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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934  þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2004 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, 2004, the aggregate market value of the voting stock (based on the closing
price as reported by NYSE of $8.90) held by non-affiliates of the Registrant was approximately
$210.5 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 15, 2005, there were 24,136,591 shares of common stock outstanding.




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DOCUMENTS INCORPORATED BY REFERENCE The Registrants Definitive Proxy Statement for its 2005 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. -2-




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for the Registrants Common Stock and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes In and Disagreements With Accountants On Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KSignaturesREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEmployment AgreementSubsidiariesConsent of Independent Registered Public AccountantSec 302 Chief Executive Officer CertificationSec 302 Chief Financial Officer CertificationSec 906 Chief Executive Officer CertificationSec 906 Chief Financial Officer Certification    Table of Contents  As used in this Annual Report on Form 10-K, we, our, us, the Company and Applica
refer to Applica Incorporated and its subsidiaries, unless the context otherwise requires. This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements are
indicated by words or phrases such as anticipates, projects, management believes, Applica
believes, intends, expects, and similar words or phrases. Such forward-looking statements are
subject to certain risks, uncertainties or assumptions and may be affected by certain other
factors, including the specific factors set forth in Item 1. Business  Risk Factors below.
Should one or more of these risks, uncertainties or other factors materialize, or should underlying
assumptions prove incorrect, actual results, performance, or achievements of Applica may vary
materially from any future results, performance or achievements expressed or implied by such
forward-looking statements. All subsequent written and oral forward-looking statements attributable
to Applica or persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements in this paragraph. Applica disclaims any intention or obligation to publicly
announce the results of any revisions to any of the forward-looking statements contained herein to
reflect future events or developments. 
 PART I 
 Item 1. Business Overview Applica is a marketer and distributor of a broad range of branded small household appliances.
Applica markets and distributes 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®, and its own brand names, such as Windmere®, LitterMaid®, Belson® and Applica®.
Applicas customers include mass merchandisers, specialty retailers and appliance distributors
primarily in North America, Latin America and the Caribbean. Applica operates a manufacturing
facility in Mexico. Since 2003, we have been making changes to our infrastructure by addressing the fixed costs in
our business. We believe that these changes will help offset the margin pressures resulting from
the combination of the inflation in raw materials prices and the deflationary pricing pressures
from the retail environment. In addition, we are focusing on more innovative products with higher
margins, we are rationalizing our manufacturing and sourcing strategy and we are attempting to
improve our pricing with our customers. We have previously indicated our desire to reduce our
manufacturing base and expand and improve our sourcing competency. These actions have reduced our
risk profile by changing significant costs from fixed to variable. This has also improved our
ability to react to a rapidly changing global marketplace. As part of this process, in July 2004,
Applica sold its Hong Kong-based manufacturing subsidiary, Applica Durable Manufacturing Limited
(Applica Durable). As the result of the sale of Applica Durable, we now outsource most of our production to
third-party suppliers located primarily in the Far East. In 2004 and 2003, approximately 35% and
63%, respectively, of the products sold by Applica were manufactured at our facilities. We expect
this percentage to decrease to approximately 17% in 2005. Applica has experience in managing
production relationships with third-party suppliers. We work with our suppliers to obtain the
lowest possible product costs for our customers, without compromising quality, while maintaining
reasonable gross margins for us. In October 2004, Applica sold its Jerdon hotel and hospitality division. Jerdon was sold
because it no longer fit in the long-term strategic plans of Applica. The sale resulted in a gain
on sale of approximately $3.4 million. The gain was recorded in the fourth quarter of 2004. Sales
of Jerdon® products totaled $8.6 million in 2004, $13.3 million in 2003 and $13.4 million in 2002. Applicas distribution, sales, and marketing operations are primarily handled through our U.S.
operating subsidiary, Applica Consumer Products, Inc. Applica also has separate entities or branch
offices providing distribution, sales and marketing operations in Canada, Puerto Rico, Costa Rica,
Mexico, Chile, Argentina, Venezuela, Peru and Colombia. Applica Incorporated is a Florida corporation, which was incorporated in 1963. -3-




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Business Segments Applica manages its business through three business segments: Household Products, Professional
Personal Care and Manufacturing. For additional information, see Note P Business Segment and
Geographic Area Information to the Consolidated Financial Statements included in Schedule I to
this Annual Report on Form 10-K. Business Strategy We have combined top brand names with a reputation for quality, durability and innovation. We
expect to increase profitability by pursuing the following strategies: Introduce new products and further develop our brands.New products allow us to generate
higher margins based on their uniqueness and desirability in the marketplace. We believe that the
enhancement and extension of our existing products and the development of new products are
necessary for our continued success and growth. We intend to drive revenues through innovation
within our core appliance categories, using new applications of existing technologies and new
marketing platforms. We also intend to create new categories or grow categories in which there are
smaller and more fragmented competitors through distinctive products and brand development. Product development is being driven by the application of existing technologies and investment
in strategic development alliances. We design the style, features and functionality of our
products to meet customer requirements for quality, performance, product mix and pricing. We work
closely with both retail customers and suppliers to identify consumer needs and preferences and to
generate new product ideas. We evaluate new ideas and seek to develop and acquire new products and
improve existing products to satisfy industry requirements and changing consumer preferences.
Brand development takes its form in integrated packaging and communication materials, as well as
national advertising that is intended to generate direct sales while also creating increased
consumer demand for our products at retail. Advertising investments in new products and brands
drive both broader distribution and higher sales at our retail customers. Additionally, when available, we employ a consumables strategy that allows us to gain
recurring revenue through sales of a consumable component to be used with our appliance. This
strategy is best represented through initiatives such as Littermaid® branded clumping litter and
waste receptacles for the Littermaid® Self-Cleaning Litter Box and replacement vacuum food storage
bags for the Freshguard Vacuum Sealer. Each of these consumables provides a recurring revenue
stream and an ongoing connection with the consumer. As part of our focus on new products introductions and brand development, we also search for
other growth opportunities within and beyond our existing businesses. We believe that the markets
and industry in which we compete may provide growth opportunities through strategic acquisitions or
mergers. We review these prospects for strategic transactions as they become available. Create long-term cost and quality advantages for our customers. We maintain a value chain for
our customers that meets their cost and quality objectives by leveraging our growing competency in
strategic sourcing. We accomplish this by developing strategic alliances with suppliers in China
who can timely deliver good quality products at a reasonable cost. These relationships allow us to
fully capitalize on our combined strengths, provide a foundation for new product development,
deliver quality products consistent with the reputation of our brands and deliver at costs that are
competitive in our industry. Optimize our supply chain.We recognize that our retail customers are our most critical link
to the consumer. We continue to refine our supply chain management, improving our operations
across all key functional areas. Our goal is to continue to be a preferred supplier to our retail
customers. We also continue to upgrade our consumer service capabilities and improve our
relationship with the consumer. Products Applica primarily distributes five categories of products: kitchen products, home products,
personal care products, pet products and pest control products. Applica is also engaged in
contract manufacturing for other companies (although primarily through our Hong Kong manufacturing
operations, which were sold in July 2004). -4-




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The following table sets forth the approximate amounts and percentages of Applicas
consolidated net sales by product category during the periods shown: 2004
    
    
    2003
    
    
    2002(Dollars in thousands)Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %Kitchen Products
    
    $
    446,290
    
    
    
    61
    %
    
    $
    352,783
    
    
    
    55
    %
    
    $
    353,271
    
    
    
    49
    %Home Products
    
    
    138,912
    
    
    
    19
    %
    
    
    135,718
    
    
    
    21
    %
    
    
    161,178
    
    
    
    22
    %Personal Care Products (1)
    
    
    64,918
    
    
    
    9
    %
    
    
    68,993
    
    
    
    11
    %
    
    
    68,570
    
    
    
    9
    %Pet Products
    
    
    38,171
    
    
    
    5
    %
    
    
    34,289
    
    
    
    5
    %
    
    
    35,855
    
    
    
    5
    %Pest Control Products
    
    
    15,087
    
    
    
    3
    %
    
    
    17,095
    
    
    
    3
    %
    
    
    15,869
    
    
    
    2
    %Contract Manufacturing (2)
    
    
    17,653
    
    
    
    2
    %
    
    
    28,246
    
    
    
    4
    %
    
    
    79,242
    
    
    
    11
    %Other Products
    
    
    5,702
    
    
    
    1
    %
    
    
    3,515
    
    
    
    1
    %
    
    
    13,371
    
    
    
    2
    %
   (1)
    Includes sales of products by the Jerdon hotel and hospitality division, which was sold
in October 2004. Such sales totaled $8.6 million in 2004, $13.3 million in 2003 and $13.4
million in 2002.(2)
    Includes contract manufacturing sales from our Hong Kong manufacturing operations,
which were sold in July 2004. Such sales totaled $14.2 million in 2004, $24.6 million in
2003 and $76.2 million in 2002. The kitchen products group includes cooking, beverage and food preparation products and
constitutes our largest product category. Applica provides customers with a broad product line in
the small kitchen appliances market, primarily at mid-tier price points. Our products in this
category include toaster ovens, toasters, blenders, can openers, coffee grinders, coffee makers,
electric knives, jar openers, skillets, bag sealers, deep fryers, food choppers, food processors,
hand mixers, rice cookers and steamers and other similar products. This category also includes the
new Black & Decker® single cup coffee maker that is a part of the Home Café brewing system
developed with The Procter & Gamble Company, which was launched in the second quarter of 2004. We
believe that Black & Decker® branded toaster ovens and coffee makers are market leaders in this
category. The home products group includes garment care products, such as hand-held irons, and home
environment products, such as fans and heaters. Under Applica, Black & Decker® branded irons
continue to be a leader in the category through design innovations. Additionally, in the second
quarter of 2004, Applica launched the new Tide Buzz Ultrasonic Stain Remover, which features a
combination of a specially formulated Tide Buzz Ultrasonic Cleaning Fluid and a Black & Decker®
branded stain removal appliance. This stain removal system was developed with The Procter & Gamble
Company. The home products group also includes a full array of fans, ceramic heaters, heater fans
and utility fans under the Black & Decker® brand. We will continue to focus our home environment
products on the mid-price point market by expanding the Black & Decker® brand into additional areas
of the home environment category. We also distribute vacuum cleaners under the Black & Decker®
brand in Latin America. The personal care group focuses mainly on professional product lines marketed under the
Belson® brand and other private label brands, and includes hair dryers, curling irons, curling
brushes, hairsetters, combs and brushes and shears. The products are sold primarily to beauty
distributors and beauty supply stores, which in turn sell the products to beauty salons and
professional hair stylists. The pet products group features the LitterMaid® patented self-cleaning cat litter box. This
innovative product is supported throughout the U.S. marketplace at retailers like Wal-Mart, Target
and PetsMart. LitterMaid® is driven by a national TV advertising campaign and has recently
undergone a major packaging update in order to better communicate the lifestyle benefits of the
product. In 2004, we also launched the Littermaid® Litter Center Litter Box & Organizer, which
includes an attached storage bin for litter. The LitterMaid® product line delivers a recurring
revenue stream from consumable accessories, including waste receptacles, charcoal filters and
LitterMaid® branded litter. Applicas pest control products group includes pest control and repelling devices that use
ultra-sonic or sub-sonic sound waves and chemical lures or repellants to control insects and
rodents, primarily in homes. The core of the business is its ultrasonic direct plug-in pest
repellers, a result of the Weitech, Inc. acquisition in May 2002. In 2004, the majority of the
pest products were marketed under the Black & Decker® brand name. In the first half of 2004, our Hong Kong manufacturing operations also served as a contract
manufacturer for a range of small appliances, including air cleaners, oral care products and pool
cleaners, which it sold to small -5-




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appliance companies primarily in the United States. In July 2004, we sold these facilities.
Our Mexican manufacturing facilities currently engage in a small amount of contract manufacturing.
In 2005, we expect contract manufacturing sales to total less than 1% of our sales. Product Development As part of our ongoing strategy to deliver new, innovative and relevant products to the
consumer marketplace, we adhere to a well-defined product development process focused on quality,
design, appropriate performance characteristics and speed-to-market. We have a product development
team dedicated to creating innovative products in and outside of our core categories. This
internal process also helps us manage the improvement of quality, performance and cost of existing
products. We also work closely with both retailers and suppliers to identify consumer needs and
preferences and to generate new product ideas. We evaluate new ideas and seek to develop and
acquire new products and improve existing products to satisfy marketplace requirements and changing
consumer preferences. We design the style, features and functionality of our products to meet
customer requirements for quality, performance, product mix and pricing. New products are those that require a new mold, have a new feature or benefit, or those that
have not been in our product line in the previous 12 months. Adding features or providing a
fresh look to existing products, either through design upgrades or creative packaging, is a
necessity for maintaining consumer preferences, protecting existing retailer shelf space and
maintaining acceptable price points. Applica launched over 140 new products in 2004, over 120 in
2003 and 110 new products in 2002, most of which were refreshes. Some of the new products launched
in 2004 include the new Black & Decker® single cup coffee maker that is a part of the Home Café
brewing system, the Tide Buzz Ultrasonic Stain Remover, the Gizmo Twist Mixer and the Gizmo
Steam N Crease Iron. New consumer products constituted 24.3% of our sales in 2004, 18.2% of the
sales in 2003 and 13.9% in 2002. Brands Applica licenses the Black & Decker brand for use in marketing small household appliances in
North America, Latin America (excluding Brazil) and the Caribbean. In addition, Applica owns
certain sub-brands, including Toast R Oven, ProFinish and Quick N Easy, and licenses Spacemaker
for under the cabinet kitchen appliances. Applica continues to develop new sub-brands for product
differentiation at the retail level, including Gizmo, Freshguard, SmartBrew, Digital Advantage,
Prestige, Chill Buster and Silent Force. Further, Applica has licenses from The Procter &
Gamble Company to use the Tide® brand in all countries in the Western Hemisphere for the specially
formulated Tide Buzz Ultrasonic Cleaning Fluid and the Home Cafe brand worldwide for the Black &
Decker® single cup brewing machine. The major portion of Applicas revenue is generated through the sale of Black & Decker®
branded products, which represented approximately 77% of Applicas total consolidated revenue in
2004, 70% in 2003 and 62% in 2002. The Black & Decker® brand has significant market share in the
toaster oven, coffee maker and iron categories, as well as in can openers, food steamers, and food
choppers. The personal care category is targeted specifically at the salon segment under the Belson®
brand and other private label programs. Applica also manufactures and markets several pet products
and accessories under the LitterMaid® brand. Applica also has, and from time to time will enter into, licenses and other agreements that
grant it the right to use other trademarks and trade names. Strategic Alliances Applica continues to pursue strategic alliances to further differentiate our products and to
create growth opportunities. Such alliances may include brand development and product development
alliances. Our current alliance with The Black & Decker Corporation encompasses brand development.
Applica has worked closely with The Black & Decker Corporation to ensure that the Black & Decker®
brand representation is seamless to the consumer. An example of this relationship is the joint
development of new consumer communications for the Black -6-




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& Decker® brand. This project involves the creation of packaging and advertising materials
that will be similar for all Black & Decker® branded products, including household appliances and
power tools. Additionally, Applica has entered into a joint product development relationship with The
Procter & Gamble Company to develop, market, manufacture and distribute new products. In 2004, we
introduced two products: the Tide Buzz Ultrasonic Stain Remover and the Home Café single-cup
coffee maker. We 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. Both of the products developed with Procter & Gamble provide the opportunity for recurring
revenues through a consumable component. For the Tide Buzz system, Applica pays a license fee to
Procter & Gamble for the use of the TideTM brand name and records all revenues related
to the sale of the Tide Buzz Ultrasonic Cleaning Fluid. For Home Café coffee maker, Applica has
the opportunity to share in revenues received by Procter & Gamble from the sale of the beverage
pods if certain targets for household penetration are met by the Home Café platform. Applica does
not expect that such targets will be met in 2005. If such targets are not met by 2009, Applica
will not receive any revenue related to the sale of beverage pods. Suppliers Applica purchased approximately 65% of its finished products from outside suppliers in 2004,
37% in 2003 and 24% in 2002. In July 2004, as part of the sale of our Hong Kong manufacturing
operations, Applica entered into a long-term supply agreement with Elec-Tech International (H.K.)
Company, Ltd. The supply agreement provides for rebates during the first five years if Applica
meets certain levels of product purchases. Additionally, the supply agreement provides a right of
first refusal with respect to manufacturing or purchasing products, as applicable, for each party.
The agreement also provides indemnification to Applica for product liability claims and recalls
related to products purchased from Elec-Tech. We intend to use Elec-Tech as a significant source
of product supply, however, we maintain the flexibility to purchase products from our affiliate and
from third parties in a number of circumstances, including Elec-Techs inability to meet our price,
quality and delivery criteria. As the result of the sale of our Hong Kong manufacturing operations, we expect purchases from
outside suppliers to be approximately 83% in 2005. We maintain long-term supply contracts with
many of the third party suppliers, which include standard terms for production, delivery, quality
and indemnification for product liability claims. Specific production amounts are ordered by
separate purchase orders. Intellectual Property Applica manufactures and distributes products with features for which we have filed or
obtained licenses for trademarks, patents and design registrations in the United States and in
several foreign countries. Our right to these patents and trademarks is a significant part of our
business and our ability to create demand for our products is dependent to a large extent on our
ability to capitalize on them. We license the Black & Decker brand in North America, Latin America (excluding Brazil) and the
Caribbean for four core categories of household appliances: beverage products, food preparation
products, garment care products and cooking products. In October 2004, Applica and The Black &
Decker Corporation extended the trademark license agreement through December 2010. Under the
agreement as extended, Applica agreed to continue to pay The Black & Decker Corporation royalties
based on a percentage of sales, with minimum annual royalty payments of $12.5 million. Renewals of
the license agreement, if mutually agreed upon, will be for five-year periods. If Black & Decker
does not agree to renew the license agreement, Applica has 18 months to transition out of the brand
name. No minimum royalty payments will be due during such transition period. The Black & Decker
Corporation has agreed not to compete in the four core product categories for a period of five
years after the termination of the license agreement. Upon request, Black & Decker may elect to extend the license to use the Black & Decker® brand
to certain additional products. In 2000 and 2001, Black & Decker extended the license to heaters,
fans, humidifiers, dehumidifiers, air purifiers, deep fryers and bag sealers. In 2002, Black &
Decker agreed to extend the license to ice cream makers and mixers. In 2003, the license was
further extended to certain electronic pest and insect control -7-




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products, the TideTM BuzzTM ultrasonic stain removing appliance and
vacuum bag sealers. In 2004, the license was extended to bug zappers. Further, Applica has licenses from The Procter & Gamble Company to use the Tide® brand in all
countries in the Western Hemisphere for the specially formulated Tide BuzzTM Ultrasonic
Cleaning Fluid and the Home Cafe brand worldwide for the Black & Decker® single cup brewing
machine. Applica owns the Littermaid® trademark for self-cleaning litter boxes and has extended the
trademark for accessories such as litter, a litterbox privacy tent and waste receptacles. Applica
owns two patents and has exclusive licenses to three other patents covering the Littermaid® litter
box. The license agreements are for the life of the applicable patent and do not require minimum
royalty payments. The patents have been issued in the United States and a number of foreign
countries. In April 2004, Applica entered into a license and settlement agreement with Tilia, Inc. and
Tilia International, Inc. to resolve patent infringement litigation involving the Black & Decker®
Freshguard Vacuum Sealer and bags. As part of the license and settlement agreement, Applica
agreed to pay Tilia royalties for using its vacuum sealing technology. In addition, Applica agreed
to not contest the validity of Tilias previously disputed patents and to settle any future
disputes over product infringement by arbitration. Additional important brand names that we own include Windmere®, Belson® and Applica®. The
Windmere® brand is targeted to electric kitchen appliances, primarily in Latin America. Belson® is
targeted to the personal care market. In addition, we acquired certain sub-brands used with our
Black & Decker® products, including Toast R Oven, ProFinish and Quick N Easy and licenses
Spacemaker for under the cabinet kitchen appliances. Manufacturing Mexico. Applica Manufacturing, S. de R.L. de C.V., is Applicas wholly owned Mexican
manufacturing subsidiary located in Queretaro, Mexico, which is approximately 150 miles northwest
of Mexico City. The factory constitutes approximately 290,000 square feet and manufactures Black &
Decker® branded products for distribution primarily to the Mexican market. The Mexican facility is
certified under ISO 9001 standards. This location primarily manufactures toaster ovens, blenders,
irons and coffee makers. We continue to rationalize our Mexican manufacturing operations. In 2004, we shifted a
significant amount of production from Mexico to third parties in China. As part of the
rationalization, we also plan to sell the building housing our factory in Mexico. In 2004, we
began to reduce our Mexican manufacturing capacity to reflect only the volume needed for the
Mexican marketplace, which will continue into 2005. China. Applica Durable Manufacturing Limited was Applicas wholly owned Hong Kong
manufacturing subsidiary. Applica Durable operated manufacturing facilities in China through
several processing arrangements with local governmental corporations in mainland China. Last year,
management made the decision to exit our Hong Kong manufacturing operations and, in July 2004,
Applica sold all of the shares of stock of Applica Durable for $28.1 million. We currently have no
manufacturing operations in China. Customers Applica markets its products primarily through mass merchandisers, but also distributes to
home improvement warehouses, specialty retailers, warehouse clubs, drug and grocery stores,
department stores, television shopping channels, pet supply retailers, beauty supply stores,
catalogers, independent distributors and military post exchange outlets, as well as through
e-commerce websites. In 2004, Applicas top three customers were Wal-Mart Stores, Inc., Target
Corporation and Sally Beauty Supply. These customers accounted for approximately 50% of
consolidated net sales in 2004. In 2003 and 2002, Applicas top three customers were Wal-Mart
Stores, Inc., Target Corporation and Kmart Corporation. These customers accounted for
approximately 44% and 39% of consolidated net sales in 2003 and 2002, respectively. Wal-Mart
accounted for approximately 35% of our consolidated net sales in 2004, 30% in 2003 and 25% in 2002.
Target Corporation accounted for approximately 11% of our consolidated net sales in 2004, 9% in
2003 and 8% in 2002. No other customer has accounted for more than 10% of consolidated net sales
in each such year. -8-




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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 was one of
Applicas top three customers in 2003 and 2002. Kmart emerged from Chapter 11 in May 2003. In
2004, 2003 and 2002, Applica had sales of $30.1 million, $30.2 million and $43.5 million,
respectively, to Kmart Corporation. Additionally, in 2002, Service Merchandise Company, Inc. and Aisenstein & Gordon, Inc., a
distributor, announced that they would cease continuing business operations and commence
liquidation. In January 2003, PHD, Inc., a distributor and significant customer of Applica, was
placed into involuntary bankruptcy, which PHD voluntarily converted to a liquidation under Chapter
11 of the U.S. Bankruptcy Code. Sales, Marketing and Distribution Applicas products are sold principally by an internal sales staff. The sales teams for
Wal-Mart Stores Inc. and Target Corporation are located in Bentonville, Arkansas and Minneapolis,
Minnesota, respectively, to provide full sales operational support to our two biggest customers.
We also have a regional sales office in Chicago, Illinois that manages a national network of sales
management and account executives focused on all other key U.S. retailers. Each sales manager has
primary coverage responsibility for certain retail accounts. We also use independent sales
representatives, primarily in Central America and the Caribbean. Additionally, we use outside
sales representatives for the professional personal care business. This strategy allows us to keep
our costs variable, while giving us access to sales people that are knowledgeable about the
categories. In addition to directing our marketing efforts toward retailers, we sell certain of
our products directly to consumers through infomercials and our internet website. Our internal marketing organization is comprised of three groups:  
    kitchen products;
    home products (which includes pet products and pest control products); and
    personal care products. Each marketing group is responsible for product and category analysis, pricing strategy,
promotions, key cooperative partnerships and overall category development. The marketing groups
develop products with all Applica markets in mind. The Canadian and Latin American marketplaces
are able to take advantage of these key initiatives when appropriate and are staffed to provide
both products and programs unique to their consumer base. We use media advertising, cooperative
advertising and other promotional materials to promote our products and develop brand awareness.
Applica enhances the equity of key brands through design, promotion, quality initiatives and
product functionality based on consumer feedback. The level of promotional effort targeted toward
sales velocity and brand building is determined by the profitability of the category, the strategic
importance of the brand and retailer plans. We distribute most of our products to retailers, including mass merchandisers, department
stores, home improvement stores, warehouse clubs, drug chains, catalog stores and discount and
variety stores. We market our professional personal care appliances and hair care accessories to
beauticians, barbers and stylists primarily through distributors in the United States and through
professional beauty and barber retail stores in the U.S. Our policy is to maintain an inventory base to service the rapid delivery requirements of our
customers. Because of manufacturing lead times and our seasonal sales, it is necessary that we
purchase products and thereby increase inventories based on anticipated sales and forecasts
provided by our customers and our sales personnel. Backlog Applicas backlog consists of commitments to order and orders for our products, which are
typically subject to change and cancellation until shipment. Customer order patterns vary from
year to year, largely because of annual differences in consumer acceptances of product lines,
product availability, marketing strategies, inventory levels of retailers and differences in
overall economic conditions. As a result, comparisons of backlog as of any date in a given year
with backlog at the same date in a prior year are not necessarily indicative of sales for that
entire given year. As of December 31, 2004, Applica had a backlog of approximately $22.3 million
compared to $39.4 million as of December 31, 2003. The decrease in the backlog from 2003 to 2004
is primarily attributable to the sale of our Hong Kong manufacturing operations and related loss of
contract manufacturing, which involved longer lead-times -9-




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for product orders. As of March 7, 2005, Applica had a backlog of approximately $29.1
million. We do not believe that the amount of backlog orders is a significant predictor of our
business. Seasonality Our business is highly seasonal, with operating results varying from quarter to quarter. We
have historically experienced higher revenues in the third and fourth quarters of the fiscal year,
primarily due to increased demand by customers in late summer for back-to-school sales and in the
fall for the holiday season. The majority of our sales occur from August through November. Competition The sale of small household appliances is characterized by intense competition. Competition is
based on price and quality, as well as access to retail shelf space, product design, brand names,
new product introductions, marketing support and distribution strategies. Applica competes with
various domestic and international manufacturers and distributors, some of which have substantially
greater financial and other resources than those of Applica. We believe that our future success
will depend upon our ability to develop and distribute reliable products that incorporate
developments in technology and satisfy customer tastes with respect to style and design. It will
also depend on our ability to market a broad offering of products in each category at competitive
prices. Primary competitive brands in the household appliance market include Hamilton Beach, Procter
Silex, Sunbeam, Mr. Coffee, Oster, General Electric, Rowenta, DeLonghi, Salton, Kitchen Aid,
Cuisinart, Krups, Braun and Rival. In addition, we compete with retailers who use their own
private label brands for household appliances. Primary competitive brands in the personal care
market include Conair, Helen of Troy and Remington and in the home environment market include
Holmes, Patton, Pelonis, Honeywell, Duracraft, Bionaire and Lakewood. Primary competitive brands
in the pet and pest market include Doskocil, Sunbeam, Coleman, Lentek and Mosquito Magnet. Regulation As a manufacturer and distributor of consumer products, we are subject to the Consumer
Products Safety Act, which empowers the Consumer Products Safety Commission to exclude from the
market products that are found to be unsafe or hazardous. Under certain circumstances, the Consumer
Products Safety Commission could require us to repurchase or recall one or more of our products.
In March 2005, Applica, in cooperation with the Consumer Products Safety Commission, voluntarily
recalled approximately 500,000 Black & Decker® BL 5000, BL 5900 and BL 6000 blenders. Costs and
expenses related to this recall are being reimbursed by the supplier who manufactured the blenders. Throughout the world, most federal, state, provincial and local authorities require safety
regulation certification prior to marketing electrical appliances in those jurisdictions. Within
the United States, Underwriters Laboratory, Inc. is the most widely recognized certification body
for electrical appliances. UL is an independent, not-for-profit corporation engaged in the testing
of products for compliance with certain public safety standards. We also use the ETL SEMKO
division of Intertek for certification and testing of compliance with UL standards, as well as
other nation- and industry-specific standards. We endeavor to have our products designed to meet
the certification requirements of, and to be certified in, each of the jurisdictions in which they
are sold. Laws regulating certain consumer products also exist in some cities and states, as well as in
other countries in which we sell our products. We believe that we are in satisfactory compliance
with all of the laws and regulations applicable to us. Certain of the products sold by Applica in the United States are also subject to the Fair
Packaging and Labeling Act. We believe that in addition to complying with the Fair Packaging and
Labeling Act, we comply with the applicable rules and regulations of the Federal Trade Commission
and other federal and state agencies with respect to the content of advertising and other trade
practices. Our pest control products are subject to various regulations, including regulations
promulgated by the U.S. Environmental Protection Agency, as well as laws and regulations of the
states and applicable state agencies. -10-




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Employees As of March 1, 2005, Applica had approximately 500 full-time employees in North America,
approximately 70 full-time employees in Hong Kong, approximately 900 full-time employees in Mexico
and approximately 76 full-time employees in South America and the Caribbean. From time to time,
Applica also uses the services of seasonal employees. In connection with the acquisition of the Black & Decker Household Products Group, Applica
Manufacturing, S. de R.L. de C.V., Applicas Mexican manufacturing subsidiary, assumed the
obligations of Black & Decker, S.A. de C.V. under a collective bargaining agreement with the Single
Workers Union of Black & Decker of the State of Queretaro, C.T.M. covering certain employees at our
manufacturing plant in Queretaro, Mexico. The wage provisions of this collective bargaining
agreement were renegotiated in the first quarter of 2005. To date, the union has not engaged in
strikes or work stoppages against Applica. We believe that our relationship with both union and
non-union employees continues to be satisfactory. In
the second half of 2004, Applica sold its Hong Kong-based manufacturing operations which managed
approximately 11,000 workers. Additionally, during the fourth quarter of 2004, Applica downsized
its Mexican manufacturing operations which resulted in a reduction of approximately 1,500
employees. Other Matters Applicas Annual Reports on Form 10-K, including this Form 10-K, as well as the Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K are filed electronically with the SEC. The
public may read or copy any materials we file with the SEC at the SECs Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains an Internet site
that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC. The address of that site is www.sec.gov. Additionally, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, and amendments to these reports, are available from the Investor Relations
link on our website. The website address is www.applicainc.com. All required reports are made
available on the website as soon as reasonably practicable after they are electronically filed with
the Securities and Exchange Commission. As required by the New York Stock Exchange, copies of the
following documents are also available on our website:  
    the charters of the Audit, Compensation and Corporate Governance and Nominating
Committees of our Board of Directors;
    the Corporate Governance Guidelines of our Board of Directors; and
    our Conflict of Interest and Business Ethics and Code of Conduct policies. In May 2004, Applica submitted to the New York Stock Exchange the CEO certification required
by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual. -11-




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Risk Factors You should carefully consider the following risk factors, together with the other information
contained in this annual report on Form 10-K for the year ended December 31, 2004, in evaluating us
and our business before making an investment decision regarding our securities. If any of the
events or circumstances described in the following risks actually occurs, our business, financial
condition or results of operations could be materially adversely affected. The risks listed below
are not the only risks that we face. Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations. Our Business Could Be Adversely Affected By Complications Resulting From Our Implementation Of
The New ERP System Or Other New Computer Technologies We Install. We are in the process of implementing a significant enterprise resource planning system, or
ERP system, along with other new technology, and complications from the project could cause
considerable disruptions to our business. While significant testing will take place and the rollout
will occur in stages, the period of change from the old system to the new system will involve risk.
Application program bugs, system conflict crashes, user error, data integrity issues, customer
data conflicts and integration issues among our legacy systems all pose potential risks.
Implementing data standards such as UCCnet and RFID, which our largest customers are requiring that
we use, all involve significant effort across the entire organization. We expect this
implementation to be completed in the second quarter of 2005. However, any delays of this
implementation could impact our ability to do business and could result in higher implementation
costs and reallocation of human resources. To support these new technology capabilities, we are building and supporting a much larger and
more complex information technology infrastructure. Increased computing capacity, power
requirements, back-up capacities, broadband network infrastructure and increased security needs are
all potential fail points. We rely on other companies to maintain some of our infrastructure.
Should they fail to perform due to events outside our control, it could affect our service levels
and threaten our ability to conduct business. Natural disasters may disrupt our infrastructure and
our disaster recovery process may not be sufficient to protect against loss. Additionally, our business operations are dependent on our logistical systems, which include
our order management system and our computerized warehouse network. Any interruption in our
logistical systems would impact our ability to procure our products from our factories and
suppliers, transport them to our distribution facilities, store them and deliver them to our
customers on time and in the correct amounts. We Purchase A Large Number of Products From One Supplier. Transition Issues And
Production-Related Risks With This Supplier Could Jeopardize Our Ability To Realize
Anticipated Sales And Profits. In July 2004, we sold our Hong Kong-based manufacturing operations. As part of this
transaction, Applica entered into a long-term supply agreement with an affiliate of the purchaser,
Elec-Tech International (H.K.) Company, Ltd. We purchase a significant number of our products from
Elec-Tech. Our business could be adversely affected by complications resulting from the transition
of our manufacturing operations in China and our transition from primarily a manufacturer of
products to a company that purchases most of its products from third
parties. To allow us to realize sales and operating profits at anticipated levels, Elec-Tech must
deliver high quality products in a timely manner. Among others, the following factors could have a
negative effect on our ability to realize sales and profits:  
    substandard product quality; and
    production schedule realization. We Depend On Third Party Suppliers For The Manufacturing Of Most Of Our Products Which Subjects
Us To Additional Risks. Any inability of our suppliers to timely deliver products or any unanticipated changes in our
suppliers could be disruptive and costly to us. Our ability to select reliable suppliers who
provide timely deliveries of quality products will impact our success in meeting customer demand.
Any significant failure by us to obtain products on a -12-




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timely basis at an affordable cost or any significant delays or interruptions of supply would
have a material adverse effect on us. Most of the products we sell are manufactured by unaffiliated third party suppliers in the Far
East, primarily China. International operations are subject to risks including, among others:  
    labor unrest;
    political instability;
    lack of developed infrastructure;
    longer payment cycles and greater difficulty in collecting accounts;
    restrictions on transfers of funds;
    currency fluctuations;

    import and export duties and quotas;
    changes in domestic and international customs and tariffs;
    unexpected changes in regulatory environments;
    difficulty in complying with a variety of foreign laws;
    difficulty in obtaining distribution and support; and
    potentially adverse tax consequences. The foregoing factors may have a material adverse effect on our ability to increase or
maintain our supply of products, our financial condition or the results of our operations. The Failure Of Our Business Strategy Could Have A Material Adverse Effect On Our Business. As part of our business strategy, we plan to:  
    introduce new products and further develop our brands;
    create long-term cost and quality advantages for our customers; and
    optimize our supply chain. Our strategic objectives may not be realized or, if realized, may not result in increased
revenue, profitability or market presence. Executing our strategy may also place a strain on our
production, information technology systems and other resources. To manage growth effectively, we
must maintain a high level of quality, properly manage our third party suppliers, continue to
enhance our operational, financial and management systems, including our database management,
inventory control and distribution systems, and expand, train and manage our employee base. We may
not be able to effectively manage our growth in any one or more of these areas. We Depend On Purchases From Several Large Customers And Any Significant Decline In These
Purchases Or Pressure From These Customers To Reduce Prices Could Have A Negative Effect On
Our Business. Due to the consolidation of the retail industry, our customer base has become relatively
concentrated. Wal-Mart Stores, Inc., our largest single customer, accounted for approximately 35%
of our 2004 consolidated net sales, 30% of our 2003 consolidated net sales and 25% of our 2002
consolidated net sales. Our top three customers accounted for approximately 50%, 44% and 39% of
consolidated net sales in 2004, 2003 and 2002, respectively. Although we have long-established
relationships with many of our customers, we do not have any long-term supply contracts and
purchases are generally made using individual purchase orders. Additionally, certain of our
larger customers are using their own private label brands on household appliances that compete with
our products. We must receive a continuous flow of new orders from our large, high-volume retail customers;
however, we may be unable to continually meet the needs of our customers. In addition, failure to
obtain anticipated orders or delays or cancellations of orders or significant pressure to reduce
prices from key customers could have a material adverse effect on us. In addition, as a result of the desire of retailers to more closely manage inventory levels,
there is a growing trend among retailers to make purchases on a just-in-time basis. This
requires us to shorten our lead time for -13-




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production in certain cases and more closely anticipate demand, which could in the future
require the carrying of additional inventories or require us to incur additional expenses to
expedite delivery. Our Business Can Be Adversely Affected By Newly Acquired Businesses Or Product Lines. Applica may acquire partial or full ownership in businesses or may acquire rights to market
and distribute particular products or lines of products. The acquisition of a business or of the
rights to market specific products or use specific product names may involve a financial commitment
by Applica, either in the form of cash or stock consideration. In the case of a new license such
commitments are usually in the form of prepaid royalties and future minimum royalty payments.
There is no guarantee that we will acquire businesses and develop products that will contribute
positively to our earnings. Anticipated synergies may not materialize, cost savings may be less
than expected, sales of products may not meet expectations, and acquired businesses may carry
unexpected liabilities. Increases In Costs Of Products Will Reduce Our Profitability. Factors that are largely beyond our control, such as movements in commodity prices for the
specific materials our products are made of, may affect the future cost of our products. As an
example, our products require a substantial amount of plastic. Because the primary resource used
in manufactured plastics is petroleum, the cost and availability of plastic varies to a great
extent with the price of petroleum. Recently, we have experienced increases in prices of
petroleum, as well as steel, aluminum and copper. Our Business Is Very Sensitive To The Strength Of The U.S. Retail Market And Weakness In This
Market Could Adversely Affect Our Business. The strength of the retail economy in the United States has a significant impact on our
performance. Weakness in consumer confidence and poor financial performance by mass merchandisers,
warehouse clubs, department stores or any of our other customers would result in lost sales by us.
A general slowdown in the retail sector, as happened in 2002 and 2003, would result in additional
pricing and marketing support pressures on us. Our Business Could Be Adversely Affected By Currency Fluctuations In Our International
Operations. While we transact business predominantly in U.S. dollars and most of our revenues are
collected in U.S. dollars, a portion of our costs, such as payroll, rent and indirect operational
costs, are denominated in other currencies, such as Mexican pesos and Hong Kong dollars. 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. Our Future Success Requires Us To Develop New And Innovative Products On A Consistent Basis In
Order To Increase Revenues And We May Not Be Able To Do So. We believe that our future success is heavily dependent upon our ability to continue to make
innovations in our existing products and to develop, manufacture and market new products, which
generally carry higher margins. We may not be successful in the introduction, marketing and
manufacture of any new products or product innovations and we may not be able to develop and
introduce in a timely manner innovations to our existing products that satisfy customer needs or
achieve market acceptance. Our Business Involves The Potential For Product Recalls And Product Liability Claims Against Us. As a manufacturer and distributor of consumer products, we are subject to the Consumer
Products Safety Act, which empowers the Consumer Products Safety Commission to exclude from the
market products that are found to be unsafe or hazardous. Under certain circumstances, the Consumer
Products Safety Commission could require us to repurchase or recall one or more of our products.
Additionally, laws regulating certain consumer products exist in some cities and states, as well as
in other countries in which we sell our products, and more restrictive laws and regulations may be
adopted in the future. Any repurchase or recall of our products could be costly to us and could -14-




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damage our reputation. If we were required to remove, or we voluntarily remove, our products
from the market, our reputation could be tarnished and we might have large quantities of finished
products that could not be sold. We also face exposure to product liability claims in the event that one of our products is
alleged to have caused property damage, bodily injury or other adverse effects. Although we
maintain product liability insurance in amounts that we believe are reasonable, we may not be able
to maintain such insurance on acceptable terms, if at all, in the future. In addition, product
liability claims may exceed the amount of insurance coverage. Additionally, we do not maintain
product recall insurance. Finally, our results of operations are susceptible to adverse publicity regarding the quality
or safety of our products. In particular, product recalls or product liability claims challenging
the safety of our products may result in a decline in sales for a particular product. This could
be true even if the claims themselves are ultimately settled for immaterial amounts. We cannot
assure you that this type of adverse publicity will not occur or that product liability claims will
not be made in the future. The Bankruptcy Or Financial Difficulty Of Any Major Customer Or Fluctuations In The Financial
Condition Of The Retail Industry Could Adversely Affect Our Business. We sell our products to distributors and retailers, including mass merchandisers, department
stores and wholesale clubs. The financial difficulties of our customers or the loss of, or a
substantial decrease in, the volume of purchases by a major customer could have a material adverse
effect on us. Additionally, a significant deterioration in the financial condition of the retail
industry in general could have a material adverse effect on our sales and profitability. In 2002 and early 2003, several large retail chains and distributors declared bankruptcy or
liquidated, two of which were large customers of ours. We maintain credit protection on certain of
our significant customers and continually monitor and evaluate our customers credit status. In
addition, we attempt to adjust sales terms as appropriate. Despite these efforts, a bankruptcy
filing or liquidation by a key customer could have a material adverse effect on us. Our Business Could Be Adversely Affected By Retailer Inventory Management. Changes in retailer inventory management strategies could make inventory management more
difficult for us. Because of our significant reliance on unaffiliated third party suppliers in the
Far East, our production lead times are relatively long. Therefore, we generally commit to
production in advance of customer orders. If retailers significantly change their inventory
management strategies or if they or we fail to forecast customer or consumer demand accurately, we
may encounter difficulties in filling customer orders or in liquidating excess inventories, or may
find that customers are canceling orders or returning products. Distribution difficulties may have
an adverse effect on our business by increasing the amount of inventory and the cost of warehousing
inventory. Any of these results could have a material adverse effect on us. If We Are Unable To Renew The Black & Decker® Trademark License Agreement, Our Business Could Be
Adversely Affected. We license the Black & Decker brand for use in marketing small household appliances in North
America, Latin America (excluding Brazil) and the Caribbean. Sales of Black & Decker® branded
products represented approximately 77% of our total revenue in 2004, 70% in 2003 and 62% in 2002.
In October 2004, Applica and The Black & Decker Corporation extended the license agreement through
December 2010. Renewals, if mutually agreed upon, will be for five-year periods and will require
the payment of minimum annual royalties, which are currently $12.5 million. Our Business Could Be Adversely Affected By Changes In Trade Relations With China. A substantial number of our products are imported from The Peoples Republic of China. China
gained Permanent Normal Trade Relations with the United States when it acceded to the World Trade
Organization, effective January 2002. The United States imposes the lowest applicable tariffs on
exports from PNTR countries to the United States. In order to maintain its WTO membership, China
has agreed to several requirements, including the elimination of caps on foreign ownership of
Chinese companies, lowering tariffs and publicizing its laws. China -15-




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may not meet these requirements, it may not remain a member of the WTO, and its PNTR trading
status may not 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 which would adversely impact our sales. The Infringement Or Loss Of Our Proprietary Rights Could Have An Adverse Effect On Our Business. We believe that our rights in owned and licensed names are a significant part of our business
and that our ability to create demand for our products is dependent to a large extent on our
ability to exploit these trademarks. The breadth or degree of protection that these trademarks
afford us may be insufficient, or we may be unable to successfully leverage our trademarks in the
future. The costs associated with protecting our intellectual property rights, including litigation
costs, may be material. We may be unable to successfully assert our intellectual property rights or
these rights may be invalidated, circumvented or challenged. Any such inability, particularly with
respect to names in which we have made significant capital investments, or a successful
intellectual property challenge or infringement proceeding against us, could have a material
adverse effect on us. In addition, because our business strategy is heavily dependent upon the use
of brand names, adverse publicity with respect to products that are not sold by us, but bear the
same brand names, could have a material adverse effect on us. We also rely on unpatented proprietary manufacturing methodologies and others may
independently develop the same or similar technology or otherwise obtain access to our technology.
If we are unable to maintain the proprietary nature of our technologies, our business, financial
condition and results of operations could be materially adversely affected. Additionally, we
distribute products with features for which we have filed or obtained licenses for patents and
design registrations in the United States and in several foreign countries. Our patent applications
may not ever be obtained. If obtained, they may not afford us commercially significant protection
of our technologies. Our Operating Results Are Affected By Seasonality. Our business is highly seasonal with operating results varying from quarter to quarter. We
experience higher revenues in the third and fourth quarters of each fiscal year primarily due to
increased demand by customers for our products in the late summer for back-to-school sales and in
the fall for the holiday season. This seasonality has also resulted in additional interest expense
to us during the third and fourth quarters of each fiscal year due to an increased need to borrow
funds to maintain sufficient working capital to support such increased demand. We Compete With Other Large Companies That Produce Similar Products. The markets for our products are highly competitive. We believe that competition is based upon
several factors, including price, quality, access to retail shelf space, product features and
enhancements, brand names, new product introductions, marketing support and distribution systems.
We compete with established companies, a number of which have substantially greater facilities,
personnel, financial and other resources than we have. We also compete with our retail customers,
who use their own private label brands, and importers and foreign manufacturers of unbranded
products. Some competitors may be willing to reduce prices and accept lower profit margins to
compete with us. As a result of this competition, we could lose market share and sales, or be
forced to reduce our prices to meet competition. Our Debt Agreements Contain Covenants That Restrict Our Ability To Take Certain Actions. Our credit facility and the indenture for our 10% notes impose restrictions that affect, among
other things, our ability to incur debt, pay dividends, sell assets, create liens, make capital
expenditures and investments, and otherwise enter into certain transactions outside the ordinary
course of business. Our credit facility also requires us to maintain a minimum borrowing base
availability and meet certain financial tests. Our ability to continue to comply with these
covenants and restrictions may be affected by events beyond our control. The breach of any of these
covenants or restrictions would result in a default under the credit facility and the indenture, in
which case our lenders could elect to declare all amounts borrowed thereunder, together with
accrued interest, to be due and payable, foreclose on the assets securing the debt or cease to
provide additional revolving loans or letters of credit, which could have a material adverse effect
on our business. -16-




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Government Regulations Could Adversely Impact Our Operations. Throughout the world, most federal, state, provincial and local authorities require
Underwriters Laboratory, Inc. or other safety regulation certification prior to marketing
electrical appliances in those jurisdictions. Most of our products have such certifications.
However, our products may not continue to meet such specifications. Many foreign, federal, state
and local governments also have enacted laws and regulations that govern the labeling and packaging
of products and limit the sale of product containing certain materials deemed to be environmentally
sensitive. A determination that we are not in compliance with such rules and regulations could
result in the imposition of fines or an award of damages to private litigants. Additionally, many of our pest control products are subject to laws and regulations by state
and federal environmental agencies. A determination that we are not in compliance with such rules
and regulations could result in the prohibition of sales of our products and the imposition of
fines. 
 Item 2. Properties The following table sets forth the principal operating facilities of Applica: Location
    
    Description
    
    Area (Sq. Feet)Miramar, Florida
    
    Headquarters, general administration,
sales office, engineering offices
    
    110,000 Leased(1)Queretaro, Mexico
    
    Manufacturing, warehouse and office
    
    290,000 OwnedLittle Rock, Arkansas
    
    Warehouse and distribution
    
    562,000 LeasedLittle Rock, Arkansas
Memphis, Tennessee
    
    Warehouse and distribution
Warehouse and distribution
    
    245,000 Leased
325,000(2)Toronto, Canada
    
    Sales office, warehouse and distribution
    
    114,000 Leased
   (1)
    In October 2004, Applica sold its executive offices located in Miami Lakes, Florida and
relocated to a leased facility in Miramar, Florida.(2)
    These facilities are managed by a third party distribution provider. We lease additional warehouse and office space in the United States, Hong Kong, Canada and
Latin America pursuant to long and short-term contracts. We also contract with third party
distribution providers that provide full service warehousing and shipping services. Applica has
such arrangements in Miami, Tennessee, California, Puerto Rico, Mexico, Colombia, Venezuela, Chile,
Peru, Argentina and Central America. Service contracts are typically short-term in nature, with
fixed pricing, and provide for specific performance requirements related to customer service. We believe our current facilities are adequate to meet our needs in the foreseeable future. If
necessary, we may, from time to time, acquire, sell or downsize current facilities or lease
additional facilities for warehousing and/or other activities. Applica closed its Shelton, Connecticut office in the third quarter of 2002 and continues to
pursue sublease arrangements for the 100,000 square feet of office space located there.
Additionally, in the first quarter of 2003, Applica consolidated its sales office and warehouse
space in Toronto, Canada. In the third quarter of 2004, Applica sold
its Hong Kong-based manufacturing
operations and transferred control of the related manufacturing facilities. 
 Item 3. Legal Proceedings Applica is subject to legal proceedings, products liability claims and other claims that arise
in the ordinary course of our business. In the opinion of management, the amount of ultimate
liability, if any, in excess of applicable insurance coverage, is not likely to have a material
effect on the financial condition, results of operations or liquidity of Applica. However, as the
outcome of litigation or other claims is difficult to predict, significant changes in the estimated
exposures could occur. -17-




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Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of Applicas security holders during the fourth quarter of
the year ended December 31, 2004. -18-




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PART II 
 Item 5. Market for the Registrants Common Stock and Related Stockholder Matters Applicas common stock, $0.10 par value, is listed for trading on the New York Stock Exchange
under the symbol APN. The following tables set forth, for the periods indicated, the range of
high and low closing prices for the common stock as reported on the New York Stock Exchange: Closing PriceHigh
    
    
    Low2003First quarter
    
    $
    5.43
    
    
    $
    4.26Second quarter
    
    $
    8.66
    
    
    $
    4.85Third quarter
    
    $
    9.74
    
    
    $
    6.05Fourth quarter
    
    $
    8.50
    
    
    $
    6.422004First quarter
    
    $
    11.24
    
    
    $
    7.29Second quarter
    
    $
    14.26
    
    
    $
    8.50Third quarter
    
    $
    8.91
    
    
    $
    3.65Fourth quarter
    
    $
    6.05
    
    
    $
    3.95
 At March 15, 2005, there were approximately 850 holders of record of our common stock. The
number of holders of record of the common stock includes nominees of various depository trust
companies for an undeterminable number of individual stockholders. Dividends. We are prohibited from declaring or paying cash dividends on our capital stock
under the terms of our debt agreements. We did not pay any common stock dividends in 2004 or 2003,
and we do not anticipate paying dividends in the foreseeable future. We intend to retain future
earnings to finance the expansion of our operations and for general corporate purposes. -19-




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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. 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands, except per share data)Statement of Operations:Net sales
    
    $
    726,733
    
    
    $
    640,639
    
    
    $
    727,356
    
    
    $
    727,044
    
    
    $
    748,751Equity in net earnings
(loss) of joint ventures
    
    $
    
    
    
    $
    55,570
    (2)
    
    $
    (1,498
    )
    
    $
    (128
    )
    
    $
    (777
    )Earnings (loss) before
income taxes and cumulative
effect of change in
accounting principle
    
    $
    (73,503
    )
    
    $
    25,370
    
    
    $
    9,878
    
    
    $
    (24,292
    )
    
    $
    (22,758
    )Income tax expense (benefit)
    
    $
    59,451
    
    
    $
    10,147
    
    
    $
    4,826
    
    
    $
    4,146
    
    
    $
    (1,542
    )Cumulative effect of change
in accounting principle, net
of tax benefit of $42,447
    
    
    
    
    
    
    
    
    
    $
    (78,829
    )
    
    
    
    
    
    
    Effective tax rate
    
    
    (80.9
    )%
    
    
    40.0
    %
    
    
    48.9
    %
    
    
    (17.1
    )%
    
    
    6.8
    %Net earnings (loss)
    
    $
    (132,954
    )(1)
    
    $
    15,223
    (2)(3)
    
    $
    (73,777
    )(4)
    
    $
    (28,438
    )(5)
    
    $
    (21,216
    )(6)Balance Sheet:Working capital
    
    $
    116,390
    
    
    $
    115,767
    
    
    $
    137,706
    
    
    $
    137,415
    
    
    $
    276,981Current ratio
    
    
    1.6
    
    
    
    1.7
    
    
    
    1.8
    
    
    
    1.7
    
    
    
    3.3Property, plant and
equipment, net
    
    $
    38,327
    
    
    $
    70,389
    
    
    $
    76,963
    
    
    $
    82,337
    
    
    $
    78,200Total assets
    
    $
    375,937
    
    
    $
    478,836
    
    
    $
    521,665
    
    
    $
    633,684
    
    
    $
    707,935Long-term debt and other
long term liabilities
    
    $
    62,012
    
    
    $
    75,261
    
    
    $
    140,301
    
    
    $
    135,017
    
    
    $
    260,147Shareholders equity
    
    $
    110,970
    
    
    $
    237,613
    
    
    $
    219,128
    
    
    $
    293,939
    
    
    $
    324,474Per Share Data:Earnings (loss) per common
share  basic
    
    $
    (5.55
    )(1)
    
    $
    0.65
    (2)(3)
    
    
    ($3.15
    )(4)
    
    $
    (1.23
    )(5)
    
    $
    (0.92
    )(6)Earnings (loss) per common
share  diluted
    
    $
    (5.55
    )(1)
    
    $
    0.63
    (2)(3)
    
    
    ($3.10
    )(4)
    
    $
    (1.23
    )(5)
    
    $
    (0.92
    )(6)Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Book value at year end
    
    $
    4.60
    
    
    $
    10.03
    
    
    $
    9.33
    
    
    $
    12.61
    
    
    $
    14.06Return on average equity
    
    
    (76.3
    )%
    
    
    6.70
    %
    
    
    (28.8
    )%
    
    
    (9.2
    )%
    
    
    (6.4
    )%
   (1)
    During 2004, Applica recorded:  
    an impairment charge of $62.8 million as the result of its annual fair value
assessment as of June 30, 2004 of goodwill in accordance with SFAS 142;
    income tax expense of $57.8 million primarily related to an increase in
valuation allowances against net deferred tax assets;
    restructuring charges of $9.2 million, primarily in connection with the
downsizing of our Mexican manufacturing facility; -20-




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
    termination benefits of $9.2 million related to resignation of Applicas
Chairman of the Board and the termination of certain other employment and
consulting agreements and relationships; and
    a net gain on the sales of a subsidiary, a division and certain property of $3.9
million.  (2)
    During 2003, Applica recorded equity in net earnings of its joint venture in which
Applica owns a 50% interest of $55.6 million.(3)
    Also during 2003, Applica recorded:  
    an impairment charge of $7.2 million in connection with an intangible asset
related to the Black & Decker® trademark;
    expenses of $7.0 million related to the restructuring of the Mexican and
Chinese manufacturing facilities;
    restructuring and other charges of $4.7 million related to accrued rental
expenses at the Shelton, Connecticut facility, which was closed in the third
quarter of 2002;
    a reversal of $4.1 million in product recall related expenses recorded in cost
of sales; and
    expenses in an aggregate amount of $3.9 million related to the early
extinguishment of $65.0 million of our 10% notes.  (4)
    In 2002, Applica recorded:  
    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) to reduce the carrying value of goodwill to
its implied fair value, which was recorded pursuant to the provisions of SFAS 142
Goodwill and Other Intangible Assets; and
    restructuring expenses of $10.6 million relating to the infrastructure
consolidation.  (5)
    In 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 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.  (6)
    Includes primarily non-cash charges totaling $37.7 million in 2000. Such charges
included:  
    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. -21-




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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 and distributor of a broad range of branded small household appliances.
Applica markets and distributes 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®, and its own brand names, such as Windmere®, LitterMaid®, Belson® and Applica®.
Applicas customers include mass merchandisers, specialty retailers and appliance distributors
primarily in North America, Latin America and the Caribbean. Applica also operates a manufacturing
facility in Mexico. The small electric consumer goods sector of the household appliance industry is a mature
industry characterized by intense competition based on price, quality, retail shelf space, product
design, trade names, new product introduction, marketing and distribution approaches. Applica
competes with both domestic and international distributors and manufacturers primarily at mid-tier
price points. We continuously have to balance the cost of our products, without compromising quality, with
the price constraints from our customers. The prices of raw materials such as copper, steel and
plastics have significantly increased in recent years and are expected to continue to be high in
the foreseeable future. This has negatively impacted our gross margins by increasing the price we
pay for our products and is expected to continue to negatively impact our margins in 2005. We have been focused on making changes to combat the margin pressures resulting from the
combination of the inflation of raw materials prices and the deflationary pressures from the retail
environment. The most significant steps taken recently were the downsizing and ultimate sale of our
manufacturing operations in Hong Kong, the downsizing of our manufacturing operations in Mexico,
the establishment of strategic sourcing partners and joint product development relationships. We
are also continuing to focus on innovative products with proprietary technologies, design and
higher margins. We continue to rationalize our Mexican manufacturing operations. In 2004, we shifted a
significant amount of production from Mexico to third parties in China. As part of the
rationalization, we also plan to sell the building housing our factory in Mexico. In 2004, we
began to reduce our Mexican manufacturing capacity to reflect only the volume needed for the
Mexican marketplace, which will continue into 2005. Additionally, in late 2004, we initiated an annual product and customer profitability review.
Through this process, management identifies products sold to customers that do not meet Applicas
product profitability threshold. Once those products are identified, management either requests a
price increase from the applicable customer or cost reductions from the applicable supplier. If
the combination of price increases and cost reductions does not increase the products
profitability to meet the threshold, Applica will not offer such product to the customer. This
initiative will significantly reduce the number of products we offer in 2005 and beyond. As a
result, we expect our sales volume to decrease in 2005; however, this process is expected to result
in higher gross margin percentages. Outlook This section contains forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Such forward-looking statements are subject to
certain risks, uncertainties or assumptions and may be affected by certain other factors, including
the specific factors set forth in Risk Factors in Item 1. Business above. You should carefully
consider these risk factors, together with the other information contained in this annual report on
Form 10-K for the year ended December 31, 2004, in evaluating us and our business before making an
investment decision regarding our securities. -22-




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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 net sales for the year ended December 31, 2005 will be between
$630 million and $650 million. The decrease in sales will primarily result from:  
    the elimination of sales of certain products identified in our product and
customer profitability review that did not meet our profitability threshold;
    the loss of a significant portion of our contract manufacturing sales as the
result of the sale of our Hong Kong-based manufacturing operations in July 2004
(which sales totaled $14.2 million in 2004); and
    the sale of the Jerdon hotel and hospitality division in October 2004 (which had
sales of $8.6 million in 2004). Earnings for 2005 are expected to be between $0.35 and $0.45 per diluted share. Management anticipates that gross margins will be approximately 31.5% in 2005. Management
expects gross margins to increase in 2005 as the result of:  
    the product and customer profitability review initiated for 2005; and
    the continued shift of the manufacture of products from Mexico to China. The gross margin guidance includes continued Mexican manufacturing restructuring costs of up
to $7.0 million. See additional information on the Mexican restructuring below. Management expects that selling, general and administrative operating expenses will decrease
to approximately 28% of sales as the result of:  
    improvements in freight and warehousing resulting from lower sales and lower
average inventory, as well as improved product flow as we complete our
manufacturing-to-sourcing transition;
    a planned decrease in national advertising; and
    lower legal and consulting fees. Management expects to record earnings of approximately $3.0 to $4.0 million relating to the
receipt of escrowed funds from the sale of an investment by a joint venture, which was 50% owned by
Applica and which has been liquidated. Management anticipates having depreciation expense of approximately $11.0 million in 2005 and
amortization expense of approximately $2.3 million. Management anticipates that interest expense will increase to approximately $10.5 million for
2005 as the result of higher interest rates. Management anticipates that the effective tax rate for 2005 will be 30%. Capital expenditures are planned to be approximately $13.0 million, driven by new products and
the final stages of our information technology/ERP initiative. Management expects that capital
expenditures for our Mexican manufacturing operations will decrease in 2005 as we continue to
downsize our manufacturing operations in Mexico. For the quarter ended March 31, 2005, we believe that sales will be between $120 million and
$125 million and there will be a loss per share of $0.20 to $0.25. -23-




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Mexico Restructuring. We continue to rationalize our Mexican manufacturing operations.
Management will continue to downsize the Mexican manufacturing facilities and expects to incur up
to an additional $7.0 million in restructuring costs in 2005, of which up to $3.0 million could be
cash severance costs. As part of such rationalization, we plan to sell the building housing our
factory in Mexico, which we expect will result in a gain over the current book value. The expected
restructuring costs set forth above do not reflect the expected gain on the sale of the building. As part of our continued downsizing efforts in Mexico, we will be producing the next
generation of the Home Café coffee maker at a third party supplier in China. As part of the
transition, we pre-built all of the first generation Home Café coffee maker needed in 2005 in the
first two months of 2005. As a result, in the first quarter, we incurred a portion of the $7.0
million in restructuring cost, which was related to the Home Café production and which did not
qualify for accrual at year end. The machinery and equipment related to the Home Café production
in Mexico and excess raw materials inventory were reduced to their fair value as of December 31,
2004 and a corresponding impairment charge was recorded in the fourth quarter of 2004. American Jobs Creation Act. We are still evaluating the impact to Applica from the
recent enactment of the American Jobs Creation Act of 2004. This law provides for a temporary
dividends received deduction on reinvested dividends from controlled foreign corporations to the
U.S. Applica repatriated $78.4 million during the fourth quarter of 2004. Certain of these
dividends may be excluded from taxable income pursuant to the Act and may result in future tax
benefits. Blender Recall. In March 2005, Applica, in cooperation with the Consumer Products
Safety Commission, voluntarily recalled approximately 500,000 Black & Decker® branded BL 5000, BL
5900 and BL 6000 blenders. Costs and expenses related to this recall are being reimbursed by the
supplier who manufactured the blenders. Use of Estimates and Critical Accounting Policies 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 included in Schedule I to
this Annual Report on Form 10-K. 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 our
financial statements. Applica believes that of its critical accounting policies, the following
had a significant effect on the operations for 2004 and 2003: Income Taxes. Applica is 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 and 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. 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. Applica records a valuation allowance to reduce its deferred tax assets to the amount that
Applica believes will more likely than not be realized. While Applica has considered future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event we were to determine that we would not be able to realize all
or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to tax expense in the period such determination is made. Likewise, should we
determine that we would be able to realize our deferred tax assets in the future in excess of our
net recorded amount, an adjustment to the deferred tax assets would increase net income in the
period such determination is made. Collectibility of Accounts Receivable. 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 factors including: -24-




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
    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. Such write-offs may not be included in the
allowance for doubtful accounts at December 31, 2004, resulting in a charge to income in the period
such determination is made. Conversely, if the financial condition of our customers were to
improve or our judgment regarding their financial condition was to change positively, a reduction
in the allowances may be required resulting in an increase in income in the period such
determination is made. Inventory. Applica values inventory at the lower of cost or market, using the
first-in, first-out (FIFO) method, and regularly reviews the book value of discontinued product
lines and stock keeping units (SKUs) to determine if these items are properly valued. If market
value is less than cost, Applica writes down the related inventory to the estimated net realizable
value. Applica regularly evaluates the composition of inventory to identify slow-moving and
obsolete inventories to determine if additional write-downs are required. This valuation requires
significant judgment from management as to the saleability of its inventory based on forecasted
sales. It is particularly difficult to judge the potential sales of new products. Should the
forecasted sales not materialize, it would have a significant impact on Applicas result of
operations and the valuation of its inventory, resulting in a charge to income in the period such
determination is made. Product Liability Claims and Litigation. Applica is subject to lawsuits and other
claims related to product and other matters that are being defended and handled in the ordinary
course of business. We maintain accruals for such costs that may be incurred, which are determined
on a case-by-case basis, taking into consideration the likelihood of adverse judgments or outcomes,
as well as the potential range of probable loss. The accruals are monitored on an ongoing basis and
are updated for new developments or new information as appropriate. With respect to product
liability claims, Applica estimates the amount of ultimate liability in excess of applicable
insurance coverage based on historical claims experience and current claim estimates, as well as
other available facts and circumstances. We believe that the amount of ultimate liability of our current claims and 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,
unfavorable significant changes in the estimated exposures could occur resulting in a charge to
income in the period such determination is made. Conversely, if favorable changes in the estimated
exposures occur, a reduction in the accruals may be required resulting in an increase in income in
the period such determination is made. 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.
Applica may also test earlier if facts and circumstances indicate that there may be a potential
impairment. The test for impairment is based upon a number of factors, including operating
results, business plans and projected future cash flows. Applica wrote off its remaining goodwill
of $62.8 million in the second quarter of 2004. 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. -25-




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##### Table of Contents



Other Estimates. 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. 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. -26-




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##### Table of Contents



Results of Operations The operating results of Applica expressed as a percentage of sales are set forth in the table
below: Year Ended December 31,2004
    
    
    2003
    
    
    2002Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Cost of goods sold
    
    
    69.7
    
    
    
    70.6
    
    
    
    68.6Restructuring charges
    
    
    1.3
    
    
    
    1.1
    
    
    
    Product recall
    
    
    
    
    
    
    (0.6
    )
    
    
    Gross profit
    
    
    29.0
    
    
    
    28.9
    
    
    
    31.4Selling, general and administrative expenses:Operating expenses
    
    
    28.6
    
    
    
    29.1
    
    
    
    26.3Termination benefits
    
    
    1.3
    
    
    
    
    
    
    
    Gain on the sale of subsidiary, division and property, net
    
    
    (0.5
    )
    
    
    
    
    
    
    Restructuring and other (credits) charges
    
    
    (0.1
    )
    
    
    0.7
    
    
    
    1.5Impairment of goodwill
    
    
    8.6
    
    
    
    
    
    
    
    Impairment of intangible asset
    
    
    
    
    
    
    1.1
    
    
    
    Operating (loss) earnings
    
    
    (8.9
    )
    
    
    (2.0
    )
    
    
    3.7Other expense
    
    
    1.2
    
    
    
    2.7
    
    
    
    2.1(Loss) earnings before equity in net (loss) earnings of joint
venture and income taxes
    
    
    (10.1
    )
    
    
    (4.7
    )
    
    
    1.6Equity in net earnings (loss) of joint ventures
    
    
    
    
    
    
    8.7
    
    
    
    (0.2
    )(Loss) earnings before income taxes and cumulative effect
of change in accounting principle
    
    
    (10.1
    )
    
    
    4.0
    
    
    
    1.4Income tax provision
    
    
    8.2
    
    
    
    1.6
    
    
    
    0.7(Loss) earnings before cumulative effect of change in
accounting principle
    
    
    (18.3
    )
    
    
    2.4
    
    
    
    0.7Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (10.8
    )Net (loss) earnings
    
    
    (18.3
    )%
    
    
    2.4
    %
    
    
    (10.1
    )%
 Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Net Sales. Sales increased by $86.1 million to $726.7 million, an increase of 13.4% over
2003. Sales to Wal-Mart Stores, Inc., our largest customer, accounted for 34.7% and 29.8% of
total sales for the 2004 and 2003 periods, respectively. Sales for the Household Product segment for the year ended December 31, 2004 increased from
$543.3 million to $645.3 million. For the year ended December 31, 2004:  
    sales of Black & Decker branded products increased by $108.2 million to $556.6 million; and
    sales of Littermaid® branded products increased by $3.6 million to $37.6 million. In 2004, sales of Black & Decker branded products increased as the result of (1) the introduction
of several new products; including the Home Café single-cup brewing system, which was co-developed
with The Procter & Gamble Company, and (2) the success of Lids Off Jar Opener and new items
introduced under the Gizmo sub brand. Additionally, starting in the second quarter of 2004, the
majority of our pest products were marketed under the Black & Decker® brand. These increases were
offset by decreases in sales of Windmere®, Weitech (pest
control) and other branded products of $9.8 million to $51.1 million. Sales for the Professional Personal Care segment for the year ended December 31, 2004
decreased from $69.0 million to $64.9 million over the 2003 period. This decrease was primarily
the result of the sale of the Jerdon -27-




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hotel and hospitality business in October 2004. Sales of
products by the Jerdon division totaled $8.6 million in 2004 and $13.3 million in 2003. Sales for the Manufacturing segment for the year ended December 31, 2004 decreased from $291.5
million to $191.4 million over the 2003 period. In 2004, the
intersegment sales decreased from
$263.1 million to $174.9 million. In 2004, contract manufacturing decreased from $28.2 million to
$17.7 million, primarily as the result of the sale of our Hong
Kong-based manufacturing operations in
July 2004. Contract manufacturing sales from our Hong Kong manufacturing operations were $14.2
million in 2004 and $24.6 million in 2003. Restructuring Charges.In 2004, Applica incurred restructuring charges of $9.2 million,
primarily relating to the continued downsizing of its Mexican manufacturing operations. We
continue to rationalize our Mexican manufacturing operations. Management will continue to downsize
the Mexican manufacturing facilities and expects to incur up to an additional $7.0 million in
restructuring costs in 2005. As part of such rationalization, we plan to sell the building housing
our factory in Queretaro, Mexico, which we expect will result in a gain over the current book
value. Additionally, we continue to reduce our Mexican manufacturing capacity to reflect only the
volume needed for the Mexican marketplace. We expect these events to occur within the next 12
months, however, not necessarily in the same quarter. In 2003, Applica incurred restructuring charges relating to its reduction of fixed costs and
capacity at its Chinese and Mexican manufacturing operations. We reduced the labor force in our
Chinese facilities and closed one factory, which resulted in restructuring costs of approximately
$3.7 million. Additionally, Applica incurred approximately $3.3 million in restructuring costs
associated with its downsizing of its Mexican manufacturing operations related to the movement of
production of irons and toaster ovens to lower cost suppliers in the Far East. Product Recall Expenses.In February 2002, Applica voluntarily recalled approximately 2.1
million Black & Decker® branded T1200 and T1400 toasters. 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. In March 2005, Applica, in cooperation with the Consumer Products Safety Commission,
voluntarily recalled approximately 500,000 Black & Decker® branded BL 5000, BL 5900 and BL 6000
blenders. Costs and expenses related to this recall are being reimbursed by the supplier who
manufactured the blenders. Gross Profit. Applicas gross profit increased by $25.5 million to $210.8 million in 2004 as
the result of higher sales volume. Applicas gross profit margin as a percentage of sales
increased slightly to 29.0% for the year ended December 31, 2004 as compared to 28.9% for 2003. The
gross profit margin increase was primarily attributed to:  
    the movement of production of core products from our manufacturing facility in
Mexico to third parties in China;
    a better overall product mix; and
    lower unabsorbed costs at our manufacturing facilities, primarily in the first
half of 2004, due to higher production levels compared to the same period in 2003. The increase was offset primarily by:  
    restructuring charges of $9.2 million incurred in 2004, primarily relating to
our downsizing of our Mexican and Chinese manufacturing operations; and
    higher prices for raw materials. -28-




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Selling, General and Administrative Expenses. Operating Expenses. Operating expenses for Applica increased $21.5 million, or 11.5%,
for the year ended December 31, 2004 to $208.1 million as compared to 2003. The following factors
contributed to the increase in operating expenses in 2004 compared to 2003:  
    increases of $14.2 million in freight and distribution expenses;
    increases of $10.8 million in royalty expenses, primarily related to Black &
Decker® royalties; and
    increases of $4.7 million in advertising and promotional expenses. The increase in freight and distribution expenses was primarily the result of late product
deliveries from our factories and suppliers which resulted in the need to expedite orders directly
to our customers nationwide at a significant premium. Additionally, increases in sales volume and
fuel costs contributed to the increase. These increases were partially offset by:  
    lower amortization of intangible assets of $7.1 million, primarily related to
the write-off of the unamortized book value of an intangible asset related to the
Black & Decker® tradename in the fourth quarter of 2003; and
    a decrease in legal expenses of $3.2 million, primarily as the result of the
significant legal expenses related to the Tilia litigation , which was settled in
2004. Operating expenses decreased as a percentage of sales to 28.6% in 2004 from 29.1% in the 2003
period primarily as the result of higher sales volume in 2004 leveraging fixed costs. Termination Benefits. In the third quarter of 2004, Applica incurred termination
costs of approximately $9.2 million related to the resignation of Applicas Chairman of the Board
and the termination of certain other employment and consulting agreements and relationships. Gain on the Sale of Subsidiary, Division and Property. In the third quarter of 2004,
we sold Applica Durable Manufacturing Limited, our Hong Kong manufacturing subsidiary, and recorded
a loss on the sale of approximately $0.8 million, primarily from the realization of cumulative
foreign currency translation adjustments. In the fourth quarter of 2004, we sold the Jerdon hotel
and hospitality division and recorded a gain on sale of approximately $3.4 million. Also in the
fourth quarter, we sold our executive offices located in Miami Lakes, Florida, which resulted in a
gain of approximately $1.3 million. Restructuring and Other (Credits) Charges. In the first quarter of 2004, we settled
an outstanding litigation matter for $125,000 and reversed the remaining accrual of $563,000
related to such litigation. 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. Impairment of Goodwill.As of June 30, 2004, we performed our annual fair value
assessment of goodwill, with the assistance of an independent third party valuation group, and
determined that the implied value of Applicas goodwill was zero, resulting in a non-cash
adjustment in the carrying value of goodwill of $62.8 million. The impairment charge was included
as a component of selling, general and administrative expenses in the consolidated statement of
operations of 2004. In accordance with SFAS No. 142 Goodwill and Other Intangible Assets, the testing for
impairment of goodwill is performed in two steps: (1) potential impairment is identified by
comparing the fair value of a reporting unit with its carrying amount (including goodwill); and (2)
if fair value is less than the carrying amount, an impairment loss is estimated as the excess of
the carrying amount of the goodwill over its implied value. The impairment of goodwill was primarily due to lower than expected cash flows, resulting from
lower-than-anticipated gross profit margins attributable to increased costs of raw materials and
higher transportation costs, which are expected to continue for the foreseeable future. The
implied fair value of goodwill was estimated using a combination of market multiples, comparable
transactions and discounted cash flow methodologies. -29-




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The implied fair value of goodwill was determined by allocating Applicas fair value to all of
Applicas assets and liabilities. Any excess of fair value over the amount allocated represented
implied fair value of goodwill. The allocation process was performed solely for purposes of testing goodwill for impairment.
Thus, the carrying amounts of assets and liabilities, other than
goodwill, were not affected. The fair value of the individual assets is the amount at which an asset could be bought or
sold in a current transaction not involving a forced or liquidating sale. The fair value of the
individual liabilities is the amount at which a liability could be incurred or settled in a current
transaction not involving a forced or liquidating sale. In our process of allocating the fair value to Applicas tangible assets, primarily accounts
receivable, inventory and manufacturing property, plant and equipment in Mexico, and identifiable
intangible assets (i.e., customer relationships and tradenames) and liabilities, we determined that
the implied value of goodwill (the residual) was zero. 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 valuation analysis 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 began to decrease significantly, which decrease 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 valuation 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 valuation analysis, management believed that there was 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 was
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 valuation analysis, the impairment charge was classified as a component of income from
operations. Interest Expense. Interest expense decreased by $4.2 million, or 30.0%, to $9.8 million in
2004 as compared to $14.0 million in 2003 as the result of lower debt levels and lower average
interest rates. The lower debt levels resulted from the redemption of $65.0 million of our 10%
Senior Subordinated Notes due 2008 during the second half of 2003 and the redemption of $4.25
million in February 2004. Loss On Early Extinguishment of Debt. In February 2004, Applica redeemed $4.25 million of our
10% notes. The notes were redeemed at prices between 103.25% and 103.33% of the principal amount,
plus accrued interest. The cost of the redemption included $187,000 in prepayment premiums and the
pro-rata write-off of deferred financing costs related to the redemption. In July, October and
November 2003, Applica redeemed a total of $65 million of the notes. The notes were redeemed at
prices between 103% and 105% of the principal amount, plus accrued interest. The cost of the 2003
redemption included $2.8 million in prepayment premiums and $1.1 million related to the pro-rata
write-off of deferred financing costs. -30-




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Equity in Net Earnings of Joint Venture.In July 2003, ZonePerfect Nutrition Company, an
investment held by a partnership that was 50% owned by Applica, was sold for approximately $160.0
million. Such sale resulted in an increase in net earnings of joint ventures of $55.6 million in
2003. A portion of the sale price was being held in escrow as of December 31, 2004 and 2003, $8.4
million of which is owed to Applica. Half of this amount ($4.2 million) was recorded as part of
the increase in net earnings of joint ventures in 2003. Management believed that the collection of
the remaining $4.2 million was uncertain and, therefore, such amount was not recorded into income
as of December 31, 2004. In July 2003, the general partner of the partnership began the process of dissolving the
partnership by distributing the remaining individual investments to the partners. The partnership
was dissolved in the third quarter of 2004. Vendor Consideration.Applicas supplier of vacuum packaging products has agreed to reimburse
us $4.0 million for a portion of the costs of litigating a patent infringement matter with Tilia
International, Inc. The reimbursement is evidenced by an unsecured note receivable bearing
interest at 6% per annum and is payable in equal quarterly installments of $200,000, plus interest,
over five years. We believe that the ultimate collection of the note receivable is not assured and
is dependent on Applicas future purchases from the supplier. Therefore, the amount collected on
the note receivable is recorded on the cash basis over the five-year period as a reduction of
future product costs. Applica recorded $380,000 (principal plus interest) as a reduction of cost
of goods sold for the year ended December 31, 2004. Taxes. Applicas tax provision is based on an estimated annual aggregation of the taxes on
earnings of each of its foreign and domestic operations. For 2004, Applica incurred a tax expense
of $59.5 million, which included the impact of an impairment of goodwill, a provision for
previously untaxed foreign earnings, and additional valuation allowances on deferred tax assets.
For 2003, Applica incurred a tax expense of $10.1 million. In the second quarter of 2004, Applica changed its position regarding the permanent investment
of certain foreign undistributed earnings, primarily as a result of its decision to exit its Hong
Kong-based manufacturing operations. In the fourth quarter of 2004, Applica repatriated $78.4
million of the $85.5 million of the previously untaxed earnings for which a related tax expense of
$24.0 million was recorded in the second quarter of 2004. SFAS No. 109, Accounting for Income Taxes requires that a valuation allowance be established
when it is more likely than not that all or a portion of a deferred tax asset will not be realized.
A review of all available positive and negative evidence needs to be considered, including a
companys current and past performance, the market environment in which the company operates, the
utilization of past tax credits, length of carryback and carryforward periods. Forming a
conclusion that a valuation allowance is not needed is difficult when there is negative objective
evidence such as cumulative losses in recent years. Cumulative losses weigh heavily in the overall
assessment. As a result of its quarterly reviews, Applica concluded that it was appropriate to
record additional valuation allowances of $75.2 million in 2004. Applica expects to realize the
benefits of the remaining net deferred tax assets of approximately $11.2 million as of December 31,
2004, primarily from identified tax planning strategies. We expect to continue to maintain a valuation allowance on certain future tax benefits until
an appropriate level of profitability is reached or we are able to develop tax strategies which
would enable us to conclude that it is more likely than not that a portion of our net deferred tax
assets would be realized. We are still evaluating the impact on Applica of the recent enactment of the American Jobs
Creation Act of 2004. This law provides for a temporary dividends received deduction on reinvested
dividends from controlled foreign corporations to the U.S. Applica repatriated $78.4 million
during the fourth quarter of 2004. Certain of these dividends may be excluded from taxable income
pursuant to the Act and may result in future tax benefits. For additional information regarding taxes, see Note L of the Notes to Consolidated Financial
Statements included in Schedule I of this Annual Report on Form 10-K. Earnings Per Share. Weighted average basic shares for the periods ended December 31, 2004 and
2003 were 23,974,664 and 23,572,857, respectively. Included in diluted shares is the dilutive
effect of common stock -31-




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equivalents relating to stock options of 424,703 for the year ended December
31, 2003. All common stock equivalents have been excluded from the diluted per share calculations
in 2004 because their inclusion would have been anti-dilutive. Potential common stock equivalents
at December 31, 2004 and 2003 were 2,755,207 and 1,494,685 with exercise prices ranging from $3.63
to $31.69 per share and $6.75 and $31.69 per share, respectively. 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. 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, -32-




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Applica had outstanding receivables of
approximately $4.3 million, which were fully reserved at December 31, 2003. Restructuring Charges.In 2003, Applica incurred restructuring charges relating to the
reduction of fixed costs at its Hong Kong-based and Mexican manufacturing facilities. We reduced
the labor force in the Chinese facilities managed by Applica Durable and closed one factory, which
resulted in restructuring costs of approximately $3.7 million. Additionally, Applica incurred approximately $3.3 million in restructuring
costs associated with its downsizing of its Mexican manufacturing operations to move production of
certain items to China. 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® branded T1200 and T1400 toasters. 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;
    $7.0 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. 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. Restructuring 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 -33-




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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 and 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 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 valuation 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 valuation
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. 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 included $2.8
million in prepayment premiums and approximately $1.1 million related to the write-off of deferred
financing costs. 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
venture increased from a $1.5 million loss in 2002 to earnings 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 that was owned 50% by
Applica. 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. -34-




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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 L 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. Weighted average 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. Financial Condition Cash Requirements At December 31, 2004, our contractual obligations and commercial commitments were as follows: Payment due in:2006 to
    
    
    2008 to
    
    
    More thanContractual Obligations
    
    Total
    
    
    2005
    
    
    2007
    
    
    2009
    
    
    5 years(In thousands)Debt Obligations
    
    $
    153,463
    
    
    $
    3,914
    
    
    $
    
    
    
    $
    149,549
    
    
    $
    Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    23,264
    
    
    $
    5,432
    
    
    
    7,122
    
    
    
    4,379
    
    
    
    6,331Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Licenses
    
    
    76,350
    
    
    
    12,650
    
    
    
    25,300
    
    
    
    25,300
    
    
    
    13,100Other Long-Term
Liabilities Reflected on
the Balance Sheet
    
    
    1,004
    
    
    
    1,004
    
    
    
    
    
    
    
    
    
    
    
    $
    254,081
    
    
    
    23,000
    
    
    $
    32,422
    
    
    $
    179,228
    
    
    $
    19,431
 Our material short-term cash requirements are the funds necessary to maintain current
operations and achieve our business strategy, including purchasing inventory, financing accounts
receivable and paying operating expenses, including Black and Decker® royalty payments, lease
payments and interest costs. We expect our operating expenses to remain similar to historical
percentages of sales. We expect our Black and Decker® royalty payments to increase as sales of
Black & Decker® branded products increase. Our interest costs will fluctuate based upon interest
rates, as well as our ability to generate cash flow to pay down debt. The table above provides a
summary of other future expected cash obligations. In addition, we require funds for capital
expenditures for tooling for new products, information technology improvements and other
improvements. Beginning in 2005, capital expenditures are anticipated to be less than prior years,
as a result of the sale of our Hong Kong-based manufacturing operations, the downsizing of our
manufacturing operations in Mexico and the completion of the first phase of our ERP implementation. Additionally, in 2005, we will pay approximately $4.0 million in cash severance benefits to
terminated executives and senior management. The cash severance to one former executive has been
reduced by amounts due to -35-




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Applica. We paid approximately $2.2 million of such benefits during
2004. We also paid approximately $1.2 million in severance and other benefits to employees at our
Mexican manufacturing facility as a result of the planned downsizing of the facility. We expect to
pay an additional $3.0 million in severance during 2005, as we continue the restructuring of our
Mexican manufacturing subsidiary. Historically, we have financed our short-term cash requirements primarily through cash flows
from operations, borrowings under our domestic credit facility, other short-term borrowings, and
the sale of certain assets. We expect to continue to do the same in the future. Our material long-term cash requirements consist mainly of the $60.8 million of our 10% notes,
which are due in July 2008. In addition, our ongoing future cash requirements include future
operating expenses, payments under our Black and Decker® trademark license, capital expenditures,
interest expense and lease payments. We expect to have sufficient liquidity from cash flow from operations and borrowings under our
credit facility to finance our long-term cash requirements. If necessary, we believe we will have
access to the capital markets to fund any unexpected long-term cash requirements. Sources and Uses of Cash Operating
Activities.In 2004, Applicas operations used $63.6 million in cash flow,
compared with the generation of cash of $27.5 million in 2003. The decrease in operating cash
flows from the prior year was principally due to higher working capital to support the higher sales
recorded in 2004. We experienced higher sales mainly due to the growth in sales of Black and
Decker® branded products. In addition, inventory was higher during 2004 as we built transitional
inventory to support the sale of our Hong Kong manufacturing operations and the transition of
production of certain products from Mexico to China. We expect 2005 working capital requirements
to be lower, as we are anticipating lower level of sales as a result of our customer and product
review process initiatives, as well as less transitional inventory. Our results of operations for the periods discussed have not been significantly affected by
inflation or foreign currency fluctuation. We generally negotiate our purchase orders with our
foreign manufacturers in United States dollars. Thus, our cost under any purchase order is not
subject to change after the time the order is placed due to exchange rate fluctuations. However,
the weakening of the United States dollar against local currencies could result in certain
manufacturers increasing the United States dollar prices for future product purchases. In
addition, Applica uses foreign exchange contracts, which usually mature within one year, to hedge
anticipated foreign currency transactions, primarily U.S. dollar inventory purchases by our foreign
commercial subsidiaries in Canada and Latin America. Investing Activities. For the year ended December 31, 2004, investing activities generated
cash of $34.1 million compared to $33.4 million of cash generated in 2003. During 2004, we
received approximately $47.4 million from the sale of assets, in addition to $1.2 million from
joint venture distributions. During 2003, we received $51.4 million from joint venture
distributions. Offsetting these receipts were capital expenditures of
$14.6 million and $18.5
million in 2004 and 2003, respectively. Capital expenditures decreased in 2004 by approximately
$4.0 million. In 2004, we sold our Hong Kong-based manufacturing operations and restructured our
Mexican manufacturing operations, which resulted in approximately
$12.4 million less in
expenditures. The decrease was offset by a $8.4 million increase in capital spending on our new
ERP implementation. Applica makes capital expenditures primarily for new product development and maintenance of
its manufacturing facility. In addition, Applica is in the process of finishing a major upgrade of
its information technology infrastructure, including the installation of a new ERP system. Capital
expenditures for 2005 are expected to be approximately $13.0 million and are allocated as follows:  
    $7.0 million for new products;
    $4.0 million for information technology (including $1.2 million for the ERP
implementation, $1.1 million for information technology upgrades and $0.9 for the
installation of radio frequency identification (RFID) capabilities in our
warehouses); and
    $2.0 million for other improvements. -36-




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##### Table of Contents



Applica plans to fund such capital expenditure from cash flow from operations and, if
necessary, borrowings under its credit facility. Financing Activities. Net cash provided in financing activities was $26.5 million in 2004,
compared to cash used of $58.8 million in 2003. Financing activities for 2004 included more
borrowings under our lines of credit to fund the increase in working capital, partially offset by
the payoff of the mortgage on the property located in Miami Lakes, Florida and $4.4 million for the
redemption of $4.25 million of our 10% notes. During 2003, we used proceeds from joint venture
distributions and cash flow to repurchase $65.0 million of our 10% notes. 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 cash flow. Debt Instruments, Guarantees and Related Covenants Applica amended and restated its domestic credit facility in November 2004. The revised $175
million asset-based senior secured revolving credit facility matures in November 2009. The facility
includes a $50 million accordion feature, which gives us the ability to increase the credit
facility to $205 million, upon approval of our bank group. Advances under the facility are
governed by Applicas collateral value, which is based primarily on percentages of outstanding
eligible accounts receivable and inventories. Other changes to the amended credit facility include
the replacement of the minimum Ebitda requirement (as defined in the credit agreement) with a fixed
charge ratio and the addition of seasonal advance rights of up to $10 million between September 1
and November 15, provided certain measurements are achieved. Under the amended agreement, if Applica does not maintain a minimum fixed charge coverage
ratio of 1.0 to 1.0, Applica must maintain a minimum daily availability under its borrowing base of
$20 million and a minimum average daily availability of $30 million. As of December 31, 2004 and
March 1, 2005, Applicas fixed charge coverage ratio was less than 1.0 to 1.0. If Applica
maintains a fixed charge coverage ratio of greater than 1.0 to 1.0, but less than 2.0 to 1.0, there
is no availability requirement, however there is an availability block of $10 million. If Applica
maintains a fixed charge coverage ratio of greater than 2.0 to 1.0, there is no availability
requirement and no availability block. As of December 31, 2004, Applica was borrowing approximately $88.5 million under the facility
and had approximately $53.8 million available for future cash borrowings, based on Applicas
collateral value. As stated above, Applica must currently maintain a minimum daily availability
under its borrowing base of $20 million and a minimum average daily availability of $30 million.
As of March 8, 2005, Applica was borrowing approximately $67.5 million under the facility and had
approximately $29.7 available for future cash borrowings. The credit facility includes a $10.0 million sub-limit for the issuance of letters of credit,
with approximately $1.5 million outstanding under the limit as of December 31, 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 fixed charge coverage ratio and set at 2.00% on December 31, 2004 and
2.00% at March 8, 2005), which was 4.40% at December 31, 2004 and 4.76% at March
8, 2005; or
    the Base Rate (Bank of Americas Prime Rate), plus a specified margin ( based
upon Applicas fixed charge coverage ratio, and was zero at December 31, 2004 and
zero at March 8, 2005), which was 5.25% at December 31, 2004 and 5.50% at March 8,
2005. Management expects its borrowing margins to increase to 2.50% for LIBOR loans and 0.50% for
based rate loans during March 2005 based on our fixed charge coverage ratio. At December 31, 2004, Applica was in compliance with all covenants under the credit facility.
See Note I of the Consolidated Financial Statements included in Schedule I to this Annual Report on
Form 10-K for more detailed information regarding Applicas senior credit facility. -37-




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##### Table of Contents



Certain of Applicas foreign subsidiaries have approximately $1.2 million in trade finance
lines of credit, payable on demand, which are secured by the subsidiaries tangible and intangible
property, and a guarantee by the parent company, Applica Incorporated. As of December 31, 2004,
there was $0.9 million outstanding in trade finance lines, which was included in short-term debt,
and zero under the letter of credit lines. In addition, Applica has senior subordinated notes bearing interest at a rate of 10%, payable
semiannually, which mature in July 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, at various redemption prices. During 2003,
we repurchased $65.0 million of these notes. In February 2004, we repurchased an additional $4.25
million of 10% notes. As of December 31, 2004, the outstanding balance was $60.8 million. See
Note J of the Consolidated Financial Statements included in Schedule I to this Annual Report on
Form 10-K for more detailed information regarding Applicas long-term borrowings. In 2002, Applica entered into credit approved receivables purchasing agreements with CIT
Group/Commercial Services, Inc. The agreements allowed Applica to transfer to CIT, without
recourse, approved receivables of specified customers under certain circumstances, including the
bankruptcy of covered customers. Applica remained the servicer of the approved receivables and
pays fees based upon a percentage of the gross face amount of each approved receivable. At
December 31, 2004 and 2003, $17.4 million and $16.5 million, respectively, of accounts receivable
were insured under this arrangement. In December 2004, Applica entered into new credit approved
receivables purchasing agreement with FCIA Underwriters. The agreement allows Applica to transfer
to FCIA, without recourse, up to 90% of approved receivables of specified customers under certain
circumstances, including the bankruptcy of covered customers, up to a maximum aggregate amount of
$10 million. Applica remains the servicer of the approved receivables and pays fees based upon a
percentage of the gross face amount of each approved receivable. No amounts were outstanding under
the agreement with FCIA in 2004. These arrangements are strictly for the purpose of insuring
selected receivables. In September 2004, Applica closed on the sale of the Miami Lakes facility and used $5.7
million of the proceeds to repay the outstanding mortgage on the property. Applica entered into a
10 year non-cancelable operating lease for its new corporate office space in Miramar, Florida. At December 31, 2004, debt as a percent of total capitalization was 58.0%, as compared to
36.5% at December 31, 2003. The increase was mainly due to a $126.6 million decrease in
shareholders equity as a result of the loss for the year and a $16.7 million increase in debt. 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. Applica is also involved in certain ongoing litigation. See Item 3. Legal Proceedings above. Off-Balance Sheet Arrangements Applica does not have off-balance sheet financing, other than the letters of credit discussed
above, or unconsolidated special purpose entities. Effect of Inflation Our results of operations for the periods discussed have not been significantly affected by
inflation. -38-




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##### Table of Contents



Currency Matters While we transact business predominantly in U.S. dollars and most of our revenues are
collected in U.S. dollars, a portion of our costs, such as payroll, rent and indirect operational
costs, are denominated in other
currencies, such as Hong Kong dollars and Mexican pesos. In addition, while a small portion
of our revenues are collected in foreign currencies, such as Canadian dollars, Argentine pesos,
Colombian pesos, Chilean pesos and Venezuelan bolivars, a significant portion of the related cost
of goods sold are denominated in U.S. dollars. Changes in the relation of these and other
currencies to the U.S. dollar will affect our cost of goods sold and operating margins and could
result in exchange losses. The impact of future exchange rate fluctuations on our results of
operations cannot be accurately predicted. The dollar foreign exchange rates may not be stable in
the future and fluctuations in financial markets may have a material adverse effect on our
business, financial condition and results of operations. From time to time, Applica uses forward exchange and option contracts to reduce fluctuations
in foreign currency cash flows related to finished goods and other operating purchases. 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. For additional information on exchange rate sensitivity, see Item 7A. Quantitative and
Qualitative Disclosures about Market Risk below. Recent Accounting Pronouncements See Note A of the Notes to Consolidated Financial Statements included in Schedule I hereto for
a discussion regarding the recently adopted accounting pronouncements, which include the following:  
    Financial Accounting Standards Board (FASB) Interpretation No. 46 and No.
46R, Consolidation of Variable Interest Entities;
    Statement of Financial Accounting Standards (SFAS) No. 132R, , Employers
Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS
87, 88, and 106;
    SFAS No. 123R, Accounting for Stock-Based Compensation;
    SFAS No. 151 Inventory Costs - an amendment of ARB No. 43, Chapter 4;
    SFAS No. 153 Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29; and
    FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation Act of 2004. 
 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 our
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 provide 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. -39-




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##### Table of Contents



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, 2004Expected Maturity DateThere-
    
    
    
    
    
    
    Fair2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    after
    
    
    Total
    
    
    Value(2)(Dollars in thousands)Liabilities:Debt:Fixed Rate:
    
    $
    3,000
    
    
    
    
    
    
    
    
    
    
    $
    61,008
    (1)
    
    
    
    
    
    
    
    
    
    $
    64,008
    
    
    $
    64,008Average Interest Rate
    
    
    6.00
    %
    
    
    
    
    
    
    
    
    
    
    10.00
    %
    
    
    
    
    
    
    Variable Rate:
    
    $
    914
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,541
    
    
    
    
    
    
    $
    89,445
    
    
    $
    89,445Average Interest Rate
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    Interest Rate Contracts:Interest Rate Swaps:Pay Floating (5) :
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    30,000
    
    
    
    
    
    
    
    
    
    
    $
    30,000
    
    
    $
    258Average Pay Rate
    
    
    8.83
    %
    
    
    9.03
    %
    
    
    9.18
    %
    
    
    10.62
    %
    
    
    
    
    
    
    Average Receive Rate
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    
    
    
    
    
   (1)
    
    Includes $258,000 that represents the positive fair value of an underlying hedge as of
December 31, 2004 related to SFAS 133.(2)
    
    Fair values were determined based on broker quotes or quoted market prices or rates for the
same or similar instruments.(3)
    
    The variable rate revolving foreign trade facility is set at a rate equivalent to the LIBOR
rate plus 1.125%.(4)
    
    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, 2004) or at a
rate equivalent to the Prime Rate plus an applicable margin based upon Applicas leverage
ratio (zero as of December 31, 2004).(5)
    
    At December 31, 2004, 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 at 10%
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, 2004. At December 31, 2003Expected Maturity DateThere-
    
    
    
    
    
    
    Fair2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    after
    
    
    Total
    
    
    Value(2)(Dollars in thousands)Liabilities:Debt:Fixed Rate:
    
    $
    151
    
    
    $
    3,166
    
    
    $
    178
    
    
    $
    5,272
    
    
    $
    65,318
    (1)
    
    
    
    
    
    $
    74,085
    
    
    $
    74,085Average Interest Rate
    
    
    7.25
    %
    
    
    6.07
    %(3)
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    10.00
    %
    
    
    Variable Rate
    
    
    
    
    
    
    62,703
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    62,703
    
    
    $
    62,703Average Interest Rate
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest Rate Contracts:Interest Rate Swaps:Pay Fixed (5):
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    50,000
    
    
    $
    97Average Pay Rate
    
    
    1.20
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average Receive Rate
    
    
    1.30
    %
 -40-




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##### Table of Contents



At December 31, 2003Expected Maturity DateThere-
    
    
    
    
    
    
    Fair2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    after
    
    
    Total
    
    
    Value(2)(Dollars in thousands)Pay Floating (6):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    --        $
    
    
    
    30,000
    
    
    
    
    
    
    $
    30,000
    
    
    $
    318Average Pay Rate
    
    
    7.20
    %
    
    
    8.78
    %
    
    
    9.66
    %
    
    
    10.25
    %
    
    
    10.62
    %Average Receive Rate
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    10.00
    %
   (1)
    
    Includes $318,000 that represents the positive fair value of an underlying hedge as of
December 31, 2003 related to SFAS 133.(2)
    
    Fair values were determined based on broker quotes or quoted market prices or rates for
the same or similar instruments.(3)
    
    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.(4)
    
    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 (zero as of December 31, 2003).(5)
    
    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 matured 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.(6)
    
    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. 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/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 or purchase of foreign currencies
to hedge probable, but not firmly committed expenditures. The principal currencies hedged are the
Mexican peso, 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, 2004, Applica hedged a portion of its 2005 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 -41-




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##### Table of Contents



in value of the underlying exposure. The estimated potential change in fair value, calculated
using the sensitivity model, is as follows: At December 31, 2004Change in Fair Value Due ToNotional Hedge
    
    
    Favorable 10%
    
    
    Unfavorable 10%Amount in US Dollars
    
    
    Movement in Spot
    
    
    Movement in Spot(Dollars in thousands)Canadian Dollar
    
    $
    7,651
    
    
    $
    696
    
    
    $
    (850
    )
 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 S of the
Consolidated Financial Statements included in Schedule I of this Annual Report on Form 10-K for
more information regarding Applicas financial instruments. 
 Item 8. Financial Statements and Supplementary Data. See Schedules I and II hereto. 
 Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure. None. 
 Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures. Applica has carried out an evaluation under
the supervision of management, including the President and Chief Executive Officer (CEO) and the
Senior Vice President and Chief Financial Officer (CFO), of the effectiveness of the design and
operation of its disclosure controls and procedures. Based on that evaluation, Applicas CEO and
CFO have concluded that, as of December 31, 2004, Applicas disclosure controls and procedures were
effective to ensure that information required to be disclosed by Applica 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 CEO and CFO,
as appropriate to allow timely decisions regarding required disclosures. Managements Annual Report on Internal Control Over Financial Reporting appears on page F-2 in
Schedule I to this Annual Report on Form 10-K for the year ended December 31, 2004 and is
incorporated herein by reference. Changes in Internal Controls. Applica is committed to continuously improve and enhance its
internal controls over financial reporting. Based on the evaluation performed in 2003, management
determined and disclosed that certain matters could be considered deficiencies in its internal
control systems as of December 31, 2003, including the following:  
    Many of the controls that were in place, including our policies and procedures,
were informal and not standardized. As such, the reliability and effectiveness of
these control processes were dependent on interpretation and execution by our
employees.
    Our legacy information technology systems were not fully integrated and did not
provide for proper controls over access and change management.
    Our independent registered public accounting firm, Grant Thornton
LLP, advised management and the Audit Committee of a failure to perform timely
reviews and evaluations of certain account balances.  
    In February 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. -42-




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##### Table of Contents



These deficiencies were discussed in detail among management, the Audit Committee and
Grant Thornton. In order to ensure that we corrected the deficiencies identified above,
Applica undertook significant efforts and used significant resources during 2004 to improve our
processes and procedures, including the following:  
    Applica formalized and standardized all policies and procedures as they relate
to internal control over financial reporting. Additionally, mandatory
informational sessions were held to communicate to all personnel the importance of
adhering to the aforementioned policies and procedures.
    Applica modified the access controls over its legacy information system to
ensure that only personnel with corresponding job duties have access to the
respective functions in the system. Additionally, we formalized and standardized
our change management process by instituting policies and procedures and approvals
of all senior management in our information technology department. Stricter
controls were added throughout the process of change management, such as the date
stamp and time stamp of binaries. Furthermore, we are in the final stages of
implementing our new enterprise resource planning system that includes financial
applications. This will further enhance access and change management controls.
    Applica developed a monthly closing checklist to ensure that reviews and
evaluations of account balances are performed on a timely basis. The reviews are
evidenced by the preparer and reviewer. Additionally, we have reiterated to key
accounting personnel the importance performing the aforementioned reviews and
evaluations.  
    Applica corrected the presentation of the borrowings under the credit facility on its
consolidated balance sheets. 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. Other than as described above, since the evaluation date by Applicas management of its
internal controls over financial reporting, there have not been any changes in Applicas internal
controls over financial reporting that has materially affected, or is reasonably likely to
materially affect Applicas internal controls over financial reporting. Limitations on the Effectiveness of Controls.Applicas management, including the CEO and
CFO, 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, Applicas CEO and CFO have concluded that our 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 9B. Other Information. None. -43-




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant. The executive officers of Applica are as follows: NAME
    
    AGE
    
    OFFICEHarry D. Schulman
    
    

    53
    
    
    Chairman, President and Chief Executive
OfficerTerry L. Polistina
    
    
    41
    
    
    Senior Vice President and Chief Financial
OfficerMichael J. Michienzi
    
    
    49
    
    
    President  Household Products Division,
Applica Consumer Products, Inc.Brian Guptill
    
    
    53
    
    
    Senior Vice President  Engineering, Applica
Consumer Products, Inc.
 Harry D. Schulmanhas served as President of Applica Incorporated and Applica Consumer
Products, Inc. since January 2001 and Chief Executive Officer since February 2003. Since August
2004, Mr. Schulman has also served as the interim Chairman of the Board. Mr. Schulman also served
as Secretary from January 1999 to September 2003. Mr. Schulman previously served as Chief
Operating Officer from November 1998 to February 2002. From March 1990 to January 2001, Mr.
Schulman served as Chief Financial Officer of Applica. From February 1998 until June 1998, he
served as a Senior Vice President and from February 1993 until June 1998, Mr. Schulman served as
Executive Vice President - Finance and Administration. Prior thereto, he held other senior finance
positions with Applica. Terry L. Polistinahas served as Chief Financial Officer of Applica Incorporated and Applica
Consumer Products, Inc. since January 2001 and has served as a Senior Vice President since June
1998. Mr. Polistina served as Controller of Applica from December 1995 to June 1998 and prior
thereto, he held other senior finance positions with Applica. Michael J. Michienziis currently President  Household Products Division of Applica Consumer
Products, Inc. Mr. Michienzi served as Senior Vice President, Global Business Development of
Applica Consumer Products from February 2002 to September 2004 and President and General Manager,
Sales and Marketing, of Applica Consumer Products, Inc. from May 1999 to February 2002. From
January 1999 until December 1999, Mr. Michienzi also served as President of the Household Products,
Inc. and from June 1998 until January 1999 he served as its Senior Vice President. From July 1994
to June 1998, Mr. Michienzi served as Vice President -
Sales, Vice President - Sales and Supply
Chain, and Vice President - Sales, Marketing and Supply Chain of the U.S. Household Products Group
of Black & Decker (U.S.) Inc. Brian
Guptillhas served as Senior Vice President - Engineering of Applica Consumer Products,
Inc. since August 2001. Prior to that time, he was the Vice President of Engineering at Amana
Appliances. He also held positions as Vice President of Operations and Quality at Amana. From
1973 through 1993, Mr. Guptill held several engineering and
management positions at Raytheons
Missile Systems Division. Additional information required by this item is incorporated by reference to Applicas Proxy
Statement for its 2005 Annual Meeting of Shareholders. 
 Item 11. Executive Compensation Information required by this item is incorporated by reference to Applicas Proxy Statement
for its 2005 Annual Meeting of Shareholders. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated by reference to Applicas Proxy Statement
for its 2005 Annual Meeting of Shareholders. -44-




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##### Table of Contents



The following table summarizes our equity compensation plans as of December 31, 2004. Applica
has not granted any warrants or stock appreciation rights. Number ofsecuritiesremainingavailable forthe futureNumber of
    
    
    
    
    
    
    issuance undersecurities to be
    
    
    Weighted-
    
    
    equityissued upon
    
    
    average
    
    
    compensationexercise of
    
    
    exercise price
    
    
    plansoutstanding
    
    
    of outstanding
    
    
    (excludingoptions,
    
    
    options,
    
    
    securitieswarrants and
    
    
    warrants and
    
    
    reflected inrights
    
    
    rights
    
    
    column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by security holders
    
    
    2,546,207
    
    
    $
    5.14
    
    
    
    409,082Employee stock purchase plan approved by security holders
    
    
    
    
    
    
    
    
    
    
    189,003Equity compensation not approved by security holders(1)
    
    
    209,000
    
    
    $
    7.25
    
    
    
    Total
    
    
    2,755,207
    
    
    
    
    
    
    
    598,085
   (1)
    
    Applica has granted non-qualified stock options, which were not issued under a formal plan
and which were not approved by security holders. No such options have been granted since 1998. 
 Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated by Reference to Applicas Proxy Statement
for its 2005 Annual Meeting of Shareholders. 
 Item 14. Principal Accounting Fees and Services Information required by this item is incorporated by Reference to Applicas Proxy Statement
for its 2005 Annual Meeting of Shareholders. 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements The following consolidated financial statements of Applica Incorporated and its subsidiaries
are included in Schedule I attached hereto:  
    Managements Annual Report on Internal Controls Over Financial Reporting
    Reports of Independent Registered Public Accounting Firm
    Consolidated Balance Sheets as of December 31, 2004 and 2003
    Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
    Consolidated Statement of Shareholders Equity for the three years ended December 31, 2004
    Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    Supplement Disclosures of Cash Flow Information
    Notes to Consolidated Financial Statements (a)(2) Financial Statements Schedules -45-




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##### Table of Contents



The Valuation and Qualifying Accounts  for the years ended December 31, 2004, 2003 and 2002
are included in Schedule II attached hereto. Individual financial statements of Applicas subsidiaries have been omitted because
consolidated financial statements have been presented, and all subsidiaries included in the
consolidated financial statements are wholly owned. All other schedules have been omitted because
the required information is not present or not present in amounts sufficient to require submission
of the schedule or because the information required is included in the consolidated financial
statements or the notes thereto. (a)(3) Exhibits ExhibitNumber
    
    
    Description3.1
    
    
    Second Amended and Restated Articles of Incorporation filed with the Florida Secretary of State
on May 10, 2000. Incorporated by reference to Applicas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000.3.2
    
    
    Second Amended and Restated Bylaws. Incorporated by reference to Applicas Annual Report on Form
10-K for the year ended December 31, 2000.4.1
    
    
    Supplemental Indenture dated as of July 27, 1998, among Applica Incorporated, the Guarantors
named therein and State Street Bank & Trust Company, as Trustee, relating to the issuance by
Applica Incorporated of $130 million in 10% Senior Subordinated Notes due 2008. Incorporated by
reference to Applicas Form 8-K dated July 27, 1998.10.1
    *
    
    Employment agreement dated May 1, 2004 between Applica Incorporated and Harry D. Schulman.
Incorporated by reference to Applicas Current Report on Form 8-K dated October 12, 2004.10.2
    *
    
    Employment Agreement dated July 1, 2000 between Applica Consumer Products, Inc. and Michael J.
Michienzi. Incorporated by reference to Applicas Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000.10.3
    *
    
    Employment Agreement dated July 1, 2000 between Applica Incorporated and Terry L. Polistina.
Incorporated by reference to Applicas Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.10.4
    *
    
    Employment Agreement dated September 16, 2004 between Applica Consumer Products, Inc. and Brian
Guptill. Filed herewith.10.5
    *
    
    Separation Agreement dated August 26, 2004 between Applica Incorporated and David M. Friedson.
Incorporated by reference to Applicas Amendment No. 1 to Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 2004.10.6
    *
    
    Termination and Release Agreement dated November 1, 2004 between Applica Incorporated and Belvin
Freidson. Incorporated by reference to Applicas Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004.10.7
    *
    
    Termination and Release Agreement dated November 1, 2004 between Applica Incorporated, Durable
Manufacturing Limited and Lai Kin. Incorporated by reference to Applicas Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004.10.8
    *
    
    1988 Director Stock Option Plan. Incorporated by reference to Applicas Annual Report on Form
10-K for the year ended December 31, 1988.10.9
    *
    
    1992 Employees Incentive Stock Option Plan. Incorporated by reference to the Registration
Statement on Form S-8 as filed with the Securities and Exchange Commission on May 12, 1998.
 -46-




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##### Table of Contents



ExhibitNumber
    
    
    Description10.10
    *
    
    1996 Stock Option Plan. Incorporated by reference to the Registration Statement on Form S-8 as
filed with the Securities and Exchange Commission on May 12, 1998.10.11
    *
    
    1998 Stock Option Plan. Incorporated by reference to the Registration Statement on Form S-8 as
filed with the Securities and Exchange Commission on September 3, 1999.10.12
    *
    
    2000 Stock Option Plan. Incorporated by reference to the Registration Statement on Form S-8 as
filed with the Securities and Exchange Commission on June 23, 2000.10.13
    *
    
    2000 Employee Stock Purchase Plan. Incorporated by reference to the Registration Statement on
Form S-8 as filed with the Securities and Exchange Commission on June 23, 2000.10.14
    
    
    Stock Purchase Agreement by and among Applica Incorporated, Remdale Investments Limited, PPC
Industries Ltd. and Central Gold Worldwide Limited dated July 28, 2004. Incorporated by
reference to Applicas Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.10.15
    
    
    Amended and Restated Credit Agreement by and among Applica Incorporated, each of its subsidiaries
party thereto, each of the lenders party thereto and Bank of America, N.A., as agent for the
lenders, and General Electric Capital Corporation as documentation agent, dated November 17,
2004. Incorporated by reference to Applicas Current Report on Form 8-K dated November 17, 2004.10.16
    
    
    Second Amendment to Security Agreement by and among Applica Incorporated, each of its
subsidiaries party thereto and Bank of America, N.A., as agent for the lenders, dated November
17, 2004. Incorporated by reference to Applicas Current Report on Form 8-K dated November 17,
2004.21
    
    
    Subsidiaries of the Registrant. Filed herewith.23
    
    
    Consent of
Independent Registered Public Accountant. 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 Principal Financial Officer Pursuant to 18 U.S.C. 1350. Filed herewith.
   *
    
    These exhibits are management contracts or compensatory plans or arrangements. (b) Omitted (c) Exhibits See Item 15(a)(3) above. -47-




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##### Table of Contents



Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. APPLICA INCORPORATED
(Registrant)By:
    /s/ Harry D. SchulmanHarry D. Schulman, President and ChiefExecutive Officer
Date: March 11, 2005 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and on the date
indicated. By:
    
    /s/ Harry D. Schulman
    
    DATE:
    
    March 11, 2005Harry D. Schulman, President and Chief ExecutiveOfficer (Principal Executive Officer)By:
    
    /s/ Terry L. Polistina
    
    DATE:
    
    March 11, 2005Terry L. Polistina, Chief Financial Officer andSenior Vice President (Principal Accounting Officer)By:
    
    /s/ Jerald I. Rosen
    
    DATE:
    
    March 11, 2005Jerald I. Rosen, DirectorBy:
    
    /s/ Ware H. Grove
    
    DATE:
    
    March 11, 2005Ware H. Grove, DirectorBy:
    
    /s/ Paul K. Sugrue
    
    DATE:
    
    March 11, 2005Paul K. Sugrue, DirectorBy:
    
    /s/ Leonard Glazer
    
    DATE:
    
    March 11, 2005Leonard Glazer, DirectorBy:
    
    /s/ Felix S. Sabates
    
    DATE:
    
    March 11, 2005Felix S. Sabates, DirectorBy:
    
    /s/ Thomas J. Kane
    
    DATE:
    
    March 11, 2005Thomas J. Kane, DirectorBy:
    
    /s/ Susan J. Ganz
    
    DATE:
    
    March 11, 2005Susan J. Ganz, DirectorBy:
    
    /s/ J. Maurice Hopkins
    
    DATE:
    
    March 11, 2005J. Maurice Hopkins, Director
 -48-




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##### Table of Contents



SCHEDULE I Applica Incorporated and Subsidiaries
INDEX TO FINANCIAL STATEMENTS Managements Annual Report on Internal Control Over Financial Reporting
    
    F-2Reports of Independent Registered Public Accounting Firm
    
    F-3 F4Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    F-5Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002
    
    F-6Consolidated Statement of Shareholders Equity for the Three Years Ended December 31, 2004
    
    F-7Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
    
    F-8  F9Notes to Consolidated Financial Statements
    
    F-10  F-46
 F-1




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##### Table of Contents



Managements Annual Report on Internal Control Over Financial Reporting The management of Applica Incorporated and its subsidiaries (Applica) is responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Internal control over financial
reporting is a process designed by, or under the supervision of, Applicas principal executive and
principal financial officers, or persons performing similar functions, and effected by Applicas
Board of Directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies
and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of Applica; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Applica are being made only in accordance
with authorizations of management and directors of Applica; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Applicas assets that could have a material
effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Management has evaluated the effectiveness of Applicas internal control over financial
reporting as of December 31, 2004. In making this assessment, management used the control
criteria established in a report entitled Internal ControlIntegrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on managements evaluation and those criteria set forth above, management believes that
Applica maintained effective internal control over financial reporting as of December 31, 2004. The independent registered public accounting firm of Grant Thornton LLP has issued a report on
managements assessment and the effectiveness of Applicas internal control over financial
reporting. That report appears on the following page. F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM Board of Directors and ShareholdersApplica Incorporated We have audited managements assessment, included in the accompanying Annual Report on Internal
Control Over Financial Reporting, that Applica Incorporated and subsidiaries maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Applica Incorporateds management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the companys internal control over
financial reporting based on our audit. We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Applica Incorporated and subsidiaries maintained
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on COSO. Also in our opinion, Applica Incorporated and subsidiaries
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2004, based on COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Applica Incorporated and subsidiaries as
of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders
equity and cash flows for each of the three years in the period ended December 31, 2004 and our
report dated March 9, 2005 expressed an unqualified opinion on those consolidated financial
statements. /s/ Grant Thornton LLP Miami, Florida
March 9, 2005 F-3




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM Board of Directors and ShareholdersApplica Incorporated We have audited the accompanying consolidated balance sheets of Applica Incorporated and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the three years in the period ended
December 31, 2004. 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, 2004 and 2003, and the results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. As discussed in Note F to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standard No. 142 Goodwill and Other Intangible Assets on January 1, 2002. Our audits were conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. 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. We have also audited, in accordance with the standards of the Public Company Oversight Board
(United States), the effectiveness of Applica Incorporateds internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated March 9, 2005 expressed an unqualified opinion. /s/ Grant Thornton LLP Miami, Florida
March 9, 2005 F-4




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##### Table of Contents



Applica Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data) As of December 31,2004
    
    
    2003AssetsCurrent Assets:Cash and cash equivalents
    
    $
    10,463
    
    

    $
    12,735Accounts and other receivables, less
allowance of $11,711 in 2004 and $12,543 in
2003
    
    
    160,436
    
    
    
    131,021Note receivable  officers and former officer
    
    
    2,569
    
    
    
    1,615Inventories
    
    
    131,503
    
    
    
    106,326Prepaid expenses and other
    
    
    12,309
    
    
    
    13,593Refundable income taxes
    
    
    2,032
    
    
    
    4,823Future income tax benefits
    
    
    33
    
    
    
    11,616Total current assets
    
    
    319,345
    
    
    
    281,729Investment in Joint Venture
    
    
    
    
    
    
    5,389Property, Plant and Equipment at cost, less
accumulated depreciation of $73,171 in 2004 and
$103,894 in 2003
    
    
    38,327
    
    
    
    70,389Future Income Tax Benefits, Non-Current
    
    
    11,212
    
    
    
    49,695Goodwill
    
    
    
    
    
    
    62,812Other Intangibles, net
    
    
    4,493
    
    
    
    6,146Other Assets
    
    
    2,560
    
    
    
    2,676Total Assets
    
    $
    375,937
    
    
    $
    478,836Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    41,827
    
    
    $
    39,273Accrued expenses
    
    
    62,046
    
    
    
    61,362Short-term debt
    
    
    89,455
    
    
    
    62,703Current portion of long-term debt
    
    
    3,000
    
    
    
    151Current taxes payable
    
    
    5,947
    
    
    
    2,172Deferred rent
    
    
    680
    
    
    
    301Total current liabilities
    
    
    202,955
    
    
    
    165,962Other Long-Term Liabilities
    
    
    1,004
    
    
    
    1,327Long-Term Debt
    
    
    61,008
    
    
    
    73,934Shareholders Equity:Common stock  authorized: 75,000 shares of
$0.10 par value; issued and outstanding: 24,137
in 2004 and 23,687 in 2003
    
    
    2,414
    
    
    
    2,369Paid-in capital
    
    
    159,131
    
    
    
    156,604(Accumulated deficit) retained earnings
    
    
    (46,480
    )
    
    
    86,474Note receivable  former officer
    
    
    (502
    )
    
    
    (1,496
    )Accumulated other comprehensive loss
    
    
    (3,593
    )
    
    
    (6,338
    )Total shareholders equity
    
    
    110,970
    
    
    
    237,613Total liabilities and shareholders equity
    
    $
    375,937
    
    
    $
    478,836
 The accompanying notes are an integral part of these financial statements. F-5




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Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) Years Ended December 31,2004
    
    
    2003
    
    
    2002Net sales
    
    $
    726,733
    
    
    $
    640,639
    
    
    $
    727,356Cost of sales:Cost of goods sold
    
    
    506,652
    
    
    
    452,450
    
    
    
    498,934Restructuring charges
    
    
    9,236
    
    
    
    6,993
    
    
    
    Product recall
    
    
    
    
    
    
    (4,125
    )
    
    
    515,888
    
    
    
    455,318
    
    
    
    498,934Gross profit
    
    
    210,845
    
    
    
    185,321
    
    
    
    228,422Selling, general and administrative expenses:Operating expenses
    
    
    208,131
    
    
    
    186,601
    
    
    
    191,170Termination benefits
    
    
    9,153
    
    
    
    
    
    
    
    Gain on the sale of subsidiary, division and
property  net
    
    
    (3,921
    )
    
    
    
    
    
    
    Restructuring and other charges (credits)
    
    
    (563
    )
    
    
    4,681
    
    
    
    10,643Impairment of goodwill
    
    
    62,812
    
    
    
    
    
    
    
    Impairment of intangible asset
    
    
    
    
    
    
    7,152
    
    
    
    275,612
    
    
    
    198,434
    
    
    
    201,813Operating (loss) earnings
    
    
    (64,767
    )
    
    
    (13,113
    )
    
    
    26,609Other (income) expense:Interest expense
    
    
    9,796
    
    
    
    13,964
    
    
    
    17,581Interest and other income
    
    
    (1,247
    )
    
    
    (817
    )
    
    
    (1,791
    )Loss on early extinguishment of debt
    
    
    187
    
    
    
    3,940
    
    
    
    Gain on litigation settlement
    
    
    
    
    
    
    
    
    
    
    (557
    )8,736
    
    
    
    17,087
    
    
    
    15,233(Loss) earnings before equity in net
earnings (loss) of joint ventures and
income taxes
    
    
    (73,503
    )
    
    
    (30,200
    )
    
    
    11,376Equity in net earnings (loss) of joint ventures
    
    
    
    
    
    
    55,570
    
    
    
    (1,498
    )(Loss) earnings before income taxes and
cumulative effect of change in
accounting principle
    
    
    (73,503
    )
    
    
    25,370
    
    
    
    9,878Income tax provision
    
    
    59,451
    
    
    
    10,147
    
    
    
    4,826(Loss) earnings before cumulative effect
of change in accounting principle
    
    
    (132,954
    )
    
    
    15,223
    
    
    
    5,052Cumulative effect of change in
accounting principle, net of tax benefit
of $42,447
    
    
    
    
    
    
    
    
    
    
    (78,829
    )Net (loss) earnings
    
    $
    (132,954
    )
    
    $
    15,223
    
    
    $
    (73,777
    )Earnings (loss) per common share  basic:(Loss) earnings before cumulative effect
of change in accounting principle
    
    $
    (5.55
    )
    
    $
    0.65
    
    
    $
    0.22Cumulative effect of change in
accounting principle, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    (3.37
    )(Loss) earnings per common share  basic
    
    $
    (5.55
    )
    
    $
    0.65
    
    
    $
    (3.15
    )Earnings (loss) per common share  diluted:(Loss) earnings before cumulative effect
of change in accounting principle
    
    $
    (5.55
    )
    
    $
    0.63
    
    
    $
    0.21Cumulative effect of change in accounting
principle, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    (3.31
    )(Loss) earnings per common share  diluted
    
    $
    (5.55
    )
    
    $
    0.63
    
    
    $
    (3.10
    )
 The accompanying notes are an integral part of these financial statements. F-6




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##### Table of Contents



Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(In thousands) (Accumulated
    
    
    Note
    
    
    AccumulatedDeficit)
    
    
    Receivable 
    
    
    OtherCommon
    
    
    
    
    
    
    Retained
    
    
    Former
    
    
    ComprehensiveStock
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    Officer
    
    
    Loss
    
    
    TotalBalance 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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:Net earnings
    
    
    
    
    
    
    
    
    
    
    15,223
    
    
    
    
    
    
    
    
    
    
    
    15,223Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,270
    
    
    
    1,270Change in unrealized gain on derivative
instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764
    
    
    
    764Total comprehensive earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    )
    
    
    237,613Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (132,954
    )
    
    
    
    
    
    
    
    
    
    
    (132,954
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,076
    
    
    
    2,076Realized foreign currency translation 
sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    753
    
    
    
    753Change in unrealized loss on derivative
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    (84
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (130,209
    )Exercise of stock options and issuance of
common stock under employee stock purchase plan
    
    
    45
    
    
    
    2,414
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,459Net change to reclass notes receivable
former-officer to current assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    994
    
    
    
    
    
    
    
    994Compensation
expense - former officer
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113Balance at December 31, 2004
    
    $
    2,414
    
    
    $
    159,131
    
    
    $
    (46,480
    )
    
    $
    (502
    )
    
    $
    (3,593
    )
    
    $
    110,970
 The accompanying notes are an integral part of these financial statements. F-7




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Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) For the years ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net (loss) earnings
    
    $
    (132,954
    )
    
    $
    15,223
    
    
    $
    (73,777
    )Reconciliation to net cash (used in) provided by operating
activities:Depreciation of property, plant and equipment
    
    
    15,278
    
    
    
    21,439
    
    
    
    21,339Loss on disposal of property, plant and equipment
    
    
    791
    
    
    
    3,661
    
    
    
    3,628Provision for doubtful accounts
    
    
    889
    

    
    
    2,228
    
    
    
    10,618Write-downs of inventory
    
    
    5,777
    
    
    
    5,355
    
    
    
    4,309Loss on early extinguishment of debt
    
    
    187
    
    
    
    3,940
    
    
    
    Compensation expense  former officer
    
    
    113
    
    
    
    
    
    
    
    Amortization of intangible and other assets
    
    
    2,212
    
    
    
    9,272
    
    
    
    9,081Impairment of intangible asset
    
    
    
    
    
    
    7,152
    
    
    
    Impairment of goodwill
    
    
    62,812
    
    
    
    
    
    
    
    Impairment of machinery and equipment
    
    
    4,851
    
    
    
    
    
    
    
    Gain on litigation settlement
    
    
    
    
    
    
    
    
    
    
    (557
    )Gain on sale of subsidiary, division and property
    
    
    (3,921
    )
    
    
    
    
    
    
    Cumulative effect of change in accounting principle, net of
tax
    
    
    
    
    
    
    
    
    
    
    78,829Deferred taxes
    
    
    53,412
    
    
    
    11,721
    
    
    
    1,119Restructuring, recall and other charges
    
    
    (563
    )
    
    
    556
    
    
    
    10,643Other non-cash changes in equity items
    
    
    
    
    
    
    57
    
    
    
    145Equity in net (earnings) loss of joint ventures
    
    
    
    
    
    
    (55,570
    )
    
    
    1,498Changes in assets and liabilities, net of acquisition:Accounts and other receivables
    
    
    (36,274
    )
    
    
    13,318
    
    
    
    28,148Inventories
    
    
    (51,094
    )
    
    
    (2,507
    )
    
    
    (11,105
    )Prepaid expenses and other
    
    
    (3,239
    )
    
    
    (1,731

    )
    
    
    38Other assets
    
    
    2,262
    
    
    
    1,944
    
    
    
    (6,196
    )Accounts payable and accrued expenses
    
    
    9,283
    
    
    
    (6,800
    )
    
    
    (8,287
    )Current income taxes
    
    
    6,566
    
    
    
    (1,506
    )
    
    
    (7,649
    )Other liabilities
    
    
    56
    
    
    
    (277
    )
    
    
    (9,784
    )Net cash (used in) provided by operating activities
    
    
    (63,556
    )
    
    
    27,475
    
    
    
    52,040Cash flows from investing activities:Net proceeds from sale of subsidiary, division, and property
    
    
    47,409
    
    
    
    
    
    
    
    Additions to property, plant and equipment
    
    
    (14,564
    )
    
    
    (18,526
    )
    
    
    (19,313
    )Distribution from (investments in) joint ventures  net
    
    
    1,194
    
    
    
    51,430
    
    
    
    (163
    )Purchase of Weitech, Inc., net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (17,002
    )Collections from officers and former officer
    
    
    62
    
    
    
    486
    
    
    
    2,122Net cash received from litigation settlement
    
    
    
    
    
    
    
    
    
    
    2,900Net cash provided by (used in) investing activities
    
    
    34,101
    
    
    
    33,390
    
    
    
    (31,456
    )
 (Continued on next page.) F-8




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Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands) For the years ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from financing activities:Borrowings (payments) under lines of credit, net
    
    
    34,195
    
    
    
    7,949
    
    
    
    (38,035
    )Proceeds from mortgage loan
    
    
    
    
    
    
    
    
    
    
    6,000Payments on mortgage loan
    
    
    (5,779
    )
    
    
    (143
    )
    
    
    (78
    )Reimbursement of debt costs, net
    
    
    
    
    
    
    
    
    
    
    369Redemption of long-term debt
    
    
    (4,390
    )
    
    
    (67,775
    )
    
    
    Exercises of stock options and issuances of common stock under
employee stock purchase plan
    
    
    2,459
    
    
    
    1,171
    
    
    
    1,219Interest receivable from former officer
    
    
    (22
    )
    
    
    (41
    )
    
    
    (58
    )Net cash provided by (used in) financing activities
    
    
    26,463
    
    
    
    (58,839
    )
    
    
    (30,583
    )Effect of exchange rate changes on cash
    
    
    720
    
    
    
    3,026
    
    
    
    1,939(Decrease) increase in cash and cash equivalents
    
    
    (2,272
    )
    
    
    5,052
    
    
    
    (8,060
    )Cash and cash equivalents at beginning of period
    
    
    12,735
    
    
    
    7,683
    
    
    
    15,743Cash and cash equivalents at end of period
    
    $
    10,463
    
    
    $
    12,735
    
    
    $
    7,683
 Supplemental Disclosures of Cash Flow Information: For the years ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Cash paid during the year for:Interest
    
    $
    10,117
    
    
    $
    15,520
    
    
    $
    16,731Income taxes
    
    $
    
    
    
    $
    312
    
    
    $
    10,465
 Non-cash financing activities:  
    In connection with the purchase of all the outstanding shares of Weitech, Inc. in
2002, Applica Consumer Products, Inc., the U.S. operating subsidiary, issued $3.0 million
of notes payable.
    Applica reclassified approximately $1.0 million of notes receivable from a former
officer to current assets in 2004. The accompanying notes are an integral part of these financial statements. F-9




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Overview Applica Incorporated and its subsidiaries (collectively, the Company or Applica) are
marketers and distributors of a broad range of branded small household appliances. Applica
markets and distributes 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®, and its own brand names, such as Windmere®, LitterMaid®, Belson® and Applica®. Applicas
customers include mass merchandisers, specialty retailers and appliance distributors primarily in
North America, Latin America and the Caribbean. Applica operates a manufacturing facility in
Mexico. In July 2004, Applica sold its Hong Kong-based manufacturing subsidiary, Applica Durable
Manufacturing Limited. Principles of Consolidation The consolidated financial statements include the accounts of Applica Incorporated and its
wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted
in the United States of America, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates include the
allowance for doubtful accounts, reserve for inventory valuation, reserve for returns and
allowances, cooperative advertising accruals, product liability, income taxes, depreciation and
amortization. Management believes that the following may involve a higher degree of judgment or complexity: Income Taxes. Applica is 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 and 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. 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. Applica records a valuation allowance to reduce its deferred tax assets to the amount that
Applica believes will more likely than not be realized. While Applica
considers future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event it was to determine that it would not be able to realize all
or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to tax expense in the period such determination is made. Likewise, should Applica
determine that it would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax assets would
increase net income in the period
such determination is made. Collectibility of Accounts Receivable. Applica records allowances for estimated
losses resulting from the inability of its customers to make required payments on their balances.
Applica assesses the credit worthiness of its customers based on multiple sources of information
and analyzes factors including:  
    Applicas historical bad debt experiences; F-10




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED  
    publicly available information regarding its 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 Applicas
customers were to worsen, additional write-offs may be required. Such write-offs may not be
included in the allowance for doubtful accounts at December 31, 2004, resulting in a charge to
income in the period such determination is made. Conversely, if the financial condition of
Applicas customers were to improve or its judgment regarding their financial condition was to
change positively, a reduction in the allowances may be required resulting in an increase in income
in the period such determination is made. Inventory. Applica values inventory at the lower of cost or market, using the
first-in, first-out (FIFO) method, and regularly reviews the book value of discontinued product
lines and stock keeping units (SKUs) to determine if these items are properly valued. If market
value is less than cost, Applica writes down the related inventory to the estimated net realizable
value. Applica regularly evaluates the composition of inventory to identify slow-moving and
obsolete inventories to determine if additional write-downs are required. This valuation requires
significant judgment from management as to the saleability of its inventory based on forecasted
sales. It is particularly difficult to judge the potential sales of new products. Should the
forecasted sales not materialize, it would have a significant impact on Applicas result of
operations and the valuation of its inventory, resulting in a charge to income in the period such
determination is made. Product Liability Claims and Litigation. Applica is subject to lawsuits and other
claims related to product and other matters that are being defended and handled in the ordinary
course of business. Applica maintains accruals for such costs that may be incurred, which are
determined on a case-by-case basis, taking into consideration the likelihood of adverse judgments
or outcomes, as well as the potential range of probable loss. The accruals are monitored on an
ongoing basis and are updated for new developments or new information as appropriate. With respect
to product liability claims, Applica estimates the amount of ultimate liability in excess of
applicable insurance coverage based on historical claims experience and current claim estimates, as
well as other available facts and circumstances. Management believes that the amount of ultimate liability of Applicas current claims and
litigation matters, if any, is not likely to have a material effect on its business, financial
condition, results of operations or liquidity. However, as the outcome of litigation is difficult
to predict, unfavorable significant changes in the estimated exposures could occur resulting in a
charge to income in the period such determination is made. Conversely, if favorable changes in the
estimated exposures occur, a reduction in the accruals may be required resulting in an increase in
income in the period such determination is made. 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.
Applica may also test earlier if facts and circumstances indicate that there may be a potential
impairment. The test for impairment is based upon a number of factors, including operating
results, business plans
and projected future cash flows. Applica wrote off its remaining goodwill of $62.8 million in
the second quarter of 2004. 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. F-11




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 Applicas financial condition but have
significantly affected operations from time to time. However, circumstances could change which may
alter future expectations. Foreign Currency Translation The financial statements of Applicas non-U.S. subsidiaries are translated in accordance with
Statement of Financial Accounting Standards (SFAS) 52, Foreign Currency Translation. SFAS 52
distinguishes between translation adjustments and foreign currency transactions. In accordance with
SFAS 52, subsidiaries that use the local currency as the functional currency translate assets and
liabilities 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
was included in a separate component of shareholders equity entitled Accumulated Other
Comprehensive Earnings (Loss). For subsidiaries that transact business predominantly in U.S.
dollars or if the local currency is deemed to be hyper-inflationary, the U.S. dollar is used as the
functional currency. 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 2004, 2003 and 2002, net foreign translation losses included in Applicas
statement of operations were $0.7 million, $3.0 million and $1.9 million, respectively. Gains or
losses resulting from foreign currency transactions are recorded in the foreign subsidiaries
statement of operations. Such losses totaled $1.4 million, $0.3 million and $0.3 million in 2004,
2003 and 2002, 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, 2004 and 2003 included
approximately $8.3 million and $11.2 million, respectively, held in foreign banks by Applicas Hong
Kong, Canadian and Latin American subsidiaries. Comprehensive Earnings (Loss) 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. The components of accumulated other comprehensive earnings, net of tax, were as follows: At December 31,2004
    
    
    2003(In thousands)Accumulated foreign currency translation adjustment
    
    $
    (2,668
    )
    
    $
    (5,525
    )Accumulated net unrealized gain on derivatives, net of tax
    
    
    (925
    )
    
    
    (813
    )$
    (3,593
    )
    
    $
    (6,338
    )
 Tax provisions (benefits) related to comprehensive earning adjustments, primarily due to
unrealized gains and (losses) on derivatives, were zero, $1.4 million and ($1.6) million in 2004,
2003 and 2002, respectively. F-12




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED In July 2004, Applica sold its Hong Kong based manufacturing subsidiary. In connection
with the sale, Applica realized a loss of approximately $0.8 million from cumulative foreign
currency translation adjustments. Inventories Inventories are stated at the lower of cost or market; cost is determined by the first-in,
first-out method. Inventories included the following: At December 31,2004
    
    
    2003(In thousands)Raw materials
    
    $
    4,528
    
    
    $
    8,383Work in process
    
    
    280
    
    
    
    3,507Finished goods
    
    
    126,695
    
    
    
    94,436$
    131,503
    
    
    $
    106,326
 Revenue Recognition Applica recognizes revenue when title, risks and rewards of ownership of its
products transfer to its customers, all contractual obligations have been satisfied and collection
of the resulting receivable is reasonably assured. Generally, this is
at the time products are shipped
for delivery to customers. Net sales are 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 included in net sales and the associated costs are included in cost of
goods sold in the period when the sale occurs. Advertising Costs Advertising and promotional costs are expensed as incurred and are included in operating
expenses in the accompanying consolidated statements of operations. Total advertising and
promotional costs for the years ended December 31, 2004, 2003 and 2002 were approximately $36.1
million, $31.4 million and $34.2 million, respectively. 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 the straight-line method. 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. Freight Costs Freight costs on goods shipped and not billed to Applicas customers were included in
operating expenses in the accompanying consolidated statements of operations. Freight costs totaled
$30.8 million, $21.5 million and $20.8 million during the years ended December 31, 2004, 2003 and
2002, respectively. Warranty Estimated future warranty obligations related to certain products are provided by charges to
cost of goods sold in the period in which the related revenue is recognized. Applica establishes a
reserve for warranty obligations based on its historical warranty experience. F-13




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Accrued
product warranties as of December 31, 2004, 2003 and 2002 were as
follows: (In thousands)Balance at December 31, 2002
    
    $
    5,698Accrued product warranties
    
    
    32,201Reductions
    
    
    (31,815
    )Balance at December 31, 2003
    
    
    6,084Accrued product warranties
    
    
    44,306Reductions
    
    
    (43,207
    )Balance at December 31, 2004
    
    $
    7,183
 Stock Based Compensation At December 31, 2004, Applica had four active stock-based compensation plans, which are
described more fully in Note N  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 (loss) earnings and (loss) earnings
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 provisions of SFAS 123
Accounting for Stock Based Compensation: For the Years Ended December 31,2004
    
    
    2003
    
    
    2002(In thousands, except per share amounts)Net (loss) earnings, as reported.
    
    $
    (132,954
    )
    
    $
    15,223
    
    
    $
    (73,777
    )Add: Stock-based employee
compensation expense included in
net (loss) earnings, net of tax
    
    
    113
    
    
    
    
    
    
    
    Deduct: Total stock-based
employee compensation expense
determined under fair value
based method, net of tax
    
    
    (831
    )
    
    
    (371
    )
    
    
    (1,016
    )Pro forma net (loss) earnings
    
    $
    (133,672
    )
    
    $
    14,852
    
    
    $
    (74,793
    )(Loss) earnings per share:Basic  as reported
    
    $
    (5.55
    )
    
    $
    0.65
    
    
    $
    (3.15
    )Basic  pro forma
    
    $
    (5.58
    )
    
    $
    0.63
    
    
    $
    (3.19
    )Diluted  as reported
    
    $
    (5.55
    )
    
    $
    0.63
    
    
    $
    (3.10
    )Diluted  pro forma
    
    $
    (5.58
    )
    
    $
    0.62
    
    
    $
    (3.14
    )
 There was approximately $0.1 million in stock-based employee compensation expense included in
the net loss in 2004 relating to the extension of the exercise period of options to purchase
500,000 shares of the common stock of Applica in connection with the resignation of Applicas
Chairman of the Board in August 2004. There was no stock-based employee compensation expense
included in net earnings (loss) in 2003 or 2002. The
above pro forma disclosures may not be representative of the effects
on reported net (loss)
earnings 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: F-14




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For the Years ended December 31,2004
    
    
    2003
    
    
    2002Expected dividend yield
    
    
    00.0
    %
    
    
    00.0
    %
    
    
    00.0
    %Expected price volatility range
    
    
    60.8% - 65.6
    %
    
    
    64.1% - 82.7
    %
    
    
    93.3% - 96.5
    %Risk-free interest rate
    
    
    3.15
    %
    
    
    3.0
    %
    
    
    5.3
    %Expected life of options in years
    
    
    4
    
    
    
    4
    
    
    
    4
 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. 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 objective in holding derivatives is to decrease the volatility of earnings and cash flows
associated with changes in foreign currency and interest rates. During 2004, 2003, and 2002, there were no significant gains or losses recognized in earnings
for hedge ineffectiveness. Applica did not discontinue any hedges during 2004, 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. F-15




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Income Taxes The provision for income taxes is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities and certain other adjustments.
Applica provides for deferred taxes under the asset and liability method, in accordance with SFAS
109 Accounting for Income Taxes. Under such method, deferred taxes are adjusted for tax rate
changes as they occur. Deferred income tax assets and liabilities are computed annually for
differences between the financial statements and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect taxable income. A
valuation allowance is provided for deferred tax assets if it is more likely than not that (1)
these items will either expire before Applica is able to realize their benefit or (2) the future
deductibility is uncertain. Legal Costs Legal costs are expensed as incurred and are included in operating expenses. For the years
ended 2004, 2003 and 2002 Applica expensed $4.9 million, $8.1 million and $2.5 million,
respectively, related to legal matters. Earnings (Loss) Per Share Basic earnings per share is computed by dividing net (loss) earnings for the period by the
weighted average number of common shares outstanding during the period. Diluted earnings per share
is computed by dividing net (loss) earnings for the period by the weighted average number of common
shares outstanding during the period, plus the dilutive effect of common stock equivalents, such as
stock options, using the treasury stock method. The following table sets forth the computation of
basic and diluted (loss) earnings per share: For the Years Ended December 31,2004
    
    
    2003
    
    
    2002(In thousands, except per share amounts)Net (loss) earnings
    
    $
    (132,954
    )
    
    $
    15,223
    
    
    $
    (73,777
    )Weighted average shares outstanding
    
    
    23,975
    
    
    
    23,573
    
    
    
    23,415Dilutive effect of stock options
    
    
    
    
    
    
    425
    
    
    
    403Dilutive weighted average common shares outstanding
    
    
    23,975
    
    
    
    23,998
    
    
    
    23,818Basic (loss) earnings per share
    
    $
    (5.55
    )
    
    $
    0.65
    
    
    $
    (3.15
    )Diluted (loss) earnings per share
    
    $
    (5.55
    )
    
    $
    0.63
    
    
    $
    (3.10
    )
 The following table shows potential common stock equivalents outstanding to purchase shares of
common stock that were excluded in the computation of diluted (loss) earnings per share. For 2004,
all common stock equivalents were excluded because their inclusion
would have been anti-dilutive as Applica incurred a net loss before
cumulative effect of change in accounting principle.
The amounts in 2003 and 2002 were excluded because their exercise prices were greater than the
average market price of the common shares during the applicable period: For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Number of shares
    
    
    2,755,207
    
    
    
    1,494,685
    
    
    
    642,964Range of exercise price
    
    $
    3.63-31.69
    
    
    $
    6.75-31.69
    
    
    $
    7.60-31.69
 Restructuring and Other Charges (Credits) In the fourth quarter of 2001, Applica initiated a plan to consolidate its Shelton,
Connecticut office with its headquarters located in Miami Lakes, Florida, as well as certain
back-office and supply chain functions in Canada and Latin America. In 2002, Applica recorded $10.6 million in restructuring charges relating
to its decision to consolidate these facilities. The consolidation resulted in a reduction of
approximately 70 employees worldwide and F-16




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED annual savings in payroll and occupancy expenses. In 2003, Applica recorded an additional $4.7 million in
restructuring charges related to its decision to consolidate the Shelton, Connecticut facilities
because it was unable to rent a majority of the facility for the remainder of the lease as
originally planned. In the first quarter of 2004, Applica settled an outstanding litigation
matter relating to the back-office consolidation for $125,000 and reversed the remaining accrual of
$563,000 related to such litigation. These charges (credits) were reflected as a component of
selling, general, and administrative expenses in the accompanying
consolidated statements of
operations. All of these charges (credits) relate to the Household Products business segment. Accrued
liabilities relating to the restructuring and other charges
(credits) were as follows: Amount
    
    
    
    
    
    
    
    
    
    
    AmountAccrued at
    
    
    2004
    
    
    
    
    
    
    Accrued atDec. 31,
    
    
    Provisions
    
    
    2004
    
    
    Dec. 31,2003
    
    
    (Credits)
    
    
    Payments
    
    
    2004(In thousands)Back-office consolidation
    
    $
    5,553
    
    
    $
    (563
    )
    
    $
    2,454
    
    
    $
    2,536
 Amount
    
    
    
    
    
    
    
    
    
    
    AmountAccrued at
    
    
    2003
    
    
    
    
    
    
    Accrued atDec. 31,
    
    
    Provisions
    
    
    2003
    
    
    Dec. 31,2002
    
    
    (Credits)
    
    
    Payments
    
    
    2003(In thousands)Back-office consolidation
    
    
    5,956
    
    
    
    4,681
    
    
    
    (5,084
    )
    
    
    5,553Shareholder litigation
    
    
    450
    
    
    
    
    
    
    
    (450
    )
    
    
    $
    6,406
    
    
    $
    4,681
    
    
    $
    (5,534
    )
    
    $
    5,553
 Product Recall Expenses (Credits) In February 2002, Applica voluntarily recalled approximately 2.1 million toasters. 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, respectively, had been
charged against the accrual. During 2003, recall claims related to the toaster recall
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. 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 January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No.
46, Consolidation of Variable Interest Entities (FIN 46), which addresses consolidation by
business enterprises of variable interest entities (VIEs). FIN 46 is applicable immediately for
VIEs created after January 31, 2003 and is effective for reporting periods ending after December
15, 2003 for VIEs created prior to February 1, 2003. In December 2003, the FASB published a
revision to FIN 46 (FIN 46R) to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of FIN 46R, public
companies that have interests in VIEs that are commonly referred to as special purpose entities
are required to apply the provisions of FIN 46R for periods ending after December 15, 2003. A public
company that does not have any interests in special purpose entities but does have a variable
interest in a VIE created before February 1, F-17




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2003, must apply the provisions of FIN 46R by the end
of the first interim or annual reporting period ending after March 14, 2004. Applica adopted FIN 46
and FIN 46R during the year ended December 31, 2004. The adoption of FIN 46 had no impact on
Applicas financial condition or results of operations. In December 2003, the FASB published a revision to FASB Statement No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefitsan amendment of SFAS 87, 88, and 106
(SFAS 132R). This Statement revises employers disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition of those plans
required by SFAS 87, Employers Accounting for Pensions, SFAS 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
SFAS 106, Employers Accounting for Postretirement Benefits Other Than Pensions. This Statement
retains the disclosure requirements contained in SFAS 132, Employers Disclosures about Pensions
and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those
in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement plans. The required
information is required to be provided separately for pension plans and for other postretirement
benefit plans. The adoption of SFAS 132R did not have a material impact on Applicas financial
condition, results of operations or cash flows. In December 2004, the FASB published a revision to SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS 123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are based on the fair
value of the entitys equity instruments or that may be settled by the issuance of those equity
instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS 123R is effective beginning of the
first interim or annual reporting period that begins after June 15, 2005. Applica has not
determined the impact that SFAS 123R will have on Applicas financial condition, results of
operations or cash flows. In November 2004, the FASB issued SFAS No. 151 Inventory Costsan amendment of ARB No. 43,
Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that . . . under
some circumstances, items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period charges. . . . This
Statement requires that those items be recognized as current-period charges regardless of whether
they meet the criterion of so abnormal. In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this Statement will be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Applica has not determined the impact,
if any, that SFAS 151 will have on Applicas financial condition, results of operations. or cash
flows. In December 2004, the FASB issued SFAS No. 153 Exchanges of Nonmonetary Assetsan amendment
of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. The provisions of this Statement will be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is
not expected to have a material impact on Applicas financial condition, results of operations or
cash flows. In December 2004, the FASB issued Staff Position No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (FSP FAS 109-1) The American Jobs Creation Act of 2004 (AJCA) provides for a special
one-time tax deduction of 85% of certain foreign earnings that are repatriated (as defined in the
AJCA) in either an enterprises last tax year that began before the enactment date, or the first
tax year that begins during the one-year period beginning on the date of enactment.
FSP FAS 109-2 was effective upon its issuance. Applica adopted the provisions of FSP FAS 109-2
as of December F-18




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 31, 2004, resulting in additional disclosures in Applicas consolidated financial
statements (see Note L  Income Taxes, below). Reclassifications Certain prior period amounts have been reclassified to conform with the current years
presentation. NOTE B - INVESTMENT IN JOINT VENTURE In July 2003, ZonePerfect Nutrition Company, an investment held by a partnership that was 50%
owned by Applica, was sold for approximately $160.0 million. Such sale resulted in equity in net
earnings of joint ventures of $55.6 million in 2003. In August 2003, Applica received a cash
distribution from the partnership of $51.4 million, which reduced Applicas investment in the
partnership. A portion of the proceeds from the sale of Zoneperfect was being held in escrow as of December
31, 2004 and 2003, $8.4 million of which was owed to Applica. Half of this amount ($4.2 million)
was recorded as part of the equity in net earnings of joint ventures
in 2003. At December 31, 2004 and 2003, Applica had not collected
any portion of the escrowed funds and had included the
$4.2 million in other receivables. Management believed
that the collection of the remaining $4.2 million was uncertain and, therefore, such amount was not
recorded into income as of December 31, 2004 and 2003. Pursuant to the escrow agreement, the funds held in escrow were to be released to Applica at
18 and 24 months from date of closing, subject to any adjustments to the escrowed funds for
breaches of representations and warranties or disputes related to a contingent negotiated matter.
To date, two claims have been made against the escrowed funds. Applicas portion of the disputed
funds is $2.6 million. Pursuant to the escrow agreement, the disputed amounts are prohibited from
being distributed until the applicable disputes are resolved. Therefore, in February 2005, Applica
received approximately $1.6 million in the first distribution of the funds held in escrow. The
disputed claims are being referred to mediation or arbitration. Assuming no additional claims are
made against the escrowed fund, in September 2005, management expects to receive in the second
distribution of funds from escrow, an additional cash payment of $4.2 million and to record
additional earnings of $1.6 million. If and when the two claims made on the escrowed funds are
resolved in its favor, Applica will receive cash and record additional earnings of up to $2.6
million. The partnership was dissolved in June 2004. The partnerships summarized financial information, derived from its financial statements, is
as follows: At December 31,2003(In thousands)Balance Sheet:Total assets
    
    $
    8,703Total liabilities
    
    $
    33Partners capital
    
    $
    8,670
 For the Years Ended December 31,2003
    
    
    2002(In thousands)Income Statement:Investment income
    
    $
    31
    
    
    $
    156Realized/unrealized gain on investments
    
    $
    49,133
    
    
    $
    31,338Net earnings
    
    $
    43,109
    
    
    $
    31,487
 As of December 31, 2003, the difference between the carrying value of Applicas investment in
the joint venture partnership and 50% of the net equity of the partnership was due to the
disproportionate share of remaining distributions from the partnership to be received by Applica
pursuant to an agreement between Applica and the other 50% partner. F-19




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Applicas equity in the net earnings of joint ventures was zero for the year ended December
31, 2004 and $55.6 million for the year ended December 31, 2003. 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 were earnings of approximately $54.1
million as of December 31, 2004 and 2003 related to Applicas equity in the net earnings of the
joint venture partnership. NOTE C - SALE OF SUBSIDIARY, DIVISION AND PROPERTY Sale of Subsidiary In July 2004, Applica sold its Hong Kong based manufacturing subsidiary, Applica Durable
Manufacturing Limited (Applica Durable) for $28.1 million. The sale primarily allowed Applica to
outsource the manufacturing of its products in China. The decision to outsource the manufacturing
operations did not materially impact the operations and cash flows of Applica, except for certain
contract manufacturing operations. The assets and liabilities sold as part of the transaction included the following: (In thousands)Accounts receivable
    
    $
    8,175Intercompany receivable
    
    
    30,604Inventory, net
    
    
    15,455Prepaid expenses and other current assets
    
    
    4,516Property and equipment, net
    
    
    17,732$
    76,482Accounts payable and other current liabilities
    
    $
    36,782Long-term debt
    
    
    7,491Deferred taxes
    
    
    3,346$
    47,619
 For 2004, revenues and gross profit from Applicas contract manufacturing operations in China
were $14.2 million and $3.5 million, respectively. Revenues and gross profit for 2003 were $24.6
million and $2.5 million, respectively. Revenues and gross profit for 2002 were $76.2 million and
$13.7 million, respectively. The sale of the Chinese manufacturing operations resulted in a loss of approximately $0.8
million, primarily from the realization of cumulative foreign currency translation adjustments. Sale of Division In October 2004, Applica sold the Jerdon hotel and hospitality division. This division of the
professional personal care products segment was sold because it no longer fit in the long-term
strategic plans of Applica. The sale resulted in a gain on sale of $3.4 million. Revenues and pre-tax earnings attributable to the Jerdon division for 2004 were $8.6 million
and $0.1 million, respectively. Revenues and pre-tax earnings for 2003 were $13.3 million and $0.7
million, respectively. Revenues and pre-tax earnings for 2002 were $13.4 million and $0.2 million,
respectively. Sale of Property In the fourth quarter of 2004, Applica sold its executive offices located in Miami Lakes,
Florida for $9.3 million. The sale resulted in a gain of approximately $1.3 million. The proceeds
from the sale were used to repay the $5.7 million outstanding mortgage on the property and the
remainder was used to repay a portion of Applicas credit facility. In October 2004, Applica moved
its executive offices to a leased facility in Miramar, Florida. F-20




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE D  RESTRUCTURING CHARGES Mexico Manufacturing In the fourth quarter of 2003, Applica initiated a plan to move the production of irons and
toaster ovens for the U.S. marketplace from Mexico to third party suppliers in China in an
effort to lower the costs of these products as manufacturers in China were providing good quality
and design at a cost below our cost of producing these products in
Mexico. This restructuring was
completed in December 2004. In connection with the above restructuring plan, in 2004 and 2003, Applica recorded
restructuring charges of $4.7 million and $3.7 million,
respectively, consisting of $4.5 million
of severance and $3.9 million of impairment charges associated with the write-down of machinery and
equipment. The severance was paid in full by the end of 2004. At December 31, 2004, approximately
$0.7 million of machinery and equipment was classified as assets held for sale and included in
prepaid expenses and other in the accompanying consolidated balance sheet. In the third quarter of 2004, Applica initiated a plan to move the production of the Home
Café single cup coffee maker from Mexico to a third party manufacturer in China. The
restructuring was completed in February 2005. At December 31, 2004, the number of Home Café units
scheduled for production in Mexico was significantly reduced, and the production schedule
shortened, to cut-off production by the end of February 2005. Due to the revised production
schedule, an impairment analysis was performed as of December 31, 2004 in order to determine the
recoverability of the carrying value of the machinery and equipment used for the Home Café
production. Additionally, due to lead time constraints of raw materials
and purchase commitments, the raw materials inventory relating to the Home Café production was
evaluated for obsolescence. In connection with the above restructuring, Applica recorded an impairment of $3.7 million,
consisting of impairment charges of approximately $1.4 million for machinery and equipment and
approximately $2.3 million for obsolete raw materials inventory, net of approximately $0.7 million
of estimated realizable value. Hong Kong-Based Manufacturing In the fourth quarter of 2003, Applica initiated a plan to restructure its Hong Kong-based
manufacturing operations to focus primarily on products with proprietary technologies, such as the
TideTM BuzzTM Ultrasonic Stain Remover, and to outsource most of its vertical
integration. As a result, in the first quarter of 2004, management closed one factory totaling
approximately 437,000 square feet. In connection with this restructuring plan, Applica recorded
charges of approximately $0.8 million and $3.3 million in 2004 and 2003, respectively, consisting
of impairment charges for the write-off of machinery and equipment of $2.5 million and severance
of $1.6 million, respectively. The severance was paid in full in 2004. In July 2004, Applica sold
its manufacturing operations in China. Estimated
fair value for machinery and equipment was determined by either
appraisals or discounted cash flows. All restructuring charges relate to the Manufacturing reportable segment. NOTE E - TERMINATION BENEFITS In August 2004, David M. Friedson resigned his position as Chairman of the Board and a
director of Applica. In connection with his resignation, Applica entered into a separation
agreement with Mr. Friedson pursuant to which Mr. Friedsons employment agreement was terminated
and Applica agreed to pay him $6.5 million over the next year. Mr. Friedson agreed to repay
approximately $3.1 million in outstanding loans to Applica on or before June 15, 2005. Applica
also agreed to provide Mr. Friedson certain health insurance benefits for a period of 18 months and
to extend the exercise period of options to purchase 500,000 shares of the common F-21




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED stock of Applica for an exercise price of $3.625 per share. The options, which would have
expired 90 days after the termination of Mr. Friedsons employment, now expire in December 2005.
The extension of the options resulted in compensation expense in 2004 of approximately $0.1
million. Additionally, during the third quarter of 2004, Applica incurred termination costs in
connection with the termination of certain other senior management employment and consulting
agreements and relationships of approximately $2.6 million, including certain officers in
Hong-Kong. As of December 31, 2004, approximately $2.2 million of the termination benefits were paid.
The remaining $6.9 million was included in accrued expenses in the accompanying consolidated
balance sheet as of December 31, 2004. NOTE F  GOODWILL AND OTHER INTANGIBLE ASSETS 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 required 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. Applica applied the provisions of SFAS 142 beginning on January 1, 2002 and performed a
transitional fair valued based impairment test. In accordance with SFAS 142, the testing for
impairment of goodwill is performed in two steps: (1) potential impairment is identified by
comparing the fair value of a reporting unit with its carrying amount (including goodwill); and (2)
if fair value is less than the carrying amount, an impairment loss is estimated as the excess of
the carrying amount of the goodwill over its implied value. Based on the initial impairment test, performed with the assistance of an independent third
party valuation group, Applica determined that the implied value of its goodwill was $49.5 million,
resulting in a non-cash adjustment in the carrying value of goodwill of $121.3 million ($78.8
million, net of tax) in the first quarter of 2002. The implied fair value of goodwill was
estimated using a combination of market multiples, comparable transactions and discounted cash flow
methodologies. In accordance with SFAS 142, the impairment charge was reflected as a cumulative
effect of change in accounting principle in the first quarter of 2002. The implied fair value of goodwill was determined by allocating the fair value of Applica to
all of Applicas assets and liabilities; any excess of fair value over the amount allocated
represented implied fair value of goodwill. The allocation process was performed solely for
purposes of testing goodwill for impairment. Thus, the carrying
amounts of assets and liabilities, other than goodwill, were not affected. The fair value of the individual assets is the amount at which an asset could be bought or
sold in a current transaction not involving a forced or liquidating sale. The fair value of the
individual liabilities is the amount at which a liability could be incurred or settled in a current
transaction not involving a forced or liquidating sale. In Applicas process of allocating the fair value to its tangible assets, primarily accounts
receivable, inventory and manufacturing property, plant and equipment in China and Mexico, and
identifiable intangible assets (i.e., customer relationships and tradenames) and liabilities,
Applica determined that the implied value of goodwill (the residual) was $49.5 million. As of June 30, 2002 and 2003, Applica performed its annual fair value assessment, with the
assistance of a third party valuation group, and determined that no additional impairment charge
was necessary. Due to lower than expected sales of certain core categories of Black & Decker®
branded products in the third and fourth quarters of F-22




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2003, Applica performed an additional fair value assessment as of December 31, 2003 with the
assistance of an independent third party valuation group, and determined that no impairment charge
was necessary. As of June 30, 2004, Applica performed its annual fair value assessment of goodwill, with the
assistance of an independent third party valuation group, and determined that the implied value of
its goodwill was zero, resulting in a non-cash adjustment in the carrying value of goodwill of
$62.8 million in the second quarter of 2004. The impairment charge was included as a component of
selling, general and administrative expenses in the accompanying statement of operations for 2004. The impairment of goodwill was primarily due to lower than expected cash flows, resulting from
lower-than-anticipated gross profit margins attributable to increased costs of raw materials and
higher transportation costs. Implied fair value of goodwill was estimated using a combination of
market multiples, comparable transactions and discounted cash flow methodologies. The implied fair value of goodwill at June 30, 2004, was determined by allocating the fair
value of Applica to all of Applicas assets and liabilities; any excess of fair value over the
amount allocated represented implied fair value of goodwill. In Applicas process of allocating the fair value to its tangible assets, primarily accounts
receivable, inventory and manufacturing property, plant and equipment in Mexico, and identifiable
intangible assets (i.e., customer relationships and tradenames) and liabilities, Applica determined
that the implied value of goodwill (the residual) was zero. The carrying amount of goodwill was as
follows: (In thousands)Balance at December 31, 2003 and 2002
    
    $
    62,812Impairment adjustment at June 30, 2004
    
    
    (62,812
    )*Balance at December 31, 2004
    
    $
    
  * Relates primarily to the Household Products segment. 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,
with assistance from an independent third party valuation group, 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 identified above. Mutually agreed upon renewals would be at a 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 began to decrease significantly, which decrease 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 its 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 valuation 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 valuation
analysis, management believed that there was no remaining value in the initial intangible asset as
of December 31, 2003. Accordingly, Applica recorded an impairment charge F-23




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED of approximately $7.2 million to write off the unamortized book value of the asset. The
impairment charge was 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 valuation analysis, the impairment charge was classified as a
component of income from operations in the accompanying statement of operations for 2003. The components of Applicas intangible assets subject to amortization are as follows: December 31, 2004
    
    
    December 31, 2003WeightedAverage
    
    
    Gross
    
    
    
    
    
    
    GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedPeriod
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    Amortization(Years)
    
    
    (In thousands)Licenses
    
    
    5.3
    
    
    $
    3,000
    
    
    $
    (1,055
    )
    
    $
    3,000
    
    
    $
    (333
    )Contract-based
    
    
    6.4
    
    
    
    5,988
    
    
    
    (3,440
    )
    
    
    5,988
    
    
    
    (2,509
    )$
    8,988
    
    
    $
    (4,495
    )
    
    $
    8,988
    
    
    $
    (2,842
    )
 Amortization expense related to intangible assets was $1.7 million during 2004, $8.6 million
during 2003 (excluding the above impairment charge of $7.2 million) and $8.3 million during 2002.
The following table provides information regarding estimated amortization expense for each of the
following years ended December 31: (In thousands)2005
    
    $
    1,9112006
    
    
    8802007
    
    
    5702008
    
    
    2612009
    
    
    261Thereafter
    
    
    610
 NOTE G - PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant and equipment: At December 31,Useful Lives
    
    
    2004
    
    
    2003(Dollars in thousands)Building
    
    15 - 50 years
    
    $
    7,430
    
    
    $
    15,963Building improvements
    
    8 - 31 years
    
    
    652
    
    
    
    4,884Computer equipment
    
    3 - 5 years
    
    
    31,635
    
    
    
    26,495Equipment and other
    
    3 - 8 years
    
    
    66,985
    
    
    
    111,579Leasehold improvements*
    
    8 years
    
    
    3,727
    
    
    
    11,600Land and land improvements**
    
    15-31 years
    
    
    1,069
    
    
    
    3,762Total
    
    
    
    
    
    
    111,498
    
    
    
    174,283Less accumulated depreciation
    
    
    
    
    
    
    73,171
    
    
    
    103,894$
    38,327
    
    
    $
    70,389
   *
    
    Shorter of remaining term of lease or useful life**
    
    Only improvements are depreciated Applica is in the final stages of a major upgrade of its information technology
infrastructure, including the installation of a new enterprise resource planning system. As of
December 31, 2004 and 2003, approximately $11.8 million and $3.4 million, respectively, of
capitalized expenditures associated with the information technology upgrade were included in
property, plant, and equipment as assets not yet placed into service. F-24




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED In connection with the sale of its Hong Kong-based manufacturing operations, and the sale of
the executive offices in Miami Lakes, Florida, Applica sold property, plant and equipment with a
net book value of approximately $17.7 million and $7.6 million, respectively. NOTE H - ACCRUED EXPENSES Accrued expenses are summarized as follows: At December 31,2004
    
    
    2003(In thousands)Promotions, co-op and other advertising allowances
    
    $
    12,565
    
    
    $
    15,327Salaries and bonuses
    
    
    11,629
    
    
    
    7,384Warranty
    
    
    7,183
    
    
    
    6,084Product liability
    
    
    4,139
    
    
    
    3,941Back-office consolidation
    
    
    2,536
    
    
    
    5,553Freight
    
    
    2,259
    
    
    
    2,654Interest
    
    
    2,530
    
    
    
    2,851Royalty
    
    
    7,020
    
    
    
    1,192Other
    
    
    12,185
    
    
    
    16,376$
    62,046
    
    
    $
    61,362
 NOTE I  SHORT-TERM DEBT Revolving Credit Facility In 2001, Applica replaced its revolving credit and term debt facilities with a four-year
asset-based senior secured credit facility that provided for borrowings on a revolving basis of up
to $205 million with a $10 million sub-limit for letters of credit. In November 2004, Applica
amended and restated the senior credit facility, to, among other things, reduce the credit amount
to $175 million (including $10.0 million for letters of credit). Other changes to the amended
credit facility include the replacement of the minimum Ebitda (as defined in the credit agreement)
with a fixed charge ratio and the addition of a seasonal advance of up to $10.0 million between
September 1 and November 15, provided certain measurements are achieved. The amended credit
facility has a maturity date of November 2009. Advances under the credit facility are governed by Applicas collateral value, which is based
upon percentages of eligible accounts receivable and inventories. Under the amended facility, if
Applica does not maintain a minimum fixed charge coverage ratio of 1.0 to 1.0, Applica must
maintain a minimum daily availability under its borrowing base of $20 million and a minimum average
daily availability of $30 million. As of December 31, 2004, Applicas fixed charge coverage ratio
was less than 1.0 to 1.0. If Applica maintains a fixed charge coverage ratio of greater than 1.0
to 1.0, but less than 2.0 to 1.0, there is no availability requirement, however there is an
availability block of $10 million. If Applica maintains a fixed charge coverage ratio of greater
than 2.0 to 1.0, there is no availability requirement and no availability block. 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
fixed charge coverage ratio and set at 2.00% at December 31, 2004), which was 4.40% at
December 31, 2004; or
    the Base Rate (which is Bank of Americas prime rate), plus a specified margin
(determined based upon Applicas fixed charge coverage ratio and was zero at December 31,
2004), which was 5.25% at December 31, 2004. Swing loans up to $15.0 million bear interest at the Base Rate plus a specified margin
(determined based on Applicas fixed charge coverage ratio and was zero at December 31, 2004),
which was 5.25% at December 31, F-25




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2004. Applica may at its option reduce the amount available under the credit facility to the
extent such amounts are unused or prepaid in certain minimum amounts. The credit facility is collateralized by substantially all of the real and personal property,
tangible and intangible, of Applica Incorporated and its domestic subsidiaries, as well as:  
    a pledge of all of the stock of such domestic subsidiaries;
    a pledge of not more than 65% of the voting stock of each direct foreign subsidiary of
Applica Incorporated and each direct foreign subsidiary of each domestic subsidiary of
Applica Incorporated; and
    a pledge of all of the capital stock of any subsidiary of a subsidiary of Applica
Incorporated that is a borrower under the credit facility. The credit facility is guaranteed by all of the current, and will be guaranteed by any future,
domestic subsidiaries of Applica Incorporated. The credit facility contains a number of significant covenants that, among other things,
restrict the ability of Applica to dispose of assets, incur additional indebtedness, prepay other
indebtedness, pay dividends, repurchase or redeem capital stock, enter into certain investments or
create new subsidiaries, enter into sale and lease-back transactions, make certain acquisitions,
engage in mergers or consolidations, create liens, or engage in certain transactions with
affiliates, and that otherwise restrict corporate and business activities. At December 31, 2004,
Applica was in compliance with all covenants under the credit facility. As of December 31, 2004, Applica had letters of credit of $1.5 million outstanding under its
credit facility, as compared to $2.5 million outstanding as of December 31, 2003. At December 31,
2004, Applica had $53.8 million available under the credit facility. As stated above, Applica must
currently maintain a minimum daily availability under its borrowing base of $20 million and a
minimum average daily availability of $30 million. Although the credit facility expires in November 2009, 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. Notes and Acceptance Payable Certain of Applicas foreign subsidiaries have approximately $1.2 million in trade finance and
letter of credit lines, payable on demand, which are secured by the subsidiaries tangible and
intangible property, and a guarantee by the parent company, Applica Incorporated. As of December
31, 2004 and 2003, there was $0.9 million and zero, classified as short term, respectively under
the trade finance lines. Applica had zero and $0.3 million outstanding under the letter of credit
lines at December 31, 2004 and 2003, respectively. Applicas credit facility, including interest rate swaps designated as hedges, and notes and
acceptance payable is summarized below: Stated
    
    
    Interest RateInterest
    
    
    Swaps
    
    
    Effective
    
    
    SwapBalance
    
    
    Rate (1)
    
    
    Pay Fixed (2)
    
    
    Interest Rate (3)
    
    
    Maturities(Dollars in Thousands)At December 31, 2004:Credit facility
    
    $
    88,541
    
    
    
    4.40
    %
    
    $
    
    
    
    
    Notes and acceptance payable
    
    
    914
    
    
    
    2.83
    %
    
    
    
    
    
    
    Total
    
    $
    89,455
    
    
    
    
    
    
    $
    
 F-26




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Stated
    
    
    Interest RateInterest
    
    
    Swaps
    
    
    Effective
    
    
    SwapBalance
    
    
    Rate (1)
    
    
    Pay Fixed (2)
    
    
    Interest Rate (3)
    
    
    Maturities(Dollars
in Thousands)At December 31, 2003:Credit facility
    
    $
    62,703
    
    
    
    3.1
    %
    
    $
    50,000
    
    
    
    3.2
    %
    
    December 2004Notes and acceptance payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    62,703
    
    
    
    
    
    
    $
    50,000
   (1)
    
    Interest rates are based upon the rates at December 31, 2004 and 2003; 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 Fixed column. NOTE J  LONG-TERM DEBT 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, 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 and incurred a loss on redemption of $187,000. 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. At December 31, 2004 Applica was in compliance with all
covenants under the subordinated note indenture. 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 bore interest at an annual rate of 7.25%, with monthly principal and interest
payments based on a 20-year amortization. A final balloon payment was due at the end of the term.
The loan was collateralized by a first mortgage on the property and the building located thereon.
In the fourth quarter of 2004, Applica sold its executive offices in Miami Lakes, Florida to an
unrelated third party for $9.3 million and $5.7 million of the proceeds was used to repay the
outstanding mortgage on the property. The remainder of the proceeds was used to pay down a portion
of Applicas credit facility. 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. At December 31, 2004, the
notes payable were included in current portion of long term debt in the accompanying consolidated
balance sheet. Applicas long-term debt, including interest rate swaps designated as hedges, is summarized
below: F-27




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Interest Rate Swaps
    
    
    Effective Interest Rate
    
    
    SwapBalance
    
    
    Stated Interest Rate
    
    
    Pay Fixed (1)
    
    
    (2)
    
    
    Maturities(Dollars
in Thousands)At
December 31, 2004:Notes Payable
    
    $
    3,000
    
    
    
    6.0
    %
    
    $
    
    
    
    
    6.0
    %10% Notes (3)
    
    
    61,008
    
    
    
    10.0
    %
    
    
    30,000
    
    
    
    8.2
    %
    
    July 2008Total
    
    
    64,008
    
    
    
    
    
    
    
    30,000Less current portion
    
    
    3,000
    
    
    
    
    
    
    
    Total long-term debt
    
    $
    61,008
    
    
    
    
    
    
    $
    30,000At December 31, 2003:Mortgage Loan (4)
    
    $
    5,767
    
    
    
    7.3
    %
    
    $
    
    
    
    
    7.3
    %Notes Payable
    
    
    3,000
    
    
    
    6.0
    %
    
    
    
    
    
    
    6.0
    %10% Notes (3)
    
    
    65,318
    
    
    
    10.0
    %
    
    
    30,000
    
    
    
    8.4
    %
    
    July 2008Total
    
    
    74,085
    
    
    
    
    
    
    
    30,000Less current portion.
    
    
    151
    
    
    
    
    
    
    
    Total long-term debt.
    
    $
    73,934
    
    
    
    
    
    
    $
    30,000
   (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 Fixed column.(3)
    
    Includes $258,000 and $318,000 that represented the positive fair value of underlying hedge
as of December 31, 2004 and 2003, respectively, as required pursuant to SFAS 133.(4)
    
    In the fourth quarter of 2004, Applica sold its executive offices in Miami Lakes, Florida to
an unrelated third party for $9.3 million. Part of the proceeds was used to repay the
outstanding mortgage. NOTE K - EMPLOYEE BENEFIT PLANS Applica has a 401(k) plan for its employees to which it 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, 2004, 2003 and 2002 totaled approximately
$477,000, $749,000 and $803,000, respectively, and were included as a component of operating
expenses in the consolidated statement of operations. Applica does not provide any health or
other benefits to retirees. NOTE L - INCOME TAXES At December 31, 2004 and 2003, Applica had deferred tax assets in excess of deferred tax
liabilities of $93.8 million and $68.7 million, respectively. Applica determined that it was more
likely than not that $11.2 million and $61.3 million of such assets will be realized, resulting in
a valuation allowance of $82.6 million and $7.4 million as of December 31, 2004 and 2003,
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. Commencing in 2001, the earnings of certain foreign entities were taxed based on U.S.
statutory rates, notwithstanding the repatriation of earnings. Applica repatriated approximately
$91.4 million of income from its foreign operations in 2004. In 2003, Applica did not repatriate
any income from its foreign operations. However, Applica provided taxes on certain 2003 foreign
earnings at U.S. based rates that Applica did not intend to permanently reinvest. In 2002,
Applica repatriated approximately $20.7 million from its foreign operations. No provision was
made for U.S. taxes on the remaining accumulated undistributed earnings of Applicas foreign
subsidiaries of approximately $61.5 million at December 31, 2004 and $156.0 million at
December 31, 2003, as it was anticipated that such earnings would be reinvested in their respective
operations or in other foreign operations. In the second quarter of 2004, Applica changed its position regarding the permanent investment
of certain foreign undistributed earnings, primarily as a result of its decision to exit its Hong
Kong-based manufacturing F-28




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED operations. In the fourth quarter of 2004, Applica repatriated $78.4
million of the $85.5 million of the previously untaxed earnings for which a related tax expense of
$24.0 million was recorded in the second quarter of 2004. SFAS No. 109, Accounting for Income Taxes requires that a valuation allowance be established
when it is more likely than not that all or a portion of a deferred tax asset will not be realized.
A review of all available positive and negative evidence needs to be considered, including a
companys current and past performance, the market environment in which the company operates, the
utilization of past tax credits and length of carryback and carryforward periods. Forming a
conclusion that a valuation allowance is not needed is difficult when there is negative objective
evidence such as cumulative losses in recent years. Cumulative losses weigh heavily in the overall
assessment. As a result of the reviews undertaken at June 30, 2004 and September 30, 2004, Applica
concluded that it was appropriate to record additional valuation allowances of $51.4 million and
$3.9 million in the second and third quarters of 2004, respectively. Management is still evaluating the impact to Applica from the recent enactment of the American
Jobs Creation Act of 2004. This law provides for a temporary dividends received deduction from
controlled foreign corporations to the U.S. Applica repatriated $78.4 million during the fourth
quarter of 2004. Certain of these dividends may be excluded from taxable income pursuant to the
Act and may result in future tax benefits. Applica expects to
complete its evaluation in 2005. Based on the review undertaken at December 31, 2004, Applica concluded that an additional
$19.9 million in valuation allowance was needed. Most of the $24.0 million of the deferred tax
liability related to the repatriation of foreign earnings that was recorded in the second quarter
of 2004 converted to additional deferred tax assets that were reserved for in the fourth quarter.
Net operating loss carryforwards and foreign tax credits were not utilized in 2004 as a result of
the 85% dividends received deduction allowed by the AJCA, but a valuation allowance was applied
against these benefits. Applica expects to realize the benefits of the remaining net deferred tax
assets of approximately $11.2 million at December 31, 2004, primarily from identified tax planning
strategies. Applica expects to continue to maintain a valuation allowance on certain future tax benefits
until an appropriate level of profitability is reached or Applica is able to develop tax strategies
which would enable it to conclude that it is more likely than not that a portion of its net
deferred tax assets would be realized. Income tax provision (benefit) consisted of the following: For the Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Current:Federal
    
    $
    1,844
    
    
    $
    (174
    )
    
    $
    Foreign
    
    
    4,298
    
    
    
    (279
    )
    
    
    3,449State
    
    
    
    
    
    
    
    
    
    
    6,142
    
    
    
    (453
    )
    
    
    3,449Deferred
    
    
    53,309
    
    
    
    10,600
    
    
    
    1,377$
    59,451
    
    
    $
    10,147
    
    
    $
    4,826
 F-29




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The United States and foreign components of earnings (loss) before income taxes were as
follows: For the Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)United States
    
    $
    (76,288
    )
    
    $
    11,441
    
    
    $
    (4,757
    )Foreign
    
    
    2,785
    
    
    
    13,929
    
    
    
    14,635$
    (73,503
    )
    
    $
    25,370
    
    
    $
    9,878
 The differences between the statutory rates and the tax rates computed on pre-tax earnings are
as follows: For the Year ended December 31,2004
    
    
    2003
    
    
    2002Statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Permanent differences
    
    
    (3.3
    )
    
    
    7.1
    *
    
    
    14.1
    *State income tax
    
    
    2.4
    
    
    
    (1.0
    )
    
    
    (1.4
    )Net tax rate differential on undistributed earnings and
change in estimated tax provision
    
    
    0.4
    
    
    
    (3.1
    )
    
    
    1.7Foreign earnings distributed to, or taxable in, the U.S.
    
    
    (13.6
    )
    
    
    2.5
    
    
    
    2.7Valuation allowance
    
    
    (101.8
    )
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    (0.5
    )
    
    
    (3.2
    )(80.9
    )%
    
    
    40.0
    %
    
    
    48.9
    %
   *
    
    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 and there were no adjustments. As a result, management expects to
receive $1.6 million, plus interest, in the first half of 2005 related to returns filed for loss
carrybacks and other amended returns that were being held until completion of the examination. In
addition, Applica Canada Corporation, Applicas Canadian operating subsidiary, was audited by the
Ontario Ministry of Finance for the 2000, 2001 and 2002 tax years. As a result, net operating
losses and carryforwards were adjusted and no cash taxes were due. Management believes that
adequate provision for taxes has been made for the years not yet examined. The primary components of future deferred tax assets (liabilities) were as follows: At December 31,2004
    
    
    2003(In thousands)Inventory differences
    
    $
    (374
    )
    
    $
    (1,889
    )Accrued expenses
    
    
    12,606
    
    
    
    13,505Valuation allowance
    
    
    (12,199
    )
    
    
    Total current assets
    
    
    33
    
    
    
    11,616Net operating loss and other carryforwards
    
    
    42,802
    
    
    
    33,465Fixed assets
    
    
    3,306
    
    
    
    760Goodwill and intangible asset amortization
    
    
    36,054
    
    
    
    23,469Unrealized derivative tax
    
    
    (579
    )
    
    
    (632
    )Valuation allowance
    
    
    (70,371
    )
    
    
    (7,367
    )Net non-current assets
    
    
    11,212
    
    
    
    49,695Net deferred tax assets
    
    $
    11,245
    
    
    $
    61,311
 The deferred tax assets resulting from disqualifying dispositions of shares of common stock
acquired pursuant to incentive stock options and the exercise of non-qualified stock options in
2004 was zero, after a F-30




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED valuation allowance of $256,000 was applied. In 2003 and 2002 Applica recorded additions to
paid-in capital in the amounts of $47,000 and $41,000, respectively. At December 31, 2004, Applica had net operating loss carryforwards (NOLs) of approximately
$31.9 million for domestic federal income tax purposes and $13.2 million for foreign income tax
purposes. Although management is still evaluating the impact from the recent enactment of the
American Jobs Creation Act, the available domestic NOLs indicated below reflect Applicas proposed
election to apply Internal Revenue Code (IRC) Section 965 in 2004. This would allow for an 85%
dividends received deduction against all or some of the $78.4 million repatriated in the fourth
quarter of 2004. The domestic operating losses and foreign losses expire as follows: Year of Expiration
    

DomesticOperating Losses
    
    
    Foreign Losses2005
    
    $
    
    
    
    $
    1,0202007
    
    
    
    
    
    
    1,7572014
    
    
    
    
    
    
    7,3712019
    
    
    11,502
    
    
    
    2020
    
    
    18,134
    
    
    
    2021
    
    
    3
    
    
    
    2022
    
    
    25
    
    
    
    2024
    
    
    2,204
    
    
    
    Indefinite
    
    
    
    
    
    
    3,081$
    31,868
    
    
    $
    13,229
 Applica also has NOLs in numerous states that had a tax benefit of $9.2 million and $7.2
million in 2004 and 2003, respectively. Applica has applied valuation allowances, tax effected,
against these NOLs of $9.2 million and $4.1 million in 2004 and 2003, respectively. In addition,
Applica has U.S. foreign tax credits of $14.7 million, assuming the IRC Section 965 election, and
$11.4 million in 2004 and 2003, respectively, before an established valuation allowance of $14.7
million as of 2004 and $3.3 million as of 2003. 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. Applicas U.S. subsidiaries have provided a valuation
allowance of $78.9 million on all its deferred tax assets except for $6.2 million related to net
operating loss carryforwards that can be used as a result of a tax planning strategy pursuant to
SFAS 109. NOTE M - COMMITMENTS AND CONTINGENCIES  Litigation Applica is subject to legal proceedings, products 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 claims is difficult to predict, significant changes in the estimated
exposures could occur.  Employment Agreements Applica has entered into employment agreements with several of its senior officers for periods
ranging from one to three years. The agreements provide the executives with an option to terminate
their agreements and receive lump sum payments of up to 30 months compensation if there is a change
in control of Applica, as defined in such agreements. F-31




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Leases Applica has non-cancelable operating leases for office leases and office equipment. The
leases expire over the next ten 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)2005
    
    $
    5,4322006
    
    
    3,5852007
    
    
    3,5372008
    
    
    2,3912009
    
    
    1,988Thereafter
    
    
    6,331$
    23,264
 Rent expense for the years ended December 31, 2004, 2003 and 2002 totaled approximately $6.2
million, $7.5 million and $8.1 million, respectively. In October 2004, Applica sold its executive offices located in Miami Lakes, Florida, for $9.3
million and moved to a 110,000 square foot leased facility in Miramar, Florida. The lease has a
term of 10 years, a five year renewal option and monthly rental payments of approximately $117,000.
In connection with the leased facility, Applica deposited, in the form of an unconditional
irrevocable letter of credit, $1.0 million to be held as a security deposit. The security deposit
will be reduced on a yearly basis if Applicas debt maintains certain Standard and Poor ratings. Applica leases a 562,000 square foot warehouse in Little Rock, Arkansas for warehousing and
distribution, which expires in March 2008. During 2004, Applica sold its Hong Kong manufacturing
subsidiary. The sale included the transfer of certain facilities in China that were operated under
contracts with the local government, with terms between two and ten years. During 2002, Applica
closed its office in Shelton, Connecticut. License Agreements Applica licenses the Black & Decker brand in North America, Latin America (excluding Brazil)
and the Caribbean for four core categories of household appliances: beverage products, food
preparation products, garment care products and cooking products. In October 2004, Applica and
The Black & Decker Corporation extended the trademark license agreement through December 2010.
Under the agreement as extended, Applica agreed to continue to pay The Black & Decker Corporation
royalties based on a percentage of sales, with guaranteed minimum royalty payments of $12.5 million
annually. Renewals of the license agreement, if mutually agreed upon, will be for five-year
periods. If Black & Decker does not agree to renew the license agreement, Applica has 18 months to
transition out of the brand name. No minimum royalty payments will be due during such transition
period. The Black & Decker Corporation has agreed not to compete in the four core product
categories for a period of five years after the termination of the license agreement. Upon request, Black & Decker may elect to extend the license to use the Black & Decker® brand
to certain additional products. In 2000 and 2001, Black & Decker extended the license to heaters,
fans, humidifiers, dehumidifiers, air purifiers, deep fryers and bag sealers. In 2002, Black &
Decker agreed to extend the license to ice cream makers and mixers. In 2003, the license was
further extended to certain electronic pest and insect control products, the TideTM
BuzzTM ultrasonic stain removing appliance and vacuum bag sealers. In 2004, the
license was extended to bug zappers. Further, Applica has licenses from The Procter & Gamble Company to use the Tide® brand in all
countries in the Western Hemisphere for the specially formulated Tide BuzzTM Ultrasonic
Cleaning Fluid and the Home Cafe brand worldwide for the Black & Decker® single cup brewing
machine. F-32




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Applica owns the Littermaid® trademark for self-cleaning litter boxes and has extended the
trademark for accessories such as litter, a litterbox privacy tent and waste receptacles. Applica
owns two patents and has exclusive licenses to three other patents covering the Littermaid® litter
box. The license agreements are for the life of the applicable patent and do not require minimum
royalty payments. The patents have been issued in the United States and a number of foreign
countries. In April 2004, Applica entered into a license and settlement agreement with Tilia, Inc. and
Tilia International, Inc. to resolve patent infringement litigation pending involving the Black &
Decker® Freshguard Vacuum Sealer and bags. As part of the license and settlement agreement,
Applica agreed to pay Tilia royalties for using its vacuum sealing technology. In addition,
Applica agreed to not contest the validity of Tilias previously disputed patents and to settle any
future disputes over product infringement by arbitration.  Supply Agreement In June 2004, Applica entered into a long-term supply agreement with Elec-Tech International
(H.K.) Company, Ltd. The supply agreement provides for rebates during the first five years if
Applica meets certain levels of product purchases. As of December 31, 2004, Applica had no accrual
related to the rebates. Additionally, the supply agreement provides a right of first refusal with
respect to manufacturing or purchasing products, as applicable, for each party. Applica intends to
use Elec-Tech as a significant source of product supply, however, Applica maintains the flexibility
to purchase products from its affiliate and from third parties in a number of circumstances,
including Elec-Techs inability to meet Applicas price, quality and delivery criteria. The
agreement also provides indemnification to Applica for product liability claims and recalls related
to products purchased from Elec-Tech. Additionally, Applica has the right of offset under the
agreement. Therefore, at December 31, 2004, accounts receivable of $9.1 million from Elec-Tech and
accounts payable of $10.8 million due to Elec-Tech are presented net and were included in accounts
payable in the accompanying consolidated balance sheet. Elec-Tech accounted for approximately 14% of Applicas total
purchases in 2004. No other supplier accounted for more than 10% of Applicas total
purchases in 2004,  2003 and 2002. NOTE N - SHAREHOLDERS EQUITY  Stock Options Under various plans, Applica may grant incentive or non-qualified stock options to employees
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, except for $0.1 million during
2004 in connection with the resignation of the former Chairman of the Board. As of December 31, 2004, there are no shares available for grant under the 1988 Directors
Stock Option Plan or the 1992 Employees Incentive Stock Option Plan, 95,253 shares available for
grant under the 1996 Stock Option Plan, 102,563 shares available for grant under the 1998 Stock
Option Plan and 211,266 shares available for grant under the 2000 Stock Option Plan. In the past, Applica has also granted non-qualified stock options that 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-33




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2004
    
    
    2003
    
    
    2002Weighted-Average
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Weighted-AverageShares(000)
    
    Exercise Price
    
    Shares(000)
    
    Exercise Price
    
    Shares(000)
    
    Exercise PriceOutstanding at beginning of year
    
    
    2,843
    
    
    $
    6.64
    
    
    
    3,382
    
    
    $
    7.50
    
    
    
    4,216
    
    
    $
    12.67Granted
    
    
    1,113
    
    
    $
    4.74
    
    
    
    172
    
    
    $
    7.21
    
    
    
    603
    
    
    $
    5.16Exercised
    
    
    (562
    )
    
    $
    6.93
    
    
    
    (130
    )
    
    $
    7.00
    
    
    
    (123
    )
    
    $
    7.16Forfeited
    
    
    (639
    )
    
    $
    8.55
    
    
    
    (581
    )
    
    $
    11.99
    
    
    
    (1,314
    )
    
    $
    23.00Outstanding at end of year
    
    
    2,755
    
    
    $
    5.30
    
    
    
    2,843
    
    
    $
    6.65
    
    
    
    3,382
    
    
    $
    7.50Options exercisable at end of year
    
    
    1,470
    
    
    
    
    
    
    
    2,270
    
    
    
    
    
    
    
    2,483Weighted-average fair value of
options granted during the year
    
    $
    5.91
    
    
    
    
    
    
    $
    6.84
    
    
    
    
    
    
    $
    3.62
 The following information applies to options outstanding at December 31, 2004: Options Outstanding
    
    
    Options ExercisableWeighted-AverageRemaining
    
    
    Weighted-Average
    
    
    
    
    
    
    Weighted-AverageShares(000)
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Shares(000)
    
    
    Exercise Price$3.63 - $6.33
    
    
    2,164
    
    
    
    3.20
    
    
    $
    4.24
    
    
    
    959
    
    
    $
    4.08$6.34 - $9.50
    
    
    415
    
    
    
    2.00
    
    
    $
    7.38
    
    
    
    353
    
    
    $
    7.36$9.51 - $12.67
    
    
    77
    
    
    
    3.40
    
    
    $
    10.27
    
    
    
    62
    
    
    $
    10.32$12.68 - $15.84
    
    
    83
    
    
    
    2.40
    
    
    $
    14.03
    
    
    
    82
    
    
    $
    14.03$16.25
    
    
    5
    
    
    
    1.30
    
    
    $
    16.25
    
    
    
    4
    
    
    $
    16.25$31.69
    
    
    11
    
    
    
    2.90
    
    
    $
    31.69
    
    
    
    10
    
    
    $
    31.692,755
    
    
    
    
    
    
    $
    5.30
    
    
    
    1,470
    
    
    $
    5.91
 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, 2004 and 2003, an
aggregate of 310,997 and 263,958 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 O  VENDOR CONSIDERATION Applicas supplier of vacuum packaging products has agreed to reimburse it $4.0 million for a
portion of the costs of litigating a patent infringement matter with Tilia International, Inc. The
reimbursement is evidenced by an unsecured note receivable bearing interest at a rate of 6% per
annum and is payable in equal quarterly F-34




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED installments of $200,000, plus interest, over five years. Management believes that the
ultimate collection of the note receivable is not assured and is dependent on Applicas future
purchases from the supplier. Therefore, the amount collected on the note receivable is being
recorded on the cash basis over the five-year period as a reduction of future product costs.
Applica recorded $380,000 (principal plus interest) as a reduction of cost of goods sold for the
year ended December 31, 2004. NOTE P - 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
electric household appliances, primarily cooking, garment care, food preparation,
beverage products, pet products and pest products, marketed under the licensed brand
names, such as Black & Decker®, Home Café and Tide®, 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 Jerdon® brand was sold in October of 2004.
    The Manufacturing segment constitutes Applicas Hong Kong-based and Mexican
manufacturing operations. In July 2004, Applica sold all of its interest in Applica
Durable Manufacturing Limited, its Hong Kong manufacturing subsidiary. 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. F-35




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Segment information for the years ended 2004, 2003 and 2002 was as follows: ProfessionalHousehold
    
    
    Personal CareProducts
    
    
    Products
    
    
    Manufacturing
    
    
    Total(In thousands)Year Ended 2004:Net sales
    
    $
    645,291
    
    
    $
    64,918
    
    
    $
    191,445
    
    
    $
    901,654Intersegment sales
    
    
    1,129
    
    
    
    
    
    
    
    173,792
    
    
    
    174,921Operating earnings (loss)
    
    
    21,359
    
    
    
    6,452
    
    
    
    (7,357
    )
    
    
    20,454Depreciation and amortization
    
    
    1,549
    
    
    
    7
    
    
    
    8,495
    
    
    
    10,051Total assets
    
    
    257,285
    
    
    
    37,965
    
    
    
    55,745
    
    
    
    350,995Year 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
    
    
    
    17,199
 The
following table sets forth the reconciliation to consolidated amounts
for net sales, operating earnings (loss) and total assets: 2004
    
    
    2003
    
    
    2002(In thousands)Net Sales:Total revenues for reportable segments
    
    $
    901,654
    
    
    $
    903,758
    
    
    $
    1,030,874Eliminations
of intersegment sales
    
    
    (174,921
    )
    
    
    (263,119
    )
    
    
    (303,518
    )Consolidated
net sales
    
    $
    726,733
    
    
    $
    640,639
    
    
    $
    727,356Operating (loss) earnings:Total operating earnings from reportable segments
    
    $
    20,454
    
    
    $
    24,118
    
    
    $
    64,129Unallocated amounts:Termination benefits
    
    
    (9,153
    )
    
    
    
    
    
    
    Gain on sale
of subsidiary, division and property - net
    
    
    3,921
    
    
    
    
    
    
    
    Restructuring and other credit (charges)
    
    
    563
    
    
    
    (4,681
    )
    
    
    (10,643
    )Impairment of goodwill
    
    
    (62,812
    )
    
    
    
    
    
    
    Impairment of intangible asset
    
    
    
    
    
    
    (7,152
    )
    
    
    Shared services and all other
    
    
    (17,740
    )
    
    
    (25,398
    )
    
    
    (26,877
    )Consolidated operating (loss) earnings
    
    $
    (64,767
    )
    
    $
    (13,113
    )
    
    $
    26,609Total assets:Total assets from reportable segments
    
    $
    350,995
    
    
    $
    391,644All other
    
    
    24,942
    
    
    
    87,192Consolidated total assets
    
    $
    375,937
    
    
    $
    478,836
 F-36




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following table sets forth the approximate amounts and percentages of Applicas
consolidated net sales by product category during the periods ending December 31,: 2004
    
    
    2003
    
    
    2002(Dollars in thousands)Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %Kitchen Products
    
    $
    446,290
    
    
    
    61
    %
    
    $
    352,783
    
    
    
    55
    %
    
    $
    353,271
    
    
    
    49
    %Home Products
    
    
    138,912
    
    
    
    19
    %
    
    
    135,718
    
    
    
    21
    %
    
    
    161,178
    
    
    
    22
    %Personal Care Products (1)
    
    
    64,918
    
    
    
    9
    %
    
    
    68,993
    
    
    
    11
    %
    
    
    68,570
    
    
    
    9
    %Pet Products
    
    
    38,171
    
    
    
    5
    %
    
    
    34,289
    
    
    
    5
    %
    
    
    35,855
    
    
    
    5
    %Pest Control Products
    
    
    15,087
    
    
    
    3
    %
    
    
    17,095
    
    
    
    3
    %
    
    
    15,869
    
    
    
    2
    %Contract Manufacturing (2)
    
    
    17,653
    
    
    
    2
    %
    
    
    28,246
    
    
    
    4
    %
    
    
    79,242
    
    
    
    11
    %Other Products
    
    
    5,702
    
    
    
    1
    %
    
    
    3,515
    
    
    
    1
    %
    
    
    13,371
    
    
    
    2
    %
   (1)
    
    Includes sales of products by the Jerdon hotel and hospitality division, which was sold
in October 2004. Such sales totaled $8.6 million in 2004, $13.3 million in 2003 and $13.4
million in 2002.(2)
    
    Includes contract manufacturing sales from Applicas Hong Kong-based manufacturing
operations, which were sold in July 2004. Such sales totaled $14.2 million in 2004, $24.6
million in 2003 and $76.2 million in 2002. In 2003 and 2004, Applicas international operations were conducted primarily in China and
Mexico, with lesser activities in Canada, the Caribbean and South and Central America. In July
2004, Applica sold its Hong Kong-based manufacturing operations. As a result, Applicas
international operations are now conducted primarily in Latin America, Canada and the Caribbean.
Other than the United States, Applica does not have external 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: 2004
    
    
    2003
    
    
    2002(In thousands)Net sales:United States operations
    
    $
    559,348
    
    
    $
    477,655
    
    
    $
    501,797International operations:Sales to unaffiliated customers
    
    
    167,385
    
    
    
    162,984
    
    
    
    225,559Sales  intercompany:Mexico
    
    
    103,496
    
    
    
    113,264
    
    
    
    134,934Canada
    
    
    1,129
    
    
    
    
    
    
    
    China
    
    
    70,296
    
    
    
    149,855
    
    
    
    168,584174,921
    
    
    
    263,119
    
    
    
    303,518Eliminations
    
    
    (174,921
    )
    
    
    (263,119
    )
    
    
    (303,518
    )Consolidated
net sales
    
    $
    726,733
    
    
    
    640,639
    
    
    $
    727,356Long-lived assets(1):United States operations
    
    $
    24,522
    
    
    $
    88,315International operations
    
    
    18,298
    
    
    
    51,032Consolidated long-lived assets
    
    $
    42,820
    
    
    $
    139,347
   (1)
    
    Includes property plant and equipment, goodwill, and other intangible assets. 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-37




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE Q - 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 34.7%, 29.8% and 24.5% of 2004, 2003 and 2002 consolidated
net sales, respectively. Target Corporation accounted for 10.9%, 9.2% and 8.3% of 2004, 2003 and
2002 consolidated net sales, respectively. No other customers accounted for more than 10% of
Applicas consolidated net sales for the years ended December 31, 2004, 2003 and 2002. As of
December 31, 2004 and 2003, Wal-Mart Corporation accounted for 30.8% and 29.0%, respectively, of
Applicas consolidated accounts receivable. As of December 31, 2004 and 2003, Target Corporation
accounted for 16.3% and 12.2%, respectively, of Applicas consolidated accounts receivable. No
other customers accounted for more than 10% of Applicas consolidated accounts receivable at
December 31, 2004 and 2003. A majority of Applicas revenue is generated from the sale of Black & Decker® branded
products, which represented approximately 77%, 70% and 62% of consolidated net sales in 2004, 2003
and 2002, 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, 2004 and
2003, the allowance for doubtful accounts was $11.7 million and $12.5 million, respectively. 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. In 2002, Applica entered into credit approved receivables purchasing agreements with CIT
Group/Commercial Services, Inc. The agreements allowed Applica to transfer to CIT, without
recourse, approved receivables of specified customers under certain circumstances, including the
bankruptcy of covered customers. Applica remained the servicer of the approved receivables and
pays fees based upon a percentage of the gross face amount of each approved receivable. At
December 31, 2004 and 2003, $17.4 million and $16.5 million, respectively, of accounts receivable
were insured under this arrangement. In December 2004, Applica entered into new credit approved
receivables purchasing agreement with FCIA Underwriters. The agreement allows Applica to transfer
to FCIA, without recourse, up to 90% of approved receivables of specified customers under certain
circumstances, including the bankruptcy of covered customers, up to a maximum aggregate amount of
$10 million. Applica remains the servicer of the approved receivables and pays fees based upon a
percentage of the gross face amount of each approved receivable. No amounts were outstanding under
the agreement with FCIA in 2004. These arrangements are strictly for the purpose of insuring
selected receivables. Applica purchases the majority of its products from third party suppliers in the Far East.
Applica also sells its products to customers located in foreign jurisdictions, including Latin
America and Canada. Applica operates a manufacturing facility through its Mexican manufacturing
subsidiary, Applica Manufacturing, S. de. R.L. de C.V. Because Applica procures 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. 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 F-38




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Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 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, which would have a material adverse impact on Applicas business, financial
condition and results of operations. Applica also conducts 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 R  RELATED PARTY TRANSACTIONS 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 $37,000 in 2004, $36,000 in 2003 and $125,000 in 2002. Applica also
reimburses TJK for certain related out-of-pocket expenses. Matters Relating to Ourimbah Investment Ltd. Ourimbah Investment Ltd., a Hong Kong company,
owns approximately 7.2% of the outstanding common stock of Applica. Messrs. Lai Kin and Lam King
Loi are majority owners of Ourimbah. Mr. Lai Kin served as a member of the Board of Directors of
Applica until October 2004 and was 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. In April 1994, in connection with the purchase by Applica of the remaining 20% of the
outstanding shares of Applica Durable Manufacturing Limited from Ourimbah, Applica agreed, upon a
change of control of Applica (as defined in the acquisition agreement), to make an additional
payment to Ourimbah in respect of the shares of Applica Durable being purchased under the
agreement. The payment is equal to the greater of (i) the same multiple of earnings per share paid
for the shares of common stock of Applica received in connection with such change of control or
(ii) the same multiple of net asset value per share paid for the shares of common stock of Applica
received in connection with such change of control. In connection with his employment with Applica Durable, Mr. Lai Kin was paid total
compensation of approximately $563,000 and $541,000 for his services during the years ended
December 31, 2003 and 2002, respectively. Members of Mr. Lais family were paid approximately
$959,500 and $946,800 for their services to Applica Durable during the years ended December 31,
2003 and December 31, 2002. Mr. Lam King Loi was paid total compensation of approximately $295,000
and $296,000 for his services during the years ended December 31, 2003 and 2002. As Applica sold
all of its shares of Applica Durable in July 2004, payments made by that company are no longer
considered related party transactions in 2004. In connection with the sale, Mr. Lai and Mr. Lam
terminated their employment relationships with Applica Durable. In connection with such
termination:  
    Applica entered into severance agreements with Mr. Lai and agreed to pay him a
severance payment of $842,833 payable over 18 months;
    Applica entered into severance agreements with Mr. Lam and agreed to pay him a
severance payment of $387,903 payable over 12 months; and F-39




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED  
    Applica entered into a severance agreement with Eliza Lai and paid her a
severance payment of $166,367. Applica Durable leased 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 and 2002 totaled approximately
$838,000 and $870,000, respectively. Dubel Industrial Limited. Applica Durable 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. 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 $13,800
and Lam King Loi received $2,400. Matters related to David Friedson. Applica has a loan outstanding to David M. Friedson, its
former Chairman of the Board. The loan, which is unsecured, bears interest at LIBOR plus 1.5% per
annum (2.72% at December 31, 2004) and is payable upon demand. Interest is payable on the due
date. At December 31, 2004, 2003 and 2002, the balance of such loan, including accrued interest,
was approximately $1,060,700, $1,039,000 and $986,000, 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, 2004). Interest is
payable on the due date. The amount due to Applica, including accrued interest, at December 31,
2004, 2003 and 2002 was approximately $2,010,330, $1,949,000 and $1,887,000, respectively. In August 2004, Mr. Friedson resigned his position as Chairman of the Board and a director of
Applica. In connection with his resignation, Applica entered into a separation agreement with Mr.
Friedson, pursuant to which Mr. Friedsons employment agreement was terminated and Applica agreed
to pay him $6.5 million over the next year. Mr. Friedson agreed to repay approximately $3.1
million in outstanding loans to Applica on or before June 15, 2005. Applica also agreed to provide
Mr. Friedson certain health insurance benefits for a period of 18 months and to extend the exercise
period of options to purchase 500,000 shares of the common stock of Applica for an exercise price
of $3.625 per share. The options, which would have expired 90 days after the termination of Mr.
Friedsons employment, will now expire in December 2005, which was the original expiration. The
extension of the options resulted in compensation expense of approximately $113,000. The agreement
also contains mutual releases and confidentiality and non-compete provisions. Employment and Related Matters. In 2003 and 2002, Belvin Friedson received annual
compensation from Applica of approximately $375,000. He also participated in the executive life
insurance plan and had use of a company car. Mr. Friedson is the founder of Applica and the
father of David M. Friedson, Applicas former Chairman of the Board. Mr. Friedson received
$312,428 in compensation from Applica in 2004. In November 2004, Mr. Friedsons consulting
agreement with Applica was terminated. In connection with such termination, Applica agreed to pay
him a termination fee of $900,000 on or before March 31, 2005. Mr. Friedson was no longer
considered a related party as of December 31, 2004. Barbara Friedson Garrett, the sister of David M. Friedson, Applicas former Chairman of the
Board, was employed by Applica Consumer Products, Inc. as a Senior Vice President. Ms. Garrett was
paid, $225,500, $358,000 and $355,000 for her services during the years ended December 31, 2004,
2003 and 2002, respectively. Ms. Garretts position was eliminated in August 2004 and she received
a severance payment of $233,692 in connection with her termination of employment. Ms. Garrett was
no longer considered a related party as of December 31, 2004. F-40




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED NOTE S  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 2004 and 2003
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, 2004 and 2003, 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 a net gain of
approximately $409,000 in 2004, insignificant in 2003 and a net loss
of approximately $289,000 in
2002. 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, Hong Kong dollar and Canadian dollar. As the result of
the sale of its Hong Kong manufacturing subsidiary, Applica is no
longer hedging Hong Kong dollars. The impact of foreign
exchange risk management activities on pre-tax income was a net loss
of approximately $1.2 million in 2004, a net loss of
approximately
$2.3 million in 2003 and a net gain of approximately $70,000 in 2002. Fair Value of Financial Instruments At December 31, 2004 and 2003, 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, 2004 and 2003, 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 were as follows: F-41




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED December 31, 2004
    
    
    December 31, 2003Carrying
    
    
    
    
    
    
    CarryingAmount/Notional
    
    
    
    
    
    
    Amount/NotionalAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(In thousands)Borrowings(1)
    
    $
    153,463
    
    
    $
    153,463
    
    
    $
    136,788
    
    
    $
    136,788Risk
management contracts(2):Foreign exchange forwards(3)
    
    $
    0
    
    
    $
    0
    
    
    $
    7,425
    
    
    $
    (144
    )Foreign exchange options(3)
    
    $
    9,200
    
    
    $
    (648
    )
    
    $
    21,100
    
    
    $
    (330
    )Interest rate swaps(4)
    
    $
    30,000
    
    
    $
    258
    
    
    $
    80,000
    
    
    $
    415
   (1)
    
    The fair value of borrowings were approximated at carrying value, including the 10% notes,
which were valued at 100% at December 31, 2004 and 2003 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 were included in other long term liabilities in the consolidated balance sheet.(4)
    
    Fair values were 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, 2004 or 2003 in the event of nonperformance by any one counterparty. Applica enters
into transactions only with financial institution counterparties that have a credit rating of A or
better. In addition, Applica limits the amount of investment credit exposure with any one
institution. NOTE T  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-42




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##### Table of Contents



Applica Incorporated and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED Year Ended December 31, 2004Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Consolidated(In thousands)Statement
of Operations:Net sales
    
    $
    
    
    
    $
    578,833
    
    
    $
    322,821
    
    
    $
    (174,921
    )
    
    $
    726,733Cost of sales
    
    
    
    
    
    
    402,092
    
    
    
    279,481
    
    
    
    (174,921
    )
    
    
    506,652Restructuring charges
    
    
    
    
    
    
    
    
    
    
    9,236
    
    
    
    
    
    
    
    9,236Gross profit
    
    
    
    
    
    
    176,741
    
    
    
    34,104
    
    
    
    
    
    
    
    210,845Operating expenses
    
    
    
    
    
    
    180,299
    
    
    
    27,832
    
    
    
    
    
    
    
    208,131Termination benefits
    
    
    
    
    
    
    7,756
    
    
    
    1,397
    
    
    
    
    
    
    
    9,153(Gain) loss on sale of subsidiary, division, and property
    
    
    
    
    
    
    (4,705
    )
    
    
    784
    
    
    
    
    
    
    
    (3,921
    )Restructuring and other charges
    
    
    
    
    
    
    (563
    )
    
    
    
    
    
    
    
    
    
    
    (563
    )Impairment of goodwill
    
    
    4,414
    
    
    
    58,398
    
    
    
    
    
    
    
    
    
    
    
    62,812Operating (loss) earnings
    
    
    (4,414
    )
    
    
    (64,444
    )
    
    
    4,091
    
    
    
    
    
    
    
    (64,767
    )Other (income) expense, net
    
    
    (79,334
    )
    
    
    9,477
    
    
    
    78,406
    
    
    
    
    
    
    
    8,549Loss on early extinguishment of debt
    
    
    
    
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    187Earnings (loss) before equity in net earnings (loss) of subsidiaries,
and income taxes
    
    
    74,920
    
    
    
    (74,108
    )
    
    
    (74,315
    )
    
    
    
    
    
    
    (73,503
    )Equity in net earnings (loss) of subsidiaries
    
    
    (149,735
    )
    
    
    
    
    
    
    
    
    
    
    149,735
    
    
    
    Income tax provision
    
    
    58,139
    
    
    
    
    
    
    
    1,312
    
    
    
    
    
    
    
    59,451Net (loss) earnings
    
    $
    (132,954
    )
    
    $
    (74,108
    )
    
    $
    (75,627
    )
    
    $
    149,735
    
    
    $
    (132,954
    )Balance Sheet:Cash and cash equivalents
    
    $
    
    
    
    $
    2,163
    
    
    $
    8,300
    
    
    $
    
    
    
    $
    10,463Accounts and other receivables, net
    
    
    4,195
    
    
    
    112,380
    
    
    
    43,861
    
    
    
    
    
    
    
    160,436Note receivable  officers and former officer
    
    
    2,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,569Receivables from affiliates
    
    
    (153,140
    )
    
    
    (61,081
    )
    
    
    (9,008
    )
    
    
    223,229
    
    
    
    Inventories
    
    
    
    
    
    
    96,565
    
    
    
    34,938
    
    
    
    
    
    
    
    131,503Future income tax benefits
    
    
    
    
    
    
    1,190
    
    
    
    (1,157
    )
    
    
    
    
    
    
    33Other current assets
    
    
    
    
    
    
    5,303
    
    
    
    9,038
    
    
    
    
    
    
    
    14,341Total current assets
    
    
    (146,376
    )
    
    
    156,520
    
    
    
    85,972
    
    
    
    223,229
    
    
    
    319,345Investment in subsidiaries
    
    
    408,231
    
    
    
    104,988
    
    
    
    29,232
    
    
    
    (542,451
    )
    
    
    Property, plant and equipment, net
    
    
    
    
    
    
    20,029
    
    
    
    18,298
    
    
    
    
    
    
    
    38,327Long-term future income tax benefits
    
    
    
    
    
    
    6,793
    
    
    
    4,419
    
    
    
    
    
    
    
    11,212Other assets
    
    
    2,010
    
    
    
    21,413
    
    
    
    9,385
    
    
    
    (25,755
    )
    
    
    7,053Total assets
    
    $
    263,865
    
    
    $
    309,743
    
    
    $
    147,306
    
    
    $
    (344,977
    )
    
    $
    375,937Accounts payable and accrued expenses
    
    $
    
    
    
    $
    75,025
    
    
    $
    28,848
    
    
    $
    
    
    
    $
    103,873Short-term debt
    
    
    88,541
    
    
    
    
    
    
    
    914
    
    
    
    
    
    
    
    89,455Current portion of long-term debt
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Deferred rent
    
    
    
    
    
    
    680
    
    
    
    
    
    
    
    
    
    
    
    680Current taxes payable
    
    
    
    
    
    
    2,817
    
    
    
    3,130
    
    
    
    
    
    
    
    5,947Total current liabilities
    
    
    91,541
    
    
    
    78,522
    
    
    
    32,892
    
    
    
    
    
    
    
    202,955Long-term debt
    
    
    61,008
    
    
    
    (75,734
    )
    
    
    12,480
    
    
    
    63,254
    
    
    
    61,008Future income tax liabilities
    
    
    
    
    
    
    3,884
    
    
    
    (3,884
    )
    
    
    
    
    
    
    Other long-term liabilities
    
    
    346
    
    
    
    658
    
    
    
    
    
    
    
    
    
    
    
    1,004Total liabilities
    
    
    152,895
    
    
    
    7,330
    
    
    
    41,488
    
    
    
    63,254
    
    
    
    264,967Shareholders equity
    
    
    110,970
    
    
    
    302,413
    
    
    
    105,818
    
    
    
    (408,231
    )
    
    
    110,970Total liabilities and shareholders equity
    
    $
    263,865
    
    
    $
    309,743
    
    
    $
    147,306
    
    
    $
    (344,977
    )
    
    $
    375,937Cash Flow Information:Net cash provided by (used in) operating activities
    
    $
    (170,329
    )
    
    $
    48,506
    
    
    $
    (91,266
    )
    
    $
    149,533
    
    
    $
    (63,556
    )Net cash provided by (used in) investing activities
    
    
    75,542
    
    
    
    135,608
    
    
    
    140,351
    
    
    
    (317,400
    )
    
    
    34,101Net cash provided by (used in) financing activities
    
    
    94,067
    
    
    
    (183,075
    )
    
    
    (52,396
    )
    
    
    167,867
    
    
    
    26,463Effect of exchange rate changes on cash
    
    
    720
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    720Cash at beginning of period
    
    
    
    
    
    
    1,124
    
    
    
    11,611
    
    
    
    
    
    
    
    12,735Cash at end of period
    
    $
    
    
    
    $
    2,163
    
    
    $
    8,300
    
    
    $
    
    
    
    $
    10,463
 F-43




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##### Table of Contents



Applica Incorporated and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED Year Ended December 31, 2003Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Consolidated(In thousands)Statement of Operations:Net sales
    
    $
    
    
    
    $
    504,941
    
    
    $
    398,817
    
    
    $
    (263,119
    )
    
    $
    640,639Cost of sales
    
    
    
    
    
    
    361,061
    
    
    
    354,508
    
    
    
    (263,119
    )
    
    
    452,450Restructuring charges
    
    
    
    
    
    
    
    
    
    
    6,993
    
    
    
    
    
    
    
    6,993Product recall expenses (credit)
    
    
    
    
    
    
    (1,900
    )
    
    
    (2,225
    )
    
    
    
    
    
    
    (4,125
    )Gross profit
    
    
    
    
    
    
    145,780
    
    
    
    39,541
    
    
    
    
    
    
    
    185,321Operating (income) expenses
    
    
    6
    
    
    
    162,277
    
    
    
    24,318
    
    
    
    
    
    
    
    186,601Restructuring charge
    
    
    
    
    
    
    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 ventures and
subsidiaries, and income taxes
    
    
    80
    
    
    
    (48,021
    )
    
    
    17,741
    
    
    
    
    
    
    
    (30,200
    )Equity in net earnings (loss) of joint
ventures
    
    
    55,570
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,570Equity in net earnings (loss) of subsidiaries
    
    
    (18,199
    )
    
    
    
    
    
    
    
    
    
    
    18,199
    
    
    
    Income tax provision (benefit)
    
    
    22,228
    
    
    
    (11,530
    )
    
    
    (551
    )
    
    
    
    
    
    
    10,147Net earnings (loss)
    
    $
    15,223
    
    
    $
    (36,491
    )
    
    $
    18,292
    
    
    $
    18,199
    
    
    $
    15,223Balance Sheet:Cash and cash equivalents
    
    $
    
    
    
    $
    1,124
    
    
    $
    11,611
    
    
    $
    
    
    
    $
    12,735Accounts and other receivables, net
    
    
    
    
    
    
    99,449
    
    
    
    31,572
    
    
    
    
    
    
    
    131,021Note receivable  officers and former officer
    
    
    1,615
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,615Receivables from affiliates
    
    
    (384,841
    )
    
    
    73,091
    
    
    
    66,283
    
    
    
    245,467
    
    
    
    Inventories
    
    
    
    
    
    
    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 portion 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 of period
    
    
    
    
    
    
    3,609
    
    
    
    4,074
    
    
    
    
    
    
    
    7,683Cash at end of period
    
    $
    
    
    
    $
    1,124
    
    
    $
    11,611
    
    
    $
    
    
    
    $
    12,735
 F-44




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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 2004 and 2003 are set forth in the following table: Basic
    
    
    DilutedNet
    
    
    (Loss)
    
    
    (Loss)(Loss)
    
    
    Earnings
    
    
    Earnings PerSales
    
    
    Gross Profit
    
    
    Earnings
    
    
    Per Share
    
    
    Share(In thousands, except per share data)2004First
quarter
    
    $
    132,493
    
    
    $
    37,471
    (1)
    
    $
    (4,479
    )(1)
    
    $
    (0.19
    )
    
    $
    (0.19
    )Second quarter
    
    
    158,993
    
    
    
    48,488
    
    
    
    (123,818
    )(2)
    
    
    (5.16
    )
    
    
    (5.16
    )Third quarter
    
    
    187,750
    
    
    
    55,900
    
    
    
    (9,943
    )(3)
    
    
    (0.41
    )
    
    
    (0.41
    )Fourth quarter
    
    
    247,497
    
    
    
    68,986
    (4)
    
    
    5,286
    (4)
    
    
    0.22
    
    
    
    0.22Total
    
    $
    726,733
    
    
    $
    210,845
    
    
    $
    (132,954
    )
    
    $
    (5.55
    )(8)
    
    $
    (5.55
    )(8)2003First quarter
    
    $
    121,239
    
    
    $
    37,022
    
    
    $
    19,621
    (5)
    
    $
    0.84
    
    
    $
    0.83Second quarter
    
    
    136,847
    
    
    
    38,106
    
    
    
    (2,785
    )(5)
    
    
    (0.12
    )
    
    
    (0.12
    )Third quarter
    
    
    173,512
    
    
    
    50,508
    
    
    
    4,855
    (5)(6)
    
    
    0.21
    
    
    
    0.20Fourth quarter
    
    
    209,041
    
    
    
    59,685
    (7)
    
    
    (6,468
    )(5)(7)
    
    
    (0.27
    )
    
    
    (0.27
    )Total
    
    $
    640,639
    
    
    $
    185,321
    
    
    $
    15,223
    
    
    $
    0.65
    (8)
    
    $
    0.63
    (8)
   (1)
    
    In the first quarter of 2004, Applica recorded restructuring charges of $0.9 million
primarily related to the downsizing of its manufacturing operations in Mexico.(2)
    
    In the second quarter of 2004, Applica recorded:  
    an impairment charge to the carrying value of goodwill of $62.8 million; and
    an additional valuation allowance of $51.4 million related to deferred tax assets.  (3)
    In the third quarter of 2004, Applica recorded termination benefits of $9.2 million in
connection with the termination of certain executive and senior management employment and
consulting agreements.(4)
    In the fourth quarter of 2004, Applica recorded restructuring charges of $8.3 million related
to the downsizing of its manufacturing operations in Mexico.(5)
    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 of 2003,
respectively.(6)
    In the third quarter of 2003, Applica recorded charges of $1.9 million related to the early
extinguishment of $30.0 million of the 10% notes(7)
    In the fourth quarter of 2003, Applica recorded:  
    an impairment charge of $7.2 million related to an intangible asset acquired as part
of the acquisition of the Black & Decker household products group;
    expenses of $7.0 million related to the retrenchment of the Mexican and Chinese
manufacturing facilities;
    restructuring and other charges of $4.7 million related to accrued rental expenses
at the Shelton, Connecticut facility; F-45




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##### Table of Contents



Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED  
    charges of $2.0 million related to the early extinguishment of an additional $35.0
million of the 10% notes; and
    A reversal of $4.1 million in product recall related expenses previously recorded in
cost of goods sold.  (8)
    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. F-46




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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, 2004Reserves deducted
from assets to
which they apply:Allowance for
doubtful
accounts
    
    $
    12,543
    
    
    
    
    
    
    $
    889
    
    
    
    
    
    
    $
    (1,721
    )(1)
    
    $
    11,711Deferred
tax valuation
allowance
    
    $
    7,367
    
    
    
    
    
    
    
    
    
    
    $
    75,203
    
    
    
    
    
    
    $
    82,570Year ended
December 31, 2003Reserves deducted
from assets to
which they apply:Allowance for
doubtful
accounts
    
    $
    15,830
    
    
    
    
    
    
    $
    2,228
    
    
    
    
    
    
    $
    (5,515
    )(1)
    
    $
    12,543Deferred
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)
    
    $
    15,830Deferred
tax valuation
allowance
    
    $
    10,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (20
    )(1)
    
    $
    10,155
   (1)
    
    Write-off against the reserve