<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 SEPTEMBER 30, 1999
COMMISSION FILE NUMBERS: 333-44473
333-77905
HOLMES PRODUCTS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<CAPTION>
<S> <C>
MASSACHUSETTS 04-2768914
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
233 FORTUNE BOULEVARD, MILFORD MASSACHUSETTS 01757
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(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 PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
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HOLMES PRODUCTS CORP.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
(UNAUDITED)................................................................... 3
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 (UNAUDITED)....... 4
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 (UNAUDITED)......................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................... 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 25
PART II. OTHER INFORMATION............................................................. 26
SIGNATURES.................................................................... 27
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOLMES PRODUCTS CORP.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999 (UNAUDITED)
------------ ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 5,379 $ 778
Accounts receivable, net............................................................... 36,967 103,558
Inventories............................................................................ 53,340 152,402
Prepaid expenses and other current assets.............................................. 2,027 1,819
Deferred income taxes.................................................................. 4,983 10,741
Income taxes receivable................................................................ -- 3,544
--------- ---------
Total current assets................................................................. 102,696 272,842
Assets held for sale................................................................... -- 1,897
Property and equipment, net............................................................ 15,752 52,797
Goodwill............................................................................... -- 84,360
Deferred income taxes.................................................................. 563 563
Deposits and other assets.............................................................. 3,174 10,248
Debt issuance costs, net............................................................... 9,172 20,830
--------- ---------
$ 131,357 $ 443,537
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations and other debt............................ $ 604 $ 239
Current portion of credit facility..................................................... -- 3,225
Accounts payable....................................................................... 15,004 28,990
Accrued expenses....................................................................... 12,292 36,109
Accrued income taxes................................................................... 3,707 3,492
--------- ---------
Total current liabilities............................................................ 31,607 72,055
Capital lease obligations.................................................................. 139 --
Credit facility............................................................................ 10,000 199,863
Long-term debt............................................................................. 105,000 135,061
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 June 30, 1999; issued and outstanding
10,200,815 shares at December 31, 1998 and 20,336,877 shares at
September 30, 1999.................................................................... 10 20
Additional paid in capital............................................................... 16,985 67,915
Accumulated other comprehensive income................................................... (40) 18
Treasury stock, at cost (18,620,450 shares).............................................. (62,058) (62,058)
Retained earnings........................................................................ 29,714 26,612
--------- ---------
Total stockholders' equity (deficit)................................................. (15,389) 32,507
--------- ---------
$ 131,357 $ 443,537
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
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HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales....................................... $66,364 $ 134,270 $157,602 $ 341,795
Cost of goods sold.............................. 43,077 94,465 110,523 245,713
------- --------- ------- ---------
Gross profit.................................. 23,287 39,805 47,079 96,082
Operating expenses:
Selling....................................... 6,212 17,063 14,724 45,327
General and administrative.................... 3,548 7,602 11,790 21,599
Product development........................... 1,614 2,794 4,738 7,452
Plant closing costs........................... -- -- -- 2,169
Amortization of goodwill and other
intangible assets............................ -- 742 -- 1,940
------- --------- ------- ---------
Total operating expenses.................... 11,374 28,201 31,252 78,487
------- --------- ------- ---------
Operating profit............................ 11,913 11,604 15,827 17,595
------- --------- ------- ---------
Other income and expense:
Interest and other expense, net............... 3,261 8,625 10,101 21,564
------- --------- ------- ---------
Income (loss) before income taxes and equity
in earnings from joint venture............... 8,652 2,979 5,726 (3,969)
Income tax expense (benefit).................. 1,297 600 873 (759)
Equity in earnings from joint venture......... -- -- -- 108
------- --------- ------- ---------
Net income (loss)......................... $ 7,355 $ 2,379 $ 4,853 $ (3,102)
======= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
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NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------
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Cash flows from operating activities:
Net income (loss) ..................................................................... $ 4,853 $ (3,102)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization ....................................................... 5,184 11,499
Amortization of debt issuance costs ................................................. 884 2,257
Change in allowance for doubtful accounts ........................................... 377 761
(Gain) loss on disposal of assets ................................................... -- (31)
Deferred income taxes ............................................................... (484) 866
Changes in operating assets and liabilities:
Accounts receivable ............................................................... (1,907) 9,915
Inventories ....................................................................... (1,564) 5,485
Prepaid expenses and other current assets ......................................... (521) 2,020
Income taxes receivable ........................................................... 104 --
Deposits and other assets ......................................................... (1,715) (391)
Accounts payable .................................................................. 2,883 (5,050)
Accrued expenses .................................................................. 4,755 2,237
Accrued income taxes .............................................................. 850 (1,475)
------- ---------
Net cash provided by operating activities ........................................... 13,699 24,991
------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ......................................... -- (279,546)
Contribution in joint venture ......................................................... -- (25)
Proceeds from sale of assets held for sale ............................................ -- 2,684
Distribution of earnings from joint venture ........................................... -- 108
Purchases of property and equipment ................................................... (3,527) (11,449)
------- ---------
Net cash used for investing activities .............................................. (3,527) (288,228)
------- ---------
Cash flows from financing activities:
Net borrowing (repayment) of line of credit ........................................... (9,002) (10,000)
Issuance of common stock .............................................................. 681 50,400
Borrowings of long-term debt, net of issuance costs ................................... -- 27,390
Borrowings on credit facility, net of issuance costs .................................. -- 191,843
Debt issuance costs ................................................................... (263) (447)
Principal payments on capital lease obligations ....................................... (991) (504)
------- ---------
Net cash provided by (used for) financing activities ................................ (9,575) 258,682
------- ---------
Effect of exchange rate changes on cash ................................................. -- (46)
------- ---------
Net increase (decrease) in cash and cash equivalents .................................... 597 (4,601)
Cash and cash equivalents, beginning of period .......................................... 5,141 5,379
------- ---------
Cash and cash equivalents, end of period ................................................ $ 5,738 $ 778
======= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................................... $ 7,423 $ 17,324
Cash paid for income taxes ........................................................... $ 437 $ 203
Non cash transactions:
During 1999 the Company issued 99,207 shares of common stock for the fair value of
services received from a vendor totaling $500,000.
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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. 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, having been acquired by HPC on
February 5, 1999.
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 the 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. One of the properties
was sold during June 1999 resulting in no gain or loss. Proceeds from the
sale were $1,519,000 net of selling expenses. A second property was sold
during September 1999 which also resulted in no gain or loss. The proceeds
from this sale were $1,165,000. The estimated fair value of the remaining
property has been reflected in the September 30, 1999
6
<PAGE> 7
balance sheet as assets held for sale. Additionally, wind down costs and
fixed asset writedowns relating to these facilities have been included as
plant closing costs in the consolidated statement of income for the three
and nine months ended September 30, 1999.
Subsequent to September 30, 1999, the Company sold substantially all of the
assets of Rival's Simer Pump product line. As these assets were acquired as
part of the Rival acquisition it is anticipated that this transaction will
result in a $2.0 to $4.0 million decrease in goodwill when recorded during
the fourth quarter of 1999.
In connection with the acquisition, the Company recorded a restructuring
charge of $6.0 million in accordance with EITF 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." This
reserve related to management severance costs and other employee related
costs and international and domestic facility exit costs. The reserve at
September 30, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
ADMINISTRATIVE
EMPLOYEE FACILITY
SEVERANCE AND EXIT AND TOTAL ACCRUED
RELOCATION COSTS OTHER COSTS RESTRUCTURING
---------------- -------------- -------------
<S> <C> <C> <C>
Restructuring accrual at February 5, 1999 ...... $4,774 $1,226 $6,000
Cash payments made.............................. (835) (267) (1,102)
------ ------- ------
Balance at September 30, 1999................... $3,939 $ 959 $4,898
</TABLE>
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 acquired.
They do not purport to be indicative of the results of operations that
actually would have resulted had the acquisition been in effect on
January 1, 1998, or of future results of operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS) SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
-------------- ------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Net sales.............................. $390,024 $364,140
Net earnings (loss).................... (6,622) (11,424)
</TABLE>
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 September 30, 1999, the Company's
results of operations for the three months and nine months ended September
30, 1998 and 1999 and cash flows for the nine months ended September 30,
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 and nine month periods ended September
30, 1999 are not necessarily indicative of the results to be expected for
any other interim period or the entire fiscal year.
7
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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:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
Finished goods................ $34,620,000 $ 96,980,000
Raw materials................. 7,930,000 46,354,000
Work-in-process............... 10,790,000 9,318,000
----------- ------------
53,340,000 152,652,000
Less LIFO allowance........... -- (250,000)
----------- ------------
$53,340,000 $152,402,000
=========== ============
</TABLE>
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 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, which was reduced to $170.0 million on
August 20, 1999. 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 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.
Long term debt consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------- ----------------- ------------------
<S> <C> <C>
Credit Facility................................................. $ 10,000 $203,088
9 7/8% Senior Subordinated Notes, net of unamortized
discount of $1.2 million at September 30, 1999 ($0 in 1998)... 105,000 135,061
-------- --------
Total debt...................................................... 115,000 338,149
Less current maturities........................................ -- 3,225
-------- --------
Long-term debt................................................. $115,000 $334,924
</TABLE>
8
<PAGE> 9
Effective May 7, 1999 the Company entered into an interest rate collar
transaction agreement with its lending bank. The interest rate collar
consists of a cap rate of 6.5% and a floor rate of 4.62%. The one-time
premium payment for the collar was $225,000 and the agreement terminates
March 31, 2002. Quarterly on the last business day of March, June, September
and December beginning September 30, 1999 if the LIBOR interest rate at the
lending bank is greater than the cap rate, the lending bank agrees to pay
the Company a notional amount as described in the agreement multiplied by
the number of days in that quarter over 365 days times the difference
between the LIBOR rate and the cap rate. If on the other hand the LIBOR rate
is less than the floor rate, the Company would have to pay the lending bank
based on the same calculation. If the LIBOR rate is between the cap and
floor rate, no payments would be necessary by either party. The LIBOR
interest rate at September 30, 1999 was 5.51%.
8. COMPREHENSIVE INCOME
The Company has 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) SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
-------------- ------------------ ------------------
<S> <C> <C>
Net Earnings (loss)................................. $7,355 $ 2,379
Foreign currency translation adjustments............ (-) 20
------ -------
Comprehensive income.............................. $7,355 $ 2,399
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Net Earnings (loss)................................. $4,853 $(3,102)
Foreign currency translation adjustments............ (28) 65
------ -------
Comprehensive income................................ $4,825 $(3,037)
</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 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% of net sales 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.
Prior to the Rival acquisition as described in Note 3 above, Holmes had two
business segments: manufacturing and distribution. The information for the
three and nine months ended September 30, 1998 has been reclassified to
conform to the new presentation.
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Summary financial information for each reportable segment for the three and
nine month periods ended September 30, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
CONSUMER CONSOLIDATED
DURABLES FAR EAST OTHER ELIMINATIONS TOTAL
-------- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 1999
Net sales.......................................... $116,991 $ 52,723 $16,290 $ (51,734) $134,270
Operating income(loss)............................. 6,167 4,035 122 1,280 11,604
NINE MONTHS ENDED SEPTEMBER 1999
Net sales.......................................... $293,623 $121,147 $43,855 $(116,830) $341,795
Operating income(loss)............................. 7,945 11,828 (2,388) 210 17,595
THREE MONTHS ENDED SEPTEMBER 1998
Net sales.......................................... $ 65,334 $ 32,931 $ 501 $ (32,402) $ 66,364
Operating income(loss)............................. 7,894 3,943 (169) 245 11,913
NINE MONTHS ENDED SEPTEMBER 1998
Net sales.......................................... $151,084 $ 88,860 $ 2,856 $ (85,198) $157,602
Operating income(loss)............................. 6,279 11,806 (387) (1,871) 15,827
</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 September 30, 1999........... $125,639 $ 989 $ 7,642 $134,270
Three months ended September 30, 1998........... 65,334 529 501 66,364
Nine months ended September 30, 1999............ 314,061 4,317 23,417 341,795
Nine months ended September 30, 1998............ 151,084 3,662 2,856 157,602
Identifiable assets:
September 30, 1999.............................. 335,312 65,052 22,343 422,707
Corporate assets at September 30, 1999........ 20,830
--------
Total assets at September 30, 1999.......... 443,537
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 September 30, 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. 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.
10
<PAGE> 11
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), Manufacturing, Motor and Taiwan, the guarantor subsidiaries, and
(iii) HPFEL, Canada, Bionaire International B.V., The Rival Company of
Canada, Ltd., Waverly Products Company, Ltd., Patton Electric (Hong Kong)
Limited, and Rival de Mexico S.A. de C.V. 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 SEPTEMBER 30, 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................ $ -- $ (1,717) $ 2,495 $ -- $ 778
Accounts receivable, net................. 38,907 52,346 12,305 -- 103,558
Inventories.............................. 44,166 90,860 21,576 (4,200) 152,402
Prepaid expenses and other current
assets................................. 685 491 643 -- 1,819
Deferred income taxes.................... 4,983 4,974 784 -- 10,741
Income taxes receivable.................. -- 3,544 -- -- 3,544
Due from affiliates...................... 250,078 2,282 30,190 (282,550) --
-------- -------- ------- ---------- --------
Total current assets................... 338,819 152,780 67,993 (286,750) 272,842
-------- -------- ------- --------- --------
Assets held for sale....................... -- 1,897 -- -- 1,897
Property and equipment, net................ 2,979 34,301 15,617 (100) 52,797
Goodwill................................... -- 82,390 1,970 -- 84,360
Deferred income taxes...................... 563 -- -- -- 563
Deposits and other assets.................. 25,808 4,355 1,815 (900) 31,078
Investments in consolidated subsidiaries... 34,965 -- -- (34,965) --
-------- -------- ------- --------- --------
$403,134 $275,723 $87,395 $(322,715) $443,537
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease
obligations and other debt ............ $ -- $ -- $ 239 $ -- $ 239
Current portion of credit facility....... 3,225 -- -- -- 3,225
Accounts payable......................... 1,856 4,666 23,368 (900) 28,990
Accrued expenses......................... 14,989 15,858 5,262 -- 36,109
Accrued income taxes..................... (2,380) 2,630 3,242 -- 3,492
Due to affiliates........................ 18,013 248,450 16,087 (282,550) --
-------- -------- ------- --------- --------
Total current liabilities.............. 35,703 271,604 48,198 (283,450) 72,055
-------- -------- ------- --------- --------
Credit facility............................ 199,863 -- -- -- 199,863
-------- -------- ------- --------- --------
Long-term debt............................. 135,061 -- -- -- 135,061
-------- -------- ------- --------- --------
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............... 67,915 -- -- -- 67,915
Accumulated other comprehensive income... 18 -- 80 (80) 18
Treasury stock........................... (62,058) -- -- -- (62,058)
Retained earnings........................ 26,612 66 39,017 (39,083) 26,612
-------- -------- ------- --------- --------
Total stockholders' equity............. 32,507 68 39,197 (39,265) 32,507
-------- -------- ------- --------- --------
$403,134 $275,723 $87,395 $(322,715) $443,537
======== ======== ======= ========= ========
</TABLE>
13
<PAGE> 14
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ................................. $65,334 $ -- $ 33,432 $(32,402) $66,364
Cost of goods sold ........................ 48,067 -- 27,657 (32,647) 43,077
------- ---- -------- -------- -------
Gross profit............................... 17,267 -- 5,775 245 23,287
------- ---- -------- -------- -------
Operating expenses:
Selling.................................. 6,022 -- 190 -- 6,212
General and administrative............... 1,738 -- 1,810 -- 3,548
Product development...................... 1,613 -- 1 -- 1,614
------- ---- -------- -------- -------
Total operating expenses............... 9,373 -- 2,001 -- 11,374
------- ---- -------- -------- -------
Operating profit (loss)................ 7,894 -- 3,774 245 11,913
------- ---- -------- -------- -------
Other (income) expense:
Interest and other (income) expense, net... 3,601 -- (340) -- 3,261
------- ---- --------- -------- -------
Income (loss) before income taxes and
equity in income of consolidated
subsidiaries............................. 4,293 -- 4,114 245 8,652
Income tax expense (benefit)............... 1,554 -- (92) (165) 1,297
------- ---- --------- -------- -------
Income (loss) before equity in income of
consolidated subsidiaries................ 2,739 -- 4,206 410 7,355
Equity in income of consolidated
subsidiaries............................. 4,616 -- -- (4,616) --
------- ---- -------- -------- -------
Net income (loss).......................... $ 7,355 $ -- $ 4,206 $ (4,206) $ 7,355
======= ==== ======== ======== =======
</TABLE>
14
<PAGE> 15
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................... $68,374 $57,265 $60,365 $(51,734) $134,270
Cost of goods sold...................... 51,400 45,589 50,490 (53,014) 94,465
------- ------- ------- -------- --------
Gross profit.......................... 16,974 11,676 9,875 1,280 39,805
------- ------- ------- -------- --------
Operating expenses:
Selling............................... 6,705 8,678 1,680 -- 17,063
General and administrative............ 2,290 2,685 2,627 -- 7,602
Product development................... 1,865 929 -- -- 2,794
Plant closing costs................... -- -- -- -- --
Amortization of goodwill and other
intangible assets.................. -- 724 18 -- 742
------- ------- ------- -------- --------
Total operating expenses............ 10,860 13,016 4,325 -- 28,201
------- ------- ------- -------- --------
Operating profit (loss)............. 6,114 (1,340) 5,550 1,280 11,604
------- -------- ------- -------- --------
Other (income) and expense:
Interest and other (income) expense,
net................................. 9,147 206 (728) -- 8,625
------- ------- ------- -------- --------
Income (loss) before income taxes,
equity in income of consolidated
subsidiaries and equity in earnings
from joint venture.................... (3,033) (1,546) 6,278 1,280 2,979
Equity in earnings from joint venture... -- -- -- -- --
Income tax expense (benefit)............ 256 (756) 1,100 -- 600
------- -------- ------- -------- --------
Income (loss) before equity in income of
consolidated subsidiaries............. (3,289) (790) 5,178 1,280 2,379
Equity in income of consolidated
subsidiaries.......................... 5,688 -- -- (5,688) --
------- ------- ------- -------- --------
Net income (loss)....................... $ 2,399 $ (790) $ 5,178 $ (4,408) $ 2,379
======= ======= ======= ======== ========
</TABLE>
15
<PAGE> 16
CONSOLIDATING INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................... $151,084 $ $91,716 $(85,198) $157,602
Cost of goods sold...................... 120,230 -- 73,620 (83,327) 110,523
-------- ---- ------- -------- --------
Gross profit............................ 30,854 -- 18,096 (1,871) 47,079
-------- ---- ------- -------- --------
Operating expenses:
Selling................................. 14,213 -- 511 -- 14,724
General and administrative.............. 5,660 -- 6,130 -- 11,790
Product development..................... 4,702 -- 36 -- 4,738
Plant closing costs..................... -- -- -- -- --
Amortization of goodwill and other
intangible assets..................... -- -- -- -- --
-------- ---- ------- -------- --------
Total operating expenses.............. 24,575 -- 6,677 -- 31,252
-------- ---- ------- -------- --------
Operating profit (loss)............... 6,279 -- 11,419 (1,871) 15,827
-------- ---- ------- -------- --------
Other (income) and expense:
Interest and other (income) expense,
net................................... 10,803 -- (685) (17) 10,101
-------- ---- -------- -------- --------
Income (loss) before income taxes,
equity...............................
Income of consolidated subsidiaries
and equity in earnings from joint
venture.............................. (4,524) -- 12,104 (1,854) 5,726
Equity in earnings from joint
venture.............................. -- -- -- -- --
Income tax expense (benefit)............ 873 -- 665 (665) 873
-------- ---- ------- -------- --------
Income (loss) before equity in income of
Consolidated subsidiaries.............. (5,397) -- 11,439 (1,189) 4,853
Equity in income of consolidated
subsidiaries........................... 10,250 -- -- (10,250) --
-------- ---- ------- -------- --------
Net income (loss)....................... $ 4,853 $ -- $11,439 $(11,439) $ 4,853
======== ==== ======= ======== ========
</TABLE>
16
<PAGE> 17
CONSOLIDATING INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................... $158,167 $155,894 $144,564 $(116,830) $341,795
Cost of goods sold...................... 122,133 120,927 119,693 (117,040) 245,713
-------- -------- -------- --------- --------
Gross profit.......................... 36,034 34,967 24,871 210 96,082
-------- -------- -------- --------- --------
Operating expenses:
Selling............................... 18,037 22,984 4,306 -- 45,327
General and administrative............ 6,899 6,751 7,949 -- 21,599
Product development................... 5,194 2,258 -- -- 7,452
Plant closing costs................... -- 2,169 -- -- 2,169
Amortization of goodwill and other
intangible assets................... -- 1,892 48 -- 1,940
-------- -------- -------- --------- --------
Total operating expenses............ 30,130 36,054 12,303 -- 78,487
-------- -------- -------- --------- --------
Operating profit (loss)............. 5,904 (1,087) 12,568 210 17,595
-------- -------- -------- --------- --------
Other (income) and expense:
Interest and other (income) expense,
net................................. 24,855 (1,220) (2,071) -- 21,564
-------- -------- -------- --------- --------
Income (loss) before income taxes,
equity in income of consolidated
subsidiaries and equity in earnings
from joint venture.................... (18,951) 133 14,639 210 (3,969)
Equity in earnings from joint venture... 108 -- -- -- 108
Income tax expense (benefit)............ (2,244) 154 1,331 -- (759)
-------- -------- -------- --------- --------
Income (loss) before equity in income of
consolidated subsidiaries............. (16,599) (21) 13,308 210 (3,102)
Equity in income of consolidated
subsidiaries.......................... 13,562 -- -- (13,562) --
-------- -------- -------- --------- --------
Net income (loss)....................... $ (3,037) $ (21) $ 13,308 $ (13,352) $ (3,102)
======== ======== ======== ========= ========
</TABLE>
17
<PAGE> 18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net cash provided by operating activities... $ 10,477 $ -- $ 3,222 $ 13,699
--------- -------- ------- ---------
Cash flows from investing activities:
Purchases of property and equipment....... (2,795) -- (732) (3,527)
--------- -------- ------- ---------
Cash flows from financing activities:
Debt issuance costs....................... (263) -- -- (263)
Net borrowing of line of credit........... (8,000) -- (1,002) (9,002)
Principal payments on capital lease
obligations............................. -- -- (991) (991)
Issuance of common stock.................. 681 -- -- 681
Other net activity with Parent............ (8) -- 8 --
--------- -------- ------- ---------
Net cash used for financing activities.. (7,590) -- (1,985) (9,575)
--------- -------- ------- ---------
Net increase (decrease) in cash and cash
Equivalents............................... 92 -- 505 597
Cash and cash equivalents, beginning of
period.................................... 3,741 -- 1,400 5,141
--------- -------- ------- ---------
Cash and cash equivalents, end of period.... $ 3,833 $ -- $ 1,905 $ 5,738
========= ======== ======= =========
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net cash provided (used for) by operating
activities................................ $ (9,609) $ 33,146 $ 1,454 $ 24,991
--------- -------- ------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired................................ (279,546) -- -- (279,546)
Contribution in joint venture............. (25) -- -- (25)
Proceeds from sales of assets held for
sale.................................... -- 2,684 -- 2,684
Distribution of earnings from joint
venture................................. 108 -- -- 108
Purchases of property and equipment....... (1,268) (4,040) (6,141) (11,449)
--------- -------- ------- ---------
(280,731) (1,356) (6,141) (288,228)
--------- -------- ------- ---------
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.......................... 27,390 -- -- 27,390
Borrowings on credit facility, net of
issuance costs.......................... 191,843 -- -- 191,843
Principal payments on capital lease -- -- (504) (504)
obligations.............................
Debt issuance costs....................... (447) -- -- (447)
Other net activity with Parent............ 29,609 (33,034) 3,425 --
--------- -------- ------- ---------
Net cash provided by (used for)
financing activities.................. 288,795 (33,034) 2,921 258,682
--------- -------- ------- ---------
Effect of exchange rate changes on cash..... -- -- (46) (46)
--------- -------- ------- ----------
Net increase (decrease) in cash and cash
equivalents............................... (1,545) (1,244) (1,812) (4,601)
Cash and cash equivalents, beginning of
period.................................... 1,545 (473) 4,307 5,379
--------- -------- ------- ---------
Cash and cash equivalents, end of period.... $ -- $ (1,717) $ 2,495 $ 778
========= ======== ======= =========
</TABLE>
18
<PAGE> 19
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 notes due in November 2007, bearing interest at 9 7/8%, and amended
and restated its existing $100.0 million credit facility to provide for a total
availability of $325.0 million. The Company also sold $50.0 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 the Company's then
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
interest expense substantially.
The Company's results of operations and balance sheet reflect the acquisition of
Rival, in accordance with purchase accounting, from the consummation of the
acquisition. Accordingly, Rival's size relative to Holmes significantly
influences comparisons between periods before and after the Rival acquisition.
The Company's ability to achieve revenue enhancements and recognize cost savings
from the Rival acquisition will depend to a significant extent on its ability to
successfully integrate the operations of Rival and other factors including
economic conditions and the retail environment. As part of its integration
strategy, the Company sold substantially all the assets of Rival's Simer Pump
product line ("Simer") on October 8, 1999. Simer accounted for net sales of
approximately $19.0 million during the twelve months ended June 30, 1999. In
furtherance of its strategic objectives, the Company will consider the possible
disposition of other non-core business assets that do not support its current
growth strategy, and may from time to time engage in discussions regarding
mergers, acquisitions or other types of business combination transactions with
other parties in the consumer products industry.
SEASONALITY
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 kitchen
electrics, 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 kitchen electrics, heater, humidifier and air
purifier products.
COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998
Net Sales. Net sales for the third quarter of fiscal 1999, which ended September
30, 1999, were $134.3 million compared to $66.4 million for the third quarter of
fiscal 1998, which ended September 30, 1998, an increase of $67.9 million or
102.3%. Approximately $67.7 million, or 99.7%, of the increase in net sales can
be attributed to the Rival acquisition. On a stand-alone basis, Holmes' product
sales were approximately $1.0 million lower in the third quarter of 1999 versus
1998. Heater sales were up approximately $1.2 million versus 1998 due to a high
demand for shipments early in the season. This increase was offset by lower
humidifier and air purifier sales of
19
<PAGE> 20
approximately $3.0 million in the third quarter of 1999 versus 1998 due to
timing of early season humidifier shipments. Holmes had also made a strategic
management decision to reduce dehumidifier volume due to its relatively low
profit margins. Sales of dehumidifiers in the third quarter were approximately
$1.3 million lower than in 1998. Partially offsetting the net reduction in
Holmes' sales in the third quarter of 1999 was a reduction in product returns. A
reduction in fan returns of approximately $1.4 million in the third quarter of
1999 versus 1998 was due to the warmer than normal temperatures throughout the
United States in the third quarter of 1999.
On a stand-alone basis, sales of Rival's products were approximately $12.3
million lower for the three months ended September 30, 1999 as compared to the
three months ended September 30, 1998. Rival's home environment sales were down
approximately $9.0 million due to anticipated retail placement losses, negative
impacts from shelf transitions at several key retailers, and timing of
shipments. Also, sales of kitchen electric products were down approximately $7.5
million due to new product introductions in the prior year and slower than
expected sell through in some new product areas and the Company's decision to
de-emphasize the lower margin opening price points for other product categories.
Gross Profit. Gross profit for the third quarter of 1999 was $39.8 million
compared to $23.3 million for the third quarter of 1998, an increase of $16.5
million or 70.8%. As a percentage of net sales, gross profit decreased to 29.6%
for the third quarter of 1999 from 35.1% for the third quarter of 1998. On a
stand-alone basis, Holmes' gross profit percentage increased two percentage
points in the third quarter of 1999 versus 1998. Rival's gross profit percentage
on a stand-alone basis for the third quarter of 1999 was approximately 22.1%,
which reduced the overall gross profit percentage for the Company. Also having a
negative impact on gross margin for the three months ended September 30, 1999
was the amortization of the acquired profit in inventory in connection with the
Rival acquisition which totalled approximately $2.4 million.
Selling Expenses. Selling expenses for the third quarter of 1999 were $17.1
million compared to $6.2 million for the third quarter of 1998, an increase of
$10.9 million or 175.8%, primarily as a result of the Rival acquisition, which
accounted for approximately $10.8 million of the increase. As a percentage of
net sales, selling expenses increased to 12.7% for the third quarter of 1999
from 9.3% for the third quarter of 1998. In addition to the Rival impact, the
increase in selling expenses was due to an increase in salaries and related
benefits and travel costs as the Company continues to build an infrastructure to
support the integration of Rival. Offsetting this was a decrease in sales
promotion activities.
General and Administrative Expenses. General and administrative expenses for the
third quarter of 1999 were $7.6 million compared to $3.5 million for the third
quarter of 1998, an increase of $4.1 million or 117.1%. As a percentage of net
sales, general and administrative expenses increased to 5.6% for the third
quarter of 1999 from 5.3% for the third quarter of 1998. The increase in dollars
is primarily attributable to the Rival acquisition. Additionally, the increase
in percentage 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 third quarter
of 1999 were $2.8 million compared to $1.6 million for the third quarter of
1998, an increase of $1.2 million or 75.0%. As a percentage of net sales,
product development expenses decreased to 2.1% for the third quarter of 1999
from 2.4% for the third 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 did not record any plant closing costs
during the third quarter of 1999.
Interest and Other Expense, Net. Interest and other expense, net for the third
quarter of 1999 was $8.6 million compared to $3.3 million for the third quarter
of 1998, an increase of $5.3 million or 160.6%. The increase in interest expense
was primarily due to the additional borrowings resulting from the new debt
associated with the Rival acquisition.
Income Tax Expense (Benefit). Income tax expense (benefit) decreased to a
expense of $.6 million in the third quarter of 1999 from an expense of $1.3
million in the third quarter of 1998, as a result of the Company reporting less
earnings in the third quarter of 1999 as compared to the third 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 income for the third
quarter of 1999 was $2.4 million, compared to net income of $7.4 million in
the third quarter of 1998.
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Net Sales. Net sales for the first nine months of fiscal 1999 were $341.8
million compared to $157.6 million for the first nine months of fiscal 1998, an
increase of $184.2 million or 116.8%. Approximately $179.3 million, or 97.3%, of
the increase in net sales can be attributed to the Rival acquisition. The
remaining increase is attributable to an overall increase of approximately $2.0
million of Holmes' products and a reduction in sales returns of Holmes' products
for the first nine months of 1999 versus 1998.
On a stand-alone basis, sales of Rival's products were approximately $33.0
million lower for the nine months ended September 30, 1999 as compared to the
nine months ended September 30, 1998. Rival's home environment sales were down
approximately $22.0 million due to anticipated and unanticipated retail
placement losses, negative impacts from shelf transitions as mentioned above, as
well as weather related and marketplace shortfalls in the Simer pumps division.
Also, Latin American sales were down approximately $5.2 million due to the
economic downturn in that region.
20
<PAGE> 21
Holmes' net increase included a $9.5 million increase in fan sales due to a
strong retailer season for fans caused by warmer than normal temperatures
throughout the United States in the first nine months of 1999 versus the same
period in 1998 and an increase in number of units placed at several of the
larger retailers for the Holmes fan lines. This increase was offset by declines
in the dehumidifier category of approximately $5.3 million as described above,
and smaller declines in two other product categories.
Gross Profit. Gross profit for the first nine months of 1999 was $96.1 million
compared to $47.1 million for the first nine months of 1998, an increase of
$49.0 million or 104.0%. As a percentage of net sales, gross profit decreased to
28.1% for the first nine months of 1999 from 29.9% for the first nine months of
1998. The Rival acquisition accounted for approximately $40.3 million of the
dollar increase, but also accounted for the decrease in gross profit as a
percentage of net sales. An increase in Holmes' gross profit as a percentage of
net sales for the first nine months of 1999 was offset by Rival's gross profit
percentage for the first nine months of 1999 of 22.5%, thus reducing the overall
gross profit percentage. Finally, the above mentioned reduction in sales returns
and allowances had a favorable impact on gross profit. Also having a negative
impact on gross margin for the nine months ended September 30, 1999 was the
amortization of acquired profit in inventory in connection with the Rival
acquisition which totalled approximately $4.7 million.
Selling Expenses. Selling expenses for the first nine months of 1999 were $45.3
million compared to $14.7 million for the first nine months of 1998, an increase
of $30.6 million or 208.2%, primarily as a result of the Rival acquisition,
which accounted for approximately $27.3 million of the increase. As a percentage
of net sales, selling expenses increased to 13.3% for the first nine months of
1999 from 9.3% for the first nine months of 1998. In addition to the Rival
impact, the increase in selling expenses was due to an increase in the warranty
reserve for potential heater returns and potential product recalls. 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. Total integration related costs were approximately $0.9 million for the
first nine months of 1999.
General and Administrative Expenses. General and administrative expenses for the
first nine months of 1999 were $21.6 million compared to $11.8 million for the
first nine months of 1998, an increase of $9.8 million or 83.0%. As a percentage
of net sales, general and administrative expenses decreased to 6.3% for the
first nine months of 1999 from 7.5% for the first nine months of 1998. The
increase in dollars was 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. The total integration costs recorded in the first nine
months of 1999 were approximately $1.9 million.
Product Development Expenses. Product development expenses for the first nine
months of 1999 were $7.5 million compared to $4.7 million for the first nine
months of 1998, an increase of $2.8 million or 59.6%. As a percentage of net
sales, product development expenses decreased to 2.2% for the first nine months
of 1999 from 3.0% for the first nine months 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 $2.2 million in plant closing costs
associated with Rival's previously announced closing of its New Haven, Indiana
and Fayetteville, North Carolina plants. Approximately $1.7 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
nine months of 1999 was $21.6 million compared to $10.1 million for the first
nine months of 1998, an increase of $11.5 million or 113.9%. The increase in
interest expense was 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 to a benefit
of $.8 million in the first nine months of 1999 from an expense of $.9 million
in the first nine months of 1998, as a result of the Company reporting a net
loss in the first nine months of 1999 as compared to net income in the first
nine months 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 nine
months of 1999 was $3.1 million, compared to net income of $4.9 million in the
first nine months of 1998.
21
<PAGE> 22
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 nine months ended September 30, 1998 and
1999 was $13.7 million and $25.0 million, respectively. Cash provided by
operations in the first nine months of 1999 reflected a $5.5 million decrease in
inventory levels as many of the third quarter sales were shipped from the
Company's warehouses versus direct shipments from the Far East. Additionally,
the Company has increased its focus on management of both raw material and
finished goods inventory levels resulting in decreases in both categories. Also
contributing to cash provided by operations was a decrease in accounts
receivable of approximately $9.9 million. Accounts receivables decreased in part
due to the decline in Rival's sales and due to a continued effort by the Company
to focus on the credit and collection area. Partially offsetting these was a
decrease in accounts payable of approximately $5.1 million which was also due to
Rival's decline in sales.
Cash provided by (used for) financing activities for the nine months ended
September 30, 1998 and 1999 was $(9.6) million and $258.7 million, respectively.
Cash used for financing in the first nine months of 1998 reflected repayments of
the prior line of credit used to fund cash flows for operations. The cash
provided by financing activities in the first nine months of 1999 reflected the
borrowings on the Credit Facility and the issuance of common stock associated
with the Rival acquisition.
Cash used for investing for the nine months ended September 30, 1999 included
$279.5 million paid in connection with the Rival acquisition. Also, the Company
received net proceeds of $2.7 million in connection with the sale of two of
Rival's closed manufacturing facilities.
The Company's capital expenditures, including assets acquired under capital
leases, for the nine months ended September 30, 1998 and 1999 were $3.5 million
and $11.4 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, which was reduced to $170.0 million
on August 20, 1999. 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 Company entered into
an interest rate collar transaction on May 7, 1999 on its Variable rate debt
with a cap rate of 6.5% and a floor rate of 4.62%. The agreement expires on
March 31, 2002. See Note 7 of Notes to Consolidated Financial Statements. 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 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."
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, the Company has developed plans to address the possible exposures related
to Year 2000 failures. However, there can be no assurance that such measures
will be sufficient.
22
<PAGE> 23
The Company has identified its Year 2000 risk to be in two general categories:
Information Technology Systems, including Electronic Data Interchange Systems
(known as "EDI" systems), and General Business Systems.
Information Technology Systems Including EDI. Holmes transitioned to Rival's
computer software system during the third quarter of 1999. In addition, all of
the Company's other 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 fourth quarter of 1999. As part of its transition, Holmes
implemented Rival's EDI system that is expected to be fully Year 2000 compliant
to prevent any interruption of data interchange from the many customers using
this platform. The Company anticipates that the EDI conversion will be fully
completed during the fourth quarter of 1999. The Company 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 in August 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 1998. Rival has used both internal and
external resources for testing. EDI transactions sets have been verified and
registered with the National Retailers Foundation.
General Business Systems. The Company's 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 throughout the
fourth quarter of 1999.
Holmes has sent out a comprehensive questionnaire to its 250 largest customers
and approximately 550 vendors and service providers regarding their Year 2000
compliance. Approximately 35% of the customers and 42% of the vendors and
service providers either completed the questionnaires or provided the requested
information to an industry-wide database. These responses have tended to provide
only vague assurances regarding Year 2000 matters, however. While Holmes intends
to carefully monitor its supplier risks, Holmes cannot control its suppliers,
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. Holmes has determined that products that the Company manufactures and
sells have no exposure related to the Year 2000 issue.
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. Approximately 316 vendors supplying goods and services to Rival,
along with 8 distributors, were requested to submit a letter stating their Year
2000 status. Rival has received responses from approximately 50% of the vendors
and 75% of the distributors. Like those received by Holmes, these responses have
generally provided only vague assurances of future compliance. Rival has
determined that products that it manufactures and sells have no exposure to the
Year 2000 issue.
23
<PAGE> 24
The Holmes and Rival Year 2000 committees have made the following determinations
with respect to general business systems:
- The Company has updated Rival's telecommunications systems and installed
the same system at Holmes. The vendor has represented that this system is
Year 2000 compliant, as have Holmes' and Rival's carriers.
- Departmental specific application systems, such as Holmes' modeling
technology, have either been tested and found Year 2000 compliant or are
expected to be compliant based on assurances from vendors.
- The Company's machinery and equipment, to the extent it includes embedded
microprocessors, is believed to be Year 2000 compliant based on testing
performed by Holmes and Rival.
- The Company's building and utility systems have been tested by service
providers and utility companies, who have represented that these systems
will be compliant.
Foreign Operations. The Company has extended its Year 2000 compliance efforts to
its overseas operations, and in particular to Holmes' administrative operations
in Hong Kong and its manufacturing facilities in China. Management believes
that, based on representations from its vendors and its testing to date, the
primary computer system which controls Holmes' Far East order processing,
inventory management, manufacturing and shipping operations is Year 2000
compliant. The financial accounting module of this software was upgraded during
the third quarter. The Far East telecommunications carriers have generally
represented to Holmes that their systems will continue to function. However, the
state of readiness of third parties is generally less well-known with respect to
the Company's overseas operations as compared to domestic operations. This is
especially true for Rival, which has utilized a limited number of vendors in
Europe and Latin America which have not been surveyed for Year 2000 compliance.
Contingency Plans. With respect to EDI systems, most of the Company's customers
accept invoices only by means of electronic interchange. Accordingly, the
Company has put most of its efforts towards Year 2000 EDI compliance into the
transition to the Rival system rather than into redundant contingency plans.
While it is possible that the Company may be able to invoice customers manually
and receive timely payments in the event that Rival's EDI system proves not to
be Year 2000 compliant or Holmes' transition to the Rival system is not
successfully completed, there can be no assurances that this will be the case.
Other worst-case Year 2000 risks for which the company is only partially able to
prepare include:
- The possible failure of a significant supplier of raw materials or
components, as discussed above, or
- Interruption in the distribution channels that may delay shipments of
finished products from the Far East. The Company is unable to determine
the Year 2000 readiness of all of its shippers and port facilities, and
reliance on airfreight as an alternative might be either impossible or
prohibitively expensive.
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," "will," 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.
24
<PAGE> 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 1999, the carrying value of the Company's debt totaled
$338.4 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 market value but do impact earnings
and cash flows, assuming other factors are held constant.
At September 30, 1999, the Company had fixed rate debt of $135.3 million
(including capital leases) and variable rate debt of $203.1 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 September
30, 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 $1.6 million, net of tax, holding other variables constant.
The Company has entered into an interest rate collar transaction on its
variable rate debt, as described in Note 7 of Notes to Consolidated
Financial Statements.
25
<PAGE> 26
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
See Item 5 below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 3, 1999, the holders of the Company's common stock, which is
privately held, voted to amend the Company's charter to change its name
to "The Holmes Group, Inc." The name change will be implemented during
the fourth quarter of 1999.
ITEM 5. OTHER INFORMATION
On August 20, 1999, the Company consummated its offer to exchange $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. There were no proceeds to
the Company resulting from the exchange.
On October 8, 1999, the Company consummated the sale of substantially all of
the assets of Rival's Simer Pump product line ("Simer"). Simer was engaged
in the design, manufacture and sale of water pumping and drainage systems.
Simer accounted for net sales of approximately $19.0 million during the
twelve months ended June 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits: 27.1 Financial Data Schedule
b. Reports on Form 8-K:
The Company filed a report on Form 8-K dated October 8, 1999 with
respect to the sale of the Simer assets.
26
<PAGE> 27
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
November 15, 1999 By: /s/ Jordan A. Kahn
--------------------------------------
Jordan A. Kahn, President, Chief
Executive Officer
(Principal Executive Officer)
November 15, 1999 By: /s/ Ira B. Morgenstern
-------------------------------------
Ira B. Morgenstern, Senior Vice
President - Finance
(Principal Financial and Accounting
Officer)
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF HOLMES PRODUCTS CORP. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 778
<SECURITIES> 0
<RECEIVABLES> 108,979
<ALLOWANCES> 5,421
<INVENTORY> 152,402
<CURRENT-ASSETS> 287,347
<PP&E> 136,672
<DEPRECIATION> 83,875
<TOTAL-ASSETS> 443,537
<CURRENT-LIABILITIES> 72,055
<BONDS> 334,924
0
0
<COMMON> 67,935
<OTHER-SE> (35,428)
<TOTAL-LIABILITY-AND-EQUITY> 443,537
<SALES> 341,795
<TOTAL-REVENUES> 341,795
<CGS> 245,713
<TOTAL-COSTS> 245,713
<OTHER-EXPENSES> 7,452<F1>
<LOSS-PROVISION> 761
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<INCOME-PRETAX> (3,969)
<INCOME-TAX> (759)
<INCOME-CONTINUING> (3,102)
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<EPS-BASIC> 0<F2>
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<FN>
<F1>PRODUCT DEVELOPMENT EXPENSES.
<F2>THE COMPANY'S SHARES ARE NOT PUBLICLY TRADED.
</FN>
</TABLE>