<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBERS:
333-44473
333-77905
THE HOLMES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2768914
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
233 FORTUNE BOULEVARD, MILFORD MASSACHUSETTS 01757
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) 634-8050
(REGISTRANT'S TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE 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 SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONSOLIDATED BALANCE SHEET AT
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED) 3
CONSOLIDATED STATEMENT OF INCOME FOR
THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 2000 (UNAUDITED) 4
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 2000 (UNAUDITED) 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
PART II. OTHER INFORMATION 27
SIGNATURES 28
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HOLMES GROUP, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000 (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,647 $ 641
Accounts receivable, net of allowance of $9,046 and $6,876 respectively 142,264 113,398
Inventories 112,660 161,208
Prepaid expenses and other current assets 3,997 2,979
Deferred income taxes 11,877 11,562
Income taxes receivable 7,852 --
-------- --------
Total current assets 285,297 289,788
Assets held for sale 2,434 1,534
Property and equipment, net 54,348 61,887
Goodwill, net 89,493 86,604
Deposits and other assets 5,610 7,879
Debt issuance costs, net 19,314 15,958
Deferred income taxes -- 1,319
-------- --------
$456,496 $464,969
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations and other liabilities $ 589 $ 651
Current portion of credit facility 6,450 7,052
Accounts payable 26,433 33,686
Accrued expenses 36,256 29,642
Accrued income taxes 3,923 5,378
-------- --------
Total current liabilities 73,651 76,409
Credit facility 203,625 218,086
Long-term debt 135,085 135,160
Other long-term liabilities 4,054 5,861
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 September 30, 2000; issued and outstanding
20,307,995 shares at December 31, 1999 and September 30, 2000 20 20
Additional paid in capital 67,915 67,915
Accumulated other comprehensive income 397 508
Treasury stock, at cost (18,620,450 shares) (62,058) (62,058)
Retained earnings 31,526 23,068
-------- --------
Total stockholders' equity 37,800 29,453
-------- --------
$456,496 $464,969
======== ========
</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 NINE MONTHS ENDED
September 30, 1999 September 30, 2000 September 30, 1999 September 30, 2000
<S> <C> <C> <C> <C>
Net sales $ 134,270 $ 116,323 $ 341,795 $ 357,015
Cost of goods sold 94,465 75,747 245,713 250,621
--------- --------- --------- ---------
Gross profit 39,805 40,576 96,082 106,394
--------- --------- --------- ---------
Operating expenses:
Selling 17,063 15,920 45,327 50,769
General and administrative 7,602 7,556 21,599 23,745
Product development 2,794 2,760 7,452 8,271
Plant closing costs -- -- 2,169 340
Amortization of goodwill and other intangible assets 742 665 1,940 1,991
--------- --------- --------- ---------
Total operating expenses 28,201 26,901 78,487 85,116
--------- --------- --------- ---------
Operating profit 11,604 13,675 17,595 21,278
--------- --------- --------- ---------
Other income and expense:
Interest and other expense, net 8,625 9,164 21,564 27,710
--------- --------- --------- ---------
Income (loss) before income taxes and equity in earnings
from joint venture 2,979 4,511 (3,969) (6,432)
Income tax expense (benefit) 600 3,169 (759) 2,637
Equity in earnings from joint venture -- 275 108 611
--------- --------- --------- ---------
Net income (loss) $ 2,379 $ 1,617 $ (3,102) $ (8,458)
========= ========= ========= =========
</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>
NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,102) $ (8,458)
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization 11,499 12,675
Amortization of debt issuance costs and discounts 2,257 2,613
Change in allowance for doubtful accounts 761 (2,170)
Loss on disposal of assets (31) --
Deferred income taxes 866 (3,285)
Changes in operating assets and liabilities:
Accounts receivable 9,915 31,036
Inventories 5,485 (48,548)
Prepaid expenses and other current assets 2,020 8,870
Deposits and other assets (391) (3,243)
Accounts payable (5,050) 7,253
Accrued expenses 2,237 (6,614)
Accrued income taxes (1,475) 1,455
--------- ---------
Net cash provided by (used for) operating activities 24,991 (8,416)
--------- ---------
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 2,684 4,753
Distribution of earnings from joint venture 108 1,100
Purchases of property and equipment (11,449) (19,621)
Cash received from joint venture partner, net -- 1,141
--------- ---------
Net cash used for investing activities (288,228) (12,627)
--------- ---------
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 27,390 --
Borrowings (repayment) of credit facility, net of issuance costs 191,843 15,063
Debt issuance costs (447) --
Principal payments on capital lease obligations (504) (139)
--------- ---------
Net cash provided by financing activities 258,682 14,924
--------- ---------
Effect of exchange rate changes on cash (46) 113
--------- ---------
Net increase (decrease) in cash and cash equivalents (4,601) (6,006)
Cash and cash equivalents, beginning of period 5,379 6,647
--------- ---------
Cash and cash equivalents, end of period $ 778 $ 641
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 17,324 $ 21,274
Cash paid for (refund of) income taxes $ 203 $ (4,864)
</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
SEPTEMBER 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.
6
<PAGE> 7
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In connection with the acquisition, THG recorded a restructuring reserve of
$6.4 million as an assumed liability in accordance with EITF 95-3,
"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 September 30, 2000, 190 of
these employees had been terminated. Severance for the remaining employees
will be paid during the remainder of fiscal 2000 and 2001 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 September
30, 2000. The estimated fair value of the Warrensburg facility has been
reflected in the September 30, 2000 balance sheet as assets held for sale.
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 (2,275) -- (2,275)
------ ---- ------
Balance at September 30, 2000 $1,942 $427 $2,369
</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 year relating to this facility have
been included as plant closing costs in the consolidated statement of
income for the nine months ended September 30, 2000.
7
<PAGE> 8
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
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 nine months of 2000, goodwill was decreased by
approximately $1.0 million to reflect contingent consideration received,
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>
NINE MONTHS ENDED
(IN THOUSANDS) SEPTEMBER 30, 1999
-------------- ------------------
(UNAUDITED)
<S> <C>
Net sales................................ $364,140
Net earnings (loss)...................... (11,424)
</TABLE>
4. RECAPITALIZATION
On November 26, 1997, the Company and its stockholders consummated an
agreement to perform the following: (i) the stockholders of HPFEL
contributed their shares of common stock to 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.
8
<PAGE> 9
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation of
the Company's financial position as of September 30, 2000 and the Company's
results of operations and cash flows for the three and nine months ended
September 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 nine month periods ended September 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 September 30, 2000
----------------- ------------------
<S> <C> <C>
Finished goods $ 61,154,000 $118,172,000
Raw materials and Work-in-process 50,405,000 42,435,000
------------ ------------
111,559,000 160,607,000
LIFO allowance 1,101,000 601,000
------------ ------------
$112,660,000 $161,208,000
</TABLE>
7. LONG-TERM DEBT
Senior Subordinated Notes
In connection with the recapitalization transactions described in Note 4
and the Rival acquisition described in Note 3, 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.
9
<PAGE> 10
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 tranche A term loan of $40.0 million that matures
February 5, 2005, a tranche B term loan of $85.0 million that matures
February 5, 2007 and a $140.0 million revolving credit facility that
matures February 5, 2005. 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.
At September 30, 2000, the Company was in compliance with all its financial
covenants. 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."
Long term debt consists of the following:
<TABLE>
<CAPTION>
(in thousands) December 31, 1999 September 30, 2000
----------------- ------------------
<S> <C> <C>
Credit Facility $210,075 $225,138
9 7/8% Senior Subordinated Notes, net of unamortized
discount of $1.2 million at December 31, 1999 and $1.1
million at September 30, 2000 135,085 135,160
-------- --------
Total debt 345,160 360,298
Less current maturities 6,450 7,052
-------- --------
Long-term debt $338,710 $353,246
</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
10
<PAGE> 11
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
365 days times the difference between the LIBOR rate and the cap rate. If
on the other hand the LIBOR rate is less than the floor rate, the Company
would have to pay the lending bank based on the same calculation. If the
LIBOR rate is between the cap and floor rate, no payments would be
necessary by either party. The LIBOR interest rate at September 30, 2000
was 6.66%, therefore the Company will be due approximately $40,000 in the
fourth 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) September 30, 1999 September 30, 2000
------------------ ------------------
<S> <C> <C>
Net Earnings (loss) $ 2,379 $ 1,617
Foreign currency translation adjustments 20 613
------- -------
Comprehensive income (loss) $ 2,399 $ 2,230
<CAPTION>
Nine months ended
(in thousands) September 30, 1999 September 30, 2000
------------------ ------------------
Net Earnings (loss) $(3,102) $(8,458)
Foreign currency translation adjustments 65 111
------- -------
Comprehensive income (loss) $(3,037) $(8,347)
</TABLE>
9. INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that a valuation allowance be recorded against deferred
tax assets for which there is a greater than fifty percent chance that the
tax assets will not be realized. The Company has generated certain deferred
tax assets as a result of net operating losses ("NOL") incurred in the
United States. The period to use these NOLs is up to 20 years for tax
purposes and THG believes these assets will be realized during this period.
However, the accounting guidance requires that a shorter time frame be used
to assess the probability of their realization when there has been recent
losses.
Based on this guidance and our history of jurisdictional losses in the
United States, mainly as a result of interest expense, we have provided a
valuation allowance against NOL carryforwards of $9.2 million generated in
Fiscal 2000. Our effective tax rate reflects the recognition of this
valuation allowance.
10. 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.
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
11
<PAGE> 12
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 nine month periods ended
September 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>
September 30, 2000
----------
Net sales $103,414 $ 70,380 $10,441 $ (67,912) $ 116,323
Operating income (loss) 9,142 5,284 (532) (219) 13,675
September 30, 1999
----------
Net sales $116,991 $ 52,723 $16,290 $ (51,734) $ 134,270
Operating income (loss) 6,167 4,035 122 1,280 11,604
NINE MONTHS ENDED
September 30, 2000
----------
Net sales $314,515 $186,638 $32,646 $(176,784) $ 357,015
Operating income (loss) 9,639 14,749 (2,951) (159) 21,278
September 30, 1999
----------
Net sales $293,623 $121,147 $43,855 $(116,830) $ 341,795
Operating income (loss) 7,945 11,828 (2,388) 210 17,595
</TABLE>
The following information is summarized by geographic area (in thousands):
<TABLE>
<CAPTION>
Other Consolidated
United States Far East International Total
------------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales:
Three months ended September 30, 2000 $ 103,591 $ 2,468 $10,264 $116,323
Three months ended September 30, 1999 125,639 989 7,642 134,270
Nine months ended September 30, 2000 $ 316,700 $ 9,854 $30,461 $357,015
Nine months ended September 30, 1999 314,061 4,317 23,417 341,795
Identifiable assets:
September 30, 2000 35,107 27,681 633 63,421
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.
12
<PAGE> 13
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. 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.
12. RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
13. 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 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.
13
<PAGE> 14
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>
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
liabilities $ -- $ -- $ 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>
14
<PAGE> 15
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ (809) $ 28 $ 1,422 -- $ 641
Accounts receivable, net 47,454 50,942 15,002 -- 113,398
Inventories 57,669 78,946 29,593 $ (5,000) 161,208
Prepaid expenses and other
current assets 2,264 246 469 -- 2,979
Deferred income taxes 5,300 6,055 207 -- 11,562
Due from affiliates 226,981 89 42,209 (269,279) --
-------- -------- -------- --------- --------
Total current assets 338,859 136,306 88,902 (274,279) 289,788
-------- -------- -------- --------- --------
Assets held for sale -- 1,534 -- -- 1,534
Property and equipment, net 4,235 29,338 28,314 -- 61,887
Goodwill, net -- 84,656 1,948 -- 86,604
Deferred income taxes -- 1,319 -- -- 1,319
Deposits and other assets 21,781 2,747 2,750 (3,441) 23,837
Investments in consolidated
subsidiaries 56,263 -- -- (56,263) --
-------- -------- -------- --------- --------
$421,138 $255,900 $121,914 $(333,983) $464,969
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease
obligations and other
liabilities $ -- $ -- $ 651 -- $ 651
Current portion of
credit facility 7,052 -- -- -- 7,052
Accounts payable 3,844 4,563 28,720 $ (3,441) 33,686
Accrued expenses 14,098 10,088 5,456 -- 29,642
Accrued income taxes 1,229 1,861 2,288 -- 5,378
Due to affiliates 12,216 232,385 24,678 (269,279) --
-------- -------- -------- --------- --------
Total current liabilities 38,439 248,897 61,793 (272,720) 76,409
-------- -------- -------- --------- --------
Credit facility 218,086 -- -- -- 218,086
-------- -------- -------- --------- --------
Long-term debt 135,160 -- -- -- 135,160
-------- -------- -------- --------- --------
Other long-term liabilities -- -- 5,861 -- 5,861
-------- -------- -------- --------- --------
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 508 -- 508 (508) 508
Treasury stock (62,058) -- -- -- (62,058)
Retained earnings 23,068 7,001 53,652 (60,653) 23,068
-------- -------- -------- --------- --------
Total stockholders' equity
(deficit) 29,453 7,003 54,260 (61,263) 29,453
-------- -------- -------- --------- --------
$421,138 $255,900 $121,914 $(333,983) $464,969
======== ======== ======== ========= ========
</TABLE>
15
<PAGE> 16
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $68,374 $57,265 $60,365 $(51,734) $134,270
Cost of goods sold 51,400 45,589 50,490 (53,014) 94,465
------- ------- ------- -------- --------
Gross profit 16,974 11,676 9,875 1,280 39,805
------- ------- ------- -------- --------
Operating expenses:
Selling 6,705 8,678 1,680 -- 17,063
General and administrative 2,290 2,685 2,627 -- 7,602
Product development 1,865 929 -- -- 2,794
Plant closing costs -- -- -- -- --
Amortization of goodwill and other
intangible assets -- 724 18 -- 742
------- ------- ------- -------- --------
Total operating expenses 10,860 13,016 4,325 -- 28,201
------- ------- ------- -------- --------
Operating profit (loss) 6,114 (1,340) 5,550 1,280 11,604
------- ------- ------- -------- --------
Other (income) and expense:
Interest and other
(income) expense, net 9,147 206 (728) -- 8,625
------- ------- ------- -------- --------
Income (loss) before income taxes,
equity in income of consolidated
subsidiaries and equity in
earnings from joint venture (3,033) (1,546) 6,278 1,280 2,979
Equity in earnings from joint venture -- -- -- -- --
Income tax expense (benefit) 256 (756) 1,100 -- 600
------- ------- ------- -------- --------
Income (loss) before equity in income of
consolidated subsidiaries (3,289) (790) 5,178 1,280 2,379
Equity in income of
consolidated subsidiaries 5,688 -- -- (5,688) --
------- ------- ------- -------- --------
Net income (loss) $ 2,399 $ (790) $ 5,178 $ (4,408) $ 2,379
======= ======= ======= ======== ========
</TABLE>
16
<PAGE> 17
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED SEPTEMBER 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 $ 55,350 $ 48,131 $ 80,754 $ (67,912) $116,323
Cost of goods sold 37,080 36,219 70,141 (67,693) 75,747
-------- -------- -------- --------- --------
Gross profit (loss) 18,270 11,912 10,613 (219) 40,576
-------- -------- -------- --------- --------
Operating expenses:
Selling 7,364 6,022 2,534 -- 15,920
General and
administrative 3,508 1,415 2,633 -- 7,556
Product development 2,208 552 -- -- 2,760
Plant closing costs -- -- -- -- --
Amortization of goodwill and
other intangible
assets -- 650 15 -- 665
-------- -------- -------- --------- --------
Total operating expenses 13,080 8,639 5,182 -- 26,901
-------- -------- -------- --------- --------
Operating profit (loss) 5,190 3,273 5,431 (219) 13,675
-------- -------- -------- --------- --------
Other (income) and expense:
Interest and other
(income) expense, net 9,706 118 (660) -- 9,164
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of consolidated subsidiaries
and equity in earnings
from joint venture (4,516) 3,155 6,091 (219) 4,511
Equity in earnings from joint
venture 275 -- -- -- 275
Income tax expense
(benefit) 2,640 -- 529 -- 3,169
-------- -------- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries (6,881) 3,155 5,562 (219) 1,617
Equity in income of
consolidated subsidiaries 8,498 -- -- (8,498) --
-------- -------- -------- --------- --------
Net income (loss) $ 1,617 $ 3,155 $ 5,562 $ (8,717) $ 1,617
======== ======== ======== ========= ========
</TABLE>
17
<PAGE> 18
CONSOLIDATING INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 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 $ 158,167 $ 155,894 $ 144,564 $ (116,830) $341,795
Cost of goods sold 122,133 120,927 119,693 (117,040) 245,713
--------- --------- --------- ---------- --------
Gross profit (loss) 36,034 34,967 24,871 210 96,082
--------- --------- --------- ---------- --------
Operating expenses:
Selling 18,037 22,984 4,306 -- 45,327
General and
administrative 6,899 6,751 7,949 -- 21,599
Product development 5,194 2,258 -- -- 7,452
Plant closing costs -- 2,169 -- -- 2,169
Amortization of goodwill and
other intangible
assets -- 1,892 48 -- 1,940
--------- --------- --------- ---------- --------
Total operating expenses 30,130 36,054 12,303 -- 78,487
--------- --------- --------- ---------- --------
Operating profit (loss) 5,904 (1,087) 12,568 210 17,595
--------- --------- --------- ---------- --------
Other (income) and expense:
Interest and other (income)
expense, net 24,855 (1,220) (2,071) -- 21,564
--------- --------- --------- ---------- --------
Income (loss) before income
taxes and equity in income
of consolidated subsidiaries
and equity in earnings
from joint venture (18,951) 133 14,639 210 (3,969)
Equity in earnings from joint
venture 108 -- -- -- 108
Income tax expense
(benefit) (2,244) 154 1,331 -- (759)
--------- --------- --------- ---------- --------
Income (loss) before equity in
income of consolidated
subsidiaries (16,599) (21) 13,308 210 (3,102)
Equity in income of
consolidated subsidiaries 13,562 -- -- (13,562) --
--------- --------- --------- ---------- --------
Net income (loss) $ (3,037) $ (21) $ 13,308 $ (13,352) $ (3,102)
========= ========= ========= ========== ========
</TABLE>
18
<PAGE> 19
CONSOLIDATING INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 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 $176,827 $141,520 $215,452 $(176,784) $357,015
Cost of goods sold 133,888 108,357 185,001 (176,625) 250,621
-------- -------- -------- --------- --------
Gross profit (loss) 42,939 33,163 30,451 (159) 106,394
-------- -------- -------- --------- --------
Operating expenses:
Selling 22,090 21,739 6,940 -- 50,769
General and
administrative 9,161 5,965 8,619 -- 23,745
Product development 6,518 1,753 -- -- 8,271
Plant closing costs -- 340 -- -- 340
Amortization of goodwill and
other intangible
assets -- 1,946 45 -- 1,991
-------- -------- -------- --------- --------
Total operating expenses 37,769 31,743 15,604 -- 85,116
-------- -------- -------- --------- --------
Operating profit (loss) 5,170 1,420 14,847 (159) 21,278
-------- -------- -------- --------- --------
Other (income) and expense:
Interest and other
(income) expense, net 28,551 154 (995) -- 27,710
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of consolidated subsidiaries
and equity in earnings
from joint venture (23,381) 1,266 15,842 (159) (6,432)
Equity in earnings from joint
venture 611 -- -- -- 611
Income tax expense
(benefit) 1,462 (85) 1,260 -- 2,637
-------- -------- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries (24,232) 1,351 14,582 (159) (8,458)
Equity in income of
consolidated subsidiaries 15,774 -- -- (15,774) --
-------- -------- -------- --------- --------
Net income (loss) $ (8,458) $ 1,351 $ 14,582 $ (15,933) $ (8,458)
======== ======== ======== ========= ========
</TABLE>
19
<PAGE> 20
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net cash provided by (used for) operating activities ... $ (9,609) $ 33,146 $ 1,454 $ 24,991
--------- -------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ........ (279,546) -- -- (279,546)
Contribution in joint venture ........................ (25) -- -- (25)
Proceeds from assets held for sale ................... -- 2,684 -- 2,684
Distribution of earnings from joint venture .......... 108 -- -- 108
Purchases of property and equipment .................. (1,268) (4,040) (6,141) (11,449)
--------- -------- --------- ---------
(280,731) (1,356) (6,141) (288,228)
--------- -------- --------- ---------
Cash flows from financing activities:
Net repayment of line of credit ...................... (10,000) -- -- (10,000)
Issuance of common stock ............................. 50,400 -- -- 50,400
Borrowings of long-term debt,
net of issuance costs ............................... 27,390 -- -- 27,390
Borrowings on credit facility,
net of issuance costs ............................... 191,843 -- -- 191,843
Principal payments on capital lease obligations ...... -- -- (504) (504)
Debt issuance costs .................................. (447) -- -- (447)
Other net activity with Parent ....................... 29,609 (33,034) 3,425 --
--------- -------- --------- ---------
Net cash provided by (used for) financing
activities......................................... 288,795 (33,034) 2,921 258,682
--------- -------- --------- ---------
Effect of exchange rate changes on cash ................ -- -- (46) (46)
--------- -------- --------- ---------
Net decrease in cash and cash equivalents .............. (1,545) (1,244) (1,812) (4,601)
Cash and cash equivalents, beginning of period ......... 1,545 (473) 4,307 5,379
--------- -------- --------- ---------
Cash and cash equivalents, end of period ............... $ -- $ (1,717) $ 2,495 $ 778
========= ======== ========= =========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Net cash provided by (used for) operating activities ... $ (32,073) $ 2,416 $ 21,241 $ (8,416)
--------- -------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ........ -- -- -- --
Contribution in joint venture ........................ -- -- -- --
Distribution of earnings from joint venture .......... 1,100 -- -- 1,100
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 .................. (2,170) (4,715) (12,736) (19,621)
--------- -------- --------- ---------
(369) (663) (11,595) (12,627)
--------- -------- --------- ---------
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 ............................... 15,063 -- -- 15,063
Principal payments on capital lease obligations ...... -- -- (139) (139)
Other net activity with Parent ....................... 16,378 (2,520) (13,858) --
--------- -------- --------- ---------
Net cash provided by (used for) financing
activities......................................... 31,441 (2,520) (13,997) 14,924
--------- -------- --------- ---------
Effect of exchange rate changes on cash ................ -- -- 113 113
--------- -------- --------- ---------
Net decrease in cash and cash equivalents .............. (1,001) (767) (4,238) (6,006)
Cash and cash equivalents, beginning of period ......... 192 795 5,660 6,647
--------- -------- --------- ---------
Cash and cash equivalents, end of period ............... $ (809) $ 28 $ 1,422 $ 641
========= ======== ========= =========
</TABLE>
20
<PAGE> 21
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 Notes to Consolidated
Financial Statements included herein, we issued $31.3 million of additional
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
21
<PAGE> 22
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
we 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.
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 SEPTEMBER 30, 2000 AND SEPTEMBER 30,
1999
Net Sales. Net sales for the third quarter of fiscal 2000, which ended September
30, 2000, were $116.3 million compared to $134.3 million for the third quarter
of fiscal 1999, which ended September 30, 1999. Excluding the impact of the pump
and industrial businesses, which were divested in the fourth quarter of 1999,
sales decreased approximately $6.1 million or 5.0% during the third quarter of
2000 versus 1999. The decrease was primarily due to lower shipments of home
environment products of approximately $8.3 million. Several of our larger
customers took their initial shipments of heaters and humidifiers in June of
2000, thereby reducing third quarter sales of these products. International
shipments increased by approximately $7.5 million in the third quarter of 2000
versus the third quarter of 1999, driven by sales in Mexico and in the Far East
due to increased sales by our motor manufacturing joint venture with General
Electric. Additionally, there was an increase in returns and allowances during
the quarter of approximately $3.7 million mainly due to seasonal returns of fans
associated with the cooler than normal temperatures during the summer. Kitchen
shipments were also down approximately $1.3 million during the third quarter of
2000 versus 1999. Shipments for the divested businesses in the third quarter of
2000 were $0.1 million pursuant to a supply agreement with the buyers, which
represented a decrease of approximately $11.8 million from the prior year.
Gross Profit. Gross profit for the third quarter of 2000 was $40.6 million
compared to $39.8 million for the third quarter of 1999, an increase of $0.8
million or 2.0%. Adjusting for the divested businesses and the amortization of
acquired profit in inventory in 1999 would result in gross profit of
approximately $38.1 million or 31.1% of net sales for the three months ended
September 30, 1999. The increase was primarily due to improved volume and
efficiencies in our Far East operations, higher margins in certain home
environment categories, increased international shipment volumes and reduced
domestic variances, partially offset by increased warehousing costs.
Selling Expenses. Selling expenses for the third quarter of 2000 were $15.9
million compared to $17.1 million for the third quarter of 1999, a decrease of
$1.2 million or 7.0%. As a percentage of net sales, selling expenses increased
to 13.7% for the third quarter of 2000 from 12.7% for the third quarter of 1999.
The primary cause of the expense decrease was the above mentioned decrease in
sales volume during the third quarter of 2000, causing freight on sales and
selling commissions to decline quarter to quarter. These were offset by an
increase in co-operative advertising with several of our larger customers.
General and Administrative Expenses. General and administrative expenses for the
third quarter of 2000 and 1999 were both $7.6 million. As a percentage of net
sales, general and administrative expenses increased to 6.5% for the third
quarter of 2000 from 5.7% for the third quarter of 1999 due to the decreased
sales volume in 2000. Integration costs related to the Rival acquisition
included in general and administrative expenses were approximately $0.4 million
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for the third quarter of 2000 and approximately $1.3 million for the third
quarter of 1999.
Product Development Expenses. Product development expenses for the third quarter
of 2000 and 1999 were both $2.8 million. The Company's expenditures in 2000,
which are in line with expenditures in 1999, relate to the development of a
number of new products in the home environment and kitchen product lines.
Interest and Other Expense, Net. Interest and other expense, net for the third
quarter of 2000 was $9.2 million compared to $8.6 million for the third quarter
of 1999, an increase of $0.6 million or 7.0%. A portion of the increase in
interest expense was due to higher interest rates during the third quarter of
2000 versus 1999. Also, our outstanding debt was higher during the third quarter
of 2000 than 1999.
Income Tax Expense. Our income tax expense increased to $3.2 million for the
three months ended September 30, 2000 from $0.6 million for the three months
ended September 30, 1999. We currently have losses in the United States that we
may not be able to carry forward to offset income in other parts of the world
taxed at lower rates, due to potential net operating loss carry forward
limitations mainly caused by interest expense.
Equity in Earnings from Joint Venture. The equity in earnings from our joint
venture with General Electric rose to $275,000 for the third quarter of 2000
versus none for the third quarter of 1999 due to increased shipments of motors
from our factory in the Far East.
Net Income. As a result of the foregoing factors, our net income for the third
quarter of 2000 was $1.6 million, compared to net income of $2.4 million in the
third quarter of 1999.
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
The financial statement amounts for the first nine months of fiscal 2000 set
forth below include nine months of Rival's operations, while (as required by
purchase accounting) the financial statement amounts for the first nine months
of fiscal 1999 include approximately eight months of Rival's operations, from
the acquisition on February 5, 1999 onward. We have also provided a number of
pro forma, full nine-month comparisons for the first nine months 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 nine months of fiscal 2000, which ended
September 30, 2000, were $357.0 million compared to $341.8 million for the first
nine months of fiscal 1999, which ended September 30, 1999, an increase of $15.2
million or 4.5%. Comparing the nine months ended September 30, 2000 to the pro
forma nine months ended September 30, 1999 and excluding the impact of the
divested pump and industrial businesses, sales increased approximately $28.0
million or 8.6%. The increase was primarily due to increased shipments of home
environment products of approximately $28.2 million. International shipments
also increased by approximately $17.1 million in the first nine months of 2000
versus the first nine months 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 nine months of approximately $12.2 million. Also
offsetting the increases was increased returns and allowances of approximately
$4.5 million. Shipments for the divested businesses in the first nine months of
2000 were $4.6 million pursuant to a supply agreement with the buyers, which
represented a decrease of approximately $35.2 million from the prior year pro
forma.
Gross Profit. Gross profit for the first nine months of 2000 was $106.4 million
compared to $96.1 million for the first nine months of 1999, an increase of
$10.3 million or 10.7%. Compared to the pro forma full nine month period ended
September
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30, 1999, gross profit increased approximately $5.3 million to 29.8% of net
sales for the first nine months of 2000 from 27.8% of net sales in 1999. The
nine 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 $109.5 million or 31.1% of net
sales and approximately $92.4 million or 28.5% of net sales for the nine months
ended September 30, 2000 and 1999, respectively. The increase was primarily due
to home environment sales volume, improved Far East performance and lower
unfavorable domestic manufacturing variances. These were partially offset by the
impact of lower kitchen electric sales volume and higher warehousing costs.
Selling Expenses. Selling expenses for the first nine months of 2000 were $50.8
million compared to $45.3 million for the first nine months of 1999, an increase
of $5.5 million or 12.1%. As a percentage of net sales, selling expenses
increased to 14.2% for the first nine months of 2000 from 13.3% for the first
nine months of 1999. Comparing the first nine months 2000 selling expenses to
the selling expenses of $48.9 million for the pro forma full nine months ended
September 30, 1999 would result in an increase of approximately $1.9 million, or
3.9%. 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 nine months of 2000 were $23.7 million compared to $21.6 million for the
first nine months of 1999, an increase of $2.1 million or 9.7%. For the pro
forma full nine months ended September 30, 1999 general and administrative
expenses were approximately $22.5 million, or 6.2% of pro forma net sales.
Approximately $0.9 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
$2.4 million for the first nine months of 2000 and approximately $3.3 million
for the first nine months of 1999.
Product Development Expenses. Product development expenses for the first nine
months of 2000 were $8.3 million compared to $7.5 million for the first nine
months of 1999, an increase of $0.8 million or 10.7%. Product development
expenses for the pro forma full nine months ended September 30, 1999 were
approximately $7.7 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 nine months of 2000 associated with the closing of the Fayetteville, NC
and Warrensburg, MO plants.
Interest and Other Expense, Net. Interest and other expense, net for the first
Nine months of 2000 was $27.7 million compared to $21.6 million for the first
nine months of 1999, an increase of $6.1 million or 28.2%. Approximately $3.6
million was due to an additional month of borrowing in 2000 related to the Rival
acquisition as well as higher interest rates and a higher debt level during the
first nine months 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 our
revolving 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). Income taxes increased to an expense of $2.6
million for the nine months ended September 30, 2000 from a benefit of $0.8
million for the nine months ended September 30, 1999. We currently have losses
in the United States that we may not be able to carry forward to offset income
in other parts of the world taxed at lower rates, due to potential net operating
loss carryforward limitations mainly caused by interest expense.
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Equity in Earnings from Joint Venture. The equity in earnings from our joint
venture with General Electric rose to $611,000 for the first nine months of 2000
versus $108,000 for the first nine months 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 nine months of 2000 was $8.5 million, compared to a net loss of $3.1
million in the first nine months of 1999.
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 (used for) operations for the nine months ended September 30,
1999 and 2000 was $25.0 million and $(8.4) million, respectively. Cash provided
by operations in the first nine months of 2000 primarily reflected a $48.5
million increase in inventory levels in anticipation of the higher sales in the
last quarter of the year. Also, levels of fan inventory are higher than in 1999
due to the number of returns associated with the cooler than normal summer
temperatures in the United States during 2000. A decrease in accounts receivable
levels of $31.0 million partially offset the inventory increase.
Cash used for investing for the nine months ended September 30, 1999 and 2000
was $288.2 million (reflecting the Rival acquisition) and $12.6 million,
respectively. Cash used for investing in the first nine months of 2000 reflected
capital expenditures of approximately $19.6 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 financing activities for the nine months ended September 30,
1999 and 2000 was $258.7 million and $14.9 million, respectively. Cash provided
by financing in the first nine months of 2000 reflected borrowings under the
Credit Facility to support operations. The cash provided by financing activities
in the first nine months 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 tranche A term loan of
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$40.0 million that matures February 5, 2005, a tranche B term loan of $85.0
million that matures February 5, 2007, and a $140.0 million revolving credit
facility that matures on February 5, 2005. 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 to cure a
default caused by costs and related impact from the purchase of a faulty
component. At September 30, 2000 the Company was in compliance with all of its
financial covenants. 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."
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," "will" and
similar expressions are intended to identify forward-looking statements. Various
economic and competitive factors could cause actual results or events to differ
materially from those discussed in such forward-looking statements, including
without limitation 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 recalls or
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 September 30, 2000, the carrying value of our debt totaled $360.3 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 September 30, 2000, the Company had fixed rate debt of $135.2 million
(including capital leases) and variable rate debt of $225.1 million. Holding
other variables constant (such as foreign exchange rates and debt levels), a one
percentage point decrease in interest rates would increase the unrealized fair
market value of fixed rate debt by approximately $6.7 million. Based on the
amounts of variable rate debt outstanding at September 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 $2.3
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 Tuesday, November 28, 2000 at
1 p.m., Eastern time, in order for investors and other stakeholders to hear
management's views on our results of operations during the third quarter ended
September 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 Judy Boyle, Executive Assistant, at 508-634-8771:
- 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: 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
November 20, 2000 By: /s/ Jordan A. Kahn
--------------------------------
Jordan A. Kahn, President,
Chief Executive Officer
(Principal Executive Officer)
November 20, 2000 By: /s/ Ira B. Morgenstern
--------------------------------
Ira B. Morgenstern,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
