's guarantee
of the Company's obligations under the supply agreement.
SOURCES OF SUPPLY
Most of the Company's products are manufactured to the Company's
specifications by over 45 unaffiliated manufacturers located primarily in Far
East locations, such as Hong Kong, the People's Republic of China and Taiwan,
and in Europe. Many of these suppliers are ISO 9000 certified. The Company
believes that it maintains good business relationships with its overseas
manufacturers. The Company also assembles woks and warming 6 trays in its plant
located in Kenilworth, New Jersey.
The Company does not maintain long-term purchase contracts with
manufacturers and operates principally on a purchase order basis. The Company
believes that it is not
12
currently dependent on any single manufacturer for any of its products.
However, during fiscal 1998, three manufacturers located in China accounted for
approximately 12.7%, 12.4% and 10.1% respectively, of the Company's product
purchases. The Company believes that the loss of any one manufacturer would not
have a long term material adverse effect on the Company because other
manufacturers with which the Company does business would be able to increase
production to fulfill the Company's requirements. However, the loss of a
supplier could, in the short term, adversely effect the Company's business
until alternative supply arrangements were secured.
The Company's purchase orders are generally made in United States
dollars in order to maintain continuity in the Company's pricing structure and
to limit exposure to currency fluctuations. The Company's policy is to maintain
an inventory base to service the seasonal demands of its customers. In certain
instances, the Company places firm commitments for products from six to twelve
months in advance of receipt of firm orders from customers.
Quality assurance is particularly important to the Company and its
product shipments are required to satisfy quality control tests established by
its internal product design and engineering department. The Company employs
independent agents to perform quality control inspections at the manufacturers'
factories during the manufacturing process and prior to acceptance of goods.
COMPETITION
The Company's industry is mature and highly competitive. Competition is
based upon price, access to retail shelf space, product features and
enhancements, brand names, new product introductions, marketing support and
distribution approaches. The Company competes with established companies, some
of which have substantially greater facilities, personnel, financial and other
resources than those of the Company. In the sale of kitchen and small household
electrical appliances, the Company competes with, among others, Toastmaster,
Rival, Hamilton Beach, Krups, Rowenta, Black and Decker, Windmere-Durable and
Sunbeam/Oster. In the sale of tabletop products, the Company competes with,
among others, Mikasa, Lenox, Miller Rogaska, Villeroy Boch, Waterford Crystal
and Baccarat Crystal. In the sale of personal and beauty care appliances, the
Company principally competes with, among others, Clairol, Inc. (wholly-owned
subsidiary of Bristol-Myers Squibb Company), Conair Corporation, Vidal Sassoon,
Windmere-Durable, Helen of Troy and Andis.
The Company believes that its success is dependent on its ability to
offer a broad range of existing products and to continually introduce new
products and enhancements to existing products which have substantial consumer
appeal based upon price, design, performance and features. The Company also
believes that its trademarks, particularly Salton(R), Maxim(R), Breadman(R),
Juiceman(R), Salton Creations(R) and Salton Time(R), and Block(R) are important
to its ability to compete effectively. The Company further believes that the
White-Westinghouse(R) and Farberware(R) brand names give it the additional
capability to provide consumers with appealing, well priced products to meet
competition.
EMPLOYEES
As of June 27, 1998, the Company employed 219 persons, of whom
approximately 54 persons, who work at the Company's Kenilworth, New Jersey
facility, were covered by a collective bargaining agreement which expires on
February 28, 1999. The Company generally
13
considers its relationship with its employees to be satisfactory and has never
experienced a work stoppage.
REGULATION
The Company is subject to federal, state and local regulations
concerning the environment, occupational safety and health, and consumer
products safety. In general, the Company has not experienced difficulty
complying with such regulations and compliance has not had an adverse effect on
the Company's business. Most of the Company's products are listed by UL.
Satisfaction of the standards of UL for the Company's consumer electrical
appliances is important to the Company and the Company has not experienced
difficulty in satisfying such standards.
BACKLOG
Orders for the Company's products are typically subject to cancellation
until shipment. Customer order patterns vary from year to year, largely because
of annual differences in consumer acceptance of product lines, product
availability, marketing strategies, inventory levels of retailers and
differences in overall economic conditions. As a result, comparisons of backlog
as of any date in a given year with backlog at the same date in a prior year
are not necessarily indicative of sales for that entire given year. As of June
27, 1998, the Company had a backlog of approximately $275.0 million compared to
approximately $83.0 million as of June 28, 1999. The Company does not believe
that backlog is necessarily indicative of the Company's future results of
operations or prospects.
SEASONALITY OF BUSINESS
The Company's business is highly seasonal, with operating results
varying from quarter to quarter. The Company has historically experienced
higher sales during the months of August through November primarily due to
increased demand by customers for the Company's products attributable to
holiday sales.
TRADEMARKS, PATENTS AND LICENSING ARRANGEMENTS
The Company holds a number of patents, including design patents, and
trademarks registered in the United States and foreign countries for various
products and processes. The Company has registered certain of its trademarks
with the United States Patent and Trademark Office. The Company considers these
trademarks to be of considerable value and of material importance to its
business. However, the Company believes that none of the Company's product
lines is dependent upon any single patent or group of patents.
During 1996, the Company entered into license agreements with WCI for
use of the White-Westinghouse(R) trademark for small kitchen appliances,
personal care products, fans, heaters, air cleaners and humidifiers. The
license agreements grant the Company the exclusive right and license to use the
White-Westinghouse(R) trademark in the United States and Canada in exchange for
certain license fees, royalties and minimum royalties. The license agreements
also contain minimum sales requirements which, if not satisfied, may
14
result in the termination of the agreements. Each license agreement is also
terminable upon one-years notice at any time on or after the fifth anniversary
of the agreement or upon a breach by the Company.
The Company has a joint venture agreement with George Foreman Products,
Inc., a Nevada corporation, and Benjamin H., a California corporation (the
"Joint Venture"). The Joint Venture is engaged solely in the business of
acquiring, selling and distributing thermal household grill products under
the name "George Foreman's Lean Mean Fat Reducing Grilling Machine." Mr.
Foreman is both a former Olympic champion and a former World Boxing
Organization's heavyweight champion of the world.
In the second quarter of fiscal 1997, the Company obtained the
exclusive, worldwide right to distribute Farberware(R) small electric
appliances. Farberware(R) is a time-honored trade name in the cookware and
small electric appliance industry.
The Company has other licensing arrangements with various other
companies to market products bearing the trademark or likeness of the subject
matter of the license. These licenses include the right to market various
products under Gino's East Pizza, Gear, Taco Bell(R), Hershey Kiss(R), Looney
Tunes(R), Andy Warhol, Marilyn Monroe, James Dean and Campbell Soup(R). The
Company believes that these other license arrangements help to demonstrate its
creativity and versatility in product design and the enhancement of existing
products. However, the Company does not believe that its product lines are
dependent upon any single license or group of other licenses.
In general, the Company's joint venture and licensing arrangements
place commercialization obligations on the Company in exchange for varying fees
and royalties based upon net sales or profits. Typically, each of these
agreements is terminable if certain minimum commercialization obligations are
not satisfied or upon breach by the Company.
WARRANTIES
The Company's products are generally sold with a limited one-year
warranty from the date of purchase. In the case of defects in material or
workmanship, the Company agrees to replace or repair the defective product
without charge. To date, the Company has not experienced significant warranty
claims.
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 the Company and its business before purchasing its
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 "Disclosure Regarding Forward-Looking Statements." The factors
listed below represent certain important factors the Company believes 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 the Company. It
should be recognized that other
15
risks may be significant, presently or in the future, and the risks set forth
below may affect the Company to a greater extent than indicated. Business and
other risks described herein as applicable to Salton are generally also
applicable to Toastmaster.
SUBSTANTIAL LEVERAGE. The Company is highly leveraged. In addition, the
Company will have to incur substantial additional indebtedness to consummate
the Toastmaster Acquisition. The degree to which the Company is leveraged
could, among other things: (i) increase the Company's vulnerability to general
adverse economic and industry conditions; (ii) limit the Company's ability to
obtain additional financing to fund future working capital, capital
expenditures or other general corporate requirements; (iii) require the
dedication of a substantial portion of the Company's cash flow from operations
to the payment of principal of, and interest on, its indebtedness, thereby
reducing the availability of such cash flow to fund working capital, capital
expenditures or other general corporate purposes; (iv) limit the Company's
flexibility in planning for, or reacting to, changes in its business and the
industry in which it competes; and (v) place the Company at a competitive
disadvantage vis-a-vis less leveraged competitors. In addition, the New Credit
Agreement contains financial and other restrictive covenants that will limit
the ability of the Company to, among other things, borrow additional funds.
Failure by the Company to comply with such covenants could result in an event
of default which, if not cured or waived, could have a material adverse effect
on the Company's business, financial condition and results of operations. If
the Company cannot generate sufficient cash to meet its obligations as they
become due or refinance such obligations, the Company may have to sell assets
or reduce capital expenditures.
RISKS RELATING TO THE TOASTMASTER ACQUISITION
Uncertainties Regarding Consummation. Consummation of the pending
Toastmaster Acquisition is subject to the satisfaction or waiver of certain
conditions, including the expiration or termination of the Hart-Scott-Rodino
Act waiting period and the approval of the holders of 66 2/3% of the
outstanding shares of Toastmaster common stock. Salton anticipates that the
Toastmaster Acquisition will be completed in the last quarter of calendar 1998.
However, there can be no assurance as to if, or when, the pending Toastmaster
Acquisition will be completed, or that it will be completed on the terms
described herein.
Integration of Toastmaster. There can be no assurance that the Company
will successfully integrate Toastmaster with the Company's business operations.
The full benefits of the Toastmaster Acquisition will require the integration
of administrative, finance, purchasing, product development and sales and
marketing organizations. The integration will also require the implementation
of appropriate operational, financial, and management systems and controls.
There can be no assurance that the Company will not encounter difficulties in
expanding its financial controls and reporting systems to meet the Company's
future needs. If the Company fails to successfully integrate the operations of
Salton and Toastmaster, or if anticipated revenue enhancements and cost savings
are not realized, the Company's business, results of operations and financial
condition would be materially adversely affected.
Limited Manufacturing Experience. Except for the assembly of certain
products in its Kenilworth, New Jersey plant, the Company arranges for the
manufacture of most of its products with manufacturers located overseas,
primarily in the Far East and Europe.
16
Toastmaster manufactures toasters, toaster-oven-bakers and electric heating
elements at its owned plant in Macon, Missouri. Toastmaster also manufactures
time products at its owned plant in Laurinburg, North Carolina. Salton
currently expects to continue manufacturing certain products at these plants
after the Toastmaster Acquisition is consummated. The manufacturing of these
products will subject Salton to certain additional risks, including those
relating to the price and availability of raw materials and environmental
concerns. There can be no assurance that the Company will be able to
manufacture products successfully and in a cost effective manner.
Reliance on Certain Customers. Toastmaster's revenues in the aggregate
with respect to its five largest customers during 1995, 1996 and 1997 were
approximately 45.7%, 42.8% and 44.0%, respectively, of its net sales. During
1995, 1996 and 1997, Wal-Mart (including Sam's Clubs) accounted for
approximately 29.0%, 27.0% and 27.0%, respectively, of Toastmaster's net sales.
Although Toastmaster has long-established relationships with many of its
customers, Toastmaster does not have long-term supply contracts with them. A
decrease in business from any of Toastmaster's major customers could have a
material adverse effect on the Company's business, results of operations and
financial condition if the Toastmaster Acquisition is consummated.
DEPENDENCE ON MAJOR CUSTOMERS. The Company's total net sales to its
five largest customers during fiscal 1998 were approximately 47% of its net
sales in fiscal 1998, with its largest customer, Kmart, representing
approximately 19% of its net sales in fiscal 1998. Except for the Company's
supply agreement with Kmart, the Company does not have long-term agreements
with its major customers, and purchases are generally made through the use of
individual purchase orders. A significant reduction in purchases by any of
these customers or a general economic downturn in retail sales could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH DEVELOPMENT OF NEW PRODUCTS. The Company believes
that its future success will depend in part upon its ability to continue to
introduce innovative designs in its existing products and to develop,
manufacture and market new products. There can be no assurance that Salton will
be successful in the introduction, marketing and manufacture of any new
products or product innovations or that it will be able to develop and
introduce in a timely manner innovations to its existing products which satisfy
customer needs or achieve market acceptance. The failure to develop products
and introduce them successfully and in a timely manner could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON FOREIGN SUPPLIERS. The Company is dependent upon
unaffiliated foreign companies for the manufacture of most of its products. The
Company's arrangements with its manufacturers are subject to the risks of doing
business abroad, such as import duties, trade restrictions, production delays
due to unavailability of parts or components, transportation delays, work
stoppages, foreign currency fluctuations, political instability and other
factors which could have an adverse effect on the Company's business, financial
condition and results of operations. Salton believes that the loss of any one
or more of its suppliers would not have a long term material adverse effect on
the Company, because other manufacturers with whom the Company does business
would be able to increase production to fulfill the Company's requirements.
However, the loss of certain of the Company's suppliers could, in the short
term, adversely affect the Company's business until alternative supply
arrangements were secured.
17
During fiscal 1998, three manufacturers located in China accounted for
approximately 12.7%, 12.4% and 10.1%, respectively, of the Company's product
purchases. China currently enjoys most-favored-nation ("MFN") trading status
granted by the United States, pursuant to which the United States imposes the
lowest applicable tariffs on Chinese exports to the United States. The United
States annually reconsiders the renewal of MFN trading status for China. No
assurance can be given that China's MFN trading status will be renewed in
future years. If MFN status for goods produced in China were removed, there
would be a substantial increase in tariffs imposed on goods of Chinese origin
entering the United States, including those manufactured for the Company, which
could have a material adverse impact on the Company's business, financial
condition and results of operations.
RETAIL INDUSTRY. The Company's products are sold to consumers through
major retail channels, primarily mass merchandisers, department stores,
specialty stores, direct mail catalogs and showrooms and other direct
distribution channels. As a result, the Company's business and financial
results can fluctuate with the financial condition of its retail customers and
the retail industry generally. Certain of the Company's retail customers, such
as HomePlace Stores, Inc. and Venture, have filed for bankruptcy protection in
recent years. The Company continually monitors and evaluates the credit status
of its customers and attempts to adjust sales terms as appropriate. Despite
these efforts, a bankruptcy filing by a significant customer could have a
material adverse effect on the Company's business, financial condition and
results of operations.
SUPPLY AGREEMENT WITH KMART. In January 1997, Salton entered into a
seven-year major supply agreement with Kmart for Kmart to purchase, distribute,
market and sell a broad range of kitchen and small household electrical
appliances under the White-Westinghouse(R) brand name licensed to Salton by
White Consolidated Industries, Inc. ("WCI"). Kmart is the exclusive discount
department store to market these White-Westinghouse(R) products.
The initial term of the supply agreement between Salton and Kmart is
through June 30, 2004; however, the agreement allows for termination prior to
such time for specified reasons, including (i) the termination of a supply
agreement between Kmart and Newtech Electronics Industries, Inc. ("Newtech"), a
50% subsidiary of Windmere, and (ii) without cause after June 30, 2002, by
giving advance written notice. The supply agreement between Kmart and Newtech
covers certain consumer electronic products sold under the
White-Westinghouse(R) name and has an initial term and termination provisions
which are substantially identical to those in Salton's supply agreement with
Kmart. Salton has no interest in Newtech or Newtech's supply agreement with
Kmart. The termination of the supply agreement between Kmart and Newtech would
nonetheless give Kmart the right to terminate the supply agreement between
Salton and Kmart. Furthermore, the supply agreement between Salton and Kmart
allows Kmart to terminate the agreement on the basis of any claim which Kmart
reasonably believes impairs or would impair Kmart's ability to receive the
benefits of its supply agreement with Salton or Newtech, whether relating to
any or all products. Although the Trademark Litigation (see "Legal Proceedings"
below) was pending prior to the execution of the supply agreement between
Salton and Kmart, if Kmart were to view the Trademark Litigation as a claim
which it reasonably believes would impair its ability to receive the benefits
of its agreement with Salton or Newtech, it could terminate the supply
agreement between Salton and Kmart. During fiscal 1998, Kmart purchased
approximately $58.9 million of products from Salton, which accounted for
approximately 19% of the Company's net sales. The termination of the supply
agreement between Salton and Kmart, or any significant modification thereof,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
18
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. Salton continues to look
for opportunities to acquire businesses and product lines that fit within its
acquisition strategy. To that end, the Company has had, and continues to have,
discussions with acquisition candidates. The level of this activity will vary
from time to time depending on the type of acquisition candidates identified by
the Company. The Company's ability to accomplish its strategy will depend upon
a number of factors including, among other things, the Company's ability to
identify acceptable acquisition candidates, to acquire the necessary funds for
such acquisitions, to consummate such acquisitions on terms favorable to the
Company and to promptly and profitably integrate the acquired operations into
the Company's operations.
Acquiring additional businesses and product lines may require
additional capital and the consent of the Company's lenders and may have a
significant impact on the Company's financial position and results of
operations. Any such acquisitions may involve the issuance of additional debt,
subject to certain restrictions in the Indenture and the New Credit Agreement.
Acquisitions could result in substantial amortization charges to the Company
from the accumulation of goodwill and other intangible assets which could
reduce reported earnings. There can be no assurance that the Company will be
successful in identifying acceptable acquisition candidates or that any
acquired operations will be profitable or will be successfully integrated into
the Company or that any such future acquisitions will not materially and
adversely affect the Company's business, financial condition and results of
operations. Opportunities for growth through acquisitions, future operating
results and the success of acquisitions may be subject to the effects of, and
changes in, United States and foreign trade and monetary policies, laws and
regulations, political and economic developments, inflation rates, and the
effect of taxes and operating conditions.
COMPETITION. See "Competition" above for information regarding certain
competition risks.
DEPENDENCE ON KEY PERSONNEL. The continued success of the Company will
depend significantly on the efforts and abilities of its executive officers:
David C. Sabin, Chairman; Leonhard Dreimann, Chief Executive Officer; and
William B. Rue, President, Chief Operating Officer and Chief Financial Officer.
In connection with the Recapitalization, Messrs. Sabin, Dreimann and Rue
entered into new employment agreements with Salton which provide for their
continued employment in their present capacities. The loss of the services of
one or more of these individuals could have a material adverse effect on the
business of the Company. In addition, as the Company's business develops and
expands, the Company believes that its future success will depend greatly on
its ability to attract and retain highly qualified and skilled personnel. The
Company does not have, and does not intend to obtain, key-man life insurance on
its executive officers.
CONCENTRATION OF OWNERSHIP. As of July 28, 1998, Centre Partners and
its affiliates own 40,000 shares of Convertible Preferred Stock, which are
currently convertible into 2,352,941 shares of Salton common stock. Each holder
of the Convertible Preferred Stock is entitled to one vote for each share of
Salton common stock which such holder could receive upon conversion of the
Convertible Preferred Stock. Accordingly, Centre Partners and its affiliates
currently hold approximately 26.4% of the total voting power of the Company. As
of September 15, 1998, the executive officers of the Company and entities
affiliated with
19
these officers own in the aggregate approximately 18.0% of the outstanding
shares of Salton common stock (assuming conversion of the Convertible Preferred
Stock, but excluding outstanding options). Consequently, in the event that
these stockholders vote together, they will be able to exercise significant
influence with respect to the election of directors or major corporate
transactions such as a merger or sale of all or substantially all of the
Company's assets, which transactions may result in a Change of Control under
the Indenture. Pursuant to the Preferred Stock Agreement, Centre Partners
generally has the right to designate two directors as long as it and its
affiliates own at least 12.5% of the total voting power of the Company and one
director as long as it and its affiliates own at least 7.5% of the total voting
power of the Company.
20
ITEM 2. PROPERTIES
The Company does not own any facilities. A summary of the Company's
leased properties is as follows:
LOCATION DESCRIPTION AREA(SQ. FT.) EXPIRATION
-------- ----------- ------------- ----------
Mt. Prospect, IL Executive
offices,
warehousing and
repair facility 34,600 June 30, 1999
Rancho Dominguez, CA Warehouse and
distribution
facility 340,672 October 31, 2002
Harrison, NJ Warehouse and
distribution facility 146,555 May 31, 2002
Kenilworth, NJ Manufacturing
and
warehouse/distribution
facilities 97,800 March 31, 2000
Long Beach, CA Warehouse and
distribution
facility 34,328 March 14, 1998
New York, NY Block sales office 11,500 December 31, 1998
Gurnee, IL Retail outlet 6,141 January 31, 2000
Mt. Prospect, IL Consumer Services 3,018 June 30, 1999
Long Branch, NJ Retail outlet 1,200 Month-to-month
Chicago, IL Block Atlantis
retail store 560 October 31, 2007
ITEM 3. LEGAL PROCEEDINGS
In November 1996, WCI filed suit for injunctive relief and damages
against CBS in the United States District Court for the Northern District of
Ohio alleging that CBS's grant of licenses to the Westinghouse(TM) name for use
on lighting products, fans and electrical accessories for use in the home
violates WCI's rights to the Westinghouse(TM) name to a third party and
constitutes a breach of the agreements under which CBS's predecessor sold WCI
its appliance business and licensed certain trademark rights in 1975. In
response to that suit, CBS filed a related action in December 1996 in the United
States District Court for the Western District of Pennsylvania, naming WCI,
Windmere, Salton, Newtech and certain other parties as defendants. The two
actions have now been consolidated in the Pennsylvania court. A trial date of
June 21, 1999 has been set by the court. CBS seeks an injunction prohibiting
the Company, Newtech and WCI from using the White-Westinghouse(R) name on
products not specifically enumerated in the sale documents between CBS's
predecessor and WCI, and unspecified damages and attorneys' fees. An adverse
decision in the Trademark Litigation could result in the Company and Newtech
being limited
21
in further use of the White-Westinghouse(R) name and therefore the possible
termination or significant modification of the supply agreement between the
Company and Kmart.
The legal costs that may be incurred in defending against this action
could be substantial. In addition, the litigation could be protracted and
result in diversion of management and other resources of the Company. WCI is
currently defending the Company in this action. There can be no assurance that
WCI will prevail in its lawsuit, or that WCI, the Company and their
co-defendants will prevail in their defense of CBS's lawsuit. In the event that
a favorable outcome for the Company is not obtained, the Company intends to
vigorously pursue its right to indemnification under indemnification provisions
in the license agreements between WCI and the Company relating to the
White-Westinghouse(R) brand name. There can be no assurance that WCI will agree
on the scope of the indemnity, or that any such indemnity payment which may
become due to the Company will be paid fully or in a timely fashion or at all.
Related proceedings have also been commenced before the Trademark Board
in opposition to WCI's and CBS's efforts to register certain uses of the
Westinghouse(TM) and White-Westinghouse(R) names. Such proceedings have been
stayed pending resolution of the Trademark Litigation in the Pennsylvania
court. Even if the Trademark Litigation is resolved in the Company's favor, it
is possible that the proceedings before the Trademark Board will continue and
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
The Company is a party to various other actions and proceedings
incident to its normal business operations. The Company believes that the
outcome of such litigation will not have a material adverse effect on the
financial condition or results of operations of the Company. The Company also
has product liability and general liability insurance policies in amounts it
believes to be reasonable given its current level of business. 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 it is
not insured.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The registrant's Common Stock is traded on the NASDAQ National Market
under the symbol "SALT". The following table sets forth the range of high and
low bid prices of the Common Stock for the years ended June 27, 1998 and June
28, 1997 as reported by the NASDAQ system.
High Low
---- ---
YEAR ENDED JUNE 27, 1998
First Quarter 10 6 1/2
Second Quarter 11 7 1/4
Third Quarter 11 1/4 8
Fourth Quarter 13 7/8 9 7/8
YEAR ENDED JUNE 28, 1997
First Quarter 8 5/8 4 1/2
Second Quarter 8 3/4 6 1/4
Third Quarter 9 5 5/8
Fourth Quarter 8 1/4 6 3/8
As of September 18, 1998, there were approximately 370 holders of
record of the common stock of the Company. The Company has paid no dividends on
the Common stock and it is the Company's present intention to retain earnings to
finance the expansion of its business. The Company's New Credit Agreement
further restricts its ability to pay dividends.
PREFERRED STOCK
In connection with the Recapitalization, the Company issued 40,000
shares of the Convertible Preferred Stock. The Convertible Preferred Stock is
generally non-dividend bearing; however, if the Company breaches in any material
respect any of its material obligations in the Preferred Stock Agreement or the
Certificate of Incorporation relating to the Convertible Preferred Stock, the
holders of Convertible Preferred Stock are entitled to receive quarterly cash
dividends on each share of Convertible Preferred Stock from the date of such
breach until it is cured at a rate per annum equal to 12 1/2% of the Liquidation
Preference (as defined below). The payment of dividends is limited by the New
Credit Agreement.
Each holder of the Convertible Preferred Stock is generally entitled to
one vote for each share of Salton common stock which such holder could receive
upon the conversion of the Convertible Preferred Stock. Each share of
Convertible Preferred Stock is convertible at any time into that number of
shares of Salton common stock obtained by dividing $1,000 by the Conversion
Price in effect at the time of conversion. The "Conversion Price" is equal to
$17.00, 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 the Company to redeem
such shares at a redemption price equal to the Liquidation Preference plus an
amount equivalent to interest accrued thereon at a rate of 7% per annum
compounded annually on each anniversary date of July 28, 1998 for the period
from July 28, 1998 through the earlier of the date of such redemption or July
28, 2003.
In the event of a liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of the Convertible Preferred
Stock are entitled to be paid out of the assets of the Company available for
distribution to its stockholders an amount in cash equal to $1,000 per share,
plus the amount of any accrued and unpaid dividends thereon (the "Liquidation
Preference"), before any distribution is made to the holders of any Salton
common stock or any other of Salton's capital stock ranking junior as to
liquidation rights to the Convertible Preferred Stock.
23
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 Salton's common stock for a specified 20
consecutive trading day period is greater than or equal to 200% of the then
current Conversion Price. On September 15, 2008, the Company will be required to
exchange all outstanding shares of Convertible Preferred Stock at a price equal
to the Liquidation Performance per share, payable at the Company's option in
cash or shares of Salton common stock.
As of September 21, 1998, there were 40,000 shares of the Convertible
Preferred Stock outstanding held by 7 shareholders of record. There is no
established market for the Convertible Preferred Stock.
24
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for Salton/Maxim
Housewares, Inc. is derived from the Company's audited financial statements. The
following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited financial statements and related notes thereto.
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data.)
[Enlarge/Download Table]
June 27, June 28, June 29, July 1, July 2,
1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
Net sales $305,599 $182,806 $ 99,202 $ 76,991 $ 48,807
Cost of sales 179,376 121,590 66,923 55,552 37,333
Distribution expenses 12,327 7,809 5,856 4,569 3,412
-------- -------- -------- -------- ---------
Gross profit 113,896 53,407 26,423 16,870 8,062
Selling, general, and administrative
expenses 84,216 42,944 21,343 13,142 8,470
-------- -------- -------- -------- ---------
Operating income (loss) 29,680 10,463 5,080 3,728 (408)
Interest expense, net (5,333) (4,063) (3,934) (3,057) (2,047)
Costs associated with refinancing (1,133)
Realized gain on sale of marketable
securities 8,972
Class action lawsuit expense (489)
-------- -------- -------- -------- ---------
Income (loss) before taxes 32,186 6,400 1,146 671 (2,944)
Income tax expense (benefit) 12,205 2,001 (3,450) 20
-------- -------- -------- -------- ---------
Net income (loss) $ 19,981 $ 4,399 $ 4,596 $ 651 $ (2,944)
======== ======== ======== ======== =========
Weighted average common shares
outstanding 13,062 12,840 6,509 5,630 5,050
Net income (loss) per share: Basic $ 1.53 $ 0.34 $ 0.71 $ 0.12 $ (0.58)
Weighted average common shares and
Common equivalent shares outstanding 13,506 13,082 6,628 5,901 5,050
Net income (loss) per share: Diluted $ 1.48 $ 0.34 $ 0.69 $ 0.11 $ (0.58)
Balance Sheet Data:
Working capital $ 44,768 $ 17,996 $ 12,244 $ 9,072 $ 9,290
Total assets 141,397 102,343 59,481 41,121 38,635
Long-term debt --- 4,933 3,754 900 4,374
Stockholders' equity 57,711 38,622 19,925 15,329 10,736
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of financial Condition and
Results of Operations may be deemed to include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risk and uncertainty. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that its expectations
will be achieved. The important factors that could cause actual results to
differ materially from those in the forward-looking statements herein (the
"Cautionary Statements") include, without limitation: the Company's degree of
leverage; economic conditions and the retail environment; the timely
development, introduction and customer acceptance of the Company's products;
competitive products and pricing; dependence on foreign suppliers and supply and
manufacturing constraints; the Company's relationship and contractual
arrangements with key customers, suppliers and licensors; cancellation or
reduction of orders; the integration of Toastmaster if the Toastmaster
Acquisition (as defined) is consummated, including the failure to realize
25
anticipated revenue enhancements and cost savings; the risks relating to pending
legal proceedings, as well as other risks referenced from time to time in the
Company's filings with the SEC, including the Company's Form 10-K for the fiscal
year ended June 27, 1998. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements. The Company
does not undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
Salton is a leading domestic designer and marketer of a broad
range of kitchen and small household electrical appliances under such brand
names as Salton(R), Maxim(R), Breadman(R), Juiceman(R), White-Westinghouse(R)
and Farberware(R). Salton believes that it has the leading U.S. market share in
juice extractors and indoor grills and a significant U.S. market share in bread
bakers and espresso makers. The Company also designs and markets personal and
beauty care appliances under the Salton Creations(R) brand name, tabletop glass
and crystal products under the Block(R) China, Atlantis(R) Crystal and Gear(R)
brand names, and clocks under the Salton Time(R) brand name.
The Company markets and sells its products throughout the
United States through its own sales force and a network of approximately 190
independent commissioned sales representatives. The Company sells its products
primarily to mass merchandisers, department stores, specialty stores, direct
mail catalogs and showrooms and other direct distribution channels. Further, the
Company sells certain of its products, primarily Juiceman(R) fresh juice
machines and the George Foreman Grills(R), directly to consumers via the
internet and through the use of paid half-hour television programs commonly
referred to as "informercials." The Company contracts for the manufacture of
most of its products with independent manufacturers located overseas, primarily
in the Far East and Europe. The Company also and assembles certain appliances in
its plant located in Kenilworth, New Jersey.
On July 28, 1998, Salton repurchased (the "Stock Repurchase")
6,535,072 shares of Salton common stock owned by Windmere-Durable Holdings, Inc.
("Windmere") pursuant to a Stock Agreement dated as of May 6, 1998 (the
"Windmere Stock Agreement") by and among Salton, Windmere and the executive
officers of Salton. Prior to the Stock Repurchase, Windmere owned approximately
50% of Salton's outstanding common stock. The price for the Stock Repurchase was
$12 per share in cash plus a $15.0 million subordinated promissory note (the
"Junior Subordinated Note"). The Junior Subordinated Note, which has a term of
six and one-half years and bears interest at 4.0% per annum payable annually, is
subject to offsets of 5% of the total purchase price paid by Salton for product
purchases from Windmere and its affiliates during the term of the note. During
fiscal 1998, the Company purchased approximately $27.1 million of products from
Windmere. The principal amount of the Junior Subordinated Note is also subject
to reduction in the event Salton's supply agreement with Kmart is terminated for
any reason.
In connection with the Stock Repurchase: (i) Windmere
effectively repaid (the "Note Repayment") in full its promissory note (the
"Windmere Note") in the principal amount of approximately $10.8 million, which
note was issued to Salton in July, 1996; (ii) Salton repurchased (the "Option
Repurchase") for approximately $3.3 million Windmere's option to purchase up to
458,500 shares of Salton, which option was granted to Windmere in July, 1996;
and (iii) Windmere and Salton agreed to continue various commercial and other
arrangements, including a fee agreement relating to Salton's supply agreement
with Kmart, subject to certain modifications. The Stock Repurchase, the Option
Repurchase and the Note Repayment are collectively referred to herein as the
"Repurchase."
On July 28, 1998, Salton entered into a Credit Agreement dated
as of July 27, 1998 (the "New Credit Agreement") among Salton, Lehman Brothers
Inc., as arranger, and Lehman Commercial Paper Inc., as syndication agent. The
New Credit Agreement provides for $215.0 million in senior secured credit
facilities (the "Senior Credit Facilities") consisting of a $90.0 million
Tranche A Term Loan (the "Tranche A Term Loan"), a $75.0
26
million Delayed Draw Term Loan (the "Delayed Draw Term Loan") and a $50.0
million revolving credit facility (the "Revolving Credit Facility").
On July 28, 1998, Salton also issued (the "Convertible
Preferred Stock Issuance") $40.0 million of Series A Voting Convertible
Preferred Stock of the Company (the "Convertible Preferred Stock") to affiliates
of Centre Partners Management LLC ("Centre Partners") in connection with a Stock
Purchase Agreement dated July 15, 1998 (the "Preferred Stock Agreement"). The
Convertible Preferred Stock is generally non-dividend bearing and is currently
convertible into 2,352,941 shares of Salton common stock (reflecting a $17 per
share conversion price). Centre Partners is a private investment firm that
manages the commitments and assets of Centre Capital Investors II, L.P. and
related entities. Centre Capital Investors II, L.P. is a $450 million private
equity fund raised in 1995. Since its inception in 1986, Centre Partners and its
predecessors have invested more than $1.8 billion in nearly 50 separate
investments. The Repurchase, borrowings under the New Credit Agreement and the
Convertible Preferred Stock Issuance are collectively referred to herein as the
"Recapitalization."
On August 26, 1998, the Company entered into a definitive
merger agreement to acquire Toastmaster Inc. ("Toastmaster"), a Columbia,
Missouri based manufacturer and marketer of kitchen and small household
electrical appliances and time products (the "Toastmaster Acquisition").
Toastmaster designs, manufactures, markets and services a wide array of kitchen
and small household electrical appliances and time products under the brand
names of Toastmaster(R) and Ingraham(R). If the pending Toastmaster Acquisition
is consummated, Salton will pay Toastmaster shareholders $7.00 per share in
cash, or a total purchase price of approximately $53.6 million. Salton will also
assume Toastmaster's debt, which was approximately $48.5 million on September
15, 1998, in connection with the Toastmaster Acquisition.
During the last quarter of 1996, Toastmaster began
implementing a restructuring plan designed to strengthen future financial
performance by improving its cost structure and its competitive posture. The
plan included the outsourcing of production of certain kitchen countertop
appliances to overseas suppliers. As part of this plan, Toastmaster discontinued
production of cool touch wafflebakers at its Boonville, Missouri plant in July
1998 and outsourced production with lower-cost vendors overseas.
Salton has identified numerous opportunities for revenue
enhancements and cost savings that it believes it will be able to realize as a
result of the Toastmaster Acquisition. The Company believes that it can use its
competitive strengths and experience in product development and marketing to
improve upon Toastmaster's product offerings, brand reputation and customer
relations. For example, the Company will utilize its strong customer
relationships to gain shelf space for Toastmaster's products with retailers
where Toastmaster does not currently have substantial shelf space presence and
to expand the shelf space and sales of Toastmaster products with existing
Toastmaster retailers by introducing certain Salton products into Toastmaster's
product lines.
Although Salton currently plans to continue the production of
certain kitchen and small household electrical appliances at Toastmaster's
Macon, Missouri plant, the Company expects to implement its strategy of
outsourcing appliances to overseas vendors. The Company believes that through
its proven ability to source products overseas, it can achieve significant cost
savings through more favorable product pricing and other terms. Other
anticipated cost savings identified by the Company include advertising, ocean
freight, warehousing and corporate overhead expenses.
Salton's ability to achieve revenue enhancements and recognize
cost savings from the Toastmaster Acquisition will depend to a significant
extent on its ability to successfully integrate the operations of Salton and
Toastmaster and other factors, including economic conditions and the retail
environment.
The consummation of the pending Toastmaster Acquisition is
subject to the satisfaction or waiver of certain conditions, including
expiration or termination of the
27
Hart-Scott-Rodino Act waiting period and the approval of the holders of 66-% of
the outstanding shares of Toastmaster common stock. The Company currently
expects the pending Toastmaster Acquisition to be completed during the last
quarter of calendar 1998. There can be no assurance as to if or when the pending
Toastmaster Acquisition will be completed, or that it will be completed on the
terms described herein.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 27, 1998 COMPARED TO YEAR ENDED JUNE 28, 1997
Net Sales. Net sales for the fiscal year ended June 27, 1988 ("Fiscal
1998") were $305.6 million, an increase of approximately $122.8 million or 67.2%
compared to net sales of $182.8 million for the fiscal year ended June 28, 1997
("Fiscal 1997"). This increase is primarily attributable to increased sales of
the Juiceman(R) juice extractors and George Foreman Grills(R), Farberware(R)
products, and White-Westinghouse(R) sales under the Kmart supply agreement. Net
sales of White-Westinghouse(R) products to Kmart approximated 19% and 16% of net
sales in Fiscal 1998 and Fiscal 1997, respectively.
Gross Profit. Gross profit in Fiscal 1998 was $113.9 million or 37.3%
of net sales as compared to $53.4 million or 29.2% in Fiscal 1997. Cost of goods
sold during the period decreased to 58.7% of net sales compared to 66.5% in
Fiscal 1997. Distribution expenses were $12.3 million or 4.0% of net sales in
Fiscal 1998 compared to $7.8 million or 4.3% of net sales in Fiscal 1997. Gross
profit and costs of goods sold in Fiscal 1998 as a percentage of net sales
improved primarily due to a more favorable mix of sales in their respective
channels of distribution when compared to Fiscal 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $84.2 million or 27.6% of net sales in
Fiscal 1998 compared to $42.9 million or 23.5% of net sales in Fiscal 1997.
Expenditures for television, certain media and cooperative advertising coverages
and royalty expenses were $58.3 million or 19.1% of net sales in Fiscal 1998
when compared to $25.7 million or 14.1% of net sales in Fiscal 1997. The
remaining selling, general and administrative costs were $25.9 million or 8.5%
of net sales in Fiscal 1998 compared to $17.2 million or 9.4% of net sales in
Fiscal 1997. The dollar increase was primarily attributable to higher costs for
additional personnel, trade show expenses, sales commissions and various other
costs related to the higher level of sales.
During Fiscal 1998, certain of the Company's customers, namely
HomePlace Stores, Inc. and Venture, filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. These customers owed the Company amounts aggregating
approximately $2.4 million. A provision of approximately $1.0 million was made
for the estimated potential losses from these Chapter 11 bankruptcy filings.
Net Interest Expense. Net interest expense was approximately $5.3
million for Fiscal 1998 compared to $4.1 million in Fiscal 1997. The Company's
rate of interest on amounts outstanding was a weighted average annual rate of
9.5% in Fiscal 1998 compared to 10.5% in Fiscal 1997. The average amount
outstanding under the Company's Amended and Restated Loan and Security Agreement
dated July 30, 1997 (the "Old Credit Agreement") between the Company and its
previous lender increased about $22.2 million when compared to the average
amount outstanding a year ago. This increase was used primarily to finance
higher net sales and a seasonal build in inventory. Interest expense during the
period was offset by interest income earned on the promissory note from Windmere
issued to the Company in July 1996.
Subsequent to the year ended June 27, 1998, the Company consummated the
Recapitalization. In connection therewith, the Company used a portion of the
proceeds it
28
received from the New Credit Agreement to refinance all outstanding
indebtedness under the Old Credit Agreement. Accordingly, at June 27, 1998, the
Company had incurred expense with the early termination of the Old Credit
Agreement of approximately $1.1 million.
The Company sold shares of Windmere common stock it held as marketable
securities during the period. The sale of these shares provided a realized gain
of approximately $9.0 million.
Income before taxes, income taxes, net income and per share data. The
Company had income before income taxes of $32.2 million in Fiscal 1998 compared
to income before income taxes of $6.4 million in Fiscal 1997. The Company had
income tax expense of $12.2 million in Fiscal 1998 as compared to income tax
expense of $2.0 million in Fiscal 1997. Net income after income taxes was $20.0
million in Fiscal 1998 compared to net income after income taxes of $4.4 million
in Fiscal 1997. Basic earnings per common share were $1.53 per share on
weighted average common shares outstanding of 13,062,465 in Fiscal 1998 compared
to earnings of $0.34 per share on weighted average common shares outstanding of
12,840,279 in Fiscal 1997. Diluted earnings per common share were $1.48 per
share on weighted average common shares outstanding, including dilutive common
stock equivalents, of 13,506,263 in Fiscal 1998 compared to earnings of $0.34
per share on weighted average common shares outstanding, including dilutive
common stock equivalents, of 13,082,254 in Fiscal 1997.
YEAR ENDED JUNE 28, 1997 COMPARED TO YEAR ENDED JUNE 29, 1996
Net Sales. Net sales for Fiscal 1997 were $182.8 million, an increase
of approximately $83.6 million or 84.3% compared to net sales of $99.2 million
for the fiscal year ended June 29, 1996 ("Fiscal 1996"). This increase is
primarily attributable to increased sales of the Juiceman(R) juice extractors
and George Foreman Grills(R), private label programs and the addition of Block
China and White-Westinghouse(R) sales under the Kmart supply agreement. Net
sales of White-Westinghouse(R) products to Kmart approximated 16% of net sales
in Fiscal 1997. Sales under the Kmart agreement are expected to increase in
anticipation of Kmart instituting a broad range program under the
White-Westinghouse(R) trade name.
Gross Profit. Gross profit in Fiscal 1997 was $53.4 million or 29.2% of
net sales as compared to $26.4 million or 26.6% in Fiscal 1996. Cost of goods
sold during Fiscal 1997 decreased to 66.5% of net sales compared to 67.5% in
Fiscal 1996. Distribution expenses were $7.8 million or 4.3% of net sales in
Fiscal 1997 compared to $5.9 million or 5.9% of net sales in Fiscal 1996. Gross
profit and costs of goods sold in Fiscal 1997 as a percentage of net sales
improved primarily due to a more favorable mix of sales of higher gross margin
items when compared to Fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $42.9 million or 23.5% of net sales in
Fiscal 1997 compared to $21.3 million or 21.5% of net sales in Fiscal 1996.
Expenditures for television, certain media and cooperative advertising coverages
and royalty expenses were $25.7 million or 14.1% of net sales in Fiscal 1997
when compared to $10.9 million or 11.0% of net sales in Fiscal 1996. The
remaining selling, general and administrative costs were $17.2 million or 9.4%
of net sales in Fiscal 1997 compared to $10.4 million or 10.5% of net sales in
Fiscal 1996. The dollar increase was primarily attributable to higher costs for
additional personnel, trade show expenses, sales commissions and various other
costs related to the higher level of sales.
Net Interest Expense. Net interest expense was approximately $4.1
million for Fiscal 1997 compared to $3.9 million for Fiscal 1996. The Company's
rate of interest on amounts outstanding was a weighted average annual rate of
10.5% in Fiscal 1997 compared to 11.1% in Fiscal 1996. The average amount
outstanding under the Company's revolving line of credit increased about $9.3
million when compared to the average amount outstanding in the same period a
year ago. This increase was used primarily to finance higher net sales and a
seasonal build in inventory. Interest expense during the period was offset by
interest income earned on the promissory note from Windmere issued to the
Company in July 1996.
29
Income before taxes, income taxes, net income and per share
data. The Company had income before income taxes of $6.4 million in Fiscal 1997
compared to income before income taxes of $1.1 million in Fiscal 1996. Net
operating loss carryforwards and resultant deferred tax assets were used in both
periods to significantly offset current income taxes payable. Net income after
income taxes was $4.4 million in Fiscal 1997 compared to net income after income
taxes of $4.6 million in Fiscal 1996. Also during 1996, the Company had
re-assessed the measurement of deferred tax assets based on available evidence
and concluded that these assets at June 29, 1996 were anticipated to be
realized. Accordingly, the Company released previously recorded valuation
allowances which resulted in an income tax benefit of $3.5 million in 1996.
Excluding the effect of this income tax benefit, net income after income taxes
would have been $1.1 million in 1996 compared to net income after income taxes
of $4.4 million in 1997. Weighted average common shares increased as a result of
the Windmere transaction. Basic earnings per common share were $0.34 per share
on weighted average common shares outstanding of 12,840,279 in Fiscal 1997
compared to earnings of $0.71 per share on weighted average common shares
outstanding of 6,508,572 in Fiscal 1996. Diluted earnings per common share were
$0.34 per share on weighted average common shares outstanding, including
dilutive common stock equivalents, of 13,082,254 in fiscal 1997 compared to
earnings of $0.69 per share on weighted average common shares outstanding,
including dilutive common stock equivalents, of 6,628,236 in Fiscal 1996.
Liquidity and Capital Resources
During Fiscal 1998, the Company used net cash of $25.1
million in operating activities. This resulted primarily from the growth in
sales in the period and higher levels of inventory and receivables. Investing
activities provided cash of approximately $14.5 million from the sale of
Windmere common stock offset by an increased investment in capital assets,
primarily tooling of about $4.6 million. Financing activities provided cash of
$8.6 million for these purposes primarily from increased line of credit proceeds
of $12.5 million, reduced by repayments of notes due to Windmere of
approximately $5.4 million. At June 27, 1998, the Company had approximately
$50.5 million outstanding as drawings under the Old Credit Agreement and had the
ability to borrow up to $68.7 million. Typically, given the seasonal nature of
the Company's business, the Company's borrowings tend to be the highest in
mid-Summer to Fall. The Company expects that capital expenditures in Fiscal 1999
will not exceed $5.3 million or, if the Toastmaster Acquisition is consummated,
$9.2 million.
On July 28, 1998, Salton entered into the New Credit Agreement. The
Company used borrowings of $90.0 million under the Tranche A Term Loan and the
net proceeds from the Convertible Preferred Stock Issuance to (i) pay the cash
portion of the purchase price for the Stock Repurchase in an amount equal to
approximately $70.8 million (which amount is net of approximately $10.8 million
due and owing by Windmere to Salton under the Windmere Note, which note was
cancelled at the closing of the Stock Repurchase), (ii) refinance all
outstanding indebtedness under the Old Credit Agreement in an amount equal to
approximately $51.7 million and (iii) pay fees and expenses relating to the
Recapitalization. At September 15, 1998, the Company had $20.0 million
outstanding under the Revolving Credit Facility and had the ability to borrow up
to $50.0 million. In addition, the Company had not drawn the $75.0 million
Delayed Draw Term Loan at that date.
In connection with the Toastmaster Acquisition, Salton has agreed to
pay Toastmaster shareholders $7.00 per share in cash, or a total purchase price
of approximately $53.6 million. Salton will also assume Toastmaster's debt,
which was approximately $48.5 million on September 15, 1998, in connection with
the Toastmaster Acquisition. Salton expects to fund this commitment through a
combination of borrowings under the New Credit Agreement and the issuance of
additional debt and/or one or more classes or series of the Company's equity
securities. The incurrence of additional indebtedness would have an adverse
effect upon Salton's reported net income and cash flow, and the issuance of
equity securities could have a dilutive effect on Salton's then outstanding
common stock. There can be no assurance as to the terms under which the Company
can raise additional funds from future debt or equity issuances.
The Senior Credit Facilities contain a number of significant covenants
that, among other things, restrict the ability of the Company to dispose of
assets, incur additional indebtedness, prepay other indebtedness, pay
dividends, repurchase or redeem capital stock, enter into certain investments,
enter into sale and lease-back transactions, make certain acquisitions, engage
in mergers and consolidations, create liens, or engage in certain transactions
with affiliates, and that will otherwise restrict corporate and business
activities. In addition, under the Senior Credit Facilities, the Company is
required to comply with specified financial ratios and tests, including a
minimum net worth test, a fixed charge coverage ratio, an interest coverage
ratio and a leverage ratio.
30
The Company's ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures, will depend upon its future performance, which, in turn, is
subject to general economic, financial, competitive and other factors that are
beyond its control. The Company's ability to fund its operating abilities is
also dependent upon its rate of growth, ability to effectively manage its
inventory, the terms under which it extends credit to customers and its ability
to collect under such terms and its ability to access external sources of
financing. Based upon the current level of operations and anticipated growth,
management believes that future cash flow from operations, together with
available borrowings under the New Credit Agreement and funds anticipated to be
available from the issuance of additional debt and/or equity securities, will be
adequate to meet the Company's anticipated requirements for capital
expenditures, working capital, interest payments and scheduled principal
payments over the next 12 months. There can be no assurance, however, that the
Company's business will continue to generate sufficient cash flow from
operations in the future to service its debt and make necessary capital
expenditures after satisfying certain liabilities arising in the ordinary course
of business. If unable to do so, the Company may be required to refinance all or
a portion of its existing debt, to sell assets or to obtain additional
financing. There can be no assurance that any such refinancing would be
available or that any such sales of assets or additional financing could be
obtained.
ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standard No. 128
(SFAS 128), "Earnings per Share" in fiscal 1998. In June 1997, the FASB issued
Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting
Comprehensive Income," No. 131 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information," No. 132 (SFAS 132), "Employer's
Disclosures about Pensions and other Post Retirement Benefits which Revises
Current Disclosure Requirements for Employers' Pensions and other Retiree
Benefits" and No. 133 (SFAS 133), "Accounting for Derivative Instruments and
Hedging Activities." These statements are effective for fiscal years commencing
after December 15, 1997. The Company will be required to comply with the
provisions of these statements in fiscal 1999. These Statements of Financial
Accounting Standards are primarily disclosure related, and the Company has not
assessed the effect that these new standards will have on its consolidated
financial statements and/or disclosures.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE
The results of operations of the Company for the periods discussed
have not been significantly affected by inflation or foreign currency
fluctuation. The Company generally negotiates its purchase orders with its
foreign manufacturers in United States dollars. Thus, the Company's 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.
YEAR 2000 ISSUES
Many computer and other software and hardware systems currently are
not, or will or may not be, able to read, calculate or output correctly using
dates after 1999, and such
31
systems will require significant modifications in order to be "year 2000
compliant." This issue may have a material adverse affect on the Company's
business, financial condition and results of operations because its computer
and other systems are integral parts of the Company's distribution activities
as well as its accounting and other information systems and because the Company
will have to divert financial resources and personnel to address this issue.
The Company has reviewed its computer and other hardware and software
systems and has recently begun upgrading those systems that it has identified
as not being year 2000 compliant. The existing systems will be upgraded either
through modification or replacement. The Company currently anticipates that it
will complete testing of these upgrades by the end of fiscal 1999.
Although the Company is not aware of any material operational
impediments associated with upgrading its computer and other hardware and
software systems to be year 2000 compliant, the Company cannot make any
assurances that the upgrade of the Company's computer systems will be completed
on schedule or, that the upgraded systems will be free of defects. If any such
risks materialize, the Company could experience material adverse consequences
to its business, financial condition and results of operations.
Year 2000 compliance may also adversely affect the Company's business,
financial condition and results of operations indirectly by causing
complications of, or otherwise affecting, the operations of any one or more of
its suppliers and customers. The Company is contacting its significant
suppliers and customers in an attempt to identify any potential year 2000
compliance issues with them. The Company is currently unable to anticipate the
magnitude of the operational or financial impact it of year 2000 compliance
issues with its suppliers and customers.
The Company incurred approximately $765,000 through fiscal 1998 and
expects to incur approximately $135,000 through fiscal 1999 to resolve and test
the Company's year 2000 compliance issues. All expenses incurred in connection
with year 2000 compliance will be expensed as incurred, other than acquisitions
of new software or hardware, which will be capitalized.
32
ITEM 7A. QUANITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISKS
Incorporated herein by reference from footnote 1 of the Financial
Statements and Supplementary Data included under item 8 hereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following pages contain the Financial Statements and Supplementary
Data as specified by Item 8 of Part II of Form 10-K.
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Salton/Maxim Housewares, Inc.
Mount Prospect, Illinois
We have audited the accompanying consolidated balance sheets of Salton/Maxim
Housewares, Inc. (the "Company") as of June 27, 1998 and June 28, 1997 and the
related consolidated statements of earnings, of stockholders' equity and of cash
flows for each of the three years in the period ended June 27, 1998. Our audits
also included the financial statement schedule listed in the Index at Item 14.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Salton/Maxim Housewares, Inc. as of
June 27, 1998 and June 28, 1997 and the results of its operations and its cash
flows for each of the three years in the period ended June 27, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As described in Note 16 to the consolidated financial statements, subsequent to
June 27, 1998, the Company entered into a new debt agreement, issued preferred
shares, repurchased approximately 50% of its outstanding common shares, and
entered into a definitive merger agreement for the acquisition of Toastmaster
Inc.
Deloitte & Touche LLP
September 3, 1998
Chicago, Illinois
34
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
ASSETS JUNE 27, JUNE 28,
1998 1997
CURRENT ASSETS:
Cash $ 661,214 $ 2,612,871
Accounts receivable, less allowance:
1998--$3,000,000; 1997--$2,400,000 43,224,852 25,646,677
Inventories 76,505,088 41,967,801
Prepaid expenses and other current assets 2,940,624 3,717,062
Federal income taxes refundable 1,105,336
Deferred income taxes 4,605,222 1,734,414
------------- -------------
Total current assets 127,937,000 76,784,161
PROPERTY, PLANT AND EQUIPMENT:
Molds and tooling 16,787,126 14,827,525
Warehouse equipment 452,715 380,487
Office furniture and equipment 5,341,755 3,792,035
------------- -------------
22,581,596 19,000,047
Less accumulated depreciation (14,266,296) (10,684,016)
------------- -------------
8,315,300 8,316,031
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION 5,145,000 4,880,006
NON-CURRENT DEFERRED INCOME TAXES 205,580
INVESTMENT IN WINDMERE COMMON STOCK 12,156,820
------------- -------------
TOTAL ASSETS $ 141,397,300 $ 102,342,598
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 50,475,078 $ 37,977,230
Accounts payable 18,960,008 17,361,238
Accrued expenses 7,234,506 2,856,512
Income taxes payable 6,499,342 93,085
Current portion-Subordinated Debt 500,000
------------- -------------
Total current liabilities 83,168,934 58,788,065
NON-CURRENT DEFERRED INCOME TAXES 517,000
DUE TO WINDMERE 4,932,730
------------- -------------
Total Liabilities 83,685,934 63,720,795
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized,
2,000,000 shares, no shares issued
Common Stock, $.01 par value; authorized, 20,000,000 shares; shares issued and
outstanding:
1998-13,099,644; 1997-13,029,144 130,996 130,291
Unrealized gains on securities available for sale 1,337,250
Additional paid-in capital 53,480,678 53,035,981
Less note receivable from stock issuance (10,847,620) (10,847,620)
Retained earnings (Deficit) 14,947,312 (5,034,099)
------------- -------------
Total stockholders' equity 57,711,366 38,621,803
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 141,397,300 $ 102,342,598
============= =============
See Notes to Consolidated Financial Statements.
35
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
[Enlarge/Download Table]
1998 1997 1996
---- ---- ----
Net sales $ 305,598,750 $ 182,806,323 $ 99,202,415
Cost of goods sold 179,375,466 121,590,232 66,923,141
Distribution expenses 12,327,187 7,808,631 5,856,477
------------- ------------- ------------
Gross profit 113,896,097 53,407,460 26,422,797
Selling, general and administrative expenses 84,216,473 42,944,341 21,342,872
------------- ------------- ------------
Operating income 29,679,624 10,463,119 5,079,925
Interest expense, net (5,333,109) (4,063,197) (3,934,325)
Costs associated with refinancing (1,132,814)
Realized gain on marketable securities 8,972,488
------------- ------------- ------------
Income before income taxes 32,186,189 6,399,922 1,145,600
Income tax expense (benefit) 12,204,778 2,000,764 (3,449,884)
------------- ------------- ------------
Net income $ 19,981,411 $ 4,399,158 $ 4,595,484
============= ============= ============
Weighted average common shares outstanding 13,062,465 12,840,279 6,508,572
Weighted average common and common
equivalent shares outstanding 13,506,263 13,082,254 6,628,236
Net income per common share: Basic $ 1.53 $ 0.34 $ 0.71
Net income per common share: Diluted $ 1.48 $ 0.34 $ 0.69
See Notes To Consolidated Financial Statements
36
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
[Enlarge/Download Table]
Unrealized
Gains on Less Note
Securities Additional Receivable Retained Total
Common Held for Paid In from sales Earnings Stockholders'
Shares Stock Sale Capital of stock (Deficit) Equity
---------- ------- ---------- ----------- ---------- ------------- -------------
BALANCE, July 1, 1995 6,508,572 $65,086 $29,292,946 $(14,028,741) $ 15,329,291
Net income for
fiscal 1996 4,595,484 4,595,484
---------- ------- ----------- ----------- ----------
BALANCE, June 29, 1996 6,508,572 65,086 29,292,946 (9,433,257) 19,924,775
Issuance of
common stock 6,508,572 65,085 23,650,352 $(10,847,620) 12,867,817
Issuance of warrants 82,303 82,303
Unrealized gains on
securities available
for sale $1,337,250 1,337,250
Employee stock option
shares exercised 12,000 120 10,380 10,500
Net income fiscal 1997 4,399,158 4,399,158
---------- -------- ---------- ----------- ------------ ------------ -----------
BALANCE, June 28, 1997 13,029,144 130,291 1,337,250 53,035,981 (10,847,620) (5,034,099) 38,621,803
Issuance of
common stock, net
of issuance costs 25,000 250 300,531 300,781
Sale of securities (1,337,250) (1,337,250)
Stock option shares
exercised 45,500 455 144,166 144,621
Net income fiscal 1998 19,981,411 19,981,411
---------- -------- ---------- ----------- ------------ ------------ -----------
BALANCE, June 27, 1998 13,099,644 $130,996 $53,480,678 $(10,847,620) $ 14,947,312 $57,711,366
========== ======== ========== =========== ============= ============ ===========
See Notes to Consolidated Financial Statements
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
[Enlarge/Download Table]
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 19,981,411 $ 4,399,158 $ 4,595,484
Adjustments to reconcile net income to net cash
(used in) operating activities:
Gain on sale of marketable securities (8,972,488)
Deferred income taxes (1,428,170) 822,332 (3,482,384)
Depreciation and amortization 4,300,647 3,136,060 2,195,510
Changes in assets and liabilities, net of acquisition:
Accounts receivable (17,578,175) (9,776,051) (2,395,175)
Inventories (34,537,287) (13,679,836) (8,847,133)
Prepaid expenses and other current assets 776,438 (1,783,056) (892,342)
Federal income tax refund 1,105,336 (1,105,336)
Accounts payable 1,598,770 7,304,043 4,650,026
Taxes payable 6,406,257 81,085 22,500
Accrued expenses 3,245,180 1,635,729 582,921
------------ ------------ -----------
Net cash used in operating activities (25,102,081) (8,965,872) (3,570,593)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,564,910) (4,608,389) (4,279,838)
Proceeds from the sale of marketable securities 19,072,000
Block acquisition and related payments (1,739,280)
------------ ------------ -----------
Net cash provided by (used in) investing
activities 14,507,090 (6,347,669) (4,279,838)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit 12,497,848 13,881,848 6,234,938
(Repayment) proceeds from subordinated debt
and due to Windmere (5,432,730) 4,515,731 2,670,955
Offering costs associated with stock issue (485,650)
Common stock issued 445,402 10,500
Payment for product line acquisitions (814,939)
Financing costs 1,132,814 (242,389)
------------ ------------ -----------
Net cash provided by financing activities 8,643,334 17,922,429 7,848,565
------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH (1,951,657) 2,608,888 (1,866)
CASH - Beginning of Year 2,612,871 3,983 5,849
------------ ------------ -----------
CASH - End of Year $ 661,214 $ 2,612,871 $ 3,983
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,893,266 $ 3,939,322 $ 3,510,123
Income taxes $ 5,798,521 $ 1,697,500 $ 10,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During fiscal 1997, a long-term debt obligation of $3,254,286 was canceled by
the consummation of a transaction with Windmere-Durable Holdings,
Inc.("Windmere"). In addition, the Company received a $10,847,620 note
receivable and 748,112 shares of Windmere common stock in exchange for 6,508,572
newly issued shares of common stock of the Company.
See Notes to Consolidated Financial Statements.
38
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Salton/Maxim Housewares, Inc.("SMHI") and its subsidiaries ("Salton" or
the "Company") is a leading marketer of a broad range of kitchen and home
appliances, personal and beauty care appliances and decorative quartz wall and
alarm clocks under the brand names of Salton(R), Maxim(R), Breadman(R),
Juiceman(R), Salton Creations(R), Salton Time(R), White-Westinghouse(R) and
Farberware(R). The Company also designs and markets a broad range of tabletop
products, including china, crystal and glassware, under the brand names
Block(R)China, Atlantis(R)Crystal and Gear.(R)
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of SMHI and its subsidiaries, Home Creations Direct, Ltd.
and Salton Hong Kong, Ltd. Salton Hong Kong, Ltd. is a foreign corporation which
was organized under the laws of Hong Kong in fiscal year 1997. Intercompany
balances and transactions are eliminated in consolidation.
USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
include the allowance for doubtful accounts, reserve for returns and allowances,
and depreciation and amortization, among others.
ACCOUNTING PERIOD - The Company's fiscal year ends on the Saturday
closest to June 30. The fiscal years ended June 27, 1998, June 28, 1997 and June
29, 1996 each consisted of 52 weeks.
INVENTORIES - Inventories are stated at the lower of cost or market.
Cost is determined on the first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost. Expenditures for maintenance costs and repairs are charged
against income. Depreciation is provided on the straight-line basis over the
estimated useful lives of the assets, not to exceed 5 years. For tax purposes,
assets are depreciated using accelerated methods.
INTANGIBLE ASSETS - Intangible assets, which are amortized over their
estimated useful lives, consist of:
USEFUL LIFE JUNE 27, JUNE 28,
(IN YEARS) 1998 1997
------------ ---------- ----------
Goodwill 10-40 $2,116,773 $1,926,454
Financing and organization costs 2-5 109,231 171,778
Patents and trademarks 5-20 2,918,996 2,781,774
---------- ----------
Intangible assets, net $5,145,000 $4,880,006
========== ==========
Accumulated amortization of intangible assets was $4,722,608 at
June 27, 1998, and $3,770,866 at June 28, 1997.
LONG-LIVED ASSETS - Long-lived assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. If such review indicates
that the carrying amount of long-lived assets is not recoverable, the carrying
amount of such assets is reduced to estimated recoverable value.
39
REVENUE RECOGNITION - The Company recognizes revenues when goods are
shipped to its customers.
DISTRIBUTION EXPENSES - Distribution expenses consist primarily of
freight, warehousing, and handling costs of products sold.
ADVERTISING - The Company sponsors various programs under which it
participates in the cost of advertising and other promotional efforts for
Company products undertaken by its retail customers. Advertising and promotion
costs associated with these programs are recognized in the period in which the
advertising or other promotion by the retailer occurs.
The Company's tradenames and, in some instances, specific products,
also are promoted from time to time through direct marketing channels, primarily
television. Advertising and promotion costs are expensed in the period in which
direct customer response occurs.
INCOME TAXES - The Company accounts for income taxes using the asset
and liability approach. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
management does not expect to be realized.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE - The Company adopted
Statement of Financial Accounting Standards No. 128-Earnings per Share (SFAS
128) in fiscal 1998. Basic net income per common share is computed based upon
the weighted average number of common shares outstanding. Diluted net income per
common share is computed based upon the weighted average number of common shares
outstanding, adjusted for dilutive common stock equivalents applying the
treasury stock method. All earnings per share data presented in these financial
statements have been restated to conform with SFAS 128.
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. During fiscal 1997, the
investment in Windmere common stock was accounted for as "available for sale"
and was carried at fair value. The stock was sold during fiscal 1998. See note 2
"Windmere Transaction."
ACCOUNTING PRONOUNCEMENTS - The Company adopted Statement of Financial
Accounting Standards No. 128-Earnings per Share in Fiscal 1998. In June 1997,
the FASB issued Statement of Financial Accounting Standard No. 130 (SFAS 130),
"Reporting Comprehensive Income," No. 131 (SFAS 131), "Disclosures About
Segments of an Enterprise and Related Information," No. 132 (SFAS 132),
"Employer's Disclosures about Pensions and other Post Retirement Benefits which
Revises Current Disclosure Requirements for Employers' Pensions and other
Retiree Benefits" and No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities." These statements are effective for fiscal years
commencing after December 15, 1997. The Company will be required to comply with
the provisions of these statements in fiscal 1999. The Company has not assessed
the effect that these new standards will have on its consolidated financial
statements.
2. WINDMERE TRANSACTION
On July 11, 1996, the Company consummated a transaction (the "Windmere
Transaction") with Windmere-Durable Holdings, Inc. ("Windmere"), pursuant to a
Stock Purchase Agreement dated February 27, 1996, as amended (the "Stock
Purchase Agreement"). Windmere is a corporation engaged principally in
manufacturing and distributing a wide variety of personal care products and
household appliances. Pursuant to the Stock Purchase Agreement, Windmere
purchased from the Company 6,508,572 newly issued shares of Common Stock (the
"Purchase"), which represented 50% of the outstanding shares of Common Stock of
the Company on February 27, 1996 after giving effect to the Purchase. As
consideration for the purchase, Windmere paid the Company: (i) $3,254,286 in
cancellation of a loan, as described below; (ii) a subordinated promissory note
in the aggregate principal amount of $10,847,620 (the "Note"), which Note is
payable July 11, 2001, bears interest at 8%, payable quarterly, and is secured
by certain assets of Windmere and its domestic subsidiaries and guaranteed by
such domestic subsidiaries; and (iii) 748,112 shares of Windmere's common
40
stock. Windmere's common stock is traded on the New York Stock Exchange. A
portion of the consideration for the Purchase was paid by the cancellation of
the Company's obligation to repay a loan in the principal amount of $3,254,286
which Windmere had made to the Company in April 1996. Windmere was also granted
an option to purchase up to 485,000 shares of Common Stock at $4.83 per share,
which option was exercisable only if and to the extent that options to purchase
shares of Common Stock which were outstanding on February 27, 1996 were
exercised. Accordingly, Windmere exercised options to purchase 26,500 shares of
Common Stock during 1998.
During fiscal 1998 the Company sold 748,112 shares of Windmere's common
stock, realizing a gain of $8,972,488.
Subsequent to year-end the Company repurchased its common shares held
by Windmere. See note 16 "Subsequent Events."
3. BLOCK CHINA ACQUISITION
On July 1, 1996, the Company acquired substantially all of the assets
and certain liabilities of Block China Corporation, a tabletop product company,
in a transaction accounted for as a purchase. The Block China Division of the
Company designs and markets tabletop products, including china, crystal and
glassware. The consideration paid by the Company consisted of $1,485,000 in cash
and a warrant to purchase 25,000 shares of Common Stock with an exercise price
of $4.75. The consideration also included an earn-out of up to $500,000 and
150,000 shares of Common Stock based on financial performance over a three-year
period of the Division. The operating results of Block China before its
acquisition by the Company are not material. During 1998, the Company paid
$83,333 and issued 25,000 shares of common stock to Block China under the
earn-out.
4. REVOLVING LINE OF CREDIT AND LETTERS OF CREDIT
During the 1998 fiscal year, the Company increased its revolving line of
credit (the "Facility") with a commercial lender (the "Lender") from $50,000,000
to $75,000,000. Borrowings under this Facility bore interest at 1% over the
Lender's established prime rate, payable monthly, and included a provision which
provided the Company with the ability to reduce its borrowing rate, based on the
London InterBank Offered Rate (LIBOR), on up to 75% of outstanding borrowings.
The Facility had an expiration date of September 30, 2000. Under the terms of
the Facility, the Company must pay fees and related expenses to the Lender upon
early termination. Subsequent to year end, the Company entered into a new credit
agreement (the "New Credit Agreement") with an investment banking firm described
in note 16 "Subsequent Events." Accordingly, the Company accrued $1,132,814 in
termination fees and related expenses.
The Facility was secured by a first lien on substantially all the
Company's assets. Credit availability was based on a formula related to trade
accounts receivable, inventories and outstanding letters of credit and it
contained restrictive financial covenants, the more significant of which
required the Company to maintain specified ratios of total liabilities to net
worth, minimum tangible net worth, and minimum earnings before interest, taxes,
depreciation and amortization. Other covenants also limited the Company's
activities in mergers or acquisitions and sales of substantial assets.
Compliance with these covenants effectively restricted the ability of the
Company to pay dividends, and also required the Company to apply cash receipts
to pay down borrowings under the Facility.
Information regarding short-term borrowings under the Facility is:
[Download Table]
JUNE 27, JUNE 28,
1998 1997
Balance at end of fiscal period $50,475,078 $37,977,230
Interest rate at end of fiscal period 9.43% 10.5%
Maximum amount outstanding at any month-end $68,521,548 $43,632,702
Average amount outstanding $56,374,193 $35,191,494
Weighted average interest rate during fiscal period 9.48% 10.5%
Outstanding letters of credit at end of fiscal period $5,566,840 $2,915,815
41
5. SUBORDINATED DEBT AND DUE TO WINDMERE
SUBORDINATED DEBT
The Company had 10% subordinated notes payable aggregating $500,000.
The notes were repaid in fiscal 1998.
WINDMERE TRANSACTIONS AND DUE TO WINDMERE
The Company owed Windmere, including Durable Electrical Metal Factory,
Ltd., a wholly owned subsidiary of Windmere ("Durable"), approximately
$4,838,000 at June 27, 1998, primarily for trade accounts payable and interest.
The Company had amounts due to Windmere, including Durable, of
approximately $9,141,000, including notes payable of $4,932,730 at June 27,
1997. These amounts primarily represented working capital advances by Windmere
to the Company to fund the development of the White-Westinghouse(R) and
Farberware(R) product lines, as well as interest and trade accounts payable.
The Company and Windmere entered into a Marketing Cooperation Agreement
on July 11, 1996 (the "Marketing Cooperation Agreement"). Pursuant to this
agreement, until Windmere's interest in the Company is less than 30% for at
least ten consecutive days, each of the Company and Windmere has agreed to
participate in a variety of mutually satisfactory marketing cooperation efforts
designed to expand the market penetration of each party. Consequently, the
Company entered into a letter agreement dated April 30, 1997 (the "Letter
Agreement") with Windmere. The Letter Agreement provides that the Company will
pay to Windmere a fee in consideration of Windmere's marketing cooperation
efforts in connection with the Company's supply contract with Kmart and
Windmere's guarantee of the Company's obligations under such contract. See note
16 "Subsequent Events."
6. CAPITAL STOCK
The Company has authorized 20,000,000 shares of $.01 par value common
stock, at June 27, 1998 there were 13,099,644 shares issued and outstanding. As
more fully described in Note 2 "Windmere Transaction" on July 11, 1996, Windmere
purchased from the Company 6,508,572 newly issued shares of common stock which
represented 50% of the outstanding shares of common stock of the Company. During
fiscal 1998, Windmere exercised its option to buy 26,500 shares of Salton common
stock.
The Company has authorized 2,000,000 shares of $.01 par value preferred
stock. At June 27, 1998, no shares of preferred stock were issued.
Subsequent to year end, the Company repurchased the 6,535,072 shares of
common stock issued to Windmere and issued 40,000 shares of preferred stock as
described in note 16 "Subsequent Events."
7. EARNINGS PER SHARE
(in thousands, except earnings per share)
[Download Table]
Year Ended Year Ended Year Ended
June 27,1998 June 28,1997 June 29,1996
------------ ------------ ------------
Net Income* $ 19,981 $ 4,399 $ 4,595
Average common shares outstanding 13,062 12,840 6,509
Earnings per share-basic $ 1.53 $ 0.34 $ 0.71
Dilutive stock options 444 242 119
Average common and common
equivalent shares outstanding 13,506 13,082 6,628
Earnings per share-diluted $ 1.48 $ 0.34 $ 0.69
* Net income is the same for purposes of calculating basic and diluted EPS
42
Options to purchase 141,440, 130,000 and 130,000 shares of common stock
at prices of $12.25, $12.00 and $12.00 per share were outstanding at June 27,
1998, June 28, 1997 and June 29, 1996, respectively, but were not included in
the computation of diluted EPS because the options exercise prices were greater
than the average market price of the common shares.
8. PROFIT SHARING PLAN
The Company has a 401 (k) defined contribution plan that covers
eligible employees. The employees are eligible for benefits upon completion of a
specified number of years of service. Under the terms of the plan the company
currently matches a portion of the employee contributions. The Company's
discretionary matching contribution is based on a portion of a maximum of 6% of
participants' eligible wages, as defined. The Company's matching contributions
were approximately $97,000, $69,000, and $66,136 in 1998, 1997, and 1996,
respectively.
9. STOCK OPTION PLANS
In October 1995, SFAS No. 123, "Accounting For Stock-Based
Compensation," was issued and is effective for financial statements for fiscal
years beginning after December 15, 1995. As permitted by the statement, the
Company will continue to measure compensation cost for stock option plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting For
Stock Issued to Employees." Accordingly, no compensation cost has been
recognized for the Company's fixed stock option plans. Had compensation cost for
the Company's stock option plans been determined consistent with the fair value
method outlined in SFAS No. 123, the impact on the Company's net income and
earnings per common share would have been as follows:
[Download Table]
Net Income 1998 1997
---- ----
As reported $19,981,411 $4,399,158
Pro forma $18,940,500 $4,192,582
Net income per common share: Basic
As reported $ 1.53 $ 0.34
Pro forma $ 1.45 $ 0.33
Net income per common share: Diluted
As reported $ 1.48 $ 0.34
Pro forma $ 1.40 $ 0.32
Options to purchase common stock of the Company have been granted to
employees under the 1992 and 1995 stock option plans at prices equal to the fair
market value of the stock on the dates the options were granted. Options have
also been granted to non-employee directors of the company, which are
exercisable one year after the date of grant. All options granted expire 10
years from the date of grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following assumptions were
used during the respective years to estimate the fair value of options granted:
[Download Table]
1998 1997
---- ----
Dividend yield 0.0% 0.0%
Expected volatility 61.74% 65.96%
Risk-free interest rate 5.38% 6.11%
Expected life of options 7.42 years 7.92 years
In addition, on July 11, 1996 Windmere was granted an option to
purchase up to 485,000 shares of common stock at $4.83 per share. This option is
exercisable only if and to the extent that options to purchase shares of common
stock which were outstanding on February 27, 1996 are exercised. During fiscal
1998, Windmere exercised their option to purchase 26,500 shares of Salton common
stock. Subsequent to year-end, the Company repurchased the remaining options.
See note 16 "Subsequent Events." A summary of the
43
Company's fixed stock options for the fiscal years ended June 27, 1998 and June
28, 1997 is as follows:
[Download Table]
1998 1997
---- ----
Weighted- Weighted-
Shares Average Shares Average
(000) Exercise Price (000) Exercise Price
------ -------------- ------ --------------
Outstanding at beginning of year 966 $ 4.90 485 $ 4.83
Granted 206 10.82 493 4.88
Exercised (46) 3.11 (12) .88
Expired
Forfeited
------ -------------- ------ ---------
Outstanding at end of year 1,126 $ 6.06 966 $ 4.90
Options exercisable at end
of year 1,118 $ 6.05 958 $ 4.88
Weighted-average fair value of
options granted during the year $ 8.14 $ 4.54
The following information summarizes the stock options outstanding at
June 27, 1998:
[Download Table]
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Prices (000) Life (years) Price (000) Price
------------------------ ------ ------------ --------- ------ ---------
$0.875 - $2.500 300 6.84 $2.12 300 $2.12
$3.438 - $5.375 490 7.91 4.83 482 4.83
$8.000 - $12.250 336 7.20 11.38 336 11.38
------------------------ ------ ------------ --------- ------ ---------
$0.875 - $12.250 1,126 N/A N/A 1,118 $6.05
10. RELATED PARTY TRANSACTIONS
The Company purchased inventory from Durable of approximately
$27,068,000, $23,511,000, and $3,200,000 in fiscal years ended June 27, 1998,
June 28, 1997, and June 29, 1996, respectively.
The Company purchased inventory and paid commissions to Markpeak, Ltd.,
a Hong Kong company, of approximately $15,699,000 and $272,000 respectively in
1998, $7,815,000 and $432,000, respectively in 1997, and $10,233,000 and
$739,000, respectively in 1996. A director of the Company is the Managing
Director of Markpeak, Ltd.
The Company paid Shapiro, Devine and Craparo, Inc. ("SDC"), a
manufacturers representation firm, commissions of approximately $290,000,
$241,000 and $160,000 in 1998, 1997 and 1996, respectively. A director of the
Company was a co-founder of SDC. At June 27, 1998, the Company owed SDC
approximately $38,000 for current commissions.
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under long-term
operating leases. Rental expense under all leases was approximately $1,564,000,
$1,183,000, and $665,000, for the fiscal years ended June 27, 1998, June 28,
1997, and June 29, 1996, respectively.
44
The future minimum rental commitments as of June 27, 1998 were as
follows:
[Download Table]
Fiscal Year Ending
1999 $2,666,095
2000 2,075,056
2001 1,938,911
2002 915,798
2003 36,400
Thereafter 157,733
----------
Total $7,789,993
==========
The Company has employment agreements with its three executive officers
that are in effect until June 30, 2001. Such agreements provide for minimum
salary levels as well as for incentive bonuses that are payable if the Company
achieves specified target performance goals. The agreements also provide for
lump sum severance payments upon termination of employment under certain
circumstances. The Company's aggregate commitment for future salaries at June
30, 1998, excluding bonuses, was approximately $1,350,000.
The Company has license agreements with White Consolidated Industries,
Inc. ("White Consolidated"), which require minimum royalty payments through the
year 2011. The current level of royalty payments are in excess of the minimum
requirements. The Company also has various license agreements with other parties
for periods usually not exceeding three years. The agreements are then typically
renewable upon mutual consent. These license agreements require royalty payments
based on the sales of licensed product in the period. Total royalties paid under
these agreements, including the White Consolidated Industries, Inc. agreement,
were $20,266,000 in fiscal year 1998, $6,300,000 in fiscal year 1997 and
$1,600,000 in fiscal year 1996.
12. LEGAL PROCEEDINGS
The Company, White Consolidated, and certain other parties have been
named as defendants in litigation filed by Westinghouse Electric Corporation
(now known as CBS Corporation ("CBS")) in the United States District Court for
the Western District of Pennsylvania on December 18, 1996. The action arises
from a dispute between CBS and White Consolidated over rights to use the
"Westinghouse" trademark for consumer products, based on transactions between
CBS and White Consolidated in the 1970's and the parties' subsequent conduct.
The action seeks, among other things, an injunction enjoining the defendants
from using the trademark, unspecified damages and attorneys' fees. Pursuant to
the Company's license agreements with White Consolidated, White Consolidated is
defending the Company and is obligated to indemnify the Company from and against
any and all claims, losses and damages arising out of the action, including the
costs of litigation. An adverse decision in the litigation could result in
Salton being limited in further use of the White-Westinghouse(R) name and
therefore the possible termination or significant modification of the supply
contract between Salton and Kmart Corporation described in note 13.
The Company is a party to various other legal actions and proceedings
incident to its normal business operations. Management believes that the outcome
of such litigation will not have a material adverse effect on its financial
condition or annual results of operations.
13. SUPPLY CONTRACT AND MAJOR CUSTOMERS
The Company entered into a major supply contract with Kmart Corporation
("Kmart") on January 31, 1997. Under the contract, the Company supplies Kmart
with small kitchen appliances, personal care products, heaters, fans and
electrical air cleaners and humidifiers under the White-Westinghouse(R) brand
name. Sales to Kmart approximated 19% and 16% of total net sales of the Company
in fiscal years 1998 and 1997, respectively.
The Company's net sales in the aggregate to its five largest customers
during the fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996
were 47%, 47% and 55% of total net sales in these periods, respectively. In
addition to Kmart, one customer
45
accounted for 7%, 9%, and 15% of total net sales during the fiscal years ended
June 27, 1998, June 28, 1997, and June 29, 1996, respectively. Another customer
accounted for 8%, 9%, and 13%, respectively, over the same fiscal years.
Although the Company has long-established relationships with many of
its customers, with the exception of Kmart Corporation, it does not have
long-term contracts with any of its customers. A significant concentration of
the Company's business activity is with department stores, upscale mass
merchandisers, specialty stores, and warehouse clubs whose ability to meet their
obligations to the Company is dependent upon prevailing economic conditions
within the retail industry.
14. INCOME TAXES
Federal, state and foreign taxes were approximately as follows:
[Download Table]
Fiscal Years Ended
June 27,1998 June 28,1997 June 29,1996
------------ ------------ ------------
Federal
Current $ 10,080,000 $ 371,000 $ 32,000
Deferred (1,134,000) 822,000 (2,711,000)
State
Current 2,699,000 303,000
Deferred (294,000) (771,000)
Foreign
Current 854,000 505,000
Deferred ------------ --------------- ------------
Total $ 12,205,000 $ 2,001,000 $ (3,450,000)
============ =============== ============
Deferred taxes based upon differences between the financial statement
and tax bases of assets and liabilities and available tax carryforwards
consisted of:
[Enlarge/Download Table]
Fiscal Year Ended
June 27, 1998 June 28, 1997
------------- -------------
Allowance for doubtful accounts $1,309,065 $ 960,000
Depreciation and amortization (1,099,679) (1,060,680)
Other deferred items, net 175,940 (302,415)
Net operating loss carry-forwards 1,764,253 2,349,579
Inventory reserves and capitalization 1,938,643 713,568
Unrealized gains on securities available for sale -- (720,058)
---------- ----------
Net deferred tax asset $4,088,222 $1,939,994
========== ==========
During 1996, the Company re-assessed the measurement of deferred tax
assets based on available evidence and concluded that a valuation allowance was
unnecessary. Accordingly, a valuation allowance of $3,463,066 was eliminated in
the fourth quarter of fiscal 1996.
The Company has net loss carry-forwards at June 27, 1998 expiring as
follows:
[Download Table]
YEAR CARRY-FORWARD EXPIRES AMOUNT
-------------------------- ------
2008 $1,273,000
2009 2,665,000
2110 60,000
2111 45,000
----------
Total $4,043,000
==========
46
As a result of certain transactions, the Company's ability to utilize
its net operating loss carryforwards to offset otherwise taxable income is
limited annually under Internal Revenue Code Section 382. The amount of such
annual limitation is approximately $2,000,000.
A reconciliation of the statutory federal income tax rate to the
effective rate was as follows:
[Download Table]
Fiscal Years Ended
------------------
June 27, June 28, June 29,
1998 1997 1996
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effective state tax rate 4.9 4.8 4.8
Permanent differences 0.3 2.3
Effect of foreign tax rate (2.1) (8.8)
Utilization of operating loss carryforwards (34.6)
Change in valuation allowance (296.9)
Other (0.2) (2.0) (9.4)
---- ---- ------
Effective income tax rate 37.9% 31.3% (301.1)%
==== ==== =======
U.S. income taxes were not provided on certain unremitted earnings of
Salton Hong Kong, Ltd. which the Company considers to be permanent investments.
The cumulative amount of U.S. income taxes which have not been provided totaled
approximately $854,000 at June 27, 1998.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly financial data is as follows (amounts in thousands,
except per share data).
[Download Table]
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998
Net sales $65,773 $102,153 $68,099 $69,574
Gross profit 24,797 35,029 26,159 27,911
Net income 4,124 5,448 2,778 7,631
Earnings per share: Basic 0.32 0.42 0.21 0.58
Earnings per share: Diluted 0.31 0.40 0.21 0.56
1997
Net sales $34,862 $58,837 $41,690 $47,417
Gross profit 9,689 18,027 12,582 13,109
Net income (loss) 1,129 3,977 (677) (30)
Earnings (loss) per share:Basic 0.09 0.31 (0.05) (0.00)
Earnings (loss) per share: Diluted 0.09 0.30 (0.05) (0.00)
16. SUBSEQUENT EVENTS
THE NEW CREDIT AGREEMENT
The Company entered into the New Credit Agreement dated as of July 27,
1998 with an investment banking firm. This agreement provides for $215.0 million
in senior secured credit facilities consisting of a Tranche A $90.0 million term
loan, a $75.0 million Delayed Draw Term Loan, and a five year $50.0 million
senior secured revolving credit facility maturing on July 27, 2003. In addition,
the New Credit Agreement allows the Company to undertake a subordinated notes
offering of up to $125 million. Proceeds of the offering, if undertaken, would
be required to be used to repay the Tranche A $90 million term loan, amounts
outstanding, if any, under the Delayed Draw Term Loan and amounts outstanding
under the senior secured Revolving Credit Facility, respectively, up to a total
47
of $115 million. Any excess amount would be available as cash to the Company. On
July 28, 1998, the Company borrowed the Tranche A term loan in order to complete
the repurchase subsequently described in this note.
The Company's borrowings under the New Credit Agreement are at an
established base rate (equivalent to the prime rate of interest) plus an
applicable margin or, at the Company's election, a eurodollar rate (equivalent
to the LIBOR rate) plus an applicable margin based on a range of ratios of total
debt to earnings before interest, taxes, depreciation and amortization. At July
28, 1998, the base rate plus applicable margin was 9.6% and the eurodollar rate
plus applicable margin was 7.8%.
The New Credit Agreement contains certain limitations restricting
company activity and financial covenants, the most significant of which are, as
defined, minimum interest coverages, fixed charge coverages and maximum total
leverage.
The Tranche A term loan matures in twenty consecutive installments
commencing on September 30, 1998.
The future maturities are:
1999 $ 3,750,000
2000 5,000,000
2001 20,000,000
2002 25,000,000
2003 28,750,000
Thereafter 7,500,000
-----------
$90,000,000
===========
The commitment for the Delayed Draw Term Loan expires on July 27, 1999.
This loan, if drawn, matures in sixteen consecutive quarterly installments,
commencing on September 30, 1999. Future installment payments would be made
quarterly in accordance with the following table:
Installments Principal Amount
------------ ----------------
1 through 4 $ 2,500,000
5 through 12 5,000,000
13 through 16 6,250,000
In addition to the preceding maturity schedules, the Company is
required to make additional mandatory payments of 50% of the defined annual
excess cash flow of the Company, 100% of the net proceeds of any sale or
disposition of certain assets, and 100% of the net proceeds of the incurrence of
certain indebtedness. All such amounts are first applied to the prepayment of
outstanding term loans and secondly to the reduction of the Revolving Credit
Facility.
THE PREFERRED STOCK
On July 28, 1998, Salton also issued $40 million of convertible
preferred stock to a private investment firm in connection with a Stock Purchase
Agreement dated July 15, 1998. The convertible preferred stock is generally
non-dividend bearing and is convertible into 2,352,941 shares of Salton common
stock (reflecting a $17 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.
48
In connection with the convertible preferred stock issuance, two
individuals representing the private investment firm were appointed to serve on
the Company's Board of Directors.
THE REPURCHASE
On July 28, 1998, the Company repurchased (the "Repurchase") 6,535,072
shares of Salton common stock owned by Windmere pursuant to a Stock Agreement
dated as of May 6, 1998 (the "Windmere Stock Agreement") by and among Salton,
Windmere and the executive officers of Salton. Prior to the Repurchase, Windmere
owned approximately 50% of Salton's outstanding common stock. The price for the
Repurchase was $12 per share in cash plus a $15 million subordinated promissory
note. The note, which has a term of six and one-half years and bears interest at
4% per annum payable annually, is subject to offsets of 5% of the total purchase
price paid by Salton for product purchases from Windmere and its affiliates
during the term of the note. The principal amount of the note is also subject to
reduction in the event Salton's supply agreement with Kmart is terminated for
any reason.
The Company (i) paid the cash portion of the purchase price for the
Repurchase, (ii) refinanced the Facility described in note 4 and (iii) paid
certain related fees and expenses in connection with the Repurchase with the net
proceeds from the Convertible Preferred Stock Issuance and borrowings of $90
million under the Tranche A term loan.
In connection with the Repurchase: (i) Windmere repaid in full its
promissory note in the principal amount of $10,847,620, that was issued to
Salton in July, 1996; (ii) Salton repurchased for approximately $3.3 million
Windmere's option to purchase up to 458,500 shares of Salton, that was granted
to Windmere in July, 1996; and (iii) Windmere and Salton agreed to continue
various commercial and other arrangements, including an agreement relating to
Salton's supply agreement with Kmart, subject to certain modifications.
Effective upon the closing of the Repurchase, each of the persons who
had been designated by Windmere to serve on Salton's Board of Directors resigned
from Salton's Board of Directors.
THE TOASTMASTER TRANSACTION
On August 26, 1998, the Company entered into a definitive merger
agreement ("Agreement") for the acquisition of Toastmaster Inc. The Agreement
provides for Toastmaster Inc. shareholders to receive $7.00 per share in cash,
for a total purchase price, including related costs, of approximately $60.0
million. The Company intends to finance the transaction through available credit
facilities.
The transaction is expected to close in the last calendar quarter of
1998, and is subject to, among other things, the approval of the holders of 66
2/3 % of the outstanding shares of Toastmaster Inc. common stock.
*****
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to the Directors of the
Company is incorporated herein by reference to the information set forth under
the caption "Election of Directors" in the Company's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders, since such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Company's fiscal year pursuant to Regulation 14A. Information
required by this Item 10 as to the executive officers of the Company is included
in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the information set forth under the caption "Compensation of Directors and
Executive Officers" in the Company's definitive Proxy Statement for the 1998
Annual Meeting of Stockholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference
to the information set forth under the caption "Stock Ownership of Principal
Holders and Management" in the Company's definitive Proxy Statement for the 1998
Annual Meeting of Stockholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information required by this Item 13 is incorporated by reference
to the information set forth under the caption "Certain Transactions" in the
Company's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON REPORT 8-K
(A)(1) FINANCIAL STATEMENTS
The following Financial Statements of the registrant and its
subsidiaries are included in Part II, Item 8:
[Enlarge/Download Table]
PAGE
----
Independent Auditors'
Report 34
Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997 35
Consolidated Statements of Earnings for the Years Ended
June 27, 1998, June 28, 1997 and June 29, 1996 36
Consolidated Statements of Stockholders' Equity for the Years Ended
June 27, 1998, June 28, 1997 and June 29, 1996 37
Consolidated Statements of Cash Flows for the Years Ended June 27, 1998,
June 28, 1997 and June 29, 1996 38
Notes to the Consolidated Financial Statements 39
(A)(2) FINANCIAL STATEMENTS SCHEDULES
The following Financial Statement Schedules of the Registrant are included
in Item 14 hereof.
[Download Table]
PAGE
----
Schedule VIII-Valuation and Qualifying Accounts 55
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(A)(3) EXHIBITS
See Exhibit Index for the Exhibits filed as part of or incorporated by
reference into this Report.
(B) REPORTS ON FORM 8-K
(i) Current Report on Form 8-K dated May 6, 1998 reporting under Item 5,
Other Events, the Company's entering into the Windmere Stock
Agreement.
(ii) Current Report on Form 8-K dated June 26, 1998 reporting under Item 5,
Other Events, the Company's giving of written notice to Windmere of
its intention to consumate the Stock Repurchase (iii)
(iii) Current Report on Form 8-K dated July 2, 1998 reporting under Item 5,
Other Events, the Company's obtaining a commitment letter from Lehman
Brothers, Inc. for a senior secured credit facility of up to $215
million.
(iv) Current Report on Form 8-K dated July 15, 1998 reporting under Item 5,
Other Events, the Company's entering into the Preferred Stock
Agreement.
(v) Current Report on Form 8-K dated July 28, 1998 reporting under Item 5,
Other Events, the consummation of the Stock Repurchase.
51
(vi) Current Report on Form 8-K dated August 26, 1998 reporting under Item
5, Other Events, the Company's entering into a definitive merger
agreement to acquire Toastmaster.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on the 21st day of
September, 1998.
SALTON/MAXIM HOUSEWARES, INC.
By: /s/ Leonhard Dreimann
Leonhard Dreimann
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on September 21, 1998:
SIGNATURE
---------
/s/ Leonhard Dreimann Chief Executive Officer and Director
Leonhard Dreimann (Principal Executive Officer)
/s/ William B. Rue President, Chief Operating Officer,
William B. Rue Treasurer, Chief Financial Officer (Principal
Accounting and Financial Officer) and Director
/s/ David Sabin Director
David C. Sabin
/s/ Frank Devine Director
Frank Devine
/s/ Bert Doornmalen Director
Bert Doornmalen
/s/ Robert A. Bergmannn Director
Robert A. Bergmann
/s/ Bruce G. Pollack Director
Bruce G. Pollack
53
The following page contains the Financial Statement Schedules as specified
by Item 14(a)(2) of Part IV of Form 10-K. The report of Deloitte & Touche LLP
thereon appears at page 34 of this Form 10-K.
54
SALTON/MAXIM HOUSEWARES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JUNE 27, 1998
[Enlarge/Download Table]
CHARGED TO
BEGINNING COSTS AND ENDING
BALANCE EXPENSES DEDUCTIONS BALANCE
--------- ----------- ------------ ----------
YEAR ENDED JUNE 29, 1996:
Allowance for returns,
allowances and doubtful accounts $1,900,000 $ 9,770,000 $(9,770,000) $1,900,000
YEAR ENDED JUNE 28, 1997:
Allowance for returns,
allowances and doubtful accounts $1,900,000 $15,244,000 $(14,744,000) $2,400,000
YEAR ENDED JUNE 27, 1998:
Allowance for returns,
allowances and doubtful accounts $2,400,000 $21,572,000 $(21,152,000) $3,000,000
55
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
2.1 Agreement and Plan of Merger, dated August 26, 1998, among the
Registrant, Columbia Acquisition Corp. and Toastmaster Inc.
Incorporated by reference to the Registrant's Current Report
on Form 8-K dated August 26, 1998.
2.2 Shareholders Agreement, dated August 26, 1998, between the
Registrant and certain shareholders of Toastmaster.
Incorporated by reference to the Registant's Current Report on
Form 8-K dated August 26, 1998.
3.1 Amended and Restated Certificate of Incorporation of
Registrant. Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-42097).
3.2 By-laws of the Registrant. Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-42097).
3.3 Certificate of Designation for the Series A Convertible
Preferred Stock of the Registrant. Incorporated by reference
to the Registrant's Current Report on Form 8-K dated July 28,
1998.
4.1 Specimen Certificate for shares of Common Stock, $.01 par
value, of the Registrant. Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-42097).
10.1 Salton/Maxim Housewares, Inc. Stock Option Plan. Incorporated
by reference to the Registrant's Registration Statement on
form S-1 (Registration No. 33-42097).
10.2 Stockholders Agreement, dated August 6, 1991, by and among the
Registrant, Braddock Financial Corporation, Financo Investors
Fund, L.P., and Mesirow Private Equity, Inc. (successor to
Mesirow Venture Capital, Inc.) as the authorized
representative of Mesirow Capital Partners III, Mesirow
Capital Partners IV, Mesirow Capital Partners V and Allied
Investment Corporation. Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-42097).
10.3 Form of Sales Representative Agreement generally used by and
between the Registrant and its sales representatives.
Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-42097).
10.4 Stock Registration Rights Agreement, dated as of August 6,
1991, by and between the Registrant, Braddock Financial
Corporation, Financo Investors Fund, L.P., Mesirow Capital
Partners II, Mesirow Capital Partners IV, Mesirow Capital
Partners V and Allied Investment Corporation. Incorporated by
reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-42097).
10.5 Salton/Maxim Housewares, Inc. 1995 Employee Stock Option Plan.
Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 30, 1995.
10.6 Salton/Maxim Housewares, Inc. Non-Employee Directors Stock
Option Plan. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 30, 1995.
56
10.7 Asset Purchase Agreement dated July 1, 1996 by and among the
Registrant, Block China Corporation and Robert C. Block
Incorporated by reference from the Company's Current Report on
Form 8-K dated July 1, 1996.
10.8 License Agreement dated as of February 1, 1996 by and between
White Consolidated Industries Inc. and the Registrant.
Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q/A for the fiscal quarter ended December 28, 1996.
10.9 License Agreement dated as of May 21, 1996 by and between
White Consolidated Industries Inc. and the Registrant.
Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q/A for the fiscal quarter ended December 28, 1996.
10.10 Purchase, Distribution and Marketing Agreement dated as of
January 27, 1997 between the Registrant and Kmart Corporation.
Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q/A for the fiscal quarter ended December 28, 1996.
10.11 Employment Agreement dated as of December 19, 1997 between the
Registrant and Leonhard Dreimann.
10.12 Employment Agreement dated as of December 19, 1997 between the
Registant and David C. Sabin.
10.13 Employment Agreement dated as of December 19, 1997 between the
Registrant and William B. Rue.
10.14 Stock Agreement, dated as of May 6, 1998, by and between the
Registrant, Windmere-Durable Holdings, Inc. and the Salton
Executive Related Parties (as defined therein). Incorporated
by reference to the Registrant's Current Report on Form 8-K
dated May 6, 1998.
10.15 Note, dated July 27, 1998, issued by the Registrant to
Windmere-Durable Holdings, Inc. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.16 Agreement dated July 27, 1998, between the Registrant to
Windmere-Durable Holdings, Inc. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.17 Credit Agreement dated July 27, 1998 among the Registrant, the
several lenders from time to time parties thereto, Lehman
Brothers Inc., as arranger, Lehman Commercial Paper Inc., as
syndication agent, and Lehman Commercial Paper Inc., as
administrative agent. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 28, 1998.
10.18 Stock Purchase Agreement dated July 15, 1998 by and among the
Registrant and Centre Capital Investors III, L.P., Centre
Capital Tax-Exempt Investors II, L.P., Centre Capital Offshore
Investors, L.P., The State Board of Administration of Florida,
Centre Parallel Management Partners, L.P. and Centre Partners
Coinvestment, L.P. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 15, 1998.
10.19 Registration Rights Agreement dated July 15, 1998 by and among
the Registrant and Centre Capital Investors II, L.P., Centre
Capital Tax-Exempt Investors II, L.P., Centre Capital Offshore
Investors II, L.P., The State Board of Administration of
Florida, Centre Parallel Management Partners, L.P. and Centre
Partners Coinvestment, L.P. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 28, 1998.
57
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule-- December 31, 1997
58
Dates Referenced Herein and Documents Incorporated by Reference
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