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.

 

Introduction

 

Salton 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, 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 ^® , Westinghouse ^TM , Toastmaster ^® , Melitta ^® , Russell Hobbs ^® , Farberware ^® and Stiffel ^® .

 

Liquidity and Strategic Alternatives

 

The accompanying condensed consolidated financial statements have been prepared and are presented assuming the Company’s ability to continue as a going concern. The Company has incurred significant operating losses over the past several years and has an accumulated deficit of $92.2 million as of September 29, 2007. The Company’s Senior Secured Credit Facility required the repayment of outstanding overadvances of approximately $62.0 million prior to November 10, 2007. As discussed in “Recent Developments,” these overadvances are subject to a Loan Purchase Agreement between the Company’s senior lenders and Harbinger Capital Partners. The Company has not repaid the overadvances and the senior lenders have not exercised this provision for repayment as of November 13, 2007. In addition, the Company has approximately $161.5 million of debt maturing in fiscal 2008. The Company’s projected cash flows will not be sufficient to fund these payments. On October 1, 2007, the Company signed an Agreement and Plan of Merger with APN Holding Company, Inc. (“APN Holdco”), the parent company of Applica Incorporated. The Company believes that without the consummation of the merger, it will not have sufficient cash to fund its activities in the near future, and will not be able to continue operating. There can be no assurance that the Company will be able to complete the merger. As such, the Company’s continuation as a going concern is uncertain. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Recent Developments

 

Merger Agreement — On October 1, 2007, we entered into an Agreement and Plan of Merger with APN Holdco, pursuant to which Applica will become a wholly-owned subsidiary of Salton. APN Holdco is owned by Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, L.P., (collectively, “Harbinger Capital Partners”). Upon consummation of the proposed merger and the related transactions, Harbinger Capital Partners would beneficially own 92% of the outstanding common stock of Salton, and existing holders of Salton’s Series A Voting Convertible Preferred Stock (excluding Harbinger Capital Partners), Series C Nonconvertible (NonVoting) Preferred Stock (excluding Harbinger Capital Partners) and common stock (excluding Harbinger Capital Partners) would own approximately 3%, 3% and 2%, respectively, of the outstanding common stock of Salton immediately following the merger and related transactions.

 

In addition to the merger, the definitive merger agreement contemplates the consummation of the following transactions simultaneously with the closing of the merger: (1) the mandatory conversion of all outstanding shares of Salton’s Series A Voting Convertible Preferred Stock, including those held by Harbinger Capital Partners, into shares of Salton’s common stock; (2) the mandatory conversion of all outstanding shares of Salton’s Series C Nonconvertible (NonVoting) Preferred Stock, including those held by Harbinger Capital Partners, into shares of Salton’s common stock; and (3) the exchange by Harbinger Capital Partners of approximately $90 million principal amount of Salton’s second lien notes and approximately $15 million principal amount of Salton’s 2008 senior subordinated notes, for shares of a new series of non-convertible (non voting) preferred stock of Salton, bearing a 16% cumulative preferred dividend.

 

We intend to complete this transaction within the next two to three months. The consummation of the merger and related transactions is subject to various conditions, including the approval by the Salton stockholders and the absence of legal impediments. The merger and related transactions are not subject to any financing condition.

Financing Related Agreements — Concurrently with the execution and delivery of the Merger Agreement, Salton, its subsidiaries, Silver Point Finance, LLC, (“Silver Point”) as co-agent for the lenders under Salton’s senior secured credit facility and Harbinger Capital Partners entered into a Loan Purchase Agreement. The Loan Purchase Agreement provides that at any time (1) from and after the date any party to the Merger Agreement has, or asserts, the right to terminate the Merger Agreement or the Merger Agreement is terminated and/or (2) on or after November 10, 2007 and prior to February 1, 2008 (provided, in each case, no insolvency proceeding with respect to Salton or its subsidiaries is then proceeding), at the request of Silver Point, Harbinger Capital Partners shall purchase from Silver Point certain overadvance loans outstanding under Salton’s senior secured credit facility having an aggregate principal amount of up to approximately $68.5 million. The purchase price shall be equal to 100% of the outstanding principal amount of the overadvance loans, plus all accrued and unpaid interest thereon through and including the date of purchase.

 

In the event that Harbinger Capital Partners purchase the overadvance loans pursuant to the Loan Purchase Agreement, the amount of the purchased overadvance loans will be deemed discharged under our senior secured credit facility and the principal amount of such over advance loans, plus all accrued and unpaid interest thereon and a $5 million drawdown fee payable to Harbinger Capital Partners as a result of such purchase, will be automatically converted to loans under a new Reimbursement and Senior Secured Credit Agreement dated as of October 1, 2007 among Harbinger Capital Partners, Salton and its subsidiaries that are signatories thereto as borrowers and guarantors.

 

The Loan Purchase Agreement also provides that under certain circumstances, including the commencement of an insolvency proceeding with respect to Salton or its subsidiaries, at the request of Silver Point, Harbinger Capital Partners shall purchase from Silver Point all of the outstanding obligations under Salton’s senior secured credit facility (and Harbinger Capital Partners Special Situations Fund, L.P. shall become the agent and co-agent thereunder).

 

The Reimbursement and Senior Secured Credit Agreement has a maturity date of January 30, 2008. The interest rate with respect to loans under the Reimbursement and Senior Secured Credit Agreement is the six month LIBOR plus 10.5%, payable in cash on the last business day of each month. The default rate is LIBOR plus 12.5%.

 

Waiver, Consent, Forebearance and Seventeenth Amendment to Senior Secured Credit Facility; Waiver, Consent and First Amendment to Second Lien Credit Agreement; Amended and Restated Intercreditor Agreement and Junior Intercreditor Agreement — On October 1, 2007 and in connection with the Loan Purchase Agreement: (a) we entered into a waiver, consent, forbearance and seventeenth amendment to the senior secured credit agreement pursuant to which Silver Point (1) permits the transactions contemplated by the Loan Purchase Agreement and related documents, (2) waives any event of default resulting from a going concern qualification in the report by our independent auditors accompanying our audited financial statements as of and for the period ending June 30, 2007, and (3) subject to certain conditions, forbears from exercising remedies with respect to certain existing events of default relating to, among other things, the filing of Salton’s annual report on Form 10-K for the fiscal year ended June 30, 2007 and the delivery of foreign stock pledge agreements and blocked account control agreements; (b) we entered into a waiver, consent and first amendment to its second lien credit agreement which, among other things, permits the transactions contemplated by the Loan Purchase Agreement and related documents; (c) the agent and co-agent for our senior secured credit agreement, the agent for the Reimbursement and Senior Secured Credit Agreement and the second lien agent for our second lien credit agreement entered into an Amended and Restated Intercreditor Agreement which, among other things, governs the priority of rights among the lenders; and (d) the agent for the Reimbursement and Senior Secured Credit Agreement and the second lien agent for the second lien credit agreement entered into a Junior Intercreditor Agreement governing the priority of rights among the lenders thereunder.

 

Sale of Time Products Business — On July 18, 2007 Salton, Inc. (“Seller”) and NYL Holdings LLC (“Buyer”) entered into an Asset Purchase Agreement as amended on August 23, 2007 (“Agreement”). The terms of the Agreement provided for Buyer to purchase Seller’s clock inventory and certain time products related trademarks and tooling and molds. The closing occurred in October 2007, when all inventory was transferred to Buyer.

The assets included in the Agreement totaled $2.8 million in inventory, net of reserves, and less than $0.1 million in tooling as reflected on the Company’s balance sheet as of September 29, 2007. There was no book value for the trademarks. The assets were sold at book value.

 

Forward Looking Statements

 

This 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:

 

 

Operational and Other Risk Factors:

 

 

 

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 Operations

 

The unaudited information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements contained in our 2007 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for future quarters or a full year.