<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 PRECEEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
<PAGE> 2
THE HOLMES GROUP, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONSOLIDATED BALANCE SHEET AT
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED) 3
CONSOLIDATED STATEMENT OF INCOME FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND
MARCH 31, 2000 (UNAUDITED) 4
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND
MARCH 31, 2000 (UNAUDITED) 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
PART II. OTHER INFORMATION 23
SIGNATURES 24
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HOLMES GROUP, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000 (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 6,647 $ 2,918
Accounts receivable, net of allowance of $9,046 and $9,338 respectively.. 142,264 106,983
Inventories ................................................................ 112,660 133,986
Prepaid expenses and other current assets .................................. 3,997 3,078
Deferred income taxes ...................................................... 11,877 11,866
Income taxes receivable .................................................... 7,852 7,852
-------- --------
Total current assets ..................................................... 285,297 266,683
Assets held for sale ....................................................... 2,434 1,733
Property and equipment, net ................................................ 54,348 57,273
Goodwill, net............................................................... 89,493 88,297
Deposits and other assets .................................................. 5,610 7,926
Debt issuance costs, net ................................................... 19,314 17,896
-------- --------
$456,496 $439,808
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations and other liabilities.......... $ 589 $ 632
Current portion of credit facility ......................................... 6,450 6,652
Accounts payable ........................................................... 26,433 38,475
Accrued expenses ........................................................... 36,256 32,935
Accrued income taxes ....................................................... 3,923 4,975
-------- --------
Total current liabilities ................................................ 73,651 83,669
Credit facility ................................................................ 203,625 178,511
Long-term debt ................................................................. 135,085 135,110
Other long-term liabilities..................................................... 4,054 5,066
Deferred income taxes .......................................................... 2,281 2,578
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value. Authorized 25,000,000 shares as of
December 31, 1999 and March 31, 2000; issued and outstanding
20,307,995 shares at December 31, 1999 and March 31, 2000 ................ 20 20
Additional paid in capital ................................................... 67,915 67,915
Accumulated other comprehensive income ....................................... 397 (226)
Treasury stock, at cost (18,620,450 shares) .................................. (62,058) (62,058)
Retained earnings ............................................................ 31,526 29,223
-------- --------
Total stockholders' equity ..................................... 37,800 34,874
-------- --------
$456,496 $439,808
======== ========
</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
MARCH 31, 1999 MARCH 31, 2000
<S> <C> <C>
Net sales ..................................................... $91,669 $116,168
Cost of goods sold ............................................ 64,748 80,804
------- -------
Gross profit ................................................ 26,921 35,364
------- -------
Operating expenses:
Selling ..................................................... 13,172 17,320
General and administrative .................................. 5,685 7,846
Product development ......................................... 2,219 2,805
Plant closing costs ......................................... 1,149 144
Amortization of goodwill and other intangible assets ........ 446 662
------- -------
Total operating expenses .................................. 22,671 28,777
------- -------
Operating profit .......................................... 4,250 6,587
------- -------
Other income and expense:
Interest and other expense, net ............................. 6,049 9,154
------- -------
Income (loss) before income taxes and equity in earnings
from joint venture .......................................... (1,799) (2,567)
Income tax expense (benefit) .................................. (338) (121)
Equity in earnings from joint venture ......................... 108 143
------- -------
Net income (loss) ......................................... $(1,353) $(2,303)
======= =======
</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>
THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 2000
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................................. $ (1,353) $ (2,303)
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization................................................ 3,890 4,188
Amortization of debt issuance costs and discounts............................ 629 1,444
Change in allowance for doubtful accounts.................................... 171 292
Loss on disposal of assets................................................... 6 --
Deferred income taxes........................................................ 7 (286)
Changes in operating assets and liabilities:
Accounts receivable........................................................ 21,854 34,689
Inventories................................................................ 6,056 (21,559)
Prepaid expenses and other current assets.................................. (223) 919
Deposits and other assets.................................................. 674 (4,009)
Accounts payable........................................................... (3,802) 12,042
Accrued expenses........................................................... 1,744 (3,321)
Accrued income taxes....................................................... (1,482) 1,052
--------- ---------
Net cash provided by operating activities.................................... 28,171 23,148
--------- ---------
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........... -- 2,757
Distribution of earnings from joint venture.................................... 108 764
Purchases of property and equipment............................................ (2,795) (6,451)
Cash received from joint venture partner, net.................................. -- 1,124
--------- ---------
Net cash used for investing activities....................................... (282,258) (1,806)
--------- ---------
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............................ 27,724 --
Borrowings (repayment) of credit facility, net of issuance costs............... 183,808 (24,912)
Debt issuance costs............................................................ -- --
Principal payments on capital lease obligations................................ (165) (69)
--------- ---------
Net cash provided by (used for) financing activities......................... 251,767 (24,981)
--------- ---------
Effect of exchange rate changes on cash.......................................... 11 (90)
--------- ---------
Net increase (decrease) in cash and cash equivalents............................. (2,309) (3,729)
Cash and cash equivalents, beginning of period................................... 5,379 6,647
--------- ---------
Cash and cash equivalents, end of period......................................... $ 3,070 $ 2,918
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest........................................................ $ 1,631 $ 4,726
Cash paid for (refund of) income taxes........................................ $ 1,623 $ (799)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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, personnel 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., Holmes Motor Corp. and Holmes Air
(Canada) Corp. The accompanying unaudited financial statements also include
the accounts of Rival's direct and indirect wholly-owned subsidiaries,
Bionaire International B.V., Patton Building Products, Inc., Patton
Electric Company, Inc., Patton Electric (Hong Kong) Limited, Rival Consumer
Sales Corporation, The Rival Company of Canada, Ltd., Rival de Mexico S.A.
de C.V. and Waverly Products Company, Ltd. and HPFEL's wholly-owned
subsidiaries, Esteem Industries Ltd., Raider Motor Corp., Dongguan Huixin
Electrical Products Company, Ltd., Holmes Products (Europe) Ltd., 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 $91.2 million and is being amortized
on a straight-line basis over 35 years.
In connection with the acquisition, THG recorded a restructuring reserve of
$6.4 million as an assumed liability in accordance with EITF 95-3,
"Recognition of Liabilities in Connection with a Purchase Business
Combination."
6
<PAGE> 7
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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 March 31, 2000, 106 of
these employees had been terminated. Severance for the remaining employees
will be paid during the remainder of fiscal 2000 when the facility closures
and office consolidations are completed.
Exit costs related to these restructuring plans are comprised primarily of
lease exit costs for Canada and Hong Kong and facility closure and exit
costs related to the Warrensburg facility. At December 31, 1999, the Hong
Kong consolidation was completed resulting in exit costs of $0.1 million.
The Montreal, Canada closure was completed as of March 31, 2000 resulting
in severance and relocation costs and exit costs of $0.2 million. Severance
costs related to the Warrensburg closure were $0.1 million as of March 31,
2000 and are expected to be completed during the remainder of fiscal 2000.
The reserve activity for fiscal 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
Employee Facility Total
Severance and Exit and Accrued
Relocation Costs Other Costs Restructuring
---------------- ----------- ------------
<S> <C> <C> <C>
Restructuring accrual
at February 5, 1999 $5,864 $563 $6,427
Cash payments made fiscal 1999 (1,647) (136) (1,783)
------ ---- ------
Balance at December 31, 1999 4,217 427 4,644
Cash payments made fiscal 2000 (992) (200) (1,192)
------ ---- ------
Balance at March 31, 2000 $3,225 $227 $3,452
</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 subsequent
to March 31, 2000. Proceeds from this sale were $1,595,000 net of selling
expenses. This transaction also resulted in no gain or loss. The estimated
fair value of this final property has been reflected in the March 31, 2000
balance sheet as assets held for sale. Additionally, non-recurring wind
down costs incurred during the quarter relating to this facility have been
included as plant closing costs in the consolidated statement of income for
the three months ended March 31, 2000.
Following the Rival acquisition, the Company divested two of Rival's
non-core business units. On October 8, 1999, the Company sold the assets of
Rival's sump and utility pump division for $11.4 million. The proceeds
received for the assets exceeded the net asset values recorded by $0.7
million. On December 21, 1999, the Company sold the assets of Rival's
industrial and building supply products businesses for proceeds of $9.7
million, net of contingent consideration of $2.7 million. The contingent
consideration may be earned during fiscal 2000 based on certain performance
metrics and actual final inventory counts. Excluding the contingent
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.
7
<PAGE> 8
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the first quarter of 2000, goodwill was decreased by $0.5 million to
reflect contingent consideration received during the quarter, net of
applicable costs and deferred taxes. Any additional contingent
consideration received will also be recorded as a decrease to goodwill as
the contingencies are resolved.
4. RECAPITALIZATION
On November 26, 1997, the Company and its stockholders consummated an
agreement to perform the following: (i) the stockholders of HPFEL
contributed their shares of common stock to THG in exchange for 2,750,741
shares of THG's common stock (ii) THG issued 4,718,579 shares of its
common stock to outside investors and certain executive officers of the
Company for approximately $15.5 million, net of related issuance costs,
(iii) the Company repaid all amounts outstanding to Pentland affiliates
and repaid all amounts outstanding on the Company's trade acceptances,
including accrued interest, and (iv) THG redeemed 18,620,450 shares of its
common stock held by Pentland for approximately $62.1 million. In
connection with these transactions, THG issued $105.0 million of 9 7/8%
Senior Subordinated Notes due in November 2007 and borrowed $27.5 million
under a new line of credit facility.
The transactions described above have been accounted for as a leveraged
recapitalization of the Company. The Company has retained its historical
cost basis of accounting, due to the significant minority shareholders
which remained. The shares redeemed from Pentland have been recorded as
treasury stock, at cost.
5. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation of
the Company's financial position as of March 31, 2000 and the Company's
results of operations and cash flows for the three months ended March 31,
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 month period ended March 31, 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 March 31, 2000
----------------- --------------
<S> <C> <C>
Finished goods $ 61,154,000 $ 85,249,000
Raw materials and Work-in-process 50,405,000 47,686,000
------------ ------------
111,559,000 132,935,000
LIFO allowance 1,101,000 1,051,000
------------ ------------
$112,660,000 $133,986,000
============ ============
</TABLE>
8
<PAGE> 9
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT
Senior Subordinated Notes
In connection with the recapitalization transactions described in Note 4
and the Rival acquisition described in Note 3, THG issued $105.0 million
and $31.3 million, respectively, in senior subordinated notes, maturing on
November 15, 2007 (the "Notes"). The Notes bear interest at 9 7/8%,
payable semi-annually on May 15 and November 15. No principal is due until
the maturity date.
The Notes are subordinated to the Company's other debt, including the
Credit Facility (as described below) and capital leases. The Notes are
guaranteed by THG's current and future domestic subsidiaries (see Note 12)
on a full, unconditional and joint and several basis, but are otherwise
unsecured.
THG can, at its option, redeem the Notes at any time after November 15,
2002, subject to a fixed schedule of redemption prices which declines from
104.9% to 100% of the face value. However, THG may redeem up to $43.3
million of the Notes prior to such date at a price of 109.875% of face
value upon issuance of equity securities. Additionally, upon certain sales
of stock or assets or a change of control of THG, THG must offer to
repurchase all or a portion of the Notes at a redemption price of 101% of
face value.
The Notes contain certain restrictions and covenants, including
limitations (based on certain financial ratios) on THG's ability to pay
dividends, repurchase stock or incur additional debt (other than
borrowings under the Credit Facility). The Notes and Credit Facility
contain cross-default provisions.
Credit Facility
The Company entered into an amended and restated Credit Facility agreement
in February, 1999 in connection with the Rival acquisition. The Credit
Facility consists of a six-year tranche A term loan of $40.0 million, an
eight-year tranche B term loan of $85.0 million and a $140.0 million,
six-year revolving credit facility. The Credit Facility bears interest at
variable rates based on either the prime rate or LIBOR, at the Company's
option, plus a margin which, in the case of the tranche A term loan and the
revolving credit facility, varies depending upon certain financial ratios
of the Company. The Credit Facility, and the guarantees thereof by the
Company's domestic subsidiaries, are secured by substantially all of the
Company's domestic and certain foreign assets. The Credit Facility and the
Notes Indentures include certain financial and operating covenants, which,
among other things, restrict the ability of the Company to incur additional
indebtedness, grant liens, make investments and take certain other actions.
The ability of the Company to meet its debt service obligations will be
dependent upon the future performance of the Company, which will be
impacted by general economic conditions and other factors. 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 March 31,2000
----------------- -------------
<S> <C> <C>
Credit Facility......................................... $210,075 $185,163
9 7/8% Senior Subordinated Notes, net of unamortized
discount of $1.2 million at December 31, 1999 and $1.1
million at March 31, 2000............................. 135,085 135,110
-------- --------
Total debt.............................................. 345,160 320,273
Less current maturities................................ 6,450 6,652
-------- --------
Long-term debt......................................... $338,710 $313,621
</TABLE>
9
<PAGE> 10
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective May 7, 1999 the Company entered into an interest rate collar
transaction agreement with its agent bank. The interest rate collar
consists of a cap rate of 6.5% and a floor rate of 4.62%. The one-time
premium payment for the collar was $225,000 and the agreement terminates
March 31, 2002. Quarterly on the last business day of March, June,
September and December beginning September 30, 1999 if the LIBOR interest
rate at the lending bank is greater than the cap rate, the lending bank
agrees to pay the Company a notional amount as described in the agreement
multiplied by the number of days in that quarter over 365 days times the
difference between the LIBOR rate and the cap rate. If on the other hand
the LIBOR rate is less than the floor rate, the Company would have to pay
the lending bank based on the same calculation. If the LIBOR rate is
between the cap and floor rate, no payments would be necessary by either
party. The LIBOR interest rate at March 31, 2000 was 6.28%.
8. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income consists of net earnings and foreign currency
translation adjustments as presented in the following table.
<TABLE>
<CAPTION>
Three months ended
(in thousands) March 31, 1999 March 31,2000
-------------- -------------
<S> <C> <C>
Net Earnings (loss).......................................... $(1,353) $ (2,303)
Foreign currency translation adjustments..................... (13) ( 623)
-------- --------
Comprehensive income (loss)................................ $(1,366) $ (2,926)
</TABLE>
9. BUSINESS SEGMENTS
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), during 1998. SFAS 131
established standards for reporting information about business segments in
annual financial statements. It also established standards for related
disclosures about products and services, major customers and geographic
areas. Business segments are defined as components of a business about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group,
in deciding how to allocate resources and in assessing performance. The
business segments are managed separately because each segment represents a
strategic business unit whose main business is entirely different. The
adoption of SFAS 131 did not affect the Company's results of operations or
financial position.
The Company manages its operations through four business segments: consumer
durables, industrial and building supply (industrial), international and
Far East. The consumer durables segment sells products including fans,
heaters, humidifiers, air purifiers, Crock-Pot (R) slow cookers, toasters,
ice cream freezers, can openers, showerheads, massagers, electric space
heaters and lighting products to retailers throughout the U.S. The consumer
durables segment is made up of home environment products and kitchen
electric products, which are considered one business segment due to the
similar customer base and distribution channels. The industrial segment
sells products including industrial fans and drum blowers, household
ventilation, ceiling fans, door chimes and electric heaters to electrical
and industrial wholesale distributors throughout the U.S. The international
segment sells the Company's products outside the U.S. The Far East segment
is the manufacturing and sourcing operation located primarily at HPFEL.
10
<PAGE> 11
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For disclosure purposes the 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-month periods ended March 31, 2000 and
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Consumer Consolidated
Durables Far East Other Eliminations Total
-------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
March 2000
- ----------
Net sales ....................... $100,438 $58,785 $11,804 $(54,859) $ 116,168
Operating income(loss) .......... 1,629 6,275 (1,347) 30 6,587
March 1999
- ----------
Net sales ....................... $80,333 $32,530 $ 9,158 $(30,352) $ 91,669
Operating income(loss) .......... 270 4,673 (493) (200) 4,250
</TABLE>
The following information is summarized by geographic area (in thousands):
<TABLE>
<CAPTION>
Other Consolidated
United States Far East International Total
------------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales:
Three months ended March 31, 2000 ........................ $ 103,625 $ 3,926 $ 8,617 $116,168
Three months ended March 31, 1999 ........................ 83,767 2,178 5,724 91,669
Identifiable assets:
March 31, 2000 ........................................... 35,214 22,935 857 59,006
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 that
originated 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.
10. CONTINGENCIES
The Company is involved in litigation and is the subject of claims arising
in the normal course of its business. In the opinion of management, based
upon discussions with legal counsel, no existing litigation or claims will
have a materially adverse effect on the Company's financial position or
results of operations and cash flows.
11
<PAGE> 12
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
12. CONDENSED CONSOLIDATING INFORMATION
The senior subordinated notes described in Note 7 were issued by THG and
are guaranteed by Rival and its three domestic subsidiaries and Holmes
Manufacturing Corp. ("Manufacturing"), Holmes Motor Corp. ("Motor") and
Holmes Air (Taiwan) Corp. ("Taiwan"), but are not guaranteed by THG's other
subsidiaries, HPFEL and Holmes Air (Canada) Corp. ("Canada"), or Rival's
five foreign subsidiaries. The guarantor subsidiaries are directly or
indirectly wholly-owned by 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 non-guarantor foreign subsidiaries),
Manufacturing, Motor and Taiwan, the guarantor subsidiaries, and (iii)
HPFEL and Canada, the non-guarantor subsidiaries. There were no
transactions between Rival, Manufacturing, Motor and Taiwan, or between
HPFEL and Canada, during any of the periods presented. Taiwan had no
revenues or operations during the periods presented, and Manufacturing
ceased operations in March 1997. As further described in Note 15 of the
Company's audited financial statements for the year ended December 31,
1999, included in the Company's Form 10-K, as amended, as filed with the
Securities and Exchange Commission, certain of HPFEL's subsidiaries in
China have restrictions on distributions to their parent companies.
12
<PAGE> 13
CONSOLIDATING BALANCE SHEET DECEMBER 31, 1999 (IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 192 $ 795 $ 5,660 -- $ 6,647
Accounts receivable, net........ 47,610 77,636 17,018 -- 142,264
Inventories..................... 45,518 47,993 23,899 $ (4,750) 112,660
Prepaid expenses and other
current assets............... 2,154 45 1,798 -- 3,997
Deferred income taxes........... 5,134 5,748 995 -- 11,877
Income taxes receivable......... -- 7,852 -- -- 7,852
Due from affiliates............. 230,256 89 20,721 (251,066) --
-------- ------- ------- -------- --------
Total current assets......... 330,864 140,158 70,091 (255,816) 285,297
-------- -------- ------- -------- --------
Assets held for sale.............. 701 1,733 -- -- 2,434
Property and equipment, net....... 3,440 30,127 20,791 (10) 54,348
Goodwill, net.................... -- 87,498 1,995 -- 89,493
Deferred income taxes............. -- -- -- -- --
Deposits and other assets......... 24,386 2,267 571 (2,300) 24,924
Investments in consolidated
subsidiaries.................... 40,898 -- -- (40,898) --
-------- -------- ------- -------- --------
$400,289 $261,783 $ 93,448 $(299,024) $456,496
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease
obligations and other debt... $ -- $ -- $ 589 -- $ 589
Current portion of
credit facility.............. 6,450 -- -- -- 6,450
Accounts payable................. 5,395 1,335 22,003 $ (2,300) 26,433
Accrued expenses................. 11,304 20,626 4,326 -- 36,256
Accrued income taxes............. (2,518) 3,028 3,413 -- 3,923
Due to affiliates................ 3,148 228,861 19,057 (251,066) --
-------- -------- ------- -------- --------
Total current liabilities.... 23,779 253,850 49,388 (253,366) 73,651
-------- -------- ------- -------- --------
Credit facility................... 203,625 -- -- -- 203,625
-------- -------- ------- -------- --------
Long-term debt.................... 135,085 -- -- -- 135,085
-------- -------- ------- -------- --------
Other long-term liabilities....... -- -- 4,054 -- 4,054
-------- -------- ------- -------- --------
Deferred income taxes............. -- 2,281 -- -- 2,281
-------- -------- ------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value... 20 2 -- (2) 20
Common stock, $1 par value...... -- -- 100 (100) --
Additional paid in capital...... 67,915 -- -- -- 67,915
Accumulated other comprehensive
income....................... 397 -- 397 (397) 397
Treasury stock.................. (62,058) -- -- -- (62,058)
Retained earnings............... 31,526 5,650 39,509 (45,159) 31,526
-------- -------- ------- -------- --------
Total stockholders' equity
(deficit).................. 37,800 5,652 40,006 (45,658) 37,800
-------- -------- ------- -------- --------
$400,289 $261,783 $ 93,448 $(299,024) $456,496
======== ======== ======= ======== ========
</TABLE>
13
<PAGE> 14
CONSOLIDATING BALANCE SHEET MARCH 31, 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....... $ 102 $ 699 $ 2,117 -- $ 2,918
Accounts receivable, net........ 50,065 43,510 13,408 -- 106,983
Inventories..................... 46,616 66,360 25,760 $ (4,750) 133,986
Prepaid expenses and other
current assets............... 2,362 146 570 -- 3,078
Deferred income taxes........... 5,300 6,352 214 -- 11,866
Income taxes receivable......... -- 7,852 -- -- 7,852
Due from affiliates............. 205,242 89 35,491 (240,822) --
-------- -------- -------- --------- --------
Total current assets......... 309,687 125,008 77,560 (245,572) 266,683
-------- -------- -------- --------- --------
Assets held for sale.............. -- 1,733 -- -- 1,733
Property and equipment, net....... 4,101 29,380 23,792 -- 57,273
Goodwill, net..................... -- 86,355 1,942 -- 88,297
Deferred income taxes............. -- -- -- -- --
Deposits and other assets......... 23,497 2,277 2,948 (2,900) 25,822
Investments in consolidated
subsidiaries.................... 44,644 -- -- (44,644) --
-------- -------- -------- --------- --------
$381,929 $244,753 $106,242 $(293,116) $439,808
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease
obligations and other debt... $ -- $ -- $ 632 -- $ 632
Current portion of
credit facility.............. 6,652 -- -- -- 6,652
Accounts payable................. 2,403 8,446 30,526 $ (2,900) 38,475
Accrued expenses................. 13,411 15,703 3,821 -- 32,935
Accrued income taxes............. (1,485) 3,404 3,056 -- 4,975
Due to affiliates................ 12,453 210,473 17,896 (240,822) --
-------- -------- -------- --------- --------
Total current liabilities.... 33,434 238,026 55,931 (243,722) 83,669
-------- -------- -------- --------- --------
Credit facility................... 178,511 -- -- -- 178,511
-------- -------- -------- --------- --------
Long-term debt.................... 135,110 -- -- -- 135,110
-------- -------- -------- --------- --------
Other long-term liabilities....... -- -- 5,066 -- 5,066
-------- -------- -------- --------- --------
Deferred income taxes............. -- 2,578 -- -- 2,578
-------- -------- -------- --------- --------
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....................... (226) -- (226) 226 (226)
Treasury stock.................. (62,058) -- -- -- (62,058)
Retained earnings............... 29,223 4,147 45,371 (49,518) 29,223
-------- -------- -------- --------- --------
Total stockholders' equity
(deficit).................. 34,874 4,149 45,245 (49,394) 34,874
-------- -------- -------- --------- --------
$381,929 $244,753 $106,242 $(293,116) $439,808
======== ======== ======== ========= ========
</TABLE>
14
<PAGE> 15
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 1999 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ............................... $48,063 $40,233 $33,725 $(30,352) $91,669
Cost of goods sold ...................... 38,274 29,881 26,745 (30,152) 64,748
------- ------- ------- -------- -------
Gross profit .......................... 9,789 10,352 6,980 (200) 26,921
------- ------- ------- -------- -------
Operating expenses:
Selling ............................... 6,498 6,252 422 -- 13,172
General and administrative ............ 1,936 1,737 2,012 -- 5,685
Product development ................... 1,639 562 18 -- 2,219
Plant closing costs ................... -- 1,149 -- -- 1,149
Amortization of goodwill and other
intangible assets ................... -- 446 -- -- 446
------- ------- ------- -------- -------
Total operating expenses ............ 10,073 10,146 2,452 -- 22,671
------- ------- ------- -------- -------
Operating profit (loss) ............. (284) 206 4,528 (200) 4,250
------- ------- ------- -------- -------
Other (income) and expense:
Interest and other
(income) expense, net ................. 6,596 (86) (461) -- 6,049
------- ------- ------- -------- -------
Income (loss) before income taxes,
equity in income of consolidated
subsidiaries and equity in
earnings from joint venture ........... (6,880) 292 4,989 (200) (1,799)
Equity in earnings from joint venture... 108 -- -- -- 108
Income tax expense (benefit) ............ (747) 216 193 -- (338)
------- ------- ------- -------- -------
Income (loss) before equity in income of
consolidated subsidiaries ............. (6,025) 76 4,796 (200) (1,353)
Equity in income of
consolidated subsidiaries ............. 4,672 -- -- (4,672) --
------- ------- ------- -------- -------
Net income (loss) ....................... $(1,353) $ 76 $ 4,796 $ (4,872) $(1,353)
======= ======= ======= ======== =======
</TABLE>
15
<PAGE> 16
CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 2000 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales..................... $ 63,386 $ 40,239 $ 67,402 $ (54,859) $116,168
Cost of goods sold............ 48,139 31,524 56,030 (54,889) 80,804
-------- -------- -------- --------- --------
Gross profit (loss)......... 15,247 8,715 11,372 30 35,364
-------- -------- -------- --------- --------
Operating expenses:
Selling..................... 8,308 6,842 2,170 -- 17,320
General and
administrative........... 2,307 2,426 3,113 -- 7,846
Product development......... 2,147 658 -- -- 2,805
Plant closing costs......... -- 144 -- -- 144
Amortization of goodwill and
other intangible
assets................... -- 646 16 -- 662
-------- -------- -------- --------- --------
Total operating expenses.... 12,762 10,716 5,299 -- 28,777
-------- -------- -------- --------- --------
Operating profit (loss)..... 2,485 (2,001) 6,073 30 6,587
-------- -------- -------- --------- --------
Other income and expense:
Other (income) expense,
net...................... (3) 98 (403) -- (308)
Interest and other expense,
net...................... 9,522 (51) (9) -- 9,462
-------- -------- -------- --------- --------
Total other (income)
expense................ 9,519 47 (412) -- 9,154
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of and equity in earnings
from joint venture.......... (7,034) (2,048) 6,485 30 (2,567)
Equity in earnings from joint
venture..................... 143 -- -- -- 143
Income tax expense
(benefit)................... (199) (545) 623 -- (121)
-------- -------- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries................ (6,692) (1,503) 5,862 30 (2,303)
Equity in income of
consolidated subsidiaries... 4,389 -- -- (4,389) --
-------- -------- -------- --------- --------
Net income (loss)............. $ (2,303) $ (1,503) $ 5,862 $ (4,359) $ (2,303)
======== ======== ======== ========= ========
</TABLE>
16
<PAGE> 17
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Net cash provided by operating activities ................. $ 13,469 $ 20,017 $ (5,315) $ 28,171
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ........... (279,546) -- -- (279,546)
Contribution in joint venture ........................... (25) -- -- (25)
Distribution of earnings from joint venture ............. 108 -- -- 108
Purchases of property and equipment ..................... (323) (1,204) (1,268) (2,795)
--------- --------- --------- ---------
(279,786) (1,204) (1,268) (282,258)
--------- --------- --------- ---------
Cash flows from financing activities:
Net repayment of line of credit ......................... (10,000) -- -- (10,000)
Issuance of common stock ................................ 50,400 -- -- 50,400
Borrowings of long-term debt,
net of issuance costs ................................... 27,724 -- -- 27,724
Borrowings on credit facility,
net of issuance costs ................................... 183,808 -- -- 183,808
Principal payments on capital lease obligations ......... -- -- (165) (165)
Other net activity with Parent .......................... 13,987 (18,813) 4,826 --
--------- --------- --------- ---------
Net cash used for financing activities ................ 265,919 (18,813) 4,661 251,767
--------- --------- --------- ---------
Effect of exchange rate changes on cash ................... 11 -- -- 11
--------- --------- --------- ---------
Net increase in cash and cash equivalents ................. (387) -- (1,922) (2,309)
Cash and cash equivalents, beginning of period ............ 1,545 -- 3,834 5,379
--------- --------- --------- ---------
Cash and cash equivalents, end of period .................. $ 1,158 $ -- $ 1,912 $ 3,070
========= ========= ========= =========
THREE MONTHS ENDED MARCH 31, 2000
Net cash provided by operating activities ................. $ (14,034) $ 22,276 $ 14,906 $ 23,148
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ........... -- -- -- --
Contribution in joint venture ........................... -- -- -- --
Distribution of earnings from joint venture ............. 764 -- -- 764
Cash received from joint venture partner ................ -- -- 1,124 1,124
Proceeds from assets held for sale
And business divestitures ............................. 701 2,056 -- 2,757
Purchases of property and equipment ..................... (1,115) (783) (4,553) (6,451)
--------- --------- --------- ---------
350 1,273 (3,429) (1,806)
--------- --------- --------- ---------
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 ................................... (24,912) -- -- (24,912)
Principal payments on capital lease obligations ......... -- -- (69) (69)
Other net activity with Parent .......................... 38,506 (23,645) (14,861) --
--------- --------- --------- ---------
Net cash used for financing activities ................ 13,594 (23,645) (14,930) (24,981)
--------- --------- --------- ---------
Effect of exchange rate changes on cash ................... -- -- (90) (90)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...... (90) (96) (3,543) (3,729)
Cash and cash equivalents, beginning of period ............ 192 795 5,660 6,647
--------- --------- --------- ---------
Cash and cash equivalents, end of period .................. $ 102 $ 699 $ 2,117 $ 2,918
========= ========= ========= =========
</TABLE>
17
<PAGE> 18
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 drug store 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.
18
<PAGE> 19
On February 5, 1999 Holmes completed its acquisition of Rival. In connection
with the acquisition, as described in Note 3 of the Company's Notes to
Consolidated Financial Statements included herein, we issued $31.3 million of
senior subordinated notes due in November 2007, bearing interest at 9 7/8%, and
amended and restated our existing $100 million credit facility to have a total
availability of $325 million. We also sold $50 million of common stock in a
private placement to investment funds affiliated with Berkshire Partners LLC
(Holmes' majority shareholder), and to members of management and certain other
co-investors. The initial borrowings under the credit facility, together with
the net proceeds of the equity investment and the offering of the Notes, were
used to consummate the Rival acquisition, refinance Rival's then existing
indebtedness, and pay the fees and expenses of the transaction.
Holmes had completed a recapitalization transaction in November 1997, in which
it issued $105 million of senior subordinated notes due in November 2007,
bearing interest at 9 7/8%, and entered into a $100 million line of credit
facility, of which approximately $27.5 million was initially drawn. The proceeds
of these borrowings were used to repay all existing indebtedness (primarily a
line of credit and other current debt facilities) and redeem a significant
portion of the previous majority shareholder's common stock.
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 MARCH 31, 2000 AND MARCH 31, 1999
The financial statement amounts for the first quarter of fiscal 2000 set forth
below include three months of Rival's operations, while (as required by purchase
accounting) the financial statement amounts for the first quarter of fiscal 1999
include approximately two months of Rival's operations, from the acquisition on
February 5, 1999 onward. We have also provided a number of full pro forma,
three-month comparisons for the first quarter 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 quarter of fiscal 2000, which ended March 31,
2000, were $116.2 million compared to $91.7 million for the first quarter of
fiscal 1999, which ended March 31, 1999, an increase of $24.5 million or 26.7%.
Comparing the quarter ended March 31, 2000 to the pro forma quarter ended March
31, 1999 (including Rival's results for the full three month period of 1999)
would result in an increase in net sales of approximately $2.1 million or 1.8%.
Excluding the impact of the divested pump and industrial businesses, sales
increased approximately $10.5 million or 10.3%. This increase was primarily due
to increased sales of home environment products of approximately $12.0 million,
with fan sales making up approximately two-thirds of the increase. International
sales also increased by approximately $3.5 million in the first quarter of 2000
versus the first quarter of 1999, driven by sales Mexico and in the Far East due
to increased sales in our motor joint venture with General Electric. Discounts
and seasonal returns in the first quarter of 2000 also decreased and contributed
to the net sales increase during the quarter. Partially offsetting these
increases was a decrease in sales of kitchen electric products during the
quarter of approximately $6.0 million, and a change in the treatment of returns
which represented approximately $2.0 million in additional kitchen decrease.
Sales for the divested businesses in the first quarter of 2000 were $3.2 million
pursuant to a supply agreement with the buyers, which represented a decrease of
approximately $8.4 million from the prior year pro forma.
Gross Profit. Gross profit for the first quarter of 2000 was $35.4 million
compared to $26.9 million for the first quarter of 1999, an increase of $8.5
million or 31.6%. Compared to the pro forma three month period ended March 31,
1999, gross profit increased approximately $3.4 million to 30.4% of net sales
for the first quarter 2000 from 28.0% of net sales in 1999. Adjusted for the
divested businesses, gross profit was 31.3% of net sales for the first quarter
of 2000 versus 27.9% of net sales for the pro forma first quarter of 1999. The
increase was largely due to home environment volume, mix and increased warehouse
sales, particularly from the West Coast. Margins on kitchen electrics were up
slightly, and domestic manufacturing variances were down versus the comparable
prior year period.
Selling Expenses. Selling expenses for the first quarter of 2000 were $17.3
million compared to $13.2 million for the first quarter of 1999, an increase of
$4.1 million or 31.1%. As a percentage of net sales, selling expenses increased
to 14.9% for the first quarter of 2000 from 14.4% for the first quarter of 1999.
Comparing the first quarter 2000 selling expenses of $17.3 million to the
selling expenses of $16.8 million for the full three months ended March 31, 1999
would result in an increase of approximately $.5 million for the quarter, or 3%.
A component of the increase was increased shipping costs due to fuel
surcharges by truckers. 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.
19
<PAGE> 20
General and Administrative Expenses. General and administrative expenses for the
first quarter of 2000 were $7.8 million compared to $5.7 million for the first
quarter of 1999, an increase of $2.1 million or 36.8%. As a percentage of net
sales, general and administrative expenses increased to 6.8% for the first
quarter of 2000 from 6.2% for the first quarter of 1999. For the full three
months ended March 31, 1999 general and administrative expenses were
approximately $6.7 million, or 5.9%. Approximately two thirds 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 $.6 million for the first quarter of 2000 and
approximately $.7 million for the first quarter of 1999.
Product Development Expenses. Product development expenses for the first
quarter of 2000 were $2.8 million compared to $2.2 million for the first
quarter of 1999, an increase of $.6 million or 27.3%. Product development
expenses for the full three months ended March 31, 1999 were also approximately
$2.2 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 $0.1 million in plant closing costs in the
first quarter associated with the closing of the Fayetteville plant. The
Fayetteville plant was sold subsequent to March 31, 2000.
Interest and Other Expense, Net. Interest and other expense, net for the first
quarter of 2000 was $9.2 million compared to $6.0 million for the first quarter
of 1999, an increase of $3.2 million or 53.3%. The increase in interest expense
was primarily due to one additional month of Rival related acquisition debt
during the first quarter of 2000. Other expense (income) was primarily
miscellaneous income from the sale of scrap and approximated $.3 million in
each of the quarters ending March 31, 2000 and 1999.
Income Tax Expense (Benefit). The income tax benefit decreased to $0.1 million
for the three months ended March 31, 2000 from $0.3 million for the three months
ended March 31, 1999. This reduction was due to the Company using a 5% effective
world wide tax rate for 2000 versus a 20% rate for 1999. This was due to the
losses experienced in the U.S. creating benefits at higher rates than the
foreign income taxed at lower rates.
Equity in Earnings from Joint Venture. The equity in earnings from our joint
venture with General Electric rose to $143,000 for the first quarter of 2000
versus $108,000 for the first 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 loss for the first
quarter of 2000 was $2.3 million, compared to a net loss of $1.4 million in the
first quarter 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 operations for the three months ended March 31, 1999 and 2000
was $28.2 million and $23.1 million, respectively. Cash provided by operations
in the first quarter of 2000 primarily reflected a $34.7 million decrease in
accounts receivable levels as heavy cash collection activity typically follows
the seasonally higher sales activity during the fourth quarter of the fiscal
year. To a lesser extent, the decrease was due to an increase in shipments to
customers from our manufacturing facilities in the Far East, which are generally
paid on faster terms than shipments from the Company's U.S. warehouses. Accounts
payable levels also
20
<PAGE> 21
increased approximately $12.0 million in the first quarter of 2000, due to
increased production in our manufacturing facilities in the Far East. These
increases were offset by an increase in inventory of approximately $21.6
million.
Cash used for investing for the three months ended March 31, 1999 and 2000 was
$282.3 million (reflecting the Rival acquisition) and $1.8 million,
respectively. Cash used for investing in the first quarter of 2000 reflected
capital expenditures of approximately $6.5 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. The
Company also received additional cash from its joint venture partner.
Cash provided by (used for) financing activities for the three months ended
March 31, 1999 and 2000 was $251.8 million and $(25.0) million, respectively.
Cash used for financing in the first quarter of 2000 reflected repayments of the
credit facility using cash flows from operations. The cash provided by financing
activities in the first quarter of 1999 reflected the issuance of debt
associated with the Rival acquisition.
We issued $105.0 million of 97/8% 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 (the "Credit Facility") with a syndicate of
banks in February, 1999. The Credit Facility amended and restated our prior
$100.0 million credit facility. The Credit Facility consists of a six-year
tranche A term loan of $40.0 million, an eight-year tranche B term loan of $85.0
million and a $140.0 million, six-year revolving credit facility. The Credit
Facility bears interest at a variable rate based on either the prime rate or
LIBOR, at our option, plus a margin which, 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, 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."
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. We
have not experienced any material Year 2000 problems subsequent to the date
change on January 1, 2000.
The cost of Year 2000 modifications to our information technology systems was
approximately $320,000 which was incurred in fiscal 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 will be expensed in 2000.
21
<PAGE> 22
FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
quarterly report, are or may be forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "intends," "expects," and similar
expressions are intended to identify forward-looking statements. Various
economic and competitive factors could cause actual results or events to differ
materially from those discussed in such forward-looking statements, including
without limitation, our degree of leverage, our dependence on major customers
and key personnel, competition, risks associated with foreign manufacturing,
risks of the retail industry, potential product liability claims, the cost of
labor and raw materials and the other factors which are discussed in our most
recent Registration Statement on Form S-4 (File No. 333-77905), and from time to
time in our reports filed with the Securities and Exchange Commission.
Accordingly, such forward-looking statements do not purport to be predictions of
future events or circumstances and may not be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2000, the carrying value of our debt totaled $320.3 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 March 31, 2000, the Company had fixed rate debt of $135.2 million (including
capital leases) and variable rate debt of $185.2 million. Holding other
variables constant (such as foreign exchange rates and debt levels), a one
percentage point decrease in interest rates would increase the unrealized fair
market value of fixed rate debt by approximately $7.1 million. Based on the
amounts of variable rate debt outstanding at December 31, 1999, the earnings and
cash flows impact, net of taxes, for the next year resulting from a one
percentage point increase in interest rates would be approximately $1.2 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.
22
<PAGE> 23
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
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits: 27.1 Financial Data Schedule
b. Reports on Form 8-K:
Not applicable
23
<PAGE> 24
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
May 12, 2000 By: /s/ Jordan A. Kahn
--------------------------------
Jordan A. Kahn, President,
Chief Executive Officer
(Principal Executive Officer)
May 12, 2000 By: /s/ Ira B. Morgenstern
--------------------------------
Ira B. Morgenstern,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24
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