| APPLICA INC 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 |
| 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^® |
| Applica’s 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 US 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: • the downsizing and ultimate sale of our Hong Kong-based manufacturing operations; • the downsizing and closure of our manufacturing operations in Mexico; • the establishment of key sourcing partners; • the product and customer profitability initiative; and • a reduction in our workforce in the US 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 Applica’s 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 product’s 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 |
| Applica’s distribution, sales, and marketing operations are primarily handled through our US 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 |
| Applica’s 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 |
| 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 |
| -2- _________________________________________________________________ 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 |
| 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&M’s engagement and appointed David Coles of A&M as interim Chief Operating Officer |
| The second phase of A&M’s 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&M’s 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 Applica’s consolidated net sales by product category during the periods shown: 2005 2004 2003 (Dollars in thousands) Net Sales % Net Sales % Net Sales % Kitchen Products $ 327cmam057 59 % $ 435cmam686 61 % $ 340cmam689 55 % Home Products 118cmam507 21 % 136cmam089 19 % 133cmam404 21 % Personal Care Products 54cmam874 10 % 63cmam743 (1) 9 % 67cmam746 (1) 11 % Pet Products 38cmam324 7 % 36cmam350 5 % 33cmam197 5 % Pest Control Products 8cmam421 1 % 14cmam549 2 % 16cmam639 3 % Contract Manufacturing(2) 8cmam936 2 % 17cmam653 (3) 3 % 28cmam246 (3) 4 % Other Products — 0 % 5cmam702 1 % 3cmam515 1 % Consolidated $ 556cmam119 100 % $ 709cmam772 100 % $ 623cmam436 100 % (1) Includes sales of products by the Jerdon hotel and hospitality division, which was sold in October 2004 |
| (2) Includes contract manufacturing sales from our Mexican manufacturing operations, which ceased operations in October 2005 |
| Such sales totaled dlra8dtta9 million in 2005, dlra3dtta5 million in 2004 and dlra0dtta9 million in 2003 |
| (3) Includes contract manufacturing sales from our Hong Kong-based manufacturing operations, which were sold in July 2004 |
| Such sales totaled dlra14dtta2 million in 2004 and dlra27dtta5 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 Cafe™ 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 |
| This innovative product is supported throughout the US 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 |
| Applica’s 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 |
| 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 |
| Some of the new products launched in 2005 included: • the second generation Black & Decker^® single cup coffee maker that is a part of the Home Cafe™ brewing system; • the 3-in-1 Open It All Lids Off^®, which opens jars, cans and bottles and constitutes the second generation of jar openers; and • the Gizmo Tilt ‘N Mix^® salad dressing mixer, a new Gizmo product that capitalizes on the current healthy eating trend |
| -4- _________________________________________________________________ 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 Applica’s revenue is generated through the sale of Black & Decker^® branded products, which represented approximately 78prca of Applica’s total consolidated revenue in 2005, 79prca in 2004 and 70prca 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 Cafe™ 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 Cafe™ platform |
| 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 86prca of its finished products from outside suppliers in 2005, 65prca in 2004 and 37prca 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 (HK) Company, Ltd |
| Elec-Tech accounted for approximately 35prca of Applica’s total purchases in 2005 and 14prca 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 dlra9dtta9 million were due to Elec-Tech |
| At December 31, 2004, accounts receivable of dlra9dtta1 million from Elec-Tech and accounts payable of dlra10dtta8 million due to Elec-Tech were presented net and were -5- _________________________________________________________________ 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 dlra12dtta5 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, Applica’s top three customers were Wal-Mart Stores, Inc, Target Corporation and Sally Beauty Supply |
| These customers accounted for approximately 48prca of consolidated net sales in 2005, 51prca in 2004 and 44prca in 2003 |
| Wal-Mart accounted for approximately 32prca of our consolidated net sales in 2005, 35prca in 2004 and 30prca in 2003 |
| Target Corporation accounted for approximately 11prca of our consolidated net sales in 2005, 11prca in 2004 and 9prca in 2003 |
| No other customer accounted for more than 10prca of consolidated net sales in 2005, 2004 or 2003 |
| Sales, Marketing and Distribution Applica’s products are sold principally by an internal sales staff |
| The sales teams for Wal-Mart Stores Inc |
| and Target Corporation are located in Bentonville, Arkansas and Minneapolis, Minnesota in order to provide full sales operational support to our two biggest customers |
| We also have a regional sales office in Chicago, Illinois, -6- _________________________________________________________________ which manages a national network of sales management and account executives focused on all other key US 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: • strategic marketing, which provides strategic leadership and is responsible for brand management at a high level; • 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; • 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 • 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 Applica’s backlog consists of commitments to order and orders for our products, which are typically subject to change and cancellation until shipment |
| Customer order patterns vary from year to year, largely because of annual differences in consumer acceptances of product lines, product availability, marketing strategies, inventory levels of retailers and differences in overall economic conditions |
| As a result, comparisons of backlog as of any date in a given year with backlog at the same date in a prior year are not necessarily indicative of sales for that entire given year |
| As of December 31, 2005, Applica had a backlog of approximately dlra20dtta0 million compared to dlra22dtta3 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 |
| 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 |
| 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 500cmam000 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 |
| 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 US 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 Applica’s Annual Reports on Form 10-K, including this Form 10-K, as well as the Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, are filed electronically with the SEC You may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549 |
| The 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 |
| 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 |
| All required reports are made available on the website as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission |
| As required by the New York Stock Exchange, copies of the following documents are also available on our website: • the charters of the Audit, Compensation and Corporate Governance and Nominating Committees of our Board of Directors; • the Corporate Governance Guidelines of our Board of Directors; and • our Conflict of Interest and Business Ethics and Code of Conduct policies |
| In May 2005, Applica submitted to the New York Stock Exchange the CEO certification required by Section 303A12(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 |
| Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations |
| 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 (HK) Company, Ltd |
| Elec-Tech accounted for approximately 35prca of Applica’s total purchases in 2005 and 14prca 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: • substandard product quality; and • production schedule realization |
| We expect Elec-Tech to remain a significant supplier in 2006 |
| 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 |
| 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 dlra75 million and total shareholders’ equity of not less than dlra75 million |
| In order to maintain the continued listing of our common stock on the NYSE, we are following the NYSE’s 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 NYSE’s 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 |
| 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: • currency fluctuations; • labor unrest; • political instability; • lack of developed infrastructure; • longer payment cycles and greater difficulty in collecting accounts; • restrictions on transfers of funds; • import and export duties and quotas; • changes in domestic and international customs and tariffs; • unexpected changes in regulatory environments; • difficulty in complying with a variety of foreign laws; • difficulty in obtaining distribution and support; and • potentially adverse tax consequences |
| 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 |
| 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 |
| Additionally, as part of our business strategy, we plan to: • maximize utility of our brand assets • leverage innovation and strategic marketing to drive profitability • create long-term cost and quality advantages for our customers; and • optimize our supply chain |
| Our strategic objectives may not be realized or, if realized, may not result in increased revenue, profitability or market presence |
| Executing our strategy may also place a strain on our production, information technology systems and other resources |
| To manage growth effectively, we must maintain a high level of quality, properly manage our third party suppliers, continue to enhance our operational, financial and management systems, including our database management, inventory control and distribution systems, and expand, train and manage our employee base |
| We may not be able to effectively manage our growth in any one or more of these areas |
| -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 8dtta28 to the US dollar |
| US groups have argued that the peg made China’s exports to the US cheaper, and US exports to China more expensive, thus greatly contributing to China’s trade surplus with the US 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 2dtta1prca to 8dtta11 to the dollar |
| At March 10, 2006, the renminbi exchange rate was 8dtta05 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 |
| 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 32prca of our 2005 consolidated net sales, 35prca of our 2004 consolidated net sales and 30prca of our 2003 consolidated net sales |
| Our top three customers accounted for approximately 48prca, 51prca and 44prca 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 |
| 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 |
| 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 |
| 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 |
| While we transact business predominantly in US dollars and most of our revenues are collected in US 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 US dollars |
| Changes in the relation of these and other currencies to the US 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 |
| 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 |
| 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 |
| 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 |
| We sell our products to distributors and retailers, including mass merchandisers, department stores and wholesale clubs |
| The financial difficulties of our customers or the loss of, or a substantial decrease in, the volume of purchases by a major customer could have a material adverse effect on us |
| Additionally, a significant deterioration in the financial condition of the retail industry in general could have a material adverse effect on our sales and profitability |
| In 2002 and early 2003, several large retail chains and distributors declared bankruptcy or liquidated, two of which were large customers of ours |
| We maintain credit protection on certain of our significant customers and continually monitor and evaluate our customer’s credit status |
| In addition, we attempt to adjust sales terms as appropriate |
| Despite these efforts, a bankruptcy filing or liquidation by a key customer could have a material adverse effect on us |
| 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 |
| 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 China’s WTO membership is withdrawn or if PNTR status for goods produced in China were removed, there could be a substantial increase in tariffs imposed on goods of Chinese origin entering the United States which would adversely impact our sales |
| 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 78prca of our total revenue in 2005, 79prca in 2004 and 70prca 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 dlra12dtta5 million |
| 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 |
| 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 credit facility, term loan and the indenture for our 10prca 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 |
| 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 |