##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2007
 OR
 o
    
    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 Flamingo Road, Miramar, Florida
    
    33027(Address Of Principal Executive Offices)
    
    (Zip Code)
 (954) 883-1000
 
  Former Name, If Changed Since Last Report:
 þ o
    Large
    accelerated
    filer o
    Accelerated
    filer o
    Non-accelerated

filer þ o þ
  Number of sharesClass
    
    outstanding on February 12, 2008Common Stock, $0.01 par value
    

    732,489,785




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##### 



SALTON, INC.
 INDEX
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements
    
    
    3Consolidated Balance Sheets as of December 31, 2007 and June 30, 2007
    
    
    3Consolidated Statements of Operations for the Three Months Ended December 31, 2007 and 2006
    
    
    4Consolidated Statements of Operations for the Six Months Ended December 31, 2007 and 2006
    
    
    5Consolidated Statement of Stockholders Equity for the Six Months Ended December 31, 2007
    
    
    6Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2007 and 2006
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    36PART II. OTHER INFORMATION
    
    
    37Item 1.
    
    Legal Proceedings
    
    
    37Item 1A.
    
    Risk Factors
    
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    48Item 6.
    
    Exhibits
    
    
    49Ex-10.1 Second Amendment and Restatement AgreementEX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO
   
 2




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##### 



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Salton, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
 December 31, 2007
    
    
    June 30,(Unaudited)
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    22,778
    
    
    $
    6,311Compensating balances on deposit
    
    
    41,258
    
    
    
    Restricted cash
    
    
    1,187
    
    
    
    Accounts and other receivables, less
allowances of $3,262 at December 31,
2007 and $2,995 at June 30, 2007
    
    
    228,423
    
    
    
    92,532Inventories
    
    
    209,177
    
    
    
    95,830Prepaid expenses and other
    
    
    24,890
    
    
    
    6,240Assets held for sale
    
    
    
    
    
    
    4,660Prepaid income taxes
    
    
    1,568
    
    
    
    1,534Future income tax benefits
    
    
    5,129
    
    
    
    3,024Total current assets
    
    
    534,410
    
    
    
    210,131Property,
Plant and Equipment at cost,
less accumulated depreciation of $4,274 at
December 31, 2007 and $2,443 at June 30,
2007
    
    
    31,919
    
    
    
    13,453Future Income Tax Benefits, Non-Current
    
    
    12,188
    
    
    
    4,146Goodwill
    
    
    99,249
    
    
    
    59,233Intangibles, Net
    
    
    223,300
    
    
    
    53,196Deferred Merger Costs
    
    
    
    
    
    
    2,674Other Assets
    
    
    6,572
    
    
    
    1,485Total Assets
    
    $
    907,638
    
    
    $
    344,318LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    175,139
    
    
    $
    40,061Accrued expenses
    
    
    115,068
    
    
    
    48,023Short-term debt
    
    
    
    
    
    
    10,009Senior subordinated notes
    
    
    43,397
    
    
    
    Current taxes payable
    
    
    12,268
    
    
    
    3,646Total current liabilities
    
    
    345,872
    
    
    
    101,739Long-Term Liabilities:Non-current deferred income taxes
    
    
    12,486
    
    
    
    Senior credit facilities
    
    
    59,585
    
    
    
    Series D Preferred Stock  authorized and
outstanding: 110 shares at $0.01 par value
    
    
    110,231
    
    
    
    Term loans
    
    
    121,797
    
    
    
    Other long-term liabilities
    
    
    9,522Total Liabilities
    
    $
    659,493
    
    
    $
    Commitments and Contingencies  See Note 4Stockholders Equity:Common stock  authorized: 1,000,000 shares
of $0.01 par value; issued and
outstanding: 732,496 shares at December
31, 2007 and June 30, 2007
    
    $
    7,325
    
    
    $
    7,325Treasury stock  7,885,845 shares, at cost
    
    
    (65,793
    )
    
    
    (65,793
    )Paid-in capital
    
    
    301,243
    
    
    
    301,243Retained earnings (accumulated deficit)
    
    
    3,812
    
    
    
    (1,609
    )Accumulated other comprehensive income
    
    
    1,558
    
    
    
    1,413Total stockholders equity
    
    
    248,145
    
    
    
    242,579Total Liabilities and Stockholders Equity
    
    $
    907,638
    
    
    $
    344,318
 The accompanying notes are an integral part of these financial statements.
 3




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##### 



Salton, Inc. and Subsidiaries
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended December 31,2007
    
    
    2006(In thousands, except per share data)Net sales
    
    $
    164,356
    
    
    
    100.0
    %
    
    $
    140,946
    
    
    
    100.0
    %Cost of goods sold
    
    
    114,129
    
    
    
    69.4
    
    
    
    105,348
    
    
    
    74.7Gross profit
    
    
    50,227
    
    
    
    30.6
    
    
    
    35,598
    
    
    
    25.3Selling, general and administrative expenses:Operating expenses
    
    
    41,647
    
    
    
    25.3
    
    
    
    36,615
    
    
    
    26.0Integration, restructuring and other charges
    
    
    1,302
    
    
    
    0.8
    
    
    
    6,161
    
    
    
    4.442,949
    
    
    
    26.1
    
    
    
    42,776
    
    
    
    30.4Operating income (loss)
    
    
    7,278
    
    
    
    4.5
    
    
    
    (7,178
    )
    
    
    (5.1
    )Other expense (income):Interest expense
    
    
    987
    
    
    
    0.6
    
    
    
    3,108
    
    
    
    2.2Interest and other income, net
    
    
    (1,886
    )
    
    
    (1.1
    )
    
    
    11
    
    
    
    0.0(899
    )
    
    
    (0.5
    )
    
    
    3,119
    
    
    
    2.2Income (loss) from continuing operations
before income taxes
    
    
    8,177
    
    
    
    5.0
    
    
    
    (10,297
    )
    
    
    (7.3
    )Income tax provision
    
    
    4,477
    
    
    
    2.7
    
    
    
    83
    
    
    
    0.1Income (loss) from continuing operations
    
    
    3,700
    
    
    
    2.3
    
    
    
    (10,380
    )
    
    
    (7.4
    )Income (loss) from discontinued operations,
net of tax (Note 5)
    
    
    (139
    )
    
    
    (0.1
    )
    
    
    2,537
    
    
    
    1.8Net income (loss)
    
    $
    3,561
    
    
    
    2.2
    %
    
    $
    (7,843
    )
    
    
    (5.6
    )%Income (loss) per common share:Income (loss) per share from continuing
operations-basic and diluted
    
    $
    0.01
    
    
    
    
    
    
    $
    (0.01
    )Income (loss) per share from discontinued
operations-basic and diluted
    
    
    (0.00
    )
    
    
    
    
    
    
    (0.00
    )Income (loss) per common share-basic and
diluted
    
    $
    0.01
    
    
    
    
    
    
    $
    (0.01
    )
 The accompanying notes are an integral part of these financial statements.
 4




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##### 



Salton, Inc. and Subsidiaries
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Six Months Ended December 31,2007
    
    
    2006(In thousands, except per share data)Net sales
    
    $
    284,320
    
    
    
    100.0
    %
    
    $
    279,987
    
    
    
    100.0
    %Cost of goods sold
    
    
    197,955
    
    
    
    69.6
    
    
    
    200,157
    
    
    
    71.5Gross profit
    
    
    86,365
    
    
    
    30.4
    
    
    
    79,830
    
    
    
    28.5Selling, general and administrative expenses:Operating expenses
    
    
    74,048
    
    
    
    26.0
    
    
    
    72,146
    
    
    
    25.8Integration, restructuring and other charges
    
    
    1,302
    
    
    
    0.5
    
    
    
    7,573
    
    
    
    2.775,350
    
    
    
    26.5
    
    
    
    79,719
    
    
    
    28.5Operating income
    
    
    11,015
    
    
    
    3.9
    
    
    
    111
    
    
    
    0.0Other expense (income):Interest expense
    
    
    1,497
    
    
    
    0.5
    
    
    
    5,971
    
    
    
    2.1Interest and other income, net
    
    
    (1,982
    )
    
    
    (0.7
    )
    
    
    (114
    )
    
    
    (0.0
    )(485
    )
    
    
    (0.2
    )
    
    
    5,857
    
    
    
    2.1Income (loss) from continuing operations
before income taxes
    
    
    11,500
    
    
    
    4.1
    
    
    
    (5,746
    )
    
    
    (2.1
    )Income tax provision
    
    
    5,963
    
    
    
    2.1
    
    
    
    1,790
    
    
    
    0.6Income (loss) from continuing operations
    
    
    5,537
    
    
    
    2.0
    
    
    
    (7,536
    )
    
    
    (2.7
    )Income (loss) from discontinued operations,
net of tax (Note 5)
    
    
    (116
    )
    
    
    0.0
    
    
    
    2,799
    
    
    
    1.0Net income (loss)
    
    $
    5,421
    
    
    
    2.0
    %
    
    $
    (4,737
    )
    
    
    (1.7
    )%Income (loss) per common share:Income per share from continuing
operations-basic and diluted
    
    $
    0.01
    
    
    
    
    
    
    $
    (0.01
    )Income (loss) per share from discontinued
operations-basic and diluted
    
    
    (0.00
    )
    
    
    
    
    
    
    (0.00
    )Income (loss) per common share-basic
and diluted
    
    $
    0.01
    
    
    
    
    
    
    $
    (0.01
    )
 The accompanying notes are an integral part of these financial statements.
 5




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##### 



Salton, Inc. and Subsidiaries
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)
 Retained
    
    
    AccumulatedEarnings
    
    
    OtherTreasury
    
    
    
    
    
    
    (Accumulated
    
    
    ComprehensiveCommon Stock
    
    
    Stock
    
    
    Paid-in Capital
    
    
    Deficit)
    
    
    Income
    
    
    TotalBalance at June 30, 2007
    
    $
    7,325
    
    
    $
    (65,793
    )
    
    $
    301,243
    
    
    $
    (1,609
    )
    
    $
    1,413
    
    
    $
    242,579Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,421
    
    
    
    
    
    
    
    5,421Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    376
    
    
    
    376Change in market value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231
    )
    
    
    (231
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,566Balance at December 31, 2007
    
    $
    7,325
    
    
    $
    (65,793
    )
    
    $
    301,243
    
    
    $
    3,812
    
    
    $
    1,558
    
    
    $
    248,145
 The accompanying notes are an integral part of this financial statement.
 6




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##### 



Salton, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Six Months EndedDecember 31,2007
    
    
    2006(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    5,421
    
    
    $
    (4,737
    )Reconciliation to net cash (used in) provided by operating activities:Depreciation of property, plant and equipment
    
    
    2,118
    
    
    
    3,268Gain on disposal of equipment and raw materials
    
    
    (485
    )
    
    
    (Recovery of) provision for doubtful accounts
    
    
    (114
    )
    
    
    644Amortization of intangible and other assets
    
    
    3,400
    
    
    
    852Product recall
    
    
    
    
    
    
    (592
    )Deferred taxes
    
    
    244
    
    
    
    (696
    )Stock-based compensation expense
    
    
    
    
    
    
    257Changes in assets and liabilities, net of acquisition:Accounts and other receivables
    
    
    (28,726
    )
    
    
    (32,862
    )Inventories
    
    
    (21,374
    )
    
    
    (16,883
    )Prepaid expenses and other
    
    
    (387
    )
    
    
    (1,038
    )Accounts payable and accrued expenses
    
    
    47,792
    
    
    
    13,421Current income taxes
    
    
    2,537
    
    
    
    3,671Other assets and liabilities
    
    
    (7,965
    )
    
    
    1,042Net cash provided by (used in) operating activities
    
    
    2,461
    
    
    
    (33,653
    )Cash flows from investing activities:Cash acquired in merger
    
    
    17,288
    
    
    
    Proceeds from sale of fixed assets
    
    
    5,554
    
    
    
    Additions to property, plant and equipment
    
    
    (472
    )
    
    
    (987
    )Net cash provided by (used in) investing activities
    
    
    22,370
    
    
    
    (987
    )Cash flows from financing activities:Proceeds from term debt
    
    
    110,000
    
    
    
    Payoff of debt
    
    
    (110,000
    )
    
    
    Net borrowings (payments) under lines of credit
    
    
    (10,009
    )
    
    
    31,995Exercise of stock options
    
    
    
    
    
    
    1,507Net cash (used in) provided by financing activities
    
    
    (10,009
    )
    
    
    33,502Effect of exchange rate changes on cash
    
    
    1,645
    
    
    
    (1,237
    )Net decrease in cash and cash equivalents
    
    
    16,467
    
    
    
    (2,375
    )Cash and cash equivalents at beginning of period
    
    
    6,311
    
    
    
    6,721Cash and cash equivalents at end of period
    
    $
    22,778
    
    
    $
    4,346Supplemental Disclosures of Cash Flow Information:Cash paid during the six-month period ended December 31:
    
    
    2007
    
    
    
    2006Interest
    
    $
    1,164
    
    
    $
    6,713Income taxes
    
    $
    2,790
    
    
    
    
 Non-cash investing and financing activities:
 The accompanying notes are an integral part of these financial statements.
 7




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##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 1. SUMMARY OF ACCOUNTING POLICIES
 Merger with APN Holding Company, Inc.
   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.
  th
 Interim Reporting
   8




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##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
  Inventories
  Comprehensive Income (Loss)
  For the six months ended
    
    
    For the three months endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Net income (loss)
    
    $
    5,421
    
    
    $
    (4,737
    )
    
    $
    3,561
    
    
    $
    (7,843
    )Foreign currency translation adjustment
    
    
    376
    
    
    
    1,187
    
    
    
    631
    
    
    
    351Change in market value of derivatives
    
    
    (231
    )
    
    
    
    
    
    
    439
    
    
    
    $
    5,566
    
    
    $
    (3,550
    )
    
    $
    4,631
    
    
    $
    (7,492
    )
 Recent Accounting Pronouncement
    9




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##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
  2. MERGER WITH APN HOLDING COMPANY, INC.
     1 4
  10




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##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
       (i)
    
    a Third Amended and Restated Credit Agreement dated as of December 28, 2007
(the North American Credit Facility) by and among the financial institutions named
therein as lenders, Bank of America, N.A., as administrative agent and collateral
agent, Salton and each of Saltons subsidiaries identified on the signature pages
thereof as borrowers and each of Saltons subsidiaries identified on the signature
pages thereof as guarantors, that provides for a 5-year $200 million revolving credit
facility;(ii)
    
    a Term Loan Agreement dated as of December 28, 2007 (the Term Loan) by and
among the financial institutions named therein as lenders, Harbinger Capital Partners
Master Fund I, Ltd., as administrative agent and collateral agent, Salton and each of
Saltons subsidiaries identified on the signature pages thereof as borrowers and each
of Saltons subsidiaries identified on the signature pages thereof as guarantors, that
provides for a 5-year $110 million term loan facility; and(iii)
    
    a Second Amended and Restated Agreement dated as of December 28, 2007 (the
European Credit Facility) by and among Burdale Financial Limited, as an arranger,
agent and security trustee, Salton Holdings Limited, Salton Europe Limited and each of
Saltons other subsidiaries identified on the signature pages thereof as borrowers,
that provides for a 5-year £40.0 million (approximately $78 million) facility
agreement, which includes a revolving credit facility with an aggregate notional
maximum availability of £30.0 million (approximately $58 million), a receivables
facility with an aggregate notional maximum availability of £30.0 million
(approximately $58 million) and two term loan facilities (one related to real property
and the other to intellectual property of the European subsidiary group) of £3.5
million and £5.8 million (approximately $7 million and $11 million, respectively) .
  11




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##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
  (In thousands)Fair value of Salton common stock (1)
    
    $
    3,919Debt repayment and accrued interest and associated fees
    
    
    258,041Fees and expenses
    
    
    10,765$
    272,725
 
 (1)
    
    The fair value of legacy Salton common stock outstanding was based on the
average closing price for the period beginning two days prior to, and ending two
days after, the execution of the merger agreement on October 1, 2007.  (In thousands)Current assets
    
    $
    278,113Property, plant and equipment
    
    
    19,954Identifiable intangible assets
    
    
    172,480Other assets
    
    
    9,438Current liabilities
    
    
    (213,702
    )Other long-term liabilities
    
    
    (33,574
    )Deferred tax liability
    
    
    (62,240
    )Valuation allowance
    
    
    62,240Goodwill
    
    
    40,016Total purchase price
    
    $
    272,725
    WeightedAverageInitial Value
    
    
    Useful Life(Dollars in thousands)License agreements
    
    $
    8,690
    
    
    9 yearsTradenames
    
    
    163,790
    
    
    Indefinite
    12




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##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
 
    
    create an industry leader by blending complementary assets, skills and strengths;
    
    result in a larger company with greater market presence and more diverse product
offerings;
    
    leverage complementary brand names;
    
    offer access to a broader range of product categories by providing a more
comprehensive portfolio of product offerings;
    
    provide opportunities for international expansion;
    
    have greater potential to access capital markets; and
    
    take advantage of financial synergies.
 Other Intangible Assets
  WeightedAverage
    
    
    December 31, 2007
    
    
    June 30, 2007Amortization
    
    
    Gross
    
    
    
    
    
    
    GrossPeriod
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Accumulated(Years)
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    Amortization(In thousands)Licenses
    
    
    9
    
    
    $
    42,510
    
    
    $
    (3,446
    )
    
    $
    33,820
    
    
    $
    (1,523
    )Trade names
    
    Indefinite
    
    
    174,550
    
    
    
    
    
    
    
    10,760
    
    
    
    Patents
    
    
    12
    
    
    
    8,240
    
    
    
    (629
    )
    
    
    8,240
    
    
    
    (264
    )Customer relationships
    
    
    9
    
    
    
    2,310
    
    
    
    (235
    )
    
    
    2,310
    
    
    
    (147
    )$
    227,610
    
    
    $
    (4,310
    )
    
    $
    55,130
    
    
    $
    (1,934
    )
  (In thousands)2008
    
    $
    2,8332009
    
    $
    5,6672010
    
    $
    5,6672011
    
    $
    5,6672012
    
    $
    5,667Thereafter
    
    $
    23,250
 Supplemental Pro Forma Information
  st st
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per share data)Net sales
    
    $
    320,998
    
    
    $
    319,180
    
    
    $
    564,921
    
    
    $
    588,711Loss from continuing operations
    
    $
    (25,506
    )
    
    $
    (17,600
    )
    
    $
    (34,913
    )
    
    $
    (25,970
    )Net loss
    
    $
    (25,645
    )
    
    $
    (15,063
    )
    
    $
    (35,029
    )
    
    $
    (23,171
    )Loss per common share:Loss from continuing operations share -
basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )Net loss per common share 
basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )
 13




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
  3. STOCKHOLDERS EQUITY
 Business Combinations
  For the three months ended
    
    
    For the six months endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average basic shares
    
    
    732,496,035
    
    
    
    732,496,035
    
    
    
    732,496,035
    
    
    
    732,496,035
  For the three months ended
    
    
    For the six months endedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Number of shares
    
    
    914,614
    
    
    
    1,580,166
    
    
    
    914,614
    
    
    
    1,580,166Range of exercise price
    
    $
    6.33-$37.00
    
    
    $
    5.33-$37.00
    
    
    $
    6.33-$37.00
    
    
    $
    5.33-$37.00
 4. COMMITMENTS AND CONTINGENCIES
 Litigation and Other Matters
 NACCO Litigation
  14




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
  LeBlanc Litigation ®
 BRX, Ltd.
 George Foreman Distributor Litigation. ® ®
 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.
 15




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
  Other Matters.
  Employment and Other Agreements
   License Agreements
 ®
 
    
    Calendar Year 2008: $13,500,000
    
    Calendar Year 2009: $14,000,000
    
    Calendar Year 2010: $14,500,000
    
    Calendar Year 2011: $15,000,000
    
    Calendar Year 2012: $15,000,000
  ®
 16




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
 ® ®
    Income Taxes
 Accounting for Uncertainty in Income
Taxes Accounting for Contingencies Accounting for Income Taxes
      17




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
 5. SALE OF DIVISION
  6. STOCK-BASED COMPENSATION
    WeightedAverageShares(000)
    
    
    Exercise PriceOutstanding at June 30, 2007
    
    
    1,006
    
    
    $
    14.91Granted
    
    
    Exercised
    
    
    Expired or cancelled
    
    
    (91
    )
    
    $
    13.51Outstanding at December 31, 2007
    
    
    915
    
    
    $
    15.05Options exercisable at December 31, 2007
    
    
    915
    
    
    $
    15.05
  Options Outstanding and ExercisableWeighted-AverageRemaining
    
    
    Weighted-AverageShares(000)
    
    
    Contractual Life
    
    
    Exercise Price$6.333 - $10.60
    
    
    481
    
    
    
    3.59
    
    
    $
    8.89$13.917 - $17.50
    
    
    261
    
    
    
    1.76
    
    
    $
    15.21$18.95 - $37.00
    
    
    173
    
    
    
    1.68
    
    
    $
    32.01915
    
    
    
    
    
    
    $
    15.05
  7. ASSETS HELD FOR SALE
  18




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
 8. PROPERTY, PLANT AND EQUIPMENT
  December 31,
    
    
    June 30,Useful Lives
    
    
    2007
    
    
    2007(In thousands)Land
    
    NA
    
    $
    6,338
    
    
    $
    Building
    
    39.5 years
    
    
    2,145
    
    
    
    Computer equipment
    
    3 - 7 years
    
    
    11,713
    
    
    
    11,383Equipment and other
    
    3 - 5 years
    
    
    13,904
    
    
    
    2,192Leasehold improvements*
    
    8 - 10 years
    
    
    2,093
    
    
    
    2,321Total
    
    
    
    
    
    $
    36,193
    
    
    $
    15,896Less accumulated depreciation
    
    
    
    
    
    
    4,274
    
    
    
    2,443$
    31,919
    
    
    $
    13,453
 
 *
    
    Shorter of remaining term of lease or useful life 9. PRODUCT WARRANTY OBLIGATIONS
  December 31,
    
    
    December 31,2007
    
    
    2006(In thousands)Balance, beginning of period
    
    $
    6,944
    
    
    $
    3,902Additions to accrued product warranties
    
    
    21,481
    
    
    
    15,945Reductions of accruals  payments and credits issued
    
    
    (16,483
    )
    
    
    (11,989
    )Balance, end of period
    
    $
    11,942
    
    
    $
    7,858
 10. 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 2.0% on December 31, 2007),
which was 6.6% on December 31, 2007; or
    
    the Base Rate (Bank of Americas prime rate), plus a specified margin (based
Saltons average quarterly availability, and was 0.25% on December 31, 2007), which
was 7.5% on December 31, 2007.
   19




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
 Term Loan.
 European Credit Facility.
    Series D Preferred Stock.
 Ranking. Liquidation Junior Stock
 Liquidation Preference. Series D
Liquidation Preference
 20




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
 Sale Transaction
 Dividends.
  Voting Rights.
 No Conversion Rights.
 Mandatory Redemption.
 11. PENSION BENEFITS PLANS
  Domestic
    
    
    Salton Europe
    
    
    TotalDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Three Months Ended:Service cost benefits earned
during the period
    
    $
    42
    
    
    $
    42
    
    
    $
    113
    
    
    $
    122
    
    
    $
    155
    
    
    $
    164Interest cost on projected
benefit obligation
    
    
    175
    
    
    
    175
    
    
    
    698
    
    
    
    617
    
    
    
    873
    
    
    
    792Actuarial return on plan assets
    
    
    (177
    )
    
    
    (167
    )
    
    
    (803
    )
    
    
    (592
    )
    
    
    (980
    )
    
    
    (759
    )Net amortization and deferral
    
    
    42
    
    
    
    48
    
    
    
    6
    
    
    
    150
    
    
    
    48
    
    
    
    198Net pension costs
    
    $
    82
    
    
    $
    98
    
    
    $
    14
    
    
    $
    297
    
    
    $
    96
    
    
    $
    395
 21




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
 Domestic
    
    
    Salton Europe
    
    
    TotalDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Six Months Ended:Service cost benefits earned
during the period
    
    $
    84
    
    
    $
    84
    
    
    $
    223
    
    
    $
    242
    
    
    $
    307
    
    
    $
    326Interest cost on projected
benefit obligation
    
    
    351
    
    
    
    350
    
    
    
    1,387
    
    
    
    1,223
    
    
    
    1,738
    
    
    
    1,573Actuarial return on plan assets
    
    
    (355
    )
    
    
    (334
    )
    
    
    (1,595
    )
    
    
    (1,173
    )
    
    
    (1,950
    )
    
    
    (1,507
    )Net amortization and deferral
    
    
    85
    
    
    
    96
    
    
    
    13
    
    
    
    297
    
    
    
    98
    
    
    
    393Net pension costs
    
    $
    165
    
    
    $
    196
    
    
    $
    28
    
    
    $
    589
    
    
    $
    193
    
    
    $
    785
  12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
   22




---



##### 



Salton, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  Continued
  Foreign BorrowersGuarantor
    
    
    
    
    
    
    
    
    
    
    and Guarantor
    
    
    Other
    
    
    
    
    
    
    Total OtherParent
    
    
    subsidiaries
    
    
    Eliminations
    
    
    Total
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Subsidiaries
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash
    
    $
    
    
    
    $
    270
    
    
    $
    
    
    
    $
    270
    
    
    $
    17,018
    
    
    $
    5,490
    
    
    $
    
    
    
    $
    22,508
    
    
    $
    22,778Compensating Balances on Deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,258
    
    
    
    
    
    
    
    
    
    
    
    41,258
    
    
    
    41,258Restricted Cash
    
    
    
    
    
    
    1,187
    
    
    
    
    
    
    
    1,187
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,187Accounts Receivable
    
    
    898
    
    
    
    39,327
    
    
    
    
    
    
    
    40,225
    
    
    
    66,826
    
    
    
    121,372
    
    
    
    
    
    
    
    188,198
    
    
    
    228,423Inventories
    
    
    1,794
    
    
    
    39,542
    
    
    
    (6,587
    )
    
    
    34,749
    
    
    
    60,276
    
    
    
    114,152
    
    
    
    
    
    
    
    174,428
    
    
    
    209,177Prepaid expense and other current assets
    
    
    1,196
    
    
    
    2,155
    
    
    
    
    
    
    
    3,351
    
    
    
    10,208
    
    
    
    11,330
    
    
    
    
    
    
    
    21,538
    
    
    
    24,890Intercompany
    
    
    (69,935
    )
    
    
    (105,481
    )
    
    
    160
    
    
    
    (175,256
    )
    
    
    26,040
    
    
    
    149,216
    
    
    
    
    
    
    
    175,256
    
    
    
    Prepaid Income Taxes
    
    
    431
    
    
    
    
    
    
    
    
    
    
    
    431
    
    
    
    
    
    
    
    1,137
    
    
    
    
    
    
    
    1,137
    
    
    
    1,568Deferred tax asset  Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    2,815
    
    
    
    2,153
    
    
    
    5,130
    
    
    
    5,129Total Current Assets
    
    
    (65,616
    )
    
    
    (23,000
    )
    
    
    (6,427
    )
    
    
    (95,043
    )
    
    
    221,788
    
    
    
    405,512
    
    
    
    2,153
    
    
    
    629,454
    
    
    
    534,410Net Property, Plant and Equipment
    
    
    2,415
    
    
    
    (2,084
    )
    
    
    
    
    
    
    331
    
    
    
    19,623
    
    
    
    11,965
    
    
    
    
    
    
    
    31,588
    
    
    
    31,919Investment in Subs
    
    
    66,983
    
    
    
    143,015
    
    
    
    (209,998
    )
    
    
    
    
    
    
    83,368
    
    
    
    
    
    
    
    (83,368
    )
    
    
    
    
    
    
    Tradenames
    
    
    83,725
    
    
    
    47,777
    
    
    
    
    
    
    
    131,502
    
    
    
    40,978
    
    
    
    50,820
    
    
    
    
    
    
    
    91,798
    
    
    
    223,300Goodwill
    
    
    
    
    
    
    40,016
    
    
    
    
    
    
    
    40,016
    
    
    
    
    
    
    
    59,233
    
    
    
    
    
    
    
    59,233
    
    
    
    99,249Non-current deferred tax asset  Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,975
    
    
    
    4,110
    
    
    
    5,103
    
    
    
    12,188
    
    
    
    12,188Other Assets, net
    
    
    257
    
    
    
    (3,314
    )
    
    
    
    
    
    
    (3,057
    )
    
    
    1,027
    
    
    
    8,602
    
    
    
    
    
    
    
    9,629
    
    
    
    6,572TOTAL ASSETS
    
    $
    87,764
    
    
    $
    202,410
    
    
    $
    (216,425
    )
    
    $
    73,749
    
    
    $
    369,759
    
    
    $
    540,242
    
    
    $
    (76,112
    )
    
    $
    833,889
    
    
    $
    907,638LIABILITIES AND STOCKHOLDERS EQUITYSenior
subordinated notes due 2008
    
    
    43,397
    
    
    
    
    
    
    
    
    
    
    
    43,397
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,397Accounts payable
    
    
    4,560
    
    
    
    99,588
    
    
    
    332
    
    
    
    104,480
    
    
    
    70,659
    
    
    
    
    
    
    
    
    
    
    
    70,659
    
    
    
    175,139Accrued expenses
    
    
    3,059
    
    
    
    (65,284
    )
    
    
    
    
    
    
    (62,225
    )
    
    
    38,271
    
    
    
    139,022
    
    
    
    
    
    
    
    177,293
    
    
    
    115,068Income taxes payable
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    3,085
    
    
    
    5,786
    
    
    
    2,798
    
    
    
    11,668
    
    
    
    12,268Total Current Liabilitites
    
    
    51,616
    
    
    
    34,304
    
    
    
    332
    
    
    
    86,252
    
    
    
    112,015
    
    
    
    144,808
    
    
    
    2,798
    
    
    
    259,621
    
    
    
    345,872Non-current deferred tax liability
    
    
    8,135
    
    
    
    
    
    
    
    
    
    
    
    8,135
    
    
    
    (484
    )
    
    
    
    
    
    
    4,836
    
    
    
    4,351
    
    
    
    12,486Senior Credit Facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,651
    
    
    
    38,934
    
    
    
    
    
    
    
    59,585
    
    
    
    59,585Term Loan
    
    
    
    
    
    
    110,231
    
    
    
    
    
    
    
    110,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,231Other Notes Payable
    
    
    
    
    
    
    1,874
    
    
    
    
    
    
    
    1,874
    
    
    
    11,797
    
    
    
    108,125
    
    
    
    
    
    
    
    119,923
    
    
    
    121,797Other Long Term Liabilities
    
    
    
    
    
    
    1,386
    
    
    
    
    
    
    
    1,386
    
    
    
    7,905
    
    
    
    231
    
    
    
    
    
    
    
    8,136
    
    
    
    9,522TOTAL LIABILITIES
    
    
    59,751
    
    
    
    147,795
    
    
    
    332
    
    
    
    207,878
    
    
    
    151,884
    
    
    
    292,098
    
    
    
    7,634
    
    
    
    451,615
    
    
    
    659,493Total Stockholders Equity
    
    
    28,013
    
    
    
    54,615
    
    
    
    (216,757
    )
    
    
    (134,129
    )
    
    
    217,875
    
    
    
    248,145
    
    
    
    (83,746
    )
    
    
    382,274
    
    
    
    248,145TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    87,764
    
    
    $
    202,410
    
    
    $
    (216,425
    )
    
    $
    73,749
    
    
    $
    369,759
    
    
    $
    540,242
    
    
    $
    (76,112
    )
    
    $
    833,889
    
    
    $
    907,638
 13. SUBSEQUENT EVENTS
   23




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
 ® ® ® ® ® ®
  Merger with Applica
     1 4
 24




---



##### 



Financings
    
    
    a Third Amended and Restated Credit Agreement dated as of December 28,
2007 (the First Lien Credit Agreement) by and among the financial institutions
named therein as lenders, Bank of America, N.A., as administrative agent and
collateral agent, Salton and each of Saltons subsidiaries identified on the
signature pages thereof as borrowers and each of Saltons subsidiaries identified
on the signature pages thereof as guarantors, that provides for a 5-year $200
million revolving credit facility;
    
    a Term Loan Agreement dated as of December 28, 2007 (the Second Lien
Credit Agreement) by and among the financial institutions named therein as
lenders, Harbinger Capital Partners Master Fund I, Ltd., as administrative agent
and collateral agent, Salton and each of Saltons subsidiaries identified on the
signature pages thereof as borrowers and each of Saltons subsidiaries identified
on the signature pages thereof as guarantors, that provides for a 5-year $110
million term loan facility; and
    
    a Second Amended and Restated Agreement dated as of December 28, 2007 (the
European Credit Facility) by and among Burdale Financial Limited, as an arranger,
agent and security trustee, Salton Holdings Limited, Salton Europe Limited and each
of Saltons other subsidiaries identified on the signature pages thereof as
borrowers, that provides for a 5-year £40.0 million (approximately $77.7 million)
revolving credit facility. The facility agreement consists of a revolving credit
facility with an aggregate notional maximum availability of £30.0 million
(approximately $58.3 million), a receivables facility with an aggregate notional
maximum availability of £30.0 million (approximately $58.4 million) and two term
loan facilities (one related to real property and the other to intellectual
property of the European subsidiary group) of £3.5 million and £5.8 million
(approximately $6.8 million and $11.4 million, respectively.)
 25




---



##### 



Forward Looking Statement Disclosure
    26




---



##### 



Results of Operations
   Three Months Ended December 31, 2007 Compared To Three Months Ended December 31, 2006
 Net Sales
  
    
    sales of Black & Decker® branded products increased by $19.5 million to $154.4
million;
    
    sales of LitterMaid® branded products increased by $2.7 million to $6.6 million;
and
    
    sales of other branded products increased by $1.2 million to $3.4 million.
 ®
 ® ®
 Gross Profit
 Operating Expenses
 
    
    employee compensation expenses increased $2.4 million due to an increase in our
total head count, as we experienced significant attrition in the first and second
quarters of 2006 as the result of a potential merger transaction;
 27




---



##### 




    
    promotion and advertising related expenses increased $2.3 million primarily
related to new product launches;
    
    amortization expenses increased $1.7 million, primarily attributable to the
amortization of intangibles valued as a result of the acquisition of all of the
outstanding stock of Applica Incorporated by Harbinger Capital Partners in January
2007; and
    
    legal fees increased by $1.3 million primarily related to our pursuit of a
patent infringement matter on certain patents related to the LitterMaid® automatic
cat litter box.
  Integration, Restructuring and Other Charges.
  Interest Expense
  Interest and Other Income.
 
    
    a gain of $1.9 million from the settlement in December 2007 of an escrow claim
related to the sale of an investment by a joint venture (the funds were received in
January 2008);
    
    a gain of $0.5 million related to the sale in October 2007 of the land and
building housing our Mexican manufacturing facility; and
    
    due diligence fees and expenses of $0.7 million that were expensed in the
period, which were associated with alternative financing for the merger that was
ultimately not consummated.
 Taxes
 Accounting for Income Taxes, Accounting for
Uncertainty in Income Taxes
 28




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##### 



Six Months Ended December 31, 2007 Compared To Six Months Ended December 31, 2006
 Net Sales
  
    
    sales of Black & Decker® branded products increased by $5.7 million to $264.5
million;
    
    sales of LitterMaid® branded products decreased by $3.5 million to $13.1
million; and
    
    sales of other branded products increased by $2.1 million to $6.7 million.
 ®
 ®
 Gross Profit
 Operating Expenses
 
    
    amortization expense increased $2.5 million, primarily attributable to the
amortization of intangibles valued as a result of the acquisition of all of the
outstanding common stock of Applica Incorporated by Harbinger Capital Partners in
January 2007;
    
    employee compensation expenses increased $1.8 million due to increased total
head count, as we experienced significant attrition in the first and second
quarters of 2006 as the result of a potential merger transaction;
    
    promotion and advertising related expenses increased $1.9 million primarily
related to new product launches;
    
    legal fees increased by $1.3 million primarily related to a our pursuit of a
patent infringement matter on certain patents related to the LitterMaid® automatic
cat litter box.
  29




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##### 



Integration, Restructuring and Other Charges.
  Interest Expense
  Interest and Other Income.
 
    
    a gain of $1.9 million from the settlement in December 2007 of an escrow claim
related to the sale of an investment by a joint venture (the funds were received in
January 2008);
    
    a gain of $0.5 million related to the sale in October 2007 of the land and
building housing our Mexican manufacturing facility; and
    
    due diligence fees and expenses of $0.7 million that were expensed in the
period, which were associated with alternative financing for the merger that was
ultimately not consummated.
 Taxes
 Accounting for Income Taxes, Accounting for
Uncertainty in Income Taxes
  30




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##### 



Liquidity and Capital Resources
 Liquidity
  Operating Activities .
 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 and set at 2.0% on December 31, 2007 and
February 8, 2008), which was 6.6% on December 31, 2007 and 5.15% on February 8,
2008; or
    
    the Base Rate (Bank of Americas prime rate), plus a specified margin (based
Saltons average quarterly availability, and was 0.25% on December 31, 2007 and
February 8, 2008), which was 7.5% on December 31, 2007 and at 6.25% on February 8,
2008.
  31




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##### 



Harbinger Term Loan.
 European Credit Facility.
    Series D Preferred Stock.
 Ranking. Liquidation Junior Stock
 32




---



##### 



Liquidation Preference. Series D
Liquidation Preference
 Sale Transaction
 Dividends.
  Voting Rights.
 No Conversion Rights.
 Mandatory Redemption.
 Senior Subordinated Notes.
 33




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##### 



Use of Estimates and Critical Accounting Policies
    Income Taxes
  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
 34




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##### 



Product Liability Claims and Litigation
  Long-Lived Assets
 Other Estimates
 Recent Accounting Pronouncement
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk Management
    35




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##### 



Foreign Exchange Risk Management
    
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Limitations on the Effectiveness of Controls.
 36




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##### 



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 NACCO Litigation
   LeBlanc Litigation ®
 BRX, Ltd.
 George Foreman Distributor Litigation. ® ®
 Asbestos Matters
 Environmental Matters.
 37




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##### 




    
    Kirksville, Missouri.Soil and groundwater contamination by trichloroethylene
has been identified at the former manufacturing facility in Kirksville, Missouri.
The Company 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.
  
 Item 1A. Risk Factors
  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.
  38




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##### 



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.
  
    
    continue cost reductions throughout our company and at our suppliers;
    
    reduce product returns and improve the quality of our products;
    
    pursue innovation in our product categories through our ability to research,
design and test new product concepts; and
    
    develop and sustain industry-leading sales, marketing and branding programs
in our industry.
  Our international operations subject us to additional business risks and may cause our
profitability to decline due to increased costs.
  
    
    the risk that because our brand names may not be locally recognized, we must
spend significant amounts of time and money to build a brand identity without
certainty that we will be successful;
    
    local and economic conditions;
    
    unexpected changes in regulatory requirements;
    
    inadequate protection of intellectual property in foreign countries;
    
    foreign currency fluctuations;
    
    transportation costs;
    
    adverse tax consequences; and
    
    political and economic instability, as a result of terrorist attacks, natural
disasters or otherwise.
  Harbinger Capital Partners has effective control over the outcome of actions requiring the approval
of our stockholders.
    Our net operating loss carryforwards may be limited as a result of the merger.
  39




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##### 



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.
  
    
    currency fluctuations;
    
    labor unrest;
    
    political instability;
    
    lack of developed infrastructure;
    
    longer payment cycles and greater difficulty in collecting accounts;
    
    restrictions on transfers of funds;
    
    import and export duties and quotas;
    
    changes in domestic and international customs and tariffs;
    
    unexpected changes in regulatory environments;
 40




---



##### 




    
    difficulty in complying with a variety of foreign laws;
    
    difficulty in obtaining distribution and support; and
    
    potentially adverse tax consequences.
  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.
  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.
  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.
  41




---



##### 



Any reduction in trade credit from our suppliers could seriously harm our operations and financial
condition.
  The small electric 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.
  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.
  
    
    price;
    
    quality;
    
    access to retail shelf space;
    
    product features and enhancements;
    
    brand names;
    
    new product introductions; and
    
    marketing support and distribution approaches.
  We depend on consumer spending, which fluctuates for a variety of reasons, including
seasonality, which may cause our results of operations to fluctuate.
  42




---



##### 



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.
  
    
    a substantial portion of the cash flow from operations has to be dedicated to
the payment of interest on existing indebtedness, thereby reducing the funds available
for other purposes;
    
    the ability to obtain additional financing in the future for working capital,
capital expenditures, product development, acquisitions or general corporate purposes
may be impaired and will limit our ability to pursue other business opportunities and
implement certain business strategies;
    
    our flexibility in reacting to competitive technological and other changes may
be limited;
    
    the indebtedness outstanding under the senior credit facilities and other
financings are secured by substantially all of our assets;
 43




---



##### 




    
    the substantial degree of leverage could make us more vulnerable in the event
of a downturn in general economic conditions or adverse developments in our business;
and
    
    We will be exposed to risks inherent in interest rate fluctuations.
 We may not be able to fund our debt service obligations through operating cash flow in the future,
which could force us to seek alternative means of funding, possibly on unfavorable terms.
  
    
    increasing, to the extent permitted, the amount of borrowings under our bank
facilities;
    
    restructuring or refinancing our indebtedness prior to maturity, and/or on
unfavorable terms;
    
    selling or disposing of some of our assets, possibly on unfavorable terms;
    
    revising or delaying the implementation of our strategic plans; or
    
    foregoing business opportunities, including the introduction of new products
and services, acquisitions and joint ventures.
  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.
  
    
    our failure to achieve the perceived benefits of the merger as rapidly as, or
to the extent, anticipated by financial or industry analysts, or such analysts failing
perceive the same benefits to the merger as we do; or
    
    the effect of the merger on our financial results failing to meet the
expectations of financial or industry analysts.
 If we are unable to renew the Black & Decker® trademark license agreement, our business
could suffer.
 ® ®
 44




---



##### 



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.
  45




---



##### 



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.
   46




---



##### 



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.
  
    
    the requirement that a majority of the board of directors consist of independent
directors;
    
    the requirement that a minimum of three members of the board of directors consist
of independent directors;
    
    the requirement that the company has an audit committee, a nominating/corporate
governance committee and a compensation committee, in each case that is composed
entirely of independent directors with a written charter addressing the committees
purpose and responsibilities;
    
    the requirement for an annual performance evaluation of the audit,
nominating/corporate governance and compensation committees;
    
    the requirement that stockholders must be given the opportunity to vote on
equity-compensation plans and material revisions thereto; and
    
    the requirement that the company must adopt and disclose a code of business
conduct and ethics for directors, officers and employees, and promptly disclose any
waivers of the code of business conduct and ethics for directors or executive
officers.
 47




---



##### 



We do not anticipate paying dividends.
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
    
    To approve the issuance and reservation for issuance of shares of Salton common
stock to holders of common stock of APN Holdco pursuant to the Agreement and Plan
of Merger, dated as of October 1, 2007, by and among Salton, SFP Merger Sub, Inc.,
a wholly-owned subsidiary of Salton, and APN Holdco (as it may be amended from time
to time, the merger agreement);
 For
    
    Against
    
    Abstain7,936,361
    
    571,895
    
    31,173
 
    
    To approve the Series A Amendment pursuant to which each outstanding share of
Salton Series A Preferred Stock would be converted, contemporaneously with the
effective time of the merger, into 2,197.49 shares of Salton common stock;
 For
    
    Against
    
    Abstain7,787,357
    
    724,031
    
    28,041
 
    
    To approve the reservation for issuance and issuance of shares of Salton common
stock to holders of Series A Preferred Stock upon the effective time of the merger
in accordance with the Series A Amendment;
 For
    
    Against
    
    Abstain7,920,217
    
    581,171
    
    38,041
 
    
    To approve the Series C Amendment pursuant to which each outstanding share of
Salton Series C Preferred Stock would be converted, contemporaneously with the
effective time of the merger, into 249.56 shares of Salton common stock;
 For
    
    Against
    
    Abstain7,769,322
    
    726,362
    
    43,745
 
    
    To approve the reservation for issuance and issuance of shares of Salton common
stock to holders of Series C Preferred Stock upon the effective time of the merger
in accordance with the Series C Amendment;
 For
    
    Against
    
    Abstain7,916,785
    
    575,899
    
    46,745
 
    
    To approve the terms and issuance of Salton Series D Preferred Stock to
Harbinger Capital Partners;
 For
    
    Against
    
    Abstain7,913,869
    
    571,194
    
    54,366
 48




---



##### 




    
    To approve an amendment to Saltons certificate of incorporation to increase the
authorized number of shares of common stock of Salton from 40,000,000 shares, $0.01
par value per share, to 1,000,000,000 shares, $0.01 par value per share, and
correspondingly increase Saltons total number of authorized shares of capital
stock from 42,000,000 shares to 1,002,000,000 shares;
 For
    
    Against
    
    Abstain13,391,805
    
    703,614
    
    68,238
 
    
    To approve an adjournment of the Special Meeting, if necessary, to solicit
additional proxies if there are not sufficient votes in favor of the foregoing
proposals;
 For
    
    Against
    
    Abstain13,381,722
    
    738,348
    
    44,443
 
    
    To elect three Class III Directors for a term expiring in 2009 and two Class I
Directors for a term expiring in 2010;
 Nominee
    
    For
    
    AgainstClass III Directors:Leonhard Dreimann
    
    
    13,459,281
    
    
    
    707,234Steven Oyer
    
    
    13,500,411
    
    
    
    666,104Lester C. Lee
    
    
    13,311,902
    
    
    
    854,613Class I Directors:William M. Lutz
    
    
    13,401,987
    
    
    
    764,528Jason B. Mudrick
    
    
    13,473,657
    
    
    
    692,858
 
    
    To ratify the appointment of Grant Thornton LLP as our independent registered
public accounting firm for the 2008 fiscal year.
 For
    
    Against
    
    Abstain13,832,749
    
    264,517
    
    68,391
   
 Item 6. Exhibits.
 (a)
    
    Exhibits:10.1
    
    Second Amendment and Restatement Agreement dated December 28, 2007
between Salton Holdings Limited, Salton Europe Limited and other
subsidiaries, and Burdale Financial Limited.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.
 49




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##### 



SIGNATURES
  SALTON, INC.
(Registrant)February 13, 2008
    By:
    /s/  Terry L. PolistinaTerry L. PolistinaChief Executive Officer and President February 13, 2008
    By:
    /s/ Ivan R. HabibeIvan R. HabibeVice President and Chief Financial Officer 50