<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBERS: 333-44473
333-77905
HOLMES PRODUCTS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2768914
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
233 FORTUNE BOULEVARD, MILFORD MASSACHUSETTS 01757
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) 634-8050
(REGISTRANT'S TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
<PAGE> 2
HOLMES PRODUCTS CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET AT
DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED) 3
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND
MARCH 31, 1999 (UNAUDITED) 4
CONSOLIDATED STATEMENT OF
CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 (UNAUDITED) 5
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 21
PART II. OTHER INFORMATION 21
SIGNATURES 23
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOLMES PRODUCTS CORP.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999 (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 5,379 $ 3,070
Accounts receivable, net ................................................... 36,967 92,209
Inventories ................................................................ 53,340 151,831
Prepaid expenses and other current assets .................................. 2,027 3,876
Deferred income taxes ...................................................... 4,983 11,500
Income taxes receivable .................................................... -- 3,544
-------- --------
Total current assets ..................................................... 102,696 266,030
Assets held for sale ....................................................... -- 5,031
Property and equipment, net ................................................ 15,752 50,283
Goodwill ................................................................... -- 85,597
Deferred income taxes ...................................................... 563 563
Deposits and other assets .................................................. 3,174 7,796
Debt issuance costs, net ................................................... 9,172 22,011
-------- --------
$131,357 $437,311
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations and other debt ................ $ 604 $ 439
Current portion of credit facility ......................................... -- 4,838
Accounts payable ........................................................... 15,004 30,001
Accrued expenses ........................................................... 12,292 35,197
Accrued income taxes ....................................................... 3,707 3,485
-------- --------
Total current liabilities ................................................ 31,607 73,960
Capital lease obligations ...................................................... 139 139
Credit facility ................................................................ 10,000 190,162
Long-term debt ................................................................. 105,000 135,000
Deferred income taxes .......................................................... -- 4,051
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value. Authorized 12,500,000 shares as of
December 31, 1998 and 25,000,000 as of March 31, 1999; issued and
outstanding 10,200,815 shares at December 31, 1998 and
20,296,877 shares at March 31, 1999 ...................................... 10 20
Additional paid in capital ................................................... 16,985 67,715
Accumulated other comprehensive income ....................................... (40) (53)
Treasury stock, at cost (18,620,450 shares) .................................. (62,058) (62,058)
Retained earnings ............................................................ 29,714 28,375
-------- --------
Total stockholders' equity (deficit) ..................................... (15,389) 33,999
-------- --------
$131,357 $437,311
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE> 4
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1999
<S> <C> <C>
Net sales ..................................................... $44,895 $91,669
Cost of goods sold ............................................ 30,830 64,748
------- -------
Gross profit ................................................ 14,065 26,921
------- -------
Operating expenses:
Selling ..................................................... 4,847 13,172
General and administrative .................................. 3,712 5,685
Product development ......................................... 1,691 2,219
Plant closing costs ......................................... -- 1,149
Amortization of goodwill and other intangible assets ........ -- 446
------- -------
Total operating expenses .................................. 10,250 22,671
------- -------
Operating profit .......................................... 3,815 4,250
------- -------
Other income and expense:
Interest and other expense, net ............................. 3,433 6,049
------- -------
Income (loss) before income taxes and equity in earnings
from joint venture .......................................... 382 (1,799)
Income tax expense (benefit) .................................. 96 (338)
Equity in earnings from joint venture ......................... -- 108
------- -------
Net income (loss) ......................................... $ 286 $(1,353)
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1999
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................ $ 286 $ (1,353)
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization .............................................. 1,563 3,890
Amortization of debt issuance costs ........................................ 294 629
Change in allowance for doubtful accounts .................................. 133 171
Loss on disposal of assets ................................................. -- 6
Deferred income taxes ...................................................... (484) 7
Changes in operating assets and liabilities:
Accounts receivable ...................................................... 8,269 21,854
Inventories .............................................................. (2,233) 6,056
Prepaid expenses and other current assets ................................ 265 (223)
Income taxes receivable .................................................. (152) --
Deposits and other assets ................................................ (284) 674
Accounts payable ......................................................... 4,890 (3,802)
Accrued expenses ......................................................... 1,913 1,744
Accrued income taxes ..................................................... 315 (1,482)
------- ---------
Net cash provided by operating activities .................................. 14,775 28,171
------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ................................ -- (279,546)
Contribution in joint venture ................................................ -- (25)
Distribution of earnings from joint venture .................................. -- 108
Purchases of property and equipment .......................................... (1,564) (2,795)
------- ---------
Net cash used for investing activities ..................................... (1,564) (282,258)
------- ---------
Cash flows from financing activities:
Net repayment of line of credit .............................................. (8,502) (10,000)
Issuance of common stock ..................................................... -- 50,400
Borrowings of long- term debt, net of issuance costs ......................... -- 27,724
Borrowings on credit facility, net of issuance costs ......................... -- 183,808
Debt issuance costs .......................................................... (194) --
Principal payments on capital lease obligations .............................. (172) (165)
------- ---------
Net cash provided by (used for) financing activities ....................... (8,868) 251,767
------- ---------
Effect of exchange rate changes on cash ........................................ -- 11
------- ---------
Net increase (decrease) in cash and cash equivalents ........................... 4,343 (2,309)
Cash and cash equivalents, beginning of period ................................. 5,141 5,379
------- ---------
Cash and cash equivalents, end of period ....................................... $ 9,484 $ 3,070
======= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ...................................................... $ 583 $ 1,631
Cash paid for income taxes .................................................. $ 344 $ 1,623
</TABLE>
Non cash transactions:
The Company issued 59,524 shares of common stock for the fair value of
services received from a vendor totaling $300,000.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. NATURE OF BUSINESS
Holmes Products Corp. ("Holmes" or "HPC") designs, develops, imports and
sells consumer durable goods, including fans, heaters, humidifiers, air
purifiers, filters, accessories and lighting products, to retailers
throughout the United States and Canada, and to a lesser extent, Europe.
The Rival Company ("Rival") and its subsidiaries design, manufacture and
market small kitchen, home environment and personal care appliances,
commercial and industrial fans, and ventilation equipment as well as sump,
well and utility pumps. Rival sells its products to retail and industrial
customers, primarily in the U.S. and Canada and, to a larger degree than
HPC, internationally. Rival is a wholly-owned subsidiary of HPC.
Holmes Products (Far East) Limited ("HPFEL") and its subsidiaries
manufacture and sell consumer durable goods, including fans, heaters and
humidifiers, mainly to HPC. HPFEL operates facilities in Hong Kong and The
People's Republic of China.
HPFEL is a wholly-owned subsidiary of HPC. Prior to the recapitalization
transaction described in Note 4, HPC and HPFEL were both directly or
indirectly an 80% owned subsidiary of Asco Investments Ltd., a subsidiary
of Pentland Group plc ("Pentland").
2. BASIS OF CONSOLIDATION
The accompanying unaudited financial statements include the accounts of
HPC and its wholly-owned subsidiaries, Rival, HPFEL, Holmes Manufacturing
Corp., Holmes Air (Taiwan) Corp., Holmes Motor Corp. and Holmes Air
(Canada) Corp. The accompanying unaudited financial statements also
include the accounts of Rival's direct and indirect wholly-owned
subsidiaries, Bionaire International B.V., Patton Building Products, Inc.,
Patton Electric Company, Inc., Patton Electric (Hong Kong) Limited, Rival
Consumer Sales Corporation, The Rival Company of Canada, Ltd., Rival de
Mexico S.A. de C.V. and Waverly Products Company, Ltd. and HPFEL's
wholly-owned subsidiaries, Esteem Industries Ltd., Raider Motor Corp.,
Dongguan Huixin Electrical Products Company, Ltd., Holmes Products
(Europe) Ltd. and Dongguan Raider Motor Corp. Ltd. All significant
inter-company balances and transactions have been eliminated.
HPC and its consolidated subsidiaries, including Rival, HPFEL and their
respective subsidiaries, are referred to herein as the "Company."
3. ACQUISITION
On February 5, 1999, the Company completed its acquisition of Rival for an
aggregate of $279.5 million, including $129.4 million cash paid in
connection with a tender offer for all of the outstanding shares of Common
Stock of The Rival Company (including payments to optionees), $142.9
million to refinance Rival's outstanding debt and $7.2 million in
acquisition costs. The acquisition was made utilizing cash on hand,
borrowings under an amended and restated Credit Facility entered into in
connection with the acquisition, the issuance of $31.3 million of senior
subordinated notes and proceeds of $50.0 million from the sale of Holmes'
common stock to investment funds affiliated with Holmes' majority
shareholder, certain members of Holmes' management and to certain other
co-investors. This acquisition has been accounted for as a purchase, and
the results of operations of Rival have been included in consolidated
financial statements since the date of acquisition. The excess of purchase
price over the fair value of net assets acquired was approximately $86.0
million and is being amortized on a straight-line basis over 35 years. The
allocation of the purchase price to the net assets of Rival is
preliminary. Management intends to complete its assessment of the fair
value of assets acquired by December 31, 1999.
Prior to the acquisition by Holmes, Rival recorded an $8.4 million
restructuring charge relating to the closing of three facilities. Each of
these facilities has been closed or is scheduled to be closed during fiscal
1999 and the Company plans to sell these properties. The estimated fair
value of these properties has been reflected in the March 31, 1999 balance
sheet as assets held for sale. Additionally, non-recurring wind down costs
and fixed asset writedowns relating to these facilities has been included
as plant closing costs in the consolidated statement of income for the
three months ended March 31, 1999.
6
<PAGE> 7
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following unaudited pro forma data summarizes the Company's results of
operations for the periods indicated as if the acquisition had been
completed as of the beginning of the periods presented. These unaudited pro
forma results have been prepared for comparative purposes only and include
certain adjustments, such as increased interest expense on acquisition debt
and additional amortization expense as a result of the goodwill. They do
not purport to be indicative of the results of operations that actually
would have resulted had the acquisitions been in effect on January 1, 1998,
or of future results of operations.
Quarter ended Quarter ended
(in thousands) March 31, 1998 March 31, 1999
-------------- --------------
(unaudited)
Net revenues............................ $115,746 $114,014
Net earnings (loss)..................... (1,341) (9,675)
4. RECAPITALIZATION
On November 26, 1997, the Company and its stockholders consummated an
agreement to perform the following: (i) the stockholders of HPFEL
contributed their shares of common stock to HPC in exchange for 2,750,741
shares of HPC's common stock (ii) HPC issued 4,718,579 shares of its
common stock to outside investors and certain executive officers of the
Company for approximately $15.5 million, net of related issuance costs,
(iii) the Company repaid all amounts outstanding to Pentland affiliates
and repaid all amounts outstanding on the Company's trade acceptances,
including accrued interest, and (iv) HPC redeemed 18,620,450 shares of HPC
common stock held by Pentland for approximately $62.1 million. In
connection with these transactions, HPC issued $105.0 million of 9 7/8%
Senior Subordinated Notes due in November 2007 and borrowed $27.5 million
under a new line of credit facility.
The transactions described above have been accounted for as a leveraged
recapitalization of the Company. The Company has retained its historical
cost basis of accounting, due to the significant minority shareholders
which remained. The shares redeemed from Pentland have been recorded as
treasury stock, at cost.
5. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation of
the Company's financial position as of March 31, 1999 and the Company's
results of operations and cash flows for the three months ended March 31,
1998 and 1999. This interim financial information and notes thereto should
be read in conjunction with the Company's Annual Report on Form 10-K and
its Registration Statement on Form S-4 (file number 333-77905), which
include or incorporate by reference HPC's audited financial statements
for the year ended December 31, 1998, as well as certain financial
statements of Rival. Due to the seasonality of the Company's business, the
Company's consolidated results of operations for the three month period
ended March 31, 1999 are not necessarily indicative of the results to be
expected for any other interim period or the entire fiscal year.
7
<PAGE> 8
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. INVENTORIES
All inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method on approximately
75% of the inventories and the last-in, first-out method (LIFO) for the
remaining 25% of the inventory. Inventories are as follows:
December 31, 1998 March 31, 1999
----------------- --------------
Finished goods $34,620,000 $ 98,944,000
Raw materials and Work-in-process 18,720,000 52,962,000
----------- ------------
53,340,000 151,906,000
Less LIFO allowance -- (75,000)
----------- ------------
$53,340,000 $151,831,000
=========== ============
7. LONG-TERM DEBT
Senior Subordinated Notes
In connection with the recapitalization transactions described in Note 4
and the Rival acquisition described in Note 3, HPC issued $105.0 million
and $31.3 million, respectively, in senior subordinated notes, maturing on
November 15, 2007 (the "Notes"). The Notes bear interest at 9 7/8%,
payable semi-annually on May 15 and November 15. No principal is due until
the maturity date.
The Notes are subordinated to the Company's other debt, including the
Credit Facility (as described below) and capital leases. The Notes are
guaranteed by HPC's current and future domestic subsidiaries (see Note 12)
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 $43.3
million of the Notes prior to such date at a price of 109.875% of face
value upon 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 Credit Facility). The Notes and Credit Facility
contain cross-default provisions.
Credit Facility
The Company entered into an amended and restated Credit Facility agreement
in February, 1999 in connection with the Rival acquisition. The Credit
Facility consists of a six-year tranche A term loan of $40.0 million, an
eight-year tranche B term loan of $85.0 million and a $200.0 million,
six-year revolving credit facility. The Credit Facility bears interest at
variable rates based on either the prime rate or LIBOR, at the Company's
option, plus a margin which, in the case of the tranche A term loan and
the revolving credit facility, varies depending upon certain financial
ratios of the Company. The Credit Facility, and the guarantees thereof by
the Company's domestic subsidiaries, are secured by substantially all of
the Company's domestic and certain foreign assets. The Credit Facility and
the Notes Indentures include
8
<PAGE> 9
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
certain financial and operating covenants, which, among other things,
restrict the ability of the Company to incur additional indebtedness, grant
liens, make investments and take certain other actions. The ability of the
Company to meet its debt service obligations will be dependent upon the
future performance of the Company, which will be impacted by general
economic conditions and other factors. See "Forward-Looking Statements."
Long term debt consists of the following:
<TABLE>
<CAPTION>
(in thousands) March 31, 1998 March 31,1999
-------------- -------------
<S> <C> <C>
Credit Facility......................................... $ 10,000 $195,000
9 7/8% Senior Subordinated Notes, net of unamortized
discount of $1.3 million at
March 31, 1999 ($0 in 1998)........................... 105,000 135,000
-------- --------
Total debt.............................................. 115,000 330,000
Less current maturities................................ -- 4,838
-------- --------
Long-term debt......................................... $115,000 $325,162
</TABLE>
8. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income consists of net earnings and foreign currency
translation adjustments as presented in the following table.
<TABLE>
<CAPTION>
Three months ended
(in thousands) March 31, 1998 March 31,1999
-------------- -------------
<S> <C> <C>
Net Earnings (loss).......................................... $286 $(1,353)
Foreign currency translation adjustments................ (20) (13)
---- -------
Comprehensive income.................................... $266 $(1,366)
</TABLE>
9. BUSINESS SEGMENTS
The Company manages its operations through four business segments: consumer
durables, industrial and building supply (industrial), international and
Far East. The consumer durables segment sells products including fans,
heaters, humidifiers, air purifiers, Crock-Pot (R) slow cookers, toasters,
ice cream freezers, can openers, showerheads, massagers, electric space
heaters and lighting products to retailers throughout the U.S. The consumer
durables segment is made up of home environment products and kitchen
electric products and are considered one business segment due to the
similar customer base and distribution channels. The industrial segment
sells products including industrial fans and drum blowers, household
ventilation, ceiling fans, door chimes and electric heaters to electrical
and industrial wholesale distributors throughout the U.S. The international
segment sells the Company's products outside the U.S. The Far East segment
is the manufacturing and sourcing operation located primarily at HPFEL. For
disclosure purposes, the industrial segment and international segment are
shown as "Other" as neither segment comprises greater than 10% separately
or in the aggregate.
The Company evaluates performance in part based upon operating income,
which it defines as gross profit less selling, general and administrative,
product development expenses and amortization of goodwill and other
intangible assets.
9
<PAGE> 10
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Prior to the Rival acquisition as described in Note 3 above, Holmes had two
business segments: manufacturing and distribution. The information for the
quarter ended March 31, 1998 has been reclassified to conform to the new
presentation.
Summary financial information for each reportable segment for the
three-month periods ended March 31, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
Consumer Consolidated
Durables Far East Other Eliminations Total
-------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
March 1999
- ----------
Net sales ....................... $80,333 $32,530 $9,158 $(30,352) $91,669
Operating income(loss) .......... 270 4,673 (493) (200) 4,250
March 1998
- ----------
Net sales ....................... $42,383 $30,809 $ 286 $(28,583) $44,895
Operating income(loss) .......... (247) 4,626 (119) (445) 3,815
</TABLE>
The following information is summarized by geographic area (in thousands):
<TABLE>
<CAPTION>
Other Consolidated
United States Far East International Total
------------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales:
Three months ended March 31, 1999 ........................ $ 83,767 $ 2,178 $ 5,724 $ 91,669
Three months ended March 31, 1998 ........................ 42,383 2,226 286 44,895
Identifiable assets:
March 31, 1999 ........................................... 343,277 54,302 17,721 415,300
Corporate assets at March 31, 1999 ..................... 22,011
--------
Total assets at March 31, 1999 ....................... 437,311
December 31, 1998 ........................................ 83,384 33,980 4,821 122,185
Corporate assets at December 31, 1998 .................. 9,172
--------
Total assets at December 31, 1998 .................... $131,357
</TABLE>
Net sales are grouped based on the geographic origin of the transaction.
The "Other International" area is comprised of sales of products that
originated in Europe, Mexico, Latin America and Canada.
The Company's manufacturing entities in the Far East 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. The
remaining Far East sales are to unrelated third parties.
Corporate assets at March 31, 1999 and December 31, 1998 represent debt
issuance costs associated with the Company's senior subordinated notes and
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 Company's other assets are used in the
operations of individual entities in the different geographic areas.
10
<PAGE> 11
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. CONTINGENCIES
The Company is involved in litigation and is the subject of claims arising
in the normal course of its business. In the opinion of management, based
upon discussions with legal counsel, no existing litigation or claims will
have a materially adverse effect on the Company's financial position or
results of operations and cash flows.
11. RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
12. CONDENSED CONSOLIDATING INFORMATION
The senior subordinated notes described in Note 7 were issued by HPC and
are guaranteed by Rival and its three domestic subsidiaries and Holmes
Manufacturing Corp. ("Manufacturing"), Holmes Motor Corp. ("Motor") and
Holmes Air (Taiwan) Corp. ("Taiwan"), but are not guaranteed by HPC's other
subsidiaries, HPFEL and Holmes Air (Canada) Corp. ("Canada"), or Rival's
five foreign subsidiaries. The guarantor subsidiaries are directly or
indirectly 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) Rival (on a consolidated basis following its
acquisition by HPC, including its non-guarantor foreign subsidiaries),
Manufacturing, Motor and Taiwan, the guarantor subsidiaries, and (iii)
HPFEL and Canada, the non-guarantor subsidiaries. There were no
transactions between Rival, Manufacturing, Motor and Taiwan, or between
HPFEL and Canada, during any of the periods presented. Taiwan had no
revenues or operations during the periods presented, and Manufacturing
ceased operations in March 1997. As further described in Note 14 of the
Company's audited financial statements for the year ended December 31,
1998, included in the Company's Form 10-K as filed with the Securities and
Exchange Commission, certain of HPFEL's subsidiaries in China have
restrictions on distributions to their parent companies.
11
<PAGE> 12
CONSOLIDATING BALANCE SHEET DECEMBER 31, 1998 (IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 1,545 $ -- $ 3,834 $ -- $ 5,379
Accounts receivable, net ............................... 35,558 -- 1,409 -- 36,967
Inventories ............................................ 44,748 -- 13,142 (4,550) 53,340
Prepaid expenses and other current assets .............. 869 -- 1,158 -- 2,027
Deferred income taxes .................................. 4,983 -- -- -- 4,983
Income taxes receivable ................................ -- -- -- -- --
Due from affiliates .................................... (89) 89 14,066 (14,066) --
-------- ---- ------- -------- --------
Total current assets ................................. 87,614 89 33,609 (18,616) 102,696
-------- ---- ------- -------- --------
Property and equipment,net ............................... 3,132 -- 12,520 100 15,752
Deferred income taxes .................................... 563 -- -- -- 563
Deposits and other assets ................................ 12,020 1 425 (100) 12,346
Investments in consolidated subsidiaries ................. 19,677 -- -- (19,677) --
-------- ---- ------- -------- --------
$123,006 $ 90 $46,554 $(38,293) $131,357
======== ==== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations
and other debt ........................................ $ -- $ -- $ 604 $ -- $ 604
Accounts payable ....................................... 2,400 -- 12,604 -- 15,004
Accrued expenses ....................................... 8,960 -- 3,332 -- 12,292
Accrued income taxes ................................... 1,922 -- 1,785 -- 3,707
Due to affiliates ...................................... 10,113 -- 3,953 (14,066) --
-------- ---- ------- -------- --------
Total current liabilities ............................ 23,395 -- 22,278 (14,066) 31,607
-------- ---- ------- -------- --------
Capital lease obligations ................................ -- -- 139 -- 139
-------- ---- ------- -------- --------
Line of credit ........................................... 10,000 -- -- -- 10,000
-------- ---- ------- -------- --------
Long-term debt ........................................... 105,000 -- -- -- 105,000
-------- ---- ------- -------- --------
Stockholders' equity (deficit):
Common stock, $.001 par value ......................... 10 1 -- (1) 10
Common stock, $1 par value ............................. -- -- 100 (100) --
Additional paid in capital ............................. 16,985 -- -- -- 16,985
Accumulated other comprehensive income ................. (40) -- -- -- (40)
Treasury stock ......................................... (62,058) -- -- -- (62,058)
Retained earnings ...................................... 29,714 89 24,037 (24,126) 29,714
-------- ---- ------- -------- --------
Total stockholders' equity (deficit) ................. (15,389) 90 24,137 (24,227) (15,389)
-------- ---- ------- -------- --------
$123,006 $ 90 $46,554 $(38,293) $131,357
======== ==== ======= ======== ========
</TABLE>
12
<PAGE> 13
CONSOLIDATING BALANCE SHEET MARCH 31, 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 1,158 $ -- $ 1,912 $ -- $ 3,070
Accounts receivable, net ............................... 28,336 62,412 1,461 -- 92,209
Inventories ............................................ 44,621 99,056 12,704 (4,550) 151,831
Prepaid expenses and other current assets .............. 512 826 2,538 -- 3,876
Deferred income taxes .................................. 4,983 6,517 -- -- 11,500
Income taxes receivable ................................ -- 3,544 -- -- 3,544
Due from affiliates .................................... 264,040 89 20,668 (284,797) --
-------- --------- ------- --------- ---------
Total current assets ................................. 343,650 172,444 39,283 (289,347) 266,030
-------- --------- ------- --------- ---------
Assets held for sale ..................................... -- 5,031 -- -- 5,031
Property and equipment,net ............................... 2,888 34,754 12,741 (100) 50,283
Goodwill ................................................. -- 85,597 -- -- 85,597
Deferred income taxes .................................... 563 -- -- -- 563
Deposits and other assets ................................ 25,903 4,360 444 (900) 29,807
Investments in consolidated subsidiaries ................. 26,283 -- -- (26,283) --
-------- --------- ------- --------- ---------
$399,287 $ 302,186 $52,468 $(316,630) $ 437,311
======== ========= ======= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations
and other debt ........................................ $ -- $ -- $ 439 $ -- $ 439
Current portion of credit facility ..................... 4,838 -- -- -- 4,838
Accounts payable ....................................... 3,191 13,717 13,993 (900) $ 30,001
Accrued expenses ....................................... 14,116 18,547 2,534 -- 35,197
Accrued income taxes ................................... (448) 1,544 2,389 -- 3,485
Due to affiliates ...................................... 18,429 264,160 2,208 (284,797) --
-------- --------- ------- --------- ---------
Total current liabilities ............................ 40,126 297,968 21,563 (285,697) 73,960
-------- --------- ------- --------- ---------
Capital lease obligations ................................ -- -- 139 -- 139
-------- --------- ------- --------- ---------
Credit facility .......................................... 190,162 -- -- -- 190,162
-------- --------- ------- --------- ---------
Long-term debt ........................................... 135,000 -- -- -- 135,000
-------- --------- ------- --------- ---------
Deferred income taxes .................................... -- 4,051 -- -- 4,051
-------- --------- ------- --------- ---------
Stockholders' equity:
Common stock, $.001 par value .......................... 20 2 -- (2) 20
Common stock, $1 par value ............................. -- -- 100 (100) --
Additional paid in capital.............................. 67,715 -- -- -- 67,715
Accumulated other comprehensive income.................. (53) --- -- -- (53)
Treasury stock ......................................... (62,058) -- -- -- (62,058)
Retained earnings ...................................... 28,375 165 30,666 (30,831) 28,375
-------- --------- ------- --------- ---------
Total stockholders' equity ........................... 33,999 167 30,766 (30,933) 33,999
-------- --------- ------- --------- ---------
$399,287 $ 302,186 $52,468 $(316,630) $ 437,311
======== ========= ======= ========= =========
</TABLE>
13
<PAGE> 14
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .............................................. $42,383 $ -- $31,095 $(28,583) $ 44,895
Cost of goods sold ..................................... 34,747 -- 24,221 (28,138) 30,830
------- ---- ------- -------- --------
Gross profit ......................................... 7,636 -- 6,874 (445) 14,065
------- ---- ------- -------- --------
Operating expenses:
Selling .............................................. 4,658 -- 189 -- 4,847
General and administrative ........................... 1,540 -- 2,172 -- 3,712
Product development .................................. 1,685 -- 6 -- 1,691
------- ---- ------- -------- --------
Total operating expenses ........................... 7,883 -- 2,367 -- 10,250
------- ---- ------- -------- --------
Operating profit (loss) ............................ (247) -- 4,507 (445) 3,815
------- ---- ------- -------- --------
Other income (expense):
Interest and other income (expense), net ............. (3,502) -- 69 -- (3,433)
------- ---- ------- -------- --------
Income (loss) before income taxes and equity
in income of consolidated subsidiaries ................ (3,749) -- 4,576 (445) 382
Income tax expense (benefit) ........................... (386) -- 459 23 96
------- ---- ------- -------- --------
Income (loss) before equity in income of
Consolidated subsidiaries ............................. (3,363) -- 4,117 (468) 286
Equity in income of consolidated subsidiaries .......... 3,649 -- -- (3,649) --
------- ---- ------- -------- --------
Net income ............................................. $ 286 $ -- $ 4,117 $ (4,117) $ 286
======= ==== ======= ======== ========
</TABLE>
14
<PAGE> 15
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ............................................... $48,063 $40,233 $33,725 $(30,352) $91,669
Cost of goods sold ...................................... 38,274 29,881 26,745 (30,152) 64,748
------- ------- ------- -------- -------
Gross profit .......................................... 9,789 10,352 6,980 (200) 26,921
------- ------- ------- -------- -------
Operating expenses:
Selling ............................................... 6,498 6,252 422 -- 13,172
General and administrative ............................ 1,936 1,737 2,012 -- 5,685
Product development ................................... 1,639 562 18 -- 2,219
Plant closing costs ................................... -- 1,149 -- -- 1,149
Amortization of goodwill and other
intangible assets ................................... -- 446 -- -- 446
------- ------- ------- -------- -------
Total operating expenses ............................ 10,073 10,146 2,452 -- 22,671
------- ------- ------- -------- -------
Operating profit (loss) ............................. (284) 206 4,528 (200) 4,250
------- ------- ------- -------- -------
Other (income) and expense:
Interest and other (income) expense, net .............. 6,596 (86) (461) -- 6,049
------- ------- ------- -------- -------
Income (loss) before income taxes, equity in
income of consolidated subsidiaries and
equity in earnings from joint venture ................. (6,880) 292 4,989 (200) (1,799)
Equity in earnings from joint venture .................. 108 -- -- -- 108
Income tax expense (benefit) ............................ (747) 216 193 -- (338)
------- ------- ------- -------- -------
Income (loss) before equity in income of
consolidated subsidiaries ............................. (6,025) 76 4,796 (200) (1,353)
Equity in income of consolidated subsidiaries ........... 4,672 -- -- (4,672) --
------- ------- ------- -------- -------
Net income (loss) ....................................... $(1,353) $ 76 $ 4,796 $ (4,872) $(1,353)
======= ======= ======= ======== =======
</TABLE>
15
<PAGE> 16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998
Net cash provided by operating activities ...................... $ 8,990 $ -- $ 5,785 $ 14,775
--------- --------- ------- ---------
Cash flows from investing activities:
Purchases of property and equipment .......................... (1,356) -- (208) (1,564)
--------- --------- ------- ---------
Cash flows from financing activities:
Debt issuance costs .......................................... (194) -- -- (194)
Net repayment of line of credit .............................. (7,500) -- (1,002) (8,502)
Principal payments on capital lease obligations .............. -- -- (172) (172)
Other net activity with Parent ............................... 527 -- (527) --
--------- --------- ------- ---------
Net cash used for financing activities ..................... (7,167) -- (1,701) (8,868)
--------- --------- ------- ---------
Net increase in cash and cash equivalents ...................... 467 -- 3,876 4,343
Cash and cash equivalents, beginning of period ................. 3,741 -- 1,400 5,141
--------- --------- ------- ---------
Cash and cash equivalents, end of period ....................... $ 4,208 $ -- $ 5,276 $ 9,484
========= ========= ======= =========
THREE MONTHS ENDED MARCH 31, 1999
Net cash provided by operating activities ...................... $ 13,469 $ 20,017 $(5,315) $ 28,171
--------- --------- ------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ................ (279,546) -- -- (279,546)
Contribution in joint venture ................................ (25) -- -- (25)
Distribution of earnings from joint venture .................. 108 -- -- 108
Purchases of property and equipment .......................... (323) (1,204) (1,268) (2,795)
--------- --------- ------- ---------
(279,786) (1,204) (1,268) (282,258)
--------- --------- ------- ---------
Cash flows from financing activities:
Net repayment of line of credit .............................. (10,000) -- -- (10,000)
Issuance of common stock ..................................... 50,400 -- -- 50,400
Borrowings of long-term debt, net of issuance costs .......... 27,724 -- -- 27,724
Borrowings on credit facility, net of issuance costs ......... 183,808 -- -- 183,808
Principal payments on capital lease obligations .............. -- -- (165) (165)
Other net activity with Parent ............................... 13,987 (18,813) 4,826 --
--------- --------- ------- ---------
Net cash used for financing activities ..................... 265,919 (18,813) 4,661 251,767
--------- --------- ------- ---------
Effect of exchange rate changes on cash ........................ 11 -- -- 11
--------- --------- ------- ---------
Net increase in cash and cash equivalents ...................... (387) -- (1,922) (2,309)
Cash and cash equivalents, beginning of period ................. 1,545 -- 3,834 5,379
--------- --------- ------- ---------
Cash and cash equivalents, end of period ....................... $ 1,158 $ -- $ 1,912 $ 3,070
========= ========= ======= =========
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Holmes is a leading developer, manufacturer and marketer of quality, branded
home comfort products, including fans, heaters, humidifiers and air purifiers.
Holmes believes it has the leading U.S. market share in each of these product
categories.
On February 5, 1999 Holmes completed its acquisition of Rival, a leading
developer, manufacturer and marketer of a variety of products including small
kitchen, home environment and personal care appliances. In connection with the
acquisition, as described in Note 3 of the Company's Notes to Consolidated
Financial Statements included herein, the Company issued $31.3 million of senior
subordinated noted due in November 2007, bearing interest at 9 7/8%, and amended
and restated its existing $100 million credit facility to have a total
availability of $325 million. The Company also sold $50 million of common stock
in a private placement to investment funds affiliated with Berkshire Partners
LLC (Holmes' majority shareholder), and to members of Holmes' management and
certain other co-investors. The initial borrowings of the credit facility,
together with the net proceeds of the equity investment and the offering of the
Notes, were used to consummate the Rival acquisition, refinance Rival's then
existing indebtedness, and pay the fees and expenses of the transaction.
The Company had completed a recapitalization transaction in November 1997, in
which the Company issued $105.0 million of senior subordinated notes due in
November 2007, bearing interest at 9 7/8%, and entered into a $100.0 million
line of credit facility, of which approximately $27.5 million was initially
drawn. The proceeds of these borrowings were used to repay all existing
indebtedness (primarily a line of credit and other current debt facilities) and
redeem a significant portion of the previous majority shareholder's common
stock.
Accordingly, commencing in November 1997, the Company had a significantly higher
level of borrowing and a corresponding higher level of interest expense than in
the past. The Rival acquisition and the related financing transactions
consummated on February 5, 1999 further increased the Company's indebtedness and
will further increase interest expense substantially.
Sales of most of the Company's products follow seasonal patterns that affect the
Company's results of operations. In general, the Company's sales of fans occur
predominantly from January through June, and the Company's sales of heaters and
humidifiers occur predominantly from July through December. Although air
purifiers, lighting products and accessories generally are used year-round,
these products tend to draw increased sales during the winter months when people
are indoors and, as a result, the Company's sales of these products tend to be
greatest in advance of the winter months from July through December. A
significant percentage of the products sold by Rival are given as gifts and, as
such, sales volumes are higher in anticipation of the holiday season. In
addition to the seasonal fluctuations in sales, the Company experiences
seasonality in gross profit, as margins realized on fan products tend to be
lower than those realized on heater, humidifier and air purifier products.
The Company's results of operations and balance sheet reflect the acquisition of
Rival, in accordance with purchase accounting, from the consumation of the
acquisition on February 5, 1999. Rival's size relative to Holmes signficantly
influences comparisons between periods before and after the Rival acquisition.
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Net Sales. Net sales for the first quarter of fiscal 1999, which ended March 31,
1999, were $91.7 million compared to $44.9 million for the first quarter of
fiscal 1998, which ended March 31, 1998, an increase of $46.8 million or 104.2%.
Approximately $40.2 million, or 85.9%, of the increase in net sales can be
attributed to the Rival acquisition. In addition, an increase in sales of
Holmes' products of approximately $6.6 million is attributable to several larger
customers taking their fan shipments earlier than in the previous year, as well
as increases in heater and humidifier sales and accessory sales. As the increase
in fan sales is largely due to the timing of customer orders, management
anticipates fan sales in the second quarter of 1999 to remain flat or decline
slightly from the comparable 1998 period. The increase in heater, humidifier and
accessory sales can be attributed to the more seasonable winter weather
experienced throughout the United States in the first quarter of 1999 versus the
same period in 1998.
17
<PAGE> 18
Gross Profit. Gross profit for the first quarter of 1999 was $26.9 million
compared to $14.1 million for the first quarter of 1998, an increase of $12.8
million or 90.8%. As a percentage of net sales, gross profit decreased to 29.3%
for the first quarter of 1999 from 31.4% for the first quarter of 1998. The
overall decrease in gross profit as a percentage of net sales is due to the
Rival acquisition, as certain of Rival's products have historically had slightly
lower margins than Holmes' product categories. On a stand alone basis, Holmes'
gross profit increased from 31.4% to 32.3% in the first quarter of 1999 versus
1998 primarily due to the above-mentioned increases in net sales of heaters,
humidifiers and accessories, which are the higher margin products.
Selling Expenses. Selling expenses for the first quarter of 1999 were $13.2
million compared to $4.8 million for the first quarter of 1998, an increase of
$8.4 million or 175.0%, primarily as a result of the Rival acquisition, which
accounted for approximately $6.1 million of the increase. As a percentage of net
sales, selling expenses increased to 14.4% for the first quarter of 1999 from
10.7% for the first quarter of 1998. In addition to the Rival impact, the
increase in selling expenses is due to an increase in the warranty reserve for
potential heater returns and potential product recalls, as well as increased
expenditures in the customer service department related to the increase in
accessory sales. To a lesser extent, shipping costs increased as a result of the
higher sales level. In addition, salaries and related benefits and travel costs
were higher as the Company continues to build an infrastructure to support the
integration of Rival.
General and Administrative Expenses. General and administrative expenses for the
first quarter of 1999 were $5.7 million compared to $3.8 million for the first
quarter of 1998, an increase of $1.9 million or 50.0%. As a percentage of net
sales, general and administrative expenses decreased to 6.2% for the first
quarter of 1999 from 8.3% for the first quarter of 1998. The increase in dollars
and the decrease as a percentage of net sales is primarily attributable to the
Rival acquisition. Additionally, the increase in dollars was due to Holmes
incurring general and administrative expenses for integration consulting
services in connection with the Rival acquisition.
Product Development Expenses. Product development expenses for the first quarter
of 1999 were $2.2 million compared to $1.7 million for the first quarter of
1998, an increase of $0.5 million or 29.4%. As a percentage of net sales,
product development expenses decreased to 2.4% for the first quarter of 1999
from 3.8% for the first quarter of 1998. The increased expenditures and the
related decrease as a percentage of net sales was primarily due to the Rival
acquisition.
Plant Closing Costs. The Company recorded $1.1 million in plant closing costs
associated with Rival's previously announced closing of its New Haven, Indiana
and Fayetteville, North Carolina plants. Approximately $0.6 million related to
the expenses associated with the wind down of these two facilities and $0.5
million related to the write down of fixed assets at these facilities.
Interest and Other Expense, Net. Interest and other expense, net for the first
quarter of 1999 was $6.0 million compared to $3.8 million for the first quarter
of 1998, an increase of $2.2 million or 57.9%. The increase in interest expense
is primarily due to the additional borrowings resulting from the new debt
associated with the Rival acquisition.
Income Tax Expense (Benefit). Income tax expense (benefit) changed from an
expense of $0.1 million in the first quarter of 1998 to a benefit of $0.3
million in the first quarter of 1999, as a result of the Company reporting a
loss in the first quarter of 1999 as compared to income in the first quarter of
1998. The Company provides for taxes using a projected worldwide effective tax
rate of 20% for the entire year.
Net Income. As a result of the foregoing factors, net loss for the first quarter
of 1999 was $1.4 million, compared to net income of $0.3 million in the first
quarter of 1998.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Following the recapitalization transaction in November, 1997 and the Rival
acquisition in February, 1999, the Company is funding its liquidity requirements
with cash flows from operations and borrowings under its Credit Facility. The
primary liquidity requirements are for working capital and to service the
Company's indebtedness. The Company believes that existing cash resources, cash
flows from operations and borrowings under the Credit Facility will be
sufficient to meet the Company's liquidity needs for the foreseeable future.
Cash provided by operations for the three months ended March 31, 1998 and 1999
was $14.8 million and $28.0 million, respectively. Cash provided by operations
in the first quarter of 1999 primarily reflected a $21.9 million decrease in
accounts receivable. Accounts receivable levels decreased significantly in the
first quarter of 1999 as heavy cash collection activity typically follows the
seasonally higher sales activity during the September to December time period.
To a lesser extent, the decrease was due to an increase in shipments to
customers from the Company's manufacturing facilities in the Far East, which are
paid on faster terms than shipments from the Company's U.S. warehouses.
Additionally, the Company has continued to increase its focus and administrative
support in the credit and collections area, which has positively impacted
accounts receivable balances. The increase in accrued expenses is attributable
to the interest on the additional long-term debt issued (which is payable
semi-annually in May and November) and the amended and restated Credit Facility
entered into as part of the Rival acquisition.
Cash provided by (used for) financing activities for the three months ended
March 31, 1998 and 1999 was $(8.9) million and $251.8 million, respectively.
Cash used for financing in the first quarter of 1998 reflected repayments of the
line of credit using cash flows from operations. The cash provided by financing
activities in the first quarter of 1999 reflected the borrowings on the amended
and restated credit facility and the issuance of common stock associated with
the Rival acquisition.
The Company's capital expenditures, including assets acquired under capital
leases, for the three months ended March 31, 1998 and 1999 were $1.6 million and
$2.8 million, respectively, primarily for molds and tooling.
The Company issued $105.0 million of 9 7/8% Senior Subordinated Notes due
November, 2007 (the "Notes") in November, 1997, and an additional $31.3 million
of Notes in February, 1999. The Notes are not redeemable at the Company's option
prior to November 15, 2002. Thereafter, the Notes are subject to redemption at
any time at the option of the Company, in whole or in part, at stated redemption
prices. Annual interest payments on the Notes are approximately $13.5 million.
The payment of principal and interest on the Notes is subordinated to the prior
payment in full of all senior debt of the Company, including borrowings under
the Credit Facility.
The Company entered into the Credit Facility in February, 1999. The Credit
Facility amended and restated the Company's prior $100.0 million credit
facility. The Credit Facility consists of a six-year tranche A term loan of
$40.0 million, an eight-year tranche B term loan of $85.0 million and $200.0
million, six-year revolving credit facility. The Credit Facility bears interest
at variable rates based on either the prime rate or LIBOR, at the Company's
option, plus a margin which, in the case of the tranche A term loan and the
revolving credit facility, varies depending upon certain financial ratios of the
Company. The Credit Facility, and the guarantees thereof by the Company's
domestic subsidiaries, are secured by substantially all of the Company's
domestic and certain foreign assets. The Credit Facility and the Notes
Indentures include certain financial and operating convenants, which, among
other things, restrict the ability of the Company to incur additional
indebtedness, grant liens, make investments and take certain other actions. The
ability of the Company to meet its debt service obligations will be dependent
upon the future performance of the Company, which will be impacted by general
economic conditions and other factors. See "Forward-Looking Statements."
19
<PAGE> 20
YEAR 2000
The Year 2000 problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19",
but may not properly read the Year 2000. If a system used by the Company or by
a third party fails because of the inability to properly read the Year 2000
date, the results could have a material adverse effect on the Company. As
described below, Holmes and Rival have developed plans to address the possible
exposures related to their computer systems from the Year 2000. However, there
can be no assurance that such measures will be sufficient to avoid Year 2000-
related problems.
The Company has identified its Year 2000 risk to be in two general categories:
Information Technology Systems, including Electronic Data Interchange Systems
(EDI), and General Business Systems.
Information Technology Systems Including EDI. Holmes is currently in the
process of transitioning to Rival's computer software system. The system is
fully Year 2000 compliant, according to the vendor, and the Company anticipates
that it will be operational by the end of the third quarter of 1999. In
addition, all of Holmes' computer hardware has been or is in the process of
being tested for Year 2000 compliance. Those systems that fail will be upgraded
or replaced during the second quarter of 1999. As part of its transition to the
Rival system, Holmes is implementing a new EDI system that will be fully Year
2000 compliant to prevent any interruption of data interchange from the many
customers using this platform. Holmes anticipates that this system will be
completed during the second quarter of 1999. Holmes intends to use both
internal and external resources to test, reprogram or replace the software and
hardware for Year 2000 modifications. The total specific project costs are
difficult to determine as many of the upgrades and new implementations would
have been made regardless of the Year 2000 issue. The majority of project
costs, related to the purchase of hardware and software to meet both Year 2000
and company specific requirements, will be capitalized. All other remaining
project costs will be expensed during 1999 and 2000.
Rival implemented its current corporate computer system in 1995. The system is
Year 2000 compliant, according to the vendor as confirmed by full systems
testing performed on August 8, 1998. The testing included rolling the date
forward to January 15, 2000 and testing all function programs. The EDI system
installation was completed by September 30, 1998. Rival has used both internal
and external resources for testing. EDI transactions sets have been verified
and registered with the National Retailers Foundation. Rival believes that any
additional issues with computers are limited to stand alone personal computers.
The upgrade of these computers is expected to be completed by June 30, 1999.
General Business Systems. Holmes' general business systems encompass the
following: telecommunications systems, departmental specific application
systems, machinery and equipment, building and utility systems and, finally,
third party vendors and service providers. Holmes has created a Year 2000
committee consisting of one member from each department. The committee is in
the final stages of reviewing all aspects of Holmes' business systems to
determine if they are Year 2000 compliant, and testing systems as necessary.
This process will continue through the second quarter of 1999.
Holmes has sent out a comprehensive questionnaire to all significant customers
and suppliers regarding their Year 2000 compliance. The questionnaires that
Holmes has received back to date have tended to provide only vague assurances
regarding Year 2000 matters, however. While Holmes intends to carefully monitor
its supplier risks, Holmes cannot fully control each supplier, and there can be
no guarantee that a Year 2000 problem that may originate with a supplier will
not materially adversely affect Holmes. Holmes has not designed a specific
contingency plan in the event of a Year 2000 failure caused by a supplier or
other third party, but is working to identify issues as soon as possible.
Finally, Holmes has determined that products that the Company manufactures and
sells have no exposure related to the Year 2000 issue.
Rival's business systems encompass the following: telecommunications systems,
machinery and equipment, building and utility systems and third party vendors
and service providers. Rival created a cross-departmental Year 2000 committee
in 1997. The committee reviewed all aspects of Rival's business systems to
determine if they are Year 2000 compliant. Any vendor supplying goods and/or
services to Rival was required to submit a letter stating their Year 2000
status. Rival has determined that products that it manufactures and sells have
no exposure to the Year 2000 issue.
20
<PAGE> 21
FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
quarterly report, are or may be forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. Various economic and
competitive factors could cause actual results or events to differ materially
from those discussed in such forward-looking statements, including without
limitation, the integration of the Rival acquisition, recent declines in the
sales of many of Rival's products, the Company's degree of leverage, its
dependence on major customers and key personnel, competition, risks associated
with foreign and domestic sourcing and manufacturing, risks of the retail
industry, potential product liability claims or recalls, the cost of labor and
raw materials and the other factors discussed in the Company's filings with the
Commission, such as its Registration Statement on Form S-4 (file number
333-77905). Accordingly, such forward-looking statements do not purport to be
predictions of future events or circumstances and may not be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 1999, the carrying value of the Company's debt totaled
$330.6 million, which approximated its fair value. This debt includes
amounts at both fixed and variable interest rates. For fixed rate
debt, interest rate changes affect the fair market value but do not
impact earnings or cash flows. Conversely, for variable rate debt,
interest rate changes generally do not affect the fair maket value but
do impact earnings and cash flows, assuming other factors are held
constant.
At March 31, 1999, the Company had fixed rate debt of $135.6 million
(including capital leases) and variable rate debt of $195.0 million.
Holding other variables constant (such as foreign exchange rates and
debt levels), a one percentage point decrease in interest rates would
increase the unrealized fair market value of fixed rate debt by
approximately $7.5 million. Based on the amount of variable rate debt
outstanding at March 31, 1999, the earnings and cash flow impact for
the next twelve months resulting from a one percentage point increase
in interest rates would be approximately $1.4 million, net of tax,
holding other variables constant.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal and similar proceedings
arising in the ordinary course of the Company's business, including
product liability and patent and trademark litigation and product
recalls. Management believes that the resolution of these matters will
not materially affect the Company's financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 5, 1999, in connection with and to help finance its
acquisition of Rival, the Company issued and sold 9,922,243 shares of
its Common Stock, $0.001 par value, at a price of $5.03918 per share,
for an aggregate consideration of $50.0 million. The shares were sold
in a private placement to the Company's existing shareholders, certain
of their affiliates, and certain members of management, pursuant to the
exemption afforded by Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
The Company has filed a Registration Statement with the Commission
relating to the exchange of $31.3 million aggregate principal amount
of its Series D Senior Subordinated Notes due 2007 for an equal amount
of Series C Senior Subordinated Notes due 2007 issued in connection
with the Rival acquisition. The Series D Notes will be issued on the
same terms as the Series C Notes. There will be no proceeds to the
Company resulting from the exchange.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits: 27.1 Financial Data Schedule
b. Reports on Form 8-K:
1. Current Report on Form 8-K dated January 25, 1999
reporting under Item 5, Other Events, certain
information disclosed in connection with the
Company's private placement of Series C Notes.
2. Current Report on Form 8-K dated February 5, 1999
reporting under Item 2, Acquisition or Disposition of
Assets, the closing of the Company's acquisition of
Rival.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOLMES PRODUCTS CORP.
------------------------------------
Registrant
May 14, 1999 By: /s/ Jordan A. Kahn
--------------------------------
Jordan A. Kahn, President,
Chief Executive Officer
(Principal Executive Officer)
May 14, 1999 By: /s/ Ira B. Morgenstern
--------------------------------
Ira B. Morgenstern,
Senior Vice President of Finance
(Principal Financial and
Accounting Officer)
23
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<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,070
<SECURITIES> 0
<RECEIVABLES> 97,407
<ALLOWANCES> 5,198
<INVENTORY> 151,831
<CURRENT-ASSETS> 266,030
<PP&E> 128,942
<DEPRECIATION> 78,659
<TOTAL-ASSETS> 437,311
<CURRENT-LIABILITIES> 74,160
<BONDS> 324,652
0
0
<COMMON> 67,735
<OTHER-SE> 33,999
<TOTAL-LIABILITY-AND-EQUITY> 437,311
<SALES> 91,669
<TOTAL-REVENUES> 91,669
<CGS> 64,748
<TOTAL-COSTS> 64,748
<OTHER-EXPENSES> 2,218<F1>
<LOSS-PROVISION> 171
<INTEREST-EXPENSE> 6,049
<INCOME-PRETAX> (1,799)
<INCOME-TAX> (338)
<INCOME-CONTINUING> (1,353)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,353)
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Product development expenses.
<F2>The Company's shares are not publicly traded.
</FN>
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