As filed with the Securities and Exchange Commission on March 23, 1998
Registration No. 333-44473
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
to
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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HOLMES PRODUCTS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MASSACHUSETTS 506 04-2768914
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
233 FORTUNE BOULEVARD
MILFORD, MASSACHUSETTS 01757
(508) 634-8050
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
SEE TABLE OF ADDITIONAL REGISTRANTS
---------------
Jordan A. Kahn
President and Chief Executive Officer
Holmes Products Corp.
233 Fortune Boulevard
Milford, Massachusetts 01757
(508) 634-8050
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies of all communications to:
Michael L. Andresino, Esq.
Posternak, Blankstein & Lund, L.L.P.
100 Charles River Plaza
Boston, Massachusetts 02114-2723
(617) 973-6100
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Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
---------------
TABLE OF ADDITIONAL REGISTRANTS(1)
<TABLE>
<CAPTION>
=================================================================================================
Exact Name of Registrant State or Other Jurisdiction Primary Standard Industrial
As Specified in its Charter of Incorporation or Organization Classification Code Number
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Holmes Manufacturing Corp. Massachusetts 506
- --------------------------------------------------------------------------------------------------
Holmes Air (Taiwan) Corp. Massachusetts 506
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</TABLE>
(1) The address, including zip code, and telephone number, including area code,
of the additional Registrants' principal executive offices is 233 Fortune
Boulevard, Milford, Massachusetts 01757, (508) 634-8050.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 23, 1998
PRELIMINARY PROSPECTUS
[Holmes Logo]
OFFER TO EXCHANGE
UP TO $105,000,000 OF
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
FOR ANY AND ALL OF THE OUTSTANDING
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
OF
HOLMES PRODUCTS CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON ---------------- , 1998, UNLESS EXTENDED.
Holmes Products Corp., a Massachusetts corporation (the "Issuer"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and, together with this Prospectus, the "Exchange Offer"), to
exchange an aggregate of up to $105,000,000 principal amount of 9 7/8% Senior
Subordinated Notes due 2007, Series B (the "Exchange Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
for an identical face amount of the issued and outstanding 9 7/8% Senior
Subordinated Notes due 2007 (referred to individually as the "144A Notes" and
"Reg S Notes"; collectively as the "Series A Notes"; and, together with the
Exchange Notes, the "Notes") of the Issuer from the Holders (as defined herein)
thereof in integral multiples of $1,000 principal amount. As of the date of
this Prospectus, there are $105,000,000 in aggregate principal amount of the
Series A Notes outstanding. The terms of the Exchange Notes are identical in
all material respects to the Series A Notes, except that the Exchange Notes
have been registered under the Securities Act, and therefore will not bear
legends restricting their transfer described in the Registration Rights
Agreement (as defined herein), the provisions of which generally will terminate
as to all of the Notes upon the consummation of the Exchange Offer. The
Exchange Notes will be obligations of the Issuer evidencing the same
indebtedness as the Series A Notes, and will be entitled to the benefits of the
same Indenture (as defined herein). See "The Exchange Offer."
Interest on the Exchange Notes will be payable semi-annually in arrears on
May 15 and November 15 of each year, commencing on May 15, 1998. The Exchange
Notes will mature on November 15, 2007. The Exchange Notes are redeemable at
any time on or after November 15, 2002 at the option of the Issuer, in whole or
in part, at the redemption prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. Upon the occurrence of a
Change of Control (as defined herein), each holder of the Exchange Notes may
require the Issuer to purchase all or a portion of such holder's Exchange Notes
at a purchase price equal to 101% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of purchase. See
"Description of the Exchange Notes -- Repurchase at the Option of the Holders."
The Exchange Notes will be unsecured senior subordinated obligations of
the Issuer and, as such, will be subordinated in right of payment to all
existing and future senior indebtedness of the Issuer. The Exchange Notes will
rank pari passu in right of payment with all other existing and future senior
subordinated indebtedness, if any, of the Issuer, and senior in right of
payment to all existing and future subordinated indebtedness, if any, of the
Issuer. The Exchange Notes will be guaranteed, fully, unconditionally and
jointly and severally, on a senior subordinated basis (the "Guarantees") by the
Issuer's Domestic Restricted Subsidiaries (the "Guarantors" and, together with
the Issuer and its other subsidiaries on a consolidated basis, the "Company").
The Guarantees will be unsecured senior subordinated obligations of the
Guarantors and will be subordinated to all existing and future senior
indebtedness of the Guarantors. See "Description of the Exchange Notes --
Subsidiary Guarantees." As of December 31, 1997, the Company and the Guarantors
had approximately $30.4 million in aggregate principal amount of Senior Debt
(as defined herein) outstanding, including guarantees of the Company's
obligations under the Credit Facility (as defined herein), and no indebtedness
junior to the Series A Notes.
See "Risk Factors" beginning on page 14 for a discussion of certain
factors that should be considered by participants in the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE. UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS.
The Date of this Prospectus is , 1998.
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
The Company will accept for exchange any and all validly tendered Series A
Notes on or prior to the Expiration Date (as defined herein). Tenders of Series
A Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date; otherwise such tenders are irrevocable. The Exchange Offer
is not conditioned upon any minimum principal amount of Series A Notes being
tendered for exchange. For certain conditions to the Exchange Offer, see "The
Exchange Offer -- Conditions."
The Series A Notes were offered and sold on November 19, 1997 in a
transaction not registered under the Securities Act in reliance upon an
exemption from the registration requirements thereof. In general, the Series A
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act.
The Exchange Notes are being offered hereby in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement. The
Company has agreed to pay the expenses of the Exchange Offer. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Series A Notes may be offered for resale, resold or otherwise
transferred by any person in whose name Series A Notes are registered on the
books of the Company or any other person who has obtained a properly completed
bond power from the registered holder (a "Holder") thereof (other than any such
Holder that is an "affiliate" of the Company within the meaning of Rule 405
promulgated under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such Holder's business
and such Holder does not intend to participate and has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. In some cases, certain broker-dealers may be required to
deliver a prospectus in connection with the resale of such Exchange Notes.
Any beneficial owner of Series A Notes whose Series A Notes are registered
in the name of a broker, commercial bank, trust company or other nominee and
who wishes to participate in the Exchange Offer should contact such registered
Holder promptly and instruct such Holder to tender the Series A Notes on such
beneficial owner's behalf. See "The Exchange Offer -- Procedures for
Tendering."
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with any resale of Exchange Notes
received in exchange for such Series A Notes where such Series A Notes were
acquired by such broker-dealer for its own account as a result of market-making
activities or other trading activities (other than Series A Notes acquired
directly from the Company). The Company has agreed that it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale.
Prior to this Exchange Offer, there has been no public market for the
Notes. If a market for the Exchange Notes should develop, the Exchange Notes
could trade at a discount from their principal amount. The Company does not
intend to list the Exchange Notes on any securities exchange nor does the
Company intend to apply for quotation of the Exchange Notes on the NASDAQ
National Market or other quotation system. BancBoston Securities Inc. and
Lehman Brothers Inc. (the "Initial Purchasers") have indicated to the Company
that they intend to make a market in the Notes, but are not obligated to do so
and such market-making activities may be discontinued at any time. As a result,
no assurance can be given that an active trading market for the Exchange Notes
will develop.
The Exchange Notes issued pursuant to this Exchange Offer will be issued
in the form of a Global Exchange Note (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company (the "Depository"
or "DTC") and registered in its name or in the name of Cede & Co., its nominee.
Beneficial interests in the Global Exchange Note representing the Exchange
Notes will be shown on, and transfers thereof will be effected through, records
maintained by DTC and its participants. Notwithstanding the foregoing, Series A
Notes held in certificated form will be exchanged solely for Certificated
Exchange Notes (as defined herein). After the initial issuance of the Global
Exchange Note, Certificated Exchange Notes will be issued in exchange for the
Global Exchange Note only on the terms set forth in the Indenture. See
"Description of the Exchange Notes -- Book-Entry, Delivery and Form."
All statements, other than statements of historical fact, included in this
Prospectus, including without limitation the statements under "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are, or may be, forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "intends," "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, the integration of future
acquisitions, the Company's dependence on major customers and key personnel,
competition, risks associated with foreign manufacturing, risks of the retail
industry, potential product liability claims, and the other factors discussed
in this Prospectus with respect to the Company's business, including those set
forth under "Risk Factors." Accordingly, such forward-looking statements do not
purport to be predictions of future events or circumstances and may not be
realized.
----------------
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<PAGE>
AVAILABLE INFORMATION
The Issuer has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and
the rules and regulations promulgated thereunder, covering the Exchange Notes
being offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission and to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
For further information with respect to the Issuer and the Notes,
reference is made to such Registration Statement. A copy of the Registration
Statement can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W. Washington, D.C. 20549, and at the Regional Offices of the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials can be obtained from the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. The Commission maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such site is http://www.sec.gov.
While any Series A Notes remain outstanding, the Company will make
available, upon request, to any Holder and any prospective purchaser of Series
A Notes the information required pursuant to Rule 144A(d)(4) under the
Securities Act during any period in which the Company is not subject to Section
13 or 15(d) of the Exchange Act. Any such request should be directed to the
Company at 233 Fortune Boulevard, Milford, Massachusetts 01757, Attention:
Chief Financial Officer (telephone number (508) 634-8050).
Upon completion of the Exchange Offer, the Issuer will become subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith, will file reports
and other information with the Securities and Exchange Commission.
------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE ISSUER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE
HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE ISSUER SINCE THE DATE HEREOF.
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
ii
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus, and is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Market data (including market share data) used
throughout this Prospectus were obtained from internal Company surveys,
independent market research companies and industry publications. Independent
market research companies and industry publications generally indicate that the
information provided by them or contained therein has been obtained from
sources believed to be reliable, but that the accuracy and completeness of such
information is not guaranteed. The Company has not independently verified such
market data. Similarly, internal Company surveys, while believed by the Company
to be reliable, have not been verified by any independent sources. Unless
otherwise specified, all market share data contained in this Prospectus are
estimates by the Company measured in units sold. Unless the context otherwise
requires, references in this Prospectus to "Holmes" and the "Company" are to
Holmes Products Corp. and its subsidiaries after giving effect to the
Transactions.
The Company
Holmes is a leading developer, manufacturer and marketer of quality,
branded home comfort products, including fans, heaters, humidifiers and air
purifiers. The Company believes that it has a leading U.S. market share in each
of these product categories, which, in the aggregate, accounted for
approximately 91.7% of the Company's net sales for the year ended December 31,
1997. In addition, the Company markets and distributes dehumidifiers and a
variety of decorative and home office lighting products. The Company believes
that its strong market position and success are attributable to its continuous
product innovation, engineering and manufacturing expertise, close customer
relationships, breadth of product offerings and reputation for quality. From
1993 to 1997, Holmes' net sales increased from $61.8 million to $192.2 million,
a compound annual growth rate of 32.8%. For the year ended December 31, 1997,
after giving pro forma effect to the Transactions, the Company would have had
net sales and net income of $192.2 million and $6.2 million, respectively.
The Company's products are sold to consumers through major retail channels,
including mass merchants, do-it-yourself home centers, warehouse clubs, hardware
stores and national drugstore chains. Representative customers in these channels
include Wal-Mart, Kmart, Target, Home Depot, Costco, BJ's Wholesale Club,
TruServ (formerly True Value and ServiStar) and Walgreens. These customers, in
the aggregate, accounted for 49.5% of the Company's net sales during fiscal year
1997. Wal-Mart, Kmart and Target represented 17.4%, 11.0% and 11.0%,
respectively, of net sales in fiscal year 1997. The Company believes that the
strength, scope and visibility of its retail account base provide a competitive
advantage with respect to brand recognition, shelf space and penetration of the
consumer market.
Holmes was founded in 1982 by its current Chief Executive Officer, Jordan
A. Kahn, an innovator in the home comfort market with over 30 years of industry
experience. Holmes opened its first manufacturing facility in China in 1989,
and currently operates two facilities in China where it manufactures its
products and electric motors for use in its products. The Company also produces
electric motors for manufacturers of other electric appliances. The Company's
vertically integrated manufacturing facilities provide the Company with control
over the production process and product quality. These facilities also enhance
operational flexibility and allow the Company to quickly respond to changes in
consumer demand and to specialized production needs. The Company maintains
offices in Hong Kong and Taiwan that are responsible for sourcing raw
materials, processing orders and shipping the Company's products. The Company
coordinates product development, marketing, sales and distribution from the
Company's Milford, Massachusetts headquarters. The Company markets and
distributes products primarily under the Holmes[RegTM] brand name.
The principal executive offices of the Company are located at 233 Fortune
Boulevard, Milford, Massachusetts 01757 and the telephone number is (508)
634-8050.
Competitive Strengths
The home comfort product market is highly competitive and fragmented. The
Company believes successful industry participants (i) deliver quality products
in a timely and cost effective manner, (ii) provide innovative product
introductions, (iii) offer a broad line of product categories across the entire
home comfort appliance market and (iv) provide value-added services to
retailers. Holmes believes that the following factors contribute to the
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<PAGE>
Company's position as a leader in the home comfort appliance market and serve
as the foundation for the Company's growth strategy:
Leading Market Share. Holmes believes that it has a leading U.S. market
share in each of the Company's four primary product categories: fans, heaters,
humidifiers and air purifiers. Management estimates that total retail sales of
these products in the United States exceeded $1.0 billion in 1996. Management
believes that the Company's leading market share provides Holmes with a
competitive advantage in terms of retail account relations and enhanced brand
awareness.
Innovation in Product Design. The Company has established a reputation for
innovation in product design, incorporating functional enhancements as well as
aesthetic improvements. Management believes that innovation in these areas has
contributed to the growth of the home comfort industry. In creating new
products, the Company seeks to develop product concepts and features not
offered in the marketplace, and which the Company can produce at strategic
price points. Holmes typically has introduced more than 20 new stock keeping
units ("SKUs") annually (excluding new color introductions of previous models)
to its primary home comfort product offerings. The Company's expenditures for
product development and tooling totaled $9.5 million for the year ended
December 31, 1997.
Product innovations by the Company include:
[bullet] Oscillating heater
[bullet] Warm mist humidifier
[bullet] Accutemp[RegTM] digital temperature control
[bullet] Oscillating window fan
[bullet] Air purifier with sound conditioning feature
[bullet] Twin ceramic heater
New products and product line extensions introduced since January 1, 1994
accounted for a majority of the Company's net sales during the year ended
December 31, 1997. Management believes product innovation will continue to
stimulate demand for the Company's products. In addition, management believes
that product innovations provide opportunities to earn higher gross margins for
both the Company and the retailer.
Strong Retailer Network. The Company has established strong relationships
with leading retailers in each of the major channels of retail distribution.
The Company's 25 largest accounts represented 70.1% of net sales in 1997, with
the three largest, Wal-Mart, Kmart and Target, representing 39.4% of net sales
in 1997. The Company believes that home comfort products provide retailers with
higher profit potential than many alternative product offerings. Management
believes that this profit potential, together with the Company's strong
relationships with its retail customers, has led many retailers to increase
shelf space for the Company's products. Over the years, Holmes has also
received a number of awards from its customers in recognition of the Company's
contribution to retailers' profitability and success, including Vendor of the
Year in 1996 from Target, True Value, Pamida and Venture Stores.
Focus on the Retailer and the Consumer. Holmes has established a
reputation among leading retailers for quality products, timely shipment and
value-added assistance in merchandising. The Company works with current and
potential retail customers to develop products at strategic price points that
meet consumer needs. Holmes also employs an in-house graphics team to develop
attractive and informative product packaging designed to educate the consumer
at the point of purchase. In addition, Holmes works closely with each retailer
to develop customized product displays, point-of-purchase signage and
educational materials. The Company also provides after-sale consumer services
such as a toll-free consumer information line.
Low Cost / High Quality Manufacturer. Management believes that Holmes is
both a low cost manufacturer and a quality leader in the home comfort industry.
The Company manufactures the majority of its products at its customized
production facilities in China. The Company believes that it has a cost
advantage as a result of its degree of vertical integration, purchasing power
and low labor costs. In addition, by operating its own vertically integrated
manufacturing facilities, Holmes has control over the quality of its products
from design through final distribution. Through rigorous control of the
manufacturing process, Holmes has established a strict quality control system
to ensure the highest quality of products.
Design and Engineering Expertise. Through its engineering expertise and
state-of-the-art technology, Holmes is able to rapidly and cost effectively
develop new products. The Company uses advanced CAD software in conjunction
with laser-based stereolithography to design and engineer new products. These
combined
2
<PAGE>
technologies allow the Company to design and produce prototypes of new products
quickly, thus enabling Holmes to accurately assess the feasibility, cost and
tooling requirements of new products before manufacturing the products. The
Company believes it is one of only a few U.S. manufacturers to employ
stereolithography technology and thereby enjoys a competitive advantage in the
design and rapid prototyping of new products and product line extensions. These
technologies also enhance the sales process by allowing customers to view
working samples of new products before they are tooled. The Company has reduced
the average time from product conception to market introduction from
approximately 20 months three years ago to approximately nine months currently.
Talented Senior Management Team with Significant Equity Ownership. Holmes
has an experienced and entrepreneurial management team, with an average of over
11 years of industry experience. The Company's Chief Executive Officer, Jordan
A. Kahn, founded the Company in 1982 and is recognized as an innovator in the
home comfort appliance industry. The Company's senior management team also
includes Stanley Rosenzweig (Chief Operating Officer), Gregory F. White
(Executive Vice President, Sales and Marketing) and Tommy Liu (Managing
Director of the Company's Far East operations). The Company's senior management
team owns an aggregate of approximately 25.7% of the Company's common stock.
Business Strategy
The Company's strategy is to achieve further growth in net sales,
profitability and cash flow by: (i) increasing sales of existing products; (ii)
introducing new product categories and product line extensions; and (iii)
expanding geographically. The Company intends to implement this strategy by
pursuing the following initiatives:
Further Penetrate Existing Distribution Channels. The Company believes
that it can further penetrate its existing distribution channels as a result of
favorable industry dynamics and the Company's strong relationships with mass
merchant retailers, the fastest growing segment in retail distribution. Holmes
currently sells to the largest, most sophisticated mass merchant retailers and
believes it is well suited to grow this business with both existing and new
customers. Management believes that mass merchants will continue to consolidate
their vendor base and focus on a smaller number of sophisticated suppliers that
can (i) provide a broad array of differentiated, quality products, (ii)
efficiently and consistently fulfill logistical requirements and volume demands
and (iii) provide full product support from design to point of sale and
after-market service with the consumer. Holmes believes that it is well
situated to capitalize on these trends.
Develop New Distribution Channels. The Company continues to develop new
channels of distribution by providing customized product offerings that appeal
to the specific needs of each channel. Since 1996, Holmes has successfully
marketed select products through an arrangement with the QVC electronic
retailing network. In addition, Holmes recently introduced a new line of
humidifiers and air purifiers, called Family Care[RegTM], to be marketed
through national drugstore chains. The Company has also partnered with Gerry
Baby Products to market the Company's products under the Gerry brand name and
expand into the juvenile products distribution channel.
Pursue Targeted Marketing Opportunities. As part of the Company's growth
strategy, the Company has established several strategic alliances in order to
promote awareness of the Company's products. For example, the Company has
established a marketing affiliation with the Allergy and Asthma Foundation of
America and has developed a strategic marketing partnership with the Brita
Products Company, a subsidiary of Clorox Company, to market a new humidifier
that integrates the Brita[RegTM] water filter. The Company has also entered
into a variety of cross-merchandising relationships with other manufacturers
including Stanley Tools, Toro, Vaseline and Benadryl.
Leverage Core Competencies to Expand Product Offerings. The Company
believes that its product development capabilities, established distribution
network, marketing skills and ability to identify customer needs uniquely
position it to successfully enter into new product categories within the
portable appliance industry, either through internal growth or selective
acquisitions. For example, in 1993, Holmes introduced a line of decorative and
home office lighting products. The Company believes that it can successfully
enter additional product categories based on the Company's core competencies
within the household and portable appliance industry. In addition to its core
appliance business, the Company designs, develops and sells electric motors to
original equipment manufacturers, including Frigidaire.
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<PAGE>
Expand into New Geographic Regions. The Company believes that the European
and Asian home comfort markets are underdeveloped and represent significant
growth opportunities. As a result, the Company has begun to focus on marketing
its products in these regions. The Company currently sells its products in
Europe and Asia on an original equipment manufacturer basis and, in August
1996, launched the sale of branded home comfort products in France.
In furtherance of its strategic objectives, the Company may from time to
time engage in discussions regarding mergers, acquisitions or other types of
business combination transactions with third parties in the consumer products
industry. The provisions of the Credit Facility permit the Company to make
acquisitions that satisfy certain criteria.
The Transactions
Prior to the closing of a series of transactions on November 26, 1997,
including the issuance of the Series A Notes, the Company operated as Holmes
Products Corp. ("Holmes U.S."), through which the Company conducted its
operations in the United States, and Holmes Products (Far East) Limited
("Holmes Far East"), through which the Company conducted its manufacturing and
sourcing operations in the Far East. Holmes U.S. and Holmes Far East were
indirect subsidiaries of the Pentland Group plc (together with its
subsidiaries, "Pentland"). In addition, Jordan A. Kahn, the founder of the
Company and the Company's President and Chief Executive Officer, owned a
minority interest in Holmes U.S. and Holmes Far East.
Pursuant to a Stock Purchase and Redemption Agreement, a Stock Purchase
Agreement and a Shareholders/Executives Agreement (the "Transactions
Agreements"), (i) Pentland and Mr. Kahn contributed their shares of Holmes Far
East to Holmes U.S., as a result of which Holmes Far East became a wholly owned
subsidiary of Holmes U.S., (ii) affiliates of Berkshire Partners LLC ("Berkshire
Partners"), certain members of the Company's senior management and certain other
investors purchased approximately $16.5 million of capital stock of Holmes U.S.
from the Company and approximately $9.7 million of capital stock of Holmes U.S.
from Mr. Kahn (collectively, the "Berkshire Equity Investment"), the proceeds of
which Holmes U.S. used to repay certain outstanding indebtedness, (iii) Mr. Kahn
and Pentland retained equity interests in Holmes U.S. with an implied value of
approximately $7.0 million and $1.8 million, respectively (valued on the basis
of the Berkshire Equity Investment), and (iv) Holmes U.S. used available cash,
the net proceeds from the Series A Notes and borrowings under a new $100.0
million senior credit facility (the "Credit Facility") to redeem a portion of
the capital stock of Holmes U.S. owned by Pentland, to repay certain outstanding
borrowings of the Company and to pay certain expenses of the transactions (the
transactions referred to in clauses (i) through (iv), including the issuance of
the Series A Notes and the initial borrowings under the Credit Facility, are
collectively referred to herein as the "Transactions").
As a result of the Transactions, the Company is currently owned
approximately 69.2% by Berkshire Partners and certain other investors,
approximately 25.7% by Mr. Kahn and other members of senior management and 5.1%
by Pentland. In addition, in connection with the Transactions, the Company
issued a warrant to Pentland to purchase 5% of the common stock of the Company,
which is exercisable upon the occurrence of certain liquidity events generally
occurring within two years following the closing of the Transactions. See "The
Transactions; Use of Proceeds."
4
<PAGE>
The following table sets forth the sources and uses of funds in connection
with the closing of the Transactions on November 26, 1997, certain of which
amounts are subject to a post-closing audit (in thousands):
<TABLE>
<S> <C>
Sources:
Available cash ............................................... $ 11,384
Credit Facility (1)(2) ....................................... 27,500
Senior Subordinated Notes .................................... 105,000
Berkshire Equity Investment (2)(3) ........................... 16,488
--------
Total cash sources to the Company .......................... 160,372
Berkshire Equity Investment (2)(4) ........................... 9,727
Equity value retained by existing stockholders (7) ........... 8,785
--------
Total sources .............................................. $178,884
========
Uses:
Repayment of existing indebtedness (5) ....................... $ 79,980
Redemption of Pentland equity (2) ............................ 62,058
Management bonuses (6) ....................................... 7,734
Estimated fees and expenses (6) .............................. 10,600
--------
Total cash uses by the Company ............................. 160,372
Purchase of equity by Berkshire from Mr. Kahn (2)(4) ......... 9,727
Equity value retained by existing stockholders (7) ........... 8,785
--------
Total uses ................................................. $178,884
========
</TABLE>
- ------------
(1) The Credit Facility provides for total availability of $100.0 million. See
"Description of Credit Facility."
(2) Subject to final working capital adjustments.
(3) Represents the portion of the Berkshire Equity Investment used to acquire
capital stock of Holmes U.S. from the Company.
(4) Represents the portion of the Berkshire Equity Investment used to acquire
capital stock of Holmes U.S. from Mr. Kahn.
(5) The indebtedness repaid in connection with the Transactions was classified
as current liabilities on the Company's balance sheet and bore interest,
as of November 26, 1997, at a weighted average rate of 7.93% per annum
exclusive of non-interest bearing amounts due to affiliates.
(6) Pursuant to the Transactions Agreements, the purchase price of the capital
stock from Pentland and Mr. Kahn was reduced by the amount of the
management bonuses and $1.8 million of the fees and expenses of the
Transactions.
(7) Valued on the basis of the Berkshire Equity Investment.
Berkshire Partners
Berkshire Partners is an active investor in the private equity market,
managing four investment funds capitalized with $725 million. The firm's
investment strategy is to seek companies that have attractive growth prospects
and to partner with talented management teams who retain meaningful ownership
stakes. Through its 13-year investment history, Berkshire Partners has
developed specific industry experience in several areas including various
manufacturing sectors, retailing and related services, surface transportation
and wireless communications. The firm's transactions have taken various forms
including leveraged buyouts, recapitalizations, privatizations, industry
consolidations and growth equity investments. Over the past decade, Berkshire
Partners has been an investor in 48 operating companies with combined revenues
in excess of $4 billion.
5
<PAGE>
The Series A Offering
<TABLE>
<S> <C>
The Series A Notes .................... The Series A Notes were sold by the Company in the Offering on
November 19, 1997, and were subsequently resold to (i) Qualified
Institutional Buyers (as defined herein) pursuant to Rule 144A under the
Securities Act, and (ii) outside the United States in reliance on Regulation
S under the Securities Act in a manner exempt from registration under
the Securities Act.
Registration Rights Agreement ......... In connection with the Offering, the Company entered into the
Registration Rights Agreement, which grants Holders of the Series A
Notes certain exchange and registration rights. The Exchange Offer is
intended to satisfy such exchange and registration rights, which generally
terminate upon the consummation of the Exchange Offer.
The Exchange Offer
Securities Offered .................... $105,000,000 in aggregate principal amount of 97/8% Senior
Subordinated Notes due 2007, Series B.
The Exchange Offer .................... $1,000 principal amount of the Exchange Notes in exchange for each
$1,000 principal amount of Series A Notes. As of the date hereof,
$105,000,000 in aggregate principal amount of Series A Notes are
outstanding. The Company will issue the Exchange Notes to Holders on
or promptly after the Expiration Date. The terms of the Exchange Notes
are substantially identical in all material respects (including principal
amount, interest rate and maturity) to the terms of the Series A Notes for
which they may be exchanged pursuant to the Exchange Offer, except that
the Exchange Notes are freely transferable by holders thereof (other than
as provided herein), and are not subject to any covenant regarding
registration under the Securities Act. See "The Exchange Offer." Other
than compliance with applicable federal and state securities laws,
including the requirement that the Registration Statement be declared
effective by the Commission, there are no material federal or state
regulatory requirements to be complied with in connection with the
Exchange Offer.
Interest Payments ..................... The Exchange Notes will bear interest from November 26 , 1997, the date
of consummation of the issuance of the Series A Notes, or the most recent
interest payment date to which interest on such Series A Notes has been
paid, whichever is later. Accordingly, Holders of Series A Notes that are
accepted for exchange will not receive interest on such Series A Notes
that is accrued but unpaid at the time of tender, but such interest will be
payable on the first interest payment date after the Expiration Date.
Minimum Condition ..................... The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Series A Notes being tendered for exchange.
Expiration Date ....................... 5:00 p.m., New York City time, on , 1998 unless the
Exchange Offer is extended, in which case the term "Expiration Date"
means the latest date and time to which the Exchange Offer is extended.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Exchange Date ................... The date of acceptance for exchange of the Series A Notes will be the
first business day following the Expiration Date.
Withdrawal Rights ............... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date by providing the Exchange Agent (as
defined) with a written or facsimile transmission of a notice of
withdrawal. See "The Exchange Offer--Withdrawal of Tenders." The
Company will determine if a withdrawal is effective. Any Series A Notes
withdrawn will be deemed not to have been validly tendered for purposes
of the Exchange Offer. Properly withdrawn Series A Notes may be
retendered. See "The Exchange Offer -- Withdrawal of Tenders."
Acceptance Of Series A Notes The Company will accept for exchange any and all Series A Notes that
And Delivery Of Exchange are properly tendered in the Exchange Offer prior to 5:00 p.m., New York
Offer Notes .................... City time, on the Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following the Expiration
Date. See "The Exchange Offer -- Terms of the Exchange Offer."
Conditions To The Exchange The Exchange Offer is subject to certain customary conditions, which
Offer .......................... may be waived by the Company. See "The Exchange Offer --
Conditions."
Procedures For Tendering Series A To tender pursuant to the Exchange Offer, a Holder must complete, sign
Notes .......................... and date the accompanying Letter of Transmittal, or a facsimile thereof,
have the signatures therein guaranteed if required by instruction 4 of the
Letter of Transmittal and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, or an Agent's message (as defined below)
in the case of a book-entry transfer, together with the Series A Notes and
any other required documentation to the Exchange Agent (as defined
herein) at the address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. See "The Exchange Offer -- Procedures
for Tendering" and "Plan of Distribution." By executing the Letter of
Transmittal, each Holder will represent to the Company that, among other
things, the Holder or the person receiving such Exchange Notes, whether
or not such person is the Holder, is acquiring the Exchange Notes in the
ordinary course of business and that neither the Holder nor any such other
person intends to participate or has any arrangement or understanding
with any person to participate in the distribution of such Exchange Notes.
In lieu of physical delivery of the certificates representing Series A Notes,
tendering Holders may transfer Series A Notes pursuant to the procedure
for book-entry transfer as set forth under "The Exchange Offer --
Procedures for Tendering."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Special Procedures For Beneficial Any beneficial owner whose Series A Notes are registered in the name
Owners ................................. of a broker, commercial bank, trust company or other nominee and who
wishes to tender in the Exchange Offer should contact such registered
holder promptly and instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner wishes to tender on
such beneficial owner's own behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering the
Series A Notes, either make appropriate arrangements to register
ownership of the Series A Notes in such beneficial owner's name or
obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time. See "The
Exchange Offer -- Procedures for Tendering."
Guaranteed Delivery Procedures .......... Holders of Series A Notes who wish to tender their Series A Notes and
whose Series A Notes are not immediately available or who cannot
deliver their Series A Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to the Exchange Agent
(or comply with the requirements for book-entry transfer) prior to the
Expiration Date must tender their Series A Notes according to the
guaranteed delivery procedures set forth in "The Exchange Offer --
Guaranteed Delivery Procedures."
Federal Income Tax Consequences ......... The issuance of the Exchange Notes to Holders pursuant to the terms set
forth in this Prospectus will not constitute an exchange for federal income
tax purposes. Consequently, no gain or loss would be recognized by
Holders upon receipt of the Exchange Notes. See "The Exchange Offer
-- Certain Federal Income Tax Consequences of the Exchange Offer."
Use Of Proceeds ......................... There will be no proceeds to the Company from the exchange of Series
A Notes pursuant to the Exchange Offer.
Exchange Agent .......................... State Street Bank and Trust Company is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange Offer. See "The
Exchange Offer -- Exchange Agent."
</TABLE>
8
<PAGE>
Summary of Terms of the Exchange Notes
The form and terms of the Exchange Notes are the same as the form and
terms of the Series A Notes (which they replace) except that (i) the Exchange
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof, and (ii) the holders of Exchange
Notes generally will not be entitled to further registration rights under the
Registration Rights Agreement, which rights generally will be satisfied when
the Exchange Offer is consummated. The Exchange Notes will evidence the same
debt as the Series A Notes and will be entitled to the benefits of the
indenture pursuant to which the Series A Notes were issued (the "Indenture").
See "Description of the Exchange Notes."
<TABLE>
<S> <C>
Securities Offered .......... $105.0 million aggregate principal amount of 9 7/8% Senior Subordinated
Notes due 2007, Series B.
Maturity .................... November 15, 2007.
Interest .................... The Exchange Notes will bear interest at the rate of 9 7/8% per annum,
payable semi-annually in arrears on May 15 and November 15 of each
year, commencing on May 15, 1998.
Guarantees .................. The Exchange Notes will be guaranteed by all of the Company's existing
Domestic Restricted Subsidiaries (the "Guarantors"), and all Domestic
Restricted Subsidiaries created or acquired by the Company in the future.
The Guarantors do not currently have any material assets or operations.
Ranking ..................... The Exchange Notes will be general unsecured obligations of the
Company and will be subordinated in right of payment to all existing and
future Senior Debt of the Company. As of December 31, 1997, the
Company had $30.4 million of Senior Debt outstanding, including
outstanding borrowings under the Credit Facility. In addition, the
Company had $71.5 million of additional borrowings available under the
Credit Facility. The Company is in compliance with the financial
covenants of the Credit Facility. Pursuant to the covenants governing the
Exchange Notes, the Company would have been permitted to incur not
less than an additional $15 million of Senior Debt at December 31, 1997.
See "Description of Credit Facility" and "Description of the Exchange
Notes."
Optional Redemption ......... Except as set forth below, the Exchange Notes will not be redeemable
at the option of the Company prior to November 15, 2002. Thereafter,
the Exchange Notes will be subject to redemption at any time at the option
of the Company, in whole or in part, at the redemption prices set forth
herein, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the redemption date. In addition, at any time prior to November
15, 2000, the Company may redeem up to an aggregate of $33.0 million
in principal amount of Exchange Notes at a redemption price equal to
109.875% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the redemption date,
with the net cash proceeds of one or more sales of Equity Interests (other
than Disqualified Stock) of the Company, provided that at least $72.0
million in principal amount of Exchange Notes remains outstanding
immediately following each such redemption.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Change of Control ........... In the event of a Change of Control, the Company will be required to
make an offer to each holder of Exchange Notes to repurchase all or any
part of such holder's Exchange Notes at a repurchase price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the repurchase date. If the
Company is required to make such an offer pursuant to a Change of
Control, there can be no assurance that the Company will have sufficient
funds available to consummate the repurchase of the Exchange Notes.
Additionally, the terms of any outstanding senior indebtedness could
preclude the Company from fulfilling its repurchase obligations.
Covenants ................... The Indenture contains certain covenants that, among other things, limit
the ability of the Company and its Restricted Subsidiaries (as defined)
to incur additional Indebtedness (as defined), pay dividends, repurchase
Equity Interests or make other Restricted Payments (as defined), create
Liens (as defined), enter into transactions with Affiliates (as defined), sell
assets or enter into certain mergers and consolidations. See "Description
of the Exchange Notes."
Registration Rights ......... The Registration Rights Agreement provides that if (i) the Issuer is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) in certain
circumstances, a Holder notifies the Company prior to the 20th day
following consummation of the Exchange Offer (a) that it is prohibited by
law or Commission policy from participating in the Exchange Offer or (b)
that it may not resell the Exchange Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not appropriate
or available for such resales or (c) that it is a broker-dealer and owns Series
A Notes acquired directly from the Issuer or an affiliate of the Issuer, the
Issuer will file with the Commission a shelf registration statement (the "Shelf
Registration Statement") to cover resales of the Series A Notes by the
Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement.
The interest rate on the Series A Notes is subject to increase under certain
circumstances if the Company is not in compliance with its obligations
under the Registration Rights Agreement. See "Description of the
Exchange Notes -- Registration Rights; Liquidated Damages."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Lack Of Prior Market For The The Exchange Notes will be new securities for which there is currently
Exchange Notes ............ no established trading market. The Company does not intend to apply for
listing of the Exchange Notes on any national securities exchange or for
quotation of the Exchange Notes on any automated dealer quotation
system. The Company has been advised by the Initial Purchasers that they
presently intend to make a market in the Exchange Notes, although they
are under no obligation to do so and may discontinue any market-making
activities at any time without notice. Accordingly, no assurance can be
given as to the liquidity of the trading market for the Exchange Notes or
that an active public market for the Exchange Notes will develop. If an
active trading market for the Exchange Notes does not develop, the
market price and liquidity of the Exchange Notes may be adversely
affected. If the Exchange Notes are traded, they may trade at a discount
from their initial offering price, depending on prevailing interest rates,
the market for similar securities, the performance of the Company and
certain other factors. See "Risk Factors -- Absence of Public Market for
the Exchange Notes."
</TABLE>
Risk Factors
Holders of the Series A Notes should carefully consider the matters set
forth under "Risk Factors," as well as the other information and financial
statements and data included in this Prospectus, prior to deciding to tender
their Series A Notes in the Exchange Offer.
11
<PAGE>
Summary Financial Data
The following summary historical financial data as of December 31, 1997
and for the years ended December 31, 1995, 1996 and 1997 have been derived from
the audited Consolidated Financial Statements of the Company included elsewhere
in this Prospectus. The summary unaudited pro forma data for the year ended
December 31, 1997 have been derived from the Unaudited Pro Forma Condensed
Financial Statements included elsewhere in this Prospectus. The unaudited pro
forma data do not purport to represent what the Company's results of operations
actually would have been if the transactions referred to therein had been
consummated for the period indicated, or what such results will be for any
future period. The following information should be read in conjunction with
"Selected Financial Data," "Unaudited Pro Forma Condensed Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Consolidated Financial Statements,
including the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
Pro Forma
1995 1996 1997 1997(1)
------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales ................................................. $ 178,132 $ 194,331 $ 192,153 $ 192,153
Cost of goods sold ........................................ 141,226 145,915 136,740 134,906
--------- --------- ---------- ----------
Gross profit ............................................. 36,906 48,416 55,413 57,247
Selling, general and administrative expenses .............. 22,500 27,308 36,530(2) 30,029
Product development expenses .............................. 3,154 5,520 5,463 5,463
--------- --------- ------------ ----------
Operating profit ......................................... 11,252 15,588 13,420 21,755
Interest expense .......................................... 5,231 6,570 7,303 14,551
Other income, net ......................................... 349 398 151 151
--------- --------- ------------ ----------
Income before income taxes and minority interest ......... 6,370 9,416 6,268 7,355
Income tax expense ........................................ 2,614 2,787 2,196 1,184
Minority interest in net income of majority-owned
subsidiaries(3) .......................................... 518 408 225 --
--------- --------- ------------ ----------
Net income ............................................... $ 3,238 $ 6,221 3,847 $ 6,171
========= ========= ============ ==========
Other Data:
EBITDA(4) ................................................. $ 16,098 $ 22,774 20,837 $ 29,172
EBITDA margin(4) .......................................... 9.0% 11.7% 10.8% 15.2%
Depreciation and amortization ............................. $ 4,509 $ 6,867 $ 7,473 $ 7,473
Capital expenditures ...................................... 9,706 8,594 5,815 5,815
Cash flows from operating activities ...................... 5,524 2,802 (46,373)(5) (46,373)
Cash flows from investing activities ...................... (9,706) (8,594) (6,266) (6,266)
Cash flows from financing activities ...................... 5,972 6,886 53,318 53,318
Ratio of EBITDA to cash interest expense(6) ............... 2.2x
Ratio of total debt to EBITDA ............................. 4.6x
Ratio of earnings to fixed charges(7) ..................... 2.1x 2.2x 1.8x 1.5x
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1997
------------------------
(In thousands)
<S> <C>
Balance Sheet Data:
Cash and cash equivalents ........... $ 5,141
Working capital ..................... 78,318
Total assets ........................ 135,165
Total long-term debt ................ 134,294
Total stockholders' deficit ......... (24,991)
</TABLE>
(1) The unaudited pro forma income statement data gives effect to the
Transactions and the repurchase of the minority interest in one of the
Company's subsidiaries as if they had occurred as of January 1, 1997. See
"Unaudited Pro Forma Condensed Financial Statements."
(2) Includes approximately $6.0 million of incremental incentive compensation
expense which was paid to certain executives in conjunction with the
Transactions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Management--Employment
Agreements."
(3) In May and June 1997, the Company repurchased the shares held by the 30%
minority stockholders in one of the Company's subsidiaries for a total of
$900,000. The summary unaudited pro forma results of operations exclude
the minority interest in net income of majority-owned subsidiaries.
(4) EBITDA represents income before interest expense, income tax expense,
depreciation and amortization and the minority interest in net income of
majority-owned subsidiaries. EBITDA margin represents EBITDA as a
percentage of net sales. EBITDA is presented because it is a widely
accepted measure to provide information regarding a company's ability to
service and/or incur debt. Management considers EBITDA particularly
relevant for a highly-leveraged company such as the Company, where net
income is significantly impacted by interest expense. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
operations or other income or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity. Additionally, the Company's calculation of
EBITDA may differ from that performed by other companies, and thus the
amounts disclosed for EBITDA may not be directly comparable to those
disclosed by other companies.
(5) Includes the repayment of approximately $43.4 million of trade acceptances
and $10.0 million of amounts due to affiliates in conjunction with the
Transactions. See "The Transactions; Use of Proceeds."
(6) Cash interest expense is defined as interest expense less amortization of
debt issuance costs.
(7) For purposes of determining the ratio of earnings to fixed charges,
earnings represent income before income taxes and minority interest, plus
fixed charges. Fixed charges consist of interest expense on all
indebtedness plus a portion of rental payments on operating leases that is
considered representative of the interest factor.
13
<PAGE>
RISK FACTORS
In addition to the other information set forth and incorporated by
reference herein, Holders of Series A Notes should carefully consider the
following information in evaluating the Company and its business before
deciding to tender the Series A Notes in the Exchange Offer. The information
contained herein includes forward-looking statements that involve a number of
risks and uncertainties. A number of factors, including those discussed below,
could cause results to differ materially from those anticipated by such
forward-looking statements. In addition, such forward-looking statements are
necessarily dependent upon assumptions, estimates and data that may be
incorrect or imprecise. Accordingly, any forward-looking statements included
herein do not purport to be predictions of future events or circumstances and
may not be realized.
Substantial Leverage
The Company is highly leveraged. As of December 31, 1997, the Company had
total consolidated indebtedness of approximately $135.4 million, including
approximately $30.4 million of Senior Debt, and a total stockholders' deficit
of $25.0 million. See "Capitalization" and the Company's Consolidated Financial
Statements. Assuming the same outstanding borrowings and interest rate on the
Credit Facility as existed at December 31, 1997, the Company's estimated debt
service requirement for 1998 would be approximately $13.8 million. The Company
may incur additional indebtedness in the future, including through available
borrowings under the Credit Facility, subject to the satisfaction of certain
financial tests. See "Description of Credit Facility" and "Description of the
Exchange Notes -- Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock."
The degree to which the Company is leveraged could have important
consequences to the holders of the Exchange Notes, including the following: (i)
the Company's ability to obtain additional financing in the future, or to
obtain financing at reasonable rates, for working capital, capital
expenditures, acquisitions or other purposes may be limited or impaired; (ii)
the Company's flexibility with respect to certain matters will be limited by
covenants contained in the Indenture and the Credit Facility which will limit
the ability of the Company and its subsidiaries to incur additional
indebtedness, grant liens, pay dividends, redeem capital stock, prepay certain
subordinated indebtedness and enter into mergers and other similar
transactions; and (iii) the Company's degree of leverage may make it more
vulnerable to economic downturns, limit its ability to pursue other business
opportunities and reduce its flexibility in responding to changing business and
economic conditions.
The Company's ability to generate cash for the repayment of debt,
including the Exchange Notes, will be dependent upon the future performance of
the Company's business, which will in turn be subject to financial,
competitive, economic and other factors affecting the operations of the
Company, including certain factors beyond its control.
Subordination of the Exchange Notes
The Exchange Notes will be unsecured obligations of the Company and will
be subordinated in right of payment to all current and future Senior Debt of
the Company, including all indebtedness of the Company under the Credit
Facility. In addition, the guarantees of the Exchange Notes will be
subordinated to all current and future Senior Debt of the Guarantors, including
the Guarantors' obligations under the Credit Facility. See "Description of the
Exchange Notes -- Subordination." As of December 31, 1997, the Company had
approximately $30.4 million of Senior Debt outstanding, including outstanding
borrowings under the Credit Facility. In addition, the Company had $71.5
million of additional borrowings available under the Credit Facility. As a
result of the subordination provisions of the Indenture, in the event of a
liquidation or insolvency involving the Company, holders of the Exchange Notes
may recover less ratably than creditors of the Company who are holders of
Senior Debt. The Indenture will permit the Company to incur additional Senior
Debt, subject to certain financial tests. See "Description of the Exchange
Notes -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
Product Liability
The Company faces exposure to product recalls and product liability claims
in the event that its products are alleged to have manufacturing or safety
defects or to have resulted in injury or other adverse effects. Although the
Company maintains product liability insurance in amounts that management
believes are reasonable, there can be no assurance that the Company will be
able to maintain its product liability insurance on acceptable terms, if at
14
<PAGE>
all, in the future or that product liability claims will not exceed the amount
of the Company's insurance coverage. The Company does not maintain product
recall insurance. As a result, there can be no assurance that product recalls
and product liability claims will not have a material adverse effect on the
Company's financial condition or results of operations. See "Business -- Legal
Proceedings."
Dependence on Major Customers
The three largest retail customers of the Company, Wal-Mart, Kmart and
Target, each accounted for over 10%, and in the aggregate 39.4%, of the
Company's net sales in 1997. The Company does not have long-term agreements
with its major customers, and purchases are generally made through the use of
individual purchase orders. The absence of long-term agreements with the
Company's major customers means that such customers have no minimum purchase
requirements and may cease doing business with the Company at any time. A
significant reduction in purchases by any of these customers could have a
material adverse effect on the Company's business. See "Business -- Sales and
Marketing."
Retail Industry
The Company's products are sold to consumers through major retail
channels, including mass merchants, do-it-yourself home centers, warehouse
clubs, hardware stores and national drugstore chains. As a result, the
Company's business and financial results fluctuate with the financial condition
of its retail customers and the retail industry generally. Certain of the
Company's retail customers have filed for bankruptcy protection in recent
years. Management monitors and evaluates the credit status of its customers and
attempts to adjust sales terms as appropriate. Additionally, the Company has
entered into agreements whereby receivables from certain pre-determined
customers, up to specified limits, can be sold in the event the customer
defaults on payment. Despite these efforts, a bankruptcy filing by a
significant customer could have a material adverse affect on the Company. See
Note 12 of Notes to Consolidated Financial Statements.
Risks of Non-U.S. Operations
The Company manufactures a significant portion of its products, and
substantially all of the motors used in the Company's products, in China. The
Company also sources a significant proportion of the raw materials used in the
manufacture of its products outside the United States. In addition, the
Company's strategy includes increasing sales to customers outside of the United
States. International operations are subject to risks including labor unrest,
political instability, restrictions on transfers of funds, import and export
duties and quotas, domestic and international customs and tariffs, unexpected
changes in regulatory environments, difficulty in obtaining distribution and
support and potentially adverse tax consequences. Labor in China has
historically been readily available at relatively low cost to the Company as
compared to labor costs applicable in other nations. China has experienced
rapid social, political and economic change in recent years. There can be no
assurance that labor will continue to be available to the Company in China at
costs consistent with historical levels. A substantial increase in labor costs
in China could have a material adverse effect on the Company. Although China
currently enjoys "most favored nation" trading status with the United States,
the United States government has in the past proposed to revoke such status and
to impose higher tariffs on products imported from China in response to human
rights abuse in China and the failure by the Chinese government to protect U.S.
intellectual property rights in China. There can be no assurance that any of
the foregoing factors will not have a material adverse effect on the Company's
ability to increase or maintain its international sales or importing
activities, its financial condition or its results of operations.
The Company's international operations also subject the Company to
currency exchange rate risk. In particular, in recent months, a number of Asian
countries have experienced currency devaluations and other turbulent economic
conditions. Although the Company's international operations have not
historically been impacted by changes in currency exchange rates, changes in
currency exchange rates, as well as other economic conditions outside the
United States, could have an adverse effect on the Company's financial
condition or results of operations.
Risks Associated with Development of New Products
The Company believes that its future success will depend in part upon its
ability to continue to make innovations in its existing products and to
develop, manufacture and market new products. There can be no assurance that
the Company will be successful in the introduction, marketing and manufacture
of any of its new products
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or product innovations or that the Company will be able to develop and
introduce in a timely manner new products or innovations to its existing
products which satisfy customer needs or achieve market acceptance. The failure
to develop products and introduce them successfully and in a timely manner
could have a material adverse effect on the Company's financial condition or
results of operations.
Dependence on Manufacturing Facilities
A substantial portion of the Company's net sales are derived from the sale
of products manufactured or assembled at the Company's two manufacturing
facilities located in China. One of the facilities manufactures substantially
all of the motors utilized in the Company's products. The second facility
manufactures many of the remaining components and assembles most of the
Company's products. These manufacturing facilities are subject to hazards that
could result in material damage to any such facility. Any such damage to either
facility, or prolonged interruption in the operations of either facility for
repairs, labor disruption or other reasons, could have a material adverse
effect on the Company's financial condition and results of operations. See
"Business -- Manufacturing."
Cost and Availability of Raw Materials
Plastic resin, copper wire and corrugated paper are significant raw
materials used in the manufacture and packaging of the Company's products.
Because the primary resource used in manufactured plastics is petroleum, the
cost and availability of plastic for use in the Company's products varies to a
great extent with the price of petroleum. In addition, copper wire and
corrugated paper prices can fluctuate significantly. The Company's inability to
acquire sufficient raw materials at reasonable prices would affect the
Company's ability to maintain its margins and could result in a material
adverse effect on the Company's financial condition or results of operations.
Seasonality
Sales of the Company's products are highly seasonal, and counter-seasonal
weather can adversely affect the Company's results of operations. Sales of the
Company's fans and dehumidifiers to retailers are highest in the first and
second quarters of each year, with an average of 84.1% and 78.7% of gross sales
of fans and dehumidifiers, respectively, generated during the first and second
quarters in each of the last three years. Sales of the Company's heaters,
humidifiers and air purifiers to retailers are highest in the third and fourth
quarters of each year, with an average of 95.4%, 89.9% and 66.2% of gross sales
of heaters, humidifiers and air purifiers, respectively, generated during the
third and fourth quarters in each of the last three years. Counter-seasonal
summer weather could adversely affect sales of fans and dehumidifiers and could
result in increased returns of these products to the Company by retailers in
subsequent quarters and in lower purchases by retailers in the following year
due to high inventory levels. Similarly, counter-seasonal winter weather could
adversely affect sales of heaters and humidifiers and could result in increased
returns in subsequent quarters and in lower purchases by retailers in the
following year. Sales of air purifiers are less subject to seasonal weather
patterns, but follow the seasonal pattern of the retail industry generally,
with highest sales to retailers in the third and fourth quarter in anticipation
of the Christmas selling season. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality."
Competition
The markets for the Company's products are highly competitive. The Company
believes that competition is based upon several factors, including price,
access to retail shelf space, product features and enhancements, brand names,
new product introductions, marketing support and distribution systems. The
Company competes with established companies, a number of which have
substantially greater facilities, personnel, financial and other resources than
those of the Company. The Company also competes with importers and foreign
manufacturers of unbranded products. In addition, the consumer home comfort
product industry has recently experienced some consolidation of existing
manufacturers, each generating annual sales which are significantly higher than
those of the Company. Large consumer product companies have from time to time
entered the market for consumer home comfort products and may do so in the
future. There can be no assurance that the Company will be able to compete
successfully against current and future sources of competition or that the
competitive pressures faced by the Company will not adversely affect its
profitability or financial performance. See "Business -- Competition."
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Dependence on Key Personnel
The continued success of the Company will depend significantly on the
efforts and abilities of its key executive officers, including Jordan A. Kahn,
its President and Chief Executive Officer, Stanley Rosenzweig, its Chief
Operating Officer, Gregory F. White, its Executive Vice President, Sales and
Marketing, and Tommy Liu, Managing Director of Holmes' Far East operations. The
loss of the services of one or more of these individuals could have a material
adverse effect on the business of the Company. In connection with the
Transactions, Messrs. Kahn, Rosenzweig, White and Liu have entered into new
employment agreements with Holmes which provide for their continued employment
in their present capacities. See "Management." The Company maintains
"key-person" life insurance coverage on Mr. Kahn, the beneficiary of which is
a trust for the benefit of Mr. Kahn's family.
Control by Principal Stockholders
Berkshire Partners, certain members of the Company's senior management,
including Jordan A. Kahn, and certain other investors beneficially own
approximately 94.9% of the Company's outstanding common stock. These
stockholders have the ability to elect or remove any or all of the Company's
directors and to control substantially all corporate actions. The interests of
the Company's stockholders may conflict with the interests of the holders of
the Exchange Notes in certain circumstances. See "Share Ownership."
Restrictions on Company under the Credit Facility and the Indenture
The Credit Facility and the Indenture impose restrictions that affect,
among other things, the ability of the Company 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. The Credit Facility also requires the Company to maintain specified
financial ratios and meet certain financial tests. The ability of the Company
to continue to comply with the covenants and restrictions may be affected by
events beyond its control. The breach of any of these covenants or restrictions
would result in a default under the Credit Facility and the Indenture, in which
case the lenders under the Credit Facility could elect to declare all amounts
borrowed thereunder, together with accrued interest, to be due and payable,
foreclose on the assets securing the Credit Facility or cease to provide
additional revolving loans or letters of credit, which could have a material
adverse effect on the Company. In the event of a default under the Credit
Facility, the subordination provisions of the Indenture may also restrict
payments with respect to the Exchange Notes. See "--Subordination of the
Exchange Notes," "Description of Credit Facility" and "Description of the
Exchange Notes."
Change of Control
In the event of a Change of Control, the Company will be required to make
an offer to repurchase all or any part of each holder's Exchange Notes at a
repurchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the repurchase
date. The source of funds for any such repurchase would be the Company's
available cash or cash generated from operations or other sources, including
borrowings, sales of equity or funds provided by a new controlling person.
However, there can be no assurance that sufficient funds will be available at
the time of any Change of Control to make any required repurchases of the
Exchange Notes tendered. In addition, the Credit Facility prohibits the Company
from making any such required repurchases. The failure of the Company to offer
to repurchase Exchange Notes, or to repurchase Exchange Notes tendered,
following a Change of Control will result in a default under the Indenture,
which could lead to a cross-default under the Credit Facility and under the
terms of other indebtedness of the Company. In such a case, the subordination
provisions of the Indenture may limit the ability of the holders of the
Exchange Notes to receive payment in respect of their Notes. See "Description
of Credit Facility," "Description of the Exchange Notes -- Subordination" and "
- -- Repurchase of the Exchange Notes at the Option of Holders -- Change of
Control."
Subsidiary Guarantees
The Exchange Notes are guaranteed fully, unconditionally and jointly and
severally by the Company's two Domestic Restricted Subsidiaries. The Guarantors
currently do not have any material assets or operations. The Company conducts a
substantial portion of its operations, including its manufacturing operations,
through foreign subsidiaries. These subsidiaries will not be guarantors of the
Exchange Notes.
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Absence of Public Market for the Exchange Notes
The Exchange Notes are being offered to the holders of the Series A Notes.
The Series A Notes were offered and sold in November 1997 (i) to "Qualified
Institutional Buyers" (as defined in Rule 144A under the Securities Act) and
(ii) outside the United States in reliance on Regulation S under the Securities
Act and are eligible for trading in the Private Offering, Resales and Trading
through Automated Linkages ("PORTAL") market.
The Exchange Notes will be a new class of securities for which there
currently is no established trading market. Although the Exchange Notes will
generally be permitted to be resold or otherwise transferred by nonaffiliates
of the Company without compliance with the registration requirements under the
Securities Act, the Company does not intend to apply for listing of the
Exchange Notes on any national securities exchange or for quotation of the
Exchange Notes on any automated dealer quotation system. Although the Initial
Purchasers have informed the Company that they currently intend to make a
market in the Exchange Notes, the Initial Purchasers are not obligated to do
so, and any such market-making may be discontinued at any time without notice.
The liquidity of any market for the Exchange Notes will depend upon the number
of holders of the Exchange Notes, the interest of securities dealers in making
a market in the Exchange Notes and other factors. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Exchange
Notes. If an active trading market for the Exchange Notes does not develop, the
market price and liquidity of the Exchange Notes may be adversely affected. If
the Exchange Notes are traded, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for
similar securities, the performance of the Company and certain other factors.
The liquidity of, and trading markets for, the Exchange Notes may also be
adversely affected by general declines in the market for non-investment grade
debt. Such declines may adversely affect the liquidity of, and trading markets
for, the Exchange Notes independent of the financial performance of, or
prospects for, the Company.
Fraudulent Conveyance Matters
The obligations of the Company under the Exchange Notes, and the
application of the net proceeds therefrom in connection with the Transactions,
may be subject to review under various laws for the protection of creditors,
including federal and state fraudulent conveyance and fraudulent transfer laws,
if a bankruptcy case or other lawsuit (including in circumstances where
bankruptcy is not involved) is commenced by or on behalf of any creditor of the
Company or a representative of any of the Company's creditors. If a court in
such case or lawsuit were to find that, at the time the Company issued the
Exchange Notes or at the time of the Transactions, the Company (i) intended to
hinder, delay or defraud any existing or future creditor or (ii) did not
receive fair consideration or reasonably equivalent value for issuing the
Exchange Notes or in connection with the Transactions, and the Company either
(a) was insolvent or rendered insolvent by reason thereof, (b) was engaged or
was about to engage in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (c) intended to
or believed that it would incur debts beyond its ability to pay such debts as
they matured or became due, such court could void the Company's obligations
under the Exchange Notes, subordinate the Exchange Notes to other indebtedness
of the Company, direct that holders of the Exchange Notes return any amounts
paid thereunder to the Company or to a fund for the benefit of its creditors or
take other action detrimental to the holders of the Exchange Notes.
The measure of insolvency for purposes of the foregoing will vary
depending upon the law of the jurisdiction being applied. Generally, however, a
company will be considered insolvent at a particular time if the sum of its
debts, including contingent liabilities, at that time is greater than the
then-fair value of its assets or if the fair saleable value of its assets at
that time is less than the amount that would be required to pay its probable
liability on its existing debts as they become absolute and mature. There can
be no assurance, however, as to what standard a court would apply to evaluate
the parties' intent or to determine whether the Company was insolvent at the
time of, or rendered insolvent upon consummation of, the Transactions or that,
regardless of the standard, a court would determine that the Company was
insolvent at the time of, or rendered insolvent upon consummation of, the
Transactions.
The Company's obligations under the Exchange Notes will be guaranteed by
the Guarantors, and the guarantees of the Exchange Notes also may be subject to
review under various laws for the protection of creditors, including federal
and state fraudulent conveyance and fraudulent transfer laws, if a bankruptcy
case or a lawsuit (including in circumstances where bankruptcy is not involved)
is commenced by or on behalf of any creditor of a Guarantor or a representative
of any such creditors. In such a case, the analysis set forth above would
generally apply, except that the Guarantees could also be subject to the claim
that, since the guarantees were incurred for the benefit of the Company (and
only indirectly for the benefit of the Guarantors), the obligations of the
Guarantors thereunder were incurred for less than reasonably
18
<PAGE>
equivalent value or fair consideration. A court could void a Guarantor's
obligation under its guarantee of the Exchange Notes, subordinate the guarantee
to other indebtedness of a Guarantor, direct that holders of the Exchange Notes
return any amounts paid under a guarantee to the relevant Guarantor or to a
fund for the benefit of its creditors, or take other action detrimental to the
holders of the Exchange Notes.
Restrictions on Transfer
The Series A Notes were offered and sold by the Company in a private
offering exempt from registration pursuant to the Securities Act and have been
resold pursuant to Rule 144A and Regulation S and other exemptions under the
Securities Act. As a result, the Series A Notes may not be reoffered or resold
by purchasers except pursuant to an effective registration statement under the
Securities Act or pursuant to an applicable exemption from such registration,
and the Series A Notes are legended to restrict transfer as aforesaid. Each
Holder (other than any Holder who is an affiliate or promoter of the Company)
who duly exchanges Series A Notes for Exchange Notes in the Exchange Offer will
receive Exchange Notes that are freely transferable under the Securities Act.
Holders who participate in the Exchange Offer should be aware, however, that if
they accept the Exchange Offer for the purpose of engaging in a distribution,
the Exchange Notes may not be publicly reoffered or resold without complying
with the registration and prospectus delivery requirements of the Securities
Act. As a result, each Holder accepting the Exchange Offer will be deemed to
have represented, by its acceptance of the Exchange Offer, that it acquired the
Exchange Notes in the ordinary course of business and that it is not engaged
in, and does not intend to engage in, a distribution of the Exchange Notes. If
existing Commission interpretations permitting free transferability of the
Exchange Notes following the Exchange Offer are changed prior to consummation
of the Exchange Offer, the Company will use its best efforts to register the
Series A Notes for resale under the Securities Act. See "Prospectus Summary --
The Exchange Offer" and "Description of the Exchange Notes Registration Rights;
Liquidated Damages."
The Series A Notes currently may be sold pursuant to the restrictions set
forth in Rule 144A, Rule 501(a)(1), (2), (3) or (7) or Regulation S under the
Securities Act or pursuant to another available exemption under the Securities
Act without registration under the Securities Act. To the extent that Series A
Notes are tendered and accepted in the Exchange Offer, the trading market for
the untendered and tendered but unaccepted Series A Notes could be adversely
affected.
Exchange Offer Procedures
Issuance of the Exchange Notes for Series A Notes pursuant to the Exchange
Offer will be made only after timely receipt by the Exchange Agent of such
Series A Notes, a properly completed, duly executed Letter of Transmittal and
all other required documents. Therefore, Holders desiring to tender their
Series A Notes in exchange for Exchange Notes should allow for sufficient time
to ensure timely delivery. The Company is under no duty to give notification of
defects or irregularities with respect to the tenders of Series A Notes for
exchange. Any Series A Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer, the registration rights under the
Registration Rights Agreement generally will terminate. In addition, any Holder
who tenders pursuant to the Exchange Offer for the purpose of participating in
a distribution of the Exchange Notes may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale. Each broker-dealer that receives Exchange Notes for its own account in
exchange for Series A Notes, where such Series A Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "The Exchange Offer."
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes what the Company
believes are the material terms of the Exchange Offer, including those set
forth in the Letter of Transmittal distributed with this Prospectus. This
summary is qualified in its entirety by reference to the full text of the
documents underlying the Exchange Offer, copies of which are filed as exhibits
to the Registration Statement of which this Prospectus is a part, and are
incorporated by reference herein.
Purpose and Effect of the Exchange Offer
In connection with the sale of the Series A Notes pursuant to the Purchase
Agreement, dated November 19, 1997 (the "Purchase Agreement"), among the
Company, the Guarantors and the Initial Purchasers, the Initial Purchasers
became entitled to the benefits of the Registration Rights Agreement, dated as
of November 26, 1997, among the Company, the Guarantors and the Initial
Purchasers (the "Registration Rights Agreement").
Under the Registration Rights Agreement, the Company and the Guarantors
agreed to (a) file a registration statement in connection with a registered
exchange offer within 60 days after November 26, 1997, the date the Series A
Notes were issued (the "Issue Date"), (b) use best efforts to cause such
registration statement to become effective under the Securities Act within 120
days of the Issue Date, (c) use best efforts to keep such registration
statement effective until the closing of the Exchange Offer and (d) use best
efforts to cause such registered Exchange Offer to be consummated within 30
days after the effective date of such registration statement. Within the
applicable time periods, the Company will endeavor to register under the
Securities Act all of the Exchange Notes pursuant to a registration statement
under which the Company will offer each Holder of Series A Notes the
opportunity to exchange any and all of the outstanding Series A Notes held by
such Holder for Exchange Notes in an aggregate principal amount equal to the
aggregate principal amount of Series A Notes tendered for exchange by such
Holder. Subject to limited exceptions, the Exchange Offer being made hereby, if
commenced and consummated within such applicable time periods, will satisfy
those requirements under the Registration Rights Agreement. In such event, the
Series A Notes would remain outstanding and would continue to accrue interest,
but would not retain any rights under the Registration Rights Agreement.
Holders of Series A Notes seeking liquidity in their investment would have to
rely on exemptions to registration requirements under the securities laws,
including the Securities Act. A copy of the Registration Rights Agreement has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. The term "Holder" with respect to the Exchange Offer means any
person in whose name the Series A Notes are registered on the books of the
Company or any other person who has obtained a properly completed bond power
from the registered holder.
Because the Exchange Offer is for any and all Series A Notes, the
principal amount of Series A Notes tendered and exchanged in the Exchange Offer
will reduce the principal amount of Series A Notes outstanding. Following the
consummation of the Exchange Offer, Holders who did not tender their Series A
Notes generally will not have any further registration rights under the
Registration Rights Agreement, and such Series A Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market, if any, for such Series A Notes could be adversely affected. The Series
A Notes are currently eligible for sale pursuant to Rule 144A, Rule 501(a)(1),
(2), (3) or (7) or Regulation S through the PORTAL Market. Because the Company
anticipates that most Holders of Series A Notes will elect to exchange such
Series A Notes for Exchange Notes due to the absence of restrictions on the
resale of Exchange Notes under the Securities Act, the Company anticipates that
the liquidity of any market for any Series A Notes remaining after the
consummation of the Exchange Offer may be substantially limited. See
"Description of the Exchange Notes -- Registration Rights; Liquidated Damages"
and "Risk Factors -- Absence of Public Market for the Exchange Notes."
Terms of the Exchange Offer
Upon the terms and conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal, the Company will accept all Series A Notes
properly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Series A
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Series A Notes pursuant to the Exchange Offer.
The form and terms of the Exchange Notes are the same as the form and
terms of the Series A Notes except that (i) the Exchange Notes have been
registered under the Securities Act and hence will not bear legends restricting
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<PAGE>
the transfer thereof, and (ii) the holders of Exchange Notes generally will not
be entitled to certain rights under the Registration Rights Agreement, which
rights generally will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Series A Notes and will be
entitled to the benefits of the Indenture.
Holders of Series A Notes do not have any appraisal or dissenters' rights
in connection with the Exchange Offer.
The Company shall be deemed to have accepted validly tendered Series A
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders of Series A Notes for the purpose of receiving the Exchange Notes from
the Company and delivering Exchange Notes to such Holders.
If any tendered Series A Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein, the
certificate for any such unaccepted Series A Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders of Series A Notes who tender pursuant to the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Transmittal Letter, transfer taxes with respect to the
exchange of Series A Notes pursuant to the Exchange Offer. The Company will pay
all charges and expenses, other than certain applicable taxes, in connection
with the Exchange Offer. See "-- Fees and Expenses."
Expiration Date; Extensions; Amendments
The Exchange Offer shall remain open for acceptance for a period of not
less than 20 business days (the "Exchange Period"). The Expiration Date will be
5:00 p.m., New York City time, on ___________, 1998, unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the Expiration Date
will be the latest business day to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record Holders an announcement thereof, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
Such announcement may state that the Company is extending the Exchange Offer
for a specified period of time.
The Company reserves the right (i) to delay accepting any Series A Notes,
to extend the Exchange Offer or to terminate the Exchange Offer and not accept
Series A Notes not previously accepted if any of the conditions set forth under
" -- Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof. If the Exchange offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the Holders of such
amendment, and the Company will extend the Exchange Offer for a period of five
to ten business days, depending upon the significance of the amendment and the
manner of disclosure to Holders, if the Exchange Offer would otherwise expire
during such five to ten business-day period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service or other comparable service.
Interest on the Exchange Notes
Interest on the Exchange Notes is payable semi-annually on May 15 and
November 15 of each year at the rate of 97/8% per annum. The Exchange Notes
will bear interest from November 26, 1997, the date of issuance of the Series A
Notes, or the most recent interest payment date to which interest on such
Series A Notes has been paid, whichever is later. Accordingly, Holders of
Series A Notes that are accepted for exchange will not receive interest that is
accrued but unpaid on the Series A Notes at the time of tender, but such
interest will be payable in respect of the Exchange Notes delivered in exchange
for such Series A Notes on the first interest payment date after the Expiration
Date.
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Procedures for Tendering
Only a Holder of Series A Notes may tender such Series A Notes pursuant to
the Exchange Offer. To tender pursuant to the Exchange Offer, a Holder must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by instruction 4 of the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile, or an Agent's Message (as defined below) in the case of a book-
entry transfer, together with the Series A Notes and any other required
documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. Delivery of the Series A Notes may be made by book-entry
transfer in accordance with the procedures described below. Confirmation of
such book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date. The term "Agent's Message" means a message, transmitted by the
Book-Entry Transfer Facility to, and received by, the Depositary and forming a
part of a Book-Entry Confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Transfer Facility tendering the Notes which are the subject of such
Book-Entry Confirmation, that such participant has received and agrees to be
bound by the terms of the Consent and Letter of Transmittal, and that the
Company may enforce such agreement against such participant.
The tender by a Holder of Series A Notes and the acceptance thereof by the
Company will constitute an agreement between such Holder and the Company in
accordance with the terms and subject to the conditions set forth herein in the
Letter of Transmittal.
Holders of the Series A Notes that are tendering by book-entry transfer to
the Exchange Agent's account at the Depository Trust Company ("DTC") can
execute the tender through the DTC Automated Tender Offer Program ("ATOP") for
which the transaction will be eligible. DTC participants should transmit their
acceptance to DTC, which will verify the acceptance and execute a book-entry
delivery the Exchange Agent's account at DTC. DTC will then send an Agent's
Message to the Exchange Agent for its acceptance. DTC participants may also
accept the Exchange Offer by submitting a notice of guaranteed delivery through
ATOP.
THE METHOD OF DELIVERY OF SERIES A NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR SERIES A NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT SUCH TENDER FOR SUCH HOLDERS.
Any beneficial Holder whose Series A Notes are registered in the name of
such Holder's broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact such registered holder promptly and
instruct such registered holder to tender on his behalf. If such beneficial
Holder wishes to tender on such beneficial Holder's behalf, such beneficial
Holder must, prior to completing and executing the Letter of Transmittal and
delivering his Series A Notes, either make appropriate arrangements to register
ownership of the Series A Notes in such Holder's name or obtain a properly
completed bond power from the registered holder. The transfer of record
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution") unless the Series A
Notes tendered pursuant thereto are tendered (i) by a registered Holder who has
not completed the box entitled "Special Registration Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantees must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Series A Notes listed therein, such Series A Notes
must be endorsed or accompanied by appropriate bond powers and a proxy which
authorizes such person to tender the Series A Notes on behalf of the registered
Holder, in each case signed as the name of the registered Holder or Holders
appears on the Series A Notes with the signature thereon guaranteed by an
Eligible Institution.
22
<PAGE>
If the Letter of Transmittal or any Series A Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
the Company, provide evidence satisfactory to the Company of their authority to
so act must be submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect
to the Series A Notes at the DTC for the purpose of facilitating the Exchange
Offer, and subject to the establishment thereof, any financial institution that
is a participant in the DTC may make book-entry delivery of the Series A Notes
by causing the DTC to transfer such Series A Notes into the Exchange Agent's
account with respect to the Series A Notes in accordance with the DTC's
procedures for such transfer. Although delivery of the Series A Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
DTC, a Letter of Transmittal properly completed and duly executed with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to the DTC
does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Series A Notes and withdrawal of the tendered
Series A Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Series A Notes not properly tendered or any Series
A Notes the Company's acceptance of which would, in the opinion of counsel for
the Company, be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tender as to particular Series A Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including, the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Series A Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Series A Notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of Series A
Notes will not be deemed to have been made until such irregularities have been
cured or waived. Any Series A Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost to such Holder by the Exchange
Agent to the tendering Holders of Series A Notes, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration
Date.
Guaranteed Delivery Procedures
Holders who wish to tender their Series A Notes and (i) whose Series A
Notes are not immediately available, or (ii) who cannot deliver their Series A
Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent (or comply with the procedures for book-entry transfer) prior to
the Expiration Date, may effect a tender if:
(i) the tender is made through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Series A Notes, the
certificate or registration number or numbers of such Series A Notes and
the principal amount of Series A Notes tendered, stating that the tender is
being made thereby, and guaranteeing that, within three business days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificates(s) representing the Series A Notes to be
tendered in proper form for transfer (or a confirmation of book-entry
transfer of such Series A Notes into the Exchange Agent's account at the
Depository) and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(iii) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Series A Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Series A Notes into the Exchange Agent's
account at the Depository) and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within three business
days after the Expiration Date.
23
<PAGE>
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Series A Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Series A Notes pursuant to the Exchange Offer, a
written or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at the address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Series A Notes to be
withdrawn (the "Depositor"), (ii) identify the Series A Notes to be withdrawn
(including the certificate or registration number(s) and principal amount of
such Series A Notes, or, in the case of notes transferred by book-entry
transfer, the name and number of the account at the DTC to be credited), (iii)
be signed by the Depositor in the same manner as the original signature on the
Letter of Transmittal by which such Series A Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee (as defined herein) with respect to the Series A
Notes register the transfer of such Series A Notes into the name of the
Depositor withdrawing the tender, (iv) specify the name in which any such
Series A Notes are to be registered, if different from that of the Depositor
and (v) include a statement that such Holder is withdrawing such Holder's
election to have such Series A Notes exchanged. All questions as to the
validity, form and eligibility (including time of receipt) of such withdrawal
notices will be determined by the Company, whose determination shall be final
and binding on all parties. Any Series A Notes withdrawn will be deemed not to
have been validly tendered for purposes of the Exchange Offer, and no Exchange
Notes will be issued with respect thereto unless the Series A Notes so
withdrawn are validly retendered. Any Series A Notes which have been tendered
but which are not accepted for payment will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Series A
Notes may be retendered by following one of the procedures described under " --
Procedures for Tendering" at any time prior to the Expiration Date.
Conditions
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange, or to exchange Exchange Notes for, any
Series A Notes, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Series A Notes, if:
(i) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(ii) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable judgment, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Series A
Notes and return all tendered Series A Notes to the tendering Holders, (ii)
extend the Exchange Offer and retain all Series A Notes tendered prior to the
expiration of the Exchange Offer subject, however, to the rights of Holders to
withdraw such Series A Notes (see " -- Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Series A Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and, depending upon the significance of
the waiver and the manner of disclosure to the registered Holders, the Company
will extend the Exchange Offer for a period of five to ten business days if the
Exchange Offer would otherwise expire during such five to ten business-day
period.
Exchange Agent and Information Agent
State Street Bank and Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
24
<PAGE>
<TABLE>
<S> <C> <C>
By Mail facsimile Transmission By Hand or Overnight By
(registered or certified (for eligible institutions only): Delivery:
mail recommended): (617) 664-5232
State Street Bank and State Street Bank and Trust
Trust Company To Confirm by Telephone Company
Corporate Trust Department or for Information Call: Corporate Trust Department
P.O. Box 778 (617) 973-6292 4th Floor
Boston, MA 02102-0078 Two International Place
Boston, MA 02110
</TABLE>
Morrow & Co., Inc. has been appointed as Information Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Information Agent addressed as follows:
Morrow & Co., Inc.
909 Third Avenue
New York, NY 10022-4799
Telephone: (212) 754-8000
Facsimile: (212) 754-8300
Fees and Expenses
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone or in person by officers and regular employees of
the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Company, however,
will pay the Exchange Agent and the Information Agent reasonable and customary
fees for their services and will reimburse the Exchange Agent and the
Information Agent for their reasonable out-of-pocket expenses in connection
therewith and pay other registration expenses, including fees and expenses of
the Trustee, filing fees, blue sky fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Series A Notes pursuant to the Exchange Offer. If, however,
certificates representing Exchange Notes or Series A Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be registered or issued in the name of any person other than the person signing
the Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Series A Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other person) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
Accounting Treatment
The Exchange Notes will be recorded at the same carrying value as the
Series A Notes, which is the aggregate principal amount of the Series A Notes,
as reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized in
connection with the Exchange Offer. The cost of the Exchange Offer will be
deferred and amortized over the term of the Exchange Notes.
Resale of the Exchange Notes
Under existing Commission interpretations, the Exchange Notes would, in
general, be freely transferable after the Exchange Offer by any holder of such
Exchange Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 of the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes acquired pursuant to the
Exchange Offer are obtained in the ordinary course of such holder's business,
and such holder does not intend to participate, and has no arrangement or
understanding to participate, in the distribution of such Exchange Notes.
25
<PAGE>
Any holder who tenders pursuant to the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the
Exchange Notes may not rely on the position of the staff of the Commission
enunciated in Exxon Capital Holdings Corporation (available May 13, 1988) or
Morgan Stanley & Co., Incorporated (available June 5, 1991) or similar
interpretive letters, but rather must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. In addition, any such resale transaction should
be covered by an effective registration statement containing the selling
security holders information required by Item 507 of Regulation S-K of the
Securities Act.
Each broker-dealer that received Exchange Notes for its own account in
exchange for Series A Notes, where such Series A Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, may be a statutory underwriter and must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Company has agreed, if requested, for a period of one year from the date
hereof, to make available a prospectus meeting the requirements of the
Securities Act to any such broker-dealer for use in connection with any resale
of any Exchange Notes acquired in the Exchange Offer. A broker-dealer which
delivers such a prospectus to purchasers in connection with such resales will
be subject to certain of the civil liability provisions under the Securities
Act and will be bound by the provisions of the Registration Rights Agreement
(including certain indemnification rights and obligations).
By tendering pursuant to the Exchange Offer, each Holder will represent to
the Company, among other things, that (i) the Exchange Notes acquired pursuant
to the Exchange Offer are being obtained in the ordinary course of its
business, (ii) neither the holder nor any such other person has an arrangement
or understanding with any person to participate in the distribution of the
Exchange Notes, and (iii) the holder and any such other person acknowledge that
if they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such holder incurring liability
under the Securities Act for which such holder is not indemnified by the
Company. Further, by tendering in the Exchange Offer, each holder that may be
deemed an "affiliate" (as defined in Rule 405 of the Securities Act) of the
Company will represent to the Company that such holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that Holder without registration under the Securities
Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
Consequences of Failure to Exchange
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement, and
Holders of Series A Notes who do not tender their Series A Notes generally will
not have any further registration rights under the Registration Rights
Agreement or otherwise. Accordingly, any Holder that does not exchange such
Holder's Series A Notes for Exchange Notes will continue to hold the untendered
Series A Notes and will be entitled to all the rights and limitations
applicable thereto under the Indenture, except to the extent that such rights
or limitations, by their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
The Series A Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Series
A Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) pursuant to an effective registration statement under the
Securities Act, (iii) so long as the 144A Notes are eligible for resale
pursuant to Rule 144A under the Securities Act, to a Qualified Institutional
Buyer in a transaction meeting the requirements of Rule 144A, (iv) outside the
United States to a foreign person pursuant to the exemption from the
registration requirements of the Securities Act provided by Regulation S
thereunder, (v) pursuant to an exemption from registration under the Securities
Act provided by Rule 144 thereunder (if available) or Rule 501 (a)(1), (2), (3)
or (7) or (vi) to an Accredited Investor in a transaction exempt from the
registration requirements of the Securities Act, in each case in accordance
with any applicable securities laws of any state of the United States or other
applicable jurisdiction. See "Risk Factors -- Restrictions on Transfer."
26
<PAGE>
Other
Participation in the Exchange Offer is voluntary, and Holders should
carefully consider whether to accept. Holders are urged to consult their
financial and tax advisors in making their own decision on what action to take.
The Company may in the future seek to acquire untendered Series A Notes,
to the extent permitted by applicable law, in open market or privately
negotiated transactions, through subsequent exchange offers or otherwise. The
Company has no present plans to acquire any Series A Notes that are not
tendered in the Exchange Offer or to file a registration statement to permit
resales of any untendered Series A Notes.
In any state where the Exchange Offer does not fall under a statutory
exemption to the blue sky rules, the Company has filed the appropriate
registrations and notices, and has made the appropriate requests, to permit the
Exchange Offer to be made in such state.
Certain Federal Income Tax Consequences of the Exchange Offer
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Department regulations (the "Regulations") and existing administrative
interpretations and court decisions. There can be no assurance that the
Internal Revenue Service (the "IRS") will not take a contrary view, and no
ruling from the IRS has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to Holders. Certain Holders of the Series A Notes (including
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. Each Holder of Series A Notes should consult his, her or its own tax
advisor as to the particular tax consequences of exchanging such Holder's
Series A Notes for Exchange Notes, including the applicability and effect of
any state, local or foreign tax laws.
The issuance of the Exchange Notes to Holders of the Series A Notes
pursuant to the terms set forth in this Prospectus will not constitute an
exchange for United States federal income tax purposes because such exchange
does not represent a significant modification of the debt instruments.
Consequently, no gain or loss would be recognized by Holders of the Series A
Notes upon receipt of the Exchange Notes, and ownership of the Exchange Notes
will be considered a continuation of ownership of the Series A Notes. For
purposes of determining gain or loss upon the subsequent sale or exchange of
the Exchange Notes, a Holder's basis in the Exchange Notes should be the same
as such Holder's basis in the Series A Notes exchanged therefore. A Holder's
holding period for the Exchange Notes should include the Holder's holding
period for the Series A Notes exchanged therefor. The issue price, original
issue discount inclusion and other tax characteristics of the Exchange Notes
should be identical to the issue price, original issue discount inclusion and
other tax characteristics of the Series A Notes exchanged therefor.
See also "Certain United States Federal Tax Considerations for Non-United
States Holders."
27
<PAGE>
THE TRANSACTIONS; USE OF PROCEEDS
Prior to the closing of a series of transactions on November 26, 1997,
including the issuance of the Series A Notes, the Company operated as Holmes
U.S., through which the Company conducted its operations in the United States,
and Holmes Far East, through which the Company conducted its manufacturing and
sourcing operations in the Far East. Holmes U.S. and Holmes Far East were
indirect subsidiaries of Pentland. In addition, Jordan A. Kahn, the founder of
the Company and the Company's President and Chief Executive Officer, owned a
minority interest in Holmes U.S. and Holmes Far East.
Pursuant to the Transactions Agreements, (i) Pentland and Mr. Kahn
contributed their shares of Holmes Far East to Holmes U.S., as a result of
which Holmes Far East became a wholly owned subsidiary of Holmes U.S., (ii)
affiliates of Berkshire Partners, certain members of the Company's senior
management and certain other investors purchased approximately $16.5 million of
capital stock of Holmes U.S. from the Company and approximately $9.7 million of
capital stock of Holmes U.S. from Mr. Kahn, the proceeds of which Holmes U.S.
used to repay certain outstanding indebtedness, (iii) Mr. Kahn and Pentland
retained equity interests in Holmes U.S. with an implied value of approximately
$7.0 million and $1.8 million, respectively (valued on the basis of the
Berkshire Equity Investment), and (iv) Holmes U.S. used available cash, the net
proceeds from the Series A Notes and borrowings under the Credit Facility to
redeem a portion of the capital stock of Holmes U.S. owned by Pentland, to
repay certain outstanding borrowings of the Company and to pay certain expenses
of the Transactions.
As a result of the Transactions, the Company is currently owned
approximately 69.2% by Berkshire Partners and certain other investors,
approximately 25.7% by Mr. Kahn and other members of senior management and 5.1%
by Pentland. In connection with the Transactions, the Company issued a
non-transferable warrant to Pentland to purchase 5% of the common stock of the
Company, at the same exercise price as paid by the other investors in the
Transactions. The Warrant is exercisable upon the occurrence of certain
liquidity events generally occurring within two years following the closing of
the Transactions. These events include a sale of all or substantially all of
the Company's common stock owned by affiliates of Berkshire Partners, a sale of
all or substantially all of the Company's capital stock or assets, certain
recapitalization transactions, or a public offering of the Company's equity
securities which includes secondary sales by stockholders or which is followed
within certain time periods by sales of common stock by affiliates of Berkshire
Partners. The warrant will expire if the Company has not entered into an
agreement for such a liquidity event within two years from the closing of the
Transactions. In connection with the Transactions, the Company also entered
into new three-year employment agreements with Mr. Kahn and with Stanley
Rosenzweig, the Company's Chief Operating Officer, Gregory F. White, the
Company's Executive Vice President, Sales and Marketing, and Tommy Liu,
Managing Director of the Company's Far East operations.
The Transactions were accounted for as a recapitalization of the Company.
As a recapitalization, the Company has retained its historical cost basis of
accounting.
There will be no proceeds to the Company from the exchange of Series A
Notes pursuant to the Exchange Offer. The following table sets forth the
sources and uses of funds in connection with the closing of the Transactions on
November 26, 1997, certain of which amounts are subject to a post-closing audit
(in thousands):
<TABLE>
<S> <C>
Sources:
Available cash ............................................. $ 11,384
Credit Facility (1)(2) ..................................... 27,500
Senior Subordinated Notes .................................. 105,000
Berkshire Equity Investment (2)(3) ......................... 16,488
--------
Total cash sources to the Company ........................ 160,372
Berkshire Equity Investment (2)(4) ......................... 9,727
Equity value retained by existing stockholders (7) ......... 8,785
--------
Total sources ............................................ $178,884
========
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
Uses:
Repayment of existing indebtedness (5) ....................... $ 79,980
Redemption of Pentland equity (2) ............................ 62,058
Management bonuses (6) ....................................... 7,734
Estimated fees and expenses (6) .............................. 10,600
--------
Total cash uses by the Company ............................. 160,372
Purchase of equity by Berkshire from Mr. Kahn (2)(4) ......... 9,727
Equity value retained by existing stockholders (7) ........... 8,785
--------
Total uses ................................................. $178,884
========
</TABLE>
- ------------
(1) The Credit Facility provides for total availability of $100.0 million. See
"Description of Credit Facility."
(2) Subject to final working capital adjustments.
(3) Represents the portion of the Berkshire Equity Investment used to acquire
capital stock of Holmes U.S. from the Company.
(4) Represents the portion of the Berkshire Equity Investment used to acquire
capital stock of Holmes U.S. from Mr. Kahn.
(5) The indebtedness to be repaid in connection with the Transactions was
classified as current liabilities on the Company's balance sheet and bore
interest, as of November 26, 1997, at a weighted average rate of 7.93% per
annum exclusive of non-interest bearing amounts due to affiliates.
(6) Pursuant to the Transactions Agreements, the purchase price of the capital
stock from Pentland and Mr. Kahn was reduced by the amount of the
management bonuses and $1.8 million of the fees and expenses of the
Transactions.
(7) Valued on the basis of the Berkshire Equity Investment.
29
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997. See "The Transactions; Use of Proceeds." The following table
should be read in conjunction with "Selected Financial Data" and the
Consolidated Financial Statements of the Company, including the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At December 31, 1997
---------------------
(In thousands)
<S> <C>
Total debt, including current maturities:
Capital lease and other debt obligations ......... $ 1,895
Credit Facility(1) ............................... 28,502
9 7/8% Senior Subordinated Notes due 2007 ........ 105,000
---------
Total debt ....................................... 135,397
Total stockholders' deficit ......................... (24,991)
---------
Total capitalization ........................... $ 110,406
=========
</TABLE>
- ------------
(1) The Credit Facility provides for total availability of $100.0 million. See
"Description of Credit Facility."
30
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the audited
Consolidated Financial Statements of the Company; such Consolidated Financial
Statements as of December 31, 1996 and 1997 and for each of the three years in
the period ended December 31, 1997 are included elsewhere in this Prospectus.
The selected financial data as of and for the year ended December 31, 1993 have
been derived from the unaudited financial statements of the Company. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements, including the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ..................................... $61,838 $ 114,509 $ 178,132 $ 194,331 $ 192,153
Cost of goods sold ............................ 43,720 84,672 141,226 145,915 136,740
------- --------- --------- --------- ----------
Gross profit ................................. 18,118 29,837 36,906 48,416 55,413
Selling, general and administrative
expenses ..................................... 12,717 17,522 22,500 27,308 36,530(1)
Product development expenses .................. 1,643 2,742 3,154 5,520 5,463
------- --------- --------- --------- ------------
Operating profit ............................. 3,758 9,573 11,252 15,588 13,420
Interest expense .............................. 1,215 2,104 5,231 6,570 7,303
Other income, net ............................. 413 261 349 398 151
------- --------- --------- --------- ------------
Income before income taxes and
minority interest .......................... 2,956 7,730 6,370 9,416 6,268
Income tax expense ............................ 787 3,214 2,614 2,787 2,196
Minority interest in net income of
majority-owned subsidiaries(2) ............... 1 282 518 408 225
------- --------- --------- --------- ------------
Income before cumulative effect of
change in accounting principle .............. 2,168 4,234 3,238 6,221 3,847
Cumulative effect of change in
accounting principle ......................... 138(3) -- -- -- --
--------- --------- --------- --------- ------------
Net income ................................... $ 2,306 $ 4,234 $ 3,238 $ 6,221 $ 3,847
========= ========= ========= ========= ============
Other Data:
EBITDA(4) ..................................... $ 12,798 $ 16,098 $ 22,774 $ 20,837
EBITDA margin(4) .............................. 11.2% 9.0% 11.7% 10.8%
Ratio of earnings to fixed charges(5) ......... 3.0x 3.9x 2.1x 2.2x 1.8x
Depreciation and amortization ................. $ 1,759 $ 2,981 $ 4,509 $ 6,867 $ 7,473
Capital expenditures .......................... 5,083 8,821 9,706 8,594 5,815
Cash flows from operating activities .......... 7,728 5,524 2,802 (46,373)(6)
Cash flows from investing activities .......... (8,821) (9,706) (8,594) (6,266)
Cash flows from financing activities .......... 2,000 5,972 6,886 53,318
Balance Sheet Data (at end of period):
Cash and cash equivalents ..................... $ 667 $ 1,578 $ 3,368 $ 4,462 $ 5,141
Working capital (deficit) ..................... (3,439) (5,021) (6,770) (2,883) 78,318
Total assets .................................. 41,175 72,490 118,524 128,286 135,165
Long-term debt ................................ -- -- 217 737 134,294
Total stockholders' equity (deficit) .......... 4,015 8,249 11,487 17,708 (24,991)
</TABLE>
31
<PAGE>
- ------------
(1) Includes approximately $6.0 million of incremental incentive compensation
expense which was paid to certain executives in conjunction with the
Transactions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Management--Employment
Agreements."
(2) In May and June 1997, the Company repurchased the shares held by the 30%
minority stockholders in one of the Company's subsidiaries for a total of
$900,000.
(3) In 1993, a required change in accounting principle for accounting for
income taxes resulted in the recognition of $138,000 of income.
(4) EBITDA represents income before interest expense, income tax expense,
depreciation and amortization and the minority interest in net income of
majority-owned subsidiaries. EBITDA margin represents EBITDA as a
percentage of net sales. EBITDA is presented because it is a widely
accepted measure to provide information regarding a company's ability to
service and/or incur debt. Management considers EBITDA particularly
relevant for a highly-leveraged company, such as the Company, where net
income is significantly impacted by interest expense. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
operations or other income or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity. Additionally, the Company's calculation of
EBITDA may differ from that performed by other companies, and thus the
amounts disclosed for EBITDA may not be directly comparable to those
disclosed by other companies.
(5) For purposes of determining the ratio of earnings to fixed charges,
earnings represent income before income taxes and minority interest, plus
fixed charges. Fixed charges consist of interest expense on all
indebtedness plus a portion of rental payments on operating leases that is
considered representative of the interest factor. After giving pro forma
effect to the Transactions, the Company's ratio of earnings to fixed
charges would have been 1.5x for the year ended December 31, 1997.
(6) Includes the repayment of approximately $43.4 million of trade acceptances
and $10.0 million of amounts due to affiliates in conjunction with the
Transactions. See "The Transactions; Use of Proceeds."
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements for the
year ended December 31, 1997 (the "Pro Forma Financial Statements") have been
derived by the application of pro forma adjustments to the financial statements
of the Company included elsewhere in this Prospectus.
The Pro Forma Financial Statements give effect to the Transactions as if
they occurred on January 1, 1997. The pro forma condensed income statement also
reflects employment and management agreements entered into in conjunction with
the Transactions, as well as the exclusion of minority interests in the net
income of one of the Company's subsidiaries as a result of the repurchase by
the Company of the minority interest in May and June 1997.
The Pro Forma Financial Statements do not purport to represent what the
Company's results of operations would have actually been had the Transactions
and the repurchase of the minority interest in fact occurred on such date, or
to project results of operations for any future period. The Pro Forma Financial
Statements should be read in conjunction with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical Consolidated Financial Statements of the Company, including the
notes thereto, included elsewhere in this Prospectus.
33
<PAGE>
HOLMES PRODUCTS CORP.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Actual Adjustments Pro Forma
---------- ------------------ ----------
<S> <C> <C> <C>
Net sales ....................................... $192,153 $192,153
Cost of goods sold .............................. 136,740 $ (1,834)(1) 134,906
------- --------- -------
Gross profit ................................... 55,413 1,834 57,247
------- --------- -------
Selling, general and administrative and product 41,993 (6,901)(2) 35,492
development expenses ........................... 400 (3)
------- --------- -------
Operating profit .............................. 13,420 8,335 21,755
------- --------- -------
Other income (expense)
Interest expense ............................... 7,303 7,248 (1) 14,551
Other income, net .............................. 151 151
------- --------- -------
Total other expense ........................... 7,152 7,248 14,400
------- --------- -------
Income before income taxes and minority
interest ...................................... 6,268 1,087 7,355
Income tax expense .............................. 2,196 (1,012)(4) 1,184
------- --------- -------
Income before minority interest ................ 4,072 2,099 6,171
Minority interest in net income of majority-owned
subsidiaries ................................... 225 (225)(5) --
------- --------- -------
Net income ..................................... $ 3,847 $ 2,324 $ 6,171
======== ========= ========
</TABLE>
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
(Dollars in thousands)
(1) Reflects adjustments to interest expense on debt incurred in connection
with the offering of the Series A Notes and the Credit Facility in excess
of historical interest expense and financing commissions assuming
consummation of the Transactions as of January 1, 1997, computed as
follows (all amounts relate to the period from January 1, 1997 through the
actual consummation of the Transactions on November 26, 1997):
<TABLE>
<S> <C>
Cash interest expense on the Series A Notes ........................................... $ 9,361
Interest expense on the Credit Facility at a LIBOR-based rate, assumed to be 7.71%,
based on the pro forma estimated average outstanding balance of $33,819 .............. 2,390
Commitment fee of 0.50% on unused availability under the Credit Facility .............. 303
Elimination of the Company's historical interest expense through November 26, 1997
associated with previous credit facility and affiliate borrowings which were repaid in
connection with the Transactions ..................................................... (5,885)
Amortization of debt issuance costs ................................................... 1,079
--------
Net increase in interest expense ...................................................... 7,248
Elimination of the Company's historical commissions paid to a related entity for
arranging financing, included within cost of sales ................................... (1,834)
--------
Net increase in interest and related financing commissions ............................ $ 5,414
========
</TABLE>
A 0.125% increase in the interest rate under the Credit Facility would
increase interest expense by $42.
(2) Certain executives of the Company signed employment agreements at the
closing of the Transactions which specify such executives' compensation
through the term of the agreements, which run initially for three years.
The executives will perform similar functions and act in the same capacity
as they did prior to the Transactions. This adjustment reflects the
difference between the historical compensation expense recorded for these
executives and the contractual amounts reflected in the employment
agreements, computed as the specified base compensation plus the maximum
amount of annual performance bonus specified in the agreements. Included
in historical compensation expense is approximately $6,013 of incremental
bonuses paid under the terms of previous agreements as a result of the
Transactions. See "Management--Employment Agreements."
(3) Reflects fees which will be paid by the Company to Berkshire Partners under
a management agreement signed in connection with the Transactions.
(4) Reflects an adjustment for the income tax effects of the items described in
Notes 1 through 3, computed at an assumed combined tax rate of 40%.
Additionally, this adjustment includes the elimination of $1,447 of income
tax expense associated with the limitation on deductibility of interest
expense paid on the previous credit facility and affiliated borrowings,
which limitation primarily resulted from the incremental bonuses described
above. See Note 9 of Notes to Consolidated Financial Statements.
(5) In May and June 1997, the Company repurchased the shares held by the 30%
minority stockholders in one of the Company's subsidiaries for a total of
$900. The adjustment reflects the elimination of minority interest in net
income of majority-owned subsidiaries.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
Prospectus.
Overview
Holmes is a leading developer, manufacturer and marketer of quality,
branded home comfort products, including fans, heaters, humidifiers and air
purifiers. The Company believes that it has a leading U.S. market share in each
of these product categories, which in the aggregate accounted for approximately
91.7% of the Company's net sales for the year ended December 31, 1997. In
addition, the Company markets and distributes dehumidifiers and a variety of
decorative and home office lighting products. The Company believes that its
strong market position and success are attributable to its continuous product
innovation, engineering and manufacturing expertise, close customer
relationships, breadth of product offerings and reputation for quality. From
1993 to 1997, Holmes' net sales increased from $61.8 million to $192.2 million,
a compound annual growth rate of 32.8%. For the year ended December 31, 1997,
after giving pro forma effect to the Transactions, the Company would have had
net sales and net income of $192.2 million and $6.2 million, respectively.
The Company's products are sold to consumers through major retail
channels, including mass merchants, do-it-yourself home centers, warehouse
clubs, hardware stores and national drugstore chains. Representative customers
include Wal-Mart, Kmart, Target, Home Depot, Costco, BJ's Wholesale Club,
TruServ (formerly True Value and ServiStar) and Walgreens. The Company believes
that the strength, scope, and visibility of its retail account base provide a
competitive advantage with respect to brand recognition, shelf space and
penetration of the consumer market.
Results of Operations
The following table sets forth the Company's results of operations as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales .............................................................. 100.0% 100.0% 100.0%
Cost of goods sold ..................................................... 79.3 75.1 71.2
----- ----- -----
Gross profit ......................................................... 20.7 24.9 28.8
----- ----- -----
Selling expenses ....................................................... 7.1 6.8 8.1
General and administrative expenses .................................... 5.5 7.2 10.9(1)
Product development expenses ........................................... 1.8 2.9 2.8
----- ----- -----
Total operating expenses ............................................. 14.4 16.9 21.8
----- ----- -----
Operating profit ..................................................... 6.3 8.0 7.0
Interest and other expenses, net ....................................... 2.7 3.2 3.8
----- ----- -----
Income before income taxes and minority interest ..................... 3.6 4.8 3.2
Income tax expense ..................................................... 1.5 1.4 1.1
----- ----- -----
Income before minority interest ...................................... 2.1 3.4 2.1
Minority interest in net income of majority-owned subsidiaries ......... 0.3 0.2 0.1
----- ----- -----
Net income ........................................................... 1.8% 3.2% 2.0%
===== ===== =====
</TABLE>
- -------------
(1) General and administrative expenses in 1997 include approximately $6.0
million (3.1% of net sales) of incremental incentive compensation expense which
was paid to certain executives in conjunction with the Transactions. See
"Management--Employment Agreements."
36
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales decreased $2.2 million, or 1.1%, to $192.2 million
for the year ended December 31, 1997 from $194.3 million for the year ended
December 31, 1996. The decrease in net sales was primarily due to a reduction
in sales of dehumidifiers and air conditioners resulting from a strategic
management decision to reduce dehumidifier volume and eliminate the air
conditioner category because of the relatively low profit margins of these
products lines. In addition, an increase in sales of heaters was offset by
decreases in sales of fans, air purifiers and lighting products.
Cost of Goods Sold. Cost of goods sold decreased $9.2 million, or 6.3%, to
$136.7 million for the year ended December 31, 1997 from $145.9 million for the
year ended December 31, 1996. As a percentage of net sales, cost of goods sold
decreased to 71.2% for the year ended December 31, 1997 from 75.1% for the year
ended December 31, 1996. The reduction in cost of goods sold as a percentage of
net sales was primarily due to the lower sales of dehumidifiers and air
conditioners, which generated lower profit margins compared to the Company's
other products, as well as efficiency improvements in the Company's
manufacturing operations.
Gross Profit. As a result of the foregoing, gross profit increased $7.0
million, or 14.5%, to $55.4 million for the year ended December 31, 1997 from
$48.4 million for the year ended December 31, 1996. The increase in gross
profit is attributable, in large part, to the factors described above. In
addition, air purifier filter and humidifier filter sales, which generate
relatively high gross profit margins, increased significantly for the year
ended December 31, 1997 as compared to the year ended December 31, 1996.
Selling Expenses. Selling expenses increased $2.4 million, or 18.3%, to
$15.6 million for the year ended December 31, 1997 from $13.2 million for the
year ended December 31, 1996. As a percentage of net sales, selling expenses
increased to 8.1% for the year ended December 31, 1997 from 6.8% for the year
ended December 31, 1996. The increase in selling expenses was primarily due to
an increase in co-operative advertising of higher margin products with a number
of major retailers.
General and Administrative Expenses. General and administrative expenses
increased $6.8 million, or 48.3%, to $20.9 million for the year ended December
31, 1997 from $14.1 million for the year ended December 31, 1996. As a
percentage of net sales, general and administrative expenses increased to 10.9%
for the year ended December 31, 1997 from 7.2% for the year ended December 31,
1996. The increase in general and administrative expenses was primarily due to
approximately $6.0 million of incremental incentive compensation expenses paid
in connection with the closing of the Transactions. These incentive
compensation amounts were deducted from the purchase price of the capital stock
in the Transactions. In addition, general and administrative expenses increased
due to additional management and information systems support to improve
operating efficiencies at the Company's manufacturing facilities in China.
Product Development Expenses. Product development expenses decreased $0.1
million, or 0.1%, to $5.4 million for the year ended December 31, 1997 from
$5.5 million for the year ended December 31, 1996. As a percentage of net
sales, product development expenses remained relatively constant at 2.9% and
2.8% for the years ended December 31, 1997 and 1996, respectively.
Interest and Other Expenses, Net. Interest and other expenses, net
increased $1.0 million, or 15.9%, to $7.2 million for the year ended December
31, 1997 from $6.2 million for the year ended December 31, 1996. The increase
in interest expense is primarily due to the additional borrowings resulting
from the Transactions, which were outstanding for one month in 1997. On a pro
forma basis, giving effect to the Transactions as if they had occurred on
January 1, 1997, interest expense would have been $14.6 million.
Provision for Income Taxes. The Company's effective tax rate increased to
35.0% of pre-tax income for the year ended December 31, 1997 from 29.6% of
pre-tax income for the year ended December 31, 1996. The increase in the
effective tax rate was principally a result of limitations placed on the
Company's ability to deduct for tax purposes approximately $3.6 million of
interest paid to or guaranteed by Pentland and its affiliates. This was offset
by an increase in the profitability of the Company's manufacturing operations
in China, which are taxed at significantly lower rates than the Company's U.S.
operations. While the interest limitation may be carried forward indefinitely,
because of the Company's current highly leveraged structure it is uncertain
whether the Company will be able to deduct this amount in the future.
Therefore, management has recorded a valuation allowance on the entire amount
of deferred tax asset arising from this carryforward, which has the impact of
increasing the effective tax
37
<PAGE>
rate. This limitation primarily arose as a result of the incentive compensation
expenses described above. The Company had no such limitations in previous
years, and because interest is no longer paid to foreign affiliates, this
limitation is not expected to be applicable in the future. If the Company is
able to utilize this deduction, it will reduce income tax expense in future
years.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales increased $16.2 million, or 9.1%, to $194.3 million
in 1996 from $178.1 million in 1995. The increase in net sales was primarily
due to an increase in sales of heaters, humidifiers, air purifiers and related
accessories which resulted from the Company's continued expansion of product
lines to improve features, performance and pricing, as well as the growing
installed base of products requiring accessories. Net sales also increased as a
result of the introduction of the air conditioner category. The increase in net
sales was offset in part by lower sales of fans and dehumidifiers as a result
of unusually cool summer weather in the United States which led to higher
product returns.
Cost of Goods Sold. Cost of goods sold increased $4.7 million, or 3.3%, to
$145.9 million in 1996 from $141.2 million in 1995. As a percentage of net
sales, cost of goods sold decreased to 75.1% in 1996 from 79.3% in 1995. The
decrease in cost of goods sold as a percentage of net sales was primarily due
to lower raw material costs. Cost of goods sold was also favorably impacted by
increased efficiencies in the Company's manufacturing operations as a result of
the opening of a new custom made facility and better management control of
production processes. These factors were offset in part by sales of air
conditioners, which generated lower profit margins than other products.
Gross Profit. As a result of the foregoing, gross profit increased $11.5
million, or 31.2%, to $48.4 million in 1996 from $36.9 million in 1995. As a
percentage of net sales, gross profit increased to 24.9% in 1996 from 20.7% in
1995.
Selling Expenses. Selling expenses increased $0.5 million, or 3.9%, to
$13.2 million in 1996 from $12.7 million in 1995. The increase in selling
expenses was primarily related to new direct advertising programs as well as an
increase in co-operative advertising programs with customers. As a percentage
of net sales, selling expenses decreased to 6.8% in 1996 from 7.1% in 1995.
General and Administrative Expenses. General and administrative expenses
increased $4.3 million, or 43.9%, to $14.1 million in 1996 from $9.8 million in
1995. As a percentage of net sales, general and administrative expenses
increased to 7.2% in 1996 from 5.5% in 1995. The increase in general and
administrative expenses was primarily due to additional management, controls
and information systems required by the Company's manufacturing operations in
order to meet the demands brought on by the rapid growth of these operations.
General and administrative expenses also increased as a result of higher
incentive compensation based on the Company's profitability.
Product Development Expenses. Product development expenses increased $2.3
million, or 71.9%, to $5.5 million in 1996 from $3.2 million in 1995. As a
percentage of net sales, product development expenses increased to 2.9% in 1996
from 1.8% in 1995. The increase in product development expenses was primarily
due to added personnel as part of the Company's strategy to invest in the
resources necessary to develop new product innovations, and the implementation
of more stringent quality control programs. Product development expenses also
increased due to an increase in patent and trademark expenses relating to
product development.
Interest and Other Expenses, Net. Interest and other expenses, net
increased $1.3 million, or 26.5%, to $6.2 million in 1996 from $4.9 million in
1995. The increase in interest and other expenses, net was primarily due to an
increase in average inventory levels, principally as a result of lower fan
sales and higher returns resulting from cool summer weather. The increase in
inventory levels and, to a lesser extent, accounts receivable resulted from a
retail industry trend to purchase more goods from the Company's warehouse
facilities rather than directly from the Company's manufacturing facilities in
China.
Provision for Income Taxes. The Company's effective tax rate decreased to
29.6% of pre-tax income in 1996 from 41.0% of pre-tax income in 1995. The
decrease in the effective tax rate was principally a result of an increase in
the profitability of the Company's manufacturing operations in China, which are
taxed at significantly lower rates than the Company's U.S. operations.
38
<PAGE>
Liquidity and Capital Resources
The Company historically has funded its operations through cash flows from
operations, trade credit and short-term financing provided by Pentland in the
form of bank trade acceptances and loans under a revolving credit facility.
Following the Transactions, the Company's primary liquidity requirements will
be for working capital and to service the Company's indebtedness. The Company
intends to finance its liquidity requirements with cash flows from operations
and borrowings under the Credit Facility. The Company believes that 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 years ended December 31,
1995, 1996 and 1997 was $5.5 million, $2.8 million and $(46.4) million,
respectively. Cash used for operations in 1997 primarily reflected the repayment
of trade acceptances payable and amounts due to affiliates in connection with
the Transactions. Additionally, the earlier timing of start-of-season sales at
the end of 1997 as compared to 1996 resulted in an increase in accounts
receivable and a corresponding reduction of inventory levels during 1997.
Operating cash flows in 1996 were adversely affected due to higher inventory
levels resulting from an increase in returns of fans attributable to cool summer
weather. The Company's operating cash flows in 1995 and 1996 were also adversely
affected by increased inventory levels attributable to the growth in the
Company's product offerings, as well as an increase in customer purchases from
the Company's warehouse facilities rather than directly from the Company's
manufacturing facilities in China. In addition, cash flows were negatively
impacted by increased accounts receivable levels in 1995 due to financial
difficulties experienced by several major retailers. In 1996, increased
collections of accounts receivable favorably impacted cash flows from
operations.
Cash provided by financing activities for the years ended December 31,
1995 and 1996 was $6.0 million and $6.9 million, respectively, largely
reflecting borrowings to finance the increases in inventory levels discussed
above and capital expenditures. Cash flows provided by financing activities for
the year ended December 31, 1997 were $53.3 million, reflecting the refinancing
of the Company's indebtedness in connection with the Transactions. Pursuant to
the Transactions, the Company raised $15.5 million in net equity and $123.3
million in net debt proceeds, which were used to repay Pentland's credit
facility and repurchase $62.1 million of stock from Pentland.
The Company's capital expenditures, including assets acquired under capital
leases, for the year ended December 31, 1997 were approximately $6.6 million,
primarily for tooling for the production of new products. The Company expects
that capital expenditures for 1998 will be approximately $6.9 million, primarily
for tooling for new products and new computer equipment. The Company is also
subject to certain minimum royalty payment commitments under various license
agreements. See Note 13 of Notes to Consolidated Financial Statements.
On May 22, 1997 and June 4, 1997, the Company reached agreements to
acquire the capital stock held by the 30% minority stockholders of one of the
Company's subsidiaries for an aggregate of $0.9 million, half of which was paid
at the closing of the acquisitions, and half of which will be payable, with
interest, after one year. See Note 2 of Notes to Consolidated Financial
Statements.
On November 26, 1997 the Company consummated the Series A Notes Offering
and entered into the Credit Facility described below. The net proceeds from the
Series A Notes Offering and the Credit Facility were used to redeem a portion
of the capital stock of Holmes U.S. owned by Pentland, to repay certain
outstanding borrowings of the Company and to pay certain fees and expenses
incurred in connection with the Transactions.
The Exchange Notes will mature on November 15, 2007. The Notes will not be
redeemable at the Company's option prior to November 15, 2002. Thereafter, the
Notes will be subject to redemption at any time at the option of the Company,
in whole or in part, at the redemption prices set forth herein. Interest on the
Exchange Notes will accrue at the rate of 9 7/8% per annum and will be payable
semi-annually in arrears on May 15 and November 15 of each year, commencing on
May 15, 1998, in an annual amount equal to approximately $10.4 million. The
payment of principal and interest on the Exchange Notes will be subordinated to
the prior payment in full of all Senior Debt of the Company, including under
the Credit Facility. See "Description of the Exchange Notes."
The Company entered into the Credit Facility in connection with the
Transactions. The Credit Facility consists of a $100.0 million revolving credit
commitment. The Credit Facility, and the guarantees thereof by the Company's
direct and indirect domestic subsidiaries, are secured by substantially all of
the Company's domestic and certain foreign assets. The Credit Facility and the
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 other actions. See "Description of Credit Facility"
and "Description of the Exchange Notes." At December 31, 1997 and the date
hereof, the Company was in compliance with the terms of the covenants. The
ability of the Company to
39
<PAGE>
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 "Risk Factors."
As a result of the consummation of the offering of the Series A Notes and
the Company's expected borrowings under the Credit Facility, the Company's
interest expense in future periods will increase substantially. See "Risk
Factors -- Substantial Leverage."
Seasonality
Sales of most of the Company's products follow seasonal patterns which
affect the Company's results of operations. In general, sales of fans and
dehumidifiers occur predominantly from January through June, and sales of
heaters and humidifiers occur predominantly from July through December.
Although air purifiers, lighting products and accessories generally are used
year-round, the nature of these products tend to draw increased sales during
the winter months when people are indoors and, as a result, 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. See "Risk Factors -- Seasonality."
Year 2000 Compliance
The Company is currently in the process of replacing certain of its
computer information systems. Based upon information currently available,
management does not anticipate that the Company will incur material incremental
costs for its software programs and applications to be "Year 2000 compliant."
However, to the extent that the Company will be relying on its outside software
vendors, the Company's Year 2000 compliance matters will not be entirely within
its direct control. In addition, the Company has relationships with vendors,
customers and other third parties that rely on computer software that may not
be Year 2000 compliant. As these systems are completely outside of the
Company's control, there can be no assurance that Year 2000 compliance failures
by such third parties will not have a material adverse effect on the Company.
40
<PAGE>
BUSINESS
Holmes is a leading developer, manufacturer and marketer of quality,
branded home comfort products, including fans, heaters, humidifiers and air
purifiers. The Company believes that it has a leading U.S. market share in each
of these product categories, which, in the aggregate, accounted for
approximately 91.7% of the Company's net sales for the year ended December 31,
1997. In addition, the Company markets and distributes dehumidifiers and a
variety of decorative and home office lighting products. The Company believes
that its strong market position and success are attributable to its continuous
product innovation, engineering and manufacturing expertise, close customer
relationships, breadth of product offerings and reputation for quality. From
1993 to 1997, Holmes' net sales increased from $61.8 million to $192.2 million,
a compound annual growth rate of 32.8%. For the year ended December 31, 1997,
after giving pro forma effect to the Transactions, the Company would have had
net sales and net income of $192.2 million and $6.2 million, respectively.
The Company's products are sold to consumers through major retail channels,
including mass merchants, do-it-yourself home centers, warehouse clubs, hardware
stores and national drugstore chains. Representative customers in these channels
include Wal-Mart, Kmart, Target, Home Depot, Costco, BJ's Wholesale Club,
TruServ (formerly True Value and ServiStar) and Walgreens. These customers, in
the aggregate, accounted for 49.5% of the Company's net sales during the fiscal
year 1997. Wal-Mart, Kmart and Target represented 17.4%, 11.0% and 11.0%,
respectively, of net sales in fiscal year 1997. The Company believes that the
strength, scope, and visibility of its retail account base provide a competitive
advantage with respect to brand recognition, shelf space and penetration of the
consumer market.
Holmes was founded in 1982 by its current Chief Executive Officer, Jordan
A. Kahn, an innovator in the home comfort market with over 30 years of industry
experience. Holmes opened its first manufacturing facility in China in 1989,
and currently operates two facilities in China where it manufactures its
products and electric motors for use in its products. The Company also produces
electric motors for manufacturers of other electric appliances. The Company's
vertically integrated manufacturing facilities provide the Company with control
over the production process and product quality. These facilities also enhance
operational flexibility and allow the Company to quickly respond to changes in
consumer demand and to specialized production needs. The Company maintains
offices in Hong Kong and Taiwan that are responsible for sourcing raw
materials, processing orders and shipping the Company's products. The Company
coordinates product development, marketing, sales and distribution from the
Company's Milford, Massachusetts headquarters. The Company markets and
distributes products primarily under the Holmes[RegTM] brand name.
Competitive Strengths
The home comfort product market is highly competitive and fragmented. The
Company believes successful industry participants (i) deliver quality products
in a timely and cost effective manner, (ii) provide innovative product
introductions, (iii) offer a broad line of product categories across the entire
home comfort appliance market and (iv) provide value-added services to
retailers. Holmes believes that the following factors contribute to the
Company's position as a leader in the home comfort appliance market and serve
as the foundation for the Company's growth strategy:
Leading Market Share. Holmes believes that it has a leading U.S. market
share in each of the Company's four primary product categories: fans, heaters,
humidifiers and air purifiers. Management estimates that total retail sales of
these products in the United States exceeded $1.0 billion in 1996. Management
believes that the Company's leading market share provides Holmes with a
competitive advantage in terms of retail account relations and enhanced brand
awareness.
Innovation in Product Design. The Company has established a reputation for
innovation in product design, incorporating functional enhancements as well as
aesthetic improvements. Management believes that innovation in these areas has
contributed to the growth of the home comfort industry. In creating new
products, the Company seeks to develop product concepts and features not
offered in the marketplace, and which the Company can produce at strategic
price points. Holmes typically has introduced more than 20 new SKUs annually
(excluding new color introductions of previous models) to its primary home
comfort product offerings. The Company's expenditures for product development
and tooling totaled $9.5 million for the year ended December 31, 1997.
41
<PAGE>
Product innovations by the Company include:
[bullet] Oscillating heater
[bullet] Warm mist humidifier
[bullet] Accutemp[RegTM] digital temperature control
[bullet] Oscillating window fan
[bullet] Air purifier with sound conditioning feature
[bullet] Twin ceramic heater
New products and product line extensions introduced since January 1, 1994
accounted for a majority of the Company's net sales during the year ended
December 31, 1997. Management believes product innovation will continue to
stimulate demand for the Company's products. In addition, management believes
that product innovations provide opportunities to earn higher gross margins for
both the Company and the retailer.
Strong Retailer Network. The Company has established strong relationships
with leading retailers in each of the major channels of retail distribution.
The Company's 25 largest accounts represented 70.1% of net sales in 1997, with
the three largest, Wal-Mart, Kmart and Target, representing 39.4% of net sales
in 1997. The Company does not have long-term agreements with these retailers.
See "Risk Factors -- Dependence on Major Customers." The Company believes that
home comfort products provide retailers with higher profit potential than many
alternative product offerings. Management believes that this profit potential,
together with the Company's strong relationships with its retail customers, has
led many retailers to increase shelf space for the Company's products. Over the
years, Holmes has also received a number of awards from its customers in
recognition of the Company's contribution to retailers' profitability and
success, including Vendor of the Year in 1996 from Target, True Value, Pamida
and Venture Stores.
Focus on the Retailer and the Consumer. Holmes has established a
reputation among leading retailers for quality products, timely shipment and
value-added assistance in merchandising. The Company works with current and
potential retail customers to develop products at strategic price points that
meet consumer needs. Holmes also employs an in-house graphics team to develop
attractive and informative product packaging designed to educate the consumer
at the point of purchase. In addition, Holmes works closely with each retailer
to develop customized product displays, point-of-purchase signage and
educational materials. The Company also provides after-sale consumer services
such as a toll-free consumer information line.
Low Cost / High Quality Manufacturer. Management believes that Holmes is
both a low cost manufacturer and a quality leader in the home comfort industry.
The Company manufactures the majority of its products at its customized
production facilities in China. The Company believes that it has a cost
advantage as a result of its degree of vertical integration, purchasing power
and low labor costs. In addition, by operating its own vertically integrated
manufacturing facilities, Holmes has control over the quality of its products
from design through final distribution. Through rigorous control of the
manufacturing process, Holmes has established a strict quality control system
to ensure the highest quality of products.
Design and Engineering Expertise. Through its engineering expertise and
state-of-the-art technology, Holmes is able to rapidly and cost effectively
develop new products. The Company uses advanced CAD software in conjunction
with laser-based stereolithography to design and engineer new products. These
combined technologies allow the Company to design and produce prototypes of new
products quickly, thus enabling Holmes to accurately assess the feasibility,
cost and tooling requirements of new products before manufacturing the
products. The Company believes it is one of only a few U.S. manufacturers to
employ stereolithography technology and thereby enjoys a competitive advantage
in the design and rapid prototyping of new products and product line
extensions. These technologies also enhance the sales process by allowing
customers to view working samples of new products before they are tooled. The
Company has reduced the average time from product conception to market
introduction from approximately 20 months three years ago to approximately nine
months currently.
Talented Senior Management Team with Significant Equity Ownership. Holmes
has an experienced and entrepreneurial management team, with an average of over
11 years of industry experience. The Company's Chief Executive Officer, Jordan
A. Kahn, founded the Company in 1982 and is recognized as an innovator in the
home comfort appliance industry. The Company's senior management team also
includes Stanley Rosenzweig (Chief Operating Officer), Gregory F. White
(Executive Vice President, Sales and Marketing) and Tommy Liu (Managing
Director of the Company's Far East operations). The Company's senior management
team owns an aggregate of approximately 25.7% of the Company's common stock.
42
<PAGE>
Business Strategy
The Company's strategy is to achieve further growth in net sales,
profitability and cash flow by: (i) increasing sales of existing products; (ii)
introducing new product categories and product line extensions; and (iii)
expanding geographically. The Company intends to implement this strategy by
pursuing the following initiatives:
Further Penetrate Existing Distribution Channels. The Company believes
that it can further penetrate its existing distribution channels as a result of
favorable industry dynamics and the Company's strong relationships with mass
merchant retailers, the fastest growing segment in retail distribution. Holmes
currently sells to the largest, most sophisticated mass merchant retailers and
believes it is well suited to grow this business with both existing and new
customers. Management believes that mass merchants will continue to consolidate
their vendor base and focus on a smaller number of sophisticated suppliers that
can (i) provide a broad array of differentiated, quality products, (ii)
efficiently and consistently fulfill logistical requirements and volume demands
and (iii) provide full product support from design to point of sale and
after-market service with the consumer. Holmes believes that it is well
situated to capitalize on these trends.
Develop New Distribution Channels. The Company continues to develop new
channels of distribution by providing customized product offerings that appeal
to the specific needs of each channel. Since 1996, Holmes has successfully
marketed select products through an arrangement with the QVC electronic
retailing network. In addition, Holmes recently introduced a new line of
humidifiers and air purifiers, called Family Care[RegTM], to be marketed
through national drugstore chains. The Company has also partnered with Gerry
Baby Products to market the Company's products under the Gerry brand name and
expand into the juvenile products distribution channel.
Pursue Targeted Marketing Opportunities. As part of the Company's growth
strategy, the Company has established several strategic alliances in order to
promote awareness of the Company's products. For example, the Company has
established a marketing affiliation with the Allergy and Asthma Foundation of
America and has developed a strategic marketing partnership with the Brita
Products Company, a subsidiary of Clorox Company, to market a new humidifier
that integrates the Brita[RegTM] water filter. The Company has also entered
into a variety of cross-merchandising relationships with other manufacturers
including Stanley Tools, Toro, Vaseline and Benadryl.
Leverage Core Competencies to Expand Product Offerings. The Company
believes that its product development capabilities, established distribution
network, marketing skills and ability to identify customer needs uniquely
position it to successfully enter into new product categories within the
portable appliance industry, either through internal growth or selective
acquisitions. For example, in 1993, Holmes introduced a line of decorative and
home office lighting products. The Company believes that it can successfully
enter additional product categories based on the Company's core competencies
within the household and portable appliance industry. In addition to its core
appliance business, the Company designs, develops and sells electric motors to
original equipment manufacturers, including Frigidaire.
Expand into New Geographic Regions. The Company believes that the European
and Asian home comfort markets are underdeveloped and represent significant
growth opportunities. As a result, the Company has begun to focus on marketing
its products in these regions. The Company currently sells its products in
Europe and Asia on an original equipment manufacturer basis and, in August
1996, launched the sale of branded home comfort products in France.
In furtherance of its strategic objectives, the Company may from time to
time engage in discussions regarding mergers, acquisitions or other types of
business combination transactions with third parties in the consumer products
industry. The provisions of the Credit Facility permit the Company to make
acquisitions that satisfy certain criteria.
Products
Holmes is a leading developer, manufacturer and marketer of quality,
branded home comfort products, including fans, heaters, humidifiers and air
purifiers, which allow consumers to better control aspects of their home
environment, such as temperature and air quality. Management estimates that
total retail sales of these products in the United States exceeded $1.0 billion
in 1996. In addition, the Company markets and distributes dehumidifiers and a
variety of decorative and home office lighting products, including table, floor
and wall-mounted lighting products used principally in residential and
commercial settings.
Fans. The Company currently manufactures and markets approximately 60
different fan models, including table, stand, window, window-to-floor, box,
commercial grade, high velocity and oscillating fans, typically for
43
<PAGE>
purchase and use by household consumers. Retail prices for the Company's fans
range from $10 to $80. From 1993 to 1997, net sales of the Company's fans have
increased at a compound annual growth rate of 20.2%.
Heaters. Portable electric space heaters are used to heat areas of the
house not reached by central heat and to heat an individual room while that
room is in use. The Company currently manufactures and markets approximately 46
different heater models, including plastic, ceramic, metal, radiant and
baseboard styles. Retail prices for the Company's heaters range from $20 to
$70. In recent years, the Company has expanded its products to cover virtually
every segment and price point in the heater category, a strategy that has been
a key driver of recent sales growth. From 1993 to 1997, net sales of the
Company's heaters have increased at a compound annual growth rate of 34.4%.
Humidifiers. Consumers use humidifiers to provide greater comfort by
increasing moisture in the home environment. The Company currently manufactures
and markets approximately 25 different humidifiers, including cool mist, warm
mist, ultrasonic and console models that range in moisture output from one to
12 gallons per day. Retail prices for the Company's humidifiers range between
$20 and $150. The Company also sells a variety of humidifier accessories,
replacement parts and chemical treatments. From 1993 to 1997, net sales of the
Company's humidifiers have increased at a compound annual growth rate of 30.5%.
Air Purifiers. Air purifiers circulate a room's air through filters that
remove contaminants from the air. In recent years, high efficiency particulate
arresting ("HEPA") filters have come to dominate the industry. This product
category has experienced tremendous growth as consumers have become more
concerned with their home environment and have learned about the benefits of
air purifiers. The Company currently manufactures and markets 17 different air
purifier models. Retail prices for the Company's air purifiers range between
$20 and $280. Air purifiers represent one of the fastest growing niches of the
Company's home comfort appliance product line. From 1993 to 1997, net sales of
the Company's air purifiers have increased at a compound annual growth rate of
47.6%.
Filters/Accessories. Most humidifiers and air purifiers require
accessories including replacement filters and chemical treatments. The
Company's air purifiers periodically need new replacement filter cartridges and
humidifiers need new replacement wick filters. As the Company's installed base
of these products continues to expand, the Company expects that the market for
these accessories will grow as well. In addition, the Company believes that
sales of filters and accessories increase brand awareness and customer loyalty.
Dehumidifiers. Dehumidifiers are compressor-based appliances designed to
remove humidity from the air. Dehumidifiers typically are larger and heavier
than the Company's primary home comfort product categories and sell for higher
retail prices, but generally at lower profit margins. The Company currently
markets four different dehumidifier models in order to complete its product
line. In 1994, the Company entered into an arrangement with Frigidaire to
produce the Company's dehumidifiers on an original equipment manufacturer
basis.
Lighting Products. Holmes began marketing portable lighting equipment in
1993, and currently sells over 90 different lighting models. These products
complement the Company's traditional home comfort product line, provide an
additional non-seasonal category for the Company and are distributed through
the same distribution channels as the Company's home comfort appliances. The
Company's lighting products are manufactured by subcontractors in China and in
the U.S. Retail prices for the Company's products range between $10 and $100.
Electric Motors. The Company, through its wholly owned subsidiary, Raider
Motor Corp., has proven strengths in the design and manufacture of a variety of
electric motors for use in home and commercial appliances. In addition to
supplying most of the motors for Holmes' products, the Company has sufficient
manufacturing capacity to supply other manufacturers of appliances with
electric motors. The Company currently designs, develops and sells motors to
original equipment manufacturers, including Frigidaire.
Product Design and Development
The Company believes that a key to its continuing success is its ability
to develop innovative new products, employing concurrent engineering to
facilitate its efforts and accelerate the product development cycle. The
Company has an internal product design and research and development team
dedicated to developing new products and product line innovations. The team
consists of an aggregate of 48 employees located in both Milford,
Massachusetts, and in the Far East. The Company also retains the services of
outside consultants to assist its internal team. The Company's design team
works closely with the Company's manufacturing personnel to evaluate the
manufacturing efficiency and feasibility of specific design concepts and
proposed products.
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<PAGE>
The Company believes that consumers of its products often make purchase
decisions on the basis of a product's design appeal and features, as well as
price. As a result, Holmes designs its products to be attractive to consumers.
The Company continually seeks to implement product and design innovations to
maintain the attractiveness of the Company's products in light of continually
changing consumer tastes and the retail environment.
The Company utilizes both employee and retailer feedback in identifying
new products and product enhancements. Once targeted for possible production,
the Company utilizes advanced CAD software and state-of-the-art
stereolithography prototyping equipment to design and engineer new product
prototypes. The Company believes that these technologies have improved the
speed and efficiency of the design process and the quality of the finished
products. The Company has reduced the average time from product conception to
market introduction from approximately 20 months three years ago to
approximately nine months currently.
The Company's expenditures for product development and tooling were
approximately $9.5 million for the year-ended December 31, 1997. New products
and product line extensions introduced since January 1, 1994 accounted for a
majority of the Company's net sales during the year ended December 31, 1997.
Quality and Safety
Holmes' commitment to quality is a critical element of its product
philosophy. To fulfill this commitment, the Company has established strict
quality programs and controls for its operations and those of its
subcontractors. The Company's products feature a number of safety
characteristics, including controls to shut off automatically when overheated
or tipped over, carrying handles for small items and indicator lights on
heaters and humidifiers. Quality control, which is coordinated by the Company's
50-person quality engineering department, begins in the design and engineering
process and extends through manufacturing, product testing, and after-sale
consumer service. The Company tests its products for performance, safety and
reliability and substantiates all product performance claims through rigorous
testing. All of the Company's products, except for accessories, replacement
pads and chemicals, carry a limited warranty, extending for periods ranging
from one to five years from the date of purchase. In addition, as part of the
product development process, Holmes submits products for safety testing by
independent laboratories, including Underwriters Laboratories, Inc. ("UL"), the
Canadian Standards Association, and similar testing laboratories in other
countries. The Company also has implemented quality programs for its major
subcontractors and has stationed Company quality control personnel at key
subcontractor manufacturing facilities, and has begun to implement the ISO 9001
quality assurance standards promulgated by the International Organization for
Standardization.
Manufacturing
The Company manufactures most of its products at its manufacturing
facilities in China. The Company's facilities are highly integrated and produce
most of the electric motors, injection molded plastic components and other
components used in the manufacturing and assembly process. The balance of the
Company's products are produced through subcontracted manufacturers in China
and the United States, generally under the supervision of the Company's
employees. The management, coordination, and control of all manufacturing
operations are centralized at the Company's principal offices in Milford,
Massachusetts.
The Company sources components for its products from suppliers in Asia,
Europe and North America and subcontracts manufacturing from producers in
China, Taiwan and the United States. The Company does not believe that it is
dependent on any single source of components or any single subcontractor or
vendor. Holmes owns all of its proprietary manufacturing designs, molds, dies,
and tooling used in production of its products. The Company believes that
ownership and control over these aspects of its operations enable it to more
easily move all or part of its operations to a new location or new
subcontractors, if necessary. In addition, the Company believes that there are
sufficient alternative sources of components, manufacturing sites, and
subcontractors available for the manufacture of its products. The Company
believes its relationships with its subcontractors are generally good. See
"Risk Factors -- Risks of Non-U.S. Operations" and " -- Dependence on
Manufacturing Facilities."
The Company purchases raw materials for its manufacturing operations from
numerous suppliers and does not believe that it is dependent on any single
source for any specific raw material or any significant portion of its raw
material purchases. See "Risk Factors -- Cost and Availability of Raw
Materials."
45
<PAGE>
Sales and Marketing
The Company's products are sold in the United States and Canada by an
internal sales staff consisting of ten sales managers with assistance from
internal sales support staff and from regional independent manufacturers'
representative organizations. The Company's sales managers are actively
involved in servicing all aspects of each retail account.
The Company currently utilizes 32 manufacturers' sales representative
organizations, all of which are paid on a commission basis. Although the
Company's manufacturers' sales representatives sell a range of consumer
products, including those of other manufacturers, they are contractually
prohibited from selling any products that compete with those of the Company.
Holmes has historically had a low rate of turnover of its sales representatives
and has therefore been able to provide continuity in its relationships with its
retailer customers.
The Company's marketing department consists of 12 individuals who are
responsible for market analysis, new product development, pricing strategy,
promotions and overall category development. The Company believes that its
packaging is one of its most powerful marketing tools because most consumers
typically purchase heaters, humidifiers and fans without the benefit of
knowledgeable retail sales staff. The Company's packaging and point-of-purchase
support provide written information and illustrations regarding product
features, usage instructions, safety features and product operation. The
Company has an in-house art department that develops over 90% of these
packaging and marketing materials on state-of-the-art desktop graphic systems.
Consumer Services
The Company maintains a customer service department and provides a
toll-free telephone number (800-5HOLMES) to assist with product assembly and
operation, respond to consumer inquiries about where to purchase Company
products, arrange for repairs of products under warranty and fill orders for
replacement items such as filters. The Company's consumer service line is
monitored and recorded to ensure consistent quality. The customer service line
enables the Company to maintain direct contact with and feedback from the end
users of its products, which the Company believes enhances brand loyalty.
Distribution
In order to respond most efficiently to the demands of its retail
customers and ensure timely delivery, particularly for those purchasing
products on a "just-in-time" basis, the Company balances direct shipments from
its manufacturing facilities with shipments from its domestic and international
warehouses. The Company leases five warehouse facilities in the United States
and Canada which provide flexible stocking in close proximity to retail
customers.
The Company's vertically integrated manufacturing capability, combined
with its domestic distribution system, contribute to its ability to deliver
products promptly and to respond quickly to re-orders and stockouts. The
Company employs an electronic data interchange ("EDI") system with selected
retail customers to expedite order and invoice processing.
Competition
The Company believes that the markets for its products are developed and
highly competitive. Management believes that competition is based upon several
factors, including price, access to retail shelf space, product features,
product enhancements, brand names, new product introductions, and marketing
support and distribution systems.
The Company competes with established companies, some of which have
substantially greater facilities, personnel, financial and other resources than
those of the Company. Holmes' major competitors include AdobeAir, Catalina
Lighting, Cheyenne, Fedders, Frigidaire, Honeywell Consumer Products (maker of
Duracraft and Enviracaire brands), Kenmore, Norelco, Rival (maker of Bionaire,
Pollenex and Patton brands), Sunbeam, Tensor and Windmere. The Company also
competes with importers and foreign manufacturers of unbranded products. See
"Risk Factors -- Competition."
Holmes believes that its most important competitive strengths are the
quality, design and competitive pricing of its products, its attention to
retailer and consumer needs, its access to major channels of distribution, the
development of new products and innovation in existing products, its ability to
provide timely shipment through its manufacturing and distribution facilities
and the capabilities of its management team.
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Properties
The following table identifies the Company's principal facilities (all of
which are leased), the primary activity at each of the facilities listed and
the expiration date of the applicable lease.
<TABLE>
<CAPTION>
Location Size Primary Use Lease Expiration
- ----------------------- --------------------- ------------------------------- -----------------
<S> <C> <C> <C>
Milford, MA 83,000 square feet Headquarters and Distribution 2001
Dongguan, China (1) 466,000 square feet Manufacturing and Assembly 2006
Dongguan, China (2) 269,000 square feet Motor Manufacturing 2004
Clinton, MA 207,000 square feet Distribution 1999
Worcester, MA (3) 156,000 square feet Distribution 2003
Vernon, CA Varies Distribution At will
Mississaugua, Ontario Varies Distribution At will
Hong Kong 10,300 square feet Office 1999
Taipei, Taiwan 1,700 square feet Office 1998
</TABLE>
- ------------
(1) These facilities are located in Guangdong Province, China, approximately 70
miles from Hong Kong. These facilities include 20 buildings on two
separate campuses that include manufacturing, assembly, warehousing, and
employee dormitory operations. The lease expiration date assumes the
exercise of the Company's options to extend the lease on the primary
manufacturing building.
(2) These facilities are located less than one-half mile from the manufacturing
and assembly facilities. These facilities include three buildings and
separate employee dormitories. The lease expiration date assumes the
exercise of the Company's options to extend the lease on the primary
manufacturing building.
(3) Includes leases in place for space currently under construction.
Employees
As of December 31, 1997, the Company employed approximately 4,150 people,
of which approximately 3,900 were located at the Company's manufacturing
facilities in Dongguan, China, approximately 66 were located in Hong Kong and
Taiwan, and 164 were located in the United States.
Regulation
The Company is subject to federal, state and local regulations concerning
the environment, occupational safety and health, trade-related issues and
consumer products safety. The Company believes that it is in material
compliance with all of such regulations. There can be no assurance, however,
that such regulations will not negatively affect the Company in the future. The
Company's operations could also be adversely affected by other regulations
relating to its foreign operations, including changes in trade laws, increased
import duties, import/export regulations and change in foreign laws. See "Risk
Factors."
Patents and Trademarks
The Company holds a number of patents and trademarks registered in the
United States, Canada, and other countries for various products and
technologies. Additional patent applications are pending in the United States,
Canada and Mexico. The Company also registers trademarks on product names and
unique features. The Company believes that none of its product lines is
dependent upon any single patent, group of patents or other intellectual
property rights. See " -- Legal Proceedings."
Legal Proceedings
Products such as fans, humidifiers, heaters, air purifiers and lighting
appliances manufactured by the Company and its competitors have features that
are the subject of numerous patents. From time to time in the course of its
business, the Company is a party to patent and trademark litigation as
plaintiff or defendant. The Company does not believe that such existing or
potential litigation will have a materially adverse effect on its business,
financial condition or results of operations.
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<PAGE>
The Company is also a party to various actions and proceedings incident to
its normal business operations, including product liability litigation. The
Company believes that the outcome of such litigation will not have a material
adverse effect on its business, financial condition or results of operations.
The Company has product liability and general liability insurance policies in
amounts it believes to be reasonable. There can be no assurance, however, that
such insurance will be adequate to cover all potential product or other
liability claims against the Company. See "Risk Factors -- Product Liability."
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to the
directors and executive officers of the Company. The Company's directors are
elected annually by the stockholders. Pursuant to the terms of a Stockholders'
Agreement entered into in connection with the Transactions, the Company's
stockholders have agreed to vote in favor of the election of the persons named
as directors below. The Company's officers serve at the pleasure of the
directors.
<TABLE>
<CAPTION>
Name Age Positions
- -------------------------- ----- --------------------------------------------------
<S> <C> <C>
Jordan A. Kahn 55 President, Chief Executive Officer and Director
Stanley Rosenzweig 33 Chief Operating Officer and Director
Gregory F. White 33 Executive Vice President, Sales and Marketing and
Director
(Tommy) Woon Fai Liu 46 Managing Director of Holmes' Far East operations
David Dusseault 43 Chief Financial Officer
Richard K. Lubin 51 Director
Randy Peeler 33 Director
</TABLE>
Other Key Employees
The following table sets forth certain information with respect to certain
other key employees of the Company:
<TABLE>
<S> <C> <C>
Yigal Offir 35 Executive Vice President, Manufacturing
Robert Livergood 64 President, Holmes Lighting
Russell Owens 46 Senior Vice President, Director of Sales
Kathleen Kelly 33 Vice President of Sales Administration and Imports
Stephen Harris 34 Vice President, Air Purification
Neville Glenn 65 Vice President, Research and Development
Julie Garilli 33 Vice President, Human Resources
Paul Powers 33 Director of Marketing
</TABLE>
Jordan A. Kahn, founder of the Company, has served as President and Chief
Executive Officer and a director since its organization in 1982. Since 1968,
Mr. Kahn has also been President of Jordan Kahn Co., Inc., a manufacturer's
representative representing small electric personal appliance manufacturers,
including the Company, to retailers across the Northeast.
Stanley Rosenzweig has served the Company since 1991, initially as Vice
President -- Operations, and since 1993 as Chief Operating Officer and a
director. From 1987 to 1988, Mr. Rosenzweig served as a management consultant
with Bain & Company, and from 1988 to 1989 as a sales manager with Jolson
Corporation, a Canadian appliance company.
Gregory F. White has served as Executive Vice President, Sales and
Marketing since 1995, and from 1993 to 1995 as Vice President -- Marketing. He
became a director of the Company in 1997. Mr. White served as Account
Supervisor at Ammirati & Puris, an advertising agency, from 1992 to 1993 and as
Account Manager at the advertising agency D'Arcy, Masius, Benton & Bowles from
1991 to 1992.
(Tommy) Woon Fai Liu became Managing Director of the Company's Far East
operations upon the closing of the Transactions. From 1993 to 1997, Mr. Liu
served as Chief Financial Officer and Executive Director of Asco General
Supplies Far East Limited, a subsidiary of Pentland, as well as Executive
Director of Holmes Far East since 1994. From 1989 to 1993, Mr. Liu was Finance
Director for Johnson & Johnson Hong Kong.
David Dusseault has served as Chief Financial Officer of the Company since
1992 and from 1988 to 1992 as Comptroller of the Company. From 1981 to 1987,
Mr. Dusseault served as Comptroller at Leach and Garner Refining.
Richard K. Lubin is a Managing Director of Berkshire Partners, which he
co-founded in 1986, and has been a director of many of the firm's
manufacturing, retailing and transportation investments, including, among
others, InteSys Technologies, Inc. and English Welsh & Scottish Railway, Ltd.
In addition, Mr. Lubin is Treasurer of the
49
<PAGE>
Dana-Farber Cancer Institute and a Trustee of Beth Israel Deaconess Medical
Center. He became a director of the Company in 1997.
Randy Peeler is a Vice President of Berkshire Partners, where he has been
employed since 1996. From 1994 to 1996, he was responsible for new business
ventures at Health Advances, a healthcare industry consulting firm. From 1993
to 1994, he served as Chief of Staff to the Assistant Secretary for Economic
Policy at the U.S. Department of the Treasury. Prior to that, he was a
consultant with Cannon Associates. He became a director of the Company in 1997.
Yigal Offir has served as Executive Vice President, Manufacturing of the
Company since 1995. From 1994 to 1995, Mr. Offir served as Director of
Engineering at Helen of Troy, Inc., a personal care and appliance company. From
1986 to 1994 he served in a variety of engineering positions at Helen of Troy,
Inc. and from 1980 to 1986 he served in the Israeli Navy.
Robert Livergood has served as President, Holmes Lighting since 1995. From
1993 to 1995, he served as Vice President, Sales of Holmes Lighting, and from
1991 to 1993 he was Vice President, Sales for the Company's Western Division.
Russell Owens has served as Senior Vice President, Director of Sales of
the Company since 1995. From 1993 to 1995 he served as Vice President, Sales
for the Company's Western Division. From 1985 to 1993, Mr. Owens was Sales
Director for Wallace Products, Inc., a manufacturer of furniture and household
products.
Kathleen Kelly has served as Vice President of Sales Administration and
Imports of the Company since 1995. She has held various positions since she
joined the Company in 1986.
Stephen Harris has served as Vice President, Air Purification Products
since 1996. From 1992 to 1996, he served as National Sales and Marketing
Manager for Air Purification Products.
Neville Glenn has served as Vice President, Research and Development of
the Company since 1996. From 1993 to 1996, Mr. Glenn served as Vice President,
Engineering. From 1991 to 1993, he acted as a consultant to the Company, and
from 1987 to 1991 he was Vice President, Engineering at Bionaire, Inc., a home
comfort products company.
Julie Garrilli has served as Vice President, Human Resources of the
Company since 1995. From 1986 to 1995 she served as Administrative Manager of
the Company.
Paul Powers joined Holmes as Director of Marketing in 1997. From 1995 to
1997, he served as Divisional Merchandise Manager, and from 1992 to 1995 as a
buyer, for Hill's Department Stores.
Compensation of Executive Officers
The following Summary Compensation Table sets forth, for the past two
fiscal years, the compensation for the Company's Chief Executive Officer and
the other four most highly compensated executive officers of the Company who
earned in excess of $100,000 in salary and bonus for the fiscal year ended
December 31, 1997.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------------------------------- -------------------
Other Annual All Other
Name and Principal Position Salary Bonus Compensation(1) Compensation
- ---------------------------------------------- ---------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Jordan A. Kahn ............................... 1997 $ 300,000 $ 752,000 $31,200 $ 3,964,000(2)
President and Chief Executive Officer 1996 300,000 825,000 31,200 --
Stanley Rosenzweig ........................... 1997 200,000 290,000 15,600 1,984,324(3)
Chief Operating Officer 1996 200,000 225,000 15,600 632,892(4)
Gregory F. White ............................. 1997 150,000 145,000 10,200 509,237(5)
Executive Vice President, Sales and Marketing 1996 150,000 112,500 10,200 4,673(6)
(Tommy) Woon Fai Liu ......................... 1997 270,513(7) 66,667(8) 2,083 --
Managing Director of Holmes Far East 1996 200,000(7) 25,000(8) -- --
David Dusseault(9) ........................... 1997 90,000 50,000 -- 4,552(6)
Chief Financial Officer
</TABLE>
50
<PAGE>
- ------------
(1) Represents automobile allowance or annual lease payments on automobile
provided by the Company.
(2) Represents bonuses paid in connection with theTransactions pursuant to the
previous employment agreement described under " -- Employment Agreements."
(3) Includes $9,500 representing the Company's matching contribution under its
401(k) plan, $20,824 paid in 1997 on account of a previous employment
agreement with the Company and $1,954,000 which was paid in connection
with the Transactions pursuant to the incentive compensation agreement
described under " -- Employment Agreements."
(4) Includes $9,500 representing the Company's matching contribution under its
401(k) plan, $77,392 paid in 1996 on account of a previous employment
agreement with the Company and $546,000 accrued for 1996 which was paid in
connection with the Transactions pursuant to the incentive compensation
agreement described under "--Employment Agreements."
(5) Includes $9,237 representing the Company's matching contribution under its
401(k) plan and $500,000 which was paid in connection with the
Transactions pursuant to the incentive compensation agreement described
under " -- Employment Agreements."
(6) Represents the Company's matching contribution under its 401(k) plan.
(7) Includes compensation paid to Mr. Liu by the Company and by an affiliate of
Pentland.
(8) Does not include any amounts paid by affiliates of Pentland for services
rendered to such affiliates.
(9) Mr. Dusseault did not earn in excess of $100,000 in 1996.
Director Compensation
The Company may compensate its directors for services rendered in such
capacity.
Employment Agreements
Messrs. Kahn, Rosenzweig, White and Liu (the "Executives") have entered
into Employment and Non-Competition Agreements with the Company, effective as of
the closing of the Transactions, which provide for their continued employment in
their present capacities with the Company for an initial term through December
31, 2000. Each agreement will thereafter renew for consecutive one-year terms
unless terminated by either party. Mr. Kahn's base salary is currently $400,000
per year, Mr. Rosenzweig's base salary is currently $250,000 per year, Mr.
White's base salary is currently $200,000 per year, and Mr. Liu's base salary is
currently $200,000 per year plus a $25,000 living expense allowance per year.
Each Executive is entitled to receive an annual performance bonus for 1997. In
addition, commencing January 1, 1998, each Executive is entitled to an annual
performance bonus equal to up to 50% of his base salary based on achievement of
certain performance criteria. These agreements provide that if employment is
terminated without cause, the Executives will receive severance payments of
their respective salaries for the longer of 12 months or the remainder of the
term, in the case of Mr. Kahn, or for 12 months, in the case of the other
Executives.
In conjunction with the closing of the Transactions, Mr. Kahn's previous
employment agreement was terminated for a lump-sum payment to Mr. Kahn of
$900,000, as specified in the agreement, plus a payment of the bonus accrued
under the terms of the agreement for the period through the effective date of
the closing of the Transactions (approximately $752,000). In addition, Mr. Kahn
received an additional bonus in conjunction with the closing of the Transactions
of approximately $3.1 million. Mr. Rosenzweig was party to an Incentive
Compensation Agreement with the Company providing for incentive compensation
payments in the event of a sale of the Company or certain other transactions,
including the Transactions. Pursuant to that agreement, Mr. Rosenzweig received
$2.5 million upon the closing of the Transactions. Mr. White was party to an
employment agreement with the Company providing for a lump-sum payment of
$500,000 upon the closing of the Transactions.
1997 Stock Option Plan
The Company's 1997 Stock Option Plan (the "Option Plan"), adopted in
connection with the Transactions, provides for the grant of incentive stock
options and non-qualified stock options to directors, officers, employees,
consultants and other key persons of the Company. An aggregate of 73.9 shares
of the Company's common stock have been reserved for issuance under the Option
Plan, representing approximately 13.5% of the Company's common stock on a
fully-diluted basis (subject to adjustment for stock splits and similar
events). The options and the common shares purchasable upon exercise of options
are expected to be subject to certain restrictions and vesting schedules, which
may be time- or performance-based. The exercise price of the options will
generally be equal to the fair market value of the common shares at the time of
issuance of such options.
51
<PAGE>
The Option Plan is administered by the Board of Directors or a Committee
consisting of two or more directors. Subject to provisions of the Option Plan,
the Board of Directors has the authority to select optionees and determine the
terms of the options granted, including (i) the number of shares subject to
such option, (ii) when the option becomes exercisable and (iii) the exercise
price of the option; provided, however, that no option may have a term in
excess of ten years from the date of grant.
No grants of options were made in 1997, and no options were outstanding at
December 31, 1997.
52
<PAGE>
SHARE OWNERSHIP
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of the date hereof.
Except as indicated in the footnotes to this table, the Company believes that
the persons named in this table have sole voting and investment power with
respect to all shares of common stock indicated.
<TABLE>
<CAPTION>
Name and Address of No. of Percent of Outstanding
Beneficial Owner (1) Shares Shares(2)
- --------------------------------------------- ---------- -----------------------
<S> <C> <C>
Berkshire Fund IV, LP (3) ............... 293.3 62.0%
c/o Berkshire Partners LLC
One Boston Place
Boston, MA 02108
Jordan A. Kahn (4) ...................... 94.6 20.0
Bain Securities, Inc. (5) ............... 27.0 5.7
c/o Bain Capital, Inc.
2 Copley Place
Boston, MA 02116
Asco Investments Ltd. (6) ............... 24.1 5.1
c/o Pentland Group plc
The Pentland Centre
Squires Lane
London, England N3 2QL
Stanley Rosenzweig (4) .................. 13.5 2.9
Gregory F. White (4) .................... 8.1 1.7
(Tommy) Woon Fai Liu (4) ................ 5.4 1.1
Richard K. Lubin (7) .................... 293.3 62.0
Randy Peeler (7) ........................ 293.3 62.0
All directors and executive officers as a
group (7 persons) (4) (8) ............. 414.9 87.7
</TABLE>
- ------------
(1) Unless otherwise specified, the address of each person is c/o Holmes
Products Corp., 233 Fortune Boulevard, Milford, MA 01757.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and reflects general voting power and/or investment power with
respect to securities. Shares of common stock subject to options or
warrants currently exercisable or exercisable within 60 days of the date
of this Prospectus are deemed outstanding.
(3) Includes shares beneficially owned by another investment fund affiliated
with Berkshire Fund IV, LP.
(4) Does not include any shares of common stock which may be subject to stock
options granted following the closing of the Transactions under the Option
Plan.
(5) Includes shares beneficially owned by an affiliated investment entity.
(6) Does not include shares of common stock subject to a warrant to purchase 5%
of the common stock, exercisable in certain circumstances. See "The
Transactions; Use of Proceeds." Asco Investments Ltd. is a subsidiary of
Pentland.
(7) This person is affiliated with Berkshire Partners and may be deemed to
beneficially own the shares held by Berkshire Fund IV, LP and its
affiliates. This person disclaims beneficial ownership of such shares.
(8) Includes shares referred to in Note 7, beneficial ownership of which is
disclaimed.
53
<PAGE>
CERTAIN TRANSACTIONS
Pursuant to a Management Agreement ("the Management Agreement") entered
into as of the closing date of the Transactions (the "Closing Date"), Berkshire
Partners received a $1.5 million fee from the Company on the Closing Date and
will receive an annual fee of $400,000 per year for the provision of management
and advisory services to the Company. The Management Agreement is in effect for
a term of five years, provided that the Management Agreement will terminate on
the later of the first date that (i) Berkshire Partners owns less than 40.0% of
the Company's common stock on a fully diluted basis, and (ii) Berkshire
Partners owns fewer common shares than the members of the Company's management,
taken as a group, or fewer shares than any other single stockholder. On the
Closing Date, Berkshire Partners was also entitled to designate two of the
Company's directors and has the right, at its election, to increase the size of
the Board of Directors and the number of directors designated by it by an
additional two directors.
Since its inception in 1982, the Company has retained Jordan Kahn Co.,
Inc. ("JKC"), a corporation owned by Jordan A. Kahn, to serve as a sales
representative for the Company in the northeastern United States. Pursuant to a
representation agreement between the Company and JKC, the Company has agreed to
pay to JKC a commission on net sales to JKC's customers in its territory, which
fee is the same fee paid by the Company to other unaffiliated sales
representative organizations representing the Company in other territories
throughout the United States. Pursuant to this arrangement, the Company paid a
total of $403,000, $480,000 and $367,000 to JKC for the years ended December
31, 1995, 1996 and 1997, respectively.
In connection with the Transactions, the Company purchased a portion of
the shares of common stock of Holmes U.S. owned by Pentland, and issued to
Pentland a warrant to purchase shares of the Company's common stock under
certain circumstances. See "The Transactions; Use of Proceeds." In addition,
the Company entered into new employment agreements with Messrs. Kahn,
Rosenzweig, White and Liu, and made certain payments to Messrs. Kahn,
Rosenzweig and White, in connection with the Transactions. See "Management."
During 1993, the Company entered into a revolving credit facility with an
affiliate of Pentland, pursuant to which such affiliate provided short-term
loans to the Company. Interest on the loans made under the revolving credit
facility was payable at the expiration of each loan, and totaled approximately
$1.5 million, $2.4 million and $2.4 million for the years ended December 31,
1995, 1996 and 1997, respectively. Another affiliate of Pentland provided the
Company with trade acceptance and letter of credit financing for its purchases
from foreign manufacturers. The Company paid a commission for administrative
services related to the processing of these trade acceptances. The commissions
paid by the Company approximated $1.6 million, $2.0 million and $1.8 million
for the years ended December 31, 1995, 1996 and 1997, respectively. In
conjunction with the Transactions, all of the financing facilities provided by
Pentland and its affiliates were terminated and paid in full. In addition, a
net payable of $10.0 million due to affiliates of Pentland as of the closing
date was repaid in connection with the Transactions. See Note 3 of Notes to
Consolidated Financial Statements.
54
<PAGE>
DESCRIPTION OF CREDIT FACILITY
As of the Closing Date, Holmes and certain of its Subsidiaries entered
into a $100.0 million revolving credit facility (the "Credit Facility") with
BankBoston, N.A. ("BankBoston"), Lehman Brothers Inc. and certain other
financial institutions party thereto. Subject to compliance with certain
covenants, including certain financial covenants, and the satisfaction of
customary borrowing conditions, Holmes and certain of its subsidiaries, as co-
borrowers, are permitted to borrow up to an aggregate of $100.0 million. The
Credit Facility also provides for the issuance of letters of credit. The Credit
Facility is secured by substantially all of the Company's domestic and certain
foreign assets and certain of the subsidiary co-borrower's assets, and is
guaranteed by all of the Company's direct and indirect domestic subsidiaries
and certain foreign subsidiaries, which guarantees are secured by substantially
all of such subsidiaries' assets. Borrowings under and subsidiary guarantees of
the Credit Facility represent Senior Debt under the Indenture. Moreover, a
default under the Indenture will result in a cross-default under the Credit
Facility.
The ability of the Company to borrow under the Credit Facility is subject
to, among other things, compliance with covenants and financial ratios
contained in the Credit Facility. Borrowings under the Credit Facility will
mature and be payable in January 2003.
The Credit Facility bears interest, at the Company's option, at the
Alternate Base Rate (as defined below) or a LIBOR rate, plus specified margins
based on the ratio of the Company's Total Debt to EBITDA (each as defined
therein). The Alternate Base Rate is the greater of BankBoston's base rate as
announced from time to time and the federal funds effective rate plus 0.50%.
The applicable margins were initially set at the Alternate Base Rate plus 0.50%
or the LIBOR rate plus 2.00%.
The Credit Facility contains covenants and provisions that restrict, among
other things, the Company's and its subsidiaries' ability to (i) incur
additional indebtedness, (ii) incur liens on their property, (iii) make certain
investments, (iv) prepay, repurchase or redeem subordinated debt, including the
Notes, (v) make capital expenditures, (vi) make distributions, (vii) engage in
certain sales of assets, (viii) engage in acquisitions that do not meet
specified criteria and (ix) engage in certain transactions with affiliates. The
Credit Facility also requires the Company to maintain certain financial ratios
which become more stringent over the life of the facility, including: (a)
minimum fixed charge coverage ratios which begin at 1.05 to 1.0 and increase to
1.2 to 1.0 for fiscal quarters ending after December 31, 1999; (b) minimum
interest coverage ratios which begin at 1.75 to 1.0 and increase to 2.15 to 1.0
for fiscal quarters ending after December 31, 1999 and (c) maximum ratios of
total debt to EBITDA which begin at 6.0 to 1.0 and decrease to 5.5 to 1.0 after
March 30, 1999.
55
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
General
The Exchange Notes will be issued pursuant to the Indenture among the
Company, the Guarantors and State Street Bank and Trust Company, as trustee
(the "Trustee"). The terms of the Exchange Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange
Notes are subject to all such terms, and Holders of the Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following is a summary of the material provisions of the Indenture. Such
summary is qualified in its entirety by reference to the Indenture, including
the definitions therein of certain terms used below. Copies of the Indenture
and Registration Rights Agreement will be made available as set forth under the
caption " -- Additional Information." The definitions of certain terms used in
the following summary are set forth below under the caption " -- Certain
Definitions." For purposes of this Description of the Exchange Notes, the term
"Company" refers only to Holmes Products Corp. and not to any of its
Subsidiaries.
The Exchange Notes will be general unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future Senior
Debt of the Company. As of December 31, 1997, the Company had approximately
$30.4 million of Senior Debt outstanding, including outstanding borrowings
under the Credit Facility. In addition, the Company had $71.5 million of
additional borrowings available under the Credit Facility. The Indenture
permits the Company to incur additional indebtedness, including additional
Senior Debt, subject to certain restrictions. See " -- Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock."
All of the Company's Subsidiaries are Restricted Subsidiaries. However,
under certain circumstances, the Company is able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries are not
subject to many of the restrictive covenants set forth in the Indenture. The
Company's payment obligations under the Exchange Notes are jointly and
severally guaranteed, on a senior subordinated basis, by all of the Company's
Domestic Restricted Subsidiaries. See " -- Subsidiary Guarantees."
Principal, Maturity and Interest
The Exchange Notes will be limited in aggregate principal amount to $105.0
million and will mature on November 15, 2007. Interest on the Exchange Notes
will accrue at the rate of 97/8% per annum and will be payable semi-annually in
arrears on May 15 and November 15 of each year, commencing on May 15, 1998, to
Holders of record on the immediately preceding May 1 and November 1. Interest
on the Exchange Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of original
issuance. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Principal of and premium, interest and Liquidated
Damages, if any, on the Exchange Notes will be payable at the office or agency
of the Company maintained for such purpose or, at the option of the Company,
payment of interest and Liquidated Damages, if any, may be made by check mailed
to the Holders of the Exchange Notes at their respective addresses set forth in
the register of Holders of the Exchange Notes; provided that all payments of
principal, premium, interest and Liquidated Damages, if any, with respect to
the Exchange Notes the Holders of which have given wire transfer instructions
to the Trustee will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof. Until
otherwise designated by the Company, the Company's office or agency will be the
office of the Trustee maintained for such purpose. The Exchange Notes will be
issued in denominations of $1,000 and integral multiples thereof.
Subordination
The payment of principal of and premium, interest and Liquidated Damages,
if any, on the Exchange Notes will be subordinated in right of payment, as set
forth in the Indenture, to the prior payment in full in cash or Cash
Equivalents of all Senior Debt of the Company.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash or Cash Equivalents of all Obligations due in
56
<PAGE>
respect of such Senior Debt (including Post-Petition Interest) before the
Holders of the Exchange Notes will be entitled to receive any payment with
respect to the Exchange Notes, and until all Obligations with respect to Senior
Debt are paid in full in cash or Cash Equivalents, any distribution to which
the Holders of the Exchange Notes would be entitled shall be made to the
holders of Senior Debt (except that Holders of the Exchange Notes may receive
Permitted Junior Securities and payments made from the trust described under
the caption " -- Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Exchange Notes, including pursuant to the redemption provisions of the
Indenture and pursuant to an offer to repurchase the Exchange Notes following a
Change of Control or with Excess Proceeds of Asset Sales (except, in each case,
in Permitted Junior Securities or from the trust described under the caption "
- -- Legal Defeasance and Covenant Defeasance") if (i) a default in the payment
of the principal of or premium, or interest on any Designated Senior Debt
occurs and is continuing beyond any applicable period of grace or (ii) any
other default occurs and is continuing with respect to any Designated Senior
Debt that permits holders of the Designated Senior Debt as to which such
default relates to accelerate its maturity and, in the case of clause (ii), the
Trustee receives a notice of such default (a "Payment Blockage Notice") from
the Company or the agent under (in the case of the Credit Facility), or the
holders of, such Designated Senior Debt. Payments on the Exchange Notes may and
shall be resumed (a) in the case of a payment default, upon the date on which
such default is cured or waived and (b) in case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Designated Senior Debt has been
accelerated. No new period of payment blockage may be commenced pursuant to
clause (ii) above unless and until 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice unless such default shall have been cured or waived for
a period of at least 30 days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Exchange Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of the Exchange Notes may recover less
ratably than creditors of the Company who are holders of Senior Debt. As of
December 31, 1997, the Company had approximately $30.4 million of Senior Debt
outstanding, including outstanding borrowings under the Credit Facility. In
addition, the Company had approximately $71.5 million of additional borrowings
available under the Credit Facility. The Company will be able to incur
additional Senior Debt in the future, subject to certain limitations. See " --
Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock."
Subsidiary Guarantees
The Company's payment obligations under the Exchange Notes will be fully,
unconditionally, and jointly and severally guaranteed by each of the Company's
current and future Domestic Restricted Subsidiaries. The Guarantee of each
Guarantor will be subordinated in right of payment to all existing and future
Senior Debt of such Guarantor to the same extent as the Exchange Notes are
subordinated to Senior Debt of the Company. See " -- Subordination." As of
December 31, 1997, the Guarantors had approximately $30.4 million of Senior
Debt outstanding, including guarantees of the Company's obligations under the
Credit Facility. The Guarantors currently do not have any material assets or
operations. The Indenture permits the Company's Subsidiaries to incur
additional indebtedness, including additional Senior Debt, subject, in the case
of the Company's Restricted Subsidiaries, to certain restrictions. See " --
Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor (other than to the Company or another Domestic Restricted
Subsidiary), or in the case the Company designates a Guarantor to be an
Unrestricted Subsidiary in accordance with the Indenture, then such Guarantor
will be released and relieved of any obligations under its Guarantee; provided
that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See " -- Repurchase
at Option of Holders -- Asset Sales."
57
<PAGE>
Optional Redemption
The Exchange Notes will not be redeemable at the Company's option prior to
November 15, 2002. Thereafter, the Exchange Notes will be subject to redemption
at any time at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on November 15 of
the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
<S> <C>
2002 ......................... 104.938%
2003 ......................... 103.292
2004 ......................... 101.646
2005 and thereafter .......... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to November 15, 2000, the Company may
redeem up to an aggregate of $33.0 million in principal amount of the Exchange
Notes at a redemption price of 109.875% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
redemption date, with the net cash proceeds of one or more offerings of Equity
Interests (other than Disqualified Stock) of the Company; provided that (i) at
least $72.0 million in principal amount of the Exchange Notes originally issued
under the Indenture remain outstanding immediately after the occurrence of each
such redemption and (ii) notice of such redemption shall be given within 90
days of the date of the consummation of each such public offering.
Selection and Notice
If less than all of the Exchange Notes are to be redeemed at any time,
selection of the Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchange Notes are listed, or, if the Exchange Notes are
not so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided that no Exchange Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of the Exchange Notes to be redeemed at its registered address.
Notices of redemption may not be conditional. If any Exchange Note is to be
redeemed in part only, the notice of redemption that relates to such Exchange
Note shall state the portion of the principal amount thereof to be redeemed. A
new Exchange Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Exchange Note. Exchange Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on the Exchange Notes or portions of them called for redemption.
Mandatory Redemption
Except as set forth below under the caption " -- Repurchase at the Option
of Holders," the Company is not required to make mandatory redemption or
sinking fund payments with respect to the Exchange Notes. The Company's
obligations to repurchase the Notes as described herein may have the effect of
discouraging a third party from attempting to acquire control of the Company,
and may adversely affect the Company's ability to obtain additional financing
in the future.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, the Company will be obligated
to make an offer (a "Change of Control Offer") to each Holder of the Exchange
Notes to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of such Holder's Exchange Notes at an offer price in cash equal to
101% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase (the "Change of
Control Payment"). Within 30 days following a Change of Control, the Company
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase the Exchange
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
58
<PAGE>
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Exchange Notes as a result
of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Exchange Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Trustee the Exchange Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of the Exchange
Notes or portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each Holder of the Exchange Notes so tendered the Change of
Control Payment for such Exchange Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Exchange Note equal in principal amount to any unpurchased portion of the
Exchange Notes surrendered, if any; provided that each such new Exchange Note
will be in a principal amount of $1,000 or an integral multiple thereof. The
Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 90 days following a Change of Control, the
Company will either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of the Exchange Notes required by this covenant. The
Company will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Exchange Notes to require
that the Company repurchase or redeem the Exchange Notes in the event of a
takeover, recapitalization or similar transaction.
The Credit Facility prohibits, and future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
prohibit, the Company from purchasing any Exchange Notes following a Change of
Control and/or provide that certain change of control events with respect to
the Company would constitute a default thereunder. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing
Exchange Notes, the Company could seek the consent of its lenders to the
purchase of the Exchange Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing the
Exchange Notes. The Company's failure to purchase tendered Exchange Notes
following a Change of Control would constitute an Event of Default under the
Indenture which would, in turn, constitute as default under the Credit
Facility. In such circumstances, the subordination provisions in the Indenture
would likely restrict payments to the Holders of the Exchange Notes. See " --
Subordination."
The Company will not be required to make a Change of Control Offer
following a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control Offer
made by the Company and purchases all Exchange Notes validly tendered and not
withdrawn under such Change of Control Offer.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents; provided that the amount of (a) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or such Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (b) any
securities, notes or other obligations received by the Company or such
Restricted Subsidiary from such transferee that are immediately converted by
the Company or such Restricted Subsidiary into cash (to the extent of the cash
received) shall be deemed to be cash for purposes of this provision.
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Within 360 days of the receipt of any Net Proceeds from an Asset Sale, the
Company or any of its Restricted Subsidiaries may apply such Net Proceeds, at
its option, (i) to repay Senior Debt of the Company or any of its Restricted
Subsidiaries or to provide cash collateral with respect to any letters of
credit outstanding under the Credit Facility (and, in each case, to
correspondingly reduce commitments with respect thereto in the case of
revolving borrowings) or (ii) to the acquisition of a controlling interest in
another business, the making of a capital expenditure or the acquisition of
other long-term assets. Pending the final application of any such Net Proceeds,
the Company may temporarily reduce Senior Debt or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0 million,
the Company will be required to make an offer to all Holders of Exchange Notes
(an "Asset Sale Offer") to purchase the maximum principal amount of Exchange
Notes that may be purchased out of the Excess Proceeds at an offer price in
cash in an amount equal to 100% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the date of
purchase, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Exchange Notes tendered pursuant to an
Asset Sale Offer is less than the Excess Proceeds, the Company may use any
remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Exchange Notes surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Exchange Notes to be
purchased on a pro rata basis. Upon completion of an Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
Certain Covenants
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Company) or to any
direct or indirect holders of the Company's Equity Interests in their capacity
as such (other than dividends or distributions (a) payable in Equity Interests
(other than Disqualified Stock) of the Company or (b) to the Company or any
Wholly Owned Restricted Subsidiary of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value (including
without limitation, in connection with any merger or consolidation involving
the Company) any Equity Interests of the Company or any direct or indirect
parent of the Company (other than any such Equity Interests owned by the
Company or any Wholly Owned Restricted Subsidiary of the Company); (iii) make
any payment on or with respect to, or purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness of the Company or any Restricted
Subsidiary that is subordinated to the Exchange Notes or any Guarantee thereof,
except a payment of interest or principal at Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption " -- Incurrence of Indebtedness and
Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Closing Date (excluding Restricted Payments
permitted by clause (ii) through (iv) of the next succeeding paragraph), is
less than the sum of (i) 50% of the Consolidated Net Income of the Company
for the period (taken as one accounting period) from the beginning of the
first fiscal quarter commencing after the Closing Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Company from the issue or sale since the date of the Indenture of
Equity Interests of the Company (other than Disqualified Stock) or of
Disqualified Stock or debt securities
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of the Company that have been converted into such Equity Interests (other
than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of the Company and other than Disqualified
Stock or convertible debt securities that have been converted into
Disqualified Stock), plus (iii) 50% of any dividends received by the
Company or a Wholly Owned Restricted Subsidiary after the date of the
Indenture from an Unrestricted Subsidiary of the Company, to the extent
that such dividends were not otherwise included in Consolidated Net Income
of the Company for such period.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at the date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
or any Restricted Subsidiary in exchange for, or out of the net cash proceeds
of the substantially concurrent sale (other than to a Subsidiary of the
Company) of, other Equity Interests of the Company (other than any Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (c)(ii) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) payments pursuant to the Transactions
as described under "The Transactions; Use of Proceeds" and "Management --
Employment Agreements;" (v) so long as no Default or Event of Default shall
have occurred and be continuing immediately after such transaction, the
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any Restricted Subsidiary of the Company
held by any member of the Company's (or any of its Restricted Subsidiaries')
management or board of directors pursuant to any management equity subscription
agreement, stock option agreement or other similar agreement; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed the sum of (a) $500,000 in any twelve-month
period plus (b) the aggregate net proceeds received by the Company from the
issuance after the Closing Date of Equity Interests (other than Disqualified
Stock) of the Company to members of management or the Board of Directors of the
Company or any of its Restricted Subsidiaries; provided that the amount of any
such net cash proceeds that are utilized for any such repurchase, redemption or
other acquisition or retirement shall be excluded from clause (c)(ii) of the
preceding paragraph; and (vi) payments to Berkshire Partners pursuant to the
Management Agreement in an amount not to exceed $400,000 in any calendar year.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined in
good faith by the Board of Directors whose resolution with respect thereto
shall be delivered to the Trustee. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
greatest of (i) the net book value of such Investments at the time of such
designation, (ii) the fair market value of such Investments at the time of such
designation and (iii) the original fair market value of such Investments at the
time they were made. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the board resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions. If, at any time, any
Unrestricted Subsidiary would fail to meet the definition of an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date
under the covenant described under the caption " -- Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant). The Board of Directors of the Company may at any
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time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption " -- Incurrence of Indebtedness and Issuance of Preferred
Stock," calculated on a pro forma basis as if such designation had occurred at
the beginning of the four-quarter reference period, and (ii) no Default or
Event of Default would be in existence immediately following such designation.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not permit any
of its Restricted Subsidiaries to issue any shares of preferred stock (other
than to the Company or another Restricted Subsidiary); provided, however, that
the Company and its Restricted Subsidiaries may incur Indebtedness (including
Acquired Debt) and the Company's Restricted Subsidiaries may issue shares of
preferred stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such preferred stock is issued would
have been at least 2.0 to 1, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred or the preferred stock had been issued at the
beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following (collectively, "Permitted Debt"):
(i) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness under the Credit Facility in an aggregate amount not to exceed the
greater of (a) $100.0 million at any time outstanding, less the aggregate
amount of all Net Proceeds of Asset Sales applied to repay any such
Indebtedness pursuant to clause (i) of the second paragraph of the covenant
described above under the caption " -- Repurchase at the Option of Holders --
Asset Sales" or (b) the sum of 80% of the accounts receivable plus 50% of the
inventory, in each case of the Company and its Restricted Subsidiaries, net of
reserves, as shown on the most recent balance sheet of the Company and its
Restricted Subsidiaries;
(ii) the incurrence by the Company and the Guarantors of Indebtedness
represented by the Exchange Notes and the Guarantees thereof;
(iii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness that was permitted
to be incurred by the first paragraph of this covenant, or by clauses (ii)
through (viii) of the second paragraph of this covenant;
(v) the incurrence of Indebtedness between or among the Company and any of
its Wholly Owned Restricted Subsidiaries; provided, however, that (a) if the
Company is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full of all Obligations with respect to
the Exchange Notes and (b) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person other
than the Company or a Wholly Owned Restricted Subsidiary, and any sale or other
transfer of any such Indebtedness to a Person that is not either the Company or
a Wholly Owned Restricted Subsidiary, shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of this Indenture to be outstanding;
(vii) the incurrence by the Company and its Restricted Subsidiaries of
additional Indebtedness in an aggregate amount not to exceed $15.0 million at
any time outstanding; and
(viii) the guarantee by the Company or any of the Guarantors of
Indebtedness that was permitted to be incurred by another provision of this
covenant.
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For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (viii) above or
is entitled to be incurred pursuant to the first paragraph of this covenant,
the Company shall, in its sole discretion, classify such item of Indebtedness
in any manner that complies with this covenant and such item of Indebtedness
will be treated as having been incurred pursuant to only one of such clauses or
pursuant to the first paragraph hereof. Accrual of interest, the accretion of
accreted value and the payment of interest in the form of additional
Indebtedness will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien securing Indebtedness or trade payables on
any asset now owned or hereafter acquired, or any income or profits therefrom
or assign or convey any right to receive income therefrom, except Permitted
Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any indebtedness owed to the
Company or any of its Restricted Subsidiaries, (ii) make loans or advances to
the Company or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
Existing Indebtedness as in effect on the Closing Date, (b) the Credit Facility
as in effect as of the Closing Date, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Credit Facility as in effect
on the Closing Date, (c) the Indenture, the Exchange Notes and the Guarantees
thereof, (d) applicable law, (e) any instrument governing Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (f) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business, (g) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, (h) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing Indebtedness
are no more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, or (i) restrictions with respect to a Subsidiary
of the Company imposed pursuant to a binding agreement which has been entered
into for the sale or disposition of all of the Capital Stock or all or
substantially all of the assets of such Subsidiary.
Merger, Consolidation or Sale of Assets
The Indenture provides that neither the Company nor any Guarantor may
consolidate or merge with or into (whether or not the Company or such
Guarantor, as the case may be, is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company or such Guarantor, as the
case may be, is the surviving corporation or the entity or the Person formed by
or surviving any such consolidation or merger (if other than the Company or
such Guarantor) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the District
of Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company or such Guarantor) or the
entity or Person to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made assumes all the obligations of the
Company or such Guarantor, as the case may be, under the Exchange Notes or such
Guarantor's Guarantee thereof and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
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after such transaction no Default or Event of Default exists; and (iv) except
in the case of a merger of the Company or a Guarantor with or into the Company
or a Wholly Owned Restricted Subsidiary of the Company, the Company, such
Guarantor or the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company or such Guarantor), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (a) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (b) will, at the time of such transaction and
after giving pro forma effect thereto (including pro forma expense and cost
reductions) as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
" -- Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess
of $1.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $5.0 million, an
opinion as to the fairness to the Company of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment
banking firm of national standing.
The foregoing provisions will not prohibit (i) any employment agreement
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business, (ii) transactions between or among the Company
and/or its Restricted Subsidiaries; and (iii) any Restricted Payment that is
permitted by the provisions of the Indenture described above under the caption
" -- Restricted Payments."
Limitation on Other Senior Subordinated Debt
The Indenture provides that neither the Company nor any Guarantor will
directly or indirectly incur any Indebtedness that is subordinate or junior in
right of payment to any Senior Debt of the Company or such Guarantor, as the
case may be, and senior in any respect in right of payment to the Exchange
Notes or such Guarantor's Guarantee thereof.
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any Guarantor shall acquire
or create another Domestic Restricted Subsidiary after the date of the
Indenture, or any Unrestricted Subsidiary shall cease to be an Unrestricted
Subsidiary and shall become a Domestic Restricted Subsidiary, then such
Subsidiary shall execute a guarantee of the Exchange Notes and deliver an
opinion of counsel, in accordance with the terms of the Indenture.
Payments for Consent
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Exchange Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Exchange Notes unless
such consideration is offered to be paid or is paid to all Holders of the
Exchange Notes that consent, waive or agree to amend in the time frame set
forth in the solicitation documents relating to such consent, waiver or
agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Exchange Notes are outstanding,
the Company will furnish to the Holders of Exchange Notes (i) all quarterly and
annual financial information (excluding exhibits and financial statement
schedules) that would be required to
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be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto, the financial condition
and results of operations of the Company and its Restricted Subsidiaries
separate from the financial information and results of operations of the
Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports. In addition, whether or not required by the rules and regulations of
the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company and
its Restricted Subsidiaries will agree that, for so long as any Exchange Notes
remain outstanding, they will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Exchange Notes (whether or not
prohibited by the subordination provisions of the Indenture), (ii) default in
payment when due of the principal of or premium, if any, on the Exchange Notes
(whether or not prohibited by the subordination provisions of the Indenture);
(iii) failure by the Company or any of its Restricted Subsidiaries to comply
with the provisions described under the captions " -- Repurchase at the Option
of Holders -- Change of Control," " -- Repurchase at the Option of Holders --
Asset Sales," " -- Certain Covenants -- Restricted Payments," " -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" or "
- -- Certain Covenants -- Merger, Consolidation or Sale of Assets;" (iv) failure
by the Company or any of its Restricted Subsidiaries for 60 days after written
notice by the Trustee or the Holders of at least 25% in principal amount of the
then outstanding Exchange Notes to comply with any of its other agreements in
the Indenture or the Exchange Notes; (v) default under any mortgage, indenture
or instrument under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Restricted Subsidiaries), whether such Indebtedness or guarantee
now exists or is created after the Closing Date, which default (a) is caused by
a failure to pay principal of or premium, if any, or interest on such
Indebtedness at final maturity (a "Payment Default") or (b) results in the
acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (vi) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0 million and
either (a) any creditor commences enforcement proceedings upon any such
judgment or (b) such judgments are not paid, discharged or stayed for a period
of 60 days; (vii) except as permitted by the Indenture, any guarantee of the
Exchange Notes shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or any
Guarantor, or any Person acting on behalf of any Guarantor, shall deny or
disaffirm its obligations under its guarantee; and (viii) certain events of
bankruptcy or insolvency with respect to the Company, any of its Restricted
Subsidiaries that constitutes a Significant Subsidiary or any group of
Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Exchange
Notes may declare all the Exchange Notes to be due and payable immediately,
provided that so long as any Indebtedness permitted to be incurred pursuant to
the Credit Facility shall be outstanding, no such acceleration shall be
effective until the earlier of (i) acceleration of any Indebtedness under the
Credit Facility or (ii) five business days after the giving of written notice
of such acceleration to the Company. Notwithstanding the foregoing, in the case
of an Event of Default arising from certain events of bankruptcy or insolvency,
with respect to the Company, any of its Restricted Subsidiaries that would
constitute a Significant Subsidiary or any group of Restricted Subsidiaries
that, taken together, would constitute a Significant Subsidiary, all
outstanding Exchange Notes will become due and payable without further action
or notice. Holders of the Exchange Notes may not enforce the Indenture or the
Exchange Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Exchange Notes may direct
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the Trustee in its exercise of any trust or power. The Trustee may withhold
from Holders of the Exchange Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Exchange Notes
pursuant to the optional redemption provisions of the Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Exchange Notes. If an Event of
Default occurs prior to November 15, 2002 by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding the prohibition on redemption of the Exchange Notes prior
to such date, then the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the
acceleration of the Exchange Notes.
The Holders of a majority in aggregate principal amount of the Exchange
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Exchange Notes waive any existing Default or Event of Default and
its consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Exchange Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees, Incorporators and
Stockholders
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company or such Guarantor under the Exchange Notes, any Guarantee thereof, the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Exchange Notes by accepting an
Exchange Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Exchange Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the Commission that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Notes and to
have each Guarantor's obligation discharged with respect to its Guarantee of
the Notes ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Exchange Notes to receive payments in respect of the principal of
and premium, interest and Liquidated Damages, if any, on the Exchange Notes
when such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Exchange Notes concerning issuing temporary
Exchange Notes, registration of Exchange Notes, mutilated, destroyed, lost or
stolen Exchange Notes and the maintenance of an office or agency for payment
and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's and the
Guarantors' obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company and each Guarantor
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Exchange Notes. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under the caption "Events of Default" will no
longer constitute an Event of Default with respect to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Exchange Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of and premium, interest and
Liquidated Damages, if any, on the outstanding Exchange Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Exchange Notes are being defeased to maturity
or to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered
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to the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that (a) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (b) since the
Closing Date, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders of the outstanding Exchange Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Exchange Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall
have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after
the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Exchange Notes over the other creditors of
the Company or with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company shall have delivered
to the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with.
Transfer and Exchange
A Holder may transfer or exchange the Exchange Notes in accordance with
the Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Exchange Note selected for redemption. Also, the Company is not required to
transfer or exchange any Exchange Note for a period of 15 days before a
selection of Exchange Notes to be redeemed.
The registered Holder of an Exchange Note will be treated as the owner of
it for all purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture,
the Exchange Notes and the Guarantees thereof may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Exchange Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Exchange Notes), and any existing default or compliance with any provision
of the Indenture, the Exchange Notes or the Guarantees thereof may be waived
with the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Exchange Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Exchange Notes held by a non-consenting Holder): (i)
reduce the principal amount of Exchange Notes whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Exchange Note or alter the provisions with respect to the
redemption of the Exchange Notes (other than provisions relating to the
covenants described above under the caption " -- Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
on any Exchange Note, (iv) waive a Default or Event of Default in the payment
of principal of or premium, interest or Liquidated Damages, if any, on the
Exchange Notes (except a rescission of acceleration of the Exchange Notes by
the Holders of at least a majority in aggregate principal amount of the
Exchange Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any
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Exchange Note payable in money other than that stated in the Exchange Notes,
(vi) make any change in the provisions of the Indenture relating to waivers of
past Defaults or the rights of Holders of Exchange Notes to receive payments of
principal of or premium, interest or Liquidated Damages, if any, on the
Exchange Notes, (vii) waive a redemption payment with respect to any Exchange
Note (other than a payment required by one of the covenants described above
under the caption " -- Repurchase at the Option of Holders"), (viii) release
any Guarantor from its Guarantee of the Exchange Notes except as provided in
the Indenture, or (ix) make any change in the foregoing amendment and waiver
provisions. In addition, any amendment to the provisions of Article 10 of the
Indenture (which relate to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the Exchange Notes
then outstanding if such amendment would adversely affect the rights of Holders
of Exchange Notes.
Notwithstanding the foregoing, without the consent of any Holder of
Exchange Notes, the Company, a Guarantor (with respect to a Guarantee of the
Exchange Notes) and the Trustee may amend or supplement the Indenture, the
Exchange Notes or any Guarantee thereof to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Exchange Notes in addition to or
in place of certificated Exchange Notes, to provide for the assumption of the
Company's or any Guarantor's obligations to Holders of Exchange Notes in the
case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of Exchange Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Exchange Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Holmes Products
Corp., 233 Fortune Boulevard, Milford, Massachusetts 01757, Attention: Chief
Financial Officer.
Book-Entry, Delivery and Form
The certificates representing the Exchange Notes will be issued in fully
registered form. Except as described in the next paragraph, the Exchange Notes
initially will be represented by a single, permanent global Exchange Note, in
definitive, fully registered form without interest coupons (the "Global
Exchange Note") and will be deposited with the Trustee as custodian for DTC and
registered in the name of Cede & Co. or such other nominee as DTC may
designate. The Global Exchange Note (and any Exchange Notes issued in exchange
therefor) will be subject to certain restrictions on transfer set forth therein
and in the Indenture and will bear the respective legends regarding such
restrictions.
Holders of Exchange Notes who elect to take physical delivery of their
certificates instead of holding their interest through the Global Exchange Note
(collectively referred to herein as the "Non-Global Holders") will be issued in
registered form a certificated Exchange Note ("Certificate Exchange Note").
Upon the transfer of any Certificated Exchange Note initially issued to a
Non-Global Holder, such Certificated Exchange Note will, unless
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the transferee requests otherwise or the Global Exchange Note has previously
been exchanged in whole for Certificated Exchange Notes, be exchanged for an
interest in the Global Exchange Note.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's system
is also available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants" or the "Depositary's
Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Persons who are not
Participants may beneficially own securities held by or on behalf of the
Depositary only thorough the Depositary's Participants or the Depositary's
Indirect Participants.
The Company expects that, pursuant to procedures established by the
Depositary, (i) upon deposit of the Global Exchange Notes, the Depositary will
credit the accounts of Participants designated by the Initial Purchasers with
portions of the principal amount of the Global Exchange Notes and (ii)
ownership of the Exchange Notes evidenced by the Global Exchange Notes will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of some
states require that certain persons take physical delivery in definitive form
of securities that they own. Consequently, the ability to transfer Exchange
Notes evidenced by the Global Exchange Notes will be limited to such extent.
For certain other restrictions on the transferability of the Exchange Notes,
see "Notice to Investors."
So long as the Global Exchange Note Holder is the registered owner of any
Exchange Notes, the Global Exchange Note Holder will be considered the sole
Holder under the Indenture of any Exchange Notes evidenced by the Global
Exchange Notes. Beneficial owners of Exchange Notes evidenced by the Global
Exchange Notes will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Exchange Notes.
Payments in respect of the principal of and premium, interest and
Liquidated Damages, if any, on any Exchange Notes registered in the name of the
Global Exchange Note Holder on the applicable record date will be payable by
the Trustee to or at the direction of the Global Exchange Note Holder in its
capacity as the registered Holder under the Indenture. Under the terms of the
Indenture, the Company and the Trustee may treat the persons in whose names
Exchange Notes, including the Global Exchange Notes, are registered as the
owners thereof for the purpose of receiving such payments. Consequently,
neither the Company nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of Exchange
Notes. The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the Depositary's Participants and the Depositary's
Indirect Participants to the beneficial owners of Exchange Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
Additional Information Concerning Euroclear and Cedel Bank
Euroclear and Cedel Bank hold securities for participating organizations
and facilitate the clearance and settlement of securities transactions between
their respective participants through electronic book-entry changes in accounts
of such participants. Euroclear and Cedel Bank provide to their participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Euroclear and Cedel Bank interface with domestic securities markets.
Euroclear and Cedel Bank participants are financial institutions such as
underwriters, securities brokers and dealers, banks, trust companies and
certain other organizations. Indirect access to Euroclear and Cedel Bank is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodian relationship with a Euroclear or
Cedel Bank participant, either directly or indirectly. The Company will have no
direct control over the clearance and settlement of such transactions.
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When beneficial interests are to be transferred from the account of a
Participant (other than Morgan Guaranty Trust Company of New York and Citibank,
N.A., as depositaries for Euroclear and Cedel Bank, respectively) to the
account of a Euroclear participant or a Cedel Bank participant, the purchaser
must send instructions to Euroclear or Cedel Bank through a participant at
least one business day prior to settlement. Euroclear or Cedel Bank, as the
case may be, will instruct Morgan Guaranty Trust Company of New York or
Citibank, N.A. to receive the beneficial interests against payment. Payment
will include interest attributable to the beneficial interest from and
including the last payment date to and excluding the settlement date, on the
basis of a calendar year consisting of twelve 30-day calendar months. For
transactions settling on the 31st day of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by Morgan Guaranty Trust Company of New York or Citibank,
N.A., as the case may be, to the Participant's account against delivery of the
beneficial interests. After settlement has been completed, the beneficial
interests will be credited to the respective clearing systems and by the
clearing system, in accordance with its usual procedures, to the Euroclear
participants' or Cedel Bank participants' account. Credit for the beneficial
interests will appear on the next business day (European time) and the cash
debit will be back-valued to, and interest attributable to the beneficial
interests will accrue from, the value date (which would be the preceding
business day when settlement occurs in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Euroclear or
Cedel Bank cash debit will instead be valued as of the actual settlement date.
Euroclear participants and Cedel Bank participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Euroclear or Cedel Bank. Under
this approach, they may take on credit exposure to Euroclear or Cedel Bank
until the beneficial interests are credited to their accounts one day later.
Finally, day traders that use Euroclear or Cedel Bank and that purchase
beneficial interests from Participants for credit to Euroclear participants or
Cedel Bank participants should note that these trades would automatically fall
on the sale side unless affirmative action were taken to avoid these potential
problems.
Due to time zone differences in their favor, Euroclear participants and
Cedel Bank participants may employ their customary procedures for transactions
in which beneficial interests are to be transferred by the respective clearing
system, through Morgan Guaranty Trust Company of New York or Citibank, N.A., to
another Participant. The seller must send instructions to Euroclear or Cedel
Bank through a participant at least one business day prior to settlement. In
these cases, Euroclear or Cedel Bank will instruct Morgan Guaranty Trust
Company of New York or Citibank, N.A., as the case may be, to credit the
beneficial interests to the Participant's account against payment. Payment will
include interest attributable to the beneficial interest from and including the
last payment date to and excluding the settlement date on the basis of a
calendar year consisting of twelve 30-day calendar months. For transactions
settling on the 31st day of the month, payment will include interest accrued to
and excluding the first day of the following month. The payment will then be
reflected in the account of the Euroclear participant or Cedel Bank participant
the following business day, and receipt of the cash proceeds in the Euroclear
or Cedel Bank participant's account will be back-valued to the value date
(which would be the preceding business day, when settlement occurs in New
York). If the Euroclear participant or Cedel Bank participant has a line of
credit with its representative clearing system and elects to draw on such line
of credit in anticipation of receipt of the sale proceeds in its account, the
back-valuation may substantially reduce or offset any overdraft charges
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., if trade fails), receipt of the cash proceeds in the
Euroclear or Cedel Bank participant's account would instead be valued as of the
actual settlement date.
Certificated Securities
Subject to certain conditions, any person having a beneficial interest in
a Global Exchange Note may, upon request, exchange such beneficial interest for
Exchange Notes in the form of Certificated Securities. Upon any such issuance,
the Trustee is required to register such Certificated Securities in the name
of, and cause the same to be delivered to, such person or persons (or the
nominee of any thereof). All such certificated Exchange Notes would be subject
to the legend requirements described herein under the caption "Notice to
Investors." In addition, if (i) the Company notifies the Trustee in writing that
the Depositary is no longer willing or able to act as a depositary and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Exchange Notes in the form of Certificated Securities under the
Indenture, then, upon surrender by the Global Exchange Note Holder of the Global
Exchange Notes,
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Exchange Notes in such form will be issued to each person that the Global
Exchange Note Holder and the Depositary identify as being the beneficial owner
of the related Exchange Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Exchange Note Holder or the Depositary in identifying the beneficial
owners of Exchange Notes and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the Global Exchange
Note Holder or the Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture will require that payments in respect of the Exchange Notes
represented by the Global Exchange Notes (including principal, premium,
interest and Liquidated Damages, if any) be made by wire transfer of
immediately available funds to the accounts specified by the Global Exchange
Note Holder. With respect to Certificated Securities, the Company will make all
payments of principal, premium, interest and Liquidated Damages, if any, by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof or, if no such account is specified, by mailing a check to each
such Holder's registered address.
The Exchange Notes represented by the Global Exchange Notes are expected
to be eligible to trade in the PORTAL market and to trade in the Depositary's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such Exchange Notes will, therefore, be required by the Depositary
to be settled in immediately available funds. The Company expects that
secondary trading in the Certificated Securities will also be settled in
immediately available funds, although such settlement will not be within the
Company's control.
Registration Rights; Liquidated Damages
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on the Closing Date. Pursuant to the Registration
Rights Agreement, the Company and the Guarantors agreed to file with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to the Exchange Notes. Upon the
effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the Holders of Transfer Restricted Securities pursuant to the Exchange
Offer who are able to make certain representations the opportunity to exchange
their Transfer Restricted Securities for Exchange Notes. If (i) the Company and
the Guarantors are not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any
Holder of Transfer Restricted Securities notifies the Company prior to the 20th
day following consummation of the Exchange Offer that (a) it is prohibited by
law or Commission policy from participating in the Exchange Offer or (b) that
it may not resell the Exchange Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales or (c) that it is a broker-dealer and owns Series A Notes acquired
directly from the Company or an affiliate of the Company, the Company and the
Guarantors will file with the Commission a Shelf Registration Statement to
cover resales of the Series A Notes by the Holders thereof who satisfy certain
conditions relating to the provision of information in connection with the
Shelf Registration Statement. The Company and the Guarantors will use their
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each Series A Note until (i)
the date on which such Series A Note has been exchanged by a person other than
a broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of a Series A Note for an
Exchange Note, the date on which such Exchange Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy of
the prospectus contained in the Exchange Offer Registration Statement, (iii)
the date on which such Series A Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Series A Note is distributed to the
public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company and the
Guarantors will file an Exchange Offer Registration Statement with the
Commission on or prior to 60 days after the Closing Date, (ii) the Company and
the Guarantors will use their best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 120
days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Company will commence the
Exchange Offer and use its
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best efforts to issue, on or prior to 30 business days after the date on which
the Exchange Offer Registration Statement was declared effective by the
Commission, Exchange Notes in exchange for all Notes tendered prior thereto in
the Exchange Offer and (iv) if obligated to file the Shelf Registration
Statement, the Company and the Guarantors will use their best efforts to file
the Shelf Registration Statement with the Commission on or prior to 60 days
after such filing obligation arises and to cause the Shelf Registration to be
declared effective by the Commission on or prior to 120 days after such
obligation arises. If (a) the Company and the Guarantors fail to file any of
the Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness, (c) the Company fails to consummate the
Exchange Offer within 30 business days of the effective date of the Exchange
Offer Registration Statement or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company and the Guarantors will pay
Liquidated Damages to each Holder of Series A Notes affected thereby, with
respect to the first 90-day period immediately following the occurrence of the
first Registration Default, in an amount equal to $.05 per week per $1,000
principal amount of Series A Notes held by such Holder. The amount of the
Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Series A Notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum amount
of Liquidated Damages of $.50 per week per $1,000 principal amount of Series A
Notes. All accrued Liquidated Damages will be paid by the Company on each
Damages Payment Date to the Global Note Holder by wire transfer of immediately
available funds or by federal funds check and to Holders of Certificated
Securities by wire transfer to the accounts specified by them or by mailing
checks to their registered addresses if no such accounts have been specified.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
Holders of Series A Notes will be required to make certain representations
to the Company (as described herein) in order to participate in the Exchange
Offer and will be required to deliver information to be used in connection with
the Shelf Registration Statement and to provide comments on the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement in order to have their Series A Notes included in the Shelf
Registration Statement and benefit from the provisions regarding Liquidated
Damages set forth above.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback), excluding sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole will be governed by the provisions
of the Indenture described above under the caption " -- Repurchase at the
Option of Holders -- Change of Control" and/or the provisions described above
under the caption " -- Certain Covenants -- Merger, Consolidation or Sale of
Assets" and not by the provisions of the Asset Sale covenant), and (ii) the
issue or sale by the Company or any
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of its Subsidiaries of Equity Interests of any of the Company's Subsidiaries,
in the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (a) that have a fair market value in excess of
$1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding
the foregoing: (i) a transfer of assets by the Company to a Wholly Owned
Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the Company
or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of Equity
Interests by a Wholly Owned Restricted Subsidiary to the Company or to another
Wholly Owned Restricted Subsidiary and (iii) a Restricted Payment that is
permitted by the covenant described above under the caption " -- Certain
Covenants -- Restricted Payments" will not be deemed to be Asset Sales.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Thompson or Keefe Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above, (v) commercial
paper having the highest rating obtainable from Moody's Investors Service, Inc.
or Standard & Poor's Corporation and in each case maturing within six months
after the date of acquisition and (vi) money market deposit accounts all of the
investments of which consist of cash or Cash Equivalents of the type described
in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries,
taken as a whole, other than to the Principals; (ii) the adoption of a plan for
the liquidation or dissolution of the Company; (iii) prior to the consummation
of an Initial Public Offering, the consummation of any transaction (including,
without limitation, any merger or consolidation) the result of which is that
the Principals fail to be the "beneficial owners" (as such term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of
at least 51% of the aggregate voting power of the outstanding Voting Stock of
the Company; (iv) following the consummation of an Initial Public Offering, the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" or "group" (as such
terms are used in Section 13(d)(3) of the Exchange Act), other than the
Principals, becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of (a)
more than 35% of the aggregate voting power of the outstanding Voting Stock of
the Company or (b) more of the voting power of the outstanding Voting Stock of
the Company than that beneficially owned by the Principals; or (v) the first
day on which more than a majority of the members of the Board of Directors are
not Continuing Directors.
"Closing Date" means the date of the closing of the sale of the Series A
Notes.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, to the extent
deducted in computing such Consolidated Net Income, (i) an amount equal to any
extraordinary loss plus any net loss realized in connection with an Asset Sale,
(ii) provision for taxes based on income or profits, (iii) consolidated
interest expense whether paid or accrued and whether or not capitalized
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred
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in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), excluding, however,
amortization of debt issuance costs relating to Indebtedness incurred in
connection with the Transactions, (iv) depreciation and amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period), (v) any compensation
expense resulting from the payment of cash bonuses as a result of the
Transactions as described under "Management -- Employment Agreements," and (vi)
any non-cash compensation expense resulting from compensation paid in Equity
Interests (other than Disqualified Stock) of the Company, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization of, a Restricted Subsidiary of a Person shall be
added to Consolidated Net Income to compute Consolidated Cash Flow only to the
extent (and in the same proportion) that the Net Income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained) pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, (iv) the cumulative effect of a change in accounting
principles shall be excluded and (v) the Net Income (but not loss) of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (a) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date, plus (b)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (i) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a consolidated
Restricted Subsidiary of such Person, (ii) all investments (other than
Permitted Investments) as of such date in unconsolidated Subsidiaries and in
Persons that are not Restricted Subsidiaries and (iii) all unamortized debt
discount and expense and unamortized deferred charges as of such date, in each
case, determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facility" means that certain credit agreement, dated as of the
Closing Date, by and among the Company, each Subsidiary of the Company party
thereto, the lenders party thereto and BankBoston, N.A., as Agent, as amended,
restated, extended, modified, renewed, refunded, replaced, substituted,
restructured or refinanced in whole or in part from time to time, whether with
the present lenders or any other lenders, including any Guarantees thereof.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
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"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Credit Facility and (ii) any other Senior Debt permitted under the Indenture
the principal amount of which is $10.0 million or more and that has been
designated by the Company as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the Holder thereof, in whole or in part, on or
prior to the date that is 91 days after the date on which the Exchange Notes
mature.
"Domestic Restricted Subsidiary" means a Restricted Subsidiary that is
organized pursuant to the laws of any state or other jurisdiction in the United
States.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness in existence on the date of the
Indenture (other than Indebtedness under the Credit Facility), until such
Indebtedness is repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations),
excluding, however, amortization of debt issuance costs relating to
Indebtedness incurred in connection with the Transactions, (ii) the
consolidated interest expense of such Person and its Restricted Subsidiaries
that was capitalized during such period, (iii) any interest expense on
Indebtedness of another Person that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one of
its Restricted Subsidiaries (whether or not such Guarantee or Lien is called
upon) and (iv) the product of (a) all dividend payments, whether or not in
cash, on any series of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable solely
in Equity Interests of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person and its Restricted Subsidiaries for such
period. In the event that the Company or any of its Restricted Subsidiaries
incurs, assumes, guarantees, repays or redeems any Indebtedness (other than
revolving credit borrowings) or issues or redeems preferred stock subsequent to
the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation
Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect to such incurrence, assumption, Guarantee, repayment or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period (including any pro forma expense or cost reductions) and Consolidated
Cash Flow for such reference period shall be calculated without giving effect
to clause (iii) of the proviso set forth in the definition of Consolidated Net
Income, (ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded and (iii) the
Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the
obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect as of the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means each of the Company's Domestic Restricted Subsidiaries
existing on the date of the Indenture, and each other Person that executes a
Guarantee of the Notes pursuant to the terms of the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency exchange rates.
"Indebtedness" means, with respect to any Person, (i) any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, (ii) all indebtedness of
others secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person) up to the fair market value of such
asset and (iii) to the extent not otherwise included, the Guarantee by such
Person of any indebtedness of any other Person. Notwithstanding the foregoing,
Indebtedness shall not include payment, performance or surety bonds or standby
letters of credit issued in the ordinary course of business.
"Initial Public Offering" means one or more underwritten public offerings
of the common stock of the Company registered under the Securities Act.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the third full paragraph of the covenant
described above under the caption " -- Certain Covenants -- Restricted
Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Management Agreement" means that certain agreement dated the Closing Date
between the Company and Berkshire Partners (of any of its Affiliates), as
amended, modified, renewed or extended from time to time.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however,
(i) any gain (but not loss), together with any related provision for taxes on
such gain (but not loss), realized in connection with (a) any Asset Sale
(including, without limitation, dispositions pursuant to sale and leaseback
transactions) or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries and (ii) any extraordinary
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or nonrecurring gain (but not loss), together with any related provision for
taxes on such extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any severance,
termination, closing, relocation or similar expenses incurred as a result
thereof, taxes paid or payable as a result thereof (after taking into account
any available tax credits or deductions and any tax sharing arrangements),
amounts required to be applied to the repayment of Indebtedness secured by a
Lien on the asset or assets that were the subject of such Asset Sale and any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness: (i) as to which neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor
or otherwise) or (c) constitutes the lender; (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Exchange Notes being offered hereby) of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and (iii) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"Obligations" means any principal, interest (including Post-Petition
Interest), penalties, fees, expenses, indemnifications, reimbursements, damages
and other liabilities payable under the documentation governing any
Indebtedness.
"Permitted Investments" means (i) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company; (ii) any Investment in Cash
Equivalents; (iii) any Investment by the Company or any Restricted Subsidiary
of the Company in a Person, if as a result of such Investment (a) such Person
becomes a Wholly Owned Restricted Subsidiary of the Company and a Guarantor or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Wholly Owned Restricted Subsidiary of the Company; (iv) any
Restricted Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the
covenant described above under the caption " -- Repurchase at the Option of
Holders -- Asset Sales;" (v) any acquisition of an Investment solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company; (vi) advances to employees in the ordinary course of business;
and (vii) other Investments in any Person (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause
(vii) that are at the time outstanding, not to exceed $5.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities that (i) are subordinated to all Senior Debt (and any debt
securities issued in exchange for Senior Debt) to substantially the same extent
as, or to a greater extent than, the Notes are subordinated to Senior Debt
pursuant to Article 10 of the Indenture and (ii) have a maturity no earlier
than the maturity of the Exchange Notes and a Weighted Average Life to Maturity
no shorter than the Weighted Average Life to Maturity of the Exchange Notes.
"Permitted Liens" means (i) Liens securing Senior Debt of the Company and
its Restricted Subsidiaries that was permitted by the terms of the Indenture to
be incurred; (ii) Liens in favor of the Company or any of its Restricted
Subsidiaries; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company, provided that such
Liens were in existence prior to the contemplation of such acquisition; (v)
Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vi) Liens existing, or created pursuant to
obligations existing, on the Closing Date; (vii) Liens for taxes, assessments
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or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefore;
(viii) statutory or common law Liens of landlords, and Liens of carriers,
warehousemen, mechanics and materialmen, and other Liens imposed by law created
in the ordinary course of business for amounts not yet due or which are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves are being maintained; (ix) Liens incurred or deposits made in
the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (x) easements,
rights of way and other similar Liens not materially interfering with the
ordinary conduct of the business of the Company and its Restricted Subsidiaries
or any of their respective properties; (xi) Liens with respect to obligations
that do not exceed $2.0 million at any one time outstanding and that (a) are
not incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of business)
and (b) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of business by
the Company or such Restricted Subsidiary; and (xii) extensions, renewals or
replacements of any Lien referred to in clauses (i) through (xi) of this
paragraph, provided that the principal amount of the Indebtedness or Obligation
secured thereby is not increased and that any such extension, renewal or
replacement is limited to the property originally encumbered by the Lien being
extended, renewed or replaced.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness is subordinated in right of payment to the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either
by the Company or by the Restricted Subsidiary that is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Permitted Transferee" means each person or entity to whom Jordan A. Kahn
may transfer shares of common stock of the Company pursuant to Section 4.1 of
the Stock Purchase Agreement, dated as of October 27, 1997, between Jordan A.
Kahn and Holmes Acquisition LLC, as in effect on the Closing Date.
"Post-Petition Interest" means, with respect to any Senior Debt after the
commencement of any liquidation or dissolution of the Company, any bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, any assignment for the benefit of creditors or any
marshaling of the Company's assets and liabilities, interest at the rate
specified in the documents governing such Senior Debt, whether or not a claim
therefor would be allowed in any such proceeding.
"Principals" means Berkshire Partners, Berkshire Fund IV, Berkshire Fund
IV Investment Corp., Berkshire Investors LLC and any of their respective
Affiliates, Jordan A. Kahn and his Affiliates, Stanley Rosenzweig and Gregory
F. White; provided, however, that for purposes of the provisions of the
Indenture set forth under "--Repurchase at the Option of Holders -- Change of
Control" and the definition of "Change in Control," any shares of Capital Stock
of the Company owned by a Permitted Transferee on the Closing Date, and any
shares of Capital Stock of the Company owned by Jordan A. Kahn on the Closing
Date but that subsequently are transferred to a Permitted Transferee, will in
each case be deemed to be owned by Jordan A. Kahn.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
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"Senior Debt" of a Person means (i) all Obligations of such Person
outstanding under the Credit Facility, (ii) any other Indebtedness of such
Person permitted to be incurred under the terms of the Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is subordinated in right of payment to any Senior Debt of such Person and (iii)
all Obligations of such Person with respect to the foregoing. Notwithstanding
anything to the contrary in the foregoing, Senior Debt of a Person will not
include (a) any liability for federal, state, local or other taxes owed or
owing by such Person, (b) any Indebtedness of such Person to any of its
Subsidiaries or other Affiliates, (c) any trade payables or (d) any
Indebtedness that is incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (1) to subscribe for additional Equity Interests or (2) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (e) has at least one director
on its board of directors that is not a director or executive officer of the
Company or any of its Restricted Subsidiaries and has at least one executive
officer that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
79
<PAGE>
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Series A Notes where such Series A Notes were acquired
as a result of market-making activities or other trading activities. The
Company has agreed that it will make this Prospectus, as amended or
supplemented, available to any Participating Broker-Dealer for use in
connection with any such resale, and Participating Broker-Dealers shall be
authorized to deliver this Prospectus in connection with the sale or transfer
of the Exchange Notes. In addition, until , 1998 (90 days after the date
of this Prospectus), all dealers effecting transactions in the Exchange Notes
may be required to deliver a prospectus.
The Issuer will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers, Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time, in one or more transactions in the over-the-counter market,
in negotiated transactions, through the writing of options on the Exchange
Notes or a combination of such methods of resale, at market prices prevailing
at the time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such Participating Broker-Dealer that
resells the Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer. Any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that is an "underwriter" within the meaning of the Securities Act.
The Issuer will promptly send additional copies of this Prospectus and any
amendment or supplement of this Prospectus to any Participating Broker-Dealer
that requests such documents in the Letter of Transmittal. See "The Exchange
Offer."
80
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and
disposition of Notes by an initial beneficial owner of Notes that, for United
States federal income tax purposes, is not a "United States person" (a
"Non-United States Holder"). This discussion is based upon the United States
federal tax law now in effect, which is subject to change, possibly
retroactively. For purposes of this discussion, a "United States person" means
a citizen or resident of the United States, a corporation, partnership or other
entity created or organized in the United States or under the laws of the
United States or of any political subdivision thereof, an estate whose income
is includible in gross income for United States federal income tax purposes
regardless of its source or a trust, if a U.S. court is able to exercise
primary supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the trust.
The tax treatment of the holders of the Notes may vary depending upon their
particular situations. U.S. persons acquiring the Notes are subject to
different rules than those discussed below. In addition, certain other holders
(including insurance companies, tax exempt organizations, financial
institutions and broker-dealers) may be subject to special rules not discussed
below. Prospective investors are urged to consult their tax advisors regarding
the United States federal tax consequences of acquiring, holding and disposing
of Notes, as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdiction.
Interest
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and such Non-United States Holder
(i) does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company; (ii) is not a controlled
foreign corporation with respect to which the Company is a "related person"
within the meaning of the United States Internal Revenue Code of 1986, as
amended (the "Code"), and (iii) certifies, under penalties of perjury, that such
holder is not a United States person and provides such holder's name and
address.
Gain on Disposition
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, redemption or other
disposition of a Note unless (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-United
States Holder or (ii) in the case of a Non-United States Holder who is a
nonresident alien individual and holds the Note as a capital asset, such holder
is present in the United States for 183 or more days in the taxable year and
certain other requirements are met.
Federal Estate Taxes
If interest on the Notes is exempt from withholding of United States
federal income tax under the rules described above, the Notes will not be
included in the estate of a deceased Non-United States Holder for United States
federal estate tax purposes.
Information Reporting and Backup Withholding
The Company will, where required, report to the holders of Notes and the
Internal Revenue Service the amount of any interest paid on the Notes in each
calendar year and the amounts of tax withheld, if any, with respect to such
payments.
In the case of payments of interest to Non-United States Holders,
temporary Treasury regulations provide that the 31% backup withholding tax and
certain information reporting will not apply to such payments with respect to
which either the requisite certification, as described above, has been received
or an exemption has otherwise been established; provided that neither the
Company nor its payment agent has actual knowledge that the holder is a United
States person or that the conditions of any other exemption are not in fact
satisfied. Under temporary Treasury regulations, these information reporting
and backup withholding requirements will apply, however, to the gross proceeds
paid to a Non-United States Holder on the disposition of the Notes by or
through a United States office of a United States or foreign broker, unless the
holder certifies to the broker under penalties of perjury as to its name,
address and status as a foreign person or the holder otherwise establishes an
exemption. Information
81
<PAGE>
reporting requirements, but not backup withholding, will also apply to a
payment of the proceeds of a disposition of the Notes by or through a foreign
office of a United States broker or foreign brokers with certain types of
relationships to the United States unless such broker has documentary evidence
in its file that the holder of the Notes is not a United States person, and
such broker has no actual knowledge to the contrary, or the holder establishes
an exception. Neither information reporting nor backup withholding generally
will apply to a payment of the proceeds of a disposition of the Notes by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
the final regulations do not significantly alter the substantive withholding
and information reporting requirements, but rather unify current certification
procedures and forms and clarify reliance standards. The final regulations are
generally effective for payments made after December 31, 1998, subject to
certain transition rules. Non-United States Holders should consult their tax
advisors with respect to the impact, if any, of the new final regulations.
82
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes will be passed
upon on behalf of the Company by Posternak, Blankstein & Lund, L.L.P., Boston,
Massachusetts.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, included in this Prospectus, have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
83
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ........................................................ F-2
Consolidated Balance Sheet as of December 31, 1996 and 1997 .............................. F-3
Consolidated Statement of Income for the years ended December 31, 1995, 1996 and 1997 .... F-4
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended December 31,
1995, 1996 and 1997 ...................................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1996 and 1997 F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Holmes Products Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Holmes Products Corp. and its subsidiaries (the "Companies") at December 31,
1996 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Companies' management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 11, 1998
F-2
<PAGE>
HOLMES PRODUCTS CORP.
CONSOLIDATED BALANCE SHEET
(dollars in thousands, except par value)
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................................. $ 4,462 $ 5,141
Accounts receivable, net of allowance for doubtful accounts of
$1,113 and $459 at December 31, 1996 and 1997, respectively .......... 31,595 38,047
Other receivables ..................................................... 77 55
Inventories ........................................................... 61,252 55,550
Prepaid expenses and other current assets ............................. 1,210 1,116
Deferred income taxes ................................................. 3,706 4,167
Income taxes receivable ............................................... -- 104
Due from affiliates ................................................... 3,329 --
-------- ---------
Total current assets ................................................. 105,631 104,180
-------- ---------
Property and equipment, net ............................................ 21,083 19,607
Deferred income taxes .................................................. 384 638
Deposits and other assets .............................................. 1,188 681
Debt issuance costs, net of accumulated amortization of $98 at
December 31, 1997 ..................................................... -- 10,059
-------- ---------
$128,286 $ 135,165
======== =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Bank overdraft ........................................................ $ 42 $ --
Trade acceptances payable ............................................. 50,357 --
Current portion of capital lease obligations and other debt ........... 356 1,103
Accounts payable ...................................................... 14,149 13,710
Accrued expenses ...................................................... 10,641 9,825
Accrued income taxes .................................................. 2,249 1,224
Loan payable to affiliate ............................................. 23,000 --
Due to affiliates ..................................................... 7,720 --
-------- ---------
Total current liabilities ............................................ 108,514 25,862
-------- ---------
Capital lease obligations .............................................. 737 792
-------- ---------
Line of credit ......................................................... -- 28,502
-------- ---------
Long-term debt ......................................................... -- 105,000
-------- ---------
Minority interest in net assets of majority-owned subsidiaries ......... 1,327 --
-------- ---------
Commitments and contingencies (Notes 10 and 13)
Stockholders' equity (deficit):
Common stock, no par value. Authorized 15,000 shares; issued and
outstanding 1,000 and 473 shares at December 31, 1996 and 1997,
respectively .......................................................... 702 16,314
Common stock, $1 par value. Authorized, issued and outstanding
100,000 shares and 0 shares at December 31, 1996 and 1997,
respectively .......................................................... 100 --
Treasury stock, at cost (880 shares) ................................... -- (62,058)
Retained earnings ...................................................... 16,906 20,753
-------- ---------
Total stockholders' equity (deficit) ................................. 17,708 (24,991)
-------- ---------
$128,286 $ 135,165
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales .............................................................. $178,132 $194,331 $192,153
Cost of goods sold ..................................................... 141,226 145,915 136,740
-------- -------- --------
Gross profit .......................................................... 36,906 48,416 55,413
-------- -------- --------
Operating expenses:
Selling ............................................................... 12,675 13,225 15,647
General and administrative ............................................ 9,825 14,083 20,883
Product development ................................................... 3,154 5,520 5,463
-------- -------- --------
Total operating expenses ............................................. 25,654 32,828 41,993
-------- -------- --------
Operating profit ..................................................... 11,252 15,588 13,420
-------- -------- --------
Other income (expense):
Other income (expense), net ........................................... 337 319 (56)
Interest income ....................................................... 12 79 207
Interest expense ...................................................... 5,231 6,570 7,303
-------- -------- --------
Total other expense .................................................. 4,882 6,172 7,152
-------- -------- --------
Income before income taxes and minority interest ....................... 6,370 9,416 6,268
Income tax expense ..................................................... 2,614 2,787 2,196
-------- -------- --------
Income before minority interest ........................................ 3,756 6,629 4,072
Minority interest in net income of majority-owned subsidiaries ......... 518 408 225
-------- -------- --------
Net income ........................................................... $ 3,238 $ 6,221 $ 3,847
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except par value)
<TABLE>
<CAPTION>
Common Stock, Common Stock,
no par value $1 par value Total
------------------- ---------------------- Treasury Retained Stockholders'
Shares Amount Shares Amount Stock Earnings Equity (Deficit)
-------- ---------- ------------- -------- ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ....... 1,000 $ 702 100,000 $ 100 $ -- $ 7,447 $ 8,249
Net income ......................... 3,238 3,238
----- ------- -------- ------ --------- ------- ---------
Balance at December 31, 1995 ....... 1,000 702 100,000 100 -- 10,685 11,487
Net income ......................... 6,221 6,221
----- ------- -------- ------ --------- ------- ---------
Balance at December 31, 1996 ....... 1,000 702 100,000 100 -- 16,906 17,708
Issuance of additional shares in
conjunction with contribution
of Holmes Products (Far East)
Limited (see Note 8) .............. 130 100 (100,000) (100) -- -- --
Issuance of common stock, net
of related costs .................. 223 15,512 -- -- -- -- 15,512
Redemption of common stock ......... (880) -- -- -- (62,058) -- (62,058)
Net income ......................... -- -- -- -- -- 3,847 3,847
----- ------- -------- ------ --------- ------- ---------
Balance at December 31, 1997 ....... 473 $16,314 -- $ -- $ (62,058) $20,753 $ (24,991)
===== ======= ======== ====== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 3,238 $ 6,221 $ 3,847
Adjustments to reconcile net income to net cash provided by (used
for) operating activities:
Depreciation and amortization .......................................... 4,509 6,867 7,473
Amortization of debt issuance costs .................................... -- -- 98
Change in allowance for doubtful accounts .............................. 1,262 (381) (654)
Deferred income tax benefit ............................................ (597) (2,674) (715)
Minority interest in net income of majority-owned subsidiaries ......... 518 408 225
Changes in operating assets and liabilities:
Accounts receivable ................................................... (19,242) 3,584 (5,776)
Inventories ........................................................... (19,287) (6,418) 5,702
Prepaid expenses and other current assets ............................. 341 114 94
Income taxes receivable ............................................... (1,214) 1,214 (104)
Due from affiliates ................................................... 191 (1,223) 3,329
Deposits and other assets ............................................. (162) (371) 507
Bank overdraft ........................................................ (860) (133) (42)
Trade acceptances payable ............................................. 20,540 (1,521) (50,357)
Accounts payable ...................................................... 8,992 (4,561) (439)
Due to affiliates ..................................................... 4,422 (2,483) (7,720)
Accrued expenses ...................................................... 3,187 2,335 (816)
Accrued income taxes .................................................. (314) 1,824 (1,025)
--------- -------- ---------
Net cash provided by (used for) operating activities ................... 5,524 2,802 (46,373)
--------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment ..................................... (9,706) (8,594) (5,815)
Purchase of minority interest ........................................... -- -- (451)
--------- -------- ---------
Net cash used for investing activities ................................. (9,706) (8,594) (6,266)
--------- -------- ---------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs ......................... -- -- 15,512
Borrowing of long-term debt, net of issuance costs ...................... -- -- 96,209
Borrowings on line of credit, net of issuance costs ..................... -- -- 27,136
Purchase of treasury stock .............................................. -- -- (62,058)
Net borrowings from (repayments to) affiliate ........................... 6,000 7,000 (23,000)
Principal payments on capital lease obligations ......................... (28) (114) (481)
--------- -------- ---------
Net cash provided by financing activities .............................. 5,972 6,886 53,318
--------- -------- ---------
Net increase in cash and cash equivalents ................................ 1,790 1,094 679
Cash and cash equivalents, beginning of period ........................... 1,578 3,368 4,462
--------- -------- ---------
Cash and cash equivalents, end of period ................................. $ 3,368 $ 4,462 $ 5,141
========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................. $ 4,587 $ 6,780 $ 7,079
Cash paid for income taxes .............................................. $ 4,739 $ 2,423 $ 4,040
</TABLE>
During the years ended December 31, 1996 and 1997 the Companies acquired
property and equipment totalling $923 and $832, respectively, under capital
leases.
See Notes 2, 5 and 8 for additional disclosure of non-cash investing and
financing activities.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Prior to the recapitalization transaction described in Note 8, HPC and
HPFEL (together as "the Companies") were both directly or indirectly an 80%
owned subsidiary of Asco Investments Ltd., a subsidiary of Pentland Group plc
("Pentland"). Subsequent to the recapitalization transaction described in Note
8, HPFEL is a wholly-owned subsidiary of HPC.
2. Summary of Significant Accounting Principles
Basis of Consolidation
The accompanying 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 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 8, the financial statements
combined the accounts of HPC and HPFEL on the basis of common ownership. All
significant intercompany balances and transactions have been eliminated.
Minority Interests
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 financial statements.
On May 22, 1997 and June 4, 1997, the Companies reached agreements to
acquire the capital stock held by the 20% and 10% minority stockholders for
$600,000 and $300,000, respectively, half of which was payable at the closing
of the transactions and half of which is payable, with interest, after one
year. Amounts payable at December 31, 1997 are included in the current portion
of capital lease obligations and other debt in the accompanying balance sheet.
The book value of the minority interests exceeded the repurchase price by
approximately $650,000. The excess of the estimated fair market value of the
assets and liabilities of Raider Motor Corp. on the date of acquisition over
the repurchase price has been recorded as a reduction of property and equipment
during the year ended December 31, 1997.
Translation of Foreign Currencies
The functional currency for HPC's foreign operations is the U.S. dollar.
Assets and liabilities are remeasured into U.S. dollars at exchange rates in
effect at the balance sheet date, except for inventories and property and
equipment, which are remeasured at historical exchange rates. Income, expense
and cash flow items are remeasured at average exchange rates for the period,
except for cost of sales and depreciation, which are remeasured at historical
exchange rates. Gains and losses resulting from remeasurement are not material
and are included in other income (expense), net.
The functional currency of HPFEL is the Hong Kong dollar. Assets and
liabilities are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income, expense and cash flow items are translated at
average exchange rates in effect during the period. Assets and liabilities of
HPFEL subsidiaries not denominated in Hong Kong dollars are remeasured into
Hong Kong dollars at exchange rates in effect at the balance sheet date, except
for inventories and property and equipment, which are remeasured at historical
exchange rates.
F-7
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Income, expense and cash flow items of HPFEL subsidiaries not denominated
in Hong Kong dollars are remeasured at average exchange rates for the period,
except for cost of sales and depreciation, which are remeasured at historical
exchange rates. Gains and losses resulting from remeasurement are not material
and are included in other income (expense), net. The cumulative effect of
translation adjustments resulting from fluctuations in the exchange rate
between the Hong Kong dollar and the U.S. dollar has not been material, and has
been reflected in the accompanying statement of income.
The assets and liabilities of HPFEL and its subsidiaries at December 31,
1997, prior to intercompany elimination with HPC, were $32,621,000 and
$19,932,000, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets using an accelerated method, except
for mold costs, tooling and plant and machinery, which are depreciated using
the straight-line method. Repairs and maintenance costs are expensed as
incurred.
Revenue Recognition
Revenue is recognized upon shipment of goods from the Companies'
warehouses. Revenue for goods sent directly from HPFEL to a retail customer is
recognized when the customer takes ownership of the goods. Estimates for
returned goods and warranty costs are accrued at the time of shipment.
Product Development
Research, engineering and product development costs are expensed as
incurred.
Statement of Cash Flows
All highly liquid debt instruments with original maturities of three
months or less are considered to be cash equivalents for purposes of the
combined statement of cash flows. Such investments consist of a money market
account.
Advertising
Advertising costs are expensed as incurred. In conjunction with a transfer
of inventory in 1993, the Companies received advertising credits totaling
$980,000 to be used for the purchase of advertising media, merchandise or
services, subject to certain limitations and cash co-payments. The credits
expire in October 1999. The remaining balance of these credits approximated
$488,000 and $218,000 at December 31, 1996 and 1997, respectively, which are
reported as prepaid expenses. Total advertising expenses in 1995, 1996 and 1997
were approximately $3,683,000, $4,446,000, and $5,968,000, respectively, which
are included in selling expenses in the accompanying statement of income.
Income Taxes
The Companies utilize the asset and liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109 requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled.
F-8
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies at December 31, 1996 and 1997, and the reported
amounts of revenues and expenses during the periods presented. Actual results
could differ from those estimates.
Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current period presentation.
3. Related Party Transactions
Prior to the recapitalization transaction described in Note 8, the
Companies had numerous business relationships with Pentland and Asco General
Supplies (Far East) Ltd. ("Asco"), an affiliated entity. These arrangements
were generally terminated in conjunction with the recapitalization of the
Companies, and all outstanding amounts were repaid.
Asco provided the Companies with letter of credit financing for their
purchases from foreign manufacturers. Trade acceptances payable under this
letter of credit financing arrangement amounted to $50,357,000 at December 31,
1996. The Companies paid a commission to Asco for administrative services
related to the processing of these trade acceptances. Total commissions
approximated $1,620,000, $1,984,000, and $1,834,000 in 1995, 1996 and 1997,
respectively, which are included in cost of goods sold in the accompanying
statement of income. This arrangement has been terminated in connection with
the completion of the recapitalization transaction described in Note 8.
HPC had a revolving credit facility agreement with Pentland Management
Services Limited ("PMSL"), an affiliated company, whereby PMSL would provide
short-term loans to HPC. The facility was increased several times between 1993
and 1997, reaching a peak of $38,000,000. Total borrowings under the agreement
were limited to a defined borrowing base of eligible accounts receivable and
inventory, and were secured by all assets of the Companies. Individual loans
under the agreement had maturities which ranged from one to six months, at
HPC's option. Interest rates on individual loans were at the prime rate as of
the inception date of the loan, and were fixed through the maturity of the
loan. The interest rate on all loans outstanding at December 31, 1996 was
8.25%. Interest was payable at the expiration of each loan, and totaled
approximately $1,484,000, $2,385,000, and $2,410,000 in 1995, 1996 and 1997,
respectively. Interest payable at December 31, 1996 approximated $93,000. This
agreement included certain financial covenants, as well as restrictions on the
incurrence of additional debt. This facility has been terminated in conjunction
with the completion of the recapitalization transaction described in Note 8.
Esteem Industries Ltd. had purchased certain raw materials from an entity
owned by the brother of a former minority stockholder of Raider Motor Corp. and
Dongguan Raider Motor Corp. Ltd. Such purchases totalled $1,849,000 and
$181,000 in 1995 and 1996, respectively, which are included in cost of goods
sold in the accompanying statement of income. There were no such purchases
during 1997.
HPC pays a sales commission to Jordan Kahn Co., Inc., owned principally by
an officer and stockholder of the Companies. Such commissions approximated
$403,000, $480,000 and $367,000 in 1995, 1996 and 1997, respectively, which are
included in selling expenses in the accompanying statement of income.
Asco had advanced HPFEL approximately $1,224,000 at December 31, 1996 for
working capital purposes, which is included in due to affiliates in the
accompanying balance sheet. All advances were repaid during 1997 in conjunction
with the recapitalization of the Companies. The interest rate on these advances
was 8.5% at December 31, 1996. Interest expense incurred on amounts due from
HPFEL to Asco was $394,000, $531,000 and $446,000 in 1995, 1996 and 1997,
respectively.
F-9
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The salaries and related benefits of certain employees of Dongguan Raider
Motor Corp. Ltd. are paid through Asco, which is reimbursed by Raider Motor
Corp. for such costs. These costs amounted to $686,000, $47,000 and $128,000 in
1995, 1996 and 1997, respectively.
During 1995, HPFEL paid rent to Asco for the lease of manufacturing
facilities occupied by the Companies. Total rent expense on these properties
amounted to $454,000 during the year ended December 31, 1995. HPFEL also paid
$78,000 to Asco for the use of certain shared computer facilities during both
1995 and 1996, and $12,000 during 1997.
In addition, beginning in March 1995, HPFEL occupied facilities owned by
the spouse of a director of HPFEL. Total rent expense paid on this property
amounted to $257,000, $452,000 and $475,000 in 1995, 1996 and 1997
respectively.
Certain employees of Pentland and Asco have performed various management
and administrative services for HPFEL, for which no amounts have been charged
to HPFEL. Management has estimated such costs, which consist of allocations of
salary and related benefits costs and travel expenses, to be insignificant in
1995, 1996 and 1997. Accordingly, no amounts have been recorded in the
accompanying financial statements for such costs.
Included within due from affiliates and due to affiliates at December 31,
1996 is a net payable of $3,611,000 to a dormant entity (Holmes Products Hong
Kong (1985) Limited), which arose from a legal restructuring of HPFEL in 1993.
This payable bore no interest and was repaid in conjunction with the
recapitalization of the Companies.
As part of the recapitalization transactions described in Note 8, the
Companies have entered into a consulting agreement with the new majority
stockholder, to provide management, financial, advisory and strategic support
and analysis. The agreement expires in November 2002, or earlier if the
stockholder's ownership percentage declines to less than 40% or less than the
percentage owned by management of the Companies, taken as a group. Fees under
this agreement are $400,000 per year.
4. Inventories
Inventories are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Finished goods .......... $42,121,000 $34,305,000
Raw materials ........... 10,853,000 8,844,000
Work-in-process ......... 8,278,000 12,401,000
----------- -----------
$61,252,000 $55,550,000
=========== ===========
</TABLE>
5. Property and Equipment
Property and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
Depreciable -------------------------------
lives 1996 1997
----------------------- -------------- --------------
<S> <C> <C> <C>
Mold costs and tooling ................... 1 1/2-5 years $16,737,000 $18,363,000
Plant and machinery ...................... 7 years 10,447,000 9,805,000
Leasehold improvements ................... life of lease-7 years 3,703,000 4,025,000
Equipment and computer equipment ......... 5 years 2,476,000 3,233,000
Furniture and fixtures ................... 5-7 years 2,141,000 2,310,000
Motor vehicles ........................... 4 years 206,000 323,000
----------- -----------
35,710,000 38,059,000
Less--accumulated depreciation and
amortization ............................ 14,627,000 18,452,000
----------- -----------
$21,083,000 $19,607,000
=========== ===========
</TABLE>
F-10
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Property and equipment recorded under capital leases amounted to
approximately $1,235,000 and $2,067,000 at December 31, 1996 and 1997,
respectively. Total accumulated amortization related to these assets is
approximately $104,000 and $411,000 at December 31, 1996 and 1997,
respectively. Amortization expense for the period is included in depreciation
and amortization in the accompanying statement of cash flows.
As described in Note 2, approximately $650,000 has been recorded as a
reduction of plant and machinery during 1997 in conjunction with the repurchase
of the capital stock held by the former minority stockholders of Raider Motor
Corp.
6. Accrued Expenses
Accrued expenses are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Sales returns and allowances ............... $ 2,973,000 $3,246,000
Payroll and bonuses ........................ 2,700,000 1,122,000
Interest payable ........................... 900,000 1,026,000
Advertising ................................ 500,000 825,000
Commissions ................................ 317,000 180,000
Duties ..................................... 489,000 490,000
Warranties and product liabilities ......... 286,000 494,000
Professional fees .......................... 260,000 884,000
Other ...................................... 2,216,000 1,558,000
----------- ----------
$10,641,000 $9,825,000
=========== ==========
</TABLE>
7. Long-Term Debt
Senior Subordinated Notes
HPC has issued $105,000,000 in senior subordinated notes, maturing on
November 15, 2007 (the "Notes"). The Notes bear interest at 9.875%, payable
semi-annually on May 15 and November 15. No principal is due until the maturity
date.
The Notes are subordinated to the Companies' other debt, including the
Line of Credit (as defined below), capital leases and amounts payable to the
former minority stockholders of Raider Motor Corp. The Notes are guaranteed by
HPC's current and future domestic subsidiaries (see Note 16) on a full,
unconditional and joint and several basis, but are otherwise unsecured.
HPC can, at its option, redeem the Notes at any time after November 15,
2002, subject to a fixed schedule of redemption prices which declines from
104.9% to 100% of the face value. However, HPC may redeem up to $33 million of
the Notes prior to this date at a price of 109.875% of face value upon the
issuance of equity securities. Additionally, upon certain sales of stock or
assets or a change of control of HPC, HPC must offer to repurchase all or a
portion of the Notes at a redemption price of 101% of face value.
The Notes contain certain restrictions and covenants, including
limitations (based on certain financial ratios) on HPC's ability to pay
dividends, repurchase stock or incur additional debt (other than borrowings
under the Line of Credit). The Notes and Line of Credit contain cross-default
provisions.
Debt issuance costs of $8,791,000 associated with the Notes are being
amortized over the 10-year life of the Notes.
Line of Credit
The Companies entered into a $100,000,000 revolving line of credit with a
bank (the "Line of Credit") as part of the recapitalization transactions
described in Note 8. Of the total amount, up to $15,000,000 can be borrowed by
HPFEL and its subsidiaries, and up to $20,000,000 can be used to secure letters
of credit.
F-11
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Borrowings under the Line of Credit are due on January 2, 2003 and may
remain outstanding until that time. Accordingly, such amounts are classified as
non-current liabilities on the accompanying consolidated balance sheet.
However, upon certain sales of stock or assets or the issuance of equity
securities, the Companies must repay a portion of the Line of Credit generally
equal to the net cash proceeds received. Such repayment is not required if the
proceeds of an equity offering are used to acquire other companies.
Amounts outstanding under the Line of Credit bear interest at either a
prime rate-based rate or a LIBOR-based rate, at the Companies' option, plus a
specified margin. The margin varies from 0 to 0.75% for prime-based loans and
1.25% to 2.25% for LIBOR-based loans, depending on a defined ratio of the
Companies' financial results (the "Leverage Ratio"). Borrowings outstanding at
December 31, 1997, of which $1,002,000 is outstanding at HPFEL, bear interest
at a weighted average rate of 7.98%. Interest is payable no less frequently
than quarterly in arrears.
The Company must pay a quarterly commitment fee on the unused portion of
the Line of Credit. The fee varies from 0.375% to 0.5% per annum, depending on
the Leverage Ratio. The Companies must also pay a quarterly fee on open letters
of credit which varies from 0.75% to 2.5% of the face amount per annum,
depending on the type of letter of credit issued and the Leverage Ratio.
Borrowings by HPC under the Line of Credit are secured by all assets of
HPC and a pledge of all of the capital stock of domestic subsidiaries and 66%
of the capital stock of foreign subsidiaries. Borrowings by HPFEL are secured
by all assets of HPFEL and certain of its subsidiaries. The Line of Credit is
also guaranteed by HPC's current and future domestic subsidiaries.
The Line of Credit agreement contains certain restrictions and covenants,
including limitations on the Companies' ability to pay dividends, invest in
certain types of securities, repurchase stock or incur additional debt.
However, among other uses, the Companies may issue debt which is subordinated
to the Line of Credit, used to finance certain permitted acquisitions of other
companies or used to repurchase shares of stock under the terms of the
stockholders' agreement described in Note 8. The Companies are also required to
maintain certain financial ratios. The Notes and Line of Credit contain
cross-default provisions.
Issuance costs of $1,366,000 associated with the Line of Credit are being
amortized over the 5-year life of the Line of Credit.
8. Stockholders' Equity
Recapitalization
On November 26, 1997, the Companies and their stockholders consummated an
agreement to perform the following: (i) the stockholders of HPFEL contributed
their shares of common stock, $1 par value, to 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 Companies for
approximately $15.5 million, net of related issuance costs, (iii) the Companies
repaid all amounts outstanding to PMSL, Asco and Holmes Products Hong Kong
(1985) Limited and repaid all amounts outstanding on the Companies' 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 the Notes and borrowed $27,500,000 under the
Line of Credit, both described in Note 7.
The price per share for each of these transactions is subject to
adjustment based upon the final amount of working capital and outstanding debt
at November 26, 1997, as well as the final amount of certain bonuses and
expenses associated with the transactions, all as defined in the stock purchase
and redemption agreement. The Companies do not believe that any material
adjustments to the price per share will occur.
The transactions described above have been accounted for as a leveraged
recapitalization of the Companies. The Companies have retained their 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.
F-12
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In connection with certain previous employment agreements, incremental
bonuses in the amount of $6,013,000 were paid at the time of closing, and the
related agreements were terminated. These costs have been recorded in general
and administrative expenses in the accompanying consolidated statement of
income.
Stock Option Plan
In connection with the recapitalization transaction described above, HPC's
Board of Directors adopted and the stockholders approved the 1997 Stock Option
Plan (the "Plan"). The Plan provides for the grant of incentive stock options
and non-qualified stock options to employees, officers, directors, and
consultants of the Companies, except that incentive stock options may not be
issued to consultants or non-employee directors. A total of 73.9 shares of
HPC's common stock have been reserved for issuance under the Plan. The exercise
price and period over which options become exercisable will be determined by
the Board of Directors. However, the exercise price of incentive stock options
will be equal to at least 100% of the fair market value of HPC's common stock
on the date of grant (110% for individuals holding more than 10% of HPC's
common stock). Options will expire no later than 10 years after the date of
grant (5 years for individuals holding more than 10% of HPC's common stock).
The Plan will expire in November 2006.
Warrant
In conjunction with the recapitalization transaction described above, HPC
issued a warrant to Pentland to purchase 24 shares of common stock at an
exercise price of $74,012 per share (which price is subject to adjustment for
the final working capital balances, as described above). This warrant is
exercisable only upon the occurrence of one of the following by November 26,
1999: (a) an initial public offering of equity securities by HPC, provided that
this offering includes or is followed within specified time periods by sales of
shares offered by selling stockholders, (b) a sale of the Companies, (c) a sale
by the new majority stockholder and its affiliates of all or substantially all
of their holdings of HPC's common stock or (d) a further recapitalization of the
Companies through the issuance of additional debt. The warrant expires on
November 26, 1999. Management has determined that the value of the warrant is
not material to the Companies' consolidated financial statements.
Stockholders' Agreement
All of the holders of HPC's outstanding stock are subject to a
stockholders' agreement. This agreement provides the Companies with a right of
first refusal on any proposed sales of stock to outside parties. Additionally,
HPC has certain rights to purchase shares of common stock from employees upon
their termination of employment.
9. Income Taxes
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. Under SFAS 109, the
benefit associated with future deductible temporary differences and operating
loss or credit carryforwards is recognized if it is more likely than not that a
benefit will be realized. Deferred tax expense (benefit) represents the change
in the net deferred tax asset or liability balance.
F-13
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1995 1996 1997
------------- --------------- -------------
<S> <C> <C> <C>
Current:
Federal ................ $2,350,000 $ 3,888,000 $1,514,000
State .................. 697,000 1,176,000 534,000
Foreign ................ 164,000 397,000 863,000
---------- ------------ ----------
Total current .......... 3,211,000 5,461,000 2,911,000
---------- ------------ ----------
Deferred:
Federal ................ (479,000) (1,943,000) (547,000)
State .................. (145,000) (594,000) (168,000)
Foreign ................ 27,000 (137,000) --
---------- ------------ ----------
Total deferred ......... (597,000) (2,674,000) (715,000)
---------- ------------ ----------
$2,614,000 $ 2,787,000 $2,196,000
========== ============ ==========
</TABLE>
Pre-tax income (loss) is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Domestic ......... $5,099,000 $5,842,000 $ (715,000)
Foreign .......... 1,271,000 3,574,000 6,983,000
---------- ---------- ----------
$6,370,000 $9,416,000 $6,268,000
========== ========== ==========
</TABLE>
The two subsidiaries which are incorporated and based in the People's
Republic of China have a two-year tax holiday on the basis that they expect to
operate in China for ten years or more. The tax holiday provides for an
exemption from income tax in the first two profit-making years and for a 50%
reduction in the subsequent three years. The first profit-making year is
defined as the year in which the foreign enterprise recognizes profit on a
cumulative basis for the first time, after offsetting prior years' losses.
Losses can be carried forward for a maximum of five years.
Dongguan Raider Motor Corp. Ltd. was profitable in both 1994 and 1995 and
as such is now subject to income tax in China. Dongguan Huixin Electrical
Products Company, Ltd. had previously experienced losses but has become
profitable on a cumulative basis in 1997, and is thus within the tax holiday.
Net operating losses at December 31, 1996 were approximately $1,952,000, which
were fully utilized during the year ended December 31, 1997.
If not exempt, the statutory tax rate which applies to these companies in
China is 24% (prior to the 50% reduction described above for the first three
years after the exemption expires), as their operations are located in a region
of China where tax incentives are applicable.
The Bahamas registered companies (HPFEL and Raider Motor Corp.) are
subject to tax in Hong Kong at 16.5% only to the extent that their income is
deemed to be onshore Hong Kong.
F-14
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Companies' effective tax rate varies from the statutory U.S. federal
tax rate as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Statutory U.S. federal tax rate .................... 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit ............ 5.6 4.0 .5
Foreign earnings taxed at different rates .......... (2.9) (5.2) (12.3)
Foreign earnings not subject to taxation ........... ( .7) (2.3) ( 2.4)
PRC earnings subject to tax exemption .............. (7.4) (1.9) ( 2.9)
Valuation allowance on deferred tax assets ......... 7.9 ( .6) 15.6
Non-deductible expenses ............................ .5 .3 .5
Other .............................................. 3.0 .3 1.0
---- ---- -----
Effective tax rate ................................. 41.0% 29.6% 35.0%
==== ==== =====
</TABLE>
Deferred tax assets and deferred tax liabilities are comprised of the
following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses ............................... $1,910,000 $ 1,932,000
Inventory ...................................... 1,372,000 2,053,000
Interest limitation carryforward ............... -- 1,447,000
Net operating loss carryforwards ............... 469,000 --
Accounts receivable ............................ 424,000 182,000
Property and equipment ......................... 384,000 638,000
---------- ------------
Gross deferred tax assets .................... 4,559,000 6,252,000
Deferred tax asset valuation allowance ......... (469,000) (1,447,000)
---------- ------------
Net deferred tax assets ...................... $4,090,000 $ 4,805,000
========== ============
</TABLE>
F-15
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The deductibility of interest paid to or guaranteed by Pentland and its
affiliates while HPC was a majority-owned subsidiary of Pentland was subject to
certain limitations under the US Internal Revenue Code. Primarily as a result
of the compensation recorded in conjunction with the recapitalization
transaction described in Note 8, approximately $3,600,000 of interest expense
incurred by HPC during the year ended December 31, 1997 will not be deductible
for income tax purposes. Such amounts can be carried forward indefinitely.
However, due to the anticipated impact of the Companies' current debt structure
on future operating results and the Internal Revenue Code limitations,
management has provided a valuation allowance of $1,447,000 against the
deferred tax asset arising from this carryforward. The utilization of this
carryforward may be further limited as a result of the change in ownership
occurring as part of the recapitalization of the Companies, although this
limitation will primarily impact only the timing of any possible utilization.
If the Companies are able to utilize this deduction, it will reduce income tax
expense in future years.
At December 31, 1996, the Companies had recorded a valuation allowance of
$469,000 against the net operating loss carryforwards at one foreign subsidiary
because it was uncertain whether such carryforwards would be utilized. All of
these carryforwards were utilized in 1997, and this valuation allowance was
released.
In general, no provision has been recorded for U.S. or additional foreign
taxes on undistributed earnings of foreign subsidiaries, as it is management's
intention that these earnings will continue to be reinvested. It is not
practicable to estimate the amount of additional tax that might be payable on
such earnings. Total undistributed earnings of foreign subsidiaries as of
December 31, 1997 are approximately $13,580,000.
10. Leases
In addition to leasing property and equipment under various capital leases
(Note 5), the Companies have various noncancellable operating leases for
facilities, vehicles and office equipment which expire at various dates through
2004. Certain of these leases contain options for renewal or purchase of the
underlying asset. Rent expense was approximately $2,440,000 in 1995, $3,064,000
in 1996 and $3,099,000 in 1997.
At December 31, 1997, future minimum rental payments under noncancelable
lease arrangements are as follows:
<TABLE>
<CAPTION>
Operating Capital
leases leases
------------ ------------
1998 ...................................................... $2,559,000 $733,000
<S> <C> <C>
1999 ...................................................... 1,784,000 660,000
2000 ...................................................... 1,470,000 163,000
2001 ...................................................... 1,450,000 19,000
2002 and thereafter ....................................... 1,878,000 9,000
--------- -------
$9,141,000 1,584,000
==========
Less: amount representing interest ........................ 140,000
---------
Present value of obligations under capital leases ......... $1,444,000
==========
Comprised of:
Current portion .......................................... $ 652,000
Non-current portion ...................................... 792,000
----------
$1,444,000
==========
</TABLE>
11. Employee Benefit Plan
HPC provides its employees with a defined contribution retirement plan
under Section 401(k) of the Internal Revenue Code. All employees are eligible
to participate in the plan and contribute up to 15% of their compensation,
which is then invested in one or more investment funds. HPC matches up to 3% of
an employee's contribution.
HPFEL provides its Hong Kong based employees with a defined contribution
retirement plan. All Hong Kong based employees of HPFEL and Esteem Industries
Ltd. may contribute 5% of their compensation, with the Company contributing an
additional 5% to 7 1/2% of an employee's compensation.
F-16
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In addition, Hong Kong based employees of Raider Motor Corp. are entitled
to join the defined contribution retirement plan maintained by Asco (an
affiliated entity), which contains terms similar to those of the HPFEL plan.
The Companies' contributions to these plans approximated $237,000,
$223,000 and $277,000 in 1995, 1996 and 1997, respectively.
12. Business and Credit Concentrations and Geographic Data
HPC sells its products to retailers throughout the United States and
Canada, and to a lesser extent, Europe. Two customers accounted for
approximately 14% and 12%, respectively, of total sales in 1995. These same two
customers and a third accounted for approximately 18%, 12% and 10%,
respectively, of total sales in 1996. These same three customers accounted for
approximately 17%, 11% and 11%, respectively, of total sales in 1997. Accounts
receivable due from the single largest of these customers amounted to 14% and
13% of total accounts receivable at December 31, 1996 and 1997, respectively.
HPC has also entered into an agreement with an insurance company to purchase
HPC's receivables from certain pre-determined customers, up to specified
limits, if the customer defaults on payment. In exchange, HPC pays a monthly
fee.
Certain of HPC's retail customers have filed for bankruptcy protection
during 1996 and 1997. Management continually monitors and evaluates the credit
status of its customers, and adjusts sales terms as appropriate. The Companies
maintain reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. Management does not
believe that the Companies are subject to any other unusual risks beyond the
normal credit risk attendant to operating their business.
Geographic Data
As described further in Note 1, the Companies operate in a single product
segment, consumer durable goods. The following information is summarized by
geographic area:
<TABLE>
<CAPTION>
Inter-area Consolidated
United States Far East Canada Eliminations Total
--------------- ------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers:
Year ended December 31, 1995 ............ $173,501,000 $ 1,290,000 $3,341,000 $ -- $178,132,000
Year ended December 31, 1996 ............ 189,943,000 1,202,000 3,186,000 -- 194,331,000
Year ended December 31, 1997 ............ 184,626,000 2,428,000 5,099,000 -- 192,153,000
Net sales between geographic areas:
Year ended December 31, 1995 ............ -- 87,547,000 -- (87,547,000) --
Year ended December 31, 1996 ............ -- 85,918,000 -- (85,918,000) --
Year ended December 31, 1997 ............ -- 83,626,000 -- (83,626,000) --
Income (loss) before income taxes
and minority interest:
Year ended December 31, 1995 ............ 5,099,000 1,995,000 (67,000) (657,000) 6,370,000
Year ended December 31, 1996 ............ 5,842,000 4,260,000 (109,000) (577,000) 9,416,000
Year ended December 31, 1997 ............ (715,000) 7,813,000 297,000 (1,127,000) 6,268,000
Identifiable assets:
December 31, 1996 ....................... 98,490,000 33,980,000 2,913,000 (7,097,000) 128,286,000
December 31, 1997 ....................... 104,911,000 32,621,000 3,966,000 (16,392,000) 125,106,000
Corporate assets at December 31, 1997 . 10,059,000
------------
Total assets at December 31, 1997 ..... $135,165,000
============
</TABLE>
F-17
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Net sales in the United States include direct export sales to Europe.
The Companies' manufacturing entities in China sell completed products to
HPC in the United States at intercompany transfer prices which reflect
management's estimate of amounts which would be charged by an unrelated third
party. These sales are eliminated in consolidation.
Inter-area eliminations of income before income taxes and minority
interest and identifiable assets primarily represent the intercompany profit in
ending inventory held by HPC. Inter-area eliminations of identifiable assets
also include amounts owed by HPC to HPFEL and its subsidiaries for operating
activities.
Corporate assets at December 31, 1997 represent debt issuance costs
associated with the Companies' senior subordinated notes and line of credit
facility. As these borrowings support operations on a worldwide basis, these
deferred costs have been excluded from the individual geographic areas. All of
the Companies' other assets are used in the operations of individual entities
in the different geographic areas. There were no unallocated corporate assets
at December 31, 1996.
13. Commitments and Contingencies
HPC is a party to several agreements to license certain technologies and
products. These license agreements generally provide for royalties based on
sales of the related products by HPC. Such royalties have not been material to
date. In January 1998, HPC entered into an exclusive product development,
licensing and distribution agreement with respect to certain metal technology.
Under this agreement HPC has committed to pay minimum royalties of $200,000 per
year, and to fund product development expenses at the rate of $30,000 per month
through July 2002. If such minimum royalties are not paid after July 2002, the
licenses will convert to a non-exclusive basis. Also in January 1998, HPC
entered into an exclusive license and supply agreement for certain chemical
additives. The agreement provides for a minimum annual royalty of $240,000,
commencing in the first quarter that HPC products incorporating the licensed
products are shipped. HPC has an annual minimum purchase obligation under this
agreement of $100,000 in 1998 and $110,000 in 1999.
The Companies are involved in litigation and are the subject of claims
arising in the normal course of their business. Additionally, HPFEL has a
contingent liability related to potential withholding taxes (and the surcharges
thereon) on rent paid to the spouse of one of the directors (see Note 3).
Although the individual has accepted responsibility for the payment of these
taxes, the Company would be accountable for these tax payments in the event
that the individual did not fulfill this obligation. These withholdings and
surcharges amounted to $724,000 at December 31, 1997. In the opinion of
management, based upon discussions with legal counsel, no existing litigation
or claims will have a materially adverse effect on the Companies' financial
position or results of operations and cash flows.
The Companies have entered into employment agreements with several
executives which expire on December 31, 2000, renewable for annual periods by
mutual consent. These agreements provide that if employment is terminated
without cause, the employees will receive severance payments of their
respective salaries for the longer of 12 months or the remainder of the term,
in the case of the Companies' president, or for 12 months, in the case of the
other executives.
Beginning July 1, 1997, Hong Kong is governed by the People's Republic of
China. Management does not believe that this event will materially affect the
Companies' financial position or results of operations and cash flows.
14. Distribution of Profit
Amounts that can be distributed by HPFEL's subsidiaries in China are based
on the financial regulations of China, which differ from accounting principles
generally accepted in the United States. In particular, HPFEL's two Chinese
incorporated subsidiaries, Dongguan Huixin Electrical Products Company, Ltd.
and Dongguan Raider Motor Corp. Ltd., are deemed to be wholly owned foreign
enterprises and, as such, Chinese laws and regulations
F-18
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
require these companies to transfer to separate reserves a certain portion of
after-tax profit each year for specific purposes. These purposes include
enterprise expansion, repair and maintenance of fixed assets and staff welfare.
These reserves are deemed to be non-distributable to the parent company.
The amount to be transferred to the reserve fund must be at least 10% of
the after-tax profit each year, determined in accordance with the financial
regulations of China, up to a cumulative maximum of 50% of the entity's
registered capital stock. Transfers to the staff welfare fund can be determined
by management.
Audited financial statements in accordance with the financial regulations
of China are not yet available for either of these companies and, as such, the
amounts to be set aside for enterprise expansion, repair and maintenance of
fixed assets and other purposes and other adjustments which would affect the
amounts distributable to the Companies' shareholders have not yet been finally
determined; however, based upon draft financial statements through December 31,
1996, management plans to transfer $497,000 to the reserve fund.
Consistent with standard practice in China, Dongguan Huixin Electrical
Products Company, Ltd. and Dongguan Raider Motor Corp. Ltd. account for their
staff welfare commitments on a monthly basis and the amounts involved are
charged directly to the profit and loss account. Such expenses were not
material in 1995, 1996 and 1997.
The retained earnings (accumulated losses) of these companies, including
earnings attributable to the former minority stockholders, on the basis of
accounting principles generally accepted in the United States, are as follows:
<TABLE>
<CAPTION>
1996 1997
--------------- -----------
<S> <C> <C>
Dongguan Raider Motor Corp. Ltd. ........................... $4,812,000 $6,394,000
Dongguan Huixin Electrical Products Company, Ltd. .......... (1,952,000) 554,000
</TABLE>
The currency of China, the reminbi, is not freely convertible and the
ability of these subsidiaries to remit retained earnings to the parent company
is dependent on their ability to generate foreign currency denominated earnings
or to obtain government approval for the purchase of foreign currency.
15. Financial Instruments
The Companies enter into various types of financial instruments in the
normal course of business. Fair values are estimated based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates reflecting varying degrees of perceived risk. Accordingly, the
fair values may not represent actual values of the financial instruments that
could have been realized as of year end or that will be realized in the future.
Fair values for cash and cash equivalents, accounts receivable, other
receivables, income taxes receivable, bank overdrafts, due from affiliates,
trade acceptances payable, accounts payable, accrued expenses, accrued income
taxes, loan payable to affiliate, due to affiliates and capital lease
obligations approximate their carrying values at December 31, 1996 and 1997,
due to their relatively short maturity. The fair values of the Companies' Notes
and Line of Credit approximate their carrying values at December 31, 1997
because the interest rates on these borrowings approximate current market
rates.
16. Condensed Consolidating Information
The senior subordinated notes described in Note 7 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
F-19
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
statements would be material to investors. Taiwan had no revenues or operations
during the periods presented, and Manufacturing ceased operations in March
1997. As described in Note 14, certain of HPFEL's subsidiaries in China have
restrictions on distributions to the parent company.
F-20
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- ---------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ......................... $ 1,284 $ -- $ 3,178 $ 4,462
Accounts receivable, net .......................... 30,795 -- 800 31,595
Other receivables ................................. 77 -- -- 77
Inventories ....................................... 48,562 2,385 12,537 $ (2,232) 61,252
Prepaid expenses and other current assets ......... 907 -- 303 1,210
Deferred income taxes ............................. 3,706 -- -- 3,706
Income taxes receivable ........................... -- -- -- --
Due from affiliates ............................... 5,202 -- 7,253 (9,126) 3,329
--------- ------- -------- --------- ---------
Total current assets ............................ 90,533 2,385 24,071 (11,358) 105,631
--------- ------- -------- --------- ---------
Property and equipment, net ........................ 9,129 15 12,148 (209) 21,083
Deferred income taxes .............................. 384 -- -- 384
Deposits and other assets .......................... 513 1 674 1,188
Investment in consolidated subsidiaries ............ 4,326 -- -- (4,326) --
--------- ------- -------- --------- ---------
$ 104,885 $ 2,401 $ 36,893 $ (15,893) $ 128,286
========= ======= ======== ========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Bank overdraft .................................... $ 42 $ -- $ -- $ 42
Trade acceptances payable ......................... 45,848 -- 4,509 50,357
Current portion of capital lease obligations and
other debt ...................................... -- -- 356 356
Accounts payable .................................. 4,214 -- 9,935 14,149
Accrued expenses .................................. 7,616 -- 3,025 10,641
Accrued income taxes .............................. 1,419 -- 830 2,249
Loan payable to affiliate ......................... 23,000 -- -- 23,000
Due to affiliates ................................. 5,138 2,016 9,692 $ (9,126) 7,720
--------- ------- -------- --------- ---------
Total current liabilities ....................... 87,277 2,016 28,347 (9,126) 108,514
--------- ------- -------- --------- ---------
Capital lease obligations .......................... -- -- 737 737
--------- ------- -------- ---------
Minority interest in net assets of majority-owned
subsidiaries ...................................... -- -- 1,327 1,327
--------- ------- -------- ---------
Stockholders' equity:
Common stock, no par value ........................ 702 1 -- (1) 702
Common stock, $1 par value......................... -- -- 100 100
Retained earnings ................................. 16,906 384 6,382 (6,766) 16,906
--------- ------- -------- ----------- ---------
Total stockholders' equity ...................... 17,608 385 6,482 (6,767) 17,708
--------- ------- -------- ----------- ---------
$ 104,885 $ 2,401 $ 36,893 $ (15,893) $ 128,286
========= ======= ======== =========== =========
</TABLE>
F-21
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------------- -------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ................... $ 3,741 $-- $ 1,400 $ 5,141
Accounts receivable, net .................... 36,720 -- 1,327 38,047
Other receivables ........................... 55 -- -- 55
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
Investment 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>
F-22
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
CONDENSED CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales ................................... $ 163,318 $ 10,183 $ 92,178 $ (87,547) $ 178,132
Cost of goods sold .......................... 133,377 9,990 84,970 (87,111) 141,226
--------- -------- -------- ---------- ---------
Gross profit ............................... 29,941 193 7,208 (436) 36,906
--------- -------- -------- ---------- ---------
Operating expenses:
Selling .................................... 12,207 -- 468 12,675
General and administrative ................. 5,589 196 4,040 9,825
Product development ........................ 3,064 -- 90 3,154
--------- -------- -------- ---------- ---------
Total operating expenses ................. 20,860 196 4,598 25,654
--------- -------- -------- ---------- ---------
Operating profit (loss) .................. 9,081 (3) 2,610 (436) 11,252
--------- ---------- -------- ---------- ---------
Other income (expense):
Other income, net .......................... -- -- 558 (221) 337
Interest income ............................ 10 -- 201 (199) 12
Interest expense ........................... 3,989 -- 1,441 (199) 5,231
--------- --------- -------- ---------- ---------
Total other expense ...................... 3,979 -- 682 221 4,882
--------- --------- -------- ---------- ---------
Income (loss) before income taxes, equity in
income of consolidated subsidiaries and
minority interest .......................... 5,102 (3) 1,928 (657) 6,370
Income tax expense .......................... 2,400 -- 214 2,614
--------- --------- -------- ----------- ---------
Income (loss) before equity in income of
consolidated subsidiaries and minority
interest ................................... 2,702 (3) 1,714 (657) 3,756
Equity in income of consolidated subsidiaries 536 -- -- (536) --
--------- --------- -------- ---------- ---------
Income (loss) before minority interest ...... 3,238 (3) 1,714 (1,193) 3,756
Minority interest in net income of majority-
owned subsidiaries ......................... -- -- 518 518
--------- --------- -------- ---------- ---------
Net income (loss) ........................ $ 3,238 $ (3) $ 1,196 $ (1,193) $ 3,238
========= ========= ======== ========== =========
</TABLE>
F-23
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
CONDENSED CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales ....................................... $ 182,992 $ 6,951 $ 90,306 $ (85,918) $ 194,331
Cost of goods sold .............................. 146,648 6,864 77,778 (85,375) 145,915
--------- ------- -------- ---------- ---------
Gross profit ................................... 36,344 87 12,528 (543) 48,416
--------- ------- -------- ---------- ---------
Operating expenses:
Selling ........................................ 12,735 -- 490 13,225
General and administrative ..................... 6,733 72 7,278 14,083
Product development ............................ 5,454 -- 66 5,520
--------- ------- -------- ---------- ---------
Total operating expenses ...................... 24,922 72 7,834 32,828
--------- ------- -------- ---------- ---------
Operating profit .............................. 11,422 15 4,694 (543) 15,588
--------- ------- -------- ---------- ---------
Other income (expense):
Other income, net .............................. -- -- 353 (34) 319
Interest income ................................ 10 -- 286 (217) 79
Interest expense ............................... 5,605 -- 1,182 (217) 6,570
--------- ------- -------- ---------- ---------
Total other expense ........................... 5,595 -- 543 34 6,172
--------- ------- -------- ---------- ---------
Income before income taxes, equity in income
of consolidated subsidiaries and minority
interest ....................................... 5,827 15 4,151 (577) 9,416
Income tax expense .............................. 2,497 -- 290 2,787
--------- ------- -------- ---------- ---------
Income before equity in income of
consolidated subsidiaries and minority
interest ....................................... 3,330 15 3,861 (577) 6,629
Equity in income of consolidated subsidiaries.... 2,891 -- -- (2,891) --
--------- ------- -------- ---------- ---------
Income before minority interest ................. 6,221 15 3,861 (3,468) 6,629
Minority interest in net income of majority-
owned subsidiaries ............................. -- -- 408 408
--------- ------- -------- ---------- ---------
Net income .................................... $ 6,221 $ 15 $ 3,453 $ (3,468) $ 6,221
========= ======= ======== ========== =========
</TABLE>
F-24
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
CONDENSED CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------------- -------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales ................................... $183,386 $1,240 $91,153 $ (83,626) $192,153
Cost of goods sold .......................... 143,584 1,244 74,425 (82,513) 136,740
-------- ------ ------- --------- --------
Gross profit (loss) ........................ 39,802 (4) 16,728 (1,113) 55,413
-------- ------- ------- --------- --------
Operating expenses:
Selling .................................... 15,317 -- 330 15,647
General and administrative ................. 13,401 15 7,467 20,883
Product development ........................ 5,348 -- 115 5,463
-------- ------- ------- --------- --------
Total operating expenses ................. 34,066 15 7,912 41,993
-------- ------- ------- --------- --------
Operating profit (loss) ................... 5,736 (19) 8,816 (1,113) 13,420
-------- ------- ------- --------- --------
Other income (expense):
Other income, net .......................... -- -- (42) (14) (56)
Interest income ............................ 8 -- 310 (111) 207
Interest expense ........................... 6,440 -- 974 (111) 7,303
-------- ------- ------- --------- --------
Total other expense ...................... 6,432 -- 706 14 7,152
-------- ------- ------- --------- --------
Income (loss) before income taxes, equity in
income of consolidated subsidiaries and
minority interest .......................... (696) (19) 8,110 (1,127) 6,268
Income tax expense .......................... 1,330 -- 940 (74) 2,196
-------- ------- ------- --------- --------
Income (loss) before equity in income of
consolidated subsidiaries and minority
interest ................................... (2,026) (19) 7,170 (1,053) 4,072
Equity in income of consolidated subsidiaries 5,873 -- -- (5,873) --
-------- ------- ------- --------- --------
Income (loss) before minority interest ...... 3,847 (19) 7,170 (6,926) 4,072
Minority interest in net income of majority-
owned subsidiaries ......................... -- -- 225 225
-------- ------- ------- --------- --------
Net income (loss) ......................... $ 3,847 $ (19) $ 6,945 $ (6,926) $ 3,847
======== ======= ======= ========= ========
</TABLE>
F-25
<PAGE>
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------------- -------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Net cash provided by (used for) operating activities...... $ (1,836) $ (683) $ 8,043 $ 5,524
--------- ------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment ..................... (6,347) -- (3,359) (9,706)
--------- ------- -------- ---------
Cash flows from financing activities:
Net borrowings from affiliate ........................... 6,000 -- -- 6,000
Principal payments on capital lease obligations ......... -- -- (28) (28)
Other net activity with Parent .......................... 1,395 683 (2,078) --
--------- ------- -------- ---------
Net cash provided by (used for) financing
activities ........................................... 7,395 683 (2,106) 5,972
--------- ------- -------- ---------
Net increase (decrease) in cash and cash
equivalents ............................................. (788) -- 2,578 1,790
Cash and cash equivalents, beginning of period ........... 886 -- 692 1,578
--------- ------- -------- ---------
Cash and cash equivalents, end of period ................. $ 98 $ -- $ 3,270 $ 3,368
========= ======= ======== =========
Year Ended December 31, 1996
Net cash provided by (used for) operating activities...... $ (1,578) $ 386 $ 3,994 $ 2,802
--------- ------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment ..................... (4,417) -- (4,177) (8,594)
--------- ------- -------- ---------
Cash flows from financing activities:
Net borrowings from affiliate ........................... 7,000 -- -- 7,000
Principal payments on capital lease obligations ......... -- -- (114) (114)
Other net activity with Parent .......................... 181 (386) 205 --
--------- ------- -------- ---------
Net cash provided by (used for) financing
activities ........................................... 7,181 (386) 91 6,886
--------- ------- -------- ---------
Net increase (decrease) in cash and cash
equivalents ............................................. 1,186 -- (92) 1,094
Cash and cash equivalents, beginning of period ........... 98 -- 3,270 3,368
--------- ------- -------- ---------
Cash and cash equivalents, end of period ................. $ 1,284 $ -- $ 3,178 $ 4,462
========= ======= ======== =========
Year Ended December 31, 1997
Net cash provided by (used for) operating activities ..... $ (45,543) $ 459 $ (1,289) $ (46,373)
--------- ------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment ..................... (4,509) -- (1,306) (5,815)
Purchase of minority interest ........................... -- -- (451) (451)
Net cash used for investing activities ................ (4,509) -- (1,757) (6,266)
--------- ------- -------- ---------
Cash flows from financing activities:
Borrowings of long-term debt ............................ 96,209 -- -- 96,209
Net borrowings on line of credit ........................ 26,134 -- 1,002 27,136
Net repayments to affiliate ............................. (23,000) -- -- (23,000)
Principal payments on capital lease obligations ......... -- -- (481) (481)
Issuance of common stock ................................ 15,512 -- -- 15,512
Purchase of treasury stock .............................. (62,058) -- -- (62,058)
Other net activity with Parent .......................... (288) (459) 747 --
--------- ------- -------- ---------
Net cash provided by (used for) financing
activities ........................................... 52,509 (459) 1,268 53,318
--------- ------- -------- ---------
Net increase (decrease) in cash and cash
equivalents ............................................. 2,457 -- (1,778) 679
Cash and cash equivalents, beginning of period ........... 1,284 -- 3,178 4,462
--------- ------- -------- ---------
Cash and cash equivalents, end of period ................. $ 3,741 $ -- $ 1,400 $ 5,141
========= ======= ======== =========
</TABLE>
F-26
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus, and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or the Initial Purchasers. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities, other than the
securities to which it relates, or any offer to buy the Exchange Notes in any
jurisdiction where or to any person to whom it is unlawful to make such offer
or solicitation in such jurisdiction.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary .................................. 1
Risk Factors ........................................ 14
The Exchange Offer .................................. 20
The Transactions; Use of Proceeds ................... 28
Capitalization ...................................... 30
Selected Financial Data ............................. 31
Unaudited Pro Forma Condensed
Financial Statements ............................. 33
Management's Discussion and Analysis of
Financial Condition and Results of Operations 36
Business ............................................ 41
Management .......................................... 49
Share Ownership ..................................... 53
Certain Transactions ................................ 54
Description of Credit Facility ...................... 55
Description of the Exchange Notes ................... 56
Plan of Distribution ................................ 80
Certain United States Federal Tax Considerations
for Non-United States Holders .................... 81
Legal Matters ....................................... 83
Experts ............................................. 83
Index to Consolidated Financial Statements .......... F-1
</TABLE>
[Holmes Logo]
Holmes Products Corp.
Offer to Exchange
$105,000,000
9 7/8% Senior Subordinated Notes
due 2007, Series B
for
9 7/8% Senior Subordinated
Notes due 2007
--------------------------------
PROSPECTUS
--------------------------------
_________ , 1998
================================================================================
<PAGE>
PART II
Item 20. Indemnification of Directors and Officers.
Article twelfth of the Company's by-laws provides that the Company, to the
extent legally permissible, will indemnify any person serving or who has served
as a director or officer of the Company against all liabilities and expenses
reasonably incurred by such director or officer in connection with the defense
or disposition of any action, suit or other proceeding in which the director or
officer may be involved, while serving as, or by reason of being or having
been, such a director or officer, except with respect to any matter as to which
he or she is adjudicated to have not acted in good faith or not with the
reasonable belief that an action was in the best interest of the Company.
The Company maintains directors' and officers' liability insurance which
may cover liabilities under the Act.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits (All exhibits have been previously filed, except as noted.)
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- ----------------------------------------------------------------------------------------
<S> <C>
1.1 Purchase Agreement dated November 19, 1997 among Holmes Products Corp., BancBoston
Securities Inc. and Lehman Brothers Inc.
3.1 Articles of Organization (as amended) of Holmes Products Corp.
3.2 Articles of Organization of Holmes Manufacturing Corp.
3.3 Articles of Organization of Holmes Air (Taiwan) Corp.
3.4 By-laws (as amended) of Holmes Products Corp.
3.5 By-laws of Holmes Manufacturing Corp.
3.6 By-laws of Holmes Air (Taiwan) Corp.
4.1 Registration Rights Agreement dated November 26, 1997 among Holmes Products Corp.,
Holmes Manufacturing Corp., Holmes Air (Taiwan) Corp., BancBoston Securities Inc. and
Lehman Brothers Inc.
4.2 Indenture dated November 26, 1997 among Holmes Products Corp., Holmes Manufacturing
Corp., Holmes Air (Taiwan) Corp. and State Street Bank and Trust Company.
4.3 Form of Notes -- (Included in Exhibit 4.2).
4.4 Form of Guaranty -- (Included in Exhibit 4.2).
5.1 Opinion of Posternak, Blankstein & Lund, L.L.P.
10.1 Revolving Credit Agreement dated as of November 26, 1997 by and among Holmes Products
Corp., Holmes Products (Far East) Limited, Esteem Industries Limited, Raider Motor
Corporation, BankBoston, N.A., Lehman Brothers Inc. and other banks which may become a
party thereto.
10.2 Stock Purchase and Redemption Agreement dated as of October 27, 1997, as amended as of
November 25, 1997, among Asco Investments Ltd., Jordan A. Kahn, Holmes Products Corp.,
Holmes Products (Far East) Limited and Holmes Acquisition LLC.
10.3 Stock Purchase Agreement dated as of October 27, 1997 among Jordan A. Kahn and Holmes
Acquisition LLC.
10.4 Executive Employment and Non-Competition Agreement dated November 26, 1997 among
Holmes Products Corp. and Jordan A. Kahn.
10.5 Executive Employment and Non-Competition Agreement dated November 26, 1997 among
Holmes Products Corp. and Stanley Rosenzweig.
10.6 Executive Employment and Non-Competition Agreement dated November 26, 1997 among
Holmes Products Corp. and Gregory F. White.
10.7 Employment Agreement dated November 26, 1997 among Holmes Products (Far East) Limited
and (Tommy) Woon Fai Liu.
10.8 Stockholders' Agreement dated November 26, 1997 among Holmes Products Corp. and certain
stockholders thereof.
10.9 Registration Rights Agreement dated November 26, 1997 among Holmes Products Corp. and
certain stockholders thereof.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------------------- ---------------------------------------------------------------------------------------------
<S> <C>
10.10 Holmes Products Corp. 1997 Stock Option Plan.
10.11 Non-transferable Common Stock Purchase Warrant dated November 26, 1997 issued to
Pentland Group plc.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of Registrant.
*23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Posternak, Blankstein & Lund, L.L.P. (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature pages hereto).
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of State Street Bank
and Trust Company.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
* Filed herewith
(b) Financial Statement Schedules.
For the years ended December 31, 1995, 1996 and 1997:
Schedule II
Holmes Products Corp.
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions Deductions
----------------------- ---------------
Balance at Charged to Charged Write-off of Balance
Beginning Costs and to Other Uncollectible at End of
of Period Expenses Accounts Accounts Period
------------ ------------ ---------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995 ......... $ 232 $1,404 -- $142 $1,494
Year ended December 31, 1996 ......... 1,494 505 -- 886 1,113
Year ended December 31, 1997 ......... 1,113 330 -- 984 459
</TABLE>
<TABLE>
<CAPTION>
Additions Deductions
----------------------------- -----------
Net
Operating Net
Balance at Charged to Losses Operating Balance
Beginning Income without Tax Losses at End of
of Period Tax Expense Benefit (1) Utilized Period
------------ --------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Deferred tax valuation allowance:
Year ended December 31, 1995 ......... $ 19 -- $505 -- $ 524
Year ended December 31, 1996 ......... 524 -- -- $ 55 469
Year ended December 31, 1997 ......... 469 $ 1,447(2) -- 469 1,447
</TABLE>
(1) Based on the weight of available evidence existing at the time, management
concluded that it was more likely than not that the Company would not be
able to realize the benefit associated with the net operating losses being
generated in certain tax jurisdictions during these periods. As the net
operating losses were utilized, the Company reduced the related valuation
allowance.
(2) The Company was subject to certain limitations on interest paid to or
guaranteed by Pentland. See Note 9 of Notes to Consolidated Financial
Statements.
II-2
<PAGE>
Item 22 Undertakings.
Each undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) To respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Items 4, 10 (b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
(e) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it
became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the undersigned registrant has duly caused this amendment to be signed on its
behalf by the undersigned, hereunto duly authorized, in the Commonwealth of
Massachusetts, on March 23, 1998.
HOLMES PRODUCTS CORP.
By: /s/ JORDAN A. KAHN
------------------------------
Jordan A. Kahn, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- ------------------------------------- ---------------
<S> <C> <C>
/s/ JORDAN A. KAHN President, Chief Executive Officer
- ------------------------- and Director (Principal Executive
Jordan A. Kahn Officer) March 23, 1998
/s/ DAVID DUSSEAULT Chief Financial Officer (Principal
- ------------------------- Financial and Accounting Officer)
David Dusseault March 23, 1998
* Chief Operating Officer and Director
- -------------------------
Stanley Rosenzweig March 23, 1998
* Executive Vice President,
- ------------------------- Sales and Marketing, and Director
Gregory F. White March 23, 1998
* Director
- -------------------------
Richard K. Lubin March 23, 1998
* Director
- -------------------------
Randy Peeler March 23, 1998
* By: /s/ JORDAN A. KAHN
- -------------------------
Jordan A. Kahn,
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the undersigned registrant has duly caused this amendment to be signed on its
behalf by the undersigned, hereunto duly authorized, in the Commonwealth of
Massachusetts, on March 23, 1998.
HOLMES MANUFACTURING CORP.
By: /s/ JORDAN A. KAHN
------------------------------
Jordan A. Kahn, President
Pursuant to the requirements of the Securities Act of 1933, this amendment
has been signed by the following person in the stated capacity and on the date
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- ---------------------------------- ---------------
<S> <C> <C>
/s/ JORDAN A. KAHN President, Treasurer and Director
- ------------------------- (Principal Executive, Financial
Jordan A. Kahn and Accounting Officer) March 23, 1998
</TABLE>
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the undersigned registrant has duly caused this amendment to be signed on its
behalf by the undersigned, hereunto duly authorized, in the Commonwealth of
Massachusetts, on March 23, 1998.
HOLMES AIR (TAIWAN) CORP.
By: /s/ JORDAN A. KAHN
------------------------------
Jordan A. Kahn, President
Pursuant to the requirements of the Securities Act of 1933, this amendment
has been signed by the following person in the stated capacity and on the date
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- ---------------------------------- ---------------
<S> <C> <C>
/s/ JORDAN A. KAHN President, Treasurer and Director
- ------------------------- (Principal Executive, Financial
Jordan A. Kahn and Accounting Officer) March 23, 1998
</TABLE>
II-6
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated March 11, 1998 relating
to the consolidated financial statements of Holmes Products Corp., which appears
in such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the three years ended December 31, 1997 shown
under Item 21(b) of this Registration Statement when such schedule is read in
conjunction with the financial statements referred to in our report. The audits
referred to in such report also included this schedule. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 23, 1998
