Applica Incorporated
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2005 |
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-10177
APPLICA INCORPORATED
(Exact name of Registrant as specified in its charter)
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Florida
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59-1028301 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
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3633 Flamingo Road, Miramar, Florida
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33027 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (954) 883-1000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange On Which Registered |
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Common Stock, $0.10 par value
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New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
¨ No
x
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
¨ No
x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x No ¨
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 registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer.
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Large Accelerated ¨
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Filer Accelerated
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Filer Non-Accelerated Filer ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
¨ No
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As of June 30, 2005, the aggregate market value of the voting stock (based on the closing
price as reported by NYSE of $3.23) held by non-affiliates of the Registrant was approximately
$76.6 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, 2006, there were 24,179,069 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrants Definitive Proxy Statement for its 2006 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.
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 1A. 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 LitterMaid®, Belson®, Windmere® and Applica®.
Applicas customers include mass merchandisers, beauty supply distributors, specialty retailers,
department stores, pet supply channels, home centers and appliance distributors primarily in North
America, Latin America and the Caribbean.
Through October 2005, Applica managed its operations through three business segments:
Household Products, Professional Personal Care Products and Manufacturing. The Manufacturing
segment ceased manufacturing operations in October 2005. For additional financial information
about segments and financial information about geographical areas, see Note R, Business Segment and
Geographic Area Information, to the Consolidated Financial Statements included in Schedule I to
this Annual Report on Form 10-K.
The small household appliance sector of the consumer goods 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. Chinese manufacturers
have emerged over the last few years as low cost and high quality competitors resulting in
increased outsourcing by U.S. suppliers and even some retailers. Additionally, retailer
consolidation has resulted in a significant power shift from suppliers to retailers, and supplier
consolidation has resulted in large companies with brand depth and breadth that provide a
significant competitive advantage. Applica competes with both domestic and international
distributors primarily at mid-tier price points.
Retailer consolidation, industry consolidation and high raw materials prices have eroded our
profitability. We have been focused on making changes to our business model in order to
combat these pressures. Measures we have taken so far include:
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the downsizing and ultimate sale of our Hong Kong-based manufacturing operations; |
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the downsizing and closure of our manufacturing operations in Mexico; |
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the establishment of key sourcing partners; |
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the product and customer profitability initiative; and |
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a reduction in our workforce in the U.S. and Canada. |
As the result of the closure of our manufacturing operations in Mexico in October 2005 and the
sale of our Hong Kong-based manufacturing operations in July 2004, we now outsource all of our
production to third-party suppliers located primarily in China. We work with our suppliers to
obtain the lowest possible product costs for our customers, without compromising quality, while
attempting to maintain reasonable gross margins for us.
-1-
With the closure of our manufacturing facility in Mexico, we have completed our transition
from a manufacturer to a company that sources and distributes small household appliances. We
believe that this change 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. This transition has reduced our risk profile by shifting significant costs from fixed
to variable. This has also improved our ability to react to a rapidly changing global marketplace.
In late 2004, we initiated a product and customer profitability review. Through this process,
management identifies products sold to customers that do not meet Applicas product profitability
threshold. Once those products are identified, management requests either 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 products profitability to meet the
threshold, Applica will generally not offer such product to the customer. However, management
may make certain exceptions under limited circumstances. As expected, the initiative has
significantly reduced the number of products we offer, primarily in the kitchen products and home
products categories. As a result, our sales volume decreased in 2005.
Applicas 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.
Business Strategy
We have combined top brand names such as Black & Decker®, SpaceMaker®, Gizmo, and LitterMaid®
with a reputation for durability and innovation. Our business strategy includes the following:
Pursue strategic alternatives. Applicas Board of Directors and management believe
that, following their continued review of our business, products, and current strategic position,
it is appropriate to initiate an external process to explore strategic alternatives to enhance
shareholder value. As a result, in February 2006, we engaged Banc of America Securities as our
financial advisor to assist the Board and management in this process, which could include a sale or
merger of Applica. However, there can be no assurance that any transaction will occur or, if one
is undertaken, of its potential terms or timing.
Maximize utility of our brand assets. Applica has world-class brands with strong consumer
equities. Applica is working to build a fully integrated communication strategy that allows for
consistent communication of our brand equity across all consumer touch points including: industrial
design, package graphics, in-store advertising, web design and national advertising. When
appropriate, national advertising will be used to generate direct sales while also creating
increased consumer demand for our products at retail.
Leverage innovation and strategic marketing to drive profitability. 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 technologies and new marketing platforms. We also
intend to create new categories or grow categories through distinctive products and brand
development.
We are increasing our consumer knowledge through market research, which will support the
expansion of profitable market segments. We invest market research dollars and work closely with
both retail customers and suppliers to identify consumer needs and preferences. This information
is then used to generate new product ideas, as well as optimize and revitalize existing products.
We design the style, features and functionality of our products to meet consumer requirements for
performance. We are redesigning our product development process to better serve consumer needs and
maximize our available resources. We are also building unity among our strategic marketing, our
product portfolio and our customer category needs so that we can better capitalize on current
consumer trends.
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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
sourcing. We are accomplishing this by strengthening our relationships 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 products at costs
that are competitive in our industry.
Optimize our supply chain. We are undertaking a thorough review of our sales and operations
planning (S&OP) process to better coordinate and align forecasted demand with available supply. We
anticipate making selective investments in inventory to improve customer service levels. The
supply chain has been working to better define product velocities, estimate procurement,
manufacturing and logistical lead times, and plan order placement accordingly. We have also been
working to better integrate our preferred suppliers within our supply chain through software
connections and more regular and effective collaborative communication.
Alvarez & Marsal
In October 2005, we engaged Alvarez & Marsal, LLP (A&M) a global professional services firm
specializing in turnaround management, to work with the Board of Directors and management team to
evaluate the 2006 business plan. In December 2005, Applica extended A&Ms engagement and appointed
David Coles of A&M as interim Chief Operating Officer. The second phase of A&Ms engagement is
focused on implementing various business initiatives and driving performance improvement. Since
being engaged, A&M has assisted management in numerous business improvement initiatives which are
in the process of being fully developed, executed and monitored. The term of A&Ms engagement is
through May 2006.
Products
Applica primarily distributes five categories of products: kitchen products, home products,
personal care products, pet products and pest control products. The following table sets forth the
approximate amounts and percentages of Applicas consolidated net sales by product category during
the periods shown:
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2005 |
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2004 |
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2003 |
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(Dollars in thousands) |
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Net Sales |
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% |
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Net Sales |
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% |
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Net Sales |
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Kitchen Products |
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327,057 |
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59 |
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435,686 |
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61 |
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$ |
340,689 |
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55 |
% |
Home Products |
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118,507 |
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21 |
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136,089 |
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19 |
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133,404 |
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21 |
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Personal Care Products |
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54,874 |
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10 |
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63,743 |
(1) |
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9 |
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67,746 |
(1) |
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11 |
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Pet Products |
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38,324 |
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7 |
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36,350 |
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33,197 |
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Pest Control Products |
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8,421 |
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% |
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14,549 |
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16,639 |
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Contract Manufacturing(2) |
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8,936 |
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17,653 |
(3) |
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28,246 |
(3) |
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Other Products |
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0 |
% |
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5,702 |
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1 |
% |
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3,515 |
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% |
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Consolidated |
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$ |
556,119 |
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100 |
% |
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$ |
709,772 |
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100 |
% |
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$ |
623,436 |
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100 |
% |
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Includes sales of products by the Jerdon hotel and hospitality division, which was sold
in October 2004. Such sales totaled $8.4 million in 2004 and $13.3 million in 2003. |
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Includes contract manufacturing sales from our Mexican manufacturing operations, which
ceased operations in October 2005. Such sales totaled $8.9 million in 2005, $3.5 million
in 2004 and $0.9 million in 2003. |
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Includes contract manufacturing sales from our Hong Kong-based manufacturing
operations, which were sold in July 2004. Such sales totaled $14.2 million in 2004 and
$27.5 million in 2003. |
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
Black & Decker® single cup coffee maker that is a part of the Home Café brewing system developed
with The Procter & Gamble Company. Black & Decker® branded toaster ovens, hand mixers, can
openers, citrus juicers, and food steamers are market leaders in this category.
-3-
The home products group includes garment care products, such as hand-held irons. Black &
Decker® branded irons continue to be a leader in the category through design innovations. We also
distribute vacuum cleaners under the Black & Decker® brand in Latin America.
The personal care products group focuses mainly on professional personal care 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 supply distributors and beauty supply stores, which in turn sell the products to beauty
salons and professional hair stylists.
The pet products group features the Litter Maid® patented self-cleaning cat litter box. This
innovative product is supported throughout the U.S. marketplace at retailers like Wal-Mart, Target,
PetsMart and Petco. Litter Maid® is driven by a national TV advertising campaign. The Litter
Maid® product line delivers a recurring revenue stream from consumable accessories, including waste
receptacles, charcoal filters, and Litter Maid® branded litter.
Applicas pest control products group includes pest control and repelling devices that use
ultra-sonic or sub-sonic sound waves to control insects and rodents, primarily in homes. The core
of the business is the ultrasonic direct plug-in pest repellers, a result of the Weitech, Inc.
acquisition in May 2002. Since 2004, the majority of the pest products have been marketed under
the Black & Decker® brand name.
Our Hong Kong-based manufacturing operations, which were sold in July 2004, 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 appliance companies primarily in the United States. In
2005 and 2004, our Mexican manufacturing facilities engaged in a small amount of contract
manufacturing. The Mexican manufacturing operations ceased production in October 2005.
Product Development
We are redesigning our product development process to better serve consumer needs and maximize
our available resources. The process is focused on quality, design, appropriate performance
characteristics and speed-to-market. We have product development teams 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 2005, over 140 in
2004 and 120 new products in 2003, most of which were refreshes. Some of the new products launched
in 2005 included:
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the second generation Black & Decker® single cup coffee maker that is a part of
the Home Café brewing system; |
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the 3-in-1 Open It All Lids Off®, which opens jars, cans and bottles and
constitutes the second generation of jar openers; and |
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the Gizmo Tilt N Mix® salad dressing mixer, a new Gizmo product that
capitalizes on the current healthy eating trend. |
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Brands
Applica licenses the Black & Decker brand for use in marketing small household appliances in
North America, Latin America (excluding Brazil) and the Caribbean. In addition, Applica owns
certain sub-brands, including Toast R Oven, ProFinish and Quick N Easy, and licenses Spacemaker
for under the cabinet kitchen appliances. Applica continues to develop new sub-brands for product
differentiation at the retail level, including Gizmo, SmartBrew, Digital Advantage and
Prestige. Further, Applica has licenses from The Procter & Gamble Company to use the Home Cafe
brand worldwide for the Black & Decker® single cup brewing machine.
The major portion of Applicas revenue is generated through the sale of Black & Decker®
branded products, which represented approximately 78% of Applicas total consolidated revenue in
2005, 79% in 2004 and 70% in 2003.
The personal care category is targeted specifically at beauty retailers and the salon segment
under the Belson® brand and other private label programs. Applica also markets several pet
products and accessories under the Litter Maid® 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 & 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. In 2005, we also worked in
conjunction with The Black & Decker Corporation to upgrade the level of consumer product
information on our website, providing easier access to a more comprehensive product assortment with
improved navigation.
Additionally, in 2004, we introduced the Home Café single-cup coffee maker with The Procter &
Gamble Company. This product provides Applica with the opportunity for recurring revenues through
a consumable component. Applica may 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. Such targets were not met in 2005 and are not expected to be met in 2006. 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 86% of its finished products from outside suppliers in 2005,
65% in 2004 and 37% in 2003.
In July 2004, as part of the sale of our Hong Kong-based manufacturing operations, Applica
entered into a supply agreement with Elec-Tech International (H.K.) Company, Ltd. Elec-Tech
accounted for approximately 35% of Applicas total purchases in 2005 and 14% in 2004. The supply
agreement was terminated by Applica in December 2005 as the result of material breaches by
Elec-Tech, most of which were corrected after the termination date. Applica intends to continue to
purchase certain products from Elec-Tech and Elec-Tech is expected to remain a significant supplier
for us in 2006. We believe that the products currently made by Elec-Tech are available from other
suppliers on similar terms, although the transition of a significant amount of production would
involve some risks. (For additional information, see Item 1A. Risk Factors, below.)
At December 31, 2005, all significant accounts receivable from Elec-Tech had been settled. At
December 31, 2005 accounts payable of $9.9 million were due to Elec-Tech. At December 31, 2004,
accounts receivable of $9.1 million from Elec-Tech and accounts payable of $10.8 million due to
Elec-Tech were presented net and were
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included in accounts payable in the accompanying consolidated balance sheet. Effective
December 1, 2005, our accounts payable terms with Elec-Tech changed from 60 days from invoice date
to 30 days from invoice date.
We maintain supply contracts with certain other 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 2004, Black & Decker extended the license to bug zappers. In
2005, the license was extended to electric garment steamers and hair straightening and curling
irons for the Latin American marketplace.
Applica owns the Litter Maid® 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 Litter Maid® litter
box, which require Applica to pay royalties based on a percentage of sales. 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.
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 license
Spacemaker for under the cabinet kitchen appliances.
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 each of 2005, 2004 and 2003, Applicas top three customers were Wal-Mart
Stores, Inc., Target Corporation and Sally Beauty Supply. These customers accounted for
approximately 48% of consolidated net sales in 2005, 51% in 2004 and 44% in 2003. Wal-Mart
accounted for approximately 32% of our consolidated net sales in 2005, 35% in 2004 and 30% in 2003.
Target Corporation accounted for approximately 11% of our consolidated net sales in 2005, 11% in
2004 and 9% in 2003. No other customer accounted for more than 10% of consolidated net sales in
2005, 2004 or 2003.
Sales, Marketing and Distribution
Applicas 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 in order to provide full sales operational support to our two biggest customers. We also
have a regional sales office in Chicago, Illinois,
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which manages a national network of sales management and account executives focused on all
other key U.S. retailers, and regional sales offices in Canada, Mexico, Colombia and Chile, which
manage the sales organizations in each such region. 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.
Currently, our internal marketing organization is comprised of four groups:
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strategic marketing, which provides strategic leadership and is responsible for
brand management at a high level; |
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product portfolio, which leads the development of sourcing strategies, category
specific strategies and new products and drives consumer understanding of core
products at category level; |
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corporate/channel marketing, which directs customer development through
corporate strategy, product segmentation and direct logistics integration and
coordination through channel and customer planning and development; and |
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creative services, which develops product packaging and promotional and
informational materials for our products. |
The marketing groups develop products for all Applica markets. 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 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
professional beauty and barber retail stores and to beauticians, barbers and stylists, primarily
through distributors in the United States.
Our policy is to maintain our inventory levels 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
Applicas 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, 2005, Applica had a backlog of approximately $20.0 million
compared to $22.3 million as of December 31, 2004. The decrease in the backlog from 2004 to 2005
is primarily attributable to the slower sales during the 2005 holiday season and the loss of
contract manufacturing as the result of the elimination of our manufacturing operations, which
involved longer lead-times for product orders. As of March 7, 2006, Applica had a backlog of
approximately $22.6 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 September through November.
-7-
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. We compete with various
domestic and international marketers and distributors, some of which have substantially greater
financial and other resources than ours. 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. Primary competitive brands in the pet and pest
market include Petmate, Sunbeam and Coleman.
Regulation
As a marketer 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.
Substantially all costs and expenses related to this recall were 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 substantial 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. Additionally, we intend that certain of our new products
will be certified by NSF International, an independent, not-for-profit organization which develops
national standards for public health and safety.
Employees
As of March 1, 2006, Applica had approximately 330 full-time employees in North America,
approximately 100 full-time employees in Hong Kong and mainland China and approximately 110
full-time employees in Latin America and the Caribbean. From time to time, Applica also uses the
services of seasonal employees.
-8-
Other Matters
Applicas 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. You
may read or copy any materials we file with the SEC at the SECs Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. You 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:
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the charters of the Audit, Compensation and Corporate Governance and Nominating
Committees of our Board of Directors; |
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the Corporate Governance Guidelines of our Board of Directors; and |
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our Conflict of Interest and Business Ethics and Code of Conduct policies. |
In May 2005, 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.
-9-
Item 1A. Risk Factors
You should carefully consider the following risk factors, together with the other information
contained in this annual report on Form 10-K, in evaluating us and our business before 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.
We Purchase A Large Number of Products From One Supplier. Production-Related Risks With This
Supplier Could Jeopardize Our Ability To Realize Anticipated Sales And Profits.
As part of the sale of our Hong Kong-based manufacturing operations, Applica entered into a
supply agreement with an affiliate of the purchaser, Elec-Tech International (H.K.) Company, Ltd.
Elec-Tech accounted for approximately 35% of Applicas total purchases in 2005 and 14% in 2004.
In December 2005, the supply agreement was terminated by Applica as the result of material breaches
by Elec-Tech. Management and representatives of Elec-Tech have met on several occasions to discuss
these and other matters and to negotiate the terms of future business between the parties, although
no new supply agreement has been executed.
We intend to continue to purchase products from Elec-Tech, and in order for 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:
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substandard product quality; and |
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production schedule realization. |
We expect Elec-Tech to remain a significant supplier in 2006.
We Are Dependent On Key Personnel And The Loss Or These Key Personnel Could Have A Material
Adverse Effect On Our Success.
We are highly dependent on the skills, experience and services of key personnel and the loss
of any key personnel could have a material adverse effect on our business, operating results and
financial condition. Generally, a company will experience higher personnel turnover during its
exploration of strategic alternatives. This could result in increased demands on our management
skills and resources. Therefore, our success also depends upon our ability to recruit, hire, train
and retain additional skilled and experienced management personnel. Employment and retention of
qualified personnel is important due to the competitive nature of our industry. Our inability to
hire new personnel with the requisite skills could impair our ability to manage and operate our
business effectively.
The New York Stock Exchange Has Notified Us That We Are Not In Compliance With Its Continued
Listing Criteria. If We Are Delisted By The NYSE, The Price And Liquidity Of Our Common Stock
Will Be Negatively Affected.
In August 2005, we received notice from the New York Stock Exchange stating that we are no
longer in compliance with its continued listing criteria, which require, among other things, that a
listed company have a market capitalization of not less than $75 million and total shareholders
equity of not less than $75 million. In order to maintain the continued listing of our common stock
on the NYSE, we are following the NYSEs rules and procedures applicable to listed companies which
fail to meet the continued listing criteria. We are currently subject to quarterly monitoring by
the NYSE for compliance with its continued listing criteria.
We cannot assure you that the NYSE will maintain our listing in the future. In the event that
our common stock is delisted by the NYSE, or if it becomes apparent to us that we will be unable to
meet the NYSEs continued listing criteria in the foreseeable future, we will seek to have our
stock listed or quoted on another national securities exchange or quotation system. However, we
cannot assure you that, if our common stock is listed or quoted on such other exchange or system,
the market for our common stock will be as liquid as it has been on the NYSE. As a result, if we
are delisted by the NYSE or transfer our listing to another exchange or quotation system, the
market price for our common stock may become more volatile than it has been historically.
-10-
We Depend On Third Party Suppliers For The Manufacturing Of All 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 timely basis at an affordable cost or any
significant delays or interruptions of supply would have a material adverse effect on us.
All of the products we sell are manufactured by unaffiliated third party suppliers located
primarily in China. International operations are subject to risks including, among others:
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currency fluctuations; |
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labor unrest; |
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political instability; |
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lack of developed infrastructure; |
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longer payment cycles and greater difficulty in collecting accounts; |
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restrictions on transfers of funds; |
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import and export duties and quotas; |
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changes in domestic and international customs and tariffs; |
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unexpected changes in regulatory environments; |
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difficulty in complying with a variety of foreign laws; |
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difficulty in obtaining distribution and support; and |
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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.
There Can Be No Assurance That Any Strategic Transaction Will Occur Or, If One Is Undertaken, Of
Its Potential Terms or Timing.
We recently announced our intent to explore strategic alternatives to enhance shareholder
value. As a result, in February 2006, we engaged Banc of America Securities as our financial
advisor to assist the Board and management in this process, which could include a sale or merger of
Applica. There can be no assurance that any transaction will occur or, if one is undertaken, of
its potential terms or timing.
The Failure Of Our Business Strategy Could Have A Material Adverse Effect On Our Business.
Additionally, as part of our business strategy, we plan to:
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maximize utility of our brand assets |
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leverage innovation and strategic marketing to drive profitability |
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create long-term cost and quality advantages for our customers; and |
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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.
-11-
Our Business Could Be Adversely Affected By Fluctuation of the Chinese Currency
In 1994, China pegged the renminbi (also called the yuan) at an exchange rate of 8.28 to the
U.S. dollar. U.S. groups have argued that the peg made Chinas exports to the U.S. cheaper, and
U.S. exports to China more expensive, thus greatly contributing to Chinas trade surplus with the
U.S. In July 2005, China ended its peg to the dollar and let the renminbi fluctuate versus a
basket of currencies. Immediately, the new renminbi rate revalued the currency by 2.1% to 8.11 to
the dollar. At March 10, 2006, the renminbi exchange rate was 8.05 to the dollar. Because a
substantial number of our products are imported from China, the floating currency could result in
significant fluctuations in our product costs and could have a material effect on our business.
We Depend On Purchases From Several Large Customers And Any Significant Decline In These
Purchases Or Pressure From These Customers To Reduce Prices Would 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 32%
of our 2005 consolidated net sales, 35% of our 2004 consolidated net sales and 30% of our 2003
consolidated net sales. Our top three customers accounted for approximately 48%, 51% and 44% of
consolidated net sales in 2005, 2004 and 2003, 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.
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.
As a result of the desire of retailers to more closely manage inventory levels, there is a
growing trend among retailers to make purchases on a just-in-time basis. This requires us to
shorten our lead time for production in certain cases and more closely anticipate demand, which
could in the future require the carrying of additional inventories or require us to incur
additional expenses to expedite delivery.
Additionally, certain of our larger customers are using their own private label brands on
household appliances that compete directly with our products.
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. In recent years, 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.
-12-
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.
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 distributor of consumer products, we are subject to the Consumer Products Safety Act,
which empowers the Consumer Products Safety Commission to exclude from the market products that are
found to be unsafe or hazardous. Under certain circumstances, the Consumer Products Safety
Commission could require us to repurchase or recall one or more of our products. Additionally,
laws regulating certain consumer products exist in some cities and states, as well as in other
countries in which we sell our products, and more restrictive laws and regulations may be adopted
in the future. Any repurchase or recall of our products could be costly to us and could damage our
reputation. If we were required to remove, or we voluntarily remove, our products from the market,
our reputation could be tarnished and we might have large quantities of finished products that
could not be sold. We do not currently maintain product recall insurance.
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 customers 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.
-13-
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.
Our Business Could Be Adversely Affected By Changes In Trade Relations With China.
Most all 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 may not meet these
requirements, it may not remain a member of the WTO, and its PNTR trading status may not be
maintained. If Chinas 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.
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 78% of our total revenue in 2005, 79% in 2004 and 70% in 2003.
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.
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.
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
-14-
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, term loan 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 or to meet certain financial tests. Our ability to continue to comply
with the covenants and restrictions contained in our debt agreements may be affected by events
beyond our control. The breach of any of these covenants or restrictions would result in a default
under one or all of the debt agreements, 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.
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 1B. Unresolved Staff Comments.
None.
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Item 2. Properties
The following table sets forth the principal operating facilities of Applica:
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Area (Sq. Feet) |
Miramar, Florida
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Headquarters, general administration,
sales, marketing and engineering offices
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110,000 Leased
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Queretaro, Mexico
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Manufacturing, warehouse and office
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290,000 Owned (1)
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Little Rock, Arkansas
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Warehouse and distribution
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562,000 Leased
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Memphis, Tennessee
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Warehouse and distribution
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140,000(2) |
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Hornlake, Mississippi
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Warehouse and distribution
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420,000(2) |
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Little Rock, Arkansas
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Warehouse and distribution
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245,000 Leased (3)
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Concord, Canada
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Sales office, warehouse and distribution
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109,000 Leased
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In October 2005, Applica ceased manufacturing operations at the Mexican facility.
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These facilities are managed by a third party distribution provider. |
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The leases for these facilities was terminated in January 2006, except for 35,000
square feet which is used primarily for warehousing. |
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, Mississippi, Puerto Rico, Mexico, Colombia, Venezuela,
Chile, Peru, Argentina, Central America and China. 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, downsize current facilities or lease additional facilities
for warehousing and/or other activities.
In the third quarter of 2004, Applica sold its Hong Kong-based manufacturing operations and
transferred control of the related manufacturing facilities. In the fourth quarter of 2005,
Applica entered into an agreement to sell its manufacturing facilities located in Queretaro, Mexico
totaling 290,000 square feet. We expect the sale to close in the second quarter of 2006.
Item 3. Legal Proceedings
Shareholder Litigation. Applica is a defendant in Scott Schultz, individually and on
behalf of all others similarly situated, v. Applica Incorporated, Harry D. Schulman and Terry L.
Polistina, 06-60149-CIV-DIMITROULEAS, which was filed in the United States District Court,
Southern District of Florida on February 3, 2006, and Joseph Rothman, individually and on
behalf of all others similarly situated, v. Applica Incorporated, Harry D. Schulman and Terry L.
Polistina, 06-60230-CIV-ZLOCH, which was filed in the United States District Court, Southern
District of Florida on February 24, 2006.
These matters are purported class action complaints filed on behalf of purchasers of Applica
Incorporated common stock during the period between November 4, 2004 and April 28, 2005. The
complaints charge Applica and certain executive officers with violations of the Securities Exchange
Act of 1934. The complaints allege that, throughout the class period, Applica issued materially
false and misleading statements regarding its ability to transform its business and become more
profitable. The complaints claim that these statements were materially false and misleading on the
asserted basis that they failed to disclose the following: (a) that Applica was experiencing
decreasing demand for its products; in particular, demand for two key products, Tide Buzz
Ultrasonic Stain Remover and Home Cafe single cup coffee maker, were not meeting internal
expectations; (b) that Applica was materially overstating its net worth by failing to timely write
down the value of its inventory which had become obsolete and unsaleable; (c) that Applica was
experiencing higher product warranty returns for which it had not
-16-
appropriately reserved; and (d) that Applicas financial statements issued during the class
period were not prepared in accordance with GAAP and therefore were materially false and
misleading.
The plaintiffs seek, among other relief, to be declared a class, to be awarded compensatory
damages, rescission rights, unspecified damages and attorneys fees and costs. Applica believes
the claims are without merit. We intend to vigorously defend these lawsuits but may be unable to
successfully resolve the disputes without incurring significant expenses. Due to the early stage
of these proceedings, any potential loss cannot presently be determined with respect to these
litigation matters.
As is often the case, the SEC has requested that Applica voluntarily produce certain documents
in connection with an informal inquiry related to these matters. We intend to respond to the
requests for documents and are fully cooperating with the SEC in this matter.
Other Matters. 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.
As a distributor of consumer products, Applica is also subject to the Consumer Products Safety
Act, which empowers the Consumer Products Safety Commission (CPSC) to exclude from the market
products that are found to be unsafe or hazardous. Applica receives inquiries from the CPSC in the
ordinary course of its business. In the opinion of management, the amount of ultimate liability
with respect to such matters, if any, is not likely to have a material effect on Applicas
business, financial condition, results of operations or liquidity. However, under certain
circumstances, the CPSC could require Applica to repurchase or recall one or more of its products.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Applicas security holders during the fourth quarter of
the year ended December 31, 2005.
-17-
PART II
Item 5. Market for the Registrants Common Stock and Related Stockholder Matters
Applicas common stock, $0.10 par value, is currently listed for trading on the New York Stock
Exchange under the symbol APN. In August 2005, Applica was notified by the New York Stock
Exchange that it was not in compliance with the NYSEs continued listing standards. Applica is
considered below criteria by the NYSE because over a consecutive 30 day trading period, its total
market capitalization and its shareholders equity were each less than $75 million. While Applica
was in full compliance with the previous continued listing standards set forth by the Exchange, the
NYSE adopted new continued listing standards with which Applica is not currently in compliance.
In order to maintain the continued listing of our common stock on the NYSE, Applica is
following the NYSEs rules and procedures applicable to listed companies which fail to meet the
continued listing criteria. In September 2005, Applica presented a plan to the NYSE demonstrating
how it intends to comply with the continued listing standards, which plan was accepted by the New
York Stock Exchange. As a result of the acceptance, Applicas common stock will continue to be
listed on the NYSE pending quarterly reviews by the NYSEs Listing and Compliance Committee to
ensure progress against the plan. We expect that the first review will be completed in April 2006.
We cannot assure you that the NYSE will maintain our listing in the future.
The following tables set forth, for the periods indicated, the range of high and low closing
prices for the common stock as reported on the New York Stock Exchange:
|
|
|
|
|
|
|
|
|
|
|
Closing Price |
|
|
|
High |
|
|
Low |
|
2004 |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
11.24 |
|
|
$ |
7.29 |
|
Second quarter |
|
$ |
14.26 |
|
|
$ |
8.50 |
|
Third quarter |
|
$ |
8.91 |
|
|
$ |
3.65 |
|
Fourth quarter |
|
$ |
6.05 |
|
|
$ |
3.95 |
|
|
2005 |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
6.04 |
|
|
$ |
4.90 |
|
Second quarter |
|
$ |
5.24 |
|
|
$ |
2.33 |
|
Third quarter |
|
$ |
3.25 |
|
|
$ |
1.67 |
|
Fourth quarter |
|
$ |
1.89 |
|
|
$ |
1.27 |
|
At
March 15, 2006, there were approximately 800 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 2005 or 2004,
and we do not anticipate paying dividends in the foreseeable future. We intend to retain any
earnings to finance our operations and for general corporate purposes.
Securities Authorized for Issuance Under Equity Compensation Plans. The following table
summarizes our equity compensation plans as of December 31, 2005. Applica has not granted any
warrants or stock appreciation rights.
-18-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
securities |
|
|
|
|
|
|
|
|
|
|
|
remaining |
|
|
|
Number of |
|
|
|
|
|
|
available for the
future issuance under |
|
|
|
securities to be |
|
|
Weighted- |
|
|
equity |
|
|
|
issued upon |
|
|
average |
|
|
compensation |
|
|
|
exercise of |
|
|
exercise price |
|
|
plans |
|
|
|
outstanding |
|
|
of outstanding |
|
|
(excluding |
|
|
|
options, |
|
|
options, |
|
|
securities |
|
|
|
warrants and |
|
|
warrants and |
|
|
reflected in |
|
|
|
rights |
|
|
rights |
|
|
column (a)) |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved by security holders |
|
|
2,306,224 |
|
|
$ |
4.23 |
|
|
|
612,299 |
|
Employee stock purchase plan approved by security holders(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation not approved by security holders(2) |
|
|
177,000 |
|
|
$ |
7.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,483,224 |
|
|
|
|
|
|
|
612,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The 2000 Employee Stock Purchase Plan was terminated on December 31, 2005. |
|
(2) |
|
Applica has granted non-qualified stock options, which were not issued under a formal plan
and which were not approved by security holders. These options were for a term of ten years
and expired in January 2006. No such options have been granted since 1998. |
-19-
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. Managements 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
|
(Dollars in thousands, except per share data) |
|
Statement of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (1) |
|
$ |
556,119 |
|
|
$ |
709,772 |
|
|
$ |
623,436 |
|
|
$ |
705,854 |
|
|
$ |
709,451 |
|
Equity in net earnings
(loss) of joint ventures |
|
$ |
|
|
|
$ |
|
|
|
$ |
55,570 |
(4) |
|
$ |
(1,498 |
) |
|
$ |
(128 |
) |
Earnings (loss) before
income taxes and cumulative
effect of change in
accounting principle |
|
$ |
(46,380 |
) |
|
$ |
(73,503 |
) |
|
$ |
25,370 |
|
|
$ |
9,878 |
|
|
$ |
(24,292 |
) |
Income tax expense (benefit) |
|
$ |
2,889 |
|
|
$ |
59,451 |
|
|
$ |
10,147 |
|
|
$ |
4,826 |
|
|
$ |
4,146 |
|
Cumulative effect of change
in accounting principle, net
of tax benefit of $42,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(78,829 |
) |
|
|
|
|
Effective tax rate |
|
|
(6.2 |
)% |
|
|
(80.9 |
)% |
|
|
40.0 |
% |
|
|
48.9 |
% |
|
|
(17.1 |
)% |
Net earnings (loss) |
|
$ |
(49,269 |
)(2) |
|
$ |
(132,954 |
)(3) |
|
$ |
15,223 |
(4) |
|
$ |
(73,777 |
)(5) |
|
$ |
(28,438 |
)(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
104,722 |
|
|
$ |
116,390 |
|
|
$ |
115,767 |
|
|
$ |
137,706 |
|
|
$ |
137,415 |
|
Current ratio |
|
|
1.7 |
|
|
|
1.6 |
|
|
|
1.7 |
|
|
|
1.8 |
|
|
|
1.7 |
|
Property, plant and
equipment, net |
|
$ |
19,715 |
|
|
$ |
38,327 |
|
|
$ |
70,389 |
|
|
$ |
76,963 |
|
|
$ |
82,337 |
|
Total assets |
|
$ |
297,282 |
|
|
$ |
375,937 |
|
|
$ |
478,836 |
|
|
$ |
521,665 |
|
|
$ |
633,684 |
|
Long-term debt and other
long term liabilities |
|
$ |
76,225 |
|
|
$ |
62,012 |
|
|
$ |
75,261 |
|
|
$ |
140,301 |
|
|
$ |
135,017 |
|
Shareholders equity |
|
$ |
63,151 |
|
|
$ |
110,970 |
|
|
$ |
237,613 |
|
|
$ |
219,128 |
|
|
$ |
293,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common
share basic |
|
$ |
(2.04 |
)(2) |
|
$ |
(5.55 |
)(3) |
|
$ |
0.65 |
(4) |
|
|
($3.15 |
)(5) |
|
$ |
(1.23 |
)(6) |
Earnings (loss) per common
share diluted |
|
$ |
(2.04 |
)(2) |
|
$ |
(5.55 |
)(3) |
|
$ |
0.63 |
(4) |
|
|
($3.10 |
)(5) |
|
$ |
(1.23 |
)(6) |
Cash dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value at year end |
|
$ |
2.61 |
|
|
$ |
4.60 |
|
|
$ |
10.03 |
|
|
$ |
9.33 |
|
|
$ |
12.61 |
|
Return on average equity |
|
|
(56.6 |
)% |
|
|
(76.3 |
)% |
|
|
6.70 |
% |
|
|
(28.8 |
)% |
|
|
(9.2 |
)% |
|
|
|
(1) |
|
Effective January 1, 2005, Applica modified its accounting treatment for cooperative
advertising and slotting fees. This modification resulted in a reclassification that
reduced each of net sales, gross profit and selling, general and administrative expenses by
$13.8 million in 2005, $17.0 million in 2004, $17.2 million in 2003, $21.5 million in 2002
and $17.6 million in 2001. The net sales figures presented above reflect such
reclassification. Because the modification resulted solely in a reclassification within
the consolidated statement of operations, there was no impact on Applicas financial
condition, operating income or net earnings for any periods presented. |
(Footnotes continued on following page.)
-20-
(2) During 2005, Applica recorded:
|
|
|
inventory write-downs of $12.8 million related to adjustment to net realizable
value of the Home Cafe single cup coffee maker and the Tide Buzz ultrasonic
stain remover; |
|
|
|
|
raw materials inventory write off of $3.3 million, write down of property, plant
and equipment of $1.1 million, accelerated depreciation of $3.2 million and
severance charges of $4.9 million related to the downsizing and closure of our
Mexican manufacturing operations; |
|
|
|
|
inefficiencies and unabsorbed overhead of $6.2 million associated with the
downsizing and ultimate closure in October 2005 of our Mexican manufacturing
operations; |
|
|
|
|
$0.7 million in bad debt expense related to a contract manufacturing project at
our Mexican manufacturing operations; |
|
|
|
|
higher product warranty returns and related expenses of $5.2 million, primarily
in the first half of 2005; and |
|
|
|
|
additional tax expense of $1.9 million related to the closure of the Mexican
manufacturing operations. |
(3) 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 FASB Statement SFAS
142; |
|
|
|
|
income tax expense of $57.8 million 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; |
|
|
|
|
termination benefits of $9.2 million related to resignation of Applicas former
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. |
(4) During 2003, Applica recorded:
|
|
|
equity in net earnings of its joint venture in which Applica owns a 50% interest
of $55.6 million; |
|
|
|
|
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. |
(5) 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;
and |
|
|
|
|
restructuring expenses of $10.6 million relating to the infrastructure
consolidation. |
(Footnotes continued on following page.)
-21-
(6) |
|
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 Applicas 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 shareholder class action litigation. |
-22-
Item 7. Managements 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 Item
1A. Risk Factors, 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 LitterMaid®, Belson®, Windmere® and Applica®.
Applicas customers include mass merchandisers, specialty retailers and appliance distributors
primarily in North America, Latin America and the Caribbean.
Through October 2005, Applica managed its operations through three business segments:
Household Products, Professional Personal Care Products and Manufacturing. The Manufacturing
segment ceased operations in October 2005. For additional information, see Note R, Business
Segment and Geographic Area Information, to the Consolidated Financial Statements included in
Schedule I to this Annual Report on Form 10-K.
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 remain high in the
foreseeable future. This has negatively impacted our gross margins by increasing the price we pay
for our products, which in many circumstances we have been unable to pass on to our customers. This
is expected to continue to negatively impact our margins in 2006.
Mexican Manufacturing Operations. In recent years, we have been rationalizing our Mexican
manufacturing operations. In 2004 and the first quarter of 2005, we shifted a significant amount
of production from Mexico to third parties in China and began to reduce our Mexican manufacturing
capacity to reflect only the volume needed for the Mexican marketplace. In July 2005, the decision
was made to close our manufacturing operations in Mexico and production ceased in October 2005.
The decision resulted primarily from competitive pressures from Chinese manufacturers.
Manufacturers in China are now able to provide good quality and well-designed products at a cost
that is lower than our cost to produce a similar product in Mexico.
With the closure of the Mexican facility, we currently outsource the manufacturing of all of
our products to third party suppliers located primarily in China. This allows us to concentrate
our efforts on marketing, distribution and sourcing of our products. We expect to see the benefits
of this decision in 2006 as we continue to work with our suppliers to obtain the lowest possible
product cost without compromising quality. We do not expect to fully realize gross margin
improvements from moving production to China until all of the remaining products manufactured by
our Mexican facility are sold through to customers.
In connection with the decision to close the Mexican manufacturing facility, we recorded a
total of $12.5 million in restructuring charges in 2005. These charges consisted of the following:
|
|
|
$4.9 million in severance charges; |
|
|
|
|
$3.3 million of write-offs of raw materials inventory no longer used in production; |
|
|
|
|
$3.2 million related to the acceleration of the depreciation of the machinery
and equipment used in the manufacturing process; and |
|
|
|
|
$1.1 million write-down of property, plant and equipment. |
All restructuring charges relate to the Manufacturing reportable segment.
We auctioned a significant portion of the machinery and equipment, along with some office
furniture and equipment, in Mexico in December 2005. As a result of the auction, we realized net
cash proceeds of approximately $2.9 million. As of December 31, 2005, we collected $2.0 million of
such proceeds. The remaining proceeds of $0.9 million were collected in February 2006. The
December 2005 auction resulted in a small gain. We expect to
-23-
have another auction in March 2006 for the remaining property and equipment and expect to
realize net proceeds of approximately $0.4 million. We do not expect the gain or loss associated
with the March auction to be significant.
In February 2006, we entered into a sale agreement with an unrelated third party to sell the
land and building housing our factory in Mexico. We expect the sale to close in the second quarter
of 2006. The land and building were classified as an asset held for sale and included in prepaid
expenses and other in the accompanying consolidated balance sheets. The value of the facilities
was approximately $5.3 million (net of commissions) as of December 31, 2005. We do not expect a
gain or loss upon the sale of the land and building.
Use of Estimates and Critical Accounting Policies
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 income
taxes, the allowance for doubtful accounts, inventory valuation reserves, product liability,
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 Applicas
financial statements and tax returns. Significant management judgment is required in developing
Applicas 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 managements 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:
|
|
|
Applicas historical bad debt experiences; |
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|
publicly available information regarding its customers and the inherent credit
risk related to them; |
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information from subscription-based credit reporting companies; |
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trade association data and reports; |
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current economic trends; and |
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|
changes in customer payment terms or payment patterns. |
This assessment requires significant judgment. If the financial condition of Applicas
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, 2005 and, therefore, a charge to
income could result in the period in which a particular customers financial condition worsens.
Conversely, if the financial condition of Applicas 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. Applica
currently has a credit approved receivables purchasing agreement with FCIA Underwriters. The
agreement allows Applica to
-24-
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
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 salability 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 Applicas results of
operations and the valuation of its inventory, resulting in a charge to income in the period such
determination is made. Applica values its inventory in Mexico at average cost.
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 Applicas 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.
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.
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 Applicas investment in a joint venture
investment partnership, Anasazi Partners, L.P. (For additional information, see Note D, Equity In
Net Earnings of Joint Venture and Other Income of the Notes, to Consolidated Financial Statements
included in Schedule I of this Annual Report on Form 10-K.) 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 Applicas financial condition but have significantly affected
operations from time to time. However, circumstances could change which may alter future
expectations.
-25-
Results of Operations
The operating results of Applica expressed as a percentage of sales are set forth in the table
below:
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Year Ended December 31, |
|
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2005 |
|
|
2004 |
|
|
2003 |
|
Net sales (1) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales: |
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Cost of goods sold |
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75.4 |
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71.4 |
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72.6 |
|
Restructuring charges |
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2.2 |
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1.3 |
|
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|
1.1 |
|
Product recall |
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|
|
|
|
|
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|
(0.7 |
) |
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|
|
|
|
|
|
|
|
Gross profit (1) |
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|
22.3 |
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|
27.3 |
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27.0 |
|
Selling, general and administrative expenses: |
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Operating expenses (1) |
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28.9 |
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26.9 |
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27.2 |
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Termination benefits |
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1.3 |
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Gain on the sale of subsidiary, division and property, net |
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(0.6 |
) |
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Restructuring and other (credits) charges |
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(0.1 |
) |
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0.8 |
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Impairment of goodwill |
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8.8 |
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Impairment of intangible asset |
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1.1 |
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Operating loss |
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(6.6 |
) |
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(9.1 |
) |
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(2.1 |
) |
Other expense |
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1.7 |
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1.2 |
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2.7 |
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Loss before equity in net earnings of joint venture and
income taxes |
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(8.3 |
) |
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(10.4 |
) |
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(4.8 |
) |
Equity in net earnings of joint ventures |
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8.9 |
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(Loss) earnings before income taxes |
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|
(8.3 |
) |
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(10.4 |
) |
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4.1 |
|
Income tax provision |
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0.5 |
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8.4 |
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1.6 |
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Net (loss) earnings |
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(8.9 |
)% |
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(18.7 |
)% |
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2.4 |
% |
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(1) |
|
Effective January 1, 2005, Applica modified its accounting treatment for cooperative
advertising and slotting fees. This modification resulted in a reclassification that
reduced each of net sales, gross profit and selling, general and administrative expenses by
2.4% in 2005, 2.3% in 2004 and 2.7% in 2003. The reclassification has been reflected in
the percentages presented above. Because the modification resulted solely in a
reclassification within the consolidated statement of operations, there was no impact on
Applicas financial condition, operating income or net earnings for any periods presented. |
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net Sales. Consolidated net sales decreased by $153.7 million to $556.1 million, a decrease
of 21.6% over 2004.
Sales for the Household Product segment, net of inter-segment sales, for the year ended
December 31, 2005 decreased from $627.2 million to $492.4 million. For the year ended December 31,
2005:
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|
sales of Black &
Decker®
branded products decreased by $126.7 million to $432.0 million; |
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|
sales of Littermaid® branded products increased by $1.8 million to $37.9 million; and |
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|
sales of other branded products decreased by $10.3 million to $22.5 million. |
In 2005, sales of Black & Decker® branded products decreased primarily as the result of (1)
the elimination of certain products identified in our product and customer profitability review (2)
lower sales of promotional items during the Holiday period (3) lower sales of the Home Cafe single
cup coffee makers and (4) inventory management by significant customers.
Sales for the Professional Personal Care segment for the year ended December 31, 2005
decreased from $64.9 million to $54.8 million for the 2004 period. This decrease was primarily the
result of the sale of the Jerdon hotel and hospitality business in October 2004. Sales of products by the Jerdon division
totaled $8.4 million in 2004.
-26-
Sales for the Manufacturing segment for the year ended December 31, 2005 decreased from $191.4
million to $53.5 million for the 2004 period. In 2005, the intersegment sales decreased from
$173.8 million to $44.6 million. In 2005, contract manufacturing decreased from $17.7 million to
$8.9 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. The decrease was offset by an increase in contract manufacturing at our
manufacturing operations in Mexico from $3.5 million to $8.9 million, primarily related to one
project. The manufacturing facility in Mexico ceased operations in October 2005.
Restructuring Charges. In 2005, Applica incurred restructuring charges of $12.5 million
relating to the continued downsizing in the first half of 2005 and ultimate closure of its Mexican
manufacturing operations in October 2005. In February 2006, Applica entered into a sale agreement
with an unrelated third party to sell the building housing the factory in Queretaro, Mexico for
$5.3 million (net of commissions). Applica expects the sale to close in the second quarter of
2006.
In 2004, Applica incurred restructuring charges of $9.2 million, primarily relating to the
downsizing of its Mexican manufacturing operations.
Product Recall Expenses. In March 2005, Applica voluntarily recalled approximately 500,000
Black & Decker® branded BL 5000, BL 5900 and BL 6000 blenders. Substantially all costs and
expenses related to this recall were reimbursed in 2005 by the supplier who manufactured the
blenders.
Gross Profit. Applicas gross profit decreased by $69.7 million to $124.2 million in 2005
primarily as the result of (1) lower sales volume, (2) restructuring charges and losses at our
Mexican manufacturing operations, (3) inventory write-downs and (4) higher warranty and related
expenses. Applicas gross profit margin as a percentage of sales decreased to 22.3% for the year
ended December 31, 2005 as compared to 27.3% for 2004. The gross profit margin decrease was
primarily attributed to:
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inventory write-downs of $12.8 million related to adjustment to net realizable
value of the Home Cafe single cup coffee maker and the Tide Buzz ultrasonic
stain remover; |
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|
higher product warranty returns and related expenses of $5.2 million primarily
in the first half of 2005; and |
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|
restructuring charges of $12.5 million in 2005 related to the downsizing and
ultimate closure of our Mexican manufacturing operations, as compared to
restructuring charges of $9.2 million in 2004, primarily related to the downsizing
of our Mexican manufacturing operations. |
We also experienced higher unabsorbed overhead and inefficiencies of $7.1 million at our
Mexican manufacturing operations in 2005 as the result of reduced production associated with the
downsizing and closure activities of such operations, which commenced in the fourth quarter of
2004.
At December 31, 2005 and 2004, we had $2.9 million and $2.0 million, respectively, of
capitalized manufacturing costs associated with the higher unabsorbed overhead and inefficiencies
at our Mexican manufacturing operations. Included in cost of goods sold for 2005 were $6.2 million
of these costs. We expect to sell through the entire inventory manufactured at our Mexican
facilities on hand at December 31, 2005 by April 2006. We also expect to incur administrative
costs of approximately $0.5 million associated with the closure of our Mexico Manufacturing
operations through April 2006.
Additionally, in 2005, we recorded $0.7 million in allowances for doubtful accounts related to
a contract manufacturing project manufactured at our Mexican manufacturing operations. This
charge was included as a component of cost of goods sold in the accompanying consolidated statement
of operations.
In the first half of 2005, sales of the first generation Home Café and Tide Buzz were lower
than we had anticipated. The size of the Tide Buzz product, the relative complexity of use and
price were the main reasons given by consumers for not purchasing the product. Based on this
information, we decided to close out the first generation of the Tide Buzz in the first quarter
of 2005 and took steps to accelerate the introduction of the next generation. In the second
quarter of 2005, our alliance partner introduced a product that performed relatively
-27-
the same function as the next generation of the Tide Buzz at a price point that made it
impractical for us to continue with the development of the next generation, which was terminated in
the second quarter of 2005.
Our Home Café sales plan for 2005 was based on promotional campaigns that did not fully
materialize. This resulted in lower-than-anticipated consumer demand for the Home Café coffee
maker and excess inventory of such product. As a result, in the first quarter of 2005, we wrote
down the first generation of Home Café inventory to its net realizable value based on facts and
circumstances existing at the time. In the second quarter, we revised the net realizable value of
the Home Café inventory primarily based on a lower than anticipated selling price.
In 2005, we experienced an increase in our warranty returns and related expenses, primarily in
the first half of 2005. We believe that we have taken appropriate measures to combat this issue in
a timely and effective manner. These measures include the retention of an independent third party
quality consultant to oversee the production process at our major suppliers in China.
Additionally, 2005 was negatively impacted by inflation pressures on the price of raw
materials and increases in oil prices.
The decreases in gross profit margins were partially offset by improved product mix, primarily
as a result of the elimination of certain products identified in our product and customer
profitability review and the movement of the manufacturing of most all of our products to China.
We expect to see the benefits of the decision to close our Mexican manufacturing facility in 2006
as we continue to work with our suppliers in China to obtain the lowest possible product cost
without compromising quality. However, we do not expect to fully realize gross margin improvements
from moving production to the Far East until all of the remaining products manufactured by our
Mexican facility are sold through to our customers.
Selling, General and Administrative Expenses.
Operating Expenses. Operating expenses decreased $30.3 million, or 15.8%, for the
year ended December 31, 2005 to $160.9 million as compared to 2004. The following factors
contributed to the decrease in operating expenses in 2005:
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|
a decrease of $10.1 million in advertising and promotional expenses primarily
due to advertising in 2004 for the Home Café single cup coffee maker and the Tide
Buzz ultrasonic stain remover, both of which were launched in the second quarter
of 2004; |
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|
a decrease of $6.9 million in freight and distribution expenses primarily due to
lower volume; |
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|
a decrease of $4.6 million in sales related expenses due to lower volume,
primarily royalty expenses related to the Black & Decker® brand; |
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|
a decrease in legal and consulting fees of $4.4 million; and |
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|
net bad debt recoveries of $2.6 million in 2005 compared to bad debt expense of
$1.1 million in 2004. |
Operating expenses as a percentage of sales increased to 28.9% in 2005 from 26.9% in the 2004
period primarily as the result of lower sales volume in 2005 and our inability to leverage fixed
costs.
Termination Benefits. In the third quarter of 2004, Applica incurred termination
costs of approximately $9.2 million related to the resignation of Applicas former 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 our Hong Kong manufacturing subsidiary and recorded a loss on the sale of approximately
$0.8 million, primarily related to 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 of 2004, we sold
our executive offices located in Miami Lakes, Florida, which resulted in a gain of approximately
$1.3 million.
-28-
Restructuring and Other (Credits) Charges. In the first quarter of 2004, we settled
an outstanding litigation matter for $0.1 million and reversed the remaining accrual of $0.6
million related to such litigation.
Impairment of Goodwill. 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 Applicas 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.
Interest Expense. Interest expense increased by $1.6 million, or 16.6%, to $11.4 million in
2005 as compared to $9.8 million in 2004 as the result of higher interest rates.
Interest and Other Income. 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. The
partnership was dissolved in the third quarter of 2004. A portion of the proceeds from the sale of
ZonePerfect was being held in escrow as of December 31, 2004, $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, 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.
In February 2005, Applica received approximately $1.6 million in the first distribution of the
funds held in escrow. In August 2005, Applica received approximately $3.4 million in the second
distribution of the escrowed funds. Applica applied these receipts, totaling $5.0 million, to the
receivable balance at December 31, 2004 of $4.2 million and recorded the income of $0.8 million as
other income for the year ended December 31, 2005.
The remainder of the funds in escrow are subject to dispute and, in December 2005, a lawsuit
was filed against the purchaser of ZonePerfect claiming that there is no basis to withhold the
distribution of the remaining funds. If and when the claims made on the remaining escrowed funds
are resolved in its favor, Applica could receive cash and record additional other income of up to
$3.4 million, although it is likely that the claims will be settled for less.
Applicas equity in the net earnings of joint venture was zero for the years ended December
31, 2005 and 2004.
(Gain) Loss On Early Extinguishment of Debt. In October 2005, Applica entered into a secured
term loan agreement with Mast Credit Opportunities I, (Master) Ltd. to borrow $20 million.
Applica used a portion of the proceeds from the term loan to repurchase from Mast $5.0 million of
its 10% senior subordinated notes due 2008 at 98% of par value. The repurchase of the bonds
resulted in a gain on redemption of approximately $0.06 million, net of the pro-rata write-off of
deferred financing costs related to the redemption. The balance of the proceeds was used to pay
down Applicas senior revolving credit facility.
In February 2004, Applica redeemed $4.25 million of the 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 $0.2 million in prepayment premiums and the pro-rata write-off of deferred
financing costs related to the redemption.
Vendor Consideration. Applicas supplier of vacuum packaging products 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 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 Applicas 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 collected cash of $228,000 and $380,000 from the supplier in 2005
and 2004, respectively, and recorded it as a reduction of cost of goods sold in each such year. We
do not expect future purchases from the supplier to be significant and, therefore, the
collectibility of the note receivable is highly unlikely.
-29-
Taxes. Applicas tax provision is based on an estimated annual aggregation of the taxes on
earnings of each of its foreign and domestic operations. For 2005, Applica incurred a tax expense
of $2.9 million most of which was attributed to foreign operations and additional valuation
allowances on deferred tax assets. 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.
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
companys 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 reviews, Applica concluded that it was appropriate to record
additional valuation allowances of $18.1 million in 2005. Applica expects to realize the benefits
of the remaining net deferred tax assets of approximately $10.4 million as of December 31, 2005,
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.
For additional information regarding taxes, see Note N, Income Taxes, of the Notes to
Consolidated Financial Statements included in Schedule I of this Annual Report on Form 10-K.
Loss Per Share. Weighted average basic shares for the periods ended December 31, 2005 and 2004
were 24,150,991 and 23,974,664, respectively. All common stock equivalents have been excluded from
the diluted per share calculations in 2005 and 2004 because their inclusion would have been
anti-dilutive. Potential common stock equivalents at
December 31, 2005 and 2004 were 2,483,224 and
2,755,207 with exercise prices ranging from $1.62 to $31.69 per share and $3.63 and $31.69 per
share, respectively.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net Sales. Consolidated net sales increased by $86.3 million to $709.8 million, an increase
of 13.8% over 2003.
Sales for the Household Product segment, net of inter-segment sales, for the year ended
December 31, 2004 increased from $526.1 million to $627.2 million. For the year ended December 31,
2004:
|
|
|
sales of Black & Decker branded products increased by $111.5 million to $559.9 million; and |
|
|
|
|
sales of Littermaid® branded products increased by $3.2 million to $36.1 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 hotel and hospitality business in October 2004. Sales of
products by the Jerdon division totaled $8.4 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 $173.8 million. In 2004, contract manufacturing decreased from $28.4 million to
$17.7 million, primarily as the result of
-30-
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.
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.
Gross Profit. Applicas gross profit increased by $25.8 million to $193.9 million in 2004 as
the result of higher sales volume. Applicas gross profit margin as a percentage of sales
increased slightly to 27.3% for the year ended December 31, 2004 as compared to 27.0% 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 manufacturing operations consisting of (1) write
down of machinery and equipment of $3.5 million and severance of $1.2 million
related to our decision to move production of irons and toaster ovens from Mexico
to third parties in China; (2) write down of raw materials inventory of $2.3
million and write down of machinery and equipment of $1.4 million related to the
decision to move production of the Home Café single cup coffee maker from Mexico
to third parties in China; and (3) severance of $0.8 million related to
restructuring at our Hong Kong-based manufacturing operations; and |
|
|
|
|
higher prices for raw materials. |
Selling, General and Administrative Expenses.
Operating Expenses. Operating expenses for Applica increased $21.8 million, or 12.9%,
for the year ended December 31, 2004 to $191.2 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; |
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increases of $10.8 million in royalty expenses, primarily related to Black &
Decker® royalties; and |
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increases of $4.7 million in advertising and promotional expenses. |
-31-
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:
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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 |
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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 26.9% in 2004 from 27.2% 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 Applicas former 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 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 then
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 Applicas 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.
The implied fair value of goodwill was determined by allocating Applicas fair value to all of
Applicas 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.
-32-
In our process of allocating the fair value to Applicas 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 Applicas 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
Applicas valuation analysis, the impairment charge was classified as a component of income from
operations.
Interest Expense. Interest expense decreased by $4.2 million, or 29.8%, 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 its
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.
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.
The partnership was dissolved in the third quarter of 2004.
-33-
Vendor Consideration. Applicas supplier of vacuum packaging products 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 was 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 Applicas 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 collected cash of $380,000 from the supplier in 2004 and recorded
it as a reduction of cost of goods sold.
Taxes. Applicas 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
companys 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.
For additional information regarding taxes, see Note N, Income Taxes, 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 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 $31.69 per share, respectively.
-34-
Financial Condition
Cash Requirements
Our material short-term cash requirements are the funds necessary to maintain current
operations and achieve our business strategy, including purchasing inventory, financing accounts
receivable and paying operating expenses, including Black and Decker® royalty payments, lease
payments and interest costs. We expect our operating expenses to remain similar to historical
percentages of sales. Our interest costs will fluctuate based upon interest rates, as well as our
ability to generate cash flow to pay down debt. The table below provides a summary of other future
expected cash obligations. In addition, we require funds for capital expenditures for tooling for
new products, information technology improvements and other improvements.
At December 31, 2005, our contractual obligations and commercial commitments were as follows:
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Payment due in: |
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2007 to |
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2009 to |
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More than |
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Contractual Obligations |
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Total |
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2006 |
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2008 |
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2010 |
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5 years |
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(In thousands) |
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Debt Obligations |
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$ |
145,274 |
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$ |
55,750 |
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$ |
89,524 |
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Operating Lease Obligations |
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18,692 |
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$ |
4,145 |
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|
6,203 |
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3,308 |
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$ |
5,036 |
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Royalties |
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62,500 |
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12,500 |
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25,000 |
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25,000 |
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Consulting Arrangements |
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8,305 |
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3,350 |
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4,101 |
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854 |
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Other Long-Term Liabilities
Reflected on the Balance Sheet |
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475 |
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475 |
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$ |
235,246 |
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|
|
20,470 |
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$ |
91,054 |
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|
$ |
118,686 |
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|
$ |
5,036 |
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Additionally, in 2006, we will pay approximately $0.6 million in cash severance benefits to
terminated employees.
In February 2006, we announced that we initiated an external process to explore strategic
alternatives to enhance shareholder value, which could include a sale or merger of Applica. In
connection therewith, Applica adopted an employee retention plan, which classifies employees into
different bands based on their level of responsibility and role within the company. The total
amount of bonuses that could be paid under the plan is approximately $1.5 million and is based on
an employees base salary at the time the bonus is determined. The bonus is payable upon the
earlier of the close of a transaction or December 31, 2006, and is contingent upon the continued
employment of the employee through the payment date. The above retention plan does not cover
individuals with employment contracts.
Effective December 1, 2005, our accounts payable terms with Elec-Tech changed from 60 days
form invoice date to 30 days from invoice date.
Historically, we have financed our short-term cash requirements primarily through cash flows
from operations, borrowings under our senior credit facility, other short-term borrowings, and the
sale of certain assets. We expect to continue to do the same in the future.
Capital expenditures are expected to be approximately $4.0 million in 2006 compared to $3.4
million in 2005.
Our material long-term cash requirements consist mainly of the $55.8 million of our 10% notes,
which are due in July 2008, and the $20 million term loan due November 2009. In addition, our
ongoing future cash requirements include future operating expenses, payments under our Black and
Decker® trademark license, capital expenditures, interest expense, lease payments and payments
under our senior credit facility.
We expect to have sufficient liquidity from cash flow from operations and borrowings under our
credit facility to finance our cash requirements. If necessary, we believe we will have access to
the capital markets to fund any unexpected long-term cash requirements.
-35-
Sources and Uses of Cash
Operating Activities. In 2005, Applicas operations used $4.0 million in cash, compared with
the use of cash of $63.6 million in 2004. The improvement in operating cash flows as compared to
the prior year was principally due to lower working capital requirements as the result of lower
sales in 2005 and lower inventory levels as compared to 2004. Inventory was higher during 2004 as
we built transitional inventory to support the sale of our Hong Kong-based manufacturing operations
and the transition of production of certain products from Mexico to China.
Investing Activities. For the year ended December 31, 2005, investing activities generated
cash of $6.7 million, compared with $34.1 million of cash generated in 2004. During 2004, we
received approximately $47.4 million from the sale of assets, in addition to $1.2 million from
joint venture distributions. Additionally, during 2005, capital expenditures were lower by $11.2
million compared to 2004 primarily due to capital spending of $8.4 million in 2004 on our
implementation of a new ERP system as compared to $0.3 million in 2005. The implementation was
completed in March 2005. Additionally, capital expenditures were lower in 2005 compared to 2004 as
the result of the sale of our Hong Kong-based manufacturing operations in July 2004 and the
downsizing and ultimate closure in 2005 of our Mexican manufacturing operations.
In 2006, Applica expects capital expenditures of $4.0 million, primarily for new product
development. Applica plans to fund these capital expenditures from cash flow from operations and,
if necessary, borrowings under its credit facility.
Financing Activities. Net cash used in financing activities was $8.0 million in 2005,
compared to cash provided of $26.5 million in 2004. Borrowings under Applicas lines of credit in
2005 were lower than 2004, primarily attributable to lower working capital requirements.
Debt Instruments, Guarantees and Related Covenants
Applica amended and restated its senior credit facility in December 2005. The revised $125
million asset-based senior secured revolving credit facility matures in November 2009. Advances
under the facility are governed by Applicas collateral value, which is based primarily on
percentages of outstanding eligible accounts receivable and inventories. Other changes to the
amended credit facility include a reduction in the daily availability and average monthly
availability requirements, and applicable margins based on those averages, and the addition of
receivables collected by our Hong Kong subsidiary to the borrowing base.
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
$10 million and a minimum average monthly availability of $13 million. As of December 31, 2005,
Applicas fixed charge coverage ratio was less than 1.0 to 1.0, but its average monthly
availability in December 2005 was $42.1 million. If Applica maintains a fixed charge coverage ratio
of greater than 1.0 to 1.0, there is no availability requirement and no availability block.
As of December 31, 2005, Applica was borrowing approximately $69.5 million under the facility
and had approximately $29.7 million available for future cash borrowings, which is net of the $10
million daily block. As of March 10, 2006, Applica was borrowing approximately $46.4 million under
the facility and had approximately $22.0 million available for future cash borrowings, which is net
of the $10 million daily block.
The credit facility includes a $10.0 million sub-limit for the issuance of letters of credit,
with approximately $1.7 million outstanding under the limit as of December 31, 2005. At Applicas
option, interest accrues on the loans made under the credit facility at either:
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LIBOR (adjusted for any reserves), plus a specified margin (determined by Applicas
fixed charge coverage ratio and set at 1.75% on December 31, 2005 and 1.75% at March 1,
2006), which was 6.14% at December 31, 2005 and 6.49% at March 10, 2006; or |
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the Base Rate (Bank of Americas Prime Rate), plus a specified margin (based upon
Applicas fixed charge coverage ratio, and was zero at December 31, 2005 and zero at March
7, 2006), which was 7.25% at December 31, 2005 and 7.50% at March 10, 2006. |
-36-
Borrowing margins will remain at 1.75% for LIBOR loans and zero percent for based rate loans
through June 2006 based on the terms of the loan agreement.
At December 31, 2005, Applica was in compliance with all covenants under the credit facility.
See Note K, Short-Term Debt, of the Consolidated Financial Statements included in Schedule I to
this Annual Report on Form 10-K for more detailed information regarding Applicas senior credit
facility.
As of December 31, 2005, Applica foreign subsidiaries had no outstandings in trade finance
lines.
Applica also 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. In October 2005, we repurchased an additional $5.0 million of the notes. As
of December 31, 2005, the outstanding balance was $55.8 million. See Note L, Long-Term Debt, of
the Consolidated Financial Statements included in Schedule I to this Annual Report on Form 10-K for
more detailed information regarding Applicas long-term borrowings.
In October 2005, Applica entered into a secured term loan agreement with Mast Credit
Opportunities I, (Master) Ltd. to borrow $20 million. The term loan is secured by a lien on
Applicas assets, which is subordinate to Applicas senior revolving credit facility. The term
loan bears interest at the three-month LIBOR rate plus 625 basis points, which was 10.9% at
December 31, 2005 and 11.2% at March 7, 2006. The term loan matures in November 2009 and requires
no principal payments until such time. In connection with the repayment of the term loan, after
June 30, 2006 Applica is required to pay an exit fee that increases on a periodic basis from 1% to
4% of the principal amount of the loan. See Note L, Long-Term Debt, of the Consolidated Financial
Statements included in Schedule I to this Annual Report on Form 10-K for more detailed information
regarding Applicas 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, $17.4 million 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. At December 31, 2005, $15.0 million of accounts receivable were
insured under the agreement with FCIA. No amounts were outstanding under the agreement with CIT in
2005. 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, 2005, debt as a percent of total capitalization was 69.7%, as compared to
58.0% at December 31, 2004. The increase was mainly due to a $47.8 million decrease in
shareholders equity, primarily as a result of the loss for the year.
Applicas 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
-37-
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 been significantly affected by
inflation pressures on the price of raw materials, increases in oil prices, and 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. From time to time, 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.
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.
In 1994, China pegged the renminbi (also called the yuan) at an exchange rate of 8.28 to the
U.S. dollar. U.S. groups argued that the peg makes Chinas exports to the U.S. cheaper, and U.S.
exports to China more expensive, thus greatly contributing to Chinas trade surplus with the U.S.
In July 2005, China ended its peg to the dollar and let the renminbi fluctuate versus a basket of
currencies. Immediately, the new renminbi rate revalued the currency by 2.1% to 8.11 to the
dollar. At March 10, 2006, the renminbi exchange rate was 8.05 to the dollar. Because a
substantial number of our products are imported from China, the floating currency could result in
significant fluctuations in our product costs and could have a material effect on our business.
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 Applicas 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.
-38-
Recent Accounting Pronouncements
See Note A, Summary of Significant Accounting Policies, 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:
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FASB Statement No. 154 Accounting Changes and
Error Corrections a replacement of APB
Opinion No. 20 and SFAS No. 3 (SFAS 154); and |
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SFAS No. 123R Accounting for Stock-Based Compensation. |
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 Applicas 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 Applicas derivative financial instruments and
other financial instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by contractual maturity dates.
Notional amounts are used to calculate the contractual payments expected to be exchanged under the
contract. Weighted average variable rates are based on implied forward rates in the yield curve at
the reporting date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 |
|
|
|
Expected Maturity Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There- |
|
|
|
|
|
|
Fair |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
after |
|
|
Total |
|
|
Value(1) |
|
|
|
(Dollars in thousands) |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate: |
|
|
|
|
|
|
|
|
|
$ |
55,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,750 |
|
|
$ |
54,217 |
|
Average Interest Rate |
|
|
|
|
|
|
|
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,524 |
|
|
|
|
|
|
|
|
|
|
$ |
89,524 |
|
|
$ |
89,524 |
|
Average Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay Floating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Pay Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Receive Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fair values were determined based on broker quotes or quoted market prices or rates for the
same or similar instruments. |
(Footnotes
continued on following page.)
-39-
(2) |
|
Includes $20.0 million term loan and the outstanding balance of $69.5 on the senior credit
facility. The variable rate on the $20 million term loan is set on a monthly basis using the
three month LIBOR rate plus an applicable margin of 6.25%. The variable rate senior 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 Applicas
average availability (1.75% as of December 31, 2005), or at a rate equivalent to the Prime
Rate plus an applicable margin based upon Applicas leverage ratio (zero as of December 31,
2005). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 |
|
|
|
Expected Maturity Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There- |
|
|
|
|
|
|
Fair |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
after |
|
|
Total |
|
|
Value(1) |
|
|
|
(Dollars in thousands) |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate: |
|
$ |
3,000 |
|
|
|
|
|
|
|
|
|
|
$ |
61,008 |
(1) |
|
|
|
|
|
|
|
|
|
$ |
64,008 |
|
|
$ |
64,008 |
|
Average Interest Rate |
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate: |
|
$ |
914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,541 |
|
|
|
|
|
|
$ |
89,445 |
|
|
$ |
89,445 |
|
Average Interest Rate |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay Floating (5) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,000 |
|
|
|
|
|
|
|
|
|
|
$ |
30,000 |
|
|
$ |
258 |
|
Average 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 Applicas leverage ratio (2.00% as of December 31, 2004) or at a
rate equivalent to the Prime Rate plus an applicable margin based upon Applicas 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. |
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
-40-
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 of December 31, 2005, Applica did not have any forward exchange contracts, or purchased
options outstanding. 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 U,
Financial Instruments, of the Consolidated Financial Statements included in Schedule I of this
Annual Report on Form 10-K for more information regarding Applicas 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, Applicas CEO and
CFO have concluded that, as of December 31, 2005, Applicas 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.
Managements 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, 2005 and is
incorporated herein by reference.
Changes in Internal Controls. Since the evaluation date by Applicas management of
its internal controls over financial reporting, there have not been any changes in Applicas
internal controls over financial reporting that have materially affected, or are reasonably likely
to materially affect Applicas internal controls over financial reporting.
Limitations on the Effectiveness of Controls. Applicas 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, Applicas 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.
-41-
PART III
Item 10. Directors and Executive Officers of the Registrant.
The executive officers of Applica are as follows:
|
|
|
|
|
|
|
NAME |
|
AGE |
|
OFFICE |
Harry D. Schulman
|
|
|
54 |
|
|
Chairman, President and Chief Executive Officer |
|
|
|
|
|
|
|
Terry L. Polistina
|
|
|
42 |
|
|
Senior Vice President and Chief Financial
Officer |
|
|
|
|
|
|
|
David Coles
|
|
|
41 |
|
|
Interim Chief Operating Officer |
|
|
|
|
|
|
|
Brian Guptill
|
|
|
54 |
|
|
Senior Vice President Engineering, Applica
Consumer Products, Inc. |
Harry D. Schulman has 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. Polistina has 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.
David Coles, a Managing Director at Alvarez & Marsal, has served as the interim Chief
Operating Officer since December 2005 and specializes in business performance improvement,
profitability analysis and working capital management, most recently with a focus on manufacturing
and healthcare. With more than 15 years of financial restructuring experience, his primary areas of
expertise include cash flow management and the formulation and implementation of restructuring and
performance improvement plans for underperforming businesses. He has worked in a variety of
management and advisory roles in several industries, most recently serving as the Chief Executive
Officer of American Business Financial Services, Inc. and prior to that as the Chief Executive
Officer of the National Century Financial Enterprises.
Brian Guptill has 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 Raytheons
Missile Systems Division.
Additional information required by this item is incorporated by reference to Applicas Proxy
Statement for its 2006 Annual Meeting of Shareholders.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference to Applicas Proxy Statement
for its 2006 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item is incorporated by reference to Applicas Proxy Statement
for its 2006 Annual Meeting of Shareholders.
-42-
Item 13. Certain Relationships and Related Transactions.
Information required by this item is incorporated by Reference to Applicas Proxy Statement
for its 2006 Annual Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services.
Information required by this item is incorporated by Reference to Applicas Proxy Statement
for its 2006 Annual Meeting of Shareholders.
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The following consolidated financial statements of Applica Incorporated and its subsidiaries
are included in Schedule I attached hereto:
|
|
|
Managements Annual Report on Internal Control Over Financial Reporting |
|
|
|
|
Reports of Independent Registered Public Accounting Firm |
|
|
|
|
Consolidated Balance Sheets as of December 31, 2005 and 2004 |
|
|
|
|
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 |
|
|
|
|
Consolidated Statement of Shareholders Equity for the three years ended December 31, 2005 |
|
|
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 |
|
|
|
|
Supplement Disclosures of Cash Flow Information |
|
|
|
|
Notes to Consolidated Financial Statements
|
(a)(2) Financial Statements Schedules
The Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2002
are included in Schedule II attached hereto.
Individual financial statements of Applicas 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
|
|
|
Exhibit
Number
|
|
Description |
|
|
|
3.1
|
|
Second Amended and Restated Articles of Incorporation filed with the Florida Secretary of State
on May 10, 2000. Incorporated by reference to Applicas Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000. |
|
|
|
3.2
|
|
Third Amended and Restated Bylaws. Filed herewith. |
|
|
|
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 Applicas Form 8-K dated July 27, 1998. |
-43-
|
|
|
Exhibit
Number
|
|
Description |
|
|
|
10.1*
|
|
Employment agreement dated May 1,
2004 between Applica Incorporated and Harry D. Schulman. Incorporated
by reference to Applicas Current Report on Form 8-K dated
October 12, 2004. |
|
|
|
10.2*
|
|
Employment Agreement effective May
1, 2005 between Applica Consumer Products, Inc. and Terry L.
Polistina. Incorporated by reference to Applicas Current Report
on Form 8-K dated June 15, 2005. |
|
|
|
10.3*
|
|
Employment Agreement effective May
1, 2005 between Applica Consumer Products, Inc. and Brian S. Guptill.
Incorporated by reference to Applicas Current Report on Form
8-K dated July 18, 2005. |
|
|
|
10.4*
|
|
Separation Agreement dated August 26, 2004 between Applica Incorporated and David M. Friedson.
Incorporated by reference to Applicas Amendment No. 1 to Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 2004. |
|
|
|
10.5*
|
|
Termination and Release Agreement dated November 1, 2004 between Applica Incorporated and Belvin
Freidson. Incorporated by reference to Applicas Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004. |
|
|
|
10.6*
|
|
Termination and Release Agreement dated November 1, 2004 between Applica Incorporated, Durable
Manufacturing Limited and Lai Kin. Incorporated by reference to Applicas Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004. |
|
|
|
10.7*
|
|
1988 Director Stock Option Plan. Incorporated by reference to Applicas Annual Report on Form
10-K for the year ended December 31, 1988. |
|
|
|
10.8*
|
|
1992 Employees Incentive Stock Option Plan. Incorporated by reference to the Registration
Statement on Form S-8 as filed with the Securities and Exchange Commission on May 12, 1998. |
|
|
|
10.9*
|
|
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. |
|
|
|
10.10*
|
|
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. |
|
|
|
10.11*
|
|
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. |
|
|
|
10.12*
|
|
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. |
|
|
|
10.13
|
|
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 Applicas Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. |
-44-
|
|
|
Exhibit
Number
|
|
Description |
|
|
|
10.14
|
|
Second Amended and Restated Credit Agreement among Applica Incorporated, each of its subsidiaries
party thereto, each of the lenders party thereto, Bank of America, N.A., as agent, General
Electric Capital Corporation, as documentation agent, and Wachovia Bank National Association, as
syndication agent, dated December 23, 2005. Incorporated by reference to Applicas Current Report
on Form 8-K dated December 23, 2005. |
|
|
|
10.15
|
|
Amended and Restated Security Agreement among Applica Incorporated, each of its subsidiaries
party thereto, and Bank of America, N.A., as agent, dated December 23, 2005. Incorporated by
reference to Applicas Current Report on Form 8-K dated December 23, 2005. |
|
|
|
10.16
|
|
Amended and Restated Stock Pledge Agreement among Applica Incorporated, each of its subsidiaries
party thereto, and Bank of America, N.A., as agent, dated December 23, 2005. Incorporated by
reference to Applicas Current Report on Form 8-K dated December 23, 2005. |
|
|
|
10.17
|
|
Amended and Restated Continuing Guaranty Agreement among Applica Incorporated, each of its
subsidiaries party thereto, and Bank of America, N.A., as agent, dated December 23, 2005.
Incorporated by reference to Applicas Current Report on Form 8-K dated December 23, 2005. |
|
|
|
10.18
|
|
First Amendment to the Second Amended and Restated Credit Agreement among Applica Incorporated,
each of its subsidiaries party thereto, each of the lenders party thereto, and Bank of America,
N.A., as agent, dated January 31, 2006. Incorporated by reference to Applicas Current Report on
Form 8-K dated January 31, 2006. |
|
|
|
10.19
|
|
Term Loan Agreement among Applica Incorporated, each of its subsidiaries party thereto, and Mast
Credit Opportunities I, (Master) Ltd., dated October 21, 2005. Incorporated by reference to
Applicas Current Report on Form 8-K dated October 21, 2005. |
|
|
|
10.20
|
|
Security Agreement among Applica Incorporated, each of its subsidiaries party thereto, and Mast
Credit Opportunities I, (Master) Ltd. dated October 21, 2005. Incorporated by reference to
Applicas Current Report on Form 8-K dated October 21, 2005. |
|
|
|
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) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules
See Item 15(a)(2) above.
-45-
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)
|
|
Date: March 14, 2006 |
By: |
/s/ Harry D. Schulman
|
|
|
|
Harry D. Schulman, President and Chief |
|
|
|
Executive Officer |
|
|
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and on the date
indicated.
|
|
|
By: /s/ Harry D. Schulman
Harry D. Schulman, President and Chief Executive
Officer (Principal Executive Officer) |
|
DATE: March 14, 2006
|
|
|
|
By: /s/ Terry L. Polistina
Terry L. Polistina, Chief Financial Officer and
Senior Vice President (Principal Accounting Officer) |
|
DATE: March 14, 2006
|
|
|
|
By: /s/ Jerald I. Rosen
Jerald I. Rosen, Director |
|
DATE: March 14, 2006
|
|
|
|
By: /s/ Ware H. Grove
Ware H. Grove, Director |
|
DATE: March 14, 2006
|
|
|
|
By: /s/ Paul K. Sugrue
Paul K. Sugrue, Director |
|
DATE: March 14, 2006
|
|
|
|
By: /s/ Leonard Glazer
Leonard Glazer, Director |
|
DATE: March 14, 2006
|
|
|
|
By: /s/ Thomas J. Kane
Thomas J. Kane, Director |
|
DATE: March 14, 2006
|
|
|
|
By: /s/ Susan J. Ganz
Susan J. Ganz, Director |
|
DATE: March 14, 2006
|
|
|
|
By: /s/ J. Maurice Hopkins
J. Maurice Hopkins, Director |
|
DATE: March 14, 2006
|
|
|
|
By: /s/ Christopher B. Madison
Christopher B. Madison, Director |
|
DATE: March 14, 2006
|
-46-
SCHEDULE I
Applica Incorporated and Subsidiaries
INDEX TO FINANCIAL STATEMENTS
|
|
|
Managements Annual Report on Internal Control Over Financial Reporting.
|
|
F-2 |
|
|
|
Reports of Independent Registered Public Accounting Firm.
|
|
F-3 F4 |
|
|
|
Consolidated Balance Sheets as of December 31, 2005 and 2004.
|
|
F-5 |
|
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003.
|
|
F-6 |
|
|
|
Consolidated Statement of Shareholders Equity for the Three Years Ended December 31, 2005.
|
|
F-7 |
|
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003.
|
|
F-8 F9 |
|
|
|
Notes to Consolidated Financial Statements.
|
|
F-10 F-45 |
F-1
Managements 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, Applicas principal executive and
principal financial officers, or persons performing similar functions, and effected by Applicas
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 Applicas 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 Applicas internal control over financial
reporting as of December 31, 2005. In making this assessment, management used the control
criteria established in a report entitled Internal ControlIntegrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on managements evaluation and those criteria set forth above, management believes that
Applica maintained effective internal control over financial reporting as of December 31, 2005.
The independent registered public accounting firm of Grant Thornton LLP has issued a report on
managements assessment and the effectiveness of Applicas internal control over financial
reporting. That report appears on the following page.
F-2
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Applica Incorporated
We have audited managements 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, 2005, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Applica Incorporateds 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
managements assessment and an opinion on the effectiveness of the Companys 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 managements 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 companys 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
companys 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 companys 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, managements assessment that Applica Incorporated and subsidiaries maintained
effective internal control over financial reporting as of December 31, 2005, 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, 2005, 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, 2005 and 2004, and the related consolidated statements of operations, shareholders
equity and cash flows for each of the three years in the period ended December 31, 2005 and our
report dated March 10, 2006 expressed an unqualified opinion on those consolidated financial
statements.
/s/ Grant
Thornton LLP
Miami, Florida
March 10, 2006
F-3
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Applica Incorporated
We have audited the accompanying consolidated balance sheets of Applica Incorporated and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the three years in the period ended
December 31, 2005. These financial statements are the responsibility of the Companys 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, 2005 and 2004, and the results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. 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 Incorporateds internal control over financial
reporting as of December 31, 2005, 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 10, 2006 expressed an unqualified opinion.
/s/ Grant
Thornton LLP
Miami, Florida
March 10, 2006
F-4
Applica Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,464 |
|
|
$ |
10,463 |
|
Accounts and other receivables, less allowance
of $8,773 in 2005 and $11,711 in 2004 |
|
|
140,479 |
|
|
|
160,436 |
|
Notes receivable former officer |
|
|
|
|
|
|
2,569 |
|
Inventories |
|
|
101,638 |
|
|
|
131,503 |
|
Prepaid expenses and other |
|
|
11,137 |
|
|
|
12,309 |
|
Refundable income taxes |
|
|
3,661 |
|
|
|
2,032 |
|
Future income tax benefits |
|
|
1,249 |
|
|
|
33 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
262,628 |
|
|
|
319,345 |
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment at cost, less |
|
|
|
|
|
|
|
|
accumulated depreciation of $46,755 in 2005 and
$73,171 in 2004 |
|
|
19,715 |
|
|
|
38,327 |
|
Future Income Tax Benefits, Non-Current |
|
|
9,185 |
|
|
|
11,212 |
|
Other Intangibles, net |
|
|
1,765 |
|
|
|
4,493 |
|
Other Assets |
|
|
3,989 |
|
|
|
2,560 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
297,282 |
|
|
$ |
375,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
33,682 |
|
|
$ |
41,827 |
|
Accrued expenses |
|
|
50,034 |
|
|
|
62,046 |
|
Short-term debt |
|
|
69,524 |
|
|
|
89,455 |
|
Current portion of long-term debt |
|
|
|
|
|
|
3,000 |
|
Current taxes payable |
|
|
3,747 |
|
|
|
5,947 |
|
Deferred rent |
|
|
919 |
|
|
|
680 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
157,906 |
|
|
|
202,955 |
|
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities |
|
|
475 |
|
|
|
1,004 |
|
Long-Term Debt |
|
|
75,750 |
|
|
|
61,008 |
|
|
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
Common stock authorized: 75,000 shares of
$0.10 par value; issued and outstanding: |
|
|
|
|
|
|
|
|
24,179 in 2005 and 24,137 in 2004 |
|
|
2,418 |
|
|
|
2,414 |
|
Paid-in capital |
|
|
159,226 |
|
|
|
159,131 |
|
Accumulated deficit |
|
|
(95,749 |
) |
|
|
(46,480 |
) |
Note receivable former officer |
|
|
|
|
|
|
(502 |
) |
Accumulated other comprehensive loss |
|
|
(2,744 |
) |
|
|
(3,593 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
63,151 |
|
|
|
110,970 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
297,282 |
|
|
$ |
375,937 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-5
Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net sales |
|
$ |
556,119 |
|
|
$ |
709,772 |
|
|
$ |
623,436 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
419,430 |
|
|
|
506,652 |
|
|
|
452,450 |
|
Restructuring charges |
|
|
12,491 |
|
|
|
9,236 |
|
|
|
6,993 |
|
Product recall |
|
|
|
|
|
|
|
|
|
|
(4,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
431,921 |
|
|
|
515,888 |
|
|
|
455,318 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
124,198 |
|
|
|
193,884 |
|
|
|
168,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
160,900 |
|
|
|
191,170 |
|
|
|
169,398 |
|
Termination benefits |
|
|
|
|
|
|
9,153 |
|
|
|
|
|
Gain on the sale of subsidiary, division
and property net |
|
|
|
|
|
|
(3,921 |
) |
|
|
|
|
Restructuring and other (credits) charges |
|
|
|
|
|
|
(563 |
) |
|
|
4,681 |
|
Impairment of goodwill |
|
|
|
|
|
|
62,812 |
|
|
|
|
|
Impairment of intangible asset |
|
|
|
|
|
|
|
|
|
|
7,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,900 |
|
|
|
258,651 |
|
|
|
181,231 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(36,702 |
) |
|
|
(64,767 |
) |
|
|
(13,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
11,420 |
|
|
|
9,796 |
|
|
|
13,964 |
|
Interest and other income |
|
|
(1,686 |
) |
|
|
(1,247 |
) |
|
|
(817 |
) |
(Gain) loss on early extinguishment of debt |
|
|
(56 |
) |
|
|
187 |
|
|
|
3,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,678 |
|
|
|
8,736 |
|
|
|
17,087 |
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in net earnings of
joint venture and income taxes |
|
|
(46,380 |
) |
|
|
(73,503 |
) |
|
|
(30,200 |
) |
Equity in net earnings of joint venture |
|
|
|
|
|
|
|
|
|
|
55,570 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes |
|
|
(46,380 |
) |
|
|
(73,503 |
) |
|
|
25,370 |
|
Income tax provision |
|
|
2,889 |
|
|
|
59,451 |
|
|
|
10,147 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(49,269 |
) |
|
$ |
(132,954 |
) |
|
$ |
15,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share |
|
$ |
(2.04 |
) |
|
$ |
(5.55 |
) |
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share |
|
$ |
(2.04 |
) |
|
$ |
(5.55 |
) |
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-6
Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated |
|
|
Note |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit) |
|
|
Receivable |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Former |
|
|
Comprehensive |
|
|
|
|
|
|
Common Stock |
|
|
Paid-in Capital |
|
|
Earnings |
|
|
Officer |
|
|
Loss |
|
|
Total |
|
Balance at December 31, 2002 |
|
$ |
2,350 |
|
|
$ |
155,395 |
|
|
$ |
71,251 |
|
|
$ |
(1,496 |
) |
|
$ |
(8,372 |
) |
|
$ |
219,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
15,223 |
|
|
|
|
|
|
|
|
|
|
|
15,223 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,270 |
|
|
|
1,270 |
|
Change in unrealized gain on
derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
764 |
|
|
|
764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,257 |
|
Exercise of stock options and issuance of
common stock under employee stock purchase
plan |
|
|
19 |
|
|
|
1,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,171 |
|
Tax benefit resulting from exercise of
stock options |
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47 |
|
Fair value of options to non-employees |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
2,369 |
|
|
|
156,604 |
|
|
|
86,474 |
|
|
|
(1,496 |
) |
|
|
(6,338 |
) |
|
|
237,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(132,954 |
) |
|
|
|
|
|
|
|
|
|
|
(132,954 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,076 |
|
|
|
2,076 |
|
Realized foreign currency translation
sale of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
753 |
|
|
|
753 |
|
Change 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,459 |
|
Net change to reclass notes receivable
former-officer to current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
994 |
|
|
|
|
|
|
|
994 |
|
Compensation expense former officer |
|
|
|
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
2,414 |
|
|
|
159,131 |
|
|
|
(46,480 |
) |
|
|
(502 |
) |
|
|
(3,593 |
) |
|
|
110,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(49,269 |
) |
|
|
|
|
|
|
|
|
|
|
(49,269 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76 |
) |
|
|
(76 |
) |
Change in unrealized loss on
derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
925 |
|
|
|
925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,420 |
) |
Exercise of stock options and issuance of
common stock under employee stock purchase
plan |
|
|
4 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
Collections of notes receivable
former-officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502 |
|
|
|
|
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
2,418 |
|
|
$ |
159,226 |
|
|
$ |
(95,749 |
) |
|
$ |
|
|
|
$ |
(2,744 |
) |
|
$ |
63,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-7
Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(49,269 |
) |
|
$ |
(132,954 |
) |
|
$ |
15,223 |
|
Reconciliation to net cash (used in) provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment |
|
|
11,822 |
|
|
|
15,278 |
|
|
|
21,439 |
|
Loss on disposal of property, plant and equipment |
|
|
1,122 |
|
|
|
791 |
|
|
|
3,661 |
|
(Recovery) provision for doubtful accounts |
|
|
(2,497 |
) |
|
|
889 |
|
|
|
2,228 |
|
Write-downs of inventory |
|
|
16,844 |
|
|
|
5,777 |
|
|
|
5,355 |
|
(Gain) loss on early extinguishment of debt |
|
|
(56 |
) |
|
|
187 |
|
|
|
3,940 |
|
Compensation expense former officer |
|
|
|
|
|
|
113 |
|
|
|
|
|
Amortization of intangible and other assets |
|
|
3,864 |
|
|
|
2,212 |
|
|
|
9,272 |
|
Impairment of intangible asset |
|
|
|
|
|
|
|
|
|
|
7,152 |
|
Impairment of goodwill |
|
|
|
|
|
|
62,812 |
|
|
|
|
|
Impairment of property, plant and equipment |
|
|
1,062 |
|
|
|
4,851 |
|
|
|
|
|
Gain on sale of subsidiary, division and property |
|
|
|
|
|
|
(3,921 |
) |
|
|
|
|
Deferred taxes |
|
|
810 |
|
|
|
53,412 |
|
|
|
11,721 |
|
Restructuring, recall and other (credits) charges |
|
|
|
|
|
|
(563 |
) |
|
|
556 |
|
Other non-cash changes in equity items |
|
|
|
|
|
|
|
|
|
|
57 |
|
Equity in net earnings of joint venture |
|
|
|
|
|
|
|
|
|
|
(55,570 |
) |
Changes in assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables |
|
|
18,406 |
|
|
|
(36,274 |
) |
|
|
13,318 |
|
Inventories |
|
|
13,223 |
|
|
|
(51,094 |
) |
|
|
(2,507 |
) |
Prepaid expenses and other |
|
|
6,573 |
|
|
|
(3,239 |
) |
|
|
(1,731 |
) |
Other assets |
|
|
(1,715 |
) |
|
|
2,262 |
|
|
|
1,944 |
|
Accounts payable and accrued expenses |
|
|
(20,035 |
) |
|
|
9,283 |
|
|
|
(6,800 |
) |
Current income taxes |
|
|
(3,829 |
) |
|
|
6,566 |
|
|
|
(1,506 |
) |
Other liabilities |
|
|
(291 |
) |
|
|
56 |
|
|
|
(277 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(3,966 |
) |
|
|
(63,556 |
) |
|
|
27,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of subsidiary, division, and property |
|
|
2,073 |
|
|
|
47,409 |
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(3,400 |
) |
|
|
(14,564 |
) |
|
|
(18,526 |
) |
Distribution from joint venture net |
|
|
|
|
|
|
1,194 |
|
|
|
51,430 |
|
Distribution from escrowed funds in connection with a dissolved
partnership |
|
|
4,982 |
|
|
|
|
|
|
|
|
|
Collections from officers and former officer |
|
|
3,078 |
|
|
|
62 |
|
|
|
486 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
6,733 |
|
|
|
34,101 |
|
|
|
33,390 |
|
(Continued on next page.)
F-8
Applica Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Payments) borrowings under lines of credit, net |
|
|
(20,107 |
) |
|
|
34,195 |
|
|
|
7,949 |
|
Payments on mortgage loan |
|
|
|
|
|
|
(5,779 |
) |
|
|
(143 |
) |
Payments of long-term debt |
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
Redemption of long-term debt |
|
|
(4,906 |
) |
|
|
(4,390 |
) |
|
|
(67,775 |
) |
Exercises of stock options and issuances of common stock under
employee stock purchase plan |
|
|
99 |
|
|
|
2,459 |
|
|
|
1,171 |
|
Interest receivable from former officer |
|
|
(7 |
) |
|
|
(22 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(7,921 |
) |
|
|
26,463 |
|
|
|
(58,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(845 |
) |
|
|
720 |
|
|
|
3,026 |
|
(Decrease) increase in cash and cash equivalents |
|
|
(5,999 |
) |
|
|
(2,272 |
) |
|
|
5,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
10,463 |
|
|
|
12,735 |
|
|
|
7,683 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
4,464 |
|
|
$ |
10,463 |
|
|
$ |
12,735 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands) |
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
10,928 |
|
|
$ |
10,117 |
|
|
$ |
15,520 |
|
Income taxes |
|
$ |
5,073 |
|
|
$ |
|
|
|
$ |
312 |
|
Non-cash financing activities:
|
|
|
Applica reclassified approximately $5.7 million from property, plant and equipment
and $0.4 million from inventories to assets held for sale, which are included within
prepaid expenses and other assets in 2005. |
|
|
|
|
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
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 LitterMaid®, Belson®, Windmere®, and Applica®. Applicas
customers include mass merchandisers, specialty retailers and appliance distributors primarily in
North America, Latin America and the Caribbean.
Applica operated a manufacturing facility in Mexico which ceased production in October 2005.
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 income
taxes, the allowance for doubtful accounts, inventory valuation reserves, product liability,
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 Applicas
financial statements and tax returns. Significant management judgment is required in developing
Applicas 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 managements 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 many factors including:
|
|
|
Applicas historical bad debt experiences; |
|
|
|
|
publicly available information regarding its customers and the inherent credit
risk related to them; |
|
|
|
|
information from subscription-based credit reporting companies; |
F-10
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
|
|
|
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 Applicas
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, 2005 and, therefore, a charge to
income could result in the period in which a particular customers financial condition worsens.
Conversely, if the financial condition of Applicas 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. Applica
currently has a credit approved receivables purchasing agreement with FCIA Underwriters.
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 the
market value of the product is less than cost, Applica will write down the related inventory to the
estimated net realizable value. Applica regularly evaluates the composition of its 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 salability 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
Applicas results 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 the 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 Applicas 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.
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.
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 Applicas investment in a joint venture
investment partnership (for additional information, see Note D). 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 Applicas financial condition, but have significantly affected
operations from time to time. However, circumstances could change which may alter future
expectations.
F-11
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Foreign Currency Translation
The financial statements of Applicas 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 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
2005, 2004 and 2003, net foreign translation (Gains) or losses included in Applicas statement of
operations were $(0.8) million, $0.7 million and $3.0 million, respectively. Gains or losses
resulting from foreign currency transactions are recorded in the consolidated statements of
operations. Such losses totaled $0.6 million, $1.4 million and $0.3 million in 2005, 2004 and 2003,
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, 2005 and 2004 included
approximately $3.9 million and $8.3 million, respectively, held in foreign banks by Applicas 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, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Accumulated foreign currency translation adjustment |
|
$ |
(2,744 |
) |
|
$ |
(2,668 |
) |
Accumulated net unrealized gain on derivatives |
|
|
|
|
|
|
(925 |
) |
|
|
|
|
|
|
|
|
|
$ |
(2,744 |
) |
|
$ |
(3,593 |
) |
|
|
|
|
|
|
|
Tax provisions (benefits) related to comprehensive earning adjustments, primarily due to
unrealized gains and (losses) on derivatives, were zero in 2005 and 2004 and $1.4 million in 2003.
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.
F-12
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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, |
|
|
|
2005* |
|
|
2004 |
|
|
|
(In thousands) |
|
Raw materials |
|
$ |
|
|
|
$ |
4,528 |
|
Work in process |
|
|
|
|
|
|
280 |
|
Finished goods |
|
|
101,638 |
|
|
|
126,695 |
|
|
|
|
|
|
|
|
|
|
$ |
101,638 |
|
|
$ |
131,503 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
In October 2005, Applica ceased its manufacturing operations in Mexico. |
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, volume rebates and cooperative advertising and slotting fees. 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.
Cooperative Advertising and Slotting Fees
Effective January 1, 2005, Applica modified its accounting treatment for cooperative
advertising and slotting fees provided to its customers. The modification was necessary because
Applica no longer uses an unrelated third party to verify performance or to determine the fair
value of the benefits Applica receives in exchange for the payment of promotional funds. In
accordance with Emerging Issues Task Force (EITF) 01-9, Accounting for Consideration Given By a
Vendor To a Customer (Including a Reseller of the Vendors Products), which addresses the income
statement classification of slotting fees and cooperative advertising arrangements with trade
customers, these promotional funds should be accounted for as a reduction of selling price and
netted against gross sales. Prior to January 1, 2005, Applica classified promotional funds as
selling, general and administrative expenses in its consolidated statement of operations. This
modification reduced each of net sales, gross profit and selling, general and administrative
expenses by approximately $13.8 million, $17.0 million, and $17.2 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Because the modification resulted solely in a
reclassification within the consolidated statement of operations, there was no impact on Applicas
financial condition, operating income or net earnings for any of the periods presented.
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, excluding cooperative advertising, for the years ended December 31, 2005, 2004
and 2003 were approximately $9.0 million, $19.1 million and $14.3 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.
F-13
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Freight Costs
Freight costs on goods shipped and not billed to Applicas customers were included in
operating expenses in the accompanying consolidated statements of operations. Freight costs totaled
$26.4 million, $30.8 million and $21.5 million during the years ended December 31, 2005, 2004 and
2003, 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 and other available
information. Accrued product warranties as of December 31, 2005, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
(In thousands) |
|
Balance at December 31, 2003 |
|
$ |
6,084 |
|
Additions to accrued product warranties |
|
|
44,306 |
|
Reductions of accruals payments and credits issued |
|
|
(43,207 |
) |
|
|
|
|
Balance at December 31, 2004 |
|
$ |
7,183 |
|
Additions to accrued product warranties |
|
|
33,972 |
|
Reductions of accruals payments and credits issued |
|
|
(33,408 |
) |
|
|
|
|
Balance at December 31, 2005 |
|
$ |
7,747 |
|
|
|
|
|
Stock Based Compensation
At December 31, 2005, Applica had three active stock-based compensation plans, which are
described more fully in Note P 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 Applicas common stock at the date
of grant over the exercise price of the options. Applicas 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 stock 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, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands, except per share amounts) |
|
Net (loss) earnings, as reported |
|
$ |
(49,269 |
) |
|
$ |
(132,954 |
) |
|
$ |
15,223 |
|
Add: Stock-based employee
compensation expense included in net
(loss) earnings, net of tax (1) |
|
|
|
|
|
|
113 |
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of tax
(1) |
|
|
(2,373 |
) |
|
|
(831 |
) |
|
|
(371 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) earnings |
|
$ |
(51,642 |
) |
|
$ |
(133,672 |
) |
|
$ |
14,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(2.04 |
) |
|
$ |
(5.55 |
) |
|
$ |
0.65 |
|
Basic pro forma |
|
$ |
(2.14 |
) |
|
$ |
(5.58 |
) |
|
$ |
0.63 |
|
Diluted as reported |
|
$ |
(2.04 |
) |
|
$ |
(5.55 |
) |
|
$ |
0.63 |
|
Diluted pro forma |
|
$ |
(2.14 |
) |
|
$ |
(5.58 |
) |
|
$ |
0.62 |
|
|
|
|
(1) |
|
Amounts are only net of tax for 2003 because in 2005 and 2004 there was a valuation
allowance against substantially all deferred tax assets. |
F-14
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
There was no stock-based employee compensation expense included in net loss in 2005. 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 Applicas former Chairman of the
Board in August 2004. There was no stock-based employee compensation expense included in net
earnings in 2003.
No tax benefits were attributed to the stock-based employee compensation expense during the
periods presented above because valuation allowances were required on substantially all of
Applicas deferred tax assets.
The above pro forma disclosures may not be representative of the effects on reported net
earnings (loss) for future periods because (1) options vest over several years, (2) Applica may
continue to grant options to employees and (3) the stock option acceleration in 2005.
In June 2005, the Compensation Committee of the Board of Directors approved the acceleration
of vesting of all unvested out-of-the-money stock options awarded to employees under Applicas
stock option plans, except for those options held by executive officers. All stock options with
exercise prices equal to or greater than $3.28 per share, the closing price of Applicas common
stock on June 16, 2005, were considered to be out-of-the-money. No stock options held by
non-employees, including directors, were subject to acceleration. Options to purchase
approximately 425,000 shares of common stock were subject to the acceleration. The options have a
range of exercise prices of $3.63 to $11.16 and a weighted average exercise price of $4.91.
Because the options that were accelerated have exercise prices in excess of the current market
value of the common stock, they were not fully achieving their original objectives of incentive
compensation and employee retention. The Compensation Committee of the Board of Directors believed
that the acceleration of the option vesting periods would have a positive effect on employee morale
and retention. Additionally, the acceleration enabled Applica to reduce compensation expense
associated with stock options upon the adoption of SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), on January 1, 2006. The aggregate pre-tax expense associated with the accelerated
options that would have been reflected in Applicas consolidated statement of operations in future
fiscal years was approximately $1.2 million. This amount is reflected in the pro forma footnote
disclosure above for the year ended December 31, 2005.
In December 2005, the Compensation Committee of the Board of Directors approved the granting
of stock options to purchase up to 475,000 shares of common stock at an exercise price of $1.62 per
share to certain employees of Applica. The exercise price was equal to the fair market value of
the common stock on the date of the grant. All of the stock options were vested immediately,
except for 30,000 which vest in 2006. The compensation expense of approximately $0.3 million
associated with this grant is reflected in the pro forma footnote disclosure above for the year
ended December 31, 2005.
In accordance with the requirements of SFAS 123, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Years ended December 31, |
|
|
|
2005 |
|
2004 |
|
2003 |
|
Expected dividend yield |
|
00.0% |
|
00.0% |
|
|
00.0% |
|
Expected price volatility range |
|
61.8% - 77.0% |
|
60.8% - 65.6% |
|
|
64.1% - 82.7% |
|
Risk-free interest rate |
|
3.80% |
|
3.15% |
|
|
3.0% |
|
Expected life of options in years. |
|
1-4 |
|
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
F-15
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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, which was 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 derivatives 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.
Applicas objective in holding derivatives is to decrease the volatility of earnings and cash flows
associated with changes in foreign currency and interest rates.
During 2005, 2004, and 2003, there were no significant gains or losses recognized in earnings
for hedge ineffectiveness. Applica did not discontinue any hedges during 2005, 2004, or 2003
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. As of December 31, 2005, there were no outstanding derivative financial
instruments.
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.
F-16
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Legal Costs
Legal costs are expensed as incurred and are included in operating expenses. For the years
ended 2005, 2004 and 2003, Applica expensed $2.4 million, $4.9 million and $8.1 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, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands, except per share amounts) |
|
Net (loss) earnings |
|
$ |
(49,269 |
) |
|
$ |
(132,954 |
) |
|
$ |
15,223 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
24,151 |
|
|
|
23,975 |
|
|
|
23,573 |
|
Dilutive effect of stock options |
|
|
|
|
|
|
|
|
|
|
425 |
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average common shares outstanding |
|
|
24,151 |
|
|
|
23,975 |
|
|
|
23,998 |
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share |
|
$ |
(2.04 |
) |
|
$ |
(5.55 |
) |
|
$ |
0.65 |
|
Diluted (loss) earnings per share |
|
$ |
(2.04 |
) |
|
$ |
(5.55 |
) |
|
$ |
0.63 |
|
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 2005
and 2004, all common stock equivalents were excluded because their inclusion would have been
anti-dilutive. The amounts in 2003 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, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Number of shares |
|
|
2,483,224 |
|
|
|
2,755,207 |
|
|
|
1,494,685 |
|
Range of exercise price |
|
$ |
1.62-31.69 |
|
|
$ |
3.63-31.69 |
|
|
$ |
6.75-31.69 |
|
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154 Accounting
Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS
154). This Statement replaced APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and changed the requirements for
the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific transition
provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The adoption of SFAS 154 is not expected to have a
material impact on Applicas financial condition, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 123R. SFAS 123R is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), and its related implementation
guidance. SFAS 123R establishes standards for the accounting for transactions in which a company
exchanges its equity instruments for goods or services. It also addresses transactions in which a
company incurs liabilities in exchange for goods or services that are based on the fair value of
the companys equity instruments or that may be settled by the issuance of those equity
instruments. SFAS 123R requires public companies to measure the cost of employee services
F-17
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
received in exchange for an award of equity instruments based on the grant-date fair value of
the award (with limited exceptions). That cost must be recognized over the period during which an
employee is required to provide services in exchange for the award (which is usually the vesting
period of the award).
SFAS 123R was originally scheduled to be effective as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. In April 2005, the SEC announced the
adoption of a new rule amending the compliance date to the beginning of the first annual reporting
period that begins after June 15, 2005. Therefore, SFAS 123R will be effective for Applica in the
fiscal year beginning January 1, 2006. As of the required effective date, Applica will apply SFAS
123R using the modified prospective transition method described in
the standard.
The effects of the adoption of SFAS No. 123R on Applicas financial condition, results of
operations and cash flows are dependent upon a number of factors, including:
|
|
|
the number of employee stock options outstanding and unvested; |
|
|
|
|
the number of employee options that may be granted in the future; |
|
|
|
|
the future market value and volatility of Applicas stock price; |
|
|
|
|
movements in the risk-free rate of interest; |
|
|
|
|
stock option exercise and forfeiture patterns; and |
|
|
|
|
the stock option valuation model used to estimate the fair value of each option. |
As a result of these variables, it is not yet possible to reliably estimate the effect of the
adoption of SFAS No. 123R will have on Applicas financial condition, results of operations or cash
flows; however, Applica expects that the effect of the adoption of SFAS 123R related to the
unvested stock options at December 31, 2005 will result in approximately $0.4 million of
compensation expense in 2006, $0.4 million in 2007 and $0.2 million in 2008, which will be
reflected in the consolidated statements of operations for the respective fiscal years.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current years
presentation.
NOTE B COST OF SALES
Cost of Goods Sold
Included in cost of goods sold for 2005 were inventory write-downs of approximately $13.5
million primarily related to lower-than-anticipated consumer demand for the Home Cafe single cup
coffee maker and the Tide Buzz ultrasonic stain remover. Included in cost of goods sold for 2004
were inventory write-downs of approximately $1.4 million recorded for the Tide Buzz ultrasonic
stain remover. There were no write-downs recorded for the aforementioned two products in 2003.
The inventory write-downs related to the Household Products reportable segment.
Restructuring Charges
For 2005, Applica incurred a total of $12.5 million of restructuring charges associated with
the continued downsizing and closure of the manufacturing operations in Mexico. These charges
consisted of the following:
|
|
|
$4.9 million in severance charges; |
|
|
|
|
$3.3 million write-down of raw materials inventory that will no longer be used in production; |
|
|
|
|
$3.2 million related to the acceleration of the depreciation of the machinery
and equipment used in the manufacturing process; and |
|
|
|
|
$1.1 million write-down of property, plant and equipment. |
F-18
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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 Applicas cost of producing these products in Mexico. In connection with
this restructuring plan, in 2004 and 2003, Applica recorded restructuring charges of $4.7 million
and $3.7 million, respectively. Such charges consisted of $1.2 million and $3.3 million of
severance in 2004 and 2003, respectively, and $3.5 million and $0.4 million of impairment charges
associated with the write-down of machinery and equipment in 2004 and 2003, respectively. The
severance was paid in full by the end of 2004. This restructuring was completed in December 2004.
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. In connection
with this 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. The restructuring was completed in February 2005.
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, 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.
In December 2005, Applica auctioned a significant portion of the machinery and equipment
located in the Mexican manufacturing facility, along with some office furniture and equipment. As
a result of the auction, Applica realized net cash proceeds of approximately $2.9 million. As of
December 31, 2005, Applica collected $2.0 million of such proceeds. The remaining proceeds of $0.9
million were collected in February 2006. The December 2005 auction resulted in a small gain.
Applica expects to have another auction in March 2006 for the remaining property and equipment
located at the manufacturing facility and expects to realize net proceeds of approximately $0.4
million. Applica does not expect the gain or loss associated with such auction to be significant.
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.
Product Recall
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. At 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.
In March 2005, Applica voluntarily recalled approximately 500,000 Black & Decker® branded BL
5000, BL 5900 and BL 6000 blenders. Substantially all costs and expenses related to this recall
were reimbursed in 2005 by the supplier who manufactured the blenders.
NOTE C RESTRUCTURING AND OTHER (CREDITS) CHARGES
In the fourth quarter of 2001, Applica initiated a plan to consolidate its Shelton,
Connecticut office, as well as certain back-office and supply chain functions in Canada and Latin
America, with its executive offices. 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 annual savings in payroll and occupancy
expenses. In 2003, Applica recorded an additional $4.7 million in restructuring charges related to
its
F-19
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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 for $0.1
million and reversed the remaining accrual of $0.6 million related to such litigation.
Accrued liabilities relating to the restructuring and other charges (credits) were zero and
$2.5 million at December 31, 2005 and 2004, respectively. 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.
NOTE D EQUITY IN NET EARNINGS OF JOINT VENTURE AND OTHER INCOME
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. A portion of the proceeds from the
sale of ZonePerfect was being held in escrow as of December 31, 2004, $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 venture in 2003. At December 31, 2004, 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.
In February 2005, Applica received approximately $1.6 million in the first distribution of the
funds held in escrow. In August 2005, Applica received approximately $3.4 million in the second
distribution of the escrowed funds. Applica applied these receipts, totaling $5.0 million, to the
receivable balance at December 31, 2004 of $4.2 million and recorded the income of $0.8 million as
other income for the year ended December 31, 2005.
The remainder of the funds in escrow are subject to dispute and, in December 2005, a lawsuit
was filed by the representative for the ZonePerfect shareholders against the purchaser of ZonePerfect claiming that
there is no basis to withhold the distribution of the remaining funds. If and when the claims made
on the remaining escrowed funds are resolved in its favor, Applica could receive cash and record
additional other income of up to $3.4 million, although it is likely that the claims will be
settled for less.
The partnership was dissolved in the third quarter of 2004. Applicas equity in the net
earnings of joint venture was zero for the years ended December 31, 2005 and 2004 and $55.6 million
for the year ended December 31, 2003. Applica has no additional commitments or exposure related to
this investment.
Included in Applicas consolidated retained earnings were earnings related to the joint
venture partnership of approximately $54.1 million as of December 31, 2005 and 2004.
NOTE E SALE OF SUBSIDIARY, DIVISION AND PROPERTY
Sale of Subsidiary
In July 2004, Applica sold its Hong Kong manufacturing subsidiary for $28.1 million, which
allowed Applica to outsource the manufacturing of a substantial amount 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.
F-20
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The assets and liabilities sold as part of the transaction included the following:
|
|
|
|
|
|
|
(In thousands) |
|
Accounts receivable |
|
$ |
8,175 |
|
Intercompany receivable |
|
|
30,604 |
|
Inventory, net |
|
|
15,455 |
|
Prepaid expenses and other current assets |
|
|
4,516 |
|
Property and equipment, net |
|
|
17,732 |
|
|
|
|
|
|
|
$ |
76,482 |
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities |
|
$ |
36,782 |
|
Long-term debt |
|
|
7,491 |
|
Deferred taxes |
|
|
3,346 |
|
|
|
|
|
|
|
$ |
47,619 |
|
|
|
|
|
For 2004, revenues and gross profit from Applicas contract manufacturing operations in China
were $14.2 million and $3.5 million, respectively. Revenues and gross profit for 2003 were $27.5
million and $2.5 million, respectively.
The sale of the Hong Kong-based manufacturing subsidiary 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.
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. A portion of
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 Applicas credit facility. In October 2004,
Applica moved its executive offices to a leased facility in Miramar, Florida.
NOTE F 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. Friedsons employment agreement was terminated
and Applica agreed to pay him $6.5 million over the next year. 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.
Friedsons employment, expired in December 2005. The extension of the options resulted in
compensation expense in 2004 of approximately $0.1 million. Mr. Friedson repaid approximately $3.1
million in outstanding loans to Applica in 2005.
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.
Accrued liabilities relating to the termination benefits were as follows:
F-21
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Accrued at |
|
|
|
|
|
|
|
|
|
|
Amount Accrued at |
|
|
|
Dec. 31, 2004 |
|
|
2005 Provisions |
|
|
2005 Payments |
|
|
Dec. 31, 2005 |
|
|
|
(In thousands) |
|
Termination benefits |
|
$ |
6,871 |
|
|
$ |
|
|
|
$ |
6,627 |
|
|
$ |
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Accrued at |
|
|
|
|
|
|
|
|
|
|
Amount Accrued at |
|
|
|
Dec. 31, 2003 |
|
|
2004 Provisions |
|
|
2004 Payments |
|
|
Dec. 31, 2004 |
|
|
|
(In thousands) |
|
Termination benefits |
|
$ |
|
|
|
$ |
9,040 |
|
|
$ |
2,169 |
|
|
$ |
6,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Provision does not include $113,000 of compensation expense related to stock option extension
for the former Chairman of the Board. |
NOTE G IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
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.
Goodwill
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 Applicas 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.
F-22
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
In Applicas 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 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 Applicas assets and liabilities; any excess of fair value over the amount allocated represented
implied fair value of goodwill.
In Applicas 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 impairment 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 Applicas 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
F-23
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
impairment charge 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 impairment. Pursuant to the requirements of
SFAS 144 and as a result of Applicas valuation analysis, the impairment charge was classified as a
component of selling general and administrative expenses in the accompanying statement of
operations for 2003.
The components of Applicas intangible assets subject to amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
|
|
Weighted Average |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
Amortization Period |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
|
|
(Years) |
|
|
(In thousands) |
|
Licenses |
|
|
5.3 |
|
|
$ |
3,000 |
|
|
$ |
(3,000 |
) |
|
$ |
3,000 |
|
|
$ |
(1,055 |
) |
Contract-based |
|
|
9.1 |
|
|
|
5,988 |
|
|
|
(4,223 |
) |
|
|
5,988 |
|
|
|
(3,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,988 |
|
|
$ |
(7,223 |
) |
|
$ |
8,988 |
|
|
$ |
(4,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was $2.7 million during 2005, $1.7 million
during 2004 and $8.6 million during 2003. The following table provides information regarding
estimated amortization expense for each of the following years ended December 31:
|
|
|
|
|
|
|
(In thousands) |
|
2006 |
|
$ |
780 |
|
2007 |
|
|
469 |
|
2008 |
|
|
161 |
|
2009 |
|
|
161 |
|
2010 |
|
|
161 |
|
Thereafter |
|
|
33 |
|
NOTE H ASSETS HELD FOR SALE
In July 2005, Applica decided to close its manufacturing facility in Mexico. The manufacturing
operations ceased production in October 2005. In February 2006, Applica entered into a sale and
purchase agreement with an unrelated third party to sell the land and building housing its factory
in Mexico for approximately $5.5 million. The sale is expected to close in the second quarter of
2006. The land and building were classified as assets held for sale and included in prepaid
expenses and other in the accompanying consolidated balance sheet at a net realizable value of
approximately $5.3 million (net of commissions) as of December 31, 2005.
In connection with the abovementioned closure of the Mexico manufacturing facility, certain
machinery and equipment and furniture and fixtures totaling approximately $0.4 million and certain
raw materials inventory totaling approximately $0.4 million have been classified as assets held for
sale and included in prepaid expenses and other in the accompanying consolidated balance sheet as
of December 31, 2005.
In connection with the 2004 restructuring plan to move the production of irons and toaster
ovens to third party suppliers in China, 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 at December 31, 2004.
All assets held for sale relate to the Manufacturing reportable segment.
F-24
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE I PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
Useful Lives |
|
2005 |
|
|
2004 |
|
|
|
|
|
(In thousands) |
|
Building |
|
20 years |
|
$ |
|
|
|
$ |
7,430 |
|
Computer equipment |
|
3 - 5 years |
|
|
30,449 |
|
|
|
31,635 |
|
Equipment and other |
|
3 - 8 years |
|
|
32,452 |
|
|
|
66,985 |
|
Leasehold improvements* |
|
8 - 10 years |
|
|
3,569 |
|
|
|
4,379 |
|
Land and land improvements** |
|
20 years |
|
|
|
|
|
|
1,069 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
66,470 |
|
|
$ |
111,498 |
|
Less accumulated depreciation |
|
|
|
|
46,755 |
|
|
|
73,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,715 |
|
|
$ |
38,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Shorter of remaining term of lease or useful life
|
|
** |
|
Only improvements are depreciated |
In March 2005, Applica completed the implementation of a significant upgrade of its
information technology infrastructure, including the installation of a new enterprise resource
planning (ERP) system. As a result, during the second quarter of 2005, approximately $12.1 million
of capitalized expenditures associated with the information technology upgrade, which were
previously not subject to depreciation, were placed into service and began to be depreciated over
their respective useful lives. As of December 31, 2004, approximately $11.8 million of capitalized
expenditures associated with the information technology upgrade were included in property, plant,
and equipment as assets not yet placed into service.
In connection with the sale of its Hong Kong-based manufacturing operations in 2004, Applica
sold property, plant and equipment with a net book value of approximately $17.7 million. In
connection with the sale of the executive offices in Miami Lakes, Florida in 2004, Applica sold
property, plant and equipment with a net book value of approximately $7.6 million.
NOTE J ACCRUED EXPENSES
Accrued expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Promotions, co-op and other advertising allowances |
|
$ |
8,858 |
|
|
$ |
12,565 |
|
Chargebacks |
|
|
4,077 |
|
|
|
1,905 |
|
Salaries and bonuses |
|
|
3,729 |
|
|
|
11,629 |
|
Warranty |
|
|
7,747 |
|
|
|
7,183 |
|
Product liability |
|
|
4,558 |
|
|
|
4,139 |
|
Back-office consolidation |
|
|
|
|
|
|
2,536 |
|
Freight |
|
|
2,196 |
|
|
|
2,259 |
|
Interest |
|
|
2,793 |
|
|
|
2,530 |
|
Royalty |
|
|
6,281 |
|
|
|
7,020 |
|
Other |
|
|
9,795 |
|
|
|
10,280 |
|
|
|
|
|
|
|
|
|
|
$ |
50,034 |
|
|
$ |
62,046 |
|
|
|
|
|
|
|
|
F-25
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE K SHORT-TERM DEBT
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).
In June 2005, Applica again amended its senior credit facility to provide a temporary increase in
liquidity from July through November 2005. In December 2005, Applica amended and restated the
senior credit facility to reduce the credit amount to $125 million, reduce the applicable interest
rate margins, reduce the minimum daily and average monthly availability reserves, and add
receivables collected by its Hong Kong subsidiary to the collateral base. The amended credit
facility matures in November 2009.
Advances under the credit facility are governed by Applicas 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 $10 million and a minimum average
monthly availability of $13 million. If Applica maintains a fixed charge coverage ratio of greater
than 1.0 to 1.0, there is no availability requirement and no availability block. As of December
31, 2005, Applicas fixed charge coverage ratio was less than 1.0 to 1.0.
As of December 31, 2005, Applica was borrowing approximately $69.5 million under the facility
and had approximately $29.7 million available for future cash borrowings, which is net of the $10
million daily block.
At Applicas option, interest accrues on the loans made under the credit facility at either:
|
|
|
LIBOR (adjusted for any reserves), plus a specified margin (determined by Applicas
average quarterly availability and set at 1.75% at December 31, 2005), which was 6.14% at
December 31, 2005; or |
|
|
|
|
the Base Rate (which is Bank of Americas prime rate), plus a specified margin
(determined based upon Applicas average quarterly availability and was zero at December
31, 2005), which was 7.25% at December 31, 2005. |
Swing loans up to $15.0 million bear interest at the Base Rate plus a specified margin (determined
based upon Applicas average quarterly availability and was zero at December 31, 2005), which was
7.25% at December 31, 2005.
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 Applicas 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, 2005,
Applica was in compliance with all covenants under the credit facility.
As of December 31, 2005, Applica had letters of credit of $1.7 million outstanding under its
credit facility, as compared to $1.5 million outstanding as of December 31, 2004.
F-26
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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 Applicas foreign subsidiaries had trade finance or letter of credit lines. As of
December 31, 2005 and 2004, there were zero and $0.9 million outstanding, respectively, under the
trade finance lines, which were classified as short term debt. Applica had no letters of credit
outstanding related to the trade finance lines as of December 31, 2005 and 2004.
Applicas credit facility and notes and acceptance payable are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated Interest |
|
|
|
Balance |
|
|
Rate (1) |
|
|
|
(In Thousands) |
|
At December 31, 2005: |
|
|
|
|
|
|
|
|
Credit facility |
|
$ |
69,524 |
|
|
|
6.21 |
% |
|
|
|
|
|
|
|
|
|
At December 31, 2004: |
|
|
|
|
|
|
|
|
Credit facility |
|
$ |
88,541 |
|
|
|
4.40 |
% |
Notes and acceptance payable |
|
|
914 |
|
|
|
2.83 |
% |
|
|
|
|
|
|
|
|
Total |
|
$ |
89,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The stated interest rates were based upon the weighted average rates at December 31, 2005 and
2004; these rates are not necessarily an indication of future interest rates. |
NOTE L 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.
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, 2005, Applica was in compliance with
all covenants under the subordinated note indenture.
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. In October 2005, Applica entered into a secured term
loan agreement with Mast Credit Opportunities I, (Master) Ltd. (Mast Credit) to borrow $20
million. Applica used a portion of the proceeds from the term loan to repurchase from Mast Credit
$5.0 million of its 10% notes at 98% of par value. The repurchase of the notes resulted in a gain
on redemption of approximately $0.06 million.
Term Loan
In October 2005, Applica entered into a secured term loan agreement with Mast Credit
Opportunities I, (Master) Ltd. (Mast Credit) to borrow $20 million. The term loan is secured by
a lien on Applicas assets, which is subordinate to Applicas senior revolving credit facility.
Applica used a portion of the proceeds from the term loan to repurchase from Mast Credit $5.0 million of its 10%
senior subordinated notes due 2008 at 98% of par value. The
F-27
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
repurchase of the bonds resulted in a gain on redemption of approximately $0.06 million. The
balance of the proceeds was used to pay down Applicas senior revolving credit facility. As
reported in a Schedule 13G filed with the SEC on February 13, 2006, Mast Credit owns approximately
9.6% of the outstanding common stock of Applica.
The term loan bears interest at the three-month LIBOR rate plus 625 basis points, which was
10.9% at December 31, 2005. The term loan matures in November 2009 and requires no principal
payments until such time. Interest is paid monthly and in 2005, Applica recorded $425,000 in
interest expense associated with this loan. In connection with the repayment of the term loan,
after June 30, 2006 Applica is required to pay an exit fee that increases on a periodic basis from
1% to 4% of the principal amount of the loan. Applica incurred fees of approximately $0.2 million
in connection with the term loan.
The term loan contains the covenants similar to the senior credit facility, which are
discussed in Note K- Short-Term Debt, above. At December 31, 2005, Applica was in compliance with
all covenants under the term loan. For additional information regarding this loan, see Note T
Related Party Transactions, below.
Notes Payable
In conjunction with the acquisition of Weitech, Inc. in May 2002, Applica Consumer Products,
Inc., Applicas U.S. operating subsidiary, issued $3.0 million of notes payable primarily to the
former shareholders of Weitech. These notes were unsecured, bore interest at an annual rate of
6.0%, and were paid off in June 2005. At December 31, 2004, the notes payable were included in
current portion of long term debt in the accompanying consolidated balance sheet.
Applicas long-term debt, including interest rate swaps designated as hedges, is summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate |
|
|
Effective |
|
|
|
|
|
|
|
|
|
Stated Interest |
|
|
Swaps Pay |
|
|
Interest |
|
|
Swap |
|
|
Balance |
|
|
Rate |
|
|
Fixed (1) |
|
|
Rate (2) |
|
|
Maturities |
|
|
(In thousands) |
At December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Notes |
|
$ |
55,750 |
|
|
|
10.0 |
% |
|
$ |
|
|
|
|
10.0 |
% |
|
|
Term Loan |
|
|
20,000 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
75,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt. |
|
$ |
75,750 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable |
|
$ |
3,000 |
|
|
|
6.0 |
% |
|
$ |
|
|
|
|
6.0 |
% |
|
|
10% Notes (3) |
|
|
61,008 |
|
|
|
10.0 |
% |
|
|
30,000 |
|
|
|
8.2 |
% |
|
July 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
64,008 |
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
Less current portion |
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
61,008 |
|
|
|
|
|
|
$ |
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 that represented the positive fair value of underlying hedge as of
December 31, 2004 as required pursuant to SFAS 133. |
NOTE M 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 employees contributions. Contributions made by Applicas
employees 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, 2005, 2004 and 2003 totaled
approximately $650,000, $477,000 and $749,000,
F-28
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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 N INCOME TAXES
At December 31, 2005 and 2004, Applica had deferred tax assets in excess of deferred tax
liabilities of $111.1 million and $93.8 million, respectively. Applica determined that it was more
likely than not that $10.4 million and $11.2 million of such assets will be realized, resulting in
a valuation allowance of $100.7 million and $82.6 million as of December 31, 2005 and 2004,
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 2005, Applica did not repatriate
any income from its foreign operations. No provision was made for U.S. taxes on the remaining
accumulated undistributed earnings of Applicas foreign subsidiaries of approximately $52.9 million
at December 31, 2005 and $61.5 million at December 31, 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
companys 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.
Applica elected on its 2004 U.S. Corporation Income Tax Return to take advantage of new
section 965 of the Internal Revenue Code enacted as part of the American Jobs Creation Act of 2004.
In general, section 965(a) provides, for one taxable year, an 85% dividends-received deduction
with respect to certain cash dividends a company receives from its controlled foreign corporations.
Applica elected the 85% dividends-received deduction on $66.7 million of cash dividends. The
related tax on the repatriated earnings was accrued in 2004. There has been no impact to the
consolidated financial statements for the year ended December 31, 2005 as a result of this election
except for an income tax benefit of approximately $0.6 million recorded in the third quarter of
2005 pursuant to Notice 2005-64 issued by the IRS in September 2005.
Applica expects to realize the benefits of the remaining net deferred tax assets of
approximately $10.4 million as of December 31, 2005, primarily from identified tax planning
strategies in the U.S. and Argentina, as well as projected taxable income from other countries.
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, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(574 |
) |
|
$ |
1,844 |
|
|
$ |
(174 |
) |
Foreign |
|
|
1,985 |
|
|
|
4,298 |
|
|
|
(279 |
) |
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,411 |
|
|
|
6,142 |
|
|
|
(453 |
) |
Deferred |
|
|
1,478 |
|
|
|
53,309 |
|
|
|
10,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,889 |
|
|
$ |
59,451 |
|
|
$ |
10,147 |
|
|
|
|
|
|
|
|
|
|
|
F-29
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, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands) |
|
United States |
|
$ |
(30,652 |
) |
|
$ |
(76,288 |
) |
|
$ |
11,441 |
|
Foreign |
|
|
(15,728 |
) |
|
|
2,785 |
|
|
|
13,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(46,380 |
) |
|
$ |
(73,503 |
) |
|
$ |
25,370 |
|
|
|
|
|
|
|
|
|
|
|
The differences between the statutory rates and the tax rates computed on pre-tax earnings are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Permanent differences |
|
|
(0.3 |
) |
|
|
(3.3 |
) |
|
|
7.1 |
* |
State income tax |
|
|
3.2 |
|
|
|
2.4 |
|
|
|
(1.0 |
) |
Net tax rate differential on undistributed earnings |
|
|
(1.8 |
) |
|
|
0.4 |
|
|
|
(3.1 |
) |
Foreign earnings distributed to, or taxable in, the U.S. |
|
|
(0.3 |
) |
|
|
(13.6 |
) |
|
|
2.5 |
|
Valuation allowance |
|
|
(42.7 |
) |
|
|
(101.8 |
) |
|
|
|
|
Other |
|
|
0.7 |
|
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.2 |
)% |
|
|
(80.9 |
)% |
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Permanent differences are primarily the result of foreign exchange translation losses. |
In October 2005, Applica was notified that Applica Canada Corporation, Applicas Canadian
operating subsidiary, was selected for an income tax audit for the years 2003 and 2004 by the
Canada Customs and Revenue Agency. In January 2006, Applica was notified by the Internal Revenue
Service that it will be examining the years 2000, 2001 and 2002 in connection with U.S. loss
carryback claims that could result in a refund to Applica of $1.0 million. Management believes
that adequate provision for taxes has been made for the years under examination.
The primary components of future deferred tax assets (liabilities) were as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Inventory differences |
|
$ |
524 |
|
|
$ |
(374 |
) |
Accrued expenses |
|
|
12,195 |
|
|
|
12,606 |
|
Valuation allowance |
|
|
(11,470 |
) |
|
|
(12,199 |
) |
|
|
|
|
|
|
|
Total current assets |
|
|
1,249 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
Net operating loss and other carryforwards |
|
|
66,591 |
|
|
|
42,802 |
|
Fixed assets |
|
|
(1,053 |
) |
|
|
3,306 |
|
Goodwill and intangible asset amortization |
|
|
32,846 |
|
|
|
36,054 |
|
Unrealized derivative tax |
|
|
|
|
|
|
(579 |
) |
Valuation allowance |
|
|
(89,199 |
) |
|
|
(70,371 |
) |
|
|
|
|
|
|
|
Net non-current assets |
|
|
9,185 |
|
|
|
11,212 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
10,434 |
|
|
$ |
11,245 |
|
|
|
|
|
|
|
|
F-30
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
At December 31, 2005, Applica had net operating loss carryforwards (NOLs) of approximately
$76.3 million for domestic federal income tax purposes and $33.8 million for foreign income tax
purposes. The domestic operating losses and foreign losses expire as follows:
|
|
|
|
|
|
|
|
|
|
|
Domestic Operating |
|
|
|
|
Year of Expiration |
|
Losses |
|
|
Foreign Losses |
|
2007 |
|
$ |
|
|
|
$ |
834 |
|
2012 |
|
|
|
|
|
|
1,262 |
|
2014 |
|
|
|
|
|
|
1,505 |
|
2015 |
|
|
|
|
|
|
27,163 |
|
2019 |
|
|
10,832 |
|
|
|
|
|
2020 |
|
|
18,134 |
|
|
|
|
|
2021 |
|
|
3 |
|
|
|
|
|
2022 |
|
|
25 |
|
|
|
|
|
2023 |
|
|
3,582 |
|
|
|
|
|
2024 |
|
|
978 |
|
|
|
|
|
2025 |
|
|
42,793 |
|
|
|
|
|
Indefinite |
|
|
|
|
|
|
3,081 |
|
|
|
|
|
|
|
|
|
|
$ |
76,347 |
|
|
$ |
33,845 |
|
|
|
|
|
|
|
|
Applica also has NOLs in numerous states that had a tax benefit of $10.8 million and $9.2
million in 2005 and 2004, respectively. Applica has applied valuation allowances, tax effected,
against these NOLs of $10.8 million and $9.2 million in 2005 and 2004, respectively. In addition,
Applica had U.S. foreign tax credits of $16.7 million and $14.7 million in 2005 and 2004,
respectively. Applica has applied valuation allowances, tax effected,
against these foreign tax credits of $16.7
million and $14.7 million in 2005 and 2004, respectively. 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. Applicas U.S. subsidiaries have provided a
valuation allowance of $90.9 million on all their 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 O COMMITMENTS AND CONTINGENCIES
Litigation and Other Matters
Shareholder Litigation. Applica is a defendant in Scott Schultz, individually and on
behalf of all others similarly situated, v. Applica Incorporated, Harry D. Schulman and Terry L.
Polistina, 06-60149-CIV-DIMITROULEAS, which was filed in the United States District Court,
Southern District of Florida on February 3, 2006, and Joseph Rothman, individually and on
behalf of all others similarly situated, v. Applica Incorporated, Harry D. Schulman and Terry L.
Polistina, 06-60230-CIV-ZLOCH, which was filed in the United States District Court, Southern
District of Florida on February 24, 2006.
These matters are purported class action complaints filed on behalf of purchasers of Applica
Incorporated common stock during the period between November 4, 2004 and April 28, 2005. The
complaints charge Applica and certain executive officers with violations of the Securities Exchange
Act of 1934. The complaints allege that, throughout the class period, Applica issued materially
false and misleading statements regarding its ability to transform its business and become more
profitable. The complaints claim that these statements were materially false and misleading on the
asserted basis that they failed to disclose the following: (a) that Applica was experiencing
decreasing demand for its products; in particular, demand for two key products, Tide Buzz
Ultrasonic Stain Remover and Home Cafe single cup coffee maker, were not meeting internal
expectations; (b) that Applica was materially overstating its net worth by failing to timely write
down the value of its inventory which had become obsolete and unsaleable; (c) that Applica was
experiencing higher product warranty returns, which it had not appropriately reserved for; and (d)
that Applicas financial statements issued during the class period were not prepared in accordance
with GAAP and therefore were materially false and misleading.
The plaintiffs seek, among other relief, to be declared a class, to be awarded compensatory
damages, rescission rights, unspecified damages and attorneys fees and costs. Applica believes
the claims are without merit. Applica intends to vigorously defend these lawsuits but may be
unable to successfully resolve the disputes without
F-31
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
incurring significant expenses. Due to the early stage of these proceedings, any potential
loss cannot presently be determined with respect to these litigation matters.
As is often the case, the SEC has requested that Applica voluntarily produce certain documents
in connection with an informal inquiry related to these matters. Applica intends to respond to the
requests for documents and are fully cooperating with the SEC in this matter.
Other Matters. Applica is subject to legal proceedings, product liability claims and other
claims that arise in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to such matters, if any, in excess of applicable insurance
coverage, is not likely to have a material effect on Applicas business, financial condition,
results of operations or liquidity. However, as the outcome of litigation or other claims is
difficult to predict, significant changes in the estimated exposures could occur.
As a distributor of consumer products, Applica is also subject to the Consumer Products Safety
Act, which empowers the Consumer Products Safety Commission (CPSC) to exclude from the market
products that are found to be unsafe or hazardous. Applica receives inquiries from the CPSC in the
ordinary course of its business. In the opinion of management, the amount of ultimate liability
with respect to such matters, if any, is not likely to have a material effect on Applicas
business, financial condition, results of operations or liquidity. However, under certain
circumstances, the CPSC could require Applica to repurchase or recall one or more of its products.
Employment and Other Agreements
Applica has entered into employment agreements with all three of its executive officers,
including the President and Chief Executive Officer. These contracts terminate on May 1, 2007 and
provide the executives with the right to receive lump sum payments of 2.5 times (1.5 times for
employees other than the CEO) their severance base if their employment is terminated after a change
in control of Applica, as defined in such agreements. The term severance base is defined in the
agreement as the sum of (1) the executives base salary, plus (2) the higher of (a) the
target-level incentive bonus for the year during which the termination occurs and (b) the average
of the incentive bonuses paid to the executive for the three years immediately preceding the year
in which the termination occurs. The agreements automatically extend for terms of one year unless
either party gives notice not less than 180 days (30 days for employees other than the CEO) prior
to the end of the then effective term.
Applica has also entered into change-in-control agreements and enhanced severance agreements
with certain of its employees.
Michael J. Michienzi elected to resign his position as President Household Products
Division of Applica Consumer Products, Inc. in December 2005, at which time his employment
agreement terminated.
In December 2005, Applica entered into an agreement with Alvarez & Marsal, LLC, a global
professional services firm specializing in turnaround management, to work with the Board of
Directors and management team to identify additional actions to accelerate the Companys financial
turnaround. Over the past few months, Alvarez & Marsal partnered with Applicas leadership team to
evaluate its strategic plan, implement various business initiatives and drive performance
improvement. David Coles of Alvarez & Marsal is currently serving as interim Chief Operating
Officer of Applica. The term of the agreement has been extended to mid-May 2006.
In June 2005, Applica entered into a managed services agreement with Auxis, Inc., an
information technology services firm. Pursuant to such agreement, Auxis is responsible for
managing all of Applicas information technology infrastructure (including telecommunications,
networking, data centers and the help desk) in North America and China. The agreement is for a
term of four years and provides for payments of approximately $170,000 per month depending on the
services required by Applica. The agreement provides for early termination
F-32
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
fees if Applica terminates such agreement without cause, which fees decrease on a yearly basis
from a maximum of 50% of the contract balance to a minimum of 25% of the contract balance.
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 Applicas non-cancelable long-term operating leases are as follows:
|
|
|
|
|
|
|
(In thousands) |
|
2006 |
|
$ |
4,145 |
|
2007 |
|
|
3,783 |
|
2008 |
|
|
2,420 |
|
2009 |
|
|
2,013 |
|
2010 |
|
|
1,295 |
|
Thereafter |
|
|
5,036 |
|
|
|
|
|
|
|
$ |
18,692 |
|
|
|
|
|
Rent expense for the years ended December 31, 2005, 2004 and 2003 totaled approximately $5.6
million, $6.2 million and $7.5 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 Applicas 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.
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 2003, the license was further extended to certain electronic
pest and insect control products, an ultrasonic stain removing appliance and vacuum bag sealers.
In 2004, the license was extended to bug zappers. In 2005, the license was extended to electric
garment steamers and hair straightening and curling irons for the Latin American marketplace.
Further, Applica has a license from The Procter & Gamble Company to use the Home Cafe brand
worldwide for the Black & Decker® single cup brewing machine.
F-33
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, which require Applica to pay royalties based on a percentage of sales. 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 Tilias previously disputed patents and to settle any
future disputes over product infringement by arbitration.
Supply Agreement
In June 2004, Applica entered into a supply agreement with Elec-Tech International (H.K.)
Company, Ltd. Elec-Tech accounted for approximately 35% of Applicas total purchases in 2005 and
approximately 14% of Applicas total purchases in 2004. No other supplier accounted for more than
10% of Applicas total purchases in 2005, 2004, and 2003.
At December 31, 2005, all significant accounts receivable from Elec-Tech had been settled. At
December 31, 2005 accounts payable of $9.9 million were due to Elec-Tech. At December 31, 2004,
accounts receivable of $9.1 million from Elec-Tech and accounts payable of $10.8 million due to
Elec-Tech were presented net and were included in accounts payable in the accompanying consolidated
balance sheet.
In December 2005, Applica terminated the supply agreement as the result of material breaches
by Elec-Tech, most of which were corrected after the termination date. After the termination,
Applica continued to purchase products from Elec-Tech and Elec-Tech continued to produce and ship
products to Applica.
Agreement with Banc of America Securities
Applica has an agreement with Banc of America Securities LLC for the provision of investment
banking services. Such agreement provides that upon the close of certain strategic transactions,
Applica will pay Banc of America a fee based on the aggregate consideration to be paid in any such
transaction.
NOTE P 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, 2005, there are no shares available for grant under the 1988 Directors
Stock Option Plan or the 1992 Employees Incentive Stock Option Plan, 703 shares available for
grant under the 1996 Stock Option Plan, 730 shares available for grant under the 1998 Stock Option
Plan and 610,866 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.
F-34
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Information with respect to stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares(000) |
|
|
Price |
|
|
Shares(000) |
|
|
Price |
|
|
Shares(000) |
|
|
Price |
|
Outstanding at beginning of year |
|
|
2,755 |
|
|
$ |
5.30 |
|
|
|
2,843 |
|
|
$ |
6.64 |
|
|
|
3,382 |
|
|
$ |
7.50 |
|
Granted |
|
|
843 |
|
|
$ |
2.09 |
|
|
|
1,113 |
|
|
$ |
4.74 |
|
|
|
172 |
|
|
$ |
7.21 |
|
Exercised |
|
|
(3 |
) |
|
$ |
3.63 |
|
|
|
(562 |
) |
|
$ |
6.93 |
|
|
|
(130 |
) |
|
$ |
7.00 |
|
Forfeited |
|
|
(1,112 |
) |
|
$ |
4.75 |
|
|
|
(639 |
) |
|
$ |
8.55 |
|
|
|
(581 |
) |
|
$ |
11.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
2,483 |
|
|
$ |
4.45 |
|
|
|
2,755 |
|
|
$ |
5.30 |
|
|
|
2,843 |
|
|
$ |
6.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year |
|
|
2,018 |
|
|
|
|
|
|
|
1,470 |
|
|
|
|
|
|
|
2,270 |
|
|
|
|
|
Weighted-average fair value of
options granted during the year |
|
$ |
1.66 |
|
|
|
|
|
|
$ |
5.91 |
|
|
|
|
|
|
$ |
6.84 |
|
|
|
|
|
The following information applies to options outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Contractual |
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares(000) |
|
|
Life |
|
|
Price |
|
|
Shares(000) |
|
|
Price |
|
$1.62 - $3.17 |
|
|
756 |
|
|
|
4.90 |
|
|
$ |
1.96 |
|
|
|
714 |
|
|
$ |
1.96 |
|
$3.17 - $6.34 |
|
|
1,312 |
|
|
|
3.00 |
|
|
$ |
4.46 |
|
|
|
890 |
|
|
$ |
4.59 |
|
$6.34 - $9.51 |
|
|
324 |
|
|
|
1.00 |
|
|
$ |
7.42 |
|
|
|
325 |
|
|
$ |
7.42 |
|
$9.51 - $12.68 |
|
|
36 |
|
|
|
5.00 |
|
|
$ |
10.24 |
|
|
|
34 |
|
|
$ |
10.22 |
|
$12.68 - $15.84 |
|
|
41 |
|
|
|
3.20 |
|
|
$ |
13.99 |
|
|
|
41 |
|
|
$ |
13.99 |
|
$15.84 - $19.01 |
|
|
5 |
|
|
|
0.30 |
|
|
$ |
16.25 |
|
|
|
5 |
|
|
$ |
16.25 |
|
$28.52 - $31.69 |
|
|
9 |
|
|
|
2.40 |
|
|
$ |
31.69 |
|
|
|
9 |
|
|
$ |
31.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,483 |
|
|
|
|
|
|
$ |
4.45 |
|
|
|
2,018 |
|
|
$ |
4.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
In May 2000, Applicas shareholders authorized up to 500,000 shares of common stock for the
2000 Employee Stock Purchase Plan. Under the plan, eligible employees could 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 was 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 participants 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, 2005 and 2004, an
aggregate of 350,142 and 310,997 shares, respectively, of common stock had been issued under the
plan. In September 2005, the Compensation Committee of the Board of Directors elected to terminate
the Employee Stock Purchase Plan effective December 31, 2005. Therefore, no additional shares will
be issued under such plan.
NOTE Q VENDOR CONSIDERATION
Applicas 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, which is payable in equal quarterly installments of $200,000, plus interest, over five
years. Management believes that the ultimate collection of the note
F-35
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
receivable is not assured and is dependent on Applicas 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 collected cash of $228,000 and
$380,000 from the supplier in 2005 and 2004, respectively, and recorded it as a reduction of cost
of goods sold in each such year. Applica does not expect purchases from the supplier to be
significant going forward, and therefore, the collectibility of the note receivable is highly
unlikely.
NOTE R 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.
Through October 2005, Applica managed its operations through three business segments:
Household Products, Professional Personal Care Products and Manufacturing. The Manufacturing
segment ceased operations in October 2005 and for the remainder of the year, Applica managed its
operations through two business segments: Household Products and Professional Personal Care
Products.
|
|
|
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® and Home Café, as well as owned brand names, such as
Applica®, Gizmo®, Littermaid® and Windmere®. The Household Products segment sales are
handled primarily through in house sales representatives and are made 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 2004. |
|
|
|
|
The Manufacturing segment consisted of Applicas Mexican and Hong Kong-based
manufacturing operations. The Mexican manufacturing operations ceased production in
October 2005. In July 2004, Applica sold all of its interest in its Hong Kong
manufacturing operations. |
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 Applicas consolidated
financial statements.
F-36
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Segment information for the years ended 2005, 2004 and 2003 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional |
|
|
|
|
|
|
|
|
|
Household |
|
|
Personal Care |
|
|
|
|
|
|
|
|
|
Products |
|
|
Products |
|
|
Manufacturing |
|
|
Total |
|
|
|
(In thousands) |
|
Year Ended 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
494,689 |
|
|
$ |
54,793 |
|
|
$ |
53,487 |
|
|
$ |
602,969 |
|
Intersegment sales |
|
|
2,282 |
|
|
|
|
|
|
|
44,568 |
|
|
|
46,850 |
|
Operating earnings (loss) |
|
|
(19,071 |
) |
|
|
2,323 |
|
|
|
(16,747 |
) |
|
|
(33,495 |
) |
Depreciation and amortization |
|
|
4,295 |
|
|
|
1 |
|
|
|
5,425 |
|
|
|
9,721 |
|
Total assets |
|
|
239,569 |
|
|
|
21,423 |
|
|
|
14,592 |
|
|
|
275,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
628,330 |
|
|
$ |
64,918 |
|
|
$ |
191,445 |
|
|
$ |
884,693 |
|
Intersegment sales |
|
|
1,129 |
|
|
|
|
|
|
|
173,792 |
|
|
|
174,921 |
|
Operating earnings (loss) |
|
|
21,359 |
|
|
|
6,452 |
|
|
|
(7,357 |
) |
|
|
20,454 |
|
Depreciation and amortization |
|
|
1,549 |
|
|
|
7 |
|
|
|
8,495 |
|
|
|
10,051 |
|
Total assets |
|
|
257,285 |
|
|
|
37,965 |
|
|
|
55,745 |
|
|
|
350,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
526,053 |
|
|
$ |
68,993 |
|
|
$ |
291,509 |
|
|
$ |
886,555 |
|
Intersegment sales |
|
|
|
|
|
|
|
|
|
|
263,119 |
|
|
|
263,119 |
|
Operating earnings |
|
|
11,366 |
|
|
|
7,448 |
|
|
|
5,304 |
|
|
|
24,118 |
|
Depreciation and amortization |
|
|
1,447 |
|
|
|
15 |
|
|
|
16,212 |
|
|
|
17,674 |
|
Total assets |
|
|
182,391 |
|
|
|
32,310 |
|
|
|
176,943 |
|
|
|
391,644 |
|
The following table sets forth the reconciliation to consolidated amounts for net sales,
operating earnings (loss), depreciation and amortization and total assets:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net Sales: |
|
|
|
|
|
|
|
|
Total revenues for reportable segments |
|
$ |
602,969 |
|
|
$ |
884,693 |
|
Eliminations of intersegment sales |
|
|
(46,850 |
) |
|
|
(174,921 |
) |
|
|
|
|
|
|
|
Consolidated net sales |
|
$ |
556,119 |
|
|
$ |
709,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings: |
|
|
|
|
|
|
|
|
Total operating (loss) earnings from reportable segments |
|
$ |
(33,495 |
) |
|
$ |
20,454 |
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
Termination benefits |
|
|
|
|
|
|
(9,153 |
) |
Gain on sale of subsidiary, division and property net |
|
|
|
|
|
|
3,921 |
|
Restructuring and other credit (charges) |
|
|
|
|
|
|
563 |
|
Impairment of goodwill |
|
|
|
|
|
|
(62,812 |
) |
Impairment of intangible asset |
|
|
|
|
|
|
|
|
Shared services and all other |
|
|
(3,207 |
) |
|
|
(17,740 |
) |
|
|
|
|
|
|
|
Consolidated operating loss |
|
$ |
(36,702 |
) |
|
$ |
(64,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
Total depreciation and amortization from reportable segments |
|
$ |
9,721 |
|
|
$ |
10,051 |
|
Shared services and all other |
|
|
5,965 |
|
|
|
7,439 |
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization |
|
$ |
15,686 |
|
|
$ |
17,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets: |
|
|
|
|
|
|
|
|
Total assets from reportable segments |
|
$ |
275,584 |
|
|
$ |
350,995 |
|
All other |
|
|
21,698 |
|
|
|
24,942 |
|
|
|
|
|
|
|
|
Consolidated total assets |
|
$ |
297,282 |
|
|
$ |
375,937 |
|
|
|
|
|
|
|
|
F-37
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table sets forth the approximate amounts and percentages of Applicas
consolidated net sales by product category during the periods ending December 31,:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands) |
|
|
|
Net Sales |
|
|
% |
|
|
Net Sales |
|
|
% |
|
|
Net Sales |
|
|
% |
|
Kitchen Products |
|
$ |
327,057 |
|
|
|
59 |
% |
|
$ |
435,686 |
|
|
|
61 |
% |
|
$ |
340,689 |
|
|
|
55 |
% |
Home Products |
|
|
118,507 |
|
|
|
21 |
% |
|
|
136,089 |
|
|
|
19 |
% |
|
|
133,404 |
|
|
|
21 |
% |
Personal Care Products |
|
|
54,874 |
|
|
|
10 |
% |
|
|
63,743 |
(1) |
|
|
9 |
% |
|
|
67,746 |
(1) |
|
|
11 |
% |
Pet Products |
|
|
38,324 |
|
|
|
7 |
% |
|
|
36,350 |
|
|
|
5 |
% |
|
|
33,197 |
|
|
|
5 |
% |
Pest Control Products |
|
|
8,421 |
|
|
|
1 |
% |
|
|
14,549 |
|
|
|
2 |
% |
|
|
16,639 |
|
|
|
3 |
% |
Contract Manufacturing (2) |
|
|
8,936 |
|
|
|
2 |
% |
|
|
17,653 |
(3) |
|
|
3 |
% |
|
|
28,246 |
(3) |
|
|
4 |
% |
Other Products |
|
|
|
|
|
|
0 |
% |
|
|
5,702 |
|
|
|
1 |
% |
|
|
3,515 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
556,119 |
|
|
|
100 |
% |
|
$ |
709,772 |
|
|
|
100 |
% |
|
$ |
623,436 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes sales of products by the Jerdon hotel and hospitality division, which was sold
in October 2004. Such sales totaled $8.4 million in 2004 and $13.3 million in 2003. |
|
(2) |
|
Includes contract manufacturing sales from our Mexican manufacturing operations, which
ceased operations in October 2005. Such sales totaled $8.9 million in 2005, $3.5 million
in 2004 and $0.9 million in 2003. |
|
(3) |
|
Includes contract manufacturing sales from our Hong Kong manufacturing operations,
which were sold in July 2004. Such sales totaled $14.2 million in 2004 and $27.5 million in
2003. |
In 2005 and 2004, Applicas 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, Applicas
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
Applicas sales between those in the United States and those in other locations for each year:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net sales: |
|
|
|
|
|
|
|
|
United States operations |
|
$ |
399,960 |
|
|
$ |
542,387 |
|
International operations: |
|
|
|
|
|
|
|
|
Sales to unaffiliated customers |
|
|
156,159 |
|
|
|
167,385 |
|
Sales intercompany: |
|
|
|
|
|
|
|
|
Mexico |
|
|
44,568 |
|
|
|
103,496 |
|
Canada |
|
|
2,282 |
|
|
|
1,129 |
|
China |
|
|
|
|
|
|
70,296 |
|
|
|
|
|
|
|
|
|
|
|
46,850 |
|
|
|
174,921 |
|
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
(46,850 |
) |
|
|
(174,921 |
) |
|
|
|
|
|
|
|
Consolidated net sales |
|
$ |
556,119 |
|
|
$ |
709,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets (1): |
|
|
|
|
|
|
|
|
United States operations |
|
$ |
19,363 |
|
|
$ |
24,522 |
|
International operations |
|
|
2,117 |
|
|
|
18,298 |
|
|
|
|
|
|
|
|
Consolidated long-lived assets |
|
$ |
21,480 |
|
|
$ |
42,820 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes property plant and equipment 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 product shipments from Hong Kong directly to customers located in the United
States.
F-38
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE S 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 Stores, Inc. accounted for 32%, 35%, and 30% of 2005, 2004, and 2003 consolidated net
sales, respectively. Target Corporation accounted for 11%, 11%, and 9% of 2005, 2004, and 2003
consolidated net sales, respectively. No other customers accounted for more than 10% of Applicas
consolidated net sales for the years ended December 31, 2005, 2004 and 2003. As of December 31,
2005 and 2004, Wal-Mart Stores, Inc. accounted for 29.6% and 30.8%, respectively, of Applicas
consolidated accounts receivable. As of December 31, 2005 and 2004, Target Corporation accounted
for 16.5% and 16.3%, respectively, of Applicas consolidated accounts receivable. No other
customers accounted for more than 10% of Applicas consolidated accounts receivable at December 31,
2005 and 2004.
A majority of Applicas revenue is generated from the sale of Black & Decker® branded
products, which represented approximately 78%, 79%, and 70% of consolidated net sales in 2005, 2004
and 2003, respectively.
Applicas allowance for doubtful accounts is based on managements 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 Applicas earnings. As of December 31, 2005 and
2004, the allowance for doubtful accounts was $8.8 million and $11.7 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 $17.4 million 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. At December 31, 2005 $15.0 million of accounts receivable were
insured under the agreement with FCIA. 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. 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
F-39
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
agreed to several requirements, including the elimination of caps on foreign ownership of
Chinese companies, lowering tariffs and publicizing its laws. No assurance can be given that China
will meet these requirements and remain a member of the WTO, or that its PNTR trading status will
be maintained. If Chinas 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 Applicas
business, financial condition and results of operations.
Applica conducts sourcing activities through a subsidiary 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.
NOTE T RELATED PARTY TRANSACTIONS
Mast Capital Management. Christopher B. Madison, a member of Applicas Board of Directors, is
a principal of Mast Capital Management, LLC, a Boston-based investment manager focused on high
yield and special situation credit investing. A fund managed by Mast currently holds 2,328,200
shares of Applica common stock (approximately 9.6% of the outstanding shares) and made a $20
million secured term loan to Applica in October 2005. Both transactions were completed prior to
Mr. Madison becoming a member of Applicas Board. For additional information on the term loan, see
Note L Long-Term Debt, above.
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 Applicas
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 TJKs 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 $47,000 in 2005, $37,000 in 2004 and $36,000 in 2003. 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,
Applicas 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. A change of control of Applica will not be
deemed to have occurred, and no additional payment will be required, if the applicable transaction
or series of transactions is approved by at least 80% of the members of the Board of Directors of
Applica.
In connection with his employment with Applica Durable, Mr. Lai Kin was paid total
compensation of approximately $563,000 for his services during the year ended December 31, 2003.
Members of Mr. Lais family were paid approximately $959,500 for their services to Applica Durable
during the year ended December 31, 2003. Mr. Lam King Loi was paid total compensation of
approximately $295,000 for his services during the year ended December 31, 2003. As Applica sold
all of its shares of Applica Durable in July 2004, payments made by that company were 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-40
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 totaled approximately $838,000.
Matters related to David Friedson. Applica had a loan outstanding to David M. Friedson, its
former Chairman of the Board. The loan, which is unsecured, bore interest at LIBOR plus 1.5% per
annum (2.72% at December 31, 2004) and was payable upon demand. The loan was repaid in 2005.
Interest was payable on the due date. At December 31, 2004 and 2003, the balance of such loan,
including accrued interest, was approximately $1,060,700 and $1,039,000, respectively. There was
no balance outstanding at December 31, 2005.
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 was on a full recourse basis and was secured
by shares of common stock held by Mr. Friedson. The loan was repaid in 2005. The loan bore
interest at the rate of LIBOR plus 2.75% per annum (3.87% at December 31, 2004). Interest was
payable on the due date. The amount due to Applica, including accrued interest, at December 31,
2004 and 2003 was approximately $2,010,330 and $1,949,000, respectively. There was no balance
outstanding at December 31, 2005.
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. Friedsons 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.
Friedsons employment, expired in December 2005. 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.
NOTE U FINANCIAL INSTRUMENTS
Interest Rate Risk Management
Applica is exposed to the impact of interest rate changes. Applicas 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 Applicas 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 2005 and 2004
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. In 2005, the yield curve flattened and Applica unwound its pay floating swap.
At December 31, 2005, did not have any interest rate hedges outstanding.
The impact of interest rate risk management activities on pre-tax income were insignificant in
2005, a gain of approximately $0.4 million in 2004, and insignificant in 2003.
F-41
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Foreign Exchange Risk Management
Applica transacts business globally and is subject to risks associated with changing foreign
exchange rates. Applicas 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 Applicas 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 $0.5 million in 2005, $1.2 million in 2004, and $2.3 million in 2003.
Fair Value of Financial Instruments
At December 31, 2005 and 2004, Applicas financial instruments included cash, cash
equivalents, receivables, accounts payable, borrowings and interest rate, forward and foreign
exchange risk management contracts. At December 31, 2005 and 2004, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Amount/Notional |
|
|
|
|
|
|
Amount/Notional |
|
|
|
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Borrowings(1) |
|
$ |
145,274 |
|
|
$ |
143,741 |
|
|
$ |
153,463 |
|
|
$ |
153,463 |
|
Risk management contracts(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange options(3). |
|
|
|
|
|
|
|
|
|
$ |
9,200 |
|
|
$ |
(648 |
) |
Interest rate swaps(4) |
|
|
|
|
|
|
|
|
|
$ |
30,000 |
|
|
$ |
258 |
|
|
|
|
(1) |
|
The fair value of borrowings were approximated at carrying value, including the
10% notes, which were valued at 97.25% and 100.00% at December 31, 2005 and 2004,
respectively, based upon quoted market prices. |
|
(2) |
|
The fair value of risk management contracts was based upon quotes from outside
parties. Fair value amounts change with market conditions and will be substantially offset by
changes in the value of the related hedged transaction. A positive fair value represents the
amount Applica would receive upon exiting the contracts and a negative fair value represents
the amount Applica would pay upon exiting the contracts. Applica intends to hold all
contracts to maturity, at which time the fair value will be zero. |
|
(3) |
|
Fair values 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. |
F-42
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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, 2005 or 2004 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 V CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Applicas domestic subsidiaries are guarantors of Applicas 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-43
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
|
Parent |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
628 |
|
|
$ |
3,836 |
|
|
$ |
|
|
|
$ |
4,464 |
|
Accounts and other receivables, net |
|
|
|
|
|
|
101,841 |
|
|
|
38,638 |
|
|
|
|
|
|
|
140,479 |
|
Note receivable former officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from affiliates |
|
|
(43,473 |
) |
|
|
79,638 |
|
|
|
(10,418 |
) |
|
|
(25,747 |
) |
|
|
|
|
Inventories |
|
|
|
|
|
|
78,508 |
|
|
|
23,130 |
|
|
|
|
|
|
|
101,638 |
|
Future income tax benefits |
|
|
|
|
|
|
1,357 |
|
|
|
(108 |
) |
|
|
|
|
|
|
1,249 |
|
Other current assets |
|
|
|
|
|
|
3,321 |
|
|
|
11,477 |
|
|
|
|
|
|
|
14,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
(43,473 |
) |
|
|
265,293 |
|
|
|
66,555 |
|
|
|
(25,747 |
) |
|
|
262,628 |
|
Investment in subsidiaries |
|
|
251,898 |
|
|
|
783 |
|
|
|
29,232 |
|
|
|
(281,913 |
) |
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
17,420 |
|
|
|
2,295 |
|
|
|
|
|
|
|
19,715 |
|
Long-term future income tax benefits |
|
|
|
|
|
|
6,472 |
|
|
|
2,713 |
|
|
|
|
|
|
|
9,185 |
|
Intangibles and other assets, net |
|
|
|
|
|
|
19,738 |
|
|
|
11,635 |
|
|
|
(25,619 |
) |
|
|
5,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
208,425 |
|
|
$ |
309,706 |
|
|
$ |
112,430 |
|
|
$ |
(333,279 |
) |
|
$ |
297,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
|
|
|
$ |
65,023 |
|
|
$ |
18,693 |
|
|
$ |
|
|
|
$ |
83,716 |
|
Short-term debt |
|
|
69,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,524 |
|
Deferred rent |
|
|
|
|
|
|
734 |
|
|
|
185 |
|
|
|
|
|
|
|
919 |
|
Current taxes payable |
|
|
|
|
|
|
515 |
|
|
|
3,232 |
|
|
|
|
|
|
|
3,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
69,524 |
|
|
|
66,272 |
|
|
|
22,110 |
|
|
|
|
|
|
|
157,906 |
|
Long-term debt |
|
|
75,750 |
|
|
|
69,100 |
|
|
|
12,280 |
|
|
|
(81,380 |
) |
|
|
75,750 |
|
Future income tax liabilities |
|
|
|
|
|
|
1,882 |
|
|
|
(1,882 |
) |
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
475 |
|
|
|
|
|
|
|
|
|
|
|
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
145,274 |
|
|
|
137,729 |
|
|
|
32,508 |
|
|
|
(81,380 |
) |
|
|
234,131 |
|
Shareholders equity |
|
|
63,151 |
|
|
|
171,977 |
|
|
|
79,921 |
|
|
|
(251,898 |
) |
|
|
63,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
208,425 |
|
|
$ |
309,706 |
|
|
$ |
112,429 |
|
|
$ |
(333,278 |
) |
|
$ |
297,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
|
|
|
$ |
416,733 |
|
|
$ |
186,236 |
|
|
$ |
(46,850 |
) |
|
$ |
556,119 |
|
Cost of sales |
|
|
|
|
|
|
306,747 |
|
|
|
159,533 |
|
|
|
(46,850 |
) |
|
|
419,430 |
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
12,491 |
|
|
|
|
|
|
|
12,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
109,986 |
|
|
|
14,212 |
|
|
|
|
|
|
|
124,198 |
|
Operating expenses |
|
|
3 |
|
|
|
125,183 |
|
|
|
35,714 |
|
|
|
|
|
|
|
160,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings |
|
|
(3 |
) |
|
|
(15,197 |
) |
|
|
(21,502 |
) |
|
|
|
|
|
|
(36,702 |
) |
Other (income) expense, net |
|
|
(716 |
) |
|
|
10,842 |
|
|
|
(392 |
) |
|
|
|
|
|
|
9,734 |
|
Gain on early extinguishment of debt |
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before equity in net earnings
(loss) of subsidiaries, and income taxes |
|
|
713 |
|
|
|
(25,983 |
) |
|
|
(21,110 |
) |
|
|
|
|
|
|
(46,380 |
) |
Equity in net earnings (loss) of subsidiaries |
|
|
(49,982 |
) |
|
|
|
|
|
|
|
|
|
|
49,982 |
|
|
|
|
|
Income tax provision |
|
|
|
|
|
|
699 |
|
|
|
2,190 |
|
|
|
|
|
|
|
2,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(49,269 |
) |
|
$ |
(26,682 |
) |
|
$ |
(23,300 |
) |
|
$ |
49,982 |
|
|
$ |
(49,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
$ |
(42,685 |
) |
|
$ |
(2,668 |
) |
|
$ |
(12,385 |
) |
|
$ |
53,772 |
|
|
$ |
(3,966 |
) |
Net cash provided by (used in) investing activities |
|
|
49,235 |
|
|
|
(39,946 |
) |
|
|
11,631 |
|
|
|
(14,187 |
) |
|
|
6,733 |
|
Net cash provided by (used in) financing activities |
|
|
(5,705 |
) |
|
|
41,079 |
|
|
|
(3,710 |
) |
|
|
(39,585 |
) |
|
|
(7,921 |
) |
Effect of exchange rate changes on cash |
|
|
(845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(845 |
) |
Cash at beginning of period |
|
|
|
|
|
|
2,163 |
|
|
|
8,300 |
|
|
|
|
|
|
|
10,463 |
|
Cash at end of period |
|
$ |
|
|
|
$ |
628 |
|
|
$ |
3,836 |
|
|
$ |
|
|
|
$ |
4,464 |
|
F-44
Applica Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 |
|
|
|
Parent |
|
|
Guarantors |
|
|
Non-Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(In thousands) |
|
Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
2,163 |
|
|
$ |
8,300 |
|
|
$ |
|
|
|
$ |
10,463 |
|
Accounts and
other receivables, net |
|
|
4,195 |
|
|
|
112,380 |
|
|
|
43,861 |
|
|
|
|
|
|
|
160,436 |
|
Note receivable former officer |
|
|
2,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,569 |
|
Receivables from affiliates |
|
|
(153,140 |
) |
|
|
(61,081 |
) |
|
|
(9,008 |
) |
|
|
223,229 |
|
|
|
|
|
Inventories |
|
|
|
|
|
|
96,565 |
|
|
|
34,938 |
|
|
|
|
|
|
|
131,503 |
|
Future income tax benefits |
|
|
|
|
|
|
1,190 |
|
|
|
(1,157 |
) |
|
|
|
|
|
|
33 |
|
Other current assets |
|
|
|
|
|
|
5,303 |
|
|
|
9,038 |
|
|
|
|
|
|
|
14,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
(146,376 |
) |
|
|
156,520 |
|
|
|
85,972 |
|
|
|
223,229 |
|
|
|
319,345 |
|
Investment in subsidiaries |
|
|
408,231 |
|
|
|
104,988 |
|
|
|
29,232 |
|
|
|
(542,451 |
) |
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
20,029 |
|
|
|
18,298 |
|
|
|
|
|
|
|
38,327 |
|
Long-term future income tax benefits |
|
|
|
|
|
|
6,793 |
|
|
|
4,419 |
|
|
|
|
|
|
|
11,212 |
|
Intangibles and other assets, net |
|
|
2,010 |
|
|
|
21,413 |
|
|
|
9,385 |
|
|
|
(25,755 |
) |
|
|
7,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
263,865 |
|
|
$ |
309,743 |
|
|
$ |
147,306 |
|
|
$ |
(344,977 |
) |
|
$ |
375,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
|
|
|
$ |
75,025 |
|
|
$ |
28,848 |
|
|
$ |
|
|
|
$ |
103,873 |
|
Short-term debt |
|
|
88,541 |
|
|
|
|
|
|
|
914 |
|
|
|
|
|
|
|
89,455 |
|
Current
portion of long-term debt |
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
Deferred rent |
|
|
|
|
|
|
680 |
|
|
|
|
|
|
|
|
|
|
|
680 |
|
Current taxes payable |
|
|
|
|
|
|
2,817 |
|
|
|
3,130 |
|
|
|
|
|
|
|
5,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
91,541 |
|
|
|
78,522 |
|
|
|
32,892 |
|
|
|
|
|
|
|
202,955 |
|
Long-term debt |
|
|
61,008 |
|
|
|
(75,734 |
) |
|
|
12,480 |
|
|
|
63,254 |
|
|
|
61,008 |
|
Future income tax liabilities |
|
|
|
|
|
|
3,884 |
|
|
|
(3,884 |
) |
|
|
|
|
|
|
|
|
Other long term liabilities |
|
|
346 |
|
|
|
658 |
|
|
|
|
|
|
|
|
|
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
152,895 |
|
|
|
7,330 |
|
|
|
41,488 |
|
|
|
63,254 |
|
|
|
264,967 |
|
Shareholders equity |
|
|
110,970 |
|
|
|
302,413 |
|
|
|
105,818 |
|
|
|
(408,231 |
) |
|
|
110,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
263,865 |
|
|
$ |
309,743 |
|
|
$ |
147,306 |
|
|
$ |
(344,977 |
) |
|
$ |
375,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
|
|
|
$ |
565,364 |
|
|
$ |
319,329 |
|
|
$ |
(174,921 |
) |
|
$ |
709,772 |
|
Cost of sales |
|
|
|
|
|
|
402,092 |
|
|
|
279,481 |
|
|
|
(174,921 |
) |
|
|
506,652 |
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
9,236 |
|
|
|
|
|
|
|
9,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
163,272 |
|
|
|
30,612 |
|
|
|
|
|
|
|
193,884 |
|
Operating expenses |
|
|
|
|
|
|
166,830 |
|
|
|
24,340 |
|
|
|
|
|
|
|
191,170 |
|
Termination 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 |
|
|
|
|
|
|
|
|
|
|
|
62,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings |
|
|
(4,414 |
) |
|
|
(64,444 |
) |
|
|
4,091 |
|
|
|
|
|
|
|
(64,767 |
) |
Other (income) expense, net |
|
|
(79,334 |
) |
|
|
9,477 |
|
|
|
78,406 |
|
|
|
|
|
|
|
8,549 |
|
Loss on early extinguishment of debt |
|
|
|
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (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 |
|
|
|
|
|
|
|
59,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(132,954 |
) |
|
$ |
(74,108 |
) |
|
$ |
(75,627 |
) |
|
$ |
149,735 |
|
|
$ |
(132,954 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash 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 |
) |
|
|
34,101 |
|
Net cash provided by (used in) financing activities |
|
|
94,067 |
|
|
|
(183,075 |
) |
|
|
(52,396 |
) |
|
|
167,867 |
|
|
|
26,463 |
|
Effect of exchange rate changes on cash |
|
|
720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
720 |
|
Cash at beginning of period |
|
|
|
|
|
|
1,124 |
|
|
|
11,611 |
|
|
|
|
|
|
|
12,735 |
|
Cash at end of period |
|
$ |
|
|
|
$ |
2,163 |
|
|
$ |
8,300 |
|
|
$ |
|
|
|
$ |
10,463 |
|
F-45
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 2005 and 2004 are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Basic (Loss) |
|
|
(Loss) Earnings Per |
|
|
|
Net Sales |
|
|
Gross Profit |
|
|
(Loss) Earnings |
|
|
Earnings Per Share |
|
|
Share |
|
|
|
(In thousands, except per share data) |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
112,450 |
|
|
$ |
18,728 |
(1) |
|
$ |
(22,955 |
)(1) |
|
$ |
(0.95 |
) |
|
$ |
(0.95 |
) |
Second quarter |
|
|
116,458 |
|
|
|
22,959 |
(2) |
|
|
(18,501 |
)(2) |
|
|
(0.77 |
) |
|
|
(0.77 |
) |
Third quarter. |
|
|
139,637 |
|
|
|
33,646 |
(3) |
|
|
(8,179 |
)(3) |
|
|
(0.34 |
) |
|
|
(0.34 |
) |
Fourth quarter |
|
|
187,574 |
|
|
|
48,865 |
(4) |
|
|
366 |
(4) |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
556,119 |
|
|
$ |
124,198 |
|
|
$ |
(49,269 |
) |
|
$ |
(2.04 |
) |
|
$ |
(2.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
128,527 |
|
|
$ |
33,505 |
(5) |
|
$ |
(4,479 |
)(5) |
|
$ |
(0.19 |
) |
|
$ |
(0.19 |
) |
Second quarter |
|
|
154,677 |
|
|
|
44,172 |
|
|
|
(123,818 |
)(6) |
|
|
(5.16 |
) |
|
|
(5.16 |
) |
Third quarter. |
|
|
182,938 |
|
|
|
51,088 |
|
|
|
(9,943 |
)(7) |
|
|
(0.41 |
) |
|
|
(0.41 |
) |
Fourth quarter |
|
|
243,630 |
|
|
|
65,119 |
(8) |
|
|
5,286 |
(8) |
|
|
0.22 |
|
|
|
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
709,772 |
|
|
$ |
193,884 |
|
|
$ |
(132,954 |
) |
|
$ |
(5.55 |
) (9) |
|
$ |
(5.55 |
)(9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the first quarter of 2005, Applica recorded: |
|
|
|
inventory write-downs of $9.4 million related to lower-than-anticipated consumer demand
for two of our products; and |
|
|
|
|
restructuring charges of $0.9 million related to our decision to move the production of
Home Café single cup coffee maker from Mexico to third party manufacturers in China. |
(2) |
|
In the second quarter of 2005, Applica recorded: |
|
|
|
inventory write-downs of $3.4 million related to lower-than-anticipated consumer
demand for two of our products; and |
|
|
|
|
$4.2 million of restructuring charges associated primarily with the downsizing and
decision in July 2005 to close the manufacturing facility in Mexico. |
(3) |
|
In the third quarter of 2005, Applica recorded $4.7 million of restructuring charges
associated with the downsizing and closure of the manufacturing facility in Mexico. |
|
(4) |
|
In the fourth quarter of 2005, Applica recorded $2.6 million of restructuring charges
associated with the downsizing and closure of the manufacturing facility in Mexico. |
|
(5) |
|
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. |
|
(6) |
|
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. |
(7) |
|
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. |
(8) |
|
In the fourth quarter of 2004, Applica recorded restructuring charges of $8.3 million related
to the downsizing of its manufacturing operations in Mexico. |
(9) |
|
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. |
SCHEDULE II
Applica Incorporated and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged (Credited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Purchase Price |
|
|
to Costs and |
|
|
Charged to Other |
|
|
|
|
|
|
Balance at End of |
|
Description |
|
Beginning of Period |
|
|
Reserves |
|
|
Expenses |
|
|
Accounts |
|
|
Deductions |
|
|
Period |
|
Year
ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted
from assets to
which they apply: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful
accounts |
|
$ |
11,711 |
|
|
|
|
|
|
$ |
(2,497 |
) |
|
|
|
|
|
$ |
(441 |
)(1) |
|
$ |
8,773 |
|
Deferred
tax valuation
allowance |
|
$ |
82,570 |
|
|
|
|
|
|
|
|
|
|
$ |
18,099 |
|
|
|
|
|
|
$ |
100,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted
from assets to
which they apply: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful
accounts |
|
$ |
12,543 |
|
|
|
|
|
|
$ |
889 |
|
|
|
|
|
|
$ |
(1,721 |
)(1) |
|
$ |
11,711 |
|
Deferred
tax valuation
allowance |
|
$ |
7,367 |
|
|
|
|
|
|
|
|
|
|
$ |
75,203 |
|
|
|
|
|
|
$ |
82,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted
from assets to
which they apply: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful
accounts |
|
$ |
15,830 |
|
|
|
|
|
|
$ |
2,228 |
|
|
|
|
|
|
$ |
(5,515 |
)(1) |
|
$ |
12,543 |
|
Deferred
tax valuation
allowance |
|
$ |
10,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,788 |
)(1) |
|
$ |
7,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Write-off against the reserve |