<PAGE> 1
As filed with the Securities and Exchange Commission on February 1, 1999.
REGISTRATION NO. 333-70169
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SALTON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 5064 36-3777824
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
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WILLIAM B. RUE
PRESIDENT AND CHIEF OPERATING OFFICER
SALTON, INC.
550 BUSINESS CENTER DRIVE
MOUNT PROSPECT, ILLINOIS 60056
(847) 803-4600
(Address, including zip code, and telephone number,
including area code, or registrant's principal executive offices)
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WITH COPIES TO:
NEAL AIZENSTEIN, ESQ.
SONNENSCHEIN NATH & ROSENTHAL
8000 SEARS TOWER
CHICAGO, ILLINOIS 60606
(312) 876-8938
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities registered on this form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a).
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<PAGE> 2
The information in the prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED FEBRUARY 1, 1999
[LOGO]
OFFER TO EXCHANGE
ALL OUTSTANDING 10 3/4% SENIOR
SUBORDINATED NOTES DUE 2005
($125,000,000 AGGREGATE PRINCIPAL
AMOUNT OUTSTANDING)
FOR
10 3/4% SENIOR SUBORDINATED
NOTES DUE 2005 OF
SALTON, INC.
TERMS OF EXCHANGE OFFER
- - Expires 5:00 p.m., New York City time, , 1999, unless
extended
- - Not subject to any condition other than that the Exchange Offer not violate
applicable law or any applicable interpretation of the Staff of the Securities
and Exchange Commission
- - All outstanding notes that are validly tendered and not validly withdrawn will
be exchanged
- - Tenders of outstanding notes may be withdrawn any time prior to 5:00 p.m. on
the business day prior to expiration of the Exchange Offer
- - The exchange of notes will not be a taxable exchange for the U.S. federal
income tax purposes
- - We will not receive any proceeds from the Exchange Offer
- - The terms of the notes to be issued are substantially identical to the
outstanding notes, except for certain transfer restrictions and registration
rights relating to the outstanding notes
------------------------
See "Risk Factors" beginning on page 25 for a discussion of certain matters
that should be considered by prospective investors.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes to be distributed in the
exchange offer, nor have any of these organizations determined that this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
The date of this Prospectus is , 1999
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TABLE OF CONTENTS
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PAGE
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Forward-Looking Statements.................................. 2
Available Information....................................... 4
Incorporation of Certain Documents by Reference............. 4
Summary..................................................... 6
Risk Factors................................................ 25
Use of Proceeds............................................. 36
The Exchange Offer.......................................... 37
Capitalization.............................................. 44
Pro Forma Condensed Consolidated Financial Information...... 45
Selected Historical Financial and Other Data................ 53
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 57
Business.................................................... 67
Management.................................................. 80
Share Ownership............................................. 84
Certain Transactions........................................ 85
Description of Preferred Stock and Certain Indebtedness..... 86
Description of the New Notes................................ 88
Plan of Distribution........................................ 115
Legal Matters............................................... 116
Experts..................................................... 116
Index to Financial Statements............................... F-1
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FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including without limitation the statements under
"Summary," "Risk Factors," "Pro Forma Condensed Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." The words "believes," "anticipates,"
"plans," "expects," "intends," "estimates" and similar expressions are intended
to identify forward-looking statements. These forward looking statements involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following:
- Our degree of leverage;
- Economic conditions and the retail environment;
- The timely development, introduction and customer acceptance of our
products;
- Competitive products and pricing;
- Dependence on foreign suppliers and supply and manufacturing constraints;
- Our relationship and contractual arrangements with key customers,
suppliers and licensors;
- Cancellation or reduction of orders;
- The integration of Toastmaster Inc., including the failure to realize
anticipated revenue enhancements and cost savings;
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- The risks relating to pending legal proceedings; and
- Other factors both referenced and not referenced in this Prospectus.
We undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this Prospectus.
-------------------------
Salton(R), Maxim(R), Breadman(R), Juiceman(R), Salton Creations(R), Salton
Time(R), Toastmaster(R) and Ingraham(R) and various product names used herein
are registered trademarks of Salton, Inc. Other trademarks used herein are the
property of their respective owners.
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AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith we
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Suite 1400, Northwestern Atrium Center, 14th Floor, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates by writing to the Commission, Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549. You may also access this information
electronically through the Commission's web page on the Internet at
http://www.sec.gov. This web cite contains reports, proxy statements and other
information regarding registrants such as ourselves that have filed
electronically with the Commission.
This Prospectus constitutes a part of a registration statement (the
"Registration Statement") filed by us with the Commission under the Securities
Act of 1933, as amended (the "Securities Act"). As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information contained in the Registration Statement and the exhibits and
schedules thereto. As such we make in this Prospectus reference to the
Registration Statement and to the exhibits and schedules thereto. For further
information about us and about the securities we hereby offer, you should
consult the Registration Statement and the exhibits and schedules thereto. You
should be aware that statements contained in this Prospectus concerning the
provisions of any documents filed as an exhibit to the Registration Statement or
otherwise filed with the Commission are not necessarily complete, and in each
instance reference is made to the copy of such document so filed. Each such
statement is qualified in its entirety by such reference.
The indenture governing the outstanding notes provides that we will furnish
to the holders of the notes copies of the periodic reports required to be filed
with the Commission under the Exchange Act. Even if we are not subject to the
periodic reporting and informational requirements of the Exchange Act, we will
make such filings to the extent that such filings are accepted by the
Commission. We will make these filings regardless of whether we have a class of
securities registered under the Exchange Act. Furthermore, we will provide the
Trustee for the notes and the holders of the notes within 15 days after such
filings with annual reports containing the information required to be contained
in Form 10-K, and quarterly reports containing the information required to be
contained in Form 10-Q promulgated by the Exchange Act. From time to time, we
will also provide such other information as is required to be contained in Form
8-K promulgated by the Exchange Act. If the filing of such information is not
accepted by the Commission or is prohibited by the Exchange Act, we will then
provide promptly upon written request, and at our cost, copies of such reports
to prospective purchasers of the notes.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We hereby incorporate by reference into this Prospectus the following
documents or information filed with the Commission (File No. 000-19557):
(a) the Company's Annual Report on Form 10-K for the fiscal year ended June
27, 1998 (the "1998 10-K"), filed with the Commission on September 25, 1998, as
amended by the amendment to the 1998 10-K filed with the Commission on October
21, 1998.
(b) the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 26, 1998, filed with the Commission on November 10, 1998.
(c) The Company's Current Report on Form 8-K dated January 8, 1999.
(d) all documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of the Registration
Statement of which this Prospectus is part and
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prior to the effectiveness thereof or subsequent to the date of this Prospectus
and prior to the termination of the offering made hereby.
Any statement contained herein, or in any documents incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for the purpose of this Prospectus to the extent that a subsequent
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available without charge upon
written or oral request from William B. Rue, Chief Operating Officer of the
Company at the Company's principal executive offices located at 550 Business
Center Drive, Mount Prospect, Illinois 60056, telephone number (847) 803-4600.
---------------
This Exchange Offer is not being made to, nor will we accept surrenders for
exchange from, holders of outstanding notes in any jurisdiction in which this
Exchange Offer or the acceptance thereof would not be in compliance with the
Securities or Blue Sky laws of such jurisdiction.
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SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire Prospectus, including the financial data and
related notes and the information set forth under the heading "Risk Factors,"
before making an investment decision. In January 1999, we changed our name to
"Salton, Inc." from "Salton Maxim Housewares Inc." Except as the context may
otherwise require, the terms "Salton", the "Company" and "we" as used in this
Prospectus refer to Salton, Inc. and its subsidiaries, other than Toastmaster
Inc. and its subsidiaries, which we acquired on January 7, 1999. See "-- Recent
Developments -- Toastmaster Acquisition."
THE EXCHANGE OFFER
We completed on December 16, 1998 the private offering of $125 million of
10 3/4% Senior Subordinated Notes due 2005. We entered into a registration
rights agreement with the initial purchaser in the private offering in which we
agreed, among other things, to deliver to you this Prospectus and to use our
best efforts to commence the Exchange Offer within 120 days of the issuance of
the 10 3/4% Senior Subordinated Notes due 2005. You are entitled to exchange in
the Exchange Offer your outstanding notes for registered notes with
substantially identical terms. You should read the discussion under the heading
"Summary Description of the New Notes" and "Description of the New Notes" for
further information regarding the registered notes.
We believe that the notes issued in the Exchange Offer may be resold by you
without compliance with the registration and prospectus delivery provisions of
the Securities Act, subject to certain conditions. You should read the
discussion under the headings "Summary of the Terms of Exchange Offer" and "The
Exchange Offer" for further information regarding the Exchange Offer and resale
of the notes.
THE COMPANY
GENERAL
We are 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). We
believe that we have 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. We also design and market personal and beauty care appliances under the
Salton Creations(R) brandname, 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. We believe that our strong market position and
success are attributable to our product innovation, strong relationships with
retailers, breadth of product offerings, reputation for quality products and
established brand names. Our net sales and EBITDA (as defined) have increased
from $48.8 million and $1.1 million in fiscal 1994 to $305.6 million and $34.0
million in fiscal 1998, which represents a compound annual growth rate of 58.2%
and 135.8%, respectively. For the twelve month period ended September 26, 1998,
our net sales and EBITDA increased to $344.2 million and $44.5 million.
We develop and introduce a wide selection of new products and enhance
existing products to satisfy the various tastes, preferences and budgets of
consumers and to service the needs of a broad range of retailers. Our kitchen
and small household electrical appliances are comprised of five major product
subcategories:
- 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;
- thermal products, including bread bakers, such as the Breadman Plus(R)
automatic bread baker, waffle makers, toasters, toaster ovens and irons;
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- coffee and tea related products, including espresso/cappuccino makers and
coffee makers;
- food preparation products, including electric woks, crepe makers, mixers,
can openers and blenders; and
- home comfort products, including fans, fan heaters and humidifiers.
We market and sell our products throughout the United States through our
own sales force and a network of approximately 170 independent commissioned
sales representatives. We sell our 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. In 1997, we entered into a seven-year supply agreement with Kmart to
supply a broad range of kitchen and small household electrical appliances under
the White-Westinghouse(R) brand name. Further, we sell certain of our products,
primarily Juiceman(R) fresh juice machines 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." We contract for the
manufacture of most of our products with independent manufacturers located
overseas, primarily in the Far East and Europe. We also manufacture and assemble
certain appliances in our plant located in Kenilworth, New Jersey.
Our common stock is traded on the Nasdaq National Market under the symbol
"SALT." On January 28, 1999, the last reported sale price of our common stock as
reported by Nasdaq was $28.00 per share, giving us an equity market value of
approximately $184 million based on 6,569,017 shares of our common stock
outstanding (excluding our outstanding convertible preferred stock, which is
currently convertible into 2,352,941 shares of our common stock).
THE INDUSTRY
According to the National Housewares Manufacturers Association, the small
household appliance industry was approximately a $11.5 billion retail business
in the United States in 1997. Historically, this industry has been characterized
as mature, fragmented and highly competitive. However, it has been consolidating
recently in response to the consolidation and changes within the retail
industry. We expect that retailers will continue to consolidate their vendor
base by dealing primarily with a smaller number of suppliers that can offer a
broad array of innovative, differentiated and quality products and comprehensive
levels of customer service. We believe that Salton, with our broad array of
innovative and quality product offerings, high level of customer service and
strong brand name recognition, is well positioned to benefit in this
environment.
COMPETITIVE STRENGTHS
We believe that the following competitive strengths contribute to our
position as a leading domestic designer and marketer in the small household
appliance industry and serve as a foundation for our business strategy.
MARKET LEADERSHIP. We believe that we have the leading U.S. market share
in juice extractors and indoor grills and a significant U.S. market share in
bread bakers and espresso makers. We believe that our leading market share in
these product lines provides us with a competitive advantage in terms of demand
from major retailers and enhanced brand awareness. Through internal and joint
product development and acquisitions of businesses and product lines, we have
enhanced our position as a leading supplier in the small household appliance
industry.
STRONG BRAND NAMES. We have built a portfolio of strong brand names which
we use 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, we have licensed the right to use the
White-Westinghouse(R) brand name for certain small household electrical
appliances, such as toasters, coffee makers, espresso/cappuccino makers and
bread makers, and distribute small household electrical appliances under the
Farberware(R)
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brand name. We believe that White-Westinghouse(R) and Farberware(R) are
time-honored traditions throughout the world for certain home appliances and
benefit from strong consumer recognition. We also market products under other
owned and licensed brand names and under private-label brand names such as Magic
Chef(R), Chefmate(R) and Kenmore(R).
BROAD RANGE OF PRODUCTS. We provide our customers with an extensive array
of product lines across product categories within the small household appliance
industry. We design our products to meet the needs of a broad range of customers
across a breadth of price points. With our breadth of product offerings, we
service the needs of a wide range of retailers and satisfy the different tastes,
preferences and budgets of consumers. We believe that as the retail industry
continues to consolidate, our ability to serve retailers with an extensive array
of product lines under a portfolio of strong brand names will continue to become
increasingly important for maintaining shelf space and for introducing new
products into the retail market.
INNOVATION IN PRODUCT DESIGN AND PACKAGING. We believe that we have a
reputation among our retail customers and consumers for innovation in product
design and packaging, incorporating functional enhancements as well as aesthetic
improvements. We design our products in many contemporary styles and with a wide
variety of features. We work 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 our products, including the Breadman(R) Plus and the
Breadman Ultimate(R), as top rated or best buy. We also package our products to
increase their appeal to consumers and to stand out among other brands on
retailers' shelves. We believe that distinctive packaging, designed to answer
customers' questions concerning our products, has resulted in increased shelf
space and greater sales.
During fiscal 1998, we introduced 175 new stock keeping units ("SKUs") in
the kitchen and small household electrical appliance products category, 65 new
SKUs in the personal and beauty care, gifts and time products category and 635
new SKUs in the tabletop products category.
ESTABLISHED CUSTOMER RELATIONSHIPS. We believe that we have been able to
establish strong relationships with our retailer customers based on our product
innovation, high level of customer service, breadth of product offerings,
reputation for quality products and established brand names. We believe that
these competitive strengths have enabled us to expand our market penetration and
to increase sales to our top twenty retail customers in fiscal 1998 by
approximately 70% from fiscal 1997 as well as obtain a seven-year supply
agreement with Kmart to supply a broad range of kitchen and small household
electrical appliances under the White-Westinghouse(R) brand name. In addition,
we have expanded our distribution of private-label products with certain major
retailers such as Target under the Chefmate(R) brand name and, more recently,
Wal-Mart under the Magic Chef(R) brand name and Sears under the Kenmore(R) brand
name. The broad distribution of our products through the mass merchant,
department store and specialty retailer channels, together with sales made
through our infomercials, provides us with access to a diversified group of
customers and multiple channels of distribution.
STRONG SUPPLIER RELATIONSHIPS. We believe that we are the largest
purchaser of kitchen and small household electrical appliances from unaffiliated
parties in the Far East. We source products from over 45 different suppliers and
believe we are the largest customer of many of our suppliers. Our dedicated
outsourcing strategy has contributed to our strong relationship with our
suppliers. We work closely with many of our suppliers to develop new products
and improvements to existing products to satisfy changing consumer preferences.
Our outsourcing strategy provides us with low-cost manufacturing capabilities
and allows us to bring new products to the market quickly and to respond to
changes in consumer tastes and preferences.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY OWNERSHIP. Our
management team has a wide range of experience in the development and marketing
of kitchen and small household electrical appliances. This management team,
consisting of David C. Sabin, Chairman, Leonhard Dreimann, Chief
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Executive Officer, and William B. Rue, President, Chief Operating Officer and
Chief Financial Officer, has an average of more than 15 years of industry
experience and has been with Salton since our inception. Our management team has
successfully increased net sales and EBITDA from 1994 to 1998 at a compound
annual growth rate of 58.2% and 135.8%, respectively, through the introduction
of new products, the expansion of distribution channels and the integration of
new businesses. As of January 27, 1999, our executive officers and entities
affiliated with these officers owned in the aggregate approximately 11.2% of our
outstanding common stock (assuming conversion of our outstanding convertible
preferred stock, but excluding outstanding options).
BUSINESS STRATEGY
We believe that we are well positioned to achieve further growth in net
sales, profitability and cash flow by further penetrating our existing
distribution channels and by continuing to expand our product offerings and
channels of distribution. Our strategy for achieving that objective includes the
following key elements:
INCREASE MARKET SHARE THROUGH NEW PRODUCT INTRODUCTIONS. We intend to
continue to increase our market share in each of our major product categories
through new product introductions. Our new product strategy capitalizes on our
strong brand names, established customer relationships and product innovation to
develop new products which offer enhanced value to consumers through new
designs, enhanced functionality and improved aesthetics. For example, in fiscal
1998, we introduced:
- the Taco Bell(R) product line,
- the Looney Tunes(R) product line,
- the Marilyn Monroe(TM) personal care product line,
- the George Foreman Fusion Grill(R),
- the Farberware(R) range of products,
- the Andy Warhol collection of tabletop and glassware products,
- the private-label Kenmore(R) products,
- the JuiceLady(R) juice extractor, and
- the Breadman Ultimate.(R)
We believe that innovative product introductions will further enhance
revenue growth, profitability and market share.
FURTHER PENETRATE EXISTING DISTRIBUTION CHANNELS. We believe that we can
further penetrate our existing distribution channels as a result of retail
industry dynamics and our strong relationships with our customers. We believe
that retail merchants will continue to consolidate their vendor base and focus
on a smaller number of suppliers that can (1) provide a broad array of
differentiated, quality products, (2) efficiently and consistently fulfill
logistical requirements and volume demands and (3) provide comprehensive product
support from design to point of sale and after-market service with the consumer.
We believe that we are well positioned to capitalize on these trends.
DEVELOP NEW DISTRIBUTION CHANNELS. We continue to develop new channels of
distribution by providing customized product offerings that appeal to the
specific needs of each distribution channel. For example, we have expanded our
private-label programs with certain major retailers and have recently entered
into such programs with Sears under the Kenmore(R) brand name, Target under the
Chefmate(R) brand name and Wal-Mart under the Magic Chef(R) brand name. We also
sell certain of our products, primarily Juiceman(R) 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 "infomercials." We believe
that this form of advertising and marketing increases consumer product awareness
and brand recognition and generates additional demand for our products at the
retailer level. We believe that our retailer focused
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strategy has increased, and will continue to increase, sales and shelf space at
key retailers while enhancing the value and recognition of our portfolio of
brand names.
PURSUE TARGETED MARKETING OPPORTUNITIES. As part of our growth strategy,
we have established several strategic alliances in order to develop and promote
awareness of our products. We have demonstrated an ability to identify and
execute marketing opportunities with strategic partners, such as our joint
venture with George Foreman to market grills under the name "George Foreman's
Lean Mean Fat Reducing Grilling Machine(R)." We have also entered into a variety
of licensing relationships to market products under the names Gino's East Pizza,
Gear, Taco Bell(R), Hershey Kiss(R), Looney Tunes(R), Andy Warhol, Marilyn
Monroe(TM), James Dean and Campbell Soup(R).
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We anticipate that the
fragmented nature of the small household appliance industry will continue to
provide significant opportunities for growth through strategic acquisitions of
complementary businesses. We intend to pursue acquisitions of complementary
businesses and product lines at attractive multiples of cash flow. Our
acquisition strategy will focus on businesses or brands with product offerings
which (1) offer expansion into related categories or increased market share in
existing product categories, and (2) can be marketed through our existing
distribution channels, thereby increasing our marketing and distribution
efficiencies. We will also consider strategic joint ventures which would provide
access to new products, technologies or markets.
THE RECAPITALIZATION
On July 28, 1998, we repurchased (the "Stock Repurchase") 6,535,072 shares
of our common stock owned by Windmere-Durable Holdings, Inc. pursuant to a Stock
Agreement dated as of May 6, 1998 (the "Windmere Stock Agreement") by and among
us, Windmere and our executive officers. Prior to the Stock Repurchase, Windmere
owned approximately 50% of our 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
matures on January 31, 2005 and bears interest at 4.0% per annum payable
annually. This Note is subject to offsets of interest and principal equal to 5%
of the total purchase price paid by us for product purchases from Windmere and
its affiliates during the term of the note. During fiscal 1998, we 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 our
supply agreement with Kmart is terminated for any reason.
In connection with the Stock Repurchase:
- 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 Windmere issued to us in July, 1996;
- We purchased (the "Option Repurchase") for approximately $3.3 million
Windmere's option to purchase up to 458,500 shares of our common stock,
which option we granted to Windmere in July, 1996; and
- Windmere and Salton agreed to continue various commercial and other
arrangements, including a fee agreement relating to our supply agreement
with Kmart, subject to certain modifications. See "Business -- Marketing
and Distribution."
The Stock Repurchase, the Option Repurchase and the Note Repayment are
collectively referred to herein as the "Repurchase."
On July 28, 1998, we entered into a Credit Agreement dated as of July 27,
1998 (the "New Credit Agreement") among us, 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
10
<PAGE> 12
million revolving credit facility (the "Revolving Credit Facility"). See
"Description of Preferred Stock and Certain Indebtedness -- New Credit
Agreement."
On July 28, 1998, we also issued (the "Convertible Preferred Stock
Issuance") $40.0 million of our Series A Voting Convertible Preferred Stock (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 our 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. See "Description of Preferred
Stock and Certain Indebtedness -- Convertible Preferred Stock." The Repurchase,
borrowings under the New Credit Agreement and the Convertible Preferred Stock
Issuance are collectively referred to herein as the "Recapitalization."
We used borrowings of $90.0 million under the Tranche A Term Loan and the
net proceeds from the Convertible Preferred Stock Issuance to:
- 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 $10.8
million due and owing by Windmere to us under the Windmere Note, which
note was cancelled at the closing of the Stock Repurchase),
- refinance all outstanding indebtedness under our Amended and Restated
Loan and Security Agreement dated July 30, 1997 (the "Old Credit
Agreement") between us and our previous lender in an amount equal to
approximately $51.7 million, and
- pay fees and expenses relating to the Recapitalization.
The following table illustrates the sources and uses of funds in connection
with the Recapitalization:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(Dollars in thousands)
<S> <C>
SOURCES OF FUNDS
Tranche A Term Loan......................................... $ 90,000
Convertible Preferred Stock................................. 40,000
--------
Total Sources of Funds............................ $130,000
========
USES OF FUNDS
Cash payment for the Stock Repurchase(1).................... $ 70,800
Refinancing of Old Credit Agreement......................... 51,700
Transaction fees and expenses............................... 6,966
Excess cash................................................. 534
--------
Total Uses of Funds............................... $130,000
========
</TABLE>
- -------------------------
(1) This payment is net of approximately $10.8 million that was due and owing by
Windmere to us under the Windmere Note at the closing of the Stock
Repurchase. The Windmere Note was cancelled upon the closing of the Stock
Repurchase.
THE FINANCING
We used the aggregate gross proceeds of the private offering of $125.0
million of our 10 3/4% Senior Subordinated Notes due 2005 (the "Financing"):
- to repay a total of approximately $110.0 million of outstanding
indebtedness under the New Credit Agreement, consisting of $90.0 million
under the Tranche A Term Loan and approximately
11
<PAGE> 13
$20.0 million under the Revolving Credit Facility, together with accrued
interest of approximately $0.8 million with respect to the indebtedness
being repaid;
- to pay fees and expenses incurred in connection with the Financing; and
- for working capital and general corporate purposes.
Upon the repayment of the Tranche A Term Loan, such facility was permanently
terminated. See "Use of Proceeds."
The following table illustrates the estimated sources and uses of funds in
connection with the Financing as of September 26, 1998:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(Dollars in thousands)
<S> <C>
SOURCES OF FUNDS
New Credit Agreement(1)..................................... $ --
Senior Subordinated Notes due 2005.......................... 125,000
--------
Total Sources of Funds............................ $125,000
========
USES OF FUNDS
Repayment of Tranche A Term Loan............................ $ 90,000
Repayment of Revolving Credit Facility...................... 20,000
Payment of accrued interest................................. 809
Transaction fees and expenses............................... 4,088
Excess cash at closing...................................... 10,103
--------
Total Uses of Funds............................... $125,000
========
</TABLE>
- -------------------------
(1) Represents commitments of up to $125.0 million under the New Credit
Agreement, consisting of a $75.0 million Delayed Draw Term Loan and a $50.0
million Revolving Credit Facility.
RECENT DEVELOPMENTS
FISCAL 1999 SECOND QUARTER RESULTS
On January 29, 1999, we announced results for our fiscal 1999 second
quarter and six months ended December 26, 1998.
For the quarter, net sales increased 39.7% to a record $142.7 million,
compared with $102.2 million in the same period last year. Net income increased
114.4% to a record $11.7 million, compared to $5.4 million a year earlier.
Earnings increased to a record $1.25 per diluted share compared to $0.40 per
diluted share in the prior year's period.
For the six months, net sales increased 47.1% to a record $247.1 million,
compared with $167.9 million in the same period last year. Net income increased
135.1% to a record $22.5 million, compared to $9.6 million a year earlier.
Earnings increased to a record $2.24 per diluted share compared to $0.71 per
diluted share in the prior year's period.
TOASTMASTER ACQUISITION
TOASTMASTER ACQUISITION. On January 7, 1999, we acquired Toastmaster Inc.
("Toastmaster"), a Columbia, Missouri based manufacturer and marketer of kitchen
and small household electrical appliances and time products (the "Toastmaster
Acquisition"). We paid Toastmaster shareholders $7.00 per share in cash, or a
total purchase price of approximately $53.2 million. We also refinanced
approximately $57.8 million of Toastmaster's outstanding debt in connection with
the Toastmaster Acquisition.
Toastmaster designs, manufactures, markets and services a wide array of
kitchen and small household electrical consumer appliances and time products
under the brand names of Toastmaster(R) and Ingraham(R).
12
<PAGE> 14
Kitchen and small household electrical appliances, which account for most of
Toastmaster's revenues, include two and four slice toasters, toaster ovens,
dessert and wafflebakers and griddles marketed under the Toastmaster(R) brand
name. Additional kitchen and small household electrical appliances include a
wide variety of other popular products, such as:
<TABLE>
<S> <C>
- buffet ranges, - Handi-Pan(R) mini-fry pans,
- the Corner Bakery(TM) breadmaker with - the Bread Box(R) automatic breadmaker,
dessert function, - Snackster(R) snack and sandwich makers,
- the Cool Edge Grill(TM) indoor contact - hand mixers,
grill,
- carving knives, - blenders,
- can openers, - coffee makers and grinders and
- food slicers, - tea kettles.
</TABLE>
Toastmaster's time products consist of an extensive line of clocks and
timers, including battery wall clocks, electric analog alarm clocks, decorator
wall clocks and mechanical and electronic household timers. The Toastmaster(R)
brand name has been in continuous use since the invention of the automatic
pop-up toaster by a predecessor of Toastmaster in 1926, and Toastmaster or its
predecessors have used the Ingraham(R) brand name on time products manufactured
by them since 1831.
During the last quarter of 1996, Toastmaster adopted 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 and small household electrical appliances to
overseas suppliers. As part of this plan, Toastmaster ceased production at its
Boonville, Missouri plant in July 1998 and outsourced production with lower-cost
vendors overseas.
Certain of the unaudited pro forma condensed consolidated financial
information contained in this Prospectus reflects the consummation of this
Toastmaster Acquisition. See "-- Summary Pro Forma Condensed Consolidated
Financial Data," "Risk Factors -- Risks Relating to the Company -- Risks
Relating to the Toastmaster Acquisition," "Capitalization" and "Pro Forma
Condensed Consolidated Financial Information."
TOASTMASTER INTEGRATION STRATEGY. We have identified numerous
opportunities for revenue enhancements and cost savings that we believe we will
be able to realize as a result of the Toastmaster Acquisition. We believe that
we can use our competitive strengths and experience in product development and
marketing to improve upon Toastmaster's product offerings, brand reputation and
customer relations. For example, we intend to use our 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's products with existing
Toastmaster retailers by introducing certain of our products into Toastmaster's
product lines.
Although we currently plan to continue the production of certain kitchen
and small household electrical appliances at Toastmaster's Macon, Missouri
plant, we expect to implement our strategy of outsourcing certain appliances to
overseas vendors. We believe that through our proven ability to source products
overseas, we can achieve significant cost savings through more favorable product
pricing and other terms. Other anticipated cost savings we have identified
include advertising, ocean freight, warehousing and corporate overhead expenses.
Our ability to achieve revenue enhancements and recognize cost savings from
the Toastmaster Acquisition will depend to a significant extent on our ability
to successfully integrate the operations of Salton and Toastmaster and other
factors, including economic conditions and the retail environment. See "Risk
Factors -- Risks Relating to the Company -- Risks Relating to the Toastmaster
Acquisition" for a discussion of certain factors that could impact our ability
to realize expected revenue enhancements and cost savings.
FINANCING OF TOASTMASTER ACQUISITION. On December 4, 1998, we received a
commitment letter from Lehman Commercial Paper Inc. and Lehman Brothers Inc.
with respect to an amendment and restatement to the New Credit Agreement. On
January 7, 1999, we entered into an amended and restated
13
<PAGE> 15
credit agreement dated as of January 7, 1999 among us, the several banks and
other financial institutions or entities from time to time parties thereto,
Lehman Brothers Inc., as advisor, arranger and book runner, Lehman Commercial
Paper Inc., as syndication agent, Lehman Commercial Paper Inc., as
administrative agent and Fleet National Bank, as documentation agent. The
amended and restated New Credit Agreement, among other things, replaced the
Delayed Draw Term Loan with a $45.0 million Tranche B Term Loan (the "Tranche B
Term Loan") and increased the Revolving Credit Facility to $80.0 million. See
"Description of Preferred Stock and Certain Indebtedness -- New Credit
Agreement." We paid the purchase price for the Toastmaster Acquisition,
refinanced certain of Toastmaster's outstanding debt and paid certain related
fees and expenses with available cash and borrowings of $50.0 million under the
Revolving Credit Facility and $45.0 million under the Tranche B Term Loan.
------------------------
Our principal executive offices are located at 550 Business Center Drive,
Mount Prospect, Illinois 60056 and our telephone number is (847) 803-4600.
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $125.0 million
aggregate principal amount of outstanding notes for an equal aggregate principal
amount of new notes. The new notes will be obligations of the Company entitled
to the benefits of the indenture governing the outstanding notes. The form and
terms of the new notes are identical in all material respects to the form and
terms of the outstanding notes except that the new notes have been registered
under the Securities Act, and therefore are not entitled to the benefits of the
registration rights granted under the registration rights agreement, executed as
part of the offering of the outstanding notes, dated December 16, 1998 between
the Company and Lehman Brothers Inc., the initial purchaser in the private
offering, relating to certain contingent increases in the interest rates
provided for pursuant thereto.
REGISTRATION RIGHTS
AGREEMENT..................... You are entitled to exchange your notes for
registered notes with substantially identical
terms. The Exchange Offer is intended to
satisfy these rights. After the Exchange Offer
is complete, you will no longer be entitled to
any exchange or registration rights with
respect to your notes.
THE EXCHANGE OFFER............ We are offering to exchange $1,000 principal
amount of 10 3/4% Senior Subordinated Notes due
2005 which have been registered under the
Securities Act for each $1,000 principal amount
of our outstanding 10 3/4% Senior Subordinated
Notes due 2005 which were issued in December
1998 in the Financing. In order to be
exchanged, an outstanding note must be properly
tendered and accepted. All outstanding notes
that are validly tendered and not validly
withdrawn will be exchanged.
As of this date there are $125.0 million
principal amount of notes outstanding.
We will issue registered notes on or promptly
after the expiration of the Exchange Offer.
RESALE OF THE NEW NOTES....... Based on an interpretation by the staff of the
Commission set forth in no-action letters
issued to third parties, including "Exxon
Capital Holdings Corporation" (available May
13, 1988), "Morgan Stanley & Co. Incorporated"
(available June 5, 1991), "Mary Kay Cosmetics,
Inc." (available June 5, 1991) and "Warnaco,
Inc." (available October 11, 1991), we believe
that the notes issued in the Exchange Offer may
be offered for resale,
14
<PAGE> 16
resold and otherwise transferred by you without
compliance with the registration and prospectus
delivery provisions of the Securities Act
provided that:
- the notes issued in the Exchange Offer are
being acquired in the ordinary course of
business; you are not participating, do not
intend to participate, and have no
arrangement or understanding with any person
to participate, in the distribution of the
notes issued to you in the Exchange Offer;
- you are not a broker-dealer who purchased
such outstanding notes directly from us for
resale pursuant to Rule 144A or any other
available exemption under the Securities Act;
and
- you are not an "affiliate" of ours.
If our belief is inaccurate and you transfer
any note issued to you in the Exchange Offer
without delivering a prospectus meeting the
requirement of the Securities Act or without an
exemption from registration of your notes from
such requirements, you may incur liability
under the Securities Act. We do not assume or
indemnify you against such liability.
Each broker-dealer that is issued notes in the
Exchange Offer for its own account in exchange
for notes which were acquired by such
broker-dealer as a result of market-making or
other trading activities, must acknowledge that
it will deliver a prospectus meeting the
requirements of the Securities Act, in
connection with any resale of the notes issued
in the Exchange Offer. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, such broker-dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. A broker-dealer may use this
Prospectus for an offer to resell, resale or
other retransfer of the notes issued to it in
the Exchange Offer. We have agreed that, for a
period of 180 days after the date of this
Prospectus, we will make this Prospectus and
any amendment or supplement to this Prospectus
available to any such broker-dealer for use in
connection with any such resales. We believe
that no registered holder of the outstanding
notes is an affiliate (as such term is defined
in Rule 405 of the Securities Act) of the
Company.
The Exchange Offer is not being made to, nor
will we accept surrenders for exchange from,
holders of outstanding notes in any
jurisdiction in which this Exchange Offer or
the acceptance thereof would not be in
compliance with the securities or blue sky laws
of such jurisdiction.
EXPIRATION DATE............... The Exchange Offer will expire at 5:00 p.m.,
New York City time, , 1999, unless
we decide to extend the expiration date.
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND THE
OUTSTANDING NOTES............. The new notes will bear interest from December
16, 1998. Holders of outstanding notes whose
notes are accepted for exchange will be deemed
to have waived the right to receive any
15
<PAGE> 17
payment of interest on such outstanding notes
accrued from December 16, 1998 to the date of
the issuance of the new notes. Consequently,
holders who exchange their outstanding notes
for new notes will receive the same interest
payment on June 15, 1999 (the first interest
payment date with respect to the outstanding
notes and the new notes to be issued in the
Exchange Offer) that they would have received
had they not accepted the Exchange Offer.
TERMINATION OF THE EXCHANGE
OFFER......................... We may terminate the Exchange Offer if we
determine that our ability to proceed with the
Exchange Offer could be materially impaired due
to any legal or governmental action, new law,
statute, rule or regulation or any
interpretation of the staff of the Commission
of any existing law, statute, rule or
regulation. We do not expect any of the
foregoing conditions to occur, although there
can be no assurance that such conditions will
not occur. Holders of outstanding notes will
have certain rights against our Company under
the registration rights agreement executed as
part of the offering of the outstanding notes
should we fail to consummate the Exchange
Offer.
PROCEDURES FOR TENDERING
OUTSTANDING NOTES............. If you are a holder of a note and you wish to
tender your note for exchange pursuant to the
Exchange Offer, you must transmit to Norwest
Bank Minnesota, National Association, as
exchange agent, on or prior to the Expiration
Date:
either
- a properly completed and duly executed Letter
of Transmittal, which accompanies this
Prospectus, or a facsimile of the Letter of
Transmittal, including all other documents
required by the Letter of Transmittal, to the
Exchange Agent at the address set forth on
the cover page of the Letter of Transmittal;
or
- a computer-generated message transmitted by
means of DTC's Automated Tender Offer Program
system and received by the Exchange Agent and
forming a part of a confirmation of book
entry transfer in which you acknowledge and
agree to be bound by the terms of the Letter
of Transmittal;
and, either
- a timely confirmation of book-entry transfer
of your outstanding notes into the Exchange
Agent's account at The Depository Trust
Company ("DTC") pursuant to the procedure for
book-entry transfers described in this
Prospectus under the heading "The Exchange
Offer -- Procedure for Tendering," must be
received by the Exchange Agent on or prior to
the Expiration Date; or
- the documents necessary for compliance with
the guaranteed delivery procedures described
below.
16
<PAGE> 18
By executing the Letter of Transmittal, each
holder will represent to us that, among other
things:
- the notes to be issued in the Exchange Offer
are being obtained in the ordinary course of
business of the person receiving such new
notes whether or not such person is the
holder,
- neither the holder nor any such other person
has an arrangement or understanding with any
person to participate in the distribution or
such new notes and
- neither the holder nor any such other person
is an "affiliate," as defined in Rule 405
under the Securities Act of the Company.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. If you are the beneficial owner of notes and
your name does not appear on a security
position listing of DTC as the holder of such
notes or if you are a beneficial owner of
registered notes that are registered in the
name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to
tender such notes or registered notes in the
Exchange Offer, you should contact such person
whose name your notes or registered notes are
registered promptly and instruct such person to
tender on your behalf. If such beneficial
holder wishes to tender on his own behalf such
beneficial holder must, prior to completing and
executing the Letter of Transmittal and
delivering its outstanding notes, either make
appropriate arrangements to register ownership
of the outstanding notes in such holder's name
or obtain a properly completed bond power from
the registered holder. The transfer of record
ownership may take considerable time.
GUARANTEED DELIVERY
PROCEDURES.................... If you wish to tender your notes and time will
not permit your required documents to reach the
Exchange Agent by the Expiration Date, or the
procedure for book-entry transfer cannot be
completed on time or certificates for
registered notes cannot be delivered on time,
you may tender your notes pursuant to the
procedures described in this Prospectus under
the heading "The Exchange Offer -- Guaranteed
Delivery Procedure."
WITHDRAWAL RIGHTS............. You may withdraw the tender of your notes at
any time prior to 5:00 p.m., New York City
time, on , 1999, the business day
prior to the Expiration Date, unless your notes
were previously accepted for exchange.
ACCEPTANCE OF OUTSTANDING
NOTES AND DELIVERY OF EXCHANGE
NOTES......................... Subject to certain conditions (as summarized
above in "Termination of the Exchange Offer"
and described more fully under the "The
Exchange Offer -- Termination"), we will accept
for exchange any and all outstanding notes
which are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time,
on the Expiration Date. The notes issued
pursuant to the Exchange Offer will be
delivered promptly following the Expiration
Date.
17
<PAGE> 19
CERTAIN U.S. FEDERAL INCOME
TAX CONSEQUENCES.............. The exchange of the notes will generally not be
a taxable exchange for United States federal
income tax purposes. We believe you will not
recognize any taxable gain or loss or any
interest income as a result of such exchange.
USE OF PROCEEDS............... We will not receive any proceeds from the
issuance of notes pursuant to the Exchange
Offer. We will pay all expenses incident to the
Exchange Offer.
EXCHANGE AGENT................ Norwest Bank Minnesota, National Association is
serving as exchange agent in connection with
the Exchange Offer. The Exchange Agent can be
reached at Corporate Trust Trustee
Administration. For more information with
respect to the Exchange Offer, the telephone
number for the Exchange Agent is (612) 667-9764
and the facsimile number for the Exchange Agent
is (612) 667-4927.
18
<PAGE> 20
SUMMARY DESCRIPTION OF THE NEW NOTES
SECURITIES OFFERED:........... $125,000,000 in aggregate principal amount of
10 3/4% Senior Subordinated Notes.
MATURITY DATE:................ December 15, 2005.
INTEREST PAYMENT DATES:....... December 15 and June 15, commencing June 15,
1999.
MANDATORY REDEMPTION:......... We will not be required to make mandatory
redemption or sinking fund payments with
respect to the notes.
OPTIONAL REDEMPTION:.......... On or after December 15, 2002, we may redeem
the notes, in whole or in part, at the
redemption prices set forth in this Prospectus.
In addition, at any time before December 15,
2001, we may redeem on any one or more
occasions up to 35% of the aggregate principal
amount of the notes at 110.750% of the
principal amount thereof, plus accrued
interest, with the net cash proceeds of one or
more public equity offerings if at least 65% of
the aggregate principal amount of the notes
originally issued remain outstanding after each
such redemption. See "Description of the New
Notes -- Optional Redemption."
CHANGE OF CONTROL:............ Upon certain change of control events, each
holder of the notes may require us to
repurchase all or any part of such holder's
notes at a price in cash equal to 101% of the
aggregate principal amount thereof, plus
accrued interest. See "Description of the New
Notes -- Repurchase at the Option of
Holders -- Change of Control."
RANKING:...................... The notes will be general unsecured obligations
and will be subordinated to all our current and
future Senior Debt, including all borrowings
under the New Credit Agreement. The notes will
rank equally with all our other existing and
future senior subordinated indebtedness. As of
September 26, 1998, after giving pro forma
effect to the Financing, we would have had no
Senior Debt outstanding (exclusive of unused
commitments of up to $125.0 million under the
New Credit Agreement). Additionally, as of
September 26, 1998, after giving pro forma
effect to the Financing and the Toastmaster
Acquisition, we would have had Senior Debt of
approximately $99.5 million outstanding
(exclusive of unused commitments of up to $25.5
million under the New Credit Agreement). See
"Risk Factors -- Risks Relating to the
Notes -- Substantial Leverage,"
"Capitalization" and "Description of the New
Notes."
GUARANTEES:................... Our current and future domestic restricted
subsidiaries will jointly and severally
guarantee our payment obligations under the
notes on a senior subordinated basis. The
guarantees will rank junior to all Senior Debt
of the guarantors (including guarantees under
the Credit Agreement) and equally with all
other senior subordinated indebtedness of the
guarantors. See "Description of the New
Notes -- Subsidiary Guarantee."
19
<PAGE> 21
CERTAIN COVENANTS:............ The indenture governing the notes will contain
certain covenants that, among other things,
limit our ability and the ability of our
restricted subsidiaries to:
- incur additional indebtedness and issue
preferred stock,
- pay dividends or make certain other
restricted payments,
- create certain liens,
- enter into certain transactions with
affiliates,
- enter into sale and lease-back transactions,
- sell assets or
- enter into certain mergers and
consolidations.
In addition, under certain circumstances, we
will be required to offer to purchase the notes
with the net cash proceeds of certain sales and
other dispositions of assets at a price equal
to 100% of the principal amount of the notes,
plus accrued interest. See "Description of the
New Notes -- Certain Covenants" and
"-- Repurchase at the Option of
Holders -- Asset Sales."
EXCHANGE OFFER;
REGISTRATION RIGHTS........... Under a registration rights agreement executed
as part of the Financing, we have agreed to:
- use our best efforts to file a registration
statement within 60 days after the issue date
of the notes enabling holders to exchange the
privately placed notes for publicly
registered notes with terms identical in all
material respects to those of the notes;
- use our best efforts to cause such
registration statement to become effective
within 120 days after the issue date of the
notes; and
- use our best efforts to file a shelf
registration statement for the resale of the
notes if we cannot effect an exchange offer
within the time periods listed above and in
certain other circumstances.
See "Description of the New
Notes -- Registration Rights; Liquidated
Damages."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS."
20
<PAGE> 22
SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited summary pro forma condensed consolidated financial data set
forth below is based on the historical consolidated financial statements of the
Company and of Toastmaster. The unaudited pro forma summary statement of
operations data for the fiscal year ended June 27, 1998 give effect to (1) the
Recapitalization and the Financing and (2) the Recapitalization, the Financing
and the Toastmaster Acquisition, in each case as if such transactions had
occurred on June 29, 1997. The unaudited pro forma summary statement of
operations data for the thirteen weeks ended September 26, 1998 give effect to
(1) the Financing and (2) the Financing and the Toastmaster Acquisition, in each
case as if such transactions had occurred on June 29, 1997. The unaudited pro
forma summary condensed consolidated balance sheet data give effect to (1) the
Financing and (2) the Financing and the Toastmaster Acquisition, in each case as
if they had occurred on September 26, 1998. See "-- The Financing" and
"-- Recent Developments -- Toastmaster Acquisition." The unaudited summary pro
forma condensed consolidated financial data is intended for informational
purposes only and is not necessarily indicative of our future financial position
or results of operations had the transactions described above occurred on the
indicated dates or been in effect for the period presented. Since the unaudited
summary pro forma condensed consolidated financial data is only a summary, you
should read the pro forma condensed consolidated financial information, the
historical consolidated financial statements of the Company and of Toastmaster,
including in each case the related notes included elsewhere herein, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" found elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED
JUNE 27, 1998 SEPTEMBER 26, 1998
------------------------------------ -------------------------
RECAPITALIZATION,
FINANCING AND FINANCING AND
RECAPITALIZATION TOASTMASTER TOASTMASTER
AND FINANCING ACQUISITION FINANCING ACQUISITION
---------------- ----------------- --------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales........................................ $305,599 $465,201 $104,388 $143,263
Cost of goods sold............................... 178,023 298,268 55,004 86,993
Distribution expenses............................ 12,327 22,010 3,609 6,244
-------- -------- -------- --------
Gross profit 115,249 144,923 45,775 50,026
Selling, general, and administrative expenses.... 84,216 106,401 27,780 33,260
-------- -------- -------- --------
Operating income................................. $ 31,033 $ 38,522 $ 17,995 $ 16,766
======== ======== ======== ========
OTHER DATA:
EBITDA(1)........................................ $ 35,334 $ 47,175 19,239 19,137
EBITDA margin(2)................................. 11.6% 10.2% 18.4% 13.4%
LTM EBITDA(6).................................... -- -- 45,850 53,251
LTM EBITDA margin(6)............................. -- -- 13.3% 10.7%
Depreciation and amortization.................... $ 4,301 $ 8,653 1,244 2,371
Capital expenditures............................. 4,565 8,094 589 835
LTM depreciation and amortization(6)............. -- -- 4,657 9,027
LTM capital expenditures(6)...................... -- -- 4,270 6,568
Net debt(3)...................................... -- -- 122,787 233,446
Ratio of earnings to fixed charges(4)............ 2.5x 1.9x 4.5x 2.8x
Ratio of LTM EBITDA to cash interest
expense(5)(6).................................. 2.3x 2.0x 3.0x 2.2x
Ratio of net debt to LTM EBITDA(6)............... 3.5x 4.9x 2.7x 4.4x
BALANCE SHEET DATA (AT PERIOD END):
Working capital........................................................................ $139,192 $140,666
Total assets........................................................................... 197,719 322,576
Total debt............................................................................. 133,907 233,446
Stockholders' equity................................................................... 25,577 25,577
</TABLE>
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- -------------------------
(1) EBITDA represents operating income plus depreciation and amortization.
EBITDA is presented because it is a widely accepted measure to provide
information regarding a company's ability to pay interest, repay debt
or make capital expenditures. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operations
or other income or cash flow data prepared in accordance with generally
accepted accounting principles, or as a measure of a company's
profitability or liquidity. Additionally, our calculation of EBITDA may
differ from that performed by other companies, and thus the amounts
disclosed for EBITDA may not be directly comparable to similarly titled
measures disclosed by other companies.
(2) EBITDA margin represents EBITDA as a percentage of net sales.
(3) Net debt represents total debt less cash and marketable securities.
(4) For purposes of this computation, earnings consist of income before
taxes plus fixed charges. Fixed charges consist of interest on
indebtedness plus that portion of lease rental expense representative
of the interest factor.
(5) Cash interest expense is defined as interest expense less amortization
of debt issuance costs.
(6) Reflects data for the latest twelve months ended ("LTM") June 27, 1998
and September 26, 1998 as indicated.
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<PAGE> 24
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The following table presents our summary historical financial and other
data as of and for the fiscal years ended June 29, 1996, June 28, 1997 and June
27, 1998. This data is from our audited consolidated financial statements,
including the notes thereto, included elsewhere in this Prospectus. This table
also presents our summary historical financial and other data as of and for the
thirteen weeks ended September 27, 1997 and September 26, 1998. This data is
from our unaudited condensed consolidated financial statements, including the
notes thereto, but, in the opinion of our management, includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
periods. Operating results for the thirteen weeks ended September 27, 1997 and
September 26, 1998 do not necessarily show what the results for a full year will
be. Since the information is only a summary, you should read "Selected
Historical Financial and Other Data," "Pro Forma Condensed Consolidated
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements,
including the notes, appearing elsewhere in this Prospectus.
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<PAGE> 25
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN WEEKS ENDED
------------------------------ -----------------------------
JUNE 29, JUNE 28, JUNE 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998 1997 1998
-------- -------- -------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS:
Net sales................................ $99,202 $182,806 $305,599 $ 65,773 $104,388
Cost of goods sold....................... 66,923 121,590 179,376 38,697 55,004
Distribution expenses.................... 5,856 7,809 12,327 2,279 3,609
------- -------- -------- -------- --------
Gross profit........................... 26,423 53,407 113,896 24,797 45,775
Selling, general, and administrative
expenses............................... 21,343 42,944 84,216 16,977 27,780
------- -------- -------- -------- --------
Operating income....................... 5,080 10,463 29,680 7,820 17,995
Interest expense, net.................... (3,934) (4,063) (5,333) (1,263) (2,399)
Cost associated with refinancing......... -- -- (1,133) -- --
Realized gain on sale of marketable
securities............................. -- -- 8,972 -- --
------- -------- -------- -------- --------
Income before income taxes............. 1,146 6,400 32,186 6,557 15,596
Income tax expense (benefit)............. (3,450) 2,001 12,205 2,433 4,777
------- -------- -------- -------- --------
Net income............................. $ 4,596 $ 4,399 $ 19,981 $ 4,124 $ 10,819
======= ======== ======== ======== ========
OTHER DATA:
Cash flows provided by (used in):
Operating Activities................... $(3,571) $ (8,966) $(25,102) $(30,061) $(20,819)
Investing Activities................... (4,280) (6,348) 14,507 (884) (589)
Financing Activities................... 7,849 17,922 8,643 28,671 21,764
EBITDA(1)................................ $ 7,276 $ 13,599 $ 33,981 $ 8,708 $ 19,239
EBITDA margin(2)......................... 7.3% 7.4% 11.1% 13.2% 18.4%
Depreciation and amortization............ $ 2,196 $ 3,136 $ 4,301 888 1,244
Capital expenditures..................... 4,280 4,608 4,565 884 589
Ratio of earnings to fixed charges(3).... 1.3x 2.2x 5.8x 5.6x 6.8x
BALANCE SHEET DATA (AT PERIOD END):
Working capital.......................... $12,244 $ 17,996 $ 44,768 $ 18,828 $103,280
Total assets............................. 59,481 102,343 141,397 145,411 183,528
Total debt............................... 28,266 43,410 50,475 172,082 118,907
</TABLE>
- -------------------------
(1) EBITDA represents operating income plus depreciation and amortization.
EBITDA is presented because it is a widely accepted measure to provide
information regarding a company's ability to pay interest, repay debt or
make capital expenditures. EBITDA should not be considered in isolation or
as a substitute for net income, cash flows from operations or other income
or cash flow data prepared in accordance with generally accepted accounting
principles, or as a measure of a company's profitability or liquidity.
Additionally, our calculation of EBITDA may differ from that performed by
other companies, and thus the amounts disclosed for EBITDA may not be
directly comparable to similarly titled measures disclosed by other
companies.
(2) EBITDA margin represents EBITDA as a percentage of net sales.
(3) For purposes of this computation, earnings consist of income before taxes
plus fixed charges. Fixed charges consist of interest on indebtedness plus
that portion of lease rental expense representative of the interest factor.
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<PAGE> 26
RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information contained in this Prospectus, before deciding to invest in
the notes. In connection with the forward-looking statements which appear in
this Prospectus, you should carefully review the factors discussed below and the
cautionary statements referred to in "Forward-Looking Statements."
RISKS RELATING TO THE NOTES
SUBSTANTIAL LEVERAGE
We are highly leveraged. As of September 26, 1998, after giving pro forma
effect to the Financing, we would have had total consolidated indebtedness of
approximately $133.9 million, including $125.0 million of the outstanding notes,
and total stockholders' equity of $25.6 million. Also, after giving pro forma
effect to the Financing, our ratio of earnings to fixed charges would have been
4.5x for the thirteen weeks ended September 26, 1998. Additionally, we incurred
substantial additional indebtedness to consummate the Toastmaster Acquisition.
As of September 26, 1998, after giving pro forma effect to the Financing and the
Toastmaster Acquisition, we would have had total consolidated indebtedness of
approximately $233.4 million and total stockholders' equity of $25.6 million.
Also, after giving pro forma effect to the Financing and the Toastmaster
Acquisition, our ratio of earnings to fixed charges would have been 2.8x for the
thirteen weeks ended September 26, 1998. See "Capitalization", "Selected
Historical Financial and Other Data," and "Pro Forma Condensed Consolidated
Financial Information." We may incur additional indebtedness in the future,
including through additional borrowings under the New Credit Agreement, subject
to the satisfaction of certain financial tests. See "Description of Preferred
Stock and Certain Indebtedness -- New Credit Agreement" and "Description of the
New Notes -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
Our ability to pay principal and interest on the notes, to satisfy our
other debt service obligations and to fund planned capital expenditures will
depend upon our future operating performance, which will be affected by
prevailing economic conditions in the markets we serve and financial, business
and other factors, certain of which are beyond our control. Based upon our
current level of operations, we believe that cash flow from operations and
available cash, together with available borrowings under the New Credit
Agreement, will be adequate to meet our anticipated future requirements for
working capital, capital expenditures and scheduled payments of principal and
interest on our indebtedness, including the notes. We cannot assure you that our
business will generate sufficient cash flow from operations or that future
borrowings will be available under the New Credit Agreement in an amount
sufficient to enable us to service our indebtedness, including the notes, or to
fund our other liquidity needs. We may need to refinance all or a portion of the
principal of the notes on or prior to maturity. We cannot assure you that we
will be able to effect any such refinancing on commercially reasonable terms or
at all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The degree to which we are leveraged could have important consequences to
holders of the notes, such as:
- making it more difficult for us to satisfy our obligations with respect
to the notes;
- increasing our vulnerability to general adverse economic and industry
conditions;
- limiting our ability to obtain additional financing to fund future
working capital, capital expenditures or other general corporate
requirements;
- requiring the dedication of a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures or other general corporate
purposes;
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
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<PAGE> 27
- placing us at a competitive disadvantage vis-a-vis less leveraged
competitors.
In addition, the indenture governing the notes and the New Credit Agreement
contain financial and other restrictive covenants that will limit our ability
to, among other things, borrow additional funds. Our failure 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 our business, financial condition and
results of operations. If we cannot generate sufficient cash to meet our
obligations as they become due or refinance such obligations, we may have to
sell assets or reduce capital expenditures. In addition, our degree of leverage
could prevent us from repurchasing all of the notes tendered to us upon the
occurrence of certain change of control events. See "Description of the New
Notes -- Repurchase at the Option of Holders -- Change of Control."
SUBORDINATION OF THE NOTES; GUARANTEES
The notes will be subordinated to all Senior Debt including all obligations
under the New Credit Agreement. Upon any distribution to creditors in a
liquidation or dissolution or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding, the holders of Senior Debt will be entitled
to be paid in full in cash before any payment may be made with respect to the
notes. In addition, the subordination provisions of the indenture governing the
notes will provide that payments with respect to the notes can be blocked in the
event of defaults on Designated Senior Debt (as defined). In the event of a
bankruptcy, liquidation or reorganization, holders of the notes will participate
equally with all holders of subordinated indebtedness that is deemed to be of
the same class as the notes, and potentially with all other general creditors,
based upon the amounts owed to each holder or creditor, in the remaining assets.
In any of the foregoing events, we cannot assure you that there would be
sufficient assets to pay amounts due on the notes. As a result, holders of the
notes may receive less, ratably, than holders of Senior Debt. As of September
26, 1998, after giving pro forma effect to the Financing, we would have had no
Senior Debt outstanding (exclusive of unused commitments of up to $125.0 million
under the New Credit Agreement, all of which would constitute Senior Debt).
Additionally, as of September 26, 1998, after giving pro forma effect to the
Financing and the Toastmaster Acquisition, the aggregate amount of consolidated
indebtedness and other liabilities to which the notes would be subordinated
would have been approximately $99.5 million, consisting of borrowings under the
New Credit Agreement (exclusive of unused commitments of up to $25.5 under the
New Credit Agreement, all of which would constitute Senior Debt). We may also
incur additional indebtedness. Substantially all of our assets will or may in
the future be pledged to secure our other indebtedness subject to certain
limitations contained in our debt agreements. See "Capitalization," "Description
of Preferred Stock and Certain Indebtedness -- New Credit Agreement" and
"Description of the New Notes -- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock."
Our payment obligations under the notes will be jointly and severally
guaranteed on a senior subordinated basis by each of our existing and future
domestic subsidiaries. The notes will not be guaranteed by any of our current or
future foreign subsidiaries. Our non-guarantor subsidiary accounted for 2.4% of
our net sales and generated $1.7 million of EBITDA during the thirteen weeks
ended September 26, 1998 and 0.5% of our net sales and generated $(0.8) million
of EBITDA during the fiscal year ended June 27, 1998. The guarantees will be
subordinated to the guarantees of Senior Debt issued by the guarantors under the
New Credit Agreement. See "Description of the New Notes -- Subordination;
Subsidiary Guarantee."
RESTRICTIONS UNDER THE NEW CREDIT AGREEMENT AND THE INDENTURE
The New Credit Agreement imposes, and the indenture governing the notes
will impose, restrictions that affect, among other things, our ability to incur
debt, pay dividends, sell assets, create liens, make capital expenditures and
investments, merge or consolidate, enter into transactions with affiliates, and
otherwise enter into certain transactions outside the ordinary course of
business. We are also required under the New Credit Agreement to maintain
specified financial ratios, including a minimum fixed charge coverage ratio and
a maximum leverage ratio, and meet certain financial tests. Our ability to
continue to
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<PAGE> 28
comply with the covenants and restrictions may be affected by events beyond our
control. A breach of any of these covenants or restrictions would result in an
event of default under the New Credit Agreement and the indenture, in which case
the lenders under the New Credit Agreement could elect to declare all amounts
borrowed thereunder, together with accrued interest, to be due and payable,
foreclose on the assets securing the New Credit Agreement or cease to provide
additional revolving loans or letters of credit, which could have a material
adverse effect on us. If any event of default exists on Designated Senior Debt,
subordination provisions in the indenture may restrict payments to holders of
the notes until holders of Senior Debt are paid in full or such default is cured
or waived or has ceased to exist. A failure to comply with the restrictions in
the indenture could result in an event of default under the indenture. See
"Description of Preferred Stock and Certain Indebtedness -- New Credit
Agreement" and "Description of the New Notes -- Certain Covenants."
LIMITATIONS ON CHANGE OF CONTROL
Upon certain change of control events, we will be required to make an offer
in cash to repurchase all or any part of each holder's notes at a repurchase
price equal to 101% of the principal amount thereof, plus accrued interest.
Further, the provisions of the indenture governing the notes may not afford
holders protection in the event we engage in a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction, if such
transaction does not result in a change of control. The source of funds for any
such repurchase would be our available cash or cash generated from operations or
other sources, including borrowings, sales of equity or funds provided by a new
controlling person. We cannot assure you that sufficient funds will be available
at the time of any change of control event to make any required repurchases of
the notes tendered. In addition, we are prohibited under the New Credit
Agreement from making any such required repurchases. Our failure to offer to
repurchase notes, or to repurchase notes tendered, following a change of control
will result in a default under the indenture governing the notes, which could
lead to a cross-default under the New Credit Agreement and under the terms of
other indebtedness. In addition, prior to repurchasing the notes upon a change
of control event, we must either repay outstanding indebtedness under our New
Credit Agreement or obtain the consent of the lenders. If we do not obtain such
consent or repay outstanding indebtedness under our New Credit Agreement, we
would remain effectively prohibited from offering to purchase the Notes. See
"Description of Preferred Stock and Certain Indebtedness -- Credit Agreement,",
"Description of the New Notes -- Subordination" and "-- Repurchase at the Option
of Holders -- Change of Control."
LIQUID TRADING MARKET FOR THE NOTES MAY NOT DEVELOP
There has not been established trading market for the notes. Although the
initial purchaser has informed us that it currently intends to make a market in
the outstanding notes and, if issued, the exchange notes, which will replace the
outstanding notes, it has no obligation to do so and may discontinue making a
market at any time without notice.
The notes are eligible for trading in the Private Offerings, Resale and
Trading through the Automatic Linkage ("PORTAL") market. However, we do not
intend to apply for listing of the outstanding notes or, if issued, the exchange
notes, on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System.
The liquidity of any market for the notes will depend upon the number of
holders of the notes, our performance, the market for similar securities, the
interest of securities dealers in making a market in the notes and other
factors. A liquid trading market may not develop for the notes.
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<PAGE> 29
CONSEQUENCES OF FAILURE TO EXCHANGE
Untendered outstanding notes that are not exchanged for new notes pursuant
to the Exchange Offer will remain restricted securities. Outstanding notes will
continue to be subject to the following restrictions on transfer:
- outstanding notes may be resold only if registered pursuant to the
Securities Act, if an exemption from registration is available
thereunder, or if neither such registration nor such exemption is
required by law,
- outstanding notes shall bear a legend restricting transfer in the absence
of registration or an exemption therefrom, and
- a holder of outstanding notes who desires to sell or otherwise dispose of
all or any part of its outstanding notes under an exemption from
registration under the Securities Act, if requested by us, must deliver
to us an opinion of independent counsel experienced in Securities Act
matters, reasonably satisfactory in form and substance to us, that such
exemption is available.
FRAUDULENT CONVEYANCE MATTERS
Our obligations under the notes, and the consummation of the
Recapitalization, the Financing and the Toastmaster Acquisition, may be subject
to review under various laws for the protection of creditors, including federal
and state fraudulent conveyance and fraudulent transfer laws, if a bankruptcy
case or other lawsuit (including in circumstances where bankruptcy is not
involved) is commenced by or on behalf of any of our creditors. If a court in
such a case or lawsuit were to find that, at the time we issued the notes or at
the time of such transactions, we (1) intended to hinder, delay or defraud any
existing or future creditor or (2) did not receive fair consideration or
reasonably equivalent value for issuing the notes or in connection with such
transactions, and we either (a) were insolvent or rendered insolvent by reason
thereof, (b) were engaged or were about to engage in a business or transaction
for which our remaining unencumbered assets constituted unreasonably small
capital or (c) intended to or believed that we would incur debts beyond our
ability to pay such debts as they matured or became due, such court could void
our obligations under the notes, subordinate the notes to our other
indebtedness, direct that holders of the notes return to us any amounts paid
thereunder or to a fund for the benefit of our creditors or take other action
detrimental to the holders of the notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction being applied. Generally, however, a company
will be considered insolvent at a particular time if the sum of its debts,
including contingent liabilities, at that time is greater than the then-fair
value of its assets or if the fair saleable value of its assets at that time is
less than the amount that would be required to pay its probable liability on its
existing debts as they become absolute and mature. We cannot assure you as to
what standard a court would apply to evaluate the parties' intent or to
determine whether we were insolvent at the time of, or rendered insolvent upon
consummation of, the Recapitalization, the Financing or the Toastmaster
Acquisition or that, regardless of the standard, a court would determine that we
were insolvent at the time of, or rendered insolvent upon consummation of, such
transactions.
Our obligations under the notes will be guaranteed by our current and
future domestic restricted subsidiaries, and the guarantees of the notes also
may be subject to review under various laws for the protection of creditors,
including federal and state fraudulent conveyance and fraudulent transfer laws,
if a bankruptcy case or a lawsuit (including in circumstances where bankruptcy
is not involved) is commenced by or on behalf of any creditor of a guarantor or
a representative of any such creditors. In such a case, the analysis set forth
above would generally apply, except that the guarantees could also be subject to
the claim that, since the guarantees were incurred for our benefit (and only
indirectly for the benefit of the guarantors), the obligations of the guarantors
thereunder were incurred for less than reasonably equivalent value or fair
consideration. A court could void a guarantor's obligation under its guarantee
of the notes, subordinate the guarantee to other indebtedness of a guarantor,
direct that holders of the notes return any
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<PAGE> 30
amounts paid under a guarantee to the relevant guarantor or to a fund for the
benefit of its creditors, or take other action detrimental to the holders of the
notes.
On the basis of historical financial information, recent operating history
and other factors, we believe that on a consolidated basis after giving effect
to the Recapitalization, the Financing and the Toastmaster Acquisition, we will
not be insolvent, will not have unreasonably small capital for the business in
which we are engaged and will not incur debts beyond our ability to pay such
debts as they mature. We cannot assure you as to what standard a court would
apply in making such determinations or that a court would agree with our
conclusions in this regard.
RISKS RELATING TO THE COMPANY
RISKS RELATING TO THE TOASTMASTER ACQUISITION
Integration of Toastmaster. We cannot assure you that we will successfully
integrate Toastmaster with our 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. We cannot assure you that we
will not encounter difficulties in expanding our financial controls and
reporting systems to meet our future needs. If we fail to successfully integrate
the operations of Salton and Toastmaster, or if anticipated revenue enhancements
and cost savings are not realized, our business, results of operations and
financial condition would be materially adversely affected. The unaudited Pro
Forma Condensed Consolidated Financial Information included herein contains
certain adjustments relating to the acquisition of Toastmaster. Although these
adjustments are based upon available information and certain assumptions we
consider reasonable as of the date of this Prospectus, actual amounts could
differ from those set forth therein, possibly to a material extent. Moreover, we
cannot assure you that the anticipated impact of the integration of Toastmaster
upon our financial condition and results of operations as presented in such pro
forma financial statements will be as presented. See "Summary -- Summary Pro
Forma Condensed Consolidated Financial Data," "-- Recent
Developments -- Toastmaster Acquisition," "-- The Financing," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Pro Forma Condensed Consolidated Financial Information."
Limited Manufacturing Experience. Except for the assembly of certain
products in our Kenilworth, New Jersey plant, we arrange for the manufacture of
most of our products with manufacturers located overseas, primarily in the Far
East and Europe. 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. We currently expect to continue manufacturing certain products at
these plants after the Toastmaster Acquisition is consummated. Our manufacture
of these products will subject us to certain additional risks, including those
relating to the price and availability of raw materials and environmental
concerns. We cannot assure you that we 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 or a general
economic downtown in retail sales could have a material adverse effect on our
business, results of operations and financial condition.
DEPENDENCE ON MAJOR CUSTOMERS
Our total net sales to our five largest customers during fiscal 1998 were
approximately 47% of net sales in fiscal 1998, with our largest customer, Kmart,
representing approximately 19% of our net sales in
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<PAGE> 31
fiscal 1998. Except for our supply agreement with Kmart, we do not have
long-term agreements with our major customers, and purchases are generally made
through the use of individual purchase orders. A significant reduction in
purchases by any of these major customers or a general economic downturn in
retail sales could have a material adverse effect on our business, financial
condition and results of operations. See "Business -- Marketing and
Distribution."
RISKS ASSOCIATED WITH DEVELOPMENT OF NEW PRODUCTS
We believe that our future success will depend in part upon our ability to
continue to introduce innovative designs in our existing products and to
develop, manufacture and market new products. We cannot assure you that we will
be successful in the introduction, marketing and manufacture of any new products
or product innovations or that we will be able to develop and introduce in a
timely manner innovations to our 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 our
business, financial condition and results of operations. See "Business -- New
Product Development."
DEPENDENCE ON FOREIGN SUPPLIERS
We are dependent upon unaffiliated foreign companies for the manufacture of
most of our products. Our arrangements with our 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 our business, financial
condition and results of operations. We believe that the loss of any one or more
of our suppliers would not have a long term material adverse effect on our
business, financial condition and results of operations, because other
manufacturers with whom we do business would be able to increase production to
fulfill our requirements. However, the loss of certain of our suppliers could,
in the short term, adversely affect our business until alternative supply
arrangements were secured.
During fiscal 1998, three manufacturers located in China accounted for
approximately 12.7%, 12.4% and 10.1%, respectively, of our 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. We cannot assure you
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 us, which could have a material adverse impact
on our business, financial condition and results of operations. See
"Business -- Sources of Supply."
RETAIL INDUSTRY
Our 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, our business
and financial results can fluctuate with the financial condition of our retail
customers and the retail industry generally. Certain of our retail customers,
such as HomePlace Stores, Inc. and Venture Stores, have filed for bankruptcy
protection in recent years. We continually monitor and evaluate the credit
status of our customers and attempt to adjust sales terms as appropriate.
Despite these efforts, a bankruptcy filing by a significant customer could have
a material adverse effect on our business, financial condition and results of
operations.
SUPPLY AGREEMENT WITH KMART
In January 1997, we 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
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<PAGE> 32
under the White-Westinghouse(R) brand name licensed to us 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 us and Kmart is through
June 30, 2004; however, the agreement allows for termination prior to such time
for specified reasons, including (1) the termination of a supply agreement
between Kmart and Newtech Electronics Industries, Inc. ("Newtech"), a 50%
subsidiary of Windmere, and (2) 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. We have 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 us and Kmart. Furthermore, the
supply agreement between us 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 us or
Newtech, whether relating to any or all products. Although the Trademark
Litigation (as defined in the next paragraph) was pending prior to the execution
of the supply agreement between us 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 us or Newtech, it could
terminate the supply agreement between us and Kmart. During fiscal 1998, Kmart
purchased approximately $58.9 million of products from us, which accounted for
approximately 19% of our net sales. The termination of the supply agreement
between us and Kmart, or any significant modification thereof, could have a
material adverse effect on our business, financial condition and results of
operations.
TRADEMARK LITIGATION
In November 1996, 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 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 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 us, 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 us 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 us 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. WCI is currently defending us in
this action. We cannot assure you that WCI will prevail in its lawsuit, or that
WCI, Salton and their other co-defendants will prevail in their defense of CBS's
lawsuit. In the event that a favorable outcome for us is not obtained, we intend
to vigorously pursue our right to indemnification under indemnification
provisions in the license agreements between WCI and us relating to the White-
Westinghouse(R) brand name. We cannot assure you that WCI will agree on the
scope of the indemnity, or that any such indemnity payment which may become due
to us will be paid fully or in a timely fashion or at all.
Related proceedings have also been commenced before the Trademark Trial and
Appeal Board (the "Trademark Board") of the United States Patent and Trademark
Office in opposition to WCI's and CBS's efforts to register certain uses of the
Westinghouse(TM) and White-Westinghouse(R) names. Such proceedings
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have been stayed pending resolution of the Trademark Litigation in the
Pennsylvania court. Even if the Trademark Litigation is resolved in our favor,
it is possible that the proceedings before the Trademark Board will continue and
could have a material adverse effect upon our business, financial condition and
results of operations. See "Business -- Legal Proceedings."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
We continue to look for opportunities to acquire businesses and product
lines that fit within our acquisition strategy. To that end, we have had, and
continue to have, discussions with acquisition candidates. The level of this
activity will vary from time to time depending on the type of acquisition
candidates we identify. Our ability to accomplish our strategy will depend upon
a number of factors including, among other things, our ability to identify
acceptable acquisition candidates, to acquire the necessary funds for such
acquisitions, to consummate such acquisitions on terms favorable to us and to
promptly and profitably integrate the acquired operations into our operations.
See "Business -- Business Strategy."
Acquiring additional businesses and product lines may require additional
capital and the consent of our lenders and may have a significant impact on our
financial position and results of operations. Any such acquisitions may involve
the issuance of additional debt, subject to certain restrictions in the
indenture governing the notes and the New Credit Agreement. Acquisitions could
result in substantial amortization charges from the accumulation of goodwill and
other intangible assets which could reduce reported earnings. We cannot assure
you that we will be successful in identifying acceptable acquisition candidates
or that any acquired operations will be profitable or will be successfully
integrated or that any such future acquisitions will not materially and
adversely affect our 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
COMPETITION
The markets for our products are highly competitive. We believe that
competition is based upon several factors, including price, access to retail
shelf space, product features and enhancements, brand names, new product
introductions, marketing support and distribution approaches. We compete with
established companies, a number of which have substantially greater facilities,
personnel, financial and other resources than we have. We cannot assure you that
significant new competitors or increased competition from existing competitors
will not adversely affect our business, financial condition and results of
operations. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
Our continued success will depend significantly on the efforts and
abilities of our 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 our business. In addition, as our
business develops and expands, we believe that our future success will depend
greatly on our ability to attract and retain highly qualified and skilled
personnel. We do not have, and do not intend to obtain, key-man life insurance
on our executive officers. See "Management -- Employment Agreements."
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CONCENTRATION OF OWNERSHIP
As of December 28, 1998, Centre Partners and its affiliates owned 213,700
shares of our common stock and 40,000 shares of Convertible Preferred Stock,
which are currently convertible into 2,352,941 shares of our common stock. Each
holder of the Convertible Preferred Stock is entitled to one vote for each share
of our common stock which such holder could receive upon conversion of the
Convertible Preferred Stock. Accordingly, Centre Partners and its affiliates
currently hold approximately 28.8% of the total voting power of the Company. As
of December 28, 1998, our executive officers and entities affiliated with these
officers owned in the aggregate approximately 11.2% of the outstanding shares of
our common stock (assuming conversion of the outstanding 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 our assets, which
transactions may result in a change of control event under the indenture
governing the notes. 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. The interests of our stockholders may conflict with the
interests of holders of the notes in certain circumstances. See "Share
Ownership."
SEASONALITY OF BUSINESS
Our business is highly seasonal, with operating results varying from
quarter to quarter. We have historically experienced higher sales during the
months of August through November primarily due to increased demand by customers
for our products attributable to holiday sales. This seasonality has also
resulted in additional interest expense for us during this period due to an
increased need to borrow funds to maintain sufficient working capital to finance
product purchases and customer receivables for the seasonal period. Lower sales
than expected by us during this period, a lack of availability of product, a
general economic downturn in retail sales or the inability to service additional
interest expense due to increased borrowings could have a material adverse
effect on our business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON TRADEMARKS
We believe that our rights in owned and licensed names are a significant
part of our business and that our ability to create demand for our products is
dependent to a large extent on our ability to exploit these trademarks. There
can be no assurance as to the breadth or degree of protection that these
trademarks may afford us, or that we will be able to successfully exploit our
trademarks in the future. Any inability to do so, particularly with respect to
names in which we have made significant capital investments, could have a
material adverse effect on our business, financial condition and results of
operations. In addition, because our business strategy is heavily dependent upon
the use of brand names, adverse publicity with respect to products that are not
sold by us, but bear the brand names used by us could have a material adverse
effect on our business, financial condition and results of operations. See
"Business -- Trademarks, Patents and Licensing Arrangements" and " -- Legal
Proceedings."
RISKS OF PROTECTION OF PROPRIETARY TECHNOLOGY
We have filed applications or obtained licenses for patents and design
registrations in the United States and in several foreign countries. With
respect to our applications for patents, we cannot assure you that any patents
will be obtained. If obtained, we cannot assure you that such patents will
afford us commercially significant protection of our technologies or that we
will have adequate resources to enforce our patents. Patent applications in the
United States are maintained in secrecy until patents are issued, and since
publication of discoveries in the scientific or patent literature tends to lag
behind actual discoveries by several months, we cannot be certain that we will
be the first creator of inventions covered by any patent application we file or
the first to file patent applications on such inventions.
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Competitors in both the United States and foreign countries, many of which
have substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or otherwise interfere
with our ability to make and sell our products. We have not conducted an
independent review of patents issued to third parties. Although we believe that
our products do not infringe the patents or other proprietary rights of third
parties, we cannot assure you that other parties will not assert infringement
claims against us or that such claims will not be successful. There can also be
no assurance that competitors will not infringe on any patents obtained by us.
Defense and prosecution of patent suits, even if successful, are both costly and
time consuming. An adverse outcome in the defense of a patent suit could subject
us to significant liabilities to third parties, require disputed rights to be
licensed from third parties on potentially unfavorable terms or require us to
cease selling our products.
We also rely on unpatented proprietary technology and there can be no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to our unpatented technology. If we are
unable to maintain the proprietary nature of our technologies, our business,
financial condition and results of operations could be materially adversely
affected. See "Business -- Trademarks, Patents and Licensing Arrangements."
PRODUCT LIABILITY
We face exposure to product recalls and product liability claims in the
event that our products are alleged to have manufacturing or safety defects or
to have resulted in injury or other adverse effects. Although we maintain
product liability insurance in amounts that we believe are reasonable, we cannot
assure you that we will be able to maintain our product liability insurance on
acceptable terms, if at all, in the future or that product liability claims will
not exceed the amount of our insurance coverage. We do not maintain product
recall insurance. As a result, we cannot assure you that product recalls and
product liability claims will not have a material adverse effect on our
business, financial condition and results of operations. See "Business -- Legal
Proceedings."
GOVERNMENT REGULATION
Most federal, state and local authorities require Underwriters Laboratory,
Inc., an independent, not-for-profit corporation engaged in the testing of
products for compliance with certain public safety standards, or other safety
regulation certification prior to marketing electrical appliances. We cannot
assure you that our products, or additional electrical appliances which may be
developed by us, will meet the specifications required by these authorities. A
determination that we are not in compliance with such rules and regulations
could result in the imposition of fines or an award of damages to private
litigants. These and other initiatives could have a material adverse effect on
our business, financial condition and results of operations. See
"Business -- Regulation."
RISKS RELATING TO YEAR 2000
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 our
business, financial condition and results of operations because our computer and
other systems are integral parts of our distribution activities as well as our
accounting and other information systems and because we will have to divert
financial resources and personnel to address this issue.
We have reviewed our computer and other hardware and software systems and
have recently begun upgrading those systems that we have identified as not being
year 2000 compliant. The existing systems will be upgraded either through
modification or, as a contingency, replacement. We currently anticipate that we
will upgrade and complete testing of the upgrades by the end of fiscal 1999.
Although we are not aware of any material operational impediments
associated with upgrading our computer and other hardware and software systems
to be year 2000 compliant, we cannot make any
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assurances that the upgrade of our computer systems will be completed on
schedule or that the upgraded systems will be free of defects. If any such risks
materialize, we could experience material adverse consequences to our business,
financial condition and results of operations.
Year 2000 compliance may also adversely affect our business, financial
condition and results of operations indirectly by causing complications of, or
otherwise affecting, the operations of any one or more of our suppliers and
customers. We have contacted our significant suppliers and certain of our
customers in an attempt to identify any potential year 2000 compliance issues
with them. We currently believe that our major suppliers have made significant
progress with respect to year 2000 compliance issues. We are currently unable to
anticipate the magnitude of the operational or financial impact on us of year
2000 compliance issues with our customers even though we know that these
customers have implemented significant programs with respect to year 2000
compliance issues.
We incurred approximately $765,000 through fiscal 1998 and expect to incur
approximately $135,000 through fiscal 1999 to resolve and test our 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.
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USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the issuance of
the new notes pursuant to the Exchange Offer. The Company used the aggregate
gross proceeds of the Financing:
- to repay approximately $90.0 million of outstanding indebtedness under
the Tranche A Term Loan;
- to repay outstanding indebtedness under the Revolving Credit Facility,
which totalled $20.0 million as of September 26, 1998;
- to repay $0.8 million of accrued interest on the outstanding indebtedness
being repaid;
- to pay fees and expenses of approximately $4.1 million incurred in
connection with this offering; and
- the balance of approximately $10.1 million will be used for working
capital and general corporate purposes.
See "Summary -- The Financing," "Description of Preferred Stock and Certain
Indebtedness -- New Credit Agreement," "Capitalization," and "Pro Forma
Condensed Consolidated Financial Information." Following the repayment of the
Tranche A Term Loan, such facility was permanently terminated. See "Description
of Preferred Stock and Certain Indebtedness -- New Credit Agreement."
The Tranche A Term Loan repaid out of the proceeds of the Financing was
incurred to finance the Stock Repurchase and the Option Repurchase. The Tranche
A Term Loan bears interest 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 September 26, 1998, the base rate plus
applicable margin was 9.6% and the eurodollar rate plus applicable margin was
7.8%. The Tranche A Term Loan matures in twenty consecutive quarterly
installments commencing on September 30, 1998. See "Description of Preferred
Stock and Certain Indebtedness -- New Credit Agreement". An affiliate of Lehman
Brothers Inc., the Initial Purchaser, is the arranger and syndication agent of
the New Credit Agreement and received a majority of the net proceeds as a result
of the repayment. See "Plan of Distribution."
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THE EXCHANGE OFFER
GENERAL
In connection with the sale of the outstanding notes (the "Old Notes"), the
purchasers thereof became entitled to the benefits of certain registration
rights. Pursuant to the registration rights agreement executed as part of the
Financing (the "Registration Rights Agreement"), the Company agreed to (i) file
the Registration Statement of which this Prospectus is a part with respect to
the exchange of the Old Notes for the new notes to be issued in the Exchange
Offer (the "New Notes," and together with the Old Notes, the "Notes") with the
Commission on or prior to 60 days after the date of original issue of the Old
Notes, (ii) use its best efforts to have the Registration Statement declared
effective by the Commission on or prior to 120 days after the original issue of
the Old Notes, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, commence the Exchange Offer and use its
best efforts to issue on or prior to 30 business days after the date on which
the Registration Statement was declared effective by the Commission, the New
Notes. The New Notes have terms identical in all material respects to the terms
of the Old Notes. However, if (i) the Company is not required to file the
Registration Statement or permitted to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or Commission policy or (ii)
any Holder of the Old Notes other than the initial purchaser notifies the
Company prior to the 20th day following consummation of the Exchange Offer that
(A) it is prohibited by law or Commission policy from participating in the
Exchange Offer or (B) that it may not resell the New Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the prospectus
contained in the Registration Statement is not appropriate or available for such
resales or (C) that it is a broker-dealer and owns Notes acquired directly from
the Company or an affiliate of the Company, the Company has agreed to file with
the Commission a Shelf Registration Statement to cover resales of the Notes by
the Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company has
also agreed that if (i) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (ii) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), or (iii) the Company fails to
consummate the Exchange Offer within 30 business days of the Effective Target
Date with respect to the Registration Statement, or (iv) the Shelf Registration
Statement or the Registration Statement is declared effective but thereafter
ceases to be effective or usable during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (i)
through (iv) above a "Registration Default"), then the Company will pay
Liquidated Damages to each Holder of Old Notes, with respect to the first 90-day
period immediately following the occurrence of the first Registration Default in
an amount equal to $.05 per week per $1,000 principal amount of Old Notes held
by such Holder. The amount of the Liquidated Damages will increase by an
additional $.05 per week per $1,000 principal amount of Old Notes with respect
to each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum amount of Liquidated Damages of $.50 per week per $1,000
principal amount of Old Notes.
In the event the Exchange Offer is consummated, the Company will not be
required to file a Shelf Registration Statement relating to any outstanding Old
Notes other than those held by persons not eligible to participate in the
Exchange Offer, and the interest rate on such Old Notes will remain at its
initial level of 10 3/4%. The Exchange Offer shall be deemed to have been
consummated upon the earlier to occur of (i) the Company having exchanged New
Notes for all outstanding Old Notes (other than Old Notes held by persons not
eligible to participate in the Exchange Offer) pursuant to the Exchange Offer
and (ii) the Company having exchanged, pursuant to the Exchange Offer, New Notes
for all Old Notes that have been tendered and not withdrawn on the Expiration
Date. Upon consummation, holders of Old Notes seeking liquidity in their
investment would have to rely on exemptions to registration requirements under
the securities laws, including the Securities Act. See "Risk
Factors -- Consequences of Failure to Exchange."
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes validly tendered prior to 5:00 p.m., New
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York City time, on the Expiration Date. The Company will issue $ 1,000 principal
amount of New Notes in exchange for each $1,000 principal amount of outstanding
Old Notes accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer in denominations of $1,000 and
integral multiples thereof.
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than (i) a broker-dealer who purchased
such Old Notes directly from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that the holder is acquiring the
New Notes in its ordinary course of business and is not participating, and has
no arrangements or understanding with any person to participate, in the
distribution of the New Notes. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Company that such conditions have been met.
Each broker-dealer that receives New Notes in exchange for Old Notes held
for its own account, as a result of market-making or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, such broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. The Prospectus,
as it may be amended or supplemented from time to time, may be used by such
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus and any amendment or supplement to
this Prospectus available to any such broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
As of the date of this Prospectus, $125 million aggregate principal amount
of the Old Notes is outstanding. In connection with the issuance of the Old
Notes, the Company arranged for the Old Notes initially purchased by Qualified
Institutional Buyers to be issued and transferable in book-entry form through
the facilities of DTC, acting as depositary. The New Notes will also be issuable
and transferable in book-entry form through DTC.
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of , 1999 (the "Record Date").
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. See "-- Exchange Agent." The Exchange Agent will act as agent
for the tendering holders of Old Notes for the purpose of receiving New Notes
from the Company and delivering New Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, without
expenses, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
EXPIRATION DATES; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean , 1999 unless the Company,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
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In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay acceptance of any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and to refuse to
accept Old Notes not previously accepted, if any of the conditions set forth
herein under "-- Termination" shall have occurred and shall not have been waived
by the Company (if permitted to be waived by the Company), by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
and (ii) to amend the terms of the Exchange Offer in any manner deemed by it to
be advantageous to the holders of the Old Notes. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of the Old Notes of such amendment.
Without limiting the manner by which the Company may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, the Company shall have no obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones New Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from December 16, 1998, payable
semiannually on December 15 and June 15 of each year commencing on June 15,
1999, at the rate of 10 3/4% per annum. Holders of Old Notes whose Old Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued from December 16, 1998
until the date of the issuance of the New Notes. Consequently, holders who
exchange their Old Notes for New Notes will receive the same interest payment on
June 15, 1999 (the first interest payment date with respect to the Old Notes and
the New Notes) that they would have received had they not accepted the Exchange
Offer. Procedure for Tendering
PROCEDURE FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes (unless such tender is being effected pursuant to the procedure for
book-entry transfer described below) and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's procedure for such transfer. Although delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account DTC, the Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received or confirmed by the Exchange Agent at its addresses
set forth herein under "-- Exchange Agent" prior to 5:00 p.m., New York City
time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH
ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
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Delivery of all documents must be made to the Exchange Agent at its address
set forth herein. Holders may also requests that their respective brokers,
dealers, commercial banks, trust companies or nominees effect such tender for
such holders.
The method of delivery of Old Notes and the Letters of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes should
be sent to the Company.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder, or
any person whose Old Notes are held of record by DTC who desires to deliver such
Old Notes by book-entry transfer at DTC.
Any beneficial holder whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be Guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office of correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution") unless the Old Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers which authorize such person
to tender the Old Notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All the questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determinations will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not validly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the absolute right to waive any irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived any defects
or irregularities in connection with tenders of Old Notes must be cured within
such time as the Company shall determine. Neither the Company, the Exchange
Agent nor any other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Old Notes nor shall any of
them incur any liability for failure to give such notification. Tenders of Old
Notes will not be deemed to have been made until such irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
40
<PAGE> 42
property tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost by the Exchange Agent to the
tendering holder of such Old Notes unless otherwise provided in the Letter of
Transmittal, as soon as practicable flowing the Expiration Date.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, or, as set forth under "Termination," to terminate the
Exchange Offer and (b) to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the Exchange
Offer.
By tendering, each holder of Old Notes will represent to the Company that
among other things, the New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the person receiving such
New Notes, whether or not such person is the holder, that neither the Holder nor
any other person has an arrangement or understanding with any person to
participate in the distribution of the New Notes and that neither the holder nor
any such other person is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act.
GUARANTEED DELIVERY PROCEDURE
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal, or any other required documents to the Exchange Agent prior to the
Expiration Date, or if such Holder cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duty executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within five business days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Old Notes to be tendered in proper form for
transfer and any other documents required by the Letter of Transmittal,
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer into the Exchange Agent's account at DTC of Old Notes
delivered electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days
after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior to
the Expiration Date, unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the business day, prior to the Expiration Date and prior to acceptance for
exchange thereof by the Company. Any such notice of withdrawal must (i) specify
the name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes), (iii) be
signed by the Depositor in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfers
sufficient to permit the Trustee with respect to the Old Notes to register the
transfer of such Old Notes into the name of the Depositor withdrawing the tender
and (iv) specify the
41
<PAGE> 43
name in which any such Old Notes are to be registered, if different from that of
the Depositor. All questions as to the validity, form and eligibility (including
time of receipt) for such withdrawal notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly tendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be tendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange New Notes for, any Old Notes not
therefore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes if: (i) any action or
proceeding is instituted or threatened in any court or by or before any
governmental agency with respect to the Exchange Offer, which, in the Company's
judgment, might materially impair the Company's ability to proceed with the
Exchange Offer or (ii) any law, statute, rule or regulation is proposed, adopted
or enacted, or any existing law, statute rule or regulation is interpreted by
the staff of the Commission or court of competent jurisdiction in a manner,
which, in the Company's judgment, might materially impair the Company's ability
to proceed with the Exchange Offer.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the Expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes, or (iii) waive such termination event with
respect to the Exchange Offer and accept all property tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
to this Prospectus that will be distributed to each registered holder of Old
Notes and the Company will extend the Exchange Offer for a period of five to ten
business days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association, the Trustee under the
indenture governing the Notes (the "Indenture"), has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
By Mail: Norwest Bank Minnesota, N.A.
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480-1517
Facsimile Transmission: (612) 667-4927
Confirm by Telephone: (612) 667-9764
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional
42
<PAGE> 44
solicitations may be made by officers and regular employees of the Company and
its affiliates in person, by telegraph or telephone.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other person) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizing the federal income tax consequences of
the Exchange Offer reflects the opinion of Sonnenschein Nath & Rosenthal,
counsel to the Company, as to material federal income tax consequences expected
to result from the Exchange Offer. An opinion of counsel is not binding on the
Internal Revenue Service ("IRS") or the courts, and there can be no assurances
that the IRS will not take, and that a court would not sustain, a position to
the contrary to that described below. Moreover, the following discussion does
not constitute comprehensive tax advice to any particular Holder of Old Notes.
The summary is based on the current provisions of the Internal Revenue Code of
1986, as amended, and applicable Treasure regulations, judicial authority and
administrative pronouncements. The tax consequences described below could be
modified by future changes in the relevant law, which could have retroactive
effect. Each Holder of Old Notes should consult its own tax advisor as to these
and any other federal income tax consequences of the Exchange Offer as well as
any tax consequences to it under foreign, state, local or other law.
In the opinion of Sonnenschein Nath & Rosenthal, exchanges of Old Notes for
New Notes pursuant to the Exchange Offer will be treated as a modification of
the Old Notes that does not constitute a material change in their terms, and the
Company intends to treat the exchanges in that manner. Therefore an exchanging
Holder, will not recognize any gain or loss, in respect of an exchange of an Old
Note for a New Note, and such Holder's basis and holding period in the New Note
will be the same as such Holder's basis and holding period in the Old Note. The
Exchange Offer will result in no federal income tax consequences to a
non-exchanging Holder.
43
<PAGE> 45
CAPITALIZATION
The following table sets forth as of September 26, 1998: (1) the historical
capitalization of the Company; (2) the unaudited pro forma capitalization of the
Company after giving effect to the Financing; and (3) the unaudited pro forma
capitalization of the Company after giving effect to the Financing and the
Toastmaster Acquisition. The actual debt amount incurred by the Company to
finance the Toastmaster Acquisition differs from the amount set forth below.
This table should be read in conjunction with the financial statements, and the
related notes thereto, included elsewhere herein. See "Summary," "Use of
Proceeds," "Pro Forma Condensed Consolidated Financial Information" and
"Selected Historical Financial and Other Data."
<TABLE>
<CAPTION>
AT SEPTEMBER 26, 1998
--------------------------------------
ADJUSTED FOR
--------------------------
FINANCING AND
TOASTMASTER
ACTUAL FINANCING ACQUISITION
-------- --------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash and cash equivalents............................... $ 1,017 $ 11,120 $ --
======== ======== ========
Total debt (including current maturities):
New Credit Agreement:(1)
Tranche A Term Loan.............................. 90,000 -- --
Delayed Draw Term Loan/Tranche B Term Loan(2).... -- -- 45,000
Revolving Credit Facility........................ 20,000 -- 54,539
10 3/4% Senior Subordinated Notes due 2005............ -- 125,000 125,000
4% Junior Subordinated Note........................... 8,907 8,907 8,907
-------- -------- --------
Total debt.................................... 118,907 133,907 233,446
-------- -------- --------
Stockholders' equity:
Convertible Preferred Stock...........................
Common stock.......................................... 131 131 131
Treasury stock........................................ (90,804) (90,804) (90,804)
Paid-in capital....................................... 90,484 90,484 90,484
Retained earnings..................................... 25,766 25,766 25,766
-------- -------- --------
Total stockholders' equity.................... 25,577 25,577 25,577
-------- -------- --------
Total capitalization.................................... $144,484 $159,484 $259,023
======== ======== ========
</TABLE>
- -------------------------
(1) Represents commitments of up to $125.0 million under the New Credit
Agreement, consisting of a $75.0 million Delayed Draw Term Loan and a $50.0
million Revolving Credit Facility.
(2) Pursuant to the Commitment Letter, the Company expects that the New Credit
Agreement will be amended and restated prior to the consummation of the
Toastmaster Acquisition to: (i) replace the $75.0 million Delayed Draw Term
Loan with a $45.0 million Tranche B Term Loan; and (ii) increase the
Revolving Credit Facility to $80.0 million.
44
<PAGE> 46
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following presents certain unaudited pro forma condensed consolidated
financial information of the Company for the periods ended and as of the dates
indicated. The unaudited pro forma condensed consolidated statement of
operations data for the fiscal year ended June 27, 1998 give effect to (1) the
Recapitalization and the Financing and (2) the Recapitalization, the Financing
and the Toastmaster Acquisition, in each case as if such transactions had
occurred on June 29, 1997. The unaudited pro forma condensed consolidated
statement of operations data for the thirteen weeks ended September 26, 1998
give effect to (1) the Financing and (2) the Financing and the Toastmaster
Acquisition, in each case as if such transactions had occurred on June 29, 1997.
The unaudited pro forma condensed consolidated balance sheet data gives effect
to (1) the Financing and (2) the Financing and the Toastmaster Acquisition, in
each case as if they had occurred on September 26, 1998.
The unaudited pro forma condensed consolidated financial information set
forth below reflects pro forma adjustments that are based upon available
information and certain assumptions that the Company believes are reasonable.
The pro forma financial information is for informational purposes only and does
not purport to represent what the Company's results of operations or financial
position would have actually been had the transactions to which pro forma effect
is given been consummated as of the dates or for the periods indicated. In
preparing the pro forma financial information, the Company believes it has
utilized reasonable methods to conform the basis of presentation of each of
Salton's and Toastmaster's historical financial statements. The Toastmaster
Acquisition has been accounted for herein by the purchase method of accounting.
The pro forma information reflects preliminary estimates of the allocation of
the purchase price and is subject to final determination. The pro forma
information does not reflect cost savings expected by the Company's management
to be achieved over time following the Toastmaster Acquisition. These cost
savings include: (1) more favorable product pricing and other terms through the
outsourcing of products overseas; and (2) advertising, ocean freight,
warehousing and corporate overhead expenses. Salton's ability to recognize
certain of these cost savings 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. See "Risk
Factors -- Risks Relating to the Company -- Risks Relating to the Toastmaster
Acquisition."
The pro forma financial statements and accompanying notes should be read in
conjunction with the historical financial statements, including the notes
thereto, of the Company and of Toastmaster and with other financial information
pertaining to the Company including "Use of Proceeds," "Capitalization,"
"Selected Historical Financial and Other Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
45
<PAGE> 47
SALTON, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 26, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA FOR
PRO FORMA ADJUSTMENTS FOR FINANCING AND
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL TOASTMASTER TOASTMASTER
SALTON(1) FOR FINANCING FOR FINANCING TOASTMASTER(2) ACQUISITION ACQUISITION
---------- ------------- ------------- -------------- --------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash....................... $ 1,017 $125,000(3) $ 11,120 $ 356 $ 45,000(5) $ --
(20,000)(3) 54,539(5)
(4,088)(3) (53,200)(5)
(90,000)(3) (50,135)(5)
(809)(3) (2,054)(5)
(5,297)(5)
(329)(5)
Accounts receivable, net
allowances............... 65,708 -- 65,708 34,903 -- 100,611
Inventories................ 93,151 -- 93,151 46,110 792(4) 140,053
Prepaid expenses and other
current assets........... 2,668 -- 2,668 2,077 -- 4,745
Income taxes receivable.... -- -- -- 5,645 -- 5,645
Deferred tax assets........ 4,213 -- 4,213 -- (1,773)(10) 2,440
-------- -------- -------- -------- -------- --------
Total current
assets............. 166,757 10,103 176,860 89,091 (12,547) 253,494
Property, plant and
equipment.................. 23,154 -- 23,154 51,289 -- 74,443
Less accumulated
depreciation............... (15,180) -- (15,180) (34,214) -- (49,394)
-------- -------- -------- -------- -------- --------
Net property, plant and
equipment................ 7,974 -- 7,974 17,075 -- 25,049
Intangibles, net and other
assets..................... 8,797 4,088(3) 12,885 6,310 27,343(6) 44,033
(2,505)(7)
-------- -------- -------- -------- -------- --------
Total assets......... $183,528 $ 14,191 $197,719 $112,476 $ 12,381 $322,576
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current Liabilities:
Accounts payable........... $ 21,787 $ -- $ 21,787 $ 7,812 $ -- $ 29,599
Accrued expenses........... 16,690 (809)(3) 15,881 12,138 671(9) 28,690
Revolving line of credit... 20,000 (20,000)(3) -- -- 54,539(5) 54,539
Current portion of long
term debt................ 5,000 (5,000)(3) -- 2,054 (2,054)(5) --
Deferred income taxes...... -- -- -- 1,456 (1,456)(10) --
-------- -------- -------- -------- -------- --------
Total current
liabilities........ 63,477 (25,809) 37,668 23,460 51,700 112,828
Non-current deferred tax
liability.................. 567 -- 567 801 (909)(8) 459
Other non-current
liabilities................ -- -- -- 805 4,000(9) 4,805
Long term debt............... 85,000 125,000(3) 125,000 50,135 (50,135)(5) 170,000
(85,000)(3) 45,000(5)
Note payable to Windmere..... 8,907 -- 8,907 -- -- 8,907
-------- -------- -------- -------- -------- --------
Total liabilities.... 157,951 14,191 172,142 75,201 49,656 296,999
Stockholders' Equity:
Convertible preferred
stock....................
Common stock............... 131 -- 131 760 (760)(11) 131
Treasury stock............. (90,804) -- (90,804) (238) 238(11) (90,804)
Accumulated other
comprehensive income..... -- -- -- (492) 492(11) --
Additional paid-in
capital.................. 90,484 -- 90,484 25,340 (25,340)(11) 90,484
Retained earnings.......... 25,766 -- 25,766 11,905 (11,905)(11) 25,766
-------- -------- -------- -------- -------- --------
Total stockholders'
equity............. 25,577 -- 25,577 37,275 (37,275) 25,577
-------- -------- -------- -------- -------- --------
Total liabilities and
stockholders'
equity............. $183,528 $ 14,191 $197,719 $112,476 $ 12,381 $322,576
======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
46
<PAGE> 48
SALTON, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS AND OTHER DATA
FISCAL YEAR ENDED JUNE 27, 1998
<TABLE>
<CAPTION>
PRO FORMA FOR
PRO FORMA PRO FORMA RECAPITALIZATION,
ADJUSTMENTS FOR PRO FORMA FOR ADJUSTMENTS FOR FINANCING AND
HISTORICAL RECAPITALIZATION RECAPITALIZATION HISTORICAL TOASTMASTER TOASTMASTER
SALTON(1) AND FINANCING AND FINANCING TOASTMASTER(2) ACQUISITION ACQUISITION
---------- ---------------- ---------------- -------------- --------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net sales:................ $305,599 -- $305,599 $159,602 -- $465,201
Cost of goods sold........ 179,376 (1,353)(12) 178,023 120,245 -- 298,268
Distribution expenses..... 12,327 -- 12,327 9,683 -- 22,010
-------- -------- -------- -------- ------- --------
Gross profit............ 113,896 1,353 115,249 29,674 -- 144,923
Selling, general and
administrative
expenses................ 84,216 -- 84,216 22,434 651(15) 106,401
(900)(16)
-------- -------- -------- -------- ------- --------
Operating income........ 29,680 1,353 31,033 7,240 249 38,522
Interest expense net...... (5,333) (10,250)(13) (15,583) (3,800) (4,088)(17) (23,471)
Other expense............. -- -- -- (785) -- (785)
Costs associated with
refinancing............. (1,133) -- (1,133) -- -- (1,133)
Realized gain on sale of
marketable securities... 8,972 -- 8,972 -- -- 8,972
-------- -------- -------- -------- ------- --------
Income before income
taxes................. 32,186 (8,897) 23,289 2,655 (3,839) 22,105
Income taxes (benefit).... 12,205 (3,381)(14) 8,824 806 (1,895)(14) 7,735
-------- -------- -------- -------- ------- --------
Net income.............. $ 19,981 $ (5,516) $ 14,465 $ 1,849 $(1,944) $ 14,370
======== ======== ======== ======== ======= ========
OTHER DATA:
EBITDA(18)................ $ 33,981 $ 35,334 $ 10,941 $ 47,175
EBITDA margin(19)......... 11.1% 11.6% 6.9% 10.1%
Depreciation and
amortization............ $ 4,301 $ 4,301 $ 3,701 $ 8,653
Cash interest
expense(20)............. 6,056 15,155 3,920 23,367
Capital expenditures...... 4,565 4,565 3,529 8,094
Ratio of EBITDA to cash
interest expense........ 2.3x 2.0x
Ratio of net debt to
EBITDA(21).............. 3.5x 4.9x
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
47
<PAGE> 49
SALTON, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS AND OTHER DATA
THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR
PRO FORMA ADJUSTMENTS FOR FINANCING AND
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL TOASTMASTER TOASTMASTER
SALTON(1) FOR FINANCING FOR FINANCING TOASTMASTER(2) ACQUISITION ACQUISITION
---------- ------------- ------------- -------------- --------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net sales:.................... $104,388 -- $104,388 $38,875 -- $143,263
Cost of goods sold............ 55,004 -- 55,004 31,989 -- 86,993
Distribution expenses......... 3,609 -- 3,609 2,635 -- 6,244
-------- ------- -------- ------- ----- --------
Gross profit................ 45,775 -- 45,775 4,251 -- 50,026
Selling, general and
administrative expenses..... 27,780 -- 27,780 5,567 163(15) 33,260
(250)(16)
-------- ------- -------- ------- ----- --------
Operating income............ 17,995 -- 17,995 (1,316) 87 16,766
Interest expense net.......... (2,399) (1,386)(13) (3,785) (1,059) (992)(17) (5,836)
Other expense................. -- -- -- -- -- --
-------- ------- -------- ------- ----- --------
Income before income
taxes..................... 15,596 (1,386) 14,210 (2,375) (905) 10,930
Income taxes (benefit)........ 4,777 (527)(14) 4,250 (752) (472)(14) 3,026
-------- ------- -------- ------- ----- --------
Net income (loss)........... $ 10,819 $ (859) $ 9,960 $(1,623) $(433) $ 7,904
======== ======= ======== ======= ===== ========
OTHER DATA:
EBITDA(18).................... $ 19,239 $ 19,239 $ (352) $ 19,137
EBITDA margin(19)............. 18.4% 18.4% (.9)% 13.4%
Depreciation and
amortization................ $ 1,244 $ 1,244 $ 964 $ 2,371
Cash interest expense(20)..... 2,412 3,652 930 5,705
Capital expenditures.......... 589 589 246 835
Ratio of LTM EBITDA to cash
interest expense(22)........ 3.0x 2.2x
Ratio of net debt to LTM
EBITDA(21).................. 2.7x 4.4x
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
48
<PAGE> 50
SALTON, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The unaudited pro forma condensed consolidated financial statements have
been adjusted for the items set forth below. Such adjustments with respect to
the Toastmaster Acquisition reflect management's preliminary assessments and
assumptions of the fair value of the assets acquired and the liabilities assumed
relating to the Toastmaster Acquisition and are therefore subject to adjustment
upon completion of the Company's planned due diligence procedures. Such
adjustments, however, are not expected to have a material impact on the
accompanying pro forma condensed consolidated financial statements. The
Toastmaster financial statements used to prepare the pro forma adjustments are
unaudited and have been conformed to the Company's fiscal period and basis of
presentation. Such conformed financial statements do not exclude from or include
more than once sales or income from any period.
1. Represents the historical financial position of the Company as of
September 26, 1998 and the consolidated results of operations for the
fiscal year ended June 27, 1998 and the thirteen weeks ended September
26, 1998. The Recapitalization occurred on July 28, 1998. Accordingly,
the historical financial position of the Company as of September 26,
1998 and the historical results of operations for the thirteen weeks
ended September 26, 1998, include the effects of the Recapitalization.
2. Represents the historical financial position of Toastmaster as of
September 30, 1998 and the consolidated results of operations for the
twelve months ended June 30, 1998 and the three months ended September
30, 1998.
BALANCE SHEET
3. Reflects the following in connection with the Financing: (a) the
receipt of aggregate gross proceeds of $125,000 from the issuance of
the Old Notes; (b) the payment and recording of $4,088 of deferred
financing fees and expenses relating to this offering and the New
Credit Agreement; (c) the repayment of the $90,000 Tranche A Term Loans
of which $5,000 is classified as the current portion of long-term debt;
(d) the repayment of $20,000 under the Revolving Credit Facility; and
(e) the payment of $809 of accrued interest.
4. Adjustment reflects the Company's estimate of the fair market value of
Toastmaster's inventories in accordance with Salton's accounting
policies. Salton accounts for inventories on a FIFO basis compared to
Toastmaster's historical practice of accounting for inventories on a
LIFO basis.
5. Reflects the following in connection with the Toastmaster Acquisition:
(a) the borrowing of $45,000 under the Tranche B Term Loan; (b) the
borrowing of $54,539 under the Revolving Credit Facility; (c) the cash
payment of $53,200 of the purchase price for Toastmaster; (d) the cash
payments of $50,135 and $2,054 to retire all of Toastmaster's
outstanding indebtedness under its revolving line and credit agreement
and mortgage, respectively; (e) the cash payment of $329 for accrued
interest on Toastmaster's outstanding indebtedness being repaid; and
(f) the cash payment of $5,297 for professional fees and certain
employee termination costs associated with the Toastmaster Acquisition.
49
<PAGE> 51
6. To eliminate Toastmaster's pre-existing goodwill balance of $3,181 and
to adjust to the excess of the purchase price of the Toastmaster
Acquisition over the fair value of the net assets acquired, which will
likely be recorded as goodwill. Goodwill is determined as follows:
<TABLE>
<S> <C>
Cash paid to Toastmaster shareholders....................... $53,200
Professional and finder's fees.............................. 7,225
Certain employee termination costs.......................... 3,072
-------
Total purchase price.............................. 63,497
Less estimated fair value of net assets acquired............ (32,973)
-------
Goodwill.................................................. $30,524
=======
</TABLE>
Goodwill is expected to be amortized on a straight-line basis over 40
years and other intangibles, primarily trademarks, from 20 to 40 years.
However management has yet to determine all identifiable intangible assets
and upon further investigation such assets may have differing determinable
lives. The Company will evaluate the net realizable value of intangible
assets on an ongoing basis relying on a number of factors, including
operating results and future undiscounted cash flows.
7. Reflects a reduction of Toastmaster deferred issuance costs associated
with the repayment of debt and the reduction of other assets to fair
market value.
8. Records noncurrent deferred tax asset related to the write-off of other
intangibles and records the net noncurrent deferred tax liability.
9. Reflects finder's fees to unaffiliated parties associated with the
Toastmaster Acquisition and cash payment for accrued interest on
Toastmaster outstanding indebtedness.
10. Records deferred tax liability related to the mark-up of Toastmaster's
inventory of $317 and reclassification of current deferred tax
liabilities to a reduction of current deferred tax assets of $1,456.
11. Reflects the elimination of Toastmaster's historical stockholders'
equity.
STATEMENT OF OPERATIONS
12. Reflects 5.0% of fiscal year 1998 purchases made by Salton from
Windmere which are recorded as a reduction in interest and principal
related to the Junior Subordinated Note and as an associated reduction
in cost of goods sold. During fiscal 1998, Salton purchased
approximately $27,100 of products from Windmere.
13. Interest expense is adjusted to reflect:
A. For fiscal year ended June 27, 1998 -
(1) $14,018 of cash interest expense resulting from the following
borrowings:
<TABLE>
<CAPTION>
ASSUMED
INTEREST INTEREST
DEBT INSTRUMENT AVERAGE PRINCIPAL RATE EXPENSE
--------------- ----------------- -------- --------
<S> <C> <C> <C>
The Notes.................................. $125,000 10.750% $13,438
Revolving Credit Facility.................. 8,436 6.875% 580
</TABLE>
(2) the elimination of $5,647 of historical interest incurred on
indebtedness outstanding under the Old Credit Agreement, which
indebtedness was paid in full in connection with the
Recapitalization.
(3) the amortization of financing costs of $1,151 over the life of
the indebtedness; and
(4) $728 of interest expense related to the Junior Subordinated Note.
50
<PAGE> 52
B. For thirteen weeks ended September 26, 1998 -
(1) $3,401 of cash interest expense resulting from the following
borrowings:
<TABLE>
<CAPTION>
ASSUMED
INTEREST INTEREST
DEBT INSTRUMENT AVERAGE PRINCIPAL RATE EXPENSE
--------------- ----------------- -------- --------
<S> <C> <C> <C>
The Notes........................................ $125,000 10.750% $3,359
Revolving Credit Facility........................ 2,453 6.875% 42
</TABLE>
(2) the elimination of (i) $360 of historical interest incurred on
indebtedness outstanding under the Old Credit Agreement, which
indebtedness was paid in full in connection with the
Recapitalization, and (ii) $1,801 of historical interest
incurred on indebtedness outstanding under the New Credit
Agreement.
(3) the amortization of financing of $146 over the life of the
indebtedness; and
14. Income tax expense is adjusted to reflect the income tax effects of pro
forma adjustments based upon an assumed tax rate of 38% and anticipated
permanent differences.
15. A. For fiscal year ended June 27, 1998
Reflects amortization of goodwill, less $112 of historical
Toastmaster goodwill amortization.
B. For thirteen weeks ended September 26, 1998
Reflects amortization of goodwill, less $28 of historical
Toastmaster goodwill amortization.
16. Eliminates salaries and benefits for certain executive officers of
Toastmaster whose employment will terminate upon consummation of the
Toastmaster Acquisition.
17. Interest expense is adjusted to reflect:
A. For fiscal year ended June 27, 1998 -
(1) $8,212 of cash interest resulting from the following borrowings:
<TABLE>
<CAPTION>
ASSUMED
INTEREST INTEREST
DEBT INSTRUMENT AVERAGE PRINCIPAL RATE EXPENSE
--------------- ----------------- -------- --------
<S> <C> <C> <C>
Tranche B Term Loan................................ $45,000 8.25% $3,713
Revolving Credit Facility.......................... $54,539 8.25% $4,499
</TABLE>
(2) the elimination of $4,124 of historical interest on the existing
Toastmaster debt.
B. For thirteen weeks ended September 26, 1998 -
(1) $2,053 of cash interest resulting from the following borrowings:
<TABLE>
<CAPTION>
ASSUMED
INTEREST INTEREST
DEBT INSTRUMENT AVERAGE PRINCIPAL RATE EXPENSE
--------------- ----------------- -------- --------
<S> <C> <C> <C>
Tranche B Term Loan................................ $45,000 8.25% $ 928
Revolving Credit Facility.......................... $54,539 8.25% $1,125
</TABLE>
(2) the elimination of $1,061 of historical interest on the existing
Toastmaster debt.
OTHER DATA
18. EBITDA represents operating income plus depreciation and amortization.
EBITDA is presented because it is a widely accepted measure to provide
information regarding a company's ability to pay interest, repay debt
or make capital expenditures. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operations
or other income or cash flow data prepared in accordance with generally
accepted accounting principles, or as a measure of a company's
profitability or liquidity. Additionally, the Company's calculation of
EBITDA may differ from that performed by other companies, and thus the
amounts disclosed for EBITDA may not be directly comparable to
similarly titled measures disclosed by other companies.
19. EBITDA margin represents EBITDA as a percentage of net sales.
51
<PAGE> 53
20. Cash interest expense is defined as interest expense less amortization
of debt issuance costs.
21. Net debt represents total debt less cash and marketable securities.
22. Reflects data for the latest twelve months ended ("LTM") September 26,
1998.
52
<PAGE> 54
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
SALTON
The following selected historical financial and other data of Salton as of
and for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998
have been derived from, and should be read in conjunction with, the audited
consolidated financial statements of the Company, including the notes thereto,
included elsewhere in this Prospectus. The selected historical financial and
other data of the Company set forth below as of and for the years ended July 2,
1994 and July 1, 1995 have been derived from the audited consolidated financial
statements of the Company, which are not included elsewhere in this Prospectus.
The financial data for the thirteen weeks ended September 27, 1997 and September
26, 1998 have been derived from financial statements which are unaudited, but,
in the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of financial position
and results of operations of such periods. Operating results for the thirteen
weeks ended September 27, 1997 and September 26, 1998 are not necessarily
indicative of results that may be expected for a full year. All of the following
information is qualified in its entirety by, and should be read in conjunction
with, "Pro Forma Condensed Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited consolidated financial statements of the Company, including the
notes thereto, appearing elsewhere in this Prospectus.
53
<PAGE> 55
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THIRTEEN WEEKS ENDED
-------------------------------------------------- -----------------------------
JULY 2, JULY 1, JUNE 29, JUNE 28, JUNE 27, SEPTEMBER 27, SEPTEMBER 26,
1994 1995 1996 1997 1998 1997 1998
------- ------- -------- -------- -------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS:
Net sales..................... $48,807 $76,991 $99,202 $182,806 $305,599 $ 65,773 $ 104,388
Cost of goods sold............ 37,333 55,552 66,923 121,590 179,376 38,697 55,004
Distribution expenses......... 3,412 4,569 5,856 7,809 12,327 2,279 3,609
------- ------- ------- -------- -------- -------- ---------
Gross profit................ 8,062 16,870 26,423 53,407 113,896 24,797 45,775
Selling, general, and
administrative expenses..... 8,470 13,142 21,343 42,944 84,216 16,977 27,780
------- ------- ------- -------- -------- -------- ---------
Operating income (loss)..... (408) 3,728 5,080 10,463 29,680 7,820 17,995
Interest expense, net......... (2,047) (3,057) (3,934) (4,063) (5,333) (1,263) (2,399)
Cost associated with
refinancing................. -- -- -- -- (1,133) -- --
Realized gain on sale of
marketable securities....... -- -- -- -- 8,972 -- --
Class action lawsuit
expense..................... (489) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- ---------
Income (loss) before income
taxes.................... (2,944) 671 1,146 6,400 32,186 6,557 15,596
Income tax expense
(benefit)................... 20 (3,450) 2,001 12,205 2,433 4,777
------- ------- ------- -------- -------- -------- ---------
Net income (loss)........... $(2,944) $ 651 $ 4,596 $ 4,399 $ 19,981 $ 4,124 $ 10,819
OTHER DATA:
Cash flows provided by (used
in):
Operating activities........ $(1,369) $ 3,533 $(3,571) $ (8,966) (25,102) $(30,061) $ (20,819)
Investing activities........ (405) (2,327) (4,280) (6,348) 14,507 (884) (589)
Financing activities........ 1,774 (1,202) 7,849 17,922 8,643 28,671 21,764
EBITDA(1)..................... $ 1,142 $ 5,714 $ 7,276 $ 13,599 $ 33,981 $ 8,708 $ 19,239
EBITDA margin(2).............. 2.3% 7.4% 7.3% 7.4% 11.1% 13.2% 18.4%
Depreciation and
amortization................ $ 1,550 $ 1,986 $ 2,196 $ 3,136 $ 4,301 $ 888 $ 1,244
Capital expenditures.......... 405 2,327 4,280 4,608 4,565 884 589
Ratio of earnings to fixed
charges(3).................. --(4) 1.2x 1.3x 2.2x 5.8x 5.6x 6.8x
BALANCE SHEET DATA (AT PERIOD END):
Working capital............... $ 9,290 $ 9,072 $12,244 $ 17,996 $ 44,768 $ 18,828 $ 103,280
Total assets.................. 38,635 41,121 59,481 102,343 141,397 145,411 183,528
Total debt.................... 22,436 18,160 28,266 43,410 50,475 172,082 118,907
</TABLE>
- -------------------------
(1) EBITDA represents operating income plus depreciation and amortization.
EBITDA is presented because it is a widely accepted measure to provide
information regarding a company's ability to pay interest, repay debt or
make capital expenditures. EBITDA should not be considered in isolation or
as a substitute for net income, cash flows from operations or other income
or cash flow data prepared in accordance with generally accepted accounting
principles, or as a measure of a company's profitability or liquidity.
Additionally, the Company's calculation of EBITDA may differ from that
performed by other companies, and thus the amounts disclosed for EBITDA may
not be directly comparable to similarly titled measures disclosed by other
companies.
(2) EBITDA margin represents EBITDA as a percentage of net sales.
(3) For purposes of this computation, earnings consist of income before taxes
plus fixed charges. Fixed charges consist of interest on indebtedness plus
that portion of lease rental expense representative of the interest factor.
(4) As a result of the loss for the fiscal year ended July 2, 1994, earnings did
not cover fixed charges by $5.2 million.
54
<PAGE> 56
TOASTMASTER
The selected historical financial and other data of Toastmaster as of and
for each of the three years ended December 31, 1997 have been derived from, and
should be read in conjunction with, the audited consolidated financial
statements of Toastmaster, including the notes thereto, included elsewhere in
this Offering Memorandum. The selected historical financial and other data of
Toastmaster as of and for the years ended December 31, 1993 and 1994 have been
derived from the audited consolidated financial statements of Toastmaster, which
are not included elsewhere in this Prospectus. The selected historical financial
and other data of Toastmaster as of and for the nine months ended September 30,
1997 and September 30, 1998, respectively, have been derived from the unaudited
consolidated financial statements of Toastmaster included elsewhere in this
Prospectus and which, in the opinion of Toastmaster management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of financial position and results of operations. The results
of operations for the nine months ended September 30, 1998 are not necessarily
indicative of results to be expected for the full year. All of the following
information is qualified in its entirety by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and the audited and unaudited consolidated financial statements
of Toastmaster, including the notes thereto, appearing elsewhere in this
Prospectus.
55
<PAGE> 57
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $163,895 $192,387 $188,509 $163,049 $154,347 $ 98,281 $ 92,923
Cost of sales(1)............ 133,591 157,564 156,310 142,458 125,465 80,539 80,094
-------- -------- -------- -------- -------- -------- --------
Gross profit.............. 30,304 34,823 32,199 20,591 28,882 17,742 12,829
Selling, general and
administrative expenses... 21,362 24,955 25,011 23,641 22,669 16,101 15,430
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)... 8,942 9,868 7,188 (3,050) 6,213 1,641 (2,601)
Interest expense............ (3,558) (4,129) (4,923) (4,393) (4,063) (2,775) (2,821)
Interest income............. -- -- 25 32 639 343 --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income tax.............. 5,384 5,739 2,290 (7,411) 2,789 (791) (5,422)
Income tax expense
(benefit)................. 1,978 2,203 956 (2,720) 899 (348) (1,905)
Net income (loss)......... $ 3,406 $ 3,536 $ 1,334 $ (4,691) $ 1,890 $ (443) $ (3,517)
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Cash flows provided by (used in):
Operating activities...... $ (1,908) $ (5,472) $ 1,953 $ 23,418 $ 7,085 $ (563) $ (6,122)
Investing activities...... (3,977) (6,080) (2,305) (4,455) (4,344) (3,423) (661)
Financing activities...... 5,913 11,556 323 (14,214) (2,653) 3,998 7,078
EBITDA(2)................... $ 12,843 $ 13,946 $ 11,560 $ 8,698(3) $ 9,958 $ 4,578 $ 310
EBITDA margin(4)............ 7.8% 7.2% 6.1% 5.3% 6.5% 4.7% 0.3%
Depreciation and
amortization.............. $ 3,901 $ 4,078 $ 4,372 $ 4,148 $ 3,622 $ 2,814 $ 2,911
Capital expenditures........ 4,131 6,080 3,249 4,485 4,372 3,423 1,349
BALANCE SHEET DATA (AT PERIOD END):
Working capital............. $ 62,639 $ 75,946 $ 79,764 $ 61,870 $ 59,735 $ 64,881 $ 65,631
Total assets................ 112,669 129,552 129,995 104,854 106,291 113,499 112,476
Total long-term debt
(including current
maturities)............... 47,002 59,165 60,366 46,756 44,701 51,207 52,189
</TABLE>
- -------------------------
(1) Restructuring charges totalling $7,600 are reflected in cost of sales for
the year ended December 31, 1996.
(2) EBITDA represents operating income (loss) plus depreciation and amortization
and non-recurring restructuring charges. EBITDA is presented because it is a
widely accepted measure to provide information regarding a company's ability
to pay interest, repay debt or make capital expenditures. EBITDA should not
be considered in isolation or as a substitute for net income, cash flows
from operations or other income or cash flow data prepared in accordance
with generally accepted accounting principles, or as a measure of a
company's profitability or liquidity. Additionally, the calculation set
forth above of EBITDA may differ from that performed by other companies, and
thus the amounts disclosed for EBITDA may not be directly comparable to
similarly titled measures disclosed by other companies.
(3) EBITDA excludes restructuring charges totalling $7,600 for the year ended
December 31, 1996.
(4) EBITDA margin represents EBITDA as a percentage of net sales.
56
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations should be read in conjunction with the financial statements,
including the notes thereto, included elsewhere in this Prospectus.
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 170 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
"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 manufactures and assembles certain appliances
in its plant located in Kenilworth, New Jersey.
On January 7, 1999, the Company acquired Toastmaster, a Columbia, Missouri
based manufacturer and marketer of kitchen and small household electrical
appliances and time products. 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).
During the last quarter of 1996, Toastmaster adopted 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 and household electrical appliances to overseas
suppliers. As part of this plan, Toastmaster ceased 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 intends to use 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's 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
certain 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. See
"Risk Factors -- Risks Relating to the Company -- Risks Relating to the
Toastmaster Acquisition" for a
57
<PAGE> 59
discussion of certain factors that could impact Salton's ability to realize
expected revenue enhancements and cost savings.
Certain of the unaudited pro forma condensed financial information
contained in this Prospectus reflect the consummation of the Toastmaster
Acquisition. See "Risk Factors -- Risks Relating to the Company -- Risks
Relating to the Toastmaster Acquisition," "Capitalization" and "Pro Forma
Condensed Consolidated Financial Information."
SALTON
The following table sets forth the Company's results of operations as a
percentage of net sales for the period indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------
JUNE 29, JUNE 28, JUNE 27,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 67.5 66.5 58.7
Distribution expenses....................................... 5.9 4.3 4.0
----- ----- -----
Gross profit.............................................. 26.6 29.2 37.3
Selling, general and administrative expenses................ 21.5 23.5 27.6
----- ----- -----
Operating income.......................................... 5.1% 5.7% 9.7%
===== ===== =====
</TABLE>
13-WEEKS ENDED SEPTEMBER 26, 1998 COMPARED TO 13-WEEKS
ENDED SEPTEMBER 27, 1997
Net Sales. Net sales in the thirteen weeks ended September 26, 1998 (the
"1999 Period") were $104.4 million, an increase of approximately $38.6 million
or 58.7%, compared to net sales of $65.8 million in the thirteen weeks ended
September 27, 1997 (the "1998 Period"). 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 1999 Period compared to 16% of net sales in
the 1998 Period.
Gross Profit. Gross profit in the 1999 Period was $45.8 million or 43.9%
of net sales as compared to $24.8 million or 37.7% in the 1998 Period. Cost of
goods sold during the 1999 Period decreased to 52.7% of net sales compared to
58.8% in the 1998 Period. Distribution expenses were $3.6 million or 3.5% of net
sales in the 1999 Period compared to $2.3 million or 3.5% of net sales in the
1998 Period. Gross profit and costs of goods sold in the 1999 Period as a
percentage of net sales 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 1998 Period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $27.8 million or 26.6% of net sales in the
1999 Period compared to $17.0 million or 25.8% of net sales for the 1998 Period.
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 1999 Period compared to $11.1 million or 16.9% of net
sales in the 1998 Period. The remaining selling, general and administrative
costs were $8.8 million or 8.4% of net sales in the 1999 Period compared to $5.9
million or 8.9% of net sales in the 1998 Period. These increases were primarily
attributable to higher costs for additional personnel, sales commissions and
various other costs related to the higher level of sales.
Operating Income. As a result of the foregoing, operating income increased
by $10.2 million or 130.8%, to $18.0 million in the 1999 Period from $7.8
million in the 1998 Period. Operating income as a percentage of net sales
increased to 17.2% in the 1999 Period from 11.9% in the 1998 Period.
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<PAGE> 60
Net Interest Expense. Net interest expense was approximately $2.4 million
for the 1999 Period compared to $1.3 million for the 1998 Period. The Company's
rate of interest on amounts outstanding was a weighted average annual rate of
7.8% in the 1999 Period compared to 8.5% in the 1998 Period. The average amount
outstanding under the New Credit Agreement was $70.5 million for the 1999 Period
compared to $56.1 million for the 1998 Period. This increase was used to
complete the Stock Repurchase, refinance the Old Credit Agreement and to finance
higher net sales and a seasonal build in accounts receivable and inventory.
Income Tax Expense (Benefit). The Company had income tax expense of $4.8
million in the 1999 Period as compared to income tax expense of $2.4 million in
the 1998 Period.
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 $58.2 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 Stores, 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.
Operating Income. As a result of the foregoing, operating income increased
by $19.2 million or 182.9%, to $29.7 million in Fiscal 1998 from $10.5 million
in Fiscal 1997. Operating income as a percentage of net sales increased to 9.7%
in Fiscal 1998 from 5.7% in Fiscal 1997.
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 revolving line of credit 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 received from the New Credit Agreement to refinance all outstanding
indebtedness under the Old Credit Agreement. Accordingly, at
59
<PAGE> 61
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 Tax Expense (Benefit). The Company had tax expense of $12.2 million
in Fiscal 1998 as compared to tax expense of $2.0 million in Fiscal 1997. Net
operating loss carryforwards and resultant deferred tax assets were used in both
periods to significantly offset current income taxes payable.
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.
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.
Operating Income. As a result of the foregoing, operating income increased
by $5.4 million or 105.9%, to $10.5 million in Fiscal 1997 from $5.1 million in
Fiscal 1996. Operating income as a percentage of net sales increased to 5.7% in
Fiscal 1997 from 5.1% in Fiscal 1996.
Income Tax Expense (Benefit). The Company had tax expense of $2.0 million
in Fiscal 1997 as compared to a tax benefit of $3.5 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.
TOASTMASTER
The following table sets forth Toastmaster's results of operations as a
percentage of net sales. Net sales reflect a reduction from revenues of amounts
related to sales discount programs, including absorption of out-bound freight
and certain allowances for advertising, the latter of which are accounted for by
certain competitors as "advertising" expense. Toastmaster views these amounts as
price reductions, thereby
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reducing net sales and lowering gross profit as well as selling, general and
administrative expense. Revenues are recorded net of product returns and are
before deduction of the items referred to above that are used in computing net
sales. During the periods indicated, net sales averaged approximately 95% of
revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 82.9 87.4 81.3
----- ----- -----
Gross profit...................................... 17.1 12.6 18.7
Selling, general and administrative expense......... 13.3 14.5 14.7
----- ----- -----
Operating income (loss)........................... 3.8 (1.9) 4.0
Interest expense.................................... 2.6 2.7 2.6
Interest income..................................... -- -- .4
----- ----- -----
Income (loss) before taxes........................ 1.2 (4.6) 1.8
Income tax expense (benefit)........................ 0.5 (1.7) .6
----- ----- -----
Net income (loss)................................. 0.7% (2.9)% 1.2%
===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net Sales. Net sales for the nine months ended September 30, 1998
decreased 5.5% to $92.9 million from $98.3 million for the comparable period in
1997.
The decline in sales in the nine months reflects several different factors,
including: delays in shipping to meet orders and the resulting difficulty of
scheduling carriers; delays in orders from some of Toastmaster's largest
customers; temporary postponement of the introduction of Toastmaster's Global
Design(TM), Porsche and Opera(TM) product lines being imported from Europe to
ensure UL compliance; delays in production on certain products from Asian
suppliers; and difficulty in obtaining an adequate number of shipping containers
at Asian ports to get product to the U.S. in a timely manner.
Revenues from kitchen appliances for the nine months ended September 30,
1998 decreased 4% to $74.8 million from $77.9 million for the nine months ended
September 30, 1997. A decline in breadmaker, toaster and countertop oven
revenues in the nine months was primarily responsible for this decrease.
Time products revenues for the nine months ended September 30, 1998 were
$23 million, a decrease of 3% from $23.7 million for the same period in 1997.
The decrease was due to a decline in timer shipments.
Revenues from the discontinued environmental products for the nine months
ended September 30, 1998 were $51 thousand compared to $1.3 million for the same
period in 1997.
Revenues from the five largest customers for the nine months ended
September 30, 1998 were 43.9%. The five largest customers accounted for 46.5% of
revenues for the nine months ended September 30, 1997.
Gross Profit. Gross profit decreased for the nine months ended September
30, 1998 to $12.8 million, or 13.8% of net sales, from $17.7 million, or 18.1%
of net sales, for the same period in 1997. The decrease as a percentage of net
sales was primarily due to lower product margins, increased health care and
workers' compensation costs and less absorption of overhead costs due to lower
production.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the nine months ended September 30, 1998 were $15.4
million, a decrease from $16.1 million for the same period in 1997. Cost
controls initiated earlier in the year contributed to the reduction in expense.
The decline in the value of the peso and the Canadian dollar negatively affected
the nine months ended September 30, 1998 by $822 thousand compared to $73
thousand for the same period of 1997.
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Interest Expense. Interest expense for the nine months ended September 30,
1998 increased slightly to $2.821 million as compared to $2.775 million for the
same period in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales for the year ended December 31, 1997 ("1997")
decreased 5.3% to $154.3 million from $163 million for the year ended December
31, 1996 ("1996"). Kitchen appliance revenues decreased 3.6% from $130.7 million
for the year ended December 31, 1996 to $126 million for the year ended December
31, 1997. A decrease in toaster and countertop oven revenues was substantially
offset by shipments of Breadmaker's Hearth(TM), a combination
breadmaker/countertop oven, and other breadmakers and the successful
introduction of clothes irons. The decline in toaster revenue was primarily from
the loss of models with a major customer. Time products revenues decreased 3.4%
from $34.9 million to $33.7 million in 1997. The loss of wall clock business
with a major customer was significantly offset with timer shipments to new and
existing customers and the introduction of a line of table alarm clocks under a
license agreement utilizing the Timex(R) and Indiglo(R) brand names.
Environmental products revenues decreased 70% to $1.5 million in 1997 from $5
million in 1996 as a result of the discontinuance of the environmental products
category.
Toastmaster's top five customers sell a variety of Toastmaster products.
Shipments to these customers increased to 44% of revenues in 1997 from 42.8% of
revenues for the top five customers in 1996. It is expected that Toastmaster's
dependence on these major retailers will continue.
Gross Profit. Gross profit as a percentage of net sales increased from
17.3% in 1996 (12.6% before a one-time pre-tax special charge of approximately
$7.6 million against cost of sales, related to the restructuring of its product
lines) to 18.7% in 1997. The increase as a percentage of net sales was primarily
due to product mix and lower fixed manufacturing costs, resulting from the
restructuring implemented during the fourth quarter of 1996.
Selling, General and Administrative Expense. Selling, general and
administrative expenses as a percentage of net sales increased slightly from
14.5% in 1996 to 14.7% in 1997.
Interest Expense. Interest income of $639 thousand in 1997 was from an
expected income tax refund from prior years. Interest expense decreased from
$4.4 million in 1996 to $4.1 million. This decrease was primarily due to a lower
average balance on borrowings under the revolving line of credit. The decreased
borrowings were due to carrying lower accounts receivable from lower sales and
shorter terms of sale during the year, as well as lower inventories from the
restructuring. Should market rates rise, Toastmaster could expect future
increases in interest expense.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales for 1996 decreased 13.5% to $163 million from $188.5
million for the year ended December 31, 1995 ("1995"). Kitchen appliance
revenues decreased 17.3% from $158.1 million in 1995 to $130.7 million in 1996.
A decrease in breadmaker shipments due to the anticipated maturation of that
product, a decrease in wafflebaker shipments due to price competition and a
decrease in blender shipments due to the discontinuance of a private label
manufacturing contract were the primary reasons for the reduction in appliance
revenues. These decreases were partially offset by a modest increase in revenues
from toaster and other appliance revenues. Time products revenues increased 5.1%
from $33.2 million in 1995 to $34.9 million in 1996 due to increased placement
of wall clocks with two major retailers. Environmental products sales decreased
35% to $5 million in 1996 from $7.7 million in 1995 as a result of Toastmaster's
decision to de-emphasize that product line.
Shipments to Toastmaster's top five customers decreased to 42.8% of
revenues in 1996 from 45.7% of revenues for the top five customers in 1995.
Gross Profit. Toastmaster recorded a one-time pre-tax special charge of
approximately $7.6 million to cost of sales related to the restructuring of its
product lines. Gross profit as a percentage of net sales before the one-time
charge increased slightly from 17.1% in 1995 to 17.3% in 1996 due primarily to
lower
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raw material prices and cost reductions implemented during the year. These
reduced costs were partially offset by higher merchandise returns in the first
half of 1996 on reduced shipments when compared to the first half of 1995 and
increased manufacturing inefficiencies related to longer production shutdowns
during the first half of 1996 when compared to production shutdowns incurred
during the first half of 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of net sales increased from 13.3% in
1995 to 14.5% in 1996. Increases in engineering and research and development
spending and additional advertising promotions related to time products revenues
were partially offset by reduced advertising promotions on lower kitchen
appliance revenues. Administrative costs as a percentage of sales were
relatively unchanged.
Interest Expense. Interest expense decreased from $4.9 million in 1995 to
$4.4 million in 1996. This decrease was primarily due to a lower average balance
on borrowings under the revolving line of credit. The decreased borrowings were
due to carrying lower accounts receivable from lower sales during the year.
LIQUIDITY AND CAPITAL RESOURCES
Historical Salton
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 $7.5 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 September
26, 1998, the Company had approximately $110.0 million outstanding as drawings
under the New Credit Agreement. Typically, given the seasonal nature of the
Company's business, the Company's borrowings tend to be the highest in
mid-Summer to Fall.
Pro Forma Salton
Following the Financing and the Toastmaster Acquisition, the Company's
principal uses of liquidity will be to meet debt service requirements, finance
the Company's capital expenditures and provide working capital. The Company
expects that ongoing requirements for debt service, capital expenditures and
working capital will be funded by internally generated cash flow and borrowings
under the New Credit Agreement. As of September 26, 1998, after giving pro forma
effect to the Financing, the Company would have had total consolidated
indebtedness of approximately $133.9 million. Additionally, as of September 26,
1998, after giving pro forma effect to the Financing and the Toastmaster
Acquisition, the Company would have had total consolidated indebtedness of
approximately $233.4 million. The Company's debt service obligations could have
important consequences to holders of the Notes. See "Risk Factors -- Risks
Relating to the Notes -- Substantial Leverage."
As of September 26, 1998, after giving pro forma effect to the Financing,
the Company would have no amounts outstanding under the New Credit Agreement
(exclusive of unused commitments of up to $75.0 million under the Delayed Draw
Term Loan and up to $50.0 million under the Revolving Credit Facility). In
addition, as of September 26, 1998, after giving pro forma effect to the
Financing and the Toastmaster Acquisition, the Company would have had an
aggregate amount of approximately $99.5 million outstanding under the New Credit
Agreement, consisting of borrowings of $45.0 million under the Tranche B Term
Loan and approximately $54.5 million under the Revolving Credit Facility
(exclusive of unused commitments of up to an additional $25.5 million under the
Revolving Credit Facility).
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The $45.0 million Tranche B Term Loan amortizes in quarterly installments
and be repayable in the following aggregate annual amounts:
<TABLE>
<CAPTION>
YEAR FOLLOWING
TOASTMASTER ACQUISITION AMOUNT DUE
----------------------- ----------
(Dollars in millions)
<S> <C>
1........................................................... $ 0.5
2........................................................... $ 0.5
3........................................................... $ 0.5
4........................................................... $ 0.5
5........................................................... $ 0.5
6........................................................... $42.5
</TABLE>
The Tranche B Term Loan is also subject to mandatory prepayment with the
proceeds of certain debt incurrences, assets sales and a portion of Excess Cash
Flow (as defined in the New Credit Agreement). The Revolving Credit Facility
will terminate in 2003. See "Description of Preferred Stock and Certain
Indebtedness -- New Credit Agreement."
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 minimum fixed charge coverage ratio, a minimum interest coverage ratio
and a maximum leverage ratio. See "Description of Preferred Stock and Certain
Indebtedness -- New Credit Agreement."
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), 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.
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, will be adequate to meet the
Company's anticipated requirements for capital expenditures, working capital,
interest payments and scheduled principal payments. 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, including the Notes, 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. See "Risk Factors -- Risks Relating to
the Notes -- Substantial Leverage."
ACCOUNTING PRONOUNCEMENTS
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 thirteen
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weeks ended September 27, 1997 components of other comprehensive income include
holding gains arising from available for sale securities, net of tax.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Net income........................................... $4,124 $10,819
Other comprehensive income........................... 2,517
------ -------
$6,641 $10,819
====== =======
</TABLE>
In February 1998 the Financial Accounting Standards Board issued SFAS No.
132 ("SFAS 132"), "Employer's Disclosure about Pensions and other
Post-Retirement Benefits." This statement is effective for fiscal years
beginning after December 15, 1997 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. In June
1997, the Financial Accounting Standards Board issued SFAS No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
is effective for fiscal years beginning after December 15, 1997. 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
This statement is effective for fiscal years beginning after June 15, 1999 and
will change accounting and 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.
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 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, as a contingency, replacement. The Company currently
anticipates that it will upgrade and complete testing of the 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
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<PAGE> 67
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 has contacted its significant suppliers
and certain of its customers in an attempt to identify any potential year 2000
compliance issues with them. The Company currently believes that its major
suppliers have made significant progress with respect to year 2000 compliance
issues. The Company is currently unable to anticipate the magnitude of the
operational or financial impact on it of year 2000 compliance issues with its
customers even though the Company knows that these customers have implemented
significant programs with respect to year 2000 compliance issues.
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.
SEASONALITY
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. This
seasonality has also resulted in additional interest expense to Salton during
this period due to an increased need to borrow funds to maintain sufficient
working capital to finance product purchases and customer receivables for the
seasonal period.
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<PAGE> 68
BUSINESS
GENERAL
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) brandname, 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 product
innovation, strong relationships with retailers, breadth of product offerings,
reputation for quality products and established brand names. Salton's net sales
and EBITDA have increased from $48.8 million and $1.1 million in fiscal 1994 to
$305.6 million and $34.0 million in fiscal 1998, which represents a compound
annual growth rate of 58.2% and 135.8%, respectively. For the twelve month
period ended September 26, 1998, Salton's net sales and EBITDA increased to
$344.2 million and $44.5 million.
The Company develops and introduces a wide selection of new products and
enhances existing products to satisfy the various tastes, preferences and
budgets of 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:
- 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;
- thermal products, including bread bakers, such as the Breadman Plus(R)
automatic bread baker, waffle makers, toasters, toaster ovens and irons;
- coffee and tea related products, including espresso/cappuccino makers and
coffee makers;
- food preparation products, including electric woks, crepe makers, mixers,
can openers and blenders; and
- 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 170 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. In 1997, Salton entered into a seven-year supply
agreement with Kmart to supply a broad range of kitchen and small household
electrical appliances under the White-Westinghouse(R) brand name. Further, the
Company sells certain of its products, primarily Juiceman(R) fresh juice
machines 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 manufactures and assembles certain appliances
in its plant located in Kenilworth, New Jersey.
THE INDUSTRY
According to the National Housewares Manufacturers Association, the small
household appliance industry was approximately a $11.5 billion retail business
in the United States in 1997. Historically, this industry has been characterized
as mature, fragmented and highly competitive. However, it has been consolidating
recently in response to the consolidation and changes within the retail
industry. The Company expects that retailers will continue to consolidate their
vendor base by dealing primarily with a smaller number of suppliers that can
offer a broad array of innovative, differentiated and quality products
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and comprehensive levels of customer service. The Company believes that Salton,
with its broad array of innovative and quality product offerings, high level of
customer service and strong brand name recognition, is well positioned to
benefit in this environment.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths contribute to
Salton's position as a leading domestic designer and marketer in the small
household appliance 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 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 uses 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 small household electrical appliances 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 and 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 and the Breadman Ultimate(R), 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.
During fiscal 1998, the Company introduced 175 new SKUs in the kitchen and
small household electrical appliance products category, 65 new SKUs in the
personal and beauty care, gifts and time products category and 635 new SKUs in
the tabletop products category.
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Established Customer Relationships. The Company believes it has been able
to establish strong relationships with its retailer customers based on its
product innovation, high level of customer service, breadth of product
offerings, reputation for quality products and established brand names. Salton
believes that these competitive strengths have enabled it to expand its market
penetration and to increase sales to its top twenty retail customers in fiscal
1998 by over 70% from fiscal 1997 as well as obtain a seven-year supply
agreement with Kmart to supply a broad range of kitchen and small household
electrical appliances under the White-Westinghouse(R) brand name. In addition,
Salton has expanded its distribution of private-label products with certain
major retailers such as Target under the Chefmate(R) brand name and, more
recently, Wal-Mart under the Magic Chef(R) brand name and Sears under the
Kenmore(R) brand name. The broad distribution of the Company's products through
the mass merchant, department store and specialty retailer channels, together
with sales made through the Company's infomercials, provides Salton with access
to a diversified group of customers and multiple channels of distribution.
Strong Supplier Relationships. Salton believes that it is the largest
purchaser of kitchen and small household electrical appliances from unaffiliated
parties in the Far East. The Company sources products from over 45 different
suppliers and believes it is the largest customer of many of its suppliers.
Salton's dedicated outsourcing strategy has contributed to its strong
relationship with its suppliers. The Company works closely with many of its
suppliers to develop new products and improvements to existing products to
satisfy changing consumer preferences. Salton's outsourcing strategy provides it
with low-cost manufacturing capabilities and allows it to bring new products to
the market quickly and to respond to changes in consumer tastes and preferences.
Experienced Management Team with Significant Equity Ownership. Salton's
management team has a wide range of experience in the development and marketing
of kitchen and small household electrical appliances. This management team,
consisting of David C. Sabin, Chairman, Leonhard Dreimann, Chief Executive
Officer, and William B. Rue, President, Chief Operating Officer and Chief
Financial Officer, has an average of more than 15 years of industry experience
and has been with the Company since its inception. Salton's management team has
successfully increased net sales and EBITDA from 1994 to 1998 at a compound
annual growth rate of 58.2% and 135.8%, respectively, through the introduction
of new products, the expansion of distribution channels and the integration of
new businesses. As of January 27, 1999, the Company's executive officers and
entities affiliated with these officers owned in the aggregate approximately
11.2% of the Company's outstanding common stock (assuming conversion of the
outstanding Convertible Preferred Stock, but excluding outstanding options).
BUSINESS STRATEGY
The Company believes that it is well positioned to achieve further growth
in net sales, profitability and cash flow by further penetrating its existing
distribution channels and by continuing to expand its product offerings and
channels of distribution. Salton's strategy for achieving that objective
includes the following key elements:
Increase Market Share Through New Product Introductions. The Company
intends to continue to increase its market share in each of its major product
categories through new product introductions. Salton's new product strategy
capitalizes on its strong brand names, established customer relationships and
product innovation to develop new products which offer enhanced value to
consumers through new designs, enhanced functionality and improved aesthetics.
For example, in fiscal 1998, the Company introduced:
- the Taco Bell(R) product line,
- the Looney Tunes(R) product line,
- the Marilyn Monroe(TM) personal care product line,
- the George Foreman Fusion Grill(R),
- the Farberware(R) range of products,
- the Andy Warhol collection of tabletop and glassware products,
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- the private-label Kenmore(R) products,
- the JuiceLady(R) juice extractor and
- the Breadman Ultimate.(R)
The Company believes that innovative product introductions will further
enhance revenue growth, profitability and market share.
Further Penetrate Existing Distribution Channels. The Company believes
that it can further penetrate its existing distribution channels as a result of
retail industry dynamics and the Company's strong relationships with its
customers. The Company believes that retail merchants will continue to
consolidate their vendor base and focus on a smaller number of suppliers that
can (1) provide a broad array of differentiated, quality products, (2)
efficiently and consistently fulfill logistical requirements and volume demands
and (3) provide comprehensive product support from design to point of sale and
after-market service with the consumer. The Company believes that it is well
positioned to capitalize on these trends.
Develop New Distribution Channels. Salton continues to develop new
channels of distribution by providing customized product offerings that appeal
to the specific needs of each distribution channel. For example, the Company has
expanded its private-label programs with certain major retailers and has
recently entered into such programs with Sears under the Kenmore(R) brand name,
Target under the Chefmate(R) brand name and Wal-Mart under the Magic Chef(R)
brand name. The Company also sells certain of its products, primarily
Juiceman(R) 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 "infomercials." The Company believes that this form of
advertising and marketing increases consumer product awareness and brand
recognition and generates additional demand for the Company's products at the
retailer level. Salton believes that its retailer focused strategy has
increased, and will continue to increase, sales and shelf space at key retailers
while enhancing the value and recognition of its portfolio of brand names.
Pursue Targeted Marketing Opportunities. As part of the it's growth
strategy, Salton has established several strategic alliances in order to develop
and promote awareness of the Company's products. The Company has demonstrated an
ability to identify and execute marketing opportunities with strategic partners,
such as it's joint venture with George Foreman to market grills under the name
"George Foreman's Lean Mean Fat Reducing Grilling Machine(R)." The Company has
also entered into a variety of licensing relationships to market products under
the names Gino's East Pizza, Gear, Taco Bell(R), Hershey Kiss(R), Looney
Tunes(R), Andy Warhol, Marilyn Monroe(TM), James Dean and Campbell Soup(R).
Pursue Strategic Acquisitions and Alliances. Salton anticipates that the
fragmented nature of the small household appliance industry will continue to
provide significant opportunities for growth through strategic acquisitions of
complementary businesses. The Company intends to pursue acquisitions of
complementary businesses and product lines at attractive multiples of cash flow.
Salton's acquisition strategy will focus on businesses or brands with product
offerings which (1) offer expansion into related categories or increased market
share in existing product categories, and (2) can be marketed through Salton's
existing distribution channels, thereby increasing its marketing and
distribution efficiencies. The Company will also consider strategic joint
ventures which would provide access to new products, technologies or markets.
PRODUCTS
Salton is a leading domestic designer and marketer of a broad range 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
price points. These products include full-featured or upscale models or designs
as well as those which are marketed to budget conscious consumers.
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The following table sets forth the approximate amounts and percentages of
the Company's net sales by product category during the periods shown.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------
JUNE 29, 1996 JUNE 28, 1997 JUNE 27, 1998
-------------------- -------------------- --------------------
(Dollars in thousands)
PERCENT PERCENT PERCENT
NET SALES OF TOTAL NET SALES OF TOTAL NET SALES OF TOTAL
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Kitchen and small household electrical
appliances........................... $91,479 92.2% $155,972 85.3% $280,607 91.8%
Tabletop products(1)................... 16,756 9.2 18,597 6.1
Personal and beauty care appliances,
gifts and time products.............. 7,723 7.8 10,078 5.5 6,395 2.1
------- ----- -------- ----- -------- -----
$99,202 100.0% $182,806 100.0% $305,599 100.0%
======= ===== ======== ===== ======== =====
</TABLE>
- -------------------------
(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(R) 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 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:
- health conscious products;
- thermal products;
- coffee and tea related products;
- food preparation products; and
- 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 range in retail price from
$9.99 to $199.99 and include thermal indoor grills, juicers, juice extractors,
rice cookers, vegetable steamers, ice cream makers and yogurt makers.
Representative health conscious products include:
- 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.
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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. These products range in retail
price from $9.99 to $249.99.
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.
- The Salton Snack 'N' Sandwich maker series.
- 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. These products range in retail price from $9.99 to
$229.99.
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. These products range in retail price from $9.99 to $99.99.
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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
types 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. These products
range in retail price from $7.99 to $69.99.
TABLETOP PRODUCTS
The Company currently markets approximately 2,218 SKUs under its brand
names in this product category. These products range in retail price from $9.99
to $499.99.
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) Crystal 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. Personal and beauty
care appliances range in retail price from $7.99 to $49.99, time products range
from $1.99 to $99.99 and gifts range from $7.99 to $39.99. 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.
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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. 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 the
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) Crystal 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
machines 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 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 170 independent sales
representatives. The Company's representatives are located throughout the United
States and Canada and are paid a 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
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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 manufactures and assembles woks and warming
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 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.
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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 September 26, 1998, the Company employed approximately 220 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 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 September
26, 1998, the Company had a backlog of approximately $181.9 million. At June 27,
1998 the Company has a backlog of approximately $275.0 million compared to
approximately $83 million as of June 28, 1997. The Company does not believe that
backlog is necessarily indicative of the Company's future results of operations
or prospects.
TRADEMARKS, PATENTS AND LICENSING ARRANGEMENTS
The Company holds a number of 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.
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The Company holds numerous United States and foreign patents, including
design patents. 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 result in
the termination of the agreements. Each of these license agreements is also
terminable on or after the fifth anniversary of such agreement upon one-years
notice 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 a thermal household grill product 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 of the agreement 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.
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<PAGE> 79
PROPERTIES
The Company does not own any facilities. A summary of the Company's leased
properties is as follows:
<TABLE>
<CAPTION>
LEASE
LOCATION DESCRIPTION AREA (SQ. FT.) EXPIRATION
-------- ----------- -------------- ----------
<S> <C> <C> <C>
Mt. Prospect, IL Executive office, warehousing and 34,600 June 30, 1999
repair facility
Rancho Dominguez, CA Warehouse and distribution 340,672 October 31, 2002
facility and retail outlet
Harrison, NJ Warehouse and distribution 146,555 May 31, 2002
facility and retail outlet
Kenilworth, NJ Manufacturing and 97,800 March 31, 2000
warehouse/distribution facilities
New York, NY Block sales office 11,500 December 31, 2001
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 Retail store 560 October 31, 2007
</TABLE>
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 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
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<PAGE> 80
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.
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<PAGE> 81
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following tables sets forth certain information with respect to each of
the Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
David C. Sabin.......................... 49 Chairman of the Board of Directors and
Secretary
Leonhard Dreimann....................... 50 Chief Executive Officer and Director
William B. Rue.......................... 51 President, Chief Operating Officer,
Chief Financial Officer and Director
Robert A. Bergmann...................... 32 Director
Frank Devine............................ 54 Director
Bert Doornmalen......................... 54 Director
Bruce G. Pollack........................ 39 Director
</TABLE>
DAVID C. SABIN has served as Chairman of the Company since September 1991
and has served as Secretary and a Director of the Company since its inception in
August 1988 and is a founder of the Company. Mr. Sabin served as the president
and a director of Glacier Holdings, Inc., a publicly held company ("Glacier
Holdings"), from December 1988 through May 1994 and as a director of Salton Time
Inc., a wholly-owned subsidiary of Glacier Holdings, since 1989. Salton Time was
an importer and distributor of quartz wall and alarm clocks. From 1991 through
May 1994, Mr. Sabin was an officer and a director of Stylemaster, Inc., a
wholly-owned subsidiary of Glacier Holdings, which was engaged in the
manufacture and distribution of plastic housewares articles. Stylemaster, Inc.
filed for protection under Chapter 11 of the United States Bankruptcy Code in
March 1994. During 1994, Glacier Holdings and its subsidiaries ceased operations
and were liquidated.
LEONHARD DREIMANN has served as Chief Executive Officer and a Director of
the Company since its inception in August 1988 and is a founder of the Company.
From 1988 to July 1998, Mr. Dreimann served as President of the Company. From
1987 to 1988, Mr. Dreimann served as president of the Company's predecessor
Salton, Inc., a wholly-owned subsidiary of SEVKO, Inc. Prior to 1987, Mr.
Dreimann served as managing director of Salton Australia Pty. Ltd., a
distributor of Salton brand kitchen appliances. From 1988 to December 1993, Mr.
Dreimann served as an officer and a director of Glacier Holdings, and as a
director of its wholly-owned subsidiary Glacier Water Systems, Inc. ("Glacier")
from 1987 to December 1993. Glacier developed, manufactured and marketed an
in-home water filtration system. During 1994, Glacier Holdings and its
subsidiaries ceased operations and were liquidated. From 1989 to December 1993,
Mr. Dreimann served as an officer and a director of Salton Time Inc.
WILLIAM B. RUE has served as President of the Company since August 1998, as
Chief Operating Officer of the Company since December, 1994 and as Chief
Financial Officer and Treasurer of the Company since September, 1988. From 1985
to 1988, he was Treasurer of SEVKO, Inc. and from 1982 to 1984 he was Vice
President-Finance of Detroit Tool Industries Corporation. Prior to that time,
Mr. Rue had been employed since 1974 by the accounting firm of Touche Ross & Co.
ROBERT A. BERGMANN has been a Principal of Centre Partners Management LLC
since 1995. From 1989 to 1991 and from 1993 to 1995, Mr. Bergmann was an
Associate of Centre Partners L.P. Mr. Bergman serves as a director of Music
Holdings Corp., Rembrandt Photo Services and a number of other private
corporations.
FRANK DEVINE has been a Director of the Company since December, 1994. Mr.
Devine serves as a business consultant for various entities. He has founded or
co-founded Bachmann-Devine, Incorporated, a venture capital firm, American Home,
Inc., an importer of hand-loomed rugs and decorative accessories, World Wide
Digital Vaulting, Inc., an on-line digital data storage company and Shapiro,
Devine &
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<PAGE> 82
Craparo, Inc., a household goods manufacturers representation company serving
the retail industry. Mr. Devine also serves on the board of directors of these
companies.
BERT DOORNMALEN has been a Director of the Company since July, 1994. Mr.
Doornmalen has been the Managing Director of Markpeak Ltd., a Hong Kong company
which represents the Company in the procurement and inspection of products in
the Far East, since 1981.
BRUCE G. POLLACK has been a Managing Director of Centre Partners Management
LLC since 1995. Mr. Pollack is also a Partner of Centre Partners L.P. which he
joined in 1991. Mr. Pollack serves as a director of Music Holdings Corp., KIK
Corp. Holdings Inc., Rembrandt Photo Services, Johnny Rockets Group, Inc. and a
number of other private corporations.
The Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. The Board is comprised of two Class I
Directors (David C. Sabin and Robert A. Bergmann), three Class II Directors
(William B. Rue, Bert Doornmalen and Bruce G. Pollack) and two Class III
Directors (Leonhard Dreimann and Frank Devine).
Pursuant to the Preferred Stock Agreement, Centre Partners has the right to
designate: (i) two directors to serve on the Board of Directors so long as it
and its affiliates own at least 12.5% of the total voting power of the Company,
and (ii) one director to serve on the Board of Directors so long as it and its
affiliates own at least 7.5% of the total voting power of the Company. Centre
Partners has designated Robert A. Bergmann and Bruce G. Pollack to serve on the
Board of Directors.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors of the Company held 12 meetings during the fiscal
year ended June 27, 1998.
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee held two meetings and the Compensation Committee held 3
meetings during 1998. The Committees received their authority and assignments
from the Board of Directors and report to the Board of Directors. No Director
attended fewer than 75% of the aggregate number of meetings of the Board of
Directors and the Committees on which he served during the period for which he
was a member of the Board.
Mr. Doornmalen and Mr. Devine, and Mr. Schulman, a former
Windmere-designated director who resigned upon consummation of the Stock
Repurchase, served as members of the Audit Committee during 1998. The Audit
Committee recommends the engagement of the Company's independent auditors and is
primarily responsible for approving the services performed by the Company's
independent auditors. The Committee also reviews and evaluates the Company's
accounting principles and its system of internal accounting controls.
Mr. Doornmalen and Mr. Devine, and Mr. Friedson and Mr. Schulman, two
former Windmere-designated directors who resigned upon consummation of the Stock
Repurchase, served as members of the Compensation Committee during 1998. The
Compensation Committee reviews and approves the Company's executive compensation
policy, makes recommendations concerning the Company's employee benefit policies
for executives, and has authority to administer the Company's stock option
plans.
COMPENSATION OF DIRECTORS
Each Director who is not an employee of the Company receives a Director's
fee in the amount of $7,500 per annum and $1,000 per meeting he or she attends
(plus reimbursement for out-of-pocket expenses incurred in connection with
attending such meetings). During the fiscal year ended June 27, 1998, each
non-employee Director was granted options to purchase 2,000 shares of common
stock under the Company's Non-Employee Directors Stock Option Plan.
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<PAGE> 83
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows the total compensation received by the Company's
Chief Executive Officer and its most highly compensated officers for the fiscal
years ending June 27, 1998, June 28, 1997 and June 29, 1996, respectively.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------- --------------------- -------
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ LTPP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR $ $ ($)(1) ($) (#) ($) ($)
------------------ ---- ------ ----- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leonhard Dreimann......... 1998 350,000 191,552 55,364 -- 47,147(3) -- --
(Chief Executive 1997 282,000 150,000 54,000 -- -- -- --
Officer) 1996 200,000 15,000 55,000 -- 70,000(2) -- --
David C. Sabin............ 1998 350,000 191,552 11,087 -- 47,147(3) -- --
(Chairman and 1997 251,000 150,000 17,000 -- -- -- --
Secretary) 1996 150,000 15,000 20,000 -- 70,000(2) -- --
William B. Rue............ 1998 240,000 142,296 11,453 -- 47,146(3) -- --
(President, Chief 1997 192,000 50,000 17,000 -- -- -- --
Operating Officer and 1996 150,000 15,000 25,000 -- 70,000(2) -- --
Chief Financial Officer)
</TABLE>
- -------------------------
(1) Consists primarily of reimbursement for costs associated with use and
maintenance of an automobile.
(2) Options were awarded on October 26, 1995 under the Company's 1995 Employee
Stock Option Plan at an exercise price equal to the fair market value of the
common stock on the date of grant ($2.50).
(3) Options were awarded on May 6, 1998 under the Company's 1995 Employee Stock
Option Plan at an exercise price equal to the fair market value of the
common stock on the date of grant ($12.25).
The following table sets forth certain information concerning options
granted to the named executive officers during the fiscal year ended June 27,
1998.
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS EXERCISE STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Leonhard Dreimann.................. 47,147 22.9% 12.25 5/17/08 $363,219 $920,467
David C. Sabin..................... 47,147 22.9% 12.25 5/17/08 363,219 920,467
William B. Rue..................... 47,146 22.9% 12.25 5/17/08 363,211 920,448
</TABLE>
- -------------------------
(1) Options vest 33 1/3% on each anniversary of December 19, 1997.
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<PAGE> 84
The following table sets forth certain information with respect to the
unexercised options to purchase the Company's common stock held by the named
executive officers at June 27, 1998. None of the named executive officers
exercised any stock options during the fiscal year ended June 27, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUES OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT
OPTIONS/SARS AT FY-END (#) FY-END ($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Leonhard Dreimann.......................... 155,716 31,431 $ 875,181 $ 35,360
David C. Sabin............................. 85,716 31,431 778,931 35,360
William B. Rue............................. 135,715 31,431 1,181,429 35,360
</TABLE>
- -------------------------
(1) Based on the fair market value of the common stock on June 26, 1998 ($13.375
per share) less the option exercise price.
EMPLOYMENT AGREEMENTS
Messrs David C. Sabin, Chairman of the Board, Leonhard Dreimann, Chief
Executive Officer, and William B. Rue, President, Chief Operating Officer and
Chief Financial Officer (collectively, the "Executives"), have each entered into
employment agreements (the "Employment Agreements"), effective as of December
19, 1997, which provide for their continued employment in their present
capacities with the Company through December 31, 2001. Messrs. Sabin and
Dreimann are entitled to an annual salary at the rate of $425,000 through June
30, 1998 and $500,000 thereafter. Mr. Rue is entitled to an annual salary at the
rate of $285,000 through June 30, 1998 and $350,000 thereafter. In addition,
commencing with calendar 1998, each of the Executives is entitled to an annual
bonus each calendar year ranging from 25% of his base salary (if the Company
achieves threshold performance goals) to 100% of his salary (if the Company
achieves target performance goals) to 125% of his salary (if the Company
achieves maximum performance goals).
Under the terms of the Employment Agreements, if an Executive is terminated
without cause or resigns with good reason, he is entitled to receive a lump-sum
payment equal to his salary for the remainder of the term, plus the bonuses he
would have received if the Company achieved target performance goals for the
remainder of the term and other benefits which he would have been entitled to
for the remainder of the term. The termination without cause of an Executive or
resignation for good reason by an Executive constitutes good reason for the
other Executives to resign under the Employment Agreements. In addition, if an
Executive voluntarily terminates his employment within two years after a change
of control of the Company, he is entitled to receive a lump sum payment equal to
his salary and other benefits for the remainder of the term; provided that the
termination of employment by an Executive during the 30 day period immediately
following the one-year anniversary of the change of control constitutes good
reason under the Executive's Employment Agreement.
The Employment Agreements provide for the granting of 126,358 options to
purchase shares of Salton common stock to each Executive (63,179 options with an
exercise price equal to the closing price of Salton common stock on the Nasdaq
National Market on December 18, 1998 and 63,179 options with an exercise price
equal to the closing price of Salton common stock on the Nasdaq National Market
on December 17, 1999). Upon a change of control prior to the granting of such
options, each Executive may elect to receive in lieu of the exercise of such
options a lump sum payment equal to (i) the difference between (x) the average
of the closing price of Salton common stock on the Nasdaq National Market for
the five trading days immediately preceding the change of control and (y)
$15.25, multiplied by (ii) the number of shares of Salton common stock subject
to such options.
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<PAGE> 85
SHARE OWNERSHIP
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of December 28, 1998 by (i) each
person known to the Company to beneficially own 5% or more of the Company's
common stock, (ii) each of the Directors and executive officers of the Company
and (iii) all executive officers and Directors of the Company as a group. The
number of shares of common stock shown as owned by the persons and group named
below assumes the exercise of all currently exercisable options and the
conversion of all shares of Convertible Preferred Stock held by such persons and
group, and the percentage shown assumes the exercise of such options and the
conversion of such shares and assumes that no options held by others are
exercised. Unless otherwise indicated below, the persons named below have sole
voting and investment power with respect to the number of shares set forth
opposite their names. For purposes of the following table, each person's
beneficial "ownership" of the Company's common stock has been determined in
accordance with Section 13(d) of the Exchange Act and Rule 13d-3 promulgated
thereunder.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OF SHARES
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL HOLDER OWNED OWNED
------------------------- ------------ ------------
<S> <C> <C>
Centre Partners Group(1).................................... 2,566,641 28.8%
Mr. Leonhard Dreimann(2).................................... 845,949 9.1
Mr. William B. Rue(2)....................................... 639,617 6.9
Mr. David C. Sabin(3)....................................... 354,392 3.8
Mr. Frank Devine(4)......................................... 31,000 *
Mr. Bert Doornmalen(4)...................................... 16,000 *
Mr. Robert A. Bergmann(1)................................... 0 *
Mr. Bruce G. Pollack(1)..................................... 0 *
All Directors and executive officers as a group (7
persons)(5)............................................... 1,263,057 13.6%
</TABLE>
- -------------------------
* Less than 1%.
(1) Consists of an aggregate of 213,700 shares of common stock and 40,000 shares
of Convertible Preferred Stock: (i) 65,777 shares of common stock and 12,312
shares of Convertible Preferred Stock owned of record by Centre Capital
Investors II, L.P. ("Investors II"), (ii) 21,401 shares of common stock and
4,006 shares of Convertible Preferred Stock owned of record by Centre
Capital Tax-Exempt Investors II, L.P. ("Tax-Exempt II"), (iii) 14,312 shares
of common stock and 2,679 shares of Convertible Preferred Stock owned of
record by Centre Capital Offshore Investors II, L.P. ("Offshore II"), (iv)
1,010 shares of common stock and 189 shares of Convertible Preferred Stock
owned of record by Centre Parallel Management Partners, L.P. ("Parallel"),
(v) 11,311 shares of common stock and 2,177 shares of Convertible Preferred
Stock owned of record by Centre Partners Coinvestment, L.P. ("Coinvestment")
and (vi) 99,889 shares of common stock and 18,697 shares of Convertible
Preferred Stock owned of record by the State Board of Administration of
Florida (the "Florida Board"). As of November 23, 1998, the 40,000 shares of
Convertible Preferred Stock were convertible into 2,352,941 shares of the
Company's common stock. Investors II, Tax-Exempt II and Offshore II are
limited partnerships, of which the general partner of each is Centre
Partners II, L.P. ("Partners II"), and of which Centre Partners Management
LLC ("Centre Management") is an attorney-in-fact. Parallel and Coinvestment
are also limited partnerships. In its capacity as manager of certain
investments for the Florida Board pursuant to a management agreement, Centre
Management is an attorney-in-fact of Parallel. Centre Partners II LLC is the
ultimate general partner of each of Investors II, Tax-Exempt II, Offshore
II, Parallel and Coinvestment. Bruce G. Pollack is Managing Director of
Centre Management and Centre Partners II LLC and as such may be deemed to
beneficially own and share the power to vote or dispose the common stock and
Convertible Preferred Stock held by Investors II, Tax-Exempt II, Offshore
II, Parallel, Coinvestment and the Florida
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<PAGE> 86
Board. Mr. Pollack disclaims the beneficial ownership of such common stock
and Convertible Preferred Stock. The foregoing is based upon information
contained in a Schedule 13D/A dated September 16, 1998, filed with the
Commission.
(2) Includes, with respect to Mr. Dreimann and Mr. Rue: (i) 463,580 shares owned
by Dominator Investors Group, a Hong Kong corporation ("Dominator"), which
is owned 71.9% by Mr. Dreimann and 28.1% by Mr. Rue; and (ii) 155,716 shares
and 135,715 shares, respectively, of common stock which may be acquired upon
the exercise of immediately exercisable options.
(3) Includes 85,716 shares of common stock which may be acquired upon the
exercise of immediately exercisable stock options. Also includes (i) 179,676
shares owned by Duquesne Financial Corporation ("Duquesne"), an Illinois
corporation which is owned by Susan Sabin, and (ii) 89,000 shares owned by
Susan Sabin. Susan Sabin is David Sabin's wife. Mr. Sabin disclaims
beneficial ownership of all shares owned by Duquesne and Susan Sabin.
(4) Includes, with respect to each of Messrs. Doornmalen and Devine, 16,000
shares of common stock which may be acquired upon the exercise of
immediately exercisable options.
(5) Includes an aggregate of 409,147 shares which may be acquired by Directors
and officers of the Company upon the exercise of immediately exercisable
options. See footnotes 2 through 4 above.
The addresses of the persons shown in the table above who are beneficial
owners of more than five percent of the Company's common stock are as follows:
Messrs. Dreimann, Sabin and Rue, 550 Business Center Drive, Mount Prospect,
Illinois 60056; and Centre Partners Management LLC, 30 Rockefeller Plaza, Suite
5050, New York, New York 10020.
CERTAIN TRANSACTIONS
Prior to the Stock Repurchase, Windmere owned approximately 50% of Salton's
outstanding common stock. In connection with the Stock Repurchase, Windmere and
Salton agreed to continue various commercial and other arrangements. These
arrangements include, among other things, (i) a letter agreement requiring the
Company to pay to Windmere a continuing fee with respect to the Company's sales
to Kmart under its supply agreement in consideration of Windmere's guarantee of
the Company's obligations under the supply agreement; and (ii) an agreement
relating to the credit terms which Durable Electrical Metal Factory, Ltd.
("Durable"), a wholly-owned subsidiary of Windmere, will provide to the Company
with respect to future product orders.
The Company purchased inventory from Durable of $27.1 million, $23.5
million and $3.2 million in fiscal 1998, 1997 and 1996, respectively. The
Company had amounts due to Windmere, including Durable, totaling approximately
$4.8 million at June 27, 1998.
Pursuant to the Convertible Preferred Stock Issuance, the Company issued to
affiliates of Centre Partners 40,000 shares of Convertible Preferred Stock. 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). In connection with the Convertible Preferred Stock Issuance,
the Company paid Centre Partners a $500,000 transaction fee. The Preferred Stock
Agreement provides that 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. The affiliates of
Centre Partners and the Company also entered into a Registration Rights
Agreement which grants such affiliates certain demand and piggyback registration
rights with respect to their shares of Convertible Preferred Stock and shares of
Salton common stock which are issuable upon conversion thereof.
Mr. Bert Doornmalen, a Director of the Company, is the Managing Director of
Markpeak, Ltd., a Hong Kong company. The Company recorded inventory purchases
from Markpeak, Ltd. of $15.7 million, $7.8 million and $10.2 million in fiscal
1998, 1997 and 1996, respectively. The Company paid commissions to Markpeak of
$272,000, $432,000 and $739,000 in fiscal 1998, 1997 and 1996, respectively.
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<PAGE> 87
Mr. Frank M. Devine, a Director of the Company, is a co-founder of the firm
Shapiro, Devine and Craparo, Inc. ("SDC"), a manufacturers representation firm.
The firm represents many major manufacturers of household products (including
the Company) to the retail industry. The Company recorded commissions with SDC
of approximately $290,000, $241,000 and $160,000 in fiscal 1998, 1997 and 1996,
respectively. As of June 27, 1998, the Company owed SDC approximately $38,000
for current charges.
DESCRIPTION OF PREFERRED STOCK AND
CERTAIN INDEBTEDNESS
CONVERTIBLE PREFERRED STOCK
The Second Amended and Restated Certificate of Incorporation of the Company
(the "Certificate of Incorporation") provides that the Company may issue
2,000,000 shares of preferred stock, $.01 par value per share, of which 40,000
shares have been designated as 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% of the Liquidation Preference (as defined below). The payment
of dividends is limited by the indenture governing the Notes and 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 in the Certificate of
Incorporation), 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.
The Company may optionally redeem, 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 Preference per share, payable at the Company's option in cash
or shares of Salton common stock.
NEW CREDIT AGREEMENT
To facilitate the Recapitalization, the Company entered into the New Credit
Agreement. The New Credit Agreement provides for $215.0 million in Senior Credit
Facilities, consisting of a $90.0 million Tranche A Term Loan, a $75.0 million
Delayed Draw Term Loan and a $50.0 million Revolving Credit
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Facility. 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 (1)
pay the cash portion of the purchase price for the Stock Repurchase, (2)
refinance all outstanding indebtedness under the Old Credit Agreement and (3)
pay certain related fees and expenses. Following the repayment of the Tranche A
Term Loan from the proceeds of this offering, such facility will be permanently
terminated.
The Senior Secured Revolving Credit Facility includes a $10.0 million
sublimit for the issuance of letters of credit. All amounts outstanding under
the Revolving Credit Facility are payable on July 27, 2003. The Tranche A Term
Loan is payable in 20 consecutive quarterly installments, commencing on
September 30, 1998, in an amount equal to: (1) $1,250,000 for the first eight
installments; (2) $6,250,000 for the next eight installments; and (3) $7,500,000
for the final four installments. Any amounts outstanding under the Delayed Draw
Term Loan, which amounts may be borrowed by the Company from time to time until
July 27, 1999, are payable in 16 consecutive quarterly installments, commencing
on September 30, 1999, in an amount equal to: (1) $2,500,000 for the first four
installments; (2) $5,000,000 for the next eight installments; and (3) $6,250,000
for the final four installments; provided that if less than $75.0 million in
aggregate principal amount of the Delayed Draw Term Loan is borrowed, each of
the foregoing installments is reduced proportionately. The Delayed Draw Term
Loan is available for certain acquisitions, subject to the terms of the New
Credit Agreement.
The Company amended and restated the New Credit Agreement on January 7,
1999 to, among other things, (a) replace the Delayed Draw Term Loan with the
Tranche B Term Loan as part of the Senior Credit Facilities, and (b) increase
the Revolving Credit Facility to $80.0 million and effectively extend the
availability of the Revolving Credit Facility until five years after
consummation of the Toastmaster Acquisition. The $45.0 million Tranche B Term
Loan is payable in 24 consecutive quarterly installments, in an amount equal to:
(1) $125,000 for the first 20 consecutive quarterly installments; and (2)
$10,625,000 for the final four installments.
Interest accrues on loans made under the Senior Credit Facilities at the
Company's option at either (1) Eurodollar base rate plus an applicable margin
ranging from 3.00% to 2.00% based upon the consolidated leverage of the Company
or (2) the base rate, which is the highest of (x) Citibank, N.A.'s prime rate,
(y) a rate based on the secondary market rate for three-month certificates of
deposit plus 1.00% and (z) the federal funds rate plus 0.50%, plus an applicable
margin ranging from 2.00% to 1.00% based upon the consolidated leverage of the
Company. The post-default rate on outstanding loans is 2.00% above the otherwise
applicable rate of interest.
The aggregate amount outstanding under the Senior Credit Facilities will be
prepaid by amounts equal to 100% of the net proceeds from certain indebtedness,
a specified portion of asset sales by the Company and its subsidiaries and by
50% of cash flow in excess of certain expenditures, costs and payments
commencing with the fiscal year ending June 26, 1999. Under certain
circumstances, optional and mandatory prepayments of principal in respect of the
Tranche B Term Loan may require a prepayment fee equal to (1) 2% of the amount
of the principal prepaid if such prepayment occurs prior to the first
anniversary of the consummation of the Toastmaster Acquisition and (2) 1% of the
amount of the principal prepaid if such prepayment occurs between the first and
third anniversary of the consummation of the Toastmaster Acquisition. The
Company may at its option reduce the amounts available under the Senior Credit
Facilities to the extent such amounts are unused or prepaid in certain minimum
amounts.
The Company pays certain administrative fees to Lehman Commercial Paper
Inc. for its own account as well as a commitment fee and certain fees relating
to letters of credit to Lehman Commercial Paper Inc. for its own account and the
account of the other lenders under the Senior Credit Facilities.
The Senior Credit Facilities are secured by a security interest in
substantially all of the real and personal property, tangible and intangible, of
the Company and its domestic subsidiaries, as well as a pledge of all of the
stock of such domestic subsidiaries. The Senior Credit Facilities are also
guaranteed by all of the domestic subsidiaries of the Company.
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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 merger or
consolidations, create liens, or engage in certain transactions with affiliates,
and that 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
minimum fixed charge coverage ratio, a minimum interest coverage ratio and a
maximum leverage ratio.
4% JUNIOR SUBORDINATED NOTE
In connection with the Stock Repurchase, the Company issued to Windmere the
Junior Subordinated Note. The Junior Subordinated Note matures on January 31,
2005 and bears interest at 4.0% per annum payable annually. The Note is subject
to offsets of principal and interest equal to 5.0% 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 Junior Subordinated Note is also
subject to reduction in the event Salton's supply agreement with Kmart is
terminated for any reason.
DESCRIPTION OF THE NEW NOTES
GENERAL
The Old Notes were issued pursuant to an Indenture dated December 16, 1998
(the "Indenture") by and among the Company, the Guarantors and Norwest Bank
Minnesota, National Association, as trustee (the "Trustee"), a copy of the form
of which will be made available upon request. Upon the issuance of the New
Notes, the Indenture will be subject to the Trust Indenture Act of 1939 (the
"Trust Indenture Act"). The New Notes are subject to all such terms, and Holders
of New Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. The definitions of certain terms used in the following summary are
set forth below under "-- Certain Definitions." For purposes of this summary,
the term "Company" refers only to Salton, Inc. and not to any of its
Subsidiaries.
The New Notes will be general unsecured obligations of the Company and will
be subordinated in right of payment to all current and future Senior Debt. The
New Notes will rank pari passu in right of payment with all other senior
subordinated Indebtedness of the Company issued in the future, if any, and
senior in the right of payment to all subordinated Indebtedness of the Company
issued in the future, if any. As of September 26, 1998, on a pro forma basis
after giving effect to the Financing, the Company would have had no Senior Debt
outstanding (exclusive of unused commitments of up to $125.0 million under the
New Credit Agreement) and, through its Restricted Subsidiaries, would have had
additional liabilities (including trade payables and lease obligations)
aggregating approximately $2.3 million. Additionally, as of September 26, 1998,
on a pro forma basis after giving effect to the Financing and the Toastmaster
Acquisition, the Company would have had $99.5 million of Senior Debt outstanding
(exclusive of unused commitments of up to $25.5 million under the New Credit
Agreement) and, through its Restricted Subsidiaries, would have had additional
liabilities (including trade payables and lease obligations) aggregating
approximately $2.3 million. The Indenture will permit the incurrence of
additional indebtedness, including additional Senior Debt, subject to certain
restrictions.
As of the Issue Date, all of the Company's Subsidiaries will be Restricted
Subsidiaries. Under certain circumstances, the Company will able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to any of the restrictive covenants set forth
in the Indenture.
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PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $125.0 million
and will mature on December 15, 2005. Interest on the Notes will accrue at the
rate of 10 3/4% per annum and will be payable semi-annually in arrears on
December 15 and June 15, commencing on June 15, 1999, to Holders of record on
the immediately preceding December 1 and June 1. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest and Liquidated Damages, if any, on the
Notes will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
payment of interest and Liquidated Damages, if any, may be made by check mailed
to the Holders of the Notes at their respective addresses set forth in the
register of Holders of Notes; provided that all payments of principal, premium,
interest and Liquidated Damages, if any, with respect to Notes the Holders of
which have given wire transfer instructions to the Company will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of $1,000
and integral multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, interest on the Notes,
Liquidated Damages, if any, Change of Control Payments or other obligations of
the Company in respect of the Notes (collectively, the "Senior Subordinated Note
Payments") will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full, in cash or Cash Equivalents, of all
Senior Debt, whether outstanding on the date of the Indenture or thereafter
incurred. (Section 10.1)
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, in
an assignment for the benefit of creditors or any marshaling of the Company=s
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full, in cash or Cash Equivalents, of all Obligations due in respect
of such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt) before the
Holders of Notes will be entitled to receive any payment with respect to the
Notes, and until all Obligations with respect to Senior Debt are paid in full,
in cash or Cash Equivalents, any distribution to which the Holders of Notes
would be entitled shall be made to the holders of Senior Debt (except that
Holders of Notes may receive and retain (i) Permitted Junior Securities and (ii)
payments made from the trust described under "-- Legal Defeasance and Covenant
Defeasance"). If a distribution is made to holders of the Notes that, due to the
subordination provisions, should not have been made to them, such holders will
be required to hold such distribution in trust for the holders of Senior Debt
and pay it over to them (pursuant to such written instructions as the holders of
Senior Debt or a representative on their behalf may provide to such holders of
the Notes) as their interests may appear. (Section 10.3)
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under
"-- Legal Defeasance and Covenant Defeasance") if (i) a default in the payment
of the principal of, premium, if any, or interest on Designated Senior Debt
occurs and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any Designated
Senior Debt. Payments on the Notes may and shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment blockage
may be commenced unless and until 360 days have elapsed since the
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effectiveness of the immediately prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice unless such default shall have been waived for a period
of not less than 180 consecutive days. (Section 10.4)
The Indenture will further require that the Company promptly notify holders
of Senior Debt if payment of the Notes is accelerated because of an Event of
Default. (Section 10.7)
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. On a pro forma basis,
after giving effect to the Financing and the application of the proceeds
therefrom, no Senior Debt would have been outstanding at September 26, 1998
(exclusive of unused commitments of up to $125.0 million under the New Credit
Agreement). Additionally, as of September 26, 1998, on a pro forma basis after
giving effect to the Financing and the Toastmaster Acquisition, the Company
would have had $99.5 million of Senior Debt outstanding (exclusive of unused
commitments of up to $25.5 million under the New Credit Agreement). The
Indenture will limit, subject to certain financial tests, the amount of
additional Indebtedness, including Senior Debt, that the Company and its
subsidiaries can incur. See "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock."
SUBSIDIARY GUARANTEE
The Company's payment obligations under the Notes will be jointly and
severally guaranteed (the "Subsidiary Guarantees") by the Guarantors. The
Subsidiary Guarantees will be subordinated to the prior payment in full of all
Senior Debt of the Guarantors and the amounts for which the Guarantors will be
liable under the guarantees issued from time to time with respect to Senior
Debt. As of September 26, 1998, no Senior Debt of the Guarantors was
outstanding. The obligations of each Guarantor under its Subsidiary Guarantee
will be limited so as not to constitute a fraudulent conveyance under applicable
law. See, however, "Risk Factors -- Risks Relating to the Notes -- Fraudulent
Conveyance Matters." (Section 12.1)
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes and the Indenture; and (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists.
The Indenture will provide that in the event of a sale or other disposition
of all the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under the Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "-- Repurchase
at the Option of Holders -- Asset Sales."
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to December
15, 2002. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages,
if any,
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thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 105.375%
2003........................................................ 102.688%
2004 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the Issue
Date, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Notes originally issued under the Indenture at a
redemption price of 110.750% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the redemption date,
with the net cash proceeds of any Public Equity Offering of common stock of the
Company; provided that at least 65% of the aggregate principal amount of Notes
originally issued on the Issue Date remain outstanding immediately after each
occurrence of such redemption; and provided, further, that each such redemption
shall occur within 60 days of the date of the closing of such Public Equity
Offering. (Section 3.7)
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption. (Sections 3.1, 3.2, 3.3 and 3.4)
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within ten days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control. (Section 4.15)
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On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officer's Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 60 days following a Change of Control, the Company will either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of Notes
required by this covenant. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The New Credit Agreement prohibits the Company from purchasing any Notes
and also provides that certain change of control events with respect to the
Company would constitute a default thereunder. Any future credit agreements or
other agreements relating to Senior Debt to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing Notes,
the Company could seek the consent of its lenders to the purchase of Notes or
could attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes. In such case, the Company's
failure to purchase tendered Notes would constitute an Event of Default under
the Indenture which would, in turn, constitute as default under the New Credit
Agreement. In such circumstances, the subordination provisions in the Indenture
would likely restrict payments to the Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Asset Sales
The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless (i) the Company or such
Restricted Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash or
Cash Equivalents; provided that the amount of (x) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet), of the
Company or any Restricted Subsidiary of the Company (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any Guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any securities, notes or
other obligations received by the Company or any such Restricted Subsidiary from
such transferee that are
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immediately converted by the Company or such Restricted Subsidiary into cash (to
the extent of the cash received), shall be deemed to be cash for purposes of
this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay Senior Debt
under any Credit Facility (and to correspondingly permanently reduce the
commitments with respect thereto in the case of revolving borrowings) or (b) to
the acquisition of a controlling interest in another business, the making of a
capital expenditure or the acquisition of other long-term assets, in each case,
in Permitted Businesses. Pending the final application of any such Net Proceeds,
the Company may temporarily reduce Senior Debt under any Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph shall be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0
million, the Company shall be required to make an offer to all Holders of Notes
(an "Asset Sale Offer") to purchase the maximum principal amount of Notes that
may be purchased out of the Excess Proceeds, at an offer price in cash in an
amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase, in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less
than the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. If the aggregate principal amount of Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero. (Section 4.11)
CERTAIN COVENANTS
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make
any other payment or distribution on account of the Company's or any of its
Restricted Subsidiaries' Equity Interests (including, without limitation, any
dividend, distribution or payment on account of such Equity Interests in
connection with any merger or consolidation involving the Company or any of its
Restricted Subsidiaries) or to the direct or indirect holders of the Company's
or any of its Restricted Subsidiaries' Equity Interests in their capacity as
such (other than dividends or distributions payable in Equity Interests (other
than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value (including without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company or other Affiliate of
the Company; (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Notes, except a payment of interest or principal at Stated
Maturity; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company or any of its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments
permitted by clauses (ii), (iii) or (iv) of the next succeeding
paragraph), is less than the sum of (i) 50% of the Consolidated Net
Income of the Company for the period
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(taken as one accounting period) from the beginning of the first fiscal
quarter immediately following the Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate
Net Cash Proceeds received by the Company as a contribution to its
common equity capital or from the issue or sale since the Issue Date of
Equity Interests of the Company (other than Disqualified Stock), or of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Restricted
Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (iii) to the extent not already included in Consolidated
Net Income of the Company for such period without duplication, any
Restricted Investment that was made by the Company or any of its
Restricted Subsidiaries after the Issue Date is sold for cash or
otherwise liquidated or repaid for cash, or any Unrestricted Subsidiary
which is designated as an Unrestricted Subsidiary subsequent to the
Issue Date is sold for cash or otherwise liquidated or repaid for cash,
the lesser of (A) the cash return of capital with respect to such
Restricted Investment or Unrestricted Subsidiary (less the cost of
disposition, if any) and (B) the initial amount of such Restricted
Investment or designated amount of such Unrestricted Subsidiary.
The foregoing provisions shall not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Indebtedness which is subordinated to the Notes or Equity
Interests of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of,
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of Indebtedness which is
subordinated to the Notes with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend or
distribution by a Restricted Subsidiary of the Company to the holders of its
common Equity Interests so long as the Company or such Restricted Subsidiary
receives at least its pro rata share of such dividend or distribution in
accordance with its Equity Interests; (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company that
are held by any member of the Company's (or any of its Restricted Subsidiaries')
management pursuant to any management equity subscription agreement or stock
option agreement; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$250,000 in any twelve-month period; (vi) repurchases of Capital Stock deemed to
occur upon the exercise of stock options if such Capital Stock represents a
portion of the exercise price thereof and (vii) (a) the payment to Windmere in
an amount not to exceed $15.0 million at the Stated Maturity of the Windmere
Note and (b) redemptions of the Windmere Note which are deemed to occur as a
result of purchases of inventory from Windmere in the ordinary course of
business, provided that, with respect to clauses (ii), (iii), (v) and (vii)(a)
above, no Default or Event of Default shall have occurred and be continuing
immediately after such transaction.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary of the Company, pursuant to the Restricted Payment. The fair market
value of any non-cash Restricted Payment shall be determined by the Board of
Directors of the Company whose resolution with respect thereto shall be
delivered to the Trustee, such determination to be based upon an opinion or
appraisal issued by an investment banking firm (or, if an investment banking
firm is generally not qualified to give such an opinion or appraisal, by an
appraisal firm) of national standing if such fair market value exceeds $5.0
million. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant
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"-- Restricted Payments" were computed, together with a copy of any fairness
opinion or appraisal required by the Indenture.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under this covenant. All such outstanding Investments will be deemed to
constitute Investments in an amount equal to the fair market value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
Any designation of an Unrestricted Subsidiary by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the resolution of the Board of Directors of the Company giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the terms of the Indenture governing the designation of
Unrestricted Subsidiaries and was permitted by the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments." If, at any
time, any Unrestricted Subsidiary fails to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period,
and (ii) no Default or Event of Default would be in existence immediately
following such designation. (Section 4.7)
Incurrence of Indebtedness and Issuance of Preferred Stock
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt) and that the
Company shall not issue any Disqualified Stock and shall not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock; provided,
however, that the Company may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock if the Company's Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.00 to 1.00, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant shall not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt") so long as no Default has occurred and is continuing or would
be caused thereby:
(i) the incurrence by the Company of: (A) revolving credit Indebtedness under
any Credit Facility, letters of credit (with letters of credit being
deemed to have a principal amount equal to the maximum potential liability
of the Company and its Restricted Subsidiaries thereunder) and related
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Guarantees under any Credit Facility; provided that the aggregate
principal amount of all revolving Indebtedness and letters of credit of
the Company and its Restricted Subsidiaries (with letters of credit being
deemed to have a principal amount equal to the maximum potential liability
of the Company and its Restricted Subsidiaries thereunder) outstanding at
any one time under all such Credit Facilities after giving effect to such
incurrence, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to
this clause (i), does not exceed $80.0 million less the aggregate amount
of Asset Sale proceeds applied by the Company and its Restricted
Subsidiaries to permanently reduce the availability of revolving credit
Indebtedness under the Credit Facility pursuant to the provisions
described under the caption "-- Repurchase at the Option of
Holders -- Asset Sales;" and (B) up to $45.0 million of the Tranche B Term
Loan or a similar facility not to exceed $45.0 million (less the aggregate
amount of all repayments (optional or mandatory) of the principal of any
term loan pursuant to this clause (i) that has been made by the Company
since the Issue Date) for the purpose of financing the Toastmaster
Acquisition if such acquisition is consummated by April 30, 1999;
(ii) the incurrence by the Company and its Restricted Subsidiaries of Existing
Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the Notes and
the incurrence by the Guarantors of Indebtedness represented by the
Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Restricted Subsidiary, in an aggregate principal amount,
including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace Indebtedness incurred pursuant to this clause (iv),
not to exceed $5.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in respect of Indebtedness that was
permitted by the Indenture to be incurred by such entity other than
pursuant to clause (i), (vi) and (vii) below;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; provided, however, that (i) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinated
to the prior payment in full in cash of all Obligations with respect to the
Notes and the Indenture and (ii)(A) any subsequent event or issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than the Company or a Restricted Subsidiary of the
Company and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Restricted Subsidiary of the
Company shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may
be, that was not permitted by this clause (vi);
(vii) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred in the normal course of business and
consistent with past business practices for the purpose of fixing or
hedging currency, commodity or interest rate risk (including with respect
to any floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding in connection with the conduct of their
respective businesses and not for speculative purposes);
(viii) the guarantee by the Company of Indebtedness of any of the Guarantors or
the Guarantee by any of the Guarantors of Indebtedness of the Company, in
each case that was permitted to be incurred by another provision of this
covenant "-- Incurrence of Indebtedness and Issuance of Preferred Stock";
(ix) the incurrence by a Restricted Subsidiary that is a Foreign Subsidiary of
Non-Recourse Debt in an amount not to exceed 75% of the net book value of
the non-Affiliate accounts receivable of such Restricted Foreign Subsidiary
determined in accordance with GAAP;
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(x) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse
Debt, provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed
to constitute an incurrence of Indebtedness by a Restricted Subsidiary of
the Company that was not permitted by this clause (x);
(xi) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for indemnification, adjustment of
purchase price or other similar obligations, in each case, incurred or
assumed in connection with the disposition of any business, assets or a
Restricted Subsidiary of the Company, other than the guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or a Restricted Subsidiary for the purpose of financing
such acquisition; provided that (A) such Indebtedness is not reflected on
the balance sheet of the Company or any Subsidiary of the Company
(contingent obligations referred to in a footnote to financial statements
and not otherwise reflected on the balance sheet will not be deemed to be
reflected on such balance sheet for purposes of this clause (A)) and (B)
the maximum assumable liability in respect of all such Indebtedness with
respect to such disposition shall at no time exceed the gross proceeds
including noncash proceeds (the fair market value of such noncash proceeds
being measured at the time received and without giving effect to any
subsequent changes in value) actually received by the Company and its
Restricted Subsidiaries in connection with such disposition; and
(xii) the incurrence by the Company or any of its Restricted Subsidiaries that
are Guarantors of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or
replace any other Indebtedness incurred pursuant to this clause (xii), not
to exceed $10.0 million, provided that up to $5.0 million of such $10.0
million may be incurred by any of the Company's Foreign Restricted
Subsidiaries that are not Guarantors.
For purposes of determining compliance with this covenant, in the event
that an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xii) above as of
the date of incurrence thereof or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Company shall, in its sole discretion, classify such item of Indebtedness as of
the date of incurrence thereof in any manner that complies with this covenant
and such item of Indebtedness shall be treated as having been incurred pursuant
to only one of such clauses or pursuant to the first paragraph hereof. Accrual
of interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant. (Section 4.9)
Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or
become effective any Lien of any kind securing Indebtedness, Attributable Debt,
or trade payables (other than Permitted Liens) upon any of their property or
assets, now owned or hereafter acquired, unless all payments due under the
Indenture and the Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer secured
by a Lien; provided that in any case involving a Lien securing indebtedness
subordinated to the Notes, such Lien is subordinated to the Lien securing the
Notes to the same extent that such subordinated indebtedness is subordinated to
the Notes. (Section 4.12)
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary of the Company to (i)(x) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with
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respect to any other interest or participation in, or measured by, its profits,
or (y) pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries, (ii) make loans or advances to the Company or any of its
Restricted Subsidiaries or (iii) transfer any of its properties or assets to the
Company or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the Issue Date, (b) the Credit Facility as in effect as of the Issue
Date, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive with respect to
such dividend and other payment restrictions than those contained in the Credit
Facility as in effect on the Issue Date, (c) the Indenture and the Notes, (d)
applicable law, (e) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (f) by
reason of customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices, (g) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, or (h) Permitted Refinancing Indebtedness, provided that
the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced. (Section 4.8)
Guarantees by Restricted Subsidiaries
The Indenture will provide that the Company will not permit any of its
Restricted Subsidiaries, directly or indirectly, to Guarantee, assume or in any
other manner become liable for the payment of any Indebtedness of the Company
unless: (i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for a Guarantee of payment of the Notes by such
Restricted Subsidiary, which Guarantee shall be (x) in the case of Indebtedness
that is subordinated to the Notes, senior to such Restricted Subsidiary's
Guarantee of or pledge to secure such other Indebtedness, (y) in the case of
Indebtedness that is pari passu with the Notes, pari passu with such Restricted
Subsidiary's Guarantee of or pledge to secure such other Indebtedness, and (z)
in the case of Indebtedness that is Senior Debt, subordinated to the Guarantee
of such Senior Debt to the same extent as the Notes are subordinated to such
other Senior Debt, and (ii) such Restricted Subsidiary waives, and will not in
any manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Guarantee until the Notes have been paid in full. (Section
4.17)
Merger, Consolidation, or Sale of Assets
The Company will not, directly or indirectly, consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, conveyance or other disposition shall have been made is a
corporation organized or existing under the laws of the United States, any state
thereof or the District of Columbia; (ii) the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company) or the
entity or Person to which such sale, assignment, transfer, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the Notes, the Registration Rights Agreement and the Indenture pursuant to
a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately before and after such transaction no Default or Event of Default
shall have occurred;
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and (iv) except in the case of a merger of the Company with or into a wholly
owned Restricted Subsidiary of the Company, the Company or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made will, immediately after such transaction after giving pro forma
effect thereto and any related financing transactions as if the same had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock." The Indenture will also provide that the Company may not, directly or
indirectly, lease all or substantially all of its properties or assets, in one
or more related transactions, to any other Person. (Section 5.1)
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any properties or assets to, or purchase any property or assets from,
or enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or Guarantee with, or for the benefit of, any
Affiliate of any such Person (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $1.0
million, a resolution of its Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of its Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $3.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an investment banking firm (or, if an investment banking firm is
generally not qualified to give such an opinion, by an appraisal firm) of
national standing; provided that none of the following shall be deemed to be
Affiliate Transactions: (1) any employment agreement entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted Subsidiary,
as the case may be, (2) transactions between or among the Company and/or its
Restricted Subsidiaries on terms that are no less favorable to the Company
and/or such Subsidiary than those that would have been obtained in a comparable
transaction by the Company and/or such Subsidiary with an unrelated Person, (3)
any sale or other issuance of Equity Interests (other than Disqualified Stock)
of the Company, (4) Restricted Payments that are permitted by the covenant
described above under the caption "-- Restricted Payments," (5) fees and
compensation paid to members of the Board of Directors of the Company and of its
Restricted Subsidiaries in their capacity as such, to the extent such fees and
compensation are reasonable, customary and consistent with past practices, (6)
advances to employees for moving, entertainment and travel expenses, drawing
accounts and similar expenditures in the ordinary course of business and
consistent with past practices, (7) fees payable to Markpeak Ltd. in the
ordinary course of business and consistent with past practices, and (8) fees and
compensation paid to, and indemnity provided on behalf of, officers, directors
or employees of the Company or any of its Restricted Subsidiaries, as determined
by the Board of Directors of the Company or of any such Restricted Subsidiary,
to the extent such fees and compensation are reasonable, customary and
consistent with past practices. (Section 4.11)
Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Company may enter into a sale and leaseback transaction if (i) the Company
could have incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "-- Incurrence of Indebtedness and
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Issuance of Preferred Stock" and (ii) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as determined
in good faith by the Board of Directors and set forth in an Officer's
Certificate delivered to the Trustee) of the property that is the subject of
such sale and leaseback transaction and (iii) the transfer of assets in such
sale and leaseback transaction is permitted by, and the Company applies the
proceeds of such transaction in compliance with, the covenant described above
under the caption "Repurchase at the Option of Holders -- Asset Sales." (Section
4.19)
No Senior Subordinated Debt
The Indenture will provide that, notwithstanding any other provision
thereof, the Company will not incur, create, issue, assume, guarantee or
otherwise become liable, directly or indirectly, for any Indebtedness (including
Acquired Debt) that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the Notes. (Section 4.16)
Business Activities
The Company will not, and the Company will not permit any of its Restricted
Subsidiaries to, directly or indirectly, engage in any line of business other
than a Permitted Business, except to such extent as would not be material to the
Company and its Restricted Subsidiaries taken as a whole. (Section 4.13)
Payments for Consent
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of the Notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement. (Section 4.18)
Reports
The Indenture will provide that whether or not the Company is required by
the rules and regulations of the Commission, so long as any Notes are
outstanding and irrespective of whether the Exchange Offer Registration
Statement or the Shelf Registration Statement has been declared effective by the
Commission, the Company will furnish to each of the Holders of Notes (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such financial information, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the Company and
any consolidated Restricted Subsidiaries and, with respect to the annual
information only, reports thereon by the Company's independent public
accountants (which shall be firm(s) of established national reputation) and (ii)
all information that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. All such information and
reports shall be filed with the Commission on or prior to the dates on which
such filings would have been required to be made had the Company been subject to
the rules and regulations of the Commission. In addition, whether or not
required by the rules and regulations of the Commission, the Company shall file
a copy of all such information and reports with the Commission for public
availability within the time periods specified in the Commission=s rules and
regulations (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. For so long as any Notes remain outstanding, the Company and the
Guarantors shall furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act. (Section 4.3)
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EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Notes (whether or not
prohibited by the subordination provisions of the Indenture); (ii) default in
payment when due of the principal of or premium, if any, on the Notes (whether
or not prohibited by the subordination provisions of the Indenture); (iii)
failure by the Company or any of its Restricted Subsidiaries to comply with the
provisions described under the caption "-- Merger, Consolidation, or Sale of
Assets"; (iv) failure by the Company or any of its Restricted Subsidiaries for
30 days after notice from the Trustee or Holders of 25% in aggregate principal
amount of the Notes then outstanding to comply with the provisions described
under the captions "Repurchase at the Option of Holders -- Asset Sales,"
"-- Restricted Payments," "-- Incurrence of Indebtedness and Issuance of
Preferred Stock" or "Repurchase at the Option of Holders -- Change of Control";
(v) failure by the Company or any of its Restricted Subsidiaries for 60 days
after notice from the Trustee or Holders of 25% in aggregate principal amount of
the Notes then outstanding to comply with any of its other agreements in the
Indenture or the Notes; (vi) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or
is created after the Issue Date, which default (a) is caused by a failure to pay
principal of or premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the date of such
default (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates without duplication $2.5 million or
more; (vii) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $2.5 million (excluding amounts covered
by insurance), which judgments are not paid, discharged or stayed for a period
of 60 days and (viii) certain events of bankruptcy or insolvency with respect to
the Company or any of its Restricted Subsidiaries. (Section 6.1)
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Restricted
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest. (Section 6.2)
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
December 15, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to December 15, 2002, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes. (Section 6.5)
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The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy. (Section 13.7)
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on such Notes when such payments are due from
the trust referred to below, (ii) the Company's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes. (Section
8.1)
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages,
if any, on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has
been a change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that, subject to customary assumptions and
exclusions, the Holders of the outstanding Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any
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time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company or any of its Restricted Subsidiaries
is a party or by which the Company or any of its Restricted Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that, subject to customary assumptions and exclusions, after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that, subject to customary assumptions and exclusions, all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with. (Section 8.2)
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
(Section 2.6)
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes). (Section 9.2)
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change
the time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the Holders of at least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of Holders of Notes. Without the consent of at least 75% in principal
amount of the Notes then outstanding (including consents obtained in connection
with a tender offer or exchange offer for the Notes), no waiver or
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amendment to the Indenture may make any change in the provisions described above
under the captions "-- Repurchase at the Option of Holders -- Change of
Control," and "-- Repurchase at the Option of Holders -- Asset Sales" that
adversely affect the rights of any Holder of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense. (Section 7.1)
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchaser have entered into the Registration
Rights Agreement. Pursuant to the Registration Rights Agreement, the Company has
agreed to file with the Commission the Exchange Offer Registration Statement on
the appropriate form under the Securities Act with respect to the New Notes.
Upon the effectiveness of the Exchange Offer Registration Statement, the Company
will offer to the Holders of Transfer Restricted Securities pursuant to the
Exchange Offer who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for New Notes. If (i) the Company
is not required to file the Exchange Offer Registration Statement or permitted
to consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Transfer Restricted
Securities notifies the Company prior to the 20th day following consummation of
the Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company will use its best efforts to cause
the applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer Restricted
Securities" means each Note until (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for a New Note in the Exchange
Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a
Note for a New Note, the date on which such New Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy of
the prospectus contained in the Exchange Offer Registration Statement,
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(iii) the date on which such Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Note is distributed to the public
pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 60
days after the Closing Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 120 days after the Closing Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
business days after the date on which the Exchange Offer Registration Statement
was declared effective by the Commission, New Notes in exchange for all Notes
tendered prior thereto in the Exchange Offer and (iv) if obligated to file the
Shelf Registration Statement, the Company will use its best efforts to file the
Shelf Registration Statement with the Commission on or prior to 60 days after
such filing obligation arises and to cause the Shelf Registration to be declared
effective by the Commission on or prior to 120 days after such obligation
arises. If (a) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), or (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
Liquidated Damages to each Holder of Notes, with respect to the first 90-day
period immediately following the occurrence of the first Registration Default in
an amount equal to $.05 per week per $1,000 principal amount of Notes held by
such Holder. The amount of the Liquidated Damages will increase by an additional
$.05 per week per $1,000 principal amount of Notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages of $.50 per week per $1,000 principal
amount of Notes. All accrued Liquidated Damages will be paid by the Company on
each damages payment date to the Global Note Holder by wire transfer of
immediately available funds or by federal funds check and to Holders of
Certificated Securities by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
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"Asset Sale" means (i) the sale, lease, conveyance or other disposition
of any assets or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business consistent with past
practices (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the covenants described above
under the captions "-- Repurchase at the Option of Holders -- Change of Control"
and "-- Certain Covenants-- Merger, Consolidation, or Sale of Assets" and not by
the provisions of the covenant described above under the caption "-- Repurchase
at the Option of Holders -- Asset Sales"), and (ii) the issue or sale by the
Company or any of its Restricted Subsidiaries of Equity Interests of any the
Company's Restricted Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for Net Proceeds in
excess of $1.0 million. Notwithstanding the foregoing: (i) a transfer of assets
by the Company to a Restricted Subsidiary of the Company or by a Restricted
Subsidiary of the Company to the Company or to another Restricted Subsidiary of
the Company, (ii) an issuance or sale of Equity Interests by a Restricted
Subsidiary of the Company to the Company or to another Restricted Subsidiary of
the Company that is a Guarantor, (iii) a Restricted Payment that is permitted by
the covenant described above under the caption "-- Restricted Payments" and (iv)
a disposition of inventory in the ordinary course of business will not be deemed
to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participation, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of not more than one year from the
date of acquisition, bankers' acceptances with maturities of not more than one
year from the date of acquisition and overnight bank deposits, in each case with
any domestic commercial bank having capital and surplus in excess of $500
million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or one of the two highest ratings from Standard & Poor's
with maturities of not more than six months from the date of acquisition and
(vi) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i) -- (v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries,
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) (other
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than persons who are, or groups of persons who are, made up entirely of
Principals or their Related Parties); (ii) the adoption of a plan relating to
the liquidation or dissolution of the Company; (iii) the consummation of any
transaction or series of related transactions (including, without limitation,
any merger or consolidation) the result of which is that any "person" (as
defined above), other than the Principals and their Related Parties, becomes the
"beneficial owners" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is currently exercisable or is exercisable only upon the occurrence
of a subsequent condition), directly or indirectly, of more than 30% of the
total Voting Stock of the Company (measured by voting power rather than number
of shares); provided that the Principals and their Related Parties beneficially
own (as defined in this clause (iii)) directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock of the Company
than such other person and do not have the right or ability by voting power,
contract or otherwise, to elect or designate for election a majority of the
Board of Directors of the Company; (iv) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors;
or (v) the Company consolidates with, or merges with or into, any Person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with,
or merges with or into, the Company, in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any such
transaction where the Voting Stock of the Company outstanding immediately prior
to such transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving or
transferee Person (immediately after giving effect to such issuance).
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, without
duplication, (i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Restricted Subsidiaries
for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation
and amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation and amortization were deducted in computing such
Consolidated Net Income, minus (v) non-cash items increasing such Consolidated
Net Income for such period, in each case, on a consolidated basis and determined
in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries (for such period, on a consolidated basis, determined in accordance
with GAAP); provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary,
(ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval (that has not been obtained)
or, directly or indirectly, by operation of the terms of its charter or any
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agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded and (v)
the Net Income (but not loss) of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to the Company or one of its Subsidiaries.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the New Credit Agreement) or
commercial paper facility with banks or other institutional lenders providing
for revolving credit loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Default" means any event that is or with the passage of time or the
giving of notice (or both) would be an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
New Credit Agreement and (ii) any other Senior Debt permitted hereunder the
principal amount of which is $25.0 million or more and that has been designated
by the Company as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature, except to the extent that such Capital Stock is solely
redeemable with, or solely exchangeable for, any Capital Stock of such Person
that is not Disqualified Stock.
"Domestic Subsidiary" means a Subsidiary that is (i) formed under the laws
of the United States of America or a state or territory thereof or (ii) as of
the date of determination, treated as a domestic entity or a partnership or a
division of a domestic entity for United States federal income tax purposes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means up to $15.0 million in aggregate principal
amount of Indebtedness of the Company and its Restricted Subsidiaries (other
than Indebtedness under the New Credit Agreement and the Notes) in existence on
the Issue Date, until such amounts are repaid.
"Financing" means the Offering of the Notes in an aggregate principal
amount of $125.0 million and the application of the proceeds of the Offering to
(i) repay approximately $110.0 million of outstanding Indebtedness under the New
Credit Agreement and (ii) pay certain fees and expenses incurred in connection
with the Offering.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), (ii) the consolidated interest of such Person and its
Restricted Subsidiaries that was capitalized during such period, (iii) any
interest expense on Indebtedness of another Person that is Guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or one of its Restricted Subsidiaries (whether or not such Guarantee
or Lien is called upon) and (iv) the product of (a) all dividend payments,
whether or not in cash, on any series of preferred stock of
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such Person or any of its Restricted Subsidiaries, other than dividend payments
on Equity Interests payable solely in Equity Interests of the Company (other
than Disqualified Stock), times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than working capital borrowings represented by
revolving credit Indebtedness under any Credit Facility) or issues preferred
stock subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but on or prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means any Subsidiary of the Company that is not a
Domestic Subsidiary.
"GAAP" means generally accepted accounting principles in the United States
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants, the statements and
pronouncements of the Financial Accounting Standards Board and such other
statements by such other entities (including the Commission) as have been
accepted by a significant segment of the accounting profession, which are
applicable at the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means Home Creations Direct Ltd., a Delaware corporation, and
any other Subsidiary that becomes a party to a Subsidiary Guarantee pursuant to
the Indenture.
"Hedging Obligations" means, with respect to any Person, the net payment
Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements in the ordinary course of business and pursuant to
past practices designed to protect such Person against fluctuations in commodity
prices, interest rates or currency exchange rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued
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expense or trade payable, if and to the extent any of the foregoing indebtedness
(other than letters of credit and Hedging Obligations) would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
as well as all Indebtedness of others secured by a Lien on any asset of such
Person (whether or not such Indebtedness is assumed by such Person) and, to the
extent not otherwise included, the Guarantee by such Person of any Indebtedness
of any other Person, and any liability, whether or not contingent, whether or
not it appears on the balance sheet of such Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness that does not require current payments of
interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other Obligations),
advances of assets or capital contributions (excluding commission, travel and
entertainment, moving, and similar advances to officers and employees made in
the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP. If the Company or any of its Restricted
Subsidiaries sells or otherwise disposes of any Equity Interests of any direct
or indirect Restricted Subsidiary of the Company such that, after giving effect
to any such sale or disposition, such Person is no longer a direct or indirect
Restricted Subsidiary of the Company, the Company or such Restricted Subsidiary,
as the case may be, shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Restricted Subsidiary not sold or disposed of in an amount
determined as provided in the third paragraph of the covenant described above
under the caption "-- Restricted Payments."
"Issue Date" means the date on which the Notes were originally issued.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in any asset and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss).
"Net Proceeds" means the aggregate cash proceeds or Cash Equivalents
received by the Company or any of its Restricted Subsidiaries in respect of any
Asset Sale (including, without limitation, any cash received upon the sale or
other disposition of any non-cash consideration received in any Asset Sale), net
of (a) all costs relating to such Asset Sale (including, without limitation,
legal, accounting, investment banking and brokers fees, and sales and
underwriting commissions) and any relocation expenses incurred as a result
thereof, taxes paid or payable as a result thereof (after taking into account
any available tax credits or deductions and any tax sharing arrangements), (b)
amounts required to be applied to repayment of Indebtedness (other than
Indebtedness under any Credit Facility) secured by a Lien on the asset or assets
that were the subject of such Asset Sale and (c) and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP.
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"New Credit Agreement" means that certain Credit Agreement, dated as of
July 27, 1998, by and among the Company, 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, providing for up to $125.0 million of borrowings, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, in each case as amended, restated, modified, renewed,
refunded, replaced or refinanced from time to time (whether with the original
agents and lenders or other agents and lenders).
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides any guarantee or credit
support of any kind (including any undertaking, guarantee, indemnity, agreement
or instrument that would constitute Indebtedness), (b) is directly or indirectly
liable (as a guarantor or otherwise) or (c) constitutes the lender; and (ii) no
default with respect to which (including any rights that the holders thereof may
have to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness (other
than the Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse against any of the assets or stock of the Company or any of
its Restricted Subsidiaries.
"Obligations" means any principal, premium, if any, interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company or its Restricted Subsidiaries whether or
not a claim for post-filing interest is allowed in such proceeding), penalties,
fees, charges, expenses, indemnifications, reimbursement obligations, damages
(including Liquidated Damages, if any), guarantees and other liabilities or
amounts payable under the documentation governing any Indebtedness or in respect
thereof.
"Permitted Business" means the lines of business conducted by the Company
and its Restricted Subsidiaries on the date hereof and businesses reasonably
related thereto.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company in
a Person engaged in a Permitted Business, if as a result of such Investment (i)
such Person becomes a Restricted Subsidiary of the Company or (ii) such Person
is merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company; (d) any Restricted Investment made as a
result of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "-- Repurchase at the Option of Holders -- Asset Sales"; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Company; (f) other Investments by the
Company or any of its Restricted Subsidiaries in any Person having an aggregate
fair market value (measured as of the date made and without giving effect to
subsequent changes in value), when taken together with all other Investments
made pursuant to this clause (f) that are at the time outstanding, not to exceed
$3.0 million; (g) Investments arising in connection with Hedging Obligations
that are incurred in the ordinary course of business consistent with past
practices, for the purpose of fixing or hedging currency, commodity or interest
rate risk (including with respect to any floating rate Indebtedness that is
permitted by the terms of the Indenture to be outstanding) in connection with
the conduct of the business of the Company and its Restricted Subsidiaries; and
(h) any Investment existing on the Issue Date and any amendment, modification,
restatement, supplement, extension, renewal, refunding, replacement,
refinancing, in whole or in part, thereof, provided that the aggregate principal
amount of all Investments of the Company pursuant to this clause (h) does not
exceed an amount equal to $3.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities that are subordinated to all Senior Debt (and any debt
securities issued in exchange for Senior Debt) to
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substantially the same extent as, or to a greater extent than, the Notes are
subordinated to Senior Debt pursuant to the Indenture.
"Permitted Liens" means (i) Liens on assets of the Company or any of its
Restricted Subsidiaries to secure Senior Debt permitted by the Indenture to be
incurred; (ii) Liens on the assets of the Company or any of its Restricted
Subsidiaries to secure Hedging Obligations with respect to Indebtedness under
any Credit Facility permitted by the Indenture to be incurred; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary of the Company;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company; (iv) Liens on property
existing at the time of acquisition thereof by the Company or any Restricted
Subsidiary of the Company, provided that such Liens were in existence prior to
the contemplation of such acquisition and only extend to the property so
acquired; (v) Liens existing on the Issue Date; (vi) Liens to secure any
Permitted Refinancing Indebtedness incurred to refinance any Indebtedness
secured by any Lien referred to in the foregoing clauses (i) through (v), as the
case may be, at the time the original Lien became a Permitted Lien; (vii) Liens
in favor of the Company or any Restricted Subsidiary; (viii) Liens incurred in
the ordinary course of business of the Company or any Restricted Subsidiary of
the Company with respect to obligations that do not exceed $5.0 million in the
aggregate at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary; (ix) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds, deposits to secure the
performance of bids, trade contracts, government contracts, leases or licenses
or other obligations of a like nature incurred in the ordinary course of
business (including, without limitation, landlord Liens on leased properties);
(x) Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently prosecuted, provided that any
reserve or other appropriate provision as shall be required to conform with GAAP
shall have been made therefor; (xi) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (iv) of the second paragraph of
the covenant described above under the caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (xii) carriers', warehousemen's, mechanics', landlords'
materialmen's, repairmen's or other like Liens arising in the ordinary course of
business in respect of obligations not overdue for a period in excess of 60 days
or which are being contested in good faith by appropriate proceedings promptly
instituted and diligently prosecuted; provided that any reserve or other
appropriate provision as shall be required to conform with GAAP shall have been
made therefor; (xiii) easements, rights-of-way, zoning and similar restrictions
and other similar encumbrances or title defects incurred, or leases or subleases
granted to others, in the ordinary course of business, which do not in any case
materially detract from the value of the property subject thereto or do not
interfere with or adversely affect in any material respect the ordinary conduct
of the business of the Company and its Restricted Subsidiaries taken as a whole;
(xiv) Liens in favor of customs and revenue authorities to secure payment of
customs duties in connection with the importation of goods in the ordinary
course of business and other similar Liens arising in the ordinary course of
business; and (xv) leases or subleases granted to third Persons not interfering
with the ordinary course of business of the Company or any of its Restricted
Subsidiaries, (xvi) Liens (other than any Lien imposed by ERISA or any rule or
regulation promulgated thereunder) incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance, and other types of social security; (xvii) deposits, in an aggregate
not to exceed $250,000, made in the ordinary course of business to secure
liability to insurance carriers; (xviii) Liens for purchase money obligations
(including refinancings thereof permitted under the covenant described above
under the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock"), provided that (A) the Indebtedness secured by any such Lien is
permitted under the covenant described above under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock" and (B) any such Lien encumbers
only the asset so purchased; (xix) any attachment or judgment Lien not
constituting
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an Event of Default under clause (i) of the first paragraph of the section
described above under the caption "Events of Default and Remedies"; (xx) any
interest or title of a lessor or sublessor under any operating lease; and (xxi)
Liens under licensing agreements for use of Intellectual Property entered into
in the ordinary course of business.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued and unpaid interest on, any Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is pari passu with the
Notes, such Permitted Refinancing Indebtedness is pari passu with or
subordinated in right of payment to the Notes or is Disqualified Stock; (iv)
such Permitted Refinancing Indebtedness is recourse to the same extent as the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (v) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Notes, such
Permitted Refinancing Indebtedness is subordinated in right of payment to, the
Notes on terms at least as favorable to the Holders of Notes as those contained
in the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (vi) such Indebtedness is incurred
either by the Company or a Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Principals" means 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., Centre Partners Coinvestment, L.P. and David C. Sabin, Leonhard Dreimann
and William B. Rue.
"Public Equity Offering" means any underwritten primary public offering of
the Common Stock or other Voting Stock of the Company pursuant to an effective
registration statement (other than a registration statement on Form S-4, Form
S-8, or any successor or similar form) under the Securities Act.
"Recapitalization" means, collectively, (i) the repurchase by the Company
of 6,535,072 shares of the Company's common stock owned by Windmere pursuant to
a stock purchase agreement by and among the Company, Windmere and certain
executive officers of the Company dated as of July 28, 1998 (the "Stock Purchase
Agreement"), (ii) the repurchase by the Company of Windmere's option to purchase
458,500 shares of the Company's common stock pursuant to the Stock Purchase
Agreement, (iii) the issuance of $40.0 million in convertible preferred stock of
the Company pursuant to a preferred stock purchase agreement between the Company
and certain affiliates of Centre Partners Management LLC and (iv) the borrowings
under the New Credit Agreement.
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 50% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding a more than 50% controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (i).
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"Representative" means the administrative agent under the New Credit
Agreement or its successor thereunder.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary; provided that, on the Issue Date,
both Subsidiaries of the Company shall be Restricted Subsidiaries of the
Company.
"Senior Debt" means (i) all Indebtedness outstanding under the Credit
Facility permitted under clause (i) of the second paragraph of the covenant
described above under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," (ii) any other Indebtedness
permitted to be incurred by the Company under the terms of the Indenture, unless
the instrument under which such Indebtedness is incurred expressly provides that
it is on a parity with or subordinated in right of payment to the Notes and
(iii) all Obligations with respect to the foregoing. Notwithstanding anything to
the contrary in the foregoing, Senior Debt will not include (w) any liability
for federal, state, local or other taxes owed or owing by the Company, (x) any
Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y)
any trade payables or (z) any Indebtedness that is incurred in violation of the
Indenture; provided that Indebtedness under the Credit Facility will not cease
to be Senior Debt if borrowed (in the case of loans) or issued (in the case of
letters of credit) based upon a written certification (which can be included in
a borrowing request) from a purported officer of the Company to the effect that
such Indebtedness was permitted by the Indenture to be incurred.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the Credit Agreement or other
original documentation governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or an entity described in clause (i) and
related to such Person or (b) the only general partners of which are such Person
or of one or more entities described in clause (i) and related to such Person
(or any combination thereof).
"Toastmaster Acquisition" means the acquisition of Toastmaster Inc. by the
Company pursuant to the Agreement and Plan of Merger by and among Toastmaster
Inc., Columbia Acquisition Corp. and the Company, dated as of August 26, 1998.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
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"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" means a Restricted Subsidiary, 100% of the
outstanding Capital Stock and other Equity Interests of which is directly or
indirectly owned by the Company.
"Windmere" means Windmere-Durable Holdings, Inc., a Florida corporation.
"Windmere Note" means that certain subordinated promissory note in the
amount of $15.0 million payable by the Company to Windmere.
BOOK-ENTRY DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form, without coupons. Except as described in the next paragraph, the Notes will
be deposited with, or on behalf of, The Depository Trust Company, New York, New
York ("DTC"), and registered in the name of Cede & Co., as DTC's nominee in the
form of a global Note certificate (the "Global Certificate") or will remain in
the custody of the Trustee pursuant to a FAST Balance Certificate Agreement
between DTC and the Trustee.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resales. In
addition, the Company agreed that it would not for a period of 120 days from
December 16, 1998, the date of the Offering Memorandum distributed in connection
with the sale of the Old Notes, directly or indirectly offer, sell, grant any
options to purchase or otherwise dispose of any debt securities other than in
connection with this Exchange Offer.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have been advised by Lehman Brothers, the Initial Purchaser of the Old
Notes, that following completion of the Exchange Offer they intend to make a
market in the New Notes to be issued in the Exchange Offer; however, it is under
no obligation to do so and any market activities with respect to the New Notes
may be discontinued at any time.
115
<PAGE> 117
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
New Notes offered hereby will be passed upon for the Company by Sonnenschein
Nath & Rosenthal, Chicago, Illinois.
EXPERTS
The financial statements as of June 27, 1998 and June 28, 1997 and for each
of the three years in the period ended June 27, 1998 included in this prospectus
and the related financial statement schedules incorporated by reference in the
registration statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and incorporated by
reference in the registration statement, and have been so included and
incorporated by reference in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Toastmaster as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997, included
in this Prospectus, have been audited by KPMG LLP, independent auditors, as set
forth in their report appearing elsewhere herein.
116
<PAGE> 118
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SALTON
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 27, 1998 and June 28,
1997...................................................... F-3
Consolidated Statements of Earnings for the Years ended June
27, 1998, June 28, 1997, and June 29, 1996................ F-4
Consolidated Statements of Stockholders' Equity for the
Years ended June 27, 1998, June 28, 1997, and June 29,
1996...................................................... F-5
Consolidated Statements of Cash Flows for the Years ended
June 27, 1998, June 28, 1997, and June 29, 1996........... F-6
Notes to Consolidated Financial Statements.................. F-7
THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998 AND SEPTEMBER 27,
1997
Consolidated Balance Sheets at September 26, 1998
(Unaudited) and June 27, 1998............................. F-20
Consolidated Statements of Earnings for the Thirteen Weeks
ended September 26, 1998 and September 27, 1997
(Unaudited)............................................... F-21
Consolidated Statements of Cash Flows for the Thirteen Weeks
ended September 26, 1998 and September 27, 1997
(Unaudited)............................................... F-22
Notes to Consolidated Financial Statements (Unaudited)...... F-23
TOASTMASTER
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Independent Auditors' Report................................ F-26
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-27
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996 and 1995.......................... F-28
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1997, 1996 and 1995.............. F-29
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995.......................... F-30
Notes to Financial Statements............................... F-31
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
Consolidated Balance Sheets as of September 30, 1998
(Unaudited), December 31, 1997............................ F-41
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997 (Unaudited)............. F-42
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (Unaudited)............. F-43
Notes to Consolidated Financial Statements (Unaudited)...... F-44
</TABLE>
F-1
<PAGE> 119
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. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with 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.
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
F-2
<PAGE> 120
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
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
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 121
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
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
</TABLE>
See Notes To Consolidated Financial Statements.
F-4
<PAGE> 122
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
<TABLE>
<CAPTION>
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
---------- -------- ---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
========== ======== ========== =========== ============ ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 123
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
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
</TABLE>
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.
F-6
<PAGE> 124
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:
<TABLE>
<CAPTION>
USEFUL LIFE JUNE 27, JUNE 28,
(IN YEARS) 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
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
========== ==========
</TABLE>
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.
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.
F-7
<PAGE> 125
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
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 or, with respect to SFAS 133,
in fiscal 2000. 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 stock.
Windmere's common stock
F-8
<PAGE> 126
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
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.
F-9
<PAGE> 127
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
Information regarding short-term borrowings under the Facility is:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
----------- -----------
<S> <C> <C>
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
</TABLE>
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.
F-10
<PAGE> 128
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
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)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- -------------
<S> <C> <C> <C>
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
</TABLE>
- -------------------------
* Net income is the same for purposes of calculating basic and diluted EPS
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
F-11
<PAGE> 129
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
method outlined in SFAS No. 123, the impact on the Company's net income and
earnings per common share would have been as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Net Income
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
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
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
</TABLE>
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
F-12
<PAGE> 130
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
Events." A summary of the Company's fixed stock options for the fiscal years
ended June 27, 1998 and June 28, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
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
</TABLE>
The following information summarizes the stock options outstanding at June
27, 1998:
<TABLE>
<CAPTION>
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
------------------------ ------ ------------ --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$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
</TABLE>
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.
F-13
<PAGE> 131
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
The future minimum rental commitments as of June 27, 1998 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
<S> <C>
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
==========
</TABLE>
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.
F-14
<PAGE> 132
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
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 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:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------------
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- -------------
<S> <C> <C> <C>
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)
=========== ========== ===========
</TABLE>
F-15
<PAGE> 133
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
Deferred taxes based upon differences between the financial statement and
tax bases of assets and liabilities and available tax carryforwards consisted
of:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
<S> <C> <C>
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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR CARRY-FORWARD EXPIRES AMOUNT
-------------------------- ----------
<S> <C>
2008........................................................ $1,273,000
2009........................................................ 2,665,000
2110........................................................ 60,000
2111........................................................ 45,000
----------
Total....................................................... $4,043,000
==========
</TABLE>
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:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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)%
==== ==== ======
</TABLE>
F-16
<PAGE> 134
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
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).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- -------
<S> <C> <C> <C> <C>
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)
</TABLE>
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
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.
F-17
<PAGE> 135
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
The Tranche A term loan matures in twenty consecutive installments
commencing on September 30, 1998.
The future maturities are:
<TABLE>
<S> <C>
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
===========
</TABLE>
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:
<TABLE>
<CAPTION>
INSTALLMENTS PRINCIPAL AMOUNT
------------ ----------------
<S> <C>
1 through 4................................................. $2,500,000
5 through 12................................................ 5,000,000
13 through 16............................................... 6,250,000
</TABLE>
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.
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
F-18
<PAGE> 136
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
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.
*****
F-19
<PAGE> 137
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 26, JUNE 27,
1998 1998
------------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
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
-------- --------
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
-------- --------
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
-------- --------
Total current liabilities............................ 63,477 83,169
Non-current deferred tax liability.......................... 567 517
Long-term debt.............................................. 85,000
Note payable................................................ 8,907
-------- --------
Total liabilities.................................... 157,951 83,686
Stockholders' equity:
Preferred stock, $.01 par value; authorized, 2,000,000
shares; 40,000 shares of convertible preferred stock
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
-------- --------
Total stockholders' equity........................... 25,577 57,711
-------- --------
Total liabilities and stockholder's equity........... $183,528 $141,397
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-20
<PAGE> 138
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- -------------
<S> <C> <C>
Net sales................................................... $104,388 $65,773
Cost of goods sold.......................................... 55,004 38,697
Distribution expenses....................................... 3,609 2,279
---------- ----------
Gross profit................................................ 45,775 24,797
Selling, general and administrative expenses................ 27,780 16,977
---------- ----------
Operating income............................................ 17,995 7,820
Interest expense............................................ 2,399 1,263
---------- ----------
Income before income taxes.................................. 15,596 6,557
Income taxes................................................ 4,777 2,433
---------- ----------
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>
See Notes to Consolidated Financial Statements.
F-21
<PAGE> 139
SALTON/MAXIM HOUSEWARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- -------------
<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 noncash
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
-------- --------
Net cash used in operating activities.............. (20,819) (30,061)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (589) (884)
-------- --------
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)
-------- --------
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.
See Notes to Consolidated Financial Statements.
F-22
<PAGE> 140
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.
<TABLE>
<CAPTION>
13 WEEKS ENDED
------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Net income............................................... $10,819 $4,124
Other comprehensive income............................... -- 2,517
------- ------
$10,819 $6,641
======= ======
</TABLE>
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 December 15, 1997 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.
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 June 15, 1999 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 2000. The Company has not assessed
the effect that this new standard will have on its consolidated financial
statements and/or disclosures.
F-23
<PAGE> 141
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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."
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
F-24
<PAGE> 142
SALTON/MAXIM HOUSEWARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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.
F-25
<PAGE> 143
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Toastmaster Inc.:
We have audited the accompanying consolidated balance sheets of Toastmaster
Inc. as of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Toastmaster
Inc. at December 31, 1997 and 1996 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
KPMG LLP
Kansas City, Missouri
February 25, 1998
F-26
<PAGE> 144
TOASTMASTER, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 178,030 $ 97,466
Accounts receivable, less allowances for doubtful
accounts, sales discounts and returns of $2,714,000 in
1997 and $2,674,000 in 1996 (note 3 and 7)............. 42,396,253 42,703,845
Inventories (notes 2 and 3)............................... 31,825,621 34,476,696
Deferred income taxes (note 4)............................ -- 2,279,741
Prepaid expenses and other current assets................. 2,144,645 794,104
Income taxes receivable................................... 4,070,503 768,428
------------ ------------
Total current assets................................... 80,615,052 81,120,280
Property, plant and equipment, at cost (note 3):
Land...................................................... 927,584 926,282
Buildings................................................. 9,884,855 9,057,296
Machinery and equipment................................... 45,660,717 42,327,069
------------ ------------
56,473,156 52,310,647
Less accumulated depreciation............................. 37,210,559 33,785,477
------------ ------------
Net property, plant and equipment...................... 19,262,597 18,525,170
Goodwill, net of accumulated amortization of $1,283,192 in
1997 and $1,170,572 in 1996............................... 3,265,499 3,378,119
Other assets................................................ 3,148,340 1,830,134
------------ ------------
$106,291,488 $104,853,703
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 3)........... $ 2,104,149 $ 2,144,643
Accounts payable.......................................... 4,382,729 3,755,131
Accrued advertising....................................... 2,528,768 2,970,125
Accrued warranty and product liability.................... 4,630,160 4,200,000
Accrued vacation.......................................... 1,161,698 1,379,717
Other accrued liabilities................................. 4,616,748 4,800,785
Deferred income taxes (note 4)............................ 1,455,992 --
------------ ------------
Total current liabilities.............................. 20,880,244 19,250,401
Long-term debt, excluding current installments (note 3)..... 42,597,072 44,611,075
Deferred income taxes (note 4)............................ 800,607 579,466
Other liabilities......................................... 695,448 249,111
------------ ------------
Total liabilities...................................... 64,973,371 64,690,053
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued................................ -- --
Common stock, $.10 par value; 20,000,000 shares
authorized, 7,596,775 shares issued.................... 759,677 759,677
Additional paid-in capital................................ 25,343,543 25,339,958
Retained earnings......................................... 15,877,723 14,591,056
Minimum pension liability adjustment...................... (356,854) (227,321)
Foreign currency translation.............................. (18,457) (11,666)
------------ ------------
41,605,632 40,451,704
Treasury stock, at cost, 57,325 shares in 1997 and 58,525
in 1996................................................ (287,515) (288,054)
------------ ------------
Total stockholders' equity............................. 41,318,117 40,163,650
------------ ------------
Commitments and contingencies (note 6)...................... $106,291,488 $104,853,703
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 145
TOASTMASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales....................................... $154,346,785 $163,049,140 $188,509,337
Cost of sales (note 9).......................... 125,464,731 142,458,084 156,310,057
------------ ------------ ------------
Gross profit.................................... 28,882,054 20,591,056 32,199,280
Selling, general and administrative expenses.... 22,669,161 23,640,864 25,011,365
------------ ------------ ------------
Operating income (loss)......................... 6,212,893 (3,049,808) 7,187,915
Other expense
-- interest................................... 4,062,561 4,392,994 4,923,160
Other income
-- interest................................... 638,669 32,247 25,055
------------ ------------ ------------
Income (loss) before income taxes............... 2,789,001 (7,410,555) 2,289,810
Income tax expense (benefit) (note 4)........... 889,251 (2,719,913) 956,066
------------ ------------ ------------
Net income (loss)............................... $ 1,889,750 $ (4,690,642) $ 1,333,744
============ ============ ============
Basic and diluted earnings (loss) per common
share......................................... $ .25 $ (.62) $ 0.18
Weighted average shares used in computation:
Basic earnings per common share............... 7,538,455 7,538,250 7,560,267
Diluted earnings per common share............. 7,545,794 7,538,250 7,560,267
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 146
TOASTMASTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Common stock:
Beginning and end of year........................ $ 759,677 $ 759,677 $ 759,677
----------- ----------- -----------
Additional paid-in capital:
Beginning of year................................ 25,339,958 25,339,958 25,339,958
Sale of 1,200 shares of treasury stock........... 3,585 -- --
----------- ----------- -----------
End of year...................................... 25,343,543 25,339,958 25,339,958
----------- ----------- -----------
Retained earnings:
Beginning of year................................ 14,591,056 19,885,776 19,159,164
Net income (loss)................................ 1,889,750 (4,690,642) 1,333,744
Cash dividends ($.08, $.08 and $.08 per share)... (603,083) (604,078) (607,132)
----------- ----------- -----------
End of year...................................... 15,877,723 14,591,056 19,885,776
----------- ----------- -----------
Minimum pension liability adjustment (note 5):
Beginning of year................................ (227,321) (267,078) (281,456)
Adjustment....................................... (129,533) 39,757 14,378
----------- ----------- -----------
End of year...................................... (356,854) (227,321) (267,078)
----------- ----------- -----------
Foreign currency translation:
Beginning of year................................ (11,666) (8,649) (54,725)
Adjustment....................................... (6,791) (3,017) 46,076
----------- ----------- -----------
End of year...................................... (18,457) (11,666) (8,649)
----------- ----------- -----------
Treasury stock:
Beginning of year................................ (288,054) (288,054) (17,695)
Purchase of 50,900 shares........................ -- -- (270,359)
Sales of 1,200 shares of treasury stock.......... 539 -- --
----------- ----------- -----------
End of year...................................... (287,515) (288,054) (288,054)
----------- ----------- -----------
Total end of year........................ $41,318,117 $40,163,650 $45,421,630
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 147
TOASTMASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 1,889,750 $ (4,690,642) $ 1,333,744
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization................. 3,621,668 4,148,456 4,372,493
Gain on sale of property, plant and
equipment.................................. (25,209) (13,671) (241,825)
Deferred income taxes......................... 4,029,737 (1,933,677) (397,817)
Restructuring charge.......................... 122,547 7,600,000 --
Changes in assets and liabilities:
Accounts receivable........................ 307,592 21,800,263 (57,756)
Inventories................................ 1,797,453 (1,137,300) (2,005,928)
Prepaid expenses and other current
assets................................... (1,350,541) (207,460) 30,851
Other assets............................... (120,081) (65,033) 197,044
Accounts payable........................... 627,598 (2,188,267) (2,495,509)
Accrued advertising and other
liabilities.............................. (513,815) (2,475,806) 741,637
Income taxes............................... (3,302,075) (2,109,089) 476,437
------------- ------------- -------------
Total adjustments.......................... 5,194,874 23,418,416 619,627
------------- ------------- -------------
Net cash flows provided by operating
activities............................... 7,084,624 18,727,774 1,953,371
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment...... (4,372,380) (4,484,999) (3,248,827)
Proceeds from sale of property, plant and
equipment..................................... 28,567 29,895 943,372
------------- ------------- -------------
Net cash flows used in investing
activities............................... (4,343,813) (4,455,104) (2,305,455)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit agreements....... 155,588,324 172,649,840 193,441,044
Repayments of revolving credit agreements....... (155,505,295) (188,213,336) (190,149,814)
Proceeds from long-term debt.................... -- 4,119,052 55,353
Repayments of long-term debt.................... (2,137,526) (2,165,933) (2,145,965)
Dividends on common stock....................... (603,083) (604,078) (607,132)
Sale (purchase) of treasury stock............... 4,124 -- (270,359)
------------- ------------- -------------
Net cash flows provided by (used in)
financing activities..................... (2,653,456) (14,214,455) 323,127
------------- ------------- -------------
Foreign currency translation adjustment......... (6,791) (3,018) 46,076
Net increase in cash.......................... 80,564 55,197 17,119
Cash at beginning of year....................... 97,466 42,269 25,150
------------- ------------- -------------
Cash at end of year............................. $ 178,030 $ 97,466 $ 42,269
============= ============= =============
Cash paid during the year for:
Interest...................................... $ 3,996,000 $ 4,393,000 $ 4,861,000
Income taxes.................................. $ 222,000 $ 1,323,000 $ 877,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 148
TOASTMASTER, INC.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Toastmaster
Inc. and its wholly-owned subsidiary, Toastmaster de Mexico S.A. de C.V.,
referred to collectively herein as the "Company." All significant intercompany
transactions and balances have been eliminated in the accompanying consolidated
financial statements.
(B) OPERATIONS
The Company manufactures small electrical kitchen and household appliances
and time products sold under the Toastmaster(R) and Ingraham(R) labels. The
Company has manufacturing facilities in Missouri and North Carolina. Although
the Company has long-established relationships with many of its customers, the
Company does not have long-term contracts with any of its customers. 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 recognizes sales revenue when products are shipped. Net sales
reflect a reduction of amounts related to product returns, sales discount
programs, outbound freight and certain allowances for advertising, the latter of
which are accounted for by certain competitors as "advertising" expense. The
Company views these amounts as price reductions, thereby reducing net sales and
lowering gross profits, as well as selling, general and administrative expense.
(C) INVENTORIES
Inventories are valued at the lower of cost, determined by the last-in,
first-out (LIFO) method, or market.
(D) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost of acquisition or
construction. Maintenance and repairs are charged to operations as incurred.
Renewals and betterments are capitalized as additions to the appropriate asset
accounts. Upon sale or retirement of assets, the cost and related accumulated
depreciation applicable to such assets are removed from the accounts and any
resulting gain or loss is reported in the statements of operations.
(E) DEPRECIATION
The Company depreciates property, plant and equipment over the useful lives
of the various assets which range from three to forty years, using principally
the straight-line method for financial reporting purposes and accelerated
methods for income tax purposes.
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities for subsequent changes in tax
rates is recognized in income in the period that includes the tax rate change.
F-31
<PAGE> 149
(G) RESEARCH AND DEVELOPMENT
Research and development costs, which are included in selling, general and
administrative expenses, aggregated $457,000, $573,000 and $399,000 in 1997,
1996 and 1995, respectively.
(H) INTANGIBLE ASSETS
The excess of the cost of the acquisition of the Company over the estimated
fair value of the net assets acquired (goodwill) is being amortized on a
straight-line basis over forty years.
Costs associated with obtaining financing arrangements are included in
other assets and are being amortized over the term of the related borrowings.
(I) EMPLOYEE BENEFIT PLANS
The Company has noncontributory retirement plans covering salaried and
hourly employees. The policy of the Company is to fund retirement costs in
amounts sufficient to satisfy the minimum funding requirements under Employee
Retirement Income Security Act (ERISA) guidelines.
(J) PRODUCT WARRANTIES
The Company provides for estimated future costs that will be incurred under
product warranties presently in force.
(K) SELF-INSURANCE
The Company maintains a self-insurance program for health claims and
workers' compensation claims of all covered employees. The Company accrues
estimated future costs that will be incurred for existing employee claims. The
Company does not provide any post-retirement health care benefits.
(L) PRODUCT LIABILITY CLAIMS
The Company is involved in product liability litigation arising in the
normal course of business and purchases product liability insurance coverage. A
liability is recognized for product liability claims when payment for such
claims is determined to be probable and the amount can be reasonably estimated,
after consideration of the applicable insurance coverages and deductibles.
(M) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair values are subjective in nature and involve uncertainties
and matters of significant judgment and therefore can not be determined with
precision. Changes in assumptions could effect the estimates. The fair market
value of the Company's financial instruments approximates the carrying value.
(N) FOREIGN CURRENCY TRANSLATION
Assets and liabilities in foreign currencies are translated into dollars at
rates prevailing at the balance sheet date. The net exchange differences
resulting from these translations are reported in stockholders' equity. Revenues
and expenses are translated at average rates for the year. Gains and losses
resulting from foreign currency transactions are included in the consolidated
statements of operations. The net losses resulting from foreign currency
transactions were $269,000, $64,000 and $189,000 in 1997, 1996 and 1995,
respectively.
(O) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
F-32
<PAGE> 150
(P) ADVERTISING COSTS
Advertising costs are expensed as incurred and amounted to $7,714,000,
$8,491,000 and $8,918,000 in 1997, 1996 and 1995, respectively.
(Q) STOCK OPTION PLANS
Prior to January 1, 1996 the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of underlying stock exceeded the exercise price. On January
1, 1996, the Company adopted SFAS No. 123,Accounting for Stock-Based
Compensation, which permits entities to recognize as expense, over the vesting
period, the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the accounting provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS
No. 123.
(R) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value of
the assets.
(S) EARNINGS PER COMMON SHARE
Prior to December 31, 1997 the Company computed earnings per share (EPS) in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 15, Earnings per Share and related interpretations. As such, primary
earnings per common share was based on the weighted average number of common
shares outstanding, giving effect to common stock equivalents (stock options),
if dilutive. On December 31, 1997 the Company adopted SFAS No. 128,Earnings per
Share, which replaces the presentation of primary and fully diluted EPS with a
presentation of basic and diluted EPS. Previously reported EPS information has
been restated to reflect the adoption of SFAS No. 128. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company.
For the years ended December 31, 1997, 1996 and 1995 there are no
differences between the numerator used in computing basic and diluted earnings
per share which represents the net earnings of the Company. For the years ended
December 31, 1997, 1996 and 1995 the denominator used in computing basic
earnings per share represents the weighted average number of common shares
outstanding (7,538,455 shares -- 1997, 7,538,250 shares -- 1996, 7,560,267
shares -- 1995). The denominator used in computing diluted earnings per share
represents the weighted average number of common shares outstanding used for
purposes of the basic earnings per share computation increased to reflect the
potential dilution under the treasury stock method of the outstanding stock
options (7,339 shares in 1997 and 0 shares in 1996 and 1995).
(T) ENVIRONMENTAL REMEDIATION LIABILITIES
Environmental remediation liabilities are accrued when probable and
reasonably estimable.
F-33
<PAGE> 151
(U) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Raw materials.............................................. $ 5,143,145 $ 4,329,623
Work-in-process............................................ 1,813,409 2,500,575
Finished goods............................................. 24,869,067 27,646,498
----------- -----------
Total............................................... $31,825,621 $34,476,696
=========== ===========
</TABLE>
If the first-in, first-out (FIFO) method of inventory valuation had been
used, inventories at December 31, 1997 and 1996 would have been approximately
$652,000 and $1,800,000 higher than reported. Net income for the year ended
December 31, 1997 would have been approximately $738,000 lower than reported and
net income for the years ended December 31, 1996 and 1995 would have been
approximately $71,000 and $173,000 higher than reported, respectively.
During 1997 and 1996, LIFO inventory layers were reduced. These reductions
resulted in charging lower inventory costs prevailing in previous years to cost
of goods sold in 1997 and 1996, thus reducing cost of goods sold by $114,000 and
$344,000, respectively, below the amount that would have resulted from
liquidating inventory recorded at December 31, 1997 and 1996 prices,
respectively.
(3) LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Borrowings under revolving credit agreements............... $35,286,620 $35,203,495
Term note, monthly payments of $154,762 plus interest,
balance of $1,798,000 due in November 2001............... 7,369,046 9,226,190
Other...................................................... 2,045,555 2,326,033
----------- -----------
Total long-term debt..................................... 44,701,221 46,755,718
Less current portion....................................... 2,104,149 2,144,643
----------- -----------
$42,597,072 $44,611,075
=========== ===========
</TABLE>
The Company has a revolving credit and term loan agreement which expires in
November 2001. The agreement, as modified, provides for borrowings of up to
$85,000,000 (including the balance of the term loan) from June 1 through January
31 or $60,000,000 from February 1 through May 31, or eligible accounts
receivable and inventory, as described therein. At December 31, 1997, the
Company could borrow an additional $10,300,000 under the agreement.
Borrowings under the revolving credit agreement generally bear interest at
prime plus .75% (9.25% at December 31, 1997), with the option to elect the
London Interbank Offering Rate (LIBOR) plus 2.25% (8.1875% at December 31,
1997). The Company had borrowings of $35,286,620 at December 31, 1997 under the
LIBOR option. The Company may elect to pay interest on a specified amount of
borrowings (not less than $4,000,000 or more than $12,000,000) at a fixed rate
based on the U.S. treasury note yield to maturity plus 2.5%. The interest period
for any fixed rate loan must be no less than one year.
At December 31, 1997, the Company had borrowed $7,369,046 under the term
loan provisions of the agreement, $469,046 of which bears interest at 9.50% and
$6,900,000 of which bears interest at 8.3125%.
F-34
<PAGE> 152
The annual interest rate on any loan under the agreement shall not be less
than 5%. The Company must also pay a 1/2% annual fee, paid monthly on the unused
portion of the revolving credit agreement. Advances under the revolving credit
agreement are secured by accounts receivable, inventory and property, plant and
equipment. The agreement contains restrictions as to maintenance of net worth
and certain financial ratios, minimum levels of income and working capital,
payment of cash dividends or purchases of treasury stock, additions to property,
plant and equipment and incurrence of additional indebtedness. At December 31,
1997, the Company is in compliance with these covenants and has retained
earnings available for dividends of $1,247,000.
Aggregate long-term debt maturities at December 31, 1997, including the
revolving credit agreement which expires in 2001, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1998........................................................ $ 2,104,149
1999........................................................ 3,655,694
2000........................................................ 1,857,144
2001........................................................ 37,084,234
-----------
$44,701,221
===========
</TABLE>
The Company has obtained guarantees for letter of credit, primarily for
importing purposes, up to $8,000,000. Outstanding letters of credit at December
31, 1997 and 1996 aggregated approximately $982,000 and $709,000, respectively.
The fair market value of the Company's revolver and term notes approximated
their carrying value at December 31, 1997. Other long-term debt with a carrying
amount of $2,045,555 had a fair value of $2,057,329 at December 31, 1997.
(4) INCOME TAXES
The components of income tax expense (benefit) are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal...................................... $(2,903,272) $ (735,825) $1,238,132
State........................................ (237,297) (72,774) 107,664
----------- ----------- ----------
Total Current.................................. (3,140,569) (808,599) 1,345,796
----------- ----------- ----------
Deferred:
Federal...................................... 3,727,294 (1,757,303) (361,945)
State........................................ 312,526 (154,011) (27,785)
----------- ----------- ----------
Total deferred................................. 4,039,820 (1,911,314) (389,730)
----------- ----------- ----------
Total income tax expense....................... $ 899,251 $(2,719,913) $ 956,066
=========== =========== ==========
</TABLE>
F-35
<PAGE> 153
The actual income tax expense differs from the expected expense computed by
applying the statutory federal rate of 34% to pre tax income for the following
reasons:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- --------
<S> <C> <C> <C>
Computed "expected" expense (benefit)............. $ 948,260 $(2,519,589) $778,539
Amortization of goodwill.......................... 38,291 38,291 38,291
State income tax expense (benefit), net........... 49,651 (112,700) 47,190
(Income) loss of foreign subsidiary............... (138,720) (46,699) 86,700
Other............................................. 1,769 (79,214) 5,346
--------- ----------- --------
Actual income tax expense (benefit)............... $ 899,251 $(2,719,913) $956,066
========= =========== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Inventories............................................... $ 1,102,290 $ 1,482,408
Accrued liabilities....................................... 2,082,141 2,710,118
Allowances for doubtful accounts, sales discounts and
returns................................................ -- 602,992
Other..................................................... 348,998 --
----------- -----------
Total gross deferred assets................................. 3,533,429 4,795,518
----------- -----------
Deferred income tax liabilities:
Property, plant and equipment............................. (800,607) (579,466)
Inventories............................................... (3,389,671) (2,515,777)
Allowances for doubtful accounts, sales discounts and
returns................................................ (1,393,652) --
Interest receivable....................................... (206,098) --
----------- -----------
Total gross deferred liabilities............................ (5,790,028) (3,095,243)
----------- -----------
Net deferred tax asset (liability).......................... $(2,256,599) $ 1,700,275
=========== ===========
</TABLE>
A valuation allowance for deferred tax assets was not necessary at December
31, 1997 or 1996. Management believes it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the deferred tax assets.
(5) EMPLOYEE BENEFIT PLANS
Substantially all of the Company's employees are covered by two defined
benefit pension plans.
The following items are components of net pension cost:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- -----------
<S> <C> <C> <C>
Service cost -- benefits earned during the
year.......................................... $ 632,271 $ 555,874 550,436
Interest cost on projected benefit obligation... 675,117 612,287 548,626
Actual return on plan assets.................... (1,244,075) (788,136) (1,323,955)
Net amortization and deferral................... 493,786 124,964 799,328
----------- --------- -----------
Net pension cost................................ $ 557,099 504,989 $ 574,435
=========== ========= ===========
</TABLE>
F-36
<PAGE> 154
The following table sets forth the plans' funded status:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $8,018,907 and $6,630,660............................ $ 8,998,156 $ 7,476,284
Additional benefits based on future salary levels......... 1,130,555 908,352
----------- -----------
Projected benefit obligation.............................. 10,128,711 8,384,636
Plan assets at fair market value.......................... 9,119,571 7,564,007
----------- -----------
Plan assets less than projected benefit obligation........ 1,009,140 820,629
Unrecognized net loss (gain) from experience different
from that assumed....................................... (246,146) 134,977
Unrecognized net transition asset being amortized over
approximately fifteen years............................. 323,288 397,922
Additional pension liability in excess of unrecognized
prior service cost...................................... 565,817 364,792
----------- -----------
Accrued pension cost recorded in other accrued liabilities
in the accompanying balance sheets...................... $ 1,652,099 $ 1,718,320
=========== ===========
</TABLE>
Under the requirements of Statement of Financial Accounting Standards No.
87, "Employers' Accounting for Pensions," an additional minimum pension
liability for one plan, representing the excess of accumulated benefits over
plan assets and accrued pension costs, was recognized at December 31, 1997 and
1996.
The plans' assets consist of a balanced portfolio of investments in money
market, common stock, bond and real estate funds. The discount rate and the rate
of increase in future compensation levels used to determine the actuarial
present value of the projected benefit obligation were 7.0% and 5% for 1997 and
7.5% and 5% for 1996. The expected long-term rate of return on plan assets was
9%.
The Company has a cash incentive program for certain key employees. Under
the terms of the plan, cash awards are made based upon the achievement of
certain corporate and individual performance goals. Awards in total are limited
to not more than 5% of the Company's earnings before interest and taxes. No
awards were earned under the program in 1997 or 1996.
The Company maintains a defined contribution savings plan covering
substantially all employees. The plan is funded through employee and voluntary
employer contributions. The Company accrued contributions of $140,000, $140,000
and $125,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company has adopted an incentive stock option plan (the ISO Plan), a
Nonemployee Director Stock Option Plan (the Directors' Plan) and a Non-Statutory
Stock Option Plan (the Non-Statutory Plan). Under the ISO Plan, options to
acquire a total of 111,000 shares of the Company's common stock were granted to
certain employees, 46,000 in 1993, 52,500 in 1994 and 12,500 in 1997. The
options vest over five years, with 20% cumulative vesting each year and expire
six years after the date of grant. The options granted in 1997 allow the holders
to acquire stock for $3.4375 per share, which was the fair market value of the
stock when the options were granted. In 1997, the exercise price and exercise
period for options granted in 1993 and 1994 and still held by active employees
were amended. The exercise price was reduced to $3.4375 per share, which was the
fair market value of the stock on the effective date of the amendment, and the
exercise period was extended an additional year to six years. Under the
Directors' Plan, options to acquire a total of 15,000 shares of common stock
were granted to nonemployee directors in 1993. The options vest immediately,
expire five years after the date of grant and allow the holders to acquire stock
for $7.375 per share, which was the fair market value of the stock when the
options were
F-37
<PAGE> 155
granted. Also under the Directors' Plan, options to acquire a total of 15,000
additional shares of common stock were granted to nonemployee directors in 1997.
The options vest immediately, expire five years after the date of grant and
allow the holders to acquire stock for $3.4375 per share, which was the fair
market value of the stock when the options were granted. At December 31, 1997
and 1996, there were options on 93,000 shares and 88,000 shares, respectively,
outstanding of which 55,700 shares and 43,300 shares, respectively, were
exercisable at $3.4375 and $7.375 per share, respectively under the ISO Plan. At
December 31,1997 there were options on 30,000 shares, outstanding and
exercisable (15,000 at $3.4375 per share and 15,000 at $7.375 per share) under
the Directors' Plan. At December 31, 1996 there were 15,000 shares outstanding
and exercisable at $7.375 per share under the Director's Plan. No options have
been granted under the Non-Statutory Plan.
In 1994, the Company adopted a supplemental executive retirement plan
("SERP") for certain officers of the Company who were unable to participate in
the Company's qualified defined benefit plan beginning January 1, 1989, because
of changes in the tax laws which imposed certain antidiscrimination requirements
upon qualified plans. The SERP provides for a normal retirement benefit for each
of the officers. Early retirement benefits under the SERP would be actuarially
adjusted to reflect the earlier commencement of the benefit. The SERP is funded
by the purchase of life insurance policies to be held in trust. The Company
reimburses the participants for the current tax recognition resulting from
insurance policy purchases. The respective costs are being amortized over a five
year vesting employment period of the participants. The expense for this plan
was approximately $407,000, $401,000 and $484,000 for 1997, 1996 and 1995,
respectively.
(6) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases certain equipment under operating lease agreements. Rent
expense was approximately $1,250,000, $1,139,000 and $853,000 for the years
ended December 31, 1997, 1996 and 1995.
Future lease commitments under long-term, noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1998........................................................ $ 817,000
1999........................................................ 631,000
2000........................................................ 488,000
2001........................................................ 445,000
2002........................................................ 436,000
Thereafter.................................................. 540,000
----------
$3,357,000
==========
</TABLE>
It is expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than the
amounts shown for 1998.
(B) CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial statements.
The Company is a party to environmental proceedings at two sites and is
investigating the need for remediation at two additional facilities of the
Company. The Company has accrued approximately $200,000 for the anticipated
future costs of investigation and remediation. Although such costs could
F-38
<PAGE> 156
exceed that amount, the Company believes that any such excess will not have a
material impact on the Company's financial position or results of operations.
(7) SIGNIFICANT CUSTOMER AND FOREIGN OPERATIONS
One customer accounted for approximately 27%, 27% and 29% of net sales for
the years ended December 31, 1997, 1996 and 1995, respectively. As of December
31, 1997 accounts receivable from a single customer comprised 19% of total
accounts receivable and accounts receivable denominated in foreign currencies
amounted to approximately $4.0 million.
Income (loss) before income taxes attributable to Toastmaster de Mexico
S.A. de C.V. amounted to $408,000 in 1997, $236,000 in 1996 and ($255,000) in
1995.
(8) UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997:
Net sales..................................... $26,315 $27,757 $44,209 $56,066
Gross profit.................................. 4,134 4,967 8,639 11,142
Income (loss) before income taxes............. (1,782) (1,131) 2,123 3,579
Net income (loss)............................. (1,141) (712) 1,410 2,333
Basic and diluted earnings (loss) per common
share...................................... (0.15) (0.09) 0.19 0.30
1996:
Net sales..................................... $26,738 $32,634 $49,321 $54,356
Gross profit.................................. 3,359 4,282 9,573 3,377
Income (loss) before income taxes............. (2,605) (2,042) 1,481 (4,245)
Net income (loss)............................. (1,654) (1,312) 950 (2,675)
Basic and diluted earnings (loss) per common
share...................................... (.22) (.17) .13 (.36)
1995:
Net sales..................................... $30,827 $36,528 $56,356 $64,798
Gross profit.................................. 4,196 5,267 9,759 12,977
Income (loss) before income taxes............. (1,559) (939) 1,550 3,238
Net income (loss)............................. (1,091) (608) 962 2,071
Basic and diluted earnings (loss) per common
share...................................... (.14) (.08) .13 .27
</TABLE>
(9) RESTRUCTURING
The Company completed the process of restructuring its product lines and
operations in 1997. The Company disposed of its environmental products line and
discontinued the production of certain kitchen countertop appliances and time
products. The inventory and manufacturing equipment related to these products
will be disposed of through normal channels of distribution and sale and
abandonment, respectively.
Restructuring charges incurred in the fourth quarter of 1996 consisted of
inventory valuation charges of $5,666,000, anticipated losses on the disposal of
fixed assets of $1,684,000 and accrued expenses of $250,000. Total restructuring
charges in 1996 amounted to $7,600,000 before income taxes and are recorded in
cost of sales.
F-39
<PAGE> 157
Additional restructuring charges of $123,000 were incurred in 1997 for
anticipated losses on the disposal of fixed assets and are recorded in cost of
sales. At December 31, 1997, accrued restructuring expenses amounted to
$127,000.
(10) ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
1997 awards and amendments under these plans consistent with the methodology
presented in Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, the Company's net income would have been reduced by
approximately $47,500 in 1997 or $0.01 for basic and diluted earnings per common
share. The fair value of the options granted and amended during 1997 is
estimated at values ranging from $0.62 to $1.03, on the dates of grant or
amendment using the Black-Scholes option-pricing model with the following
assumptions: dividend rate of $0.02 per share, volatility of 33.47%, risk-free
interest rate ranging between 5.88% and 6.31% and an expected life ranging
between 1.5 and 4.0 years.
Pro forma net income reflects only options granted or amended since
December 31, 1994. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected over the
options vesting period and compensation cost for options granted prior to
January 1, 1995 is not considered.
F-40
<PAGE> 158
TOASTMASTER INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash........................................................ $ 356 $ 178
Accounts receivable, less allowances........................ 34,903 42,396
Inventories
Finished goods............................................ 38,677 26,029
Raw matl., WIP............................................ 8,225 7,157
LIFO/inventory valuation
Total inventory................................... 45,984 31,826
Deferred income tax......................................... 0 0
Prepaid expenses............................................ 2,077 2,145
Income taxes receivable..................................... 5,645 4,070
-------- --------
Total current assets.............................. 89,091 80,615
Property, plant and equipment
Land...................................................... 928 928
Buildings................................................. 10,602 9,885
Less: accumulated depreciation......................... (5,781) (5,393)
Machinery & equipment..................................... 39,759 45,661
Less: accumulated depreciation......................... (28,433) (31,818)
-------- --------
Net property, plant & equipment...................... 17,075 19,263
Goodwill, net of accumulated amortization................... 3,181 3,265
Other assets................................................ 3,129 3,148
-------- --------
$112,476 $106,291
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 2,054 $ 2,104
Accounts payable.......................................... 7,812 4,383
Accrued expenses.......................................... 12,138 12,936
Deferred income taxes..................................... 1,456 1,456
-------- --------
Total current liabilities......................... 23,460 20,879
Long term debt, excl. current installments.................. 50,135 42,597
Deferred income taxes....................................... 801 801
Other liabilities........................................... 805 695
-------- --------
Total liabilities................................. 75,201 64,972
-------- --------
Stockholders' equity:
Common stock, $.10 par value.............................. 760 760
Additional paid-in capital................................ 25,340 25,344
Retained earnings......................................... 11,905 15,878
Accumulated other comprehensive income.................... (492) (375)
-------- --------
37,513 41,607
Treasury stock............................................ (238) (288)
-------- --------
Total stockholders' equity........................ 37,275 41,319
-------- --------
$112,476 $106,291
======== ========
</TABLE>
See accompanying notes.
F-41
<PAGE> 159
TOASTMASTER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
------- -------
<S> <C> <C>
Net sales................................................... $92,923 $98,281
Cost of sales............................................... 80,094 80,539
------- -------
Gross profit.............................................. 12,829 17,742
Selling, general and administrative expenses................ 15,430 16,101
------- -------
Operating income (loss)................................... (2,601) 1,640
Other income -- Interest.................................... 0 343
Other expense -- Interest................................... 2,821 2,775
------- -------
Income (Loss) before income taxes......................... (5,422) (791)
Income tax expense (benefit)................................ (1,905) (348)
------- -------
Net income (loss)...................................... $(3,517) $ (443)
======= =======
Basic earnings (loss) per common share...................... $ (0.47) $ (0.06)
Diluted earnings (loss) per common share.................... $ (0.46) $ (0.06)
Weighted average shares used in computation:
Basic earnings per common share........................... 7,547 7,538
Diluted earnings per common share......................... 7,588 7,542
</TABLE>
See accompanying notes.
F-42
<PAGE> 160
TOASTMASTER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (3,517) $ (443)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization............................. 2,911 2,814
Loss on sale of property, plant and equipment............. (26) 0
Restructuring charge...................................... 0 123
Accounts receivable....................................... 7,493 2,554
Inventories............................................... (14,284) (7,750)
Prepaid expenses & other current assets..................... (68) (1,311)
Other assets................................................ 15 (166)
Accounts payable............................................ 2,429 4,972
Accrued liabilities......................................... (688) (1,000)
Income taxes................................................ (1,575) (348)
2,605 (120)
--------- ---------
Net cash flows used in operating activities............ (6,122) (563)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.................. (1,349) (3,423)
Proceeds from sale of property, plant and equipment......... 688 0
--------- ---------
Net cash flows used in investing activities............ (661) (3,423)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit agreement.................... 111,128 106,005
Repayments of revolving credit agreement.................... (102,044) (99,946)
Stock options exercised..................................... 43 0
Dividends paid.............................................. (453) (453)
Repayment of long-term debt................................. (1,596) (1,608)
--------- ---------
Net cash flows provided by financing activities........ (7,078) (3,778)
--------- ---------
Foreign currency translation adjustment..................... (117) (3)
Net increase (decrease) in cash........................ (178) (15)
Cash at beginning of period................................. 178 97
--------- ---------
Cash at end of period....................................... $ 356 $ 112
========= =========
Cash paid during the period for:
Interest............................................... $ 2,736 $ 2,699
Income taxes........................................... $ 0 $ 0
</TABLE>
See accompanying notes.
F-43
<PAGE> 161
TOASTMASTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying financial statements as of September 30, 1998 and
September 30, 1997 and for the nine months then ended are unaudited. The balance
sheet as of December 31, 1997 has been derived from the audited balance sheet as
of that date. The 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 the financial position and
operating results for the interim periods. These financial statements should be
read in conjunction with the consolidated financial statements for the year
ended December 31, 1997 and notes thereto contained in the Company's Annual
Report to Shareholders incorporated by reference in the Annual Report on Form
10-K for the year ended December 31, 1997. The results of operations for the
interim periods shown are not necessarily indicative of the results for the
entire fiscal year ending December 31, 1998.
2. The loan and security agreement between the Company and Fleet Capital
Corporation, as described in note 3 in the Notes to Consolidated Financial
Statements contained in the Company's Annual Report to Shareholders, was amended
as of March 11, 1998. The amendment reduced by .5% the interest rate under the
London Interbank Offering Rate (LIBOR) option for borrowings under the revolving
credit and term loan provisions of the agreement. The Company was not in
compliance with Sec. 9.3(C), Quarterly Pre-Tax Earnings, for the nine months
ended September 30, 1998. A waiver has been obtained for this non-compliance as
of September 30, 1998.
3. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The adjustments
that were previously made through stockholders' equity for the minimum pension
liability and foreign currency adjustments will now be disclosed as other
comprehensive income. For the nine months ended September 30, 1998, other
comprehensive loss was $117 thousand and the total comprehensive loss was $3,634
million. For the nine months ended September 30, 1997, other comprehensive loss
was $3 thousand and the total comprehensive loss was $440 thousand.
F-44
<PAGE> 162
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$125,000,000
EXCHANGE OFFER
SALTON, INC.
[SALTON LOGO]
10 3/4% SENIOR SUBORDINATED
NOTES DUE 2005
PROSPECTUS
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 163
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by or
in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any action or proceeding, had no reasonable
cause to believe his conduct was unlawful. Section 145 further provides that a
corporation similarly may indemnify any such person serving in any such capacity
who was or is a party or is threatened to be made a part to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor, against expenses actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Registrant's Restated Certificate of Incorporation (the "Certificate")
provides that the Company's directors shall not be liable to the Registrant or
its stockholders for monetary damages for breach of fiduciary duty as a director
except to the extent that exculpation from liabilities is not permitted under
the DGCL as in effect at the time such liability is determined. The Registrant's
Certificate further provides that the Registrant shall indemnify its directors
and officers to the fullest extent permitted by the DGCL.
II-1
<PAGE> 164
The directors and officers of the Company are covered under directors' and
officers' liability insurance policies maintained by the Company.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith or to be filed by amendment:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Purchase Agreement dated December 16, 1998 by and among the
Registrant, Home Creations Direct Ltd. and Lehman Brothers
Inc.*
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 Registrant'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).
4.2 Form of Note for the Registrant's 10 3/4% Senior
Subordinated Notes (included in Exhibit 4.3).
4.3 Indenture dated December 16, 1998 between Norwest Bank
National Association, as Issuer, and the Registrant relating
to the Registrant's 10 3/4% Senior Subordinated Notes.*
5.1 Opinion of Sonnenschein Nath & Rosenthal.**
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.
</TABLE>
II-2
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.6 Salton/Maxim Housewares, Inc. Non-Employee Directors Stock
Option Plan. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 30, 1995.
10.7 Asset Purchase Agreement dated July 1, 1996 by and among the
Registrant, Block China Corporation and Robert C. Block
Incorporated by reference from the Company's Current Report
on Form 8-K dated July 1, 1996.
10.8 License Agreement dated as of February 1, 1996 by and
between White Consolidated Industries Inc. and the
Registrant. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q/A for the fiscal quarter ended
December 28, 1996.
10.9 License Agreement dated as of May 21, 1996 by and between
White Consolidated Industries Inc. and the Registrant.
Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q/A for the fiscal quarter ended December
28, 1996.
10.10 Purchase, Distribution and Marketing Agreement dated as of
January 27, 1997 between the Registrant and Kmart
Corporation. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q/A for the fiscal quarter ended
December 28, 1996.
10.11 Employment Agreement dated as of December 19, 1997 between
the Registrant and Leonhard Dreimann. Incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 27, 1998.
10.12 Employment Agreement dated as of December 19, 1997 between
the Registrant and David C. Sabin. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 27, 1998.
10.13 Employment Agreement dated as of December 19, 1997 between
the Registrant and William B. Rue. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 27, 1998.
10.14 Stock Agreement, dated as of May 6, 1998, by and between the
Registrant, Windmere-Durable Holdings, Inc. and the Salton
Executive Related Parties (as defined therein). Incorporated
by reference to the Registrant's Current Report on Form 8-K
dated May 6, 1998.
10.15 Note, dated July 27, 1998, issued by the Registrant to
Windmere-Durable Holdings, Inc. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.16 Agreement dated July 27, 1998, between the Registrant to
Windmere-Durable Holdings, Inc. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.17 Credit Agreement dated July 27, 1998 among the Registrant,
the several lenders from time to time parties thereto,
Lehman Brothers Inc., as arranger, Lehman Commercial Paper
Inc., as syndication agent, and Lehman Commercial Paper
Inc., as administrative agent. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.18 Stock Purchase Agreement dated July 15, 1998 by and among
the Registrant and Centre Capital Investors III, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., Centre Capital
Offshore Investors, L.P., The State Board of Administration
of Florida, Centre Parallel Management Partners, L.P. and
Centre Partners Coinvestment, L.P. Incorporated by reference
to the Registrant's Current Report on Form 8-K dated July
15, 1998.
10.19 Registration Rights Agreement dated July 15, 1998 by and
among the Registrant and Centre Capital Investors II, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., Centre Capital
Offshore Investors II, L.P., The State Board of
Administration of Florida, Centre Parallel Management
Partners, L.P. and Centre Partners Coinvestment, L.P.
Incorporated by reference to the Registrant's Current Report
on Form 8-K dated July 28, 1998.
21.1 Subsidiaries of the Company. Incorporated by reference to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 27, 1998.
</TABLE>
II-3
<PAGE> 166
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
23.1 Consent of Independent Accountants -- Deloitte & Touche
LLP.**
23.2 Consent of Sonnenschein Nath & Rosenthal (included in
Exhibit 5.1).**
23.3 Consent of Independent Accountants -- KPMG LLP.**
24.1 Power of Attorney (included on page II-5).
25.1 Statement of Eligibility of Norwest Bank Minnesota, National
Association.*
99.1 Form of Letter of Transmittal**
</TABLE>
- -------------------------
* Previously filed as an Exhibit to this Registration Statement.
** Filed herewith.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant, pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by any such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether or not
such indemnification is against public policy as expressed in the Securities Act
of 1933 and will be governed by the final adjudication to such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago and
the State of Illinois, on the 1st day of February, 1999.
SALTON, INC.
By: /s/ LEONHARD DREIMANN
--------------------------------------
Leonhard Dreimann
Chief Executive
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities indicated on the 1st day of February, 1999.
<TABLE>
<CAPTION>
SIGNATURE
---------
<C> <S>
* Chief Executive Officer and Director
- --------------------------------------------- (Principal Executive Officer)
Leonhard Dreimann
* President, Chief Operating Officer, Treasurer
- --------------------------------------------- and Chief Financial Officer (Principal
William B. Rue Accounting and Financial Officer)
* Director
- ---------------------------------------------
David C. Sabin
* Director
- ---------------------------------------------
Frank Devine
* Director
- ---------------------------------------------
Bert Doornmalen
Director
- ---------------------------------------------
Robert A. Bergmann
Director
- ---------------------------------------------
Bruce G. Pollack
By: /s/ WILLIAM B. RUE
- ---------------------------------------------
William B. Rue
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 168
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Purchase Agreement dated December 16, 1998 by and among the
Registrant, Home Creations direct Ltd. and Lehman Brothers
Inc.*
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 Registrant'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).
4.2 Form of Note for the Registrant's 10 3/4% Senior
Subordinated Notes (included in Exhibit 4.3).
4.3 Indenture dated December 16, 1998 between Norwest Bank
National Association, as Issuer, and the Registrant relating
to the Registrant's 10 3/4% Senior Subordinated Notes.*
5.1 Opinion of Sonnenschein Nath & Rosenthal.**
10.1 Salton/Maxim Housewares, Inc. Stock Option Plan.
Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-42097).
10.2 Stockholders Agreement, dated August 6, 1991, by and among
the Registrant, Braddock Financial Corporation, Financo
Investors Fund, L.P., and Mesirow Private Equity, Inc.
(successor to Mesirow Venture Capital, Inc.) as the
authorized representative of Mesirow Capital Partners III,
Mesirow Capital Partners IV, Mesirow Capital Partners V and
Allied Investment Corporation. Incorporated by reference to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-42097).
10.3 Form of Sales Representative Agreement generally used by and
between the Registrant and its sales representatives.
Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-42097).
10.4 Stock Registration Rights Agreement, dated as of August 6,
1991, by and between the Registrant, Braddock Financial
Corporation, Financo Investors Fund, L.P., Mesirow Capital
Partners II, Mesirow Capital Partners IV, Mesirow Capital
Partners V and Allied Investment Corporation. Incorporated
by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-42097).
10.5 Salton/Maxim Housewares, Inc. 1995 Employee Stock Option
Plan. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 30, 1995.
10.6 Salton/Maxim Housewares, Inc. Non-Employee Directors Stock
Option Plan. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 30, 1995.
10.7 Asset Purchase Agreement dated July 1, 1996 by and among the
Registrant, Block China Corporation and Robert C. Block
Incorporated by reference from the Company's Current Report
on Form 8-K dated July 1, 1996.
10.8 License Agreement dated as of February 1, 1996 by and
between White Consolidated Industries Inc. and the
Registrant. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q/A for the fiscal quarter ended
December 28, 1996.
</TABLE>
II-6
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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. Incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 27, 1998.
10.12 Employment Agreement dated as of December 19, 1997 between
the Registrant and David C. Sabin. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 27, 1998.
10.13 Employment Agreement dated as of December 19, 1997 between
the Registrant and William B. Rue. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 27, 1998
10.14 Stock Agreement, dated as of May 6, 1998, by and between the
Registrant, Windmere-Durable Holdings, Inc. and the Salton
Executive Related Parties (as defined therein). Incorporated
by reference to the Registrant's Current Report on Form 8-K
dated May 6, 1998.
10.15 Note, dated July 27, 1998, issued by the Registrant to
Windmere-Durable Holdings, Inc. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.16 Agreement dated July 27, 1998, between the Registrant to
Windmere-Durable Holdings, Inc. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.17 Credit Agreement dated July 27, 1998 among the Registrant,
the several lenders from time to time parties thereto,
Lehman Brothers Inc., as arranger, Lehman Commercial Paper
Inc., as syndication agent, and Lehman Commercial Paper
Inc., as administrative agent. Incorporated by reference to
the Registrant's Current Report on Form 8-K dated July 28,
1998.
10.18 Stock Purchase Agreement dated July 15, 1998 by and among
the Registrant and Centre Capital Investors III, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., Centre Capital
Offshore Investors, L.P., The State Board of Administration
of Florida, Centre Parallel Management Partners, L.P. and
Centre Partners Coinvestment, L.P. Incorporated by reference
to the Registrant's Current Report on Form 8-K dated July
15, 1998.
10.19 Registration Rights Agreement dated July 15, 1998 by and
among the Registrant and Centre Capital Investors II, L.P.,
Centre Capital Tax-Exempt Investors II, L.P., Centre Capital
Offshore Investors II, L.P., The State Board of
Administration of Florida, Centre Parallel Management
Partners, L.P. and Centre Partners Coinvestment, L.P.
Incorporated by reference to the Registrant's Current Report
on Form 8-K dated July 28, 1998.
21.1 Subsidiaries of the Company. Incorporated by reference to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 27, 1998.
23.1 Consent of Independent Accountants -- Deloitte & Touche
LLP.**
23.2 Consent of Sonnenschein Nath & Rosenthal (included in
Exhibit 5.1).**
23.3 Consent of Independent Accountants -- KPMG LLP.**
24.1 Power of Attorney (included on page II-5).
25.1 Statement of Eligibility of Norwest Bank Minnesota, National
Association.*
99.1 Form of Letter of Transmittal**
</TABLE>
- -------------------------
* Previously filed as an Exhibit to this Registration Statement.
** Filed herewith.
II-7
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement of Salton, Inc. (formerly, Salton-Maxim Housewares, Inc.,
the "Company") No. 333-70169 of our report dated September 3, 1998, appearing in
the Annual Report on Form 10-K of the Company for the year ended June 27, 1998,
and to the use of our report dated September 3, 1998 appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Prospectus, which is part of
this Registration Statement.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 1, 1999
<PAGE> 1
Exhibit 23.2
[LETTERHEAD OF SONNENSCHEIN NATH & ROSENTHAL]
February 1, 1999
Salton, Inc.
550 Business Center Drive
Mount Prospect, Illinois 60056
Ladies and Gentlemen:
We have acted as counsel to Salton, Inc., a Delaware corporation (the
"Company"), in connection with the preparation and filing by the Company with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Securities Act"), of a Registration Statement on
Form S-4 (Registration No. 333-70169), as it may be amended (the "Registration
Statement") including the prospectus included therein at the time the
Registration Statement is declared effective (the "Prospectus"), relating to the
exchange offer (the "Exchange Offer") by the Company of the Company's 10 3/4%
Senior Subordinated Notes due 2005 (the "New Notes") for the Company's 10 3/4%
Senior Subordinated Notes due 2005 (the "Old Notes"), originally issued by the
Company pursuant to Rule 144A under the Securities Act. The Old Notes were, and
the New Notes are to be, issued pursuant to the terms of an Indenture (the
"Indenture") between the Company and Norwest Bank Minnesota, National
Association, as trustee (the "Trustee"). The form of the Indenture is filed as
an exhibit to the Registration Statement.
In this capacity, we have examined the Registration Statement, the form of
the Indenture and the originals, or copies, identified to our satisfaction, of
such corporate records of the Company and its subsidiaries and other persons,
and such other documents, agreements and instruments, as we have deemed
necessary as a basis for the opinions hereinafter expressed. In our
examinations, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
originals of all documents submitted to us as copies thereof. In rendering the
opinions expressed below, we have relied as to certain factual matters upon
certificates of officers of the Company and certificates of public officials.
For purposes of this opinion, we have assumed that the Indenture will be
valid and binding on the Trustee and enforceable against the Trustee in
accordance with its terms.
Our opinions set forth below are limited to the laws of the State of
Illinois, the federal laws of the United States of America and the General
Corporation Law of the State of Delaware, and we do not express any opinions
herein concerning any other laws.
<PAGE> 2
Based upon and subject to the foregoing, we are of the opinion that:
When the New Notes have been duly executed by the Company and
authenticated by the Trustee as provided in the Indenture, and
delivered in exchange for the Old Notes as described in the
Registration Statement, the New Notes will be duly issued and
delivered by the Company and will constitute valid and binding
obligations of the Company entitled to the benefits of the Indenture
and will be enforceable against the Company in accordance with their
terms, except as enforcement thereof may be limited by bankruptcy,
insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws
affecting enforcement of creditors' rights generally and except as
enforcement thereof is subject to general principles of equity
(regardless of whether enforcement is considered in a proceeding in
equity or at law).
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name therein and in the related
prospectus under the captions "The Exchange Offer -- Federal Income Tax
Consequences" and "Legal Matters".
Very truly yours,
/s/ Sonnenschein Nath & Rosenthal
<PAGE> 1
EXHIBIT 23.3
[KPMG LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated February 25, 1998 with respect
to the consolidated balance sheets of Toastmaster Inc. as of December 31, 1997
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. We consent to the reference of our firm under the caption Experts in
Amendment No. 1 to the Form S-4 Registration Statement of Salton, Inc. and
related Prospectus.
/s/ KPMG LLP
KPMG LLP
February 1, 1999
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
10 3/4% SENIOR SUBORDINATED NOTES DUE 2005
OF
SALTON, INC.
PURSUANT TO THE PROSPECTUS DATED , 1999
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1999 (THE "EXPIRATION DATE"), UNLESS THE EXCHANGE
OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION, IN WHICH CASE THE TERM
"EXPIRATION DATE" SHALL MEAN THE LATEST DATE AND TIME TO WHICH THE EXCHANGE
OFFER IS EXTENDED. TENDERS MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE.
The Exchange Agent is:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
<TABLE>
<CAPTION>
By Hand: By Registered or Certified Mail: By Overnight Courier:
-------- -------------------------------- ---------------------
<S> <C> <C>
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Northstar East Building Corporate Trust Operations Corporate Trust Services
608 Second Avenue South P.O. Box 1517 Sixth and Marquette Avenue
12th Floor Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
Corporate Trust Services
Minneapolis, MN
By Facsimile:
- ----------------------------------------------------------------------------------------------------
(612) 667-4927
Confirm by Telephone:
(612) 667-9764
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS SET FORTH IN THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned acknowledges receipt of the Prospectus dated
, 1999 (the "Prospectus"), of Salton, Inc., a Delaware
corporation (the "Company"), and this Letter of Transmittal (the "Letter of
Transmittal"), which together with the Prospectus constitutes the Company's
offer (the "Exchange Offer") to exchange $1,000 principal amount of its 10 3/4%
Senior Subordinated Notes due 2005 (the "Exchange Notes") for each $1,000
principal amount of its outstanding 10 3/4 Senior Subordinated Notes due 2005
(the "Private Notes"). Recipients of the Prospectus should read the requirements
described in such Prospectus with respect to eligibility to participate in the
Exchange Offer. Capitalized terms used but not defined herein have the meaning
given to them in the Prospectus.
The undersigned hereby tenders the Private Notes described in the box
entitled "Description of Private Notes" below pursuant to the terms and
conditions described in the Prospectus and this Letter of Transmittal. The
undersigned is the registered owner of all the Private Notes and the undersigned
represents that it has received from each beneficial owner of Private Notes
("Beneficial Owners") a duly completed and executed form of "Instruction to
Registered Holder from Beneficial Owner" accompanying this Letter of
Transmittal, instructing the undersigned to take the action described in this
Letter of Transmittal.
<PAGE> 2
This Letter of Transmittal is to be used by a holder of Private Notes (i)
if certificates representing Private Notes are to be forwarded herewith, (ii) if
delivery of Private Notes is to be made by book-entry transfer to the Exchange
Agent's account at The Depository Trust Company ("DTC"), pursuant to the
procedures set forth in the section of the Prospectus entitled "The Exchange
Offer -- Procedure for Tendering," or (iii) if a tender is made pursuant to the
guaranteed delivery procedures in the section of the Prospectus entitled "The
Exchange Offer -- Guaranteed Delivery Procedure."
The undersigned hereby represents and warrants that the information
received from the beneficial owners is accurately reflected in the boxes
entitled "Beneficial Owner(s) -- Purchaser Status" and "Beneficial Owner(s) --
Residence."
Any beneficial owner whose Private Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder of Private Notes promptly and
instruct such registered holder of Private Notes to tender on behalf of the
beneficial owner. If such beneficial owner wishes to tender on its own behalf,
such beneficial owner must, prior to completing and executing this Letter of
Transmittal and delivering its Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such beneficial
owner's name or obtain a properly completed bond power from the registered
holder of Private Notes. The transfer of record ownership may take considerable
time.
In order to properly complete this Letter of Transmittal, a holder of
Private Notes must (i) complete the box entitled "Description of Private Notes,"
(ii) complete the boxes entitled "Beneficial Owner(s) -- Purchaser Status" and
"Beneficial Owner(s) -- Residence," (iii) if appropriate, check and complete the
boxes relating to book-entry transfer, guaranteed delivery, Special Issuance
Instructions and Special Delivery Instructions, (iv) sign the Letter of
Transmittal by completing the box entitled "Sign Here" and (v) complete the
Substitute Form W-9. Each holder of Private Notes should carefully read the
detailed instructions below prior to completing the Letter of Transmittal.
Holders of Private Notes who desire to tender their Private Notes for
exchange and (i) whose Private Notes are not immediately available or (ii) who
cannot deliver their Private Notes, this Letter of Transmittal and all other
documents required hereby to the Exchange Agent on or prior to the Expiration
Date, must tender the Private Notes pursuant to the guaranteed delivery
procedures set forth in the section of the Prospectus entitled "The Exchange
Offer -- Guaranteed Delivery Procedure." See Instruction 2.
2
<PAGE> 3
Holders of Private Notes who wish to tender their Private Notes for
exchange must complete columns (1) through (3) in the box below entitled
"Description of Private Notes," complete the boxes entitled and sign the box
below entitled "Sign Here." If only those columns are completed, such holder of
Private Notes will have tendered for exchange all Private Notes listed in column
(3) below. If the holder of Private Notes wishes to tender for exchange less
than all of such Private Notes, column (4) must be completed in full. In such
case, such holder of Private Notes should refer to Instruction 5.
<TABLE>
<S> <C> <C> <C>
DESCRIPTION OF PRIVATE NOTES
(4)
(3) PRINCIPAL AMOUNT
(1) (2) AGGREGATE TENDERED FOR
NAME(S) AND ADDRESSE(ES) OF REGISTERED HOLDER(S) OF PRIVATE NOTE PRINCIPAL EXCHANGE
PRIVATE NOTE(S), EXACTLY AS NAME(S) APPEAR(S) ON NUMBER(S) AMOUNT (MUST BE IN
PRIVATE NOTE CERTIFICATE(S) (ATTACHED SIGNED REPRESENTED BY INTEGRAL MULTIPLES
(PLEASE FILL IN, IN BLANK) LIST IF NECESSARY) CERTIFICATE(S)(A) OF $1,000)(B)
TOTAL PRINCIPAL
AMOUNT OF NOTES
TENDERED
A. Unless indicated in the column "Principal Amount Tendered For Exchange," any tendering Holder of 10 3/4% Senior
Subordinated Notes due 2005 will be deemed to have tendered the entire aggregate principal amount represented by
the column labelled "Aggregate Principal Amount Represented by Certificate(s)."
B. The minimum permitted tender is $1,000 in principal amount of 10 3/4% Senior Subordinated Notes due 2005. All
other tenders must be integral multiples of $1,000.
</TABLE>
[ ] CHECK HERE IF TENDERED PRIVATE NOTES ARE ENCLOSED HEREWITH.
[ ]CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER
DEFINED) ONLY):
Name of Tendering Institution:
- -------------------------------------------------------------------------------
Account Number:
- --------------------------------------------------------------------------------
Transaction Code Number:
- --------------------------------------------------------------------------------
[ ]CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING (FOR USE
BY ELIGIBLE INSTITUTIONS ONLY):
Name of Registered Holder of Private Note(s):
- -------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
- --------------------------------------------------------
Window Ticket Number (if available):
- -----------------------------------------------------------------------
Name of Institution which Guaranteed Delivery:
- -------------------------------------------------------------
Account Number (if delivered by book-entry transfer):
- ------------------------------------------------------
3
<PAGE> 4
[ ]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6, 7 AND 8)
To be completed ONLY (i) if the Exchange Notes issued in exchange for
Private Notes, certificates for Private Notes in a principal amount not
exchanged for Exchange Notes, or Private Notes (if any) not tendered for
exchange, are to be issued in the name of someone other than the undersigned or
(ii) if Private Notes tendered by book-entry transfer which are not exchanged
are to be returned by credit to an account maintained at DTC.
Issue to:
Name
- -------------------------------------------------
(Please Type or Print)
Address
- -------------------------------------------------
- -------------------------------------------------
- -------------------------------------------------
(Include Zip Code)
- -------------------------------------------------
(Tax Identification or Social Security No.)
Credit Private Notes not exchanged and delivered by book-entry transfer to
DTC account set forth below:
(Account Number)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6, 7 AND 8)
To be completed ONLY if the Exchange Notes issued in exchange for Private
Notes, certificates for Private Notes in a principal amount not exchanged for
Exchange Notes, or Private Notes (if any) not tendered for exchange, are to be
mailed or delivered (i) to someone other than the undersigned or (ii) to the
undersigned at an address other than the address shown below the undersigned's
signature.
Mail or deliver to:
Name
- -------------------------------------------------
(Please Type or Print)
Address
- -------------------------------------------------
- -------------------------------------------------
- -------------------------------------------------
(Include Zip Code)
- -------------------------------------------------
(Tax Identification or Social Security No.)
4
<PAGE> 5
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
BENEFICIAL OWNER(S) RESIDENCE
<S> <C>
- --------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OF PRIVATE NOTES
HELD FOR ACCOUNT OF BENEFICIAL OWNER(S)
STATE OF DOMICILE/PRINCIPAL PLACE OF BUSINESS
OF EACH BENEFICIAL OWNER OF PRIVATE NOTES
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
BENEFICIAL OWNER(S) -- PURCHASER STATUS
- --------------------------------------------------------------------------------------------
</TABLE>
The beneficial owner of each of the Private Notes described herein is
(check the box that applies):
[ ] A "Qualified Institutional Buyer" (as defined in Rule 144A under the
Securities Act)
[ ] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act)
[ ] A non "U.S. person" (as defined in Regulation S of the Securities Act)
that purchased the Private Notes outside the United States in
accordance with Rule 904 of the Securities Act
[ ] Other (describe)
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Pursuant to the offer by Salton, Inc., a Delaware corporation (the
"Company"), upon the terms and subject to the conditions set forth in the
Prospectus dated , 1999 (the "Prospectus") and this Letter of
Transmittal (the "Letter of Transmittal"), which together with the Prospectus
constitutes the Company's offer (the "Exchange Offer") to exchange $1,000
principal amount of its 10 3/4% Senior Subordinated Notes due 2005 (the
"Exchange Notes") for each $1,000 principal amount of its outstanding 10 3/4%
Senior Subordinated Notes due 2005 (the "Private Notes"), the undersigned hereby
tenders to the Company for exchange the Private Notes indicated above.
By executing this Letter of Transmittal and subject to and effective upon
acceptance for exchange of the Private Notes tendered for exchange herewith, the
undersigned will have irrevocably sold, assigned, transferred and exchanged, to
the Company, all right, title and interest in, to and under all of the Private
Notes tendered for exchange hereby, and hereby will have appointed the Exchange
Agent as the true and lawful agent and attorney-in-fact (with full knowledge
that the Exchange Agent also acts as agent of the Company) of such holder of
Private Notes with respect to such Private Notes, with full power of
substitution to (i) deliver certificates representing such Private Notes, or
transfer ownership of such Private Notes on the account books maintained by DTC
(together, in any such case, with all accompanying evidences of transfer
5
<PAGE> 6
and authenticity), to the Company, (ii) present and deliver such Private Notes
for transfer on the books of the Company and (iii) receive all benefits and
otherwise exercise all rights and incidents of beneficial ownership with respect
to such Private Notes, all in accordance with the terms of the Exchange Offer.
The power of attorney granted in this paragraph shall be deemed to be
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that (i) the undersigned is
the owner; (ii) has a net long position within the meaning of Rule 14e-4 under
the Securities Exchange Act as amended ("Rule 14e-4") equal to or greater than
the principal amount of Private Notes tendered hereby; (iii) the tender of such
Private Notes complies with Rule 14e-4 (to the extent that Rule 14e-4 is
applicable to such exchange); (iv) the undersigned has full power and authority
to tender, exchange, assign and transfer the Private Notes and (v) that when
such Private Notes are accepted for exchange by the Company, the Company will
acquire good and marketable title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claims.
The undersigned will, upon receipt, execute and deliver any additional documents
deemed by the Exchange Agent or the Company to be necessary or desirable to
complete the exchange, assignment and transfer of the Private Notes tendered for
exchange hereby.
By tendering, the undersigned hereby further represents to the Company that
(i) the Exchange Notes to be acquired by the undersigned in exchange for the
Private Notes tendered hereby and any beneficial owner(s) of such Private Notes
in connection with the Exchange Offer will be acquired by the undersigned and
such beneficial owner(s) in the ordinary course of business of the undersigned,
(ii) the undersigned is not engaged in, and does not intend to engage in, and
has no arrangement or understanding with any person to participate in, a
distribution of the Exchange Notes, (iii) the undersigned and each beneficial
owner acknowledge and agree that any person who is a broker-dealer registered
under the Exchange Act or is participating in the Exchange Offer for the purpose
of distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes acquired by such person and
cannot rely on the position of the staff of the Commission set forth in certain
no-action letters, (iv) the undersigned and each beneficial owner understand
that a secondary resale transaction described in clause (iii) above and any
resales of Exchange Notes obtained by the undersigned in exchange for the
Private Notes acquired by the undersigned directly from the Company should be
covered by an effective registration statement containing the selling
securityholder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) neither the undersigned nor any
beneficial owner is an "affiliate," as defined under Rule 405 under the
Securities Act, of the Company. If the undersigned is not a broker-dealer, the
undersigned represents that it is not engaged in, and does not intent to engage
in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that
will receive Exchange Notes for its own account in exchange for Private Notes,
it represents that the Private Notes to be exchanged for the Exchange Notes were
acquired by it as a result of market-making activities or other trading
activities and acknowledges that it will deliver a prospectus in connection with
any resale of such Exchange Notes; however, by so acknowledging and by
delivering a prospectus, the undersigned will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For purposes of the Exchange Offer, the Company will be deemed to have
accepted for exchange, and to have exchanged, validly tendered Private Notes,
if, as and when the Company gives oral or written notice thereof to the Exchange
Agent. Tenders of Private Notes for exchange may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders" in the Prospectus. Any Private Notes tendered by
the undersigned and not accepted for exchange will be returned to the
undersigned at the address set forth above unless otherwise indicated in the box
above entitled "Special Delivery Instructions" as promptly as practicable after
the Expiration Date.
The undersigned acknowledges that the Company's acceptance of Private Notes
validly tendered for exchange pursuant to any one of the procedures described in
the section of the Prospectus entitled "The Exchange Offer" and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
Unless otherwise indicated in the box entitled "Special Issuance
Instructions," please return any Private Notes not tendered for exchange in the
name(s) of the undersigned. Similarly, unless otherwise indicated in
6
<PAGE> 7
the box entitled "Special Delivery Instructions," please mail any certificates
for Private Notes not tendered or exchanged (and accompanying documents, as
appropriate) to the undersigned at the address shown below the undersigned's
signature(s). In the event that both "Special Issuance Instructions" and
"Special Delivery Instructions" are completed, please issue the certificates
representing the Exchange Notes issued in exchange for the Private Notes
accepted for exchange in the name(s) of, and return any Private Notes not
tendered for exchange or not exchanged to, the person(s) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" and "Special Delivery Instructions" to transfer
any Private Notes from the name of the holder of Private Note(s) thereof if the
Company does not accept for exchange any of the Private Notes so tendered for
exchange or if such transfer would not be in compliance with any transfer
restrictions applicable to such Private Note(s).
IN ORDER TO VALIDLY TENDER PRIVATE NOTES FOR EXCHANGE, HOLDERS OF PRIVATE
NOTES MUST COMPLETE, EXECUTE, AND DELIVER THIS LETTER OF TRANSMITTAL.
7
<PAGE> 8
Except as stated in the Prospectus, all authority herein conferred or
agreed to be conferred shall survive the death, incapacity, or dissolution of
the undersigned, and any obligation of the undersigned hereunder shall be
binding upon the heirs, personal representatives, successors and assigns of the
undersigned. Except as otherwise stated in the Prospectus, this tender for
exchange of Private Notes is irrevocable.
SIGN HERE
--------------------------------------------------------------------------
Signature(s) of Owner(s)
Dated:
---------------------, 1999
(MUST BE SIGNED BY THE REGISTERED HOLDER(S) OF PRIVATE NOTES EXACTLY AS
NAME(S) APPEAR(S) ON CERTIFICATE(S) REPRESENTING THE PRIVATE NOTES OR ON A
SECURITY POSITION LISTING OR BY PERSON(S) AUTHORIZED TO BECOME REGISTERED
PRIVATE NOTE HOLDER(S) BY CERTIFICATES AND DOCUMENTS TRANSMITTED HEREWITH.
IF SIGNATURE IS BY TRUSTEES, EXECUTORS, ADMINISTRATORS, GUARDIANS,
ATTORNEYS-IN-FACT, OFFICERS OF CORPORATIONS OR OTHERS ACTING IN A
FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE PROVIDE THE FOLLOWING
INFORMATION. (SEE INSTRUCTION 6).
Name(s):
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(Please Print)
Capacity (Full Title):
--------------------------------------------------------------------------
Address:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(Include Zip Code)
Principal place of business (if different from address listed above):
------------------------------------------
--------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone No.:
- --------------------------------------------------------------------------------
Tax Identification or Social Security No.:
---------------------------------------------------------------------
--------------------------------------------------------------------------
Please complete Substitute Form W-9
GUARANTEE OF SIGNATURE(S)
(SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 1
Authorized Signature:
--------------------------------------------------------------------------
Dated:
---------------------, 1999
Name and Title:
--------------------------------------------------------------------------
(Please Print)
Name and Title:
--------------------------------------------------------------------------
8
<PAGE> 9
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by an institution
which is (1) a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., (2) a commercial bank or
trust company having an office or correspondent in the United States, or (3) an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Securities Exchange Act of 1934 which is a member of one of the following
recognized Signature Guarantee Programs (an "Eligible Institution"):
a. The Securities Transfer Agents Medallion Program (STAMP)
b. The New York Stock Exchange Medallion Signature Program (MSP)
c. The Stock Exchange Medallion Program (SEMP)
Signatures on this Letter of Transmittal need not be guaranteed (i) if this
Letter of Transmittal is signed by the registered holder(s) of the Private Notes
entered herewith and such registered holder(s) have not completed the box
entitled "Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on this Letter of Transmittal or (ii) if such Private Notes are
tendered for the account of an Eligible Institution. IN ALL OTHER CASES, ALL
SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND PRIVATE NOTES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed by holders of
Private Notes (i) if certificates are to be forwarded herewith or (ii) if
tenders are to be made pursuant to the procedures for tender by book-entry
transfer or guaranteed delivery set forth in the section of the Prospectus
entitled "The Exchange Offer." Certificates for all physically tendered Private
Notes or any timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation"), as well as a properly completed and duly executed copy of this
Letter of Transmittal or facsimile hereof, and any other documents required by
this Letter of Transmittal, must be received by the Exchange Agent at its
address set forth on the cover of this Letter of Transmittal prior to 5:00 p.m.,
New York City time, on the Expiration Date. Holders of Private Notes who elect
to tender Private Notes and (i) whose Private Notes are not immediately
available or (ii) who cannot deliver the Private Notes, this Letter of
Transmittal or other required documents to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date, must tender their Private
Notes according to the guaranteed delivery procedures set forth in the
Prospectus. Holders may have such tender effected if: (a) such tender is made
through an Eligible Institution; (b) prior to 5:00 p.m., New York City time, on
the Expiration Date, the Exchange Agent has received from such Eligible
Institution a properly completed and duly executed Notice of Guaranteed
Delivery, setting forth the name and address of the holder of such Private
Notes, the certificate number(s) of such Private Notes and the principal amount
of Private Notes tendered for exchange, stating that tender is being made
thereby and guaranteeing that, within five New York Stock Exchange trading days
after the Expiration Date, this Letter of Transmittal (or facsimile hereof),
together with the certificate(s) representing such Private Notes (or a
Book-Entry Confirmation), in proper form for transfer, and any other documents
required by this Letter of Transmittal, will be deposited by such Eligible
Institution with the Exchange Agent; and (c) a properly executed Letter of
Transmittal (or a facsimile hereof), as well as the certificate(s) for all
tendered Private Notes in proper form for transfer or a Book- Entry
Confirmation, together with any other documents required by this Letter of
Transmittal, are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
THE METHOD OF DELIVERY OF PRIVATE NOTES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND
DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE
9
<PAGE> 10
EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NEITHER THIS LETTER OF TRANSMITTAL
NOR ANY PRIVATE NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders of Private Notes, by execution of this Letter of Transmittal
(or facsimile hereof, if applicable), waive any right to receive notice of the
acceptance of their Private Notes for exchange.
3. INADEQUATE SPACE. If the space provided in the box entitled "Description
of Private Notes" above is inadequate, the certificate numbers and principal
amounts of the Private Notes tendered should be listed on a separate signed
schedule affixed hereto.
4. WITHDRAWALS. A tender of Private Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date by delivery of
written or facsimile notice of withdrawal to the Exchange Agent at the address
set forth on the cover of this Letter of Transmittal. To be effective, a notice
of withdrawal of Private Notes must (i) specify the name of the person who
tendered the Private Notes to be withdrawn (the "Depositor"), (ii) identify the
Private Notes to be withdrawn (including the certificate number or numbers and
aggregate principal amount of such Private Notes), and (iii) be signed by the
holder of Private Notes in the same manner as the original signature on the
Letter of Transmittal by which such Private Notes were tendered (including any
required signature guarantees). All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, whose determination shall be final and
binding on all parties. Any Private Notes so withdrawn will therefore be deemed
not validly tendered for purposes of the Exchange Offer and no Exchange Notes
will be issued with respect thereto unless the Private Notes so withdrawn are
validly retendered. Properly withdrawn Private Notes may be retendered by
following one of the procedures described in the section of the Prospectus
entitled "The Exchange Offer -- Procedures for Tendering" at any time prior to
5:00 p.m., New York City time, on the Expiration Date.
5. PARTIAL TENDERS. Tenders of Private Notes will be accepted only in
integral multiples of $1,000 principal amount. If a tender for exchange is to be
made with respect to less than the entire principal amount of any Private Notes,
fill in the principal amount of Private Notes which are tendered for exchange in
column (4) of the box entitled "Description of Private Notes," as more fully
described in the footnotes thereto. In case of a partial tender for exchange, a
new certificate, in fully registered form, for the remainder of the principal
amount of the Private Notes, will be sent to the holders of Private Notes unless
otherwise indicated in the appropriate box on this Letter of Transmittal as
promptly as practicable after the expiration or termination of the Exchange
Offer.
6. SIGNATURES ON THIS LETTER OF TRANSMITTAL, ASSIGNMENT AND ENDORSEMENTS.
(a) The signature(s) of the holder of Private Notes on this Letter of
Transmittal must correspond with the name(s) as written on the face of the
Private Notes without alteration, enlargement or any change whatsoever.
(b) If tendered Private Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
(c) If any tendered Private Notes are registered in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal and any necessary or required
documents as there are different registrations or certificates.
(d) When this Letter of Transmittal is signed by the holder of the Private
Notes listed and transmitted hereby, no endorsements of Private Notes or bond
powers are required. If, however, Private Notes not tendered or not accepted,
are to be issued or returned in the name of a person other than the holder of
Private Notes, then the Private Notes transmitted hereby must be endorsed or
accompanied by a properly completed bond power, in a form satisfactory to the
Company, in either case signed exactly as the name(s) of the holder
10
<PAGE> 11
of Private Notes appear(s) on the Private Notes. Signatures on such Private
Notes or bond powers must be guaranteed by an Eligible Institution (unless
signed by an Eligible Institution).
(e) If this Letter of Transmittal or Private Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with this Letter of Transmittal.
(f) If this Letter of Transmittal is signed by a person other than the
registered holder of Private Notes listed, the Private Notes must be endorsed or
accompanied by a properly completed bond power, in either case signed by such
registered holder exactly as the name(s) of the registered holder of Private
Notes appear(s) on the certificates. Signatures on such Private Notes or bond
powers must be guaranteed by an Eligible Institution (unless signed by an
Eligible Institution).
7. TRANSFER TAXES. Except as set forth in this Instruction 7, the Company
will pay all transfer taxes, if any, applicable to the exchange of Private Notes
pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any
reason other than the exchange of the Private Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemptions therefrom is not
submitted with this Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
8. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If the Exchange Notes are to
be issued, or if any Private Notes not tendered for exchange are to be issued or
sent to someone other than the holder of Private Notes or to an address other
than that shown above, the appropriate boxes on this Letter of Transmittal
should be completed. Holders of Private Notes tendering Private Notes by
book-entry transfer may request that Private Notes not accepted be credited to
such account maintained at DTC as such holder of Private Notes may designate.
9. IRREGULARITIES. All questions as to the validity, form, eligibility
(including time of receipt), compliance with conditions, acceptance and
withdrawal of tendered Private Notes will be determined by the Company in its
sole discretion, which determination will be final and binding. The Company
reserves the absolute right to reject any and all Private Notes not properly
tendered or any Private Notes the Company's acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Private Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Private Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Private Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive,
amend or modify certain of the specified conditions as described under "The
Exchange Offer" in the Prospectus in the case of any Private Notes tendered
(except as otherwise provided in the Prospectus).
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<PAGE> 12
11. MUTILATED, LOST, STOLEN OR DESTROYED PRIVATE NOTES. Any tendering
Holder whose Private Notes have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address listed below for further instructions:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
CORPORATE TRUST OPERATIONS
P.O. BOX 1517
MINNEAPOLIS, MN 55480-1517
12. REQUESTS FOR INFORMATION OR ADDITIONAL COPIES. Requests for information
or for additional copies of the Prospectus and this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover of this Letter of Transmittal.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF, IF
APPLICABLE) TOGETHER WITH CERTIFICATES, OR CONFIRMATION OF BOOK-ENTRY OR THE
NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED
BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
IMPORTANT TAX INFORMATION
Under current federal income tax law, a holder of Private Notes whose
tendered Private Notes are accepted for exchange may be subject to backup
withholding unless the holder provides the Company (as payor), through the
Exchange Agent, with either (i) such holder's correct taxpayer identification
number ("TIN") on Substitute Form W-9 attached hereto, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder of Private Notes
is awaiting a TIN) and that (A) the holder of Private Notes has not been
notified by the Internal Revenue Service that he or she is subject to backup
withholding as a result of a failure to report all interest or dividends or (B)
the Internal Revenue Service has notified the holder of Private Notes that he or
she is no longer subject to backup withholding; or (ii) an adequate basis for
exemption from backup withholding. If such holder of Private Notes is an
individual, the TIN is such holder's social security number. If the Exchange
Agent is not provided with the correct taxpayer identification number, the
holder of Private Notes may be subject to certain penalties imposed by the
Internal Revenue Service.
Certain holders of Private Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Exempt holders of Private Notes should indicate their
exempt status on Substitute Form W-9. A foreign individual may qualify as an
exempt recipient by submitting to the Exchange Agent a properly completed
Internal Revenue Service Form W-8 (which the Exchange Agent will provide upon
request) signed under penalty of perjury, attesting to the holder's exempt
status. See the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 (the "Guidelines") for additional instructions.
If backup withholding applies, the Company is required to withhold 31% of
any payment made to the holder of Private Notes or other payee. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
The holder of Private Notes is required to give the Exchange Agent the TIN
(e.g., social security number or employer identification number) of the record
owner of the Private Notes. If the Private Notes are held in more than one name
or are not held in the name of the actual owner, consult the enclosed Guidelines
for additional guidance regarding which number to report.
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<PAGE> 13
INSTRUCTION TO REGISTERED HOLDER
FROM BENEFICIAL OWNER
OF 10 3/4% SENIOR SUBORDINATED NOTES DUE 2005 OF SALTON, INC.
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1999 (the "Prospectus") of Salton, Inc., a Delaware corporation
(the "Company"), and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Company's offer (the "Exchange
Offer"). Capitalized terms used but not defined herein have the meanings
ascribed to them in the Prospectus.
This will instruct you, the registered holder, as to the action to be taken
by you relating to the Exchange Offer with respect to the 10 3/4% Senior
Subordinated Notes due 2005 (the "Private Notes") held by you for the account of
the undersigned.
The aggregate face amount of the Private Notes held by you for the account
of the undersigned is (fill in amount):
$________________ of the Private Notes.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[ ] To TENDER the following Private Notes held by you for the account of
the undersigned (insert principal amount of Private Notes to be
tendered, if any):
$________________ of the Private Notes.
[ ] NOT to TENDER any Private Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Private Notes held by you
for the account of the undersigned, it is understood that you are authorized (a)
to make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representations and warranties contained in the
Letter of Transmittal that are to be made with respect to the undersigned as a
beneficial owner of the Private Notes, including but not limited to the
representations that (i) the undersigned's principal residence is in the state
of (fill in state) , (ii) the undersigned is acquiring the Exchange Notes in the
ordinary course of business of the undersigned, (iii) the undersigned has no
arrangement or understanding with any person to participate in the distribution
of the Exchange Notes, (iv) the undersigned acknowledges that any person who is
a broker-dealer registered under the Exchange Act or is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
of 1933, as amended, in connection with a secondary resale transaction of the
Exchange Notes acquired by such person and cannot rely on the position of the
Staff of the Securities and Exchange Commission set forth in certain no-action
letters (See the section of the Prospectus entitled "The Exchange
Offer -- Resale of the Exchange Notes"), (v) the undersigned understands that a
secondary resale transaction described in clause (iv) above and any resales of
Exchange Notes obtained by the undersigned in exchange for the Private Notes
acquired by the undersigned directly from the Company should be covered by an
effective registration statement containing the selling securityholder
information required by Item 507 or Item 508, if applicable, of Regulation S-K
of the Commission, (vi) the undersigned is not an "affiliate," as defined in
Rule 405 under the Securities Act, of the Company, and (vii) if the undersigned
is a not broker-dealer, the undersigned represents that it is not engaged in,
and does not intend to engage in, a distribution of Exchange Notes and, (viii)
if the undersigned is a broker-dealer that will receive Exchange Notes for its
own account in the exchange for Private Notes, it represents that the Private
Notes to be exchanged for the Exchange Notes were acquired by it as a result of
market-making activities or other trading activities and acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act; (b) to agree, on behalf of the undersigned, as set forth in
the Letter of Transmittal; and (c) to take such other action as necessary under
the Prospectus or the Letter of Transmittal to effect the valid tender of
Private Notes.
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<PAGE> 14
The purchaser status of the undersigned is (check the box that applies):
[ ] A "Qualified Institutional Buyer" (as defined in Rule 144A under the
Securities Act)
[ ] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1), (2),
(3) or (7) under the Securities Act)
[ ] A non "U.S. person" (as defined in Regulation S of the Securities Act)
that purchased the Private Notes outside the United States in accordance
with Rule 904 of the Securities Act
[ ] Other (describe)
SIGN HERE
Name of Beneficial Owner(s):
- --------------------------------------------------------------------------------
Signature(s):
- --------------------------------------------------------------------------------
Name(s)(please print):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Principal place of business (if different from address listed above):
- -------------------------------------------
Telephone Number(s):
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security Number(s):
- ------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
14
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
PAYER'S NAME:
SUBSTITUTE PART I--PLEASE PROVIDE YOUR TIN IN THE BOX
FORM W-9 AT RIGHT AND CERTIFY BY SIGNING AND DATING ------------------------------------
DEPARTMENT OF THE TREASURY BELOW: Social Security Number
INTERNAL REVENUE SERVICE
OR -------------------------------
Employer Identification No.
Payer's Request for Taxpayer
Identification Number ("TIN")
</TABLE>
PART II--CERTIFICATIONS--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding either because I have not been
notified by the Internal Revenue Service (the "IRS") that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or the IRS has notified me that I am no longer subject to
backup withholding.
CERTIFICATION INSTRUCTION--You must cross out item (2) in Part II above if you
have been notified by the IRS that you are subject to backup withholding
because of underreporting interest or dividends on your tax return. However,
if after being notified by the IRS that you are subject to backup withholding
you received another notification from the IRS stating that you are no longer
subject to backup withholding, do not cross out item (2).
PART III--AWAITING TIN [ ]
NAME
- --------------------------------------------------------------------------------
(Please Print)
ADDRESS
- --------------------------------------------------------------------------------
(Including Zip Code)
- --------------------------------------------------------------------------------
SIGNATURE DATE
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECK THE BOX IN PART III OF SUBSTITUTE FORM W-9
<TABLE>
<S> <C>
PAYOR'S NAME: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I CERTIFY UNDER PENALTIES OF PERJURY THAT A TAXPAYER IDENTIFICATION NUMBER HAS NOT BEEN ISSUED TO ME, AND
EITHER (A) I HAVE MAILED OR DELIVERED AN APPLICATION TO RECEIVE A TAXPAYER IDENTIFICATION NUMBER TO THE
APPROPRIATE INTERNAL REVENUE SERVICE CENTER OR SOCIAL SECURITY ADMINISTRATION OFFICE OR (B) I INTEND TO MAIL
OR DELIVER AN APPLICATION IN THE NEAR FUTURE. I UNDERSTAND THAT IF I DO NOT PROVIDE A TAXPAYER IDENTIFICATION
NUMBER WITHIN SIXTY (60) DAYS, 31% OF ALL REPORTABLE PAYMENTS
MADE TO ME THEREAFTER WILL BE WITHHELD UNTIL I PROVIDE SUCH A NUMBER.
-------------------------------------------------- ----------------------------------------------------
SIGNATURE DATE
</TABLE>
