<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended July 1, 2000 Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From ________ To ________
Commission File Number 0-19557
SALTON, INC.
(Exact Name Of Registrant As Specified In Its Charter)
<TABLE>
<S> <C>
DELAWARE 36-3777824
-------- ----------
(State or other jurisdiction of Incorporation or (I.R.S. Employer Identification Number)
organization)
MOUNT PROSPECT, ILLINOIS 60056
------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(847) 803-4600
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant To Section 12(b) Of The Act:
None
Securities Registered Pursuant To Section 12(g) Of The Act:
Common Stock, $.01 Par Value
(Title Of Class)
Indicate by check mark whether this registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of September 26, 2000 was approximately $365,400,000 computed on
the basis of the last reported sale price per share ($31 9/16) of such stock on
the NYSE. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The number of shares of the Registrant's Common Stock outstanding as of
September 21, 2000 was 12,175,778.
-2-
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE
Part III (Items 10, 11, 12 Portions of the Registrant's Definitive Proxy
and 13) Statement to be used in connection with its
2000 Annual Meeting of Stockholders.
-3-
<PAGE> 3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in
this annual report on Form 10-K, including without limitation the statements
under "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are, or may be, forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Without limiting the foregoing, (1) the words
"believes," "anticipates," "plans," "expects," "intends," "estimates" and
similar expressions are intended to identify forward-looking statements and (2)
forward-looking statements include any statements with respect to the possible
future results of the company or Toastmaster (as defined), including any
projections or descriptions of anticipated revenue enhancements or cost savings.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: the company's degree of leverage; economic conditions and the retail
environment; the timely development, introduction and customer acceptance of the
company's products; competitive products and pricing; dependence on foreign
suppliers and supply and manufacturing constraints; the company's relationship
and contractual arrangements with key customers, suppliers and licensors;
cancellation or reduction of orders; the integration of Toastmaster, including
the failure to realize anticipated revenue enhancements and cost savings; the
availability and success of future acquisitions; the risks relating to pending
legal proceedings; the risks relating to intellectual property rights; the risks
relating to regulatory matters; and other factors both referenced and not
referenced in this annual report on Form 10-K, including those set forth under
"Risk Factors." All subsequent written and oral forward-looking statements
attributable to the company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements contained throughout
this annual report on Form 10-K.
-4-
<PAGE> 4
PART I
ITEM 1. BUSINESS
As used in this Annual Report on Form 10-K, "we," "our," "us", "the
Company", and "Salton" refer to Salton and our subsidiaries, unless the context
otherwise requires.
OVERVIEW
We are a leading domestic designer, marketer and distributor of a broad
range of branded, high quality small appliances, tabletop products, and personal
care and time products. We act as a marketing service provider by managing our
brands and product lines in a manner that allows our retail customers to
differentiate themselves to consumers. We believe we have the leading domestic
market share in toasters, juice extractors, indoor grills, bread bakers,
griddles, waffle makers and buffet ranges/hotplates and a significant market
share in other product categories. We believe that our strong market share
results from our well-known brand names, the breadth, quality and innovation of
our product offerings and our strong relationships with retailers and suppliers.
We outsource most of our production to independent manufacturers, primarily in
the Far East.
Our portfolio of well-recognized owned and licensed brand names
includes Salton(R), Toastmaster(R), Maxim(R), Breadman(R), Juiceman(R),
Juicelady(R), George Foreman Grills(R), White-Westinghouse(R), Farberware(R),
Melitta(R), Block(R), Atlantis(R), Sasaki(R), Rejuvenique(R), Ingraham(R),
Timex(R), Indiglo(R), Calvin Klein(R), Sonex(R), Stiffel(R) and Relaxor(R). We
are also a leading designer and distributor of small appliances in the U.S.
under such well-known names as Kenmore(R) and Magic Chef(R).
We predominantly sell our products to mass merchandisers, department
stores, specialty stores and mail order catalogs. We also sell certain of our
products directly to consumers through infomercials and our Internet website.
Salton's customers include many premier domestic retailers, including Kmart,
Target Corporation, Sears, Wal-Mart, Federated Department Stores, May Company
Department Stores, QVC, Service Merchandise, Kohls Department Stores and Bed
Bath & Beyond. We market and sell our products primarily in the U.S. through our
own sales force and a network of independent commissioned sales representatives.
Our primary business objective is to increase sales and profits by
acting as a marketing and distribution service provider to our customers. We
believe we can accomplish this through active brand and product management. The
key elements of our growth strategy include:
INTRODUCE NEW PRODUCTS AND PRODUCT LINE EXTENSIONS. We plan to
manage our existing and new brands through strong product development
initiatives, including introducing new products, modifying existing
products and extending existing product lines. Our product designers
strive to develop new products and product line extensions which offer
added value to consumers through enhanced functionality and improved
aesthetics. During fiscal 2000, we introduced approximately 305 new
stock keeping units, or SKUs, in the small appliance category, 952 new
SKUs in the tabletop products category and 350 new SKUs in the personal
care/time products category.
-5-
<PAGE> 5
INCREASE SALES TO NEW AND EXISTING CUSTOMERS. We believe that
retail merchants will continue to consolidate their vendor bases and
focus on a smaller number of suppliers that can (1) provide a broad
array of differentiated, quality products, (2) efficiently and
consistently fulfill logistical requirements and volume demands and (3)
provide comprehensive product and marketing support. We believe that we
can increase sales to our existing customers by continuing to introduce
new products and new product categories. While we currently sell to a
diversified base of premier retail customers, we believe that we can
penetrate additional channels of distribution. For example, we recently
expanded our product offerings to specialty retailing, mail order
catalog, home center, drug store and grocery store channels.
PURSUE LICENSING AGREEMENTS AND STRATEGIC ALLIANCES. We have
entered into licensing agreements and strategic alliances to further
differentiate our products and to accelerate our growth. For example,
we supply products to Kmart, Sears and Wal-Mart, which they sell under
the White-Westinghouse(R), Kenmore(R) and Magic Chef(R) brand names,
respectively. In addition, we have licensing rights to market certain
products under the Calvin Klein(R), Sasaki(R), Marilyn Monroe(TM),
LooneyTunes(TM) and Melitta(R) brands. We also recently entered into a
worldwide exclusive licensing agreement to market and distribute the
"Ultravection" oven and the "Spin Fryer" home appliance.
CONTINUE DEVELOPING ALTERNATIVE DISTRIBUTION CHANNELS. We
expect to continue selling our products through infomercials and our
Internet website. These alternative distribution channels increase our
product sales and provide us with direct contact with consumers, assist
us in creating and building brand and product awareness and stimulate
traditional retail channel demand. We currently use these alternative
channels to sell certain of our products, primarily George Foreman
Grills(R), Juiceman(R) and JuiceLady(R) fresh juice machines and the
Rejuvenique(R) facial toning system.
ENHANCE GROWTH AND PROFITABILITY THROUGH STRATEGIC
ACQUISITIONS. We anticipate that the fragmented small household
appliance industry will provide significant growth opportunities
through strategic acquisitions. We will focus our acquisition strategy
on businesses or brands which (1) offer expansion into related or
existing categories, (2) can be marketed through our existing
distribution channels or (3) provide a platform for growth into new
distribution channels. Our recent acquisitions include:
. Toastmaster, a manufacturer and marketer of kitchen
and small appliances and time products;
. certain assets of Sasaki, Inc., a leading designer of
high-quality tabletop products and accessories for the
home;
. Sonex International Corporation, a designer and
distributor of electrically operated toothbrushes which
employ ultra high frequency sonic waves for cleaning;
. certain assets and intellectual property of The
Stiffel Company, a designer of lamps and related products;
and
-6-
<PAGE> 6
. the Relaxor(R) brand business and certain inventory,
including personal massagers and other personal care
items.
EXPAND INTERNATIONAL PRESENCE. We intend to expand
international sales of certain of our products. For example, in March
1999, we entered into a five-year supply agreement with Zellers, the
leading national chain of discount department stores in Canada, to
supply a broad range of small appliances under the White-Westinghouse
brand name. We also acquired approximately 21% of the outstanding
equity of Amalgamated Appliance Holding Limited, a public company
located in South Africa which manufactures and distributes appliances
and electrical accessories.
PRODUCTS
Salton's portfolio of strong brand names enables it to service the
needs of a broad range of retailers and satisfy the different tastes,
preferences and budgets of consumers. Salton's products include full-featured
and upscale models or designs as well as those which are marketed to budget
conscious consumers.
The following table sets forth the approximate amounts and percentages
of Salton's net sales by product category during the periods shown.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
JULY 1, 2000 JUNE 26, 1999 JUNE 27, 1998
------------ ------------- -------------
(DOLLARS IN THOUSANDS) NET SALES % OF TOTAL NET SALES(1) % OF TOTAL NET SALES % TOTAL
--------- ---------- ------------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Small Appliances $742,774 88.7 $459,621 90.8 $280,607 91.8
Tabletop products 24,109 2.9 22,875 4.5 18,597 6.1
Personal care/time
products 70,419 8.4 23,620 4.7 6,395 2.1
-------- ------ ------ --- ----- ---
$837,302 100.0 $506,116 100.0 $305,599 100.0
======== ===== ======== ===== ======== =====
</TABLE>
(1) Includes the sales of Toastmaster from its acquisition date of January
7, 1999.
SMALL APPLIANCES. Salton designs and markets an extensive line of small
appliances under the Salton(R), Toastmaster(R), Maxim(R), Breadman(R),
Juiceman(R), George Foreman Grills(R), White-Westinghouse(R), Farberware(R) and
Melitta(R) brand names. At the end of fiscal 2000, Salton marketed approximately
1,069 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 George Foreman Grills(R),
White-Westinghouse(R), Farberware(R) and other product lines.
Salton's small appliances product category includes:
. products for health conscious consumers, including
thermal indoor and indoor/outdoor grills, juicers, juice
extractors, rice cookers, vegetable steamers, soy milk
makers, ice cream makers and yogurt makers;
. thermal products, including bread bakers, sandwich
makers, toasters,
-7-
<PAGE> 7
waffle makers, countertop ovens and irons;
. coffee and tea related products, including
combination espresso/cappuccino/drip coffee makers, coffee
makers, coffee urns, coffee percolators, iced tea/iced
coffee makers, latte makers, coffee grinders, and a broad
range of coffee related accessories; and
. food preparation and serving products, including electric
woks, crepe makers, mixers, can openers, blenders,
hand-held blenders, choppers, pizza makers and warming
trays.
TABLETOP PRODUCTS. Tabletop products include crystal products offered
under the Block(R), Atlantis(R), Sasaki(R) and Jonal(R) brand names, fine china
and basic dinnerware in various designs and patterns under the Block(R) and
Calvin Klein(R) brand names, and ceramic products under the Block(R) brand name.
At the end of fiscal 2000, Salton marketed approximately 3,695 SKUs under its
brand names in this product category.
Salton entered this business category in fiscal 1997 to add a
complementary product line to its small appliances. Salton augmented the
Block(R) product line on June 19, 1997 by acquiring the assets of Jonal Crystal
Ltd. Jonal products which include the Crystal Kiss line of glassware and
giftware featuring the famous shape of the Hershey's Chocolate Kiss.
Salton enhanced its tabletop product offerings on April 5, 1999 by
acquiring certain assets of Sasaki, Inc., a leading designer of high-quality
tabletop products and accessories for the home. The Sasaki product lines which
Salton acquired include dinnerware, barware, flatware and crystal giftware
designed by well-known tabletop and domestic designers.
In the fourth quarter of fiscal 2000, Salton entered into an exclusive
licensing agreement for the manufacture and distribution of tabletop and
giftware items under the Calvin Klein(R) Tabletop label.
Salton also recently acquired the trademarks, other intellectual
property assets and molds of The Stiffel Company, a designer of lamps and
related products.
PERSONAL CARE AND TIME PRODUCTS. At the end of fiscal 2000, Salton
marketed approximately 750 SKUs in the personal care and time products category.
Salton Creations(R) hair dryers feature high quality materials, long life motors
and high air flow systems. Salton markets hair dryers in various sizes, shapes
and colors that are designed to mix form and function to enable consumers to
correctly address power and heat to hair type and styling needs.
Salton 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 are sold under the Salton(R) brand name and
feature 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.
New models include a radio with TV audio channels and a CD player. Also included
in this series are Wet Reflections(R), which has a light and fog-free mirror,
Wet Cassette(R) and Wet Lantern(R).
-8-
<PAGE> 8
Salton's personal and beauty care appliances also include the
Rejuvenique(R) system, which Salton began marketing through infomercials in
early 1999. This system includes a facial mask with 26 contact areas that
receive light electrical impulses designed to exercise and tone the skin.
Salton enhanced its personal and beauty care appliances offerings on
July 19, 2000 through its acquisition of Sonex International Corporation, a
designer and distributor of electrically operated toothbrushes which employ
ultra high frequency sonic wave for cleaning flossers and related products.
On September 21, 2000, Salton further enhanced this product category
through its acquisition of the Relaxor brand business and certain inventory,
including personal massagers and other personal care items, from JB Research,
Inc.
Salton also has a "gifts" program designed for department stores. Under
this program, Salton provides department stores with practical, special occasion
and small gift products. Salton's gifts programs include the mini tool kit,
calcutape, travel smoke alarm, emergency auto flasher, deluxe art kit and the
7-piece gardening kit.
Salton's time products are comprised of electric analog alarm clocks,
electric and quartz wall clocks with plastic, wood and/or metal cases, imported
key-wound clocks and L.E.D. digital clocks. Salton also markets household
(electromechanical and electronic) timers, which are used for, among other
purposes, switching electric lights and other appliances on and off at
pre-determined times.
NEW PRODUCT DEVELOPMENT
Salton believes that the enhancement and extension of its existing
products and the development of new products are necessary for its continued
success and growth. Salton designs 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, marketing design and engineering departments evaluate new ideas and
seeks to develop new products and improve existing products to satisfy industry
requirements and changing consumer preferences.
During fiscal 2000, Salton has introduced approximately 305 new SKUs in
the small appliances product category, 952 new SKUs in the tabletop products
category and 350 new SKUs in the personal care/time products category. These new
products and product extensions include:
- George Foreman(R)indoor/outdoor electric grills;
- Toastmaster(R)sourced toaster line;
- Melitta(R)"Perfect Brew" coffeemaker with atomic clock that
automatically sets
-9-
<PAGE> 9
the correct time;
- ePods handheld internet device; and
- Dr. Seuss' "How the Grinch Stole Christmas" line of appliances;
During fiscal 1999, Salton introduced approximately 101 new SKUs in the
small appliances product category, 709 new SKUs in the tabletop products
category and 98 new SKUs in the personal care/time products category.
MARKETING AND DISTRIBUTION
In addition to directing its marketing efforts toward retailers, Salton
sells certain of its products, primarily George Foreman Grills(R), Juiceman(R)
and JuiceLady(R) fresh juice machines and the Rejuvenique(R) facial toning
system, directly to consumers through infomercials and its Internet website.
Salton 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. Salton believes that these
promotional activities are important to strengthening its brand name
recognition.
Salton relies on its management's ability to determine the existence
and extent of available markets for its products. Salton's management has
extensive marketing and sales backgrounds and devotes a significant portion of
its time to marketing-related activities. Salton markets its products primarily
through its own sales force and approximately 247 independent sales
representatives. Salton's representatives are located throughout the United
States and Canada and are paid a commission based upon sales in their respective
territories. Salton's sales representative agreements are generally terminable
by either party upon 30 days' notice.
Salton 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, Salton
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.
Salton 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. Salton believes that distinctive packaging, designed to
answer consumers' questions concerning its products, has resulted in increased
shelf space and greater sales.
Salton's net sales to its five largest customers were approximately 46%
and 50% of its total net sales in fiscal 2000 and 1999, respectively. In 1997,
Salton entered into a seven-year supply agreement with Kmart for Kmart to
purchase, distribute, market and sell a broad range of small appliances under
the White-Westinghouse(R) brand name. Kmart is the exclusive United States mass
merchant to market these White-Westinghouse(R) products. The supply agreement
provides Kmart sole distribution rights to the White-Westinghouse(R) brand name
for the mass merchandiser market, but allows distribution through other retail
channels under certain
-10-
<PAGE> 10
conditions. Sales to Kmart approximated 12%, and 16% of total net sales of the
Company in fiscal years 2000 and 1999, respectively.
The supply agreement with Kmart provides for minimum purchases by
Kmart, which increase through the term of the supply agreement, and for the
payment of penalties for shortfalls. 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. Salton pays Applica Inc.
(formerly known as Windmere-Durable Holdings, Inc.) a fee based upon Salton's
net sales less specified costs and expenses relating to the Kmart supply
agreement in consideration of Applica's guarantee of Salton's obligations under
the supply agreement.
SOURCES OF SUPPLY
Most of Salton's products are manufactured to Salton'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. Salton believes that it
maintains good business relationships with its overseas manufacturers.
Salton does not maintain long-term purchase contracts with
manufacturers and operates principally on a purchase order basis. Salton
believes that it is not currently dependent on any single manufacturer for any
of its products. However, one supplier located in China accounted for
approximately 38.0% and 57.3% of Salton's product purchases during fiscal 2000
and 1999, respectively. Salton believes that the loss of any one manufacturer
would not have a long term material adverse effect on its business because other
manufacturers with which it does business would be able to increase production
to fulfill its requirements. However, the loss of a supplier could, in the short
term, adversely effect Salton's business until alternative supply arrangements
were secured.
Salton's purchase orders are generally made in United States dollars in
order to maintain continuity in our pricing structure and to limit exposure to
currency fluctuations. Salton's policy is to maintain an inventory base to
service the seasonal demands of its customers. In certain instances, Salton
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 Salton and its product
shipments are required to satisfy quality control tests established by its
internal product design and engineering department. Salton employs independent
agents to perform quality control inspections at the manufacturers' factories
during the manufacturing process and prior to acceptance of goods.
MANUFACTURING
Although most of Salton's products are outsourced to overseas vendors,
Salton manufactures certain Toastmaster(R) toasters, toaster-oven-broilers and
electric heating elements at its plant in Macon, Missouri and Ingraham(R) time
products at its plant in Laurinburg, North
-11-
<PAGE> 11
Carolina. Salton also manufactures and assembles woks and warming trays in its
plant located in Kenilworth, New Jersey.
On June 19, 2000 and July 20, 2000, Salton announced that it is
converting its manufacturing operations in Laurinburg, North Carolina and Macon,
Missouri to distribution facilities.
Most of the component parts and raw materials purchased by Salton for
its manufacturing operations, such as finished and aluminized steels, phenolic
resins and molded parts are available from numerous suppliers. Salton does not
believe that it is dependent on any single source for any significant portion of
our component purchases or raw materials, the loss of which may have a material
adverse effect on Salton. Salton has not experienced any significant raw
material or component shortages.
COMPETITION
Salton'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 and marketing support and
distribution approaches.
Salton competes with established companies, some of which have
substantially greater facilities, personnel, financial and other resources than
those of Salton. Salton 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. Salton also believes
that its brand names are important to its ability to compete effectively and
give it the capability to provide consumers with appealing, well priced products
to meet competition.
EMPLOYEES
As of July 1, 2000, Salton employed approximately 1,395 persons, of
whom approximately 57 persons, who work at Salton's Kenilworth, New Jersey
facility, were covered by a collective bargaining agreement, which expires on
February 28, 2002. Salton generally considers its relationship with its
employees to be satisfactory and has never experienced a work stoppage.
The Company expects the conversion of the manufacturing operations in
Laurinburg, North Carolina and Macon, Missouri to distribution facilities to
result in the layoff of approximately 670 employees.
REGULATION
Salton is subject to federal, state and local regulations concerning
consumer products safety. In general, Salton has not experienced difficulty
complying with such regulations and compliance has not had an adverse effect on
Salton's business. Most of Salton's products are listed by UL.
-12-
<PAGE> 12
In July, 2000, Salton received a letter from the Food and Drug
Administration warning that its marketing and sale of the Rejuvenique(R) facial
mask violates certain FDA rules and regulations. Salton believes that it is in
compliance with such rules and regulations and intends to work with the FDA to
resolve this matter. A determination by the FDA that Salton violated its rules
could result in, among other things, a seizing of the Rejuvenique(R) inventory,
a court injunction against further marketing of the product and/or civil money
penalties.
BACKLOG
Salton's backlog consists of commitments to order and orders for
Salton's products, which are typically subject to change and cancellation until
shipment. Customer order patterns vary from year to year, largely because of
annual differences in consumer acceptance of product lines, product
availability, marketing strategies, inventory levels of retailers and
differences in overall economic conditions. As a result, comparisons of backlog
as of any date in a given year with backlog at the same date in a prior year are
not necessarily indicative of sales for that entire given year. As of July 1,
2000, Salton had a backlog of approximately $426.4 million compared to
approximately $303.6 million as of June 26, 1999. Salton does not believe that
backlog is necessarily indicative of our future results of operations or
prospects.
TRADEMARKS, PATENTS AND LICENSING ARRANGEMENTS
Salton holds a number of patents and trademarks registered in the
United States and foreign countries for various products and processes. Salton
has registered certain of its trademarks with the United States Patent and
Trademark Office. Salton considers these trademarks to be of considerable value
and of material importance to its business.
Salton holds numerous United States and foreign patents, including
design patents. Salton believes that none of its product lines is dependent upon
any single patent or group of patents.
On December 9, 1999, Salton acquired from George Foreman and his
partners the right to use in perpetuity and worldwide the name "George Foreman",
including pictures and likeness of George Foreman, in connection with the
marketing and sale of food preparation appliances. This transaction terminated
as of July 1, 1999 Salton's obligation to pay royalties to George Foreman and
his partners based on the sale of "George Foreman" products. The aggregate
purchase price payable to George Foreman was $113,750,000 in cash, payable in
five annual installments of $22,750,000 commencing on the closing date, and
779,191 shares of Salton common stock.
On September 7, 2000, Salton entered into agreements with George
Foreman and his partners pursuant to which Salton satisfied $22,750,000 of
payment obligations it incurred in connection with its acquisition of the
"George Foreman" name by issuing 621,074 shares of its common stock to George
Foreman and his partners. Under the terms of the transaction: (1) Salton agreed
that in the event the aggregate net proceeds (the transaction price less
reasonable and customary brokerage commissions) of shares sold by George Foreman
or any of his partners during a one year period and the aggregate market value
(based on the average closing price of Salton common stock over a specified
period of time) is less than $36.625 multiplied by the number of shares issued
to such person, Salton will pay to such person an amount of cash and/or
additional shares of Salton common stock equal to the difference between
-13-
<PAGE> 13
(a) the product of (x) the number of shares sold during such period multiplied
by (y) $36.625 and (b) the aggregate net proceeds from the sale of such shares;
and (2) each of George Foreman and his partners agreed that in the event the
aggregate net proceeds of shares he sells during such period and the aggregate
market value (based on the average closing price of Salton common stock over a
specified period of time) of any shares which he continues to hold at the end of
such period exceeds the product of (x) $36.625 multiplied by (y) the number of
shares which Salton issued to such person, he will pay Salton in cash 50% of
such excess. Salton agreed to register for resale the shares of common stock
issued in connection with the transaction.
During 1996, Salton entered into license agreements with White
Consolidated Industries, Inc. ("White Consolidated") 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 Salton 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-year's notice or upon a breach by
Salton.
In the second quarter of fiscal 1997, Salton 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.
Salton has a license agreement with Aesthetics, Inc. The license covers
the manufacturing, marketing and distributing of the Rejuvenique(R) facial
product lines.
In the fourth quarter of fiscal 1999, Salton obtained the exclusive
right to manufacture, market and distribute throughout the United States small
electrical coffee preparation products, including drip coffee makers,
percolators, espresso machines, coffee grinders, and coffee mills, under the
Melitta(R) brand name.
In the fourth quarter of fiscal 2000, Salton entered into an exclusive
licensing agreement for the manufacture and distribution of tabletop and
giftware items under the Calvin Klein(R) Tabletop label.
On September 8, 2000, Salton entered into a worldwide exclusive
licensing agreement to market and distribute the "Spin Fryer" home appliance.
Salton 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
Sasaki(R), Timex(TM), Indiglo(TM), Gino's East Pizza(R), Gear(R), Taco Bell(R),
Hershey Kiss(R), Looney Tunes(R), Andy Warhol, Marilyn Monroe(TM), James Dean
and Campbell Soup(R). Salton believes that these other license arrangements help
to demonstrate its creativity and versatility in product design and the
enhancement of existing products.
In general, Salton's joint venture and licensing arrangements place
marketing obligations
-14-
<PAGE> 14
on Salton in exchange for varying fees and royalties based upon net sales or
profits. Typically, each of these agreements may be terminated if Salton does
not satisfy minimum sales obligations or breaches the agreement.
WARRANTIES
Salton's products are generally sold with a limited one-to-three year
warranty from the date of purchase. A limited number of products are sold with a
lifetime warranty. In the case of defects in material or workmanship, Salton
agrees to replace or repair the defective product without charge.
RISK FACTORS
Prospective investors should carefully consider the following risk
factors, together with the other information contained in this annual report on
Form 10-K, in evaluating the Company and our business before purchasing our
securities. In particular, prospective investors should note that this annual
report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act and that
actual results could differ materially from those contemplated by such
statements. See "Disclosure Regarding Forward-Looking Statements." The factors
listed below represent certain important factors the Company believes could
cause such results to differ. These factors are not intended to represent a
complete list of the general or specific risks that may affect the Company. It
should be recognized that other risks may be significant, presently or in the
future, and the risks set forth below may affect the Company to a greater extent
than indicated.
IF WE ARE UNABLE TO INTEGRATE TOASTMASTER EFFECTIVELY, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
We cannot assure you that we will successfully integrate Toastmaster
with our business operations. We are integrating the administrative, finance,
purchasing, product development and sales and marketing activities of Salton and
Toastmaster in order to realize the full benefits from our acquisition of
Toastmaster. The integration also requires the implementation of appropriate
operational, financial and management systems and controls. We may 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.
WE DEPEND ON OUR MAJOR CUSTOMERS.
Our success depends on our sales to our significant customers. Our
total net sales to our five largest customers during the fiscal 2000 were
approximately 46% of net sales, with Wal-Mart representing approximately 13% of
our net sales and Kmart representing approximately 12% of our net sales. Our
total net sales to our five largest customers during fiscal 1999 were
approximately 50% of net sales, with Kmart representing approximately 16% of our
net sales and Target Corporation representing approximately 10% of our net
sales. Except for our supply agreements with Kmart and Zellers, we do not have
long-term agreements with our major
-15-
<PAGE> 15
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.
THE TERMINATION OF OUR SUPPLY AGREEMENT WITH KMART COULD ADVERSELY AFFECT OUR
BUSINESS.
In January 1997, we entered into a seven-year supply agreement with
Kmart. Under this agreement, Kmart is the exclusive discount department store in
the United States to market and sell a broad range of small appliances under the
White-Westinghouse(R) brand name.
The initial term of our agreement with Kmart expires on June 30, 2004.
However, Kmart may terminate the agreement without cause after June 30, 2002 and
under other specified circumstances prior to that date. Kmart may also terminate
our 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 Applica or us.
Sales to Kmart approximated 12%, 16% and 19% of total net sales of the
Company in fiscal years 2000, 1999 and 1998, respectively. The termination or
any significant modification of our supply agreement with Kmart could have a
material adverse effect on our business, financial condition and results of
operations.
A SIGNIFICANT DECLINE IN SALES OF OUR GEORGE FOREMAN GRILLS, JUICEMAN OR
BREADMAN PRODUCT LINES COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our George Foreman Grills(R), Juiceman(R) and Breadman(R) product
lines, which include approximately 226 SKUs in the aggregate, have been
important to Salton's growth to date. Our total net sales of these product lines
were approximately 55.2% of our total net sales for fiscal 2000 and
approximately 55.4% of our total net sales in fiscal 1999. As a result, a
significant decline in the sales of any of these product lines would have a
material adverse effect on our business, results of operations and financial
condition.
WE DEPEND ON THE DEVELOPMENT AND INTRODUCTION 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 may not successfully introduce,
market and manufacture any new products or product innovations or develop and
introduce in a timely manner innovations to our existing products which satisfy
customer needs or achieve market acceptance. If we fail to develop products and
introduce them successfully and in a timely manner, our business, financial
condition and results of operations could be materially adversely affected.
OUR DEPENDENCE ON FOREIGN SUPPLIERS COULD ADVERSELY AFFECT OUR BUSINESS.
We depend upon unaffiliated foreign companies for the manufacture of
most of our products. One supplier located in China accounted for approximately
38.0% and 57.3% of our product purchases during fiscal 2000 and 1999,
respectively. We believe that the loss of any one
-16-
<PAGE> 16
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.
Our arrangements with our manufacturers are subject to the risks of
doing business abroad, including:
. import duties;
. trade restrictions;
. production delays due to unavailability of parts or
. components;
. increase in transportation costs and transportation
delays;
. work stoppages;
. foreign currency fluctuations; and
. political instability.
These risks could adversely affect our business, financial condition and results
of operations.
COMPETITION COULD ADVERSELY IMPACT OUR PERFORMANCE.
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; and
. 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. Significant new competitors or increased competition from existing
competitors may adversely affect our business, financial condition and results
of operations.
-17-
<PAGE> 17
OUR PERFORMANCE CAN FLUCTUATE WITH THE FINANCIAL CONDITION OF THE RETAIL
INDUSTRY.
We sell our products to consumers through major retail channels,
primarily mass merchandisers, department stores, specialty stores and mail order
catalogs. As a result, our business and financial results can fluctuate with the
financial condition of our retail customers and the retail industry. Certain of
our retail customers have filed for bankruptcy protection in recent years. We
continually monitor and evaluate the credit status of our customers and attempt
to adjust sales terms as appropriate. Despite these efforts, a bankruptcy filing
by, or other adverse change in the financial condition of, a significant
customer could have a material adverse effect on our business, financial
condition and results of operations.
POTENTIAL FUTURE ACQUISITIONS AND ACQUISITION FINANCING COULD ADVERSELY AFFECT
OUR BUSINESS AND FINANCIAL CONDITION.
We continue to seek opportunities to acquire businesses and product
lines that fit within our acquisition strategy. We may not successfully identify
acceptable acquisition candidates or integrate any acquired operations. Any
future acquisitions may 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.
Our acquisitions of additional businesses and product lines may require
additional capital and the consent of our lenders and may have a significant
impact on our financial position and results of operations. We may finance
acquisitions with internally generated funds, bank borrowings, public offerings
or private placements of debt or equity securities, or through a combination of
these sources. This may have the effect of increasing our debt and reducing our
cash available for other purposes.
Acquisitions may also require substantial attention from, and place
substantial additional demands upon, our senior management. This may divert
their attention away from our existing businesses, making it more difficult to
manage effectively. In addition, unanticipated events or liabilities relating to
these acquisitions or the failure to retain key personnel could have a material
adverse effect on our business, results of operations and financial condition.
OUR INDEBTEDNESS MAY RESTRICT OUR ABILITY TO PURSUE OUR GROWTH STRATEGY.
We may incur additional indebtedness in the future, including through
additional borrowings under our credit agreement, subject to the satisfaction of
certain financial tests.
The degree to which we are leveraged could:
. make it more difficult for us to satisfy our obligations;
. make us more vulnerable to general adverse economic and
industry conditions;
-18-
<PAGE> 18
. limit our ability to obtain additional financing to fund
future working capital, capital expenditures or other general
corporate requirements;
. require us to dedicate 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;
. limit our flexibility in planning for, or reacting to,
changes in our business and the industry in which we compete; and
. place us at a competitive disadvantage with less leveraged
competitors.
The terms of our credit agreement and senior subordinated notes impose
significant restrictions on our ability to, among other things, borrow and make
investments, acquire other businesses, make capital expenditures and pay
dividends. In addition, our credit agreement requires us to satisfy specified
financial covenants. Our ability to comply with these provisions depends, in
part, on factors over which we may have no control. These restrictions could
adversely affect our ability to pursue our growth strategy. If we breach any of
our financial covenants or fail to make scheduled payments, our creditors could
declare all amounts owed to them to be immediately due and payable. We may not
have available funds sufficient to repay the amounts declared due and payable,
and we may have to sell assets to repay those amounts. Our credit agreement is
secured by substantially all of our assets. If we cannot repay all amounts that
we have borrowed under our credit agreement, our lenders could proceed against
our assets.
OUR MANUFACTURING FACILITIES EXPOSE US TO THE RISKS OF POTENTIAL RAW MATERIAL
SHORTAGES AND ENVIRONMENTAL LIABILITIES.
We manufacture certain Toastmaster(R) toasters, countertop ovens and
electric heating elements at our owned plant in Macon, Missouri. We also
manufacture Ingraham(R) time products at our owned plant in Laurinburg, North
Carolina. Although we have begun to outsource certain of our Toastmaster(R)
products with overseas vendors and plan on converting our plants in
Laurinburg, North Carolina and Macon, Missouri to distribution facilities, we
currently manufacture certain products at these plants. We may not be able to
manufacture products successfully and in a cost effective manner. Our
manufacture of these products exposes us to additional risks, including those
relating to the price and availability of raw materials and potential
liabilities for environmental damage that our manufacturing facilities may have
caused or may cause nearby land owners. During the ordinary course of its
operations, Toastmaster has received, and we expect that we may in the future
receive, citations or notices from governmental authorities asserting that the
manufacturing facilities are not in compliance with, or require investigation or
remediation under, applicable environmental statutes and regulations.
Toastmaster has generally worked with, and we expect to generally work with, the
authorities to resolve the issues raised by the citations or notices. However,
we may not always be successful in this regard and such citations or notices
could have a material adverse effect on our business, results of operations and
financial condition.
-19-
<PAGE> 19
LOSS OF KEY PERSONNEL COULD IMPAIR OUR SUCCESS.
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 and Chief
Operating Officer. Although we have entered into employment agreements with
these executive officers, they may not remain in our employment. 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.
OWNERSHIP BY A SIGNIFICANT STOCKHOLDER MAY ADVERSELY AFFECT THE MARKET FOR OUR
COMMON STOCK.
Centre Partners and entities directly or indirectly controlled by
Centre Partners beneficially own in the aggregate 23.7% of our common stock.
Centre Partners is able to exercise significant influence with respect to the
election of directors or major corporate transactions such as a merger or sale
of all or substantially all of our assets. Centre Partners generally has the
right to designate two directors as long as it and its affiliates own at least
12.5% of the total voting power of Salton and one director as long as it and its
affiliates own at least 7.5% of the total voting power of Salton. The interests
of Centre Partners may conflict with the interests of other stockholders.
THE SEASONAL NATURE OF OUR BUSINESS COULD ADVERSELY IMPACT OUR OPERATIONS.
Our business is highly seasonal, with operating results varying from
quarter to quarter. We have historically experienced higher sales during the
months of August through November primarily due to increased demand by customers
for our products attributable to holiday sales. This seasonality has also
resulted in additional interest expense for us during this period due to an
increased need to borrow funds to maintain sufficient working capital to finance
product purchases and customer receivables for the seasonal period. Lower sales
than expected by us during this period, a lack of availability of product, a
general economic downturn in retail sales or the inability to service additional
interest expense due to increased borrowings could have a material adverse
effect on our business, financial condition and results of operations.
PRODUCT RECALLS OR LAWSUITS RELATING TO DEFECTIVE PRODUCTS COULD ADVERSELY
IMPACT OUR FINANCIAL RESULTS.
We face exposure to product recalls and product liability claims in the
event that our products are alleged to have manufacturing or safety defects or
to have resulted in injury or other adverse effects. 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. 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.
-20-
<PAGE> 20
THE INFRINGEMENT OR LOSS OF OUR PROPRIETARY RIGHTS COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS.
We regard our copyrights, trademarks, service marks and similar
intellectual property as important to our success. We rely on copyright and
trademark laws in the United States and other jurisdictions to protect our
proprietary rights. We seek to register our trademarks in the United States and
elsewhere. These registrations could be challenged by others or invalidated
through administrative process or litigation. If any of these rights were
infringed or invalidated, our business could be materially adversely affected.
In addition, our business activities could infringe upon the proprietary rights
of others, who could assert infringement claims against us.
We license various trademarks and tradenames from third parties for use
on our products. These licenses generally place marketing obligations on us in
exchange for various fees and royalties based on net sales or profits.
Typically, each license may be terminated if we fail to satisfy minimum sales
obligations or if we breach the license. The termination of these licensing
arrangements could adversely affect our business, financial condition and
results of operations.
GOVERNMENT REGULATIONS COULD ADVERSELY IMPACT OUR OPERATIONS.
Most federal, state and local authorities require Underwriters
Laboratory, Inc. ("UL"), 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.
Our products, or additional electrical appliances which may be developed by us,
may not meet the specifications required by these authorities. A determination
that we are not in compliance with 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.
In July, 2000, we received a letter from the Food and Drug
Administration warning us that our marketing and sale of the Rejuvenique(R)
facial mask violates certain FDA rules and regulations. We believe that we are
in compliance with such rules and regulations and we intend to work with the FDA
to resolve this matter. A determination by the FDA that we violated its rules
could result in, among other things, a seizing of our Rejuvenique(R) inventory,
a court injunction against further marketing of the product and/or civil money
penalties.
TAKEOVER DEFENSE PROVISIONS MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK.
Various provisions of Delaware corporation law and of our corporate
governance documents may inhibit changes in control not approved by our board of
directors and may have the effect of depriving stockholders of an opportunity to
receive a premium over the prevailing market price of our common stock in the
event of an attempted hostile takeover or may deter takeover attempts by third
parties. In addition, the existence of these provisions may adversely affect the
market price of our common stock. These provisions include:
-21-
<PAGE> 21
. a classified board of directors;
. a prohibition on stockholder action through written
consents;
. a requirement that special meetings of stockholders be
called only by the board of directors; and
. availability of "blank check" preferred stock.
WE DO NOT ANTICIPATE PAYING DIVIDENDS.
We have not paid dividends on our common stock and we do not anticipate
paying dividends in the foreseeable future. We intend to retain future earnings,
if any, to finance the expansion of our operations and for general corporate
purposes, including future acquisitions. In addition, our credit agreement and
senior subordinated notes prohibit us from paying dividends on our capital
stock.
OUR FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM CURRENT BELIEFS.
This document 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
"Business Summary," "Risk Factors," "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:
. the integration of Toastmaster, including the failure to
realize anticipated revenue enhancements and cost savings;
. our relationship and contractual arrangements with key
customers, suppliers and licensors;
. the risks relating to pending legal proceedings;
. cancellation or reduction of orders;
. the timely development, introduction and customer
acceptance of our products;
. dependence on foreign suppliers and supply and
manufacturing constraints;
. competitive products and pricing;
-22-
<PAGE> 22
. economic conditions and the retail environment;
. the availability and success of future acquisitions;
. our degree of leverage;
. the risks relating to intellectual property rights;
. the risks relating to regulatory matters; and
. other factors both referenced and not referenced in this
prospectus.
ITEM 2. PROPERTIES
A summary of Salton's leased properties is as follows:
<TABLE>
<CAPTION>
LOCATION DESCRIPTION AREA (SQ. LEASE EXPIRATION
FT.)
<S> <C> <C> <C>
Mira Loma, CA Warehouse and distribution facility 216,300 October 31, 2007
Elizabeth, NJ Manufacturing, warehouse and 188,000 October 31, 2004
distribution facility
Lake Forest, IL New corporate offices(under 58,680 September 30, 2011
construction)
Mt. Prospect, IL Executive office, warehouse and repair
facility 34,600 June 30, 2001
Rancho Dominguez, CA Warehouse and distribution facility and
retail outlet 340,672 October 31, 2002
Harrison, NJ Warehouse and distribution facility and
retail outlet 146,555 May 31, 2002
Kenilworth, NJ Marketing and sales office 12,309 September 30, 2007
McColl, SC Warehouse 52,628 September 15, 2000
Boonville, MO Warehouse 27,000 Month to month
Laurinburg, NC Warehouse 18,000
New York, NY Sales office 6,802 December 31,2001
New York, NY Sales office 6,959 August 31, 2004
Macon, MO Warehouse 7,500 Month to month
Gurnee, IL Retail outlet 6,141 January 31, 2003
Westend, NJ Retail outlet 2,400 May 31, 2004
Milwaukee, WI Design office 2,380 Month to month
Laurinburg, NC Show room 2,000 April 30, 2001
Eden Prairie, MN Sales office 1,262 April 30, 2005
Troy, MI Sales office 1,435 May 31, 2004
Chicago, IL Retail store 560 October 31, 2007
</TABLE>
Salton owns all of the facilities listed below, which it acquired in connection
with the acquisition of Toastmaster in January 1999. These facilities have been
pledged as collateral to secure payment of Salton's debt obligations. The
following table sets forth the location and approximate square footage of each
of Salton's significant owned facilities.
-23-
<PAGE> 23
SQUARE
------
LOCATION USE FEET
-------- --- ----
Boonville, Missouri Warehouse and service center 169,000
Macon, Missouri* Manufacturing facility 171,000
Laurinburg, NC* Manufacturing and warehouse facility 223,000
Columbia, Missouri Warehouse 107,000
Columbia, Missouri Warehouse 65,000
Moberly, Missouri Warehouse 134,000
Columbia, Missouri Administrative offices 62,000
Boonville, Missouri Idle facility 58,000
Kirksville, Missouri Warehouse 114,000
* On June 19, 2000 and July 20, 2000, Salton announced that it is
converting its operations in Laurinburg, North Carolina and Macon,
Missouri from manufacturing facilities to distribution facilities.
Salton believes that its facilities generally are suitable and adequate
for its current level of operations and provide sufficient productive capacity
for its foreseeable needs without the need for material capital expenditures.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
In September, 1999, Linda Evans Fitness Centers, Inc. (the "Fitness
Centers"), Mark Golub and Thomas Gergley filed suit against the Company and its
principal executive officers alleging that the Company tortiously interfered
with a contract between the Fitness Centers and Ms. Evans by hiring Ms. Evans to
act as a spokesperson for the Rejuvenique(TM) facial toning system. Before Ms.
Evans was hired by the Company, Ms. Evans had brought suit against the Fitness
Centers seeking a determination that her contract with the Fitness Centers had
been terminated on the basis of fraud and the failure of the Fitness Centers to
make certain payments. The Company believes that it has valid defenses against
the claims made against it by the Fitness Centers. Ms. Evans has agreed to
indemnify the Company against matters relating to her services to the Company.
ENVIRONMENTAL
Salton is participating in environmental remediation activities at four
sites which it owns or operates. As of July 1, 2000, Salton has accrued
approximately $175,000 for the anticipated costs of investigation, remediation
and/or operation and maintenance costs at these sites. Although such costs could
exceed that amount, Salton believes that any such excess will not have a
material adverse effect on the financial condition or annual results of
operations of Salton.
ARBITRATION
On April 20, 1999, an individual filed a notice of arbitration
asserting a breach of contract claim against Salton due to Salton's alleged
failure to pay royalties to this individual for the sale of certain juice
extractors and related health products. This individual also asserted various
other
-24-
<PAGE> 24
causes of action for an accounting, breach of covenant of good faith and fair
dealing, forgery, trademark infringement, unfair competition, permanent
injunction, fraud, negligent misrepresentation, age discrimination, Lanham Act
violations, breach of fiduciary duty and rescission of contract, and is seeking
compensatory and punitive damages of $15 million.
An initial arbitration hearing solely with respect to the forgery claim
was held in October 1999. The arbitrator ruled in favor of Salton.
On August 24, 2000, the arbitrator ruled that all claims against Salton
are not supported by the facts or applicable law except for Salton's obligation
to pay minor royalties. The arbitrator ruled that the individual must partially
reimburse Salton for reasonable attorneys' fees and costs.
OTHER
Salton is a party to various other actions and proceedings incident to
its normal business operations. Salton believes that the outcome of such
litigation will not have a material adverse effect on the financial condition or
annual results of operations of Salton. Salton also has product liability and
general liability insurance policies in amounts it believes to be reasonable
given its current level of business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The registrant's common stock has traded on the New York Stock Exchange
under the symbol "SFP" since February 26, 1999. From October 1991 until February
25, 1999, our common stock traded on the Nasdaq National Market under the symbol
"SALT". The following table sets forth, for the periods indicated, the high and
low sales prices for the common stock as reported on the Nasdaq National Market
prior to February 26, 1999 and on the New York Stock Exchange after such date,
in each case adjusted for the three-for-two stock split effected on July 28,
1999.
HIGH LOW
---- ---
FISCAL 1998
First Quarter $ 6.67 $ 4.33
Second Quarter $ 7.33 $ 4.83
Third Quarter $ 7.50 $ 5.33
-25-
<PAGE> 25
Fourth Quarter $ 9.25 $ 6.58
FISCAL 1999
First Quarter $ 11.17 $ 7.67
Second Quarter $ 15.50 $ 5.92
Third Quarter $ 22.83 $ 14.00
Fourth Quarter $ 33.58 $ 14.67
FISCAL 2000
First Quarter $50.00 $21.69
Second Quarter $39.44 $24.25
Third Quarter $60.88 $27.69
Fourth Quarter $49.81 $26.88
We have not paid dividends on our common stock and we do not anticipate
paying dividends in the foreseeable future. We intend to retain future earnings,
if any, to finance the expansion of our operations and for general corporate
purposes, including future acquisitions. We are also prohibited from declaring
or paying cash dividends on our capital stock under our terms of our credit
agreement and senior subordinated notes.
As of September 20, 2000, there were approximately 340 holders of
record of the common stock of the Company. The Company has paid no dividends on
the Common stock and it is the Company's present intention to retain earnings to
finance the expansion of its business. The Company's credit agreement further
restricts its ability to pay dividends.
PREFERRED STOCK
The Company has 40,000 outstanding shares of the convertible preferred
stock. The convertible preferred stock is generally non-dividend bearing;
however, if the Company breaches in any material respect any of its material
obligations in the preferred stock agreement or the certificate of incorporation
relating to the convertible preferred stock, the holders of convertible
preferred stock are entitled to receive quarterly cash dividends on each share
of convertible preferred stock from the date of such breach until it is cured at
a rate per annum equal to 12 1/2% of the Liquidation Preference (as defined
below). The payment of dividends is limited by the terms of our credit
agreement.
Each holder of the convertible preferred stock is generally entitled to
one vote for each share of Salton common stock which such holder could receive
upon the conversion of the convertible preferred stock. Each share of
convertible preferred stock is convertible at any time into that number of
shares of Salton common stock obtained by dividing $1,000 by the Conversion
Price in effect at the time of conversion. The "Conversion Price" is equal to
$11.33, subject to certain anti-dilution adjustments.
In the event of a Change of Control (as defined), each holder of shares
of convertible preferred stock has the right to require 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
-26-
<PAGE> 26
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 convert in whole or in part, the convertible
preferred stock at any time on and after July 15, 2003 at a cash price per share
of 100% of the then effective Liquidation Preference per share, if the daily
closing price per share of Salton's common stock for a specified 20 consecutive
trading day period is greater than or equal to 200% of the then current
Conversion Price. On September 15, 2008, the Company will be required to
exchange all outstanding shares of convertible preferred stock at a price equal
to the Liquidation Performance per share, payable at the Company's option in
cash or shares of Salton common stock.
As of September 21, 2000, there were 40,000 shares of the convertible
preferred stock outstanding held by 7 shareholders of record. There is no
established market for the convertible preferred stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for Salton, Inc. is derived
from the Company's audited financial statements. The following selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the audited
financial statements and related notes thereto.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA.)
JULY 1, JUNE 26, JUNE 27, JUNE 28, JUNE 29,
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 837,302 $ 506,116 $ 305,599 $ 182,806 $ 99,202
Cost of sales 467,250 285,526 179,376 121,590 66,923
Distribution expenses 37,639 21,621 12,327 7,809 5,856
--------- --------- --------- --------- ---------
Gross Profit 332,413 198,969 113,896 53,407 26,423
Selling, general, and
administrative expenses 156,749 129,588 84,216 42,944 21,343
--------- --------- --------- --------- ---------
Operating income 175,664 69,381 29,680 10,463 5,080
Interest expense, net (28,761) (15,518) (5,333) (4,063) (3,934)
Costs associated with (1,133)
refinancing
Realized gain on sale of
marketable securities 8,972
--------- --------- --------- --------- ---------
Income before taxes 146,903 53,863 32,186 6,400 1,146
Income tax expense (benefit) 55,087 19,320 12,205 2,001 (3,450)
--------- --------- --------- --------- ---------
Net income $ 91,816 $ 34,543 $ 19,981 $ 4,399 $ 4,596
========= ========= ========= ========= =========
</TABLE>
-27-
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding 11,221 10,760 19,594 19,260 9,764
Net income per share: $ 8.18 $ 3.21 $ 1.02 $ 0.23 $ 0.47
Basic
Weighted average common
shares and Common 15,526 14,562 20,259 19,623 9,942
equivalent shares outstanding
Net income per share:
Diluted $ 5.91 $ 2.37 $ 0.99 $ 0.22 $ 0.46
BALANCE SHEET DATA
Working Capital $ 197,671 $ 165,936 $ 44,768 $ 17,996 $ 12,244
Total Assets 564,276 328,316 141,397 102,343 59,481
Long-term Debt 215,065 182,329 -- 4,933 3,754
Stockholders' equity 173,808 50,739 57,711 38,622 19,925
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations may be deemed to include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risk and uncertainty. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that its expectations
will be achieved. The important factors that could cause actual results to
differ materially from those in the forward-looking statements herein (the
"Cautionary Statements") include, without limitation: the Company's degree of
leverage; economic conditions and the retail environment; the timely
development, introduction and customer acceptance of the Company's products;
competitive products and pricing; dependence on foreign suppliers and supply and
manufacturing constraints; the Company's relationship and contractual
arrangements with key customers, suppliers and licensors; cancellation or
reduction of orders; the integration of Toastmaster, including the failure to
realize anticipated revenue enhancements and cost savings; the availability and
success of future acquisitions, the risks relating to pending legal proceedings,
the risks relating to intellectual property rights; the risks relating to
regulatory matters, as well as other risks referenced from time to time in the
Company's filings with the SEC. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements. The Company
does not undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
Salton is a leading domestic designer, marketer and distributor of a
broad range of branded, high quality small appliances, tabletop products and
personal care/time products. Salton
-28-
<PAGE> 28
acts as a marketing service provider by managing its brands and product lines in
a manner that allows its retail customers to differentiate themselves to
consumers. Salton has the leading domestic market share in toasters, juice
extractors, indoor grills, bread bakers, griddles, waffle makers and buffet
ranges/hotplates and a significant market share in other product categories.
Salton outsources most of its production to independent manufacturers, primarily
in the Far East.
Salton's portfolio of well-recognized owned and licensed brand names
includes Salton(R), Toastmaster(R), Maxim(R), Breadman(R), Juiceman(R),
Juicelady(R), George Foreman Grills(R), White-Westinghouse(R), Farberware(R),
Melitta(R), Block(R), Atlantis(R), Sasaki(R), Rejuvenique(R), Ingraham(R),
Calvin Klein(R), Sonex(R), Stiffel(R) and Relaxor(R). Salton is also a leading
designer and distributor of small appliances in the U.S. under such well-known
names as Kenmore(R) and Magic Chef(R).
Salton predominantly sells its products to mass merchandisers,
department stores, specialty stores and mail order catalogs. Salton also sells
certain of its products directly to consumers through infomercials and its
Internet website. Salton markets and sells its products primarily in the U.S.
through its own sales force and a network of independent commissioned sales
representatives.
In July 1998, Salton completed a recapitalization by issuing $40.0
million of its convertible preferred stock to affiliates of Centre Partners and
repurchasing 9,802,608 shares of its common stock owned by Applica Inc.
(formerly Windmere-Durable Holdings) for $8 per share plus a $15.0 million
junior subordinated note. In December 1998, Salton issued $125.0 million of 10
3/4% senior subordinated notes, primarily to repay certain indebtedness.
On January 7, 1999, Salton acquired Toastmaster, a Columbia, Missouri
based manufacturer and marketer of kitchen and small appliances and time
products. Through Toastmaster, Salton designs, manufactures, markets and
services a wide array of kitchen and small appliances and time products under
the brand names Toastmaster(R) and Ingraham(R).
Salton believes that through its proven ability to source products
overseas, it can achieve significant cost savings through more favorable product
pricing and other terms. Although Salton currently produces certain Ingraham(R)
time products at its Laurinburg, North Carolina plant and certain Toastmaster(R)
small appliances at its Macon, Missouri plant, Salton is implementing its
strategy of outsourcing certain appliances to overseas vendors by converting its
manufacturing operations in Laurinburg, North Carolina and Macon, Missouri to
distribution facilities. Other anticipated cost savings identified by Salton
include advertising, ocean freight, warehousing and corporate overhead expenses.
Salton's ability to successfully integrate Toastmaster will depend upon
its ability to achieve revenue enhancements and recognize cost savings and on
other factors, including economic conditions and the retail environment.
Salton's operating results for fiscal 1999 include the operating
results of Toastmaster from its acquisition date of January 7, 1999.
The following table sets forth Salton's results of operations as a
percentage of net sales for the period indicated:
-29-
<PAGE> 29
FISCAL YEAR ENDED
-----------------
JULY 1, JUNE 26, JUNE 27,
2000 1999 1998
-------- -------- ------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 55.8 56.4 58.7
Distribution expenses 4.5 4.3 4.0
---- ---- ----
Gross profit 39.7 39.3 37.3
Selling, general and administrative
expenses 18.7 25.6 27.6
---- ---- ----
Operating income 21.0% 13.7% 9.7%
----- ----- ----
YEAR ENDED JULY 1, 2000 COMPARED TO YEAR ENDED JUNE 26, 1999
NET SALES. Net sales in the fifty-three weeks ended July 1, 2000
("fiscal 2000") were $837.3 million, an increase of approximately $331.2 million
or 65.4%, compared to net sales of $506.1 million in the fifty-two weeks ended
June 26, 1999 ("fiscal 1999"). This increase is primarily attributable to
increased sales of products within the George Foreman(R) product line, including
the initial shipments of the George Foreman indoor/outdoor electric grills,
sales of Toastmaster(R) products for a full fiscal year, and sales of
Farberware(R), Juicelady(R) and Juiceman(R) products. Net sales of the
White-Westinghouse(R) brand and other products to Kmart approximated 12% of net
sales in fiscal 2000 compared to 16% of net sales in fiscal 1999.
GROSS PROFIT. Gross profit in fiscal 2000 was $332.4 million or 39.7%
of net sales as compared to $199.0 million or 39.3% of net sales in fiscal 1999.
Cost of goods sold during fiscal 2000 decreased to 55.8% of net sales compared
to 56.4% in fiscal 1999. Distribution expenses were $37.6 million or 4.5% of net
sales in fiscal 2000 compared to $21.6 million or 4.3% of net sales in fiscal
1999. Distribution expenses increased slightly as a percentage of sales due to
higher costs for shipping to customers, primarily due to higher fuel costs and
expenses related to the addition of two warehouses during fiscal 2000. Gross
profit in fiscal 2000 as a percentage of net sales increased primarily due to a
more favorable mix of sales with lower costs in their respective channels of
distribution when compared to fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to 18.7% of net sales or $156.7 million in
fiscal 2000 compared to 25.6% of net sales or $129.6 million for fiscal 1999.
Expenditures for television, royalty expense, certain other media and
cooperative advertising and trade show expenses were 10.7% of net sales or $89.7
million in fiscal 2000 when compared to 17.4% of net sales or $88 million in
fiscal 1999. The effect of the acquisition of the George Foreman name related to
fiscal 2000 was the elimination of royalty payments partially offset by
amortization expense of $8.1 million and imputed interest of $6.3 million,
compared to payments of royalties of $38.3 million in fiscal 1999. The remaining
selling, general and administrative costs increased to $67 million or 8% of net
sales in fiscal 2000 compared to $41.6 million or 8.2% of net sales in fiscal
1999, primarily attributable to higher costs related to the higher level of
sales.
-30-
<PAGE> 30
OPERATING INCOME. As a result of the foregoing, operating income
increased by $106.3 million or 153.2%, to $175.7 million in fiscal 2000 from
$69.4 million in fiscal 1999. Operating income as a percentage of net sales
increased to 21.0% in fiscal 2000 from 13.7% in fiscal 1999.
NET INTEREST EXPENSE. Net interest expense was approximately $28.8
million for fiscal 2000 compared to $15.5 million in fiscal 1999. The increase
is primarily attributable to imputed interest of $6.3 million on the George
Foreman note payable and a full year of actual interest of $11.1 million on debt
incurred to complete the Toastmaster acquisition compared to $5.1 million of
interest expense from the January 7, 1999 completion date of the Toastmaster
acquisition. Salton's rate of interest on amounts outstanding under the
revolver, term loan and senior subordinated debt was a weighted average annual
rate of 10.0% in fiscal 2000 compared to 9.2% in fiscal 1999. The average amount
of all debt outstanding was $279.5 million for fiscal 2000 compared to $155.7
million for fiscal 1999. These increases contributed to higher interest expense
and the increased borrowings were used to provide working capital necessary to
support the growth in sales.
INCOME TAX EXPENSE. Salton had tax expense of $55.1 million in fiscal
2000 as compared to tax expense of $19.3 million in fiscal 1999.
NET INCOME. Net income increased 165.8% to $91.8 million in fiscal
2000, compared to $34.5 million in fiscal 1999.
EARNINGS PER SHARE. Basic earnings per common share were $8.18 per
share on weighted average common shares outstanding of 11,221,379 in fiscal 2000
compared to earnings of $3.21 per share on weighted average common shares
outstanding of 10,760,455 in fiscal 1999. Diluted earnings per common share were
$5.91 per share on weighted average common shares outstanding, including
dilutive common stock equivalents, of 15,525,991 in fiscal 2000 compared to
earnings of $2.37 per share on weighted average common shares outstanding,
including dilutive common stock equivalents, of 14,561,964 in fiscal 1999. All
share counts reflect a 3-for-2 split of Salton's common stock effective July 28,
1999, for stockholders of record at the close of business on July 14, 1999.
YEAR ENDED JUNE 26, 1999 COMPARED TO YEAR ENDED JUNE 27, 1998
NET SALES. Net sales for the fiscal year ended June 26, 1999 were
$506.1 million, an increase of approximately $200.5 million or 65.6% compared to
net sales of $305.6 million for the fiscal year ended June 27, 1998. This
increase is primarily attributable to increased sales of products within the
George Foreman Grills(R) product line, White-Westinghouse(R) sales under the
Kmart program, sales of Toastmaster products since January 7, 1999, and sales of
our Farberware(R) products. Net sales of White-Westinghouse(R) brand and other
products to Kmart approximated 16% of net sales in fiscal 1999 compared to 19%
of net sales in fiscal 1998.
GROSS PROFIT. Gross profit in fiscal 1999 was $199.0 million or 39.3%
of net sales as compared to $113.9 million or 37.3% in fiscal 1997. Cost of
goods sold during the period decreased to 56.4% of net sales compared to 58.7%
in fiscal 1998. Distribution expenses were
-31-
<PAGE> 31
$21.6 million or 4.3% of net sales in fiscal 1999 compared to $12.3 million or
4.0% of net sales in fiscal 1998. Gross profit and costs of goods sold in fiscal
1999 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
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $129.6 million or 25.6% of net sales in
fiscal 1999 compared to $84.2 million or 27.6% of net sales in fiscal 1998.
Expenditures for television, certain media and cooperative advertising coverages
and royalty expenses were $88.0 million or 17.4% of net sales in fiscal 1999
compared to $58.3 million or 19.1% of net sales in fiscal 1998. Through
increased leverage of fixed costs, the remaining selling, general and
administrative costs decreased to 8.2% of net sales or $41.6 million in fiscal
1999 compared to 8.5% of net sales or $25.9 million in fiscal 1998.
OPERATING INCOME. As a result of the foregoing, operating income
increased by $39.7 million or 133.8%, to $69.4 million in fiscal 1999 from $29.7
million in fiscal 1998. Operating income as a percentage of net sales increased
to 13.7% in fiscal 1999 from 9.7% in fiscal 1998, primarily as a result of
higher net sales and the increased leverage of fixed costs.
NET INTEREST EXPENSE. Net interest expense was approximately $15.5
million for fiscal 1999 compared to $5.3 million in fiscal 1998. Salton's rate
of interest on amounts outstanding was a weighted average annual rate of 9.2% in
fiscal 1999 compared to 9.5% in fiscal 1998. The average amount of all debt
outstanding was $155.7 million for fiscal 1999 compared to $52.4 million for the
same period in fiscal 1998. This increase was used to complete Salton's
recapitalization, complete the acquisition of Toastmaster and to finance higher
net sales.
Subsequent to the year ended June 27, 1998, Salton consummated the
recapitalization. In connection therewith, Salton used a portion of the proceeds
it received from the new credit agreement to refinance all outstanding
indebtedness under Salton's prior credit agreement. Accordingly, at June 27,
1998, Salton had incurred expense with the early termination of the prior credit
agreement of approximately $1.1 million.
During fiscal 1998, Salton 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. Salton had tax expense of $19.3 million in fiscal
1999 as compared to tax expense of $12.2 million in fiscal 1998.
NET INCOME. Net income increased 72.9% to $34.5 million in fiscal 1999,
compared to $20.0 million in fiscal 1998. Excluding a non-recurring after tax
gain of approximately $5.4 million ($9.0 million before taxes) from the sale of
marketable securities by Salton, and after-tax costs of approximately $681,000
($1.1 million before taxes) associated with the refinancing of Salton's credit
facility, net income increased 126.1% in fiscal 1999.
EARNINGS PER SHARE. Basic earnings per common share were $3.21 per
share on weighted average common shares outstanding of 10,760,455 in fiscal 1999
compared to earnings of $1.02
-32-
<PAGE> 32
per share on weighted average common shares outstanding of 19,593,698 in the
same period in fiscal 1998. Diluted earnings per common share were $2.37 per
share on weighted average common shares outstanding, including dilutive common
stock equivalents, of 14,561,964 in fiscal 1999 compared to earnings of $0.99
per share on weighted average common shares outstanding, including dilutive
common stock equivalents, of 20,259,395 in the same period in fiscal 1998. All
share counts reflect a 3-for-2 split of Salton's common stock effective July 28,
1999, for stockholders of record at the close of business on July 14, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, operating activities provided cash of $5.6 million
and $47.1 million of cash was used in investing activities. The cash provided
from operating activities resulted primarily from the growth in net income in
the period, offset by higher levels of receivables and inventory and lower
levels of accounts payable when compared to year-end June 26, 1999. The primary
investing activities included the George Foreman transaction and equity
investments in Amalgamated and ePods, as well as increased investment in capital
assets, primarily tooling. Financing activities provided net cash of
$37.8 million, primarily from draws under the revolving line of credit of
$36.4 million.
In the quarter ended December 25,1999, Salton acquired, effective July
1, 1999, the right to use in perpetuity and worldwide the name "George Foreman"
in connection with the marketing and sale of food preparation and non-alcoholic
drink preparation and serving appliances. The aggregate purchase price payable
to George Foreman and other participants was $137.5 million, of which $113.75
million is payable in five annual cash installments and the remaining $23.75
million was paid through the issuance of 779,191 shares of Salton, Inc. common
stock. The first cash installment of $22.75 million was paid during fiscal 2000.
In connection with the transaction, Salton issued a five-year $91.0 million
non-interest bearing subordinated promissory note recorded at its present value
of $74.5 million accreted to the present value of $80.8 million as of July 1,
2000. The effect of the George Foreman transaction was an elimination of royalty
expense, partially offset by the recording of amortization of $8.1 million and
imputed interest of $6.3 million.
On September 7, 2000 Salton announced that it had reached an agreement
to satisfy $22.75 million of payment obligations, which otherwise would have
been due on June 30, 2001, that it incurred in connection with its acquisition
of the George Foreman name by issuing 621,074 shares of its common stock to
George Foreman and other venture partners. Salton has agreed, under certain
circumstances, to pay an amount of cash and/or additional shares of its common
stock if the shares issued to George Foreman and the others are sold for less
than $36.625 per share during a specified one year period. George Foreman and
the others have agreed, under certain circumstances, to pay Salton in cash 50%
of the excess over $36.625 per share of any shares sold during such one year
period, plus 50% of the excess of the market value over $36.625 for any shares
retained at the end of such one year period.
At July 1, 2000, Salton had debt outstanding of $327.2 million,
including $125.0 million of 10-3/4% senior subordinated notes due 2005, and had
the ability to borrow up to an additional $30.0 million under its revolving
credit facility. Typically, given the seasonal nature of Salton's business,
Salton's borrowings tend to be the highest in mid-fall and early winter.
-33-
<PAGE> 33
Salton amended and restated its credit agreement among Salton, Lehman
Brothers Inc., as arranger, Lehman Commercial Paper Inc., as syndication agent
and administration agent, and a syndicate of banks (the "Amended Credit
Agreement") during the quarter ended December 25, 1999. Salton increased its
existing revolving credit facility from $80.0 million to $115.0 million. The
Amended Credit Agreement also provides for $160.0 million in a senior secured
credit facility consisting of a $45.0 million term loan at an established base
rate (equivalent to the prime rate of interest) plus an applicable margin of 225
basis points or, at the Company's election, a eurodollar rate (equivalent to the
LIBOR rate) plus an applicable margin of 325 basis points maturing in
twenty-four consecutive quarterly installments commencing on March 26, 1999; and
a $115.0 million revolving credit facility at an established base rate
(equivalent to the prime rate of interest) plus an applicable margin or, at 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 maturing on January 7, 2004. The
Amended Credit Agreement is secured by a first lien on substantially all the
Company's assets. Credit availability is based on a formula related to trade
accounts receivable, inventories and outstanding letters of credit.
Salton's Amended Credit Agreement and senior subordinated notes contain
a number of significant covenants that, among other things, restrict the ability
of Salton 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 Amended Credit Agreement, Salton
is required to comply with specified financial ratios and tests, including a
minimum net worth test, a fixed charge coverage ratio, an interest coverage
ratio and a leverage ratio.
On August 24, 2000 Salton signed a commitment letter with Lehman
Commercial Paper Inc. and Lehman Brothers Inc. to amend and restate the Amended
Credit Agreement, to increase by $50,000,000 the amount of the credit facilities
made available thereunder, reduce the pricing grid for interest rates under
certain circumstances and to amend certain of the terms applicable thereto.
Salton's ability to make scheduled principal and interest payments
on, or to refinance, its indebtedness, or to fund planned capital expenditures
will depend upon its future performance, which is subject to general economic,
financial, competitive and other factors that are beyond its control. Salton's
ability to fund its operating activities is also dependent upon its rate of
growth, ability to effectively manage its inventory, the terms under which it
extends credit to customers and its ability to collect under such terms and its
ability to access external sources of financing. Based upon the current level of
operations and anticipated growth, management believes that future cash flow
from operations, together with available borrowings under the Amended Credit
Agreement and funds anticipated to be available from the issuance of additional
debt and/or equity securities, will be adequate to meet Salton's anticipated
requirements for capital expenditures, working capital, interest payments and
scheduled principal payments over the next 12 months. There can be no assurance,
however, that Salton's business will continue to generate sufficient cash flow
from operations in the future to service its debt and make necessary
-34-
<PAGE> 34
capital expenditures after satisfying certain liabilities arising in the
ordinary course of business. If unable to do so, Salton may be required to
refinance all or a portion of its existing debt, to sell assets or to obtain
additional financing. There can be no assurance that any such refinancing would
be available or that any such sales of assets or additional financing could be
obtained.
ACCOUNTING PRONOUNCEMENTS
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. Components of other
comprehensive income (loss) include foreign currency translation gains and
minimum pension liability, net of tax.
During the fourth quarter of fiscal 1999, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement requires public business enterprises to report certain information
about operating segments, their products and services, the geographic areas in
which they operate, and their major customers. The effect of this new statement
is limited to the form and content of disclosures.
During the fourth quarter of fiscal 1999, the Company adopted SFAS
No. 132, "Employer's Disclosures about Pensions and other Post-Retirement
Benefits." The effect of this new statement is limited to the form and content
of disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which was
amended in June 1999 with the issuance of SFAS No. 137. SFAS No. 137 delayed the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
SFAS No. 133 will change accounting and disclosure requirements for derivative
instruments and hedging activities. The adoption of SFAS No. 133 will not have
a material effect on the Company's consolidated financial statements.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE
The results of operations for the periods discussed have not been
significantly affected by inflation or foreign currency fluctuation. Salton
generally negotiates its purchase orders with its foreign manufacturers in
United States dollars. Thus, Salton'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.
SEASONALITY
Salton's business is highly seasonal, with operating results varying
from quarter to quarter. Salton has historically experienced higher sales during
the months of August through November primarily due to increased demand by
customers for Salton's products attributable to holiday
-35-
<PAGE> 35
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The following tables provide information about the Company's market
sensitive financial instruments and constitutes a "forward-looking statement."
The Company's major market risk exposure is changing interest rates in the
United States. The Company's policy is to manage interest rates through the use
of a combination of fixed and variable rate debt. The fair value of the
Company's long-term, fixed rate debt was estimated based on dealer quotes. The
carrying amount of short-term debt and long-term variable-rate debt approximates
fair value. All items described in the tables are non-trading.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR 2000 2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
Liabilities:
Revolver $68,000 $68,000 $68,000
Average interest rates 8.73%
Jr. subordinated note payable $13,406 $13,406 $9,015
Average interest rate 8.0%
Foreman note payable $45,500 $22,750 $22,750 $91,000 $80,854
Average interest rate 8.5% 8.5% 8.5%
Other notes payable $62 $35 $4 $101 $101
Average interest rate 5.37% 5.37% 5.37%
Long-term debt,
including current
portion
Fixed rate amount $125,000 $125,000 $125,000
Average interest rates 10.75%
Variable rate amount $375 $500 $500 $11,000 $31,875 $44,250 $44,250
Average interest rates 9.77% (1) (1) (1) (1)
FISCAL YEAR 1999 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
Liabilities:
Revolver $30,000 $30,000 $30,000
Average interest rates 7.98%
Jr. subordinated note payable $14,126 $14,126 $8,949
Average interest rate 8.0%
Long-term debt,
including current
portion
Fixed rate amount $125,000 $125,000 $125,000
Average interest rates 10.75%
Variable rate amount $500 $500 $500 $500 $11,000 $31,875 $44,875 $44,875
Average interest rates 8.25% (1) (1) (1) (1) (1)
</TABLE>
(1)The variable rate $45.0 million Term Loan is set quarterly at an established
base rate (equivalent to the prime rate of interest) plus an applicable margin
of 225 basis points or, at the Company's election, a eurodollar rate (equivalent
to the LIBOR rate) plus an applicable margin of 325 basis points
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following pages contain the Financial Statements and Supplementary
Data as specified by Item 8 of Part II of Form 10-K.
-36-
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Salton, Inc.
Mount Prospect, Illinois
We have audited the accompanying consolidated balance sheets of Salton, Inc.
(the "Company") as of July 1, 2000 and June 26, 1999 and the related
consolidated statements of earnings, of stockholders' equity and of cash flows
for each of the three years in the period ended July 1, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14 of the
Annual Report on Form 10-K. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Salton, Inc. as of July 1, 2000 and
June 26, 1999 and the results of its operations and its cash flows for each of
the three years in the period ended July 1, 2000 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
September 7, 2000
-37-
<PAGE> 37
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
JULY 1, 2000 AND JUNE 26, 1999
(IN THOUSANDS EXCEPT SHARE DATA)
--------------------------------------------------------------------------------
ASSETS 2000 1999
CURRENT ASSETS:
Cash $ 7,606 $ 11,240
Accounts receivable, less allowance:
2000 - $7,111; 1999 - $6,102 129,850 96,179
Inventories 219,230 144,124
Prepaid expenses and other current assets 10,146 6,350
Deferred income taxes 3,713 3,134
--------- ---------
Total current assets 370,545 261,027
PROPERTY, PLANT AND EQUIPMENT:
Land 1,625 928
Buildings 8,079 4,696
Molds and tooling 35,749 26,364
Warehouse equipment 7,061 6,142
Office furniture and equipment 9,373 6,097
--------- ---------
61,887 44,227
Less accumulated depreciation (27,244) (19,576)
--------- ---------
34,643 24,651
PATENTS AND TRADEMARKS, NET OF
ACCUMULATED AMORTIZATION 127,074 2,711
OTHER INTANGIBLES, NET OF ACCUMULATED AMORTIZATION,
AND OTHER NON-CURRENT ASSETS 32,014 39,927
--------- ---------
TOTAL ASSETS $ 564,276 $ 328,316
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit and other current debt $ 112,155 $ 32,229
Accounts payable 35,113 40,997
Accrued expenses 21,028 21,865
Income taxes payable 4,578
--------- ---------
Total current liabilities 172,874 95,091
NON-CURRENT DEFERRED INCOME TAXES 2,529 157
LONG-TERM DEBT 215,065 182,329
--------- ---------
Total liabilities 390,468 277,577
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized,
2,000,000 shares, 40,000 shares issued
Common stock, $.01 par value; authorized,
40,000,000 shares; shares issued and outstanding:
2000 - 11,351,927; 1999 - 6,834,572 135 133
Treasury stock - at cost (30,211) (90,804)
Additional paid-in capital 62,572 91,968
Accumulated other comprehensive income (loss) 6 (48)
Retained earnings 141,306 49,490
--------- ---------
Total stockholders' equity 173,808 50,739
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 564,276 $ 328,316
========= =========
See notes to consolidated financial statements.
-38-
<PAGE> 38
SALTON, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JULY 1, 2000, JUNE 26, 1999, AND JUNE 27, 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
NET SALES $ 837,302 $ 506,116 $ 305,599
COST OF GOODS SOLD 467,250 285,526 179,376
DISTRIBUTION EXPENSES 37,639 21,621 12,327
--------- --------- ---------
GROSS PROFIT 332,413 198,969 113,896
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 156,749 129,588 84,216
--------- --------- ---------
OPERATING INCOME 175,664 69,381 29,680
INTEREST EXPENSE, NET (28,761) (15,518) (5,333)
COSTS ASSOCIATED WITH REFINANCING (1,133)
REALIZED GAIN ON MARKETABLE SECURITIES 8,972
--------- --------- ---------
INCOME BEFORE INCOME TAXES 146,903 53,863 32,186
INCOME TAX EXPENSE 55,087 19,320 12,205
--------- --------- ---------
NET INCOME $ 91,816 $ 34,543 $ 19,981
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,221 10,760 19,594
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 15,526 14,562 20,259
NET INCOME PER COMMON SHARE: BASIC $ 8.18 $ 3.21 $ 1.02
========= ========= =========
NET INCOME PER COMMON SHARE: DILUTED $ 5.91 $ 2.37 $ 0.99
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
-39-
<PAGE> 39
SALTON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 27, 1998 THROUGH JULY 1, 2000
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON PREFERRED ADDITIONAL RETAINED
SHARES SHARES COMMON PREFERRED PAID IN EARNINGS
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 28, 1997 13,029 $ 130 $ 53,036 $ (5,034)
Net income 19,981
Other comprehensive income:
Unrealized gains reclassification
adjustment net of tax of $720
Total comprehensive income
Issuance of common stock 25 300
Stock options exercised 46 145
------- --------- --------- ---------
BALANCE, JUNE 27, 1998 13,100 130 53,481 14,947
Net income 34,543
Other comprehensive income:
Minimum pension liability
net of tax of $28
Foreign currency translation
Total comprehensive income
Issuance of preferred stock 40 37,000
Purchase of treasury stock (6,535)
Stock options exercised 270 3 1,487
------ ------- --------- --------- ---------
BALANCE, JUNE 26, 1999 6,835 40 133 91,968 49,490
Net income 91,816
3 for 2 stock split effective 7/28/99 3,417 (47,496)
Other comprehensive income:
Minimum pension liability
net of tax of $28
Foreign currency translation
Total comprehensive income
Issuance of common stock 942 16,625
Stock options exercised 158 2 1,475
------ ------- --------- --------- ---------
BALANCE, JULY 1, 2000 11,352 40 $ 135 $ 62,572 $ 141,306
====== ======= ========= ========= =========
<CAPTION>
ACCUMULATED
OTHER LESS TOTAL TOTAL
TREASURY COMPREHENSIVE NOTE STOCKHOLDERS' COMPREHENSIVE
STOCK INCOME RECEIVABLE EQUITY INCOME
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 28, 1997 $ 1,337 $ (10,848) $ 38,622
Net income 19,981 $ 19,981
Other comprehensive income:
Unrealized gains reclassification
adjustment net of tax of $720 (1,337) (1,337) (1,337)
---------
Total comprehensive income $ 18,644
=========
Issuance of common stock 300
Stock options exercised 145
------- --------- ---------
BALANCE, JUNE 27, 1998 (10,848) 57,711
Net income 34,543 $ 34,543
Other comprehensive income:
Minimum pension liability
net of tax of $28 (50) (50) (50)
Foreign currency translation 2 2 2
---------
Total comprehensive income $ 34,495
=========
Issuance of preferred stock 37,000
Purchase of treasury stock $ (90,804) 10,848 (79,956)
Stock options exercised 1,489
--------- ------- --------- ---------
BALANCE, JUNE 26, 1999 (90,804) (48) 50,739
Net income 91,816 $ 91,816
3 for 2 stock split effective 7/28/99 47,496
Other comprehensive income:
Minimum pension liability
net of tax of $28 50 50 50
Foreign currency translation 4 4 4
---------
Total comprehensive income $ 91,870
=========
Issuance of common stock 13,097 29,722
Stock options exercised 1,477
--------- ------- --------- ---------
BALANCE, JULY 1, 2000 $ (30,211) $ 6 $ $ 173,808
========= ======= ========= =========
</TABLE>
See notes to consolidated financial statements.
-40-
<PAGE> 40
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 1, 2000, JUNE 26, 1999, AND JUNE 27, 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 91,816 $ 34,543 $ 19,981
Adjustments to reconcile net income
to net cash from operating activities:
Imputed interest on note payable 6,336
Gain on sale of marketable securities (8,972)
Deferred income taxes 1,793 4,109 (1,428)
Depreciation and amortization 19,075 7,301 4,301
Equity in net income of investees (321)
Purchase reduction of note payable and
other noncash items 1,662 (208)
Changes in assets and liabilities, net of acquisition:
Accounts receivable (33,671) (12,176) (17,578)
Inventories (75,106) (26,406) (34,537)
Prepaid expenses and other current assets (3,796) (1,365) 1,881
Accounts payable (5,884) 14,716 1,599
Taxes payable 4,578 (4,290) 6,406
Accrued expenses (837) (1,032) 3,245
--------- --------- ---------
Net cash from operating activities 5,645 15,192 (25,102)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,976) (5,390) (4,565)
Proceeds from the sale of marketable securities 19,072
Acquisition of George Foreman Trademark (22,750)
Additions to intangibles for patents/trademarks (737)
Equity investment (9,615)
Acquisition of businesses (108,126)
--------- --------- ---------
Net cash from investing activities (47,078) (113,516) 14,507
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment) proceeds from revolving line of credit and other debt 36,367 (20,475) 12,498
Repayment of long-term debt (625) (90,125)
Proceeds from long-term debt 260,000
Repayment of subordinated and other debt (125) (5,433)
Costs associated with refinancing (616) (8,065) 1,133
Common stock issued 2,669 1,489 445
Preferred stock issued 40,000
Purchase of treasury stock (70,799)
Costs associated with preferred stock issuance (2,999)
--------- --------- ---------
Net cash from financing activities 37,795 108,901 8,643
--------- --------- ---------
The effect of exchange rate changes on cash 4 2
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (3,634) 10,579 (1,952)
CASH, BEGINNING OF YEAR 11,240 661 2,613
--------- --------- ---------
CASH, END OF YEAR $ 7,606 $ 11,240 $ 661
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 22,257 14,046 5,893
Income taxes 50,509 25,022 5,799
</TABLE>
-41-
<PAGE> 41
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 1, 2000, JUNE 26, 1999, AND JUNE 27, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In the quarter ended March 25, 2000, the Company authorized the issuance of
53,977 shares of common stock out of treasury for payment of executive
bonuses.
In the quarter ended December 25, 1999, the Company acquired, effective July
1, 1999, the right to use in perpetuity and worldwide the name "George
Foreman" in connection with the marketing and sale of food preparation and
non-alcoholic drink preparation and serving appliances. The aggregate
purchase price payable to George Foreman and other participants was
$137,500, of which $113,750 is payable in five annual cash installments, and
the remaining $23,750 was paid through the issuance of 779,191 shares of
Salton, Inc. common stock issued out of treasury. The first cash installment
of $22,750 was paid during the first half of fiscal 2000. In connection with
the transaction the Company issued a five-year $91,000 non-interest bearing
subordinated promissory note which is recorded at its present value of
$80,854 as of July 1, 2000.
In the quarter ended December 25, 1999, the Company retired a $4.0 million
note payable associated with the acquisition of Toastmaster Inc. by issuing
109,090 shares of common stock out of treasury. The Company received $1.2
million in cash related to the subsequent sale of this stock by the holder,
per terms of the note payable retirement.
In the quarter ended September 26, 1998, the Company repurchased 6,535 shares
of the Company's common stock from Applica, Inc. (formerly known as
Windmere-Durable Holdings Inc.) ("Applica") for a total purchase price of
$90,804. The purchase price included the issuance of a six and one-half year
$15,000 subordinated promissory note which bears interest at 4% per annum
which is recorded at its fair value of $9,015 as of July 1, 2000 and the
effective repayment of Applica's promissory note to the Company for the
principal amount of $10,544.
See notes to consolidated financial statements. (Concluded)
-42-
<PAGE> 42
SALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 1, 2000, JUNE 26, 1999, AND JUNE 27, 1998
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Salton, Inc. ("Salton" or the "Company") is a leading domestic designer,
marketer, manufacturer and distributor of a broad range of branded, high
quality small appliances, tabletop products and personal care/time
products.
The Company's portfolio of well-recognized owned and licensed brand names
includes Salton(R), Toastmaster(R), Maxim(R), Breadman(R), Juiceman(R),
JuiceLady(R), Calvin Klein(R), George Foreman Grills(R),
White-Westinghouse(R), Farberware(R), Melitta(R), Block(R) China,
Atlantis(R) Crystal, Sasaki(R), Rejuvenique(R), Salton Creations(R),
Marilyn Monroe(TM), Taco Bell(R), Looney Tunes(R), Ingraham(R), Timex(R),
and Indiglo(R).
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of all majority-owned subsidiaries. Investments in
affiliates, in which the company has the ability to exercise significant
influence, but not control, are accounted for by the equity method. All
other investments in affiliates are carried at cost. 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 year ended July 1, 2000 consisted of 53 weeks and
is referred to as "fiscal 2000." The fiscal years ended June 26, 1999, and
June 27, 1998 each consisted of 52 weeks and are referred to as "fiscal
1999", and "fiscal 1998", respectively.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost
is determined by the last-in, first-out (LIFO) method, for approximately
29% and 32% of the Company's inventories as of July 1, 2000 and June 26,
1999. All remaining inventory cost is determined on the first-in,
first-out basis. See Note 3 "Inventories."
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, which range from three to forty
years. For tax purposes, assets are depreciated using accelerated methods.
INTANGIBLES AND NON-CURRENT ASSETS - Intangible assets, which are
amortized over their estimated useful lives, and other non-current assets
consist of:
-43-
<PAGE> 43
<TABLE>
<CAPTION>
USEFUL LIFE JULY 1, JUNE 26,
(IN THOUSANDS) (IN YEARS) 2000 1999
<S> <C> <C> <C>
Patents and trademarks, net 5-20 $127,074 $ 2,711
Goodwill 10-40 12,807 32,768
Financing and organization costs 2-7 9,152 7,051
Other non-current assets 10,055 108
-------- -------
Other intangibles, net, and other noncurrent assets 32,014 39,927
-------- -------
Intangible assets, net, and other non-current assets $159,088 $42,638
======== =======
</TABLE>
Accumulated amortization of intangible assets was $18.1 million and $6.7
million at July 1, 2000 and June 26,1999, respectively.
LONG-LIVED ASSETS - Long-lived assets are reviewed for possible impairment
whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. If such review indicates
that the carrying amount of long-lived assets is not recoverable, the
carrying amount of such assets is reduced to the estimated recoverable
value.
REVENUE RECOGNITION - The Company recognizes revenues when goods are
shipped to its customers. Provision is made for estimated cost of returns,
warranties, and product liability claims.
DISTRIBUTION EXPENSES - Distribution expenses consist primarily of
freight, warehousing, and handling costs of products sold.
ADVERTISING - The Company sponsors various programs under which it
participates in the cost of advertising and other promotional efforts for
Company products undertaken by its retail customers. Advertising and
promotion costs associated with these programs are expensed in the period
in which the advertising or other promotion by the retailer occurs.
The Company's tradenames and, in some instances, specific products, also
are promoted from time to time through direct marketing channels,
primarily television. Advertising and promotion costs are expensed in the
period in which the advertising and promotion occurs.
SELF-INSURANCE - The Company maintains a self-insurance program for health
claims and workers' compensation claims for certain covered employees. The
Company accrues estimated future costs that will be incurred for existing
employee claims. The Company does not provide any post-retirement health
care benefits.
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 - On June 28, 1999, the
Company's Board of Directors authorized a 3-for-2 split of its common
stock effective July 28, 1999, for stockholders of record at the close of
business on July 14, 1999. All earnings per-share data in the accompanying
consolidated financial statements have been restated to give effect to the
split.
-44-
<PAGE> 44
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
for options and warrants and the if-converted method for convertible
securities. All earnings per share data presented in these financial
statements 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. The fair
value of the Company's long-term, fixed rate debt was estimated based on
dealer quotes and approximates the carrying value recorded. The carrying
amount of short-term debt and long-term variable-rate debt approximates
fair value. During fiscal 1997, the investment in Applica common stock was
accounted for as "available for sale" and was carried at fair value. The
stock was sold during fiscal 1998. See Note 4 "Applica Transaction."
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. Components of other comprehensive income (loss) include
foreign currency translation gains and minimum pension liability, net of
tax, respectively.
During the fourth quarter of fiscal 1999, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." This statement requires public business enterprises to
report certain information about operating segments, their products and
services, the geographic areas in which they operate, and their major
customers. The effect of this statement is disclosed in Note 13 "Operating
Segments".
During the fourth quarter of fiscal 1999, the Company adopted SFAS No.
132, "Employer's Disclosures about Pensions and other Post-Retirement
Benefits." The effect of this statement is disclosed in Note 8 "Employee
Benefit Plans".
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
was amended in June 1999 with the issuance of SFAS No. 137. SFAS No. 137
delayed the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. SFAS No. 133 requires that all derivative financial
instruments be recognized in the financial statements and measured at fair
value regardless of the purpose or intent for holding them. Changes in the
fair value of derivative financial statements are either recognized
periodically in income or shareholders' equity, depending on whether the
derivative is being used to hedge changes in fair value or cash flows. The
adoption of SFAS 133 will not have a material effect on the Company's
consolidated financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1999
and 1998 financial statements to conform with current year presentation.
2. ACQUISITIONS AND ALLIANCES
On January 7, 1999, the Company acquired the stock of Toastmaster Inc.
("Toastmaster"), a Columbia, Missouri based manufacturer and marketer of
kitchen and small household electrical appliances and time
-45-
<PAGE> 45
products (the "Toastmaster Acquisition"). The Company paid Toastmaster
shareholders $7.00 per share in cash, for a total purchase price of
approximately $53.2 million. In addition, Toastmaster's outstanding debt
of $57.8 million was paid by the Company in connection with the
acquisition. The acquisition was accounted for as a purchase. The purchase
price has been allocated based upon estimated fair market values at the
date of acquisition. The excess of the purchase price over the fair values
of the net assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over forty years.
The operating results of Toastmaster have been included in the
consolidated statements of earnings from the date of acquisition. The
following unaudited pro forma results of operations assume the transaction
occurred at the beginning of the periods presented:
(IN THOUSANDS) JUNE 26, 1999 JUNE 27, 1998
Net sales $597,140 $465,201
Operating income 67,350 38,327
Net income 27,052 14,317
Net income per share:
Basic 2.51 0.73
Diluted 1.86 0.71
The pro forma results are for informational purposes only and do not
purport to represent what the Company's results of operations would have
actually been had the transaction been consummated for the periods
indicated.
On March 31, 1999, the Company bought certain assets of Sasaki, Inc., a
well-known designer and manufacturer of high-quality tabletop products and
accessories for the home, from Sasaki Glass Company Ltd. Under the terms
of the transaction, Salton purchased Sasaki's inventory, except for the
Christian Dior tabletop product line, in addition to licensing the
Sasaki(R) brand name for a period of twenty years, with an option to renew
on mutually agreed upon terms. As part of the transaction, Salton agreed
to assume certain minor liabilities.
On October 6, 1999, Salton purchased approximately 21% of the outstanding
shares of Amalgamated Appliance Holdings Limited ("Amalgamated"), a
leading manufacturer and distributor of a wide range of branded consumer
electronics and appliances in South Africa, for approximately $6 million.
The investment is being accounted for under the equity method of
accounting, and is included in the consolidated financial statements in
other assets. Based in South Africa, Amalgamated is a publicly held
company, listed on the Johannesburg Stock Exchange, which owns the rights
to the Salton brand name in South Africa. In conjunction with this
transaction, the Chief Executive Officer of Salton, Inc., was added to
Amalgamated's Board of Directors.
In the quarter ended December 25, 1999, Salton acquired, effective July 1,
1999, the right to use in perpetuity and worldwide the name "George
Foreman" in connection with the marketing and sale of food preparation and
non-alcoholic drink preparation and serving appliances. The aggregate
purchase price payable to George Foreman and other participants was $137.5
million, of which $113.75 million is payable in five annual cash
installments, and the remaining $23.75 million was paid through the
issuance of 779,191 shares of Salton, Inc. common stock issued out of
treasury. The first cash installment of $22.75 million was paid during the
first half of fiscal 2000. In connection with the transaction Salton
issued a five-year $91.0 million non-interest bearing subordinated
promissory note recorded at its present value of $80.8 million as of July
1, 2000. In the quarter ended December 25, 1999, the effect of the
-46-
<PAGE> 46
George Foreman transaction was an elimination of $16.6 million in royalty
expense, partially offset by the recording of amortization of $4.0 million
and imputed interest of $3.2 million. The following pro forma results of
operations assumed the transaction occurred at the beginning of the
periods presented:
(IN THOUSANDS) JUNE 26, 1999 JUNE 27, 1998
Net Sales $506,116 $305,599
Operating Income 99,409 37,597
Net Income 47,310 20,350
Net income per share:
Basic 4.40 1.04
Diluted 3.25 1.00
The proforma results are for informational purposes only and do not
purport to represent what the Company's results of operations would have
actually been had the transaction been consummated for the periods
indicated.
On January 14, 2000, Salton entered into a strategic alliance with ePods,
Inc., an Internet company, which offers consumers an easy, simple to use,
all-in-one solution to accessing the Internet. Salton will become the
exclusive distributor of ePods products in the U.S., Canada and Mexico. As
part of this alliance, Salton has invested approximately $2 million in
convertible preferred stock of ePods, recorded at its historical cost, and
has a note receivable from ePods, Inc. of approximately $1.6 million, both
of which are included in the consolidated financial statements in other
assets.
3. INVENTORIES
A summary of inventories is as follows:
(IN THOUSANDS) JULY 1, 2000 JUNE 26, 1999
Raw materials $ 6,392 $ 5,359
Work-in-process 447 1,238
Finished goods 212,391 137,527
-------- --------
Total $219,230 $144,124
======== ========
If the first-in, first-out (FIFO) method of inventory valuation had been
used to determine cost for 100% of the Company's inventories at July 1,
2000 and June 26, 1999, they would have been approximately $2.9 million
and $1.7 million lower than reported.
4. APPLICA TRANSACTION
On July 11, 1996, the Company consummated a transaction with Applica, Inc.
("Applica"), formerly known as Windmere--Durable Holdings, Inc. (the
"Applica Transaction"), pursuant to a Stock Purchase Agreement dated
February 27, 1996, as amended (the "Stock Purchase Agreement"). Applica 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, Applica purchased from the Company 6,508,572
newly issued shares of Common Stock (the "Purchase"), which represented
50%
-47-
<PAGE> 47
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, Applica paid the Company: (i) $3.2 million in cancellation of a
loan, as described below; (ii) a subordinated promissory note in the
aggregate principal amount of $10.8 million (the "Note"), which Note was
payable July 11, 2001, bore interest at 8%, payable quarterly, and was
secured by certain assets of Applica and its domestic subsidiaries and
guaranteed by such domestic subsidiaries; and (iii) 748,112 shares of
Applica's common stock. Applica's common stock is traded on the New York
Stock Exchange. A portion of the consideration for the Purchase was paid
by the cancellation of the Company's obligation to repay a loan in the
principal amount of $3.2 million which Applica had made to the Company in
April 1996. Applica was also granted an option (the "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, Applica exercised options to purchase 26,500 shares of Common
Stock during 1998.
During fiscal 1998, the Company sold 748,112 shares of Applica's common
stock, realizing a pre-tax gain of approximately $8.9 million.
On July 28, 1998, Salton repurchased (the "Stock Repurchase") 6,535,072
shares of Salton common stock owned by Applica pursuant to a Stock
Agreement dated as of May 6, 1998 (the "Applica Stock Agreement") by and
among Salton, Applica and the executive officers of Salton. Prior to the
Stock Repurchase, Applica owned approximately 50% of Salton's outstanding
common stock. The price for the Stock Repurchase was $12 per share in cash
plus a $15.0 million subordinated promissory note (the "Junior
Subordinated Note"). The Junior Subordinated Note, which 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 Applica and its affiliates during the term of the
note. During fiscal 2000 and fiscal 1999, the Company reduced this debt
and interest by approximately $1.3 and $1.5 million, respectively, for
related purchases of products from Applica. The principal amount of the
Junior Subordinated Note is also subject to cancellation in the event
Salton's supply agreement with Kmart is terminated for any reason.
In connection with the Stock Repurchase: (i) Applica effectively repaid
(the "Note Repayment") the Note; (ii) Salton repurchased for approximately
$3.3 million Applica's Option (the "Option Repurchase"); and (iii) Applica
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."
Effective upon the closing of the Repurchase, each of the persons who had
been designated by Applica to serve on Salton's Board of Directors
resigned from Salton's Board of Directors.
5. REVOLVING LINE OF CREDIT, LETTERS OF CREDIT AND LONG-TERM DEBT
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 provided for $215.0 million in senior secured 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 facility. As further
explained below, the New Credit Agreement was amended and restated on
January 7, 1999 and again on December 10, 1999.
-48-
<PAGE> 48
On December 16, 1998, the Company issued $125.0 million of 10 3/4% Senior
Subordinated Notes (the "Subordinated Notes") due 2005. Proceeds of the
Subordinated Notes were used to repay outstanding indebtedness and for
working capital and general corporate purposes. The Subordinated Notes
contain a number of significant covenants that, among other things,
restrict the ability of the Company to dispose of assets, incur additional
indebtedness, prepay other indebtedness, pay dividends, repurchase or
redeem capital stock, enter into certain investments, enter into sale and
lease-back transactions, make certain acquisitions, engage in mergers and
consolidations, create liens, or engage in certain transactions with
affiliates, and will otherwise restrict corporate and business activities.
In addition, under the Subordinated Notes, the Company is required to
comply with a specified financial fixed charge coverage ratio. At June 26,
1999, the Company was in compliance with all the covenants described
above.
Salton amended and restated the New Credit Agreement on January 7, 1999
(the "Amended Credit Agreement"). The Amended Credit Agreement, among
Salton, Lehman Brothers Inc., as arranger, Lehman Commercial Paper Inc.,
as syndication agent and administration agent, and a syndicate of banks,
provides for $125.0 million in a senior secured credit facility consisting
of a $45.0 million Term Loan at an established base rate (equivalent to
the prime rate of interest) plus an applicable margin of 225 basis points
or, at the Company's election, a eurodollar rate (equivalent to the LIBOR
rate) plus an applicable margin of 325 basis points maturing in
twenty-four consecutive quarterly installments commencing on March 26,
1999; and a $80.0 million revolving credit facility at an established base
rate (equivalent to the prime rate of interest) plus an applicable margin
of 200 basis points 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 maturing on January 7, 2004. The Amended Credit Facility
is secured by a first lien on substantially all the Company's assets.
Credit availability is based on a formula related to trade accounts
receivable, inventories and outstanding letters of credit.
On October 29, 1999, Salton retired the $4.0 million note payable
associated with the acquisition of Toastmaster Inc. by issuing 109,090
shares of common stock out of treasury.
Salton amended and restated the New Credit Agreement again (the "Amended
Credit Agreement") during the quarter ended December 25, 1999. Salton
increased its existing revolving credit facility from $80.0 million to
$115.0 million. The Amended Credit Agreement, among Salton, Lehman
Brothers Inc., as arranger, Lehman Commercial Paper Inc., as syndication
agent and administration agent, and a syndicate of banks, provides for
$160.0 million in a senior secured credit facility consisting of a $45.0
million Term Loan at an established base rate (equivalent to the prime
rate of interest) plus an applicable margin of 225 basis points or, at the
Company's election, a eurodollar rate (equivalent to the LIBOR rate) plus
an applicable margin of 325 basis points maturing in twenty-four
consecutive quarterly installments commencing on March 26, 1999; and a
$115.0 million revolving credit facility at an established base rate
(equivalent to the prime rate of interest) plus an applicable margin or,
at 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 maturing on
January 7, 2004.
The Amended Credit Facility is secured by a first lien on substantially
all the Company's assets. Credit availability is based on a formula
related to trade accounts receivable, inventories and outstanding letters
of credit. The Amended Credit Agreement contains a number of significant
covenants that, among other things, restrict the ability of the Company to
dispose of assets, incur additional indebtedness, prepay other
indebtedness, pay dividends, repurchase or redeem capital stock, enter
into certain investments, enter into sale and lease-back transactions,
make certain acquisitions, engage in mergers and consolidations, create
liens, or engage in certain transactions with affiliates, and will
otherwise restrict corporate and business
-49-
<PAGE> 49
activities. In addition, under the Amended Credit Agreement, the Company
is required to comply with specified financial ratios and tests, including
a net average debt ratio, a net average senior debt ratio, a consolidated
fixed charge coverage ratio, and a consolidated interest coverage ratio.
At July 1, 2000, the Company was in compliance with all of the covenants
described above. At July 1, 2000, the base rate plus applicable margin on
the Term Loan was 9.77% and the base rate plus applicable margin on the
Revolving Credit Facility was 8.96%.
Information regarding short-term borrowings under the Revolving Credit
Facility is:
<TABLE>
<CAPTION>
(IN THOUSANDS) JULY 1, 2000 JUNE 26, 1999
<S> <C> <C>
Balance at end of fiscal period $68,000 $30,000
Interest rate at end of fiscal period 8.96% 8.29%
Maximum amount outstanding at any month-end 93,000 50,000
Average amount outstanding 52,974 25,655
Weighted average interest rate during fiscal period 8.73% 7.98%
Outstanding letters of credit at end of fiscal period 17,863 9,414
Unused letters of credit at end of the fiscal period 7,137 586
</TABLE>
Notes payable consist of the Junior Subordinated Note to Applica, Inc.
(see Note 4) and the note payable associated with the acquisition of the
George Foreman trademarks (see Note 2).
Long-term debt matures as follows:
<TABLE>
<CAPTION>
FISCAL JUNIOR OTHER FOREMAN
YEAR SUBORDINATED TERM SUBORDINATED NOTES NOTE
ENDED NOTES LOAN NOTE PAYABLE PAYABLE TOTAL
<S> <C> <C> <C> <C> <C> <C>
2001 $ 375 $ 62 $43,718 $ 44,155
2002 500 35 19,325 19,860
2003 500 4 17,811 18,315
2004 11,000 $9,015 20,015
2005 $125,000 31,875 156,875
Thereafter
-------- ------- ------ ---- ------- --------
$125,000 $44,250 $9,015 $101 $80,854 259,220
======== ======= ====== ==== =======
Less current maturities (44,155)
--------
$215,065
========
</TABLE>
In addition to the preceding maturity schedules, the Company is required
to make additional mandatory payments of 75% 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.
6. CAPITAL STOCK
On June 28, 1999, the Company's Board of Directors authorized a 3-for-2
split of its common stock
-50-
<PAGE> 50
effective July 28, 1999, for stockholders of record at the close of
business on July 14, 1999. All earnings per-share data in the accompanying
financial statements and notes thereto have been restated to give effect
to the split.
On July 28, 1998, the Company issued $40 million of convertible preferred
stock in connection with a Stock Purchase Agreement dated July 15, 1998.
The convertible preferred stock is non-dividend bearing and is convertible
into 3,529,411 shares of Salton common stock (reflecting a $11.33 per
share conversion price). The holders of the convertible preferred stock
are entitled to one vote for each share of Salton common stock that the
holder would receive upon conversion of the convertible preferred stock.
In connection with the convertible preferred stock issuance, two
individuals representing the purchasers of the preferred stock were
appointed to serve on the Company's Board of Directors.
On December 6, 1999, the Company's Board of Directors approved the
amendment to the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of $.01 par value common stock
from 20,000,000 to 40,000,000.
7. EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) JULY 1, 2000 JUNE 26, 1999 JUNE 27, 1998
<S> <C> <C> <C>
Net Income* $91,816 $34,543 $19,981
Average common shares outstanding 11,221 10,760 19,594
Earnings per share-basic $ 8.18 $ 3.21 $ 1.02
Dilutive stock equivalents 4,305 3,802 665
Average common and common equivalent
shares outstanding 15,526 14,562 20,259
Earnings per share-diluted $ 5.91 $ 2.37 $ 0.99
</TABLE>
*Net income is the same for purposes of calculating basic and diluted EPS
Options to purchase 270,000 shares at a price of $29.25 per share were
outstanding at July 1, 2000, but were not included in the computation of
diluted EPS because the options are contingent upon certain external
factors. Options to purchase 212,160 shares of common stock at a price of
$8.17 per share were outstanding at June 27, 1998, but were not included
in the computation of diluted EPS because the exercise prices were greater
than the average market price of the common shares.
8. EMPLOYEE BENEFIT PLANS
The Company has two 401(k) defined contribution plans that cover eligible
employees. The employees are eligible for benefits upon completion of a
specified number of years of service. Under the terms of the plans the
Company may elect to match a portion of the employee contributions. The
Company's discretionary matching contribution is based on a portion of
participants' eligible wages, as defined, up to a maximum amount ranging
typically from two percent to six percent. A higher matching percentage
was approved in fiscal 2000 for Toastmaster employees affected by the
freeze of the Toastmaster defined pension plans. The Company's total
matching contributions were approximately $307,000, $95,000, and $97,000,
in fiscal 2000, 1999, and 1998, respectively. In fiscal 2000, the Company
amended the Toastmaster 401(k) plan to allow for discretionary employer
contributions to all employees, whether or not the employees contribute
individually to the plan, in connection with the freeze of the Toastmaster
defined pension plans. A discretionary employer contribution of
approximately $287,000 was made in fiscal 2000.
-51-
<PAGE> 51
The Company has two defined benefit plans that were assumed in the 1999
acquisition of Toastmaster and cover substantially all of the employees of
Toastmaster. The plans' assets consist of a balanced portfolio of
investments in money market, common stock, bond and real estate funds. The
Company uses March 31 as the measurement date for determining pension plan
assets and obligations. Effective October 30, 1999, the Company's Board of
Directors approved the freezing of benefits under the Company's two
defined benefit plans. Beginning October 31, 1999, no further benefits
were accrued under the plans. Effective June 26, 1999, the Company adopted
SFAS No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits" SFAS No. 132 requires the disclosure of the
information presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS) JULY 1, 2000 JUNE 26, 1999
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 11,748 $ 11,589
Service cost 323 315
Interest cost 788 408
Actuarial (gain)/loss (1,217) (401)
Curtailment gain (1,009)
Benefits paid and expenses (826) (163)
-------- --------
Benefit obligation at end of year $ 9,807 $ 11,748
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 11,050 $ 10,808
Actual return on plan assets 1,793 47
Employer contribution 678 358
Benefits paid from plan assets (826) (163)
-------- --------
Fair value of plan assets at end of year $ 12,695 $ 11,050
======== ========
</TABLE>
-52-
<PAGE> 52
<TABLE>
<CAPTION>
(IN THOUSANDS) JULY 1, 2000 JUNE 26, 1999
<S> <C> <C>
Funded status $ 2,888 $ (698)
Unrecognized net actuarial loss (1,896) 92
Unrecognized transitional asset
Unrecognized prior service cost
Additional pension liability in excess of
unrecognized prior service cost (78)
------- -------
Prepaid (accrued) pension cost recorded in prepaid
expenses and other accrued liabilities, as applicable, in
the accompanying consolidated balance sheet $ 992 $ (684)
======= =======
Weighted average assumptions:
Discount rate 8% 7%
Rate of increase in compensation 5% 5%
Expected return on plan assets 9% 9%
Components of net periodic pension cost:
Service cost benefits earned during the year $ 323 $ 315
Interest cost on projected benefit obligation 788 408
Actuarial return on plan assets (1,021) (480)
Curtailment gain (1,009)
Net amortization and deferral
------- -------
Net pension cost (benefit) $ (919) $ 243
======= =======
</TABLE>
The Company recorded a $1.0 million curtailment gain in 2000 as a result
of a freeze in pension plan benefits. Under the requirements of SFAS No.
87, "Employers' Accounting for Pensions," an additional minimum pension
liability for one plan, representing the excess of accumulated benefits
over the plan assets and accrued pension costs, was recognized at June 26,
1999, with the balance recorded as a separate reduction of stockholders'
equity, net of deferred tax effect. During fiscal 2000, minimum pension
liability recorded in prior years was eliminated as a result of the
curtailment of the plans.
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 continues to measure compensation cost for stock option plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting
For Stock Issued to Employees." Accordingly, no compensation cost has been
recognized for the Company's fixed stock option plans. Had compensation
cost for the Company's stock option plans been determined consistent with
the fair value method outlined in SFAS No. 123, the impact on the
Company's net income and earnings per common share would have been as
follows:
-53-
<PAGE> 53
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998
Net income:
As reported $91,816 $34,543 $19,981
Pro forma 85,266 33,241 18,941
Net income per common share: Basic
As reported $ 8.18 $ 3.21 $ 1.02
Pro forma 7.60 3.09 0.97
Net income per common share: Diluted
As reported 5.91 2.37 0.99
Pro forma 5.49 2.28 0.93
Options to purchase common stock of the Company have been granted to
employees under the 1992, 1995, 1998, and 1999 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:
2000 1999 1998
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 61.45% 60.60% 61.74%
Risk-free interest rate 6.50% 6.16% 5.38%
Expected life of options 7.98 years 7.81 years 7.42 years
In addition, on July 11, 1996, Applica was granted an option to purchase
up to 485,000 shares of common stock at $4.83 per share. This 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.
During fiscal 1998, Applica exercised their option to purchase 26,500
shares of Salton common stock. The Company repurchased the remaining
options held by Applica. See Note 4 "Applica Transaction." A summary of
the Company's fixed stock options for the fiscal years ended July 1, 2000,
June 26, 1999, and June 27, 1998 is as follows:
-54-
<PAGE> 54
<TABLE>
<CAPTION>
2000 1999 1998
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,101 $ 7.83 1,126 $ 6.06 966 $ 4.90
Granted 745 30.36 337 16.74 206 10.82
Exercised (158) 6.64 (270) 5.47 (46) 3.11
Expired or Canceled (459)
------ ------ ------
Outstanding at
end of year 1,688 17.88 734 11.75 1,126 6.06
====== ====== ======
Options exercisable at
end of year 1,038 9.39 461 5.99 1,118 6.05
Weighted-average fair value of
options granted during the year 24.05 12.09 8.14
</TABLE>
The shares outstanding at the beginning of the year for fiscal 2000 have
been restated to reflect the three-for-two stock split that was effective
on July 28,1999. The remaining activity in fiscal 2000 occurred on a
post-split basis.
The following information summarizes the stock options outstanding at July
1, 2000:
<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>
$0.583 - $1.667 234 5.21 1.63 234 $ 1.63
$2.292 - $5.833 40 6.94 5.24 40 5.24
$6.333 - $8.167 392 6.61 7.68 392 7.68
$13.917-$15.917 304 8.50 14.05 304 14.05
$27.375-$34.250 718 9.46 31.05 68 27.38
----- ----- ------
$0.583 - $34.250 1,688 N/A N/A 1,038 $ 9.39
===== =====
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Company purchased inventory from Applica, Inc. of approximately
$26,408,000, $32,340,000, and $27,068,000, in fiscal years ended July 1,
2000, June 26, 1999, and June 27, 1998, respectively.
The Company purchased inventory from Markpeak, Ltd. ("Markpeak"), a Hong
Kong company, including commissions, of approximately $184,955,000,
$187,925,000, and $15,971,000 in fiscal years 2000, 1999, and 1998,
respectively. The Company had a receivable from Markpeak of approximately
$9,881,000 and $13,685,000 at July 1, 2000 and June 26, 1999,
respectively. The Company owed Markpeak approximately $473,000 and
$3,075,000 at July 1, 2000 and June 26, 1999, respectively. Markpeak acts
as a buying agent on behalf of the Company with certain suppliers in the
Far East.
-55-
<PAGE> 55
The Company paid Shapiro, Devine and Craparo, Inc. ("SDC"), a
manufacturers representation firm, commissions of approximately $413,000,
$498,000, and $290,000 in fiscal 2000, 1999, and 1998, respectively. A
director of the Company was a co-founder of SDC. At July 1, 2000, the
Company owed approximately $90,000 and $42,000 for current commissions at
July 1, 2000 and June 26, 1999, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under long-term
operating leases. Rental expense under all leases was approximately
$5,769,000, $3,474,000, and $1,183,000 for the fiscal years ended July 1,
2000, June 26, 1999, and June 27, 1998, respectively.
The future minimum rental commitments as of July 1, 2000 were as follows:
FISCAL YEAR ENDED
(DOLLARS IN THOUSANDS)
2001 $ 5,603
2002 6,221
2003 4,407
2004 3,607
2005 2,762
Thereafter 9,075
-------
Total $31,675
=======
The Company has employment agreements with its four executive officers
that are in effect until December 30, 2002. 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 annual
commitment for future salaries at July 1, 2000, excluding bonuses, was
approximately $1,870,000.
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 $24,779,000 in fiscal 2000, $43,918,000 in fiscal 1999, and
$20,266,000 in fiscal 1998. Royalties paid in fiscal 2000 decreased from
the prior year due to the acquisition of the George Foreman Trademark (see
Note 2).
12. LEGAL PROCEEDINGS
TRADEMARK LITIGATION - In November 1996, White Consolidated 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(R) name for use on lighting products, fans
and electrical accessories for use in the home violates White
Consolidated's rights to the Westinghouse(R) name and
-56-
<PAGE> 56
constitutes a breach of the agreements under which CBS's predecessor sold
White Consolidated 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 White Consolidated, Applica, Salton and certain
other parties as defendants. The two actions were consolidated in the
Pennsylvania court. CBS sought an injunction prohibiting Salton, Applica
and White Consolidated from using the White-Westinghouse(R) name on
products not specifically enumerated in the sale documents between CBS's
predecessor and White Consolidated, and unspecified damages and attorneys'
fees.
On June 30, 1999, CBS and White Consolidated entered into a settlement
agreement relating to the ownership of the White-Westinghouse(R) name for
certain consumer products. Under the settlement, the Company retained its
existing rights under its license from White Consolidated for the use of
the White-Westinghouse(R) name.
In September 1999, Linda Evans Fitness Centers, Inc. (the "Fitness
Centers"), Mark Golub and Thomas Gergley filed suit against the Company
and its principal executive officers alleging that the Company tortuously
interfered with a contract between the Fitness Centers and Ms. Evans by
hiring Ms. Evans to act as a spokesperson for the Rejuvenique(TM) facial
toning system. Before Ms. Evans was hired by the Company, Ms. Evans had
brought suit against the Fitness Centers seeking a determination that her
contract with the Fitness Centers had been terminated on the basis of
fraud and the failure of the Fitness Centers to make certain payments. The
Company believes that it has valid defenses against the claims made
against it by the Fitness Centers. Ms. Evans has agreed to indemnify the
Company against matters relating to her services to the Company.
ENVIRONMENTAL - Salton is participating in environmental remediation
activities at four sites, which it owns or operates. As of July 1, 2000,
Salton has accrued approximately $175,000 for the anticipated costs of
investigation, remediation and/or operation and maintenance costs at these
sites. Although such costs could exceed that amount, Salton believes that
any such excess will not have a material adverse effect on the financial
condition or annual results of operations of Salton.
ARBITRATION - On April 20, 1999, an individual filed a notice of
arbitration asserting a breach of contract claim against Salton due to
Salton's alleged failure to pay royalties, and certain other matters, to
this individual for the sale of certain juice extractors and related
health products.
On August 24, 2000, the arbitrator ruled that all claims against Salton
are not supported by the facts or applicable law except for Salton's
obligation to pay minor royalties. The arbitrator ruled that the
individual must partially reimburse Salton for reasonable attorneys' fees
and costs.
OTHER - Salton is a party to various other actions and proceedings
incident to its normal business operations. Salton believes that the
outcome of such litigation will not have a material adverse effect on the
financial condition or annual results of operations of Salton. Salton also
has product liability and general liability insurance policies in amounts
it believes to be reasonable given its current level of business.
13. OPERATING SEGMENTS
The Company consists of a single operating segment that designs, markets
and distributes housewares, including small appliances, tabletop products
and personal care/time products. This segmentation is appropriate because
the Company makes operating decisions and assesses performance based upon
brand
-57-
<PAGE> 57
management, and such brand management encompasses a wide variety of
products and types of customers. Most of the Company's products are
procured through independent manufacturers, primarily in the Far East, and
are distributed through similar distribution channels.
PRODUCT INFORMATION - NET SALES -
<TABLE>
<CAPTION>
(IN THOUSANDS) JULY 1, 2000 JUNE 26, 1999 JUNE 27, 1998
<S> <C> <C> <C>
Small appliances $742,774 $459,621 $280,607
Tabletop products 24,109 22,875 18,597
Personal care/time products 70,419 23,620 6,395
-------- -------- --------
Total $837,302 $506,116 $305,599
======== ======== ========
</TABLE>
MAJOR CUSTOMERS AND SUPPLIERS - The Company entered into a major supply
contract with Kmart Corporation ("Kmart") on January 31, 1997. Under the
contract, the Company supplies Kmart with small kitchen appliances,
personal care products, heaters, fans and electrical air cleaners and
humidifiers under the White-Westinghouse(R) brand name. Sales to Kmart
approximated 12%, 16%, and 19% of total net sales of the Company in fiscal
2000, 1999, and 1998, respectively.
On March 30, 1999, Salton entered into a five-year supply agreement with
Zellers, the leading national chain of discount department stores in
Canada. Under the contract, the Company supplies Zellers with small
kitchen appliances under the White-Westinghouse(R) brand name. The
agreement has a minimum purchase requirement by Zellers of approximately
$17 million, over an initial period of five years, with rights to extend
the contract for additional one-year periods.
The Company's net sales in the aggregate to its five largest customers
during the fiscal years ended July 1, 2000, June 26, 1999, and June 27,
1998 were 46%, 50%, and 47% of total net sales in these periods,
respectively. In addition to Kmart, one customer accounted for 7%, 10%,
and 7% of total net sales during the fiscal years ended July 1, 2000, June
26, 1999, and June 27, 1998, respectively, while another customer
accounted for 13%, 9%, and 6% for the same respective years.
Although the Company has long-established relationships with many of its
customers, with the exception of Kmart Corporation and Zellers, it does
not have long-term contracts with any of its customers. A significant
concentration of the Company's business activity is with department
stores, upscale mass merchandisers, specialty stores, and warehouse clubs
whose ability to meet their obligations to the Company is dependent upon
prevailing economic conditions within the retail industry.
During fiscal 2000 and 1999, one supplier located in China accounted for
approximately 38.0% and 57.3% of our product purchases. During fiscal
1998, three manufacturers located in China accounted for approximately
13%, 12% and 10%, respectively, of our product purchases.
14. INCOME TAXES
Federal, state and foreign taxes were approximately as follows:
-58-
<PAGE> 58
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
==================================================
(IN THOUSANDS) JULY 1,2000 JUNE 26,1999 JUNE 27,1998
<S> <C> <C> <C>
Federal
Current $44,514 $ 9,778 $10,080
Deferred 1,521 3,605 (1,134)
State
Current 7,954 2,529 2,699
Deferred 272 504 (294)
Foreign
Current 826 2,904 854
Deferred ------- ------- -------
Total $55,087 $19,320 $12,205
======= ======= =======
</TABLE>
Deferred taxes based upon differences between the financial statement and tax
bases of assets and liabilities and available tax carryforwards consisted of:
<TABLE>
<CAPTION>
(IN THOUSANDS) JULY 1,2000 JUNE 26,1999
<S> <C> <C>
Allowance for doubtful accounts $ 1,945 $ 1,161
Depreciation and amortization (2,529) (2,017)
Other deferred items, net 53 268
Net operating loss carry-forward 1,109 2,547
Accrued liabilities 317 2,362
Inventory reserves and capitalization 64 (1,566)
AMT credit carryforward 225 222
------- -------
Net deferred tax asset $ 1,184 $ 2,977
======= =======
</TABLE>
The Company has net loss carry-forwards at July 1, 2000 expiring as follows:
<TABLE>
<CAPTION>
YEAR CARRY-FORWARD EXPIRES AMOUNT
(IN THOUSANDS)
<S> <C>
2018 $ 2,851
-------
Total $ 2,851
=======
</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. While the annual limitations
are calculated on a separate company basis, the combined limitation for the
Company is approximately $5,000,000.
A reconciliation of the statutory federal income tax rate to the effective rate
is as follows:
-59-
<PAGE> 59
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------
(IN THOUSANDS) JULY 1, 2000 JUNE 26, 1999 JUNE 27, 1998
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effective state tax rate 3.9 3.5 4.9
Permanent differences 0.4 0.2 0.3
Effect of foreign tax rate (1.4) (1.9) (2.1)
Other (0.4) (0.9) (0.2)
---- ---- ----
Effective income tax rate 37.5% 35.9% 37.9%
==== ==== ====
</TABLE>
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 $3,150,000 at July 1, 2000.
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>
2000
Net Sales $196,340 $292,767 $172,100 $176,095
Gross Profit 78,819 116,011 67,831 69,751
Net income 13,898 47,558 15,047 15,313
Earning per share: Basic 1.35 4.25 1.33 1.35
Earning per share: Diluted 0.95 3.08 0.95 0.98
1999
Net Sales 104,388 142,684 124,340 134,704
Gross Profit 45,775 53,390 43,352 56,452
Net income 10,819 11,682 5,154 6,888
Earning per share: Basic 0.82 1.19 0.52 0.68
Earning per share: Diluted 0.68 0.83 0.36 0.48
</TABLE>
16. SUBSEQUENT EVENTS
SONEX - On July 19, 2000 Salton acquired Sonex(R) International
Corporation, a designer and distributor of electrically operated
toothbrushes which employ ultra high frequency sonic waves for cleaning,
flossers and related products. Under terms of the deal, Salton acquired
Sonex for approximately $2.6 million in cash, plus an additional cash
performance incentive, based on future sales of Sonex(R) products.
STIFFEL - On Aug. 14, 2000 Salton announced that it acquired the
trademarks, other intellectual property assets and molds of The Stiffel
Company, a premier designer of lamps and related products based in
Chicago, and now in the process of liquidation for approximately $6.5
million in stock. Under the terms of the transaction, Salton will not
assume any liabilities of The Stiffel Company.
RELAXOR - On Aug. 18, 2000 Salton announced that it has executed a
non-binding letter of intent to acquire the Relaxor brand business and
inventory from JB Research, Inc., a California-based company.
-60-
<PAGE> 60
JB Research distributes a full line of high quality personal massagers,
indoor calming pools and other personal care items under the Relaxor name
as well as several other brand names. Salton and JB Research anticipate
executing a purchase contract before October 30, 2000.
FOREMAN - On September 7, 2000 Salton announced it had reached an
agreement to satisfy $22,750,000 of payment obligations, which otherwise
would have been due on June 30, 2001, that it incurred in connection with
its acquisition of the "George Foreman" name by issuing 621,074 shares of
its common stock to George Foreman and other venture participants. Salton
has agreed under certain circumstances to pay an amount of cash and/or
issue additional shares of common stock if the shares issued to George
Foreman and the others are sold for less than $36.625 per share during a
specified one-year period. George Foreman and the others have agreed under
certain circumstances to pay Salton in cash 50% of the excess over
$22,750,000 of the aggregate sales proceeds plus the market value of any
shares retained at the end of such one year period.
LEHMAN COMMITMENT LETTER - On August 24, 2000, the Company signed a
commitment letter with Lehman Commercial Paper Inc. and Lehman Brothers
Inc. to amend and restate its existing Amended Credit Agreement, dated as
of December 10, 1999, to increase by $50,000,000 the amount of the credit
facilities made available thereunder and to amend certain of the terms
applicable thereto.
******
-61-
<PAGE> 61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART II
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to the Directors of the
Company is incorporated herein by reference to the information set forth under
the caption "Election of Directors" in the Company's definitive Proxy Statement
for the 2000 Annual Meeting of Stockholders, since such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Company's fiscal year pursuant to Regulation 14A. Information
required by this Item 10 as to the executive officers of the Company is included
in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the information set forth under the caption "Compensation of Directors and
Executive Officers" in the Company's definitive Proxy Statement for the 1998
Annual Meeting of Stockholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference
to the information set forth under the caption "Stock Ownership of Principal
Holders and Management" in the Company's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information required by this Item 13 is incorporated by reference
to the information set forth under the caption "Certain Transactions" in the
Company's definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A.
-62-
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON REPORT 8-K
(a)(1) FINANCIAL STATEMENTS
The following Financial Statements of the registrant and its
subsidiaries are included in Part II, Item 8:
Page
SALTON
Independent Auditors' Report 37
Consolidated Balance Sheets as of July 1, 2000 and June 26, 1999 38
Consolidated Statements of Earnings for the Years Ended
July 1, 2000, June 26, 1999 and June 27, 1998 39
Consolidated Statements of Stockholders' Equity for the Years Ended
July 1, 2000, June 26, 1999 and June 27, 1998 40
Consolidated Statements of Cash Flows for the Years Ended
July 1, 2000, June 26, 1999 and June 27, 1998 41
Notes to the Consolidated Financial Statements 43
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedules of the Registrant are
included in Item 14 hereof.
Schedule VIII - Valuation and Qualifying Accounts 65
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a)(3) EXHIBITS
See Exhibit Index for the Exhibits filed as part of or incorporated by
reference into this Report.
(b) REPORTS ON FORM 8-K
(i) Current Report on Form 8-K dated December 9, 1999 reporting
under Item 5 Other Events, the Company's entering into
agreements with George Foreman and others for the acquisition
of the right to use the "George Foreman" name.
-63-
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on the 26th day of
September, 2000.
SALTON, INC.
By: /s/ Leonard Dreimann
-----------------------------------
Leonard Dreimann
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on September 26, 2000.
Signature
/s/ LEONHARD DREIMANN
-------------------------------------- Chief Executive Officer and Director
Leonhard Dreimann (Principal Executive Officer)
/s/ WILLIAM B. RUE
-------------------------------------- President and Chief Operating Officer
William B. Rue
/s/ JOHN E. THOMPSON
-------------------------------------- Senior Vice President and
John E. Thompson Chief Financial Officer
(Principal Accounting and
Financial Officer)
/s/ DAVID C. SABIN
-------------------------------------- Chairman of the Board and Director
David C. Sabin
/s/ FRANK DEVINE
-------------------------------------- Director
Frank Devine
/s/ BERT DOORNMALEN
-------------------------------------- Director
Bert Doornmalen
-------------------------------------- Director
Robert A. Bergmann
-------------------------------------- Director
Bruce G. Pollack
-64-
<PAGE> 64
The following pages contain the Financial Statement Schedules as
specified by 12(a) and 14(a)(2) of Part IV of Form 10-K. The report of Deloitte
& Touche LLP with respect to the schedule required by 14(a)(2) appears at page
37 of this Form 10-K
EXHIBIT 12(A)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SALTON, INC.
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
(THOUSANDS, EXCEPT RATIOS) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest and amortization of debt,
issuance costs on all indebtedness $ 31,102 $15,864 $7,336 $4,967 $3,934
Add interest element implicit in
rentals 1,923 1,158 521 394 222
-------- ------- ------- ------- ------
Total fixed charges $ 33,025 $17,022 $7,857 $5,361 $4,156
======== ======= ======= ======= ======
Income
Income before income taxes $146,903 $53,863 $32,186 $6,400 $1,146
Add fixed charges 33,025 17,022 7,857 5,361 4,156
-------- ------- ------- ------- ------
Income before fixed charges and
income taxes $179,928 $70,885 $40,043 $11,761 $5,302
======== ======= ======= ======= ======
Ratio of earnings to fixed charges 5.45 4.16 5.10 2.19 1.28
======== ======= ======= ======= ======
</TABLE>
SALTON, INC.
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JULY 1, 2000
CHARGED TO
BEGINNING COSTS AND ENDING
BALANCE EXPENSES DEDUCTIONS BALANCE
------- -------- ---------- -------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 27, 1998:
Allowance for returns,
allowances and doubtful accounts $2,400,000 $21,752,000 $(21,152,000) $3,000,000
YEAR ENDED JUNE 26, 1999:
Allowance for returns,
allowances and doubtful accounts $3,000,000 $31,606,000 $(28,504,000) $6,102,000
YEAR ENDED JULY 1, 2000:
Allowance for returns,
allowances and doubtful accounts $6,102,000 $45,593,000 $(44,584,000) $7,111,000
</TABLE>
-65-
<PAGE> 65
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
2.1 Agreement and Plan of Merger, dated August 26, 1998, among the
Registrant, Columbia Acquisition Corp. and Toastmaster Inc.
Incorporated by reference to the Registrant's Current Report
on Form 8-K dated August 26, 1998.
2.2 Shareholders Agreement, dated August 26, 1998, between the
Registrant and certain shareholders of Toastmaster.
Incorporated by reference to the 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 Registrant's 10 3/4% Senior Subordinated
Notes. Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (Registration No.
333-70169)
4.3 Indenture dated December 16,1998 between Norwest Bank National
Association, as Issuer, and the Registrant relating to the
Registrant's 10 3/4% Senior Subordinated Notes. Incorporated
by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-70169)
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
-66-
<PAGE> 66
Investors Fund, L.P., and Mesirow Private Equity, Inc.
(successor to Mesirow Venture Capital, Inc.) as the authorized
representative of Mesirow Capital Partners III, Mesirow
Capital Partners IV, Mesirow Capital Partners V and Allied
Investment Corporation. Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-42097).
10.3 Form of Sales Representative Agreement generally used by and
between the Registrant and its sales representatives.
Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-42097).
10.4 Stock Registration Rights Agreement, dated as of August 6,
1991, by and between the Registrant, Braddock Financial
Corporation, Financo Investors Fund, L.P., Mesirow Capital
Partners II, Mesirow Capital Partners IV, Mesirow Capital
Partners V and Allied Investment Corporation. Incorporated by
reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-42097).
10.5 Salton/Maxim Housewares, Inc. 1995 Employee Stock Option Plan.
Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 30, 1995.
10.6 Salton/Maxim Housewares, Inc. Non-Employee Directors Stock
Option Plan. Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 30, 1995.
10.7 Asset Purchase Agreement dated July 1, 1996 by and among the
Registrant, Block China Corporation and Robert C. Block
Incorporated by reference from the Company's Current Report on
Form 8-K dated July 1, 1996.
10.8 License Agreement dated as of February 1, 1996 by and between
White Consolidated Industries Inc. and the Registrant.
Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q/A for the fiscal quarter ended December 28, 1996.
10.9 License Agreement dated as of May 21, 1996 by and between
White Consolidated Industries Inc. and the Registrant.
Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q/A for the fiscal quarter ended December 28, 1996.
-67-
<PAGE> 67
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
-68-
<PAGE> 68
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 July15, 1998.
10.19 Registration Rights Agreement dated July 15, 1998 by and among
the Registrant and Centre Capital Investors II, L.P.,Centre
Capital Tax-Exempt Investors II, L.P., Centre Capital Offshore
Investors II, L.P., The State Board of Administration of
Florida, Centre Parallel Management Partners, L.P. and Centre
Partners Coinvestment, L.P. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 28, 1998.
10.20 The Salton, Inc. 1998 Employee Stock Option Plan. Incorporated
by reference to the Registrants annual report on form 10-K
dated June 26, 1999.
10.21 Agreement effective as of July 1, 1999 between Salton and
George Foreman. Incorporated by reference to the Registrant's,
Current Report on Form 8-K dated December 9, 1999.
10.22 Agreement effective as July 1, 1999 between Salton and Sam
Perlmutter. Incorporated by reference to the Registrant's,
Current Report on Form 8-K dated December 9, 1999.
10.23 Agreement effective as of July 1, 1999 between Salton and
Michael Srednick Incorporated by reference to the Registrant,
Current Report on Form 8-K dated December 9, 1999.
10.24 Second amended and restated credit agreement, among Salton,
Inc., as borrower, the several lenders from time to time
parties hereto, Lehman Brothers Inc., as arranger, Lehman
Commercial Paper Inc., as syndication agent, and
administration agent and Fleet National Bank as documentation
agent dated as of December 10, 1999. Incorporated by reference
to the registrants quarterly report on the form 10Q for the
fiscal quarter ended December 26, 1999.
10.25 Agreement effective January 12, 2000, between Salton, Inc. and
William B. Rue. Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 28, 2000.
10.26 Agreement effective January 12, 2000, between Salton, Inc. and
Leonard Dreimann. Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 28, 2000.
10.27 Agreement effective January 12, 2000, between Salton, Inc. and
David Sabin.
-69-
<PAGE> 69
Incorporated by reference to Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 28, 2000.
10.28 Agreement effective January 12, 2000, between Salton, Inc. and
John E. Thompson. Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 28, 2000.
10.29 Agreement dated as of September 7, 2000 between Salton and
George Foreman. Incorporated by reference to the Current
Report on Form 8-K dated September 7, 2000.
10.30 Agreement dated as of September 7, 2000 between Salton and Sam
Perlmutter. Incorporated by reference to Registrant's Current
Report on Form 8-K dated September 7, 2000.
10.31 Agreement dated as of September 7, 2000 between Salton and
Michael Srednick. Incorporated by reference to Registrant's
Current Report on Form 8-K dated September 7, 2000.
10.32 The Salton, Inc. 1999 Employee Stock Option Plan.
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 Deloitte & Touche LLP
27 Financial Data Schedule
-70-
