##### Table of Contents



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 March 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 of other jurisdiction of
    
    (I.R.S. EmployerIncorporation or organization)
    
    Identification Number)1955 Field CourtLake Forest, IL
    
    60045(Address of principal executive offices)
    
    (Zip Code)
 
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  o þ




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##### 



Page No.Part I
    
    
    
    Financial InformationItem 1:
    
    Financial StatementsCondensed Consolidated Balance Sheets  March 31, 2007 and July 1, 2006
    
    
    3Condensed Consolidated Statements of Operations  Thirteen weeks ended  March 31, 2007 and April 1, 2006 and Thirty-nine weeks ended March 31, 2007 and April 1, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows  Thirty-nine weeks ended March 31, 2007 and April 1, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2:
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3:
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4:
    
    Controls and Procedures
    
    
    39Part II
    
    
    
    Other InformationItem 1:
    
    Legal Proceedings
    
    
    40Item 1A:
    
    Risk Factors
    
    
    41Item 6:
    
    Exhibits
    
    
    41Signature
    
    
    42Index of ExhibitsComputation of Ratio of Earnings to Fixed Charges302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  2




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##### Table of Contents



SALTON, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)(In thousands except share data)
    
    March 31, 2007
    
    
    July 1, 2006ASSETSCurrent Assets:Cash
    
    $
    16,765
    
    
    $
    18,103Compensating balances on deposit
    
    
    40,753
    
    
    
    39,516Accounts receivable, less allowances
    
    
    81,518
    
    
    
    117,094Inventories
    
    
    112,507
    
    
    
    143,997Prepaid expenses and other current assets
    
    
    10,594
    
    
    
    14,809Prepaid income taxes
    
    
    3,156
    
    
    
    1,332Deferred income taxes
    
    
    5,401
    
    
    
    5,433Total Current Assets
    
    
    270,694
    
    
    
    340,284Property, Plant and Equipment, net
    
    
    36,196
    
    
    
    40,460Tradenames
    
    
    149,679
    
    
    
    159,675Non-Current Deferred Tax Asset
    
    
    3,852
    
    
    
    3,269Other Assets
    
    
    7,641
    
    
    
    9,844TOTAL ASSETS
    
    $
    468,062
    
    
    $
    553,532LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Revolving line of credit and other current debt
    
    $
    111,191
    
    
    $
    21,547Senior
secured notes  including an adjustment of $13,013
and $10,971 for accrued interest, respectively
    
    
    116,284
    
    
    
    10,971Accounts payable
    
    
    76,204
    
    
    
    91,308Accrued expenses
    
    
    28,768
    
    
    
    28,081Accrued interest
    
    
    6,092
    
    
    
    5,028Income taxes payable
    
    
    2,276
    
    
    
    702Total Current Liabilities
    
    
    340,815
    
    
    
    157,637Non-Current Deferred Income Taxes
    
    
    11,104
    
    
    
    16,271Senior Subordinated Notes due 2008, including an adjustment of
$1,050 and $1,829 to the carrying value related
to interest rate swap agreements, respectively
    
    
    59,116
    
    
    
    61,531Senior
Secured Notes, including an adjustment of $0 and $13,136 to the
carrying value for accrued interest, respectively
    
    
    
    
    
    
    116,407Series C Preferred Stock, $.01 par value; authorized, 150,000 shares;
135,217 shares issued
    
    
    9,750
    
    
    
    8,922Term Loan and Other Notes Payable
    
    
    13,387
    
    
    
    117,908Other Long Term Liabilities
    
    
    16,019
    
    
    
    15,668TOTAL LIABILITIES
    
    
    450,191
    
    
    
    494,344Convertible Preferred Stock, $0.01 par value; authorized,
2,000,000 shares; 40,000 shares issued
    
    
    40,000
    
    
    
    40,000Stockholders (Deficit) Equity:Common Stock, $0.01 par value; authorized, 40,000,000
shares; issued and outstanding: 2007-15,218,861 shares;
2006-14,386,390 shares
    
    
    187
    
    
    
    178Treasury Stock, 7,885,845 shares  at cost
    
    
    (65,793
    )
    
    
    (65,793
    )Additional Paid-In Capital
    
    
    66,881
    
    
    
    63,854Accumulated Other Comprehensive Income
    
    
    14,221
    
    
    
    10,297(Accumulated Deficit) Retained Earnings
    
    
    (37,625
    )
    
    
    10,652Total Stockholders (Deficit) Equity
    
    
    (22,129
    )
    
    
    19,188TOTAL LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
    
    $
    468,062
    
    
    $
    553,532
  3




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##### Table of Contents



SALTON, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (In thousands except share and per share data)
    
    13 Weeks Ended
    
    
    39 Weeks EndedMarch 31, 2007
    
    
    April 1, 2006
    
    
    March 31, 2007
    
    
    April 1, 2006Net Sales
    
    $
    95,155
    
    
    $
    127,657
    
    
    $
    424,411
    
    
    $
    506,461Cost of Goods Sold
    
    
    70,445
    
    
    
    91,434
    
    
    
    294,602
    
    
    
    353,123Distribution Expenses
    
    
    8,880
    
    
    
    10,374
    
    
    
    29,731
    
    
    
    33,589Gross Profit
    
    
    15,830
    
    
    
    25,849
    
    
    
    100,078
    
    
    
    119,749Selling, General and Administrative Expenses
    
    
    29,289
    
    
    
    37,004
    
    
    
    109,034
    
    
    
    130,807Impairment loss on intangible assets
    
    
    12,478
    
    
    
    18
    
    
    
    12,579
    
    
    
    205Restructuring Costs
    
    
    81
    
    
    
    80
    
    
    
    988
    
    
    
    237Operating Loss
    
    
    (26,018
    )
    
    
    (11,253
    )
    
    
    (22,523
    )
    
    
    (11,500
    )Interest Expense, net
    
    
    8,963
    
    
    
    8,351
    
    
    
    28,817
    
    
    
    28,596Gain-Early Settlement of Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,720
    )Loss from Continuing OperationsBefore Income Taxes
    
    
    (34,981
    )
    
    
    (19,604
    )
    
    
    (51,340
    )
    
    
    (18,376
    )Income Tax
(Benefit) Expense
    
    
    (3,070
    )
    
    
    (540
    )
    
    
    (3,063
    )
    
    
    28,388Net Loss from Continuing Operations
    
    
    (31,911
    )
    
    
    (19,064
    )
    
    
    (48,277
    )
    
    
    (46,764
    )Income from Discontinued Operations, Net of Tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,735Gain on Sale of Discontinued Operations, Net of Tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,816Net Loss
    
    $
    (31,911
    )
    
    $
    (19,064
    )
    
    $
    (48,277
    )
    
    $
    (17,213
    )Weighted Average Common Shares Outstanding
    
    
    15,141,059
    
    
    
    13,616,903
    
    
    
    14,641,821
    
    
    
    13,118,437Weighted
Average Common and Common Equivalent Shares Outstanding
    
    
    15,141,059
    
    
    
    13,616,903
    
    
    
    14,641,821
    
    
    
    13,118,437Net Loss per Common Share: Basic and DilutedLoss from continuing operations
    
    $
    (2.11
    )
    
    $
    (1.40
    )
    
    $
    (3.30
    )
    
    $
    (3.56
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.13Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.12Net Loss per Common Share: Basic and Diluted
    
    $
    (2.11
    )
    
    $
    (1.40
    )
    
    $
    (3.30
    )
    
    $
    (1.31
    )
  4




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##### Table of Contents



SALTON, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 (In thousands)
    
    39 Weeks EndedMarch 31, 2007
    
    
    April 1, 2006Cash Flows from Operating Activities:Net Loss
    
    $
    (48,277
    )
    
    $
    (17,213
    )Adjustments
to Reconcile Net Loss to Net Cash from Operating Activities:Imputed interest on notes payable and other non-cash items
    
    
    124
    
    
    
    (192
    )Deferred income tax (benefit) provision
    
    
    (5,507
    )
    
    
    33,198Stock-based compensation expense
    
    
    662
    
    
    
    509Depreciation and amortization
    
    
    10,230
    
    
    
    11,898Amortization of deferred financing costs
    
    
    6,241
    
    
    
    3,325Bad debt provision
    
    
    1,478
    
    
    
    178Gain on sale of discontinued operations
    
    
    
    
    
    
    (27,816
    )Gain on disposal of property and equipment
    
    
    (1,551
    )
    
    
    (729
    )Inventory valuation adjustment
    
    
    908
    
    
    
    322Impairment loss on intangible assets
    
    
    12,579
    
    
    
    205Foreign currency gains
    
    
    (10
    )
    
    
    (18
    )Gain  early settlement of debt
    
    
    
    
    
    
    (21,720
    )Minority interest
    
    
    
    
    
    
    1,404Changes in assets and liabilities:Accounts receivable
    
    
    36,317
    
    
    
    1,766Inventories
    
    
    34,046
    
    
    
    5,653Prepaid expenses and other current assets
    
    
    4,442
    
    
    
    (3,189
    )Other non-current assets
    
    
    5
    
    
    
    1,761Accounts payable
    
    
    (15,065
    )
    
    
    7,671Income taxes payable
    
    
    (288
    )
    
    
    (2,926
    )Accrued expenses
    
    
    (1,443
    )
    
    
    (6,941
    )Net Cash from Operating Activities
    
    
    34,891
    
    
    
    (12,854
    )Cash Flows from Investing Activities:Capital expenditures
    
    
    (8,000
    )
    
    
    (4,000
    )Proceeds from sale of property and equipment
    
    
    4,340
    
    
    
    1,152Proceeds from sale of tabletop assets
    
    
    
    
    
    
    14,195Proceeds from sale of discontinued operations, net of $10,998 cash sold
    
    
    
    
    
    
    69,938Increase in restricted cash
    
    
    
    
    
    
    (1,408
    )Acquisition of majority interest, net of cash acquired
    
    
    
    
    
    
    (4,525
    )Additional payment for acquisition of trade names
    
    
    (107
    )
    
    
    (205
    )Increase in compensating balances on deposit
    
    
    (1,237
    )
    
    
    (4,910
    )Net Cash from Investing Activities
    
    
    (5,004
    )
    
    
    70,237Cash Flows from Financing Activities:Net repayment of revolving line of credit and other short term debt
    
    
    (11,874
    )
    
    
    (43,070
    )Proceeds from new credit agreement
    
    
    
    
    
    
    48,870Repayment of terminated credit agreement
    
    
    
    
    
    
    (39,675
    )Repayment of long term debt
    
    
    (18,470
    )
    
    
    (50,434
    )Costs associated with refinancing
    
    
    (3,260
    )
    
    
    (14,666
    )Common stock issued
    
    
    1,755
    
    
    
    175Net Cash from Financing Activities
    
    
    (31,849
    )
    
    
    (98,800
    )Effect of Exchange Rate Changes on Cash
    
    
    624
    
    
    
    1,534Change in Cash
    
    
    (1,338
    )
    
    
    (39,883
    )Cash, Beginning of Period, Including Cash of Discontinued Operations of
$0 and $35,934, respectively
    
    
    18,103
    
    
    
    50,791Cash, End of Period
    
    $
    16,765
    
    
    $
    10,908Supplemental Disclosure of Cash Flow Information:Cash Paid During the Period for:Interest
    
    $
    29,960
    
    
    $
    31,382Income taxes, net
    
    $
    2,754
    
    
    $
    304
 Supplemental Disclosure of Noncash Investing and Financing Activities:
   5




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##### Table of Contents



SALTON, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1.
    
    Condensed Consolidated Financial StatementsIn the opinion of management, the accompanying condensed consolidated balance sheets and related
interim condensed consolidated statements of operations and cash flows include all adjustments,
consisting only of normal recurring items, necessary for their fair presentation in conformity
with principles, generally accepted in the United States of America. Preparing financial
statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses. Actual results may differ from these
estimates. The Companys business is highly seasonal, with operating results varying from
quarter to quarter. Interim results are not necessarily indicative of results for a full year.
The information included in this Form 10-Q should be read in conjunction with Managements
Discussion and Analysis and consolidated financial statements and notes thereto included in the
Salton, Inc. 2006 Annual Report on Form 10-K. Certain current liabilities, cash flows from
operating activities and cash flows from investing activities from the prior year have been
separated to conform to the current year presentation.2.
    
    Intangible AssetsIntangible assets that are not amortized are subject to a fair-value based impairment test on an
annual basis or more frequently if circumstances indicate a potential impairment.Each quarter management performs a review to determine if events would require an interim
evaluation. In the third quarter of fiscal 2007, management determined that the uncertainty
associated with the pending merger, along with the drop in domestic sales represented a
triggering event, and an interim evaluation of the Companys
tradenames was performed. This interim
evaluation was done on a stand alone basis, and did not consider potential changes in the use or
performance of the brands that may result following the pending merger.As a result of this interim evaluation, the Company determined that the implied fair value of
the George Foreman tradename was less than its carrying value, and recorded a
non-cash impairment charge totaling $12.5 million.The following table summarizes the intangible asset activity and balances:
 (In thousands)
    
    
    
    
    
    
    
    
    
    Impairment
    
    
    
    
    
    
    Currency7/1/2006
    
    
    Additions
    
    
    Charges
    
    
    Amortization
    
    
    Fluctuations
    
    
    3/31/2007Trade names-indefinite lived
    
    $
    159,675
    
    
    $
    128
    
    
    $
    (12,579
    )
    
    $
    
    
    
    $
    2,455
    
    
    $
    149,679Total
    
    $
    159,675
    
    
    $
    128
    
    
    $
    (12,579
    )
    
    $
    
    
    
    $
    2,455
    
    
    $
    149,679
 6




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##### Table of Contents



3.
    
    Strategic Alternatives and Merger AgreementThe accompanying condensed consolidated financial statements have been prepared on a going
concern basis. The Company has reported a net loss from continuing operations for the 13 week
and the 39 week periods ended March 31, 2007. Historically, the Company has also reported net
losses in the prior three fiscal years, and has not consistently generated positive net cash
flows from operating activities during these periods. The Company has used a combination of cash
flows from operations, additional borrowing under certain amendments to its senior secured credit
facility and asset sales to meet its debt service and working capital needs. At this time, there
can be no assurance that the Company will be able to generate sufficient cash flows to meet its
future working capital needs, debt service obligations and to satisfy or refinance its debt
maturities without additional sales or monetization of existing assets.The Company has required amendments and waivers to its senior debt during recent periods due to a
failure to remain in compliance with the financial covenants. There can be no assurance that the
Company will be able to comply with the financial covenants and other covenants in its debt
instruments or that, if it fails to comply, that its debt holders would waive compliance or
forbear from exercising their remedies.In order to address the need to satisfy its continuing obligations and realize its long term
strategy, the Company has been reviewing various strategic alternatives. On February 7, 2007,
the Company and its wholly-owned subsidiary SFP Merger Sub, Inc. (MergerSub) entered into a
definitive merger agreement with APN Holding Company, Inc. (APN Holdco), whereby, among other
things, MergerSub will merge with and into APN Holdco. APN Holdco acquired all of the
outstanding common shares of Applica Incorporated (Applica) on January 23, 2007. Applica is a
marketer and distributor of a wide range of small appliances for use in and outside the home.
Through its operating subsidiary, Applica Consumer Products, Inc., Applica markets products under
licensed brand names such as Black & Decker®, company-owned brand names such as LittermaidTM and InfrawaveTM and private label brand names, primarily in North America,
Latin America and the Caribbean.The merger would result in Applica and its subsidiaries becoming subsidiaries of Salton. The
transaction is expected to be completed in June or July 2007. The consummation of the merger is
subject to various conditions, including the approval by the Companys stockholders, the funding
of financing commitments and the absence of legal impediments to the consummation of the merger.
The consummation of the merger would result in the redemption or refinancing of substantially all
of the Companys existing debt obligations, and provide adequate working capital for future
operations. The Merger Agreement contains certain termination rights for both the Company and APN
Holdco and provides that, under certain circumstances, if financing commitments were not
delivered within 45 days or the funding thereof does not occur, APN Holdco would be obligated to
pay the Company a termination fee of $10.3 million (which fee may be paid through the surrender
by Harbinger Capital Partners of $10.3 million of the Companys outstanding 2008 senior
subordinated notes or second lien notes). The financing commitments were delivered on March 27,
2007, and subsequently accepted by the Companys Board of Directors. The Merger Agreement
further provides that upon termination of the Merger Agreement as the result of either the
Companys Board of Directors withdrawing its recommendation for the Merger or a superior
proposal, the Company would be obligated to pay APN Holdco a termination fee of $2.5 million plus
up to $2.0 million of expenses.
 7




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##### Table of Contents



While it is expected that the merger will close, if it fails to do so, the Company believes that
its current cash flows from operating activities and existing credit facilities may not be
sufficient to fund its operations and meet its overadvance repayment requirement at June 30,
2007 and its debt obligations that are due on December 31, 2007. In this case, the Company
would rely on alternative sources of financing and additional sales of assets to refinance its
maturing debt and meet its operating needs. The Company can not assure that it will be able to
execute these plans on favorable terms and within a time frame that will permit it to continue
its current operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.4.
    
    Discontinued OperationsOn September 29, 2005, the Company completed the sale of its 52.6% ownership interest in
Amalgamated Appliances Holdings Limited (AMAP), a leading distributor and marketer of small
appliances and other products in South Africa, to a group of investors led by Interactive
Capital (Proprietary) Limited. In the first quarter of fiscal 2006, the Company received
proceeds, net of expenses, of approximately $81.0 million in connection with the transaction and
recorded a preliminary gain of $27.8, million net of tax. Also, the Company licensed its George
Foreman®, Russell Hobbs® and Carmen® branded products to AMAP following the transaction.The following is a summary of financial results included within discontinued operations:
 Thirty-Nine Weeks EndedMarch 31, 2007
    
    
    April 1, 2006Net sales from discontinued operations
    
    $
    
    
    
    $
    68,798Income from discontinued operations before income taxes
    
    $
    
    
    
    $
    5,477Income taxes
    
    
    
    
    
    
    2,338Minority Interest
    
    
    
    
    
    
    1,404Income from discontinued operations, net of tax
    
    $
    
    
    
    $
    1,735
 At March 31, 2007 and July 1, 2006 there were no assets and liabilities classified as
assets and liabilities of discontinued operations.5.
    
    Senior Secured Credit Facility, Letters of Credit and Long-Term DebtTenth Amendment to Senior Secured Credit Facility On February 12, 2007, the Company entered
into a tenth amendment to the senior secured credit facility (the Tenth Amendment).The Tenth Amendment, among other things: (1) provides that the combined outstanding amount of
the existing overadvance of up to $16.2 million plus the additional overadvance of up to $27.2
million must be reduced to a maximum of $23.0 million by the end of June 2007; (2) eliminates
the fixed charge coverage ratio and minimum EBITDA covenants through and including June 2007 and
revises such covenants thereafter; (3) adds a monthly cash flow covenant from April through June
2007; and (4) places a limit of availability of $105.0 million through June 2007.The $100 million term loan portion of the senior secured credit facility has been reclassified
from long-term to current debt. The senior secured credit facility matures December 31, 2007.
 8




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##### Table of Contents



As of March 31 2007, the Company had outstanding borrowings of $100.0 million under the senior
secured credit facility and had approximately $3.1 million available under this facility for
future borrowings.Subsequent to March 31, 2007, the Company entered into an Eleventh Amendment to the senior
secured credit facility (see Note 17, Subsequent Events).Letters of Credit As of March 31, 2007, the Company had outstanding letters of credit of $1.1
million under the letter of credit subfacility of $15.0 million.Salton Europe Facility Agreement  On October 10, 2006, the Company entered into an amendment
and restatement to the Europe Facility Agreement, which waived compliance with the fixed charge
coverage ratio for the months of April and May, 2006 and amended the definition of such covenant
thereafter.As of March 31, 2007, the Company had outstanding borrowings denominated in the Great Britain
Pound of £10.6 million (approximately $20.8 million), and borrowings denominated in the U.S.
Dollar of $3.4 million, and had approximately $1.1 million available under this agreement for
future borrowings.As of March 31, 2007, the Company was in compliance with covenants under the Senior Secured
Credit Facility and the Salton Europe Facility Agreement.Senior Subordinated Notes  On December 28, 2006, the Company issued 701,600 shares of Salton
common stock to Harbinger Capital Partners Master Fund I, Ltd. (Harbinger) for an aggregate
purchase price of approximately $1.8 million ($2.50 per share) and used the proceeds from such
stock issuance to repurchase from Harbinger a portion of the Companys outstanding 12 1/4%
senior subordinated notes due 2008 with an aggregate principal and accrued interest of
approximately $1.8 million.6.
    
    Stock-Based CompensationStock Options Effective July 3, 2005, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 123(R), Share-Based Payment, which revises FASB Statement 123 Accounting
for Stock-Based Compensation, and supersedes Accounting Principles Board (APB) 25Accounting for Stock Issued to Employees. Statement No. 123(R)
requires all share-based payments to employees to be recognized in the financial statements
based on their fair value using an option-pricing model at the date of grant. The Company uses
the Black-Scholes option-pricing model to determine fair value of awards on the date of grant.There were no stock option awards granted during the thirty-nine weeks ended March 31, 2007 and
April 1, 2006. Stock-based compensation expense related to stock options for the thirteen weeks
ended March 31, 2007 and April 1, 2006 was $0 and de minimis, respectively. Stock-based
compensation expense related to stock options for the thirty-nine weeks ended March 31, 2007 and
April 1, 2006 was $0 and $0.4 million, net of related income tax of $0, respectively. There was
no compensation expense related to nonvested options not yet recognized as of March 31, 2007.
 9




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##### Table of Contents



A summary of the Companys fixed stock options for the thirty-nine weeks ended March 31, 2007 is
as follows:
 WeightedAverageShares
    
    
    Exercise(000)
    
    
    PriceOutstanding as of July 1, 2006
    
    
    2,164
    
    
    $
    14.87Granted
    
    
    Exercised
    
    
    Expired or Canceled
    
    
    (1,142
    )
    
    
    14.88Outstanding as of March 31, 2007
    
    
    1,022
    
    
    $
    14.86Options exercisable at March 31, 2007
    
    
    1,022
    
    
    $
    14.86Weighted-average fair value of
options granted during the period
    
    
    
    
    
    
    N/A
 The following information summarizes the stock options outstanding at March 31, 2007:
 Options Outstanding
    
    
    
    
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageShares
    
    
    Contractual
    
    
    Exercise
    
    
    Shares
    
    
    ExerciseRange of Exercise Prices
    
    (000)
    
    
    Life (Years)
    
    
    Price
    
    
    (000)
    
    
    Price$5.333 - $5.833
    
    
    7
    
    
    
    0.29
    
    
    $
    5.03
    
    
    
    7
    
    
    $
    5.03$6.333 - $10.60
    
    
    545
    
    
    
    4.86
    
    
    
    8.87
    
    
    
    545
    
    
    
    8.87$13.917-$17.50
    
    
    279
    
    
    
    3.09
    
    
    
    15.36
    
    
    
    279
    
    
    
    15.36$18.95-$37.00
    
    
    191
    
    
    
    2.79
    
    
    
    31.61
    
    
    
    191
    
    
    
    31.61$5.333 - $37.00
    
    
    1,022
    
    
    
    3.93
    
    
    $
    14.86
    
    
    
    1,022
    
    
    $
    14.86
 Stock Grants On March 9, 2006, the Company granted certain employees common stock of the
Company. A total of 192,250 shares were granted, of which 101,250 vested upon issuance. The
remaining 91,000 shares have a two year vesting, with 50% vesting after one year and the
remaining 50% vesting after two years.The Company has previously recognized compensation cost for these stock grants at the fair value
of the stock at the date of grant. As of March 31, 2007, a minimal amount of compensation cost
related to nonvested awards not yet recognized is being recognized over the remainder of the
requisite two year service period.On August 24, 2006, the Company agreed to issue to David Sabin, the former Chairman of the
Board, common stock of the Company pursuant to his Separation Agreement. As of March 31, 2007,
the Company has issued the total award of 141,510 shares. In the thirty-nine weeks ended March
31, 2007,
the Company recognized severance cost at fair value of the stock as of the date of the Agreement
of $0.3 million.
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On October 18, 2006, the Company agreed to issue to William Rue, the former President and Chief
Operating Officer, common stock of the Company pursuant to his Separation Agreement. A total of
144,928 shares will be issued upon the earlier of six months from the date of the Agreement or
consummation of a change in control of the Company. In the thirty-nine weeks ended March 31,
2007, the Company recognized severance cost at fair value of the stock as of the date of the
Agreement of $0.3 million. Further, in the event a change of control is consummated within six
months of the Separation Agreement, the Company has also agreed to issue an additional number
shares of common stock of the Company equal to $0.6 million divided by the fair market value (as
determined by the Board of Directors of the Company in good faith) of the consideration per
share of common stock received by holders of common stock in connection with such change of
control. Subsequent to March 31, 2007, the Company issued the total award of 144,928 shares in
fulfillment of its agreement with Mr. Rue.Warrants As partial consideration for the Ninth Amendment to the Senior Secured Credit
Facility entered into on August 15, 2006, the Company issued a warrant to purchase 719,320
shares of common stock of the Company at an exercise price of $2.12 per share. The warrant may
be exercised any time before the later of December 31, 2007 and the Stated Termination Date (as
defined in the senior secured credit facility). The Company granted registration rights with
respect to the shares issuable upon exercise of the warrant.The Company has recognized deferred financing cost for the warrant at fair value as of the date
of issue of $0.6 million, which is being amortized over the related remaining loan term.The fair value of the warrant was estimated on the date of issue using the Black-Scholes
option-pricing model. The following assumptions were used to estimate the fair value of the
warrant:
 Dividend yield
    
    
    N/AExpected volatility
    
    
    97.2%Risk-free interest rate
    
    
    5.0%Expected life of warrant
    
    1.4 years
 7.
    
    Recent Accounting PronouncementsIn June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 to
clarify the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This
interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. This interpretation is
effective for fiscal years beginning after December 15, 2006.
The Company has not yet
completed its evaluation of the impact of adopting Interpretation 48 and as a result, is not able
to estimate the effect the adoption will have on its financial position and results of
operations.In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This statement
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting
principles, and expands disclosures about fair value measurements. This statement is effective
for financial statements issued for fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact of adopting this statement on the consolidated financial
statements.
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##### Table of Contents



In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Benefit Plans. This statement requires companies to recognize
the overfunded or underfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position. This statement is effective for financial
statements as of the end of the fiscal year ending after December 15, 2006. The Company is
currently evaluating the impact of adopting this statement on the consolidated financial
statements.In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108, (SAB 108). SAB 108 considers the effects of prior year misstatements when quantifying
misstatements in current year financial statements. It is effective for annual financial
statements as of the end of the fiscal year ending after November 15, 2006. The Company does
not believe the adoption of SAB 108 will have a material impact on the consolidated financial
statements.In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115. This statement
permits an entity to measure certain financial assets and financial liabilities at fair value.
Entities that elect the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. This statement is effective as of the beginning of the first
fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact
of the interpretation on the consolidated financial statements.8.
    
    Net Income per Common and Common Equivalent ShareNet income (loss) per share is computed in accordance with FASB Statement No. 128, Earnings Per
Share, and Emerging Issues Task Force (EITF) Statement No. 03-6, Participating Securities and
the Two Class Method Under FASB Statement No. 128, Earnings per Share. Under EITF 03-06,
Convertible Preferred Stock is included in both basic and diluted net income (loss) per share
using the two-class method, if the effect is dilutive. Diluted net income per share also
includes dilutive common stock equivalents applying the treasury stock method for options,
settlements and warrants.For the thirteen and thirty-nine weeks ended March 31, 2007 and April 1, 2006, the Companys
Convertible Preferred Stock was not dilutive and was excluded from the calculation of basic and
diluted loss per share. Additionally, the Companys outstanding common stock equivalents,
options and warrants were excluded from the computation of diluted earnings per share because
they had an anti-dilutive effect due to the Companys loss from continuing operations in these
periods. Had the Company recognized net income from continuing operations in these periods,
basic shares outstanding would have increased by 3.5 million shares related to the Convertible
Preferred Stock under the two-class method. Diluted shares outstanding would have increased by
3.6 million and 4.0 million shares for the thirteen and thirty-nine weeks ended March 31, 2007
and April 1, 2006, respectively, for the effect of the Convertible Preferred Stock, common stock
equivalents and outstanding warrants. Common stock equivalents totaling 1.0 million and 2.2
million shares at a price range of $5.33 to $37.00 per share were not included in the
calculations as of March 31, 2007 and April 1, 2006, respectively, due to the Companys loss
from continuing operations.9.
    
    Derivative Financial InstrumentsThe Company uses derivative financial instruments to manage foreign currency risk. The Company
does not enter into derivative financial instruments for trading purposes. The Company uses
forward exchange contracts to hedge foreign currency payables for periods consistent with the
expected cash
 12




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##### Table of Contents



flow of the underlying transactions. The contracts generally mature within one
year and are designed to limit exposure to exchange rate fluctuations, primarily related to the
Australian dollar and the U.S. dollar.All foreign exchange contracts have been recorded in the consolidated balance sheets within
accrued expenses at de minimis fair values at March 31, 2007 and July 1, 2006, respectively. The
change in the fair value of contracts in the third quarter of fiscal 2006 and 2007 and for the
fiscal year to date was insignificant.Contracts for the purchase of 6.8 million U.S. dollars were entered into during the third
quarter of fiscal 2007. At March 31, 2007 the Company had foreign exchange forward contracts
outstanding for the purchase of approximately 2.8 million U.S. dollars.10.
    
    Capital StockActivity in the Companys capital accounts for the thirteen and thirty-nine weeks ended March
31, 2007 was as follows:
 13 Weeks Ended
    
    
    39 Weeks EndedMarch 31, 2007
    
    
    March 31, 2007(in thousands)
    
    Common
    
    
    
    
    
    
    Additional
    
    
    Common
    
    
    
    
    
    
    AdditionalShares
    
    
    Common
    
    
    Paid in
    
    
    Shares
    
    
    Common
    
    
    Paid inOutstanding
    
    
    Stock
    
    
    Capital
    
    
    Outstanding
    
    
    Stock
    
    
    CapitalBalance, December 30 and July
1, 2006
    
    
    15,085
    
    
    $
    186
    
    
    $
    66,880
    
    
    
    14,386
    
    
    $
    178
    
    
    $
    63,854Share-based compensation
    
    
    134
    
    
    
    1
    
    
    
    1
    
    
    
    131
    
    
    
    1
    
    
    
    640Subordinated note exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    702
    
    
    
    8
    
    
    
    1,747Warrant issued  financing fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640Balance, March 31, 2007
    
    
    15,219
    
    
    $
    187
    
    
    $
    66,881
    
    
    
    15,219
    
    
    $
    187
    
    
    $
    66,881
 11.
    
    Comprehensive Income and Accumulated Other Comprehensive IncomeFor the thirteen weeks ended March 31, 2007 and April 1, 2006, components of other comprehensive
income include foreign currency translation adjustments of $0.7 million and $0.9 million,
respectively, and derivative liability adjustments in both periods of a nominal amount. For the
thirty-nine weeks ended March 31, 2007 and April 1, 2006, components of other comprehensive
income include foreign currency translation adjustments of $3.9 million and $(6.4) million,
respectively and derivative liability adjustments of a nominal amount and $(1.4) million,
respectively.
 13 Weeks Ended
    
    
    39 Weeks EndedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (31,911
    )
    
    $
    (19,064
    )
    
    $
    (48,277
    )
    
    $
    (17,213
    )Other Comprehensive Income (Loss), net of tax of $0
and 517, $0 and $(575), respectively
    
    
    688
    
    
    
    947
    
    
    
    3,924
    
    
    
    (7,767
    )Comprehensive Loss
    
    $
    (31,223
    )
    
    $
    (18,117
    )
    
    $
    (44,353
    )
    
    $
    (24,980
    )
 13




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##### Table of Contents



Accumulated other comprehensive income is comprised of the following:
 As Of(In thousands)
    
    March 31, 2007
    
    
    July 1, 2006Minimum Pension Liability, net of tax of $(4,485) and $(4,308), respectively
    
    $
    (8,585
    )
    
    $
    (8,173
    )Unrealized Loss on Derivative, net of tax of $(14) and $0, respectively
    
    
    (31
    )
    
    
    Foreign Currency Translation
    
    
    22,837
    
    
    
    18,470$
    14,221
    
    
    $
    10,297
 12.
    
    Pension Benefit PlansThe components of net periodic pension cost are as follows:
 (In thousands)
    
    Domestic
    
    
    Salton Europe
    
    
    TotalThirteen Weeks Ended:
    
    3/31/2007
    
    
    4/1/2006
    
    
    3/31/2007
    
    
    4/1/2006
    
    
    3/31/2007
    
    
    4/1/2006Service cost-benefits earned during the period
    
    $
    42
    
    
    $
    42
    
    
    $
    125
    
    
    $
    68
    
    
    $
    167
    
    
    $
    110Interest cost on projected benefit obligation
    
    
    175
    
    
    
    176
    
    
    
    631
    
    
    
    528
    
    
    
    806
    
    
    
    704Actuarial return on plan assets
    
    
    (167
    )
    
    
    (157
    )
    
    
    (605
    )
    
    
    (453
    )
    
    
    (772
    )
    
    
    (610
    )Net amortization and deferral
    
    
    48
    
    
    
    61
    
    
    
    153
    
    
    
    196
    
    
    
    201
    
    
    
    257Net pension cost
    
    $
    98
    
    
    $
    122
    
    
    $
    304
    
    
    $
    339
    
    
    $
    402
    
    
    $
    461
 (In thousands)
    
    Domestic
    
    
    Salton Europe
    
    
    TotalThirty-Nine Weeks Ended:
    
    3/31/2007
    
    
    4/1/2006
    
    
    3/31/2007
    
    
    4/1/2006
    
    
    3/31/2007
    
    
    4/1/2006Service cost-benefits earned during the period
    
    $
    126
    
    
    $
    126
    
    
    $
    366
    
    
    $
    206
    
    
    $
    492
    
    
    $
    332Interest cost on projected benefit obligation
    
    
    524
    
    
    
    528
    
    
    
    1,854
    
    
    
    1,596
    
    
    
    2,378
    
    
    
    2,124Actuarial return on plan assets
    
    
    (501
    )
    
    
    (472
    )
    
    
    (1,778
    )
    
    
    (1,369
    )
    
    
    (2,279
    )
    
    
    (1,841
    )Net amortization and deferral
    
    
    144
    
    
    
    184
    
    
    
    450
    
    
    
    592
    
    
    
    594
    
    
    
    776Net pension cost
    
    $
    293
    
    
    $
    366
    
    
    $
    892
    
    
    $
    1,025
    
    
    $
    1,185
    
    
    $
    1,391
 The Company previously disclosed in its financial statements for the year ended July 1,
2006 that it expected to contribute $0.5 million to its domestic pension plans and $1.5 million
to the Salton Europe pension plan in fiscal 2007. As of March 31, 2007, $0.3 million and $1.2
million of contributions have been made to the domestic and Europe plans, respectively.13.
    
    Operating Segments and Major CustomersSalton consists of a single operating segment which designs, sources, markets and distributes a
diversified product mix for use in the home. The product mix consists of small kitchen and home
appliances, electronics for the home, time products, lighting products and personal care and
wellness products. The Company believes this segmentation is appropriate based upon Managements
operating decisions and performance assessment. Nearly all of the Companys products are
consumer goods within the housewares market, procured through independent manufacturers,
primarily in the Far East. Saltons products are distributed through similar distribution
channels and customer base using the marketing efforts of its Global Marketing Team.
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Major Customers  For the thirteen week periods ended March 31, 2007 and April 1, 2006, no one
customer accounted for more than 10.0% of net sales from continuing operations. For the
thirty-nine week period ended March 31, 2007, one customer accounted for 10.1% of net sales from
continuing operations. For the thirty-nine week period ended April 1, 2006, another customer
accounted for 10.4% of net sales from continuing operations.14.
    
    Legal ProceedingsProduct LiabilityOn or about October 27, 2004, a lawsuit entitled DiNatale vs. Salton was filed in the
New York State Supreme Court against the Company. The plaintiffs, who seek unspecified damages,
allege that they were injured by water contaminated with lead taken from a tea kettle sold by
the Company under its Russell Hobbs brand. The plaintiffs attorney had been seeking to convert the lawsuit into a
class action suit; no class action suit has been filed to date. The products liability insurer
of the Company and the insurer of the manufacturer of the product are cooperating in the defense
of the lawsuit.On or about December 20, 2006, a lawsuit entitled Paul E. LeBlanc, Jr.,et al., Plaintiffs, vs.
Salton, Inc.; Salton/Maxim Housewares, Inc.: Bloomingdales, Inc.; Chiaphua Industries Limited,;
and Does 1 through 100, inclusive, Defendants was filed in the Orange County Superior Court
against the Company. The plaintiffs, who are seeking unspecified damages, allege that
they were injured by water contaminated with lead taken from a tea kettle sold by the Company
and also allege that the tea kettle violated California laws in failing to give a warning of the
presence of lead in the product. The products liability insurer of the Company and the insurer
of the manufacturer of the product are cooperating in the defense of the lawsuit.Jay Kordich v. Salton, Inc.On October 19, 2005, a lawsuit named Jay Kordich v. Salton, Inc. was filed in the United States
District Court for the Southern District of California. The plaintiff in this action is seeking
a judicial determination that a covenant not to compete in an agreement between him and Salton
is invalid and unenforceable against him plus attorneys fees and costs. Salton believes that
the lawsuit is without merit.The outcome of the foregoing legal matters cannot be predicted with certainty, however Salton
does not believe that these actions will have a material adverse effect on its business,
financial condition or results of operations. Therefore, no amounts have been accrued for such
claims.EnvironmentalThe Company has accrued approximately $0.2 million for the anticipated costs of environmental
remediation at four of its current and previously owned sites. Although such costs could exceed
that amount, Management believes any such excess will not have a material adverse effect on the
financial condition or annual results of operations of the Company.OtherThe Company is a party to various other actions and proceedings incident to its normal business
operations. The Company believes that the outcome of any such litigation will not have a
material adverse effect on its business, financial condition or results of operations. The
Company also has product liability and general liability insurance policies in amounts believed
to be reasonable given its current level of business. Although historically the Company has not
had to pay any material product liability claims, it is conceivable that the Company could incur
claims for which we are not insured.
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15.
    
    Income TaxesDeferred tax assets are recognized for deductible temporary differences, net operating loss
carryforwards, and credit carryforwards if it is more likely than not that the tax benefit will
be realized. To the extent that a deferred tax asset cannot be recognized under the preceding
criteria, a valuation allowance has been established. This assessment is based on an analysis
of historical and prospective earnings that will allow the Company to utilize the deferred tax
asset. During fiscal 2006, the Company recorded a valuation allowance against its U.S. deferred
income tax asset balance, its unused foreign tax credits, and increased its valuation allowance
on certain foreign entity deferred tax balances. During fiscal 2007, the Company further
increased its U.S. and foreign valuation
allowances. This non-cash charge does not limit the Companys ability to realize future tax
benefits associated with its net operating loss carryforwards to the extent that future profits
result in taxable income during the carryforward period. Included in the Companys tax provision
are increases in the Companys foreign valuation allowances for Salton Germany and Salton Spain.
The U.S. net operating loss carryforwards primarily expire beginning in fiscal year 2009
through fiscal year 2026.In the second quarter of fiscal year 2007, the Internal Revenue Service completed its
examination of Saltons consolidated federal income tax returns for fiscal years 2001 through
2004, resulting in a potential tax refund, subject to review by the Joint Committee on Taxation.
As a result of the IRS examination, the Companys fiscal year 2005 income tax return has been
amended accordingly and will not be subject to any future IRS examination. Saltons management
consented to the results of the examination in the second quarter. The Joint Committee on
Taxation approved the results of the IRS examination early in the fourth quarter, and the income
tax refund will be recorded in that quarter. Additionally, as a result of the examination, the
Company has agreed to a revision of its tax deductible trade name tax basis resulting in a $2.0
million benefit to the tax provision in the thirty-nine weeks ended
March 31, 2007.16.
    
    Supplemental Consolidating Financial InformationThe payment obligations of the Company under the senior secured credit facility, the second lien
notes and the senior subordinated notes are guaranteed by certain of the Companys 100% owned
domestic subsidiaries (Subsidiary Guarantors). Such guarantees are full, unconditional and
joint and several.In December 2005, the Company entered into a facility agreement which is guaranteed by certain
of the Companys foreign subsidiaries (see Note 5, Senior Secured Credit Facility, Letters of
Credit and Long-Term Debt). As a result of the foreign borrowing facility, primarily all of the
assets in these foreign subsidiaries are restricted as to the transfer of funds to the parent in
the form of cash dividends, loans, or advances. The column titled Foreign Borrowers and
Guarantor Subsidiaries represents the financial position, results operations and cash flows of
these foreign subsidiaries.The following condensed consolidating financial information sets forth, on a combined basis,
balance sheets, statements of operations and statements of cash flows for Salton, Inc. (Parent), the
Guarantor Subsidiaries under the domestic facility, the Guarantor Subsidiaries under the foreign
facility and the Companys Non-Guarantor subsidiaries (Other Subsidiaries). Investments in
subsidiaries are accounted for using the equity method for purposes of the consolidating
presentation. The principal elimination entries eliminate investments in subsidiaries and
intercompany transactions.
 16




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##### Table of Contents



Consolidating Balance Sheet as of March 31, 2007
(In thousands)
 ForeignBorrowers andGuarantor
    
    
    
    
    
    
    
    
    
    
    Guarantor
    
    
    Other
    
    
    
    
    
    
    Total Other
    
    
    Consolidated
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Total
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalsASSETSCurrent Assets:Cash
    
    $
    
    
    
    $
    7,425
    
    
    $
    
    
    
    $
    7,425
    
    
    $
    5,101
    
    
    $
    4,239
    
    
    $
    
    
    
    $
    9,340
    
    
    $
    
    
    
    $
    16,765Compensating balances on deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,753
    
    
    
    
    
    
    
    40,753
    
    
    
    
    
    
    
    40,753Accounts receivable, net of allowances
    
    
    44
    
    
    
    35,883
    
    
    
    
    
    
    
    35,927
    
    
    
    29,411
    
    
    
    16,180
    
    
    
    
    
    
    
    45,591
    
    
    
    
    
    
    
    81,518Inventories
    
    
    4,112
    
    
    
    61,082
    
    
    
    (11,153
    )
    
    
    54,041
    
    
    
    40,439
    
    
    
    18,027
    
    
    
    
    
    
    
    58,466
    
    
    
    
    
    
    
    112,507Prepaid expenses and other current assets
    
    
    1,939
    
    
    
    2,356
    
    
    
    
    
    
    
    4,295
    
    
    
    2,316
    
    
    
    3,983
    
    
    
    
    
    
    
    6,299
    
    
    
    
    
    
    
    10,594Intercompany
    
    
    98,218
    
    
    
    (130,081
    )
    
    
    (17
    )
    
    
    (31,880
    )
    
    
    (7,098
    )
    
    
    38,978
    
    
    
    
    
    
    
    31,880
    
    
    
    
    
    
    
    Prepaid income taxes
    
    
    3,156
    
    
    
    
    
    
    
    
    
    
    
    3,156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,156Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163
    
    
    
    5,238
    
    
    
    5,401
    
    
    
    
    
    
    
    5,401Total
Current Assets
    
    
    107,469
    
    
    
    (23,335
    )
    
    
    (11,170
    )
    
    
    72,964
    
    
    
    70,169
    
    
    
    122,323
    
    
    
    5,238
    
    
    
    197,730
    
    
    
    
    
    
    
    270,694Property, Plant and Equipment,
    
    
    3,173
    
    
    
    6,619
    
    
    
    
    
    
    
    9,792
    
    
    
    8,492
    
    
    
    17,912
    
    
    
    
    
    
    
    26,404
    
    
    
    
    
    
    
    36,196Investments in Subsidiaries
    
    
    164,938
    
    
    
    144,665
    
    
    
    (309,603
    )
    
    
    
    
    
    
    
    
    
    
    83,368
    
    
    
    (83,368
    )
    
    
    
    
    
    
    
    
    
    
    Tradenames
    
    
    98,890
    
    
    
    10,313
    
    
    
    
    
    
    
    109,203
    
    
    
    40,476
    
    
    
    
    
    
    
    
    
    
    
    40,476
    
    
    
    
    
    
    
    149,679Non-Current
Deferred Tax Asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,677
    
    
    
    579
    
    
    
    596
    
    
    
    3,852
    
    
    
    
    
    
    
    3,852Other Assets, net
    
    
    4,888
    
    
    
    77
    
    
    
    
    
    
    
    4,965
    
    
    
    2,663
    
    
    
    13
    
    
    
    
    
    
    
    2,676
    
    
    
    
    
    
    
    7,641Total Assets
    
    $
    379,358
    
    
    $
    138,339
    
    
    $
    (320,773
    )
    
    $
    196,924
    
    
    $
    124,477
    
    
    $
    224,195
    
    
    $
    (77,534
    )
    
    $
    271,138
    
    
    $
    
    
    
    $
    468,062LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITYCurrent Liabilities:Revolving line of credit and other
current debt
    
    $
    
    
    
    $
    100,018
    
    
    $
    
    
    
    $
    100,018
    
    
    $
    10,828
    
    
    $
    345
    
    
    $
    
    
    
    
    11,173
    
    
    $
    
    
    
    $
    111,191Senior
secured notes  current
    
    
    116,284
    
    
    
    
    
    
    
    
    
    
    
    116,284
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,284Accounts payable
    
    
    5,079
    
    
    
    3,369
    
    
    
    155
    
    
    
    8,603
    
    
    
    3,764
    
    
    
    63,837
    
    
    
    
    
    
    
    67,601
    
    
    
    
    
    
    
    76,204Accrued expenses
    
    
    3,381
    
    
    
    5,915
    
    
    
    
    
    
    
    9,296
    
    
    
    15,317
    
    
    
    4,155
    
    
    
    
    
    
    
    19,472
    
    
    
    
    
    
    
    28,768Accrued interest
    
    
    3,663
    
    
    
    2,429
    
    
    
    
    
    
    
    6,092
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,092Income taxes payable
    
    
    916
    
    
    
    
    
    
    
    
    
    
    
    916
    
    
    
    535
    
    
    
    446
    
    
    
    379
    
    
    
    1,360
    
    
    
    
    
    
    
    2,276Total
Current Liabilities
    
    
    129,323
    
    
    
    111,731
    
    
    
    155
    
    
    
    241,209
    
    
    
    30,444
    
    
    
    68,783
    
    
    
    379
    
    
    
    99,606
    
    
    
    
    
    
    
    340,815Non-Current
Deferred Tax Liability
    
    
    7,307
    
    
    
    
    
    
    
    
    
    
    
    7,307
    
    
    
    
    
    
    
    775
    
    
    
    3,022
    
    
    
    3,797
    
    
    
    
    
    
    
    11,104Senior
Subordinated Notes
    
    
    59,116
    
    
    
    
    
    
    
    
    
    
    
    59,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,116Series C Preferred Stock
    
    
    9,750
    
    
    
    
    
    
    
    
    
    
    
    9,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,750Term Loan
and Other Notes Payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,387
    
    
    
    
    
    
    
    
    
    
    
    13,387
    
    
    
    
    
    
    
    13,387Other Long
Term Liabilities
    
    
    
    
    
    
    2,928
    
    
    
    
    
    
    
    2,928
    
    
    
    13,023
    
    
    
    68
    
    
    
    
    
    
    
    13,091
    
    
    
    
    
    
    
    16,019Total Liabilities
    
    
    205,496
    
    
    
    114,659
    
    
    
    155
    
    
    
    320,310
    
    
    
    56,854
    
    
    
    69,626
    
    
    
    3,401
    
    
    
    129,881
    
    
    
    
    
    
    
    450,191Convertible Preferred Stock
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000Stockholders Equity (Deficit)
    
    
    133,862
    
    
    
    23,680
    
    
    
    (320,928
    )
    
    
    (163,386
    )
    
    
    67,623
    
    
    
    154,569
    
    
    
    (80,935
    )
    
    
    141,257
    
    
    
    
    
    
    
    (22,129
    )Total Liabilities and Stockholders
(Deficit) Equity
    
    $
    379,358
    
    
    $
    138,339
    
    
    $
    (320,773
    )
    
    $
    196,924
    
    
    $
    124,477
    
    
    $
    224,195
    
    
    $
    (77,534
    )
    
    $
    271,138
    
    
    $
    
    
    
    $
    468,062
 17




---



##### Table of Contents



Consolidating Balance Sheet as of July 1, 2006
(In thousands)
 ForeignBorrowers andGuarantor
    
    
    
    
    
    
    
    
    
    
    Guarantor
    
    
    Other
    
    
    
    
    
    
    Total Other
    
    
    Consolidated
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Total
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalsASSETSCurrent Assets:Cash
    
    $
    1
    
    
    $
    4,437
    
    
    $
    
    
    
    $
    4,438
    
    
    $
    7,247
    
    
    $
    6,418
    
    
    $
    
    
    
    $
    13,665
    
    
    $
    
    
    
    $
    18,103Compensating balances on deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,516
    
    
    
    
    
    
    
    39,516
    
    
    
    
    
    
    
    39,516Accounts receivable, net of allowances
    
    
    420
    
    
    
    71,231
    
    
    
    
    
    
    
    71,651
    
    
    
    30,205
    
    
    
    15,238
    
    
    
    
    
    
    
    45,443
    
    
    
    
    
    
    
    117,094Inventories
    
    
    5,184
    
    
    
    85,911
    
    
    
    (14,124
    )
    
    
    76,971
    
    
    
    50,599
    
    
    
    16,427
    
    
    
    
    
    
    
    67,026
    
    
    
    
    
    
    
    143,997Prepaid expenses and other current assets
    
    
    1,620
    
    
    
    1,876
    
    
    
    
    
    
    
    3,496
    
    
    
    3,031
    
    
    
    8,282
    
    
    
    
    
    
    
    11,313
    
    
    
    
    
    
    
    14,809Intercompany
    
    
    120,860
    
    
    
    (161,298
    )
    
    
    
    
    
    
    (40,438
    )
    
    
    (12,164
    )
    
    
    52,602
    
    
    
    
    
    
    
    40,438
    
    
    
    
    
    
    
    Prepaid income taxes
    
    
    1,332
    
    
    
    
    
    
    
    
    
    
    
    1,332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,332Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    5,238
    
    
    
    5,433
    
    
    
    
    
    
    
    5,433Total
Current Assets
    
    
    129,417
    
    
    
    2,157
    
    
    
    (14,124
    )
    
    
    117,450
    
    
    
    78,918
    
    
    
    138,678
    
    
    
    5,238
    
    
    
    222,834
    
    
    
    
    
    
    
    340,284Property, Plant and Equipment,
    
    
    4,553
    
    
    
    7,573
    
    
    
    
    
    
    
    12,126
    
    
    
    10,884
    
    
    
    17,450
    
    
    
    
    
    
    
    28,334
    
    
    
    
    
    
    
    40,460Investments in Subsidiaries
    
    
    188,574
    
    
    
    145,352
    
    
    
    (333,926
    )
    
    
    
    
    
    
    
    
    
    
    83,368
    
    
    
    (83,368
    )
    
    
    
    
    
    
    
    
    
    
    Tradenames
    
    
    111,341
    
    
    
    10,313
    
    
    
    
    
    
    
    121,654
    
    
    
    38,021
    
    
    
    
    
    
    
    
    
    
    
    38,021
    
    
    
    
    
    
    
    159,675Non-Current
Deferred Tax Asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,124
    
    
    
    550
    
    
    
    595
    
    
    
    3,269
    
    
    
    
    
    
    
    3,269Other Assets
    
    
    6,877
    
    
    
    102
    
    
    
    
    
    
    
    6,979
    
    
    
    2,852
    
    
    
    13
    
    
    
    
    
    
    
    2,865
    
    
    
    
    
    
    
    9,844Total Assets
    
    $
    440,762
    
    
    $
    165,497
    
    
    $
    (348,050
    )
    
    $
    258,209
    
    
    $
    132,799
    
    
    $
    240,059
    
    
    $
    (77,535
    )
    
    $
    295,323
    
    
    $
    
    
    
    $
    553,532LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Revolving line of credit and other current debt
    
    $
    10,971
    
    
    $
    30
    
    
    $
    
    
    
    $
    11,001
    
    
    $
    21,130
    
    
    $
    387
    
    
    $
    
    
    
    
    21,517
    
    
    $
    
    
    
    $
    32,518Accounts payable
    
    
    7,075
    
    
    
    4,397
    
    
    
    172
    
    
    
    11,644
    
    
    
    3,501
    
    
    
    76,163
    
    
    
    
    
    
    
    79,664
    
    
    
    
    
    
    
    91,308Accrued expenses
    
    
    2,395
    
    
    
    7,150
    
    
    
    
    
    
    
    9,545
    
    
    
    14,875
    
    
    
    3,661
    
    
    
    
    
    
    
    18,536
    
    
    
    
    
    
    
    28,081Accrued interest
    
    
    2,071
    
    
    
    2,957
    
    
    
    
    
    
    
    5,028
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,028Income taxes payable
    
    
    720
    
    
    
    
    
    
    
    
    
    
    
    720
    
    
    
    52
    
    
    
    (70
    )
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    702Total
Current Liabilities
    
    
    23,232
    
    
    
    14,534
    
    
    
    172
    
    
    
    37,938
    
    
    
    39,558
    
    
    
    80,141
    
    
    
    
    
    
    
    119,699
    
    
    
    
    
    
    
    157,637Non-Current
Deferred Tax Liability
    
    
    11,391
    
    
    
    
    
    
    
    
    
    
    
    11,391
    
    
    
    
    
    
    
    1,858
    
    
    
    3,022
    
    
    
    4,880
    
    
    
    
    
    
    
    16,271Senior Subordinated Notes due 2008, including
an adjustment
of $1,829 to the carrying value related to
interest rate swap agreements
    
    
    61,531
    
    
    
    
    
    
    
    
    
    
    
    61,531
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,531Senior Secured Notes
    
    
    116,407
    
    
    
    
    
    
    
    
    
    
    
    116,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,407Series C Preferred Stock
    
    
    8,922
    
    
    
    
    
    
    
    
    
    
    
    8,922
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,922Term Loan
and Other Notes Payable
    
    
    
    
    
    
    100,008
    
    
    
    
    
    
    
    100,008
    
    
    
    17,900
    
    
    
    
    
    
    
    
    
    
    
    17,900
    
    
    
    
    
    
    
    117,908Other Long
Term Liabilities
    
    
    443
    
    
    
    2,968
    
    
    
    
    
    
    
    3,411
    
    
    
    12,257
    
    
    
    
    
    
    
    
    
    
    
    12,257
    
    
    
    
    
    
    
    15,668Total liabilities
    
    
    221,926
    
    
    
    117,510
    
    
    
    172
    
    
    
    339,608
    
    
    
    69,715
    
    
    
    81,999
    
    
    
    3,022
    
    
    
    154,736
    
    
    
    
    
    
    
    494,344Convertible Preferred Stock
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000Stockholders Equity
    
    
    178,836
    
    
    
    47,987
    
    
    
    (348,222
    )
    
    
    (121,399
    )
    
    
    63,084
    
    
    
    158,060
    
    
    
    (80,557
    )
    
    
    140,587
    
    
    
    
    
    
    
    19,188Total Liabilities and Stockholders Equity
    
    $
    440,762
    
    
    $
    165,497
    
    
    $
    (348,050
    )
    
    $
    258,209
    
    
    $
    132,799
    
    
    $
    240,059
    
    
    $
    (77,535
    )
    
    $
    295,323
    
    
    $
    
    
    
    $
    553,532
 18




---



##### Table of Contents



Consolidating Statement of Operations for the Thirteen Weeks ended March 31, 2007
(In thousands)
 ForeignBorrowersandGuarantor
    
    
    
    
    
    
    
    
    
    
    Guarantor
    
    
    Other
    
    
    
    
    
    
    Total Other
    
    
    Consolidated
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Total
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalsNet Sales
    
    $
    18,711
    
    
    $
    53,125
    
    
    $
    (30,902
    )
    
    $
    40,934
    
    
    $
    38,431
    
    
    $
    24,417
    
    
    $
    
    
    
    $
    62,848
    
    
    $
    (8,627
    )
    
    $
    95,155Cost of Goods Sold
    
    
    14,827
    
    
    
    50,419
    
    
    
    (31,551
    )
    
    
    33,695
    
    
    
    24,531
    
    
    
    19,816
    
    
    
    
    
    
    
    44,347
    
    
    
    (7,597
    )
    
    
    70,445Distribution Expenses
    
    
    
    
    
    
    4,190
    
    
    
    
    
    
    
    4,190
    
    
    
    3,448
    
    
    
    1,242
    
    
    
    
    
    
    
    4,690
    
    
    
    
    
    
    
    8,880Gross Profit
    
    
    3,884
    
    
    
    (1,484
    )
    
    
    649
    
    
    
    3,049
    
    
    
    10,452
    
    
    
    3,359
    
    
    
    
    
    
    
    13,811
    
    
    
    (1,030
    )
    
    
    15,830Selling, General and Administrative
expenses
    
    
    5,472
    
    
    
    10,866
    
    
    
    
    
    
    
    16,338
    
    
    
    8,531
    
    
    
    5,450
    
    
    
    
    
    
    
    13,981
    
    
    
    (1,030
    )
    
    
    29,289Impairment loss on intangible assets
    
    
    12,451
    
    
    
    27
    
    
    
    
    
    
    
    12,478
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,478Restructuring costs
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81Operating Income (loss)
    
    
    (14,039
    )
    
    
    (12,458
    )
    
    
    649
    
    
    
    (25,848
    )
    
    
    1,921
    
    
    
    (2,091
    )
    
    
    
    
    
    
    (170
    )
    
    
    
    
    
    
    (26,018
    )Interest Expense, Net
    
    
    4,233
    
    
    
    3,575
    
    
    
    
    
    
    
    7,808
    
    
    
    1,219
    
    
    
    (64
    )
    
    
    
    
    
    
    1,155
    
    
    
    
    
    
    
    8,963(Income) Loss from Subsidiaries
    
    
    18,204
    
    
    
    355
    
    
    
    (18,559
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) Income Before Income Taxes
    
    
    (36,476
    )
    
    
    (16,388
    )
    
    
    19,208
    
    
    
    (33,656
    )
    
    
    702
    
    
    
    (2,027
    )
    
    
    
    
    
    
    (1,325
    )
    
    
    
    
    
    
    (34,981
    )Income Tax Expense (Benefit)
    
    
    (3,561
    )
    
    
    
    
    
    
    
    
    
    
    (3,561
    )
    
    
    (274
    )
    
    
    (97
    )
    
    
    862
    
    
    
    491
    
    
    
    
    
    
    
    (3,070
    )Net (Loss) Income from Continuing
Operations
    
    
    (32,915
    )
    
    
    (16,388
    )
    
    
    19,208
    
    
    
    (30,095
    )
    
    
    976
    
    
    
    (1,930
    )
    
    
    (862
    )
    
    
    (1,816
    )
    
    
    
    
    
    
    (31,911
    )Income from Discontinued
Operations, Net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (Loss) Income
    
    $
    (32,915
    )
    
    $
    (16,388
    )
    
    $
    19,208
    
    
    $
    (30,095
    )
    
    $
    976
    
    
    $
    (1,930
    )
    
    $
    (862
    )
    
    $
    (1,816
    )
    
    $
    
    
    
    $
    (31,911
    )
 19




---



##### Table of Contents



Consolidating Statement of Operations for the Thirteen Weeks ended April 1, 2006
(In thousands)
 ForeignBorrowersandGuarantor
    
    
    
    
    
    
    
    
    
    
    Guarantor
    
    
    Other
    
    
    
    
    
    
    Total Other
    
    
    Consolidated
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Total
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalsNet Sales
    
    $
    41,946
    
    
    $
    85,465
    
    
    $
    (54,789
    )
    
    $
    72,622
    
    
    $
    38,315
    
    
    $
    34,903
    
    
    $
    
    
    
    $
    73,218
    
    
    $
    (18,183
    )
    
    $
    127,657Cost of Goods Sold
    
    
    32,703
    
    
    
    74,446
    
    
    
    (54,778
    )
    
    
    52,371
    
    
    
    26,115
    
    
    
    29,513
    
    
    
    
    
    
    
    55,628
    
    
    
    (16,565
    )
    
    
    91,434Distribution Expenses
    
    
    
    
    
    
    6,164
    
    
    
    
    
    
    
    6,164
    
    
    
    3,111
    
    
    
    1,099
    
    
    
    
    
    
    
    4,210
    
    
    
    
    
    
    
    10,374Gross Profit
    
    
    9,243
    
    
    
    4,855
    
    
    
    (11
    )
    
    
    14,087
    
    
    
    9,089
    
    
    
    4,291
    
    
    
    
    
    
    
    13,380
    
    
    
    (1,618
    )
    
    
    25,849Selling, General and Administrative
expenses
    
    
    10,038
    
    
    
    11,580
    
    
    
    
    
    
    
    21,618
    
    
    
    66,039
    
    
    
    3,443
    
    
    
    (52,478
    )
    
    
    17,004
    
    
    
    (1,618
    )
    
    
    37,004Impairment loss on intangible assets
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18Restructuring costs
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Operating Income (loss)
    
    
    (795
    )
    
    
    (6,823
    )
    
    
    (11
    )
    
    
    (7,629
    )
    
    
    (56,950
    )
    
    
    848
    
    
    
    52,478
    
    
    
    (3,624
    )
    
    
    
    
    
    
    (11,253
    )Interest Expense, Net
    
    
    (13,524
    )
    
    
    3,552
    
    
    
    
    
    
    
    (9,972
    )
    
    
    (1,230
    )
    
    
    137
    
    
    
    2,765
    
    
    
    1,672
    
    
    
    16,651
    
    
    
    8,351(Income) Loss from Subsidiaries
    
    
    15,115
    
    
    
    (14
    )
    
    
    (15,101
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) Income Before Income Taxes
    
    
    (2,386
    )
    
    
    (10,361
    )
    
    
    15,090
    
    
    
    2,343
    
    
    
    (55,720
    )
    
    
    711
    
    
    
    49,713
    
    
    
    (5,296
    )
    
    
    (16,651
    )
    
    
    (19,604
    )Income Tax Expense (Benefit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,430
    
    
    
    45
    
    
    
    (5,015
    )
    
    
    (540
    )
    
    
    
    
    
    
    (540
    )Net (Loss) Income from Continuing
Operations
    
    
    (2,386
    )
    
    
    (10,361
    )
    
    
    15,090
    
    
    
    2,343
    
    
    
    (60,150
    )
    
    
    666
    
    
    
    54,728
    
    
    
    (4,756
    )
    
    
    (16,651
    )
    
    
    (19,064
    )Income from Discontinued
Operations, Net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,373
    
    
    
    (57,373
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (Loss) Income
    
    $
    (2,386
    )
    
    $
    (10,361
    )
    
    $
    15,090
    
    
    $
    2,343
    
    
    $
    (2,777
    )
    
    $
    (56,707
    )
    
    $
    54,728
    
    
    $
    (4,756
    )
    
    $
    (16,651
    )
    
    $
    (19,064
    )
 20




---



##### Table of Contents



Consolidating Statement of Operations for the Thirty-Nine Weeks ended March 31, 2007
(In thousands)
 ForeignBorrowersandGuarantor
    
    
    
    
    
    
    
    
    
    
    Guarantor
    
    
    Other
    
    
    
    
    
    
    Total Other
    
    
    Consolidated
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Total
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalsNet Sales
    
    $
    97,339
    
    
    $
    263,894
    
    
    $
    (142,032
    )
    
    $
    219,201
    
    
    $
    146,414
    
    
    $
    102,900
    
    
    $
    
    
    
    $
    249,314
    
    
    $
    (44,104
    )
    
    $
    424,411Cost of Goods Sold
    
    
    76,026
    
    
    
    226,321
    
    
    
    (145,003
    )
    
    
    157,344
    
    
    
    93,451
    
    
    
    83,594
    
    
    
    
    
    
    
    177,045
    
    
    
    (39,787
    )
    
    
    294,602Distribution Expenses
    
    
    
    
    
    
    14,952
    
    
    
    
    
    
    
    14,952
    
    
    
    10,527
    
    
    
    4,252
    
    
    
    
    
    
    
    14,779
    
    
    
    
    
    
    
    29,731Gross Profit
    
    
    21,313
    
    
    
    22,621
    
    
    
    2,971
    
    
    
    46,905
    
    
    
    42,436
    
    
    
    15,054
    
    
    
    
    
    
    
    57,490
    
    
    
    (4,317
    )
    
    
    100,078Selling, General and Administrative
expenses
    
    
    23,657
    
    
    
    34,128
    
    
    
    
    
    
    
    57,785
    
    
    
    37,549
    
    
    
    18,017
    
    
    
    
    
    
    
    55,566
    
    
    
    (4,317
    )
    
    
    109,034Impairment loss on intangible assets
    
    
    12,451
    
    
    
    128
    
    
    
    
    
    
    
    12,579
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,579Restructuring costs
    
    
    680
    
    
    
    308
    
    
    
    
    
    
    
    988
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    988Operating (loss) Income
    
    
    (15,475
    )
    
    
    (11,943
    )
    
    
    2,971
    
    
    
    (24,447
    )
    
    
    4,887
    
    
    
    (2,963
    )
    
    
    
    
    
    
    1,924
    
    
    
    
    
    
    
    (22,523
    )Interest Expense, Net
    
    
    12,263
    
    
    
    11,677
    
    
    
    
    
    
    
    23,940
    
    
    
    4,238
    
    
    
    639
    
    
    
    
    
    
    
    4,877
    
    
    
    
    
    
    
    28,817(Income) Loss from Subsidiaries
    
    
    27,885
    
    
    
    687
    
    
    
    (28,572
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) Income Before Income Taxes
    
    
    (55,623
    )
    
    
    (24,307
    )
    
    
    31,543
    
    
    
    (48,387
    )
    
    
    649
    
    
    
    (3,602
    )
    
    
    
    
    
    
    (2,953
    )
    
    
    
    
    
    
    (51,340
    )Income Tax (Benefit) Expense
    
    
    (3,688
    )
    
    
    
    
    
    
    
    
    
    
    (3,688
    )
    
    
    (27
    )
    
    
    275
    
    
    
    377
    
    
    
    625
    
    
    
    
    
    
    
    (3,063
    )Net (Loss) Income from Continuing
Operations
    
    
    (51,935
    )
    
    
    (24,307
    )
    
    
    31,543
    
    
    
    (44,699
    )
    
    
    676
    
    
    
    (3,877
    )
    
    
    (377
    )
    
    
    (3,578
    )
    
    
    
    
    
    
    (48,277
    )Income from Discontinued Operations, Net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (Loss) Income
    
    $
    (51,935
    )
    
    $
    (24,307
    )
    
    $
    31,543
    
    
    $
    (44,699
    )
    
    $
    676
    
    
    $
    (3,877
    )
    
    $
    (377
    )
    
    $
    (3,578
    )
    
    $
    
    
    
    $
    (48,277
    )
 21




---



##### Table of Contents



Consolidating Statement of Operations for the Thirty-Nine Weeks ended April 1, 2006
(In thousands)
 ForeignBorrowersandGuarantor
    
    
    
    
    
    
    
    
    
    
    Guarantor
    
    
    Other
    
    
    
    
    
    
    Total Other
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Total
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated TotalsNet Sales
    
    $
    125,886
    
    
    $
    374,637
    
    
    $
    (199,698
    )
    
    $
    300,825
    
    
    $
    146,917
    
    
    $
    166,384
    
    
    $
    
    
    
    $
    313,301
    
    
    $
    (107,665
    )
    
    $
    506,461Cost of Goods Sold
    
    
    100,954
    
    
    
    323,110
    
    
    
    (207,674
    )
    
    
    216,390
    
    
    
    95,962
    
    
    
    143,508
    
    
    
    
    
    
    
    239,470
    
    
    
    (102,737
    )
    
    
    353,123Distribution Expenses
    
    
    
    
    
    
    19,840
    
    
    
    
    
    
    
    19,840
    
    
    
    10,271
    
    
    
    3,478
    
    
    
    
    
    
    
    13,749
    
    
    
    
    
    
    
    33,589Gross Profit
    
    
    24,932
    
    
    
    31,687
    
    
    
    7,976
    
    
    
    64,595
    
    
    
    40,684
    
    
    
    19,398
    
    
    
    
    
    
    
    60,082
    
    
    
    (4,928
    )
    
    
    119,749Selling, General and Administrative expenses
    
    
    30,814
    
    
    
    38,108
    
    
    
    
    
    
    
    68,922
    
    
    
    44,458
    
    
    
    20,589
    
    
    
    1,766
    
    
    
    66,813
    
    
    
    (4,928
    )
    
    
    130,807Impairment loss on intangible assets
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205Restructuring costs
    
    
    27
    
    
    
    210
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237Operating (loss) Income
    
    
    (5,909
    )
    
    
    (6,836
    )
    
    
    7,976
    
    
    
    (4,769
    )
    
    
    (3,774
    )
    
    
    (1,191
    )
    
    
    (1,766
    )
    
    
    (6,731
    )
    
    
    
    
    
    
    (11,500
    )Interest Expense, Net
    
    
    (4,160
    )
    
    
    11,851
    
    
    
    
    
    
    
    7,691
    
    
    
    (446
    )
    
    
    (79,143
    )
    
    
    83,843
    
    
    
    4,254
    
    
    
    16,651
    
    
    
    28,596Gain  early settlement of debt
    
    
    (21,720
    )
    
    
    
    
    
    
    
    
    
    
    (21,720
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,720
    )(Income) Loss from Subsidiaries
    
    
    (21,713
    )
    
    
    (61
    )
    
    
    21,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (Loss) Before Income Taxes
    
    
    41,684
    
    
    
    (18,626
    )
    
    
    (13,798
    )
    
    
    9,260
    
    
    
    (3,328
    )
    
    
    77,952
    
    
    
    (85,609
    )
    
    
    (10,985
    )
    
    
    (16,651
    )
    
    
    (18,376
    )Income Tax Expense (Benefit)
    
    
    28,840
    
    
    
    
    
    
    
    
    
    
    
    28,840
    
    
    
    3,839
    
    
    
    64
    
    
    
    (4,355
    )
    
    
    (452
    )
    
    
    
    
    
    
    28,388Net Income (Loss) from Continuing
Operations
    
    
    12,844
    
    
    
    (18,626
    )
    
    
    (13,798
    )
    
    
    (19,580
    )
    
    
    (7,167
    )
    
    
    77,888
    
    
    
    (81,254
    )
    
    
    (10,533
    )
    
    
    (16,651
    )
    
    
    (46,764
    )Income from Discontinued Operations, Net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,735
    
    
    
    
    
    
    
    1,735
    
    
    
    
    
    
    
    1,735Gain on Sale of Discontinued Operations,
Net of Tax
    
    
    (21,322
    )
    
    
    
    
    
    
    
    
    
    
    (21,322
    )
    
    
    62,771
    
    
    
    (13,633
    )
    
    
    
    
    
    
    49,138
    
    
    
    
    
    
    
    27,816Net (Loss) Income
    
    $
    (8,478
    )
    
    $
    (18,626
    )
    
    $
    (13,798
    )
    
    $
    (40,902
    )
    
    $
    55,604
    
    
    $
    65,990
    
    
    $
    (81,254
    )
    
    $
    40,340
    
    
    $
    (16,651
    )
    
    $
    (17,213
    )
 22




---



##### Table of Contents



Consolidating Statement of Cash Flows for the Thirty-Nine Weeks ended March 31, 2007
(In thousands)
 ForeignBorrowersandGuarantor
    
    
    
    
    
    
    
    
    
    
    Guarantor
    
    
    Other
    
    
    
    
    
    
    Total Other
    
    
    Consolidated
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Total
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalsCash flows from operating activities:Net loss
    
    $
    (51,934
    )
    
    $
    (24,307
    )
    
    $
    31,542
    
    
    $
    (44,699
    )
    
    $
    676
    
    
    $
    (3,877
    )
    
    $
    (377
    )
    
    $
    (3,578
    )
    
    $
    
    
    
    $
    (48,277
    )Adjustments to reconcile net loss to net cash
from operating activities:Imputed interest on note payable and other
non-cash items
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124Deferred income tax (benefit) provision
    
    
    (4,085
    )
    
    
    
    
    
    
    
    
    
    
    (4,085
    )
    
    
    (404
    )
    
    
    (1,019
    )
    
    
    
    
    
    
    (1,423
    )
    
    
    
    
    
    
    (5,508
    )Stock-based
compensation expense
    
    
    662
    
    
    
    
    
    
    
    
    
    
    
    662
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    662Depreciation and amortization
    
    
    1,527
    
    
    
    1,177
    
    
    
    
    
    
    
    2,704
    
    
    
    957
    
    
    
    6,569
    
    
    
    
    
    
    
    7,526
    
    
    
    
    
    
    
    10,230Amortization of deferred financing costs
    
    
    5,186
    
    
    
    
    
    
    
    
    
    
    
    5,186
    
    
    
    1,055
    
    
    
    
    
    
    
    
    
    
    
    1,055
    
    
    
    
    
    
    
    6,241Bad debt provision
    
    
    
    
    
    
    1,228
    
    
    
    
    
    
    
    1,228
    
    
    
    118
    
    
    
    132
    
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    1,478(Gain)loss on disposal of property and equipment
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    32
    
    
    
    (1,599
    )
    
    
    16
    
    
    
    
    
    
    
    (1,583
    )
    
    
    
    
    
    
    (1,551
    )Inventory valuation adjustment
    
    
    
    
    
    
    908
    
    
    
    
    
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    908Impairment loss on intangible assets
    
    
    12,451
    
    
    
    128
    
    
    
    
    
    
    
    12,579
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,579Foreign currency gains and losses
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    (58
    )
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    (10
    )Equity in
income of unconsolidated affiliate/consolidated subsidiaries
    
    
    27,884
    
    
    
    687
    
    
    
    (28,571
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Changes in assets and liabilities, net of
acquisitions:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accounts receivable
    
    
    376
    
    
    
    34,178
    
    
    
    
    
    
    
    34,554
    
    
    
    2,285
    
    
    
    (522
    )
    
    
    
    
    
    
    1,763
    
    
    
    
    
    
    
    36,317Inventories
    
    
    1,072
    
    
    
    23,921
    
    
    
    (2,971
    )
    
    
    22,022
    
    
    
    12,761
    
    
    
    (737
    )
    
    
    
    
    
    
    12,024
    
    
    
    
    
    
    
    34,046Prepaid expenses and other current assets
    
    
    (319
    )
    
    
    (480
    )
    
    
    
    
    
    
    (799
    )
    
    
    883
    
    
    
    4,358
    
    
    
    
    
    
    
    5,241
    
    
    
    
    
    
    
    4,442Other non-current assets
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Accounts payable
    
    
    (2,013
    )
    
    
    (1,028
    )
    
    
    
    
    
    
    (3,041
    )
    
    
    294
    
    
    
    (12,318
    )
    
    
    
    
    
    
    (12,024
    )
    
    
    
    
    
    
    (15,065
    )Income taxes payable
    
    
    (1,628
    )
    
    
    
    
    
    
    
    
    
    
    (1,628
    )
    
    
    465
    
    
    
    498
    
    
    
    377
    
    
    
    1,340
    
    
    
    
    
    
    
    (288
    )Accrued expenses
    
    
    24,485
    
    
    
    (33,033
    )
    
    
    
    
    
    
    (8,548
    )
    
    
    (5,764
    )
    
    
    12,870
    
    
    
    
    
    
    
    7,106
    
    
    
    
    
    
    
    (1,442
    )Net cash from operating activities
    
    
    13,788
    
    
    
    3,358
    
    
    
    
    
    
    
    17,146
    
    
    
    11,775
    
    
    
    5,970
    
    
    
    
    
    
    
    17,745
    
    
    
    
    
    
    
    34,891Cash flows from investing activities:Capital expenditures
    
    
    (148
    )
    
    
    (431
    )
    
    
    
    
    
    
    (579
    )
    
    
    (328
    )
    
    
    (7,093
    )
    
    
    
    
    
    
    (7,421
    )
    
    
    
    
    
    
    (8,000
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    176
    
    
    
    4,129
    
    
    
    35
    
    
    
    
    
    
    
    4,164
    
    
    
    
    
    
    
    4,340Additional payment for trade names
    
    
    
    
    
    
    (107
    )
    
    
    
    
    
    
    (107
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107
    )Increase in compensating balances on deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,237
    )
    
    
    
    
    
    
    (1,237
    )
    
    
    
    
    
    
    (1,237
    )Net cash from investing activities
    
    
    (148
    )
    
    
    (362
    )
    
    
    
    
    
    
    (510
    )
    
    
    3,801
    
    
    
    (8,295
    )
    
    
    
    
    
    
    (4,494
    )
    
    
    
    
    
    
    (5,004
    )Cash flows from financing activities:Net proceeds (repayments) from revolving line
of credit
and other short term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,785
    )
    
    
    (89
    )
    
    
    
    
    
    
    (11,874
    )
    
    
    
    
    
    
    (11,874
    )Repayment of long-term debt
    
    
    (12,818
    )
    
    
    (8
    )
    
    
    
    
    
    
    (12,826
    )
    
    
    (5,644
    )
    
    
    
    
    
    
    
    
    
    
    (5,644
    )
    
    
    
    
    
    
    (18,470
    )Costs associated with refinancing
    
    
    (2,578
    )
    
    
    
    
    
    
    
    
    
    
    (2,578
    )
    
    
    (682
    )
    
    
    
    
    
    
    
    
    
    
    (682
    )
    
    
    
    
    
    
    (3,260
    )Common stock issued
    
    
    1,755
    
    
    
    
    
    
    
    
    
    
    
    1,755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,755Net cash from financing activities
    
    
    (13,641
    )
    
    
    (8
    )
    
    
    
    
    
    
    (13,649
    )
    
    
    (18,111
    )
    
    
    (89
    )
    
    
    
    
    
    
    (18,200
    )
    
    
    
    
    
    
    (31,849
    )The effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389
    
    
    
    235
    
    
    
    
    
    
    
    624
    
    
    
    
    
    
    
    624Net (decrease)/increase in cash and cash equivalents
    
    
    (1
    )
    
    
    2,988
    
    
    
    
    
    
    
    2,987
    
    
    
    (2,146
    )
    
    
    (2,179
    )
    
    
    
    
    
    
    (4,325
    )
    
    
    
    
    
    
    (1,338
    )Cash, beginning of year
    
    
    1
    
    
    
    4,437
    
    
    
    
    
    
    
    4,438
    
    
    
    7,247
    
    
    
    6,418
    
    
    
    
    
    
    
    13,665
    
    
    
    
    
    
    
    18,103Cash, end of period
    
    $
    
    
    
    $
    7,425
    
    
    $
    
    
    
    $
    7,425
    
    
    $
    5,101
    
    
    $
    4,239
    
    
    $
    
    
    
    $
    9,340
    
    
    $
    
    
    
    $
    16,765
 23




---



##### Table of Contents



Consolidating Statement of Cash Flows for the Thirty-Nine Weeks ended April 1, 2006
(In thousands)
 ForeignBorrowersandGuarantor
    
    
    
    
    
    
    
    
    
    
    Guarantor
    
    
    Other
    
    
    
    
    
    
    Total Other
    
    
    Consolidated
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Total
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalsCash flows from operating activities:Net Income (loss)
    
    $
    (8,478
    )
    
    $
    (18,626
    )
    
    $
    (13,798
    )
    
    $
    (40,902
    )
    
    $
    55,603
    
    
    $
    65,990
    
    
    $
    (81,253
    )
    
    $
    40,340
    
    
    $
    (16,651
    )
    
    $
    (17,213
    )Adjustments to reconcile net loss to net cash
from operating activities:Imputed interest on note payable and other non-cash
items
    
    
    (257
    )
    
    
    
    
    
    
    
    
    
    
    (257
    )
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    (192
    )Deferred income tax (benefit) provision
    
    
    25,809
    
    
    
    7,977
    
    
    
    
    
    
    
    33,786
    
    
    
    4,526
    
    
    
    (759
    )
    
    
    (4,355
    )
    
    
    (588
    )
    
    
    
    
    
    
    33,198Stock-based compensation expense
    
    
    509
    
    
    
    
    
    
    
    
    
    
    
    509
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    509Depreciation and amortization
    
    
    2,655
    
    
    
    1,855
    
    
    
    
    
    
    
    4,510
    
    
    
    872
    
    
    
    6,516
    
    
    
    
    
    
    
    7,388
    
    
    
    
    
    
    
    11,898Amortization of deferred financing costs
    
    
    3,060
    
    
    
    
    
    
    
    
    
    
    
    3,060
    
    
    
    265
    
    
    
    
    
    
    
    
    
    
    
    265
    
    
    
    
    
    
    
    3,325Bad debt provision
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    139
    
    
    
    30
    
    
    
    
    
    
    
    169
    
    
    
    
    
    
    
    178Gain on sale of discontinued operations
    
    
    21,323
    
    
    
    
    
    
    
    
    
    
    
    21,323
    
    
    
    (62,771
    )
    
    
    13,632
    
    
    
    
    
    
    
    (49,139
    )
    
    
    
    
    
    
    (27,816
    )(Gain)loss on disposal of property and equipment
    
    
    
    
    
    
    (708
    )
    
    
    
    
    
    
    (708
    )
    
    
    9
    
    
    
    (30
    )
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (729
    )Inventory valuation adjustment
    
    
    
    
    
    
    1,342
    
    
    
    
    
    
    
    1,342
    
    
    
    (1,020
    )
    
    
    
    
    
    
    
    
    
    
    (1,020
    )
    
    
    
    
    
    
    322Impairment loss on intangible assets
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205Foreign currency gains and losses
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    150
    
    
    
    (168
    )
    
    
    
    
    
    
    
    
    
    
    (168
    )
    
    
    
    
    
    
    (18
    )Gain-early settlement of debt
    
    
    (21,720
    )
    
    
    
    
    
    
    
    
    
    
    (21,720
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,720
    )Equity in
income of unconsolidated affiliate/consolidated subsidiaries
    
    
    (21,713
    )
    
    
    (61
    )
    
    
    21,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority Interest, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,404
    
    
    
    
    
    
    
    1,404
    
    
    
    
    
    
    
    1,404Changes in assets and liabilities, net of acquisitions:Accounts receivable
    
    
    221
    
    
    
    9,437
    
    
    
    
    
    
    
    9,658
    
    
    
    231
    
    
    
    (8,123
    )
    
    
    
    
    
    
    (7,892
    )
    
    
    
    
    
    
    1,766Inventories
    
    
    (5,054
    )
    
    
    33,861
    
    
    
    (7,976
    )
    
    
    20,831
    
    
    
    7,492
    
    
    
    (22,670
    )
    
    
    
    
    
    
    (15,178
    )
    
    
    
    
    
    
    5,653Prepaid expenses and other current assets
    
    
    395
    
    
    
    (420
    )
    
    
    
    
    
    
    (25
    )
    
    
    271
    
    
    
    (3,435
    )
    
    
    
    
    
    
    (3,164
    )
    
    
    
    
    
    
    (3,189
    )Other non-current assets
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    5
    
    
    
    1,766
    
    
    
    1,771
    
    
    
    
    
    
    
    1,761Accounts payable
    
    
    3,852
    
    
    
    (1,412
    )
    
    
    
    
    
    
    2,440
    
    
    
    (6,701
    )
    
    
    11,932
    
    
    
    
    
    
    
    5,231
    
    
    
    
    
    
    
    7,671Income taxes payable
    
    
    (4,784
    )
    
    
    
    
    
    
    
    
    
    
    (4,784
    )
    
    
    (463
    )
    
    
    2,321
    
    
    
    
    
    
    
    1,858
    
    
    
    
    
    
    
    (2,926
    )Accrued expenses
    
    
    66,329
    
    
    
    509
    
    
    
    
    
    
    
    66,838
    
    
    
    (3,047
    )
    
    
    (70,732
    )
    
    
    
    
    
    
    (73,779
    )
    
    
    
    
    
    
    (6,941
    )Net cash from operating activities
    
    
    62,147
    
    
    
    34,108
    
    
    
    
    
    
    
    96,255
    
    
    
    (4,762
    )
    
    
    (3,854
    )
    
    
    (83,842
    )
    
    
    (92,458
    )
    
    
    (16,651
    )
    
    
    (12,854
    )Cash flows from investing activities:Capital expenditures
    
    
    (504
    )
    
    
    (81
    )
    
    
    
    
    
    
    (585
    )
    
    
    (295
    )
    
    
    (3,120
    )
    
    
    
    
    
    
    (3,415
    )
    
    
    
    
    
    
    (4,000
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    1,152
    
    
    
    
    
    
    
    1,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,152Proceeds from sale of tabletop assets
    
    
    
    
    
    
    14,080
    
    
    
    
    
    
    
    14,080
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    14,195Proceeds from sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,938
    
    
    
    
    
    
    
    
    
    
    
    69,938
    
    
    
    
    
    
    
    69,938Increase in restricted cash
    
    
    
    
    
    
    (1,408
    )
    
    
    
    
    
    
    (1,408
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,408
    )Acquisition of business, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,525
    )
    
    
    
    
    
    
    (4,525
    )
    
    
    
    
    
    
    (4,525
    )Additional payment for acquisition of trade names
    
    
    (205
    )
    
    
    
    
    
    
    
    
    
    
    (205
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (205
    )Increase in compensating balances on deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,910
    )
    
    
    
    
    
    
    (4,910
    )
    
    
    
    
    
    
    (4,910
    )Net cash from investing activities
    
    
    (709
    )
    
    
    13,743
    
    
    
    
    
    
    
    13,034
    
    
    
    69,643
    
    
    
    (12,440
    )
    
    
    
    
    
    
    57,203
    
    
    
    
    
    
    
    70,237Cash flows from financing activities:Net proceeds from revolving line of credit
and other short term debt
    
    
    
    
    
    
    (47,551
    )
    
    
    
    
    
    
    (47,551
    )
    
    
    4,422
    
    
    
    59
    
    
    
    
    
    
    
    4,481
    
    
    
    
    
    
    
    (43,070
    )Proceeds from new credit agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,870
    
    
    
    
    
    
    
    
    
    
    
    48,870
    
    
    
    
    
    
    
    48,870Repayment of terminated credit agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,675
    )
    
    
    
    
    
    
    
    
    
    
    (39,675
    )
    
    
    
    
    
    
    (39,675
    )Repayment of long-term debt
    
    
    (50,126
    )
    
    
    (168
    )
    
    
    
    
    
    
    (50,294
    )
    
    
    
    
    
    
    (140
    )
    
    
    
    
    
    
    (140
    )
    
    
    
    
    
    
    (50,434
    )Costs associated with refinancing
    
    
    (11,488
    )
    
    
    
    
    
    
    
    
    
    
    (11,488
    )
    
    
    (3,178
    )
    
    
    
    
    
    
    
    
    
    
    (3,178
    )
    
    
    
    
    
    
    (14,666
    )Dividend Paid from CV to US
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,651
    )
    
    
    
    
    
    
    (16,651
    )
    
    
    16,651
    
    
    
    Dividend Paid from Eu to CV
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83,843
    )
    
    
    
    
    
    
    83,843
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175Net cash from financing activities
    
    
    (61,439
    )
    
    
    (47,719
    )
    
    
    
    
    
    
    (109,158
    )
    
    
    (73,404
    )
    
    
    (16,732
    )
    
    
    83,843
    
    
    
    (6,293
    )
    
    
    16,651
    
    
    
    (98,800
    )The effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    1,592
    
    
    
    
    
    
    
    1,534
    
    
    
    
    
    
    
    1,534Net (decrease)/increase in cash and cash equivalents
    
    
    (1
    )
    
    
    132
    
    
    
    
    
    
    
    131
    
    
    
    (8,581
    )
    
    
    (31,434
    )
    
    
    1
    
    
    
    (40,014
    )
    
    
    
    
    
    
    (39,883
    )Cash, beginning of year
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    127
    
    
    
    2,019
    
    
    
    48,645
    
    
    
    
    
    
    
    50,664
    
    
    
    
    
    
    
    50,791Cash, end of period
    
    $
    (1
    )
    
    $
    259
    
    
    $
    
    
    
    $
    258
    
    
    $
    (6,562
    )
    
    $
    17,211
    
    
    $
    1
    
    
    $
    10,650
    
    
    $
    
    
    
    $
    10,908
 24




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##### Table of Contents



17.
    
    Subsequent EventsEleventh Amendment to Senior Secured FacilityOn April 13, 2007, the Company entered into an eleventh amendment to the senior secured credit
facility (the Eleventh Amendment). The Eleventh Amendment, among other things, increased the
additional overadvance from $27.2 million to $32.2 million. In addition, it provides that the
combined outstanding amount of the existing overadvance of up to $16.2 million plus the
additional overadvance of up to $32.2 million must be reduced to a maximum of $23.0 million by
the end of June 2007.Separation Agreement and General ReleaseOn April 30, 2007, the Company signed a Separation Agreement and General Release (the
Agreement) with Leon Dreimann, the former Chief Executive Officer, whereby Dreimann agreed to
resign all offices and titles with the Company immediately. Further, the Company and Dreimann
acknowledged and agreed that the Employment Agreement dated as January 1, 2003 by and between
the Company and Dreimann is terminated and shall have no further force and effect.
Additionally, the Company agreed to retain Dreimann in a non employee position as an Advisor, as
defined, for the period ending on the earlier of (i) six months from the date of the agreement
and (ii) the date on which the Merger Agreement with APN Holding Company is consummated, and
agreed to compensate Dreimann at an annualized rate of $450,000 per year.The Company agreed to pay Dreimann, in lieu of any other severance or termination pay, (a)
$450,000 on the eighth day following his execution of the Agreement (the Effective Date); and
(b) $750,000 plus interest six months from the Effective Date. Additionally, the Company agreed
to provide welfare benefits (including medical, dental, and life insurance) as if Dreimann had
remained employed during the three-year period following the date of the Agreement. The charge
for these payments and benefits will be recorded in the fourth quarter of fiscal 2007.
 25




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 As used in this quarterly report on Form 10-Q, we, us, our, Salton and the Company
refer to Salton, Inc. and our subsidiaries, unless the context otherwise requires.IntroductionSalton consists of a single operating segment which designs, sources, markets and distributes a
diversified product mix for use in the home. Our product mix consists of small kitchen and home
appliances, electronics for the home, time products, lighting products and
personal care and wellness products. Salton sells its products under its portfolio of well
recognized brand names such as Salton®, George Foreman®,
WestinghouseTM, Toastmaster®, Melitta®, Russell
Hobbs®, Farberware®, Ingraham® and Stiffel®. Salton
believes its strong market position results from its well-known brand names, high quality and
innovative products, strong relationships with its customer base and the Companys focused
outsourcing strategy.Strategic AlternativesThe accompanying condensed consolidated financial statements have been prepared on a going
concern basis. The Company has reported a net loss from continuing operations for the 13 week
and the 39 week periods ended March 31, 2007. Historically, the Company has also reported net
losses in the prior three fiscal years, and has not consistently generated positive net cash
flows from operating activities during these periods. The Company has used a combination of
cash flows from operations, additional borrowing under certain amendments to its senior secured
credit facility and asset sales to meet its debt service and working capital needs. At this
time, there can be no assurance that the Company will be able to generate sufficient cash flows
to meet its future working capital needs, debt service obligations and to satisfy or refinance
its debt maturities without additional sales or monetization of existing assets.The Company has required amendments and waivers to its senior debt during recent periods due to
a failure to remain in compliance with the financial covenants. There can be no assurance that
the Company will be able to comply with the financial covenants and other covenants in its debt
instruments or that, if it fails to comply, that its debt holders would waive compliance or
forbear from exercising their remedies.In order to address the need to satisfy its continuing obligations and realize its long term
strategy, the Company has been reviewing various strategic alternatives. On February 7, 2007,
the Company and its wholly-owned subsidiary SFP Merger Sub, Inc. (MergerSub) entered into a
definitive merger agreement with APN Holding Company, Inc. (APN Holdco), whereby, among other
things, MergerSub will merge with and into APN Holdco. APN Holdco acquired all of the
outstanding common shares of Applica Incorporated (Applica) on January 23, 2007. Applica is a
marketer and distributor of a wide range of small appliances for use in and outside the home.
Through its operating subsidiary, Applica Consumer Products, Inc., Applica markets products
under licensed brand names such as Black & Decker®, company-owned brand names such as
LittermaidTM and InfrawaveTM and private label brand names, primarily in
North America, Latin America and the Caribbean.
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##### Table of Contents



The merger would result in Applica and its subsidiaries becoming subsidiaries of Salton. The
transaction is expected to be completed in June or July 2007. The consummation of the merger is
subject to various conditions, including the approval by the Companys stockholders, the funding
of financing commitments and the absence of legal impediments to the consummation of the merger.
The consummation of the merger would result in the redemption or refinancing of substantially
all of the Companys existing debt obligations, and provide adequate working capital for future
operations.While it is expected that the merger will close, if it fails to do so, the Company believes that
its current cash flows from operating activities and existing credit facilities may not be
sufficient to fund its operations and meet its overadvance repayment requirement at June 30,
2007 and its debt obligations that are due on December 31, 2007. In this case, the Company
would rely on alternative sources of financing and additional sales of assets to refinance its
maturing debt and meet its operating needs. The Company can not assure that it will be able to
execute these plans on favorable terms and within a time frame that will permit it to continue
its current operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.In connection with the Merger Agreement, the Company and UMB Bank, N.A., the Rights Agent,
entered into a Second Amendment to the Rights Agreement, which has the effect of making the
Companys existing Rights Agreement, dated as of June 28, 2004 and as subsequently amended as of
June 7, 2006, and the rights issued to the Companys stockholders thereunder, inapplicable to
the specific transactions contemplated by the Merger Agreement.In connection with the Merger Agreement, the board of directors of the Company approved and
recommended for approval by the stockholders of the Company an amendment to the Companys
Restated Certificate of Incorporation to increase the number of authorized shares of common
stock to 150 million.The Merger Agreement contains certain termination rights for both the Company and APN Holdco and
provides that, under certain circumstances, if financing commitments were not delivered within
45 days or the funding thereof does not occur, APN Holdco would be obligated to pay the Company
a termination fee of $10.3 million (which fee may be paid through the surrender by Harbinger
Capital Partners of $10.3 million of the Companys outstanding 2008 senior subordinated notes or
second lien notes). The financing commitments were delivered on March 27, 2007, and
subsequently accepted by the Companys Board of Directors. The Merger Agreement further
provides that upon termination of the Merger Agreement as the result of either the Companys
Board of Directors withdrawing its recommendation for the Merger or a superior proposal, the
Company would be obligated to pay APN Holdco a termination fee of $2.5 million plus up to $2.0
million of expenses.Recent DevelopmentsSubsequent to March 31, 2007, the Company entered into an Eleventh Amendment to the senior
secured credit facility (see Note 17, Subsequent Events in Item 1).
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##### Table of Contents



On April 30, 2007, the Company signed a Separation Agreement and General Release (the
Agreement) with Leon Dreimann, the former Chief Executive Officer, whereby Dreimann agreed to
resign all offices and titles with the Company immediately. Further, the Company and Dreimann
acknowledged and agreed that the Employment Agreement dated as January 1, 2003 by and between
the Company and Dreimann is terminated and shall have no further force and effect.
Additionally, the Company agreed to retain Dreimann in a non employee position as an Advisor, as
defined, for the period ending on the earlier of (i) six months from the date of the agreement
and (ii) the date on which the Merger Agreement with APN Holding Company is consummated, and
agreed to compensate Dreimann at an annualized rate of $450,000 per year.The Company agreed to pay Dreimann, in lieu of any other severance or termination pay, (a)
$450,000 on the eighth day following his execution of the Agreement (the Effective Date); and
(b) $750,000 plus interest six months from the Effective Date. Additionally, the Company agreed
to provide welfare benefits (including medical, dental, and life insurance) as if Dreimann had
remained employed during the three-year period following the date of the Agreement. The charge
for these payments and benefits will be recorded in the fourth quarter of fiscal 2007.Forward Looking StatementThis quarterly report on Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation the statements under Risk Factors, and Managements
Discussion and Analysis of Financial Condition and Results of Operations. The words believes,
anticipates, plans, expects, intends, estimates and similar expressions are intended
to identify forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause our actual results, performance
or achievements, or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following:Merger-Related Risk Factors:
 
    
    the failure of APN Holdco to obtain the financing contemplated by financing commitments
received or alternative financing may result in the termination of the merger agreement;
    
    the failure to obtain approval of the merger from Salton stockholders;
    
    the failure to obtain required third party consents to the merger;
    
    the ability of the two businesses to be integrated successfully;
    
    the ability of the combined company to fully realize the cost savings and synergies from
the proposed transaction within the proposed time frame;
    
    disruption from the merger may make it more difficult to maintain relationships with
customers, employees or suppliers;
    
    completion of the merger may result in dilution of future earnings per share to the
stockholders of Salton;
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##### Table of Contents




    
    the combined Companys common stock may not be listed on the New York Stock Exchange
upon completion of the merger;
    
    the combined companys net operating loss carryforwards may be limited as a result of
the merger; and
    
    costs associated with the merger are difficult to estimate, may be higher than expected
and may harm the financial results of the combined company.
 Operational and Other Risk Factors:
 
    
    our ability to repay or refinance our indebtedness as it matures and satisfy the redemption
obligations under our preferred stock;
    
    our ability to find other strategic alternatives, in the event the merger does not close
as anticipated;
    
    our ability to continue to realize the benefits we expect from our U.S. restructuring;
    
    our substantial indebtedness and our ability to comply with restrictive covenants in our
debt instruments;
    
    our ability to access the capital markets on attractive terms or at all;
    
    our relationship and contractual arrangements with key customers, suppliers, strategic
partners and licensors;
    
    unfavorable outcomes from pending legal proceedings;
    
    cancellation or reduction of orders;
    
    the timely development, introduction and delivery to and acceptance by customers of our
products;
    
    dependence on foreign suppliers and supply and marketing constraints;
    
    competitive products and pricing;
    
    economic conditions and the retail environment;
    
    international business activities;
    
    the cost and availability of raw materials and purchased components for our products;
    
    our ability to continue the listing of our common stock on the New York Stock Exchange.
If we are delisted by the New York Stock Exchange, the price and liquidation of our common stock
will be negatively affected;
    
    the risks related to intellectual property rights; and
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##### Table of Contents




    
    the risks relating to regulatory matters and other risks and uncertainties detailed from
time to time in our Securities and Exchange Commission Filings.
 All forward looking statements included in this quarterly report on Form 10-Q are based on
information available to us on the date of this quarterly report. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of new information,
future events or otherwise. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained throughout this quarterly report on Form 10-Q.Consolidated Results of OperationsThe unaudited information included in this Form 10-Q should be read in conjunction with the
Consolidated Financial Statements contained in our 2006 Annual Report on Form 10-K. Interim
results are not necessarily indicative of results for a full year. We report discontinued
operations in accordance with the guidance from Financial Accounting Standards Board (FASB) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, we have
reported the sale of Amalgamated Appliance Holdings (AMAP) as discontinued operations for the
periods presented.THIRD QUARTER 2007 COMPARED TO THIRD QUARTER 2006The following table sets forth our results of operations as a percentage of net sales for the
thirteen weeks ended:
 Thirteen Weeks EndedMarch 31, 2007
    
    April 1, 2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    74.0
    %
    
    
    71.6
    %Distribution expenses
    
    
    9.4
    %
    
    
    8.2
    %Gross profit
    
    
    16.6
    %
    
    
    20.2
    %Selling, general and administrative expense
    
    
    30.7
    %
    
    
    29.0
    %Impairment loss on goodwill and intangible assets
    
    
    13.1
    %
    
    
    0.0
    %Restructuring costs
    
    
    0.1
    %
    
    
    0.0
    %Operating loss
    
    
    -27.3
    %
    
    
    -8.8
    %
 30




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##### Table of Contents



Net Sales and Gross Profit
Saltons worldwide sales were $95.2 million in the third quarter of fiscal 2007 versus $127.7
million in the third quarter of fiscal 2006. Net sales decreased domestically by $34.3 million.
In the U.S., the George Foreman brand experienced a decline in consumer demand due to pricing
issues, as well as a loss of business due to supply issues caused by liquidity constraints. The
Toastmaster brand declined due primarily to the loss of the opening price point business at
Target and other retailers. Additionally, the Company was impacted from an overall slowdown in
orders from customers due to the pending merger. Domestic net sales were further impacted by
the need to increase the provision for returns and allowances by $4.1 million. This increase to
the accounts receivable reserve resulted from a change in managements estimate of the
collectability of certain disputed retailer deductions and chargebacks. The uncertainty
associated with the pending merger has resulted in more cautious buying decisions and more
resistance to settlement relative to chargebacks by our domestic customers. This recent action
has caused management to revise its estimates of the collectability of disputed items downward.
In spite of the additional provision, we will continue to pursue collection of all disputed
charges.Foreign sales showed a net increase of $1.8 million, which consisted of $4.7 million in
favorable foreign currency fluctuations, offset by $2.9 million in actual sales decline.Gross profit for the third quarter declined $10.0 million from $25.8 million in fiscal 2006 to
$15.8 million in fiscal 2007 due to lower sales, as well as, the increase in the accounts
receivable reserve. As a percent of net sales, gross profit declined to 16.6% in the third
quarter of fiscal 2007 compared to 20.2% in the same quarter of 2006, primarily due to the
impact on net sales from the change in the accounts receivable reserve.Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $29.3 million for third quarter of
fiscal 2007 compared to $37.0 million for third quarter of fiscal 2006. U.S. operations reduced
selling, general and administrative expenses by $6.1 million due to a decline in promotional
expenditures such as television and certain other media, trade show expense and cooperative
advertising expenses, lower salaries and benefits due to lower average headcount and a decline
in other operating expenses due to cost cutting initiatives. The remaining reduction from the
foreign entities was primarily a result of decreased promotional spending and lower salaries and
benefits due to lower average headcount in Europe.Impairment Loss on Intangible Assets
Intangible assets comprised entirely of the Companys brand names are subject to a fair value
impairment test on an annual basis, or more frequently if circumstances indicate a potential
impairment. Each quarter management performs a review to determine if events would require an
interim evaluation. In the third quarter of fiscal 2007, management determined that the
uncertainty associated with the pending merger, along with the drop in domestic sales
represented a triggering event, and an interim evaluation of the brands was performed. This
interim evaluation was done on a stand alone basis, and did not consider potential changes in
the use or performance of the brands that may result following the pending merger.As a result of this interim evaluation, the Company determined that the implied fair value of
the George Foreman tradename was less than its carrying value, and recorded a
non-cash impairment charge totaling $12.5 million. The Company
also plans to complete its independent annual test for impairment at the end of the fourth quarter of
fiscal 2007.
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##### Table of Contents



Net Interest Expense
Net interest expense was $9.0 million for the third quarter of fiscal 2007 compared to $8.4
million for the third quarter of fiscal 2006. Excluding amortization of fees, interest expense
as a percent of the average carrying value of debt outstanding was a weighted average annual
rate of 8.1% in the third quarter of fiscal 2007 compared to 7.7% in fiscal 2006. The increase
in the rate is due to the increase in the LIBOR rate in the U.S. and Europe. The average amount
of all debt outstanding was $312.0 million for the third quarter of fiscal 2007 compared to
$345.3 million for the third quarter of fiscal 2006.Income Taxes
The Companys provision for income taxes is based upon estimated annual tax rates for the year
applied to federal, state, and foreign income. The effective tax rate for the third quarter
fiscal 2007 is 8.8%, with a tax benefit of $3.1 million on a pretax loss of $35.0 million. The
tax benefit booked varied from the statutory rates mainly due to full valuation allowances being
placed on book losses in the U.S. and certain foreign entities. The Company expects the current
years effective tax rate to vary significantly from the prior years rate due to the following
one-time events that occurred in fiscal 2006: 1) U.S. tax of $4.6 million on an inter-company
foreign exchange gain with no related pretax income, 2) the establishment of a valuation
allowance of $26.6 million against the U.S. net deferred tax asset balance offsetting tax
benefits provided for U.S. net operating loss carryforwards and 3) the increase of $1.5 million
of valuation allowances against foreign deferred tax assets related to certain foreign net
operating losses.FIRST THIRTY-NINE WEEKS 2007 COMPARED TO FIRST THIRTY-NINE WEEKS 2006Results of OperationsThe following table sets forth our results of operations as a percentage of net sales for the
thirty-nine weeks ended:
 Thirty-nine weeks endedMarch 31, 2007
    
    April 1, 2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    69.4
    %
    
    
    69.7
    %Distribution expenses
    
    
    7.0
    %
    
    
    6.7
    %Gross profit
    
    
    23.6
    %
    
    
    23.6
    %Selling, general and administrative expense
    
    
    25.7
    %
    
    
    25.9
    %Impairment loss on goodwill and intangible assets
    
    
    3.0
    %
    
    
    0.0
    %Restructuring costs
    
    
    0.2
    %
    
    
    0.0
    %Operating loss
    
    
    -5.3
    %
    
    
    -2.3
    %
 32




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##### Table of Contents



Net Sales and Gross Profit
Saltons worldwide sales were $424.4 million in the first thirty-nine weeks of fiscal 2007
versus $506.5 million in the first thirty-nine weeks of fiscal 2006. Net sales decreased
domestically by $95.5 million. This decrease includes $16.8 million of planned reductions of
discontinued non-core products, including reductions associated with the sale of the tabletop
business in September 2005 and the discontinuation of the U.S. personal care product lines, as
well as product shortages that occurred during the first quarter of fiscal 2007 when liquidity
constraints caused inventory shortages, followed by acceptance issues associated with price
increases that occurred due to higher raw material costs at our suppliers. In the U.S., the
George Foreman brand experienced a decline in consumer demand due to pricing issues, as well as
a loss of business due to supply issues caused by liquidity constraints. The Toastmaster brand
declined due primarily to the loss of the opening price point business at Target and other
retailers. Additionally, the Company was impacted from an overall slowdown in orders from
customers due to the pending merger. Domestic net sales were further impacted by the need to
increase the provision for returns and allowances by $4.1 million. This increase to the
accounts receivable reserve resulted from a change in managements estimate of the
collectability of certain disputed retailer deductions and chargebacks. The uncertainty
associated with the pending merger has resulted in more cautious buying decisions and more
resistance to settlement relative to chargebacks by our domestic customers. This recent action
has caused management to revise its estimates of the collectability of disputed items downward.
In spite of the additional provision, we will continue to pursue collection of all disputed
charges.Foreign sales showed a net increase of $13.5 million, which consisted of $14.2 million in
favorable foreign currency fluctuations, offset by $0.7 million in actual sales decline.Gross profit for the first thirty-nine weeks of fiscal 2007 declined $19.7 million from $119.8
million in fiscal 2006 to $100.1 million in 2007. As a percent of net sales, gross profit was
unchanged at 23.6% in the first thirty-nine weeks of fiscal 2007, compared to the same period of
2006. Lower sales volumes resulted in declining gross profit, offset by a more favorable
product mix including fewer closeouts and a higher percentage of core products in 2007. Gross
profit was further impacted by the increase in the accounts receivable reserve. These decreases
in gross profit were partially offset by a $3.9 million decline in distribution expense
resulting from lower sales and inventory levels.Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $109.0 million for the first
thirty-nine weeks of fiscal 2007 compared to $130.8 million for the first thirty-nine weeks of
fiscal 2006. U.S. operations reduced selling, general and administrative expenses by $15.1
million, due to a decline in promotional expenditures such as television and certain other
media, trade show expense and cooperative advertising expenses, lower salaries and benefits due
to lower average headcount and a decline in other operating expenses due to cost cutting
initiatives. The remaining reduction from the foreign entities was primarily a result of
decreased promotional spending and lower salaries and benefits due to lower average headcount in
Europe.
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##### Table of Contents



Impairment Loss on Intangible Assets
Intangible assets comprised entirely of the Companys brand names are subject to a fair value
impairment test on an annual basis, or more frequently if circumstances indicate a potential
impairment. Each quarter management performs a review to determine if events would require an
interim evaluation. In the third quarter of fiscal 2007, management determined that the
uncertainty associated with the pending merger, along with the drop in domestic sales
represented a triggering event, and an interim evaluation of the brands was performed. This
interim evaluation was done on a stand alone basis, and did not consider potential changes in
the use or performance of the brands that may result following the pending merger.As a result of this interim evaluation, the Company determined that the implied fair value of
the George Foreman tradename was less than its carrying value, and recorded a
non-cash impairment charge totaling $12.6 million. The Company
also plans to complete its independent annual test for impairment at the end of the fourth quarter of
fiscal 2007.Restructuring Costs
As a result of our U.S. restructuring, we incurred $1.0 million in restructuring costs during
the first thirty-nine weeks of fiscal 2007 related to severance costs. Restructuring costs of
$0.2 million in the first thirty-nine weeks of 2006 consisted of warehouse rationalization.Payments of $1.0 million were made for the year-to-date fiscal 2007, including $0.3 million of
stock-based compensation. Accrued restructuring costs were $0.1 million as of March 31, 2007.On August 24, 2006, the Company agreed to issue to David Sabin, the former Chairman of the
Board, common stock of the Company pursuant to his Separation Agreement. As of March 31, 2007,
the Company has issued the total award of 141,510 shares. The Company has recognized severance
cost at fair value of the stock as of the date of the Agreement of $0.3 million.Net Interest Expense
Net interest expense was $28.8 million for the first thirty-nine of fiscal 2007 compared to
$28.6 million for the first thirty-nine weeks of fiscal 2006. Excluding amortization of fees,
interest expense as a percent of the average carrying value of debt outstanding was a weighted
average annual rate of 8.5% in the first thirty-nine weeks of fiscal 2007 compared to 8.1% for
the same period in fiscal 2006. The average amount of all debt outstanding was $339.9 million
for the first thirty-nine weeks of fiscal 2007 compared to $396.6 million for the first
thirty-nine weeks of fiscal 2006.Income Taxes
The Companys provision for income taxes is based upon estimated annual tax rates for the year
applied to federal, state, and foreign income. The effective tax rate for the first thirty-nine
weeks of fiscal 2007 is 6.0% with income tax benefit of $3.1 million on a pretax loss of $51.3
million. The tax benefit booked varied from the statutory rates mainly due to full valuation
allowances being placed on book losses in the U.S. and certain foreign entities. The Company
expects its effective tax rate for fiscal 2007 to differ significantly from the prior years
rate due to the following one-time events which occurred in the first half of FY 2006: 1) U.S.
tax of $ 4.6 million on an inter-company foreign exchange gain with no related pretax income
2) the establishment of a valuation allowance of $26.6 million against the U.S. net deferred tax
asset balance offsetting tax benefits provided for U.S. net operating loss carryforwards and 3)
the increase of $1.5 million of valuation allowances against foreign deferred tax assets related
to certain foreign net operating losses.In the second quarter of fiscal year 2007, the Internal Revenue Service completed its
examination of Saltons consolidated federal income tax returns for fiscal years 2001
through 2004, resulting in a potential tax refund, subject to review by the Joint Committee on
Taxation. As a result of the IRS examination, the Companys fiscal year 2005 income
tax return has been amended accordingly and will not be subject to any future IRS
examination. Saltons management consented to the results of the examination in the
second quarter. The Joint Committee on Taxation approved the results of the IRS
examination early in the fourth quarter, and the income tax refund will be recorded in that
quarter. Additionally, as a result of the examination, the Company has agreed to a revision of
its tax deductible trade name tax basis resulting in a $2.0 million benefit to the tax
provision in the thirty-nine weeks ended March 31, 2007.
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Discontinued Operations
In the first thirty-nine weeks of fiscal 2007, no operations of the Company were reported as
discontinued operations. On September 29, 2005, the Company completed the sale of its 52.6%
ownership interest in Amalgamated Appliances Holdings Limited (AMAP), a leading distributor
and marketer of small appliances and other products in South Africa, to a group of investors led
by Interactive Capital (Proprietary) Limited. In the first quarter of fiscal 2006, the Company
received proceeds, net of expenses, of approximately $81.0 million in connection with the
transaction, and recorded a gain of $27.8 million, net of tax. Also, the Company licensed its
George Foreman®, Russell Hobbs® and Carmen® branded products to AMAP following the transaction.The following is a summary of financial results included within discontinued operations:
 Thirty-nine weeks endedApril 1, 2006Net sales from discontinued operations
    
    $
    68,798Income from discontinued operations before income taxes
    
    $
    5,477Income taxes
    
    
    2,338Minority Interest
    
    
    1,404Income from discontinued operations, net of tax
    
    $
    1,735
 LIQUIDITY AND CAPITAL RESOURCESCash Flow from Continuing Operations
The following discussion excludes the impact on cash flows from discontinued operations in
fiscal 2006.Our primary sources of liquidity are our cash flow from continuing operations and borrowings
under our senior secured credit facilities. In the first thirty-nine weeks of fiscal 2007, the
Companys continuing operations provided $34.9 million in cash flow. In the same period of
fiscal 2006, our continuing operations provided $9.0 million in cash flow. This improvement was
primarily the result of a decrease in inventory in fiscal 2007 due to closeouts of certain
brands and product lines.Our results of operations for the periods discussed have not been significantly affected by
inflation or foreign currency fluctuation. We generally negotiate our purchase orders with our
foreign manufacturers in United States dollars. Thus, our cost under any purchase order is not
subject to change after the time the order is placed due to exchange rate fluctuations. However,
the weakening of the United States dollar against local currencies could result in certain
manufacturers increasing the United States dollar prices for future product purchases. Given
the seasonal nature of our business, borrowings and borrowing capacity tend to be highest in
mid-fall and early winter.The Company also currently uses foreign exchange contracts to hedge anticipated foreign currency
transactions, primarily U.S. dollar inventory purchases. The contracts generally mature within
one year and are designed to limit exposure to exchange rate fluctuations, primarily the
Australian dollar against United States dollars.Investing Activities
In the first thirty-nine weeks of fiscal 2007, the Company used $8.0 million for capital
expenditures. In the first thirty-nine weeks of fiscal 2006, we had $80.9 million in proceeds
from the sale of discontinued operations as a result of the AMAP transaction and $14.2 million
in proceeds from the sale of tabletop assets.
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Financing Activities
During the first thirty-nine weeks of fiscal 2007, we repaid $11.9 million on our worldwide
credit facilities. We also made $18.5 million in repayments of long-term debt, of which $11.1
million was for the payment of accrued interest on the Second Lien Notes, which was accounted
for as a troubled debt restructuring in accordance with Statement of Financial Accounting
Standards (SFAS) No. 15. Under SFAS No. 15, the Second Lien Notes were recorded at their
principal amount plus the total estimated future interest payments.On December 28, 2006, the Company issued 701,600 shares of Salton common stock to Harbinger
Capital Partners Master Fund I, Ltd. (Harbinger) for an aggregate purchase price of
approximately $1.8 million ($2.50 per share).Credit Facilities, Other Debt and Preferred Stock
The Liquidity and Capital Resources section of Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in our 2006 Annual Report on Form 10-K contains
the detailed terms for our credit facilities, other debt and preferred stock, which include the
following:
 
    
    Senior Secured Credit Facility
    
    Second Lien Credit Agreement
    
    Intercreditor Agreement
    
    Senior Subordinated Notes
    
    Salton Europe Facility Agreement
    
    Other Credit Facilities
    
    Series C Preferred Stock
    
    Convertible Preferred Stock
 An update of the above items is discussed below.Senior Secured Credit FacilityAs of May 11, 2007, we had borrowed $100.0 million under the
senior secured credit facility and had approximately $3.1 million available under this facility
for future borrowings.Borrowings under our senior secured credit facility accrue interest, at our option, at either:
LIBOR, plus 6.5% (effective August 15, 2006) equaling 11.86% at May 11, 2007; or the Base Rate
(prime rate), plus 4.5% (effective August 15, 2006) equaling 12.75% at May 11, 2007. The
Company has the option to convert any base rate loan to LIBOR rate loan.Tenth Amendment to Senior Secured Facility On February 12, 2007, the Company entered into a
tenth amendment to the senior secured credit facility (the Tenth Amendment). The Tenth
Amendment, among other things: (1) provides that the combined outstanding amount of the existing
overadvance of up to $16.2 million plus the additional overadvance of up to $27.2 million must
be reduced to a maximum of $23.0 million by the end of June 2007; (2) eliminates the fixed
charge coverage ratio and minimum EBITDA covenants through and including June 2007 and revises
such covenants thereafter; (3) adds a monthly cash flow covenant from April through June 2007;
and (4) places a limit of availability of $105.0 million through June 2007.
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Eleventh Amendment to Senior Secured Facility On April 13, 2007, the Company entered into an
eleventh amendment to the senior secured credit facility (the Eleventh Amendment). The
Eleventh Amendment, among other things, increased the additional overadvance from $27.2 million
to $32.2 million. In addition, it provides that the combined outstanding amount of the existing
overadvance of up to $16.2 million plus the additional overadvance of up to $32.2 million must
be reduced to a maximum of $23.0 million by the end of June 2007.Second Lien Credit Agreement-The interest rate with respect to the Second Lien Notes is the six
month LIBOR plus 7%, currently 12.38%, payable in cash on January 15th and July
15th of each year.Salton Europe Facility Agreement-On December 23, 2005, Salton Holdings Limited, Salton Europe
Limited and certain affiliates entered into a Facility Agreement with Burdale Financial Limited,
as agent and security trustee, and a financial institution group as lender. The provisions of
the Facility Agreement allow certain of the Companys European subsidiaries to borrow funds as
needed in an aggregate amount not to exceed £61.0 million (approximately $120.0 million). The
Facility Agreement matures on December 22, 2008 and bears a variable interest rate of LIBOR plus
7% on term loans and LIBOR plus 2.75% on revolver loans, payable on the last business day of
each month. At March 31, 2007, these rates for borrowings denominated in the Great Britain
Pound were 12.4% and 8.2% for term and revolver loans, respectively. The rate for revolver loan
borrowings denominated in the U.S. Dollar was 8.1%.The Facility Agreement consists of a Revolving Credit Facility with an aggregate maximum
availability of £50.0 million (approximately $98.4 million) and two Term Loan Facilities of £5.0
million and £6.0 million (approximately $9.8 million and $11.8 million, respectively). The
Company uses borrowings under these facilities for working capital purposes. As of March 31,
2007, under the Revolving Credit Facility, the Company had outstanding borrowings denominated in
the Great Britain Pound of £2.9 million (approximately $5.8 million) and borrowings denominated
in the U.S. Dollar of $3.4 million.Discussion of Critical Accounting PoliciesOur financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require us to make estimates and judgments that
significantly affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. We regularly evaluate these estimates,
including those related to our allowance for doubtful accounts, reserve for inventory valuation,
reserve for returns and allowances, valuation of intangible assets having indefinite lives,
cooperative advertising accruals, pension benefits and depreciation and amortization. We base
these estimates on historical experience and on assumptions that are believed by management to
be reasonable under the circumstances. Actual results may differ from these estimates, which may
impact the carrying value of assets and liabilities. There have been no material changes in
policies or estimates since July 1, 2006.
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Recent Accounting PronouncementsIn June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 to
clarify the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This
interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. This interpretation is
effective for fiscal years beginning after December 15, 2006.
The Company has not yet
completed its evaluation of the impact of adopting Interpretation 48 and as a result, is not able
to estimate the effect the adoption will have on its financial position and results of
operations.In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This statement
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years beginning after November 15, 2007.
The Company is currently evaluating the impact of adopting this statement on the consolidated
financial statements.In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Benefit Plans. This statement requires companies to recognize
the overfunded or underfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position. This statement is effective for financial
statements as of the end of the fiscal year ending after December 15, 2006. The Company is
currently evaluating the impact of adopting this statement on the consolidated financial
statements.In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108, (SAB 108). SAB 108 considers the effects of prior year misstatements when quantifying
misstatements in current year financial statements. It is effective for annual financial
statements as of the end of the fiscal year ending after November 15, 2006. The Company does
not believe the adoption of SAB 108 will have a material impact on the consolidated financial
statements.In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115. This statement
permits an entity to measure certain financial assets and financial liabilities at fair value.
Entities that elect the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. This statement is effective as of the beginning of the first
fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact
of the interpretation on the consolidated financial statements.Forward LookingWe anticipate capital expenditures on an ongoing basis to be at historical levels in relation to
net sales.
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Item 3. Quantitative And Qualitative Disclosures About Market Risks
 The market risk of the Companys financial instruments as of March 31, 2007 has not
significantly changed since July 1, 2006. The market risk profile of the Company on July 1,
2006 is disclosed in the Companys 2006 Annual Report on Form 10-K.
 
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal controls.
 1.
    
    Implementing additional policies and improving interim reporting requirements
for the Companys foreign subsidiaries to ensure the accuracy of accounting and tax
calculations and supporting detailed schedules;2.
    
    Streamlining the processes to ensure adequate time for review and controls
testing;3.
    
    Continuing the utilization of external resources to supplement the Companys
tax personnel; and4.
    
    Additional training of finance and tax personnel as required;
 These remediation plans will continue to be implemented and monitored during the remainder of
this fiscal year. The material weakness will not be considered remediated until the remedial
procedures operate for a period of time, are subsequently tested and management has concluded
that the procedures are operating effectively.There were no other changes in the Companys internal controls during the quarter ended March
31, 2007 that could materially affect or is reasonably likely to affect the Companys internal
controls over financial reporting.
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Part II: Other Information
 
 Item 1: Legal Proceedings
 Product LiabilityOn or about October 27, 2004, a lawsuit entitled DiNatale vs. Salton was filed in the New
York State Supreme Court against the Company. The plaintiffs, who seek unspecified damages,
allege that they were injured by water contaminated with lead taken from a tea kettle sold by the
Company under its Russell Hobbs brand. The plaintiffs attorney had been seeking to convert the
lawsuit into a class action suit; no class action suit has been filed to date. The products
liability insurer of the Company and the insurer of the manufacturer of the product are
cooperating in the defense of the lawsuit.On or about December 20, 2006, a lawsuit entitled Paul E. LeBlanc, Jr.,et al., Plaintiffs, vs.
Salton, Inc.; Salton/Maxim Housewares, Inc.: Bloomingdales, Inc.; Chiaphua Industries Limited,;
and Does 1 through 100, inclusive, Defendants was filed in the Orange County Superior Court
against the Company. The plaintiffs, who are seeking unspecified damages, allege that they were
injured by water contaminated with lead taken from a tea kettle sold by the Company and also
allege that the tea kettle violated California laws in failing to give a warning of the presence
of lead in the product. The products liability insurer of the Company and the insurer of the
manufacturer of the product are cooperating in the defense of the lawsuit.Jay Kordich v. Salton, Inc.On October 19, 2005, a lawsuit named Jay Kordich v. Salton, Inc. was filed in the United States
District Court for the Southern District of California. The plaintiff in this action is seeking
a judicial determination that a covenant not to compete in an agreement between him and Salton is
invalid and unenforceable against him plus attorneys fees and costs. Salton believes that the
lawsuit is without merit.The outcome of the foregoing legal matters cannot be predicted with certainty, however Salton
does not believe that these actions will have a material adverse effect on its business,
financial condition or results of operations. Therefore, no amounts have been accrued for such
claims.EnvironmentalThe Company has accrued approximately $0.2 million for the anticipated costs of environmental
remediation at four of its current and previously owned sites. Although such costs could exceed
that amount, Salton believes any such excess will not have a material adverse effect on the
financial condition or annual results of operations of the Company.OtherThe Company is a party to various other actions and proceedings incident to its normal business
operations. The Company believes that the outcome of any such litigation will not have a material
adverse effect on its business, financial condition or results of operations. The Company also
has product liability and general liability insurance policies in amounts believed to be
reasonable given its current level of business. Although historically the Company has not had to
pay any material product liability claims, it is conceivable that the Company could incur claims
for which we are not insured.
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Item. 1A Risk Factors.
 In the course of operations, we are subject to certain risk factors, which are set forth above in
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 
Forward Looking Statement Disclosure and in our Annual Report on Form 10-K. Except as set forth
below, there have been no material changes to any of the risk factors disclosed in our most
recently filed Annual Report on Form 10-K.
 
    
    the ability of APN Holdco to obtain the financing contemplated by financing commitments
received or alternative financing pursuant to the merger agreement;
    
    the failure to obtain approval of the merger from Salton stockholders;
    
    the failure to obtain required third party consents to the Merger;
    
    the ability of the two businesses to be integrated successfully;
    
    the ability of the combined company to fully realize the cost savings and synergies from
the proposed transaction within the proposed time frame;
    
    disruption from the merger may make it more difficult to maintain relationships with
customers, employees or suppliers;
    
    completion of the merger may result in dilution of future earnings per share to the
stockholders of Salton;
    
    the combined companys net operating loss carryforwards may be limited as a result of
the merger; and
    
    costs associated with the merger are difficult to estimate, may be higher than expected
and may harm the financial results of the combined company.
 
 Item. 6 Exhibits.
 The exhibits listed on the accompanying Index to Exhibits are filed as part of this Form 10-Q.
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Signature
  Date: May 15, 2007
    SALTON, INC./s/ William M. LutzWilliam M. LutzInterim Chief Executive Officer and
Chief Financial Officer 42




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EXHIBIT INDEX
 Exhibit Number
    
    Description of Document
 10.55
    
    Separation Agreement dated as of October 18, 2006 by and between William B. Rue
and Salton, Inc. Incorporated by reference to the Registrants Current Report on Form
8-K dated October 18, 2006.10.56
    
    Agreement dated as of November 15, 2006, by and among Salton, Inc. and Harbinger
Capital Partners Master Fund I, Ltd. Incorporated by reference to the Registrants Current
Report on Form 8-K dated November 15, 2006.10.57
    
    Amendment, dated as of December 15, 2006, by and among Salton, Inc. and
Harbinger Capital Partners Master Fund I, Ltd. Incorporated by reference to the
Registrants Current Report on Form 8-K dated December 15, 2006. Incorporated by
reference to the Registrants Current Report on Form 8-K dated December 15, 2006.10.58
    
    Stock Purchase Agreement dated as of December 28, 2006 by and between Salton,
Inc. and Harbinger Capital Partners Master Fund I, Ltd. Incorporated by reference to
the Registrants Current Report on Form 8-K dated December 28, 2006.10.59
    
    Registration Rights Agreement dated as of December 28, 2006 by and between
Salton, Inc. and Harbinger Capital Partners Master Fund I, Ltd. Incorporated by
reference to the Registrants Current Report on Form 8-K dated December 28, 2006.10.60
    
    Debt Repurchase Agreement dated as of December 28, 2006 by and between Salton,
Inc. and Harbinger Capital Partners Master Fund I, Ltd. Incorporated by reference to
the Registrants Current Report on Form 8-K dated December 28, 2006.10.61
    
    Extension Agreement dated as of November 15, 2006 between George Foreman and
Salton, Inc. Incorporated by reference to the Registrants Current Report on Form 8-K
dated January 12, 2007.10.62
    
    Second Amendment to Rights Agreement dated as of February 7, 2007, by and
between Salton, Inc. and UMB Bank, N.A. Incorporated by reference to the Registrants
Current Report on Form 8-K dated February 7, 200710.63
    
    Agreement and Plan of Merger dated as of February 7, 2007 by and between
Salton, Inc., SFP Merger Sub, Inc., and APN Holding Company, Inc. Incorporated by
reference to the Registrants Current Report on Form 8-K dated February 7, 200710.64
    
    Commitment Agreement dated as of February 7, 2007 by and between Salton, Inc.,
Harbinger Capital Partners Master Fund I, Ltd., and Harbinger Capital Partners Special
Situations Fund, L.P. Incorporated by reference to the Registrants Current Report on
Form 8-K dated February 7, 2007
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10.65
    
    Tenth Amendment to Amended and Restated Credit Agreement dated as of
February 12, 2007 by and among the Lenders, Wells Fargo Foothill, Inc., as
administrative agent, and collateral agent for the Lenders, Silver Point Finance, LLC,
as co-agent, syndication agent, documentation agent, arranger and book runner, Salton,
Inc., 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. Incorporated by reference to the Registrants Current Report on Form
8-K dated February 12, 2007.10.66
    
    Eleventh Amendment to Amended and Restated Credit Agreement dated as of
April 13, 2007 by and among the Lenders, Wells Fargo Foothill, Inc., as administrative
agent, and collateral agent for the Lenders, Silver Point Finance, LLC, as co-agent,
syndication agent, documentation agent, arranger and book runner, Salton, Inc., 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.
Incorporated by reference to the Registrants Current Report on Form 8-K dated April
13, 2007.10.67
    
    Separation Agreement and General Release dated as of April 30, 2007 by and between
Leon Dreimann and Salton, Inc. Incorporated by reference to the Registrants Current Report
on Form 8-K dated April 30, 2007.12(A)
    
    Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification By The Interim Chief Executive Officer Pursuant To Section 302 Of The
Sarbanes-Oxley Act Of 200231.2
    
    Certification By The Chief Financial Officer Pursuant To Section 302 Of The
Sarbanes-Oxley Act Of 200232.1
    
    Certification of The Interim Chief Executive Officer Pursuant to 18 U.S.C. 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of The Chief Financial Officer Pursuant to 18 U.S.C. 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 44