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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K/A*
(AMENDMENT NO. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBERS:
333-44473
333-77905
THE HOLMES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-2768914
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
233 FORTUNE BOULEVARD, MILFORD, MASSACHUSETTS 01757
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(508) 634-8050
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
TITLE OF CLASS: NOT APPLICABLE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE: NOT APPLICABLE
*AMENDMENT TO PART II, ITEM 7, AS SET FORTH HEREIN.
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AMENDMENT TO FORM 10-K
We are filing this Amendment to our Annual Report on Form 10-K for the
fiscal year ended December 31, 1999. Part II, Item 7 ("Management's Discussion
and Analysis of Financial Condition and Results of Operations") is being amended
to revise certain information regarding the net sales and gross profit of our
Rival subsidiary, as set forth in the second and third paragraphs under
"Comparison of Years Ended December 31, 1999 and December 31, 1998." As required
by the regulations of the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, the complete text of Item 7 as
amended is set forth herein.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
amended report, are or may be forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. Various economic and
competitive factors could cause actual results or events to differ materially
from those discussed in such forward-looking statements, including without
limitation, our degree of leverage, our dependence on major customers and key
personnel, the integration of the Rival acquisition, 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 described in our most recent Annual Report on Form 10-K, our
most recent Registration Statement on Form S-4 (File No. 333-77905), our Current
Reports on Form 8-K (filed February 10, 1999, October 12, 1999 and January 13,
2000), and from time to time in our other periodic 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. Except as amended hereby, statements in our Annual Report on Form
10-K speak only as to the date of its filing.
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PART II.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Sales of most of our products follow seasonal patterns that affect results
of operations. In general, sales of fans occur predominantly from January
through June, and 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, sales of these products tend to be greatest in advance of the winter
months from July through December. Additionally, many of the kitchen and
personal care products we sell are given as gifts and, as such, sell at larger
volumes during the holiday season. When holiday shipments are combined with
seasonal products, 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 kitchen electrics and other home environment products.
On February 5, 1999, we completed the acquisition of The Rival Company, a
leading developer, manufacturer and marketer of a variety of products including
small kitchen, home environment and personal care appliances. In connection with
this acquisition, we issued $31.3 million of senior subordinated notes due in
November 2007, bearing interest at 9 7/8% (the "Notes"), amended and restated
our existing $100.0 million credit facility to provide for a total availability
of $325.0 million, and sold $50.0 million of common stock in a private
placement. In November 1997, we completed a recapitalization transaction in
which we issued $105.0 million of Notes and entered into the $100.0 million line
of credit facility, of which approximately $27.5 million was initially drawn
(collectively, the "1997 Transactions"). As a result of these transactions, we
have a significantly higher level of borrowing and a corresponding higher level
of interest expense than in the past.
RESULTS OF OPERATIONS
Our historical results of operations for the year 1998 discussed below do
not include any of Rival's operations. The Rival acquisition was accounted for
as a purchase, and accordingly, Rival's results of operations are included in
the Company's financial information beginning on February 5, 1999. Rival's
larger size relative to Holmes greatly influences the comparison of 1999 and
1998 below. Therefore, we have provided supplemental information for Holmes and
its subsidiaries other than Rival on a stand-alone basis, and for Rival and its
subsidiaries on a stand-alone basis.
Comparison of Years Ended December 31, 1999 and December 31, 1998
Net Sales. Net sales for fiscal 1999 were $506.8 million compared to $214.5
million for fiscal 1998, an increase of $292.3 million or 136.3%, primarily due
to the Rival acquisition. On a stand-alone basis, Holmes' net sales increased
approximately $17.5 million, or 8.2%, in 1999 versus 1998. Holmes' U.S. fan
shipments increased approximately $5 million in 1999 over 1998 as warm summer
weather improved customer response. Winter season U.S. shipments of heaters and
humidifiers increased by approximately $4 million and $3 million, respectively,
in 1999 versus 1998 as increased product offerings and improved placement
resulted in increased volume. Lighting product shipments increased as well in
1999 by approximately $2 million when compared to 1998, and U.S. sales of
accessory products increased by $5 million from 1998 to 1999. Dehumidifier
shipments decreased in 1999 by approximately $5 million versus 1998 following a
management decision to exit this low margin category. U.S. sales of air
purifiers also decreased from 1998 to 1999 by approximately $4 million as stock
levels at retailers slowed shipping demand in 1999. A reduction in returns and
allowances of approximately $4 million from 1998 to 1999 also favorably impacted
net sales. Increases in other categories accounted for the balance of the sales
gain.
On a stand-alone basis, Rival's net sales decreased by approximately $41
million for the full calendar year 1999 compared with 1998, excluding the
divested businesses. Rival's U.S. shipments of kitchen appliances decreased by
approximately $11 million in 1999 when compared to 1998. Decreased sales of can
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openers made up approximately 40% of this decrease as an increase in shipments
from new product introductions in 1998 did not repeat in 1999. In addition,
approximately 30% of the overall kitchen decrease was attributable to reduced
shipments of toasters and irons as we de-emphasized the existing lower margin
opening price point products on several categories. Despite price erosion, U.S.
sales of Crock-Pot(R)slow cookers were flat in dollars but shipments in units
were up from 1998 to 1999. The remainder of the kitchen shortfall was spread
over a number of the smaller categories. Rival U.S. home environment shipments
decreased approximately $23 million in 1999 versus 1998 with the retail fan and
air purifier product categories making up over 80% of the decrease. Anticipated
retail placement losses and negative impacts from shelf transitions at several
key retailers were the primary factors for these category decreases. Shipments
from Rival's industrial and pump business units decreased by approximately $5
million and $4 million, respectively, in 1999 versus 1998. The sale of both of
these divisions, which accounted for net sales of approximately $43.0 million in
1999, took place in the fourth quarter of 1999. Rival's international shipments
decreased by approximately $2 million in 1999 versus 1998, driven by shortfalls
in Latin America (excluding Mexico, where sales were up significantly). Rival
also experienced an increase in credits for returns and discounts of
approximately $5 million from 1998 to 1999, which further reduced its overall
net sales.
Gross Profit. Gross profit for fiscal 1999 was $143.2 million compared to
$68.0 million for fiscal 1998, an increase of $75.2 million or 110.6%, with the
increase again in large part due to the Rival acquisition. As a percentage of
net sales, gross profit decreased to 28.2% in 1999 from 31.7% in 1998 as a
result of the decreased gross margins realized by Rival in 1999. On a
stand-alone basis, Holmes' gross profit margin increased over three percentage
points for the year 1999 versus 1998. Holmes' product mix in 1999 included a
decrease in low margin dehumidifier sales and an increase in higher margin sales
as discussed above which favorably impacted overall Holmes' margins. In
addition, positive contribution was realized from improved efficiencies in our
Far East factories. On a stand-alone basis for the full calendar year 1999,
Rival's gross profit decreased approximately $21 million from 1998, primarily
due to the sales volume shortfall discussed above and due to amortization of
acquired profit in inventory in connection with the Rival acquisition. Rival's
gross profit percentage was approximately 24.0% in 1999 versus 24.5% in 1998
(before the impact of the amortization of acquired profit in inventory in 1999).
Selling Expenses. Selling expenses for 1999 were $67.5 million compared to
$20.5 million in 1998, an increase of $47.0 million or 229.3%, primarily as a
result of the Rival acquisition. As a percentage of net sales, selling expenses
increased to 13.3% for 1999 compared to 9.5% in 1998. A significant portion of
this percentage increase was due to the traditionally higher levels of
co-operative advertising done by Rival and increased freight costs related to
both continuing Rival businesses and businesses sold during 1999. In addition to
the Rival impact, there were increases in some sales related expense items such
as shipping freight costs and supplies, particularly in regards to the overall
Holmes sales increases and to the increase in accessory sales. In addition,
salaries and related benefits and travel costs increased as we developed an
infrastructure to support the integration of Rival and future initiatives.
General and Administrative Expenses. General and administrative expenses
for 1999 were $28.3 million compared to $16.6 million in 1998, an increase of
$11.7 million or 70.5%. As a percentage of net sales, general and administrative
expenses decreased to 5.6% for 1999 from 7.8% for 1998. The increase in dollars
was primarily attributable to the Rival acquisition. In addition, the increase
in dollars was due to expenses incurred for consulting, travel and other costs
to support the Rival integration process. Total integration related expenses in
1999 were approximately $3.4 million.
Product Development Expenses. Product development expenses for 1999 were
$10.4 million compared to $6.3 million for 1998, an increase of $4.1 million or
65.1%. As a percentage of net sales, product development expenses decreased to
2.1% for 1999 from 2.9% for 1998. The increase in dollars and the decrease as a
percentage of net sales were primarily due to the Rival acquisition.
Plant Closing Costs. The Company recorded $2.4 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
which were expensed as incurred and $0.7 million related to the write down of
fixed assets at these facilities.
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Interest and Other Expense, Net. Interest and other expense, net for 1999
was $31.0 million compared to $13.4 million for 1998, an increase of $17.6
million or 131.3%. The increase in interest expense was primarily due to the
additional borrowings resulting from the new debt associated with the Rival
acquisition. This increase was offset by an increase in other income largely
related to a favorable legal settlement in 1999.
Income Tax Expense (Benefit). The income tax benefit for 1999 was $0.1
million compared to expense of $2.2 million for 1998. This was largely 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. We recorded $0.9 million in equity
in earnings from our joint venture with General Electric for the shipment of
motors from our factory in the Far East. There were no such earnings recorded in
1998.
Net Income. As a result of the foregoing factors, net income for 1999 was
$1.8 million, compared to net income of $9.0 million for 1998.
Comparison of Years Ended December 31, 1998 and December 31, 1997
Net Sales. Net sales for fiscal 1998 were $214.5 million compared to
$192.2 million for fiscal 1997, an increase of $22.3 million or 11.6%. This
increase was attributable to increases in each of what were then our four major
product categories: fans, heaters, humidifiers and air purifiers, which resulted
from a strong 1998 for retailers, as well as continued growth in filter and
accessory sales due to the growing installed base of products requiring filters
and accessories. Our Far East operations also had a significant increase in
external sales versus 1997.
Gross Profit. Gross profit for fiscal 1998 was $68.0 million compared to
$55.4 million for fiscal 1997, an increase of $12.6 million or 22.7%. As a
percentage of net sales, gross profit increased to 31.7% for fiscal 1998 from
28.8% for fiscal 1997. The increase was primarily due to the above mentioned
increases in net sales in humidifiers, heaters and filters and accessories which
are relatively higher margin contributors, as well as continued reductions in
raw material prices at our manufacturing operations in the Far East.
Selling Expenses. Selling expenses for fiscal 1998 were $20.5 million
compared to $15.6 million for fiscal 1997, an increase of $4.9 million or 31.4%.
As a percentage of net sales, selling expenses increased to 9.6% for fiscal 1998
from 8.1% for fiscal 1997. The increase in selling expenses was primarily due to
an increase in co-operative advertising of higher margin products and new sales
promotions with several major retailers. To a lesser extent, shipping costs
increased as a result of the higher sales level. Also, there were continued
expenses associated with the redesign of some of our product packaging.
General and Administrative Expenses. General and administrative expenses
for fiscal 1998 were $16.6 million compared to $20.9 million for fiscal 1997, a
decrease of $4.3 million or 20.6%. As a percentage of net sales, general and
administrative expenses decreased to 7.7% for fiscal 1998 from 10.9% for fiscal
1997. The higher amount in 1997 resulted from incremental incentive compensation
expenses paid in connection with the 1997 Transactions. This overall decrease
was offset in part by increased expenditures on management and information
systems support, increases in personnel costs to improve operating efficiencies
at all of our locations and on-going expenses associated with the
recapitalization in November, 1997.
Product Development Expenses. Product development expenses for fiscal 1998
were $6.3 million compared to $5.5 million for fiscal 1997, an increase of $.8
million or 14.6%. As a percentage of net sales, product development expenses
remained constant at 2.9% for fiscal 1998 and 1997. The increase was primarily
due to increased expenditures for royalties and outside consultants as part of
our continuing effort in developing new technologies for both existing and new
product lines.
Interest and Other Expense, Net. Interest and other expense, net for
fiscal 1998 was $13.4 million compared to $7.2 million for fiscal 1997, an
increase of $6.2 million or 86.1%. The increase in interest expense was
primarily due to the additional borrowings resulting from the recapitalization
in November 1997. Our interest expense in future periods has been higher than
1998 as a result of the Rival acquisition.
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Income Tax Expense. In 1997, we recorded a $3.6 million valuation
allowance related to deferred tax assets generated as a result of certain
limitations on the deductibility of interest paid to Pentland. This 1997
non-recurring charge comprises the majority of the 15% change in our effective
tax rate from 35% in 1997 to 20% in 1998.
Net Income. As a result of the foregoing factors, net income for fiscal
1998 was $9.0 million, compared to net income of $3.8 million in fiscal 1997.
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 years ended December 31, 1999 and 1998
was $4.9 million and $24.3 million, respectively. Cash provided by operations
for 1999 reflected a $36.5 million increase in receivables as a significant
percentage of Rival's sales are shipped and billed in the fourth quarter which
results in an increase in open receivables at year end from the February 5, 1999
balance. Partially offsetting the increase in receivables was a decrease in
inventory levels of approximately $26.2 million at December 31, 1999, which
included the amortization of acquired profit in inventory. This decrease related
to an increase in shipping activity during the fourth quarter as well as our
increased focus on management of raw material and finished goods inventory
levels. Finally, cash provided by operations in 1999 included a decrease in
accounts payable which was in large part related to Rival's overall sales
activity decline in 1999.
Cash used for investing for the year ended December 31, 1999 included
$279.6 million paid in connection with the Rival acquisition. In addition, we
invested $17.6 million in capital expenditures for property and equipment during
1999. We also received net proceeds of $23.8 million in 1999 in connection with
the sale of two of Rival's closed manufacturing facilities and from the sale of
the Rival's commercial and industrial and Simer pump business units.
Cash provided by (used for) financing activities for the years ended
December 31, 1999 and 1998 was $265.2 million and $(18.8) million, respectively.
Cash used for financing for the year 1998 reflected repayments of the prior line
of credit used to fund cash flows for operations. The cash provided by financing
activities for the year 1999 reflected the borrowings on the Credit Facility,
and proceeds from the issuance of the Notes and common stock 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 of our senior debt, including borrowings under the Credit Facility.
We entered into the Credit Facility 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 $200.0 million, six-year
revolving credit facility which was reduced to $170.0 million on August 20, 1999
and further reduced to $140.0 million on February 8, 2000. The Credit Facility
bears interest at variable rates based on either the prime rate or LIBOR, at our
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. The
Credit Facility, and the guarantees thereof by our domestic subsidiaries, are
secured by substantially all of our domestic and certain foreign assets. The
Credit Facility and the Notes Indentures include certain financial and operating
covenants, which, among other things, restrict our ability to incur additional
indebtedness, grant liens, make investments and take certain other actions. Our
ability to meet our debt service obligations will be dependent upon our future
performance, which will be
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impacted by general economic conditions and other factors. See "Disclosure
Regarding Forward-Looking Statements."
YEAR 2000
Over the past year, we developed and implemented plans to address possible
Year 2000 exposures related to computer systems used by us and by third parties,
as described below. We have not experienced any material Year 2000 problems
subsequent to the date change on January 1, 2000.
We had identified our Year 2000 risk to be in two general categories:
Information Technology Systems, including Electronic Data Interchange Systems
(EDI), and General Business Systems.
Information Technology Systems Including EDI. We transitioned to Rival's
computer software system approximately six months following the Rival
acquisition, during the third quarter of 1999. Rival had implemented its
corporate computer system in 1995. This system is Year 2000 compliant, according
to the vendor, as confirmed by full systems testing performed by Rival. The
Company used both internal and external resources to test, reprogram or replace
the software and hardware for Year 2000 modifications, the cost of which was
approximately $320,000 as of December 31, 1999. The majority of project costs,
related to the purchase of hardware and software to meet both Year 2000 and
company specific requirements, have been capitalized. All other remaining
project costs were expensed in 1999 or will be expensed in 2000.
General Business Systems. Our 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. We created a Year 2000 committee
consisting of one member from each department. The committee reviewed all
aspects of our internal business systems and determined that they were Year 2000
compliant. Rival had created its own cross-departmental Year 2000 committee in
1997, and determined that its internal systems were Year 2000 compliant as well.
We have not experienced any material Year 2000 problems subsequent to the
date change with respect to our significant customers and suppliers. While we
have carefully monitored our supplier and customer risks, and will continue to
do so, we cannot fully control suppliers and customers, and there can be no
guarantee that a Year 2000 problem that may originate with a supplier will not
materially adversely affect us in a subsequent accounting period. Finally, we
determined that products that we manufacture and sell have no exposure related
to the Year 2000 issue.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the balance sheet, and the
corresponding gains and losses be reported either in the statement of income or
as a component of comprehensive income, depending on the type of hedging
relationship that exists. The Company does not expect the impact of SFAS 133,
which will be effective for fiscal 2001, to be significant given its limited use
of derivatives.
INVESTOR CONFERENCE CALL
We will hold a telephone conference call on Friday, April 14, 2000 at 2
p.m., Eastern time, in order for investors and other interested stakeholders to
hear management's views on our results of operations during the fourth quarter
and year ended December 31, 1999, 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
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE HOLMES GROUP, INC.
By: /s/ JORDAN A. KAHN
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Jordan A. Kahn, President,
Chief Executive Officer
Dated: April 11, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
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/s/ JORDAN A. KAHN President, Chief Executive Officer April 11, 2000
- --------------------------------------------------- and Director (Principal Executive
Jordan A. Kahn Officer)
/s/ IRA B. MORGENSTERN Chief Financial Officer and April 11, 2000
- --------------------------------------------------- Treasurer (Principal Financial and
Ira B. Morgenstern Accounting Officer)
/s/ STANLEY ROSENZWEIG Chief Operating Officer and April 11, 2000
- --------------------------------------------------- Director
Stanley Rosenzweig
/s/ GREGORY F. WHITE Executive Vice President Sales and April 11, 2000
- --------------------------------------------------- Marketing and Director
Gregory F. White
/s/ RICHARD LUBIN Director April 11, 2000
- ---------------------------------------------------
Richard Lubin
/s/ RANDY PEELER Director April 11, 2000
- ---------------------------------------------------
Randy Peeler
/s/ THOMAS K. MANNING Director April 11, 2000
- ---------------------------------------------------
Thomas K. Manning
/s/ (TOMMY) WOON FAI LIU Director April 11, 2000
- ---------------------------------------------------
(Tommy) Woon Fai Liu
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