<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 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 of other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
550 BUSINESS CENTER DRIVE
MOUNT PROSPECT, ILLINOIS 60056
(Address of principal executive (Zip Code)
offices)
(847) 803-4600
(Registrant's telephone number, including area code)
N/A
Former name, former address and former fiscal year, if changed since last year
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of October 26, 1998 -
6,568,802 shares of its $.01 par value Common Stock.
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SALTON/MAXIM HOUSEWARES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 26, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets-September 26, 1998
(Unaudited) and June 27, 1998 3
Consolidated Statements of Earnings (Unaudited)
Thirteen weeks ended
September 26, 1998 and
September 27, 1997 4
Consolidated Statements of Cash Flows (Unaudited)
Thirteen weeks ended
September 26, 1998 and
September 27, 1997 5
Notes to Consolidated Financial
Statements (Unaudited) 6
Item 2: Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 6: Exhibits and Reports on Form 8-K 14
Signature 16
</TABLE>
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SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
ASSETS SEPT 26, JUNE 27,
1998 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,017 $ 661
Accounts receivable, net of allowances 65,708 43,225
Inventories 93,151 76,505
Prepaid expenses and other current assets 2,668 2,941
Deferred tax assets 4,213 4,605
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TOTAL CURRENT ASSETS 166,757 127,937
PROPERTY, PLANT AND EQUIPMENT:
Molds and tooling 17,102 16,787
Warehouse equipment 481 453
Office furniture and equipment 5,571 5,342
-------- --------
23,154 22,582
Less accumulated depreciation (15,180) (14,266)
-------- --------
7,974 8,315
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION 8,797 5,145
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TOTAL ASSETS $183,528 $141,397
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 21,787 $ 18,960
Accrued expenses 7,330 7,235
Income taxes payable 9,360 6,499
Revolving line of credit 20,000 50,475
Current portion - Long-term debt 5,000
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TOTAL CURRENT LIABILITIES 63,477 83,169
NON-CURRENT DEFERRED TAX LIABILITY 567 517
LONG-TERM DEBT 85,000
NOTE PAYABLE 8,907
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TOTAL LIABILITIES 157,951 83,686
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized,
2,000,000 shares; 40,000 shares issued
Common stock, $.01 par value; authorized,
20,000,000 shares; issued and outstanding,
1999-6,568,802 shares, 1998-13,072,144 shares 131 131
Treasury Stock (90,804)
Additional paid-in capital 90,484 53,481
Less Note Receivable - Windmere (10,848)
Retained Earnings 25,766 14,947
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TOTAL STOCKHOLDERS' EQUITY 25,577 57,711
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $183,528 $141,397
======== ========
</TABLE>
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SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------
09/26/98 09/27/97
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<S> <C> <C>
NET SALES $104,388 $65,773
Cost of goods sold 55,004 38,697
Distribution expenses 3,609 2,279
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GROSS PROFIT 45,775 24,797
Selling, general and administrative expenses 27,780 16,977
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OPERATING INCOME 17,995 7,820
Interest expense 2,399 1,263
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INCOME BEFORE INCOME TAXES 15,596 6,557
Income taxes 4,777 2,433
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Net income $ 10,819 $ 4,124
======== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,794,014 13,029,144
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 10,680,269 13,446,461
NET INCOME PER COMMON SHARE : BASIC $ 1.23 $ 0.32
NET INCOME PER COMMON SHARE : DILUTED $ 1.01 $ 0.31
</TABLE>
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SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------
09/26/98 09/27/97
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income: $ 10,819 $ 4,124
Adjustments to reconcile net income
to net cash used in operating activities:
Changes in deferred taxes 442 330
Depreciation and amortization 1,244 888
Purchase reduction of note payable
and other non-cash items (251)
Changes in assets and liabilities:
Accounts receivable (22,483) (23,907)
Inventories (16,646) (15,903)
Prepaid expenses and other
current assets 273 (2,015)
Accounts payable 2,827 2,859
Taxes payable 2,861 1,105
Accrued expenses 95 2,458
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NET CASH USED IN OPERATING ACTIVITIES (20,819) (30,061)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (589) (884)
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NET CASH USED IN INVESTING ACTIVITIES (589) (884)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment) proceeds from revolving line of credit (30,475) 32,467
Proceeds from long-term debt 90,000
Repayment of subordinated debt and due to Windmere (3,796)
Costs associated with refinancing (3,966)
Common stock issuance 2
Preferred stock issuance 40,000
Purchase of treasury stock (70,799)
Costs associated with preferred stock issuance (2,998)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 21,764 28,671
NET INCREASE (DECREASE) IN CASH $ 356 $ (2,274)
Cash, beginning of period 661 2,613
-------- --------
Cash, end of period $ 1,017 $ 339
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 610 $ 1,408
Income taxes $ 1,474 $ 193
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In the quarter ended September 26,1998, the Company repurchased 6,535,072
shares of the Company's common stock from Windmere-Durable Holdings
Inc.("Windmere") for a total purchase price of $90,804,024. The purchase price
included the issuance of a six and one-half year $15,000,000 subordinated
promissory note which bears interest at 4% per annum recorded at its fair value
of $9,095,715 and the effective repayment of Windmere's promissory note to
Salton for the principal amount of $10,847,620.
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SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS.
The consolidated financial statements have been prepared from the
Company's records without audit and are subject to year end adjustments. The
interim consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of financial information. The interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Salton/Maxim
Housewares, Inc. 1998 Annual Report to Shareholders and the Annual Report on
Form 10-K. The results of operations for the interim periods should not be
considered indicative of results to be expected for the full year.
2. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE.
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 for options and warrants and the if-converted method for convertible
securities.
3. EFFECT OF NEW ACCOUNTING STANDARDS AND STATEMENTS
During the first quarter of fiscal 1999 the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This statement requires that the Company report the change in its net
assets during the period from non-owner sources. For the 13 weeks ended
September 27, 1997 components of other comprehensive income include holding
gains arising from available for sale securities, net of tax.
13 WEEKS ENDED
--------------
(DOLLARS IN THOUSANDS) 09/26/98 09/27/97
-------- --------
Net income $ 10,819 $ 4,124
Other comprehensive income 2,517
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$ 10,819 $ 6,641
======== =======
In February 1998 the Financial Accounting Standards Board issued
Financial Accounting Standards," No. 132 (SFAS 132), "Employer's Disclosures
about Pensions and other Post-Retirement Benefits." This statement is effective
for fiscal years beginning after 12/15/97 and will change disclosure
requirements for Pensions and other Post-Retirement Benefits. The Company will
be required to comply with the provisions of this statement in fiscal 1999. The
effect of this new statement will be limited to the form and content of
disclosures.
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In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities." This statement is effective for fiscal years beginning
after 6/15/99 and will change disclosure requirements for Derivative Instruments
and Hedging Activities. The Company will be required to comply with the
provisions of this statement in fiscal 1999. The Company has not assessed the
effect that this new standard will have on its consolidated financial statements
and/or disclosures.
4. EVENTS OF THE QUARTER ENDED SEPTEMBER 26, 1998.
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
the first quarter of fiscal 1999, the Company purchased approximately $13.9
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, that 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 that 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 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). The Repurchase, borrowings under the New Credit Agreement and the
Convertible Preferred Stock Issuance are collectively referred to herein as the
"Recapitalization."
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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 $52.2 million on September
30, 1998.
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 second or third quarter of fiscal 1999. 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.
In November 1996, White Consolidated Industries, Inc. ("WCI") filed
suit for injunctive relief and damages against Westinghouse Electric Corporation
(now known as CBS Corporation ("CBS") in the United States District Court for
the Northern District of Ohio alleging that CBS's grant of licenses of 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 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 (the "Trademark
Litigation"). 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 being limited 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
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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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998 COMPARED WITH THIRTEEN WEEKS
ENDED SEPTEMBER 27, 1997.
Net sales in the quarter ended September 26, 1998 ("first quarter of
fiscal 1999") were $104.4 million, an increase of approximately $38.6 million or
58.7%, compared to net sales of $65.8 million in the quarter ended September 27,
1997("first quarter of fiscal 1998"). This increase is primarily attributable to
increased sales of the George Foreman Grills(R), White-Westinghouse(R) sales
under the Kmart program, sales of the Juiceman(R) juice extractors, and
Farberware(R) products. Net sales of White-Westinghouse(R) products to Kmart
approximated 14% of net sales in the first quarter of fiscal 1999 compared to
16% of net sales in the same period in fiscal 1998.
Gross profit in the first quarter of fiscal 1999 was $45.8 million or
43.9% of net sales as compared to $24.8 million or 37.7% in the same period in
fiscal 1998. Cost of goods sold during the first quarter of fiscal 1999
decreased to 52.7% of net sales compared to 58.8% in the same period in fiscal
1998. Distribution expenses were $3.6 million or 3.5% of net sales in the first
quarter of fiscal 1999 compared to $2.3 million or 3.5% of net sales in the same
period in fiscal 1998. Gross profit and costs of goods sold in the first quarter
of fiscal 1999 as a percentage of net sales were improved primarily due to lower
costs on certain products of the Company and due to a more favorable mix of
sales in their respective channels of distribution when compared to the same
period in fiscal 1998.
Selling, general and administrative expenses increased to $27.8 million
or 26.6% of net sales in the first quarter of fiscal 1999 compared to $17.0
million or 25.8% of net sales for the same period in fiscal 1998. Expenditures
for television, royalty expenses, certain other media and cooperative
advertising coverages and trade show expenses were $19.0 million or 18.2% of net
sales in the first quarter of fiscal 1999 when compared to $11.1 million or
16.9% of net sales in the same period in fiscal 1998. The remaining selling,
general and administrative costs were $8.8 million or 8.4% of net sales in the
first quarter of fiscal 1999 compared to $5.9 million or 8.9% of net sales in
the same period in fiscal 1998. These increases were primarily attributable to
higher costs for additional personnel, sales commissions and various other costs
related to the higher level of sales.
As a result of the foregoing, operating income increased by $10.2
million or 130.8%, to $18.0 million in the first quarter of fiscal 1999 from
$7.8 million in the same period in fiscal 1998. Operating income as a percentage
of net sales increased to 17.2% in the first quarter of fiscal 1999 from 11.9%
in the same period of fiscal 1998.
Net interest expense was approximately $2.4 million for the first
quarter of fiscal 1999 compared to $1.3 million for the same period in fiscal
1998. The Company's rate of interest on amounts outstanding was a weighted
average annual rate of 7.8% in the first quarter of fiscal 1999 compared to 8.5%
in the same period in fiscal 1998. The average amount outstanding under the
Company's New Credit Facility was $70.5 million for the first quarter of fiscal
1999 compared to $56.1 million for the same period in fiscal 1998. This increase
was used to complete the Stock
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<PAGE> 11
Repurchase, refinance the Company's Old Credit Facility with a commercial lender
("Old Credit Facility") and to finance higher net sales and a seasonal build in
accounts receivable and inventory.
The Company had income before income taxes of $15.6 million in the
first quarter of fiscal 1999 compared to income before income taxes of $6.6
million in the same period in fiscal 1998. The Company had income tax expense of
$4.8 million in the first quarter of fiscal 1999 as compared to income tax
expense of $2.4 million in the same period in fiscal 1998. Net income was $10.8
million in the first quarter of fiscal 1999 compared to net income of $4.1
million in the same period in fiscal 1998. Basic earnings per common share were
$1.23 per share on weighted average common shares outstanding of 8,794,014 in
the first quarter of fiscal 1999 compared to earnings of $0.32 per share on
weighted average common shares outstanding of 13,029,144 in the same period in
fiscal 1998. Diluted earnings per common share were $1.01 per share on weighted
average common shares outstanding, including dilutive common stock equivalents,
of 10,680,269 in the first quarter of fiscal 1999 compared to earnings of $0.31
per share on weighted average common shares outstanding, including dilutive
common stock equivalents, of 13,446,461 in the same period in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal 1999, the Company used net cash of
$20.8 million in operating activities and $589,000 in investing activities. This
resulted primarily from the growth in sales in the period and higher levels of
inventory and receivables, as well as increased investment in capital assets,
primarily tooling. Financing activities provided cash of $21.8 million. This
resulted primarily from the issuance of preferred stock of $40.0 million,
proceeds from the Tranche A Term Loan of $90.0 million under the New Credit
Facility, draws of $20.0 million under the revolving line of credit, reduced by
the refinancing of the Old Credit Facility of $50.5, the purchase of treasury
stock of $70.8 million, the payment of costs associated with refinancing of $3.9
million and the payment of certain costs associated with the issuance of
preferred stock of $3.0 million.
On July 28, 1998, Salton entered into the New Credit Agreement. The
Company used the 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 (this 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 26, 1998, the Company had approximately $90.0
million outstanding under the Tranche A Term Loan and $20.0 million under the
Revolving Credit Facility and had the ability to borrow up to an additional
$105.0 million including the $75.0 million Delayed Draw Term Loan. Typically,
given the seasonal nature of the Company's business, the Company's borrowings
tend to be the highest in mid-Summer to Fall.
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 $52.2 million on September 30, 1998, in connection with
the Toastmaster Acquisition. Salton expects to fund this commitment through a
combination of
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borrowings under 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 New Credit Agreement contains a number of significant covenants
that, among other things, restrict the ability of the Company to dispose of
assets, incur additional indebtedness, prepay other indebtedness, pay dividends,
repurchase or redeem capital stock, enter into certain investments, enter into
sale and lease-back transactions, make certain acquisitions, engage in mergers
and consolidations, create liens, or engage in certain transactions with
affiliates, and that will otherwise restrict corporate and business activities.
In addition, under the New Credit Agreement, 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.
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 is subject
to general economic, financial, competitive and other factors that are beyond
its control. The Company's ability to fund its operating activities 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.
FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. 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 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
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<PAGE> 13
integration of Toastmaster if the Toastmaster Acquisition is consumated,
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 the Company's filings with the Securities and
Exchange Commission. When used in this Quarterly Report on Form 10-Q, the words
"estimate," "project," "anticipated," "expect," "intend," "believe," and similar
expressions are intended to identify forward-looking statements.
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 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 to the Company's activities
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 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.
-13-
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 1: 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 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.
ITEM 6: EXHIBITS AND 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) 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
-14-
<PAGE> 15
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.
(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.
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements 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.
SALTON/MAXIM HOUSEWARES, INC.
Date: October 27, 1998 /s/WILLIAM B. RUE
William B. Rue
President and
Chief Operating Officer
(Duly Authorized Officer
of the Registrant)
-16-
<PAGE> 17
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
27 Financial Data Schedule
-17-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
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<S> <C>
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0
0
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