##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008ORo
    
    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.
 
  Delaware
    
    36-3777824(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)
 3633 S. Flamingo Road, Miramar, Florida
    
    33027(Address Of Principal Executive Offices)
    
    (Zip Code)
 (954) 883-1000
 
  Former Name, If Changed Since Last Report:
 x o
  Large accelerated filer
    
    o
    
    Accelerated filer
    
    oNon-accelerated filer
    
    o
    
    Smaller reporting company
    
    x(Do not check if smaller reporting company)
 o x
  Number of sharesClass
    
    outstanding on November 10, 2008Common Stock, $0.01 par value
    
    
    731,874,361




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##### 



SALTON, INC.
 INDEX
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1.
    

Financial Statements
    
    
    3Consolidated Balance Sheets as of September 30, 2008 and June 30, 2008
    
    
    3Consolidated Statements of Operations for the Three Months Ended September 30, 2008 and 2007
    
    
    4Consolidated Statement of Stockholders Equity for the Three Months Ended September 30, 2008
    
    
    5Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2008 and 2007
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    

Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 4.
    

Controls and Procedures
    
    
    31PART II. OTHER INFORMATION
    
    
    33Item 1A.
    

Risk Factors
    
    
    33Item 2.
    

Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 6.
    

Exhibits
    
    
    33EX-31.1EX-31.2EX-32.1EX-32.2
   
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Salton, Inc. and Subsidiaries
 CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)  Assets
 September30, 2008
    
    
    June 30,(Unaudited)
    
    
    2008Current Assets:Cash and cash equivalents
    
    $
    22,824
    
    
    $
    26,136Accounts and other receivables, less
allowances of $2,835 at September 30,
2008 and $3,061 at June 30, 2008
    
    
    178,091
    
    
    
    155,555Inventories
    
    
    247,545
    
    
    
    222,643Prepaid expenses and other
    
    
    27,418
    
    
    
    23,005Assets held for sale
    
    
    427
    
    
    
    427Prepaid income taxes
    
    
    4,510
    
    
    
    4,464Deferred income taxes
    
    
    987
    
    
    
    1,324Total current assets
    
    
    481,802
    
    
    
    433,554Property, Plant and Equipment- at cost,
less accumulated depreciation of $5,651
at September 30, 2008 and $3,792 at June
30, 2008
    
    
    23,020
    
    
    
    24,090Non-current deferred income taxes
    
    
    8,505
    
    
    
    8,822Goodwill
    
    
    164,021
    
    
    
    164,021Intangibles, Net
    
    
    226,934
    
    
    
    228,350Other Assets
    
    
    9,444
    
    
    
    6,251Total Assets
    
    $
    913,726
    
    
    $
    865,088Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    121,378
    
    
    $
    96,702Accrued expenses
    
    
    100,507
    
    
    
    103,437Current
portion of term loans ($5,000 related party)
    
    
    6,698
    
    
    
    Current taxes payable
    
    
    5,950
    
    
    
    3,979Total current liabilities
    
    
    234,533
    
    
    
    204,118Long-Term Liabilities:Senior credit facilities
    
    
    120,454
    
    
    
    115,776Term loans (approximately $144,538 and $145,252 related
party at September 30, 2008 and June 30, 2008)
    
    
    163,230
    
    
    
    164,274Series D Redeemable Preferred Stock authorized and
outstanding: 110 shares at $0.01 par value (related
party)
    
    
    124,427
    
    
    
    119,453Series E Redeemable Preferred Stock authorized and
outstanding: 25 shares at $0.01 par value (related
party)
    
    
    25,444
    
    
    
    Pension liability
    
    
    10,432
    
    
    
    11,659Non-current deferred income taxes
    
    
    44,518
    
    
    
    43,783Other long-term liabilities
    
    
    5,528
    
    
    
    5,905Total Liabilities
    
    
    728,566
    
    
    
    664,968Commitments and Contingencies See Note 4Stockholders Equity:Common stock  authorized: 1,000,000 shares of $0.01
par value; issued and outstanding: 731,874 shares at
Sept. 30, 2008 and June 30, 2008
    
    $
    7,319
    
    
    $
    7,319Treasury stock 7,886 shares, at cost
    
    
    (65,793
    )
    
    
    (65,793
    )Paid-in capital
    
    
    301,536
    
    
    
    301,431Accumulated deficit
    
    
    (52,988
    )
    
    
    (44,143
    )Accumulated other comprehensive income (loss)
    
    
    (4,914
    )
    
    
    1,306Total stockholders equity
    
    
    185,160
    
    
    
    200,120Total Liabilities and Stockholders Equity
    
    $
    913,726
    
    
    $
    865,088
 The accompanying notes are an integral part of these financial statements.
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Salton, Inc. and Subsidiaries
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended September 30,2008
    
    
    2007(In thousands, except per share data)Net sales
    
    $
    235,799
    
    
    
    100.00
    %
    
    $
    119,963
    
    
    
    100.0
    %Cost of goods sold
    
    
    165,505
    
    
    
    70.2
    
    
    
    83,826
    
    
    
    69.9Gross profit
    
    
    70,294
    
    
    
    29.8
    
    
    
    36,137
    
    
    
    30.1Selling, general and administrative
expenses:Operating expenses
    
    
    62,556
    
    
    
    26.5
    
    
    
    32,286
    
    
    
    26.9Integration and transition expenses
    
    
    858
    
    
    
    0.4
    
    
    
    
    
    
    
    Acquisition related expenses
    
    
    198
    
    
    
    0.1
    
    
    
    
    
    
    
    63,612
    
    
    
    27.0
    
    
    
    32,286
    
    
    
    26.9Operating income
    
    
    6,682
    
    
    
    2.8
    
    
    
    3,851
    
    
    
    3.2Other expense (income):Interest expense
    
    
    2,667
    
    
    
    1.1
    
    
    
    624
    
    
    
    0.5Related party interest expense
    
    
    9,705
    
    
    
    4.1
    
    
    
    
    
    
    
    Interest and other income, net
    
    
    (477
    )
    
    
    (0.2
    )
    
    
    (96
    )
    
    
    (0.1
    )11,895
    
    
    
    5.0
    
    
    
    528
    
    
    
    0.4(Loss) income from continuing
operations before income taxes
    
    
    (5,213
    )
    
    
    (2.2
    )
    
    
    3,323
    
    
    
    2.8Income tax provision
    
    
    3,894
    
    
    
    1.7
    
    
    
    1,486
    
    
    
    1.2(Loss) income from continuing operations
    
    
    (9,107
    )
    
    
    (3.9
    )
    
    
    1,837
    
    
    
    1.6Income from discontinued operations,
net of tax (Note 5)
    
    
    262
    
    
    
    0.1
    
    
    
    23
    
    
    
    0.0Net (loss) income
    
    $
    (8,845
    )
    
    
    (3.8
    )%
    
    $
    1,860
    
    
    
    1.6
    %Income (loss) per common share:Loss per share from continuing
operations-basic and diluted
    
    $
    (0.01
    )
    
    
    
    
    
    $
    0.00Income per share from discontinued
operations-basic and diluted
    
    
    0.00
    
    
    
    
    
    
    
    0.00Income (loss) per common
share-basic and diluted
    
    $
    (0.01
    )
    
    
    
    
    
    $
    0.00
 The accompanying notes are an integral part of these financial statements.
 4




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Salton, Inc. and Subsidiaries
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)
 AccumulatedOtherCommon
    
    
    Treasury
    
    
    Paid-in
    
    
    Accumulated
    
    
    ComprehensiveStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    TotalBalance at June 30, 2008
    
    $
    7,319
    
    
    $
    (65,793
    )
    
    $
    301,431
    
    
    $
    (44,143
    )
    
    $
    1,306
    
    
    $
    200,120Comprehensive
loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,845
    )
    
    
    
    
    
    
    (8,845
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,220
    )
    
    
    (6,220
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,065
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Balance at September 30, 2008
    
    $
    7,319
    
    
    $
    (65,793
    )
    
    $
    301,536
    
    
    $
    (52,988
    )
    
    $
    (4,914
    )
    
    $
    185,160
 The accompanying notes are an integral part of this financial statement.
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Salton, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months EndedSeptember 30,2008
    
    
    2007(In thousands)Cash flows from operating activities:Net (loss) income
    
    $
    (8,845
    )
    
    $
    1,860Reconciliation to net cash used in operating activities:Depreciation of property, plant and equipment
    
    
    1,859
    
    
    
    1,044Loss on
disposal of fixed assets
    
    
    
    
    
    
    25Recovery of doubtful accounts
    
    
    (226
    )
    
    
    (114
    )Amortization of intangible and other assets
    
    
    1,432
    
    
    
    1,279Non-cash interest
    
    
    9,705
    
    
    
    Deferred taxes
    
    
    1,052
    
    
    
    (19
    )Stock-based compensation
    
    
    105
    
    
    
    Changes in assets and liabilities, net of acquisition:Accounts and other receivables
    
    
    (22,310
    )
    
    
    (15,735
    )Inventories
    
    
    (24,902
    )
    
    
    (19,306
    )Prepaid expenses and other
    
    
    (4,640
    )
    
    
    (1,223
    )Accounts payable and accrued expenses
    
    
    23,717
    
    
    
    21,112Current income taxes
    
    
    291
    
    
    
    290Other assets and liabilities
    
    
    (1,266
    )
    
    
    (2,687
    )Net cash used in operating activities
    
    
    (24,028
    )
    
    
    (13,474
    )Cash flows from investing activities:Purchase of minority interest
    
    
    (3,548
    )
    
    
    Additions to property, plant and equipment
    
    
    (561
    )
    
    
    (242
    )Net cash used in investing activities
    
    
    (4,109
    )
    
    
    (242
    )Cash flows from financing activities:Net borrowings under lines of credit
    
    
    2,634
    
    
    
    11,057Proceeds
from Series E Redeemable Preferred Stock
    
    
    25,000
    
    
    
    Proceeds from term debt
    
    
    3,770
    
    
    
    Payoff of term debt
    
    
    (359
    )
    
    
    Net cash provided by financing activities
    
    
    31,045
    
    
    
    11,057Effect of exchange rate changes on cash
    
    
    (6,220
    )
    
    
    1,345Net decrease in cash and cash equivalents
    
    
    (3,312
    )
    
    
    (1,314
    )Cash and cash equivalents at beginning of period
    
    
    26,136
    
    
    
    6,311Cash and cash equivalents at end of period
    
    $
    22,824
    
    
    $
    4,997Supplemental Disclosures of Cash Flow Information:Cash paid during the three-month period ended September 30:
    
    
    2008
    
    
    
    2007Interest
    
    $
    1,409
    
    
    $
    417Income taxes
    
    $
    1,136
    
    
    $
    1,282
 The accompanying notes are an integral part of these financial statements.
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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
 1. SUMMARY OF ACCOUNTING POLICIES
 Overview
 ® ® ® ® ® ®
 Merger
with APN Holdco
   Business Combinations
 
    
    The relative voting interests in the combined entity after the combination. In
this case, stockholders of APN Holdco received approximately 92% of the equity
ownership and associated voting rights in the combined entity upon completion of the
merger and related transactions.
    
    The composition of the governing body of the combined entity. In this case, the
merger agreement provided that the composition of the Board of Directors of the
surviving company would be determined by APN Holdco.
   Interim Reporting
  7




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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
  Comprehensive Income (Loss)
  For the three months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007(In thousands)Net income (loss)
    
    $
    (8,845
    )
    
    $
    1,860Foreign currency translation adjustment
    
    
    (6,220
    )
    
    
    184Change in market value of derivatives
    
    
    
    
    
    
    (670
    )$
    (15,065
    )
    
    $
    1,374
 Reclassifications
  Recent Accounting Pronouncements
 , Fair Value Measurements
  8




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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Business Combinations
 Non-controlling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133
 Determination of the Useful
Life of Intangible Assets Goodwill and Other Intangible Assets
 2. SALTON MERGER WITH APN HOLDCO
  9




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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
   Amount
    
    
    
    
    
    
    
    
    AmountAccrued as of
    
    
    Additional
    
    
    
    
    
    Accrued as ofJune 30, 2008
    
    
    Accruals
    
    
    Amount Paid
    
    
    September 30, 2008(In thousands)Severance and related expenses
    
    $
    2,189
    
    
    $
    
    
    
    $
    (806
    )
    
    $
    1,383Unfavorable lease and other
    
    
    2,522
    
    
    
    
    
    
    
    (1,080
    )
    
    
    1,442Total
    
    $
    4,711
    
    
    $
    
    
    
    $
    (1,886
    )
    
    $
    2,825
 Intangible Assets
  Weighted
    
    
    September 30, 2008
    
    
    June 30, 2008Average
    
    
    Gross
    
    
    
    
    
    
    GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedPeriod
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    Amortization(Years)
    
    
    (In thousands)Licenses
    
    
    9
    
    
    $
    42,510
    
    
    $
    (6,987
    )
    
    $
    42,510
    
    
    $
    (5,806
    )Trade names
    
    Indefinite
    
    
    182,433
    
    
    
    
    
    
    
    182,433
    
    
    
    Patents
    
    
    12
    
    
    
    8,240
    
    
    
    (1,144
    )
    
    
    8,240
    
    
    
    (973
    )Customer relationships
    
    
    9
    
    
    
    2,310
    
    
    
    (428
    )
    
    
    2,310
    
    
    
    (364
    )$
    235,493
    
    
    $
    (8,559
    )
    
    $
    235,493
    
    
    $
    (7,143
    )
  3. STOCKHOLDERS EQUITY
 Business Combinations
  For the three months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007Weighted average basic and diluted shares
    
    
    731,874,361
    
    
    
    731,874,361
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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
 4. COMMITMENTS AND CONTINGENCIES
 Litigation and Other Matters
 NACCO Litigation
   Brown Litigation.
    George Foreman® Distributor Litigation. ® ®
 11




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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
  Asbestos Matters
 Environmental Matters.
 
    
    Kirksville, Missouri.Soil and groundwater contamination by trichloroethylene
has been identified at the former manufacturing facility in Kirksville, Missouri.
Salton has entered into a Consent Agreement with the Missouri Department of Natural
Resources (MDNR) regarding the contamination.
    
    Laurinburg, North Carolina.Soil and groundwater contamination by
trichloroethylene has been identified at the former manufacturing facility in
Laurinburg, North Carolina. A groundwater pump and treat system has operated at
the site since 1993.
    
    Macon, Missouri.Soil and groundwater contamination by trichloroethylene and
petroleum have been identified at the former manufacturing facility in Macon,
Missouri. The facility is participating in the Missouri Brownfields/Voluntary
Cleanup Program.
  Other Matters.
   Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes.
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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
   5. SALE OF DIVISION
  6. STOCK-BASED COMPENSATION
  Share-Based
Payment
  WeightedAverageShares(000)
    
    
    Exercise PriceOutstanding at June 30, 2008
    
    
    9,528
    
    
    $
    1.17Granted
    
    
    411
    
    
    $
    0.20Exercised
    
    
    
    
    
    
    Expired or cancelled
    
    
    (85
    )
    
    $
    10.89Outstanding at September 30, 2008
    
    
    9,854
    
    
    $
    1.05Options exercisable at September 30, 2008
    
    
    516
    
    
    $
    15.93
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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
  7. ISLAND SKY AUSTRALIA LIMITED
   8. PRODUCT WARRANTY OBLIGATIONS
  September 30,
    
    
    September 30,2008
    
    
    2007(In thousands)Balance, beginning of period
    
    $
    8,030
    
    
    $
    6,944Additions to accrued product warranties
    
    
    17,240
    
    
    
    8,376Reductions of accruals  payments and credits issued
    
    
    (16,227
    )
    
    
    (7,710
    )Balance, end of period
    
    $
    9,043
    
    
    $
    7,610
 9. SENIOR SECURED CREDIT FACILITY, LETTERS OF CREDIT AND LONG-TERM DEBT
 North
American Credit Facility.
  
    
    LIBOR (adjusted for any reserves), plus a specified margin (determined by
Saltons average quarterly availability and set at 2.75% on September 30, 2008),
which was 6.68% on September 30, 2008; or
    
    the Base Rate (Bank of Americas prime rate), plus a specified margin (based
Saltons average quarterly availability, and was 1% on September 30, 2008), which
was 6.0% on September 30, 2008.
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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
  Term Loan.
 
    
    provided for the payment of interest by automatically having the outstanding
principal amount increase by an amount equal to the interest due (the PIK Option)
from January 31, 2008 through March 31, 2009;
    
    provided Salton the option, after March 31, 2009, to pay the interest due on
such loan either (i) in cash or (ii) by the PIK Option;
    
    increased the applicable borrowing margins by 150 basis points (the Margin
Increase) as consideration for the right to have the PIK Option;
    
    eliminated the obligation of Salton and its subsidiaries to gross up any
withholding tax payments in respect of the Margin Increase;
    
    increased the outstanding loan amount by $15 million from $110 million to $125
million to fund general corporate purposes; and
    
    provided Salton and its subsidiaries a delayed draw option to draw down up to
an additional $15 million in the next 24 months in installments of at least $5
million to fund general corporate expenses (which was subsequently drawn in the
fourth fiscal quarter of 2008).
  European Credit Facility.
    15




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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
 Series D Redeemable Preferred Stock.
 Ranking .
 Liquidation Preference .
  Dividends .
  Voting Rights .
 No Conversion Rights .
 Mandatory Redemption .
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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
 Series E Redeemable Preferred Stock.
 Ranking .
 Liquidation Preference .
  Dividends .
  Voting Rights .
 No Conversion Rights .
 17




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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
 Mandatory Redemption .
 10. EMPLOYEE BENEFIT PLANS
   For the three months endedSeptember 30, 2008Domestic
    
    
    Europe
    
    
    Total(In thousands)Service cost benefits
earned during the period
    
    $
    
    
    
    $
    64.3
    
    
    $
    64.3Interest cost on projected
benefit obligation
    
    
    175.1
    
    
    
    729.5
    
    
    
    904.6Actuarial return on plan assets.
    
    
    (161.1
    )
    
    
    (589.2
    )
    
    
    (750.3
    )Net amortization and deferral
    
    
    0.2
    
    
    
    
    
    
    
    0.2Net pension costs
    
    $
    14.2
    
    
    $
    204.6
    
    
    $
    218.8
  11. PROPOSED GOING PRIVATE TRANSACTION BY HARBINGER CAPITAL PARTNERS
   12. SUBSEQUENT EVENTS
 Island Sky
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Salton, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements  Continued
   North
American Credit Facility
 Series E Redeemable Preferred Stock
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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
 ® ® ® ® ® ®
  Current Economic Issues
    Proposed Going Private Transaction by Harbinger Capital Partners
  http://www.saltoninc.com http://www.sec.gov
 Business Strategy
  Maximizing utility of our brand assets.
 Leveraging innovation and strategic marketing to drive profitability.
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Creating long-term cost and quality advantages for our customers .
 Pursuing acquisitions.
 Island Sky
    Merger with APN Holdco
  Business Combinations
 
    
    The relative voting interests in the combined entity after the combination: in
this case, stockholders of APN Holdco received approximately 92% of the equity
ownership and associated voting rights in the combined entity upon completion of the
merger and related transactions; and
    
    The composition of the governing body of the combined entity: in this case, the
merger agreement provided that the composition of the Board of Directors of the
surviving company would be determined by APN Holdco.
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Forward Looking Statement Disclosure
   
    
    Difficult conditions in the economy generally may materially adversely affect our
business and results of operations.
    
    Due to the current global economic crisis, our business could be adversely impacted by
the financial instability of our customers and suppliers.
    
    Significant fluctuations in the exchange rate between the U.S. dollar and the currencies
in which our costs are denominated may reduce our sales or profits.
    
    Our margins may be adversely impacted by increases in raw material prices.
    
    The costs of the products purchased by us could increase as a result of fluctuations in
the Chinese currency.
    
    The bankruptcy or financial difficulty of any major customer or fluctuations in the
financial condition of the retail industry in general could adversely affect our results of
operations.
    
    We purchase a large number of products from two suppliers. Production-related risks with
these suppliers could jeopardize our ability to realize anticipated sales and profits until
alternative supply arrangements are secured.
    
    The failure of our business strategy could seriously hurt our financial condition and
results of operations.
    
    Our international operations subject us to additional business risks and may cause our
profitability to decline due to increased costs.
    
    Harbinger Capital Partners has effective control over the outcome of actions requiring
the approval of our stockholders.
    
    We depend on consumer spending, which fluctuates for a variety of reasons, including
seasonality, which may cause our results of operations to fluctuate.
    
    Our net operating loss carryforwards are limited as a result of the merger and are
dependent upon us achieving profitable results.
    
    If the household appliance sector of the retail industry experiences an economic
slowdown, our results of operations will suffer.
    
    Our ability to obtain products may be adversely impacted by changes in worldwide supply
of or demand for raw materials.
    
    We depend on third party suppliers for the manufacturing of substantially all of our
products and if we fail to develop and maintain relationships with a sufficient number of
qualified suppliers, our ability to timely and efficiently source products that meet our
standards for quality could be adversely affected.
    
    We are subject to significant international business risks that could hurt our business
and cause our results of operations to fluctuate.
    
    A deterioration in trade relations with China could lead to a substantial increase in
tariffs imposed on goods of Chinese origin, which potentially could reduce demand for and
sales of our products.
    
    We may not be able to realize expected benefits and synergies from future acquisitions
of businesses or product lines.
    
    If we were to lose one or more of our major customers, or suffer a major reduction of
orders from them, our financial results would suffer.
    
    Any reduction in trade credit from our suppliers could seriously harm our operations and
financial condition.
    
    The small household appliance industry is consolidating, which could reduce our ability
to successfully secure product placements at key customers and limit our ability to sustain
a cost competitive position in the industry.
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
    
    The small household appliance industry is highly competitive and we may not be able to
compete effectively, causing us to lose market share and sales.
    
    Our future success requires us to develop new and innovative products on a consistent
basis in order to increase revenues and we may not be able to do so.
    
    Long lead times, potential material price increases and customer demands may cause us to
purchase more inventory than necessary, which may lead to increased obsolescence and
adversely affect our results of operations.
    
    Our financing arrangements could subject us to various restrictions that could limit our
operating flexibility.
    
    Our leverage is substantial, which may have an adverse effect on our available cash
flow, our ability to obtain additional financing if necessary in the future, our
flexibility in reacting to competitive and technological changes and our operations.
    
    Sales of our common stock by Harbinger Capital Partners could cause the trading price of
our common stock to decline.
    
    The market price of our common stock could decline if we fail to achieve the expected
benefits of the merger with APN Holdco.
    
    If we are unable to renew the Black & Decker® trademark license agreement,
our business could suffer.
    
    Our actual liabilities relating to environmental matters may exceed our expectations.
    
    Product recalls or lawsuits relating to defective products could adversely impact our
results of operations.
    
    The infringement or loss of our proprietary rights could harm our business.
    
    We may be subject to litigation and infringement claims, which could cause us to incur
significant expenses or prevent us from selling our products.
    
    Compliance with governmental regulations could significantly increase our operating
costs or prevent us from selling our products.
    
    The requirements of complying with the Sarbanes-Oxley Act may strain our resources, and
our internal control over financial reporting may not be sufficient to ensure timely and
reliable external financial reports.
    
    Our stock price may continue to be volatile.
    
    Our common stock was delisted from the New York Stock Exchange and now is an
over-the-counter security quoted on The Pink Sheets Electronic Quotation Service.
    
    Companies quoted on the Pink Sheets are not subject to corporate governance requirements
in order for their shares to be quoted, and we have more limited protections against
conflicts of interest, related party transactions and similar matters.
    
    We do not anticipate paying dividends.
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Results of Operations
 Pursuant to the requirements of SFAS No. 141, the information presented below for the three
months ended September 30, 2007 represents only the operations of APN Holdco.
 Three Months Ended September 30, 2008 Compared To Three Months Ended September 30, 2007
 Net Sales
  
    
    sales in North, South and Central America were $182.4 million;
    
    sales in Europe were $44.0 million; and
    
    sales in the remainder of the world were $9.4 million.
  
    
    sales of Black & Decker® branded products were $134.9 million;
    
    sales of Russell Hobbs® branded products were $38.1 million;
    
    sales of George Foreman® branded products were $36.1 million; and
    
    sales of other branded products were $26.7 million.
 Gross Profit
 Operating Expenses
 ®
 Integration and Transition Expenses.
 Interest Expense
 Related Party Interest Expense.
 Taxes
 
    
    valuation allowances against unrealizable tax assets;
    
    unrecognized tax benefits; and
    
    rate differentials associated with foreign earnings taxed at different rates
than in the U.S.
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Liquidity and Capital Resources
 Liquidity
  Operating Activities . 2
 Investing Activities
 Financing Activities
 Capital Resources
  North American Credit Facility.
  
    
    LIBOR (adjusted for any reserves), plus a specified margin (determined by
Saltons average quarterly availability, which was 2.75% on September 30, 2008 and
2.5% on November 7, 2008), which was 6.68% on September 30, 2008 and 4.12% on
November 7, 2008; or
    
    the Base Rate (Bank of Americas prime rate), plus a specified margin (based
Saltons average quarterly availability, which was 1.0% on September 30, 2008 and
0.75% on November 7, 2008), which was 6.0% on September 30, 2008 and at 4.75% on
November 7, 2008.
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##### Table of Contents



Harbinger Term Loan.
 
    
    provided for the payment of interest by automatically having the outstanding
principal amount increase by an amount equal to the interest due (the PIK Option)
from January 31, 2008 through March 31, 2009;
    
    provided us the option, after March 31, 2009, to pay the interest due on such
loan either (i) in cash or (ii) by the PIK Option;
    
    increased the applicable borrowing margins by 150 basis points (the Margin
Increase) as consideration for the right to have the PIK Option;
    
    eliminated our obligation to gross up any withholding tax payments in respect of
the Margin Increase;
    
    increased the outstanding loan amount by $15 million from $110 million to $125
million to fund general corporate purposes; and
    
    provided us a delayed draw option to draw down up to an additional $15 million
in the next 24 months in installments of at least $5 million to fund general
corporate expenses (which was subsequently drawn in the fourth fiscal quarter of
2008).
  European Credit Facility.
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Series D Redeemable Preferred Stock.
 Ranking .
 Liquidation Preference .
  Dividends .
  Voting Rights .
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No Conversion Rights .
 Mandatory Redemption .
 Series E Redeemable Preferred Stock.
 Ranking .
 Liquidation Preference .
  Dividends .
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##### Table of Contents



Voting Rights .
 No Conversion Rights .
 Mandatory Redemption .
 Use of Estimates and Critical Accounting Policies
   Income Taxes Accounting for Income Taxes, Accounting for Uncertainty in Income Taxes
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Collectibility of Accounts Receivable
 
    
    our historical bad debt experiences;
    
    publicly available information regarding our customers and the inherent credit
risk related to them;
    
    information from subscription-based credit reporting companies;
    
    trade association data and reports;
    
    current economic trends; and
    
    changes in customer payment terms or payment patterns.
  Inventory
 Product Liability Claims and Litigation
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Long-Lived Assets .
 Intangible Assets .
 Goodwill .
 Other Estimates
 Recent Accounting Pronouncement
  
 Item 4.
    
    Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures
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(b ) Changes in Internal Control Over Financial Reporting
  (c ) Limitations
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PART II. OTHER INFORMATION
 
 Item 1A.
    
    Risk Factors.
  Difficult conditions in the economy generally may materially adversely affect our business and results of operations.
  Due to the current global economic crisis, our business could be adversely impacted by the financial instability of our customers and suppliers.
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
      
 Item 6.
    
    Exhibits.
 (a)
    
    Exhibits:31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
  SALTON, INC.
(Registrant)November 14, 2008
    By:
    /s/  Terry L. PolistinaTerry L. PolistinaChief Executive Officer and PresidentNovember 14, 2008
    By:
    /s/ Ivan R. HabibeIvan R. HabibeVice President and Chief Financial Officer 34