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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K/A Amendment No.1
 þ
    
    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 
  Florida
    
    59-1028301(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 3633 Flamingo Road, Miramar, Florida
    
    33027(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (954) 883-1000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange On Which RegisteredCommon 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
þ  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. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ
 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  EXPLANATORY NOTELiabilities and Shareholders EquityItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsOverviewResults of OperationsFinancial ConditionNew Accounting PronouncementsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9A. Controls and ProceduresItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KSignaturesSCHEDULE IINDEX TO FINANCIAL STATEMENTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSSupplemental Disclosures of Cash Flow InformationNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSUPPLEMENTAL FINANCIAL DATASCHEDULE IIVALUATION AND QUALIFYING ACCOUNTSConsent of Grant Thornton LLPSection 302 Certification of President and CEOSection 302 Certification of CFO and Senior Vice PresidentSection 906 Certification of President and CEOSection 906 Certification of CFO and Senior Vice President    Table of Contents  
 EXPLANATORY NOTE Applica Incorporated (Applica) is filing this amendment to its Annual Report on Form
10-K for the fiscal year ended December 31, 2003, originally filed March 15, 2004, in order to
comply with EITF Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement, (EITF 95-22). This amendment to the original Form 10-K amends and restates the
original Form 10-K, but does not reflect events occurring after the original filing
of the Form 10-K. All information contained in this amendment and the original Form 10-K is subject
to updating and supplementing as provided in the periodic reports filed subsequent to the original
filing date with the Securities and Exchange Commission. Additionally, Applica is revising its Business Segment and Geographic Area Information footnote to
present three reportable segments: Household Products, Professional Personal Care Products and
Manufacturing, as the result of comments from the staff (the Staff) of the Securities and
Exchange Commission (the SEC) in connection with the Staffs normal periodic review of Applicas
filings. Based on the fact that Applica was in the process of filing an amendment to its Form 10-K
for 2003, Applica decided to present the segment disclosure footnote in its amended 10-K for 2003. This Form 10-K/A contains no changes to
the Consolidated Statements of Operations, Stockholders Equity, or Cash Flows as previously
reported, although this Form 10-K/A does include changes in the Consolidated Balance Sheets and the
additional disclosures as described below: Part IIItem 6. Selected Financial Information  Balance Sheet Data:  
    a decrease in working capital in the amounts of $62.7 million at December
31, 2003; $55.1 million at December 31, 2002; and $90.7 million at December 31,
2001;
    a decrease in long-term debt and other liabilities at each of such dates in
an equivalent amount; and
    a decrease in the current ratio from 2.7 to 1.7 at December 31, 2003, from
2.8 to 1.8 at December 31, 2002, and from 3.0 to 1.7 at December 31, 2001. Part IIItem 7. Managements Discussion and Analysis of Results of Operations and Financial
Condition  Results of Operations  Year Ended December 31, 2003 Compared to Year Ended December
31, 2002  Net Sales  Revised disclosure to include discussion of sales by reportable segments:
Household Products, Professional Personal Care and Manufacturing. Part IIItem 7. Managements Discussion and Analysis of Results of Operations and
Financial Condition  Capital Resources  Added disclosure concerning the reclassification of
Applicas revolving credit facility pursuant to EITF 95-22. Part IIItem 7A. Quantitative and Qualitative Disclosures About Market Risk  Added disclosure
concerning the reclassification of Applicas revolving credit facility pursuant to EITF 95-22. Part IIItem 8. Consolidated Financial Statements  Consolidated Balance Sheets  Liabilities
and Stockholders Equity  Total current liabilities and long-term debt, less current maturities at
December 31, 2003 and 2002 have been restated from amounts originally reported as follows (note:
caption Short-term debt was added): 
 Liabilities and Shareholders Equity December 31, 2003
    
    
    December 31, 2002Originally
    
    
    
    
    
    
    OriginallyRestated
    
    
    Reported
    
    
    Restated
    
    
    Reported(In thousands)Current Liabilities:Accounts payable
    
    $
    39,273
    
    
    $
    39,273
    
    
    $
    31,446
    
    
    $
    31,446Accrued expenses
    
    
    61,362
    
    
    
    61,362
    
    
    
    74,686
    
    
    
    74,686Short-term debt
    
    
    62,703
    
    
    
    
    
    
    
    55,070
    
    
    
    Current maturities of long-term debt
    
    
    151
    
    
    
    151
    
    
    
    144
    
    
    
    144Current taxes payable
    
    
    2,172
    
    
    
    2,172
    
    
    
    518
    
    
    
    518Deferred rent
    
    
    301
    
    
    
    301
    
    
    
    372
    
    
    
    372Total current liabilities
    
    
    165,962
    
    
    
    103,259
    
    
    
    162,236
    
    
    
    107,166Other Long-Term Liabilities
    
    
    1,327
    
    
    
    1,327
    
    
    
    1,533
    
    
    
    1,533Long-Term Debt, Less Current Maturities
    
    
    73,934
    
    
    
    136,637
    
    
    
    138,768
    
    
    
    193,838
 Part IIItem 8. Consolidated Financial Statements  Notes to Consolidated Financial Statement
Note G  Short-Term Debt  Added footnote disclosure to reflect the borrowings under the credit
facility of $62.7 million at
December 31, 2003 and $55.1 million at December 31, 2002, respectively, as current liabilities
in accordance with EITF 95-22. -2-




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EXPLANATORY NOTE (continued) Part IIItem 8. Consolidated Financial Statements  Notes to Consolidated Financial Statement
Note H  Long-Term Debt  Reflected a decrease of $62.7 million at December 31, 2003 and $55.1
million at December 31, 2002, respectively, as the result of the reclass to current liabilities the
borrowings under the credit facility in accordance in accordance with EITF 95-22. Part IIItem 8. Consolidated Financial Statements  Notes to Consolidated Financial Statement
Note M  Business Segment and Geographic Area InformationAdded disclosure regarding presentation of
three reportable segment: Household Products, Professional Personal
Care Products and Manufacturing. Part IIItem 8. Consolidated Financial Statements  Notes to Consolidated Financial Statement
 NOTE Q  Condensed Consolidating Financial Information  Reflected the reclassification between
long-term debt and short-term debt in accordance with EITF 95-22 (note: caption Short-term debt
was added). Part II  Item 9A  Controls and Procedures  Added disclosure regarding the existence of a
significant deficiency in internal control over financial reporting as of December 31, 2003 related
to the presentation on its balance sheet of the borrowings under its credit facility and
determination that such significant deficiency did not rise to the level of a material weakness in
its internal control over financial reporting. Because Applica corrected its presentation of
long-term and short-term debt in the fourth quarter of 2004, Applica believes that it corrected
this significant deficiency. Part II  Item 9A  Limitations on the Effectiveness of Controls  Added a statement that the
disclosure controls and procedures are designed to provide reasonable assurance of achieving their
objectives. -3-




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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
    
    
    $
    718,309Equity 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
    )
    
    $
    21,020Income tax expense (benefit)
    
    $
    10,147
    
    
    $
    4,826
    
    
    $
    4,146
    
    
    $
    (1,542
    )
    
    $
    4,177Cumulative 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
    (2)(3)
    
    $
    (73,777
    )(3)
    
    $
    (28,438
    )(4)
    
    $
    (21,216
    )(5)
    
    $
    16,843
    (6)Balance Sheet:Working capital (as restated)
    
    $
    115,767
    
    
    $
    137,706
    
    
    $
    137,415
    
    
    $
    276,981
    
    
    $
    263,315Current ratio (as restated)
    
    
    1.7
    
    
    
    1.8
    
    
    
    1.7
    
    
    
    3.3
    
    
    
    3.1Property, plant and equipment, net
    
    $
    70,389
    
    
    $
    76,963
    
    
    $
    82,337
    
    
    $
    78,200
    
    
    $
    75,983Total assets
    
    $
    478,836
    
    
    $
    521,665
    
    
    $
    633,684
    
    
    $
    707,935
    
    
    $
    714,310Long-term debt and other long
term liabilities (as restated)
    
    $
    75,261
    
    
    $
    140,301
    
    
    $
    135,017
    
    
    $
    260,147
    
    
    $
    243,807Shareholders equity
    
    $
    237,613
    
    
    $
    219,128
    
    
    $
    293,939
    
    
    $
    324,474
    
    
    $
    343,397Per 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
    
    
    $
    15.17Return 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; -4-




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
    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
    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. -5-




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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 -6-




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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 onForm 10-Qsubsequently
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 -7-




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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. -8-




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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
    
    
    2001Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Cost of goods sold
    
    
    71.7
    
    
    
    68.6
    
    
    
    71.6Product recall expenses (credit)
    
    
    (0.6
    )
    
    
    
    
    
    
    1.8Gross profit
    
    
    28.9
    
    
    
    31.4
    
    
    
    26.6Selling, general and administrative expenses:Operating expenses
    
    
    29.1
    
    
    
    26.3
    
    
    
    25.0Repositioning charges and other charges
    
    
    0.7
    
    
    
    1.4
    
    
    
    2.1Impairment 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
    )
    
    
    0.0Earnings (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
    
    
    
    0.6Earnings (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. Sales for the Household Product segment for the year ended December 31, 2003 decreased from
$578.9 million to $543.3 million. For the year ended December 31, 2003:  
    total sales of Windmere®, White Westinghouse®, Weitech (pest control) and other
branded products decreased $29.6 million to $60.9 million;
    sales of Black & Decker® branded products decreased by $4.5 million to $448.4
million; and
    sales of Littermaid® products decreased by $1.5 million to $34.0 million. 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.
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. 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. Sales for the Professional Personal Care segment for the year ended December 31, 2003
increased slightly from $68.6 million to $69.0 million over the 2002 period. Sales for the Manufacturing segment for the year ended December 31, 2003 decreased from $383.4
million to $291.5 million over the 2002 period. In 2003, the
intersegment sales decreased from
$303.5 million to $263.1 million. In 2003, contract manufacturing decreased from $79.2 million to
$28.2 million 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. -9-




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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. 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. -10-




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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 -11-




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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 -12-




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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 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 J 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 -13-




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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. 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. -14-




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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 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 J 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. -15-




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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 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 -16-




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##### Table of Contents



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
    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. Applica has classified the borrowings under the credit facility as a current liability in
accordance with Emerging Issues Task Force (EITF) 95-22 Balance Sheet Classifications of
Borrowings Outstanding under Revolving Credit Agreements That Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement. Despite such classification, Applica has the
ability and the intent to maintain these obligations for longer than one year. 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 H 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. -17-




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##### Table of Contents



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 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 K to the Consolidated Financial Statements included in Schedule J to this Annual Report on
Form 10-K. For information regarding related party transactions, see
Note O 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. -18-




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##### Table of Contents



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. 
 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. -19-




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##### Table of Contents



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 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 and
Revolving Credit
Facility: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
    (7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    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
    %
 -20-




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##### Table of Contents



(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.(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.(7)
    
    Although the credit facility expires in December 2005, Applica has classified the borrowings
thereunder as a current liability in accordance with Emerging Issues Task Force (EITF) 95-22
Balance Sheet Classifications of Borrowings Outstanding under Revolving Credit Agreements
That Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement, although
Applica has the ability and the intent to maintain these obligations for longer than one year. At December 31, 2002Expected Maturity DateThere-
    
    
    
    
    
    
    Fair2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    after
    
    
    Total
    
    
    Value(5)(Dollars in thousands)Liabilities:Long-Term Debt and
Revolving Credit
Facility: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
    (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    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). -21-




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##### Table of Contents



(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.(6)
    
    Although the credit facility expires in December 2005, Applica has classified the
borrowings thereunder as a current liability in accordance with Emerging Issues Task
Force (EITF) 95-22 Balance Sheet Classifications of Borrowings Outstanding under
Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and a
Lock-Box Arrangement, although Applica has the ability and the intent to maintain these
obligations for longer than one year. 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 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: -22-




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##### Table of Contents



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 P 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 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 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. On February 11, 2005, Applica announced that it was restating its consolidated balance sheets
for fiscal years 2003 and 2002 and for the first three quarters of 2004 to reclassify as short-term
debt the borrowings under its senior credit facility with Bank of America, N.A., which had
previously been classified as long-term debt in order to comply with EITF Issue No. 95-22, Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both
a Subjective Acceleration Clause and a Lock-Box Arrangement. In the fourth quarter of 2004, the
Company corrected the presentation of the borrowings under the credit facility on its consolidated
balance sheets. Applica has reflected such reclassification in its restated consolidated balance
sheets at December 31, 2003 and 2002 presented in this amended Form 10-K/A. The restatement to reclassify the outstanding balance on the credit facility from long-term
debt to short-term did not affect total assets or total debt, and there was no impact on, or change
in, Applicas reported results of operations or statements of cash flows. Moreover, the
reclassification had no impact on Applicas liquidity or the maturity date of the senior credit
facility. Furthermore, the reclassification did not impact any of the covenants under the credit
facility nor did it trigger any accelerated clauses under the 10% Senior Subordinated Notes. As a result of the restatement of its consolidated balance sheets, Applica determined that
there was a significant deficiency in its internal control over financial reporting as of December
31, 2003 related to the presentation on its balance sheet of the borrowings under its credit
facility. The Company determined that such significant deficiency did not rise to the level of a
material weakness in its internal control over financial reporting. Because Applica corrected its
presentation of long-term and short-term debt in the fourth quarter of 2004, Applica believes that
it corrected this significant deficiency. -23-




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##### Table of Contents



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. Despite these limitations, however, the Chief Executive
Officer and Chief Financial Officer have concluded that Applicas disclosure controls and
procedures (1) are designed to provide reasonable assurance of
achieving their objectives and (2) do provide reasonable assurance of
achieving their objectives. 
 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 Registered Public Accounting Firm
    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
    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 -24-




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##### Table of Contents



(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
    
    Description23
    
    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.
 (c) Exhibits See Item 15(a)(3) above. -25-




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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 amended report to be signed on its behalf by the undersigned,
thereunto duly authorized. APPLICA INCORPORATED(Registrant)By:
    
    /s/ Harry D. SchulmanHarry D. Schulman, President andChief Executive OfficerDate: March 11, 2005
 -26-




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##### Table of Contents



SCHEDULE I 
 Applica Incorporated and Subsidiaries
INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm
    
    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-35
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 Board of Directors and Shareholders
Applica Incorporated We have audited the accompanying consolidated balance sheets of Applica Incorporated and subsidiaries 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 based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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 consolidated 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 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. Our audits were conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule II is presented for purposes of additional analysis and
is not a required part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial statements taken as a
whole. 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. As discussed in Note G to the consolidated financial statements, the Company has
restated the balance sheet to reclassify its revolving credit facility to a current liability as of December 31, 2003 and 2002. /s/ Grant Thornton LLP Miami, Florida
February 12, 2004 (except for the last paragraph of Note G,
as to which the date is February 11, 2005) F-2




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##### Table of Contents



Applica Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data) December 31,2003
    
    
    2002RestatedAssetsCurrent 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
    
    
    
    74,686Short-term debt
    
    
    62,703
    
    
    
    55,070Current maturities of long-term debt
    
    
    151
    
    
    
    144Current taxes payable
    
    
    2,172
    
    
    
    518Deferred rent
    
    
    301
    
    
    
    372Total current liabilities
    
    
    165,962
    
    
    
    162,236Other Long-Term Liabilities
    
    
    1,327
    
    
    
    1,533Long-Term Debt, Less Current Maturities
    
    
    73,934
    
    
    
    138,768Shareholders 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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##### Table of Contents



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. 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. F-9




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 L  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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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 entered. 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:
 F-17




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands)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. 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: December 31, 2003
    
    
    December 31, 2002WeightedAverage
    
    
    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: F-18




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands)2004
    
    $
    2,4322005
    
    
    1,6162006
    
    
    1,1132007
    
    
    4692008
    
    
    161Thereafter
    
    
    322
 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
 F-19




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED   *
    
    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: 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  SHORT-TERM DEBT Applicas short-term debt, including interest rate swaps designated as hedges, is summarized
below: Stated

    
    Interest Rate Swaps (1)
    
    
    Effective

    
    SwapBalance
    
    
    Interest Rate

    
    Pay Float
    
    Pay Fixed
    
    
    Interest Rate (2)

    
    Maturities(Dollars in thousands)At December 31, 2003:Revolving Credit Facility
    
    $
    62,703
    
    
    
    3.1
    %
    
    $
    
    $
    50,000
    
    
    
    3.2
    %
    
    December 2004At December 31, 2002:Revolving Credit Facility
    
    $
    55,070
    
    
    
    3.7
    %
    
    $
    
    $
    15,000
    
    
    
    4.7
    %
    
    July 2003
   (1)
    
    Amounts represent notional values of interest rate swaps.(2)
    
    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. 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:  
    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 F-20




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED 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. Applica has restated its consolidated balance sheets as of December 31, 2003 and 2002 to
properly classify the credit facility as a current liability in accordance with EITF 95-22,
Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That
Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement (EITF 95-22). This
restatement has no impact on the Applicas results of operations or cash flows for the years ended
December 31, 2003 and 2002. Although it expires in December
2005, the credit facility is classified as a current liability in accordance
with EITF 95-22 because the credit facility agreement contains a subjective acceleration clause and
contractual provisions that require the cash receipts of Applica be used to repay amounts
outstanding under the credit facility. NOTE H  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:Mortgage 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
    
    
    74,085
    
    
    
    
    
    
    
    30,000
    
    
    
    50,000Less current maturities
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    Total long-term debt
    
    $
    73,934
    
    
    
    
    
    
    $
    30,000
    
    
    $
    50,000At December 31, 2002:Mortgage 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
    
    
    138,912
    
    
    
    
    
    
    
    5,939
    
    
    
    15,000Less current maturities
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    Total long-term debt
    
    $
    138,768
    
    
    
    
    
    
    $
    5,939
    
    
    $
    15,000
 F-21




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED   (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. 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. 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 I  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 F-22




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED not provide any health
or other benefits to retirees, except for executive life insurance provided to Mr. Belvin Freidson,
the founder of Applica. NOTE J  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
    )Foreign 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
    )%
   *
    
    Permanent differences are primarily the result of foreign exchange translation
losses. 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: F-23




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED 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: Year of Expiration
    
    Operating Losses
    
    
    Foreign Losses2005
    
    $
    
    
    
    $
    1,3382006
    
    
    
    
    
    
    1102007
    
    
    
    
    
    
    2,9462009
    
    
    
    
    
    
    1,2422019
    
    
    11,298
    
    
    
    2020
    
    
    18,134
    
    
    
    2021
    
    
    400
    
    
    
    2022
    
    
    520
    
    
    
    Indefinite
    
    
    
    
    
    
    4,018$
    30,352
    
    
    $
    9,654
 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 K  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. F-24




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED 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
    
    
    5,1582007
    
    
    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. F-25




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED 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 L  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. 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: F-26




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED 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. 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 M  BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information, established standards for reporting information about business
segments in annual financial statements. It also established standards for related disclosures
about products and services, major customers and geographic areas. Business segments are defined as
components of a business about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. Applica currently manages its operations through three business segments: Household Products,
Professional Personal Care Products and Manufacturing.  
    The Household Products segment is a leading distributor and marketer of small
household appliances, primarily cooking, garment care, food preparation, beverage
products, pet products and pest products, marketed under the licensed brand name, such
as Black & Decker®, as well as owned brand names, such as Applica®, Gizmo®,
Littermaid®, Weitech and Windmere®. The Household Products segment sales are handled
primarily through in house sales representatives to mass merchandisers, specialty
retailers and appliance distributors in North America, Latin America and the Caribbean.
    The Professional Personal Care segment is a distributor and marketer of a broad
range of personal care products under the Belson® and Jerdon® brands. The Professional
Personal Care segment sales are handled primarily through independent sales
representatives to specialty retailers and some mass merchandisers in North America.
    The Manufacturing segment constitutes Applicas
manufacturing operations in Hong Kong and Mexico. The profitability measure employed by Applica for making decisions about allocating resources
to segments and evaluating segment performance is operating (loss) earnings. Generally, segments
follow the same accounting policies as those described in Note A of Applicas consolidated
financial statements. Segment information for the years ended 2003, 2002 and 2001 was as follows: ProfessionalHousehold
    
    
    Personal CareProducts
    
    
    Products
    
    
    Manufacturing
    
    
    Total(In thousands)Year
Ended 2003:Net sales
    
    $
    543,256
    
    
    $
    68,993
    
    
    $
    291,509
    
    
    $
    903,758Intersegment sales
    
    
    
    
    
    
    
    
    
    
    263,119
    
    
    
    263,119Operating earnings
    
    
    11,366
    
    
    
    7,448
    
    
    
    5,304
    
    
    
    24,118Depreciation and amortization
    
    
    1,447
    
    
    
    15
    
    
    
    16,212
    
    
    
    17,674Total assets
    
    
    182,391
    
    
    
    32,310
    
    
    
    176,943
    
    
    
    391,644Year Ended 2002:Net sales
    
    $
    578,919
    
    
    $
    68,570
    
    
    $
    383,385
    
    
    $
    1,030,874Intersegment sales
    
    
    
    
    
    
    
    
    
    
    303,518
    
    
    
    303,518Operating earnings
    
    
    33,115
    
    
    
    6,773
    
    
    
    24,241
    
    
    
    64,129Depreciation and amortization
    
    
    1,240
    
    
    
    20
    
    
    
    15,939
    
    
    
    17,199Total assets
    
    
    229,082
    
    
    
    29,657
    
    
    
    171,977
    
    
    
    430,716Year Ended 2001:Net sales
    
    $
    600,676
    
    
    $
    65,254
    
    
    $
    374,041
    
    
    $
    1,039,971Intersegment sales
    
    
    
    
    
    
    
    
    
    
    312,927
    
    
    
    312,927Operating earnings
    
    
    20,515
    
    
    
    6,642
    
    
    
    22,309
    
    
    
    49,466Depreciation and amortization
    
    
    644
    
    
    
    30
    
    
    
    14,593
    
    
    
    15,267
 The following table sets forth the reconciliation to consolidated amounts for net sales,
operating earnings (loss) and total assets: 2003
    
    
    2002
    
    
    2001(In thousands)Net Sales:Total net sales for reportable segments
    
    $
    903,758
    
    
    $
    1,030,874
    
    
    $
    1,039,971Eliminations of intersegment sales
    
    
    (263,119
    )
    
    
    (303,518
    )
    
    
    (312,927
    )Consolidated net sales
    
    $
    640,639
    
    
    $
    727,356
    
    
    $
    727,044Operating (loss) earnings:Total operating earnings from reportable segments
    
    $
    24,118
    
    
    $
    64,129
    
    
    $
    49,466Unallocated amounts:Restructuring and other credit (charges)
    
    
    (4,681
    )
    
    
    (10,643
    )
    
    
    (14,817
    )Impairment of intangible asset
    
    
    (7,152
    )
    
    
    
    
    
    
    Shared services and all other
    
    
    (25,398
    )
    
    
    (26,877
    )
    
    
    (38,283
    )Consolidated operating (loss) earnings
    
    $
    (13,113
    )
    
    $
    26,609
    
    
    $
    (3,634
    )Total assets:Total assets from reportable segments
    
    $
    391,644
    
    
    $
    430,716All other
    
    
    87,192
    
    
    
    90,949Consolidated total assets
    
    $
    478,836
    
    
    $
    521,665
 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. Applicas
international operations are conducted primarily in Hong Kong 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.


F-27



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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED NOTE N  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 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 F-28




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED 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 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 O  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 F-29




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED 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. 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, F-30




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED $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 P  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. 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. F-31




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED 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
   (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 F-32




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED 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 Q  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-33




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED Year Ended December 31, 2003Parent
    
    
    Guarantors
    
    
    Non-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: (as restated)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
    
    
    $
    
    
    
    $
    100,635Short-term debt
    
    
    62,703
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,703Current maturities of long-term debt
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151Deferred rent
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    301Current taxes payable
    
    
    
    
    
    
    447
    
    
    
    1,725
    
    
    
    
    
    
    
    2,172Total current liabilities
    
    
    62,854
    
    
    
    61,317
    
    
    
    41,791
    
    
    
    
    
    
    
    165,962Long-term debt
    
    
    73,934
    
    
    
    39,310
    
    
    
    13,142
    
    
    
    (52,452
    )
    
    
    73,934Future 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-34




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED Year Ended December 31, 2002Parent
    
    
    Guarantors
    
    
    Non-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: (as restated)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
    
    
    $
    
    
    
    $
    106,132Short-term debt
    
    
    55,070
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,070Current
maturities of long-term debt
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    144Deferred rent
    
    
    
    
    
    
    372
    
    
    
    
    
    
    
    
    
    
    
    372Current taxes payable
    
    
    
    
    
    
    1,034
    
    
    
    (516
    )
    
    
    
    
    
    
    518Total current liabilities
    
    
    55,072
    
    
    
    64,404
    
    
    
    42,760
    
    
    
    
    
    
    
    162,236Long-term debt
    
    
    138,768
    
    
    
    40,463
    
    
    
    20,706
    
    
    
    (61,169
    )
    
    
    138,768Future 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-35




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##### Table of Contents



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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##### Table of Contents



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