SALTON INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For The Fiscal Year Ended June 29, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For The Transition Period From to

COMMISSION FILE NUMBER 0-19557

SALTON, INC.
(Exact Name Of Registrant As Specified In Its Charter)

DELAWARE 36-3777824
(State or other jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
1955 FIELD COURT 60045
LAKE FOREST, ILLINOIS (Zip Code)
(Address of Principal Executive Offices)

(847) 803-4600
(Registrant's Telephone Number, Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK $.01
PAR VALUE
(Title of Class)

[X] YES
[ ] NO Indicate by check mark whether this registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of September 19, 2002 was approximately $80,000,000
computed on the basis of the last reported sale price per share $8.35 of
such stock on the NYSE. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

[ ] Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.

The number of shares of the Registrant's Common Stock outstanding as of
September 19, 2002 was 10,993,077

DOCUMENTS INCORPORATED BY REFERENCE

PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE
- ---------------------------------------------------------------------------------------------------
Part III (Items 10, 11, 12 and 13) Portions of the Registrant's Definitive Proxy Statement to
be used in connection with its 2002 Annual Meeting of
Stockholders.

SALTON, INC.

FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 29, 2002

INDEX

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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K 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:

- - Our degree of leverage;

- - Economic conditions and the retail environment;

- - The timely development, introduction and customer acceptance of our products;

- - Competitive products and pricing;

- - Dependence on foreign suppliers and supply and manufacturing constraints;

- - Our relationship and contractual arrangements with key customers, suppliers
and licensors;

- - Cancellation or reduction of orders;

- - International business activities;

- - Availability and success of future acquisitions;

- - The risks relating to legal proceedings;

- - The risks relating to intellectual property matters;

- - The risks relating to regulatory matters; and

- - Other risks detailed from time to time in our Commission filings.

All forward looking statements included in this annual report on Form 10-K
are based on information available to us on the date of this annual 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 annual report on Form 10-K.

ITEM 1. Business

As used in this annual report on Form 10-K, "we," "our," "us," "the
Company" and "Salton" refer to Salton and our subsidiaries, unless the context
otherwise requires.

GENERAL

We are a leading designer, marketer and distributor of a broad range of
branded, high quality small appliances under well-recognized brand names such as
Salton(R), George Foreman(TM), Toastmaster(R), Russell Hobbs(R), Juiceman(R),
Farberware(R), Melitta(R), White-Westinghouse(R), Kenmore(R), Breadman(R),
Haden(R), Maxim(R) and Westinghouse(R). We believe that we have the leading
domestic market share in indoor grills, toasters, juice extractors, breadmakers,
griddles, waffle makers and buffet ranges/hotplates and a significant market
share in other product categories. We also design and market tabletop products,
time products, lighting products and personal care and wellness products under
brand names such as Ingraham(R), Block China(R), Stiffel(R), Westclox(R),
Rejuvenique(R), Carmen(R), Pifco(R), Ultrasonex(TM), Relaxor(R) and Calvin
Klein(R). We believe that our strong market position results from our well-known
brand names, the breadth, quality and innovation of our product offerings, our
strong relationships with retailers and our focused outsourcing strategy.

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We develop and introduce a wide selection of new products and enhance
existing products to satisfy the various tastes, preferences and budgets of
consumers and to service the needs of a broad range of retailers. Our product
categories include:

We currently market and sell our products primarily in North America
through an internal sales force and a network of independent commissioned sales
representatives. We predominantly sell our products to mass merchandisers,
department stores, specialty stores and mail order catalogs. Our customers
include many premier domestic retailers, including Wal-Mart, Target Corporation,
Sears, Kmart, Federated Department Stores, J.C. Penney Company, Argos Limited,
Kohl's Department Stores, May Company Department Stores, Bed, Bath & Beyond,
Lowe's and Linens 'n Things. We also sell certain of our products directly to
consumers through paid half-hour television programs referred to as
"infomercials" and through our Internet website.

We outsource most of our production to more than 25 independent
manufacturers, located primarily in the Far East, and we believe that we are the
largest purchaser of electric small appliances from unaffiliated parties in the
Far East. We employ both internal and independent inspection agents to ensure
that products meet our rigorous quality standards.

THE INDUSTRY

Based on data compiled from the National Housewares Manufacturers
Association, the household industry categories in which we currently compete
were approximately a $19 billion retail business in the United States in 2000.
Historically, this industry has been characterized as mature, fragmented and
highly competitive. However, it has been consolidating recently in response to
the merger activity and changes within the retail industry. We expect that
retailers will continue to consolidate their vendor base by dealing primarily
with a smaller number of suppliers that can offer a broad array of innovative,
differentiated and quality products and comprehensive levels of customer

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service. We believe that with our broad array of innovative and quality product
offerings, high level of customer service and strong brand name recognition, we
are well positioned to benefit from this environment.

COMPETITIVE STRENGTHS

We believe that the following competitive strengths contribute to our
position as a leading domestic designer and marketer in the small household
appliance industry and serve as a foundation for our business strategy:

Market Leadership. We believe that we have the leading domestic market
share in indoor grills, toasters, juice extractors, bread makers, griddles,
waffle makers and buffet ranges/hotplates and a significant market share in
other product categories. We believe that our leading market share in these
product lines provides us with a competitive advantage in terms of demand from
major retailers and enhanced brand awareness. Through internal and joint product
development and acquisitions of businesses and product lines, we have enhanced
our position as a leading supplier in the U.S. housewares industry.

Strong Brand Names. We have built a portfolio of strong brand names which
we use to gain retail shelf space and introduce new products. The Salton(R)
brand name has been in continuous use since 1947, the Ingraham(R) brand name
since 1831 and the Toastmaster(R) brand name since 1926. These names are widely
recognized in the housewares industry. Since the introduction of the first
George Foreman(TM) product in 1995, we have established the George Foreman(TM)
name as a significant product brand, representing approximately 47% of our sales
in the fiscal year ended June 29, 2002. In addition, we have licensed the right
to use the White-Westinghouse(R) brand name for certain small household
electrical appliances, such as toasters, coffee makers, espresso/cappuccino
makers and bread makers, and distribute certain products under the Farberware(R)
brand name. In April 2002 we obtained the exclusive right to use the
Westinghouse(R) brand name and its trademarks for kitchen electrics, fans and
heaters, personal care, tabletop air cleaners and humidifiers, clocks and
vacuums. We believe that White-Westinghouse(R), Farberware(R) and
Westinghouse(R) are time-honored traditions throughout the world for certain
home appliances and benefit from strong consumer recognition. We also market
products under other owned and licensed brand names, such as Russell Hobbs(R),
Juiceman(R), Melitta(R), Breadman(R), Haden(R), Maxim(R), Ingraham(R), Block
China(R), Stiffel(R), Westclox(R), Calvin Klein(R), Hi-Tech(R), Timex(R) Timers,
Rejuvenique(R), Carmen(R), Pifco(R), Ultrasonex(TM), Relaxor(R) and under
private-label brand names such as Kenmore(R) (Sears) and Cook's Essentials(R)
(QVC).

Innovation In Product Design And Packaging. We have a reputation among
retailers and consumers for innovative product design and packaging. We design
our products in both contemporary and traditional styles and with a wide variety
of functional and aesthetic features. We work closely with both retailers and
suppliers to identify consumer needs and preferences and to develop new products
to satisfy consumer demand. Our product innovations have included the first
triple function (espresso, cappuccino and latte) coffee maker in the United
States, George Foreman(TM) Grills, Toastmaster(R) ovens with removable liners,
the Icebox(TM) product line of kitchen entertainment centers and the Wet
Tunes(TM) shower radios. During fiscal 2002, we introduced 2,635 new stock
keeping units, or SKUs. Several of our products, including the Breadman(R) Plus,
the Breadman(R) Ultimate, the Salton(R) Pro Steam iron and the George
Foreman(TM) Lean Mean Fat Reducing Grilling machine, have been selected by
various consumer organizations and magazines as top rated or best buys.

We also package our products to increase their appeal to consumers and to
stand out among other brands on retailers' shelves. We believe that the
distinctive packaging, designed to answer customers' questions concerning our
products, has resulted in increased retail shelf space and greater sales.

Broad Range Of Products. We currently sell over 10,028 SKUs across
multiple housewares categories using our portfolio of more than 66 owned and
licensed brand names. Our products meet the needs of a broad range of retailers
and satisfy the different tastes, preferences and budgets of consumers. Our
diverse product offerings enable us to help retailers differentiate themselves
because we can offer them exclusive rights for designated periods of time to
sell certain of our products. We believe that as the retail industry continues
to consolidate, our ability to serve retailers with an extensive array of
product lines under a portfolio of strong brand names will continue to become
increasingly important for maintaining shelf space and for introducing new
products into the retail market.

Established Relationships With Diverse Customer Base. We have been able to
establish strong relationships with our retail customers based on our frequent
product innovation, high level of customer service, breadth of product

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offerings, reputation for quality products and established brand names. In
addition, we have been able to secure long-term supply agreements with certain
customers such as Kmart and Zellers. We have also expanded our distribution of
private-label products with certain major retailers under brand names such as
Kenmore(R) (Sears) and Cook's Essentials(R) (QVC). The broad distribution of
products through the mass merchant, department store and specialty retailer
channels, together with sales made through infomercials and the Internet,
provides us with access to a diversified group of customers and multiple
channels of distribution.

Focused Outsourcing Strategy. Our strong relationships with our suppliers
provide us with a low-cost, comparable quality alternative to domestic
manufacturing. We believe that we are the largest purchaser of small electric
appliances from unaffiliated parties in the Far East. We source products from
more than 25 different suppliers and believe that we are the largest customer of
many of our suppliers. We work closely with our suppliers to develop new
products and improvements to existing products to satisfy changing consumer
preferences. Our outsourcing strategy provides us with low-cost manufacturing
capabilities and allows us to bring new products to the market quickly and
respond rapidly to changes in consumer tastes and preferences.

Experienced Management Team With Significant Equity Ownership. Our
management team has a wide range of experience in the development and marketing
of housewares. This management team, consisting of Leonhard Dreimann, Chief
Executive Officer, David C. Sabin, Chairman, William B. Rue, President and Chief
Operating Officer, David Mulder, Executive Vice President and Chief
Administrative Officer, and John E. Thompson, Senior Vice President and Chief
Financial Officer, has an average of more than 20 years of industry experience.
Since our inception, management has successfully integrated over 14 acquisitions
of companies and/or product lines.

BUSINESS STRATEGY

Our primary business objective is to increase net sales, profitability and
cash flow by continuing to execute the following key elements of our business
strategy:

- - Introduce New Products And Product Line Extensions. We plan to manage our
existing and new brands through strong product development initiatives,
including introducing new products, modifying existing products and extending
existing product lines. Our product managers strive to develop and acquire new
products and product line extensions, which offer added value to consumers
through enhanced functionality and improved aesthetics. During fiscal 2002, we
introduced 326 new SKUs in the small appliance category, 2,189 new SKUs in the
Salton At Home products category and 120 new SKUs in the personal care and
wellness products category. For example, we recently introduced:

- - the George Foreman(TM) Lean, Mean Contact Roasting Machine, a countertop
appliance capable of roasting whole chickens, beef and pork roasts, vegetables
and other foods;

- - the Phillipe Starck personal care product line under the Starck(R) brand name;

- - the ICEBOX(TM) FlipScreen 2002, the latest addition to the Icebox(TM) product
line consisting of kitchen entertainment centers offering one-touch access to
cable TV, FM radio, broadband Internet and e-mail, DVDs, audio CDs and
security video monitoring;

- - Additionally, we plan to begin shipments in calendar 2003 of the following
products we introduced late in fiscal 2002;

+ Westinghouse(R) wireless, upright vacuum cleaners, which vacuum cleaners
are bagless and eliminate the need for cord while vacuuming;

+ Westinghouse(R) corded upright vacuum cleaners that feature bagless
technology and HEPA filtration; and

+ Westinghouse(R) new line of smart, networked home appliances, including
the gateway device, bread makers, convection ovens and coffee makers.

Increase Sales To New And Existing Customers. We believe that retail
merchants will continue to consolidate their vendor bases and focus on a smaller
number of suppliers that can (1) provide a broad array of differentiated,
quality products, (2) efficiently and consistently fulfill logistical
requirements and volume demands and (3) provide comprehensive product and
marketing support. We believe that we can increase sales to our existing
customers by

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continuing to introduce new products and new product categories. While we
currently sell to a diversified base of premier retail customers, we believe
that we can further penetrate additional channels of distribution such as
grocery stores and e-commerce outlets.

Pursue Licensing Agreements And Strategic Alliances. We have entered into
licensing agreements and strategic alliances in order to further differentiate
our products and to accelerate our growth. For example, we supply products to
Kmart, Zellers and Sears, which they sell under the White-Westinghouse(R), and
Kenmore(R) brand names, respectively. We also have a joint marketing alliance
with Kellogg USA. We recently entered into a worldwide agreement with designer,
inventor and architect Phillipe Starck to design a series of kitchen appliances,
which will include a Phillipe Starck designed George Foreman(TM) grill. In
addition, we have licensing rights to market certain products under the
Farberware(R), Melitta(R), Sasaki(R), Timex(R) Timers, Looney Tunes(TM) and
Calvin Klein(R) brands.

Continue Developing Alternative Distribution Channels. We expect to
continue selling products through infomercials and our Internet website. These
alternative distribution channels increase our product sales and provide us with
direct contact with consumers, assist us in creating and building brand and
product awareness and stimulate traditional retail channel demand. We currently
use these alternative channels to sell certain of our products, primarily George
Foreman(TM) Grills, Juiceman(R) and Juicelady(R) fresh juice machines and the
Rejuvenique(R) facial toning system, as well as electric woks, pizza makers,
George Foreman(TM) Rotisserie Ovens, Ultrasonex(TM) line of electrically
operated toothbrushes and related products, and George Foreman(TM) Portable
Outdoor Grills. We plan on developing additional new products, which will also
be sold on infomercials.

Pursue Strategic Acquisitions. We anticipate that the fragmented small
household appliance, clock, tabletop, and home lighting industries will provide
significant growth opportunities through strategic acquisitions. We will focus
our acquisition strategy on businesses or brands which (1) offer expansion into
related or existing categories, (2) can be marketed through our existing
distribution channels or (3) provide a platform for growth into new distribution
channels including expanding our international sales of products. Our recent
acquisitions include:

- - the Look For Group, a small household appliance distributor located in France;

- - the Westclox(R), Big Ben(R) and Spartus(R) trademarks, molds, intellectual
property, rights and patents related to these brands;

- - Pifco Holdings PLC, a United Kingdom producer and marketer of a broad range of
branded small electric household appliances, personal care appliances,
electrical hardware, cookware and battery operated products;

- - the Relaxor(R) brand and certain inventory, including personal massagers and
other personal care and wellness items;

- - certain assets and intellectual property of The Stiffel Company, a designer of
lamps and related products; and

- - Sonex International Corporation, a designer and distributor of electric
toothbrushes, which employ ultra high frequency sonic waves for cleaning.

Expand International Presence. We intend to expand our international sales
by developing international distribution channels for certain of our products
and by pursuing acquisitions of complementary businesses.

In fiscal 2003 we expect to expand out European distribution to include
sales in Ireland and the Netherlands, as well as Spain and Italy, through
certain exclusive distributorship agreements.

In February 2002 we acquired Look For, a small household appliance
distributor located in France, to enhance our European distribution system. In
June 2001, we acquired Pifco Holdings PLC, a United Kingdom producer and
marketer of a broad range of branded kitchen and small appliances, personal care
and wellness products, cookware and battery operated products. We renamed Pifco
in fiscal 2002 to Salton Europe. We believe that Salton Europe's strong product
lines and European distribution channels will enable us to expand our
international distribution channels and cross-market our products in Europe.

In March 1999 we entered into a five-year supply agreement with Zellers,
the leading national chain of discount department stores in Canada, to supply a
broad range of small appliances under the White-Westinghouse(R) brand name. We
also market George Foreman(TM) Grills through QVC Germany and the Rejuvenique(R)
facial mask and cosmetics through QVC Marco Polo Housewares in the United
Kingdom. In addition, we have a 31% ownership

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interest in Amalgamated Appliance Holdings Limited, a public company located in
South Africa, which manufactures and distributes appliances and electrical
accessories. We market certain of our products in South Africa through
Amalgamated Appliance Holdings Limited. We also market our products in Australia
and New Zealand through our subsidiaries formed in fiscal 2000.

PRODUCTS

Our portfolio of strong brand names enables us to service the needs of a
broad range of retailers and satisfy the different tastes, preferences and
budgets of consumers. Our products include full-featured and upscale models or
designs as well as those which are marketed to budget conscious consumers. Our
product categories include:

The following table sets forth the approximate amounts and percentages of our
net sales by product category during the periods shown.

(1) For fiscal 2001, the table includes the sales of Salton Europe from June 1,
2001 through June 30, 2001. For fiscal 2002, the table includes the sales of
Salton Europe from July 1, 2001 through June 29, 2002.

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APPLIANCES

We design and market an extensive line of small appliances under the
Salton(R), George Foreman(TM), Toastmaster(R), Russell Hobbs(R), Juiceman(R),
Farberware(R), Melitta(R), White-Westinghouse(R), Kenmore(R), Breadman(R),
Haden(R), Maxim(R), Westinghouse(R) and other brand names. At the end of fiscal
2002, we marketed approximately 2,548 SKUs under our brand names in this
category. Growth within this product category has historically been driven
primarily by the introduction of new or enhanced products and the development of
the George Foreman(TM), White-Westinghouse(R), Farberware(R) and other product
lines. For example, our line of George Foreman(TM) products, which began as a
single grill in 1995, included 173 SKUs as of June 29, 2002.

Our appliances product category includes:

- - kitchen electrics products including thermal grills, toasters, bread makers,
waffle makers, tea kettles, espresso/cappuccino/drip coffee makers, waffle
makers, juicers, can openers, blenders, mixers, and electric knives; and

- - home appliances including heaters, fans, vacuums, steam cleaners, irons,
steamers;

We enhanced our appliance offerings in January 1999 by acquiring
Toastmaster Inc. Toastmaster markets and distributes a wide array of appliances
under the Toastmaster(R) brand name.

We further enhanced our appliance offerings in June 2001 by acquiring Pifco
Holdings, PLC, now renamed Salton Europe. In addition to appliance offerings,
Salton Europe also markets products under the Salton At Home and Personal Care
and Wellness categories.

SALTON AT HOME

We design and market an extensive line of tabletop products, time products
and lighting products. At the end of fiscal 2002, we marketed approximately
6,807 SKUs under our brand names in this category. Tabletop products include
crystal products offered under the Block China(R), Atlantis(R), Sasaki(R),
Jonal(R) and other brand names, fine china and basic dinnerware in various
designs and patterns under the Block China(R), Calvin Klein(R), Sasaki(R) and
other brand names, and ceramic products under the Block(R) brand name.

We began offering tabletop products in fiscal 1997. We enhanced our
tabletop product offerings on April 5, 1999 by acquiring certain assets of
Sasaki, Inc., a designer of high-quality tabletop products and accessories for
the home. The Sasaki(R) product lines which we acquired include dinnerware,
barware, flatware and crystal giftware designed by well-known tabletop
designers.

In the fourth quarter of fiscal 2000, we entered into an exclusive
licensing agreement for the manufacture and distribution of tabletop and
giftware items under the Calvin Klein(R) tabletop label.

Our time products are comprised of electric and analog alarm clocks,
electric and quartz wall clocks with plastic, wood and/or metal cases, imported
key-wound clocks and L.E.D. digital clocks. We market our time products under
the Ingraham(R), Westclox(R), Big Ben(R), Spartus(R), and other brand names. We
also market household (electromechanical and electronic) timers under both the
Ingraham(R) and Timex(R) brand names, which are used for, among other purposes,
switching electric lights and other appliances on and off at pre-determined
times.

We began offering table lamps, floor lamps, other lamps and lighting
accessories after our acquisition in August 2001 of the trademarks, other
intellectual property assets and molds of The Stiffel Company, a designer of
lamps and related products. We offer our lighting products under the Decor by
Stiffel(TM), Expressions by Stiffel(TM), Reflections by Stiffel(TM), Studio by
Stiffel(TM), Stiffel(R) and other brand names.

PERSONAL CARE AND WELLNESS PRODUCTS

We design and market a broad range of personal care and wellness products
under brand names such as Wet Tunes(TM), Salton(R), White-Westinghouse(R),
Rejuvenique(R), Ultrasonex(TM), Starck(R), Relaxor(R), Carmen(R) and others. At
the end of fiscal 2002, we marketed approximately 673 SKUs in the personal care
and wellness products category.

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Our personal and beauty care appliances marketed under the Salton(R) brand
name include hair dryers, curling irons and brushes, make-up mirrors, massagers,
manicure systems and shower radios. Our Wet Tunes(TM) series of shower radios
are sold under the Salton(R) brand name and feature AM/FM radio with waterproof
mylar speakers and wall mount brackets. Our personal and beauty care appliances
also include the Rejuvenique(R) system, which we began marketing through
infomercials in early 1999.

We enhanced our personal and beauty care appliances offerings on July 19,
2000 through our acquisition of Sonex International Corporation, a designer and
distributor of electrically operated toothbrushes which employ ultra high
frequency sonic waves for cleaning, flossers and related products.

On September 21, 2000, we further enhanced this product category through
our acquisition of the Relaxor(R) business and certain inventory, including
personal massagers, aromatherapy products, indoor calming pools, magnetic
therapy products and other personal care items, from JB Research, Inc.

We also have a "gifts" program designed for department stores. Under this
program, we provide department stores with practical, special occasion and small
gift products. Our gifts programs include the mini tool, calcutape, travel smoke
alarm, emergency auto flasher and the 7-piece gardening kits.

NEW PRODUCT DEVELOPMENT

We believe that the enhancement and extension of our existing products and
the development of new products are necessary for our continued success and
growth. We design the style, features and functionality of our products to meet
customer requirements for quality, performance, product mix and pricing. We work
closely with both retailers and suppliers to identify consumer needs and
preferences and to generate new product ideas. We evaluate new ideas and seek to
develop and acquire new products and improve existing products to satisfy
industry requirements and changing consumer preferences.

During fiscal 2002, we introduced 326 new SKUs in the small appliance
category, 2,189 new SKUs in the Salton At Home products category, and 120 new
SKUs in the personal care and wellness products category.

MARKETING AND DISTRIBUTION

We currently market and sell our products primarily in North America and
Europe through an internal sales force and a network of independent commissioned
sales representatives. We predominantly sell our products to mass merchandisers,
department stores, specialty stores and mail order catalogs. Our customers
include many premier domestic and international retailers, including Wal-Mart,
Target Corporation, Sears, Kmart, Federated Department Stores, J.C. Penney
Company, Argos Limited, Kohl's Department Stores, May Company Department Stores,
Bed, Bath & Beyond, Lowe's and Linens 'n Things.

In addition to directing our marketing efforts toward retailers, we sell
certain of our products, primarily George Foreman(TM) Grills, Juiceman(R) and
Juicelady(R) fresh juice machines and the Rejuvenique(R) facial toning system,
as well as electric woks, pizza makers, George Foreman(TM) Rotisserie Ovens,
Ultrasonex(TM) line of electrically operated toothbrushes and related products
and George Foreman(TM) Portable Outdoor Grills, directly to consumers through
infomercials and our Internet website. We provide promotional support for our
products with the aid of national television, radio and print advertising,
cooperative advertising with retailers, and in-store displays and product
demonstrations. We believe that these promotional activities are important to
strengthening our brand name recognition.

We rely on our management's ability to determine the existence and extent
of available markets for our products. Our management has an extensive marketing
and sales background and devotes a significant portion of its time to
marketing-related activities. We market our products primarily through our own
sales force and independent sales representatives. Our representatives are
located throughout the United States and Canada and are paid a commission based
upon sales in their respective territories. Our sales representative agreements
are generally terminable by either party upon 30 days' notice.

We direct our marketing efforts toward retailers and believe that obtaining
favorable product placement at the retail level is an important factor in our
business, especially when introducing new products. In an effort to provide

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our retail customers with the highest level of customer service, we have an
advanced electronic data interchange system to receive customer orders and
transmit shipping and invoice information electronically. Our management uses
this system to monitor point-of-sale information at certain accounts. We
maintain an Internet site, which enables our retail customers to access on-line
shipment information.

We emphasize the design and packaging of our products to increase their
appeal to consumers and to stand out among other brands on retailers' shelves.
We believe that distinctive packaging, designed to answer consumers' questions
concerning our products, has resulted in increased shelf space and greater
sales. In addition, we have a consumer relations department with over 50 persons
to answer consumer questions about our products.

Our total net sales to our five largest customers during fiscal 2002 were
approximately 43% of net sales, with Wal-Mart representing approximately 14% of
our net sales and Target Corporation representing approximately 12% of our net
sales. Our total net sales to our five largest customers during fiscal 2001 were
approximately 47% of net sales, with Wal-Mart representing approximately 12% of
our net sales and Kmart representing approximately 11% of our net sales.

In 1997, we entered into a seven-year supply agreement with Kmart, which is
currently in Chapter 11 bankruptcy, for Kmart to purchase, distribute, market
and sell a broad range of small appliances under the White-Westinghouse(R) brand
name. Kmart is the exclusive United States mass merchant to market these
White-Westinghouse(R) products. The supply agreement provides Kmart sole
distribution rights to the White-Westinghouse(R) brand name for the mass
merchandiser market, but allows distribution through other retail channels under
certain conditions. Sales of White-Westinghouse products to Kmart approximated
0.9% and 3.8% of our total net sales for fiscal years 2002 and 2001,
respectively.

The supply agreement with Kmart provides for minimum purchases by Kmart,
which increase through the term of the supply agreement, and for the payment of
penalties for shortfalls. If the aggregate United States retail sales for any
specified category decrease by more than 10% in any year from that sold in the
prior year, Kmart has the right to reduce the minimum purchase requirements for
that category to an amount not less than 80% of the minimum for that period.
Kmart, currently in Chapter 11 bankruptcy proceedings, has not reaffirmed its
rights under the contract on a post petition basis. We are currently in
negotiations with Kmart to resolve both pre- and post-petition issues under this
contract.

In 1999, we entered into a five-year supply agreement with Zellers, the
leading national chain of discount department stores in Canada, to supply a
broad range of small appliances under the White-Westinghouse(R) brand name. We
also have expanded our distribution of private-label products with certain major
retailers under brand names such as Kenmore(R) (Sears) and Cook's Essentials(R)
(QVC).

SOURCES OF SUPPLY

Most of our products are manufactured to our specifications by over 25
unaffiliated manufacturers located primarily in Far East locations, such as Hong
Kong, the People's Republic of China and Taiwan, and in Europe. Many of these
suppliers are ISO 9000 and ISO 9002 certified. We believe that we maintain good
business relationships with our overseas manufacturers.

We do not maintain long-term purchase contracts with manufacturers and
operate principally on a purchase order basis. We believe that we are not
currently dependent on any single manufacturer for any of our products. However,
one supplier located in China, accounted for approximately 32.5% of our product
purchases during fiscal 2002 and for approximately 35.2% of our product
purchases in fiscal 2001. We believe that the loss of any one manufacturer would
not have a long-term material adverse effect on our business because other
manufacturers with which we do business would be able to increase production to
fulfill our requirements. However, the loss of a supplier could, in the short
term, adversely affect our business until alternative supply arrangements are
secured.

Our purchase orders are generally made in United States dollars in order to
maintain continuity in our pricing structure and to limit exposure to currency
fluctuations. Salton Europe 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 British Pound
Sterling against United States dollars. Our policy is to maintain an inventory
base to service the seasonal demands of

11

our customers. In certain instances, we place firm commitments for products from
six to twelve months in advance of receipt of firm orders from customers.

Quality assurance is particularly important to us and our product shipments
are required to satisfy quality control tests established by our internal
product design and engineering department. We employ both internal and
independent agents to perform quality control inspections at the manufacturers'
factories during the manufacturing process and prior to acceptance of goods.

Salton Hong Kong, Ltd. (Salton Hong Kong), our wholly owned subsidiary, has
been granted status in Hong Kong and the People's Republic of China as a
manufacturing company. Salton Hong Kong has developed a key relationship with
one of its suppliers whereby the supplier produces certain products for us using
materials purchased by Salton Hong Kong and certain assets provided by Salton
Hong Kong. The purpose of this relationship is to secure for us a long-term
supply relationship at favorable pricing.

COMPETITION

Our industry is mature and highly fragmented. Competition is based upon
price, access to retail shelf space, product features and enhancements, brand
names, new product introductions and marketing support and distribution
approaches.

In the sale of small appliances, we compete with, among others, Applica,
Inc., Braun, Delonghi, Hamilton Beach/Proctor Silex, Holmes/Rival, Krups,
National Presto, Rowenta and Sunbeam. In the sale of Salton At Home products, we
compete with, among others, Baccarat Crystal, Lenox, Mikasa, Miller Rogaska,
Villeroy Boch, Waterford Crystal, Wedgewood, Westwood Lighting, Robert Abbey,
Advance Corp. and M.Z. Berger. In the sale of personal care and wellness
products, we compete with, among others, Andis, Conair Corporation, Helen of
Troy and Sunbeam. We believe that our success is dependent on our ability to
offer a broad range of existing products and to continually introduce new
products and enhancements of existing products, which have substantial consumer
appeal, based upon price, design, performance and features. We also believe that
our brand names are important to our ability to compete effectively and give us
the capability to provide consumers with appealing, well priced products to meet
competition.

EMPLOYEES

As of June 29, 2002, we employed approximately 1400 persons. Approximately
90 employees, who work at our Elizabeth, New Jersey facility and approximately
70 employees at our Salton Europe, Wolverhampton, England facility, were covered
by collective bargaining agreements. The Elizabeth, New Jersey agreement expires
on February 28, 2005 and the Wolverhampton, England agreement is ongoing and has
no expiration date. We generally consider our relationship with our employees to
be satisfactory and have never experienced a work stoppage.

REGULATION

We are subject to federal, state and local regulations concerning consumer
products safety. Foreign jurisdictions also have regulatory authorities
overseeing the safety of consumer products. In general, we have not experienced
difficulty complying with such regulations and compliance has not had an adverse
effect on our business. Most of our products are listed by Underwriters
Laboratory, Inc.

BACKLOG

Our backlog consists of commitments to order and orders for our products,
which are typically subject to change and cancellation until shipment. Customer
order patterns vary from year to year, largely because of annual differences in
consumer acceptance of product lines, product availability, marketing
strategies, inventory levels of retailers and differences in overall economic
conditions. As a result, comparisons of backlog as of any date in a given year
with backlog at the same date in a prior year are not necessarily indicative of
sales for that entire given year. As of June 29, 2002, we had a backlog of
approximately $298.2 million compared to approximately $346.8 million as of June
30, 2001. We do not believe that backlog is necessarily indicative of our future
results of operations or prospects.

12

TRADEMARKS, PATENTS AND LICENSING ARRANGEMENTS

We hold numerous patents and trademarks registered in the United States and
foreign countries for various products and processes. We have registered certain
of our trademarks with the United States Patent and Trademark Office. We
consider these trademarks to be of considerable value and of material importance
to our business.

During 1996, we entered into license agreements with White Consolidated
Industries, Inc. for use of the White-Westinghouse(R) trademark for small
kitchen appliances, personal care products, fans, heaters, air cleaners and
humidifiers. The license agreements grant us the exclusive right and license to
use the White-Westinghouse(R) trademark in the United States and Canada in
exchange for certain license fees and royalties. The license agreements also
contain minimum sales requirements that, if not satisfied, may result in the
termination of the agreements. Each of these license agreements is also
terminable on or after the fifth anniversary of the agreement upon one-year's
notice or upon a breach by us.

In fiscal 1997, we obtained the exclusive, worldwide right to distribute
Farberware(R) small electric appliances. Farberware(R) is a time-honored trade
name in the cookware and small electric appliance industry.

In fiscal 1999, we obtained the exclusive right to manufacture, market and
distribute throughout the United States small electrical coffee preparation
products, including drip coffee makers, percolators, espresso machines, coffee
grinders, and coffee mills, under the Melitta(R) brand name. We also entered
into a license agreement with Aesthetics, Inc. in fiscal 1999. The license
covers the manufacturing, marketing and distributing of the Rejuvenique(R)
facial product lines. Also in fiscal 1999, we entered into an exclusive
worldwide licensing agreement with UltraVection International to market ovens
using UltraVection(TM)'s patented technology.

On December 9, 1999, we acquired from George Foreman and other venture
participants the right to use in perpetuity and worldwide the name George
Foreman(TM), including pictures and the likeness of George Foreman, in
connection with the marketing and sale of food preparation and non-alcoholic
drink preparation and serving appliances. This transaction terminated as of July
1, 1999 our obligation to pay royalties based on the sale of George Foreman(TM)
products. The aggregate purchase price was $113.75 million in cash, a note
payable in five annual installments of $22.75 million commencing on the closing
date, and 779,191 shares of our common stock.

On September 7, 2000, we entered into agreements with George Foreman and
other venture participants pursuant to which we satisfied $22.75 million of
payment obligations we incurred in connection with our acquisition of the
"George Foreman" name by issuing 621,161 shares of our common stock to George
Foreman and other venture participants. Under the terms of the transaction we
guaranteed under certain circumstances the value of these 621,161 shares. We
registered for resale the shares of common stock issued in connection with the
transaction.

On July 2, 2001, we took back 456,175 of the 546,075 shares issued to
George Foreman on September 7, 2000 and paid him $18 million. This payment,
which represented $20 million less the proceeds George Foreman received from the
sale of shares on the open market previously issued to him, terminated our
guarantee obligation with respect to the shares issued to him and satisfied the
third annual installment due under the note payable to George Foreman. Upon
completion of this transaction, we had only two installments of $22.75 million
remaining under the note as well as our outstanding guarantee obligation to the
other venture participants. In the first quarter of fiscal 2003, we paid the
first of the remaining installments under the note.

In the fourth quarter of fiscal 2000, we entered into an exclusive
licensing agreement for the manufacture and distribution of tabletop and
giftware items under the Calvin Klein(R) Tabletop label.

On July 20, 2000, we entered into a joint marketing alliance with Kellogg
USA. We have both agreed as part of this alliance to launch print and broadcast
advertising, joint trade and on-line consumer promotions and couponing and to
collaborate with Kellogg on creating Pop-Tarts(R) and Eggo(R) branded toasters.

On September 8, 2000, we entered into a worldwide exclusive licensing
agreement to market and distribute the "spin fryer" home appliance. This product
continues in development and we expect to introduce the first version in January
2003.

On January 12, 2001, Appliance Co. of America LLC appointed us as its
exclusive distributor in North America of Welbilt(R) small kitchen electric
appliances. In connection with the distribution agreement, we agreed to offer
China

13

Resources Electrical Appliance (Zuhai Co.) Ltd., one of our suppliers located in
the Far East and the parent company of Appliance Co. of America LLC, orders to
manufacture an aggregate of at least $200 million of small kitchen electric
appliances by the end of 2006 (with minimum offered orders of $25 million per
year). If we offer China Resources an order but fail to reach an agreement on
delivery, payment and other terms, our offered order counts against the minimum
offered orders requirement if we place the order with a third party on terms
which are more favorable to us, in our sole discretion, than those offered by
China Resources to us. In the third quarter of fiscal 2002 we elected to
discontinue use of the Welbilt(R) name after disappointing results in the first
year. We continue to purchase other products from China Resources to fulfill our
obligation.

On August 7, 2001 we acquired all of the trademarks, molds, intellectual
property, rights and patents related to the Westclox(R), Big Ben(R) and
Spartus(R) brands for $9.8 million.

On April 22, 2002, we entered into an exclusive licensing agreement with
Westinghouse Electric Corporation to use its marquis Westinghouse(R) brand name,
Circle W trademark, and the brand awareness statement "You can be sure . . . if
it's a Westinghouse(R)" on the following product categories: kitchen electrics,
fans and heaters, personal care, table top air cleaners and humidifiers, clocks
and vacuums. The agreement, which covers North America, South America, Africa,
Europe, Asia and Australia-New Zealand, has a term ending on March 31, 2008.
Upon completion of the six-year term, the agreement is renewable for additional
five year terms. We are subject to pay minimum royalty payments to Westinghouse
beginning in the third year of the agreement.

We have other licensing arrangements with various other companies to market
products bearing the trademark or likeness of the subject matter of the license.
These licenses include the right to market various products under Sasaki(R),
Timex(R) for timers, Hershey Kiss(R), Looney Tunes(TM) and Starck(R). We believe
that these other license arrangements help to demonstrate our creativity and
versatility in product design and the enhancement of existing products.

In general, our joint venture and licensing arrangements place marketing
obligations on us and require us to pay fees and royalties based upon net sales
or profits. Typically, each of these agreements may be terminated within 30 to
180 days if we do not satisfy minimum sales obligations or breach the agreement.

WARRANTIES

Our products are generally sold with a limited one-to-three year warranty
from the date of purchase. A limited number of products are sold with a lifetime
warranty. In the case of defects in material or workmanship, we agree to replace
or repair the defective product without charge.

RISK FACTORS

Prospective investors should carefully consider the following risk factors,
together with the other information contained in this annual report on Form
10-K, in evaluating us and our business before purchasing our securities. In
particular, prospective investors should note that this annual report on Form
10-K contains forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act and that actual results
could differ materially from those contemplated by such statements. See "Special
Note Regarding Forward-Looking Statements." The factors listed below represent
certain important factors which we believe could cause such results to differ.
These factors are not intended to represent a complete list of the general or
specific risks that may affect us. It should be recognized that other risks may
be significant, presently or in the future, and the risks set forth below may
affect us to a greater extent than indicated.

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR PAYMENT OBLIGATIONS.

We have a significant amount of indebtedness relative to our equity size.
As of June 29, 2002, we had total consolidated indebtedness of $460.1 million,
including $148.6 million of 12 1/4% senior subordinated notes due 2008 and
$125.0 million of 10 3/4% senior subordinated notes due 2005, excluding $8.1
million related to the fair value of a monetized fixed to floating interest rate
swap on the notes due 2008 and $18.2 million for the loan notes to Pifco
shareholders that are fully cash collateralized, and total stockholders' equity
of $245.0 million. We also had additional

14

availability under our revolving credit facility of $62.2 million. We may incur
additional indebtedness in the future, including through additional borrowings
under our amended and restated credit agreement, subject to the satisfaction of
certain financial tests.

Our ability to service our debt obligations, including the notes, and to
fund planned capital expenditures will depend upon our future operating
performance, which will be affected by prevailing economic conditions in the
markets we serve and financial, business and other factors, certain of which are
beyond our control. We cannot assure you that our business will generate
sufficient cash flow from operations or that future borrowings will be available
under our amended and restated credit agreement in an amount sufficient to
enable us to service our indebtedness, including the notes, or to fund our other
liquidity needs. We may need to refinance all or a portion of the principal of
the notes on or prior to maturity. We cannot assure you that we will be able to
effect any refinancing on commercially reasonable terms or at all.

Our high level of debt could have important consequences for you, such as:

- our debt level makes us more vulnerable to general adverse economic and
industry conditions;

- our ability to obtain additional financing for acquisitions, or to fund
future working capital, capital expenditures or other general corporate
requirements may be limited;

- we will need to use a substantial portion of our cash flow from
operations for the payment of principal of, and interest on, our
indebtedness, which will reduce the amount of money available to fund
working capital, capital expenditures or other general corporate
purposes;

- our flexibility in planning for, or reacting to, changes in our business
and the industry in which we compete may be limited; and

- our debt level may place us at a competitive disadvantage to our less
leveraged competitors.

OUR DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT COULD ADVERSELY AFFECT
OUR BUSINESS BY LIMITING OUR FLEXIBILITY.

Our amended and restated credit agreement and the indentures governing the
12 1/4% senior subordinated notes and the 10 3/4% senior subordinated notes
impose restrictions that affect, among other things, our ability to incur debt,
pay dividends, sell assets, create liens, make capital expenditures and
investments, merge or consolidate, enter into transactions with affiliates, and
otherwise enter into certain transactions outside the ordinary course of
business. Our amended and restated credit agreement also requires us to maintain
specified financial ratios, including a minimum fixed charge coverage ratio and
a maximum leverage ratio, and meet certain financial tests. Our ability to
continue to comply with these covenants and restrictions may be affected by
events beyond our control. A breach of any of these covenants or restrictions
would result in an event of default under our amended and restated credit
agreement and the indentures. Upon the occurrence of a breach, the lenders under
our amended and restated credit agreement could elect to declare all amounts
borrowed thereunder, together with accrued interest, to be due and payable,
foreclose on the assets securing our amended and restated credit agreement
and/or cease to provide additional revolving loans or letters of credit, which
could have a material adverse effect on us. A failure to comply with the
restrictions in the indentures could result in an event of default under the
indentures.

IF WE WERE TO LOSE ONE OR MORE OF OUR MAJOR CUSTOMERS, OUR FINANCIAL RESULTS
WOULD SUFFER.

Our success depends on our sales to our significant customers. Our total
net sales to our five largest customers during fiscal 2002 were approximately
43% of net sales, with Wal-Mart representing approximately 14% of our net sales
and Target Corporation representing approximately 12% of our net sales. Our
total net sales to our five largest customers during fiscal 2001 were
approximately 47% of net sales, with Wal-Mart representing approximately 12% of
our net sales and Kmart representing approximately 11% of our net sales. Except
for our supply agreements with Kmart and Zellers, we do not have long-term
agreements with our major customers, and purchases are generally made through
the use of individual purchase orders. A significant reduction in purchases by
any of these major customers or a general economic downturn in retail sales
could have a material adverse effect on our business, financial condition and
results of operations.

15

IF WE EXPERIENCE A WORK STOPPAGE AT OUR MAJOR PORTS OF ENTRY CAUSED BY A DOCK
STRIKE OUR ABILITY
TO SERVICE OUR CUSTOMERS MAY BE AFFECTED.

We purchase almost all of our product from foreign suppliers. These
products are shipped to us on ocean vessels, which land at various ports. A work
stoppage at any or all of these ports could have a material adverse impact on
our ability to obtain and deliver products to our warehouses or our customers.

IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS, OUR ABILITY TO GROW OUR
BUSINESS WILL BE LIMITED.

We believe that our future success will depend in part upon our ability to
continue to introduce innovative designs in our existing products and to
develop, manufacture and market new products. We may not successfully introduce,
market and manufacture any new products or product innovations or develop and
introduce, in a timely manner, innovations to our existing products, which
satisfy customer needs or achieve market acceptance. Our failure to develop
products and introduce them successfully and in a timely manner would harm our
ability to grow our business.

WE DEPEND HEAVILY ON OUR FOREIGN SUPPLIERS, WHICH SUBJECTS US TO THE RISKS OF
DOING BUSINESS ABROAD.

We depend upon unaffiliated foreign companies for the manufacture of most
of our products. One supplier located in China, accounted for approximately
32.5% of our product purchases during fiscal 2002 and accounted for
approximately 35.2% of our product purchases in fiscal 2001. We believe that the
loss of any one supplier would not have a long term material adverse effect on
our business because other suppliers with which we do business would be able to
increase production to fulfill our requirements however, the loss of a supplier
could, in the short term, adversely effect our business until alternative supply
arrangements are secured.

Our arrangements with our suppliers are subject to the risks of doing business
abroad, including:

- - import duties;

- - trade restrictions;

- - production delays due to unavailability of parts or components;

- - increase in transportation costs and transportation delays;

- - work stoppages;

- - foreign currency fluctuations; and

- - political and economic instability.

THE SMALL HOUSEHOLD APPLIANCE INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY.

We believe that competition is based upon several factors, including:

- - price;

- - access to retail shelf space;

- - product features and enhancements;

- - brand names;

- - new product introductions; and

- - marketing support and distribution approaches.

We compete with established companies, some of which have substantially
greater facilities, personnel, financial and other resources than we have.
Significant new competitors or increased competition from existing competitors
may adversely affect our business, financial condition and results of
operations.

16

IF THE RETAIL INDUSTRY CONTINUES TO EXPERIENCE AN ECONOMIC SLOWDOWN, OUR
FINANCIAL RESULTS WILL BE ADVERSELY AFFECTED.

We sell our products to consumers through major retail channels, primarily
mass merchandisers, department stores, specialty stores and mail order catalogs.
As a result, our business and financial results can fluctuate with the financial
condition of our retail customers and the retail industry. The current general
slowdown in the retail sector has adversely impacted our net sales of products,
our operating margins and our net income. The risks of terrorist attacks and
potential hostilities could prolong or worsen the current economic downturn. If
such conditions continue or worsen, it could have a material adverse effect on
our business, financial condition and results of operations.

The current general slowdown in the retail sector has resulted in, and we
expect it to continue to result in, additional pricing and marketing support
pressures on us.

Certain of our retail customers, including Kmart, have filed for bankruptcy
protection in recent years. Kmart represented 6% and 11% of total net sales in
fiscal 2002 and 2001, respectively. We continually monitor and evaluate the
credit status of our customers and attempt to adjust sales terms as appropriate.
Despite these efforts, a bankruptcy filing by, or other adverse change in the
financial condition of, a significant customer could adversely affect our
financial results.

ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE AND MAY DISRUPT OUR BUSINESS.

We continue to seek opportunities to acquire businesses and product lines
that fit within our acquisition strategy, including the expansion of our
international sales through the acquisition of complementary businesses. We may
not successfully identify acceptable acquisition candidates or integrate any
acquired operations. For instance, we cannot assure you that the anticipated
benefits of our recent acquisitions of Look For, a distributor located in
France, the Westclox(R), Big Ben(R) and Spartus(R) brands and Pifco Holdings PLC
(renamed Salton Europe) will be realized. Opportunities for growth through
acquisitions, future operating results and the success of acquisitions may be
subject to the effects of, and changes in, U.S. and foreign trade and monetary
policies, laws and regulations, political and economic developments, inflation
rate and tax laws.

Our acquisitions of additional businesses and product lines may require
additional capital and the consent of our lenders and may have a significant
impact on our business, financial condition and results of operations. We may
finance acquisitions with internally generated funds, bank borrowings, public
offerings or private placements of debt or equity securities, or through a
combination of these sources. This may have the effect of increasing our debt
and reducing our cash available for other purposes.

Acquisitions may also require substantial attention from, and place
substantial additional demands upon, our senior management. This may divert
senior management's attention away from our existing businesses, making it more
difficult to manage effectively. In addition, unanticipated events or
liabilities relating to these acquisitions or the failure to retain key
personnel could have a material adverse effect on our business, results of
operations and financial condition.

EXPANDING OUR INTERNATIONAL SALES WILL SUBJECT US TO ADDITIONAL BUSINESS RISKS
AND MAY CAUSE OUR PROFITABILITY TO DECLINE DUE TO INCREASED COSTS.

We intend to pursue growth opportunities internationally. Our international
sales accounted for less than 20% of our total net sales for fiscal 2002. Our
pursuit of international growth opportunities may require significant
investments for an extended period before returns on these investments, if any,
are realized. International operations are subject to a number of other risks
and potential costs, including:

- - the risk that because our brand names may not be locally recognized, we must
spend significant amounts of time and money to build a brand identity without
certainty that we will be successful;

- - unexpected changes in regulatory requirements;

- - inadequate protection of intellectual property in foreign countries;

- - foreign currency fluctuations;

- - transportation costs;

17

- - adverse tax consequences; and

- - political and economic instability.

We cannot assure you that we will not incur significant costs in addressing
these potential risks.

IF WE HAVE TO EXPEND SIGNIFICANT AMOUNTS TO REMEDIATE ENVIRONMENTAL LIABILITIES,
OUR FINANCIAL RESULTS WILL SUFFER.

Prior to January 2001, we manufactured certain of our products at our owned
plants in Laurinburg, North Carolina, Macon, Missouri, Boonville, Missouri,
Moberly, Missouri and Kirksville, Missouri. Our previous manufacturing of
products at these sites, which have been converted to warehouse and distribution
facilities, exposes us to potential liabilities for environmental damage that
these facilities may have caused or may cause nearby landowners. During the
ordinary course of our operations, we have received, and we expect that we may
in the future receive, citations or notices from governmental authorities
asserting that our facilities are not in compliance with, or require
investigation or remediation under, applicable environmental statutes and
regulations. Any citations or notices could have a material adverse effect on
our business, results of operations and financial condition.

THE SEASONAL NATURE OF OUR BUSINESS COULD ADVERSELY IMPACT OUR OPERATIONS.

Our business is highly seasonal, with operating results varying from
quarter to quarter. We have historically experienced higher sales during the
months of August through November primarily due to increased demand by customers
for our products attributable to holiday sales. This seasonality has also
resulted in additional interest expense for us during this period due to an
increased need to borrow funds to maintain sufficient working capital to finance
product purchases and customer receivables for the seasonal period. Lower sales
than expected by us during this period, a lack of availability of product, a
general economic downturn in retail sales or the inability to service additional
interest expense due to increased borrowings could have a material adverse
effect on our business, financial condition and results of operations.

LONG LEAD TIMES AND CUSTOMER DEMANDS MAY CAUSE US TO PURCHASE MORE INVENTORY
THAN NECESSARY.

Manufacturing lead times and a strong concentration of our sales occurring
during the September through December time period require that we purchase
products and thereby increase inventories based on anticipated sales and
forecasts provided by our customers and our sales personnel. In an extended
general economic slowdown we cannot assure you that our customers will order
these inventories as anticipated.

PRODUCT RECALLS OR LAWSUITS RELATING TO DEFECTIVE PRODUCTS COULD ADVERSELY
IMPACT OUR FINANCIAL RESULTS.

We face exposure to product recalls and product liability claims in the
event that our products are alleged to have manufacturing or safety defects or
to have resulted in injury or other adverse effects. We cannot assure you that
we will be able to maintain our product liability insurance on acceptable terms,
if at all, or that product liability claims will not exceed the amount of our
insurance coverage. As a result, we cannot assure you that product recalls and
product liability claims will not adversely affect our business.

THE INFRINGEMENT OR LOSS OF OUR PROPRIETARY RIGHTS COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS.

We regard our copyrights, trademarks, service marks and similar
intellectual property as important to our success. We rely on copyright and
trademark laws in the United States and other jurisdictions to protect our
proprietary rights. We seek to register our trademarks in the United States and
elsewhere. These registrations could be challenged by others or invalidated
through administrative process or litigation. If any of these rights were
infringed or invalidated, our business could be materially adversely affected.

We license various trademarks and trade names from third parties for use on
our products. These licenses generally place marketing obligations on us and
require us to pay fees and royalties based on net sales or profits. Typically,
each license may be terminated if we fail to satisfy minimum sales obligations
or if we breach the license. The termination of these licensing arrangements
could adversely affect our business, financial condition and results of
operations.

18

WE MAY BE SUBJECT TO LITIGATION AND INFRINGEMENT CLAIMS, WHICH COULD CAUSE US TO
INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING OUR PRODUCTS.

We cannot assure you that others will not claim that our proprietary or
licensed products are infringing their intellectual property rights or that we
do not in fact infringe those intellectual property rights. If someone claimed
that our proprietary or licensed products infringed their intellectual property
rights, any resulting litigation could be costly and time consuming and would
divert the attention of management and key personnel from other business issues.
We also may be subject to significant damages or an injunction against use of
our proprietary or licensed products. A successful claim of patent or other
intellectual property infringement against us could harm our financial
condition.

COMPLIANCE WITH GOVERNMENTAL REGULATIONS COULD SIGNIFICANTLY INCREASE OUR
OPERATING COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.

Most federal, state and local authorities require certification by
Underwriters Laboratory, Inc., an independent, not-for-profit corporation
engaged in the testing of products for compliance with certain public safety
standards, or other safety regulation certification prior to marketing
electrical appliances. Foreign jurisdictions also have regulatory authorities
overseeing the safety of consumer products. Our products, or additional
electrical appliances which may be developed by us, may not meet the
specifications required by these authorities. A determination that we are not in
compliance with these rules and regulations could result in the imposition of
fines or an award of damages to private litigants.

IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, OUR ABILITY TO GROW AND
DEVELOP OUR BUSINESS WILL SUFFER.

Our continued success will depend significantly on the efforts and
abilities of David C. Sabin, Chairman; Leonhard Dreimann, Chief Executive
Officer; William B. Rue, President and Chief Operating Officer and David Mulder,
Executive Vice President and Chief Administrative Officer. The loss of the
services of one or more of these individuals could have a material adverse
effect on our business. In addition, as our business develops and expands, we
believe that our future success will depend greatly on our ability to attract
and retain highly qualified and skilled personnel. We do not have, and do not
intend to obtain, key-man life insurance on our executive officers.

THE INTERESTS OF OUR SIGNIFICANT STOCKHOLDER MAY CONFLICT WITH YOUR INTERESTS.

As of June 29, 2002, Centre Partners Management LLC and entities directly
or indirectly controlled by Centre Partners beneficially owned in the aggregate
approximately 27% of our common stock. Centre Partners is able to exercise
significant influence with respect to the election of directors or major
corporate transactions such as a merger or sale of all or substantially all of
our assets. Centre Partners generally has the right to designate two directors
as long as it and its affiliates own at least 12.5% of the total voting power of
our outstanding common stock and one director as long as it and its affiliates
own at least 7.5% of the total voting power of our outstanding common stock. The
interests of Centre Partners may conflict with your interests in certain
circumstances.

TAKEOVER DEFENSE PROVISIONS WHICH WE HAVE IMPLEMENTED MAY ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.

Various provisions of Delaware corporation law and of our corporate
governance documents may inhibit changes in control not approved by our board of
directors and may have the effect of depriving stockholders of an opportunity to
receive a premium over the prevailing market price of our common stock in the
event of an attempted hostile takeover or may deter takeover attempts by third
parties. In addition, the existence of these provisions may adversely affect the
market price of our common stock. These provisions include:

- - a classified board of directors;

- - a prohibition on stockholder action through written consents;

19

- - a requirement that special meetings of stockholders be called only by the
board of directors;

- - availability of "blank check" preferred stock.

ITEM 2. Properties

A summary of our leased properties is as follows:

We own all of the facilities listed below, which we acquired in connection
with the acquisition of Pifco Holdings PLC in June 2001 and Toastmaster in
January 1999. These facilities have been pledged as collateral to secure payment
of our senior debt obligations. The following table sets forth the location and
approximate square footage of each of our significant owned facilities.

20

We believe that our facilities generally are suitable and adequate for our
current level of operations and provide sufficient capacity for our foreseeable
needs without the need for material capital expenditures.

In addition to the facilities mentioned above, we acquired 6.3 acres of
vacant land located in Manchester, England as part of our acquisition of Pifco
Holdings PLC in June 2001.

ITEM 3. Legal Proceedings

GENERAL

On January 23, 2001, we filed a lawsuit against Applica, Inc. (formerly
known as Windmere-Durable Holdings, Inc.) and its affiliate in the United States
District Court for the Northern District of Illinois. The lawsuit alleged that
Applica intentionally, willfully and maliciously breached its noncompetition
agreement with us, attempted to conceal the breach, tortuously interfered with
our business and contractual relationships and breached its duty of good faith
and fair dealing. We reached a settlement agreement with Applica, effective as
of June 21, 2002, which resulted in the following:

- - The cancellation of the obligations on our balance sheet with respect to the
promissory note which we issued to Applica in 1998, which note has a face
value of $15.0 million and a carrying value prior to the settlement of
approximately $10.8 million and an accounts payable balance of $1.3 million;

- - The termination of our obligation to pay Applica a fee based upon our net
sales of White-Westinghouse(R) products to Kmart;

- - The agreement by Applica to be responsible for the payment of any losses or
settlements relating to claims made by a former sales representative of
Salton;

- - The grant by a subsidiary of Applica to Salton of a royalty-free license to
use certain technology relating to electric toasters;

- - The payment by Salton to Applica of $1.8 million on or before December 31,
2002 and $2.0 million on or before June 30, 2004; and

- - A mutual release by the parties.

On July 2, 2001, we were served with a complaint for patent infringement
alleged by AdVantage Partners LLC in the United States District Court for the
Central District of California. In this complaint, AdVantage alleged that we and
retailers that sell our "George Foreman Jr." rotisserie grills were infringing
two of AdVantage's patents. AdVantage sought a permanent injunction against sale
of George Foreman(TM) rotisserie grills utilizing the inventions claimed by
those patents and unspecified monetary damages including a request for treble
damages.

On August 9, 2001, AdVantage Partners LLC filed a second complaint against
us for patent infringement in the United States District Court for the Central
District of California. In this complaint, AdVantage alleged that we have
infringed a patent assigned to AdVantage, and sought a permanent injunction
against our sale of the "Baby George Foreman" rotisserie grill, which
purportedly utilizes an invention claimed by that patent, and unspecified
monetary damages including a request for treble damages. The patent relates to a
gear driven spit assembly for rotisserie ovens.

In the first quarter of fiscal 2003, we settled the aforementioned patent
infringement litigations as well as those suits involving some of our retail
customers. The resolution provides us with the right to distribute and sell
certain rotisserie products, including our current versions of the George Jr.
and Baby George Rotisseries, and retailers the right to resell those products,
without fear of future patent litigation. The resolution also preserves to
Popeil Inventions Inc. the exclusive license in countertop rotisseries to the
rotisserie patents developed by Ron Popeil.

On May 6, 2002, Philips Oral Healthcare, Inc. ("Philips") filed suit
against us in the federal court of the Western District of Washington. In its
Complaint, Philips challenges various advertising claims made by us about the
Ultrasonex(TM) electric toothbrush. Philips alleges causes of action for false
advertising and seeks to enjoin us from using various claims in its advertising
of the product.

21

On August 28, 2002, the Court entered an order granting Philips' motion for
preliminary injunction. As a result of this order, we are preliminarily enjoined
from airing two commercials or developing new advertising for the Ultrasonex(TM)
using one of the specific advertising claims at issue. The preliminary order
does not enjoin the sale of the toothbrush or require that we modify the
product's packaging in any way. Under the current scheduling order, a trial on
the merits is scheduled for October 2003.

On September 5, 2002, we entered into an agreement with the Attorney
Generals of New York and Illinois governing our future conduct with retailer
relating to our indoor electric grills. We expect all, or nearly all, other
states will join this agreement. This agreement provides for us to make a
payment of $1.2 million upon final approval of the agreement and two additional
payments of $3.5 million each on March 1, 2003 and 2004, respectively. All of
our payments are contingent on states representing at least 80% of the national
population entering into the settlement agreement.

We are a party to various other actions and proceedings incident to our
normal business operations. We believe that the outcome of any litigation will
not have a material adverse effect on our business, financial condition or
results of operations. We also have product liability and general liability
insurance policies in amounts we believe to be reasonable given our current
level of business. Although historically we have not had to pay any material
product liability claims, it is conceivable that we could incur claims for which
we are not insured.

ENVIRONMENTAL

We are participating in environmental remediation activities at four sites,
which we own or operate. As of June 29, 2002, we have accrued approximately $0.2
million for the anticipated costs of investigation, remediation and/or operation
and maintenance costs at these sites. Although the costs could exceed that
amount, we believe that any excess will not have a material adverse effect on
our financial condition or results of operations.

ITEM 4. Submission Of Matters To Vote Of Security Holders

(a) Not applicable

(b) Not applicable

(c) Not applicable

(d) Not applicable

22

PART II

ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters

The registrant's common stock has traded on the New York Stock Exchange
under the symbol "SFP" since February 26, 1999. From October 1991 until February
25, 1999, our common stock traded on the Nasdaq National Market under the symbol
"SALT". The following table sets forth, for the periods indicated, the high and
low sales prices for the common stock as reported on the New York Stock Exchange
adjusted for the three-for-two stock split effected on July 28, 1999.

We have not paid dividends on our common stock and we do not anticipate
paying dividends in the foreseeable future. We intend to retain future earnings,
if any, to finance the expansion of our operations and for general corporate
purposes, including future acquisitions. We are also prohibited from declaring
or paying cash dividends on our capital stock under our terms of our credit
agreement and senior subordinated notes. As of September 20, 2002 there were
approximately 337 holders of record of our common stock.

PREFERRED STOCK

We have 40,000 outstanding shares of the convertible preferred stock. The
convertible preferred stock is non-dividend bearing except if we breach, in any
material respect, any of our material obligations in the preferred stock
agreement or the certificate of incorporation relating to the convertible
preferred stock, the holders of convertible preferred stock are entitled to
receive quarterly cash dividends on each share of convertible preferred stock
from the date of such breach until it is cured at a rate per annum equal to 12
1/2% of the Liquidation Preference (as defined below). The payment of dividends
is limited by the terms of our credit agreement.

Each holder of the convertible preferred stock is generally entitled to one
vote for each share of Salton common stock which such holder could receive upon
the conversion of the convertible preferred stock. Each share of convertible
preferred stock is convertible at any time into that number of shares of Salton
common stock obtained by dividing $1,000 by the Conversion Price in effect at
the time of conversion. The "Conversion Price" is equal to $11.33, subject to
certain anti-dilution adjustments.

In the event of a Change of Control (as defined), each holder of shares of
convertible preferred stock has the right to require us to redeem such shares at
a redemption price equal to the Liquidation Preference plus an amount equivalent
to interest accrued thereon at a rate of 7% per annum compounded annually on
each anniversary date of July 28, 1998 for the period from July 28, 1998 through
the earlier of the date of such redemption or July 28, 2003.

23

In the event of a liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, holders of the Convertible Preferred Stock are
entitled to be paid out of the assets of the Company available for distribution
to its stockholders an amount in cash equal to $1,000 per share, plus the amount
of any accrued and unpaid dividends thereon (the "Liquidation Preference"),
before any distribution is made to the holders of any Salton common stock or any
other of our capital stock ranking junior as to liquidation rights to the
convertible preferred stock.

We may optionally convert in whole or in part, the convertible preferred
stock at any time on and after July 15, 2003 at a cash price per share of 100%
of the then effective Liquidation Preference per share, if the daily closing
price per share of our common stock for a specified 20 consecutive trading day
period is greater than or equal to 200% of the then current Conversion Price. On
September 15, 2008, we will be required to exchange all outstanding shares of
convertible preferred stock at a price equal to the Liquidation Performance per
share, payable at the Company's option in cash or shares of Salton common stock.

As of September 20, 2002 there were 40,000 shares of the convertible
preferred stock outstanding, held by 7 shareholders of record. There is no
established market for the convertible preferred stock.

ITEM 6. Selected Financial Data

The following selected historical financial data as of and for the fiscal
years ended June 29, 2002, June 30, 2001, July 1, 2000, June 26, 1999 and June
27, 1998 have been derived from, and should be read in conjunction with, our
audited consolidated financial statements, including the notes thereto. All of
the following information is qualified in its entirety by, and should be read in
conjunction with our audited consolidated financial statements, including the
notes thereto.

24

- ---------------
(1) Excluding $18.2 million in fiscal 2002 and $11.3 million in fiscal 2001
related to the loan notes to Pifco shareholders which were fully cash
collateralized and excluding $8.1 million in fiscal 2002 and $(0.5) million
in fiscal 2001 related to the fair value of a monetized fixed to floating
interest rate swap on the notes due 2008.

ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results
of Operations

This Management's Discussion and Analysis of Financial Condition and
Results of Operations may be deemed to include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risk and uncertainty. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our expectations will be
achieved. The important factors that could cause actual results to differ
materially from those in the forward-looking statements herein (the "Cautionary
Statements") include, without limitation: our degree of leverage; economic
conditions and the retail environment; the timely development, introduction and
customer acceptance of our products; competitive products and pricing;
dependence on foreign suppliers and supply and manufacturing constraints; our
relationship and contractual arrangements with key customers, suppliers and
licensors; cancellation or reduction of orders; international business
activities; the risks relating to legal proceedings, the risks relating to
intellectual property rights; the risks relating to regulatory matters, as well
as other risks referenced from time to time in our filings with the commission.
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. We do not

25

undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

OVERVIEW

We are a leading domestic designer, marketer and distributor of a broad
range of branded, high quality small appliances under well-recognized brand
names such as Salton(R), George Foreman(TM), Toastmaster(R), Breadman(R),
Juiceman(R), Juicelady(R), White-Westinghouse(R), Westinghouse(R),
Farberware(R), Melitta(R), Russell Hobbs(R), Tower(R), Haden(R) and Pifco(R). We
believe that we have the leading domestic market share in indoor grills,
toasters, juice extractors, bread makers, griddles, waffle makers and buffet
ranges/hotplates and a significant market share in other product categories. We
outsource most of our production to independent manufacturers, primarily in the
Far East. We also design and market tabletop products, time products, lighting
products and personal care and wellness products under brand names such as Block
China(R), Atlantis(R) Crystal, Sasaki(R), Calvin Klein(R), Timex(R) timers,
Ingraham(R), Westclox(R), Big Ben(R), Spartus(R), Stiffel(R), Ultrasonex(TM),
Relaxor(R), Carmen(R), Hi-Tech(R), Mountain Breeze(R) and Salton(R).

We predominantly sell our products to mass merchandisers, department
stores, specialty stores and mail order catalogs. We also sell certain of our
products directly to consumers through infomercials and our Internet website. We
market and sell our products primarily in the United States and Europe through
our own sales force and a network of independent commissioned sales
representatives.

The general slowdown in the retail sector, which began during our second
fiscal quarter of 2001, has continued to have an adverse effect on our sales,
operating profit and net income. We continue to experience a shift in our
customers' buying patterns from higher-priced products to lower price point
promotional products. Although this was somewhat abated in the fourth quarter of
fiscal 2002 we are unsure of the longer term pattern of purchases of our
customers. Our wide range of products at different price points has allowed us
to adapt to this shift in buying patterns. This shift to lower priced products
also lowered gross margins as opening and mid-price point products generally
have lower gross margins than our higher price point products. Also, we have had
to spend additional promotion and advertising dollars to maintain our market
presence. Our products, and our market leading position in so many categories,
gives us a solid foundation to actively face the difficult economic environment.

The results for the fiscal year 2002 include pre-tax charges of $2.6
million related to three legal settlements discussed below, $5.3 million in
reserve increases related to certain trade and royalty receivables, and $6.8
million associated with exiting certain product lines. These lines include
cookware and large outdoor gas grills. The results for fiscal 2001 include
pre-tax charges of $8.2 million related to inventory losses, $5.1 million in
LIFO charges, and $2.0 million related to the bankruptcy of Ames Department
Stores.

As a result of complaints from a few retailers concerning our allocation in
1998 and 1999 of certain George Foreman(TM) grills, we have entered into an
agreement with the Attorney Generals of New York and Illinois governing our
future conduct with retailers relating to our indoor electric grills. We expect
all, or nearly all, of the other states to join in this agreement.

Although we believe that we acted in compliance with longstanding antitrust
principles, we entered into this agreement to resolve this matter without the
distractions and costs of a lengthy investigation and likely litigation.

The agreement with the Attorney Generals provides for us to make a payment
of $1.2 million upon final approval of the agreement and two additional payments
of $3.5 million each on March 1, 2003 and 2004, respectively. All of these
payments are contingent on States representing at least 80% of the national
population entering into the settlement agreement.

We also entered into a settlement agreement with Applica, Inc. to settle
all outstanding claims against each other. The principal features of the
settlement are:

- - The cancellation of the obligations on our balance sheet with respect to the
promissory note which we issued to Applica in 1998, which note has a face
value of $15.0 million and a carrying value prior to the settlement of
approximately $10.8 million and an accounts payable balance of $1.3 million;

26

- - The termination of our obligation to pay Applica a fee based upon our net
sales of White-Westinghouse(R) products to Kmart;

- - The agreement by Applica to be responsible for the payment of any losses or
settlements relating to claims made by a former sales representative of
Salton;

- - The grant by a subsidiary of Applica to Salton of a royalty-free license to
use certain technology relating to electric toasters;

- - The payment by Salton to Applica of $1.8 million on or before December 31,
2002 and $2.0 million on or before June 30, 2004; and

- - A mutual release by the parties.

We also settled the litigation brought by AdVantage Partners, the licensee
of Popeil Inventions. AdVantage Partners claimed that our Foreman(TM) rotisserie
ovens infringed certain patents held by AdVantage. The settlement we entered
into entitles Salton and all of our retail customers to sell the rotisserie
ovens without fear of future litigation and effectively grants to us the right
to use all of the patents on rotisserie ovens held by AdVantage Partners.

In April 2002, we announced we had signed an exclusive licensing agreement
with Westinghouse Electric Corporation to use its Westinghouse(R) brand name,
Circle W trademark, and the brand awareness statement "You can be sure . . . if
it's Westinghouse(R)" on certain product categories in North America, South
America, Africa, Europe, Asia, and Australia-New Zealand.

The agreement commenced immediately and will last six years, ending on
March 31, 2008. Upon completion of the six-year term, the agreement will be
renewable for an additional five 5-year terms. Under the agreement, no initial
capital investment is required from Salton. We are subject to minimum royalty
payments to Westinghouse beginning in the third year of the agreement. The terms
of the agreement give Salton the exclusive right to use the Westinghouse brand
name and its trademarks on the following product categories: kitchen electrics,
fans and heaters, personal care, table top air cleaners and humidifiers, clocks,
and vacuums.

We intend to launch a new line of Westinghouse(R) branded innovative vacuum
cleaners. The launch includes a series of innovative, technologically advanced
vacuums under the Westinghouse(R) brand and will feature a wireless upright
vacuum cleaner. This product will be bagless, eliminate the need for a cord
while vacuuming, and provide comparable suction power to a corded vacuum
cleaner. We also plan to introduce two corded upright vacuum cleaners that
feature bagless technology and HEPA filtration.

Additionally, we announced the introduction of a new line of smart,
networked home appliances, under the Westinghouse(R) brand, that will interface
with the internet via a information center called a gateway device designed by
Salton and powered by Microsoft Windows CE .NET. The new line of products will
include the gateway device, breadmakers, convection ovens, and coffee makers,
among other planned future products. Initial shipments of these products are
expected to occur in calendar year 2003.

In March 2002, we announced the acquisition by Salton Europe of the Look
For Group in France. Look For is a distributor of small electric appliances in
mainland Europe, primarily France, under the brand names Suntai(R), Orgalys(R)
and Orva(R) brands. Look For also distributes Russell Hobbs(R) for Salton Europe
in its existing markets. For the year ended December 31, 2001, Look For recorded
annual sales of approximately US$10 million.

In March 2002, we announced the appointment of David M. Mulder to the newly
created position of Executive Vice President and Chief Administrative Officer.
Mr. Mulder is responsible for overseeing corporate finance, U.S. operations,
U.S. information technology and U.S. human resources.

In August 2001, we announced the acquisition of the Westclox(R), Big Ben(R)
and Spartus(R) brands from the bankrupt General Time Corporation, until recently
the largest producer and marketer of alarm, wall and occasional clocks in North
America. Under the terms of the acquisition, we agreed to purchase all of the
trademarks, molds, intellectual property, rights and patents related to these
select brands for $9.8 million. In addition, we agreed to purchase certain
inventory related to these brands held in the U.S., Europe and Canada.

27

In August 2001, we appointed Martin Burns to oversee the operations of
Salton Europe (formerly Pifco Holdings PLC). Martin most recently served as
Managing Director of Morphy Richards at the Glen Dimplex Group, a manufacturer
of electrical heating and small kitchen appliances in the United Kingdom.

On July 9, 2001, we announced the appointment of Dr. Bruce J. Walker to our
Board of Directors, increasing the board to eight members. Dr. Walker currently
serves as Dean and Professor of Marketing at the College of Business at the
University of Missouri-Columbia.

On June 4, 2001, we acquired Pifco Holdings PLC, a United Kingdom based
producer and marketer of a broad range of branded kitchen and small appliances,
personal care and wellness products, cookware and battery operated products. Our
operating results for fiscal 2001 include the operating results of Pifco from
June 1, 2001 through June 30, 2001. In fiscal 2002 we renamed Pifco Holdings PLC
to Salton Europe Ltd.

On January 7, 1999, we acquired Toastmaster, a Columbia, Missouri based
marketer of kitchen and small appliances and time products. Through Toastmaster,
we design, market and service a wide array of kitchen and small appliances and
time products under the brand names Toastmaster(R) and Ingraham(R). Our
operating results for fiscal 1999 include the operating results of Toastmaster
from our acquisition date of January 7, 1999.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States, 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, inventory reserves and
intangible assets. 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.

The following critical accounting policies affect the most significant
estimates used in the preparation of our consolidated financial statements:

Allowance for Doubtful Accounts. We record allowances for estimated losses
resulting from the inability of our customers to make required payments. We
assess the credit worthiness of our customers based on multiple sources of
information and analyze such factors as our historical bad debt experiences,
publicly available information regarding our customers and the inherent credit
risk related to them, information from subscription based credit reporting
companies, trade association data and reports, current economic trends and
changes in customer payment terms or payment patterns. This assessment requires
significant judgment. If the financial condition of our customers were to
worsen, additional write-offs may be required, resulting in write-offs that are
not included in the allowance for doubtful accounts at June 29, 2002.

Inventory Valuation. Our inventories are generally determined using the
last-in, first-out (LIFO) cost method. We value our inventory at the lower of
cost or market, and regularly review the book value of discontinued product
lines and stock keeping units (SKUs) to determine if these items are properly
valued. If market value is less than cost, we write down the related inventory
to the lower of market or net realizable value. We regularly evaluate the
composition of our inventory to determine slow-moving and obsolete inventories
to determine if additional write-offs are required. Changes in consumer
purchasing patterns, however, could result in the need for additional
write-offs.

Commitments and Contingencies: We are subject to lawsuits and other claims
related to product and other matters that are being defended and handled in the
ordinary course of business. We maintain reserves and or accruals for such costs
that may be incurred, which are determined on a case-by-case basis, taking into
consideration the likelihood of adverse judgments or outcomes, as well as the
potential range of probable loss. The reserves and accruals are monitored on an
ongoing basis and are updated for new developments or new information as
appropriate.

Intangible Assets. We record intangible assets when we acquire other
companies. The cost of acquisition is allocated to the assets and liabilities
acquired, including identifiable intangible assets, with the remaining amount
being classified as goodwill. Under current accounting guidelines that became
effective on July 1, 2001, goodwill arising from transactions occurring after
July 1, 2001 and any existing goodwill as of February 1, 2002 are not

28

amortized to expense but rather periodically assessed for impairment. Intangible
assets that have an indefinite life are also periodically assessed for
impairment.

The allocation of the acquisition cost to intangible assets and goodwill
therefore has a significant impact on our future operating results. The
allocation process requires the extensive use of estimates and assumptions,
including estimates of future cash flows expected to be generated by the
acquired assets. Independent valuation consultants are employed by us to assist
in determining if and when intangible assets might be impaired. Further, when
impairment indicators are identified with respect to previously recorded
intangible assets, the values of the assets are determined using discounted
future cash flow techniques, which are based on estimated future operating
results. Significant management judgment is required in the forecasting of
future operating results which are used in the preparation of projected
discounted cash flows and should different conditions prevail, material write
downs of net intangible assets and/or goodwill could occur.

In fiscal 2003, Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets became effective and, as a result, we will
cease to amortize approximately $30 million of goodwill as well as, $180.3
million of intangible assets with indefinite lives. In lieu of amortization, we
are required to perform at least an initial impairment review of goodwill and
other intangible assets with indefinite lives in fiscal 2003 and an annual
impairment review thereafter. We periodically review the estimated remaining
useful lives of our intangible assets. A reduction in our estimate of remaining
useful lives, if any, could result in increased amortization expense in future
periods.

RESULTS OF OPERATIONS

The following table sets forth our results of operations as a percentage of
net sales for the periods indicated: