<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 JUNE 30, 2000
COMMISSION FILE NUMBERS:
333-44473
333-77905
THE HOLMES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</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 [ ]
<PAGE> 2
THE HOLMES GROUP, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONSOLIDATED BALANCE SHEET AT
DECEMBER 31, 1999 AND JUNE 30, 2000 (UNAUDITED) 3
CONSOLIDATED STATEMENT OF INCOME FOR
THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 (UNAUDITED) 4
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 2000 (UNAUDITED) 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
PART II. OTHER INFORMATION 26
SIGNATURES 27
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HOLMES GROUP, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000 (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,647 $ 2,875
Accounts receivable, net of allowance of $9,046 and $9,550 respectively 142,264 108,509
Inventories 112,660 132,447
Prepaid expenses and other current assets 3,997 3,253
Deferred income taxes 11,877 11,564
Income taxes receivable 7,852 4,252
-------- --------
Total current assets 285,297 262,900
Assets held for sale 2,434 137
Property and equipment, net 54,348 58,463
Goodwill, net 89,493 87,192
Deposits and other assets 5,610 8,915
Debt issuance costs, net 19,314 16,777
Deferred income taxes -- 1,319
-------- --------
$456,496 $435,703
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations and other liabilities $ 589 $ 662
Current portion of credit facility 6,450 6,852
Accounts payable 26,433 31,071
Accrued expenses 36,256 26,349
Accrued income taxes 3,923 4,352
-------- --------
Total current liabilities 73,651 69,286
Credit facility 203,625 198,098
Long-term debt 135,085 135,134
Other long-term liabilities 4,054 5,962
Deferred income taxes 2,281 --
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value. Authorized 25,000,000 shares as of
December 31, 1999 and June 30, 2000; issued and outstanding
20,307,995 shares at December 31, 1999 and June 30, 2000 20 20
Additional paid in capital 67,915 67,915
Accumulated other comprehensive income 397 (105)
Treasury stock, at cost (18,620,450 shares) (62,058) (62,058)
Retained earnings 31,526 21,451
-------- --------
Total stockholders' equity 37,800 27,223
-------- --------
$456,496 $435,703
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE> 4
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
<S> <C> <C> <C> <C>
Net sales $115,856 $124,524 $207,525 $240,692
Cost of goods sold 86,500 94,070 151,248 174,874
-------- ------- ------- --------
Gross profit 29,356 30,454 56,277 65,818
-------- ------- ------- --------
Operating expenses:
Selling 15,092 17,529 28,264 34,849
General and administrative 8,312 8,343 13,997 16,189
Product development 2,439 2,706 4,658 5,511
Plant closing costs 1,020 196 2,169 340
Amortization of goodwill and other intangible assets 752 664 1,198 1,326
-------- ------- ------- --------
Total operating expenses 27,615 29,438 50,286 58,215
-------- ------- ------- --------
Operating profit 1,741 1,016 5,991 7,603
-------- ------- ------- --------
Other income and expense:
Interest and other expense, net 6,845 9,392 12,894 18,546
-------- ------- ------- --------
Income (loss) before income taxes and equity in earnings
from joint venture (5,104) (8,376) (6,903) (10,943)
Income tax expense (benefit) (1,021) (411) (1,359) (532)
Equity in earnings from joint venture -- 193 108 336
-------- ------- -------- -------
Net income (loss) $ (4,083) $(7,772) $(5,436) $(10,075)
======== =======- ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 2000
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,436) $ (10,075)
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization 7,622 8,644
Amortization of debt issuance costs and discounts 1,446 2,587
Change in allowance for doubtful accounts 475 504
Loss on disposal of assets (31) --
Deferred income taxes 527 313
Changes in operating assets and liabilities:
Accounts receivable 14,580 33,251
Inventories 11,012 (19,787)
Prepaid expenses and other current assets 1,091 744
Deposits and other assets (727) (5,290)
Accounts payable (6,945) 4,638
Accrued expenses (2,133) (9,907)
Accrued income taxes (1,510) 429
--------- ---------
Net cash provided by operating activities 19,971 6,051
--------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (279,546) --
Contribution to joint venture (25) --
Proceeds from sale of assets held for sale and business divestitures 1,519 4,753
Distribution of earnings from joint venture 108 907
Purchases of property and equipment (6,115) (11,432)
Cash received from joint venture partner, net -- 1,141
--------- ---------
Net cash used for investing activities (284,059) (4,631)
--------- ---------
Cash flows from financing activities:
Net repayment of line of credit (10,000) --
Issuance of common stock 50,400 --
Borrowings of long-term debt, net of issuance costs 27,464 --
Borrowings (repayment) of credit facility, net of issuance costs 193,055 (5,125)
Debt issuance costs (350) --
Principal payments on capital lease obligations (333) (139)
--------- ---------
Net cash provided by (used for) financing activities 260,236 (5,264)
--------- ---------
Effect of exchange rate changes on cash 1 72
--------- ---------
Net increase (decrease) in cash and cash equivalents (3,851) (3,772)
Cash and cash equivalents, beginning of period 5,379 6,647
--------- ---------
Cash and cash equivalents, end of period $ 1,528 $ 2,875
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12,334 $ 16,123
Cash paid for (refund of) income taxes $ (118) $ (504)
</TABLE>
Non-cash transactions:
During 1999 we issued 99,207 shares of common stock for the fair value of
services received from a vendor totaling $500,000.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. NATURE OF BUSINESS
The Holmes Group, Inc. ("THG"), formerly known as Holmes Products
Corp., along with its wholly-owned subsidiary, The Rival Company
("Rival") and its subsidiaries, acquired on February 5, 1999, designs,
develops, imports and sells consumer durable goods, including fans,
heaters, humidifiers, air purifiers, small kitchen electric appliances,
personal care appliances, filters and accessories and lighting
products, to retailers throughout the United States and Canada, and to
a lesser extent, Europe, Latin America and Asia.
Holmes Products (Far East) Limited ("HPFEL") and its subsidiaries
manufacture, source and sell consumer durable goods, including fans,
heaters and humidifiers and kitchen electrics, mainly to THG. HPFEL
operates facilities in Hong Kong, Taiwan and The People's Republic of
China.
HPFEL is a wholly-owned subsidiary of THG. Prior to the
recapitalization transaction described in Note 4, THG and HPFEL were
both directly or indirectly 80%-owned subsidiaries of Asco Investments
Ltd., a subsidiary of Pentland Group plc ("Pentland").
2. BASIS OF CONSOLIDATION
The accompanying unaudited financial statements include the accounts of
THG and its wholly-owned subsidiaries, Rival, HPFEL, Holmes
Manufacturing Corp., Holmes Air (Taiwan) Corp. and Holmes Motor 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 Holmes Group 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., Dongguan Holmes Products Ltd. and Dongguan Raider Motor
Corp. Ltd. All significant inter-company balances and transactions have
been eliminated.
THG and its consolidated subsidiaries, including Rival, HPFEL and their
respective subsidiaries, are referred to herein as the "Company."
3. ACQUISITION
On February 5, 1999, THG completed its acquisition of Rival for an
aggregate of $279.6 million, including $129.4 million cash paid in
connection with a tender offer for all of the outstanding shares of
Common Stock of Rival (including payments to optionees), $142.9 million
to refinance Rival's outstanding debt and $7.3 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 THG's common stock to investment funds affiliated with THG's
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 the purchase price over the fair value of the net assets
acquired was approximately $90.8 million and is being amortized on a
straight-line basis over 35 years.
In connection with the acquisition, THG recorded a restructuring
reserve of $6.4 million as an assumed liability in accordance with EITF
95-3,
6
<PAGE> 7
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
"Recognition of Liabilities in Connection with a Purchase Business
Combination."
Management determined that certain restructuring actions would be
required to effectively integrate the Rival operations into THG. These
restructuring actions were comprised primarily of the elimination of
certain overlapping positions within the management and support staff
layers of the combined company, relocation of key home environment and
kitchen electric personnel from Kansas City, MO to Milford, MA,
consolidation of the Rival Hong Kong and Canadian offices into other
existing local offices, and closure of the Warrensburg, MO
manufacturing facility.
These actions are estimated to result in the elimination of 216 Rival
employees from a combination of the Rival Warrensburg facility and the
Kansas City, Canada and Hong Kong offices. As of June 30, 2000, 161 of
these employees had been terminated. Severance for the remaining
employees will be paid during the remainder of fiscal 2000 when the
facility closures and office consolidations are completed.
Exit costs related to these restructuring plans are comprised primarily
of lease exit costs for Canada and Hong Kong and facility closure and
exit costs related to the Warrensburg facility. At December 31, 1999,
the Hong Kong consolidation was completed resulting in exit costs of
$0.1 million. The Montreal, Canada closure was completed as of March
31, 2000 resulting in severance and relocation costs and exit costs of
$0.2 million. Severance costs related to the Warrensburg closure were
$0.3 million as of June 30, 2000 and are expected to be completed
during the remainder of fiscal 2000.
The reserve activity for fiscal 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
Employee Facility Total
Severance and Exit and Accrued
Relocation Costs Other Costs Restructuring
---------------- ----------- --------------
<S> <C> <C> <C>
Restructuring accrual
at February 5, 1999 $5,864 $563 $6,427
Cash payments made fiscal 1999 (1,647) (136) (1,783)
------ ---- ------
Balance at December 31, 1999 4,217 427 4,644
Cash payments made fiscal 2000 (1,793) -- (1,793)
------ ---- ------
Balance at June 30, 2000 $2,424 $427 $2,851
</TABLE>
Prior to the acquisition by THG, Rival recorded an $8.4 million
restructuring charge relating to the closing of three facilities. Each
of these facilities was closed during fiscal 1999. Two of the
properties were sold in 1999 resulting in no gain or loss. Proceeds
from the sales were $2,684,000 net of selling expenses. The final
property was sold in April, 2000. Proceeds from this sale were
$1,595,000 net of selling expenses. This transaction also resulted in
no gain or loss. Additionally, non-recurring wind down costs incurred
during the quarter relating to this facility have been included as
plant closing costs in the consolidated statement of income for the
three and six months ended June 30, 2000.
Following the Rival acquisition, the Company divested two of Rival's
non-core business units. On October 8, 1999, the Company sold the
assets of Rival's sump and utility pump division for $11.4 million. The
proceeds received for the assets exceeded the net asset values recorded
by $0.7 million. On December 21, 1999, the Company sold the assets of
Rival's industrial and building supply products businesses for proceeds
of $9.7 million, net of contingent consideration of $2.7 million. The
contingent consideration may be earned during fiscal 2000 based on
certain performance metrics and actual final inventory counts.
Excluding the contingent
7
<PAGE> 8
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
consideration, the book value of the assets sold exceeded the proceeds
by $5.5 million. Due to the proximity of the transactions to the
original Rival acquisition date, the net loss on these transactions of
$4.7 million was recorded as an increase to goodwill.
During the first half of 2000, goodwill was decreased by approximately
$1.0 million to reflect contingent consideration received during the
quarter, net of applicable costs and deferred taxes. Any additional
contingent consideration received will also be recorded as a decrease
to goodwill as the contingencies are resolved.
The following unaudited pro forma data summarizes the Company's results
of operations for the period indicated as if the acquisition had been
completed as of the beginning of the period 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, 1999 or of future results of operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(IN THOUSANDS) JUNE 30, 1999
-------------- ----------------
(UNAUDITED)
<S> <C>
Net sales................................ $229,870
Net earnings (loss)...................... (13,758)
</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 THG in exchange for
2,750,741 shares of THG's common stock (ii) THG 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) THG redeemed
18,620,450 shares of its common stock held by Pentland for
approximately $62.1 million. In connection with these transactions, THG
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 June 30, 2000
and the Company's results of operations and cash flows for the three
and six months ended June 30, 1999 and 2000. This interim financial
information and notes thereto should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31,
1999, as amended. Due to the seasonality of the Company's business, the
Company's consolidated results of operations for the three and six
month periods ended June 30, 2000 are not necessarily indicative of the
results to be expected for any other interim period or the entire
fiscal year.
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
80% of the inventories and the last-in, first-out method (LIFO) for the
remaining 20% of the inventory. Inventories are as follows:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 2000
----------------- --------------
<S> <C> <C>
Finished goods $ 61,154,000 $ 89,464,000
Raw materials and Work-in-process 50,405,000 42,157,000
------------ ------------
111,559,000 131,621,000
LIFO allowance 1,101,000 826,000
------------ ------------
$112,660,000 $132,447,000
</TABLE>
8
<PAGE> 9
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, THG 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 THG's current and future domestic subsidiaries (see Note
12) on a full, unconditional and joint and several basis, but are
otherwise unsecured.
THG can, at its option, redeem the Notes at any time after November 15,
2002, subject to a fixed schedule of redemption prices which decline
from 104.9% to 100% of the face value. However, THG 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 THG, THG
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 THG's ability to pay
dividends, repurchase stock or incur additional debt (other than
borrowings under the Credit Facility). The Notes contain certain
limited cross-default provisions relating to the Credit Facility.
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
$140.0 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, on a portion of
the 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
is cross-defaulted to the Notes Indentures. Effective June 30, 2000,
the Credit Facility was amended to revise the application of certain of
the financial covenants and pricing terms to cure a default caused by
costs and related impact from the purchase of a faulty component. There
can be no assurance that there will not be covenant violations in the
future.
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 Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Forward-Looking Statements."
9
<PAGE> 10
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Long term debt consists of the following:
<TABLE>
<CAPTION>
(in thousands) December 31, 1999 June 30,2000
----------------- -------------
<S> <C> <C>
Credit Facility $210,075 $204,950
9 7/8% Senior Subordinated Notes, net of unamortized
discount of $1.2 million at December 31, 1999 and $1.1
million at June 30, 2000 135,085 135,134
-------- --------
Total debt 345,160 340,084
Less current maturities 6,450 6,852
-------- --------
Long-term debt $338,710 $333,232
</TABLE>
Effective May 7, 1999 the Company entered into an interest rate collar
transaction agreement with its agent 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
June 30, 2000 was 6.78%, therefore the Company will be due
approximately $71,000 in the third quarter from the lending bank.
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) June 30, 1999 June 30,2000
-------------- -------------
<S> <C> <C>
Net Earnings (loss) $(4,083) $ (7,772)
Foreign currency translation adjustments 58 121
-------- --------
Comprehensive income (loss) $(4,025) $ (7,651)
</TABLE>
<TABLE>
<CAPTION>
Six months ended
(in thousands) June 30, 1999 June 30,2000
-------------- -------------
<S> <C> <C>
Net Earnings (loss) $(5,436) $(10,075)
Foreign currency translation adjustments 45 (502)
-------- --------
Comprehensive income (loss) $(5,391) $(10,577)
</TABLE>
9. BUSINESS SEGMENTS
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), during 1998. SFAS 131
established standards for reporting information about business segments
in annual financial statements. It also established standards for
related disclosures about products and services, major customers and
geographic areas. Business segments are defined as components of a
business about which separate financial information is available that
is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in
assessing performance. The business segments are managed separately
because each segment represents a strategic business unit whose main
business is entirely different. The adoption of SFAS 131 did not affect
the Company's results of operations or financial position.
10
<PAGE> 11
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company manages its operations through three business segments:
consumer durables, 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,
which are considered one business segment due to the similar customer
base and distribution channels. 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. The
industrial segment, the assets of which were divested in the fourth
quarter of 1999, sold 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.
For disclosure purposes the divested industrial segment and the
international segment are combined into Other as neither segment
comprises more than 10% of net sales individually. Summary financial
information for each reportable segment for the three and six month
periods ended June 30, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Consumer Consolidated
THREE MONTHS ENDED Durables Far East Other Eliminations Total
-------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
June 30, 2000
----------
Net sales $110,663 $ 57,473 $10,401 $(54,013) $ 124,524
Operating income(loss) (1,132) 3,190 (1,072) 30 1,016
June 30, 1999
----------
Net sales $ 96,299 $ 35,894 $18,407 $(34,744) $ 115,856
Operating income(loss) 1,508 3,120 (2,017) (870) 1,741
SIX MONTHS ENDED
June 30, 2000
----------
Net sales $211,101 $116,258 $22,205 $(108,872) $ 240,692
Operating income(loss) 497 9,465 (2,419) 60 7,603
June 30, 1999
----------
Net sales $176,632 $ 68,424 $27,565 $ (65,096) $ 207,525
Operating income(loss) 1,778 7,793 (2,510) (1,070) 5,991
</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 June 30, 2000 $ 110,550 $ 3,460 $10,514 $124,524
Three months ended June 30, 1999 107,778 1,150 6,928 115,856
Six months ended June 30, 2000 $ 213,109 $ 7,386 $20,197 $240,692
Six months ended June 30, 1999 189,331 3,328 14,866 207,525
Identifiable assets:
June 30, 2000 32,996 24,975 629 58,600
December 31, 1999 35,991 20,264 527 56,782
</TABLE>
Net sales are grouped based on the geographic origin of the
transaction. The "Other International" area is comprised of sales of
products in Europe, Mexico, Latin America and Canada.
The Company's manufacturing entities in the Far East sell completed
products to THG 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.
11
<PAGE> 12
THE HOLMES GROUP, INC.
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 THG
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 THG's direct foreign subsidiary, HPFEL, HPFEL's six
foreign subsidiaries or Rival's five foreign subsidiaries. The
guarantor subsidiaries are directly or indirectly wholly-owned by THG,
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) THG, as
parent, as if it accounted for its subsidiaries on the equity method,
(ii) Rival (on a consolidated basis following its acquisition by THG,
including its domestic subsidiaries), Manufacturing, Motor and Taiwan,
the guarantor subsidiaries, and (iii) the non-guarantor, foreign
subsidiaries. There were no transactions between Rival, Manufacturing,
Motor and Taiwan 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 15 of the
Company's audited financial statements for the year ended December 31,
1999, included in the Company's Form 10-K, as amended, as filed with
the Securities and Exchange Commission, certain of HPFEL's subsidiaries
in China have restrictions on distributions to their parent companies.
12
<PAGE> 13
CONSOLIDATING BALANCE SHEET DECEMBER 31, 1999 (IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 192 $ 795 $ 5,660 -- $ 6,647
Accounts receivable, net 47,610 77,636 17,018 -- 142,264
Inventories 45,518 47,993 23,899 $ (4,750) 112,660
Prepaid expenses and other
current assets 2,154 45 1,798 -- 3,997
Deferred income taxes 5,134 5,748 995 -- 11,877
Income taxes receivable -- 7,852 -- -- 7,852
Due from affiliates 230,256 89 20,721 (251,066) --
-------- ------- ------- -------- --------
Total current assets 330,864 140,158 70,091 (255,816) 285,297
-------- -------- ------- -------- --------
Assets held for sale 701 1,733 -- -- 2,434
Property and equipment, net 3,440 30,127 20,791 (10) 54,348
Goodwill, net -- 87,498 1,995 -- 89,493
Deferred income taxes -- -- -- -- --
Deposits and other assets 24,386 2,267 571 (2,300) 24,924
Investments in consolidated
subsidiaries 40,898 -- -- (40,898) --
-------- -------- ------- -------- --------
$400,289 $261,783 $ 93,448 $(299,024) $456,496
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease
obligations and other debt $ -- $ -- $ 589 -- $ 589
Current portion of
credit facility 6,450 -- -- -- 6,450
Accounts payable 5,395 1,335 22,003 $ (2,300) 26,433
Accrued expenses 11,304 20,626 4,326 -- 36,256
Accrued income taxes (2,518) 3,028 3,413 -- 3,923
Due to affiliates 3,148 228,861 19,057 (251,066) --
-------- -------- ------- -------- --------
Total current liabilities 23,779 253,850 49,388 (253,366) 73,651
-------- -------- ------- -------- --------
Credit facility 203,625 -- -- -- 203,625
-------- -------- ------- -------- --------
Long-term debt 135,085 -- -- -- 135,085
-------- -------- ------- -------- --------
Other long-term liabilities -- -- 4,054 -- 4,054
-------- -------- ------- -------- --------
Deferred income taxes -- 2,281 -- -- 2,281
-------- -------- ------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
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 397 -- 397 (397) 397
Treasury stock (62,058) -- -- -- (62,058)
Retained earnings 31,526 5,650 39,509 (45,159) 31,526
-------- -------- ------- -------- --------
Total stockholders' equity
(deficit) 37,800 5,652 40,006 (45,658) 37,800
-------- -------- ------- -------- --------
$400,289 $261,783 $ 93,448 $(299,024) $456,496
======== ======== ======= ======== ========
</TABLE>
13
<PAGE> 14
CONSOLIDATING BALANCE SHEET JUNE 30, 2000 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 376 $ 561 $ 1,938 -- $ 2,875
Accounts receivable, net 48,602 46,382 13,525 -- 108,509
Inventories 47,083 62,220 27,894 $ (4,750) 132,447
Prepaid expenses and other
current assets 2,622 143 488 -- 3,253
Deferred income taxes 5,300 6,055 209 -- 11,564
Income taxes receivable -- 4,252 -- -- 4,252
Due from affiliates 217,093 89 35,280 (252,462) --
-------- -------- -------- --------- --------
Total current assets 321,076 119,702 79,334 (257,212) 262,900
-------- -------- -------- --------- --------
Assets held for sale -- 137 -- -- 137
Property and equipment, net 3,983 28,876 25,604 -- 58,463
Goodwill, net -- 85,305 1,887 -- 87,192
Deferred income taxes -- 1,319 -- -- 1,319
Deposits and other assets 22,885 2,270 3,978 (3,441) 25,692
Investments in consolidated
subsidiaries 47,622 -- -- (47,622) --
-------- -------- -------- --------- --------
$395,566 $237,609 $110,803 $(308,275) $435,703
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease
obligations and other debt $ -- $ -- $ 662 -- $ 662
Current portion of
credit facility 6,852 -- -- -- 6,852
Accounts payable 6,048 727 27,737 $ (3,441) 31,071
Accrued expenses 9,763 12,923 3,663 -- 26,349
Accrued income taxes (2,463) 3,834 2,981 -- 4,352
Due to affiliates 14,911 216,277 21,274 (252,462) --
-------- -------- -------- --------- --------
Total current liabilities 35,111 233,761 56,317 (255,903) 69,286
-------- -------- -------- --------- --------
Credit facility 198,098 -- -- -- 198,098
-------- -------- -------- --------- --------
Long-term debt 135,134 -- -- -- 135,134
-------- -------- -------- --------- --------
Other long-term liabilities -- -- 5,962 -- 5,962
-------- -------- -------- --------- --------
Deferred income taxes -- -- -- -- --
-------- -------- -------- --------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
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 (105) -- (105) 105 (105)
Treasury stock (62,058) -- -- -- (62,058)
Retained earnings 21,451 3,846 48,529 (52,375) 21,451
-------- -------- -------- --------- --------
Total stockholders' equity
(deficit) 27,223 3,848 48,524 (52,372) 27,223
-------- -------- -------- --------- --------
$395,566 $237,609 $110,803 $(308,275) $435,703
======== ======== ======== ========= ========
</TABLE>
14
<PAGE> 15
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $41,730 $58,396 $50,474 $(34,744) $115,856
Cost of goods sold 32,459 45,457 42,458 (33,874) 86,500
------- ------- ------- -------- -------
Gross profit 9,271 12,939 8,016 (870) 29,356
------- ------- ------- -------- -------
Operating expenses:
Selling 4,834 8,054 2,204 -- 15,092
General and administrative 2,673 2,329 3,310 -- 8,312
Product development 1,690 767 (18) -- 2,439
Plant closing costs -- 1,020 -- -- 1,020
Amortization of goodwill and other
intangible assets -- 722 30 -- 752
------- ------- ------- -------- -------
Total operating expenses 9,197 12,892 5,526 -- 27,615
------- ------- ------- -------- -------
Operating profit (loss) 74 47 2,490 (870) 1,741
------- ------- ------- -------- -------
Other (income) and expense:
Interest and other
(income) expense, net 9,112 (1,340) (927) -- 6,845
------- ------- ------- -------- -------
Income (loss) before income taxes,
equity in income of consolidated
subsidiaries and equity in
earnings from joint venture (9,038) 1,387 3,417 (870) (5,104)
Equity in earnings from joint venture -- -- -- -- --
Income tax expense (benefit) (1,753) 694 38 -- (1,021)
------- ------- ------- -------- -------
Income (loss) before equity in income of
consolidated subsidiaries (7,285) 693 3,379 (870) (4,083)
Equity in income of
consolidated subsidiaries 3,202 -- -- (3,202) --
------- ------- ------- -------- -------
Net income (loss) $(4,083) $ 693 $ 3,379 $ (4,072) $(4,083)
======= ======= ======= ======== =======
</TABLE>
15
<PAGE> 16
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales $ 58,091 $ 53,150 $ 67,296 $ (54,013) $124,524
Cost of goods sold 48,669 40,614 58,830 (54,043) 94,070
-------- -------- -------- --------- --------
Gross profit (loss) 9,422 12,536 8,466 30 30,454
-------- -------- -------- --------- --------
Operating expenses:
Selling 6,418 8,875 2,236 -- 17,529
General and
administrative 3,346 2,124 2,873 -- 8,343
Product development 2,163 543 -- -- 2,706
Plant closing costs -- 196 -- -- 196
Amortization of goodwill and
other intangible
assets -- 650 14 -- 664
-------- -------- -------- --------- --------
Total operating expenses 11,927 12,388 5,123 -- 29,438
-------- -------- -------- --------- --------
Operating profit (loss) (2,505) 148 3,343 30 1,016
-------- -------- -------- --------- --------
Other income and expense:
Interest and other
(income) expense, net 9,326 (11) 77 -- 9,392
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of and equity in earnings
from joint venture (11,831) 159 3,266 30 (8,376)
Equity in earnings from joint
venture 193 -- -- -- 193
Income tax expense
(benefit) (979) 460 108 -- (411)
-------- -------- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries (10,659) (301) 3,158 30 (7,772)
Equity in income of
consolidated subsidiaries 2,887 -- -- (2,887) --
-------- -------- -------- --------- --------
Net income (loss) $ (7,772) $ (301) $ 3,158 $ (2,857) $ (7,772)
======== ======== ======== ========= ========
</TABLE>
16
<PAGE> 17
CONSOLIDATING INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales $ 89,793 $ 98,629 $ 84,199 $ (65,096) $207,525
Cost of goods sold 70,733 75,338 69,203 (64,026) 151,248
-------- -------- -------- --------- --------
Gross profit (loss) 19,060 23,291 14,996 (1,070) 56,277
-------- -------- -------- --------- --------
Operating expenses:
Selling 11,332 14,306 2,626 -- 28,264
General and
administrative 4,609 4,066 5,322 -- 13,997
Product development 3,329 1,329 -- -- 4,658
Plant closing costs -- 2,169 -- -- 2,169
Amortization of goodwill and
other intangible
assets -- 1,168 30 -- 1,198
-------- -------- -------- --------- --------
Total operating expenses 19,270 23,038 7,978 -- 50,286
-------- -------- -------- --------- --------
Operating profit (loss) (210) 253 7,018 (1,070) 5,991
-------- -------- -------- --------- --------
Other income and expense:
Interest and other (income)
expense, net 15,708 (1,426) (1,388) -- 12,894
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of and equity in earnings
from joint venture (15,918) 1,679 8,406 (1,070) (6,903)
Equity in earnings from joint
venture 108 -- -- -- 108
Income tax expense
(benefit) (2,500) 910 231 -- (1,359)
-------- -------- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries (13,310) 769 8,175 (1,070) (5,436)
Equity in income of
consolidated subsidiaries 7,874 -- -- (7,874) --
-------- -------- -------- --------- --------
Net income (loss) $ (5,436) $ 769 $ 8,175 $ (8,944) $ (5,436)
======== ======== ======== ========= ========
</TABLE>
17
<PAGE> 18
CONSOLIDATING INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales $121,477 $ 93,389 $134,698 $(108,872) $240,692
Cost of goods sold 96,808 72,138 114,860 (108,932) 174,874
-------- -------- -------- --------- --------
Gross profit (loss) 24,669 21,251 19,838 60 65,818
-------- -------- -------- --------- --------
Operating expenses:
Selling 14,726 15,717 4,406 -- 34,849
General and
administrative 5,653 4,550 5,986 -- 16,189
Product development 4,310 1,201 -- -- 5,511
Plant closing costs -- 340 -- -- 340
Amortization of goodwill and
other intangible
assets -- 1,296 30 -- 1,326
-------- -------- -------- --------- --------
Total operating expenses 24,689 23,104 10,422 -- 58,215
-------- -------- -------- --------- --------
Operating profit (loss) (20) (1,853) 9,416 60 7,603
-------- -------- -------- --------- --------
Other income and expense:
Interest and other
(income) expense, net 18,845 36 (335) -- 18,546
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of and equity in earnings
from joint venture (18,865) (1,889) 9,751 60 (10,943)
Equity in earnings from joint
venture 336 -- -- -- 336
Income tax expense
(benefit) (1,178) (85) 731 -- (532)
-------- -------- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries (17,351) (1,804) 9,020 60 (10,075)
Equity in income of
consolidated subsidiaries 7,276 -- -- (7,276) --
-------- -------- -------- --------- --------
Net income (loss) $(10,075) $ (1,804) $ 9,020 $ (7,216) $(10,075)
======== ======== ======== ========= ========
</TABLE>
18
<PAGE> 19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Net cash provided by operating activities .................. $ (15,898) $ 29,616 $ 6,253 $ 19,971
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ............ (279,546) -- -- (279,546)
Contribution in joint venture ............................ (25) -- -- (25)
Proceeds from assets held for sale ....................... -- 1,519 -- 1,519
Distribution of earnings from joint venture .............. 108 -- -- 108
Purchases of property and equipment ...................... (564) (2,837) (2,714) (6,115)
--------- --------- --------- ---------
(280,027) (1,318) (2,714) (284,059)
--------- --------- --------- ---------
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 .................................... 27,464 -- -- 27,464
Borrowings on credit facility,
net of issuance costs .................................... 193,055 -- -- 193,055
Principal payments on capital lease obligations .......... -- -- (333) (333)
Debt issuance costs ...................................... (350) -- -- (350)
Other net activity with Parent ........................... 33,834 (28,055) (5,779) --
--------- --------- --------- ---------
Net cash used for financing activities ................. 294,403 (28,055) (6,112) 260,236
--------- --------- --------- ---------
Effect of exchange rate changes on cash .................... 25 -- (24) 1
--------- --------- --------- ---------
Net increase in cash and cash equivalents .................. (1,497) 243 (2,597) (3,851)
Cash and cash equivalents, beginning of period ............. 1,545 (473) 4,307 5,379
--------- --------- --------- ---------
Cash and cash equivalents, end of period ................... $ 48 $ (230) $ 1,710 $ 1,528
========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 2000
Net cash provided by operating activities .................. $ (21,875) $ 9,152 $ 18,774 $ 6,051
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ............ -- -- -- --
Contribution in joint venture ............................ -- -- -- --
Distribution of earnings from joint venture .............. 907 -- -- 907
Cash received from joint venture partner ................. -- -- 1,141 1,141
Proceeds from assets held for sale
And business divestitures .............................. 701 4,052 -- 4,753
Purchases of property and equipment ...................... (1,467) (1,660) (8,305) (11,432)
--------- --------- --------- ---------
141 2,392 (7,164) (4,631)
--------- --------- --------- ---------
Cash flows from financing activities:
Net repayment of line of credit .......................... -- -- -- --
Issuance of common stock ................................. -- -- -- --
Borrowings (repayments) of long-term debt,
net of issuance costs .................................... -- -- -- --
Borrowings on credit facility,
net of issuance costs .................................... (5,125) -- -- (5,125)
Principal payments on capital lease obligations .......... -- -- (139) (139)
Other net activity with Parent ........................... 27,043 (11,778) (15,265) --
--------- --------- --------- ---------
Net cash used for financing activities ................. 21,918 (11,778) (15,404) (5,264)
--------- --------- --------- ---------
Effect of exchange rate changes on cash .................... -- -- 72 72
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ....... 184 (234) (3,722) (3,772)
Cash and cash equivalents, beginning of period ............. 192 795 5,660 6,647
--------- --------- --------- ---------
Cash and cash equivalents, end of period ................... $ 376 $ 561 $ 1,938 $ 2,875
========= ========= ========= =========
</TABLE>
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Holmes Group, Inc. formerly known as Holmes Products Corp., is a leading
developer, manufacturer and marketer of quality, branded home appliances,
including home environment, small kitchen and personal care appliances. Our home
environment products include fans, heaters, humidifiers and air purifiers. We
believe that we have the leading U.S. market share in each of these product
categories. Our kitchen appliances include Crock-Pot(R) slow cookers, can
openers, ice cream freezers and other similar small kitchen electric appliances
where we hold a leading market share. Our personal care products include
massagers and showerheads. We believe that our strong market position and
success are attributable to our continuous product innovation, engineering and
manufacturing expertise, close customer partnerships, breadth of product
offerings, reputation for quality, and presence and experience in the Far East.
Our products are sold under the Holmes(R), Rival(R), Crock-Pot(R) Pollenex(R),
Bionaire(R), Patton(R), Family Care(R) and Titan(R) brand names. These products
are sold to consumers through major retail chains, including mass merchants,
do-it-yourself home centers, warehouse clubs, hardware, department and specialty
stores and national drugstore chains. We believe that the strength, scope and
visibility of our retail account base provide a competitive advantage with
respect to brand recognition, access to shelf space and penetration of the
consumer market.
Sales of our products are highly seasonal, and counter-seasonal weather can
adversely affect our results of operations. Within the home environment product
line, sales of fans occur predominantly from January through June, and sales of
heaters and humidifiers occur predominantly from July through December. Although
kitchen appliances, personal care products and certain home environment products
such as air purifiers and lighting products are used year-round, the nature of
these products tend to draw increased sales during the winter months when people
are indoors and, as a result, sales of these products tend to be greatest in
advance of the winter months from July through December. Additionally, because
many of the kitchen and personal care products we sell are given as gifts, we
sell more of these products in anticipation of the holiday season. When holiday
shipments are combined with seasonal products such as heaters and humidifiers,
our sales during the months of August through November are generally at a higher
level than during the other months of the year. In addition to the seasonal
fluctuations in sales, we experience seasonality in gross profit, as margins
realized on fan products tend to be lower than those realized on heater,
humidifier and air purifier products.
On February 5, 1999 Holmes completed its acquisition of Rival. In connection
with the acquisition, as described in Note 3 of the Company's Notes to
Consolidated Financial Statements included herein, we issued $31.3 million of
senior subordinated notes due in November 2007, bearing interest at 9 7/8%, and
amended and restated our existing $100 million credit facility to have a total
availability of $325 million. We 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 management and certain other
co-investors. The initial borrowings under 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.
Holmes had completed a recapitalization transaction in November 1997, in which
it issued $105 million of senior subordinated notes due in November 2007,
bearing interest at 9 7/8%, and entered into a $100 million line of credit
facility, of which approximately $27.5 million was initially drawn. The proceeds
of these borrowings were used to repay all existing indebtedness (primarily a
line of credit and other current debt facilities) and redeem a significant
portion of the previous majority shareholder's common stock.
20
<PAGE> 21
Accordingly, commencing in November 1997, we 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 our indebtedness and interest expense
substantially.
COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Net Sales. Net sales for the second quarter of fiscal 2000, which ended June 30,
2000, were $124.5 million compared to $115.9 million for the second quarter of
fiscal 1999, which ended June 30, 1999, an increase of $8.6 million or 7.4%.
Excluding the impact of the divested pump and industrial businesses, sales
increased approximately $23.1 million or 23.0% during the second quarter of 2000
versus 1999. The increase was primarily due to increased shipments of home
environment products of approximately $22.5 million. Fan shipments were up
approximately 17% and heater and humidifier shipments increased in part because
several of our larger customers took shipments earlier than in 1999.
International sales also increased by approximately $5.9 million in the second
quarter of 2000 versus the second quarter of 1999, driven by sales in Mexico and
in the Far East due to increased sales in our motor joint venture with General
Electric. Partially offsetting these increases was a decrease in shipments of
kitchen electric products during the quarter of approximately $5.3 million.
Sales for the divested businesses in the second quarter of 2000 were $0.8
million pursuant to a supply agreement with the buyers, which represented a
decrease of approximately $14.5 million from the prior period.
Gross Profit. Gross profit for the second quarter of 2000 was $30.5 million
compared to $29.4 million for the second quarter of 1999, an increase of $1.1
million or 3.7%. Gross profit for the three months ended June 30, 2000 included
costs and related impact of approximately $2.1 million related to the purchase
of a faulty component. Adjusting for the divested businesses, the impact of the
faulty component and the amortization of acquired profit in inventory in 1999
would result in gross profit of approximately $32.6 million or 26.2% of net
sales and approximately $27.0 million or 26.8% of net sales for the three months
ended June 30, 2000 and 1999, respectively. The increase was primarily due to
home environment and international volumes partially offset by the kitchen
shortfall.
Selling Expenses. Selling expenses for the second quarter of 2000 were $17.5
million compared to $15.1 million for the second quarter of 1999, an increase of
$2.4 million or 15.9%. As a percentage of net sales, selling expenses increased
to 14.1% for the second quarter of 2000 from 13.0% for the second quarter of
1999. A component of the increase was increased shipping costs due to fuel
surcharges by transportation companies. Shipping costs also increased as a
result of logistics planning decisions on shipping points, with some offsetting
benefits to gross margins as a result of lower inbound freight costs. Also,
contributing to the increase was a buildup of our sales infrastructure to
support sales in the future.
General and Administrative Expenses. General and administrative expenses for the
second quarter of 2000 and 1999 were both $8.3 million. As a percentage of net
sales, general and administrative expenses decreased to 6.7% for the second
quarter of 2000 from 7.2% for the second quarter of 1999 due to the increased
sales volume in 2000. Integration costs related to the Rival acquisition
included in general and administrative expenses were approximately $1.4 million
for the second quarter of 2000 and approximately $1.3 million for the second
quarter of 1999.
Product Development Expenses. Product development expenses for the second
quarter of 2000 were $2.7 million compared to $2.4 million for the second
quarter of 1999, an increase of $.3 million or 12.5%. The increased expenditures
in 2000 relate to the development of a number of new products in the home
environment and kitchen product lines.
Plant Closing Costs. We recorded $0.2 million in plant closing costs in the
second quarter of 2000 associated with the closing of the Fayetteville, North
Carolina and Warrensburg, Missouri plants. The Fayetteville plant was sold in
April 2000.
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Interest and Other Expense, Net. Interest and other expense, net for the second
quarter of 2000 was $9.4 million compared to $6.9 million for the second quarter
of 1999, an increase of $2.5 million or 36.2%. A portion of the increase in
interest expense, approximately $0.6 million, was due to higher interest rates
during the second quarter of 2000 versus 1999. Also, we were required to
amortize to interest expense approximately $0.3 million of debt issuance costs
when we reduced our outstanding credit facility from $170 million to $140
million in February 2000. Finally, during the second quarter of 1999 we recorded
a legal settlement of $1.6 million arising out of a previous Rival acquisition,
which reduced interest and other expense in 1999.
Income Tax Expense (Benefit). The income tax benefit decreased to $0.4 million
for the three months ended June 30, 2000 from $1.0 million for the three months
ended June 30, 1999. This reduction was due to the Company using a 5% effective
world wide tax rate for 2000 versus a 20% rate for 1999. This was due to the
losses experienced in the U.S. creating benefits at higher rates than the
foreign income taxed at lower rates.
Equity in Earnings from Joint Venture. The equity in earnings from our joint
venture with General Electric rose to $193,000 for the second quarter of 2000
versus none for the second quarter of 1999 due to increased shipments of motors
from our factory in the Far East.
Net Income (Loss). As a result of the foregoing factors, our net loss for the
second quarter of 2000 was $7.8 million, compared to a net loss of $4.1 million
in the second quarter of 1999.
COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999
The financial statement amounts for the first half of fiscal 2000 set forth
below include six months of Rival's operations, while (as required by purchase
accounting) the financial statement amounts for the first half of fiscal 1999
include approximately five months of Rival's operations, from the acquisition on
February 5, 1999 onward. We have also provided a number of pro forma, full
six-month comparisons for the first half of fiscal 1999 that include Rival's
comparable results from January 1, 1999 onward, which management believes to be
a more meaningful comparison.
Net Sales. Net sales for the first half of fiscal 2000, which ended June 30,
2000, were $240.7 million compared to $207.5 million for the first half of
fiscal 1999, which ended June 30, 1999, an increase of $33.2 million or 16.0%.
Comparing the six months ended June 30, 2000 to the pro forma six months ended
June 30, 1999 (including Rival's results for the full six month period of 1999)
would result in an increase in net sales of approximately $10.8 million or 4.7%.
Excluding the impact of the divested pump and industrial businesses, sales
increased approximately $34.2 million or 16.9%. The increase was primarily due
to increased shipments of home environment products of approximately $36.5
million. International shipments also increased by approximately $9.4 million in
the first half of 2000 versus the first half of 1999, driven by sales in Mexico
and in the Far East due to increased sales in our motor joint venture with
General Electric. Partially offsetting these increases was a decrease in
shipments of kitchen electric products during the six months of approximately
$10.9 million. Sales for the divested businesses in the first half of 2000 were
$4.5 million pursuant to a supply agreement with the buyers, which represented a
decrease of approximately $23.4 million from the prior year pro forma.
Gross Profit. Gross profit for the first half of 2000 was $65.8 million compared
to $56.3 million for the first half of 1999, an increase of $9.5 million or
16.9%. Compared to the pro forma six month period ended June 30, 1999, gross
profit increased approximately $4.5 million to 27.3% of net sales for the first
half of 2000 from 26.7% of net sales in 1999. The six month 2000 gross profit
amount includes costs and related impact of approximately $3.1 million related
to the purchase of a faulty component, as previously mentioned. Adjusting for
the divested businesses, the impact of the faulty component and the amortization
of acquired profit in inventory in 1999 would result in gross profit of
approximately $68.9 million or 29.1% of net sales and approximately $54.9
million or 27.2% of net sales for the six months ended June 30, 2000 and 1999,
respectively. The increase was primarily due to home environment volume and
lower unfavorable variances, both of which were partially offset by the impact
of lower kitchen electric volume.
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Selling Expenses. Selling expenses for the first half of 2000 were $34.8 million
compared to $28.3 million for the first half of 1999, an increase of $6.5
million or 22.9%. As a percentage of net sales, selling expenses increased to
14.5% for the first half of 2000 from 13.6% for the first half of 1999.
Comparing the first half 2000 selling expenses of $34.8 million to the selling
expenses of $31.9 million for the full six months ended June 30, 1999 would
result in an increase of approximately $2.9 million for the six months, or 9.0%.
A component of the increase was increased shipping costs due to fuel surcharges
by transportation companies. Shipping costs also increased as a result of
logistics planning decisions on shipping points, with some offsetting benefits
to gross margins as a result of lower inbound freight costs. Also, there was an
increase in advertising, packaging and other related sales tools expenses
associated with developing and marketing our new and existing products.
General and Administrative Expenses. General and administrative expenses for the
first half of 2000 were $16.2 million compared to $14.0 million for the first
half of 1999, an increase of $2.2 million or 15.7%. As a percentage of net
sales, general and administrative expenses decreased to 6.7% for the first half
of 2000 from 6.8% for the first half of 1999. For the full six months ended June
30, 1999 general and administrative expenses were approximately $15.0 million,
or 6.5% of pro forma net sales. Approximately $1.0 million of the increase in
general and administrative expense was directly attributable to the Far East
operations to support the increased production and sourcing demands of the
combined businesses, as well as the growth of the GE joint venture. Integration
costs related to the Rival acquisition included in general and administrative
expenses were approximately $2.0 million for the first half of 2000 and
approximately $2.0 million for the first half of 1999.
Product Development Expenses. Product development expenses for the first half of
2000 were $5.5 million compared to $4.7 million for the first half of 1999, an
increase of $0.8 million or 17.0%. Product development expenses for the full six
months ended June 30, 1999 were approximately $4.9 million. The increased
expenditures in 2000 relate to the development of a number of new products in
the home environment and kitchen product lines.
Plant Closing Costs. We recorded $0.3 million in plant closing costs in the
first half of 2000 associated with the closing of the Fayetteville and
Warrensburg plants.
Interest and Other Expense, Net. Interest and other expense, net for the first
half of 2000 was $18.5 million compared to $12.9 million for the first half of
1999, an increase of $5.6 million or 43.4%. A portion of the increase in
interest expense, approximately $2.8 million, was due to an additional month of
borrowing in 2000 related to the Rival acquisition as well as higher interest
rates during the first half of 2000 versus 1999 on the outstanding debt. Also,
we wrote off to interest expense $0.9 million in debt issuance costs when we
reduced the credit facility from $170.0 million to $140.0 million in February
2000. Finally, we recorded a legal settlement from a previous Rival acquisition
in 1999 in the amount of $1.6 million.
Income Tax Expense (Benefit). The income tax benefit decreased to $0.5 million
for the six months ended June 30, 2000 from $1.4 million for the six months
ended June 30, 1999. This reduction was due to the Company using a 5% effective
world wide tax rate for 2000 versus a 20% rate for 1999. This was due to the
losses experienced in the U.S. creating benefits at higher rates than the
foreign income taxed at lower rates.
Equity in Earnings from Joint Venture. The equity in earnings from our joint
venture with General Electric rose to $336,000 for the first half of 2000 versus
$108,000 for the first half of 1999 due to increased shipments of motors from
our factory in the Far East.
Net Income (Loss). As a result of the foregoing factors, our net loss for the
first half of 2000 was $10.1 million, compared to a net loss of $5.4 million in
the first half of 1999.
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LIQUIDITY AND CAPITAL RESOURCES
Following the recapitalization transaction in November 1997 and the Rival
acquisition in February 1999, we have funded our liquidity requirements with
cash flows from operations and borrowings under the Credit Facility. Our primary
liquidity requirements are for working capital and to service our indebtedness.
We believe that existing cash resources, cash flows from operations and
borrowings under the Credit Facility will be sufficient to meet our liquidity
needs for the foreseeable future.
Cash provided by operations for the six months ended June 30, 1999 and 2000 was
$20.0 million and $6.1 million, respectively. Cash provided by operations in the
first half of 2000 primarily reflected a $33.8 million decrease in accounts
receivable levels as heavy cash collection activity typically follows the
seasonally higher sales activity during the fourth quarter of the previous
fiscal year. These decreases were offset by an increase in inventory of $19.8
million as inventory levels for domestic manufacturing are higher at this point
in anticipation of the higher sales in the last half of the year.
Cash used for investing for the six months ended June 30, 1999 and 2000 was
$284.1 million (reflecting the Rival acquisition) and $4.6 million,
respectively. Cash used for investing in the first half of 2000 reflected
capital expenditures of approximately $11.4 million offset by additional
proceeds from the sale of the sump and utility pump division and additional
contingent consideration from the sale of the commercial and industrial
division. We also received $1.6 million from the sale of the Fayetteville
facility. We also received additional cash contributions from our joint venture
partner as part of their contribution towards joint venture capital equipment.
Cash provided by (used for) financing activities for the six months ended June
30, 1999 and 2000 was $260.2 million and $(5.3) million, respectively. Cash used
for financing in the first half of 2000 reflected repayments of the Credit
Facility using cash flows from operations. The cash provided by financing
activities in the first half of 1999 reflected the issuance of debt associated
with the Rival acquisition.
We 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. While we may repurchase Notes from time to time in open market
or privately negotiated transactions, the Notes are not redeemable at our option
prior to November 15, 2002. Thereafter, the Notes are subject to redemption at
any time at our option, 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 our senior debt, including borrowings under the Credit Facility. The
Notes are guaranteed by our domestic subsidiaries but are otherwise unsecured.
We entered into the Credit Facility with a syndicate of banks in February 1999.
The Credit Facility amended and restated our 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 a $140.0
million, six-year revolving credit facility. The Credit Facility bears interest
at a variable rate based on either the prime rate or LIBOR, at our option, plus
a margin which, on a portion of the facility, varies depending upon certain
financial ratios. The Credit Facility, and the guarantees thereof by our
domestic subsidiaries, are secured by substantially all of our domestic and
certain foreign assets.
Effective June 30, 2000, the Credit Facility was amended to revise the
application of certain of the financial covenants and pricing terms. Without
this amendment, we would have been in default of one of the Credit Facility's
financial ratio covenants as of June 30, 2000, due to costs and related impact
from the purchase of a faulty component. There can be no assurance that there
will not be covenant violations in the future.
The Credit Facility and the Notes Indentures include certain financial and
operating covenants which, among other things, restrict our ability to incur
additional indebtedness, make investments and take certain other actions. Our
ability to meet our debt service obligations will be dependent upon the future
performance, which will be impacted by general economic conditions and other
factors. See "Forward-Looking Statements."
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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," "intends," "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 our degree of leverage, risks associated with a failure to
comply with the covenants governing our indebtedness, our dependence on major
customers and key personnel, competition, risks associated with foreign
manufacturing, risks of the retail industry, potential product liability claims,
the cost of labor and raw materials and the other factors which are discussed in
our most recent Registration Statement on Form S-4 (File No. 333-77905), and
from time to time in our reports filed with the Securities and Exchange
Commission. Accordingly, such forward-looking statements do not purport to be
predictions of future events or circumstances and may not be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2000, the carrying value of our debt totaled $340.1 million
(including capital leases), 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 June 30, 2000, the Company had fixed rate debt of $135.1 million (including
capital leases) and variable rate debt of $205.0 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 $6.9 million. Based on the
amounts of variable rate debt outstanding at June 30, 2000, the earnings and
cash flows impact, net of taxes, for the next twelve months resulting from a one
percentage point increase in interest rates would be approximately $2.0 million,
holding other variables constant.
In order to help hedge our interest rate exposure, effective May 7, 1999, we
entered into an interest rate collar transaction agreement with our agent bank.
This arrangement is described in Note 7 of Notes to Consolidated Financial
Statements.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings incident to our normal business
operations, including product liability and patent and trademark litigation.
Management believes that the outcome of such litigation will not have a material
adverse effect on our business, financial condition or results of operations. We
have product liability and general liability insurance policies in amounts
management believes to be reasonable. There can be no assurance, however, that
such insurance will be adequate to cover all potential product or other
liability claims against us. We also face exposure to voluntary or mandatory
product recalls in the event that our products are alleged to have manufacturing
or safety defects. We do not maintain product recall insurance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
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
We will hold a telephone conference call on Thursday, August 17, 2000 at 2 p.m.,
Eastern time, in order for investors and other stakeholders to hear management's
views on our results of operations during the second quarter ended June 30,
2000, as well as our current financial position. If you are interested in
participating in the call in listen-only mode, please fax the following
information to Sandy LaBree, Executive Assistant, at 508-634-7942:
- Name of Participant(s)
- Company Affiliation
- Nature of Business
- Address
- Phone, Fax and E-mail
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits: 10.1 Form of Second Amendment to Amended and Restated Revolving
Credit and Term Loan Agreement dated as of June 30, 2000
27.1 Financial Data Schedule
b. Reports on Form 8-K:
Not applicable
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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.
THE HOLMES GROUP, INC.
------------------------------------
Registrant
August 14, 2000 By: /s/ Jordan A. Kahn
--------------------------------
Jordan A. Kahn, President,
Chief Executive Officer
(Principal Executive Officer)
August 14, 2000 By: /s/ Ira B. Morgenstern
--------------------------------
Ira B. Morgenstern,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
27
