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UNITED STATES
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 DECEMBER 31, 2003
|- |  | --------------------------------------------------------------------------------------------------------------------------------

OR



|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------

Commission File Number 1-10177

APPLICA INCORPORATED




(Exact name of Registrant as specified in its charter)


|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Florida                                                        |  | 59-1028301                             
|                                                               |  |                                        
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

|                                             |  |           
|-------------------------------------------- |  | ----------
|5980 Miami Lakes Drive, Miami Lakes, Florida |  | 33014     
|                                             |  |           
|(Address of principal executive offices)     |  | (Zip Code)

Registrants telephone number, including area code: (305) 362-2611

Securities registered pursuant to Section 12(b) of the Act:

|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of Each Class           |  | Name of Each Exchange On Which Registered
|                              |  |                                          
|Common Stock, $0.10 par value |  | New York Stock Exchange                  

Indicate by check mark whether the 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. Yes x No o

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. x

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o

As of June 30, 2003, the aggregate market value of the voting stock (based
on the closing price as reported by NYSE of $8.50) held by non-affiliates of
the Registrant was approximately $170.5 million (based on reported ownership of
all directors and executive officers of the Registrant). This determination
does not, however, constitute an admission of affiliated status for any of
these individual shareholders.

As of
March 11, 2004, there were 23,778,074 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrants Definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K
pursuant to General Instruction G(3) of the Form 10-K. Information from such
Definitive Proxy Statement will be incorporated by reference into Part III,
Items 10, 11, 12, 13 and 14 hereof.





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TABLE OF CONTENTS



|                                                   |                                                                                                                    |  |  |  |  |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. Business                                                                                                  
|                                                   | Item 2. Properties                                                                                                
|                                                   | Item 3. Legal Proceedings                                                                                         
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                                       
|PART II                                           
|                                                   | Item 5. Market for the Registrants Common Stock and Related Stockholder                      Matters             
|                                                   | Item 6. Selected Financial Data                                                                                   
|                                                   | Item 7. Managements Discussion and Analysis of Financial Condition and                      Results of Operations
|                                                   | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                               
|                                                   | Item 8. Financial Statements and Supplementary Data                                                               
|                                                   | Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure                      
|                                                   | Item 9A. Controls and Procedures                                                                                  
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Registrant                                                       
|                                                   | Item 11. Executive Compensation                                                                                   
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management                                           
|                                                   | Item 13. Certain Relationships and Related Transactions                                                           
|                                                   | Item 14. Principal Accounting Fees and Services                                                                   
|                                                   | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                                          
|Signatures                                        
|INDEX TO FINANCIAL STATEMENTS                     
|REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
|CONSOLIDATED BALANCE SHEETS                       
|CONSOLIDATED STATEMENTS OF OPERATIONS             
|CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY    
|CONSOLIDATED STATEMENTS OF CASH FLOWS             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|EX-21 Subsidiaries                                
|EX-23 Consent of Grant Thornton LLP               
|Consent of Kaufman, Rossin & Co.                  
|EX-31.1 Section 302 CEO Certification             
|EX-31.2 Section 302 CFO Certification             
|EX-32.1 Section 906 CEO Certification             
|EX-32.2 Section 906 CFO Certification             



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As used in this Annual Report on Form 10-K, we, our, us, the
Company and Applica refer to Applica Incorporated and its subsidiaries,
unless the context otherwise requires.

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. Such statements are indicated by words or phrases such as
anticipates, projects, management believes, Applica believes,
intends, expects, and similar words or phrases. Such forward-looking
statements are subject to certain risks, uncertainties or assumptions and may
be affected by certain other factors, including the specific factors set forth
in Item 1. Business  Risk Factors below. Should one or more of these risks,
uncertainties or other factors materialize, or should underlying assumptions
prove incorrect, actual results, performance, or achievements of Applica may
vary materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. All subsequent written and oral
forward-looking statements attributable to Applica or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
in this paragraph. Applica disclaims any intention or obligation to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.




PART I




Item 1. Business

Overview

Applica Incorporated is a Florida corporation that was incorporated in
1963. Applica is a marketer, distributor and manufacturer of a broad range of
branded and private-label small household appliances. Applica markets,
distributes and manufactures kitchen products, home products, pest control
products, pet care products and personal care products. Applica markets
products under licensed brand names, such as Black & Decker®, its own brand
names, such as Windmere®, LitterMaid® and Applica®, and other
private-label brand names. Applicas customers include mass merchandisers,
specialty retailers and appliance distributors primarily in North America,
Latin America and the Caribbean.

We operate manufacturing facilities in China and Mexico. In 2003,
approximately 63% of the products sold by Applica were manufactured at our
facilities. In addition, we manufacture products for other consumer product
companies, which we refer to as contract manufacturing.

Applicas manufacturing operations are conducted by two wholly owned
subsidiaries: Applica Durable Manufacturing Limited in China and Applica
Manufacturing, S. de R.L. de C.V. in Mexico. The distribution, sales, and
marketing operations are primarily handled through our U.S. operating
subsidiary, Applica Consumer Products, Inc. Applica also has separate entities
or branch offices providing distribution, sales and marketing operations in
Canada, Puerto Rico, Mexico, Chile, Argentina, Venezuela, Peru, Colombia and
Costa Rica.

We have one business segment for financial reporting purposes. See Note
L Business Segment and Geographic Area Information to the Consolidated
Financial Statements included in Schedule I to this Annual Report on Form 10-K
for information regarding geographic area data.

Business Strategy

We have combined top brand names with a reputation for quality, durability
and innovation. We expect to achieve growth and increase profitability by
pursuing the following strategies:

Introduce new products and further develop our brands.New products allow
us to generate higher margins based on their uniqueness and desirability in the
marketplace. We intend to drive revenues through innovation within our core
appliance categories, using new applications of existing technologies and new
marketing platforms. We also intend to create new categories or grow
categories in which there are smaller and more fragmented competitors through
distinctive products and brand development. Product development is being
driven by our application of existing technologies and investment in strategic
development alliances. Brand development takes its form in integrated
packaging and communication materials, as well as national advertising that is
intended to generate direct sales while also creating increased consumer demand
for our products at retail. Advertising investments in these new products
drive both broader distribution and higher sales at our retail customers.

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Additionally, as part of our focus on new products introductions and brand
development, we are searching for other growth opportunities within and beyond
our existing businesses. We believe that the markets and industry in which we
compete may provide growth opportunities through strategic acquisitions.

Capitalize on consumable goods that work with our products. We are
employing a consumables strategy to key product initiatives, which allows us to
gain recurring revenue through sales of a consumable component to be used with
our appliance. This strategy is best represented through initiatives such as
Littermaid® branded clumping litter and waste receptacles for the
Littermaid® Self-Cleaning Litter Box and replacement vacuum food storage bags
for the Freshguard Vacuum Sealer. Each of these consumables provides a
recurring revenue stream and an ongoing connection with the consumer. We have
applied this strategy to the projects resulting from our development
relationship with The Procter & Gamble Company. The new Tide Buzz Ultrasonic
Stain Removal System involves a consumable component, the Tide Buzz
Ultrasonic Cleaning Fluid, from which Applica will gain recurring revenues.

Create long-term cost and quality advantages for our customers. We will
maintain a value chain for our customer that meets their cost and quality
objectives by leveraging our manufacturing facilities with our growing
competency in strategic sourcing. We will accomplish this by ensuring that our
manufacturing plants in China and Mexico remain competitive through continuous
improvement and competitive benchmarking. Additionally, we will leverage our
global sourcing and procurement efforts to partner with suppliers who have also
committed to our continuous improvement philosophy. This relationship will
allow us to fully capitalize on our combined strengths, provide a foundation
for new product development, deliver quality consistent with the reputation of
our brands and deliver at costs that are competitive in our industry.

Optimize our supply chain.We recognize that our retail customers are our
most critical link to the consumer. We will continue to refine our supply
chain management, improving our operations across all key functional areas,
including customer service. Our goal is to continue to be a preferred
supplier to our retail customers. We will also continue to upgrade our
consumer service capabilities and improve our relationship with the consumer.

Products

Applica primarily manufactures and distributes five categories of
products: kitchen products, home products, personal care products, pet products
and pest control products. Applica also engages in contract manufacturing for
other companies. The following table sets forth the approximate amounts and
percentages of Applicas consolidated net sales by product category during the
periods shown:

|                           |  |           |         |      |  |           |    |   |  |                        |         |   |  |  |    |   |  |   |         |  |  |  |    |  
|-------------------------- |  | --------- | ------- | ---- |  | --------- | -- | - |  | ---------------------- | ------- | - |  |  | -- | - |  | - | ------- |  |  |  | -- | -
|                           |  | 2003      |         | 2002 |  | 2001      |    |   |  |                       
|                           |  |           |         |      |  |           |    |   |  |                       
|                           |  |           |         |      |  |           |    |   |  | (Dollars in thousands) |         |   |  |  |    |   |  |  
|                           |  | Net Sales |         | %    |  | Net Sales |    | % |  | Net Sales              |         | % |  | 
|                           |  |           |         |      |  |           |    |   |  |                        |         |   | 
|Kitchen Products (1)       |  | $         | 352,783 |      |  |           | 55 | % |  | $                      | 353,271 |   |  |  | 49 | % |  | $ | 367,414 |  |  |  | 51 | %
|Home Products              |  |           | 135,718 |      |  |           | 21 | % |  |                        | 161,178 |   |  |  | 22 | % |  |   | 171,937 |  |  |  | 24 | %
|Personal Care Products (1) |  |           | 68,993  |      |  |           | 11 | % |  |                        | 68,570  |   |  |  | 9  | % |  |   | 65,254  |  |  |  | 9  | %
|Pet Products               |  |           | 34,289  |      |  |           | 5  | % |  |                        | 35,855  |   |  |  | 5  | % |  |   | 32,541  |  |  |  | 4  | %
|Pest Control Products      |  |           | 17,095  |      |  |           | 3  | % |  |                        | 15,869  |   |  |  | 2  | % |  |   |        |  |  |  |   |  
|Contract Manufacturing     |  |           | 28,246  |      |  |           | 4  | % |  |                        | 79,242  |   |  |  | 11 | % |  |   | 61,450  |  |  |  | 8  | %
|Other Products (1)         |  |           | 3,515   |      |  |           | 1  | % |  |                        | 13,371  |   |  |  | 2  | % |  |   | 28,448  |  |  |  | 4  | %



---

|(1) |  | Includes certain kitchen and retail personal care sales that Applica
transitioned out of in 2001.
|--- |  | -------------------------------------------------------------------------------------------------

The kitchen products group includes cooking, beverage and food preparation
products and constitutes our largest product category. Applica provides
customers with a broad product line in the small kitchen appliances market,
primarily at mid-tier price points. Our products in this category include
toaster ovens, toasters, blenders, can openers, coffee grinders, coffee makers,
electric knives, skillets, griddles, waffle makers, deep fryers, food choppers,
food processors, mixers, rice cookers and steamers, sandwich makers and other
similar products. This category also includes the new Black & Decker® single
cup coffee maker that is a part of the Home Café brewing system developed with
The Procter & Gamble Company. This product will be launched in the second
quarter of 2004.

The home products group includes garment care products, such as hand-held
irons, and home environment products, such as fans and heaters. Under
Applica, Black & Decker® branded irons continue to be a leader in the

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category through design innovations. Additionally, in the second quarter
of 2004, Applica will launch the new Tide Buzz Ultrasonic Stain
Remover, which features a combination of a specially formulated Tide
Buzz Ultrasonic Cleaning Fluid and a Black & Decker® branded stain
removal appliance. This stain removal system was developed with The Procter &
Gamble Company. In 2001, Applica entered the mid-price point segment of the
home environment market by launching a full array of ceramic heaters, heater
fans and utility fans under the Black & Decker® brand. In addition, in
January 2002, we launched a line of fans under the Black & Decker® brand. We
will continue to focus our home environment products on the mid-price point
market by expanding the Black & Decker® brand into additional areas of the
home environment category. We also distribute vacuum cleaners under the Black &
Decker® brand in Latin America.

The personal care group focuses mainly on professional product lines
marketed under the Belson® brand and other private label brands, and includes
hair dryers, curling irons, curling brushes, hairsetters, combs and brushes,
shears and mirrors. The products are sold primarily to beauty distributors and
beauty supply stores, which in turn sell the products to beauty salons and
professional hair stylists. Applica also supplies electric and non-electric
amenities to the lodging industry under the Jerdon® and First Class®
brands. These products include wall-mounted hair dryers, lighted makeup and
shaving mirrors, pulsating shower heads, coffee makers and other similar
products.

The pet products group features the LitterMaid® patented self-cleaning
cat litter box. This innovative product is supported throughout the U.S.
marketplace at retailers like Wal-Mart, Target and PetsMart. LitterMaid® is
driven by a strong national TV advertising campaign and has recently undergone
a major packaging update in order to better communicate the lifestyle benefits
of the product. The LitterMaid® product delivers a recurring revenue stream
from consumable accessories, including waste receptacles and LitterMaid®
branded litter.

Applicas pest control products group includes pest control and repelling
devices that use ultra-sonic or sub-sonic sound waves and chemical lures or
repellants to control insects and rodents in homes, yards and businesses. The
core of the business is its ultrasonic direct plug-in pest repellers, a result
of the Weitech, Inc. acquisition in May 2002. The category is expected to
expand and grow in the first quarter of 2004 as we launch a line of ultrasonic
pest repellers under the Black & Decker® brand. Another area of focus is in
mosquito control products aimed at trapping or repelling the biting pests. Two
such products are the SonicWeb® and Mosquito Halo.

Our Chinese manufacturing facility also serves as a contract manufacturer
for a range of small appliances, including air cleaners, oral care products and
pool cleaners, which it sells to small appliance companies primarily in the
United States. In late 2002, we de-emphasized production of products for
customers which would be in direct competition with products produced for sale
under our brands and are now focusing efforts on the development of projects
that are complimentary in nature. This shift resulted in a significant
decrease in contract manufacturing sales for 2003.

Product Development

As part of our ongoing strategy to deliver new, innovative and relevant
products to the consumer marketplace, we adhere to a well-defined product
development process focused on quality design, appropriate performance
characteristics, and speed-to-market. We have a product development team
dedicated to creating innovative products in and outside of our core
categories. This internal process also helps manage the improvement of
quality, performance and cost of existing products.

We also 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 marketplace requirements and changing consumer preferences.
We design the style, features and functionality of our products to meet
customer requirements for quality, performance, product mix and pricing.

New products are those that require a new mold, have a new feature or
benefit, or those that have not been in our product line previously. Adding
features or providing a fresh look to existing products, either through
design upgrades or creative packaging, is a necessity for maintaining consumer
preferences, protecting existing retailer shelf space and maintaining
acceptable price points. Applica launched over 50 new products in 2003 and 200
new products in 2002, most of which were refreshes. Some of the new products
launched in 2003 include the Lids-
Off Jar Opener, the Freshguard vacuum sealer and accessories, and the
Gizmo Grater. New consumer products constituted 20% of our sales in 2003
and 18% of the sales in 2002.

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Brands

Applica
licenses the Black & Decker® brand for use in marketing small
household appliances in North America, Latin America (excluding Brazil) and the
Caribbean. In addition, Applica owns certain sub-brands, including Toast R
Oven, ProFinish and Quick N Easy, and licenses Spacemaker for under the
cabinet kitchen appliances. Applica continues to develop new sub-brands for
product differentiation at the retail level, including Gizmo,
Freshguard, SmartBrew, Prestige, Chill Buster and Silent
Force. Further, Applica has licenses from The Procter & Gamble Company to
use the Tide® brand in all countries in the Western Hemisphere for the
specially formulated Tide Ultrasonic Cleaning Fluid and the Home Cafe
brand worldwide for the Black & Decker® single cup brewing machine.

The major portion of Applicas revenue is generated through the sale of
Black & Decker® branded products, which represented approximately 70% and 62%
of Applicas total consolidated revenue in 2003 and 2002, respectively. The
Black & Decker® brand has significant market share in the toaster oven,
coffee maker and hand-held iron categories, as well as in can openers, hand
mixers, food steamers, electric knives, food choppers and citrus juicers.

The personal care category is targeted specifically at the salon segment
under the Belson® brand and other private label programs. In addition,
Applica also sells appliances and personal care products that are targeted to
the hotel and hospitality industry through the distribution of the Jerdon®
and First Class® brands of products.

Applica also manufactures and markets several products under the
LitterMaid® brand. The flagship LitterMaid® branded product is the
patented self-cleaning cat litter box. We have also introduced other products
under this brand, including accessories.

Applica also has, and from time to time will enter into, licenses and
other agreements that grant it the right to use other trademarks and trade
names.

Strategic Alliances

Applica continues to pursue strategic alliances to further differentiate
our products and to accelerate our growth. Such alliances may include brand
development and product development alliances. Our current alliance with The
Black & Decker Corporation encompasses brand development. Applica has worked
closely with The Black & Decker Corporation to ensure that the Black &
Decker® brand representation is seamless to the consumer.

Additionally, Applica has entered into a joint product development
relationship with The Procter & Gamble Company to develop, market, manufacture
and distribute new products. We have developed two products and are in the
process of reviewing other opportunities for joint product development with
Procter & Gamble in household appliance categories. This relationship has
initially been targeted to the Black & Decker® brand, but may be expanded to
new brands and wider categories. As part of this relationship, we have
developed two products: the Tide Buzz Ultrasonic Stain Remover and the
Home Café single-cup coffee maker. We anticipate that these products will be
launched in the second quarter of 2004.

Both of these products provide the opportunity for recurring revenues
through a consumable component. For the Tide Buzz system, Applica pays
a license fee to Procter & Gamble for the use of the Tide brand name and
will record all revenues related to the sale of the Tide Buzz
Ultrasonic Cleaning Fluid. For Home Café, Applica has the opportunity to share
in revenues received by Procter & Gamble from the sale of the beverage pods if
certain targets for household penetration are met by the Home Café platform.
Applica expects that it will not meet such targets until at least 2005. If
such targets are not met by 2009, Applica will not receive any revenue related
to the sale of beverage pods.

Raw Materials and Suppliers

The raw materials used to manufacture our products are available from
numerous suppliers in quantities sufficient to meet our normal requirements.
Applicas primary raw materials include plastic resin, electrical
components, corrugated cardboard for cartons, steel, aluminum and copper.
Because the majority of our raw materials are commodity based, they are
available from at least two or more independent suppliers. Applica is not
dependent upon any single foreign source for such materials, although the cost
from alternative sources may be

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higher. We do not maintain long-term purchase
contracts with our raw materials suppliers. Factors that are largely beyond
our control, such as movements in commodity prices for specific raw materials,
may affect the cost of these materials. As an example, our products require a
substantial amount of plastic. Because the primary resource used in
manufactured plastics is petroleum, the cost and availability of plastic varies
to a great extent with the price of petroleum. We have recently experienced
increases in the price of plastics, steel, aluminum, and copper.

Applica purchased approximately 37% of its finished products from outside
suppliers in 2003 and 24% in 2002. Although overall we have no significant
concentration with any one supplier, certain individual products are made by
single suppliers. Going forward, management intends to outsource the
manufacture of more commodity-type household appliances to strategic sourcing
partners in China, which will significantly increase the percentage of finished
products purchased from outside suppliers. We do maintain long-term supply
contracts with certain of these suppliers, however, production amounts are
determined via separate purchase orders.

Intellectual Property

Applica manufactures and distributes products with features for which we
have filed or obtained licenses for trademarks, patents and design
registrations in the United States and in several foreign countries. Our right
to these patents and trademarks is a significant part of our business and our
ability to create demand for our products is dependent to a large extent on our
ability to capitalize on them. We also rely on unpatented proprietary
manufacturing methodologies in our Mexican and Chinese manufacturing
facilities.

In June
1998, as part of our acquisition of the Black & Decker® Household
Products Group, we licensed the Black & Decker® brand in North America, Latin
America (excluding Brazil) and the Caribbean for four core categories of
household appliances: beverage products, food preparation products, garment
care products and cooking products. In July 2001, Applica and The Black &
Decker Corporation extended the trademark license agreement through December
31, 2006. Under the agreement as extended, Applica paid guaranteed minimum
royalty payments to The Black & Decker Corporation of $5.0 million in 2003 and
has agreed to pay $12.5 million in each year thereafter through 2006. Renewals
of the license agreement, if mutually agreed upon, are for five-year periods.
If Black & Decker does not agree to renew the license agreement, Applica has 18
months to transition out of the brand name. No minimum royalty payments will
be due during such transition period. The Black & Decker Corporation has
agreed not to compete in the four core product categories for a period of five
years after the termination of the license agreement.

Upon request, Black & Decker may elect to extend the license to use the
Black & Decker® brand to certain additional products. In 2000 and 2001,
Black & Decker extended the license to heaters, fans, humidifiers,
dehumidifiers, air purifiers, deep fryers and bag sealers. In 2002, Black &
Decker agreed to extend the license to ice cream makers and mixers. In 2003,
the license was further extended to certain electronic pest and insect control
products, the Tide Buzz stain removing appliance and vacuum bag
sealers.

Further, Applica has licenses from The Procter & Gamble Company to use the
Tide® brand in all countries in the Western Hemisphere for the specially
formulated Tide Buzz Ultrasonic Cleaning Fluid and the Home Cafe
brand worldwide for the Black & Decker® single cup brewing machine.

Applica owns the Littermaid® trademark for self-cleaning litter boxes
and has extended the trademark for accessories such as litter, a litterbox
privacy tent and waste receptacles. Applica owns two patents and has exclusive
licenses to three other patents covering the Littermaid® litter box. The
patents have been issued in the United States and a number of foreign
countries.

Additional important brand names that we own include Applica®,
Windmere®, Jerdon® and Belson®. The Windmere® brand is targeted to
electric kitchen appliances and to home environment products at the opening
price point segment. Belson® and Jerdon®, and its sub-brand First
Class®, are targeted to the personal care and hospitality markets. In
addition, we acquired certain sub-brands used with our Black & Decker®
products, including Toast R Oven, ProFinish and Quick N Easy and licenses
Spacemaker for under the cabinet kitchen appliances.

On December 31, 2002, Applica terminated its license agreement for the
White Westinghouse trademark on small electronic appliances.

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Manufacturing

China. Applica Durable Manufacturing Limited is Applicas wholly owned
Hong Kong subsidiary. Applica Durable operates in China through several
processing arrangements with local governmental corporations in mainland China.
The manufacturing facilities are located in Bao An County, Guangdong Province
of China, which is approximately 60 miles northwest of central Hong Kong.
Applica Durable provides the raw materials, technical know-how, design,
training, management and supervision to the processing entities. The
processing entities provide the factory premises, the land and the labor and
are responsible for the processing, manufacturing and assembling of the
products. Such entities operate solely for the benefit of Applica Durable.
The Chinese facilities include five manufacturing plants located within a six
mile radius, constituting approximately 1.5 million square feet.

We are in the process of restructuring our Chinese facilities to focus
primarily on products with proprietary technologies, such as the Tide
Buzz Ultrasonic Stain Remover. As a result, in the first quarter of
2004, management closed one factory totaling approximately 437,000 square feet.
We expect that the downsizing of the Chinese facilities will continue
throughout 2004.

Mexico. Applica Manufacturing, S. de R.L. de C.V., is Applicas wholly
owned Mexican manufacturing subsidiary, located in Queretaro, Mexico, which is
approximately 150 miles northwest of Mexico City. The factory constitutes
approximately 290,000 square feet and manufactures Black & Decker® branded
products for distribution to both North America and Latin America. Its
capabilities include product design and tool fabrication. The Mexican facility
is certified under ISO 9001 standards. This location primarily manufactures
toaster ovens, blenders, irons and coffee makers.

We are in the process of restructuring our Mexican factory. As a result,
in the fourth quarter of 2003, management made the decision to reduce headcount
and output at our factory. We are continuing to explore options to lower costs
in Mexico in 2004.

Customers

Applica markets its products primarily through mass merchandisers, but
also distributes to home improvement warehouses, specialty retailers, warehouse
clubs, drug and grocery stores, department stores, television shopping
channels, pet supply retailers, beauty supply stores, catalogers, independent
distributors and military post exchange outlets, as well as through e-commerce
websites. In 2003, Applicas top three customers were Wal-Mart Stores, Inc.,
Target Corporation and Kmart Corporation. These customers accounted for
approximately 44%, 39% and 38% of consolidated net sales in 2003, 2002 and
2001, respectively. Wal-Mart accounted for approximately 30%, 25% and 24% of
our consolidated net sales in 2003, 2002 and 2001, respectively, and was the
only customer that accounted for more than 10% of consolidated net sales in
such years.

In January 2002, Kmart Corporation and certain of its U.S. subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Kmart is one of Applicas top three customers. Kmart
emerged from Chapter 11 in May 2003. In 2003, 2002 and 2001, Applica had sales
of $30.2 million, $43.5 million and $49.4 million, respectively, to Kmart
Corporation.

Additionally, in 2002, Service Merchandise Company, Inc. and Aisenstein &
Gordon, Inc., a distributor, announced that they would cease continuing
business operations and commence liquidation. In January 2003, PHD, Inc., a
distributor and significant customer of Applica, was placed into involuntary
bankruptcy, which PHD voluntarily converted to a liquidation under Chapter 11
of the U.S. Bankruptcy Code.

Sales, Marketing and Distribution

Our internal marketing organization is comprised of five strategic
business units: kitchen products, home products, personal care products, pet
products and pest control products. Each business unit is responsible for
product and category analysis, pricing strategy, promotions, key cooperative
partnerships and overall category development. The business units develop
products with all Applica markets in mind. The Canadian and Latin American
marketplaces are able to take advantage of these key initiatives when
appropriate and are staffed to
provide both products and programs unique to their consumer base. We use
media advertising, cooperative advertising and collateral materials to promote
our products and develop brand awareness. Applica enhances the equity of key
brands through design, promotion, quality initiatives and product functionality
based on consumer

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feedback. The level of promotional effort targeted toward
sales velocity and brand building is determined by the profitability of the
category, the strategic importance of the brand and retailer plans.

Applicas products are sold principally by an internal sales staff. The
sales teams for Wal-Mart Stores Inc. and Target Corporation are located in
Bentonville, Arkansas and Minneapolis, Minnesota, respectively, to provide full
sales operational support to our two biggest customers. We also have a
regional sales office in Chicago, Illinois that manages a national network of
sales management and account executives focused on all other key U.S.
retailers. Each sales manager has primary coverage responsibility for certain
retail accounts. We also use independent sales representatives, primarily in
Central America and the Caribbean. Additionally, we use outside sales
representatives for businesses outside of the kitchen and home categories.
This strategy allows us to keep our costs variable, while giving us access to
sales people that are knowledgeable about the categories. In addition to
directing our marketing efforts toward retailers, we sell certain of our
products directly to consumers through infomercials and our internet website.

We distribute our kitchen products, home products, pet products and pest
control products to retailers, including mass merchandisers, department stores,
home improvement stores, warehouse clubs, drug chains, catalog stores and
discount and variety stores. We market our personal care lines, professional
salon appliances and hair care accessories to beauticians, barbers and stylists
primarily through distributors in the United States and through professional
beauty and barber retail stores in the U.S. and to the hospitality industry.

Our policy is to maintain an inventory base to service the rapid delivery
requirements of our customers. Because of manufacturing lead times and our
seasonal sales, it is necessary that we purchase products and thereby increase
inventories based on anticipated sales and forecasts provided by our customers
and our sales personnel.

Backlog

Applicas 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 acceptances 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
December 31, 2003, Applica had a backlog of approximately $39.4 million
compared to $36.0 million as of December 31, 2002. As of March 1, 2004,
Applica had a backlog of approximately $56.2 million. We do not believe that
the amount of backlog orders is a significant factor in our business.

Seasonality

Our business is highly seasonal, with operating results varying from
quarter to quarter. We have historically experienced higher revenues in the
third and fourth quarters of the fiscal year, primarily due to increased demand
by customers in late summer for back-to-school sales and in the fall for
holiday sales. The majority of our sales occur from July through November.

Competition

The sale of small household appliances is characterized by intense
competition. Competition is based on price and quality, as well as access to
retail shelf space, product design, brand names, new product introductions,
marketing support and distribution strategies. Applica competes with various
domestic and international manufacturers and distributors, some of which have
substantially greater financial and other resources than those of Applica. We
believe that our future success will depend upon our ability to develop and
distribute reliable products that incorporate developments in technology and
satisfy customer tastes with respect to style and design. It will also depend
on our ability to market a broad offering of products in each category at
competitive prices.

Primary competitive brands in the household appliance market include
Hamilton Beach, Procter Silex, Sunbeam, Mr. Coffee, Oster, General Electric,
Rowenta, DeLonghi, Salton, Kitchen Aid, Cuisinart, Krups, Braun and Rival. In
addition, we compete with retailers who use their own private label brands for
household appliances.
Primary competitive brands in the personal care market include Conair,
Helen of Troy and Remington and in the home environment market include Holmes,
Patton, Pelonis, Honeywell, Duracraft, Bionaire and Lakewood. Primary
competitive brands in the pet and pest market include Doskocil, Sunbeam,
Coleman, Lentek and Mosquito Magnet.

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Regulation

As a manufacturer and distributor of consumer products, we are subject to
the Consumer Products Safety Act, which empowers the Consumer Products Safety
Commission to exclude from the market products that are found to be unsafe or
hazardous. Under certain circumstances, the Consumer Products Safety Commission
could require us to repurchase or recall one or more of our products. In
February 2002, Applica Consumer Products, Inc., in cooperation with the
Consumer Products Safety Commission, voluntarily recalled approximately 2.1
million Black & Decker® two-slice and four-slice toasters. Applicas
Canadian operating subsidiary, Applica Canada Corporation, also recalled
approximately 180,000 of these toasters in Canada.

Laws regulating certain consumer products also exist in some cities and
states, as well as in other countries in which we sell our products. We
believe that we are in satisfactory compliance with all of the laws and
regulations applicable to us.

Throughout the world, most federal, state, provincial and local
authorities require safety regulation certification prior to marketing
electrical appliances in those jurisdictions. Within the United States,
Underwriters Laboratory, Inc. (UL) is the most widely recognized
certification body for electrical appliances. UL is an independent,
not-for-profit corporation engaged in the testing of products for compliance
with certain public safety standards. We also use the ETL SEMKO division of
Intertek for certification and testing of compliance with UL, as well as other
nation- and industry-specific standards. We endeavor to have our products
designed to meet the certification requirements of, and to be certified in,
each of the jurisdictions in which they are sold.

Certain of the products sold by Applica in the United States are also
subject to the Fair Packaging and Labeling Act. We believe that in addition to
complying with the Fair Packaging and Labeling Act, we comply with the
applicable rules and regulations of the Federal Trade Commission and other
federal and state agencies with respect to the content of advertising and other
trade practices.

Our pest control products are subject to various regulations, including
regulations promulgated by the U.S. Environmental Protection Agency, as well as
laws and regulations of the states and applicable state agencies.

Employees

As of March 1, 2004, Applica had approximately 500 full-time employees in
North America, approximately 125 full-time employees at its operations in Hong
Kong and approximately 1,700 full-time employees in Mexico and South America.
Applica Durable also manages approximately 11,000 employees who are employed by
the mainland China processing entities. From time to time, Applica also uses
the services of seasonal employees.

In connection with the acquisition of the Black & Decker Household
Products Group, Applica Manufacturing, S. de R.L. de C.V., Applicas Mexican
manufacturing subsidiary, assumed the obligations of Black & Decker, S.A. de
C.V. under a collective bargaining agreement with the Single Workers Union of
Black & Decker of the State of Queretaro, C.T.M. covering certain employees at
our manufacturing plant in Queretaro, Mexico. The wage provisions of this
collective bargaining agreement were renegotiated in the first quarter of 2004.
To date, the union has not engaged in strikes or work stoppages against
Applica. We believe that our relationships with both union and non-union
employees continue to be good.

In 2002, Applica closed its offices in Shelton, Connecticut and
consolidated the engineering, sales and marketing functions at its Miami Lakes
location. Certain back-office and supply chain functions in Canada and Latin
America were also consolidated. These consolidations resulted in the reduction
of approximately 70 employees worldwide. In the second half of 2003, Applica
reduced the workforce at its Miami Lakes location and downsized its Mexico
manufacturing operations. Additionally, we reduced our fixed costs and
capacity in our Chinese facilities and closed one factory. These
consolidations resulted in a headcount reduction of approximately 4,000
employees worldwide, including employees of the Chinese processing entities.

Termination of Common Stock Purchase Rights Plan

In February 2003, the Board of Directors of Applica Incorporated voted to
terminate Applicas Common Stock Purchase Rights Plan. The plan was terminated
by redeeming the rights that were issued under the Amended

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and Restated 1995
Common Stock Purchase Rights Agreement. The rights were redeemed at a price of
$.00001 per right, payable in cash.

Other Matters

Pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
Applicas Annual Reports on Form 10-K, including this Form 10-K, as well as the
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K are filed
electronically with the SEC. The public may read or copy any materials we file
with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains
an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The
address of that site is http://www.sec.gov.

Additionally, our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, and amendments to these reports, are
available from the Investor Relations link on our website. The website address
is http://www.applicainc.com. All required reports are made available on the
website as soon as reasonably practicable after they are electronically filed
with the Securities and Exchange Commission. As required by the New York Stock
Exchange, copies of the charters of the Audit, Compensation and Corporate
Governance and Nominating Committees of our Board of Directors and our Conflict
of Interest and Business Ethics and Code of Conduct policies will also be
available on our website prior to the 2004 annual meeting of shareholders.

Risk Factors

You 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. If any of the
events or circumstances described in the following risks actually occurs, our
business, financial condition or results of operations could be materially
adversely affected. The risks listed below are not the only risks that we
face. Additional risks that we do not yet know of or that we currently think
are immaterial may also impair our business operations.

The Failure Of Our Growth Strategy Could Have A Material Adverse Effect On Our Business.

As part of our growth strategy, we plan to:



| |  |  | introduce new products and further develop our brands;             
| | - |  | -------------------------------------------------------------------
|
| |  |  | capitalize on consumable goods that work with our products;        
|
| |  |  | create long-term cost and quality advantages for our customers; and
|
| |  |  | optimize our supply chain.                                         

Our strategic objectives may not be realized or, if realized, may not
result in increased revenue, profitability or market presence. Executing our
strategy may also place a strain on our production, information technology
systems and other resources. To manage growth effectively, we must maintain a
high level of manufacturing quality and efficiency, properly manage our third
party suppliers, continue to enhance our operational, financial and management
systems, including our database management, inventory control and distribution
systems, and expand, train and manage our employee base. We may not be able to
effectively manage our growth in any one or more of these areas.

Increases In Cost And Unavailability Of Raw Materials And Components Will
Reduce Our Profitability.

Raw materials and components constitute a significant portion of our cost
of goods. Factors that are largely beyond our control, such as movements in
commodity prices for the specific materials we require, may affect the
future cost of raw materials and components. As an example, our products
require a substantial amount of plastic. Because the primary resource used in
manufactured plastics is petroleum, the cost and availability of plastic varies
to a great extent with the price of petroleum. Recently, we have experienced
increases in prices of petroleum, as well as steel, aluminum and copper, which
could continue in 2004.

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In addition, any inability of our suppliers to timely deliver raw
materials or components or any unanticipated changes in our suppliers could be
disruptive and costly to us. Our ability to select reliable suppliers who
provide timely deliveries of quality materials and components will impact our
success in meeting customer demand. Any significant failure by us to obtain
raw materials on a timely basis at an affordable cost or any significant delays
or interruptions of supply would have a material adverse effect on us.



Our Business Could Be Adversely Affected By Complications Resulting From Our
Implementation Of The New ERP System Or Other New Computer Technologies We
Install.


We are in the process of implementing a significant enterprise resource
planning system, or ERP system, along with other new technology, and
complications from the project could cause considerable disruptions to our
business. While significant testing will take place and the rollout will occur
in stages, the period of change from the old system to the new system will
involve risk. Application program bugs, system conflict crashes, user error,
data integrity issues, customer data conflicts and integration issues among our
legacy systems all pose potential risks. Implementing data standards such as
UCCnet and RFID, which our largest customers are requiring that we use, all
involve significant effort across the entire organization. We expect this
implementation to be completed in 2005. However, any delays of this
implementation could impact our ability to do business and could result in
higher implementation costs and reallocation of human resources.

To support these new technology capabilities, we are building and
supporting a much larger and more complex information technology
infrastructure. Increased computing capacity, power requirements, back-up
capacities, broadband network infrastructure and increased security needs are
all potential fail points. We rely on other companies to maintain some of our
infrastructure. Should they fail to perform due to events outside our control,
it could affect our service levels and threaten our ability to conduct
business. Natural disasters may disrupt our infrastructure and our disaster
recovery process may not be sufficient to protect against loss.

Additionally, our business operations are dependent on our logistical
systems, which include our order management system and our computerized
warehouse network. Any interruption in our logistical systems would impact
our ability to procure our products from our factories and suppliers, transport
them to our distribution facilities, store them and deliver them to our
customers on time and in the correct amounts.



We Depend On Purchases From Several Large Customers And Any Significant
Decline In These Purchases Or Pressure From These Customers To Reduce
Prices Could Have A Negative Effect On Our Business.


Due to the consolidation of the retail industry, our customer base has
become relatively concentrated. Wal-Mart Stores, Inc., our largest single
customer, accounted for approximately 30% of our 2003 consolidated net sales,
25% of our 2002 consolidated net sales and 24% of our 2001 consolidated net
sales. Our top three customers accounted for approximately 44%, 39% and 38% of
consolidated net sales in 2003, 2002 and 2001, respectively. Although we have
long-established relationships with many of our customers, we do not have any
long-term supply contracts and purchases are generally made using individual
purchase orders. Additionally, certain of our larger customers are using
their own private label brands on household appliances that compete with our
products.

We must receive a continuous flow of new orders from our large,
high-volume retail customers; however, we may be unable to continually meet the
needs of our customers. In addition, failure to obtain anticipated orders or
delays or cancellations of orders or significant pressure to reduce prices from
key customers could have a material adverse effect on us.

In addition, as a result of the desire of retailers to more closely manage
inventory levels, there is a growing trend among retailers to make purchases on
a just-in-time basis. This requires us to shorten our lead time for
production in certain cases and more closely anticipate demand, which could in
the future require the carrying of additional inventories or require us to
incur additional expenses to expedite delivery.

If We Are Unable To Renew The Black & Decker® Trademark License Agreement,
Our Business Could Be Adversely Affected.

As part of the acquisition of the Black & Decker Household Products Group,
we licensed the Black & Decker® brand for use in marketing small household
appliances in North America, Latin America (excluding Brazil) and the
Caribbean. The majority of our revenue is generated through the sale of Black &
Decker® branded products,

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which represented approximately 70% and 62% of our
total revenue in 2003 and 2002, respectively. In 2001, Applica and The Black &
Decker Corporation extended the trademark license agreement through December
31, 2006. Renewals, if mutually agreed upon, are for five-year periods and
will require the payment of minimum guaranteed royalties, which are currently
$12.5 million annually.

Our Business Is Very Sensitive To The Strength Of The U.S. Retail Market And
Weakness In This Market Could Adversely Affect   Our Business.

The strength of the retail economy in the United States has a significant
impact on our performance. Weakness in consumer confidence and poor financial
performance by mass merchandisers, warehouse clubs, department stores or any of
our other customers would result in lost sales by us. A general slowdown in
the retail sector, as happened in 2002 and 2003, would result in additional
pricing and marketing support pressures on us.

Our Business Could Be Adversely Affected By Currency Fluctuations In Our
International Operations.

While we transact business predominantly in U.S. dollars and most of our
revenues are collected in U.S. dollars, a substantial portion of our costs,
such as payroll, rent and indirect operational costs, are denominated in other
currencies, such as Chinese renminbi, Hong Kong dollars and Mexican pesos. In
addition, while a small portion of our revenues are collected in foreign
currencies, such as Canadian dollars, Argentine pesos, Colombian pesos, Chilean
pesos and Venezuelan bolivars, a significant portion of the related cost of
goods sold are denominated in U.S. dollars. Changes in the relation of these
and other currencies to the U.S. dollar will affect our cost of goods sold and
operating margins and could result in exchange losses. The impact of future
exchange rate fluctuations on our results of operations cannot be accurately
predicted.

Currently, there is renewed activity within the Chinese government
regarding the relationship between the renminbi, the Hong Kong dollar and the
U.S. dollar. If these currencies are allowed to float freely, it could result
in significant fluctuations in our product costs.

Our Business Involves The Potential For Product Recalls And Product Liability
Claims Against Us.

As a manufacturer and distributor of consumer products, we are subject to
the Consumer Products Safety Act, which empowers the Consumer Products Safety
Commission to exclude from the market products that are found to be unsafe or
hazardous. Under certain circumstances, the Consumer Products Safety Commission
could require us to repurchase or recall one or more of our products.
Additionally, laws regulating certain consumer products exist in some cities
and states, as well as in other countries in which we sell our products, and
more restrictive laws and regulations may be adopted in the future. Any
repurchase or recall of our products could be costly to us and could damage our
reputation. If we were required to remove, or we voluntarily remove, our
products from the market, our reputation could be tarnished and we might have
large quantities of finished products that could not be sold.

We also face exposure to product liability claims in the event that one of
our products is alleged to have caused property damage, bodily injury or other
adverse effects. Although we maintain product liability insurance in amounts
that we believe are reasonable, we may not be able to maintain such insurance
on acceptable terms, if at all, in the future. In addition, product liability
claims may exceed the amount of insurance coverage. Additionally, we do not
maintain product recall insurance.

We are a defendant in four asbestos lawsuits in which the plaintiffs have
alleged injury as the result of exposure to asbestos in hair dryers distributed
by us over 20 years ago. Although we never manufactured such products,
asbestos was used in certain hair dryers sold by us prior to 1979. There are
numerous defendants named in these lawsuits, many of whom actually manufactured
asbestos containing products. At this time, we have not confirmed coverage
under our insurance policies for the asbestos lawsuits, but we are currently
undertaking research to ascertain if coverage can be identified.

Finally, our results of operations are susceptible to adverse publicity
regarding the quality or safety of our products. In particular, product recalls
or product liability claims challenging the safety of our products may result
in a decline in sales for a particular product. This could be true even if the
claims themselves are ultimately settled for immaterial amounts. We cannot
assure you that this type of adverse publicity will not occur or that product
liability claims will not be made in the future.

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The Bankruptcy Or Financial Difficulty Of Any Major Customer Or Fluctuations
In The Financial Condition Of The Retail Industry Could Adversely Affect
Our Business.


We sell our products to distributors and retailers, including mass
merchandisers, department stores and wholesale clubs. The financial
difficulties of our customers or the loss of, or a substantial decrease in, the
volume of purchases by a major customer could have a material adverse effect on
us. Additionally, a significant deterioration in the financial condition of
the retail industry in general could have a material adverse effect on our
sales and profitability.

In 2002 and early 2003, several large retail chains and distributors
declared bankruptcy or liquidated, two of which were large customers of ours.
We maintain credit protection on certain of our significant customers and
continually monitor and evaluate our customers credit status. In addition, we
attempt to adjust sales terms as appropriate. Despite these efforts, a
bankruptcy filing or liquidation by a key customer could have a material
adverse effect on us.

We Operate A Significant Portion Of Our Business Outside Of The United
States Which Subjects Us To Additional Risks.

We manufacture a significant number of the products we sell in China and
Mexico and obtain a significant proportion of the raw materials used in the
manufacturing of our products outside the United States. We also have many
products manufactured by third party suppliers outside of the United States.
International operations are subject to risks including, among others:



| |  |  | labor unrest;                                                       
| | - |  | --------------------------------------------------------------------
|
| |  |  | political instability;                                              
|
| |  |  | lack of developed infrastructure;                                   
|
| |  |  | longer payment cycles and greater difficulty in collecting accounts;
|
| |  |  | restrictions on transfers of funds;                                 
|
| |  |  | import and export duties and quotas;                                
|
| |  |  | changes in domestic and international customs and tariffs;          
|
| |  |  | unexpected changes in regulatory environments;                      
|
| |  |  | difficulty in complying with a variety of foreign laws;             
|
| |  |  | difficulty in obtaining distribution and support; and               
|
| |  |  | potentially adverse tax consequences.                               

Labor in China and Mexico has historically been readily available at
relatively low cost as compared to labor costs available in other nations.
Both countries have experienced social, political and economic change in recent
years. We cannot assure you that labor will continue to be available to us in
China or Mexico at costs consistent with historical levels. A substantial
increase in labor costs could have a material adverse effect on us. We could
also be adversely affected by the imposition of austerity measures intended to
reduce inflation, the inadequate development or maintenance of infrastructure
or the unavailability of adequate power and water supplies, transportation, raw
materials and parts, or a deterioration of the general political, economic or
social environment in the foreign countries where we do business, particularly
China and Mexico. The foregoing factors may have a material adverse effect on
our ability to increase or maintain our international sales or importing
activities, our financial condition or the results of our operations.

Additionally, our manufacturing facilities in China are operated under
processing agreements with the local government. If changing conditions in
China result in the termination of one or more of the processing agreements by
the local government, it could have a material adverse effect on our business.

Our Business Could Be Adversely Affected By Changes In Trade Relations With
China.

China gained Permanent Normal Trade Relations (PNTR) with the United
States when it acceded to the World Trade Organization, effective January 2002.
The United States imposes the lowest applicable tariffs on exports from PNTR
countries to the United States. In order to maintain its WTO membership,
China has agreed to several requirements, including the elimination of caps on
foreign ownership of Chinese companies, lowering tariffs and publicizing its
laws. No assurance can be given that China will meet these requirements and
remain a member

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of the WTO, or that its PNTR trading status will be maintained.
If Chinas WTO membership is withdrawn or if PNTR status for goods produced in
China were removed, there could be a substantial increase in tariffs imposed on
goods of Chinese origin entering the United States, including those
manufactured by us, which would adversely impact our sales.

In September 2003, a bipartisan group of U.S. senators introduced
legislation that would impose a 27.5% duty on all imports from China until
China stopped fixing the value of its currency, the renminbi, to the dollar.
The legislation maintains that the renminbi is artificially pegged below its
market value and therefore acts as a virtual trade barrier. Since 1994, China
has pegged the renminbi at an exchange rate of 8.28 to the dollar. U.S. groups
have argued that the peg makes Chinas exports to the U.S. cheaper, and U.S.
exports to China more expensive, thus greatly contributing to Chinas trade
surplus with the U.S. A House version of the bill was also introduced.
Action has not been completed on either bills. We do not believe the
legislations will be adopted in its current form. However, because a
substantial number of our products are imported from China, the adoption of
such legislation in its current or a similar form would have a material adverse
effect on our business.

Our Business Could Be Adversely Affected By Retailer Inventory Management.

Changes in retailer inventory management strategies could make inventory
management more difficult for us. Because of our significant reliance on our
factory in China and third party suppliers in the Far East, our production lead
times are relatively long. Therefore, we generally commit to production in
advance of customer orders. If retailers significantly change their inventory
management strategies or if they or we fail to forecast customer or consumer
demand accurately, we may encounter difficulties in filling customer orders or
in liquidating excess inventories, or may find that customers are canceling
orders or returning products. Distribution difficulties may have an adverse
effect on our business by increasing the amount of inventory and the cost of
warehousing inventory. Any of these results could have a material adverse
effect us.



Our Future Success Requires Us To Develop New And Innovative Products On A
Consistent Basis In Order To Increase Revenues And We May Not Be Able To
Do So.


We believe that our future success depends in part upon our ability to
continue to make innovations in our existing products and to develop,
manufacture and market new products, which generally carry higher margins. We
may not be successful in the introduction, marketing and manufacture of any new
products or product innovations and we may not be able to develop and introduce
in a timely manner innovations to our existing products that satisfy customer
needs or achieve market acceptance.



We Rely Heavily On Our Manufacturing Facilities To Manufacture And Assemble
Our Products. An Extended Interruption In The Operation Of Any Facility
Could Have An Adverse Impact On Our Operating Results.


Approximately 63% of our consolidated net sales were derived from products
manufactured or assembled at our manufacturing facilities located in China and
Mexico in 2003 and 76% were derived from such facilities in 2002. These
manufacturing facilities are subject to hazards that could result in material
damage to any such facility. Any such damage to either facility, or prolonged
interruption in the operations of either facility for repairs, labor disruption
or other reasons, would have a material adverse effect on us.



We Are Subject To Several Production-Related Risks Which Could Jeopardize
Our Ability To Realize Anticipated Sales And Profits.


To realize sales and operating profits at anticipated levels we must
manufacture, source and deliver high quality products in a timely manner.
Among others, the following factors can have a negative effect on our ability
to do these things:



| |  |  | labor difficulties;                                                                                          
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | scheduling and transportation difficulties;                                                                  
|
| |  |  | substandard product quality, which can result in higher
warranty, product liability and product recall costs;
|
| |  |  | delays in development of quality new products;                                                               

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| |  |  | changes in laws and regulations, including changes in tax
rates, accounting standards, environmental laws and occupational
health and safety laws; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in the availability and costs of labor.                                                                                                       

The Infringement Or Loss Of Our Proprietary Rights Could Have An Adverse
Effect On Our Business.

We believe that our rights in owned and licensed names are a significant
part of our business and that our ability to create demand for our products is
dependent to a large extent on our ability to exploit these trademarks. There
can be no assurance as to the breadth or degree of protection that these
trademarks may afford us, or that we will be able to successfully leverage our
trademarks in the future. The costs associated with protecting our intellectual
property rights, including litigation costs, may be material. We also cannot be
sure that we will be able to successfully assert our intellectual property
rights or that these rights will not be invalidated, circumvented or
challenged. Any inability to do so, particularly with respect to names in
which we have made significant capital investments, or a successful
intellectual property challenge or infringement proceeding against us, could
have a material adverse effect on us. In addition, because our business
strategy is heavily dependent upon the use of brand names, adverse publicity
with respect to products that are not sold by us, but bear the same brand
names, could have a material adverse effect on us.

We also rely on unpatented proprietary manufacturing methodologies and
there can be no assurance that others may not independently develop the same or
similar technology or otherwise obtain access to our technology. If we are
unable to maintain the proprietary nature of our technologies, our business,
financial condition and results of operations could be materially adversely
affected. Additionally, we manufacture our products with features for which we
have filed or obtained licenses for patents and design registrations in the
United States and in several foreign countries. With respect to our
applications for patents, there can be no assurance that any patents will be
obtained. If obtained, there can be no assurance that such patents will afford
us commercially significant protection of our technologies or that we will have
adequate resources to enforce our patents.

Our Operating Results Can Be Affected By Seasonality.

Our business is highly seasonal with operating results varying from
quarter to quarter. We experience higher revenues in the third and fourth
quarters of each fiscal year primarily due to increased demand by customers for
our products in the late summer for back-to-school sales and in the fall for
holiday sales. This seasonality has also resulted in additional interest
expense to us during the third and fourth quarters of each fiscal year due to
an increased need to borrow funds to maintain sufficient working capital to
support such increased demand.

We Compete With Other Large Companies That Produce Similar Products.

The markets for our products are highly competitive. We believe that
competition is based upon several factors, including price, quality, access to
retail shelf space, product features and enhancements, brand names, new product
introductions, marketing support and distribution systems. We compete with
established companies, a number of which have substantially greater facilities,
personnel, financial and other resources than we have. We also compete with our
retail customers, who use their own private label brands, and importers and
foreign manufacturers of unbranded products. Some competitors may be willing to
reduce prices and accept lower profit margins to compete with us. As a result
of this competition, we could lose market share and sales, or be forced to
reduce our prices to meet competition.

Our Debt Agreements Contain Covenants That Restrict Our Ability To Take
Certain Actions.

Our credit facility and the indenture for our 10% notes impose
restrictions that affect, among other things, our ability to incur debt, pay
dividends, sell assets, create liens, make capital expenditures and
investments, and otherwise enter into certain transactions outside the ordinary
course of business. Our credit facility also requires us to maintain a minimum
borrowing base availability and meet certain financial tests. Our ability to
continue to comply
with these covenants and restrictions may be affected by events beyond our
control. The breach of any of these covenants or restrictions would result in a
default under the credit facility and the indenture, in which case our lenders
could elect to declare all amounts borrowed thereunder, together with accrued
interest, to be due and payable, foreclose on the assets securing the debt or
cease to provide additional revolving loans or letters of credit, which could
have a material adverse effect on our business.

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Our Business Can Be Adversely Affected By Newly Acquired Businesses Or
Product Lines.

Applica may acquire partial or full ownership in businesses or may acquire
rights to market and distribute particular products or lines of products. The
acquisition of a business or of the rights to market specific products or use
specific product names may involve a financial commitment by Applica, either in
the form of cash or stock consideration. In the case of a new license such
commitments are usually in the form of prepaid royalties and future minimum
royalty payments. There is no guarantee that we will acquire businesses and
develop products that will contribute positively to our earnings. Anticipated
synergies may not materialize, cost savings may be less than expected, sales of
products may not meet expectations, and acquired businesses may carry
unexpected liabilities.

Government Regulations Could Adversely Impact Our Operations.

Throughout the world, most federal, state, provincial and local
authorities require Underwriters Laboratory, Inc. or other safety regulation
certification prior to marketing electrical appliances in those jurisdictions.
Most of our products have such certifications. However, there can be no
assurance that our products will continue to meet such specifications. Many
foreign, federal, state and local governments also have enacted laws and
regulations that govern the labeling and packaging of products and limit the
sale of product containing certain materials deemed to be environmentally
sensitive. A determination that we are not in compliance with such rules and
regulations could result in the imposition of fines or an award of damages to
private litigants.

Additionally, many of our pest control products are subject to laws and
regulations by state and federal environmental agencies. A determination that
we are not in compliance with such rules and regulations could result in the
prohibition of sales of our products and the imposition of fines.




Item 2. Properties

The following table sets forth the principal operating facilities of
Applica:

|                      |  |                                                     |  |                 |  |           |  | 
|--------------------- |  | --------------------------------------------------- |  | --------------- |  | --------- |  | 
|Location              |  | Description                                         |  | Area (Sq. Feet)
|                      |  |                                                     |  |                
|Miami Lakes, Florida  |  | Headquarters, general administration, sales office, |  | 140,000         |  | Owned(1) 
|                      |  | engineering offices, warehouse and distribution     |  | 40,000          |  | Leased   
|Man Fung, China       |  | Manufacturing                                       |  | 250,000         |  | Leased(2)
|Sai Po Yuen, China    |  | Manufacturing                                       |  | 208,000         |  | Leased(2)
|Man Cheung Po, China  |  | Manufacturing                                       |  | 605,000         |  | Leased(2)
|Sun Kiu, China        |  | Manufacturing                                       |  | 358,000         |  | Leased(2)
|Gong He, China        |  | Manufacturing                                       |  | 63,000          |  | Leased(2)
|Queretaro, Mexico     |  | Manufacturing, warehouse and office                 |  | 290,000         |  | Owned    
|Little Rock, Arkansas |  | Warehouse and distribution                          |  | 562,000         |  | Leased   
|Little Rock, Arkansas |  | Warehouse and distribution                          |  | 245,000         |  | Leased   
|Toronto, Canada       |  | Sales office, warehouse and distribution            |  | 109,000         |  | Leased   
|Hong Kong, China      |  | General administration                              |  | 49,000          |  | Owned    



---

|(1) |  | In November 2003, Applica entered into an agreement to sell the
executive offices located in Miami Lakes, Florida for $9.5 million.
The sale is expected to close in July 2004. Applica intends to move to
a smaller, leased building in the same geographical area.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | These facilities are operated under processing agreements and
leases with the local mainland Chinese governmental entities.                                                                                                                                         

We lease additional warehouse and office space in the United States,
Canada and Latin America pursuant to short-term contracts. We also contract
with third party distribution providers that furnish full service warehousing
and shipping services. Applica has such arrangements in Miami, Tennessee,
California, Puerto Rico, Mexico, Colombia, Venezuela, Chile, Peru and
Argentina. Service contracts are typically short-term in nature, stable in
pricing, and provide for specific performance requirements related to customer
service.

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We believe our current facilities are adequate to meet our needs in the
foreseeable future. If necessary, we may, from time to time, acquire, sell or
downsize current facilities or lease additional facilities for warehousing
and/or other activities.

Applica closed its Shelton, Connecticut office in the third quarter of
2002 and is currently pursuing sublease arrangements for the 100,000 square
feet of office space located there. Additionally, in the first quarter of
2003, Applica consolidated its sales office and warehouse space in Toronto,
Canada. In the first quarter of 2004, Applica closed a 437,000 square foot
manufacturing facility in China.




Item 3. Legal Proceedings

Tilia Matters. In May 2003, Applica brought suit against Tilia
International, Inc. in U.S. district court in Miami, Florida to invalidate
certain patents held by Tilia relating to its home vacuum packaging products.
Immediately thereafter, Tilia sued Applica in the U.S. district court in
California for alleged patent infringement by Applicas Black & Decker®
branded vacuum packaging machine and accessories. The California district
court action was voluntarily dismissed without prejudice by Tilia in favor of
the district court proceeding in Florida. In January 2004, Applica amended its
complaint to add allegations that Tilia has violated U.S antitrust laws. The
Florida action is in its initial stages.

In July 2003, Tilia filed a complaint against Applica and other parties
with the International Trade Commission, known as the ITC, in Washington D.C.
Tilia alleged infringement of its patent related to vacuum packaging machines
and requested permanent relief in the form of an exclusion order. Tilia also
sought preliminary relief, requesting a temporary exclusion order that would
prevent Applica from selling its vacuum sealer product in the U.S. Tilias
request for a temporary exclusion order was denied by the ITC in January 2004.
Full trial before the ITC currently is scheduled for May 2004, with a final ITC
decision expected in November 2004.

In late September 2003, Applica also brought a nullity action in Germany
seeking to invalidate the German counterpart of the Tilia vacuum sealer machine
patent. This matter is in its initial stages.

We believe that the amount of ultimate liability of these matters, if any,
is not likely to have a material effect on our business, financial condition,
results of operations or liquidity. However, as the outcome of litigation is
difficult to predict, significant changes in the estimated exposures could
occur.

Other Matters. Applica is subject to other legal proceedings, products
liability claims and other claims that arise in the ordinary course of our
business. In the opinion of management, the amount of ultimate liability, if
any, in excess of applicable insurance coverage, is not likely to have a
material effect on the financial condition, results of operations or liquidity
of Applica. However, as the outcome of litigation or other claims is difficult
to predict, significant changes in the estimated exposures could occur.




Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of Applicas security holders during
the fourth quarter of the year ended December 31, 2003.

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PART II




Item 5. Market for the Registrants Common Stock and Related Stockholder
Matters

Applicas common stock, $0.10 par value, is listed for trading on the New
York Stock Exchange under the symbol APN. The following tables set forth,
for the periods indicated, the range of high and low closing prices for the
common stock as reported on the New York Stock Exchange:

|               |  |               |       |     |  |   |      | 
|-------------- |  | ------------- | ----- | --- |  | - | ---- | 
|               |  | Closing Price
|               |  |              
|               |  | High          |       | Low
|               |  |               |       |    
|2002           |  |               |       |     |  |   |      | 
|First quarter  |  | $             | 9.90  |     |  | $ | 5.00 | 
|Second quarter |  | $             | 12.40 |     |  | $ | 8.44 | 
|Third quarter  |  | $             | 12.20 |     |  | $ | 4.30 | 
|Fourth quarter |  | $             | 6.45  |     |  | $ | 4.26 | 
|2003           |  |               |       |     |  |   |      | 
|First quarter  |  | $             | 5.43  |     |  | $ | 4.26 | 
|Second quarter |  | $             | 8.66  |     |  | $ | 4.85 | 
|Third quarter  |  | $             | 9.74  |     |  | $ | 6.05 | 
|Fourth quarter |  | $             | 8.50  |     |  | $ | 6.42 | 

At March 1, 2004, there were approximately 900 holders of record of our
common stock. The number of holders of record of the common stock includes
nominees of various depository trust companies for an undeterminable number of
individual stockholders.

Dividends. We are prohibited from declaring or paying cash dividends on
our capital stock under the terms of our debt agreements. We did not pay any
common stock dividends in 2003 or 2002, and we do not anticipate paying
dividends in the foreseeable future. We intend to retain future earnings to
finance the expansion of our operations and for general corporate purposes.

Termination of Common Stock Purchase Rights Plan. In February 2003, our
Board of Directors voted to terminate Applicas Common Stock Purchase Rights
Plan. The plan was terminated by redeeming the rights that were issued under
the Amended and Restated 1995 Common Stock Purchase Rights Agreement. The
rights were redeemed at a price of $.00001 per right, payable in cash. There
was one right attached to each outstanding share of common stock.

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Item 6. Selected Financial Data

The selected financial data presented below is derived from our audited
financial statements and should be read in conjunction with Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations below and the Consolidated Financial Statements and related notes
thereto included in Schedule I to this Annual Report on Form 10-K.

|                                                                                            |  |                                               |         |        |  |      |         |       |  |      |         |      |  |   |         |      |  |   |         |    
|------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | ------ |  | ---- | ------- | ----- |  | ---- | ------- | ---- |  | - | ------- | ---- |  | - | ------- | ---
|                                                                                            |  | 2003                                          |         | 2002   |  | 2001 |         | 2000  |  | 1999
|                                                                                            |  |                                               |         |        |  |      |         |       |  |     
|                                                                                            |  | (Dollars in thousands, except per share data)
|Statement of Operations:                                                                    |  |                                               |         |        |  |      |         |       |  |      |         |      |  |   |         |      |  |   |         |    
|Net sales                                                                                   |  | $                                             | 640,639 |        |  | $    | 727,356 |       |  | $    | 727,044 |      |  | $ | 748,751 |      |  | $ | 718,309 |    
|Equity in net earnings (loss) of
joint ventures                                             |  | $                                             | 55,570  | (1)    |  | $    | (1,498  | )     |  | $    | (128    | )    |  | $ | (777    | )    |  | $ | (12,894 | )  
|Earnings (loss) before income
taxes and cumulative effect of
change in accounting principle |  | $                                             | 25,370  | (1)    |  | $    | 9,878   |       |  | $    | (24,292 | )    |  | $ | (22,758 | )    |  | $ | 21,020  |    
|Income tax expense (benefit)                                                                |  | $                                             | 10,147  |        |  | $    | 4,826   |       |  | $    | 4,146   |      |  | $ | (1,542  | )    |  | $ | 4,177   |    
|Cumulative effect of change in
accounting principle, net of tax
benefit of $42,447          |  |                                               |        |        |  | $    | (78,829 | )     |  |      |        |      |  |   |        |      |  |   |        |    
|Effective tax rate                                                                          |  |                                               | 40.0    | %      |  |      | 48.9    | %     |  |      | (17.1   | )%   |  |   | 6.8     | %    |  |   | 19.9    | %  
|Net earnings (loss)                                                                         |  | $                                             | 15,223  | (1)(2) |  | $    | (73,777 | )(3)  |  | $    | (28,438 | )(4) |  | $ | (21,216 | )(5) |  | $ | 16,843  | (6)
|Balance Sheet:                                                                              |  |                                               |         |        |  |      |         |       |  |      |         |      |  |   |         |      |  |   |         |    
|Working capital                                                                             |  | $                                             | 178,470 |        |  | $    | 192,776 |       |  | $    | 228,124 |      |  | $ | 276,981 |      |  | $ | 263,315 |    
|Current ratio                                                                               |  |                                               | 2.7     |        |  |      | 2.8     |       |  |      | 3.0     |      |  |   | 3.3     |      |  |   | 3.1     |    
|Property, plant and equipment, net                                                          |  | $                                             | 70,389  |        |  | $    | 76,963  |       |  | $    | 82,337  |      |  | $ | 78,200  |      |  | $ | 75,983  |    
|Total assets                                                                                |  | $                                             | 478,836 |        |  | $    | 521,665 |       |  | $    | 633,684 |      |  | $ | 707,935 |      |  | $ | 714,310 |    
|Long-term debt and other long
terms liabilities                                             |  | $                                             | 137,964 |        |  | $    | 195,371 |       |  | $    | 225,726 |      |  | $ | 260,147 |      |  | $ | 243,807 |    
|Shareholders equity                                                                        |  | $                                             | 237,613 |        |  | $    | 219,128 |       |  | $    | 293,939 |      |  | $ | 324,474 |      |  | $ | 343,397 |    
|Per Share Data:                                                                             |  |                                               |         |        |  |      |         |       |  |      |         |      |  |   |         |      |  |   |         |    
|Earnings
(loss) per common share  basic                                                    |  | $                                             | 0.65    | (1)(2) |  | ($   | 3.15    | ) (3) |  | ($   | 1.23    | )(4) |  | $ | (0.92   | )(5) |  | $ | 0.75    | (6)
|Earnings
(loss) per common share  diluted                                                  |  | $                                             | 0.63    | (1)(2) |  | ($   | 3.10    | ) (3) |  | ($   | 1.23    | )(4) |  | $ | (0.92   | )(5) |  | $ | 0.72    | (6)
|Cash dividends paid                                                                         |  |                                               |        |        |  |      |        |       |  |      |        |      |  |   |        |      |  |   |        |    
|Book value at year end                                                                      |  | $                                             | 10.03   |        |  | $    | 9.33    |       |  | $    | 12.61   |      |  | $ | 14.06   |      |  | $ | 15.17   |    
|Return on average equity                                                                    |  |                                               | 6.70    | %      |  |      | (28.8   | )%    |  |      | (9.2    | )%   |  |   | (6.4    | )%   |  |   | 5.1     | %  



---

|(1) |  | During 2003, Applica recorded equity in net earnings of its joint
venture in which Applica owns a 50% interest of $55.6 million ($33.4
million, net of tax).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Also during 2003, Applica recorded:                                                                                                                         



| |  |  | an impairment charge of $7.2 million ($4.3 million, net
of tax) in connection with an intangible asset related to the
Black & Decker® trademark;                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | expenses of $6.9 million ($4.1 million, net of tax)
related to the retrenchment of the Mexican and Chinese
manufacturing facilities;                                                              
|
| |  |  | repositioning and other charges of $4.7 million ($2.8
million, net of tax) related to accrued rental expenses at the
Shelton, Connecticut facility, which was closed in the third
quarter of 2002;
|
| |  |  | expenses in an aggregate amount of $3.9 million ($2.3
million, net of tax) related to the early extinguishment of $65.0
million of the 10% notes; and                                             

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| |  |  | a reversal of $4.1 million ($2.5 million, net of tax)
in product recall related expenses recorded in cost of sales.
| | - |  | -------------------------------------------------------------------------------------------------------------------



|(3) |  | In January 2002, Applica applied the provisions of SFAS 142
Goodwill and Other Intangible Assets. Based on its impairment tests,
Applica recognized an adjustment of $121.3 million ($78.8 million, or
$3.31 per share, net of tax on a full year and fully diluted basis) in
the first quarter of 2002 to reduce the carrying value of goodwill to
its implied fair value. In addition, repositioning expenses of $10.6
million relating to the infrastructure consolidation were incurred.
These expenses did not qualify for accrual at December 31, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | In the fourth quarter of 2001, Applica took charges relating to
several events in the aggregate amount of $28.2 million. These charges
included:                                                                                                                                                                                                                                                                                                                                                                                                               



| |  |  | $13.4 million related to a product recall;                                                                                                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $6.8 million related to its infrastructure consolidation;                                                                                                                                                         
|
| |  |  | $5.2 million of such charges related to Applicas
execution of a new four-year senior secured revolving credit
facility and the write-off of fees and expenses associated with
the terminated credit facility; and
|
| |  |  | $1.5 million related to the devaluation of the
Argentinean peso and $1.0 million related to the settlement of
the shareholder class action litigation.                                                            



|(5) |  | Includes primarily non-cash charges totaling $37.7 million ($32.6
million, or $1.42 per share, net of tax). Such charges include:
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | a repositioning charge of $34.1 million, of which $30.1
million was included in cost of goods sold and $4.0 million was
included in selling, general and administrative expenses; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a loss on asset held for sale of $3.6 million.                                                                                                                                       



|    |  | The $32.6 million after-tax effect of the charges has been adjusted to
include a tax valuation allowance of approximately $4.5 million related
to certain U.S. foreign tax credits, contributions and state net
operating loss carryforwards, which expire in five years or less.                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(6) |  | Includes an adjustment of $1.5 million ($0.9 million after tax)
related to the reversal of a portion of the 1998 repositioning charge.
Also includes a charge of $12.6 million ($8.3 million after tax)
primarily for the write-down of Applicas remaining investment in
Newtech Electronics Industries, Inc.

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Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations

Overview

The following discussion of our financial conditions and results of
operations should be read in conjunction with our financial statements and the
related notes included in Schedule I to this Annual Report on Form 10-K. This
discussion contains forward-looking statements. Please see Risk Factors in
Item 1. Business above for a discussion of the uncertainties, risks and
assumptions associated with these statements.

Applica is a marketer, distributor and manufacturer of a broad range of
branded and private-label small electric consumer goods. Applica markets,
distributes and manufactures kitchen products, home products, pest control
products, pet care products and personal care products. Applica markets
products under licensed brand names, such as Black & Decker®, its own brand
names, such as Windmere®, LitterMaid® and Applica®, and other
private-label brand names. Applicas customers include mass merchandisers,
specialty retailers and appliance distributors primarily in North America,
Latin America and the Caribbean.

We operate manufacturing facilities in China and Mexico. In 2003 and
2002, approximately 63% and 76%, respectively, of the products sold by Applica
were manufactured in such facilities. In addition, we manufacture products for
other consumer products companies, which we refer to as contract manufacturing.
Management is currently focused on restructuring our manufacturing facilities
to focus on more innovative, proprietary products. We are outsourcing more
commodity-type products to strategic sourcing partners in China, which will
significantly decrease the percentage of products manufactured at our own
facilities.

In the fourth quarter of 2000, Applica entered into a joint product
development relationship with The Procter & Gamble Company to develop,
manufacture, market and distribute new products. We have entered into
agreements related to two products and are in the process of reviewing other
opportunities for joint product development with Procter & Gamble in household
appliance categories. This relationship has initially been targeted to the
Black & Decker® brand, but may be expanded to new brands and wider
categories. We anticipate that the first new products developed will be
launched in the second quarter of 2004.

In June 1996, Applica made a $1.3 million investment representing a 50%
interest in Anasazi Partners L.P. In the fourth quarter of 2002, Anasazi
engaged an investment banker to pursue exit strategies for its equity
investment in ZonePerfect Nutrition Company. In July 2003, the ZonePerfect
Nutrition Company was sold for approximately $160.0 million in cash, $20.0
million of which is being held in escrow at December 31, 2003. In August 2003, Applica received a
cash distribution from Anasazi of $51.4 million related to the sale, which
reduced Applicas investment in Anasazi. In the second half of 2003, the
general partner of Anasazi Partners L.P. began the process of liquidating the
remaining partnership investments and dissolving the partnership, which is
expected to be completed in the first quarter of 2004.

During 2003, we purchased $65.0 million of our 10% notes. As of December
31, 2003, the outstanding balance was $65.0 million. In February 2004, we
purchased an additional $4.25 million of the 10% notes.

In September 2003, a bipartisan group of U.S. senators introduced
legislation that would impose a 27.5% duty on all imports from China until
China stopped fixing the value of its currency, the renminbi, to the dollar.
The legislation maintains that the renminbi is artificially pegged below its
market value and therefore acts as a virtual trade barrier. Since 1994, China
has pegged the renminbi at an exchange rate of 8.28 to the dollar. U.S. groups
have argued that the peg makes Chinas exports to the U.S. cheaper, and U.S.
exports to China more expensive, thus greatly contributing to Chinas trade
surplus with the U.S. A House version of the bill was recently introduced.
Action has not been completed on either bill. We do not believe the
legislation will be adopted in its current form. However, because a
substantial number of our products are imported from China, the adoption of
such legislation in its current or a similar form would have a material adverse
effect on our business. In response to the proposal of such legislation, there
is renewed activity within the Chinese government regarding the relationship
between the renminbi, the Hong Kong dollar and the U.S. dollar. If these
currencies are allowed to float freely, it could result in significant
fluctuations in our product costs.

In May 2002, Applica acquired Weitech, Inc. for a total of $20.0 million,
including cash and notes. Weitechs business involved the design, manufacturer
and distribution of pest control products that emit high

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frequency sound waves. The results of operations of Weitech, Inc. were
included in the accompanying consolidated statement of operations from the date
of the acquisition.

Outlook

We intend to update this Outlook section in our Quarterly Reports on
Form 10-Q subsequently filed with the SEC; however, Applica disclaims any
intention or obligation to publicly announce the results of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.

Management anticipates that sales for the year ended December 31, 2004
will be between $710 million and $730 million. Earnings per diluted share for
2004 is expected to be between $0.80 and $1.00.

The increased sales volume is expected to result from the introduction of
the Home Café single-cup brewing system and the Tide Buzz ultrasonic stain
removal system (both of which were co-developed with The Procter & Gamble
Company), as well as increases in sales of other new Black & Decker® branded
products.

Management expects gross margins to expand in 2004 as a result of the cost
reduction and retrenchment work undertaken in 2003 and a greater proportion of
higher margin, new products to be launched in 2004. Management anticipates
that gross margins will be approximately 35% in 2004.

Management expects that selling, general and administrative operating
expenses will increase in amount in 2004, but remain at approximately 29% of
sales. Variable cost categories will increase because of higher sales volume.
Additionally, minimum royalties on the Black and Decker® branded products
will increase to $12.5 million in 2004 from $5.0 million in 2003. Management
is planning to increase advertising and promotional spending by $11.0 million.
These expenses will be partially offset by a decrease of approximately $7.2
million in amortization expense.

Management anticipates that interest expense will continue to decrease to
approximately $9.0 million for 2004.

Capital expenditures are planned to be approximately $22.0 million, driven
by new products and the information technology initiative. Management expects
that capital expenditures for our manufacturing operations will decrease in
2004.

For the quarter ended March 31, 2004, we believe that sales will be
between $125 million and $130 million and there will be a loss per share of
$0.13 to $0.18. Management will continue to downsize both the Mexican and
Chinese manufacturing facilities and expects to incur up to an additional $3.0
million in severance costs and non-cash asset write-offs in the first quarter
of 2004, which did not qualify for accrual at December 31, 2003.

Use of Estimates and Critical Accounting Policies

Applicas accounting policies are more fully described in Note A of Notes
to Consolidated Financial Statements included in Schedule I hereto. As
disclosed in Note A, the preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Future events and their effects
cannot be determined with absolute certainty. Therefore, the determination of
estimates requires the exercise of judgment. Actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements. Applica believes that of its critical accounting
policies, the following had a significant effect on the operations for 2003 and
2002.

Applica performs goodwill impairment tests on at least an annual basis
and more frequently in certain circumstances. Applica cannot predict the
occurrence of certain events that might adversely affect the reported value of
goodwill that totaled $62.8 million at December 31, 2003 and 2002. For
example, such events may include strategic decisions made in response to
economic and competitive conditions, the impact of the economic environment on
Applicas customer base, or a material negative change in its relationships
with significant customers. If events occur or circumstances change that would
more likely than not reduce the fair value of goodwill below its carrying
amount, goodwill will be tested for impairment. Applica will recognize an
impairment loss if the carrying value of the asset exceeds the fair value
determination. During the first quarter of 2002, Applica recorded a

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write-down of its goodwill of $121.3 million ($78.8 million, net of tax).
Applica performed its annual fair value assessment as of June 30, 2003 and no
impairment was noted. As the result of lower than expected sales of certain
core categories of Black & Decker® branded products in the third and fourth
quarters of 2003, Applica also performed a fair value test as of December 31,
2003. However, no impairment was noted.

Applica reviews long-lived assets and certain identifiable intangibles
held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In evaluating the fair value and future benefits of its intangible
assets, management performs an analysis of the anticipated undiscounted future
net cash flows of the individual assets over the remaining amortization period.
Applica recognizes an impairment loss if the carrying value of the asset
exceeds the expected future cash flows. During 2003, in connection with an
intangible asset related to the Black & Decker® trademark, management
determined that a triggering event had occurred in accordance with Statement of
Financial Accounting Standards No. 144 Accounting for Impairment or Disposal
of Long-Lived Assets. Applica performed a benefit analysis by calculating the
expected effective royalty rate in 2004 through 2006, taking into account the
minimum royalties, as well as the projected sales of Black and Decker branded
products. Based on the benefit analysis, Applica recorded an impairment charge
of $7.2 million to write off the unamortized book value of the intangible
asset.

Applica is also subject to income tax laws in many countries. Judgment is
required in assessing the future tax consequences of events that have been
recognized in Applicas financial statements or tax returns. Significant
management judgment is required in developing Applicas provision for income
taxes, including the determination of foreign tax liabilities, deferred tax
assets and liabilities and any valuation allowances that might be required to
be applied against the deferred tax assets. At December 31, 2003, Applica had
deferred tax assets in excess of deferred tax liabilities of $68.7 million.
Applica determined that it was more likely than not that $61.3 million of such
assets will be realized, resulting in a valuation allowance of $7.4 million as
of December 31, 2003. Applica evaluates its ability to realize its deferred
tax assets on a quarterly basis and adjusts the amount of its valuation
allowance, if necessary. Applica operates within multiple taxing jurisdictions
and is subject to audit in those jurisdictions. Because of the complex issues
involved, any claims can require an extended period to resolve. In
managements opinion, adequate provisions for income taxes have been made.
During 2004, Applica expects that taxing authorities may complete tax audits
currently underway. The final outcome of these future tax consequences, tax
audits, and changes in regulatory tax laws and rates could materially impact
Applicas financial statements.

Applica records allowances for estimated losses resulting from the
inability of our customers to make required payments on their balances. 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 December 31,
2003.

Applica is subject to various legal proceedings, product liability claims
and other claims in the ordinary course of its business. During 2003, Applica
had an increase of $5.6 million in legal expenses, which were primarily
associated with the Tilia-related litigation matters. With respect to product
liability, Applica estimates the amount of ultimate liability in excess of
applicable insurance coverage based on historical claims experience and current
claim amounts, as well as other available facts and circumstances. We believe
that the amount of ultimate liability of our current litigation matters, if
any, is not likely to have a material effect on our business, financial
condition, results of operations or liquidity. However, as the outcome of
litigation is difficult to predict, significant changes in the estimated
exposures could occur.

Estimates in connection with specific events have a significant effect on
accruals for, among others, the consolidation of operations, plant closings,
reduction in employees and product recalls. Estimates have also been
required with respect to our investment in a joint venture investment
partnership, Anasazi Partners, L.P. Applica makes a number of other estimates
in the ordinary course of business relating to sales returns and allowances,
warranty accruals, and accruals for promotional incentives. Historically,
changes to these estimates have not had a material impact on our financial
condition but have significantly affected operations from time to time.
However, circumstances could change which may alter future expectations.

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Results of Operations

The operating results of Applica expressed as a percentage of sales and
other revenues are set forth in the table below:

|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |      |      |      |   
|-------------------------------------------------------------------------------------- | --------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------- | ---- | ----------------------- | --- | ----- | ---- | ---- | ----- | ----- | ---- | ---- | ---- | --
|                                                                                       |                                         |                                                                                             |                     |      | Year Ended December 31,
|                                                                                       |                                         |                                                                                             |                     |      |                        
|                                                                                       |                                         |                                                                                             |                     |      | 2003                    |     | 2002  |      | 2001
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |     
|Net sales                                                                              |                                         |                                                                                             | 100.0               | %    |                         |     | 100.0 | %    |      |       | 100.0 | %   
|Cost of sales:                                                                         |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|                                                                                       | Cost of goods sold                      |                                                                                             |                     | 71.7 |                         |     |       | 68.6 |      |       |       | 71.6 |     
|                                                                                       | Product recall expenses (credit)        |                                                                                             |                     | (0.6 | )                       |     |       |     |      |       |       | 1.8  |     
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|                                                                                       |                                         | Gross profit                                                                                |                     |      | 28.9                    |     |       |      | 31.4 |       |       |      | 26.6 |     
|Selling, general and administrative expenses:                                          |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|                                                                                       | Operating expenses                      |                                                                                             |                     | 29.1 |                         |     |       | 26.3 |      |       |       | 25.0 |     
|                                                                                       | Repositioning charges and other charges |                                                                                             |                     | 0.7  |                         |     |       | 1.4  |      |       |       | 2.1  |     
|                                                                                       | Impairment and intangible asset         |                                                                                             |                     | 1.1  |                         |     |       |     |      |       |       |     |     
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|                                                                                       |                                         | Operating earnings (loss)                                                                   |                     |      | (2.0                    | )   |       |      | 3.7  |       |       |      | (0.5 | )   
|Other income (expense)                                                                 |                                         |                                                                                             | (2.7                | )    |                         |     | (2.1  | )    |      |       | (2.8  | )   
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|Earnings (loss) before equity in net earnings (loss) of joint
venture and income taxes |                                         |                                                                                             | (4.7                | )    |                         |     | 1.6   |      |      |       | (2.8  | )   
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|Equity in net earnings (loss) of joint ventures                                        |                                         |                                                                                             | 8.7                 |      |                         |     | (0.2  | )    |      |       | 0.0   |     
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|                                                                                       |                                         | Earnings (loss) before income taxes and cumulative
effect of change in accounting principle |                     |      | 4.0                     |     |       |      | 1.4  |       |       |      | (3.3 | )   
|Income tax expense (benefit)                                                           |                                         |                                                                                             | 1.6                 |      |                         |     | 0.7   |      |      |       | 0.6   |     
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|Earnings (loss) before cumulative effect of change in
accounting principle             |                                         |                                                                                             | 2.4                 |      |                         |     | 0.7   |      |      |       | (3.9  | )   
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|Cumulative effect of change in accounting principle, net of tax                        |                                         |                                                                                             |                    |      |                         |     | (10.8 | )    |      |       |      |     
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     
|                                                                                       |                                         |                                                                                             | Net earnings (loss) |      |                         | 2.4 | %     |      |      | (10.1 | )%    |      |      | (3.9 | )%
|                                                                                       |                                         |                                                                                             |                     |      |                         |     |       |      |      |       |       |     

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Net Sales. Sales decreased by $86.8 million to $640.6 million, a decrease
of 11.9% over 2002. Sales to Wal-Mart Stores, Inc., our largest customer,
accounted for 29.8% and 24.5% of total sales for the 2003 and 2002 periods,
respectively. For the year ended December 31, 2003:



| |  |  | contract manufacturing decreased by $51.0 million to $28.2 million;                                                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | sales of Windmere® and other branded products decreased by $14.4 million to $49.9 million;                                                                         
|
| |  |  | sales of White Westinghouse® products decreased by $14.7
million (no such products were sold in 2003);                                                             
|
| |  |  | sales of Black & Decker® branded products decreased
by $4.5 million to $448.4 million; and                                                                         
|
| |  |  | total sales of Littermaid®, Weitech (pest control),
Belson® (personal care) and Jerdon® (hospitality) branded products
decreased by $2.2 million to $114.1 million.

In 2003, contract manufacturing decreased as the result of a planned
de-emphasis on production of products for customers that would be in direct
competition with products produced for sale under our brand names.
Additionally, sales of Windmere® and other branded products decreased as the
result of the continued de-emphasis of Windmere® branded products and lower
sales to key retailers.

Decreases in the sales of Black & Decker® branded products in 2003 were
primarily the result of losses of market share in irons and toaster ovens.
These decreases were partially offset by increased sales of new products under
the Black & Decker® brand in the fourth quarter of 2003.

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In June 2000, Kmart Corporation exercised its option to terminate its
long-term supply contract with Applica for the sale of White-Westinghouse®
consumer electronic products in the United States. The termination was
effective on June 30, 2002. On December 31, 2002, Applica terminated the White
Westinghouse license agreement. Sales of White Westinghouse branded products
totaled $14.7 million in 2002.

We expect sales of Black & Decker® branded products to increase in 2004
as the result of the introduction of several new products, including the Home
Café single-cup brewing system and the Tide Buzz ultrasonic stain
removal system, both of which were co-developed with The Procter & Gamble
Company. Additionally, in 2004, we anticipate that the majority of the pest
control products will be marketed under the Black & Decker® brand name and we
will introduce new items under the Gizmo sub brand.

In January 2002, Kmart Corporation and certain of its U.S. subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Kmart is one of Applicas top three customers. Kmart
emerged from Chapter 11 in May 2003. In 2003 and 2002, Applica had sales of
$30.2 million and $43.5 million to Kmart Corporation.

In July 2002, Aisenstein & Gordon, Inc. (A&G), a distributor, announced
that it would cease continuing business operations and undertake an
out-of-court liquidation. In 2002, Applica had sales of $2.7 million to A&G.
Applica had outstanding receivables from A&G of approximately $1.7 million and,
in connection with the liquidation, received approximately $160,000 on such
receivables.

In January 2003, PHD, Inc., a distributor and significant customer of
Applica, was placed into involuntary bankruptcy, which PHD voluntarily
converted to a liquidation under Chapter 11 of the U.S. Bankruptcy Code. In
2002, Applica had sales of $13.4 million to PHD, Inc. and its subsidiaries. At
the date of the bankruptcy filing, Applica had outstanding receivables of
approximately $4.3 million, which were fully reserved at December 31, 2003.

Product Recall Expenses.In February 2002, Applica Consumer Products,
Inc., in cooperation with the Consumer Products Safety Commission, voluntarily
recalled approximately 2.1 million Black & Decker® T1200 and T1400 toasters.
Applicas Canadian operating subsidiary, Applica Canada Corporation, also
recalled approximately 180,000 of these toasters in Canada. In 2001, Applica
took a charge to cost of sales of $13.4 million relating to the estimated
expenses of such recalls. In 2003 and 2002, $638,000 and $8.7 million were
charged against the accrual, respectively. During 2003, recall claims
continued to diminish considerably. In the fourth quarter of 2003, management
determined that an accrual related to the product recall was no longer required
and $4.1 million of such accrual was reversed and was included as a reduction
of cost of sales.

Gross Profit. Applicas gross profit decreased by $43.1 million to $185.3
million in 2003 as the result of lower sales volume and lower gross profit
margins. Applicas gross profit margin decreased to 28.9% for the year ended
December 31, 2003 as compared to 31.4% for 2002. The gross profit margin
decrease was primarily attributed to:



| |  |  | unabsorbed overhead at our factories related to lower production levels;                    
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | $6.9 million in manufacturing retrenchment costs incurred in the fourth quarter of 2003, and
|
| |  |  | a poor product mix.                                                                         

These decreases were partially offset by the reversal of $4.1 million
related to the 2001 product recall accrual.

We are continuing to reduce fixed costs and capacity in our Chinese
factories and to focus on products with proprietary technologies and higher
margins. We are planning to outsource the more commodity-type products to
strategic sourcing partners within China, thus reducing the percentage of our
products made at our manufacturing facilities. We have reduced the labor force
in our Applica Durable facilities and are in the process of closing one
factory, which resulted in additional retrenchment costs of approximately $3.8
million in the fourth quarter of 2003.

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Additionally, we recently downsized our Mexico manufacturing operations
and moved production of certain items to China. In the fourth quarter of 2003,
Applica incurred approximately $3.1 million in retrenchment expenses.

Management will continue to downsize both the Mexican and Chinese
manufacturing facilities and expects to incur up to an additional $3.0 million
in retrenchment costs in the first quarter of 2004, which relate to expenses
that did not qualify for accrual at December 31, 2003.

Selling, General and Administrative Expenses.

Operating Expenses. Operating expenses for Applica decreased $4.6
million, or 2.4%, for the year ended December 31, 2003 to $186.6 million as
compared to 2002. Such expenses increased as a percentage of sales to 29.1%
from 26.3% in the 2002 period primarily as the result of lower sales volume.
In 2003:



| |  |  | bad debt expenses decreased $8.9 million;                                                                                                               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Applica experienced a decrease in expenses of $5.0
million as the result of the 2002 consolidation of certain
facilities in North and Latin America; and
|
| |  |  | advertising and promotion expenses decreased by $2.8 million.                                                                                           

These decreases were partially offset by:



| |  |  | increases of $5.6 million in legal expenses (primarily related to the Tilia litigation);                                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increases of $4.2 million in royalty expenses; and                                                                                                                  
|
| |  |  | increases of $3.1 million in consulting expenses
related to information technology improvements and the
implementation of a new enterprise resource planning system.

Minimum royalties under the license agreement with The Black & Decker
Corporation will increase by $7.5 million in 2004. Additional royalty expenses
may be incurred depending on higher sales volume. Additionally, management
expects to continue to incur significant legal expenses in connection with the
Tilia litigation and increases in advertising and promotional expenses.

Repositioning and Other Charges. In 2003, Applica incurred additional
expenses of $4.7 million relating to its previous decision to consolidate its
Shelton, Connecticut office with the headquarters located in Miami Lakes,
Florida. Applica was unable to rent a majority of the facility for the
remainder of its lease as originally planned. For the year ended December 31,
2002, Applica incurred expenses of $10.6 million relating to its decision to
consolidate its Shelton, Connecticut office with the headquarters located in
Miami Lakes, Florida, as well as certain back-office and supply chain functions
in Canada and Latin America. Such consolidation was completed in the third
quarter of 2002.

Impairment of Intangible Asset.In June 1998, Applica acquired the
household products group of The Black & Decker Corporation for $319.8 million
in cash and assumed certain related liabilities. As part of the acquisition,
Applica acquired the right to use the Black & Decker® trademark in four
product categories: garment care, cooking, food preparation and beverage.
Applica has the right to sell products under this license agreement in North
America, Central America, and South America, excluding Brazil. The excess of
the purchase price over the estimated fair value of the acquired net assets was
$228.8 million, of which $47.2 million was allocated to an intangible asset
related to the Black & Decker® trademark and the remaining $181.6 million was
allocated to goodwill. The $47.2 million assigned to the fair value of the
intangible asset was based on a benefit performed by Applica as of June 1998.
For the first five years (through June 30, 2003), the license was on a royalty
free basis for the core product categories. Mutually agreed upon renewals were
to be at the stated royalty rate, along with specified minimum royalty
payments. The agreement provided for an initial period of five years, with a
subsequent five-year extended term and up to three additional five-year
extensions.

Beginning in 2002, sales of Black & Decker® branded products under the
original four product categories started to decrease significantly and
continued through December 31, 2003. Sales of Black & Decker® branded

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products under the original four product categories for 2003, 2002, and
2001 were $399 million, $429 million and $446 million, respectively. As a
result of the continuation of the lower sales of Black & Decker® branded
products in the four core product categories in the third and fourth quarter of
2003 (which are Applicas busiest quarters due to the seasonality of our
business), management determined that a triggering event had occurred in
accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Accordingly, Applica performed a benefit analysis by
calculating the expected effective royalty rate in 2004 through 2006, taking
into account the minimum royalties as well as the projected sales of Black &
Decker® branded products under the original four categories. Based on the
benefit analysis, management believes that there is no remaining value in the
initial intangible asset as of December 31, 2003. Accordingly, Applica recorded
an impairment charge of approximately $7.2 million to write off the unamortized
book value of the intangible asset. The impairment charge is reflected in the
fourth quarter of 2003 because the decreased fourth quarter sales provided
further confirmation of an impairment. Pursuant to the requirements of SFAS
144 and as a result of Applicas benefit analysis, the impairment charge is
classified as a component of income from operations.

Interest Expense. Interest expense decreased by $3.6 million, or 20.5%,
to $14.0 million for the twelve months ended December 31, 2003, as compared to
$17.6 million for 2002, as the result of lower debt levels and lower average
interest rates. The lower debt levels and lower interest rates resulted from
the redemption of $65.0 million of the 10% notes. In 2004, assuming interest
rates remain at current levels, management expects interest expense to decrease
approximately $5.0 million as a result of the 2003 note redemptions and
additional redemptions anticipated in 2004.

Loss On Early Extinguishment of Debt. In July, October and November 2003,
Applica redeemed a total of $65.0 million of its $130.0 million 10% Senior
Subordinated Notes due 2008. The notes were redeemed, primarily using the cash
proceeds from the distribution of earnings by the Anasazi joint venture, at
prices between 103% and 105% of the principal amount, plus accrued interest up
to, but not including, the redemption date. The cost of the redemption of the
notes includes $2.8 million in prepayment premiums and approximately $1.1
million related to the write-off of deferred financing costs. In February
2004, Applica redeemed an additional $4.25 million of the 10% notes. The cost
of the February redemption includes $200,000 in prepayment premiums and
deferred financing costs related to the write-off.

Gain on Litigation Settlement.In September 2002, Applica and Salton,
Inc. entered into a settlement agreement in the matter Salton, Inc. v
Windmere-Durable Holdings, Inc. and Windmere Corporation, which was filed in
the United States District Court, Northern District of Illinois in January
2001. In connection with such settlement, Applica reported a one-time gain of
$557,000 in the third quarter of 2002.

Equity in Net Earnings (Loss) of Joint Venture.The equity in net
earnings (loss) of joint venture increased from a $1.5 million loss in 2002 to
a gain of $55.6 million in 2003. The equity in net earnings resulted primarily
from a gain in the fair value of an investment in ZonePerfect Nutrition Company
held by Anasazi Partners L.P., a partnership owned 50% by Applica.

In the fourth quarter of 2002, Anasazi engaged an investment banker to
pursue exit strategies for Anasazis equity investment in ZonePerfect Nutrition
Company. In July 2003, ZonePerfect was sold for approximately $160.0 million
in cash, $20.0 million of which is being held in escrow. Payment of $10.0
million of the amount held in escrow is contingent on the performance of a negotiated
matter and no portion thereof has been reflected in Applicas earnings.

In August 2003, Applica received a cash distribution from Anasazi of $51.4
million resulting from the sale of ZonePerfect, which reduced Applicas
investment in Anasazi. Pursuant to an agreement between Applica and
the other 50% partner of Anasazi, Applica receives a disproportionate
share of the earnings related to the sale of the investment in
ZonePerfect. The funds held in escrow are to be released to the
sellers, including Anasazi, at 18 and 24 months from date of closing, subject
to any adjustments to the escrowed funds for breaches of representations and
warranties. Management of Anasazi believes that Anasazi is entitled to receive
additional amounts with respect to the contingent negotiated matter.
Upon agreement with the purchaser of ZonePerfect, or release of the related
funds from escrow, Applica expects to record additional earnings of
approximately $3.7 million.

The remaining investments of Anasazi Partners include certain privately
traded securities whose values have been estimated by the general partner in
the absence of readily ascertainable market values. Fair value of these
securities may differ significantly from the values that would have been used
had a ready market for the securities existed. In July 2003, the general
partner of Anasazi Partners L.P. began the process of liquidating the remaining

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partnership investments and dissolving the partnership, which is expected
to be completed in the first quarter of 2004.

Taxes. Applicas tax expense is based on an estimated annual aggregation
of the taxes on earnings of each of its foreign and domestic operations. For
2003, Applica had an effective tax rate of 40%. The change in tax rate from
2002 resulted from a reduction in permanent differences, such as foreign
exchange translation losses. Applica expects its future effective tax rate to
approximate 40%.

The earnings of subsidiaries in Canada, Mexico and Latin America (other
than Chile) are generally taxed at rates comparable to or higher than 35%, the
United States statutory rate. In addition, commencing on January 1, 2002, the
earnings of Applicas Hong Kong subsidiary are also taxed at the United States
statutory rate of 35% due to Applicas intent not to permanently reinvest the
earnings outside of the United States. Applica does not make tax provisions for
the undistributed earnings of its foreign subsidiaries that it expects will be
permanently reinvested in its operations outside of the United States.

For additional information regarding taxes, see Note I of the Notes to
Consolidated Financial Statements included in Schedule I of this Annual Report
on Form 10-K.

Cumulative Effect of Change in Accounting Principle. In January 2002,
Applica applied the provisions of SFAS 142, Goodwill and Other Intangible
Assets and performed a transitional fair valued based impairment test. Based
on its impairment tests, Applica recognized an adjustment of $121.3 million
($78.8 million, or $3.31 per share, net of tax on a fully diluted basis) in the
first quarter of 2002 to reduce the carrying value of goodwill to its implied
fair value. Under SFAS 142, the impairment adjustment was reflected as a
cumulative effect of change in accounting principle.

Earnings Per Share. Basic shares for the periods ended December 31, 2003
and 2002 were 23,572,857 and 23,415,186, respectively. Included in diluted
shares are the dilutive effect of common stock equivalents relating to stock options of 424,703 for the
year ended December 31, 2003 and 403,275 for the year ended December
31, 2002. Potential common stock equivalents at December 31, 2003 and 2002
were 1,494,685 and 642,964 with exercise prices ranging from $6.75 to $31.69
per share and $7.60 and $31.69 per share, respectively.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net Sales. Sales for Applica remained flat at $727.4 million compared to
$727.0 million in 2001. For the year:



| |  |  | contract manufacturing increased $17.8 million to $79.2
million;                                                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | sales of pest control products were $15.7 million (no
pest control products were sold in 2001); and                                        
|
| |  |  | total sales of Littermaid®,
Belson® (personal care)
and Jerdon® (hospitality) branded products increased by $7.2
million to $100.6 million.

These increases were offset by the following:



| |  |  | sales of Windmere® branded and other products of
decreased by $23.4 million to $64.3 million;
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | sales of White Westinghouse® products decreased by $8.6 million to $14.7 million; and        
|
| |  |  | sales of Black & Decker® branded products decreased $8.3 million to $452.9 million.          

In 2002, sales of Black & Decker® branded products increased $7.1
million in North American, but decreased $15.4 million in Latin America. Sales
to Wal-Mart Stores, Inc., our largest customer, accounted for 24.5% and 24.3%
of total sales for the 2002 and 2001 periods, respectively.

In June 2000, the Kmart Corporation exercised its option to terminate its
long-term supply contract with Applica for the sale of White-Westinghouse®
consumer electronic products in the United States. The termination was
effective on June 30, 2002. On December 31, 2002, Applica terminated the White
Westinghouse® license agreement. Sales of White Westinghouse® branded products
totaled $14.7 million in 2002 and $23.3 million in 2001.

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In January 2002, Kmart Corporation and certain of its U.S. subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. In 2002 and 2001, Applica had sales of $43.5 million and
$49.4 million to Kmart Corporation and, at the date of the bankruptcy filing,
Applica had outstanding receivables of approximately $5.0 million.

In July 2002, Aisenstein & Gordon, Inc. (A&G), a distributor, announced
that it would cease continuing business operations and undertake an
out-of-court liquidation. In 2002 and 2001, Applica had sales of $2.7 million
and $7.1 million, respectively, to A&G. Applica had outstanding receivables
from A&G of approximately $1.7 million and, in connection with the liquidation,
received approximately $160,000 on such receivables.

In January 2003, PHD, Inc., a distributor and significant customer of
Applica, was placed into involuntary bankruptcy, which PHD voluntarily
converted to a liquidation under Chapter 11 of the U.S. Bankruptcy Code. In
2002 and 2001, Applica had sales of $13.4 million and $12.9 million,
respectively, to PHD, Inc. and its subsidiaries. At the date of the bankruptcy
filing, Applica had outstanding receivables of approximately $4.3 million,
which were fully reserved at December 31, 2002 and 2003.

Gross Profit Margin. Applicas gross profit margin was 31.4% in 2002 as
compared to 26.6% for 2001. The gross profit margins increased as Applica
experienced an improved product mix during 2002 and higher production levels at
its manufacturing facilities.

Selling, General and Administrative Expenses.

Operating Expenses. Operating expenses for Applica increased $9.4
million, or 5.2%, in 2002 to $191.2 million as compared to $181.8 in 2001.
Such expenses increased as a percentage of sales to 26.3% from 25.0% in the
2001 period. In 2002, advertising and promotion expenses increased $10.3
million, largely as the result of increased television promotion to support new
product introductions. Additionally:



| |  |  | our bad debt expenses increased by $6.6 million, as we
experienced the credit deterioration of two of our major
distributors, 
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we experienced a $2.2 million foreign exchange loss
primarily related to the devaluation of certain Latin American
currencies,
|
| |  |  | payroll and severance expenses increased by $1.5 million, and                                                                 
|
| |  |  | selling and other expenses increased by $400,000.                                                                             

These increases were offset by decreases in amortization expense of $10.9
million primarily as the result of the adoption of SFAS 142, Goodwill and
Other Intangible Assets and the write down of White Westinghouse related
intangibles. Additionally, distribution and freight costs decreased by $1.5
million during 2002 as the result of our supply chain management program.

Repositioning and Other Charges. In the fourth quarter of 2001, Applica
took charges relating to several events in the aggregate amount of $14.8
million. These charges included $6.8 million relating to Applicas decision to
consolidate its Shelton, Connecticut office with the headquarters located in
Miami Lakes, Florida, as well as certain back-office and supply chain functions
in Canada and Latin America. In addition, $5.2 million of such charges related
to Applicas execution of a new four-year senior secured revolving credit
facility and the write-off of fees and expenses associated with the terminated
credit facility. Also included in the charge were $1.5 million relating to the
devaluation of the Argentinean peso and $1.0 million related to the settlement
of the shareholder class action litigation. In 2002, Applica incurred
repositioning expenses of $10.6 million relating to the consolidation. These
expenses did not qualify for accrual at December 31, 2001.

Interest Expense. Interest expense decreased by $4.9 million, or 21.8%,
to $17.6 million for 2002, as compared to $22.5 million for 2001. Such
decrease was largely the result of the reduction of debt and lower interest
rates.

Gain on Litigation Settlement.In September 2002, Applica and Salton,
Inc. entered into a settlement agreement in the matter Salton, Inc. v
Windmere-Durable Holdings, Inc. and Windmere Corporation, which was filed

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##### Table of Contents



in the United States District Court, Northern District of Illinois in
January 2001. In connection with such settlement, Applica reported a one-time
gain of $557,000 in the third quarter of 2002.

Equity in Net Earnings (Loss) of Joint Ventures.The equity in net
earnings (loss) of joint ventures increased from a $128,000 loss in 2001 to a
$1.5 million loss in 2002. This increase was due to Applicas losses of
approximately $1.5 million related to its investment in a Florida limited
liability company. Applica has no additional commitments or exposure related
to this investment. During 2002, Applica did not reflect any equity in net
earnings (loss) related to its investment in Anasazi Partners, L.P. Anasazis
investments include certain privately traded securities whose values have been
estimated by the general partner in the absence of readily ascertainable market
values. Fair value of these securities may differ significantly from the
values that would have been used had a ready market for the securities existed.

Taxes. Applicas tax expense is based on an estimated annual aggregation
of the taxes on earnings of each of its foreign and domestic operations. For
2002, Applica had an effective tax rate of 48.9%. The change in tax rate from
2001 resulted from additional tax expense of $10.1 million in 2001 due to the
repatriation of previously untaxed earnings. In addition, in 2002 Applica
incurred additional permanent differences, such as foreign exchange translation
losses.

The earnings of subsidiaries in Canada, Mexico and Latin America (other
than Chile) are generally taxed at rates comparable to or higher than 35%, the
United States statutory rate. In addition, commencing on January 1, 2002, the
earnings of Applicas Hong Kong subsidiary are also taxed at the United States
statutory rate of 35% due to Applicas intent not to permanently reinvest the
earnings outside of the United States. Applica does not make tax provisions for
the undistributed earnings of its foreign subsidiaries that it expects will be
permanently reinvested in its operations outside of the United States.

For additional information regarding taxes, see Note I of the Notes to
Consolidated Financial Statements included in Schedule I of this Annual Report
on Form 10-K.

Cumulative Effect of Change in Accounting Principle. In January 2002,
Applica applied the provisions of SFAS 142, Goodwill and Other Intangible
Assets and performed a transitional fair valued based impairment test. Based
on its impairment tests, Applica recognized an adjustment of $121.3 million
($78.8 million, or $3.31 per share, net of tax on a fully diluted basis) in the
first quarter of 2002 to reduce the carrying value of goodwill to its implied
fair value. Under SFAS 142, the impairment adjustment was reflected as a
cumulative effect of change in accounting principle.

Earnings Per Share. Basic shares for the periods ended December 31, 2002
and 2001 were 23,415,186 and 23,135,222, respectively. Included in diluted
shares is the dilutive effect of common stock equivalents relating to options
of 403,275 for the period ended December 31, 2002. All common stock
equivalents were excluded from the per share calculations in 2001 as Applica
incurred a net loss before cumulative effect of change in accounting principle
in the period and such inclusion would have been anti-dilutive.

Financial Condition

Liquidity

Applicas financial condition and liquidity remained adequate as of
December 31, 2003. Cash and cash equivalents amounted to $12.7 million at
December 31, 2003 compared to $7.7 million at December 31, 2002. The increase
in cash and marketable securities was primarily the result of higher
collections during the last few days of the year and the timing of
expenditures. Any excess cash in the United States is used to pay down
Applicas borrowings under its domestic credit facility on the next business
day.

Operating Activities.Operations generated cash of $27.5 million for the
year ended December 31, 2003, as compared to $52.0 million net cash provided in
the year ended December 31, 2002. The decrease in operating cash flows from
the prior year was principally due to lower operating earnings of $39.7
million, partially offset by a decrease in working capital (which is comprised
of current assets less current liabilities) of $14.3 million.

As part of its capital management focus, Applica reviews certain working
capital metrics. For example, management evaluates accounts receivable and
inventory levels through the computation of days sales outstanding

-30-



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##### Table of Contents



and inventory turns. The number of days sales outstanding as of December
31, 2003 decreased by approximately seven days as compared to the prior period.
This decrease in average days sales outstanding, coupled with lower sales
volume, resulted in a source of cash of $13.3 million. Average inventory turns
during 2003 decreased from the prior period due to lower than forecasted sales
during the year. However, through focused inventory management in the fourth
quarter of 2003, we decreased our inventory resulting in a source of cash of
$2.8 million for the year ended December 31, 2003.

Investing Activities. For the year ended December 31, 2003, investing
activities generated cash of $33.4 million compared to $31.5 million of cash
used in 2002. Cash flow from investing activities benefited from the cash
proceeds of $51.4 million received from Anasazi Partners L.P., our 50% joint
venture, in connection with the sale of its investment in Zone Perfect
Nutrition Company. In addition, investing activities for the year ended
December 31, 2002 included a payment of $17.0 million in connection with the
acquisition of Weitech, Inc.

Applica makes capital expenditures primarily for new product development
and maintenance of its manufacturing facilities. In addition, Applica is
undergoing a major upgrade of its information technology infrastructure,
including the installation of a new enterprise resource planning system.
Capital expenditures for 2004 are expected to be approximately $22.0 million
allocated as follows:



| |  |  | $7.5 million for new products;                                         
| | - |  | -----------------------------------------------------------------------
|
| |  |  | $6.7 million for information technology;                               
|
| |  |  | $5.1 million for maintenance at our manufacturing facilities; and      
|
| |  |  | $2.2 million for other improvements, such as supply chain enhancements.

Applica plans to fund such capital expenditure from cash flow from
operations and, if necessary, borrowings under its credit facilities.

Financing Activities. Net cash used in financing activities was $58.8
million in 2003, compared to cash used of $30.6 million in 2002. The increase
in cash used in financing reflects Applicas redemption of $65.0 million of its
10% notes at a redemption price of approximately $68.0 million. The notes were
redeemed primarily using the cash distribution received from Anasazi Partners.
There were no such redemptions in 2002. The increase was partially offset by
net borrowings under lines of credit of $7.8 million in 2003, as compared to
net payments of $38.1 million in 2002.

We will continue to have cash requirements to support seasonal working
capital needs and capital expenditures, to pay interest and to service debt.

Management continues to review its opportunities to repurchase additional
10% notes depending on several factors, including availability under Applicas
credit facility, the market price of the 10% notes and projected free cash
flow.

Capital Resources

Applicas primary sources of short-term capital are its cash flow from
operations and borrowings under its credit facilities. Applicas current
domestic credit facility is a $205 million asset-based senior secured revolving
credit facility maturing December 28, 2005. As of March 1, 2004, Applica was
borrowing approximately $30.9 million under the facility and had approximately
$47.1 million available for future cash borrowings, based on Applicas
collateral value. Advances under the facility are primarily based upon
percentages of outstanding eligible accounts receivable and inventories. The
credit facility includes a $10.0 million sublimit for the issuance of letters
of credit, with approximately $1.7 million outstanding under the limit as of
March 1, 2004.

At Applicas option, interest accrues on the loans made under the credit
facility at either:



| |  |  | LIBOR (adjusted for any reserves), plus a specified margin (determined by
Applicas leverage ratio and set at 2.00% at December 31, 2003 and 2.00% at
March 1, 2004), which was 3.12% at December 31, 2003 and 3.10% at March 1,
2004; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-31-



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##### Table of Contents




    
    the Base Rate (which is Bank of Americas prime rate), plus a specified
margin (determined based upon Applicas leverage ratio and was zero at December
31, 2003 and March 1, 2004), which was 4.00% at December 31, 2003 and 4.00% at
March 1, 2004. Management expects its borrowing margins to increase to 2.35% (for LIBOR
loans) and 0.35% (for Base Rate loans) during March 2004. This increase is a
result of an increase in our leverage ratio. Swing loans up to $15.0 million bear interest at the Base Rate plus a
specified margin (determined based on Applicas leverage ratio and was zero at
December 31, 2003 and at March 1, 2004), which was 4.00% at December 31, 2003
and 4.00% at March 1, 2004. Certain of Applicas foreign subsidiaries have approximately $14.5 million
in trade finance lines of credit, payable on demand, which are secured by the
subsidiaries tangible and intangible property, and in some cases, a guarantee
by the parent company, Applica Incorporated. As of December 31, 2003, there
were no amounts outstanding under the working capital lines and $258,000
outstanding under the letter of credit lines. As of March 1, 2004, there were
no amounts outstanding under the working capital lines and $300,000 under the
letter of credit lines. In addition, Applica has senior subordinated notes bearing interest at a
rate of 10%, payable semiannually, and mature on July 31, 2008. The notes are
general unsecured obligations of Applica Incorporated and rank subordinate in
right of payment to all senior debt of Applica and rank pari passu in right of
payment to all future subordinated indebtedness of Applica. The notes may be
redeemed at the option of Applica, in whole or in part, on or after July 31,
2003 at various redemption prices. During 2003, we repurchased $65.0 million
of these notes. As of December 31, 2003, the outstanding balance was $65.0
million. In February 2004, we repurchased an additional $4.25 million of 10%
notes. See Note G of the Consolidated Financial Statements included in
Schedule I to this Annual Report on Form 10-K for more detailed information
regarding Applicas borrowings. On September 28, 2002, Applica entered into credit approved receivables
purchasing agreements with CIT Group/Commercial Services, Inc. The agreements
allow Applica to transfer to CIT, without recourse, approved receivables of
specified customers under certain circumstances, including the bankruptcy of
covered customers. Applica remains the servicer of the approved receivables
and pays fees based upon a percentage of the gross face amount of each approved
receivable. These arrangements are strictly for the purpose of insuring
selected receivables. At December 31, 2003 and 2002, $16.5 million and $4.4
million of accounts receivable were insured under this arrangement. In April 2002, Applica Consumer Products, Inc. entered into a five-year
$6.0 million mortgage loan on Applicas executive offices located in Miami
Lakes, Florida. The loan bears interest at an annual rate of 7.25%,
with monthly principal and interest payments based on a 20-year
amortization. A final balloon payment is due at the end of the term. The loan
is secured by a mortgage on the property and the building located thereon. In
November 2003, Applica entered into an agreement to sell its executive offices
located in Miami Lakes for $9.5 million. The sale is scheduled to close in
July 2004. At the time of closing, approximately $6.0 million of these
proceeds will be used to repay the outstanding mortgage on the property.
Applicas intention is to enter into a non-cancelable long-term operating lease
for new corporate office space in South Florida. No commitment has been made
as of the current date. At December 31, 2003, debt as a percent of total capitalization was 36.5%,
as compared to 47.0% at December 31, 2002. The improvement was a result of a
$57.2 million decrease in debt and an increase in shareholders equity of $18.5
million as a result of our earnings for the year. Applicas ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures, product research and development expenses and marketing expenses
will depend on its future performance, which, to a certain extent, is subject
to general economic, financial, competitive, legislative, regulatory, and
international and United States domestic political factors and other factors
that are beyond its control. Based upon the current level of operations and
anticipated margin improvements and revenue growth, we believe that cash flow
from operations and available cash, together with available borrowings under
its credit facility and other facilities, will be adequate to meet our future
liquidity needs for at least the next several years. However, business may not
generate sufficient cash flow from operations, our anticipated revenue growth
and operating improvements may not be realized and future borrowings may not be
available under the credit -32-




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##### Table of Contents



facility in an amount sufficient to enable us to
service our indebtedness, including the outstanding 10% notes, or to fund our
other liquidity needs. In addition, we may not be able to effect any needed
refinancing on commercially reasonable terms or at all. At December 31, 2003, our contractual obligations and commercial
commitments were as follows (in thousands): Payment due in:2005 to
    
    2007 to
    
    More thanContractual Obligations
    
    Total
    
    2004
    
    2006
    
    2008
    
    5 years(In thousands)Debt Obligations
    
    $
    136,788
    
    
    $
    151
    
    
    $
    66,047
    
    
    $
    70,590
    
    
    $
    Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    25,872
    
    
    
    7,831
    
    
    
    12,715
    
    
    
    4,876
    
    
    
    450Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Licenses
    
    
    39,200
    
    
    
    12,500
    
    
    
    25,300
    
    
    
    400
    
    
    
    1,000Other Long-Term
Liabilities Reflected on
the Balance Sheet
    
    
    1,327
    
    
    
    660
    
    
    
    372
    
    
    
    295
    
    
    
    $
    203,187
    
    
    $
    21,142
    
    
    $
    104,434
    
    
    $
    76,161
    
    
    $
    1,450
 Additional information regarding our financial commitments as of December
31, 2003 is provided in Note J to the Consolidated Financial Statements
included in Schedule I to this Annual Report on Form 10-K. For information
regarding related party transactions, see Note N to the Consolidated Financial
Statements included in Schedule I to this Annual Report on Form 10-K. Applica is also involved in certain ongoing litigation. See Item 3. Legal
Proceedings above. Effect of Inflation Our results of operations for the periods discussed have not been
significantly affected by inflation. Currency Matters While we transact business predominantly in U.S. dollars and most of our
revenues are collected in U.S. dollars, a substantial portion of our costs,
such as payroll, rent and indirect operational costs, are denominated in other
currencies, such as Chinese renminbi, Hong Kong dollars and Mexican pesos. In
addition, while a small
portion of our revenues are collected in foreign currencies, such as
Canadian dollars, Argentine pesos, Colombian pesos, Chilean pesos and
Venezuelan bolivars, a significant portion of the related cost of goods sold
are denominated in U.S. dollars. Changes in the relation of these and other
currencies to the U.S. dollar will affect our cost of goods sold and operating
margins and could result in exchange losses. The impact of future exchange rate
fluctuations on our results of operations cannot be accurately predicted. The
dollar foreign exchange rates may not be stable in the future and fluctuations
in financial markets may have a material adverse effect on our business,
financial condition and results of operations. From time to time, Applica uses forward exchange and option contracts to
reduce fluctuations in foreign currency cash flows related to third party raw
materials and other operating purchases, as well as trade receivables. The
purpose of Applicas foreign currency management activity is to reduce the risk
that anticipated cash flows and earnings from foreign currency denominated
transactions may be affected by changes in exchange rates. Currently, there is renewed activity within the Chinese government
regarding the relationship between the renminbi, the Hong Kong dollar and the
U.S. dollar. If these currencies are allowed to float freely, it could result
in significant fluctuations in our product costs, which would have a material
impact on our business. For additional information on exchange rate sensitivity, see Item 7A.
Quantitative and Qualitative Disclosures about Market Risk below. -33-




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##### Table of Contents



New Accounting Pronouncements In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS No. 148). SFAS No. 148 amends SFAS Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. Additionally,
SFAS No. 148 requires prominent disclosures about the effects on reported net
income of an entitys accounting policy decisions with respect to stock-based
employee compensation. SFAS No. 148 also amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosures about such effects in interim
financial information. Applica currently accounts for its stock-based
compensation awards to employees and directors under the accounting prescribed
by Accounting Principles Board Opinion No. 25 and provides the disclosures
required by SFAS No. 123. Applica currently intends to continue to account for
its stock-based compensation awards to employees and directors under the
accounting prescribed by Accounting Principles Board Opinion No. 25. Applica
adopted the additional disclosure provisions of SFAS No. 148 during the first
quarter of 2003. In December 2002, the FASB issued Interpretation 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. For a guarantee subject to
FASB Interpretation 45, a guarantor is required to:  
    
    measure and recognize the fair value of the guarantee at inception
(for many guarantees, fair value will be determined using a present
value method); and  
    
    provide new disclosures regarding the nature of any guarantees, the
maximum potential amount of future guarantee payments, the current
carrying amount of the guarantee liability, and the nature of any
recourse provisions or assets held as collateral that could be
liquidated and allow the guarantor to recover all or a portion of its
payments in the event guarantee payments are required. The disclosure requirement of this Interpretation is effective for
financial statements for fiscal years ending after December 15, 2002 and did
not have a material effect on Applica financial statements. The initial
recognition and measurement provision are effective prospectively for
guarantees issued or modified on or after January 1, 2003, which did not have a
material effect on Applicas financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (and Interpretation of ARB No. 51) (FIN 46). FIN
46 addresses consolidation by business enterprises of certain variable interest
entities, commonly referred to as special purpose entities. The adoption of
FIN 46 did not have a material effect on Applicas financial statement
presentation or disclosure. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No.
133 on Derivative Instruments with Characteristics of both Liabilities and
Equity. This statement amends and clarifies accounting for derivatives
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. This statement is
effective for contracts entered into or modified after June 30, 2003, except as
for provisions that relate to SFAS No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15, 2003, which should
continue to be applied in accordance with their respective dates. The adoption
of SFAS No. 149 did not have a material impact on Applicas financial
condition, results of operations, and cash flows. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for classifying and measuring certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. The adoption of SFAS No. 150 will not have a
material impact on Applicas financial condition, results of operations, and
cash flows. In March 2003, the SEC issued Regulation G, Conditions for Use of
Non-GAAP Financial Measures. As defined in Regulation G, a non-GAAP financial
measure is a numerical measure of a companys historical or future performance,
financial position, or cash flow that excludes or includes amounts or
adjustments that are included or excluded in the most directly comparable
measure calculated in accordance with generally accepted accounting principles
(GAAP). Companies that present non-GAAP financial measures must disclose a
numerical reconciliation -34-




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##### Table of Contents



to the most directly comparable measurement using
GAAP. Management does not believe it has used any non-GAAP financial measure in
this report. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Applica is exposed to the impact of interest rate changes and foreign
currency fluctuations. In the normal course of business, we employ
established policies and procedures to manage our exposure to changes in
interest rates and foreign currencies using a variety of financial instruments. Interest Rate Sensitivity. Our primary market risk exposure with respect
to interest rates is changes in short- and long-term interest rates in the
United States. Certain of Applicas debt arrangements represent floating rate
debt and accordingly, we are subject to interest rate risk. Applica uses
interest rate risk management contracts to manage our fixed-to-floating ratio,
which may reduce the impact of changes in interest rates on our floating rate
debt. Our objectives in managing exposure to interest rate changes are to
limit the impact of interest rate changes on earnings and cash flows and to
lower overall borrowing costs. To achieve these objectives, we primarily use
interest rate swaps to manage net exposure to interest rate changes related to
Applicas portfolio of borrowings. Applica maintains fixed rate debt as a
percentage of its net debt between a minimum and maximum percentage, which is
set by policy. The tables below provides information regarding Applicas derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps and debt obligations.
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. For interest rate
swaps, the table presents notional amounts and weighted average interest rates
by contractual maturity dates. Notional amounts are used to calculate the
contractual payments expected to be exchanged under the contract. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date. At December 31, 2003Expected Maturity DateThere-
    
    
    
    
    
    Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    after
    
    Total
    
    Value(5)(Dollars in thousands)Liabilities:Long-Term Debt:Fixed Rate (6):
    
    $
    151
    
    
    $
    3,166
    
    
    $
    178
    
    
    $
    5,272
    
    
    $
    65,318
    
    
    
    
    
    
    $
    74,085
    
    
    $
    74,085Average Interest Rate
    
    
    7.25
    %
    
    
    6.07
    %(1)
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    10.00
    %
    
    
    Variable Rate
    
    
    
    
    
    
    62,703
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    62,703
    
    
    $
    62,703Average Interest Rate
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest Rate Contracts:Interest Rate Swaps:Pay Fixed (3):
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    50,000
    
    
    $
    97Average Pay Rate
    
    
    1.20
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average Receive Rate
    
    
    1.30
    %Pay Floating (4):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    30,000
    
    
    
    
    
    
    $
    30,000
    
    
    $
    318Average Pay Rate
    
    
    7.20
    %
    
    
    8.78
    %
    
    
    9.66
    %
    
    
    10.25
    %
    
    
    10.62
    %Average Receive Rate
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
   (1)
    
    Calculated as the weighted average of 6% on the $3.0 million notes
payable relating to the Weitech, Inc. acquisition and 7.25% on the
mortgage loan on the property located in Miami Lakes, Florida.(2)
    
    The variable rate revolving credit facility is set depending upon the
interest period elected by Applica (one, two, three or six months) at a
rate equivalent to the LIBOR rate plus an applicable margin based upon
Applicas leverage ratio (2.00% as of December 31, 2003) or at a rate
equivalent to the Prime Rate plus an applicable margin based upon
Applicas leverage ratio (0.00% as of December 31, 2003).(3)
    
    At December 31, 2003, Applica had two interest rate swap contracts to pay
a fixed-rate of interest (1.19% and 1.21%) and receive a variable-rate of
interest of three-month LIBOR that mature on December 15, 2004. The LIBOR
used to calculate the Average Receive Rate is based upon the forward yield
curve as of December 31, 2003. -35-




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##### Table of Contents



(4)
    
    At December 31, 2003, Applica had an interest rate swap contract to pay a
variable-rate of interest of six- month LIBOR in arrears plus 5.45% and
receive a fixed-rate of interest of 10.0% that matures on July 31, 2008.
The LIBOR used to calculate the Average Pay Rate is based upon the forward
yield curve as of December 31, 2003.(5)
    
    Fair values were determined based on broker quotes or quoted market
prices or rates for the same or similar instruments.(6)
    
    Includes $318,000 that represents the positive fair value of an
underlying hedge as of December 31, 2003 related to FAS 133. At December 31, 2002Expected Maturity DateThere-
    
    
    
    
    
    Fair2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    after
    
    Total
    
    Value(5)(Dollars in thousands)Liabilities:Long-Term Debt:Fixed Rate
    
    $
    143
    
    
    $
    153
    
    
    $
    3,166
    
    
    $
    178
    
    
    $
    5,272
    
    
    $
    130,000
    
    
    $
    138,912
    
    
    $
    138,262Average Interest Rate
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    6.07
    %(1)
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    10.0
    %Variable Rate
    
    
    
    
    
    
    
    
    
    
    55,070
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    55,070
    
    
    $
    55,070Average Interest Rate
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Interest Rate Contracts:Interest Rate Swaps:Pay Fixed (3):
    
    $
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,000
    
    
    $
    (328
    )Average Pay Rate
    
    
    4.8
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average Receive Rate
    
    
    5.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pay Floating (4):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,939
    
    
    
    
    
    
    $
    5,939
    
    
    $
    481Average Pay Rate
    
    
    1.8
    %
    
    
    1.4
    %
    
    
    2.5
    %
    
    
    3.5
    %
    
    
    4.1
    %Average Receive Rate
    
    
    4.9
    %
    
    
    4.9
    %
    
    
    4.9
    %
    
    
    4.9
    %
    
    
    4.9
    %
   (1)
    
    Calculated as the weighted average of 6% on the $3.0 million
notes payable relating to the Weitech, Inc. acquisition and 7.25% on
the mortgage loan on the property located in Miami Lakes, Florida.(2)
    
    The variable rate revolving credit facility is set depending
upon the interest period elected by Applica (one, two, three or six
months) at a rate equivalent to the LIBOR rate plus an applicable
margin based upon Applicas leverage ratio (2.35% as of December 31,
2002) or at a rate equivalent to the Prime Rate plus an applicable
margin based upon Applicas leverage ratio (0.35% as of December 31,
2002).(3)
    
    At December 31, 2002, Applica had an interest rate swap
contract to pay a fixed-rate of interest of 5.045% and received a
variable-rate of interest of one-month LIBOR that matured on July 31,
2003. The LIBOR used to calculate the Average Receive Rate was based
upon the forward yield curve as of December 31, 2002.(4)
    
    At December 31, 2002, Applica had an interest rate swap
contract to pay a variable-rate of interest of one-month LIBOR and
receive a fixed-rate of interest of 4.9% that matures on May 1, 2007.
The LIBOR used to calculate the Average Pay Rate is based upon the
forward yield curve as of December 31, 2002.(5)
    
    Fair values were determined based on broker quotes or quoted
market prices or rates for the same or similar instruments. Exchange Rate Sensitivity. Our primary market risk exposure with respect
to exchange rates is to changes in U.S. dollar/Mexican peso, U.S.
dollar/Chinese renminbi, U.S. dollar/Hong Kong dollar and U.S. dollar/Canadian
dollar exchange rates. In addition, we also have exposure to the Argentinean
peso, Colombian peso, Chilean peso and Venezuelan bolivar. Certain forecasted
transactions could expose Applica to foreign currency risk. We purchase -36-




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##### Table of Contents



currency forwards and options as cash flow hedges of foreign currency
forecasted transactions related to the purchase of third party raw materials
and other operating expenses. Our objective in managing exposure to foreign
currency fluctuations is to reduce earnings and cash flow volatility in order
to allow management to focus on core business issues and challenges.
Accordingly, we enter into various contracts that change in value as foreign
exchange rates change to protect the value of our existing foreign currency
assets, liabilities, commitments and forecasted foreign currency revenues and
expenses. Applica uses option strategies and forward contracts that provide for
the sale and/or purchase of foreign currencies to hedge probable, but not
firmly committed, expenditures. The principal currencies hedged are the Mexican
peso, Chinese renminbi, Hong Kong dollar and Canadian dollar. By policy,
Applica maintains hedge coverage between minimum and maximum percentages of its
forecasted foreign exchange exposures for periods not to exceed eighteen
months. The gains and losses on these contracts offset changes in the value of
the related exposures. As discussed above, we are exposed to market risks arising from changes in
foreign exchange rates. As of December 31, 2003, Applica hedged a portion of
its 2004 estimated foreign currency transactions using forward exchange
contracts and purchased options. We use a sensitivity model to determine a
potential change in the fair value of our foreign exchange financial
instruments. The sensitivity model estimates the change in fair value based
upon a favorable and unfavorable movement of 10% in the respective spot rate.
The sensitivity model is a risk analysis tool and does not purport to represent
actual losses or gains in fair value that will be incurred by Applica. It
should also be noted that the change in value represents the estimated change
in the fair market value of the derivative. Because the derivatives hedge an
underlying exposure, there would be a comparable and opposite change in value
of the underlying exposure. The estimated potential change in fair value,
calculated using the sensitivity model, is as follows: At December 31, 2003Change in Fair Value Due ToNotional Hedge
    
    Favorable 10%
    
    Unfavorable 10%Amount in US Dollars
    
    Movement in Spot
    
    Movement in Spot(Dollars in thousands)Mexican Peso
    
    $
    4,300
    
    
    $
    427
    
    
    $
    (406
    )Canadian Dollar
    
    
    16,800
    
    
    
    1,276
    
    
    
    (1,015
    )Chilean Peso
    
    
    4,005
    
    
    
    377
    
    
    
    (461
    )Colombian Peso
    
    
    3,420
    
    
    
    317
    
    
    
    (388
    )Total Change in Fair Value
    
    $
    28,525
    
    
    $
    2,397
    
    
    $
    (2,270
    )
 It is our policy to enter into foreign currency and interest rate
transactions and other financial instruments only to the extent considered
necessary to meet our objectives as stated above. We do not enter into these
transactions for speculative purposes. See Note O of the Consolidated
Financial Statements included in Schedule I of this Annual Report on Form 10-K
for more information regarding Applicas financial instruments. 
 Item 8. Financial Statements and Supplementary Data See Schedules I and II hereto. 
 Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure None. 
 Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures. Applica has carried out
an evaluation under the supervision of management, including the President and
Chief Executive Officer and the Senior Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures. Based on that evaluation, Applicas Chief Executive
Officer and Chief Financial Officer have concluded that, as of December 31,
2003, Applicas disclosure controls and procedures were effective to ensure
that information required to be disclosed by the company in the reports filed
or submitted by it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC, and include controls and procedures designed
to ensure that information required to be disclosed by -37-




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Applica in such reports
is accumulated and communicated to management, including the President and
Chief Executive Officer and the Senior Vice President and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures.

Changes in Internal Controls. Applica is committed to continuously improving
its internal controls and financial reporting. During 2003, Applica retained a
consulting firm with experience in internal controls to assist management and
the Audit Committee in reviewing Applicas current internal controls structure
with a view towards meeting the formalized requirements of Section 404 of the
Sarbanes-Oxley Act. As a result of such review and the evaluation discussed
above, management has determined that certain matters could be considered
deficiencies in its internal control systems, including the following:  
    
    Many of the controls that are currently in place,
including our policies and procedures, are informal and not
standardized. As such, the reliability and effectiveness of
these control processes are dependent on interpretation and
execution by our employees.  
    
    Our legacy information technology systems are not fully
integrated and do not provide for proper controls over access and
change management. Additionally, our independent auditors, Grant Thornton LLP, have advised
management and the Audit Committee of a failure to perform timely reviews and
evaluations of certain account balances. Grant Thornton believes this
represents a significant deficiency (reportable condition), which, in its
judgment, represents an internal control deficiency that could lead to
misstatements in our financial statements that are other than inconsequential. These potential deficiencies have been discussed in detail among
management, the Audit Committee and Grant Thornton. Management has assigned
the highest priority to correction of these matters and is committed to
addressing them and resolving them fully. We are devoting significant
resources, both internal and external, to update, formalize and standardize our
internal controls. Additionally, we are in the process of implementing a new
enterprise resource planning system that includes financial applications. As a
result of the steps we have taken and will continue to take to improve our
systems and controls, changes in internal controls were undertaken in the
fourth quarter of 2003 and will be ongoing during 2004. Despite the issues
identified above, management believes that our financial statements and related
disclosures as filed to date present fairly, in all material respects, our
financial condition and results of operations for the respective periods. Limitations on the Effectiveness of Controls.Applicas management,
including the Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure or internal controls will prevent all errors or
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected. -38-




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant The executive officers of Applica are as follows: NAME
    
    AGE
    
    OFFICEDavid M. Friedson
    
    
    48
    
    
    Chairman of the BoardHarry
D. Schulman
Terry L. Polistina
    
    
    52
40
    
    
    President and Chief Executive
Officer
Senior Vice President and Chief Financial
OfficerMichael J. Michienzi
    
    
    48
    
    
    Senior Vice President  Global Business
Development of Applica Consumer Products,
Inc.Albio Espinosa
    
    
    48
    
    
    Vice President  Worldwide Manufacturing,
Applica Consumer Products, Inc.Ben Lai
    
    
    41
    
    
    Managing Director of Applica Durable
Manufacturing Limited
 David M. Friedsonhas served as Chairman of the Board of Applica
Incorporated since April 1996. From January 1987 to February 2003, Mr.
Friedson served as Chief Executive of Applica Incorporated and Applica Consumer
Products, Inc. From January 1985 to January 2001, Mr. Friedson served as
President of Applica and from June 1976 to January 1985, Mr. Friedson held
various other senior management positions. Harry D. Schulmanhas served as President of Applica Incorporated and
Applica Consumer Products, Inc. since January 2001 and Chief Executive Officer
since February 2003. Mr. Schulman also served as Secretary from January 1999
to September 2003. Mr. Schulman previously served as Chief Operating Officer
from November 1998 to February 2002. From March 1990 to January 2001, Mr.
Schulman served as Chief Financial Officer of Applica. From February 1998 until
June 1998, he served as a Senior Vice President and from February 1993 until
June 1998, Mr. Schulman served as Executive Vice President - Finance and
Administration. Prior thereto, he held other senior finance positions with
Applica. Terry L. Polistinahas served as Chief Financial Officer of Applica
Incorporated and Applica Consumer Products, Inc. since January 2001 and has
served as a Senior Vice President since June 1998. Mr. Polistina served as
Controller of Applica from December 1995 to June 1998 and prior thereto, he
held other senior finance positions with Applica. Michael
J. Michienziis currently Senior Vice President - Global Business
Development and served as President and General Manager, Sales and Marketing,
of Applica Consumer Products, Inc. from May 1999 to February 2002. From
January 1999 until December 1999, Mr. Michienzi also served as President of the
Household Products, Inc. and from June 1998 until January 1999 he served as its
Senior Vice President. From July 1994 to June 1998, Mr. Michienzi served as
Vice President - Sales, Vice President - Sales and Supply Chain, and Vice
President - Sales, Marketing and Supply Chain of the U.S. Household Products
Group of Black & Decker (U.S.) Inc. Albio
Espinosais currently Vice President - Global Manufacturing of
Applica Consumer Products, Inc. and served as the Managing Director of Applica
Manufacturing, S. de R.L. de C.V., the Mexican manufacturing subsidiary, from
1994 to 2001. He joined Black & Decker in 1989 and served in several other
capacities, including the Manufacturing Director and the Logistics and
Purchasing Director. Ben Laihas served as Managing Director of Applica Durable Manufacturing
Limited since October 2002. He served as Executive Director of Applica Durable
since April 2002. Mr. Lai served as Director of Applica Durable responsible
for World Class Manufacturing Projects, Training and Kaizen from April 2001 to
March 2002. Mr. Lai also served as a Director of Applica Durable responsible
for Supply Chain since 1996. Additional information required by this item is incorporated by reference
to Applicas Proxy Statement for its 2004 Annual Meeting of Shareholders. -39-




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##### Table of Contents



Item 11. Executive Compensation Information required by this item is incorporated by reference to
Applicas Proxy Statement for its 2004 Annual Meeting of Shareholders. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated by reference to
Applicas Proxy Statement for its 2004 Annual Meeting of Shareholders. The following table summarizes our equity compensation plans as of
December 31, 2003. Applica has not granted any warrants or stock appreciation
rights. Number ofsecuritiesremainingavailable forthe futureNumber of
    
    
    
    
    
    issuance undersecurities to be
    
    Weighted-
    
    equityissued upon
    
    average
    
    compensationexercise of
    
    exercise price
    
    plansoutstanding
    
    of outstanding
    
    (excludingoptions,
    
    options,
    
    securitieswarrants and
    
    warrants and
    
    reflected inrights
    
    rights
    
    column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation plans approved by security holders
    
    
    2,376,703
    
    
    $
    6.58
    
    
    
    1,124,392Employee stock purchase plan approved by security holders
    
    
    
    
    
    
    
    
    
    
    236,042Equity compensation not approved by security holders(1)
    
    
    466,415
    
    
    $
    6.98
    
    
    
    Total
    
    
    2,843,118
    
    
    
    
    
    
    
    1,360,434
  (1)
    
    Applica has granted non-qualified stock options, which were not issued
under a formal plan and which were not approved by security holders. No such
options have been granted since 1998. 
 Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated by Reference to
Applicas Proxy Statement for its 2004 Annual Meeting of Shareholders. 
 Item 14. Principal Accounting Fees and Services Information required by this item is incorporated by Reference to
Applicas Proxy Statement for its 2004 Annual Meeting of Shareholders. 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements The following consolidated financial statements of Applica Incorporated
and its subsidiaries are included in Schedule I attached hereto:  
    
    Report of Independent Certified Public Accountants
    
    Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
    
    Consolidated Statement of Shareholders Equity for the three years ended December 31, 2003 -40-




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##### Table of Contents




    
    Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
    
    Supplement Disclosures of Cash Flow Information
    
    Notes to Consolidated Financial Statements (a)(2) Financial Statements Schedules The
Valuation and Qualifying Accounts - Years ended December 31, 2003,
2002 and 2001 is included in Schedule II attached hereto. Individual financial statements of Applicas subsidiaries have been
omitted because consolidated financial statements have been presented, and all
subsidiaries included in the consolidated financial statements are wholly
owned. All other schedules have been omitted because the required information
is not present or not present in amounts sufficient to require submission of
the schedule or because the information required is included in the
consolidated financial statements or the notes thereto. (a)(3) Exhibits ExhibitNumber
    
    Description3.1
    
    Second Amended and Restated Articles of Incorporation filed with the Florida
Secretary of State on May 10, 2000. Incorporated by reference to Applicas
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.3.2
    
    Second Amended and Restated Bylaws. Incorporated by reference to Applicas
Annual Report on Form 10-K for the year ended December 31, 2000.4.1
    
    Supplemental Indenture dated as of July 27, 1998, among Applica Incorporated,
the Guarantors named therein and State Street Bank & Trust Company, as Trustee,
relating to the issuance by Applica Incorporated of $130 million in 10% Senior
Subordinated Notes due 2008. Incorporated by reference to Applicas Form 8-K
dated July 27, 1998.10.1*
    
    Employment agreement dated June 18, 1999 between Applica Incorporated and David
M. Friedson. Incorporated by reference to Applicas Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.10.2*
    
    Employment agreement dated August 2, 1999 between Applica Incorporated and Harry
D. Schulman. Incorporated by reference to Applicas Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.10.3*
    
    Amendment to Employment Agreement dated October 1, 2003 between Applica and
Harry D. Schulman. Incorporated by reference to Exhibit 10.1 of Applicas
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.10.4*
    
    Employment Agreement dated July 1, 2000 between Applica Consumer Products, Inc.
and Michael J. Michienzi. Incorporated by reference Applicas Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000.10.5*
    
    Employment Agreement dated July 1, 2000 between Applica Incorporated and Terry
L. Polistina. Incorporated by reference Applicas Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.10.6*
    
    Consulting Agreement dated January 1, 1989 between Mr. Lai Kin and Applica
Incorporated. Incorporated by reference to Applicas Annual Report on Form 10-K
for the year ended December 31, 1988.
 -41-




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##### Table of Contents



ExhibitNumber
    
    Description10.7*
    
    Employment Agreement dated as of January 27, 1983 between Belvin Friedson and
Applica Incorporated. Incorporated by reference to Applicas Annual Report on
Form 10-K for the year ended December 31, 1982.10.8*
    
    First Amendment dated February 27, 1987 to Employment Agreement between Belvin
Friedson and Applica Incorporated. Incorporated by reference to Applicas
Annual Report on Form 10-K for the year ended December 31, 1986.10.9*
    
    Second Amendment dated December 16, 1992 to Employment Agreement between Belvin
Friedson and Applica Incorporated. Incorporated by reference to Applicas
Annual Report on Form 10-K for the year ended December 31, 1992.10.10*
    
    1988 Director Stock Option Plan. Incorporated by reference to Applicas Annual
Report on Form 10-K for the year ended December 31, 1988.10.11*
    
    1992 Employees Incentive Stock Option Plan. Incorporated by reference to the
Registration Statement on Form S-8 as filed with the Securities and Exchange
Commission on May 12, 1998.10.12*
    
    1996 Stock Option Plan. Incorporated by reference to the Registration Statement
on Form S-8 as filed with the Securities and Exchange Commission on May 12,
1998.10.13*
    
    1998 Stock Option Plan. Incorporated by reference to the Registration Statement
on Form S-8 as filed with the Securities and Exchange Commission on September 3,
1999.10.14*
    
    2000 Stock Option Plan. Incorporated by reference to the Registration Statement
on Form S-8 as filed with the Securities and Exchange Commission on June 23,
2000.10.15*
    
    2000 Employee Stock Purchase Plan. Incorporated by reference to the
Registration Statement on Form S-8 as filed with the Securities and Exchange
Commission on June 23, 2000.10.16
    
    Credit Agreement by and among Applica Incorporated, each of its subsidiaries
party thereto, each of the lenders party thereto and Bank of America, N.A., as
agent for the lenders, dated December 28, 2001. Incorporated by reference to
Applicas Annual Report on Form 10-K for the year ended December 31, 2001.10.17
    
    Security Agreement by and among Applica Incorporated, each of its subsidiaries
party thereto and Bank of America, N.A., as agent for the lenders, dated
December 28, 2001. Incorporated by reference to Applicas Annual Report on Form
10-K for the year ended December 31, 2001.10.18
    
    Amendment No. 1 to Credit Agreement by and among Applica Incorporated, each of
its subsidiaries party thereto, each of the lenders party thereto and Bank of
America, N.A., as agent for the lenders, dated April 26, 2002. Incorporated by
reference to Applicas Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.10.19
    
    Second Amendment to Credit Agreement by and among Applica Incorporated, each of
its subsidiaries party thereto, each of the lenders party thereto and Bank of
America, N.A., as agent for the lenders, dated January 17, 2003.
Incorporated by reference to Applicas Annual Report on Form 10-K for the year ended December 31, 2002.10.20
    
    Third Amendment to Credit Agreement by and among Applica Incorporated, each of
its subsidiaries party thereto, each of the lenders party thereto and Bank of
America, N.A., as agent for the lenders, dated July 18, 2003. Incorporated by
reference to Applicas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003.
 -42-




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##### Table of Contents



ExhibitNumber
    
    Description21
    
    Subsidiaries of the Registrant. Filed herewith.23
    
    Consents of experts and counsel. Filed herewith.31.1
    
    Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). Filed herewith.31.2
    
    Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). Filed herewith.32.1
    
    Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350. Filed herewith.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350. Filed herewith.
   *
    
    These exhibits are management contracts or compensatory plans or
arrangements. (b) Reports on Form 8-K The following Reports on Form 8-K were filed during the quarter ended
December 31, 2003: Form 8-K dated October 27, 2003 reporting under Item 5. Other
Events and Required FD Disclosure that Applica issued a press
release regarding its co-development program with The Procter &
Gamble Company. The applicable press release was attached. Form 8-K dated October 30, 2003 reporting under Item 12. Results
of Operations and Financial Condition that Applica issued a press
release describing its results of operations for the third quarter
ended September 30, 2003 and attaching such press release. (c) Exhibits See Item 15(a)(3) above. (d) Financial Statement Schedules The financial statements of Anasazi Partners, L.P., a 50% owned joint
venture, are attached hereto as Schedule III, as required by Regulation S-X. -43-




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##### Table of Contents



Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. APPLICA INCORPORATED(Registrant)By:
    
    /s/ Harry D. SchulmanHarry D. Schulman, President and ChiefExecutive OfficerDate:  March 8, 2004
 Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated. By:
    
    /s/ Harry D. Schulman


Harry D. Schulman, President and Chief Executive
Officer (Principal Executive Officer)
    
    DATE: March 8, 2004By:
    
    /s/ Terry L. Polistina
Terry L. Polistina, Chief Financial Officer and
Senior Vice President (Principal Accounting Officer)
    
    DATE: March 8, 2004By:
    
    /s/ David M. Friedson
David M. Friedson, Chairman of the Board
    
    DATE: March 8, 2004By:
    
    /s/ Frederick E. Fair
Frederick E. Fair, Director
    
    DATE: March 8, 2004By:
    
    /s/ Jerald I. Rosen
Jerald I. Rosen, Director
    
    DATE: March 8, 2004By:
    
    /s/ Paul K. Sugrue
Paul K. Sugrue, Director
    
    DATE: March 8, 2004By:
    
    /s/ Lai Kin
Lai Kin, Director
    
    DATE: March 8, 2004By:
    
    /s/ Leonard Glazer
Leonard Glazer, Director
    
    DATE: March 8, 2004By:
    
    /s/ Felix S. Sabates
Felix S. Sabates, Director
    
    DATE: March 8, 2004By:
    
    /s/ Thomas J. Kane
Thomas J. Kane, Director
    
    DATE: March 8, 2004By:
    
    /s/ Susan J. Ganz
Susan J. Ganz, Director
    
    DATE: March 8, 2004By:
    
    /s/ J. Maurice Hopkins
J. Maurice Hopkins, Director
    
    DATE: March 8, 2004
 -44-




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SCHEDULE I 
 Applica Incorporated and Subsidiaries
INDEX TO FINANCIAL STATEMENTS Report of Independent Certified Public Accountants
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    F-3Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001.
    
    F-4Consolidated Statement of Shareholders Equity for the Three Years Ended December 31, 2003.
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001.
    
    F-6 - F7Supplemental Disclosures of Cash Flow Information
    
    F-7Notes to Consolidated Financial Statements
    
    F-8 - F-34
 F-1




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REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS Board of Directors and ShareholdersApplica Incorporated We have audited the accompanying consolidated balance sheets of Applica
Incorporated and subsidiaries (the Company) as of December 31, 2003 and 2002,
and the related consolidated statements of operations, shareholders equity and
cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Applica
Incorporated and subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America. As discussed in Note D to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard 142 Goodwill and
Other Intangible Assets on January 1, 2002. We have also audited Schedule II of Applica Incorporated and subsidiaries
for each of the three years in the period ended December 31, 2003. In our
opinion, this schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information therein. /s/ Grant Thornton LLP
Miami, Florida
February 12, 2004 F-2




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##### Table of Contents



Applica Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS December 31,2003
    
    2002(In thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    12,735
    
    
    $
    7,683Accounts and other receivables, less allowances
of $12,543 in 2003 and $15,830 in 2002
    
    
    131,021
    
    
    
    146,567Note
receivable - officer
    
    
    1,615
    
    
    
    2,060Inventories
    
    
    106,326
    
    
    
    111,453Prepaid expenses and other
    
    
    13,593
    
    
    
    11,862Refundable income taxes
    
    
    4,823
    
    
    
    1,663Future income tax benefits
    
    
    11,616
    
    
    
    18,654Total current assets
    
    
    281,729
    
    
    
    299,942Investment in Joint Ventures
    
    
    5,389
    
    
    
    1,249Property,
Plant and Equipment at cost, less
accumulated depreciation of $103,894 in 2003 and
$109,949 in 2002
    
    
    70,389
    
    
    
    76,963Future Income Tax Benefits, Non-Current
    
    
    49,695
    
    
    
    54,378Goodwill
    
    
    62,812
    
    
    
    62,812Other
Intangibles, net
    
    
    6,146
    
    
    
    20,860Other Assets
    
    
    2,676
    
    
    
    5,461Total Assets
    
    $
    478,836
    
    
    $
    521,665Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    39,273
    
    
    $
    31,446Accrued expenses
    
    
    61,362
    
    
    
    74,686Current maturities of long-term debt
    
    
    151
    
    
    
    144Current taxes payable
    
    
    2,172
    
    
    
    518Deferred rent
    
    
    301
    
    
    
    372Total current liabilities
    
    
    103,259
    
    
    
    107,166Other Long-Term Liabilities
    
    
    1,327
    
    
    
    1,533Long-Term Debt, Less Current Maturities
    
    
    136,637
    
    
    
    193,838Shareholders Equity:Common stock
 authorized: 75,000 shares of
$0.10 par value; issued and outstanding:23,687 in 2003 and 23,497 in 2002
    
    
    2,369
    
    
    
    2,350Paid-in capital
    
    
    156,604
    
    
    
    155,395Retained earnings
    
    
    86,474
    
    
    
    71,251Note
receivable  officer
    
    
    (1,496
    )
    
    
    (1,496
    )Accumulated other comprehensive earnings (loss)
    
    
    (6,338
    )
    
    
    (8,372
    )Total shareholders equity
    
    
    237,613
    
    
    
    219,128Total liabilities and shareholders equity
    
    $
    478,836
    
    
    $
    521,665
 The accompanying notes are an integral part of these financial statements. F-3




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##### Table of Contents



Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31,2003
    
    2002
    
    2001(In thousands, except per share data)Net sales
    
    $
    640,639
    
    
    $
    727,356
    
    
    $
    727,044Cost of sales:Cost of goods sold
    
    
    459,443
    
    
    
    498,934
    
    
    
    520,672Product recall expenses (credit)
    
    
    (4,125
    )
    
    
    
    
    
    
    13,418455,318
    
    
    
    498,934
    
    
    
    534,090Gross profit
    
    
    185,321
    
    
    
    228,422
    
    
    
    192,954Selling, general and administrative expenses:Operating expenses
    
    
    186,601
    
    
    
    191,170
    
    
    
    181,771Repositioning and other charges
    
    
    4,681
    
    
    
    10,643
    
    
    
    14,817Impairment of intangible asset
    
    
    7,152
    
    
    
    
    
    
    
    198,434
    
    
    
    201,813
    
    
    
    196,588Operating earnings (loss)
    
    
    (13,113
    )
    
    
    26,609
    
    
    
    (3,634
    )Other (income) expense:Interest expense
    
    
    13,964
    
    
    
    17,581
    
    
    
    22,536Interest and other income
    
    
    (817
    )
    
    
    (1,791
    )
    
    
    (2,006
    )Loss on early extinguishment of debt
    
    
    3,940
    
    
    
    
    
    
    
    Gain on litigation settlement
    
    
    
    
    
    
    (557
    )
    
    
    17,087
    
    
    
    15,233
    
    
    
    20,530Earnings (loss) before equity in net
earnings (loss) of joint ventures and
income taxes
    
    
    (30,200
    )
    
    
    11,376
    
    
    
    (24,164
    )Equity in net earnings (loss) of joint ventures
    
    
    55,570
    
    
    
    (1,498
    )
    
    
    (128
    )Earnings (loss) before income taxes and
cumulative effect of change in
accounting principle
    
    
    25,370
    
    
    
    9,878
    
    
    
    (24,292
    )Income tax expense
    
    
    10,147
    
    
    
    4,826
    
    
    
    4,146Earnings (loss) before cumulative effect
of change in accounting principle
    
    
    15,223
    
    
    
    5,052
    
    
    
    (28,438
    )Cumulative effect of change in
accounting principle, net of tax benefit
of $42,447
    
    
    
    
    
    
    (78,829
    )
    
    
    Net earnings (loss)
    
    $
    15,223
    
    
    $
    (73,777
    )
    
    $
    (28,438
    )Earnings (loss) per common share  basic:Earnings (loss) before cumulative effect
of change in accounting principle
    
    $
    0.65
    
    
    $
    0.22
    
    
    $
    (1.23
    )Cumulative effect of change in
accounting principle, net of tax benefit.
    
    
    
    
    
    
    (3.37
    )
    
    
    Earnings (loss) per common share  basic
    
    $
    0.65
    
    
    $
    (3.15
    )
    
    $
    (1.23
    )Earnings (loss) per common share  diluted:Earnings (loss) before cumulative effect
of change in accounting principle
    
    $
    0.63
    
    
    $
    0.21
    
    
    $
    (1.23
    )Cumulative effect of change in accounting
principle, net of tax benefit
    
    
    
    
    
    
    (3.31
    )
    
    
    Earnings (loss) per common share  diluted
    
    $
    0.63
    
    
    $
    (3.10
    )
    
    $
    (1.23
    )
 The accompanying notes are an integral part of these financial statements. F-4




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##### Table of Contents



Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AccumulatedNote
    
    OtherCommon
    
    
    
    
    
    Retained
    
    Receivable
    
    ComprehensiveStock
    
    Paid-in Capital
    
    Earnings
    
    Officer
    
    Earnings(Loss)
    
    Total(In thousands)Balance at December 31, 2000
    
    $
    2,308
    
    
    $
    152,591
    
    
    $
    173,466
    
    
    $
    (1,496
    )
    
    $
    (2,395
    )
    
    $
    324,474Comprehensive earnings (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    (28,438
    )
    
    
    
    
    
    
    
    
    
    
    (28,438
    )Foreign currency translation
adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,723
    )
    
    
    (2,723
    )Change in unrealized gain (loss) on
derivative instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (856
    )
    
    
    (856
    )Total comprehensive earnings(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,017
    )Exercise of stock options and issuance
of common stock under employee stock
purchase plan
    
    
    24
    
    
    
    1,232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,256Tax benefit resulting from exercise of
stock options
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176Fair value of options to non-employees
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Balance at December 31, 2001
    
    
    2,332
    
    
    
    154,049
    
    
    
    145,028
    
    
    
    (1,496
    )
    
    
    (5,974
    )
    
    
    293,939Comprehensive earnings (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    (73,777
    )
    
    
    
    
    
    
    
    
    
    
    (73,777
    )Foreign currency translation
adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,677
    )
    
    
    (1,677
    )Change in unrealized gain (loss) on
derivative instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (721
    )
    
    
    (721
    )Total comprehensive earnings(loss).
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,175
    )Exercise of stock options and issuance
of common stock under employee stock
purchase plan
    
    
    18
    
    
    
    1,201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,219Tax benefit resulting from exercise of
stock options
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Fair value of options to non-employees
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Balance at December 31, 2002
    
    
    2,350
    
    
    
    155,395
    
    
    
    71,251
    
    
    
    (1,496
    )
    
    
    (8,372
    )
    
    
    219,128Comprehensive earnings (loss):Net earnings
    
    
    
    
    
    
    
    
    
    
    15,223
    
    
    
    
    
    
    
    
    
    
    
    15,223Foreign currency translation
adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,270
    
    
    
    1,270Change in unrealized gain (loss) on
derivative instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764
    
    
    
    764Total comprehensive earnings(loss).
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,257Exercise of stock options and issuance
of common stock under employee stock
purchase plan
    
    
    19
    
    
    
    1,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171Tax benefit resulting from exercise of
stock options
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47Fair value of options to non-employees
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Balance at December 31, 2003
    
    $
    2,369
    
    
    $
    156,604
    
    
    $
    86,474
    
    
    $
    (1,496
    )
    
    $
    (6,338
    )
    
    $
    237,613
 The accompanying notes are an integral part of these financial statements. F-5




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##### Table of Contents



Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31,2003
    
    2002
    
    2001(In thousands)Cash flows from operating activities:Net earnings (loss)
    
    $
    15,223
    
    
    $
    (73,777
    )
    
    $
    (28,438
    )Reconciliation to net cash provided by (used in)
operating activities:Depreciation of property, plant and equipment
    
    
    21,439
    
    
    
    21,339
    
    
    
    19,123Disposal of property, plant and equipment
    
    
    3,661
    
    
    
    3,628
    
    
    
    Provision for doubtful accounts
    
    
    2,228
    
    
    
    10,618
    
    
    
    4,002Amortization of intangible and other assets
    
    
    9,272
    
    
    
    9,081
    
    
    
    19,941Impairment of intangible asset
    
    
    7,152
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    3,940
    
    
    
    
    
    
    
    Gain on litigation settlement
    
    
    
    
    
    
    (557
    )
    
    
    Cumulative effect of change in accounting principle,
net of tax
    
    
    
    
    
    
    78,829
    
    
    
    Deferred taxes
    
    
    11,721
    
    
    
    1,119
    
    
    
    (10,969
    )Repositioning, recall and other charges
    
    
    556
    
    
    
    10,643
    
    
    
    28,235Other non-cash changes in equity items
    
    
    57
    
    
    
    145
    
    
    
    226Equity in net (earnings) loss of joint ventures
    
    
    (55,570
    )
    
    
    1,498
    
    
    
    128Changes in assets and liabilities, net of acquisition:Accounts and other receivables
    
    
    13,318
    
    
    
    28,148
    
    
    
    808Inventories
    
    
    2,848
    
    
    
    (6,796
    )
    
    
    54,184Prepaid expenses and other
    
    
    (1,731
    )
    
    
    38
    
    
    
    4,073Other assets
    
    
    1,944
    
    
    
    (6,196
    )
    
    
    (4,287
    )Accounts payable and accrued expenses
    
    
    (6,800
    )
    
    
    (8,287
    )
    
    
    (6,404
    )Current income taxes
    
    
    (1,506
    )
    
    
    (7,649
    )
    
    
    6,385Other liabilities
    
    
    (277
    )
    
    
    (9,784
    )
    
    
    (71
    )Net cash provided by (used in) operating
activities
    
    
    27,475
    
    
    
    52,040
    
    
    
    86,936Cash flows from investing activities:Purchase of Weitech, Inc., net of cash acquired
    
    
    
    
    
    
    (17,002
    )
    
    
    Additions to property, plant and equipment
    
    
    (18,526
    )
    
    
    (19,313
    )
    
    
    (23,260
    )Distributions from (investments in) joint ventures  net
    
    
    51,430
    
    
    
    (163
    )
    
    
    (15
    )Receivables from officer
    
    
    486
    
    
    
    2,122
    
    
    
    72Net cash received from litigation settlement
    
    
    
    
    
    
    2,900
    
    
    
    Net cash (used in) provided by investing
activities
    
    
    33,390
    
    
    
    (31,456
    )
    
    
    (23,203
    )
 (Continued on next page.) F-6




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Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the years ended December 31,2003
    
    2002
    
    2001(In thousands)Cash flows from financing activities:Notes payable
    
    
    
    
    
    
    
    
    
    
    (13,494
    )Proceeds from long-term debt
    
    
    
    
    
    
    6,000
    
    
    
    106,041Payments of long-term debt
    
    
    
    
    
    
    
    
    
    
    (108,513
    )Net (payments) borrowings under lines of credit
    
    
    7,806
    
    
    
    (38,113
    )
    
    
    (48,885
    )Reimbursement (payment) of debt costs, net
    
    
    
    
    
    
    369
    
    
    
    (1,906
    )Redemption of long-term debt
    
    
    (67,775
    )
    
    
    
    
    
    
    Exercises of stock options and issuances of common
stock under employee stock purchase plan
    
    
    1,171
    
    
    
    1,219
    
    
    
    1,256Interest receivable from officer
    
    
    (41
    )
    
    
    (58
    )
    
    
    (322
    )Net cash (used in) financing activities
    
    
    (58,839
    )
    
    
    (30,583
    )
    
    
    (65,823
    )Effect of exchange rate changes on cash
    
    
    3,026
    
    
    
    1,939
    
    
    
    976Increase (decrease) in cash and cash equivalents
    
    
    5,052
    
    
    
    (8,060
    )
    
    
    (1,114
    )Cash and cash equivalents at beginning of period
    
    
    7,683
    
    
    
    15,743
    
    
    
    16,857Cash and cash equivalents at end of period
    
    $
    12,735
    
    
    $
    7,683
    
    
    $
    15,743
 Supplemental Disclosures of Cash Flow Information: For the years ended December 31,2003
    
    2002
    
    2001(In thousands)Cash paid during the year for:Interest
    
    $
    15,520
    
    
    $
    16,731
    
    
    $
    21,114Income taxes
    
    $
    312
    
    
    $
    10,465
    
    
    $
    8,489
 Non-cash investing and financing activities:In May 2002, Applica
Consumer Products, Inc., the U.S. operating subsidiary, purchased all of the
outstanding shares of Weitech, Inc. in exchange for $17.0 million in cash and
$3.0 million of notes payable. The accompanying notes are an integral part of these financial statements. F-7




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF ACCOUNTING POLICIES Overview Applica Incorporated and its subsidiaries (collectively, the Company or
Applica) are marketers, distributors and manufacturers of a broad range of
branded and private-label small electric consumer goods. Applica markets,
distributes and manufactures kitchen products, home products, pest control
products, pet care products and personal care products. Applica markets
products under licensed brand names, such as Black & Decker®, its own brand
names, such as Windmere®, LitterMaid® and Applica®, and other private-label
brand names. Applicas customers include mass merchandisers, specialty
retailers and appliance distributors primarily in North America, Latin America
and the Caribbean. Applica operates manufacturing facilities in Mexico and in China. In 2003
and 2002, approximately 63% and 76%, respectively, of the products sold by
Applica were manufactured in such facilities. In addition, Applica
manufactures products for other consumer products companies. Applica applied the provisions of SFAS 142, Goodwill and Other Intangible
Assets, beginning on January 1, 2002. SFAS 142 established new accounting and
reporting requirements for goodwill and other intangible assets. Applica did
not adopt any other accounting policies during 2003 or 2002. The preparation of Applicas financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
revenues and expenses during the period. Future events and their effects
cannot be determined with absolute certainty; therefore, the determination of
estimates requires the exercise of judgment. Actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements. Management continually evaluates its estimates and
assumptions, which are based on historical experience and other factors that
are believed to be reasonable under the circumstances. Management believes that the following may involve a higher degree of
judgment or complexity: Collectibility of Accounts Receivable. Applicas allowance for doubtful
accounts is based on managements estimates of the creditworthiness of its
customers, current economic conditions and historical information, and, in the
opinion of management, is believed to be an amount sufficient to respond to
normal business conditions. Management sets specific allowances for customers
in bankruptcy and other allowances for the remaining customers based upon
historical collection experience. Should business conditions deteriorate or
any major customer default on its obligations to Applica, this allowance may
need to be significantly increased, which would have a negative impact upon
Applicas operations. Applica reviews its accounts receivable
aging on a regular basis to determine if any of the receivables are
past due. Applica writes off all uncollectible trade receivables
against its allowance for doubtful accounts. Inventory Allowances. Applica establishes an allowance based on historical
experience and specific allowances when it is apparent that the expected
realizable value of an inventory item falls below its original cost. A charge
to operations results when the estimated net realizable value of inventory
items declines below cost. Management regularly reviews Applicas investment in
inventories for declines in value. Income Taxes. Significant management judgment is required in developing
Applicas provision for income taxes, including the determination of foreign
tax liabilities, deferred tax assets and liabilities and any valuation
allowances that might be required to be applied against the deferred tax
assets. At December 31, 2003 and 2002, Applica had deferred tax assets in
excess of deferred tax liabilities of $68.7 million and $83.2 million,
respectively. Applica determined that it was more likely than not that $61.3
million and $73.0 million of such assets will be realized, resulting in a
valuation allowance of $7.4 million and $10.2 million as of December 31, 2003
and 2002, respectively. Applica evaluates its ability to realize its deferred
tax assets on a quarterly basis and adjusts the amount of its valuation
allowance, if necessary. Applica operates within multiple taxing jurisdictions
and is subject to audit in those jurisdictions. Because of the complex issues
involved, any claims can require an extended period to resolve. F-8




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Goodwill. On an annual basis, management assesses the composition of
Applicas assets and liabilities, as well as the events that have occurred and
the circumstances that have changed since the most recent fair value
determination. If events occur or circumstances change that would more likely
than not reduce the fair value of goodwill below its carrying amount, goodwill
will be tested for impairment. Applica selected
June 30th as the annual
impairment test date and will recognize an impairment loss if the carrying
value of the asset exceeds the fair value determination as of
June 30th of each
year. Long-Lived Assets. Applica reviews long-lived assets and certain
identifiable intangibles held and used for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In evaluating the fair value and future benefits of its
intangible assets, management performs an analysis of the anticipated
undiscounted future net cash flows of the individual assets over the remaining
amortization period. Applica recognizes an impairment loss if the carrying
value of the asset exceeds the expected future cash flows. Accruals for Product Liability Claims and Litigation. Applica is subject
to various legal proceedings, product liability claims and other claims in the
ordinary course of its business. Management estimates the amount of ultimate
liability, if any, with respect to such matters in excess of applicable
insurance coverage based on historical claims experience and current claim
amounts, as well as other available facts and circumstances. As the outcome of
litigation is difficult to predict and significant estimates are made with
regard to future events, significant changes from estimated amounts could
occur. Other Estimates. During the years, Applica has made significant estimates
in connection with specific events affecting its expectations. These have
included accruals relating to the consolidation of its operations, plant
closings, reduction in employees and product recalls. Estimates have also been required with respect to Applicas investment in a joint
venture investment partnership, Anasazi Partners, L.P. (For additional
information, see Note B.) Applica makes a number of other estimates in the
ordinary course of business relating to sales returns and allowances, warranty
accruals, and accruals for promotional incentives. Historically, past changes
to these estimates have not had a material impact on our financial condition
but have significantly affected operations from time to time. However,
circumstances could change which may alter future expectations. Principles of Consolidation The consolidated financial statements include the accounts of Applica
Incorporated and its wholly-owned subsidiaries. Generally, Applica uses the
equity method of accounting for its investments. Intercompany balances and
transactions have been eliminated in consolidation. Foreign Currency Translation For subsidiaries where the local currency is the functional currency,
assets and liabilities are translated into United States dollars at the
exchange rate in effect at the end of the year. Revenues and expenses of these
subsidiaries are translated at the average exchange rate during the year. The
aggregate effect of translating the financial statements of these foreign
subsidiaries is included in a separate component of shareholders equity
entitled Accumulated Other Comprehensive Earnings (Loss). For countries
where business is transacted predominantly in U.S. dollars or is deemed to be
hyper-inflationary, the U.S. dollar is the functional currency and monetary
balance sheet accounts are translated at the exchange rate in effect at the end
of the year and non-monetary balance sheet accounts are translated at
historical exchange rates. Income and expense accounts are translated at the
average exchange rates in effect during the year. Adjustments resulting from
the translation of these entities are included in operations. During 2003,
2002 and 2001, net foreign translation losses included in Applicas statement
of operations were $3.0 million, $1.9 million and $0.9 million, respectively. F-9




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Cash and Cash Equivalents Applica considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash balances
at December 31, 2003 and 2002 include approximately $11.2 million and $3.6
million, respectively, held in foreign banks by Applicas Hong Kong, Canadian
and Latin American subsidiaries. Comprehensive Earnings Comprehensive earnings (loss) is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, including foreign currency translation
adjustments and unrealized gains and losses on derivatives designated as cash
flow hedges. Applica presents accumulated other comprehensive earnings (loss)
net of taxes in its consolidated statement of shareholders equity. Tax expenses (benefit) related to comprehensive
 earning adjustments were approximately $1.4 million, ($1.6 million) and $2.4 million in 2003, 2002
 and 2001, respectively. Inventories Inventories are stated at the lower of cost or market; cost is determined
by the first-in, first-out method. Inventories are comprised of the following: 2003
    
    2002(In thousands)Raw materials
    
    $
    1,894
    
    
    $
    4,103Work in process
    
    
    3,029
    
    
    
    1,513Finished goods
    
    
    101,403
    
    
    
    105,837$
    106,326
    
    
    $
    111,453
 Inventory allowances were $5.4 million and $4.3 million at December 31, 2003
and 2002, respectively. Reclassifications Certain prior period amounts have been reclassified to conform with the
current years presentation. Revenue Recognition Applica recognizes sales and related cost of sales at the later of (a) the
time of shipment or (b) when title passes to the customers, all significant
contractual obligations have been satisfied and collection of the resulting
receivable is reasonably assured. Net sales is comprised of gross sales less
provisions for estimated customer returns, discounts, vendor payments and
volume rebates. Amounts billed to a customer for shipping and handling are
reported as revenue. Any shipping, handling or other costs incurred by Applica
associated with the sale are expensed as cost of sales in the period when the
sale occurs. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to their estimated operating service lives using accelerated
and straight-line methods. Direct external and internal costs of developing
software for internal use are capitalized subsequent to the preliminary stage
of development in accordance with SOP 98-1 Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use. Maintenance, repairs and minor renewals and betterments are
charged to expense as incurred. Warranty Estimated future warranty obligations related to certain products are
provided by charges to operations in the period in which the related revenue is
recognized. Accrued product warranties as of December 31, 2003, 2002 and 2001
were as follows: F-10




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands)Balance at December 31, 2001
    
    $
    3,689Accrued product warranties
    
    
    30,328Reductions
    
    
    (28,319
    )Balance at December 31, 2002
    
    
    5,698Accrued product warranties
    
    
    32,201Reductions
    
    
    (31,815
    )Balance at December 31, 2003
    
    $
    6,084
 Stock Based Compensation At
December 31, 2003, Applica had four active stock-based compensation
plans, which are described more fully in Note K  Shareholders Equity.
Applica accounts for employee stock-based compensation using the intrinsic
value method. Accordingly, compensation cost for stock options issued is
measured as the excess, if any, of the fair value of Applicas common stock at
the date of grant over the exercise price of the options. Applicas net
earnings (loss) and earnings (loss) per share would have been changed to the
pro forma amounts indicated below had compensation cost for the stock option
plans and non-qualified options issued to employees been determined based on
the fair value of the options at the grant dates consistent with the method of
SFAS 123 Accounting for Stock-Based Compensation: 2003
    
    2002
    
    2001(In thousands, except per share data)Net earnings (loss):As reported
    
    $
    15,223
    
    
    $
    (73,777
    )
    
    $
    (28,438
    )Pro forma
    
    $
    14,852
    
    
    $
    (74,793
    )
    
    $
    (33,113
    )Basic earnings (loss) per share:As reported
    
    $
    0.65
    
    
    $
    (3.15
    )
    
    $
    (1.23
    )Pro forma
    
    $
    0.63
    
    
    $
    (3.19
    )
    
    $
    (1.43
    )Diluted earnings (loss) per share:As reported
    
    $
    0.63
    
    
    $
    (3.10
    )
    
    $
    (1.23
    )Pro forma
    
    $
    0.62
    
    
    $
    (3.14
    )
    
    $
    (1.43
    )
 There was no stock-based employee compensation expense included in net
earnings (loss) in 2003, 2002 or 2001. The above pro forma disclosures may not be representative of the effects
on reported net earnings (loss) for future years as options vest over several
years and Applica may continue to grant options to employees. In accordance with the requirements of SFAS 123, the fair value of each
option grant was estimated on the date of grant using a binomial option-pricing
model with the following weighted-average assumptions used for grants in 2003,
2002 and 2001, respectively: no dividend yield for all years; expected
volatility ranging from 64.1% to 82.7% for 2003, 93.3% to 96.5% for 2002 and
82.9% to 86.0% for 2001; risk-free interest rates of 3% in 2003 and 5.3% in
2002 and 2001; and expected holding periods of four years in 2003, 2002 and
2001. Goodwill Prior to January 1, 2002, intangible assets, consisting primarily of
goodwill, were being amortized on a straight line basis over periods ranging
from 2.5 to 40 years. In June 2001, the Financial Accounting Standards Board
issued SFAS 142, Goodwill and Other Intangible Assets, which established new
accounting and reporting requirements for goodwill and other intangible assets.
The new standard requires that all intangible assets acquired that are
obtained through contractual or legal right, or are capable of being separately
sold, transferred, licensed, rented or exchanged must be recognized as an asset
apart from goodwill. Goodwill and intangibles with indefinite
lives are no longer amortized, but are subject to an annual assessment for
impairment by applying a fair value based test. F-11




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Applica applied the provisions of SFAS 142 beginning on January 1, 2002
and performed a transitional fair valued based impairment test. Based on the
initial impairment test, Applica recognized a non-cash adjustment of $121.3
million ($78.8 million, net of tax) in the first quarter of 2002 to reduce the
carrying value of goodwill to its implied fair value, which was estimated using
a combination of market-multiples, comparable transactions and discounted cash
flow methodologies. Under SFAS 142, the impairment adjustment was reflected as
a cumulative effect of change in accounting principle in the first quarter of
2002. As of June 30, 2003, Applica performed its annual fair value assessment
and determined that no additional impairment charge was necessary. In
addition, due to lower than expected sales of certain core categories of Black
& Decker® branded products in the third and fourth quarters of 2003, Applica
performed an additional fair value assessment as of December 31, 2003 and no
impairment was noted. Other Intangible Assets In June 1998, Applica acquired the household products group of The Black &
Decker Corporation for $319.8 million in cash and assumed certain related
liabilities. As part of the acquisition, Applica acquired the right to use the
Black & Decker® trademark in four product categories: garment care, cooking,
food preparation and beverage. Applica has the right to sell products under
this license agreement in North America, Central America, and South America,
excluding Brazil. The excess purchase price consideration over the estimated
fair value of the acquired net assets was $228.8 million, of which $47.2
million was allocated to an intangible asset related to the Black & Decker®
trademark and the remaining $181.6 million was allocated to goodwill. The $47.2
million assigned to the fair value of the intangible asset was based on a
valuation performed by Applica as of June 1998. For the first five years
(through June 30, 2003), the license was on a royalty free basis for the core
product categories. Mutually agreed upon renewals would be at the stated
royalty rate, along with specified minimum royalty payments. The agreement
provided for an initial period of five years, with a subsequent five-year
extended term and up to three additional five-year extensions. Beginning in 2002, sales of Black & Decker® branded products under the
original four product categories started to decrease significantly and
continued through December 31, 2003. Sales of Black & Decker® branded products
under the original four product categories for 2003, 2002, and 2001 were $399
million, $429 million and $446 million, respectively. As a result of the
continuation of the lower sales of Black & Decker® branded products in the four
core product categories in the third and fourth quarter of 2003 (which are
Applicas busiest quarters due to the seasonality of our business), management
determined that a triggering event had occurred in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly,
Applica performed a benefit analysis by calculating the expected effective
royalty rate in 2004 through 2006, taking into account the minimum royalties as
well as the projected sales of Black & Decker® branded products under the
original four categories. Based on the benefit analysis, management believes
that there is no remaining value in the initial intangible asset as of December
31, 2003. Accordingly, Applica recorded an impairment charge of approximately
$7.2 million to write off the unamortized book value of the asset. The
impairment charge is reflected in the fourth quarter of 2003 because the
decreased fourth quarter sales provided further confirmation of an impairment.
Pursuant to the requirements of SFAS 144 and as a result of Applicas benefit
analysis, the impairment charge is classified as a component of income from
operations. Other intangible assets were amortized on a straight-line basis over
periods ranging from two to 15 years. Other intangible assets subject to
amortization were $9.0 million and $55.2 million at December 31, 2003 and 2002,
respectively, and the related accumulated amortization was $2.8 million and
$34.3 million, respectively. Long-Lived Assets Long-lived assets and certain identifiable intangible assets to be held
and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of such asset and
eventual disposition. Measurement of an impairment loss for long-lived assets
and
certain identifiable intangible assets that management expects to hold and
use is based on the fair value of the asset. Long-lived assets and certain
identifiable intangible assets to be disposed of are reported at the lower of
carrying amount or fair value less costs to sell. F-12




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Risk Management Contracts Applica designates its derivatives based upon criteria established by SFAS
133, Accounting for Derivative Instruments and Hedging Activities and later
amended by SFAS 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. For a derivative designated as a fair value hedge, the
gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item attributed to the risk being
hedged. For a derivative designated as a cash flow hedge, the effective portion
of the derivatives gain or loss is initially reported as a component of
accumulated other comprehensive earnings (loss) and subsequently reclassified
into earnings when the hedged exposure affects earnings. The ineffective
portion of the gain or loss is reported in earnings immediately. For
derivatives that do not meet the criteria for hedge accounting, the gain or
loss is recognized in earnings immediately. Applica uses derivatives to manage exposures to foreign currency and
interest rate risk. Applicas objectives for holding derivatives are to
decrease the volatility of earnings and cash flows associated with changes in
foreign currency and interest rates. During 2003 and 2002, there were no significant gains or losses recognized
in earnings for hedge ineffectiveness. Applica did not discontinue any hedges
during 2003 or 2002 because it was probable that the original forecasted
transaction would not occur. In the normal course of business, Applica uses a variety of financial
instruments to manage its exposure to fluctuations in interest and foreign
currency exchange rates, including interest rate and currency swap agreements,
forward and option contracts, and interest rate caps. Applica designates and
assigns the financial instruments as hedges of forecasted transactions,
specific assets, or specific liabilities. When hedged assets or liabilities
are sold or extinguished or the forecasted transactions being hedged are no
longer expected to occur, Applica recognizes the gain or loss on the designated
hedging financial instrument. For derivatives that meet the criteria for hedge accounting, option
premiums and unrealized losses on forward contracts and the accrued
differential for interest rate and currency swaps to be received under the
agreements are recorded in the balance sheet as other comprehensive earnings
(loss). Unrealized gains on forward and option contracts and the accrued
differential for interest rate swaps to be paid under the agreements are
included in other liabilities. Realized gains and losses from hedges are
classified in the income statement consistent with the accounting treatment of
the item being hedged. Applica accrues the differential for interest rate
swaps to be paid or received under the agreements as interest rates shift as
adjustments to net interest expense over the lives of the swaps. Gains and
losses on the termination of effective swap agreements for which the hedged
transaction is still in place and expected to occur, prior to their original
maturity, are deferred and amortized to net interest expense over the remaining
term of the underlying hedged transactions. Income Taxes Deferred taxes have been provided on temporary differences in reporting
transactions for financial accounting and tax purposes. Applica provides a
valuation allowance against its deferred tax assets when it believes that it is
more likely than not that the asset will not be realized. Commencing in 2001, the earnings of certain foreign entities were taxed
based on U.S. statutory rates, notwithstanding the repatriation of earnings.
Applica did not repatriate any income from its foreign operations in 2003 as
compared to the repatriation of approximately $20.7 million and $31.4 million
from its foreign operations in 2002 and 2001, respectively. However, Applica
provided taxes on certain 2003 foreign earnings at U.S. based rates that
Applica does not intend to permanently reinvest. No provision was made for
U.S. taxes on the remaining accumulated undistributed earnings of Applicas
foreign subsidiaries of approximately $156.0 million at December 31, 2003 and
$148.0 million at December 31, 2002, as it is anticipated that such earnings
would be reinvested in their respective operations or in other foreign
operations. Applica does not intend in the foreseeable future to
permanently reinvest current and future earnings of certain of its foreign
subsidiaries outside of the United States, and will provide taxes on such
earnings at the U.S. statutory rates. F-13




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Advertising Costs Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses. Total advertising costs for the years
ended December 31, 2003, 2002 and 2001 were approximately $31.4 million, $34.2
million and $23.9 million, respectively. Legal Costs Legal costs are expensed as incurred and are included in selling, general
and administrative expenses. In 2003, Applica expensed approximately $8.1
million related to possible legal contingencies. The amounts incurred in 2002
and 2001 were $2.5 million and $1.6 million, respectively. Earnings (Loss) Per Share Basic net earnings (loss) per share equals net earnings (loss) divided by
the weighted average shares outstanding during the year. The computation of
diluted net earnings (loss) per share includes the dilutive effect of common
stock equivalents in the weighted average shares outstanding. The
reconciliation between the computations is as follows: Net Earnings
    
    Basic
    
    Basic
    
    Diluted
    
    Diluted(Loss)
    
    Shares
    
    EPS
    
    Shares
    
    EPS(In thousands, except per share data)2003
    
    $
    15,223
    
    
    
    23,573
    
    
    $
    0.65
    
    
    
    23,998
    
    
    $
    0.632002
    
    $
    (73,777
    )
    
    
    23,415
    
    
    $
    (3.15
    )
    
    
    23,818
    
    
    $
    (3.10
    )2001
    
    $
    (28,438
    )
    
    
    23,135
    
    
    $
    (1.23
    )
    
    
    23,135
    
    
    $
    (1.23
    )
 Included in diluted shares are the dilutive effect of common stock
equivalents relating to stock options of 424,703 for the year ended December 31, 2003
and 403,275 for the year ended December 31, 2002. Common stock
equivalents have been excluded from the diluted per share calculations in 2001,
as Applica incurred a net loss before cumulative effect of change in accounting
principle in that year and their inclusion would have been anti-dilutive.
Potential common stock equivalents at December 31, 2003 and 2002 were 1,494,685
and 642,964 with exercise prices ranging from $6.75 to $31.69 per share and
$7.60 to $31.69 per share, respectively. Repositioning, Recall and Other Charges 2003.During 2003, recall claims continued to diminish considerably and
in the fourth quarter of 2003, management determined the accrual was no longer
required and the remaining accrual of $4.1 million was reversed and was
included as a reduction of cost of sales. In addition Applica incurred an
additional charge of $4.7 million related to a lease at the
Shelton, Connecticut facility, which is reflected as a component of selling,
general and administrative expenses. 2002.In February 2002, Applica Consumer Products, Inc., in cooperation
with the Consumer Products Safety Commission, voluntarily recalled
approximately 2.1 million Black & Decker® T1200 and T1400 toasters. Applicas
Canadian operating subsidiary, Applica Canada Corporation, also recalled
approximately 180,000 of these toasters in Canada. In 2001, Applica took a
charge to cost of sales of $13.4 million relating to the estimated expenses of
such recalls. As of December 31, 2003 and 2002, $9.3 million and $8.7 million
had been charged against the accrual, respectively. In 2002, Applica incurred an additional $10.6 million in charges relating
to its decision to consolidate facilities and functions. These expenses did not
qualify for accrual at December 31, 2001. 2001.In the fourth quarter of 2001, Applica recorded charges relating to
several events in the aggregate amount of $28.2 million. These charges
included $6.8 million relating to Applicas decision to consolidate its
Shelton, Connecticut office with the headquarters located in Miami Lakes,
Florida, as well as certain back-office and supply chain functions in Canada
and Latin America. This facilities consolidation resulted in a reduction of
approximately 70 employees worldwide. In addition, $5.2 million of such
charges related to the write-off of fees and expenses of Applicas terminated
credit facility as Applica executed a new four-year senior secured revolving
credit facility. Also included in the charge were $1.5 million relating to the
devaluation of the Argentinean peso and $1.0 million related to the settlement F-14




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED of the shareholder class action litigation. Additionally, in 2001, Applica
took a charge to cost of sales of $13.4 million relating to the toaster recall
discussed above. Additionally, in the fourth quarter of 2001, Applica received a dividend
from its foreign operations of $31.4 million, which resulted in a $10.1 million
tax expense for previously untaxed earnings. Accrued liabilities relating to the 2001 repositioning, recall and other
charges were as follows: Amount
    
    
    
    
    
    
    
    
    
    AmountAccrued at
    
    2003
    
    
    
    
    
    Accrued atDec. 31,
    
    Provisions
    
    2003
    
    Dec. 31,2002
    
    (Write-offs)
    
    Payments
    
    2003(In thousands)Product recall
    
    $
    4,763
    
    
    $
    (4,125
    )*
    
    $
    638
    
    
    $
    Back-office consolidation
    
    
    5,956
    
    
    
    4,681
    
    
    
    5,084
    
    
    
    5,553Shareholder litigation
    
    
    450
    
    
    
    
    
    
    
    450
    
    
    
    $
    11,169
    
    
    $
    556
    
    
    $
    6,172
    
    
    $
    5,553
 Amount
    
    
    
    
    
    
    
    
    
    AmountAccrued at
    
    
    
    
    
    
    
    
    
    Accrued atDec. 31,
    
    2002
    
    2002
    
    Dec. 31,2001
    
    Provisions
    
    Payments
    
    2002(In thousands)Product recall
    
    $
    13,417
    
    
    $
    
    
    
    $
    8,654
    
    
    $
    4,763Back-office consolidation
    
    
    5,179
    
    
    
    10,643
    
    
    
    9,866
    
    
    
    5,956Shareholder litigation
    
    
    1,000
    
    
    
    
    
    
    
    550
    
    
    
    450$
    19,596
    
    
    $
    10,643
    
    
    $
    19,070
    
    
    $
    11,169
   *
    
    Represents write-off. There were no provisions for the recall recorded in 2003. Gain on Litigation Settlement In September 2002, Applica and Salton, Inc. entered into a settlement
agreement in the matter Salton, Inc. v Windmere-Durable Holdings, Inc. and
Windmere Corporation, which was filed in the United States District Court,
Northern District of Illinois in January 2001. In connection with such
settlement, Applica reported a gain of $557,000 in the third quarter of 2002. Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS No. 148). SFAS No. 148 amends SFAS Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. Additionally,
SFAS No. 148 requires prominent disclosures about the effects on reported net
income of an entitys accounting policy decisions with respect to stock-based
employee compensation. SFAS No. 148 also amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosures about such effects in interim
financial information. Applica currently accounts for its stock-based
compensation awards to employees and directors under the accounting prescribed
by Accounting Principles Board Opinion No. 25 (APB No. 25) and provides the
disclosures required by SFAS No. 123, as amended by SFAS No. 148. Applica
currently intends to continue to account for its stock-based compensation
awards to employees and directors under the accounting prescribed by APB No.
25. In December 2002, the FASB issued Interpretation 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. For a guarantee subject to FASB
Interpretation 45, a guarantor is required to:  
    
    measure and recognize the fair value of the guarantee at inception
(for many guarantees, fair value will be determined using a present
value method); and F-15




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED  
    
    provide new disclosures regarding the nature of any guarantees, the
maximum potential amount of future guarantee payments, the current
carrying amount of the guarantee liability, and the nature of any
recourse provisions or assets held as collateral that could be
liquidated and allow the guarantor to recover all or a portion of its
payments in the event guarantee payments are required. The disclosure requirement of this Interpretation is effective for
financial statements for fiscal years ending after December 15, 2002 and did
not have a material effect on Applica financial statements. The initial
recognition and measurement provision are effective prospectively for
guarantees issued or modified on or after January 1, 2003, which did not have a
material effect on Applicas financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (an Interpretation of ARB No. 51) (FIN 46). FIN
46 addresses consolidation by business enterprises of certain variable interest
entities, commonly referred to as special purpose entities. The adoption of
FIN 46 did not have a material effect on Applicas financial statement
presentation or disclosure. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No.
133 on Derivative Instruments with Characteristics of both Liabilities and
Equity. This statement amends and clarifies accounting for derivatives
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. This statement is
effective for contracts entered into or modified after June 30, 2003, except as
for provisions that relate to SFAS No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15, 2003, which should
continue to be applied in accordance with their respective dates. The adoption
of SFAS No. 149 did not have a material impact on Applicas financial
condition, results of operations, and cash flows. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for classifying and measuring certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. The adoption of SFAS No. 150 will not have a
material impact on Applicas financial condition, results of operations, and
cash flows. NOTE B - INVESTMENT IN
JOINT VENTURES Anasazi Partners, L.P. is a partnership owned 50% by Applica that invested
in public and privately owned securities. In the fourth quarter of 2002,
Anasazi Partners engaged an investment banker to pursue exit strategies for
Anasazis equity investment in ZonePerfect Nutrition Company. In July 2003,
ZonePerfect was sold for approximately $160.0 million in cash, $20.0 million of
which is being held in escrow as of December 31, 2003. Payment of $10.0 million dollars of the amount held in escrow is contingent on the performance of a negotiated matter and no portion
thereof has been reflected in the net earnings of Anasazi. For
the years ended December 31, 2003, 2002 and 2001, Applicas equity in the
net earnings (loss) of Anasazi was $55.6 million, zero, and
a loss of $128,000, respectively. In
August 2003, Applica received a cash distribution from Anasazi of $51.4 million
resulting from the sale of ZonePerfect, which reduced Applicas investment in
Anasazi. The funds held in escrow are to be released to the sellers, including
Anasazi, at 18 and 24 months from date of closing, subject to any adjustments
to the escrowed funds for breaches of representations and warranties.
Management of Anasazi believes that Anasazi is entitled to receive
additional amounts with respect to the contingent negotiated matter.
Upon agreement with the purchaser of ZonePerfect, or release of the related
funds from escrow, Applica expects to record additional earnings of
approximately $3.7 million. In July 2003, the general partner of Anasazi Partners L.P. began the
process of dissolving the partnership by distributing the remaining individual
investments to the partners. At December 31, 2003, Applicas interest in
Anasazi represents its share of the escrow funds and undistributed cash held by
Anasazi, net of deferred income. Anasazis summarized financial information,
derived from its financial statements, is as follows (in thousands): F-16




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED At December 31,2003
    
    2002(In thousands)Balance Sheet:Total assets
    
    $
    8,703
    
    
    $
    43,132Total liabilities
    
    $
    33
    
    
    $
    Partners capital
    
    $
    8,670
    
    
    $
    43,132
 Years ended December 31,2003
    
    2002
    
    2001(In thousands)Income Statement:Investment income
    
    
    31
    
    
    
    156
    
    
    
    14Realized/unrealized gain on investments
    
    
    49,133
    
    
    
    31,338
    
    
    
    4,466Net earnings
    
    $
    43,109
    
    
    $
    31,487
    
    
    $
    4,437
 As
of December 31, 2002, the difference between the carrying value
of Applicas investment in Anasazi and 50% of the net equity of
Anasazi was due to the valuation reserve that Applica applied to its
investment. As of December 31, 2003, the difference between the
carrying value of Applicas investment in Anasazi and 50% of the
net equity of Anasazi was due to the disproportionate share of
remaining distributions from Anasazi to be received by Applica
pursuant to an agreement between Applica and the other 50% partner of
Anasazi. In 2002, the equity in net earnings (loss) of joint ventures was a $1.5
million loss as the result of Applicas losses related to its investment in a
Florida limited liability company. Applica has no additional commitments or
exposure related to this investment. Included
in Applicas consolidated retained earnings are earnings of
approximately $54.1 million as of December 31, 2003 and a
loss of approximately $1.5 million as of December 31, 2002
related to Applicas equity in the net earnings of Anasazi. NOTE C  ACQUISITIONS In May 2002, Applica Consumer Products, Inc., Applicas U.S. operating
subsidiary, purchased all of the outstanding stock of Weitech, Inc., an
electronic pest control company, for approximately $17.0 million in cash and
the issuance of $3.0 million of notes payable. The acquisition was accounted
for as a purchase in accordance with SFAS 141 and, accordingly, the purchase
price was allocated based on the estimated fair market values of the
identifiable assets and liabilities obtained, resulting in original goodwill of
approximately $9.6 million. Goodwill will not be amortized in the future but
will be evaluated for impairment in accordance with the provisions of SFAS 142.
During the fourth quarter of 2002, Applica changed its preliminary allocation
of certain acquired identified intangible assets and, accordingly, reclassified
$3.7 million from other intangible assets to goodwill resulting in goodwill of
$13.3 million as of December 31, 2002. This goodwill is attributable to the
general reputation of the business and the collective experience of the
management and other employees, and was calculated as follows: (In thousands)Cash consideration paid
    
    $
    17,002Notes payable issued
    
    
    3,000Total consideration
    
    
    20,002Less: Fair value of identifiable assets acquired:Cash
    
    
    210Accounts receivable, net
    
    
    2,683Inventory
    
    
    1,124Other assets
    
    
    433Property and equipment
    
    
    2804,730Plus: Fair value of liabilities assumed:Accounts payable and accrued expenses
    
    
    1,550Deferred tax liability
    
    
    431,593Less:Fair value of non-compete agreements (1)
    
    
    3,271Fair value
of tradename(1)
    
    
    270Excess of cost over fair value of net assets acquired; goodwill
    
    $
    13,324
   (1)
    
    Identifiable intangible assets subject to amortization. F-17




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The results of operations of Weitech, Inc. were included in the
accompanying consolidated statement of operations since the date of the
acquisition. NOTE D  GOODWILL AND OTHER INTANGIBLE ASSETS Applica applied the provisions of SFAS 142 beginning on January 1, 2002
and performed a transitional fair valued based impairment test. Based on the
initial impairment test, Applica recognized a non-cash adjustment of $121.3
million ($78.8 million, or $3.31 per diluted share, net of tax) in the first
quarter of 2002 to reduce the carrying value of goodwill to its implied fair
value, which was estimated using a combination of market-multiples, comparable
transactions and discounted cash flow methodologies. Under SFAS 142, the
impairment adjustment was reflected as a cumulative effect of change in
accounting principle in the first quarter of 2002. In connection with adopting
SFAS 142, Applica also reassessed the useful lives and the classifications of
its identifiable intangible assets and determined that they continue to be
appropriate. The carrying amount of goodwill is as follows: (In thousands)Goodwill, net of accumulated amortization, at December 31, 2001
    
    $
    170,764Impairment adjustment at adoption of SFAS 142
    
    
    (121,276
    )Addition resulting from Weitech acquisition
    
    
    13,324Balance at December 31, 2003 and 2002
    
    $
    62,812
 The components of Applicas intangible assets subject to amortization are
as follows: Weighted
    
    December 31, 2003
    
    December 31, 2002Average
    
    Gross
    
    
    
    
    
    GrossAmortization
    
    Carrying
    
    Accumulated
    
    Carrying
    
    AccumulatedPeriod
    
    Amount
    
    Amortization
    
    Amount
    
    Amortization(Years)
    
    (In thousands)Licenses
    
    
    2.0
    
    
    $
    2,000
    
    
    $
    (333
    )
    
    $
    49,200
    
    
    $
    (32,786
    )Contract-based
    
    
    3.3
    
    
    
    6,988
    
    
    
    (2,509
    )
    
    
    5,968
    
    
    
    (1,522
    )$
    8,988
    
    
    $
    (2,842
    )
    
    $
    55,168
    
    
    $
    (34,308
    )
 As part of Applicas June 1998 acquisition of the household products group
of The Black & Decker Corporation, $47.2 million of the excess purchase price
was allocated to an intangible asset related to the Black & Decker® trademark.
As a result of the lower than expected sales of Black & Decker® branded
products in the third and fourth quarter of 2003, Applica reviewed whether the
related intangible asset was impaired as of December 31, 2003. Based on the
analysis, Applica determined that the intangible asset had no future value and
accordingly recorded an impairment charge of $7.2 million, which is included as

a separate line item in the statement of operations for the year ended December
31, 2003. The fair value of this intangible asset was based on an estimate of
Applicas future cash flows resulting from the use of the Black & Decker®
tradename, taking into account the royalties now required to be paid on each
product sold. Amortization expense related to intangible assets was $8.6 million during
2003 (excluding the above impairment charge of $7.2 million) and $8.3 million during
2002. The following table provides information regarding estimated
amortization expense for each of the following years ended December 31: (In thousands)2004
    
    $
    2,4322005
    
    
    1,6162006
    
    
    1,1132007
    
    
    4692008
    
    
    161Thereafter
    
    
    322
 F-18




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following table discloses the effect on earnings (loss) and earnings (loss) per share
of the adoption of SFAS 142 for the years ended December 31, 2003, 2002 and
2001: At December 31,2003
    
    2002
    
    2001(In thousands, except per share amounts)Net earnings (loss):Reported net earnings (loss)
    
    $
    15,223
    
    
    $
    (73,777
    )
    
    $
    (28,438
    )Add: Goodwill amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    3,410Adjusted net earnings (loss)
    
    
    15,223
    
    
    
    (73,777
    )
    
    
    (25,028
    )Add: Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    78,829
    
    
    
    Adjusted net earnings (loss) before cumulative effect of change
in accounting principle
    
    $
    15,223
    
    
    $
    5,052
    
    
    $
    (25,028
    )Basic earnings (loss) per share:Basic reported net earnings (loss)
    
    $
    0.65
    
    
    $
    (3.15
    )
    
    $
    (1.23
    )Add: Goodwill amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    0.15Adjusted net earnings (loss)
    
    
    0.65
    
    
    
    (3.15
    )
    
    
    (1.08
    )Add: Cumulative effect of change in accounting principle
    
    
    
    
    
    
    3.37
    
    
    
    Adjusted net earnings (loss) before cumulative effect of change
in accounting principle.
    
    $
    0.65
    
    
    $
    0.22
    
    
    $
    (1.08
    )Diluted earnings (loss) per share:Basic reported net earnings (loss)
    
    $
    0.63
    
    
    $
    (3.10
    )
    
    $
    (1.23
    )Add: Goodwill amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    0.15Adjusted net earnings (loss)
    
    
    0.63
    
    
    
    (3.10
    )
    
    
    (1.08
    )Add: Cumulative effect of change in accounting principle
    
    
    
    
    
    
    3.31
    
    
    
    Adjusted net earnings (loss) before cumulative effect of change
in accounting principle
    
    $
    0.63
    
    
    $
    0.21
    
    
    $
    (1.08
    )
 NOTE E - PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant and equipment: At December 31,Useful Lives
    
    2003
    
    2002(Dollars in thousands)Building
    
    15-50  years
    
    $
    15,963
    
    
    $
    15,257Building improvements
    
    8-31  years
    
    
    4,884
    
    
    
    4,708Computer equipment
    
    3-5  years
    
    
    26,495
    
    
    
    20,022Equipment and other
    
    3-8  years
    
    
    111,579
    
    
    
    129,725Leasehold improvements*
    
    8  years
    
    
    11,600
    
    
    
    13,471Land and land improvements**
    
    15-31  years
    
    
    3,762
    
    
    
    3,729Total
    
    
    
    
    
    
    174,283
    
    
    
    186,912Less accumulated depreciation
    
    
    
    
    
    
    103,894
    
    
    
    109,949$
    70,389
    
    
    $
    76,963
   * Shorter of remaining term of lease or useful life** Only improvements are depreciated Included in computer equipment is $3.4 million of in-process software
development for internal use that was not placed in service as of December 31, 2003. There were
no in-process items as of December 31, 2002. NOTE F - ACCRUED EXPENSES Accrued expenses are summarized as follows: F-19




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For the Year ended December 31,2003
    
    2002(In thousands)Product recall
    
    $
    
    
    
    $
    4,763Salaries and bonuses
    
    
    7,384
    
    
    
    12,686Promotions and advertising allowances
    
    
    9,435
    
    
    
    11,863Warranty
    
    
    6,084
    
    
    
    5,698Back-office consolidation
    
    
    5,553
    
    
    
    5,956Co-op advertising and volume rebates
    
    
    5,892
    
    
    
    4,938Other
    
    
    27,014
    
    
    
    28,782$
    61,362
    
    
    $
    74,686
 NOTE G  LONG TERM DEBT Applicas long-term debt, including interest rate swaps designated as
hedges, is summarized below: Stated
    
    Interest Rate Swaps (2)
    
    Effective
    
    SwapBalance
    
    Interest Rate (1)
    
    Pay Float
    
    Pay Fixed
    
    Interest Rate (3)
    
    Maturities(Dollars in thousands)At December 31, 2003:Revolving Credit Facility
    
    $
    62,703
    
    
    
    3.1
    %
    
    $
    
    
    
    $
    50,000
    
    
    
    3.2
    %
    
    December 2004Mortgage Loan
    
    
    5,767
    
    
    
    7.3
    %
    
    
    
    
    
    
    
    
    
    
    7.3
    %Notes Payable
    
    
    3,000
    
    
    
    6.0
    %
    
    
    
    
    
    
    
    
    
    
    6.0
    %10% Notes (4)
    
    
    65,318
    
    
    
    10.0
    %
    
    
    30,000
    
    
    
    
    
    
    
    8.4
    %
    
    July 2008Total
    
    
    136,788
    
    
    
    
    
    
    
    30,000
    
    
    
    50,000Less current maturities
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    Total long-term debt
    
    $
    136,637
    
    
    
    
    
    
    $
    30,000
    
    
    $
    50,000At December 31, 2002:Revolving Credit Facility
    
    $
    55,070
    
    
    
    3.7
    %
    
    $
    
    
    
    $
    15,000
    
    
    
    4.7
    %
    
    July 2003Mortgage Loan
    
    
    5,912
    
    
    
    7.3
    %
    
    
    5,939
    
    
    
    
    
    
    
    3.1
    %
    
    May 2007Notes Payable
    
    
    3,000
    
    
    
    6.0
    %
    
    
    
    
    
    
    
    
    
    
    6.0
    %10% Notes
    
    
    130,000
    
    
    
    10.0
    %
    
    
    
    
    
    
    
    
    
    
    10.0
    %Total
    
    
    193,982
    
    
    
    
    
    
    
    5,939
    
    
    
    15,000Less current maturities
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    Total long-term debt
    
    $
    193,838
    
    
    
    
    
    
    $
    5,939
    
    
    $
    15,000
   (1)
    
    The stated interest rate represents the coupon rate for the 10% notes and
mortgage loan for the executive offices located in Miami Lakes, Florida.
For floating rate borrowings, interest rates are based upon the rates at
December 31, 2003 and 2002; these rates are not necessarily an indication
of future interest rates.(2)
    
    Amounts represent notional values of interest rate swaps.(3)
    
    The effective interest rate is the weighted average interest rate after
taking into consideration the effect of interest rate swaps outstanding as
of year-end entered into with respect to certain of those borrowings as
indicated in the Pay Float and Pay Fixed columns.(4)
    
    Includes $318,000 that represents the positive fair value of an
underlying hedge as of December 31, 2003 as required pursuant to FAS 133. Revolving Credit Facility Applica has a $205 million four-year asset-based senior secured revolving
credit facility. Advances under the credit facility are primarily based upon
percentages of outstanding eligible accounts receivable and inventories.
The credit facility includes a $10.0 million sublimit for the issuance of
letters of credit. All amounts outstanding under the credit facility are
payable on December 28, 2005. At Applicas option, interest accrues on the loans made under the credit
facility at either: F-20




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED  
    
    LIBOR (adjusted for any reserves), plus a specified margin
(determined by Applicas leverage ratio and set at 2.00% at December
31, 2003), which was 3.12% at December 31, 2003; or
    
    the Base Rate (which is Bank of Americas prime rate), plus a
specified margin (determined based upon Applicas leverage ratio and
was zero at December 31, 2003), which was 4.00% at December 31, 2003. Swing loans up to $15.0 million bear interest at the Base Rate plus a specified
margin (determined based on Applicas leverage ratio and was zero at December
31, 2003), which was 4.00% at December 31, 2003. Applica may at its option
reduce the amount available under the Credit Facility to the extent such
amounts are unused or prepaid in certain minimum amounts. The credit facility is collateralized by substantially all of the real and
personal property, tangible and intangible, of Applica Incorporated and its
domestic subsidiaries, as well as:  
    
    a pledge of all of the stock of such domestic subsidiaries,
    
    a pledge of not more than 65% of the voting stock of each direct
foreign subsidiary of Applica Incorporated and each direct foreign
subsidiary of each domestic subsidiary of Applica Incorporated, and
    
    a pledge of all of the capital stock of any subsidiary of a
subsidiary of Applica Incorporated that is a borrower under the credit
facility. The credit facility is guaranteed by all of the current, and will be guaranteed
by any future, domestic subsidiaries of Applica Incorporated. The credit facility contains a number of significant covenants that, among
other things, restrict the ability of Applica to dispose of assets, incur
additional indebtedness, prepay other indebtedness, pay dividends, repurchase
or redeem capital stock, enter into certain investments or create new
subsidiaries, enter into sale and lease-back transactions, make certain
acquisitions, engage in mergers or consolidations, create liens, or engage in
certain transactions with affiliates, and that otherwise restrict corporate and
business activities. In addition, under the credit facility, Applica is
required to comply with a minimum borrowing base availability and a maximum
annual capital expenditure requirement. 10% Senior Subordinated Notes Applica issued $130.0 million in 10% Senior Subordinated Notes in July
1998, which bear interest at an annual rate of 10%, are payable semi-annually
and mature on July 31, 2008. The notes are general unsecured obligations of
Applica and rank subordinate in right of payment to all senior debt of Applica
and pari passu in right of payment to all future subordinated indebtedness of
Applica. The notes may be redeemed at the option of Applica, in whole or in
part, on or after July 31, 2003 at various redemption prices. During 2003,
Applica repurchased $65 million of these notes, and incurred a loss on
redemption of $3.9 million. In February 2004, Applica repurchased an
additional $4.25 million of these notes on the open market and incurred a loss
on redemption of approximately $200,000. The indenture pursuant to which the notes were issued contains certain
covenants that, among other things, limit the ability of Applica to incur
additional indebtedness and issue preferred stock, pay dividends or make other
certain restricted payments, apply net proceeds from certain asset sales, or
sell stock of subsidiaries. Mortgage Loan In April 2002, Applica Consumer Products, Inc., Applicas U.S. operating
subsidiary, entered into a five-year $6.0 million mortgage loan on Applicas
executive offices located in Miami Lakes, Florida. The loan bears interest at
an annual rate of 7.25%, with monthly principal and interest payments based on
a 20-year amortization. A final balloon payment is due at the end of the term.
The loan is collateralized by a first mortgage on the property and the
building located thereon. In November 2003, Applica entered into an agreement
to sell its executive offices located in Miami Lakes to an unrelated party for $9.5 million, which is
scheduled to close in July 2004. At the time of closing, approximately $6
million of the proceeds will be used to repay the outstanding mortgage on the
property. Applicas intention is to enter into a non-cancelable long-term
operating lease for new corporate office space in South Florida. No commitment
has been made as of the current date. F-21




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Notes Payable In conjunction with the acquisition of Weitech, Inc. in May 2002, Applica
Consumer Products, Inc., Applicas U.S. operating subsidiary, issued $3.0
million of notes payable primarily to the former shareholders of Weitech.
These notes are unsecured, bear interest at an annual rate of 6.0%, and mature
on May 31, 2005, with interest only payable quarterly. Foreign Indebtedness Applicas foreign subsidiaries have available approximately $14.5 million
of trade finance lines of credit, payable on demand, which are collateralized
by the subsidiaries assets and in some cases, a guarantee of Applica
Incorporated. At December 31, 2003 and 2002, the foreign subsidiaries were
using approximately $258,000 and $1.7 million, respectively, which were all
used for trade financing. NOTE H - EMPLOYEE BENEFIT PLANS Applica has a 401(k) plan for its employees to which Applica makes
discretionary contributions at rates dependent on the level of each employees
contributions. Contributions made by Applica are limited to the maximum
allowable for federal income tax purposes. The amounts charged to earnings for
this plan during the years ended December 31, 2003, 2002 and 2001 totaled
approximately $749,000, $803,000 and $766,000, respectively. Applica does not
provide any health or other benefits to retirees, except for executive life
insurance provided to Mr. Belvin Freidson, the founder of Applica. NOTE I - INCOME TAXES Income tax expense (benefit) consists of the following: At December 31,2003
    
    2002
    
    2001(In thousands)Current:Federal
    
    $
    (174
    )
    
    $
    
    
    
    $
    Foreign
    
    
    (279
    )
    
    
    3,449
    
    
    
    12,754State
    
    
    
    
    
    
    
    
    
    
    (453
    )
    
    
    3,449
    
    
    
    12,754Deferred
    
    
    10,600
    
    
    
    1,377
    
    
    
    (8,608
    )$
    10,147
    
    
    $
    4,826
    
    
    $
    4,146
 The United States and foreign components of earnings (loss) before income
taxes are as follows: For the Year ended December 31,2003
    
    2002
    
    2001(In thousands)United States
    
    $
    11,441
    
    
    $
    (4,757
    )
    
    $
    (46,484
    )Foreign
    
    
    13,929
    
    
    
    14,635
    
    
    
    22,192$
    25,370
    
    
    $
    9,878
    
    
    $
    (24,292
    )
 The differences between the statutory rates and the tax rates computed on
pre-tax profits are as follows: For the Year ended December 31,2003
    
    2002
    
    2001Statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Permanent differences
    
    
    7.1
    *
    
    
    14.1
    *
    
    
    (2.3
    )State income tax
    
    
    (1.0
    )
    
    
    (1.4
    )
    
    
    4.1Net tax rate differential on
undistributed earnings and
change in estimated tax
provision
    
    
    (3.1
    )
    
    
    1.7
    
    
    
    (11.4
    )
 F-22




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For the Year ended December 31,2003
    
    2002
    
    2001Foreign earnings distributed to, or taxable in, the U.S.
    
    
    2.5
    
    
    
    2.7
    
    
    
    (41.6
    )Other
    
    
    (0.5
    )
    
    
    (3.2
    )
    
    
    (0.9
    )40.0
    %
    
    
    48.9
    %
    
    
    (17.1
    )%
    The Internal Revenue Service has completed its examination of Applicas
U.S. tax returns for the years 1994 through 1998. One adjustment has been
proposed, which, if sustained, would defer a deduction taken by Applica in 1995
until 1998 and would result in an interest charge net of the tax benefit of
approximately $500,000. Applica believes its position is correct and is
protesting the disallowance but had accrued for the related liability as of
December 31, 2003 and 2002. In addition, Applica Canada Corporation, Applicas
Canadian operating subsidiary, is currently under audit by the Ontario Ministry
of Finance for the 2000, 2001 and 2002 tax years. Management believes that
adequate provision for taxes has been made for the years under examination and
those not yet examined. The primary components of future income tax benefits (liabilities) were as
follows: At December 31,2003
    
    2002(In thousands)Inventory differences
    
    $
    (1,889
    )
    
    $
    685Accrued expenses
    
    
    13,505
    
    
    
    17,969Total current assets
    
    
    11,616
    
    
    
    18,654Net operating loss and other carryforwards
    
    
    33,465
    
    
    
    39,111Fixed assets
    
    
    760
    
    
    
    1,682Goodwill and intangible asset amortization
    
    
    23,469
    
    
    
    21,734Capital loss carryforward
    
    
    
    
    
    
    2,006Unrealized derivative tax
    
    
    (632
    )
    
    
    Valuation allowance
    
    
    (7,367
    )
    
    
    (10,155
    )Net non-current assets
    
    
    49,695
    
    
    
    54,378Net deferred tax assets
    
    $
    61,311
    
    
    $
    73,032
 The tax benefits resulting from disqualifying dispositions of shares of
common stock acquired pursuant to incentive stock options and the exercise of
non-qualified stock options have been recorded as additions to paid-in capital
in the amounts of $47,000, $41,000 and $176,000 in 2003, 2002 and 2001,
respectively. At December 31, 2003, Applica had net operating loss carryforwards
(NOLs) of approximately $30.4 million for domestic federal income tax
purposes and $9.7 million for foreign income tax purposes. The domestic
operating losses and foreign losses expire as follows: Operating
    
    ForeignYear of Expiration
    
    Losses
    
    Losses2005
    
    $
    
    
    
    $
    1,3382006
    
    
    
    
    
    
    1102007
    
    
    
    
    
    
    2,9462009
    
    
    
    
    
    
    1,2422019
    
    
    11,298
    
    
    
    2020
    
    
    18,134
    
    
    
    2021
    
    
    400
    
    
    
    2022
    
    
    520
    
    
    
    Indefinite
    
    
    
    
    
    
    4,018$
    30,352
    
    
    $
    9,654
 F-23




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Applica also has NOLs in numerous states that have a tax benefit of $7.2
million and $9.7 million in 2003 and 2002, respectively. Applica has applied
valuation allowances, tax effected, against these NOLs of $4.1 million and $7.1
million in 2003 and 2002, respectively. In addition, Applica has U.S. foreign
tax credits of $8.1 million and $8.7 million in 2003 and 2002, respectively,
net of an established valuation allowance of $3.3 million as of 2003 and $2.4
million as of 2002. Applica establishes valuation allowances against the state
NOLs and U.S. foreign tax credits when it is more likely than not that the
benefits will not be realized prior to expiration. NOTE J - COMMITMENTS AND CONTINGENCIES Litigation Tilia Matters. In May 2003, Applica brought suit against Tilia
International, Inc. in U.S. district court in Miami, Florida to invalidate
certain patents held by Tilia relating to its home vacuum packaging products.
Immediately thereafter, Tilia sued Applica in the U.S. district court in
California for alleged patent infringement by Applicas Black & Decker® branded
vacuum packaging machine and accessories. The California district court action
was voluntarily dismissed without prejudice by Tilia in favor of the district
court proceeding in Florida. In January 2004, Applica amended its complaint to
add allegations that Tilia has violated U.S antitrust laws. The Florida action
is in its initial stages. In July 2003, Tilia filed a complaint against Applica and other parties
with the International Trade Commission, known as the ITC, in Washington D.C.
Tilia alleged infringement of its patent related to vacuum packaging machines
and requested permanent relief in the form of an exclusion order. Tilia also
sought preliminary relief, requesting a temporary exclusion order that would
prevent Applica from selling its vacuum sealer product in the U.S. Tilias
request for a temporary exclusion order was denied by the ITC in January 2004.
Full trial before the ITC currently is scheduled for May 2004, with a final ITC
decision expected in November 2004. In late September 2003, Applica also brought a nullity action in Germany
seeking to invalidate the German counterpart of the Tilia vacuum sealer machine
patent. This matter is in its initial stages. We believe that the amount of ultimate liability of these matters, if any,
is not likely to have a material effect on our business, financial condition,
results of operations or liquidity and, accordingly, no accrual has been recorded as of December 31, 2003. However, as the outcome of litigation is
difficult to predict, significant changes in the estimated exposures could
occur. Other Matters. Applica is also subject to other legal proceedings,
product liability claims and other claims that arise in the ordinary course of
its business. In the opinion of management, the amount of ultimate liability,
if any, in excess of applicable insurance coverage, is not likely to have a
material effect on the financial condition, results of operations or liquidity
of Applica. However, as the outcome of litigation or other legal claims is
difficult to predict, significant changes in the estimated exposures could
occur, which could have a material impact on Applicas operations. Employment Agreements Applica has entered into employment agreements with several of its
executive officers for periods ranging from two to five years. The agreements
provide the employees with an option to terminate their agreements and receive
lump sum payments of up to five years compensation if there is a change in
control of Applica, as defined in such agreements. Leases Applica has non-cancelable operating leases for office leases and office
equipment. The leases expire over the next six years and contain provisions
for certain annual rental escalations. Future minimum payments under Applicas non-cancelable long-term operating
leases are as follows: (In thousands)2004
    
    $
    7,8312005
    
    
    7,5572006
    
    
    5,158
 F-24




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2007
    
    
    3,4272008
    
    
    1,449Thereafter
    
    
    450$
    25,872
 Rent expense for the years ended December 31, 2003, 2002 and 2001 totaled
approximately $7.5 million, $8.1 million and $9.2 million, respectively. In November 2003, Applica entered into an agreement to sell its executive
offices located in Miami Lakes for $9.5 million, which is scheduled to close in
July 2004. Applicas intention is to enter into a non-cancelable long-term
operating lease for new corporate office space in South Florida. No commitment
has been made as of the current date. Applica leases a 562,000 square foot warehouse in Little Rock, Arkansas
for warehousing and distribution, which expires in March 2008. Durables
facilities in China are operated under contracts with the local government,
with terms between two and ten years. During 2002, Applica closed its office
in Shelton, Connecticut. License Agreement As part of its acquisition of the Black & Decker household products group
in June 1998, Applica licensed the Black & Decker brand in North America, Latin
America (excluding Brazil) and the Caribbean for four categories of household
appliances. The license was on a royalty-free basis for the four product
categories through June 2003. In July 2001, Applica and The Black & Decker
Corporation entered into an extension of the trademark license agreement
through December 31, 2006. Under the agreement as extended, Applica agreed to
pay certain fees and guaranteed minimum royalty payments to The Black & Decker
Corporation of $1.2 million in 2001, $2.0 million in 2002, $5.0 million in 2003
and $12.5 million in each year thereafter through 2006. Renewals of the
license agreement, if mutually agreed upon, are for five-year periods. If The
Black & Decker Corporation does not agree to renew the license agreement,
Applica has 18 months to transition out of the product line. No minimum
royalty payments would be due during such transition period. The Black &
Decker Corporation has agreed not to compete in core product categories for a
period of five years after the termination of such license agreement. Upon request, The Black & Decker Corporation may elect to extend the
license to use the Black & Decker® brand to certain additional products. Such
additional products are subject to royalty payments. In 2000 and 2001, Black &
Decker extended the license to heaters, fans, humidifiers, dehumidifiers, air
purifiers, deep fryers and bag sealers. In 2002, Black & Decker agreed to
extend the license to ice cream makers and mixers. In 2003, the license was
further extended to certain electronic pest and insect control products, a
stain removal product and vacuum bag sealers. Other In April 1994, Applica purchased from Ourimbah Investment Limited
(Ourimbah) the remaining 20% of the issued and outstanding capital stock (the
Purchased Shares) of Applica Durable Manufacturing Limited, Applicas Chinese
manufacturer, which had not, prior to such purchase, been owned, directly or
indirectly, by Applica. In connection with such purchase, Applica agreed to
make an additional payment (based upon amounts received in connection with any
such change in control) to Ourimbah for the Purchased Shares upon the
occurrence of a change of control (as defined) of Applica Incorporated on or
before July 1, 2009. No change of control will be deemed to have occurred in
connection with any transaction approved by a majority of the members of
Applicas Board of Directors. NOTE K - SHAREHOLDERS EQUITY Stock Options Under various plans, Applica may grant incentive or non-qualified stock
options to employees, consultants and directors. The terms of stock options
granted under the plans are determined by the Compensation Committee of the
Board of Directors at the time of grant, including the exercise price, term and
any restrictions on the exercisability of such option. The exercise price of
all options granted under the plans equals the market price at the date of
grant and no option is exercisable after the expiration of ten years from the
date of grant. The stock options outstanding under the plans were generally
granted for terms of five, six or ten years and vest on a straight line basis
over periods ranging from one to six years. No compensation expense was
recognized upon either the grant or exercise of these stock options. F-25




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED As of December 31, 2003, there are no shares available for grant under the
1988 Directors Stock Option Plan or the 1992 Employees Incentive Stock Option
Plan, 4,803 shares available for grant under the 1996 Stock Option Plan,
890,723 shares available for grant under the 1998 Stock Option Plan and 228,866
shares available for grant under the 2000 Stock Option Plan. Applica has also granted non-qualified stock options, which are not under
any plan. However, no non-plan options have been granted since 1998. Information with respect to stock option activity is as follows: 2003
    
    2002
    
    2001Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares(000)
    
    Price
    
    Shares(000)
    
    Price
    
    Shares(000)
    
    PriceOutstanding at beginning of year
    
    
    3,382
    
    
    $
    7.50
    
    
    
    4,216
    
    
    $
    12.67
    
    
    
    4,343
    
    
    $
    12.46Granted
    
    
    172
    
    
    $
    7.21
    
    
    
    603
    
    
    $
    5.16
    
    
    
    177
    
    
    $
    7.76Exercised
    
    
    (130
    )
    
    $
    7.00
    
    
    
    (123
    )
    
    $
    7.16
    
    
    
    (128
    )
    
    $
    6.27Forfeited
    
    
    (581
    )
    
    $
    11.99
    
    
    
    (1,314
    )
    
    $
    23.00
    
    
    
    (176
    )
    
    $
    7.50Outstanding at end of year
    
    
    2,843
    
    
    $
    6.65
    
    
    
    3,382
    
    
    $
    7.50
    
    
    
    4,216
    
    
    $
    12.67Options exercisable at end of year
    
    
    2,270
    
    
    
    
    
    
    
    2,483
    
    
    
    
    
    
    
    3,546Weighted-average fair value of
options granted during the year
    
    $
    6.84
    
    
    
    
    
    
    $
    3.62
    
    
    
    
    
    
    $
    5.44
 The following information applies to options outstanding at December 31,
2003: Options Outstanding
    
    Options ExercisableWeighted-Average
    
    Weighted-
    
    
    
    
    
    Weighted-Remaining
    
    Average
    
    
    
    
    
    AverageContractual
    
    Exercise
    
    
    
    
    
    ExerciseShares(000)
    
    Life
    
    Price
    
    Shares(000)
    
    Price$3.17 - $6.33
    
    
    1,267
    
    
    
    3.3
    
    
    $
    4.28
    
    
    
    875
    
    
    $
    3.97$6.34 - $9.50
    
    
    1,237
    
    
    
    3.1
    
    
    $
    7.31
    
    
    
    1,074
    
    
    $
    7.31$9.51 - $12.67.
    
    
    220
    
    
    
    1.7
    
    
    $
    11.27
    
    
    
    206
    
    
    $
    11.31$12.68 - $15.84
    
    
    99
    
    
    
    3.9
    
    
    $
    14.02
    
    
    
    97
    
    
    $
    14.02$16.25
    
    
    5
    
    
    
    2.3
    
    
    $
    16.25
    
    
    
    3
    
    
    $
    16.25$31.69
    
    
    15
    
    
    
    4.4
    
    
    $
    31.69
    
    
    
    15
    
    
    $
    31.692,843
    
    
    
    
    
    
    
    
    
    
    
    2,270
 Employee Stock Purchase Plan In May 2000, Applicas shareholders authorized up to 500,000 shares of
common stock for the 2000 Employee Stock Purchase Plan. Under the plan,
eligible employees may elect to participate on January 1 or July 1 of each
year. Subject to certain limitations determined in accordance with
calculations set forth in the plan, an eligible employee is granted a right to
purchase shares of common stock (up to a maximum of 1,000 shares) on the last
business day on or before each June 30th and December 31st of any year during
which he or she is a participant. The option exercise price per share will be
an amount equal to 85% of the lower of the market price on the first day of the
twelve-month offering period or the market price on the exercise date, unless
the participants entry date is not the first day of the offering period, in
which case the exercise price will be an amount equal to 85% of the lower of
the market price of the common stock on the entry date or the market price on
the exercise date. As of December
31, 2003 and 2002, an aggregate of 263,958 and 206,776 shares,
respectively, of common stock had been issued under the plan. F-26




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Common Stock Purchase Rights Plan In February 2003, the Board of Directors of Applica Incorporated
terminated Applicas Common Stock Purchase Rights Plan. The plan was terminated
by redeeming the Rights that were issued under the Rights Agreement. The
Rights were redeemed at a price of $.00001 per right, paid in cash. NOTE L - BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION Applica has one business segment for financial reporting purposes. Applicas international operations are conducted primarily in China and
Mexico, with lesser activities in Canada, the Caribbean and South and Central
America. Other than the United States, Applica does not have sales to
customers located in any country which exceed 10% of consolidated sales. The
following table sets forth the composition of Applicas sales between those in
the United States and those in other locations for each year: 2003
    
    2002
    
    2001(In thousands)Revenues:United States operations
    
    $
    477,655
    
    
    $
    501,797
    
    
    $
    485,843International operations:Sales to unaffiliated customers
    
    
    162,984
    
    
    
    225,559
    
    
    
    241,201Sales  intercompany:Mexico
    
    
    113,264
    
    
    
    134,934
    
    
    
    153,713China
    
    
    149,855
    
    
    
    168,584
    
    
    
    159,214263,119
    
    
    
    303,518
    
    
    
    312,927Eliminations
    
    
    (263,119
    )
    
    
    (303,518
    )
    
    
    (312,927
    )Consolidated revenues
    
    $
    640,639
    
    
    $
    727,356
    
    
    $
    727,044Long-lived assets:United States operations
    
    $
    965,757
    
    
    $
    956,681International operations
    
    
    135,919
    
    
    
    157,482Eliminations
    
    
    (904,569
    )
    
    
    (892,440
    )Consolidated long-lived assets.
    
    $
    197,107
    
    
    $
    221,723
 Intercompany sales are billed at prices established by Applica. All
United States revenues are derived from sales to unaffiliated customers.
Geographic area of sales is based primarily on the location from where the
product is shipped. Included in United States operations are certain sales
derived from direct product shipments from Hong Kong directly to customers
located in the United States. NOTE M - CONCENTRATION OF CREDIT AND OTHER RISKS Applica sells on credit terms to a majority of its customers, most of
which are U.S., Canadian and Latin American retailers and distributors located
throughout those countries. Wal-Mart Corporation accounted for 29.8%, 24.5% and 24.3% of 2003, 2002
and 2001 consolidated net sales, respectively. As of December 31, 2003 and
2002, Wal-Mart Corporation accounted for 29.0% and 21.5%, respectively, of
Applicas consolidated accounts receivable. A majority of Applicas revenue is generated from the sale of Black &
Decker® branded products, which represented approximately 70%, 62% and 63% of
consolidated net sales in 2003, 2002 and 2001, respectively. Applicas allowance for doubtful accounts is based on managements
estimates of the creditworthiness of its customers, current economic conditions
and historical information, and, in the opinion of management is believed to be
set in an amount sufficient to respond to normal business conditions.
Management sets specific allowances for customers in F-27




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED bankruptcy, if any, and an additional allowance for the remaining customers.
Should business conditions deteriorate or any major credit customer default on
its obligations to Applica, this allowance may need to be increased which may
have an adverse impact upon Applicas earnings. As of December 31, 2003 and
2002, the allowance for bad debt was $12.5 million and $15.8 million,
respectively. In 2002, Applica Consumer Products, Inc. entered into credit approved
receivables purchasing agreements with CIT Group/Commercial Services, Inc. The
agreements allow Applica to transfer to CIT, without recourse, approved
receivables under certain circumstances, including the bankruptcy of covered
customers. Applica remains the servicer of the approved receivables and pays
fees based upon a percentage of the gross face amount of each approved
receivable. These agreements are strictly to insure selected receivables. As
of December 31, 2003 and 2002, Applica was insuring $16.5 million and $4.4
million of receivables under this agreement. Applicas manufacturing operations are located abroad and Applica
purchases a significant amount of product from third party suppliers in the Far
East. Applica also sells its products to customers located in foreign
jurisdictions, including Latin America, Canada and China. The majority of
Applicas products are manufactured by its Hong Kong based manufacturing
subsidiary, Applica Durable Manufacturing Limited, and its Mexican
manufacturing subsidiary, Applica Manufacturing, S. de. R.L. de C.V. The
geographical distances between China, the United States and Mexico create a
number of logistical and communications challenges. Because Applica
manufactures its products and conducts business in several foreign countries,
Applica is affected by economic and political conditions in those countries,
including fluctuations in the value of currency, increased duties, possible
employee turnover, labor unrest, lack of developed infrastructure, longer
payment cycles, greater difficulty in collecting accounts receivable, and the
burdens and costs of compliance with a variety of foreign laws. Changes in
policies by the United States or foreign governments resulting in, among other
things, increased duties, higher taxation, currency conversion limitations,
restrictions on the transfer of funds, limitations on imports or exports, or
the expropriation of private enterprises could have a material adverse effect
on Applica, its results of operations, prospects or debt service ability.
Applica could also be adversely affected if the current policies encouraging
foreign investment or foreign trade by its host countries were to be reversed. If Applica determines that it is necessary to relocate Applicas
manufacturing facilities from China or Mexico and is unable to do so, due to
confiscation, expropriation, nationalization, embargoes, governmental
restrictions or otherwise, Applica would incur substantial operating and
capital losses, including losses resulting from business disruption and delays
in production. In addition, as a result of a relocation of its manufacturing
equipment and certain other assets, Applica would likely incur relatively
higher manufacturing costs. A relocation could also adversely affect Applicas
revenues if the demand for Applicas products currently manufactured in China
and Mexico decreases due to a disruption in the production and delivery of such
products or due to higher prices which might result from increased
manufacturing costs. Furthermore, earnings could be adversely affected due to
reduced sales and/or Applicas inability to maintain its current margins on the
products currently manufactured in China and Mexico. China gained Permanent Normal Trade Relations (PNTR) with the United
States when it acceded to the World Trade Organization (WTO), effective
January 2002. The United States imposes the lowest applicable tariffs on
exports from PNTR countries to the United States. In order to maintain its
WTO membership, China has agreed to several requirements, including the
elimination of caps on foreign ownership of Chinese companies, lowering tariffs
and publicizing its laws. No assurance can be given that China will meet these
requirements and remain a member of the WTO, or that its PNTR trading status
will be maintained. If Chinas WTO membership is withdrawn or if PNTR status
for goods produced in China were removed, there could be a substantial increase
in tariffs imposed on goods of Chinese origin entering the United States,
including those manufactured by us, which would have a material adverse impact
on our business, financial condition and results of operations. Applica Durable Manufacturing Limited is incorporated in Hong Kong and its
executive sales offices and its senior executives are located or reside there.
Applica also conducts significant trading activities through subsidiaries
incorporated in Hong Kong, which may be influenced by the changing political
situation in Hong Kong and by the general state of the Hong Kong economy. Applica Manufacturing, S. de R.L. de C.V., Applicas Mexican manufacturing
facility, is incorporated in Mexico. The Mexican government exercises
significant influence over many aspects of the Mexican economy. Accordingly,
the actions of the Mexican government concerning the economy could have a
significant effect on private sector entities in general and Applica in
particular. In addition, during the 1980s and 1990s, Mexico experienced
periods of slow or negative growth, high inflation, significant devaluations of
the peso and limited availability of foreign exchange. As a F-28




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED result of Applicas reliance upon manufacturing facilities in Mexico, economic
conditions in Mexico could adversely affect Applicas business, financial
condition and results of operations. NOTE N - RELATED PARTY TRANSACTIONS Matters Relating to Ourimbah Investment Ltd. Ourimbah Investment Ltd., a
Hong Kong company, owns approximately 7.8% of the outstanding common stock of
Applica. Messrs. Lai Kin and Lam King Loi are majority owners of Ourimbah. Mr.
Lai Kin serves as a member of the Board of Directors of Applica and is the
former Chairman of Applica Durable Manufacturing Limited, Applicas Hong Kong
manufacturing subsidiary. Mr. Lam King Loi is the former Vice Chairman of
Applica Durable Manufacturing Limited. In April 1994, in connection with the purchase by Applica of the remaining
20% of the outstanding shares of Applica Durable Manufacturing Limited from
Ourimbah, Applica agreed, upon a change of control of Applica (as defined in
the acquisition agreement), to make an additional payment to Ourimbah in
respect of the shares of Applica Durable being purchased under the agreement.
The payment is equal to the greater of (i) the same multiple of earnings per
share paid for the shares of common stock of Applica received in connection
with such change of control or (ii) the same multiple of net asset value per
share paid for the shares of common stock of Applica received in connection
with such change of control. In addition, Applica agreed to use its best efforts to recommend to its
shareholders and directors that two individuals be nominated by Mr. Lai Kin and
deemed suitable by Applica be appointed as members of Applicas Board of
Directors. Applica further agreed to maintain the composition of Durables
Board of Directors equally divided between designees of Ourimbah and persons
selected by Applica. Accordingly, for so long as (i) such designees of
Ourimbah who are present members of the Board of Directors of Durable remain
shareholders of Ourimbah, and (ii) Ourimbah remains a shareholder of Applica,
Applica must vote its shares of Durable to appoint such designees of Ourimbah
to the Durable Board. When any member of the Durable Board who has been
designated by Ourimbah ceases to be a shareholder of Ourimbah, such designee
shall no longer be entitled to serve on the Durable Board, and Applica shall
have the right to designate a replacement member to the Durable Board in its
sole discretion. Additionally, Applica has agreed to use its best efforts to recommend to
its shareholders and directors that Lai Kin be appointed as, and remain a
member of, Applicas Board of Directors for such time as Mr. Lai (or Ourimbah)
continues to be a shareholder of Applica and continues to be employed by
Durable and/or any other affiliate of Applica. Applica Durable Manufacturing Limited leases certain factories and worker
dormitories in China from Ourimbah, which facilitated the building of such
factories and dormitories with the local government. The rental payments made
to Ourimbah during the year ended December 31, 2003, 2002 and 2001 totaled
approximately $838,000, $870,000, and $850,000, respectively. The rental charges are
generally comparable to the rates charged Applica Durable Manufacturing Limited
by the local government for similar buildings and dormitories. Loans. Applica has a loan outstanding to David M. Friedson, its Chairman
of the Board. The loan, which is unsecured, bears interest at LIBOR plus 1.5%
per annum (2.62% at December 31, 2003) and is payable upon demand. Interest is
payable on the due date. At December 31, 2003, 2002 and 2001, the balance of
such loan, including accrued interest, was approximately $1,039,000, $986,000
and $1,323,000, respectively. In April 1999, Applica sold 210,000 shares of its common stock to Mr.
Friedson at the fair market value of $7.125 per share and provided a loan in
the amount of $1,496,250 that was used in connection with the purchase of such
shares. The loan is on a full recourse basis and is secured by shares of
common stock held by Mr. Friedson. The loan is due in April 2005. The loan
bears interest at the rate of LIBOR plus 2.75% per annum (3.87% at December 31,
2003). Interest is payable on the due date. The amount due to Applica,
including accrued interest, at December 31, 2003, 2002 and 2001 was
approximately $1,949,000, $1,887,000 and 1,818,000, respectively. Sales Representative Relationships.Applica Consumer Products, Inc. uses
the services of TJK Sales, Inc. (TJK), an independent sales representative.
Thomas J. Kane, a member of Applicas Board of Directors, is the
sole shareholder and Chief Executive Officer of TJK. Applica Consumer
Products, Inc. entered into an agreement with TJK, pursuant to which Applica
agreed to pay $3,000 per month plus certain expenses in return for TJKs
services as a sales representative to J.C. Penney. The agreement may be
terminated by either party on 30 days notice. Payments to TJK totaled
approximately $36,000 in 2003, $125,000 in 2002 and $179,000 in 2001. Applica also
reimburses TJK for related out-of-pocket expenses. F-29




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Employment and Related Matters. In 1983, Belvin Friedson, the founder of
Applica, entered into an employment agreement with Applica. Pursuant to his
employment agreement, Mr. Friedson agreed to provide advisory services to
Applica subsequent to his resignation as Chief Executive Officer. In 2003,
2002 and 2001, Mr. Friedson received annual compensation from Applica of
approximately $375,000 under such agreement. He also participated in the
executive life insurance plan and had use of a company car. Mr. Friedson is
the father of David M. Friedson, Applicas Chairman of the Board. Barbara Friedson Garrett, the sister of David M. Friedson, Applicas
Chairman of the Board, has been employed by Applica Consumer Products, Inc. as
a Senior Vice President since 1983 and served in other capacities with Applica
since 1973. Ms. Garretts current employment agreement, dated July 18, 1983,
will be terminated in July 2004. After such time,
Ms. Garrett will remain an employee of Applica Consumer Products, Inc., but her compensation
will be reduced to approximately $175,000. Ms. Garrett was
paid $358,000 $355,000 and $536,000 for her services during the year ended
December 31, 2003, 2002 and 2001, respectively. Mr. Lai Kin, a majority owner of Ourimbah, serves as a member of the Board
of Directors of Applica and the former Chairman of Applica Durable
Manufacturing Limited and was paid total compensation of approximately
$563,000, $541,000 and $513,000 for his services during the years ended
December 31, 2003, 2002 and 2001, respectively. Mr. Lai has been employed by
Applica Durable since 1970. Mr. Lam King Loi, a majority owner of Ourimbah, is
the former Vice Chairman of Applica Durable Manufacturing Limited and was paid
total compensation of approximately $295,000, $296,000 and $295,000 for his
services during the years ended December 31, 2003, 2002 and 2001. Mr. Lam has
been employed by Applica Durable since 1970. Ben Lai, the son of Mr. Lai Kin, is employed by Applica Durable
Manufacturing Limited as the Managing Director and was paid total compensation
of approximately $368,000, $307,000 and $205,000 for his services during the
year ended December 31, 2003, 2002 and 2001, respectively. Ben Lai has been
employed by Applica Durable since 1990. Desmond Lai, the son of Mr. Lai Kin,
is employed by Applica Consumer Products, Inc. and was paid total compensation
of approximately $321,000, $354,000 and $311,000 for his services during 2003,
2002 and 2001, respectively. Desmond Lai has been employed by Applica Durable
since 1986. Eliza Lai, the daughter of Mr. Lai Kin, is employed by Applica
Durable Manufacturing Limited as the General Manager  Purchasing and was paid
total compensation of approximately $187,000, $213,000 and $188,000 for her
services during the years ended December 31, 2003, 2002 and 2001, respectively.
Eliza Lai has been employed by Applica Durable since 1983. Jannie Fung,
Desmond Lais wife, was employed by Applica Durable Manufacturing Limited as a
Senior Product Manager and was paid total compensation of approximately
$83,530, $72,800 and $60,000 for her services during 2003, 2002 and 2001,
respectively. Jannie Fung has been employed by Applica Durable since 1977 and
resigned her position effective April 2003. Dubel Industrial Limited. Applica Durable Manufacturing was the majority
shareholder of Dubel Industrial Limited, which owned a dormitory building
located in China. Certain employees of Durable who resided in the dormitories
were given shares of Dubel as a form of employee benefit. As a shareholder,
these employees would also receive cash distributions based on the rental
payments received by Dubel. In December 2003, Applica Durable purchased the
shares of Dubel held by employees and Dubel is currently a 100% owned
subsidiary of Applica Durable. In 2003, in connection with the cash
distributions and the repurchase of the shares, Lai Kin and his family received
approximately $109,400 and Lam King Loi received $17,800. In 2002, in
connection with the cash distributions, Lai Kin and his family received
approximately $13,839 and Lam King Loi received $2,410. In 2001, in connection
with the cash distributions, Lai Kin and his family received approximately
$12,240 and Lam King Loi received $2,080. Charitable Contributions. During 2003, 2002 and 2001, Applica made
contributions to the United Way of approximately $203,000, $120,500 and
$68,700, respectively. Barbara Friedson Garrett serves as a member of the
Executive Committee of the United Way of Miami-Dade County. NOTE O  FINANCIAL INSTRUMENTS Interest Rate Risk Management Applica is exposed to the impact of interest rate changes. Applicas
objective is to manage the impact of interest rate changes on earnings and cash
flows and on the market value of its borrowings. Applica maintains fixed rate
debt as a percentage of its net debt between a minimum and maximum percentage,
which is set by policy. F-30




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED It is Applicas policy to enter into interest rate risk management
transactions only to the extent considered necessary to meet its objectives as
set forth above. Applica does not enter into interest rate risk management
transactions for speculative purposes. Significant interest rate risk management instruments held by Applica
during 2003 and 2002 included pay-floating swaps, pay-fixed swaps and interest
rate caps. The pay-floating swap effectively converts medium term fixed-rate
obligations to LIBOR-rate indexed variable-rate instruments. Pay-fixed swaps
effectively convert floating-rate obligations to fixed-rate instruments.
Interest rate caps provide protection against rising interest rates. All swaps
that qualify for fair value hedging have maturity dates that mirror the
maturity date of the underlying hedged transaction. At December 31, 2003 and
2002, Applica did not discontinue any hedges due to the probability that the
original underlying forecasted transaction would not occur. The impact of interest rate risk management activities on pre-tax income
was negligible in 2003, a net loss of approximately $289,000 in 2002 and a net
gain of $1.7 million in 2001. Foreign Exchange Risk Management Applica transacts business globally and is subject to risks associated
with changing foreign exchange rates. Applicas objective is to reduce earnings
and cash flow volatility associated with foreign exchange rate changes to allow
management to focus attention on core business issues and challenges. Applica
maintains hedge coverage between minimum and maximum percentages of its
forecasted foreign exchange exposures for periods not to exceed eighteen
months. The gains and losses on these contracts offset changes in the value of
the related exposures. It is Applicas policy to enter into foreign currency transactions only to
the extent considered necessary to meet its objectives as set forth above.
Applica does not enter into foreign currency transactions for speculative
purposes. Applica enters into various contracts that change in value as foreign
exchange rates change to protect the value of its existing foreign currency
assets and liabilities, commitments and forecasted foreign currency revenues.
Applica uses option strategies and forward contracts that provide for the
purchase and sale of foreign currencies to hedge forecasted revenues and
expenses. Applica also uses forward contracts to hedge foreign currency assets
and liabilities. While these hedging instruments are subject to fluctuations in
value, such fluctuations are offset by changes in the value of the underlying
exposures being hedged. The principal currencies hedged are the Mexican peso,
Chinese renminbi, Hong Kong dollar and Canadian dollar. The impact of foreign exchange risk management activities on operating
income was a net loss of $2.3 million in 2003, a net gain of $70,000 in 2002
and a net gain of $715,000 in 2001. Fair Value of Financial Instruments At December 31, 2003 and 2002, Applicas financial instruments included
cash, cash equivalents, receivables, accounts payable, borrowings and interest
rate, forward and foreign exchange risk management contracts. At December 31,
2003 and 2002, the fair values of cash and cash equivalents, receivables and
accounts payable approximated carrying values because of the short-term nature
of these instruments. The estimated fair values of other financial instruments
subject to fair value disclosures, determined based on broker quotes or quoted
market prices or rates for the same or similar instruments, and the related
carrying amounts are as follows: 2003
    
    2002Carrying
    
    
    
    
    
    CarryingAmount/Notional
    
    
    
    
    
    Amount/NotionalAmount
    
    Fair Value
    
    Amount
    
    Fair Value(In thousands)Borrowings(1)
    
    $
    136,788
    
    
    $
    136,788
    
    
    $
    193,982
    
    
    $
    193,332Risk management contracts(2):Foreign exchange forwards(3)
    
    $
    7,425
    
    
    $
    (144
    )
    
    $
    7,000
    
    
    $
    48Foreign exchange options(3).
    
    $
    21,100
    
    
    $
    (330
    )
    
    $
    34,049
    
    
    $
    (1,734
    )Interest rate swaps(4)
    
    $
    80,000
    
    
    $
    415
    
    
    $
    20,939
    
    
    $
    153
 F-31




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED   (1)
    
    The fair value of borrowings was approximated at carrying value, except
for the 10% Senior Subordinated Notes, which were valued at 100.0% and
99.5% at December 31, 2003 and 2002, respectively, based upon quoted
market prices.(2)
    
    The fair value of risk management contracts was based upon quotes from
outside parties. Fair value amounts change with market conditions and
will be substantially offset by changes in the value of the related hedged
transaction. A positive fair value represents the amount Applica would
receive upon exiting the contracts and a negative fair value represents
the amount Applica would pay upon exiting the contracts. Applica intends
to hold all contracts to maturity, at which time the fair value will be
zero.(3)
    
    Fair values are included in other long term liabilities in the
consolidated balance sheet.(4)
    
    Fair values are included in prepaid expenses and other in the
consolidated balance sheet. Credit Concentrations Applica continually monitors its positions with, and the credit quality
of, the financial institutions that are counterparties to its financial
instruments, and does not anticipate nonperformance by the counterparties.
Applica would not have realized a material loss as of December 31, 2003 or 2002
in the event of nonperformance by any one counterparty. Applica enters into
transactions only with financial institution counterparties that have a credit
rating of A or better. In addition, Applica limits the amount of investment
credit exposure with any one institution. NOTE P  CONDENSED CONSOLIDATING FINANCIAL INFORMATION Applicas domestic subsidiaries are guarantors of Applicas 10% Senior
Subordinated Notes due 2008. The following condensed consolidating financial
information presents the results of operations, financial position and cash
flows of Applica Incorporated (on a stand alone basis), the guarantor
subsidiaries (on a combined basis), the non-guarantor subsidiaries (on a
combined basis) and the eliminations necessary to arrive at the consolidated
results of Applica. The results of operations and cash flows presented below
assume that the guarantor subsidiaries were in place for all periods presented.
Applica and guarantor subsidiaries have accounted for investments in their
respective subsidiaries on an unconsolidated basis using the equity method of
accounting. The guarantor subsidiaries are wholly owned subsidiaries of
Applica and have fully and unconditionally guaranteed the notes on a joint and
several basis. The notes contain certain covenants which, among other things,
restrict the ability of the guarantor subsidiaries to make distributions to
Applica Incorporated. Applica has not presented separate financial statements
and other disclosures concerning the guarantor subsidiaries and non-guarantor
subsidiaries because it has determined they would not be material to investors. F-32




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Year Ended December 31, 2003Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    Consolidated(In thousands)Statement of Operations:Net sales
    
    $
    
    
    
    $
    504,941
    
    
    $
    398,817
    
    
    $
    (263,119
    )
    
    $
    640,639Cost of sales
    
    
    
    
    
    
    361,061
    
    
    
    361,501
    
    
    
    (263,119
    )
    
    
    459,443Product recall expenses (credit)
    
    
    
    
    
    
    (1,900
    )
    
    
    (2,225
    )
    
    
    
    
    
    
    (4,125
    )Gross profit
    
    
    
    
    
    
    145,780
    
    
    
    39,541
    
    
    
    
    
    
    
    185,321Operating (income) expenses
    
    
    6
    
    
    
    162,277
    
    
    
    24,318
    
    
    
    
    
    
    
    186,601Repositioning and other charges
    
    
    
    
    
    
    4,681
    
    
    
    
    
    
    
    
    
    
    
    4,681Impairment of intangible asset
    
    
    
    
    
    
    7,152
    
    
    
    
    
    
    
    
    
    
    
    7,152Operating earnings (loss)
    
    
    (6
    )
    
    
    (28,330
    )
    
    
    15,223
    
    
    
    
    
    
    
    (13,113
    )Other (income) expense, net
    
    
    (86
    )
    
    
    15,751
    
    
    
    (2,518
    )
    
    
    
    
    
    
    13,147Loss on early extinguishment of debt
    
    
    
    
    
    
    3,940
    
    
    
    
    
    
    
    
    
    
    
    3,940Earnings (loss) before equity in net earnings (loss) of joint
venture and subsidiaries, and income taxes
    
    
    80
    
    
    
    (48,021
    )
    
    
    17,741
    
    
    
    
    
    
    
    (30,200
    )Equity in net earnings (loss) of joint venture
    
    
    55,570
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,570Equity in net earnings (loss) of subsidiaries
    
    
    (18,199
    )
    
    
    
    
    
    
    
    
    
    
    18,199
    
    
    
    Income tax expense (benefit)
    
    
    22,228
    
    
    
    (11,530
    )
    
    
    (551
    )
    
    
    
    
    
    
    10,147Net earnings (loss)
    
    $
    15,223
    
    
    $
    (36,491
    )
    
    $
    18,292
    
    
    $
    18,199
    
    
    $
    15,223Balance Sheet:Cash and cash equivalents
    
    $
    
    
    
    $
    1,124
    
    
    $
    11,611
    
    
    $
    
    
    
    $
    12,735Accounts and other receivables, net
    
    
    
    
    
    
    99,449
    
    
    
    31,572
    
    
    
    
    
    
    
    131,021Receivables from affiliates
    
    
    (383,226
    )
    
    
    73,091
    
    
    
    66,283
    
    
    
    245,467
    
    
    
    1,615Inventories
    
    
    
    
    
    
    74,147
    
    
    
    32,179
    
    
    
    
    
    
    
    106,326Future income tax benefits
    
    
    
    
    
    
    13,723
    
    
    
    (2,107
    )
    
    
    
    
    
    
    11,616Other current assets
    
    
    
    
    
    
    4,857
    
    
    
    13,559
    
    
    
    
    
    
    
    18,416Total current assets
    
    
    (383,226
    )
    
    
    266,391
    
    
    
    153,097
    
    
    
    245,467
    
    
    
    281,729Investment in joint venture
    
    
    5,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,389Investment in subsidiaries
    
    
    678,645
    
    
    
    113,502
    
    
    
    70,430
    
    
    
    (862,577
    )
    
    
    Property, plant and equipment, net
    
    
    
    
    
    
    19,357
    
    
    
    51,032
    
    
    
    
    
    
    
    70,389Long-term future income tax benefits
    
    
    
    
    
    
    46,619
    
    
    
    3,076
    
    
    
    
    
    
    
    49,695Other assets
    
    
    2,072
    
    
    
    100,173
    
    
    
    11,381
    
    
    
    (41,992
    )
    
    
    71,634Total assets
    
    $
    302,880
    
    
    $
    546,042
    
    
    $
    289,016
    
    
    $
    (659,102
    )
    
    $
    478,836Accounts payable and accrued expenses
    
    $
    
    
    
    $
    60,569
    
    
    $
    40,066
    
    
    $
    
    
    
    $
    100,635Current maturities of long-term debt
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151Deferred rent
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    301Current taxes payable
    
    
    
    
    
    
    447
    
    
    
    1,725
    
    
    
    
    
    
    
    2,172Total current liabilities
    
    
    151
    
    
    
    61,317
    
    
    
    41,791
    
    
    
    
    
    
    
    103,259Long-term debt
    
    
    136,637
    
    
    
    39,310
    
    
    
    13,142
    
    
    
    (52,452
    )
    
    
    136,637Future income tax liabilities
    
    
    
    
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    Other long-term liabilities
    
    
    474
    
    
    
    853
    
    
    
    
    
    
    
    
    
    
    
    1,327Total liabilities
    
    
    137,262
    
    
    
    101,490
    
    
    
    54,923
    
    
    
    (52,452
    )
    
    
    241,223Shareholders equity
    
    
    165,618
    
    
    
    444,552
    
    
    
    234,093
    
    
    
    (606,650
    )
    
    
    237,613Total liabilities and shareholders equity
    
    $
    302,880
    
    
    $
    546,042
    
    
    $
    289,016
    
    
    $
    (659,102
    )
    
    $
    478,836Cash Flow Information:Net cash provided by (used in) operating activities
    
    $
    (5,411
    )
    
    $
    4,923
    
    
    $
    55,118
    
    
    $
    (27,155
    )
    
    $
    27,475Net cash provided by (used in) investing activities
    
    
    33,379
    
    
    
    (54,499
    )
    
    
    (37,043
    )
    
    
    91,553
    
    
    
    33,390Net cash provided by (used in) financing activities
    
    
    (30,994
    )
    
    
    47,091
    
    
    
    (10,538
    )
    
    
    (64,398
    )
    
    
    (58,839
    )Effect of exchange rate changes on cash
    
    
    3,026
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,026Cash at beginning
    
    
    
    
    
    
    3,609
    
    
    
    4,074
    
    
    
    
    
    
    
    7,683Cash at end
    
    $
    
    
    
    $
    1,124
    
    
    $
    11,611
    
    
    $
    
    
    
    $
    12,735
 F-33




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Year Ended December 31, 2002Non-Parent
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    Consolidated(In thousands)Statement of Operations:Net sales
    
    $
    
    
    
    $
    544,493
    
    
    $
    486,381
    
    
    $
    (303,518
    )
    
    $
    727,356Cost of sales
    
    
    
    
    
    
    363,916
    
    
    
    438,536
    
    
    
    (303,518
    )
    
    
    498,934Gross profit
    
    
    
    
    
    
    180,577
    
    
    
    47,845
    
    
    
    
    
    
    
    228,422Operating (income) expenses
    
    
    (1,063
    )
    
    
    157,952
    
    
    
    34,281
    
    
    
    
    
    
    
    191,170Repositioning charge
    
    
    
    
    
    
    10,643
    
    
    
    
    
    
    
    
    
    
    
    10,643Operating earnings (loss)
    
    
    1,063
    
    
    
    11,982
    
    
    
    13,564
    
    
    
    
    
    
    
    26,609Other (income) expense, net
    
    
    (103
    )
    
    
    (4,813
    )
    
    
    20,706
    
    
    
    
    
    
    
    15,790Gain on litigation settlement
    
    
    
    
    
    
    (1,070
    )
    
    
    513
    
    
    
    
    
    
    
    (557
    )Earnings (loss) before equity in net
earnings (loss) of joint ventures and
subsidiaries, and income taxes
    
    
    1,166
    
    
    
    17,865
    
    
    
    (7,655
    )
    
    
    
    
    
    
    11,376Equity in net earnings (loss) of joint
ventures
    
    
    (1,498
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,498
    )Equity in net earnings (loss) of subsidiaries
    
    
    (73,445
    )
    
    
    
    
    
    
    
    
    
    
    73,445
    
    
    
    Income tax expense (benefit)
    
    
    
    
    
    
    2,807
    
    
    
    2,019
    
    
    
    
    
    
    
    4,826Earnings (loss) before cumulative effect of
change in accounting principle
    
    
    (73,777
    )
    
    
    15,058
    
    
    
    (9,674
    )
    
    
    73,445
    
    
    
    5,052Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    (78,829
    )
    
    
    
    
    
    
    
    
    
    
    (78,829
    )Net earnings (loss)
    
    $
    (73,777
    )
    
    $
    (63,771
    )
    
    $
    (9,674
    )
    
    $
    73,445
    
    
    $
    (73,777
    )Balance Sheet:Cash and cash equivalents
    
    $
    
    
    
    $
    3,609
    
    
    $
    4,074
    
    
    $
    
    
    
    $
    7,683Accounts and other receivables, net
    
    
    
    
    
    
    104,739
    
    
    
    41,828
    
    
    
    
    
    
    
    146,567Receivables from affiliates
    
    
    (350,886
    )
    
    
    24,515
    
    
    
    38,202
    
    
    
    290,229
    
    
    
    2,060Inventories
    
    
    
    
    
    
    80,584
    
    
    
    30,869
    
    
    
    
    
    
    
    111,453Future income tax benefits
    
    
    
    
    
    
    18,654
    
    
    
    
    
    
    
    
    
    
    
    18,654Other current assets
    
    
    
    
    
    
    2,593
    
    
    
    10,932
    
    
    
    
    
    
    
    13,525Total current assets
    
    
    (350,886
    )
    
    
    234,694
    
    
    
    125,905
    
    
    
    290,229
    
    
    
    299,942Investment in joint venture
    
    
    1,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,249Investment in subsidiaries
    
    
    651,430
    
    
    
    113,482
    
    
    
    70,430
    
    
    
    (835,342
    )
    
    
    Property, plant and equipment, net
    
    
    
    
    
    
    18,363
    
    
    
    58,600
    
    
    
    
    
    
    
    76,963Long-term future income tax benefits
    
    
    
    
    
    
    52,404
    
    
    
    1,974
    
    
    
    
    
    
    
    54,378Other assets
    
    
    2,473
    
    
    
    117,280
    
    
    
    26,478
    
    
    
    (57,098
    )
    
    
    89,133Total assets
    
    $
    304,266
    
    
    $
    536,223
    
    
    $
    283,387
    
    
    $
    (602,211
    )
    
    $
    521,665Accounts payable and accrued expenses
    
    $
    2
    
    
    $
    62,854
    
    
    $
    43,276
    
    
    $
    
    
    
    $
    106,132Current maturities of long-term debt
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    144Deferred rent
    
    
    
    
    
    
    372
    
    
    
    
    
    
    
    
    
    
    
    372Current taxes payable
    
    
    
    
    
    
    1,034
    
    
    
    (516
    )
    
    
    
    
    
    
    518Total current liabilities
    
    
    2
    
    
    
    64,404
    
    
    
    42,760
    
    
    
    
    
    
    
    107,166Long-term debt
    
    
    193,838
    
    
    
    40,463
    
    
    
    20,706
    
    
    
    (61,169
    )
    
    
    193,838Future income tax liabilities
    
    
    
    
    
    
    (1,146
    )
    
    
    1,146
    
    
    
    
    
    
    
    Other long term liabilities
    
    
    1,686
    
    
    
    (153
    )
    
    
    
    
    
    
    
    
    
    
    1,533Total liabilities
    
    
    195,526
    
    
    
    103,568
    
    
    
    64,612
    
    
    
    (61,169
    )
    
    
    302,537Shareholders equity
    
    
    108,740
    
    
    
    432,655
    
    
    
    218,775
    
    
    
    (541,042
    )
    
    
    219,128Total liabilities and shareholders equity
    
    $
    304,266
    
    
    $
    536,223
    
    
    $
    283,387
    
    
    $
    (602,211
    )
    
    $
    521,665Cash Flow Information:Net cash provided by (used in) operating activities
    
    $
    701
    
    
    $
    (47,465
    )
    
    $
    18,659
    
    
    $
    80,145
    
    
    $
    52,040Net cash provided by (used in) investing activities
    
    
    22,908
    
    
    
    22,907
    
    
    
    (17,642
    )
    
    
    (59,629
    )
    
    
    (31,456
    )Net cash provided by (used in) financing activities
    
    
    (25,548
    )
    
    
    27,411
    
    
    
    (11,930
    )
    
    
    (20,516
    )
    
    
    (30,583
    )Effect of exchange rate changes on cash
    
    
    1,939
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,939Cash at beginning
    
    
    
    
    
    
    756
    
    
    
    14,987
    
    
    
    
    
    
    
    15,743Cash at end
    
    $
    
    
    
    $
    3,609
    
    
    $
    4,074
    
    
    $
    
    
    
    $
    7,683
 F-34




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SUPPLEMENTAL FINANCIAL DATA Quarterly Financial Data (Unaudited) The following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. The quarterly results for the
years 2003 and 2002 are set forth in the following table: Basic
    
    DilutedNet
    
    Earnings
    
    EarningsGross
    
    Earnings
    
    (Loss Per
    
    (Loss) PerSales
    
    Profit
    
    (Loss)
    
    Share)
    
    Share(In thousands, except per share data)2003First quarter
    
    $
    121,239
    
    
    $
    37,022
    
    
    $
    19,621
    (1)
    
    $
    0.84
    
    
    $
    0.83Second quarter
    
    
    136,847
    
    
    
    38,106
    
    
    
    (2,785
    )(1)
    
    
    (0.12
    )
    
    
    (0.12
    )Third quarter
    
    
    173,512
    
    
    
    50,508
    
    
    
    4,855
    (1)(2)
    
    
    0.21
    
    
    
    0.20Fourth quarter
    
    
    209,041
    
    
    
    59,685
    
    
    
    (6,468
    )(1)(3)
    
    
    (0.27
    )
    
    
    (0.27
    )Total
    
    $
    640,639
    
    
    $
    185,321
    
    
    $
    15,223
    
    
    $
    0.65
    (4)(5)
    
    $
    0.63
    (5)2002First quarter
    
    $
    143,058
    
    
    $
    40,614
    
    
    $
    (82,010
    )
    
    $
    (3.51
    )(4)
    
    $
    (3.51
    )(4)Second quarter
    
    
    168,039
    
    
    
    52,168
    
    
    
    (2,057
    )
    
    
    (0.09
    )
    
    
    (0.09
    )Third quarter
    
    
    194,851
    
    
    
    63,938
    
    
    
    5,214
    
    
    
    0.22
    
    
    
    0.22Fourth quarter
    
    
    221,408
    
    
    
    71,702
    
    
    
    5,076
    
    
    
    0.22
    
    
    
    0.21Total
    
    $
    727,356
    
    
    $
    228,422
    
    
    $
    (73,777
    )
    
    $
    (3.15
    )(5)
    
    $
    (3.10
    )(5)
  (1)
    
    In the first quarter of 2003, Applica recorded equity in net earnings of
its joint venture of $37.5 million. In addition, Applica recorded equity
in net earnings of its joint venture for $1.5 million, $16.2 million and
$371,000 for the second, third and fourth quarters, respectively.(2)
    
    In the third quarter of 2003, Applica recorded charges of $1.9 million
($1.1 million, net of tax) related to the early extinguishment of $30.0
million of the 10% notes(3)
    
    In the fourth quarter of 2003, Applica recorded:  
    
    an impairment charge of $7.2 million ($4.3 million, net of
tax) related to an intangible asset acquired as part of the
acquisition of the Black & Decker household products group;
    
    expenses of $6.9 million ($4.1 million, net of tax) related
to the retrenchment of the Mexican and Chinese manufacturing
facilities;
    
    repositioning and other charges of $4.7 million ($2.8
million, net of tax) related to accrued rental expenses at the
Shelton, Connecticut facility, which was closed in the third quarter
of 2002; and
    
    charges of $2.0 million ($1.2 million, net of tax) related to
the early extinguishment of an additional $35.0 million of the 10%
notes.  (4)
    
    In January 2002, Applica applied the provisions of SFAS 142 Goodwill and
Other Intangible Assets. Based on its impairment test, Applica
recognized an adjustment of $121.3 million ($78.8 million or $3.31 per
share, net of tax on a full year and fully diluted basis) in the first
quarter of 2002 to reduce the carrying value of goodwill to its implied
fair value.(5)
    
    The sum of the quarters differs from the total due to exclusion of
anti-dilutive effect of stock options in earnings per share calculation in
periods with losses.




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SCHEDULE II Applica Incorporated and Subsidiaries VALUATION AND QUALIFYING ACCOUNTS
(In Thousands) Balance at
    
    Purchase
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    Price
    
    Costs and
    
    Other
    
    
    
    
    
    End ofDescription
    
    Period
    
    Reserves
    
    Expenses
    
    Accounts
    
    Deductions
    
    PeriodYear ended December 31,
2003Reserves deducted from
assets to which they
apply:Allowance for
doubtful accounts
    
    $
    15,830
    
    
    
    
    
    
    $
    2,228
    
    
    
    
    
    
    $
    (5,515
    )(1)
    
    $
    12,543Inventory reserves
    
    $
    4,309
    
    
    
    
    
    
    $
    1,805
    
    
    
    
    
    
    $
    (759
    )(1)
    
    $
    5,355Deferred tax
valuation
allowance
    
    $
    10,155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,788
    )(1)
    
    $
    7,367Year ended December 31,
2002Reserves deducted from
assets to which they
apply:Allowance for
doubtful accounts
    
    $
    10,499
    
    
    $
    (62
    )
    
    $
    10,618
    
    
    
    
    
    
    $
    (5,225
    )(1)
    
    $
    15,830Inventory reserves
    
    $
    2,831
    
    
    
    
    
    
    $
    2,929
    
    
    
    
    
    
    $
    (1,451
    )(1)
    
    $
    4,309Deferred tax
valuation
allowance
    
    $
    10,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (20
    )(1)
    
    $
    10,155Year ended December 31,
2001Reserves deducted from
assets to which they
apply:Allowance for
doubtful accounts
    
    $
    8,049
    
    
    
    
    
    
    $
    4,002
    
    
    
    
    
    
    $
    (1,552
    )(1)
    
    $
    10,499Inventory reserves
    
    $
    2,510
    
    
    
    
    
    
    $
    1,719
    
    
    
    
    
    
    $
    (1,398
    )(1)
    
    $
    2,831Deferred tax
valuation
allowance
    
    $
    4,537
    
    
    
    
    
    
    $
    5,638
    
    
    
    
    
    
    
    
    
    
    $
    10,175
   (1)
    
    Write-off against the reserve




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SCHEDULE III Applica Incorporated and Subsidiaries Anasazi Partners, Limited Partnership FINANCIAL STATEMENTS DECEMBER 31, 2003 III-1




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##### Table of Contents



C O N T E N T S PageINDEPENDENT AUDITORS REPORT
    
    III - 3FINANCIAL STATEMENTSStatements of Assets and Liabilities
    
    III - 4Condensed Schedule of Investments
    
    III - 5Statements of Operations
    
    III - 6Statements of Changes in Partners Capital
    
    III - 7Statements of Cash Flows
    
    III - 8Notes to Financial Statements
    
    III - 9 to III - 11
 III-2




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INDEPENDENT AUDITORS REPORT To the Partners
Anasazi Partners, Limited Partnership We have audited the accompanying statement of assets and liabilities of Anasazi
Partners, Limited Partnership as of December 31, 2003, and the related
statements of operations, changes in partners capital and cash flows for the
year then ended. These financial statements are the responsibility of the
Partnerships management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Anasazi Partners, Limited
Partnership as of December 31, 2003, and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. The accompanying statement of assets and liabilities, including the condensed
schedule of investments, of Anasazi Partners, Limited Partnership as of
December 31, 2002 and the related statements of operations, changes in
Partners capital and cash flows for the years ended December 31, 2002 and 2001
were not audited by us and, accordingly, we do not express an opinion on them. The Partnership ceased operations in 2003 after the sale of its principal
investment. The remaining net assets are intended for distribution to
creditors and partners. /s/ KAUFMAN, ROSSIN & CO. Miami, Florida
March 5, 2004 III-3




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ANASAZI PARTNERS, LIMITED PARTNERSHIP
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 2003 AND 2002 (Unaudited)ASSETS
    
    2003
    
    2002MARKETABLE SECURITIES OWNED, at market value
(cost $1,680,874 for 2002)
    
    $
    
    
    
    $
    1,540,545INVESTMENTS IN PRIVATE COMPANIES, at fair
value(cost $2,174,000 for 2002)
    
    
    
    
    
    
    41,538,583CASH AND CASH EQUIVALENTS
    
    
    2,434,583
    
    
    
    38,746ESCROWED SALES PROCEEDS RECEIVABLE
    
    
    6,268,907
    
    
    
    PREPAID EXPENSES
    
    
    
    
    
    
    13,686TOTAL ASSETS
    
    $
    8,703,490
    
    
    $
    43,131,560LIABILITIES AND PARTNERS CAPITALACCOUNTS PAYABLE AND ACCRUED LIABILITIES
    
    $
    33,000
    
    
    $
    PARTNERS CAPITAL
    
    
    8,670,490
    
    
    
    43,131,560TOTAL LIABILITIES AND PARTNERS CAPITAL
    
    $
    8,703,490
    
    
    $
    43,131,560
 See accompanying notes. III-4




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ANASAZI PARTNERS, LIMITED PARTNERSHIP
CONDENSED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2002 (UNAUDITED) NUMBER OF SHARES
    
    
    
    VALUECOMMON STOCK (3.57%)9,965,389
    
    Casinos and Gaming (3.47%)
Transworld Corporation (3.47%)
    
    $
    1,494,808Consumer Financial Services (0.01%)
    
    
    6,000Major Drugs (0.09%)
    
    
    39,737TOTAL MARKETABLE SECURITIES OWNED
(Cost $1,680,874)
    
    $
    1,540,545INVESTMENTS IN PRIVATE COMPANIES (96.31%)Business Services (0.23%)
    
    $
    100,000Chemical and Allied Products (0.06%)
    
    
    25,000Food Processing (95.39%)2,927,031
    
    ZonePerfect Nutrition Company (95.39%) (1)
    
    
    41,143,583Semiconductors (0.63%)
    
    
    270,000TOTAL INVESTMENTS IN PRIVATE COMPANIES (Cost $2,174,000)
    
    $
    41,538,583
   *
    
    Percent of net assets is parenthetically shown for each category.*
    
    All investments are United States of America issues.(1)
    
    The President of the Partnerships general partner was the
chief executive officer of this company. See accompanying notes. III-5




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##### Table of Contents



ANASAZI PARTNERS, LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (Unaudited)
    
    (Unaudited)2003
    
    2002
    
    2001REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:Net realized gain (loss) on investments
    
    $
    82,356,967
    )
    
    $
    (151,717
    )
    
    $
    (560,878
    )Change in unrealized gain (loss) on
investments
    
    
    (39,224,252
    )
    
    
    31,489,431
    
    
    
    5,026,895NET GAIN ON INVESTMENTS
    
    
    43,132,715
    
    
    
    31,337,714
    
    
    
    4,466,017INVESTMENT INCOME AND EXPENSES:Interest income
    
    
    30,600
    
    
    
    156,047
    
    
    
    14,492Other partnership expenses
    
    
    54,814
    
    
    
    6,708
    
    
    
    43,183INVESTMENT INCOME (LOSS)  NET
    
    
    (24,214
    )
    
    
    149,339
    
    
    
    (28,691
    )NET INCOME
    
    $
    43,108,501
    
    
    $
    31,487,053
    
    
    $
    4,437,326
 See accompanying notes.  III-6




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##### Table of Contents



ANASAZI PARTNERS, LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS CAPITAL
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 TOTAL
    
    GENERAL PARTNER
    
    LIMITED PARTNERBalances December 31, 2000 (Unaudited)
    
    $
    7,539,449
    
    
    $
    3,706,028
    
    
    $
    3,833,421Net income for 2001 (Unaudited)
    
    
    4,437,326
    
    
    
    2,218,663
    
    
    
    2,218,663Distributions in 2001 (Unaudited)
    
    
    (132,268
    )
    
    
    (66,134
    )
    
    
    (66,134
    )Balances December 31, 2001 (Unaudited)
    
    
    11,844,507
    
    
    
    5,858,557
    
    
    
    5,985,950Net income for 2002 (Unaudited)
    
    
    31,487,053
    
    
    
    15,743,526
    
    
    
    15,743,527Distributions in 2002 (Unaudited)
    
    
    (200,000
    )
    
    
    (100,000
    )
    
    
    (100,000
    )Balances December 31, 2002 (Unaudited)
    
    
    43,131,560
    
    
    
    21,502,083
    
    
    
    21,629,477Net income for 2003
    
    
    43,108,501
    
    
    
    7,567,620
    
    
    
    35,540,881Distributions in 2003
    
    
    (77,569,571
    )
    
    
    (25,716,974
    )
    
    
    (51,852,597
    )Balances December 31, 2003
    
    $
    8,670,490
    
    
    $
    3,352,729
    
    
    $
    5,317,761
 See accompanying notes.  III-7




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ANASAZI PARTNERS, LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (Unaudited)
    
    (Unaudited)2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES:Net income
    
    $
    43,108,501
    
    
    $
    31,487,053
    
    
    $
    4,437,326Adjustments to reconcile net income to net cash
provided by operating and investing activities:Changes in operating assets and liabilities:Marketable securities owned
    
    
    533,086
    
    
    
    (1,346,767
    )
    
    
    (127,748
    )Investments in private companies
    
    
    35,269,676
    
    
    
    (29,6321,268
    )
    
    
    (4,207,658
    )Prepaid expenses
    
    
    13,686
    
    
    
    17,510
    
    
    
    (7,797
    )Accounts payable and accrued liabilities
    
    
    33,000
    
    
    
    
    
    
    
    Total adjustments
    
    
    35,849,448
    
    
    
    (30,961,525
    )
    
    
    (4,343,203
    )Net cash provided by
operating and investing
activities
    
    
    78,957,949
    
    
    
    525,528
    
    
    
    94,123CASH FLOWS FROM FINANCING ACTIVITIES:Notes payable
    
    
    
    
    
    
    (290,000
    )
    
    
    (10,000
    )Distributions to partners
    
    
    (76,562,112
    )
    
    
    (200,000
    )
    
    
    (132,268
    )Net cash used in financing
activities
    
    
    (76,562,112
    )
    
    
    (490,000
    )
    
    
    (142,268
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    2,395,837
    
    
    
    35,528
    
    
    
    (48,145
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    38,746
    
    
    
    3,218
    
    
    
    51,363CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    2,434,583
    
    
    $
    38,746
    
    
    $
    3,218Supplemental Disclosures of Cash Flow Information:Cash paid for interest
    
    $
    
    
    
    $
    25,100
    
    
    $
    Cash paid for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
 Non-Cash Investing and Financing Activities: In 2003, upon the sale of one of the Partnerships investments,
$6,268,907 was placed into an escrow account to be held subject to
     representations and warranties of the seller. In 2003, the Partnership made distributions to its partners in the
form of securities valued at $1,007,459. See accompanying notes. III-8




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ANASAZI PARTNERS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Anasazi Partners, Limited Partnership (the
Partnership) is a limited partnership organized
under the laws of Massachusetts pursuant to the
Agreement of Limited Partnership, dated August 20,
1996 (the Partnership Agreement). The Partnerships
business activity is to invest the funds of the
Partnership, with the principal objective of achieving
appreciation of capital invested. The general partner
of the Partnership is C.P. Baker, Inc. (the General
Partner). The Partnership ceased operations in 2003
after the sale of its principal investment. The
remaining net assets are intended for distribution to
creditors and partners. Cash and Cash Equivalents The Partnership considers all highly liquid debt
instruments purchased with an original maturity of
three months or less to be cash equivalents. The
Partnership may, during the ordinary course of
business, maintain account balances with banks in
excess of federally insured limits. Investments Unregistered Securities- The Partnership records all
unregistered securities transactions on a settlement
date basis, using the specific identification method.
The fair value of these securities are determined in
good faith by the General Partner. In determining the
fair market value of these investments, the General
Partner considers factors such as earnings trends,
earnings forecasts, recent transactions in the same or
similar securities and all other indications of fair
value that are available. The value assigned to these
investments is based upon available information and
does not necessarily represent the amount that might
ultimately be realized upon sale. Because of the
inherent uncertainty of valuation, these estimated
fair values may differ significantly from the value
that would have been used had a ready market for the
securities existed, and the differences could be
material. Marketable Securities- The Partnership records all
marketable securities transactions on a trade date
basis, using the specific identification method.
Securities and other investments traded on a national
exchange or on the national market system of NASDAQ
are valued at the last sale price or, if there has
been no sale on that date, then at the last reported
sale price within the five-day period preceding such
date; otherwise, at the closing bid price, provided
that any securities or other investments sold short
are valued at the closing asked price. Other
securities or investments for which over-the-counter
market quotations are available are similarly valued
at the last trade price or bid quotation, provided
that securities or investments sold short are valued
at the last current asked quotation. The General
Partner has sole and absolute discretion in valuing
any positions for which market quotations are not
readily available or in adjusting the valuation of any
other position. III-9




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##### Table of Contents



NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investment Income and Expenses Interest income and expenses are recorded on the accrual basis.
Other partnership expenses generally consist of costs, expenses
and obligations relating to the Partnerships activities,
investments and business as defined by the Partnership Agreement. Income Taxes No provision has been made for income taxes since the income or
loss is includible in the tax returns of the partners.
Additionally, the cost basis of assets and liabilities in the
accompanying financial statements approximates their basis for
income tax purposes. Use of Estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. NOTE 2. INVESTMENTS IN PRIVATE COMPANIES, AT FAIR VALUE At December 31, 2002, investments in private companies were valued
at $41,538,583. These values have been estimated by the General
Partner in the absence of readily ascertainable market values.
However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would
have been used had a ready market for the securities existed, and
the difference could be material. NOTE 3. SIGNIFICANT TRANSACTIONS In 2003, the Partnership sold its ownership interest in
ZonePerfect Nutrition Company, Inc. for approximately $85.2
million, recognizing a realized gain of approximately $83.3
million. In connection with the sale, $6.3 million is being held
in escrow against potential claims concerning representations and
warranties of the seller. This amount is included in the
accompanying financial statements as realized gain on investments
and escrow receivable. Additionally, the Partnership may be
entitled to receive up to an additional $6.3 million, which is
also held in escrow, dependent upon the satisfactory performance
of certain contract renegotiations. This amount has not been
included in the financial statements as its realization is
dependent upon the resolution of future events. III-10




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NOTE 4. LIMITED PARTNERSHIP AGREEMENT Income and Expense Allocation The Partnership Agreement provides for the allocation of net profits
and net losses to and among the partners in proportion to their
respective partnership percentages based upon each partners
respective pro-rata capital account. Realized capital gains and
losses are allocated in accordance with the Partnership Agreement.
Effective January 1, 2003, the Partnership agreement was amended to
provide for a specific allocation of the net profits resulting from
the Partnerships interest in ZonePerfect. Distributions Distributions may be made at the discretion of the General Partner
and the distribution must be made first in cash to the extent
practicable and then in securities. Cash distributions representing
a return of capital are made in proportion to contributed capital.
Generally, cash distributions representing profit are made in the
same proportion as such profit is allocated to the capital accounts. NOTE 5. FINANCIAL HIGHLIGHTS Financial highlights for the years ended December 31, are as follows: (Unaudited)
    
    (Unaudited)2003
    
    2002
    
    2001Operating Ratios(Based on average net assets)Expenses
    
    
    0.13
    %
    
    
    0.06
    %
    
    
    0.56
    %Net investment income (loss)
    
    
    (0.06
    %)
    
    
    1.24
    %
    
    
    (0.37
    %)Internal Rate of Return (IRR)Through each year-end, beginning with 2001
    
    
    163.49
    %
    
    
    138.59
    %
    
    
    56.31
    %
 Total return and operating ratios are calculated for the limited
partner investor class taken as a whole. The cumulative IRR of the limited partner class taken as a whole
beginning with the year ended December 31, 2001 are presented above.
The IRR was computed based on the actual dates of the cash outflows
for 2003 (cash and stock distributions) and the ending net assets at
the end of the respective years (residual value). The dates of the
outflows for 2001 and 2002 were deemed effective on December 31st of
each year. III-11