UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER: 333-44473
HOLMES PRODUCTS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2768914
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
233 FORTUNE BOULEVARD, MILFORD MASSACHUSETTTS 01757
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) 634-8050
(REGISTRANT'S TELEPHONE NUMBER)
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 PRECEEDING 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 NO X*
----- -----
* THE REGISTRANT HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR LESS THAN 90
DAYS.
<PAGE>
HOLMES PRODUCTS CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET AT
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED) 3
CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 (UNAUDITED) 4
CONSOLIDATED STATEMENT OF
CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND MARCH 31, 1998 (UNAUDITED) 5
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 17
PART II. OTHER INFORMATION 17
SIGNATURES 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOLMES PRODUCTS CORP.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................................... $ 5,141 $ 9,484
Accounts receivable, net............................................................ 38,102 29,700
Inventories......................................................................... 55,550 57,783
Prepaid expenses and other current assets........................................... 1,116 851
Deferred income taxes............................................................... 4,167 4,651
Income taxes receivable............................................................. 104 256
----------- -----------
Total current assets.............................................................. 104,180 102,725
Property and equipment, net......................................................... 19,607 19,608
Deferred income taxes............................................................... 638 638
Deposits and other assets........................................................... 681 965
Debt issuance costs, net............................................................ 10,059 9,959
----------- -----------
$ 135,165 $ 133,895
=========== ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of capital lease obligations and other debt......................... $ 1,103 $ 913
Accounts payable.................................................................... 13,710 18,600
Accrued expenses.................................................................... 9,825 11,738
Accrued income taxes................................................................ 1,224 1,539
----------- -----------
Total current liabilities......................................................... 25,862 32,790
Capital lease obligations............................................................... 792 810
Line of credit.......................................................................... 28,502 20,000
Long-term debt.......................................................................... 105,000 105,000
Commitments and contingencies
Stockholders'deficit:
Common stock, no par value. Authorized 15,000 shares; issued and
outstanding 473 shares at December 31, 1997 and March 31, 1998.................... 16,314 16,314
Treasury stock, at cost (880 shares).................................................. (62,058) (62,058)
Retained earnings..................................................................... 20,753 21,039
----------- -----------
Total stockholders' deficit...................................................... (24,991) (24,705)
----------- -----------
$ 135,165 $ 133,895
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE>
HOLMES PRODUCTS CORP.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31, 1997 March 31, 1998
<S> <C> <C>
Net sales....................................................................... $ 37,886 $ 44,895
Cost of goods sold.............................................................. 29,518 30,830
---------- ----------
Gross profit.................................................................. 8,368 14,065
---------- ----------
Operating expenses:
Selling....................................................................... 3,343 4,370
General and administrative.................................................... 3,092 4,189
Product development........................................................... 1,243 1,691
---------- ----------
Total operating expenses.................................................... 7,678 10,250
---------- ----------
Operating profit............................................................ 690 3,815
---------- ----------
Other income (expense):
Interest and other expense, net............................................... 1,383 3,433
---------- ----------
Income (loss) before income taxes and minority interest......................... (693) 382
Income tax expense (benefit).................................................... (104) 96
---------- ----------
Income (loss) before minority interest.......................................... (589) 286
Minority interest in net income of majority-owned subsidiaries.................. 177 --
---------- ----------
Net income (loss)........................................................... $ (766) $ 286
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31, 1997 March 31, 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................................... $ (766) $ 286
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization....................................................... 1,609 1,563
Amortization of debt issuance costs................................................. -- 294
Change in allowance for doubtful accounts........................................... 163 133
Deferred income taxes............................................................... 97 (484)
Minority interest in net income of majority-owned subsidiaries...................... 177 --
Changes in operating assets and liabilities:
Accounts receivable............................................................... 2,345 8,269
Inventories....................................................................... (2,267) (2,233)
Prepaid expenses and other current assets......................................... 282 265
Income taxes receivable........................................................... (1,914) (152)
Due from affiliates............................................................... (1,208) --
Deposits and other assets......................................................... (522) (284)
Trade acceptances payable......................................................... (448) --
Accounts payable.................................................................. 1,324 4,890
Due to affiliates................................................................. (273) --
Accrued expenses.................................................................. (2,134) 1,913
Accrued income taxes.............................................................. (1,623) 315
---------- ----------
Net cash provided by (used for) operating activities................................ (5,158) 14,775
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment................................................... (1,209) (1,564)
---------- ----------
Net cash used for investing activities.............................................. (1,209) (1,564)
---------- ----------
Cash flows from financing activities:
Net repayment of line of credit....................................................... -- (8,502)
Net borrowings from affiliate......................................................... 10,000 --
Debt issuance costs................................................................... -- (194)
Principal payments on capital lease obligations....................................... (130) (172)
---------- -----------
Net cash provided by (used for) financing activities................................ 9,870 (8,868)
---------- -----------
Net increase in cash and cash equivalents............................................... 3,503 4,343
Cash and cash equivalents, beginning of period.......................................... 4,462 5,141
---------- ----------
Cash and cash equivalents, end of period................................................ $ 7,965 $ 9,484
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest............................................................... $ 1,457 $ 583
Cash paid for income taxes........................................................... $ 3,060 $ 344
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. Nature of Business
Holmes Products Corp. ("HPC") designs, develops, imports and sells consumer
durable goods, including fans, heaters, humidifiers, air purifiers,
dehumidifiers and lighting products, to retailers throughout the United
States and Canada, and to a lesser extent, Europe.
Holmes Products (Far East) Limited ("HPFEL") and its subsidiaries
manufacture and sell consumer durable goods, including fans, heaters and
humidifiers, mainly to HPC. HPFEL operates facilities in Hong Kong and The
People's Republic of China.
HPFEL is a wholly-owned subsidiary of HPC. Prior to the recapitalization
transaction described in Note 4, HPC and HPFEL (together as "the Company")
were both directly or indirectly an 80% owned subsidiary of Asco
Investments Ltd., a subsidiary of Pentland Group plc ("Pentland").
2. Basis of Consolidation
The accompanying unaudited financial statements include the accounts of HPC
and its wholly-owned subsidiaries, HPFEL, Holmes Manufacturing Corp.,
Holmes Air (Taiwan) Corp. and Holmes Air (Canada) Corp. The accompanying
unaudited financial statements also include the accounts of HPFEL's
wholly-owned subsidiaries, Esteem Industries Ltd., Raider Motor Corp.,
Dongguan Huixin Electrical Products Company, Ltd. and Dongguan Raider Motor
Corp. Ltd. Prior to the recapitalization transaction described in Note 4,
the unaudited financial statements combined the accounts of HPC and HPFEL
on the basis of common ownership. All significant inter-company balances
and transactions have been eliminated.
3. Minority Interest
Prior to May 1997, HPFEL owned 70% of Raider Motor Corp., which owns 100%
of Dongguan Raider Motor Corp. Ltd. The minority stockholders' interests in
the net income and net assets of Raider Motor Corp. and Dongguan Raider
Motor Corp. Ltd. were presented separately in the accompanying unaudited
financial statements.
In May and June 1997, the Company reached agreements to acquire the capital
stock held by the minority stockholders. The book value of the minority
interest exceeded the repurchase price by approximately $650,000. The
excess of the fair market value of the assets and liabilities of Raider
Motor Corp. on the date of acquisition over the purchase price has been
recorded as a reduction of property and equipment during the year ended
December 31, 1997.
4. Recapitalization
On November 26, 1997, the Company and its stockholders consummated an
agreement to perform the following: (i) the stockholders of HPFEL
contributed their shares of common stock, $1 par value, to
6
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
HPC in exchange for 130 shares of HPC's common stock, no par value, (ii)
HPC issued 223 shares of its common stock to outside investors and certain
executive officers of the Company for approximately $15.5 million, net of
related issuance costs, (iii) the Company repaid all amounts outstanding to
Pentland affiliates and repaid all amounts outstanding on the Company's
trade acceptances, including accrued interest, and (iv) HPC redeemed 880
shares of HPC common stock held by Pentland for approximately $62.1
million. In connection with these transactions, HPC issued $105,000,000 of
9 7/8% Senior Subordinated Notes due in November 2007 and borrowed
$27,500,000 under a new Line of Credit facility.
The transactions described above have been accounted for as a leveraged
recapitalization of the Company. The Company has retained its historical
cost basis of accounting, due to the significant minority shareholders
which remained. The shares redeemed from Pentland have been recorded as
treasury stock, at cost.
5. Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation of
the Company's financial position as of March 31, 1998 and the Company's
results of operations and cash flows for the three months ended March 31,
1997 and 1998. This interim financial information and notes thereto should
be read in conjunction with the Company's Registration Statement on Form
S-4, which includes audited financial statements for the year ended
December 31, 1997. Due to the seasonality of the Company's business, the
Company's consolidated results of operations for the three month period
ended March 31, 1998 are not necessarily indicative of the results to be
expected for any other interim period or the entire fiscal year.
6. Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventories are as follows:
December 31, 1997 March 31, 1998
Finished goods $ 34,305,000 $ 36,163,000
Raw materials 8,844,000 8,165,000
Work-in-process 12,401,000 13,455,000
-------------- --------------
$ 55,550,000 $ 57,783,000
-------------- --------------
7. Contingencies
The Company is involved in litigation and is the subject of claims arising
in the normal course of its business. In the opinion of management, based
upon discussions with legal counsel, no existing litigation or claims will
have a materially adverse effect on the Company's financial position or
results of operations and cash flows.
7
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. Condensed Consolidating Information
The senior subordinated notes described in Note 4 were issued by HPC and
are guaranteed by Holmes Manufacturing Corp. ("Manufacturing") and Holmes
Air (Taiwan) Corp. ("Taiwan"), but are not guaranteed by HPC's other
subsidiaries, HPFEL and Holmes Air (Canada) Corp. ("Canada"). The guarantor
subsidiaries are wholly-owned by HPC, and the guarantees are full,
unconditional and joint and several. The following condensed consolidating
financial information presents the financial position, results of
operations and cash flows of (i) HPC, as parent, as if it accounted for its
subsidiaries on the equity method, (ii) Manufacturing and Taiwan, the
guarantor subsidiaries, and (iii) HPFEL and Canada, the non-guarantor
subsidiaries. There were no transactions between Manufacturing and Taiwan,
or between HPFEL and Canada, during any of the periods presented. Separate
financial statements of Manufacturing and Taiwan are not presented herein
as management does not believe that such statements would be material to
investors. Taiwan had no revenues or operations during the periods
presented, and Manufacturing ceased operations in March 1997. As further
described in Note 14 of the Company's audited financial statements for the
year ended December 31, 1997, included in the Company's Registration
Statement on Form S-4, certain of HPFEL's subsidiaries in China have
restrictions on distributions to the parent company.
8
<PAGE>
CONSOLIDATING BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 3,741 $ -- $ 1,400 $ 5,141
Accounts receivable, net....................... 36,775 -- 1,327 38,102
Inventories.................................... 47,592 -- 11,433 $ (3,475) 55,550
Prepaid expenses and other current assets...... 813 -- 303 1,116
Deferred income taxes.......................... 4,167 -- -- 4,167
Income taxes receivable........................ 104 -- -- 104
Due from affiliates............................ 5,426 89 10,605 (16,120) --
-------- ------- --------- ---------- ----------
Total current assets......................... 98,618 89 25,068 (19,595) 104,180
Property and equipment,net....................... 8,607 -- 11,093 (93) 19,607
Deferred income taxes............................ 638 -- -- 638
Deposits and other assets........................ 10,313 1 426 10,740
Investments in consolidated subsidiaries......... 10,178 -- -- (10,178) --
-------- ------- --------- ---------- ----------
$128,354 $ 90 $ 36,587 $ (29,866) $ 135,165
======== ======= ========= ========== ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of capital lease obligations
and other debt................................ $ -- $ -- $ 1,103 $ 1,103
Accounts payable............................... 3,253 -- 10,457 13,710
Accrued expenses............................... 6,898 -- 2,927 9,825
Accrued income taxes........................... -- -- 1,298 $ (74) 1,224
Due to affiliates.............................. 10,694 -- 5,426 (16,120) --
-------- ------- --------- ---------- ----------
Total current liabilities.................... 20,845 -- 21,211 (16,194) 25,862
-------- ------- --------- ---------- ----------
Capital lease obligations........................ -- -- 792 792
-------- ------- --------- ----------
Line of credit................................... 27,500 -- 1,002 28,502
-------- ------- --------- ----------
Long-term debt................................... 105,000 -- -- 105,000
-------- ------- --------- ----------
Stockholders' equity (deficit):
Common stock, no par value..................... 16,314 1 -- (1) 16,314
Common stock, $1 par value..................... -- -- 100 (100) --
Treasury stock................................. (62,058) -- -- (62,058)
Retained earnings.............................. 20,753 89 13,482 (13,571) 20,753
-------- ------- --------- ---------- ----------
Total stockholders' equity (deficit)......... (24,991) 90 13,582 (13,672) (24,991)
-------- ------- --------- ---------- ----------
$128,354 $ 90 $ 36,587 $ (29,866) $ 135,165
======== ======= ========= ========== ==========
</TABLE>
9
<PAGE>
CONSOLIDATING BALANCE SHEET MARCH 31, 1998 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 4,208 $ -- $ 5,276 $ 9,484
Accounts receivable, net......................... 28,407 -- 1,293 29,700
Inventories...................................... 51,972 -- 9,761 $ (3,950) 57,783
Prepaid expenses and other current assets........ 725 -- 126 851
Deferred income taxes............................ 4,651 -- -- 4,651
Income taxes receivable.......................... 256 -- -- 256
Due from affiliates.............................. 4,261 89 14,471 (18,821) --
--------- -------- ----------- --------- ----------
Total current assets........................... 94,480 89 30,927 (22,771) 102,725
Property and equipment, net........................ 8,530 -- 11,148 (70) 19,608
Deferred income taxes.............................. 638 -- -- 638
Deposits and other assets.......................... 10,406 1 517 10,924
Investments in consolidated subsidiaries........... 13,669 -- -- (13,669) --
--------- -------- ----------- --------- ----------
$ 127,723 $ 90 $ 42,592 $ (36,510) $ 133,895
========= ======== =========== ========= ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of capital lease obligations
and other debt.................................. $ -- $ -- $ 913 $ 913
Accounts payable................................. 3,851 -- 14,749 18,600
Accrued expenses................................. 9,222 -- 2,516 11,738
Accrued income taxes............................. (205) -- 1,722 $ 22 1,539
Due to affiliates................................ 14,560 -- 4,261 (18,821) --
--------- -------- ----------- --------- ----------
Total current liabilities...................... 27,428 -- 24,161 (18,799) 32,790
--------- -------- ----------- --------- ----------
Capital lease obligations.......................... -- -- 810 810
--------- -------- ----------- ----------
Line of credit..................................... 20,000 -- -- 20,000
--------- -------- ----------- ----------
Long-term debt..................................... 105,000 -- -- 105,000
--------- -------- ----------- ----------
Stockholders' equity (deficit):
Common stock, no par value....................... 16,314 1 -- (1) 16,314
Common stock, $1 par value....................... -- -- 100 (100) --
Treasury stock................................... (62,058) -- -- (62,058)
Retained earnings................................ 21,039 89 17,521 (17,610) 21,039
--------- -------- ----------- --------- ----------
Total stockholders' equity (deficit)........... (24,705) 90 17,621 (17,711) (24,705)
--------- -------- ----------- --------- ----------
$ 127,723 $ 90 $ 42,592 $ (36,510) $ 133,895
========= ======== =========== ========= ==========
</TABLE>
10
<PAGE>
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 1997 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ................................. $ 35,338 $ 1,144 $ 20,176 $ (18,772) $ 37,886
Cost of goods sold ........................ 30,274 1,001 16,783 (18,540) 29,518
------ ----- ------ ------- ------
Gross profit ............................ 5,064 143 3,393 (232) 8,368
------ ----- ------ ------- ------
Operating expenses:
Selling ................................. 3,223 - 120 3,343
General and administrative .............. 1,280 5 1,807 3,092
Product development ..................... 1,226 - 17 1,243
------ ----- ------ ------- ------
Total operating expenses .............. 5,729 5 1,944 - 7,678
------ ----- ------ ------- ------
Operating profit (loss) ............... (665) 138 1,449 (232) 690
------ ----- ------ ------- ------
Other income (expense):
Interest and other expense, net ......... 1,286 - 99 (2) 1,383
------ ----- ------ ------- ------
Total other expense ................... 1,286 - 99 (2) 1,383
------ ----- ------ ------- ------
Income (loss) before income taxes, equity in
income of consolidated subsidiaries and
minority interest ....................... (1,951) 138 1,350 (230) (693)
Income tax expense (benefit)............... (777) - 140 533 (104)
------ ----- ------ ------- ------
Income (loss) before equity in income of
consolidated subsidiaries and minority
Interest .................................. (1,174) 138 1,210 (763) (589)
Equity in income of consolidated
subsidiaries ............................ 408 - - (408) -
------ ----- ------ ------- ------
Income (loss) before minority interest .... (766) 138 1,210 (1,171) (589)
Minority interest in net income of
majority owned subsidiaries.............. - - 177 - 177
------ ----- ------ ------- ------
Net income (loss) ......................... $ (766) $ 138 $ 1,033 $ (1,171) $ (766)
====== ===== ====== ======= ======
</TABLE>
11
<PAGE>
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ............................. $ 42,383 $ - $ 31,095 $ (28,583) $ 44,895
Cost of goods sold .................... 34,747 - 24,221 (28,138) 30,830
------ ----- ------ ------- ------
Gross profit ........................ 7,636 - 6,874 (445) 14,065
------ ----- ------ ------- ------
Operating expenses:
Selling ............................. 4,181 - 189 4,370
General and administrative .......... 2,017 - 2,172 4,189
Product development ................. 1,685 - 6 1,691
------ ----- ------ ------- ------
Total operating expenses .......... 7,883 - 2,367 - 10,250
------ ----- ------ ------- ------
Operating profit (loss) ........... (247) - 4,507 (445) 3,815
------ ----- ------ ------- ------
Other income (expense):
Interest and other income
(expense), net .................... (3,502) - 69 - (3,433)
------ ----- ------ ------- ------
Total other income (expense) ...... (3,502) - 69 - (3,433)
------ ----- ------ ------- ------
Income (loss) before income
taxes and equity in income of
consolidated subsidiaries (3,749) - 4,576 (445) 382
Income tax expense (benefit) .......... (386) - 459 23 96
------ ----- ------ ------- ------
Income (loss) before equity in
income of consolidated subsidiaries .. (3,363) - 4,117 (468) 286
Equity in income of consolidated
subsidiaries.......................... 3,649 - - (3,649) -
------ ----- ------ ------- ------
Net income ............................ $ 286 $ - $ 4,117 $ (4,117) $ 286
====== ===== ====== ======= ======
</TABLE>
12
<PAGE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Three Months Ended March 31, 1997
Net cash provided by (used for)
operating activities ........................... $ (7,342) $ 48 $ 2,136 $ (5,158)
------ ----- ----- ------
Cash flows from investing activities:
Purchases of property and equipment ........... (827) - (382) (1,209)
------ ----- ----- ------
Cash flows from financing activities:
Net borrowings from affiliate ................. 10,000 - - 10,000
Principal payments on capital lease
obligations ................................. - - (130) (130)
Other net activity with Parent ................ (1) (48) 49 -
------ ----- ----- ------
Net cash provided by (used for)
financing activities ...................... 9,999 (48) (81) 9,870
------ ----- ----- ------
Net increase in cash and cash
equivalents ................................... 1,830 - 1,673 3,503
Cash and cash equivalents,
beginning of period ............................. 1,284 - 3,178 4,462
------ ----- ----- ------
Cash and cash equivalents,
end of period .................................. $ 3,114 $ - $ 4,851 $ 7,965
===== ===== ===== =====
Three Months Ended March 31, 1998
Net cash provided by
operating activities ............................ $ 8,990 $ - $ 5,785 $ 14,775
------ ----- ----- ------
Cash flows from investing activities:
Purchases of property and equipment ........... (1,356) - (208) (1,564)
------ ----- ----- ------
Cash flows from financing activities:
Debt issuance costs ........................... (194) - - (194)
Net repayment of line of credit ............... (7,500) - (1,002) (8,502)
Principal payments on capital lease
obligations ................................. - - (172) (172)
Other net activity with Parent ................ 527 - (527) -
------ ----- ----- ------
Net cash used for financing
activities ................................ (7,167) - (1,701) (8,868)
------ ----- ----- ------
Net increase in cash and cash
equivalents ................................... 467 - 3,876 4,343
Cash and cash equivalents,
begining of period ............................ 3,741 - 1,400 5,141
------ ----- ----- ------
Cash and cash equivalents,
end of period ................................... $ 4,208 $ - $ 5,276 $ 9,484
===== ===== ===== ======
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Sales of most of the Company's products follow seasonal patterns that affect the
Company's results of operations. In general, the Company's sales of fans and
dehumidifiers occur predominantly from January through June, and the Company's
sales of heaters and humidifiers occur predominantly from July through December.
Although air purifiers, lighting products and accessories generally are used
year-round, these products tend to draw increased sales during the winter months
when people are indoors and, as a result, the Company's sales of these products
tend to be greatest in advance of the winter months from July through December.
In addition to the seasonal fluctuations in sales, the Company experiences
seasonality in gross profit, as margins realized on fan products tend to be
lower than those realized on heater, humidifier and air purifier products.
The Company completed a recapitalization transaction in November 1997, in which
the Company issued $105 million of senior subordinated notes due in November
2007, bearing interest at 9 7/8%, and entered into a $100 million line of credit
facility, of which approximately $27.5 million was initially drawn. The proceeds
of these borrowings were used to repay all existing indebtedness (primarily a
line of credit and other current debt facilities) and redeem a significant
portion of the previous majority shareholder's common stock. Accordingly,
commencing in November 1997, the Company has a significantly higher level of
borrowing and a corresponding higher level of interest expense than in the past.
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 1998 AND MARCH 31, 1997
Net Sales. Net sales for the first quarter of fiscal 1998, which ended March 31,
1998, were $44.9 million compared to $37.9 million for the first quarter of
fiscal 1997, which ended March 31, 1997, an increase of $7.0 million or 18.5%.
This increase is primarily attributable to several larger customers taking their
fan shipments earlier than in the previous year, as well as increases in air
purifier and related filter sales over the prior period as this product line
continues to mature. As the increase in fan sales is largely due to the timing
of customer orders, management anticipates fan sales in the second quarter of
1998 to decline from the comparable 1997 period.
Cost of Goods Sold. Cost of goods sold for the first quarter of 1998 were $30.8
million compared to $29.5 million for the first quarter of 1997, an increase of
$1.3 million or 4.4%. The increase was primarily due to the above increases in
net sales, partially offset by higher gross margins in the first quarter of 1998
versus 1997.
Gross Profit. Gross profit for the first quarter of 1998 was $14.1 million
compared to $8.4 million for the first quarter of 1997, an increase of $5.7
million or 67.9%. As a percentage of net sales, gross profit increased to 31.3%
for the first quarter of 1998 from 22.1% for the first quarter of 1997. The
increase was primarily due to the above mentioned increases in net sales as well
as reductions in raw material prices at the Company's manufacturing operations.
Additionally, air purifiers and related filters generate higher gross profit
margins than fans and dehumidifiers, and the increase in sales of these product
categories in the first quarter of 1998 improved the overall gross profit
percentage.
Selling Expenses. Selling expenses for the first quarter of 1998 were $4.4
million compared to $3.3 million for the first quarter of 1997, an increase of
$1.1 million or 33.3%. As a percentage of net sales, selling expenses increased
to 9.7% for the first quarter of 1998 from 8.8% for the first quarter of 1997.
The increase in selling expenses is primarily due to an increase in co-operative
advertising of higher margin products with several major retailers. To a lesser
extent, shipping costs and selling commissions increased as a result of the
higher sales level.
General and Administrative Expenses. General and administrative expenses for the
first quarter of 1998 were $4.2 million compared to $3.1 million for the first
quarter of 1997, an increase of $1.1 million or 35.5%. As a percentage of net
sales, general and administrative expenses increased to 9.3% for the first
quarter of 1998 from 8.2% for the first quarter of 1997. The increase was
primarily due to continued additional management and information systems support
to improve operating efficiencies at all of the
14
<PAGE>
Company's locations. In addition, general and administrative expenses increased
due to the management fee paid to Berkshire Partners as part of the
recapitalization of the Company in November 1997.
Product Development Expenses. Product development expenses for the first quarter
of 1998 were $1.7 million compared to $1.2 million for the first quarter of
1997, an increase of $.5 million or 41.7%. As a percentage of net sales, product
development expenses increased to 3.8% for the first quarter of 1998 from 3.3%
for the first quarter of 1997. The increase was primarily due to increased
expenditures for outside consulting firms and manufacturers as part of the
Company's effort in developing new technologies for both existing and new
product lines.
Interest and Other Expense, Net. Interest and other expense, net for the first
quarter of 1998 were $3.4 million compared to $1.4 million for the first quarter
of 1997, an increase of $2.0 million or 143%. The increase in interest expense
is primarily due to the additional borrowings resulting from the
recapitalization of the Company in November 1997.
Income Tax Expense (Benefit). Income tax expense (benefit) changed from a
benefit of $104,000 in the first quarter of 1997 to an expense of $96,000 in the
first quarter of 1998, as a result of the Company reporting income in the first
quarter of 1998 as compared to a loss in the first quarter of 1997. The Company
provides for taxes using a projected worldwide effective tax rate for the entire
year. The effective tax rate increased to 25% in the first quarter of 1998 from
15% in the comparable prior period, as a result of a change in the tax structure
of the Company arising from the recapitalization in November 1997. Under the
current structure, certain of the Company's Far East operations are subject to
tax at the higher US tax rates.
Net Income. As a result of the foregoing factors, net income for the first
quarter of 1998 was $286,000, compared to a net loss of $766,000 in the first
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Following the recapitalization transaction in November 1997 the Company is
funding its liquidity requirements with cash flows from operations and
borrowings under its Line of Credit facility. The primary liquidity requirements
are for working capital and to service the Company's indebtedness. The Company
believes that existing cash resources, cash flows from operations and borrowings
under the credit facility will be sufficient to meet the Company's liquidity
needs for the foreseeable future.
Cash provided by (used for) operations for the three months ended March 31, 1997
and 1998 was $(5.2) million and $14.8 million, respectively. Cash provided by
operations in the first quarter of 1998 primarily reflected an $8.3 million
decrease in accounts receivable and increases in accounts payable and accrued
expenses. The decrease in accounts receivable is largely due to an increase in
shipments to customers from the Company's manufacturing facilities in the Far
East, which are paid on faster terms than shipments from the Company's US
warehouses. Additionally, the Company has continued to increase its focus and
administrative support in the credit and collections area, which has positively
impacted accounts receivable balances. The increase in accounts payable is
primarily due to purchases of materials for increased manufacturing activity in
the Company's Far East operations to support the Company's higher sales level.
The increase in accrued expenses is attributable to the interest on the
long-term debt issued as part of the recapitalization of the Company, which is
payable semi-annually in May and November.
Cash provided by (used for) financing activities for the three months ended
March 31, 1997 and 1998 was $9.9 million and $(8.9) million, respectively. Cash
used for financing in the first quarter of 1998 reflected repayments of the line
of credit using cash flows from operations. The cash provided by financing
activities in the first quarter of 1997 reflected borrowings for working capital
purposes under the previous line of credit from Pentland.
15
<PAGE>
The Company's capital expenditures, including assets acquired under capital
leases, for the three months ended March 31, 1997 and 1998 were $1.2 million and
$1.6 million, respectively, primarily for molds and tooling.
The senior subordinated notes issued in the recapitalization are not redeemable
at the Company's option prior to November 15, 2002. Thereafter, the notes are
subject to redemption at any time at the option of the Company, in whole or in
part, at stated redemption prices. Annual interest payments on the notes are
approximately $10.4 million. The payment of principal and interest on the notes
is subordinated to the prior payment in full of all senior debt of the Company,
including borrowings under the Line of Credit facility. The Line of Credit
facility expires in January 2003.
The Company's Line of Credit facility bears interest at a variable rate based on
either the prime rate or LIBOR, at the Company's option, plus a margin which
varies depending upon certain financial ratios of the Company. The Line of
Credit facility, and the guarantees thereof by the Company's domestic
subsidiaries, are secured by substantially all of the Company's domestic and
certain foreign assets. The Line of Credit facility and the senior subordinated
notes Indenture include certain financial and operating covenants which, among
other things, restrict the ability of the Company to incur additional
indebtedness, make investments and take certain other actions. The ability of
the Company to meet its debt service obligations will be dependent upon the
future performance of the Company, which will be impacted by general economic
conditions and other factors. See "Forward-Looking Statements."
FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
quarterly report, are or may be forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. Various economic and
competitive factors could cause actual results or events to differ materially
from those discussed in such forward-looking statements, including without
limitation, the Company's degree of leverage, its dependence on major customers
and key personnel, competition, risks associated with foreign manufacturing,
risks of the retail industry, potential product liability claims, the cost of
labor and raw materials and the other factors discussed in the Company's filings
with the Securities and Exchange Commission. Accordingly, such forward-looking
statements do not purport to be predictions of future events or circumstances
and may not be realized.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other
than those arising in the ordinary course of the Company's business.
Management believes that the resolution of these matters will not
materially affect the Company's financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Item 5 below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Effective April 24, 1998, the Company exchanged $105 million aggregate
principal amount of its Series B Senior Subordinated Notes due 2007
for an equal amount of Series A Senior Subordinated Notes due 2007.
The Series B Notes were issued on the same terms as the Series A
Notes, except that the Series B Notes were registered under the
Securities Act of 1933 as amended. There were no proceeds to the
Company resulting from the exchange.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits: 27.1 Financial Data Schedule
b. Reports on Form 8-K:
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
HOLMES PRODUCTS CORP.
---------------------
Registrant
May 14, 1998 By: /s/ Jordan A. Kahn
------------------------------
Jordan A. Kahn, President,
Chief Executive Officer
(Principal Executive Officer)
May 14, 1998 By: /s/ David Dusseault
------------------------------
David Dusseault,
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF HOLMES PRODUCTS CORP. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 9,484
<SECURITIES> 0
<RECEIVABLES> 30,292
<ALLOWANCES> 592
<INVENTORY> 57,783
<CURRENT-ASSETS> 102,725
<PP&E> 36,908
<DEPRECIATION> 17,300
<TOTAL-ASSETS> 133,895
<CURRENT-LIABILITIES> 32,790
<BONDS> 125,000
0
0
<COMMON> 16,314
<OTHER-SE> (41,019)
<TOTAL-LIABILITY-AND-EQUITY> 133,895
<SALES> 44,895
<TOTAL-REVENUES> 44,895
<CGS> 30,830
<TOTAL-COSTS> 30,830
<OTHER-EXPENSES> 1,691<F1>
<LOSS-PROVISION> 143
<INTEREST-EXPENSE> 3,432
<INCOME-PRETAX> 382
<INCOME-TAX> 96
<INCOME-CONTINUING> 286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 286
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Product development expenses.
<F2>The Company's shares are not publicly traded.
</FN>
</TABLE>
