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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBERS:
333-44473
333-77905
THE HOLMES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2768914
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
233 FORTUNE BOULEVARD, MILFORD, MASSACHUSETTS 01757
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) 634-8050
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
TITLE OF CLASS: NOT APPLICABLE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE: NOT APPLICABLE
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THE HOLMES GROUP, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
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PART I.
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 16
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 50
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 50
Item 11. Executive Compensation...................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 53
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 54
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
report, are or may be forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. Various economic and
competitive factors could cause actual results or events to differ materially
from those discussed in such forward-looking statements, including without
limitation, our degree of leverage, our dependence on major customers and key
personnel, the integration of the Rival acquisition, as described herein,
competition, risks associated with foreign manufacturing, risks of the retail
industry, potential product liability claims, the cost of labor and raw
materials and the other factors which are described in our most recent
Registration Statement on Form S-4 (File No. 333-77905), our Current Reports on
Form 8-K (filed February 10, 1999, October 12, 1999 and January 13, 2000), and
from time to time in our other periodic reports filed with the Securities and
Exchange Commission. Accordingly, such forward-looking statements do not purport
to be predictions of future events or circumstances and may not be realized.
PART I
ITEM 1. BUSINESS
GENERAL
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. Home environment products, in the aggregate, accounted
for approximately 56% of our net sales for the fiscal year ended December 31,
1999. Our kitchen appliances include Crock-Pot(R) slow cookers, can openers, ice
cream freezers and other similar small kitchen electric appliances where we hold
the number one or two market share. Kitchen appliances accounted for
approximately 36% of our net sales for fiscal 1999. 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), 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. Major customers in these channels include
Wal-Mart, Kmart, Target, Home Depot, Costco, BJ's Wholesale Club, TruServ
(formerly True Value and ServiStar) and Walgreens. 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.
Holmes was founded in 1982 by our Chief Executive Officer, Jordan A. Kahn,
an innovator in the home environment market with over 30 years of industry
experience. Holmes opened its first manufacturing facility in China in 1989, and
currently operates two facilities in China where we manufacture many of our
products and electric motors for use in our products. We also currently operate
five manufacturing facilities in the United States. Our Warrensburg, Missouri
facility will be closing during 2000. Our vertically integrated manufacturing
facilities provide control over the production process and product quality.
These facilities also enhance operational flexibility and allow us to quickly
respond to changes in consumer demand and to specialized production needs. We
maintain distribution facilities in the United States, Canada and Europe, as
well as offices in Hong Kong and Taiwan that are responsible for sourcing raw
materials, processing orders and shipping the Company's products from the
Chinese factories. We coordinate product development, marketing, sales and
distribution from our Milford, Massachusetts headquarters.
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Our principal executive offices are located at 233 Fortune Boulevard,
Milford, Massachusetts 01757. Our telephone number is (508) 634-8050 and our
corporate web site is located at www.theholmesgroup.com.
THE RIVAL COMPANY ACQUISITION
On February 5, 1999, we completed our acquisition of The Rival Company
("Rival"), a leading developer, manufacturer and marketer of a variety of
products including small kitchen, home environment and personal care appliances.
In connection with this acquisition, we issued $31.3 million of senior
subordinated notes due in November 2007, bearing interest at 9 7/8% (the
"Notes"), and amended and restated our existing $100.0 million credit facility
to provide for a total availability of $325.0 million. We also sold $50.0
million of common stock in a private placement to investment funds affiliated
with Berkshire Partners LLC (Holmes' majority shareholder), and to members of
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.
Prior to the Rival acquisition, in November 1997, Holmes and Berkshire
Partners completed a recapitalization transaction in which we issued $105.0
million of Notes and entered into the $100.0 million line of credit facility, of
which approximately $27.5 million was initially drawn. The proceeds of these
borrowings were used to repay our then existing indebtedness 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 in February 1999 further increased our indebtedness and interest
expense substantially.
Our results of operations and balance sheet included herein reflect the
acquisition of Rival, in accordance with purchase accounting, from the
consummation of the acquisition. Accordingly, Rival's larger size relative to
Holmes significantly influences comparisons between periods before and after the
Rival acquisition.
Following the Rival acquisition, we made two strategic divestitures of
certain of Rival's non-core business units. On October 8, 1999, we sold the
assets of Rival's sump and utility pump division, which accounted for net sales
of approximately $19.0 million during the twelve months ended June 30, 1999. On
December 21, 1999, we sold the assets of Rival's industrial and building supply
products businesses, which accounted for net sales of approximately $25.0
million during the twelve months ended October 31, 1999. Net proceeds from these
divestitures were approximately $21.1 million and resulted in an increase in
goodwill of approximately $4.7 million. The Company may receive up to an
additional $2.7 million in connection with the industrial and building supply
divestiture during the year ended December 31, 2000 as additional consideration
for certain performance obligations of the Company.
Our ability to achieve revenue enhancements and recognize cost savings from
the Rival acquisition will depend to a significant extent on our ability to
continue to integrate Rival's operations, as well as other factors including
competition, labor and materials costs, and the general retail environment. In
furtherance of our strategic objectives, we may from time to time engage in
discussions regarding mergers, acquisitions, divestitures of other non-core
assets, or other business combination transactions within the consumer products
industry.
BUSINESS STRATEGY
Our strategy is to capitalize on our core strengths to achieve further
growth in net sales, profitability and cash flow by: (1) growing Rival's core
kitchen franchise, (2) further growth of the multibrand home environment product
lines (Holmes(R), Bionaire(R), Pollenex(R), Patton(R), Titan(R) and Family
Care(R)) (3) penetrating new and existing distribution channels, (4) improving
our overall cost structure and (5) expanding geographically. We believe an
important challenge in the year ahead will be the continued integration of
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Rival's operations in order to capitalize on the full potential of the
acquisition. We intend to pursue the following initiatives as part of our
strategy:
Strengthen the Kitchen Franchise. Rival's long-standing reputation as a
leader in the small kitchen appliance market has added a strong, complementary
business to our home environment product line. We are the leading manufacturer
and marketer of slow cookers through Rival's Crock-Pot(R) brand, and enjoy a
leading market share in can openers and ice cream freezers. We intend to
leverage our expertise in product innovation, manufacturing, marketing and
distribution to further strengthen our kitchen franchise.
Leverage and Grow Brands. The addition of Rival's home environment brands
has allowed us to increasingly differentiate our home comfort offerings among
customers and consumers. Through these additional brands, such as Bionaire(R),
the Company can offer a step-up brand strategy for increased presence in high
end distribution channels.
Further Penetrate Existing Distribution Channels. We believe that we can
further penetrate our existing distribution channels as a result of favorable
industry dynamics and our strong relationships and execution with mass merchant
retailers. Management believes that mass merchants will continue to consolidate
their vendor base and focus on a smaller number of sophisticated suppliers that
can (1) provide a broad array of differentiated, quality products, (2)
efficiently and consistently fulfill logistical requirements and volume demands
and (3) provide full product support from design to category management,
point-of-sale and after-market service with the consumer. We work closely with
key customers such as Wal-Mart, where we have been selected to design and
produce home environment and selected kitchen products for the GE branded
product program.
Develop New Distribution Channels. We continue to develop new channels of
distribution by providing customized product offerings that appeal to the
specific needs of each channel. For example, since 1996, we have marketed
selected products through an arrangement with the QVC electronic retailing
network. We have begun to partner with internet based electronic retailers to
distribute a broad array of our products. We also have developed unique brands
and product offerings to further penetrate the national chain drug stores.
Develop Our Brand Portfolio. We believe our wide portfolio of brands
allows us to increase market share by penetrating new segments of distribution
as well as expand shelf share in existing channels. Our brand development
focuses on both consumer brand awareness vehicles as well as the development of
new technologies and feature enhancements unique to these brands.
Improve the Overall Cost Structure. Through our manufacturing facilities
in China and related Far East sourcing capabilities, we have the ability to be a
low-cost, high quality, flexible producer of appliance products. By applying
these capabilities to certain of Rival's products, we believe we can further
reduce our overall manufacturing costs.
Expand into New Geographic Regions. We believe that the European, Latin
American and Asian home comfort markets are underdeveloped and represent
significant growth opportunities. We intend to leverage the greater
international recognition of Rival's brands in Europe and Latin America with our
low cost flexible supply in Asia to increase sales in these regions.
PRODUCTS
Holmes is a leading developer, manufacturer and marketer of quality,
branded home appliances, including home environment, small kitchen and personal
care appliances.
HOME ENVIRONMENT
Home environment products allow consumers to better control the air
quality, temperature and lighting of their home and office environments.
Fans. We currently manufacture and market approximately 90 different fan
models under the Holmes(R) and Patton(R) brand names, including table, stand,
window, window-to-floor, box, commercial grade, high
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velocity and oscillating fans, typically for purchase and use by household
consumers. Retail prices for our fans range from $5 to $300.
Heaters. Portable electric space heaters are used to heat areas of the
house not adequately reached by central heat and to heat an individual room
while that room is in use. We currently manufacture and market approximately 65
different heater models under the Holmes(R), Patton(R), Bionaire(R) and Titan(R)
brand names, including plastic, ceramic, metal, radiant and baseboard styles.
Retail prices for our heaters range from $20 to $80.
Humidifiers. Consumers use humidifiers to provide greater comfort by
increasing moisture in the home environment. We currently manufacture and market
approximately 50 different humidifiers under the Holmes(R), Bionaire(R) and
Pollenex(R) brand names, including cool mist, warm mist, ultrasonic and console
models that range in moisture output from one to 12 gallons per day. Retail
prices for our humidifiers range between $15 and $150. We also sell a variety of
humidifier accessories, replacement parts and chemical treatments.
Air Purifiers. Air purifiers circulate a room's air through filters that
remove contaminants from the air. In recent years, high efficiency particulate
arresting ("HEPA") filters have come to dominate the industry. We currently
manufacture and market approximately 30 different air purifier models under the
Holmes(R), Bionaire(R) and Pollenex(R) brand names. Retail prices for our air
purifiers range between $10 and $280. Air purifiers represent one of the most
underdeveloped categories of the home environment product line.
Accessories. Many of our products require accessories, including
replacement filters, chemical treatments and replacement parts. For example, air
purifiers periodically need new replacement filter cartridges and humidifiers
need new replacement wick filters. As the installed base of these products
continues to expand, we expect that the market for these accessories will grow
as well. In addition, we believe that sales of filters and accessories increase
brand awareness and customer loyalty. Accessories represent one of the fastest
growing categories in the home environment product line.
Lighting Products. We market over 150 different decorative and home office
lighting products, including table, floor and wall-mounted models. These
products complement our traditional home environment appliance line, provide an
additional non-seasonal category, and are distributed through the same
distribution channels as our other products. Holmes' lighting products are
manufactured by subcontractors in China and in the United States. Retail prices
for these products range between $4 and $90.
KITCHEN ELECTRICS
Small kitchen electric appliances, which constituted Rival's primary
product line for over sixty years, accounted for approximately 36% of our net
sales in 1999. The kitchen electrics business unit sells products including slow
cookers under the Crock-Pot(R) brand, ice cream freezers under the White
Mountain(R) brand and can openers, toasters, food slicers, mixers, indoor
grills, fryers and skillets under the Rival(R) brand to retailers and
distributors throughout the United States. We are the dominant manufacturer and
marketer of slow cookers, of which we market over 25 different models which
retail for between $10 and $70. In addition, Rival invented the electric can
opener category and continues to maintain the number one market share. We
believe that the combination of innovative product development and global
manufacturing strengths will position our kitchen business for growth and share
gain in the future.
PERSONAL CARE
We manufacture and market a wide variety of personal care products,
including showerheads, massagers and other wellness products under the
Pollenex(R) brand to retailers and distributors throughout the United States.
Personal care products represent an important growth opportunity for the
Company.
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INTERNATIONAL
Our products are sold in Canada and Europe from our sales and distribution
facilities in Toronto and the Netherlands. We also ship products from the United
States and our manufacturing facilities in China to customers in Latin America
and Asia.
ELECTRIC MOTORS
One of our Far East subsidiaries, Raider Motor Corporation, has proven
strengths in the design and manufacture of a variety of electric motors for use
in home and commercial appliances. In addition to supplying most of the motors
for our products, Raider has sufficient manufacturing capacity to supply other
manufacturers of appliances with electric motors. In October, 1998, we entered
into a joint venture with General Electric for motor manufacturing, sales and
distribution to third parties. The joint venture entity is owned 49% by Holmes
and 51% by GE. Capital expenditures necessary to support the growth of the GE
joint venture are shared 50/50 with GE.
PRODUCT DEVELOPMENT
We have internal product development teams dedicated to new product
development and product enhancements. We maintain our own engineering and
product development department to research new product concepts as well as
activities relating to improving existing products. The product design and
research development team consists of employees located in Milford,
Massachusetts, Kansas City, Missouri and in the Far East. We also retain the
services of outside consultants to assist our internal team.
We utilize state-of-the-art design technology including advanced CAD design
software and a laser-based stereolithography technique to design and engineer
new products. Management believes this technology allows us to design and
develop new products quickly, enabling us to accurately assess the feasibility,
cost and tooling requirements of new products before manufacturing the products.
Management believes this technology gives us a competitive advantage in the
design and development of new products and product line extensions.
Our expenditures for new product development and tooling totaled
approximately $9.5 million, $9.4 million and $17.6 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
MANUFACTURING
We manufacture over 80% of our products ourselves, utilizing a combination
of our foreign and domestic manufacturing facilities. The management,
coordination and control of all manufacturing operations are centralized at our
principal offices in Milford, Massachusetts.
We manufacture most of our home environment products at our manufacturing
facilities in China. These facilities are highly integrated and produce most of
the electric motors, injection molded plastic components and other components
used in the manufacturing and assembly process. The balance of our home
environment products are produced through subcontracted manufacturers in China
and the United States, generally under the supervision of Holmes employees.
Our domestic manufacturing plants specialize in the production of selected
small kitchen appliances, particularly our Crock-Pot(R) slow cookers. These
plants are highly integrated and produce electric elements and motors, injection
molded plastic components, screw machine parts, stampings and stoneware. Four of
these manufacturing and assembly facilities are located in rural Missouri
(Clinton, Sedalia, Sweet Springs and Warrensburg), near Kansas City. The fifth
facility, in Flowood, Mississippi, produces the stoneware for our slow cookers
and other products. We will be closing the Warrensburg, Missouri facility during
2000.
We believe that we have a cost advantage as a result of our degree of
vertical integration, purchasing power, and low labor costs at our Chinese
manufacturing facilities. In addition, by operating our own manufacturing
facilities, we have control over the quality of our products from design through
final distribution.
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MARKETING AND DISTRIBUTION
Our products are sold in the United States, Canada and Europe to the retail
trade by an internal sales staff consisting of 35 sales managers, with
assistance from an internal sales support staff, field sales associates and
regional independent manufacturers representative organizations. We market our
products through all major channels of distribution including mass merchants,
do-it-yourself home centers, warehouse clubs, hardware stores, department
stores, home and kitchen specialty stores, national drugstore chains and mail
order and premium companies. The sales managers are actively involved in
servicing all aspects of each retail account.
In order to respond most efficiently to the demands of its retail customers
and ensure timely delivery, we balance direct shipments from our manufacturing
facilities with shipments from our domestic and international warehouses. We
employ an electronic data interchange system with selected retail customers to
expedite order and invoice processing.
Our marketing department consists of 40 individuals who are responsible for
market analysis, new product development, pricing strategy, promotions and
overall category development. We believe that our packaging is one of our most
powerful marketing tools because most consumers typically purchase small
appliances without the benefit of knowledgeable retail sales staff. Holmes'
innovative packaging and point-of-purchase support provide written information
and illustrations regarding product features, usage instructions, safety
features and product operation. We have an in-house art department that develops
much of our packaging and marketing materials on state-of-the-art desktop
graphics systems.
MAJOR CUSTOMERS
Our three largest retail customers, Wal-Mart (including Sam's Wholesale
Club), Kmart and Target accounted for approximately 46% of our net sales during
1999. Individually, Wal-Mart and Kmart each accounted for over 10% of our net
sales during 1999. We do not have long-term agreements with our major customers,
and purchases are generally made through the use of individual purchase orders.
A significant reduction in purchases by any of these customers could have a
material adverse effect on our business.
SEASONALITY
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.
COMPETITION
The markets for most of our products are developed and highly competitive.
Management believes that competition is based on several factors, including
price, access to retail shelf space, product features, product enhancements,
brand names, new product introductions, and marketing support and distribution
systems.
We compete with many well-established companies, some of which have
substantially greater facilities, personnel, financial and other resources than
us. Our major competitors include AdobeAir, Catalina Lighting, Cheyenne,
Homedics, Honeywell Consumer Products (maker of Duracraft and Enviracare
brands), Hamilton
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Beach/Proctor Silex, Lasko, Masco, Salton/Maxim (Toastmaster), Sunbeam, Tensor,
Teledyne and Windmere. We also compete with importers and foreign manufacturers
of unbranded products.
We believe that our most important competitive strengths are the quality,
design and competitive pricing of our products, our attention to retailer and
consumer needs, our stable of recognized brands, our access to major channels of
distribution, the development of new products and innovation in existing
products, our ability to provide timely shipment through our manufacturing and
distribution facilities and the capabilities of our management team.
PATENTS AND TRADEMARKS
We hold a number of patents and trademarks registered in the United States,
Canada, and other countries for various products and technologies. Of particular
importance are the Holmes(R), Rival(R), Pollenex(R), Patton(R), Bionaire(R),
White Mountain(R), Family Care(R), Titan(R) and Crock-Pot(R) trademarks. We have
additional patent applications pending in the United States, Canada and Mexico.
We also register trademarks on product names and unique features in the United
States and other countries. We believe that, other than with respect to the
Crock-Pot(R) trademark, none of our product lines is dependent upon any single
trademark, patent, group of patents or other intellectual property rights.
REGULATION
We are subject to federal, state and local regulations concerning the
environment, occupational safety and health, trade-related issues and consumer
products safety. Most of our products are listed by Underwriters Laboratories,
Inc. ("UL"), the Canadian Underwriters Laboratories, Inc. ("CUL"), or similar
organizations in other markets. UL and CUL are independent, not-for-profit
corporations engaged in the testing of products for compliance with certain
public safety standards. We are also regulated by, and hold ongoing discussions
regarding specific products with, the United States Consumer Products Safety
Commission and the Canadian Standards Association. We believe that we are in
material compliance with all of the regulations applicable to us. There can be
no assurance, however, that such regulations will not negatively affect us in
the future. Our operations could also be adversely affected by other regulations
relating to our foreign operations, including changes in trade laws, increased
import duties, import/export regulations and changes in foreign laws.
EMPLOYEES
We had approximately 7,500 employees as of December 31, 1999, of which
approximately 2,215 were located in the United States, Europe and Canada,
approximately 5,200 were located at our manufacturing facilities in Dongguan,
China, and approximately 85 were located in Hong Kong and Taiwan.
ITEM 2. PROPERTIES
The following table sets forth our principal facilities, the primary
activity at each of the facilities listed and the expiration date of the
applicable lease, in the case of leased facilities.
LOCATION SIZE PRIMARY USE LEASE EXPIRATION
- -------- ------------------- ---------------------------- ----------------
Milford, MA............... 83,000 square feet Headquarters and
Distribution 2001
City of Industry, CA...... Varies Distribution At will
Clinton, MA............... 207,000 square feet Distribution 2000
Worcester, MA............. 156,000 square feet Distribution 2003
Clinton, MO............... 164,000 square feet Manufacturing and Assembly Owned
279,000 square feet Warehousing and Distribution Owned
Kansas City, MO........... 32,000 square feet General Offices 2005
Sedalia, MO(1)............ 157,000 square feet Manufacturing and Assembly Owned
67,000 square feet Manufacturing and Assembly Owned
216,000 square feet Warehousing and Distribution Owned
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LOCATION SIZE PRIMARY USE LEASE EXPIRATION
- -------- ------------------- ---------------------------- ----------------
Sweet Springs, MO......... 125,000 square feet Manufacturing/Return
Processing Owned
Warrensburg, MO(1)........ 158,000 square feet Manufacturing and Assembly Owned
Flowood, MS............... 154,000 square feet Manufacturing Owned
Dongguan, China(2)........ 466,000 square feet Manufacturing and Assembly 2006
Dongguan, China(2)........ 269,000 square feet Motor Manufacturing 2006
Hong Kong................. 21,000 square feet Office 2001
Oosterhout, Netherlands... 50,000 square feet General Office, Warehousing
and Distribution 2005
Mississaugua, Ontario..... Varies Distribution At will
Mississaugua, Ontario..... 55,000 square feet General Office, Warehousing
and Distribution 2005
Taipei, Taiwan............ 1,700 square feet Office 2000
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(1) The Warrensburg plant and 67,000 square feet of the Sedalia plant are
occupied under long-term leases which give the Company the option to
purchase the relevant property at a nominal cost. We will be closing the
Warrensburg facility during 2000.
(2) These facilities are located in Guangdong Province, China, approximately 70
miles from Hong Kong. These facilities include 20 buildings on two separate
campuses that include manufacturing, assembly, warehousing, and employee
dormitory operations. The lease expiration date assumes the exercise of our
options to extend the lease on the primary manufacturing buildings. We have
agreed to purchase additional land in Guangdong Province for the
construction of a new manufacturing facility.
Rival's previously closed manufacturing and assembly facility in
Fayetteville, North Carolina is currently under agreement to be sold.
Subsequent to December 31, 1999, we signed a lease for our new corporate
headquarters and distribution facility currently under construction in Milford,
Massachusetts. See Note 11 of Notes to Consolidated Financial Statements.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Holmes is privately-owned and there is no public trading market for our
equity securities.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from our audited
Consolidated Financial Statements. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements, including
the notes thereto, included elsewhere herein.
YEAR ENDED DECEMBER 31,
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1995 1996 1997 1998 1999
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(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales......................... $178,132 $194,331 $ 192,153 $ 214,479 $506,833
Cost of goods sold................ 141,226 145,915 136,740 146,509 363,654
-------- -------- --------- --------- --------
Gross profit.................... 36,906 48,416 55,413 67,970 143,179
Selling, general and
administrative expenses......... 22,500 27,308 36,530(1) 37,095 98,486
Product development expenses...... 3,154 5,520 5,463 6,295 10,448
Plant closing costs............... -- -- -- -- 2,439
-------- -------- --------- --------- --------
Operating profit................ 11,252 15,588 13,420 24,580 31,806
Interest expense, net............. 5,219 6,491 7,096 13,833 33,472
Other (income) expense, net....... (337) (319) 56 (436) (2,489)
-------- -------- --------- --------- --------
Income before income taxes,
equity in earnings from joint
venture and minority
interest..................... 6,370 9,416 6,268 11,183 823
Income tax expense (benefit)...... 2,614 2,787 2,196 2,222 (87)
Equity in earnings from joint
venture......................... -- -- -- -- (902)
-------- -------- --------- --------- --------
Income before minority
interest..................... 3,756 6,629 4,072 8,961 1,812
Minority interest in net income of
majority-owned
subsidiaries(2)................. 518 408 225 -- --
-------- -------- --------- --------- --------
Net income...................... $ 3,238 $ 6,221 $ 3,847 $ 8,961 $ 1,812
======== ======== ========= ========= ========
OTHER DATA:
EBITDA(3)......................... $ 16,098 $ 22,774 $ 20,837 $ 32,264 $ 50,330
Ratio of earnings to fixed
charges(4)...................... 2.1x 2.2x 1.8x 1.7x 1.0x
Depreciation and amortization..... 4,509 6,867 7,473 7,248 15,133
Capital expenditures.............. 9,706 8,594 5,815 4,749 17,614
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents......... $ 3,368 $ 4,462 $ 5,141 $ 5,379 $ 6,647
Working capital (deficit)......... (6,770) (2,883) 78,318 71,089 211,646
Total assets...................... 118,524 128,286 135,165 131,357 456,496
Total long-term debt including
capital leases.................. 217 737 134,294 115,139 338,710
Total stockholders' equity
(deficit)....................... 11,487 17,708 (24,991)(5) (15,389)(5) 37,800
- ---------------
(1) Includes approximately $6.9 million of incremental compensation expense,
which was paid to certain executives in conjunction with Holmes' November,
1997 recapitalization.
(2) In May and June, 1997, Holmes repurchased the shares held by 30% minority
stockholders in one of Holmes' subsidiaries for a total of $900,000.
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(3) EBITDA represents income before interest expense, income tax expense
(benefit), depreciation and amortization and the minority interest in net
income of majority-owned subsidiaries. EBITDA is presented because it is a
widely accepted measure to provide information regarding a company's ability
to service and/or incur debt. EBITDA should not be considered in isolation
or as a substitute for net income, cash flows from operations or other
income or cash flow data prepared in accordance with generally accepted
accounting principles, or as a measure of a company's profitability or
liquidity. Additionally, Holmes' calculation of EBITDA may differ from that
performed by other companies, and thus the amounts disclosed may not be
directly comparable to those disclosed by other companies. EBITDA as
presented does not reflect addback of integration expenses, amortization of
acquired profit in inventory, plant closing costs and reduction for a legal
settlement. Adjusting for these items would result in EBITDA of $62.3
million for 1999.
(4) For purposes of determining the ratio of earnings to fixed charges, earnings
represent income before income taxes and minority interest, plus fixed
charges as presented, without adjustment for one-time items as discussed in
(3) above. Fixed charges consist of interest expense on all indebtedness
plus a portion of rental payments on operating leases that is considered
representative of the interest factor.
(5) Total stockholders' equity (deficit) as of December 31, 1997 and 1998
reflects a reduction attributable to Holmes' 1997 recapitalization. See Note
9 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Sales of most of our products follow seasonal patterns that affect results
of operations. In general, sales of fans occur predominantly from January
through June, and sales of heaters and humidifiers occur predominantly from July
through December. Although kitchen electrics, air purifiers, lighting products
and accessories generally are used year-round, these products tend to draw
increased sales during the winter months when people are indoors and, as a
result, sales of these products tend to be greatest in advance of the winter
months from July through December. Additionally, many of the kitchen and
personal care products we sell are given as gifts and, as such, sell at larger
volumes during the holiday season. When holiday shipments are combined with
seasonal products, our sales during the months of August through November are
generally at a higher level than during the other months of the year. In
addition to the seasonal fluctuations in sales, we experience seasonality in
gross profit, as margins realized on fan products tend to be lower than those
realized on kitchen electrics and other home environment products.
On February 5, 1999, we completed the acquisition of The Rival Company, a
leading developer, manufacturer and marketer of a variety of products including
small kitchen, home environment and personal care appliances. In connection with
this acquisition, we issued $31.3 million of senior subordinated notes due in
November 2007, bearing interest at 9 7/8% (the "Notes"), amended and restated
our existing $100.0 million credit facility to provide for a total availability
of $325.0 million, and sold $50.0 million of common stock in a private
placement. In November 1997, we completed a recapitalization transaction in
which we issued $105.0 million of Notes and entered into the $100.0 million line
of credit facility, of which approximately $27.5 million was initially drawn
(collectively, the "1997 Transactions"). As a result of these transactions, we
have a significantly higher level of borrowing and a corresponding higher level
of interest expense than in the past.
RESULTS OF OPERATIONS
Our historical results of operations for the year 1998 discussed below do
not include any of Rival's operations. The Rival acquisition was accounted for
as a purchase, and accordingly, Rival's results of operations are included in
the Company's financial information beginning on February 5, 1999. Rival's
larger size relative to Holmes greatly influences the comparison of 1999 and
1998 below. Therefore, we have provided supplemental information for Holmes and
its subsidiaries other than Rival on a stand-alone basis, and for Rival and its
subsidiaries on a stand-alone basis.
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Comparison of Years Ended December 31, 1999 and December 31, 1998
Net Sales. Net sales for fiscal 1999 were $506.8 million compared to $214.5
million for fiscal 1998, an increase of $292.3 million or 136.3%, primarily due
to the Rival acquisition. On a stand-alone basis, Holmes' net sales increased
approximately $17.5 million, or 8.2%, in 1999 versus 1998. Holmes' U.S. fan
shipments increased approximately $5 million in 1999 over 1998 as warm summer
weather improved customer response. Winter season U.S. shipments of heaters and
humidifiers increased by approximately $4 million and $3 million, respectively,
in 1999 versus 1998 as increased product offerings and improved placement
resulted in increased volume. Lighting product shipments increased as well in
1999 by approximately $2 million when compared to 1998, and U.S. sales of
accessory products increased by $5 million from 1998 to 1999. Dehumidifier
shipments decreased in 1999 by approximately $5 million versus 1998 following a
management decision to exit this low margin category. U.S. sales of air
purifiers also decreased from 1998 to 1999 by approximately $4 million as stock
levels at retailers slowed shipping demand in 1999. A reduction in returns and
allowances of approximately $4 million from 1998 to 1999 also favorably impacted
net sales. Increases in other categories accounted for the balance of the sales
gain.
On a stand-alone basis, Rival's net sales decreased by approximately $31
million for the full calendar year 1999 compared with 1998, excluding the
divested businesses. Rival's U.S. shipments of kitchen appliances decreased by
approximately $11 million in 1999 when compared to 1998. Decreased sales of can
openers made up approximately 40% of this decrease as an increase in shipments
from new product introductions in 1998 did not repeat in 1999. In addition,
approximately 30% of the overall kitchen decrease was attributable to reduced
shipments of toasters and irons as we de-emphasized the existing lower margin
opening price point products on several categories. Despite price erosion, U.S.
sales of Crock-Pot(R)slow cookers were flat in dollars but shipments in units
were up from 1998 to 1999. The remainder of the kitchen shortfall was spread
over a number of the smaller categories. Rival U.S. home environment shipments
decreased approximately $18 million in 1999 versus 1998 with the retail fan and
air purifier product categories making up over 95% of the decrease. Anticipated
retail placement losses and negative impacts from shelf transitions at several
key retailers were the primary factors for these category decreases. Shipments
from Rival's industrial and pump business units decreased by approximately $5
million and $4 million, respectively, in 1999 versus 1998. The sale of both of
these divisions, which accounted for net sales of approximately $43.0 million in
1999, took place in the fourth quarter of 1999. Rival's international shipments
increased by approximately $4 million in 1999 versus 1998 with shipments in
Mexico making up virtually all of this increase. Rival also experienced an
increase in credits for returns and discounts of approximately $6 million from
1998 to 1999 which further reduced its overall net sales.
Gross Profit. Gross profit for fiscal 1999 was $143.2 million compared to
$68.0 million for fiscal 1998, an increase of $75.2 million or 110.6%, with the
increase again in large part due to the Rival acquisition. As a percentage of
net sales, gross profit decreased to 28.2% in 1999 from 31.7% in 1998 as a
result of the decreased gross margins realized by Rival in 1999. On a
stand-alone basis, Holmes' gross profit margin increased over three percentage
points for the year 1999 versus 1998. Holmes' product mix in 1999 included a
decrease in low margin dehumidifier sales and an increase in higher margin sales
as discussed above which favorably impacted overall Holmes' margins. In
addition, positive contribution was realized from improved efficiencies in our
Far East factories. On a stand-alone basis for the full calendar year 1999,
Rival's gross profit decreased approximately $19 million from 1998, primarily
due to the sales volume shortfall discussed above and due to amortization of
acquired profit in inventory in connection with the Rival acquisition. Rival's
gross profit percentage was approximately 24.2% in 1999 versus 24.5% in 1998
(before the impact of the amortization of acquired profit in inventory in 1999).
Selling Expenses. Selling expenses for 1999 were $67.5 million compared to
$20.5 million in 1998, an increase of $47.0 million or 229.3%, primarily as a
result of the Rival acquisition. As a percentage of net sales, selling expenses
increased to 13.3% for 1999 compared to 9.5% in 1998. A significant portion of
this percentage increase was due to the traditionally higher levels of
co-operative advertising done by Rival and increased freight costs related to
both continuing Rival businesses and businesses sold during 1999. In addition to
the Rival impact, there were increases in some sales related expense items such
as shipping freight costs and supplies, particularly in regards to the overall
Holmes sales increases and to the increase in accessory sales. In
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addition, salaries and related benefits and travel costs increased as we
developed an infrastructure to support the integration of Rival and future
initiatives.
General and Administrative Expenses. General and administrative expenses
for 1999 were $28.3 million compared to $16.6 million in 1998, an increase of
$11.7 million or 70.5%. As a percentage of net sales, general and administrative
expenses decreased to 5.6% for 1999 from 7.8% for 1998. The increase in dollars
was primarily attributable to the Rival acquisition. In addition, the increase
in dollars was due to expenses incurred for consulting, travel and other costs
to support the Rival integration process. Total integration related expenses in
1999 were approximately $3.4 million.
Product Development Expenses. Product development expenses for 1999 were
$10.4 million compared to $6.3 million for 1998, an increase of $4.1 million or
65.1%. As a percentage of net sales, product development expenses decreased to
2.1% for 1999 from 2.9% for 1998. The increase in dollars and the decrease as a
percentage of net sales were primarily due to the Rival acquisition.
Plant Closing Costs. The Company recorded $2.4 million in plant closing
costs associated with Rival's previously announced closing of its New Haven,
Indiana and Fayetteville, North Carolina plants. Approximately $1.7 million
related to the expenses associated with the wind down of these two facilities
which were expensed as incurred and $0.7 million related to the write down of
fixed assets at these facilities.
Interest and Other Expense, Net. Interest and other expense, net for 1999
was $31.0 million compared to $13.4 million for 1998, an increase of $17.6
million or 131.3%. The increase in interest expense was primarily due to the
additional borrowings resulting from the new debt associated with the Rival
acquisition. This increase was offset by an increase in other income largely
related to a favorable legal settlement in 1999.
Income Tax Expense (Benefit). The income tax benefit for 1999 was $0.1
million compared to expense of $2.2 million for 1998. This was largely due to
the losses experienced in the U.S. creating benefits at higher rates than the
foreign income taxed at lower rates.
Equity in Earnings from Joint Venture. We recorded $0.9 million in equity
in earnings from our joint venture with General Electric for the shipment of
motors from our factory in the Far East. There were no such earnings recorded in
1998.
Net Income. As a result of the foregoing factors, net income for 1999 was
$1.8 million, compared to net income of $9.0 million for 1998.
Comparison of Years Ended December 31, 1998 and December 31, 1997
Net Sales. Net sales for fiscal 1998 were $214.5 million compared to
$192.2 million for fiscal 1997, an increase of $22.3 million or 11.6%. This
increase was attributable to increases in each of what were then our four major
product categories: fans, heaters, humidifiers and air purifiers, which resulted
from a strong 1998 for retailers, as well as continued growth in filter and
accessory sales due to the growing installed base of products requiring filters
and accessories. Our Far East operations also had a significant increase in
external sales versus 1997.
Gross Profit. Gross profit for fiscal 1998 was $68.0 million compared to
$55.4 million for fiscal 1997, an increase of $12.6 million or 22.7%. As a
percentage of net sales, gross profit increased to 31.7% for fiscal 1998 from
28.8% for fiscal 1997. The increase was primarily due to the above mentioned
increases in net sales in humidifiers, heaters and filters and accessories which
are relatively higher margin contributors, as well as continued reductions in
raw material prices at our manufacturing operations in the Far East.
Selling Expenses. Selling expenses for fiscal 1998 were $20.5 million
compared to $15.6 million for fiscal 1997, an increase of $4.9 million or 31.4%.
As a percentage of net sales, selling expenses increased to 9.6% for fiscal 1998
from 8.1% for fiscal 1997. The increase in selling expenses was primarily due to
an increase in co-operative advertising of higher margin products and new sales
promotions with several major retailers. To a lesser extent, shipping costs
increased as a result of the higher sales level. Also, there were continued
expenses associated with the redesign of some of our product packaging.
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General and Administrative Expenses. General and administrative expenses
for fiscal 1998 were $16.6 million compared to $20.9 million for fiscal 1997, a
decrease of $4.3 million or 20.6%. As a percentage of net sales, general and
administrative expenses decreased to 7.7% for fiscal 1998 from 10.9% for fiscal
1997. The higher amount in 1997 resulted from incremental incentive compensation
expenses paid in connection with the 1997 Transactions. This overall decrease
was offset in part by increased expenditures on management and information
systems support, increases in personnel costs to improve operating efficiencies
at all of our locations and on-going expenses associated with the
recapitalization in November, 1997.
Product Development Expenses. Product development expenses for fiscal 1998
were $6.3 million compared to $5.5 million for fiscal 1997, an increase of $.8
million or 14.6%. As a percentage of net sales, product development expenses
remained constant at 2.9% for fiscal 1998 and 1997. The increase was primarily
due to increased expenditures for royalties and outside consultants as part of
our continuing effort in developing new technologies for both existing and new
product lines.
Interest and Other Expense, Net. Interest and other expense, net for
fiscal 1998 was $13.4 million compared to $7.2 million for fiscal 1997, an
increase of $6.2 million or 86.1%. The increase in interest expense was
primarily due to the additional borrowings resulting from the recapitalization
in November 1997. Our interest expense in future periods has been higher than
1998 as a result of the Rival acquisition.
Income Tax Expense. In 1997, we recorded a $3.6 million valuation
allowance related to deferred tax assets generated as a result of certain
limitations on the deductibility of interest paid to Pentland. This 1997
non-recurring charge comprises the majority of the 15% change in our effective
tax rate from 35% in 1997 to 20% in 1998.
Net Income. As a result of the foregoing factors, net income for fiscal
1998 was $9.0 million, compared to net income of $3.8 million in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Following the recapitalization transaction in November 1997 and the Rival
acquisition in February 1999, we have funded our liquidity requirements with
cash flows from operations and borrowings under the Credit Facility. Our primary
liquidity requirements are for working capital and to service our indebtedness.
We believe that existing cash resources, cash flows from operations and
borrowings under the Credit Facility will be sufficient to meet our liquidity
needs for the foreseeable future.
Cash provided by operations for the years ended December 31, 1999 and 1998
was $4.9 million and $24.3 million, respectively. Cash provided by operations
for 1999 reflected a $36.5 million increase in receivables as a significant
percentage of Rival's sales are shipped and billed in the fourth quarter which
results in an increase in open receivables at year end from the February 5, 1999
balance. Partially offsetting the increase in receivables was a decrease in
inventory levels of approximately $26.2 million at December 31, 1999, which
included the amortization of acquired profit in inventory. This decrease related
to an increase in shipping activity during the fourth quarter as well as our
increased focus on management of raw material and finished goods inventory
levels. Finally, cash provided by operations in 1999 included a decrease in
accounts payable which was in large part related to Rival's overall sales
activity decline in 1999.
Cash used for investing for the year ended December 31, 1999 included
$279.6 million paid in connection with the Rival acquisition. In addition, we
invested $17.6 million in capital expenditures for property and equipment during
1999. We also received net proceeds of $23.8 million in 1999 in connection with
the sale of two of Rival's closed manufacturing facilities and from the sale of
the Rival's commercial and industrial and Simer pump business units.
Cash provided by (used for) financing activities for the years ended
December 31, 1999 and 1998 was $265.2 million and $(18.8) million, respectively.
Cash used for financing for the year 1998 reflected repayments of the prior line
of credit used to fund cash flows for operations. The cash provided by financing
activities for the year 1999 reflected the borrowings on the Credit Facility,
and proceeds from the issuance of the Notes and common stock associated with the
Rival acquisition.
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We issued $105.0 million of 9 7/8% Senior Subordinated Notes due November
2007 (the "Notes") in November 1997, and an additional $31.3 million of Notes in
February, 1999. While we may repurchase Notes from time to time in open market
or privately negotiated transactions, the Notes are not redeemable at our option
prior to November 15, 2002. Thereafter, the Notes are subject to redemption at
any time at our option, in whole or in part, at stated redemption prices. Annual
interest payments on the Notes are approximately $13.5 million. The payment of
principal and interest on the Notes is subordinated to the prior payment in full
of all of our senior debt, including borrowings under the Credit Facility.
We entered into the Credit Facility in February, 1999. The Credit Facility
amended and restated our prior $100.0 million credit facility. The Credit
Facility consists of a six-year tranche A term loan of $40.0 million, an
eight-year tranche B term loan of $85.0 million and a $200.0 million, six-year
revolving credit facility which was reduced to $170.0 million on August 20, 1999
and further reduced to $140.0 million on February 8, 2000. The Credit Facility
bears interest at variable rates based on either the prime rate or LIBOR, at our
option, plus a margin which, in the case of the tranche A term loan and the
revolving credit facility, varies depending upon certain financial ratios. The
Credit Facility, and the guarantees thereof by our domestic subsidiaries, are
secured by substantially all of our domestic and certain foreign assets. The
Credit Facility and the Notes Indentures include certain financial and operating
covenants, which, among other things, restrict our ability to incur additional
indebtedness, grant liens, make investments and take certain other actions. Our
ability to meet our debt service obligations will be dependent upon our future
performance, which will be impacted by general economic conditions and other
factors. See "Disclosure Regarding Forward-Looking Statements."
YEAR 2000
Over the past year, we developed and implemented plans to address possible
Year 2000 exposures related to computer systems used by us and by third parties,
as described below. We have not experienced any material Year 2000 problems
subsequent to the date change on January 1, 2000.
We had identified our Year 2000 risk to be in two general categories:
Information Technology Systems, including Electronic Data Interchange Systems
(EDI), and General Business Systems.
Information Technology Systems Including EDI. We transitioned to Rival's
computer software system approximately six months following the Rival
acquisition, during the third quarter of 1999. Rival had implemented its
corporate computer system in 1995. This system is Year 2000 compliant, according
to the vendor, as confirmed by full systems testing performed by Rival. The
Company used both internal and external resources to test, reprogram or replace
the software and hardware for Year 2000 modifications, the cost of which was
approximately $320,000 as of December 31, 1999. The majority of project costs,
related to the purchase of hardware and software to meet both Year 2000 and
company specific requirements, have been capitalized. All other remaining
project costs were expensed in 1999 or will be expensed in 2000.
General Business Systems. Our general business systems encompass the
following: telecommunications systems, departmental specific application
systems, machinery and equipment, building and utility systems and, finally,
third party vendors and service providers. We created a Year 2000 committee
consisting of one member from each department. The committee reviewed all
aspects of our internal business systems and determined that they were Year 2000
compliant. Rival had created its own cross-departmental Year 2000 committee in
1997, and determined that its internal systems were Year 2000 compliant as well.
We have not experienced any material Year 2000 problems subsequent to the
date change with respect to our significant customers and suppliers. While we
have carefully monitored our supplier and customer risks, and will continue to
do so, we cannot fully control suppliers and customers, and there can be no
guarantee that a Year 2000 problem that may originate with a supplier will not
materially adversely affect us in a subsequent accounting period. Finally, we
determined that products that we manufacture and sell have no exposure related
to the Year 2000 issue.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the balance sheet, and the
corresponding gains and losses be reported either in the statement of income or
as a component of comprehensive income, depending on the type of hedging
relationship that exists. The Company does not expect the impact of SFAS 133,
which will be effective for fiscal 2001, to be significant given its limited use
of derivatives.
INVESTOR CONFERENCE CALL
We will hold a telephone conference call on Friday, April 14, 2000 at 2
p.m., Eastern time, in order for investors and other interested stakeholders to
hear management's views on our results of operations during the fourth quarter
and year ended December 31, 1999, as well as our current financial position. If
you are interested in participating in the call in listen-only mode, please fax
the following information to Sandy LaBree, Executive Assistant, at 508-634-7942:
- Name of Participant(s)
- Company Affiliation
- Nature of Business
- Address
- Phone, Fax and E-mail
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, the carrying value of our debt totaled $345.3 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 December 31, 1999, the Company had fixed rate debt of $135.2 million
(including capital leases) and variable rate debt of $210.1 million. Holding
other variables constant (such as foreign exchange rates and debt levels), a one
percentage point decrease in interest rates would increase the unrealized fair
market value of fixed rate debt by approximately $7.3 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 $1.4 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 lending
bank. This arrangement is described in Note 8 of Notes to Consolidated Financial
Statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... 18
Consolidated Balance Sheet at December 31, 1998 and 1999.... 19
Consolidated Statement of Income for the years ended
December 31, 1997, 1998 and 1999.......................... 20
Consolidated Statement of Stockholders' Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1999.......... 21
Consolidated Statement of Comprehensive Income for the years
ended December 31, 1997, 1998 and 1999.................... 22
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... 23
Notes to Consolidated Financial Statements.................. 24
Financial Statement Schedule:
For each of the three years in the period ended December
31, 1999:
II-Valuation and Qualifying Accounts...................... 49
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or the notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The Holmes Group, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 of this Form 10-K present fairly, in all material
respects, the financial position of The Holmes Group, Inc. and its subsidiaries
(the "Company") at December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 8 of this Form 10-K presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 23, 2000
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THE HOLMES GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,379 $ 6,647
Accounts receivable, net of allowances of $719 and
$10,057, respectively.................................. 36,967 142,264
Inventories............................................... 53,340 112,660
Prepaid expenses and other current assets................. 2,027 3,997
Deferred income taxes..................................... 4,983 11,877
Income taxes receivable................................... -- 7,852
-------- --------
Total current assets................................... 102,696 285,297
Assets held for sale...................................... -- 2,434
Property and equipment, net............................... 15,752 54,348
Goodwill, net............................................. -- 89,493
Deferred income taxes..................................... 563 --
Deposits and other assets................................. 3,174 5,610
Debt issuance costs, net.................................. 9,172 19,314
-------- --------
$131,357 $456,496
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations and other
liabilities............................................ $ 604 $ 589
Current portion of credit facility........................ -- 6,450
Accounts payable.......................................... 15,004 26,433
Accrued expenses.......................................... 12,292 36,256
Accrued income taxes...................................... 3,707 3,923
-------- --------
Total current liabilities.............................. 31,607 73,651
Capital lease obligations................................... 139 --
Credit facility............................................. 10,000 203,625
Long-term debt.............................................. 105,000 135,085
Other long-term liabilities................................. -- 4,054
Deferred income taxes....................................... -- 2,281
Commitments and contingencies
Stockholders' Equity (Deficit):
Common stock, $.001 par value. Authorized 12,500,000
shares as of December 31, 1998 and 25,000,000 as of
December 31, 1999; issued and outstanding 10,200,815
shares at December 31, 1998 and 20,307,995 shares at
December 31, 1999...................................... 10 20
Additional paid in capital.................................. 16,985 67,915
Accumulated other comprehensive income...................... (40) 397
Treasury stock, at cost (18,620,450 shares)................. (62,058) (62,058)
Retained earnings........................................... 29,714 31,526
-------- --------
Total stockholders' equity (deficit)................... (15,389) 37,800
-------- --------
$131,357 $456,496
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
19
21
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS)
Net sales............................................... $192,153 $214,479 $506,833
Cost of goods sold...................................... 136,740 146,509 363,654
-------- -------- --------
Gross profit....................................... 55,413 67,970 143,179
-------- -------- --------
Operating expenses:
Selling............................................... 15,647 20,456 67,452
General and administrative............................ 20,883 16,639 28,334
Product development................................... 5,463 6,295 10,448
Plant closing costs................................... -- -- 2,439
Amortization of goodwill and other intangible
assets............................................. -- -- 2,700
-------- -------- --------
Total operating expenses......................... 41,993 43,390 111,373
-------- -------- --------
Operating profit................................. 13,420 24,580 31,806
-------- -------- --------
Other income and expense:
Other (income) expense, net........................... 56 (436) (2,489)
Interest expense, net................................. 7,096 13,833 33,472
-------- -------- --------
7,152 13,397 30,983
-------- -------- --------
Income before income taxes, equity in earnings from
joint venture and minority interest................... 6,268 11,183 823
Income tax expense (benefit)............................ 2,196 2,222 (87)
Equity in earnings from joint venture................... -- -- (902)
Minority interest in net income of majority-owned
subsidiaries.......................................... 225 -- --
-------- -------- --------
Net income....................................... $ 3,847 $ 8,961 $ 1,812
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
20
22
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK,
$.001 PAR VALUE
COMMON STOCK, --------------------------- ACCUMULATED TOTAL
$1 PAR VALUE ADDITIONAL OTHER STOCKHOLDERS'
----------------- PAID IN COMPREHENSIVE TREASURY RETAINED EQUITY
SHARES AMOUNT SHARES PAR CAPITAL INCOME STOCK EARNINGS (DEFICIT)
-------- ------ ------- ---- ---------- ------------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PAR VALUE)
BALANCE AT DECEMBER 31,
1996.................... 100,000 $100 21,159 $ 21 $ 681 $ -- $ -- $16,906 $ 17,708
Issuance of additional
shares in conjunction
with contribution of
Holmes Products (Far
East) Limited (see Note
9)...................... (100,000) (100) 2,750 3 97 -- -- -- --
Issuance of common stock,
Net of related costs.... -- -- 4,718 5 15,507 -- -- -- 15,512
Redemption of common
stock................... -- -- (18,621) (19) 19 -- (62,058) -- (62,058)
Foreign currency
translation
adjustments............. -- -- -- -- -- -- -- -- --
Net income................ -- -- -- -- -- -- -- 3,847 3,847
-------- ---- ------- ---- ------- ---- -------- ------- --------
BALANCE AT DECEMBER 31,
1997.................... -- -- 10,006 10 16,304 -- (62,058) 20,753 (24,991)
Issuance of common
stock................... -- -- 195 -- 681 -- -- -- 681
Foreign currency
translation
adjustments............. -- -- -- -- -- (40) -- -- (40)
Net income................ -- -- -- -- -- -- -- 8,961 8,961
-------- ---- ------- ---- ------- ---- -------- ------- --------
BALANCE AT DECEMBER 31,
1998.................... -- -- 10,201 10 16,985 (40) (62,058) 29,714 (15,389)
Issuance of common
stock................... -- -- 10,107 10 50,930 -- -- -- 50,940
Foreign currency
translation
adjustments............. -- -- -- -- -- 437 -- -- 437
Net income................ -- -- -- -- -- -- -- 1,812 1,812
-------- ---- ------- ---- ------- ---- -------- ------- --------
BALANCE AT DECEMBER 31,
1999.................... -- -- 20,308 $ 20 $67,915 $397 $(62,058) $31,526 $ 37,800
======== ==== ======= ==== ======= ==== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
21
23
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS)
Net income............................................ $3,847 $8,961 $1,812
Other comprehensive income:
Foreign currency translation adjustments............ -- (40) 437
------ ------ ------
Comprehensive income.................................. $3,847 $8,921 $2,249
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
22
24
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS)
Cash flows from operating activities:
Net income.............................................. $ 3,847 $ 8,961 $ 1,812
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization......................... 7,473 7,248 15,133
Amortization of debt issuance costs................... 98 1,182 3,983
Change in allowance for doubtful accounts............. (654) 260 1,297
(Gain) Loss on disposition of property, plant and
equipment.......................................... -- 1,356 (31)
Deferred income taxes................................. (715) (741) (1,477)
Minority interest in net income of majority-owned
subsidiaries....................................... 225 -- --
Changes in operating assets and liabilities:
Accounts receivable................................ (5,776) 875 (36,518)
Inventories........................................ 5,702 2,210 26,219
Prepaid expenses and other current assets.......... 94 (911) (158)
Income taxes receivable............................ (104) 104 (4,308)
Deposits and other assets.......................... 3,836 (2,493) 5,366
Accounts payable................................... (58,558) 1,254 (7,607)
Accrued expenses................................... (816) 2,467 2,211
Accrued income taxes............................... (1,025) 2,483 (1,044)
-------- -------- ---------
Net cash provided by (used for) operating
activities..................................... (46,373) 24,255 4,878
-------- -------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired........... -- -- (279,571)
Contribution in joint venture........................... -- -- (25)
Proceeds from sale of assets held for sale and business
divestitures.......................................... -- -- 23,787
Distribution of earnings from joint venture............. -- -- 138
Purchase of property and equipment...................... (5,815) (4,749) (17,614)
Purchase of minority interest........................... (451) (451) --
Cash received from joint venture partner................ -- -- 4,504
-------- -------- ---------
Net cash used for investing activities........... (6,266) (5,200) (268,781)
-------- -------- ---------
Cash flows from financing activities:
Net borrowing (repayment) of line of credit............. 27,136 (18,502) (10,000)
Issuance of common stock................................ 15,512 681 50,400
Borrowings of long-term debt, net of issuance costs..... 96,209 -- 27,329
Borrowings on credit facility, net of issuance costs.... -- -- 198,704
Net borrowings from (repayments to) affiliate........... (23,000) -- --
Purchase of treasury stock.............................. (62,058) -- --
Debt issuance costs..................................... -- (295) (658)
Principal payments on capital lease obligations......... (481) (701) (604)
-------- -------- ---------
Net cash provided by (used for) financing
activities..................................... 53,318 (18,817) 265,171
-------- -------- ---------
Net increase in cash and cash equivalents........ 679 238 1,268
Cash and cash equivalents, beginning of period... 4,462 5,141 5,379
-------- -------- ---------
Cash and cash equivalents, end of period.................. $ 5,141 $ 5,379 $ 6,647
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................. $ 7,079 $ 13,283 $ 28,812
Cash paid for income taxes.............................. $ 4,040 $ 268 $ 190
The Company had a non-cash transaction in 1999 whereby the Company paid
vendor invoices totaling $500,000 with 99,222 shares of common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
23
25
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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,
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 9, THG and HPFEL were both directly or indirectly
80% owned subsidiaries of Asco Investments Ltd., a subsidiary of Pentland Group
plc ("Pentland").
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis of Consolidation
The accompanying 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 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."
Minority Interest
Prior to May 1997, HPFEL owned 70% of Raider Motor Corp., which owns 100%
of Dongguan Raider Motor Corp. Ltd. The minority stockholders' interests in the
net income and net assets of Raider Motor Corp. and Dongguan Raider Motor Corp.
Ltd. were presented separately in the accompanying financial statements.
In May and June 1997, the Company acquired the capital stock held by the
minority stockholders. The book value of the minority interest exceeded the
repurchase price by approximately $650,000. The excess of the fair market value
of the assets and liabilities of Raider Motor Corp. on the date of acquisition
over the purchase price has been recorded as a reduction of property and
equipment during the year ended December 31, 1997.
Translation of Foreign Currencies
The functional currency for the Company's foreign operations is the local
currency. Assets and liabilities are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Income, expense and cash flow items
are translated at average exchange rates for the period. Adjustments resulting
from the translation of foreign functional currency financial statements into
U.S. dollars are recorded in the accumulated other comprehensive income
component of stockholders equity (deficit).Gains and losses resulting from
remeasure-
24
26
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ment of balances denominated in other than the local currency are not material
and are included in other (income) expense, net.
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.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method, except
for Rival tooling which is depreciated using the units of production method.
Repairs and maintenance are expensed as incurred.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including goodwill, for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the useful lives of
these assets are no longer appropriate. Each impairment test is based on a
comparison of the undiscounted cash flows to the recorded value of the asset. If
an impairment is indicated, the asset is written down to its estimated fair
value on a discounted cash flow basis.
Revenue Recognition
Revenue is recognized upon shipment of goods from the Company's warehouses.
Revenue for goods sent directly from HPFEL to a retail customer is recognized
when the customer takes ownership of the goods. Estimates for returned goods and
warranty costs are accrued at the time of shipment.
Product Development
Research, engineering and product development costs are expensed as
incurred.
Statement of Cash Flows
All highly liquid debt instruments with original maturities of three months
or less are considered to be cash equivalents. Such investments consist of a
money market account.
Advertising
Advertising costs are expensed as incurred. In conjunction with transfers
of inventory in 1998, the Company received advertising credits totaling
$2,352,000 to be used for the purchase of advertising media, merchandise or
services, subject to certain limitations and cash co-payments. The credits
expire in February 2003. The remaining balance of these credits approximated
$2,352,000 at December 31, 1998 and $2,346,000 at December 31, 1999 which are
reported as prepaid expenses and other current assets and deposits and other
assets. Additionally, the Company offers co-operative advertising credits to
certain customers. These credits are expensed as earned. Total advertising
expenses in 1997, 1998, and 1999 were approximately $5,968,000, $6,564,000 and
$12,716,000, respectively which are included in selling expenses in the
accompanying statement of income.
25
27
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109 requires recognition
of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled.
Joint Venture
In October 1998, the Company signed an agreement with General Electric
creating a limited liability company for a motor manufacturing, sales and
distribution company. The limited liability company, GE Holmes Industries, is
owned 49% by a subsidiary of THG. The Company's portion of the joint venture
earnings in 1999 was approximately $1,475,000 of which $902,000 is recorded as
equity in earnings from joint venture and $573,000 is recorded as part of gross
profit. The joint venture had no transactions during the year ended December 31,
1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies at December 31, 1998 and 1999, and the reported
amounts of revenues and expenses during the periods presented. Actual results
could differ from those estimates.
Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current period presentation.
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 The
Rival Company (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 THG's management and to certain other
co-investors. This acquisition has been accounted for as a purchase, and the
results of operations of Rival have been included in the consolidated financial
statements since the date of acquisition. The excess of purchase price over the
fair value of net assets acquired was approximately $91.8 million and is being
amortized on a straight-line basis over 35 years.
In connection with the acquisition, THG recorded a restructuring reserve of
$6.4 million as an assumed liability in accordance with EITF 95-3, "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 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.
26
28
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 December 31, 1999, 20 of these
employees had been terminated. Severance for the remaining employees will be
paid during fiscal 2000 when the facility closure 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 has been completed resulting in exit costs of $0.1 million. The
Canada and Warrensburg closures will be completed during fiscal 2000.
The reserve activity for fiscal 1999 is as follows (in thousands):
EMPLOYEE FACILITY TOTAL
SEVERANCE AND EXIT AND ACCRUED
RELOCATION COSTS OTHER COSTS RESTRUCTURING
---------------- -------------- -------------
Restructuring accrual at February 5,
1999..................................... $5,864 $ 563 $ 6,427
Cash payments made......................... (1,647) (136) (1,783)
------ ------ -------
Balance at December 31, 1999............... $4,217 $ 427 $ 4,644
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 has been closed during fiscal 1999. One of the properties was sold
during June 1999 resulting in no gain or loss. Proceeds from the sale were
$1,519,000 net of selling expenses. A second property was sold during September
1999 which also resulted in no gain or loss. The proceeds from this sale were
$1,165,000. The estimated fair value of the remaining property has been
reflected in the December 31, 1999 balance sheet as assets held for sale.
Additionally, wind down costs and fixed asset writedowns relating to these
facilities have been included as plant closing costs in the consolidated
statement of income for the year ended December 31, 1999. Approximately $0.2
million of this Rival restructuring reserve remains in accrued expenses at
December 31, 1999 relating to exit activities for the final facility.
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 pumps division for $11.4 million. The proceeds received
for the assets exceeded the net asset values recorded by $0.7. On December 21,
1999, the Company sold the net 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 net assets
sold exceeded the proceeds received 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 in goodwill. Any
contingent consideration earned during fiscal 2000 will result in corresponding
decreases in the goodwill balance as the contingencies are resolved. These
business units accounted for approximately $43.0 million of revenue for fiscal
1999.
The following unaudited pro forma data summarizes the Company's results of
operations for the periods indicated as if the acquisition had been completed as
of the beginning of the periods presented. These unaudited pro forma results
have been prepared for comparative purposes only and include certain
adjustments, such as increased interest expense on acquisition debt and
additional amortization expense as a result of the goodwill. 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, 1998, or of future results of
operations.
27
29
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------
(UNAUDITED)
(IN THOUSANDS)
Net sales.......................................... $561,748 $529,178
Net income (loss).................................. 38 (6,465)
4. RELATED PARTY TRANSACTIONS
Prior to the 1997 recapitalization described in Note 9, THG had numerous
business relationships with Pentland and Asco General Supplies (Far East) Ltd.
("Asco"), an affiliated entity. These arrangements were generally terminated in
conjunction with the recapitalization of THG, and all outstanding amounts were
repaid.
Asco provided THG with letter of credit financing for their purchases from
foreign manufacturers. THG paid a commission to Asco for administrative services
related to the processing of these trade acceptances. Total commissions
approximated $1,834,000 in 1997 which is included in cost of goods sold in the
accompanying statement of income. This arrangement has been terminated in
connection with the completion of the recapitalization transaction described in
Note 9.
THG had a revolving credit facility agreement with Pentland Management
Services Limited ("PMSL"), an affiliated company, whereby PMSL would provide
short-term loans to THG. The facility was increased several times between 1993
and 1997, reaching a peak of $38,000,000. Total borrowings under the agreement
were limited to a defined borrowing base of eligible accounts receivable and
inventory, and were secured by all assets of the Company. Individual loans under
the agreement had maturities which ranged from one to six months, at THG's
option. Interest rates on individual loans were at the prime rate as of the
inception date of the loan, and were fixed through the maturity of the loan.
Interest was payable at the expiration of each loan, and totaled approximately
$2,410,000 in 1997. This agreement included certain financial covenants, as well
as restrictions on the incurrence of additional debt. This facility was
terminated in conjunction with the completion of the recapitalization
transaction described in Note 9.
THG pays a sales commission to Jordan Kahn Co. Inc., owned principally by
an officer and stockholder of the Company. Such commissions approximated
$367,000, $368,000 and $287,000 in 1997, 1998 and 1999, respectively, which are
included in selling expenses in the accompanying statement of income.
Asco had advanced HPFEL monies for working capital purposes from time to
time. All advances were repaid during 1997 in conjunction with the
recapitalization of the Company. The interest rate on these advances was 8.5%.
Interest expense incurred on amounts due from HPFEL to Asco was $446,000 in
1997.
The salaries and related benefits of certain employees of Dongguan Raider
Motor Corp Ltd. were paid through Asco, which is reimbursed by Raider Motor
Corp. for such costs. These costs amounted to $128,000 in 1997.
In addition, beginning in March 1995, HPFEL occupied facilities owned by
the spouse of a director of HPFEL. Total rent expense paid on this property
amounted to $475,000 in 1997. HPFEL also paid $12,000 in 1997 to Asco for the
use of certain shared computer facilities.
Certain employees of Pentland and Asco have performed various management
and administrative services for HPFEL, for which no amounts have been charged to
HPFEL. Management has estimated such costs, which consist of allocations of
salary and related benefits costs and travel expenses, to be insignificant in
1997. Accordingly, no amounts have been recorded in the accompanying financial
statements for such costs.
As part of the recapitalization transactions described in Note 9, the
Company entered into a consulting agreement with the new majority stockholder,
to provide management, financial, advisory and strategic
28
30
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
support and analysis. The agreement expires in November 2002, or earlier if the
stockholder's ownership percentage declines to less than 40% or less than the
percentage owned by management of the Company, taken as a group. Fees under this
agreement were $400,000 per year and increased to $500,000 per year as of
February 5, 1999, related to the Rival acquisition.
5. INVENTORIES
Inventories are as follows:
DECEMBER 31,
---------------------------
1998 1999
----------- ------------
Finished goods........................................... $34,620,000 $ 61,154,000
Raw materials............................................ 7,930,000 39,117,000
Work-in-process.......................................... 10,790,000 11,288,000
----------- ------------
53,340,000 111,559,000
LIFO allowance........................................... -- 1,101,000
----------- ------------
$53,340,000 $112,660,000
=========== ============
6. PROPERTY AND EQUIPMENT
Property and equipment are as follows:
DECEMBER 31,
--------------------------
DEPRECIABLE LIVES 1998 1999
--------------------- ----------- -----------
Mold costs and tooling............... 1 1/2-5 years $15,241,000 $26,377,000
Plant and machinery.................. 7-10 years 11,283,000 30,564,000
Buildings and leasehold
improvements....................... life of lease-40 4,048,000 16,581,000
years
Equipment and computer equipment..... 5-7 years 3,282,000 6,059,000
Furniture and fixtures............... 5-10 years 2,347,000 4,385,000
Land................................. N/A -- 712,000
Motor vehicles....................... 4-5 years 412,000 506,000
----------- -----------
36,613,000 85,184,000
Less -- accumulated depreciation and
amortization....................... 20,861,000 30,836,000
----------- -----------
$15,752,000 $54,348,000
=========== ===========
Property and equipment recorded under capital leases amounted to
approximately $2,055,000 and $1,321,000 at December 31, 1998 and 1999,
respectively. Total accumulated amortization related to these assets is
approximately $582,000 and $567,000 at December 31, 1998 and 1999, respectively.
Amortization expense for the period is included in depreciation and amortization
in the accompanying statement of cash flows.
29
31
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
Sales returns and allowances.............................. $ 3,540,000 $ 7,812,000
Payroll and bonuses....................................... 1,606,000 8,179,000
Interest payable.......................................... 1,576,000 2,144,000
Advertising............................................... 1,210,000 6,613,000
Other..................................................... 4,360,000 11,508,000
----------- -----------
$12,292,000 $36,256,000
=========== ===========
8. LONG-TERM DEBT
Senior Subordinated Notes
In connection with the recapitalization transactions described in Note 9
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 17) 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
consisted of a six-year tranche A term loan of $40.0 million, an eight-year
tranche B term loan of $85.0 million and a $200.0 million, six-year revolving
credit facility, which was reduced to $170.0 million on August 20, 1999 and
further reduced to $140.0 million on February 8, 2000. The Credit Facility bears
interest at variable rates based on either the prime rate or eurodollar rate 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. There is a 0.5% commitment fee charged on the unused
portion of the revolving facility. 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.
30
32
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following:
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
Credit Facility............................................ $ 10,000 $210,075
9 7/8% Senior Subordinated Notes, net of unamortized
discount of $1.2 million at December 31, 1999 ($0 in
1998).................................................... 105,000 135,085
-------- --------
Total debt................................................. 115,000 345,160
Less current maturities.................................... -- 6,450
-------- --------
Long-term debt............................................. $115,000 $338,710
Aggregate maturities of long-term debt (excluding obligations under capital
leases) are as follows:
DECEMBER 31,
1999
--------------
(IN THOUSANDS)
2000........................................................ $6,450
2001........................................................ 7,250
2002........................................................ 8,850
2003........................................................ 9,450
2004........................................................ 9,450
Effective May 7, 1999 the Company entered into an interest rate collar
transaction agreement with its lending bank. The interest rate collar consists
of a cap rate of 6.5% and a floor rate of 4.62%. The one-time premium payment
for the collar was $225,000 and the agreement terminates March 31, 2002.
Quarterly on the last business day of March, June, September and December
beginning September 30, 1999 if the LIBOR interest rate at the lending bank is
greater than the cap rate, the lending bank agrees to pay the Company a notional
amount as described in the agreement multiplied by the number of days in that
quarter over 365 days times the difference between the LIBOR rate and the cap
rate. If on the other hand the LIBOR rate is less than the floor rate, the
Company would have to pay the lending bank based on the same calculation. If the
LIBOR rate is between the cap and floor rate, no payments would be necessary by
either party. The LIBOR interest rate at December 31, 1999 was 6.18%.
9. STOCKHOLDERS' EQUITY
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, $1 par value, to THG in exchange for 2,750,741
shares of THG's common stock, no par value, (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 THG 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, both
described in Note 8.
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.
31
33
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with certain previous employment agreements, incremental
compensation in the amount of $6.9 million was paid at the time of closing in
1997, and the related agreements were terminated. These costs have been recorded
in general and administrative expenses in the accompanying consolidated
statement of income.
Stock Option Plan
In connection with the recapitalization transaction described above, THG's
Board of Directors adopted and the stockholders approved the 1997 Stock Option
Plan (the "Plan"). The Plan provides for the grant of incentive stock options
and non-qualified stock options to employees, officers, directors, and
consultants of the Company's, except that incentive stock options may not be
issued to consultants or non-employee directors. A total of 1,563,020 shares of
THG's common stock were reserved for issuance under the Plan. In order to
provide for the Company's larger size and the addition of Rival's employees
following the acquisition, the Option Plan was amended to increase the number of
shares available for grant to 4,260,978. The exercise price and period over
which options become exercisable will be determined by the Board of Directors.
However, the exercise price of incentive stock options will be equal to at least
100% of the fair market value of THG's common stock on the date of grant (110%
for individuals holding more than 10% of THG's common stock). Options will
expire no later than 10 years after date of grant (5 years for individuals
holding more than 10% of THG's common stock). The Plan will expire in November
2006.
The following summarizes stock option activity under the plan:
EXERCISE WEIGHTED AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
--------- ------------- ----------------
Outstanding as of December 31, 1997............... -- -- --
Granted during 1998............................... 1,474,152 $3.50 $3.50
Exercised during 1998............................. -- -- --
Forfeited during 1998............................. (25,800) $3.50 $3.50
--------- ------------- -----
Outstanding as of December 31, 1998............... 1,448,352 $3.50 $3.50
Granted during 1999............................... 2,380,404 $5.04 $5.04
Exercised during 1999............................. -- -- --
Forfeited during 1999............................. (161,670) $3.50 - $5.04 $4.48
--------- ------------- -----
Outstanding as of December 31, 1999............... 3,667,086 $3.50 - $5.04 $4.46
--------- ------------- -----
Number of shares exercisable as of December 31,
1999............................................ 307,421 $3.50 $3.50
Total available for grant as of December 31,
1999............................................ 593,892 -- --
The following table summarizes information about the 1997 Plan stock
options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------------
WEIGHTED
AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED NUMBER WEIGHTED
EXERCISES OUTSTANDING AT LIFE AVERAGE EXERCISABLE AT AVERAGE
PRICES DECEMBER 31, 1999 (YEARS) EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE
- --------------- ----------------- ----------- -------------- ----------------- --------------
$3.05 1,389,682 8.5 $3.05 307,421 $3.05
$5.04 2,277,404 9.2 $5.04 -- $5.04
--------- ----- ------- -----
3,667,086 $4.46 307,421 $3.05
========= ===== ======= =====
32
34
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-based compensation
The Company accounts for stock-based compensation using the method
prescribed in Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees". Accordingly, no compensation cost has been recognized for
the Company's stock option plan. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" ("FAS 123"). Had compensation cost been determined
based on fair value at the grant dates for awards in 1998 and 1999, consistent
with the provisions of FAS 123, the Company's net income would have been reduced
to the pro forma amounts indicated below:
1998 1999
------ ------
(IN THOUSANDS)
Net income -- as reported................................... $8,961 $1,812
Net income -- pro forma..................................... 8,805 1,286
The fair value of options granted at date of grant was estimated using the
Black-Sholes model with the following assumptions:
1998 1999
------ ------
Weighted average expected life (years)...................... 6.0 6.0
Weighted average interest rate.............................. 5.32% 5.12%
The weighted average grant date fair value of options granted during 1998
and 1999 was $1.17 and $1.30 per share, respectively.
Stock Split
In April 1998, the Company's Board of Directors approved an increase in the
number of authorized shares of common stock from 15,000 with no par value to
12.5 million with a $.001 par value. The change in par value did not affect any
of the existing rights of shareholders and has been recorded as an adjustment to
additional paid-in capital and common stock. In addition, the Company's Board of
Directors approved a 21,159-for-1 stock split. Shares outstanding have been
adjusted for all periods presented to reflect post-split amounts.
Warrant
In conjunction with the recapitalization transaction described above, THG
issued a warrant to Pentland to purchase 24 shares of common stock at an
exercise price of $74,012 per share (pre stock split). This warrant is
exercisable only upon the occurrence of one of the following by November 26,
1999: (a) an initial public offering of equity securities by THG, provided that
this offering includes or is followed within specified time periods by sales of
shares offered by selling stockholders, (b) a sale of the Company, (c) a sale by
the new majority stockholder and its affiliates of all or substantially all of
their holdings of THG's common stock or (d) a further recapitalization of the
Company through the issuance of additional debt. The warrant expired on November
26, 1999 as none of the conditions of excerisability occurred. Management has
determined that the value of the warrant is not material to the Company's
consolidated financial statements.
Stockholders' Agreement
All of the holders of THG's outstanding stock are subject to stockholders'
agreements. These agreements provide the Company with a right of first refusal
on any proposed sales of stock to outside parties. Additionally, THG has certain
rights to purchase shares of Common Stock and options from employees upon their
termination of employment.
33
35
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. Under SFAS 109, the
benefit associated with future deductible temporary differences and operating
loss or credit carryforwards is recognized if it is more likely than not that a
benefit will be realized. Deferred tax expense (benefit) represents the change
in the net deferred tax asset or liability balance.
Income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---------- ----------- ------------
Current:
Federal................................... $1,514,000 $ 1,844,000 $ (7,309,000)
State..................................... 534,000 366,000 115,000
Foreign................................... 863,000 753,000 2,046,000
---------- ----------- ------------
Total current............................. 2,911,000 2,963,000 (5,148,000)
---------- ----------- ------------
Deferred:
Federal................................... $ (547,000) $ (609,000) $ 2,770,000
State..................................... (168,000) (132,000) 92,000
Foreign................................... -- -- 2,199,000
---------- ----------- ------------
Total deferred............................ (715,000) (741,000) 5,061,000
---------- ----------- ------------
$2,196,000 $ 2,222,000 $ (87,000)
========== =========== ============
Pre-tax income (loss) is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---------- ----------- ------------
Domestic.................................... $ (715,000) $ 988,000 $(16,464,000)
Foreign..................................... 6,983,000 10,195,000 18,189,000
---------- ----------- ------------
$6,268,000 $11,183,000 $ 1,725,000
========== =========== ============
The two subsidiaries which are incorporated and based in the People's
Republic of China have a two-year tax holiday on the basis that they expect to
operate in China for ten or more years. The tax holiday provides for an
exemption from income tax in the first two profit-making years and for a 50%
reduction in the subsequent three years. The first profit-making year is defined
as the year in which the foreign enterprise recognizes profit on a cumulative
basis for the first time, after offsetting prior years' losses. Losses can be
carried forward for a maximum of five years.
Dongguan Raider Motor Corp. Ltd. has been profitable for over 5 years and
therefore has technically passed the tax holiday. However, since over 70% of
Dongguan Raider Motor Corp. Ltd's sales were exported, it is eligible to claim
the status of "export oriented enterprise" and thus is entitled to a 50%
reduction in the tax rate. Dongguan Huixin Electrical Products Company, Ltd. has
made profits in 1997 and 1998 and is now in the tax holiday period which
provides for a 50% reduction in the tax rate.
If not exempt, the statutory tax rate which applies to these companies in
China is 24% (prior to the 50% reduction described above for the first three
years after the exemption expires), as their operations are located in a region
of China where tax incentives are applicable.
34
36
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bahamas registered companies (HPFEL and Raider Motor Corp.) are subject
to tax in Hong Kong at 16.5% only to the extent that their income is deemed to
be onshore Hong Kong.
The Company's effective tax rate varies from the statutory U.S. federal tax
rate as a result of the following:
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
----- ----- ------
Statutory U.S. federal tax rate............................ 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit.................... .5 1.4 (30.1)
Foreign earnings taxed at different rates.................. (17.6) (17.1) (102.7)
Valuation allowance on deferred tax assets................. 15.6 -- 16.4
Goodwill amortization...................................... -- -- 41.2
Non-deductible expenses.................................... .5 .3 3.8
Other...................................................... 1.0 .3 31.4
----- ----- ------
Effective tax rate......................................... 35.0% 19.9% (5.0)%
===== ===== ======
Deferred tax assets and deferred tax liabilities are comprised of the
following at December 31, 1998 and 1999:
DECEMBER 31,
------------------------
1998 1999
---------- ----------
Deferred tax assets:
Net operating losses to be carried back................... -- 3,729,000
Accrued expenses.......................................... 2,632,000 4,712,000
Inventory................................................. 2,144,000 1,910,000
Interest limitation carryforward.......................... 1,367,000 964,000
Intangibles............................................... -- 997,000
Property and equipment.................................... 483,000 --
Accounts receivable....................................... 287,000 5,348,000
---------- ----------
Gross deferred tax assets.............................. 6,913,000 17,660,000
Deferred tax liabilities:
Property and equipment.................................... -- (5,653,000)
Employee pension plan..................................... -- (867,000)
---------- ----------
Net deferred tax assets before valuation allowance..... 6,913,000 11,140,000
Valuation allowance....................................... (1,367,000) (1,650,000)
---------- ----------
Net deferred tax assets................................... 5,546,000 9,490,000
========== ==========
The deductibility of interest paid to or guaranteed by Pentland and its
affiliates while THG was a majority-owned subsidiary of Pentland was subject to
certain limitations under the U.S. Internal Revenue Code. Primarily as a result
of the compensation recorded in conjunction with the recapitalization
transaction described in Note 9, approximately $2,500,000 of interest expense
incurred by THG during the year ended December 31, 1997 was not deductible for
income tax purposes. Such amounts can be carried forward indefinitely. However,
due to the impact of the Company's current debt structure on future operating
results and the Internal Revenue Code limitations, management has provided a
valuation allowance of $964,000 against the deferred tax asset arising from this
carryforward. The utilization of this carryforward may be further limited as a
result of the change in ownership that occurred as part of the recapitalization
of the
35
37
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, although this limitation will primarily impact only the timing of any
possible utilization. If the Company is able to utilize this deduction, it will
reduce income tax expense in future years. In addition, the Company generated
state net operating losses of $11,748,000 during fiscal 1999 resulting in a
deferred tax asset of $886,000. The Company has provided a valuation reserve of
$686,000 against this asset due to the inability to carry these losses back and
the brevity of the state carryforward period.
In general, no provision has been recorded for U.S. or additional foreign
taxes on undistributed earnings of foreign subsidiaries, as it is management's
intention that these earnings will continue to be reinvested. It is not
practicable to estimate the amount of additional tax that might be payable on
such earnings. Total undistributed earnings of foreign subsidiaries as of
December 31, 1999 are approximately $27,693,000.
11. LEASES
In addition to leasing property and equipment under various capital leases
(Note 6), the Company has various noncancellable operating leases for
facilities, vehicles and office equipment which expire at various dates through
2015. Certain of these leases contain options for renewal or purchase of the
underlying asset. Rent expense was approximately $3,099,000 in 1997, $3,916,000
in 1998 and $7,052,000 in 1999.
Subsequent to year end on January 7, 2000, the Company signed a 15 year
lease agreement for its new corporate headquarters facility and distribution
center currently under construction. The lease payments commence September 1,
2000 for a portion of the facility and December 1, 2000 for the full facility.
Yearly lease payments of $2,265,415 increase every three years by a factor of up
to 6.75%.
At December 31, 1999, future minimum rental payments under noncancellable
lease arrangements (including the new corporate headquarters facility and
distribution center) are as follows:
OPERATING CAPITAL
LEASES LEASES
----------- --------
2000........................................................ $ 5,943,000 $143,000
2001........................................................ 5,151,000 --
2002........................................................ 4,812,000 --
2003........................................................ 4,326,000 --
2004 and thereafter......................................... 36,079,000 --
----------- --------
$56,311,000 $143,000
===========
Less: amount representing interest.......................... 4,000
--------
Present value of obligations under capital leases........... $139,000
Comprised of:
Current portion........................................... $139,000
Non-current portion....................................... --
--------
$139,000
========
12. EMPLOYEE BENEFIT PLANS
THG provides its employees with a defined contribution retirement plan
under section 401(k) of the Internal Revenue Code. All employees are eligible to
participate in the plan and contribute up to 15% of their compensation, which is
then invested in one or more investment funds. THG matches up to 3% of an
employee's contribution. Employees of THG's subsidiary, The Rival Company, are
not eligible for this plan.
The Rival Company has a Savings Plan (401k) which allows employees to make
voluntary contributions of up to 15% of annual compensation, as defined. The
Company makes partial matching contributions.
36
38
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HPFEL provides its Hong Kong based employees with a defined contribution
retirement plan. All Hong Kong based employees of HPFEL and Esteem Industries
Ltd. may contribute 5% of their compensation, with the Company contributing an
additional 5% to 7 1/2% of an employee's compensation.
The Company's contributions to these plans approximated $277,000, $308,000
and $542,000 in 1997, 1998 and 1999, respectively.
As part of the acquisition as described in Note 3, THG acquired three Rival
Company defined benefit pension plans. The plans have not been amended from the
acquisition date through December 31, 1999.
The benefits for one of these plans, The Rival Company Retirement Plan for
Sales, Administrative and Clerical Employees, are based primarily on years of
service and employees' pay near retirement. The benefits for the other two
plans, The Rival Company Jackson Plant Employees' Retirement Plan and The Rival
Manufacturing Company Clinton Plant Employees' Retirement Plan, are based
primarily on years of service. All of the defined benefit plans are
noncontributory. The company's funding policy is consistent with the funding
requirements under ERISA and the Internal Revenue Code.
Statement of Financial Accounting Standards No. 132, "Employer's
Disclosures about Pension and Other Postretirement Benefits," first became
applicable in 1999.
FISCAL YEAR ENDED
DECEMBER 31, 1999
-----------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ --
Service cost................................................ 729,989
Interest cost............................................... 930,357
Actuarial (gain)/loss....................................... (1,080,411)
Acquisition................................................. 15,374,393
Benefits paid............................................... (533,031)
-----------
Benefit obligation at end of year........................... $15,421,297
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. --
Actual return on plan assets................................ $ (410,186)
Acquisition................................................. 17,550,509
Employer contribution....................................... 332,056
Benefits paid............................................... (533,031)
-----------
Fair value of plan assets at end of year.................... 16,939,348
Funded status............................................... 1,518,051
Unrecognized transition asset............................... --
Unrecognized prior service cost............................. --
Unrecognized net actuarial (gain)/loss...................... 748,142
-----------
(Accrued)/prepaid benefit cost.............................. $ 2,266,193
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31, 1999
Discount rate............................................... 8.00%
Expected return on plan assets.............................. 9.00%
Rate of compensation increase............................... 4.50%
37
39
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED
DECEMBER 31, 1999
-----------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................................ $ 729,989
Interest cost............................................... 930,357
Expected return on plan assets.............................. (1,418,368)
Recognized net actuarial loss............................... --
Amortization of transition obligation....................... --
Amortization of prior service cost.......................... --
-----------
Net periodic pension cost................................... $ 241,978
WEIGHTED-AVERAGE ASSUMPTIONS AS OF ACQUISITION DATE
Discount rate............................................... 6.75%
Expected return on plan assets.............................. 9.00%
Rate of compensation increase............................... 4.50%
13. BUSINESS AND CREDIT CONCENTRATIONS AND BUSINESS SEGMENTS
Business and Credit Concentrations
THG sells its products to retailers throughout the United States, Canada
and Europe. Three customers accounted for approximately 17%, 11% and 11%,
respectively, of total sales in 1997. These same three customers accounted for
approximately 22%, 14% and 12%, respectively, of total sales in 1998. Two of
these customers accounted for approximately 27% and 11%, respectively, of total
sales in 1999. Accounts receivable due from the single largest customers
amounted to 27% and 29% of total accounts receivable at December 31, 1998 and
1999, respectively.
Certain of THG's retail customers have filed for bankruptcy protection
during 1998 and 1999. Management monitors and evaluates the credit status of its
customers, and adjusts sales terms as appropriate. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
exceeded management's expectations. THG has also entered into an agreement with
an insurance company to insure THG's receivables from certain pre-determined
customers, up to specified limits, if the customer defaults on payment. In
exchange, THG pays a monthly fee. Management does not believe that the Company
is subject to any other unusual risks beyond the normal credit risk attendant to
operating their business.
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 and lighting products to retailers
throughout the U.S. The consumer
38
40
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
durables segment is made up of home environment products and kitchen electric
products and is 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.
CONSUMER CONSOLIDATED
DURABLES FAR EAST INTERNATIONAL INDUSTRIAL ELIMINATIONS TOTALS
-------- -------- ------------- ---------- ------------ ------------
Net sales to customers........ 1999 $436,643 $ 6,566 $ 38,953 $24,671 -- $506,833
1998 203,940 5,070 5,469 -- -- 214,479
1997 184,626 2,428 5,099 -- -- 192,153
Intersegment net sales........ 1999 -- 154,501 -- -- (154,501) --
1998 -- 106,241 -- -- (106,241) --
1997 -- 83,626 -- -- (83,626)
Depreciation and
amortization................ 1999 8,432 4,764 170 1,767 -- 15,133
1998 2,770 4,571 7 -- (100) 7,248
1997 5,521 2,077 5 -- (130) 7,473
Net interest expense
(income).................... 1999 33,489 (25) -- 8 -- 33,472
1998 14,337 (890) 404 -- (18) 13,833
1997 6,432 579 85 -- -- 7,096
Other operating costs......... 1999 401,887 144,678 36,240 27,802 (154,191) 456,416
1998 187,470 97,261 4,872 -- (105,166) 184,437
1997 174,718 76,616 4,846 -- (82,443) 173,737
Segment income (loss)......... 1999 (7,165) 11,650 2,543 (4,906) (310) 1,812
1998 (637) 10,369 186 -- (957) 8,961
1997 (2,045) 6,782 163 -- (1,053) 3,847
Segment assets................ 1999 656,448 63,828 29,620 5,624 (299,024) 456,496
1998 103,418 41,734 4,821 -- (18,616) 131,357
1997 115,070 32,621 3,966 -- (16,492) 135,165
Segment capital
expenditures................ 1999 4,212 12,534 240 628 -- 17,614
1998 2,784 1,963 2 -- -- 4,749
1997 4,509 1,304 2 -- -- 5,815
39
41
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accounting policies of the reportable segments are the same as those
described in Note 2 of the Notes to Consolidated Financial Statements. The
results are disaggregated using a management approach, which is consistent with
the manner in which the Company's management internally disaggregates financial
information for the purposes of assisting in making internal operational
decisions.
Other operating costs include: cost of sales, operating expenses, other
(income) expense, net and income taxes.
The following information is summarized by geographic area:
CANADA CONSOLIDATED
UNITED STATES FAR EAST AND EUROPE TOTAL
------------- ----------- ----------- ------------
Net sales:
Year ended December 31, 1997.... $184,626,000 $ 2,428,000 $ 5,099,000 $192,153,000
Year ended December 31, 1998.... 203,940,000 5,070,000 5,469,000 214,479,000
Year ended December 31, 1999.... 461,314,000 6,566,000 38,953,000 506,833,000
Identifiable assets:
December 31, 1998............... 3,232,000 12,510,000 10,000 15,752,000
December 31, 1999............... 35,991,000 20,264,000 527,000 56,782,000
Net sales are grouped based on the geographic origin of the transaction.
Net sales in the United States include direct export sales to Europe.
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.
14. COMMITMENTS AND CONTINGENCIES
THG is a party to several agreements to license certain technologies and
products. These license agreements generally provide for royalties based on
sales of the related products by THG. Such royalties have not been material to
date.
In January 1998, THG entered into an exclusive license and supply agreement
for certain chemical additives. The agreement provides for a minimum annual
royalty payment by THG of $240,000 that commenced in September 1998. THG has an
annual minimum purchase obligation under this agreement of $100,000 in 1998 and
$110,000 in 1999.
The Company is involved in litigation and is the subject of claims arising
in the normal course of its business. HPFEL has a contingent liability related
to potential withholding taxes (and the surcharges thereon) on rent paid to the
spouse of one of the directors (see Note 4). Although the individual has
accepted responsibility for the payment of these taxes, the Company would be
accountable for these tax payments in the event that the individual did not
fulfill this obligation. 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.
The Company has entered into employment agreements with several executives,
which expire on December 31, 2000, renewable for annual periods by mutual
consent. These agreements provide that if employment is terminated without
cause, the employees will receive severance payments of their respective
salaries for the longer of 12 months or the remainder of the term, in the case
of the Company's president, or for 12 months, in the case of the other
executives.
40
42
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Beginning July 1, 1997, Hong Kong has been governed by the People's
Republic of China. Management does not believe that this event has materially
affected the Company's financial position or results of operations and cash
flows.
15. DISTRIBUTION OF PROFIT
Amounts that can be distributed by HPFEL's subsidiaries in China are based
on the financial regulations of China, which differ from accounting principles
generally accepted in the United States. In particular, HPFEL's two Chinese
operating subsidiaries, Dongguan Huixin Electrical Products Company, Ltd. and
Dongguan Raider Motor Corp. Ltd., are deemed to be wholly owned foreign
enterprises and, as such, Chinese laws and regulations require these companies
to transfer to separate reserves a certain portion of after-tax profit each year
for specific purposes. These purposes include enterprise expansion, repair and
maintenance of fixed assets and staff welfare. These reserves are deemed to be
non-deductible to the parent company.
The amount transferred to the reserve fund must be at least 10% of the
after-tax profit each year, determined in accordance with the financial
regulations of China, up to a cumulative maximum of 50% of the entity's
registered capital stock. Transfers to the staff welfare fund can be determined
by management. Management has decided that no transfers are to be made to the
employee staff welfare fund in 1998.
Consistent with standard practice in China, Dongguan Huixin Electrical
Products Company, Ltd. and Dongguan Raider Motor Corp. Ltd. account for their
staff welfare commitments on a monthly basis and the amounts involved are
charged directly to the profit and loss account. Such expenses were not material
in 1997, 1998 and 1999.
The retained earnings (accumulated losses) of these companies, including
earnings attributable to the former minority stockholders, on the basis of
accounting principles generally accepted in the United States, are as follows:
1998 1999
---------- ----------
Dongguan Raider Motor Corp. Ltd............................. $8,860,000 $9,633,000
Dongguan Huixin Electrical Products Company, Ltd. .......... 1,997,000 4,780,000
The currency of China, the reminbi, is not freely convertible and the
ability of these subsidiaries to remit retained earnings to the parent company
is dependent on their ability to generate foreign currency denominated earnings
or to obtain government approval for the purchase of foreign currency.
16. FINANCIAL INSTRUMENTS
The company enters into various types of financial instruments in the
normal course of business. Fair values are estimated based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates reflecting varying degrees of perceived risk. Accordingly, the
fair values may not represent actual values of the financial instruments that
could have been realized as of year end or that will be realized in the future.
Fair values for cash and cash equivalents, accounts receivable, other
receivables, income taxes receivable, accounts payable, accrued expenses,
accrued income taxes and capital lease obligations approximate their carrying
values at December 31, 1998 and 1999, due to their relatively short maturity.
The fair values of the Company's Notes and Credit Facility approximate their
carrying values at December 31, 1999 because the interest rates on these
borrowings approximate current market rates.
41
43
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. CONDENSED CONSOLIDATING INFORMATION
The senior subordinated notes described in Note 8 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), Manufacturing, Motor
and Taiwan, the guarantor subsidiaries, and (iii) HPFEL, Canada, Bionaire
International B.V., The Rival Company of Canada, Ltd., Waverly Products Company,
Ltd., and Rival de Mexico S.A. de C.V. the non-guarantor subsidiaries. There
were no transactions between Rival, Manufacturing, Motor and Taiwan, or between
HPFEL and Canada, during any of the periods presented. Taiwan had no revenues or
operations during the periods presented, and Manufacturing ceased operations in
March 1997. As further described in Note 15, certain of HPFEL's subsidiaries in
China have restrictions on distributions to their parent companies.
42
44
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 1,545 $-- $ 3,834 -- $ 5,379
Accounts receivable, net........ 35,558 -- 1,409 -- 36,967
Inventories..................... 44,748 -- 13,142 $ (4,550) 53,340
Prepaid expenses and other
current assets............... 869 -- 1,158 -- 2,027
Deferred income taxes........... 4,983 -- -- -- 4,983
Income taxes receivable......... -- -- -- -- --
Due from affiliates............. (89) 89 14,066 (14,066) --
-------- --- ------- -------- --------
Total current assets......... 87,614 89 33,609 (18,616) 102,696
-------- --- ------- -------- --------
Property and equipment, net....... 3,132 -- 12,520 100 15,752
Deferred income taxes............. 563 -- -- -- 563
Deposits and other assets......... 12,020 1 425 (100) 12,346
Investments in consolidated
subsidiaries.................... 19,677 -- -- (19,677) --
-------- --- ------- -------- --------
$123,006 $90 $46,554 $(38,293) $131,357
======== === ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease
obligations and other debt... $ -- $-- $ 604 -- $ 604
Accounts payable................ 2,400 -- 12,604 -- 15,004
Accrued expenses................ 8,960 -- 3,332 -- 12,292
Accrued income taxes............ 1,922 -- 1,785 -- 3,707
Due to affiliates............... 10,113 -- 3,953 $(14,066) --
-------- --- ------- -------- --------
Total current liabilities.... 23,395 -- 22,278 (14,066) 31,607
-------- --- ------- -------- --------
Capital lease obligations......... -- -- 139 -- 139
-------- --- ------- -------- --------
Line of credit.................... 10,000 -- -- -- 10,000
-------- --- ------- -------- --------
Long-term debt.................... 105,000 -- -- -- 105,000
-------- --- ------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value... 10 1 -- (1) 10
Common stock, $1 par value...... -- -- 100 (100) --
Additional paid in capital...... 16,985 -- -- -- 16,985
Accumulated other comprehensive
income....................... (40) -- -- -- (40)
Treasury stock.................. (62,058) -- -- -- (62,058)
Retained earnings............... 29,714 89 24,037 (24,126) 29,714
-------- --- ------- -------- --------
Total stockholders' equity
(deficit).................. (15,389) 90 24,137 (24,227) (15,389)
-------- --- ------- -------- --------
$123,006 $90 $46,554 $(38,293) $131,357
======== === ======= ======== ========
43
45
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
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......................... 3,148 226,104 21,814 $(251,066) --
-------- -------- ------- --------- --------
Total current liabilities............... 23,779 251,093 52,145 (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 8,407 36,752 (45,159) 31,526
-------- -------- ------- --------- --------
Total stockholders' equity (deficit).... 37,800 8,409 37,249 (45,658) 37,800
-------- -------- ------- --------- --------
$400,289 $261,783 $93,448 $(299,024) $456,496
======== ======== ======= ========= ========
44
46
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales..................... $183,386 $1,240 $91,153 $(83,626) $192,153
Cost of goods sold............ 143,584 1,244 74,425 (82,513) 136,740
-------- ------ ------- -------- --------
Gross profit................ 39,802 (4) 16,728 (1,113) 55,413
-------- ------ ------- -------- --------
Operating expenses:
Selling..................... 15,317 -- 330 -- 15,647
General and
administrative........... 13,401 15 7,467 -- 20,883
Product development......... 5,348 -- 115 -- 5,463
-------- ------ ------- -------- --------
Total operating
expenses............... 34,066 15 7,912 -- 41,993
-------- ------ ------- -------- --------
Operating profit
(loss)................. 5,736 (19) 8,816 (1,113) 13,420
-------- ------ ------- -------- --------
Other income and expense:
Other (income) expense,
net...................... -- -- 42 14 56
Interest expense, net....... 6,432 -- 664 -- 7,096
-------- ------ ------- -------- --------
Total other income
(expense).............. 6,432 -- 706 14 7,152
-------- ------ ------- -------- --------
Income (loss) before income
taxes and equity in income
of consolidated
subsidiaries................ (696) (19) 8,110 (1,127) 6,268
Income tax expense
(benefit)................... 1,330 -- 940 (74) 2,196
-------- ------ ------- -------- --------
Income (loss) before equity in
income of consolidated
subsidiaries................ (2,026) (19) 7,170 (1,053) 4,072
Equity in income of
consolidated subsidiaries... 5,873 -- -- (5,873) --
-------- ------ ------- -------- --------
Income (loss) before minority
interest.................... 3,847 (19) 7,170 (6,926) 4,072
Minority interest in net
income of majority owned
subsidiaries................ -- -- 225 -- 225
-------- ------ ------- -------- --------
Net income (loss)............. $ 3,847 $ (19) $ 6,945 $ (6,926) $ 3,847
======== ====== ======= ======== ========
45
47
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales..................... $203,940 $-- $116,780 $(106,241) $214,479
Cost of goods sold............ 154,736 -- 97,039 (105,266) 146,509
-------- -- -------- --------- --------
Gross profit (loss)......... 49,204 -- 19,741 (975) 67,970
-------- -- -------- --------- --------
Operating expenses:
Selling..................... 19,740 -- 716 -- 20,456
General and
administrative........... 8,328 -- 8,311 -- 16,639
Product development......... 6,213 -- 82 -- 6,295
-------- -- -------- --------- --------
Total operating
expenses............... 34,281 -- 9,109 -- 43,390
-------- -- -------- --------- --------
Operating profit
(loss)................. 14,923 -- 10,632 (975) 24,580
-------- -- -------- --------- --------
Other income and expense:
Other (income) expense,
net...................... (216) -- (220) -- (436)
Interest and other expense,
net...................... 14,337 -- (486) (18) 13,833
-------- -- -------- --------- --------
Total other (income)
expense................ 14,121 -- (706) (18) 13,397
-------- -- -------- --------- --------
Income (loss) before income
taxes and equity in income
of consolidated subsidiaries
and minority interest....... 802 -- 11,338 (957) 11,183
Income tax expense............ 1,439 -- 783 -- 2,222
-------- -- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries and minority
interest.................... (637) -- 10,555 (957) 8,961
Equity in income of
consolidated subsidiaries... 9,598 -- -- (9,598) --
-------- -- -------- --------- --------
Income (loss) before minority
interest.................... 8,961 -- 10,555 (10,555) 8,961
Minority interest in net
income of majority owned
subsidiaries................ -- -- -- -- --
-------- -- -------- --------- --------
Net income (loss)............. $ 8,961 $-- $ 10,555 $ (10,555) $ 8,961
======== == ======== ========= ========
46
48
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales..................... $215,803 $245,512 $200,019 $(154,501) $506,833
Cost of goods sold............ 159,618 191,448 166,778 (154,190) 363,654
-------- -------- -------- --------- --------
Gross profit (loss)......... 56,185 54,064 33,241 (311) 143,179
-------- -------- -------- --------- --------
Operating expenses:
Selling..................... 27,621 33,226 6,605 -- 67,452
General and
administrative........... 9,146 9,645 9,543 -- 28,334
Product development......... 7,448 3,000 -- -- 10,448
Plant closing costs......... -- 2,439 -- -- 2,439
Amortization of goodwill and
other intangible
assets................... -- 2,634 66 -- 2,700
-------- -------- -------- --------- --------
Total operating expenses.... 44,215 50,944 16,214 -- 111,373
-------- -------- -------- --------- --------
Operating profit (loss)..... 11,970 3,120 17,027 (311) 31,806
-------- -------- -------- --------- --------
Other income and expense:
Other (income) expense,
net...................... -- (1,041) (1,448) -- (2,489)
Interest and other expense,
net...................... 33,423 74 (25) -- 33,472
-------- -------- -------- --------- --------
Total other (income)
expense................ 33,423 (967) (1,473) -- 30,983
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of and equity in earnings
from joint venture.......... (21,453) 4,087 18,500 (311) 823
Income tax expense
(benefit)................... (3,357) (1,037) 4,307 -- (87)
-------- -------- -------- --------- --------
Equity in earnings from joint
venture..................... (902) -- -- -- (902)
Income (loss) before equity in
income of consolidated
subsidiaries................ (17,194) 5,124 14,193 (311) 1,812
Equity in income of
consolidated subsidiaries... 19,006 -- -- (19,006) --
Net income (loss)............. $ 1,812 $ 5,124 $ 14,193 $ (19,317) $ 1,812
======== ======== ======== ========= ========
47
49
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Year Ended December 31, 1997
Net cash provided by (used for) operating activities........ $(45,543) $ 459 $ (1,289) $(46,373)
-------- ------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (4,509) -- (1,306) (5,815)
Purchase of minority interest............................. -- -- (451) (451)
-------- ------- -------- --------
Net cash used for investing activities.................. (4,509) -- (1,757) (6,266)
-------- ------- -------- --------
Cash flows from financing activities:
Borrowings of long-term debt.............................. 96,209 -- -- 96,209
Net borrowing of line of credit........................... 26,134 -- 1,002 27,136
Net repayments to affiliate............................... (23,000) -- -- (23,000)
Principal payments on capital lease obligations........... -- -- (481) (481)
Issuance of common stock.................................. 15,512 -- -- 15,512
Purchase of treasury stock................................ (62,058) -- -- (62,058)
Other net activity with Parent............................ (288) (459) 747 --
-------- ------- -------- --------
Net cash provided by (used for) financing activities.... 52,509 (459) 1,268 53,318
-------- ------- -------- --------
Net increase in cash and cash equivalents................... 2,457 -- (1,778) 679
Cash and cash equivalents, beginning of period.............. 1,284 -- 3,178 4,462
-------- ------- -------- --------
Cash and cash equivalents, end of period.................... $ 3,741 $ -- $ 1,400 $ 5,141
======== ======= ======== ========
Year Ended December 31, 1998
Net cash provided by operating activities................... $ 18,454 $ -- $ 5,801 $ 24,255
-------- ------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,784) -- (1,965) (4,749)
Purchase of minority interest............................. -- -- (451) (451)
-------- ------- -------- --------
Net cash used for investing activities.................. (2,784) -- (2,416) (5,200)
-------- ------- -------- --------
Cash flows from financing activities:
Debt issuance costs....................................... (295) -- -- (295)
Net borrowing of line of credit........................... (17,500) -- (1,002) (18,502)
Principal payments on capital lease obligations........... -- -- (701) (701)
Issuance of common stock.................................. 681 -- -- 681
Other net activity with Parent............................ (752) -- 752 --
-------- ------- -------- --------
Net cash used for financing activities.................. (17,866) -- (951) (18,817)
-------- ------- -------- --------
Net increase in cash and cash equivalents................... (2,196) -- 2,434 238
Cash and cash equivalents, beginning of period.............. 3,741 -- 1,400 5,141
-------- ------- -------- --------
Cash and cash equivalents, end of period.................... $ 1,545 $ -- $ 3,834 $ 5,379
======== ======= ======== ========
Year Ended December 31, 1999
Net cash provided by operating activities................... $(39,278) $33,563 $ 10,593 $ 4,878
-------- ------- -------- --------
Cash flows from investing activities:
Acquisition of business, net of cash acquired............. (279,571) -- -- (279,571)
Contribution in joint venture............................. (25) -- -- (25)
Proceeds from sale of assets held for sale and business
divestitures............................................ -- 23,787 -- 23,787
Distribution in earnings from joint venture............... 138 -- -- 138
Purchases of property and equipment....................... (1,700) (3,140) (12,774) (17,614)
Cash received from joint venture partners................. -- -- 4,504 4,504
-------- ------- -------- --------
Net cash used for investing activities.................. (281,158) 20,647 (8,270) (268,781)
-------- ------- -------- --------
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....... 27,329 -- -- 27,329
Borrowings on credit facility, net of issuance costs...... 198,704 -- -- 198,704
Principle payments on capital lease obligations........... -- -- (604) (604)
Debt issuance costs....................................... (658) -- -- (658)
Other net activity with Parent............................ 53,308 (52,942) (366) --
-------- ------- -------- --------
Net cash used for financing activities.................. 319,083 (52,942) (970) 265,171
-------- ------- -------- --------
Net increase in cash and cash equivalents................... (1,353) 1,268 1,353 1,268
Cash and cash equivalents, beginning of period.............. 1,545 (473) 4,307 5,379
-------- ------- -------- --------
Cash and cash equivalents, end of period.................... $ 192 $ 795 $ 5,660 $ 6,647
======== ======= ======== ========
48
50
SCHEDULE II
THE HOLMES GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
--------------------- DEDUCTIONS
BALANCE AT CHARGED TO CHARGED WRITE-OFF OF BALANCE
BEGINNING COSTS AND TO OTHER UNCOLLECTIBLE AT END OF
OF PERIOD EXPENSES ACCOUNTS ACQUISITION ACCOUNTS PERIOD
---------- ---------- -------- ----------- ------------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1997......... $1,113 $ 330 $ -- $ -- $984 $ 459
Year ended December 31, 1998......... 459 523 -- -- 263 719
Year ended December 31, 1999......... 719 1,297 -- 8,751 710 10,057
ADDITIONS
-----------------------
NET DEDUCTIONS
OPERATING ---------------------------
CHARGED TO LOSSES NET
BALANCE AT INCOME WITHOUT OPERATING CHARGED BALANCE
BEGINNING TAX TAX LOSSES TO OTHER AT END OF
OF PERIOD EXPENSE BENEFIT(1) UTILIZED ACCOUNTS PERIOD
---------- ---------- ---------- ----------- ------------- ---------
Deferred tax valuation allowance:
Year ended December 31, 1997........... $ 469 $1,447(1) $ -- $ 469 -- $1,447
Year ended December 31, 1998........... 1,447 -- -- -- 80 1,367
Year ended December 31, 1999........... 1,367 283 -- -- -- 1,650
ADDITIONS DEDUCTIONS
---------- ----------
BALANCE AT CHARGED TO WRITE-OFF BALANCE
BEGINNING COSTS AND OF AT END OF
OF PERIOD EXPENSES ACQUISITION INVENTORY PERIOD
---------- ---------- ----------- ---------- ---------
Inventory obsolescence reserve:
Year ended December 31, 1997................... $2,003 $2,268 $ -- $ 807 $ 3,464
Year ended December 31, 1998................... 3,464 1,522 -- 1,069 3,917
Year ended December 31, 1999................... 3,917 1,456 10,082 4,523 10,932
- ---------------
(1) The Company was subject to certain limitations on interest paid to or
guaranteed by Pentland. See Note 10 of Notes to Consolidated Financial
Statements.
49
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
directors and executive officers. The directors are elected annually by the
stockholders. Pursuant to the terms of a Stockholders' Agreement entered into in
connection with the 1997 Transactions, the stockholders have agreed to vote in
favor of the election of the persons named as directors below.
NAME AGE POSITION
- ---- --- --------
Jordan A. Kahn....................... 58 President, Chief Executive Officer and Director
Stanley Rosenzweig................... 35 Chief Operating Officer and Director
Gregory F. White..................... 35 Executive Vice President, Sales and Marketing and
Director
Ira B. Morgenstern................... 47 Chief Financial Officer and Treasurer
(Tommy) Woon Fai Liu................. 47 Managing Director of Holmes' Far East Operations and
Director
Louis F. Cimini...................... 45 Senior Vice President -- Human Resources and
Organization Performance
Richard K. Lubin..................... 53 Director
Randy Peeler......................... 35 Director
Thomas K. Manning.................... 58 Director
Jordan A. Kahn, Holmes' founder, has served as President and Chief
Executive Officer and a director since Holmes' organization in 1982. Since 1968,
Mr. Kahn has also been President of Jordan Kahn Co., Inc. a manufacturer's
representative representing small electric personal appliance manufacturers,
including the Company, to retailers across the Northeast.
Stanley Rosenzweig has served with Holmes since 1991, initially as Vice
President -- Operations, and since 1993 as Chief Operating Officer and a
director. From 1987 to 1988, Mr. Rosenzweig served as a management consultant
with Bain & Company, and from 1988 to 1989 as a sales manager with Jolson
Corporation, a Canadian appliance company.
Gregory F. White has served as Executive Vice President, Sales and
Marketing since 1995, and from 1993 to 1995 as Vice President Marketing. He
became a director of Holmes in 1997. Mr. White served as Account Supervisor at
Ammirati & Puris, an advertising agency, from 1992 to 1993 and as Account
Manager at the advertising agency D'Arcy, Masius, Benton & Bowles from 1991 to
1992.
Ira B. Morgenstern, Chief Financial Officer and Treasurer, joined Holmes in
August, 1998 from Diageo, PLC, a combination of the food and beverage businesses
of Grand Metropolitan PLC and Guinness PLC, where he spent over six years in a
number of financial management positions in the U.S. and London, including Vice
President of Strategic Marketing Finance in the U.S. drinks division. Prior to
Diageo, Mr. Morgenstern served as Vice President of Ditri Associates, Inc., a
leveraged acquisition firm, consultant for Touche Ross, and internal auditor
with Atlantic Richfield.
(Tommy) Woon Fai Liu became Managing Director of Holmes' Far East
operations upon the closing of the 1997 Transactions. From 1993 to 1997, Mr. Liu
served as Chief Financial Officer and Executive Director of Asco General
Supplies Far East Limited, a subsidiary of Pentland, as well as Executive
Director of Holmes Far East since 1994. From 1989 to 1993, Mr. Liu was Finance
Director for Johnson & Johnson Hong Kong. He became a director of Holmes during
1999.
Louis F. Cimini joined the Company in December, 1999 from CGU, an insurance
company, where he was Vice President of Human Resources for two years. Prior to
joining CGU, Mr. Cimini spent nine years
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with PHH (now Cendant Mobility), a Fortune 500 corporate services organization,
as Senior Vice President of Human Resources and Quality, where he lead the human
resources elements of restructuring and re-engineering during several
acquisitions.
Richard K. Lubin is a Managing Director of Berkshire Partners, which he
co-founded in 1986. He became a director of Holmes in 1997, and has been a
director of many of Berkshire's manufacturing, retailing and transportation
investments, including, among others, InteSys Technologies, Inc. and English
Welsh & Scottish Railway, Ltd. In addition, Mr. Lubin is Treasurer of the
Dana-Farber Cancer Institute and a Trustee of Beth Israel Deaconess Medical
Center.
Randy Peeler is a Managing Director of Berkshire Partners, where he has
been employed since 1996. From 1994 to 1996, he was responsible for new business
ventures at Health Advances, a healthcare industry consulting firm. From 1993 to
1994, he served as Chief of Staff to the Assistant Secretary for Economic Policy
at the U.S. Department of the Treasury. Prior to that, he was a consultant with
Cannon Associates. Mr. Peeler became a director of Holmes in 1997, and also
serves as a director of Miami Cruisline Services, B.V. and Weigh-Tronix, Inc.
Thomas K. Manning became a director of Holmes in February, 1999 upon the
closing of the Rival acquisition. He was Chairman of the Board and Chief
Executive Officer of Rival, and served with Rival for over 20 years.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY
The following Summary Compensation Table sets forth information concerning
the compensation paid or accrued by Holmes to the Chief Executive Officer and
certain other persons who served as executive officers during the fiscal year
ended December 31, 1999.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ----------------------------
NAME AND OTHER ANNUAL STOCK OPTION ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) SHARES COMPENSATION
- ------------------ -------- -------- --------------- ------------ ------------
Jordan A. Kahn............ 1999 $488,804 $112,500 $ 15,600 490,538 $ --
President and Chief 1998 402,776 200,000 23,400 297,717 --
Executive Officer 1997 311,905 770,000 31,200 -- 3,964,000(2)
Stanley Rosenzweig........ 1999 353,441 112,500 15,600 367,903 4,800(3)
Chief Operating Officer 1998 253,960 125,000 15,600 297,717 4,800(3)
1997 228,859 296,000 15,600 -- 1,984,324(4)
Gregory F. White.......... 1999 277,638 112,500 10,200 367,903 4,800(3)
Executive Vice President 1998 205,054 100,000 10,200 297,717 4,800(3)
Sales and Marketing 1997 173,800 148,000 10,200 -- 509,237(5)
(Tommy) Woon Fai Liu...... 1999 250,000 112,500 43,701 50,000 --
Managing Director of 1998 200,000 100,000 43,701 60,000 --
Holmes Far East 1997 270,513(6) 66,667(7) 2,083 -- --
Ira B. Morgenstern(8)..... 1999 207,818 112,500 50,000(9) 135,000 4,800(3)
Chief Financial Officer
- ---------------
(1) Primarily represents automobile allowance, annual living expense allowance
or annual lease payments on automobile provided by Holmes.
(2) Represents bonuses paid in connection with the 1997 Transactions pursuant to
a previous employment agreement with Holmes.
(3) Represents Holmes' matching contribution under its 401(k) plan.
(4) Includes $9,500 representing Holmes' matching contribution under its 401(k)
plan, $20,824 paid in 1997 on account of a previous employment agreement
with Holmes and $1,954,000 which was paid in connection with the 1997
Transactions.
(5) Includes $9,237 representing Holmes' matching contribution under its 401(k)
plan and $500,000 which was paid in connection with the 1997 Transactions.
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(6) Includes compensation paid to Mr. Liu by Holmes and by an affiliate of
Pentland.
(7) Does not include any amounts paid by affiliates of Pentland for services
rendered to such affiliates.
(8) Mr. Morgenstern joined Holmes in August, 1998.
(9) Represents the 1999 payment of a relocation bonus in connection with joining
the Company.
OPTION GRANTS IN LAST FISCAL YEAR
The following table describes stock options granted during 1999 to the
executive officers set forth in the Summary Compensation Table above.
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATE OF
SECURITIES TOTAL STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM($)(2)
GRANTED EMPLOYEES PRICE EXPIRATION ----------------------
NAME (#)(1) IN 1999 ($/SH) DATE 5% 10%
- ---- ---------- ---------- -------- ---------- --------- ---------
Jordan A. Kahn............ 490,538 20.6% 5.04 02-05-09 1,554,823 3,940,228
Stanley Rosenzweig........ 367,903 15.5% 5.04 02-05-09 1,166,116 2,955,167
Gregory F. White.......... 367,903 15.5% 5.04 02-05-09 1,166,116 2,955,167
(Tommy) Woon Fai Liu...... 50,000 2.1% 5.04 02-05-09 158,481 401,623
Ira B. Morgenstern........ 135,000 5.7% 5.04 02-05-09 427,900 1,084,382
- ---------------
(1) These options to purchase Holmes' common stock were granted under Holmes'
1997 Stock Option Plan. Approximately one-half of each option grant consists
of "incentive stock options" (except for Mr. Kahn, who received only
non-qualified options), vesting over a five-year period. The remaining
options are non-qualified options whose vesting is tied to specific Holmes
performance measures.
(2) Net gains from potential stock option exercises are estimated based on
assumed rates of stock price appreciation over the options' terms, as set
forth in rules promulgated by the Securities and Exchange Commission, and
are not intended to forecast future appreciation of Holmes' common stock.
The actual net gains, if any, are dependent on the actual future performance
of the common stock, for which there is currently no public market.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table sets forth certain information concerning the number
and value of unexercised options to purchase Holmes' common stock at December
31, 1999.
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT YEAR-END(#) OPTIONS($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Jordan A. Kahn.............. -- -- 57,400 730,855 88,396 370,088
Stanley Rosenzweig.......... -- -- 57,400 608,220 88,396 370,088
Gregory F. White............ -- -- 57,400 608,220 88,396 370,088
(Tommy) Woon Fai Liu........ -- -- 11,568 98,432 17,815 74,585
Ira B. Morgenstern.......... -- -- 1,446 148,554 2,227 20,873
- ---------------
(1) Represents the assumed value of shares of Holmes' common stock covered by
outstanding options, less the aggregate option exercise price. There is
currently no public market for Holmes' common stock, and no valuation of
such common stock existed as of December 31, 1999. The price of the common
stock, valued on February 5, 1999, the date of the Rival acquisition
closing, was $5.04 per share.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Holmes' common stock. Except as indicated in the footnotes to this
table, the Company believes that the persons named in this table have sole
voting and investment power with respect to all shares of common stock
indicated.
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OUTSTANDING SHARES(2)
--------------------------------------- ----------- ---------------------
Berkshire Fund IV, Limited Partnership(3)................... 15,052,594 74.0%
Berkshire Fund V, Limited Partnership
c/o Berkshire Partners LLC
One Boston Place
Boston, MA 02108
Jordan A. Kahn(4)........................................... 2,621,330 12.7
Bain Securities, Inc.(5).................................... 1,028,214 5.1
c/o Bain Capital, Inc.
2 Copley Place
Boston, MA 02116
Stanley Rosenzweig(4)....................................... 314,596 1.5
Gregory F. White(4)......................................... 200,238 *
(Tommy) Woon Fai Liu(4)..................................... 139,987 *
Ira B. Morgenstern(4)....................................... 58,588 *
Richard Lubin(6)............................................ 15,052,594 74.0
Thomas K. Manning........................................... 100,000 *
Randy Peeler(6)............................................. 15,052,594 74.0
All directors and executive officers as a group (8
persons)(7)............................................... 18,487,333 90.1
- ---------------
* Less than 1.0%
(1) Unless otherwise specified, the address of each person is c/o The Holmes
Group, Inc., 233 Fortune Boulevard, Milford, MA 01757.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and reflects general voting power and/or investment power with
respect to securities. Shares of common stock subject to options or warrants
currently exercisable are deemed outstanding.
(3) Includes shares held by various investment entities affiliated with
Berkshire Partners LLC.
(4) Includes shares which may be held by family members or affiliates. Includes
the following shares subject to vested stock options: 57,400 option shares
held by each of Messrs. Kahn, Rosenzweig and White, 11,568 option shares
held by Mr. Liu, and 1,446 option shares held by Mr. Morgenstern. With
respect to Mr. Kahn, includes 194,472 shares held in trust for employees of
the Company as to which Mr. Kahn is voting trustee. Mr. Kahn disclaims
beneficial ownership of such shares.
(5) Includes shares held by affiliated investment entities.
(6) This person is affiliated with Berkshire Partners and may be deemed to have
a beneficial interest in certain of the shares held by its affiliates. This
person disclaims beneficial ownership of such shares.
(7) Includes stock options referred to in Note 4 and the shares referred to in
Note 6.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a letter agreement dated December 10, 1998 with two investment
funds affiliated with Berkshire Partners (the "Letter Agreement"), Berkshire
Partners received a fee of $2.0 million from Holmes as of the closing of the
Rival acquisition. Pursuant to a Management Agreement (the "Management
Agreement"), entered into in November, 1997 in connection with the 1997
Transactions, Berkshire Partners received a $1.5 million fee from Holmes and an
annual fee of $400,000 per year for the provision of management and advisory
services. The Letter Agreement increased the annual management fee to $500,000
following the closing of the Rival acquisition. The Management Agreement will be
in effect until November,
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2002, provided that the Management Agreement will terminate on the later of the
first date that (i) Berkshire Partners owns less than 40.0% of Holmes' common
stock on a fully diluted basis, and (ii) Berkshire Partners owns fewer common
shares than the members of Holmes' management, taken as a group, or fewer shares
than any other single stockholder. Berkshire Partners is also entitled to
designate two of Holmes' directors and has the right, at its election, to
increase the size of the Board of Directors and the number of directors
designated by it by an additional two directors. From time to time, Holmes may
pay additional consulting or other fees to Berkshire Partners.
Since its inception in 1982, Holmes has retained Jordan Kahn Co., Inc.
("JKC"), a corporation owned by Jordan A. Kahn, to serve as a sales
representative for Holmes in the northeastern United States. Pursuant to a
representation agreement between Holmes and JKC, Holmes has agreed to pay to JKC
a commission on net sales to JKC's customers in its territory, which fee is the
same fee paid by Holmes to other unaffiliated sales representatives
organizations representing Holmes in other territories throughout the United
States. Pursuant to this arrangement, Holmes paid a total of $367,000, $368,000
and $287,000 to JKC for the years ended December 31, 1997, 1998 and 1999,
respectively.
In connection with the 1997 Transactions, Holmes purchased a portion of the
shares of common stock of Holmes beneficially owned by an affiliate of Pentland,
its former majority stockholder, and issued to the Pentland affiliate a warrant
to purchase shares of Holmes' common stock under certain circumstances. In
addition, Holmes entered into new employment agreements with Messrs. Kahn,
Rosenzweig, White and Liu, and made certain payments to Messrs. Kahn, Rosenzweig
and White in connection with the 1997 Transactions.
During 1993, Holmes entered into a revolving credit facility with an
affiliate of Pentland, pursuant to which such affiliate provided short-term
loans to Holmes. Another affiliate of Pentland provided Holmes with trade
acceptance and letter of credit financing for its purchases from foreign
manufacturers. Holmes paid a commission for administrative services related to
the processing of these trade acceptances. In conjunction with the 1997
Transactions, all of the financing facilities provided by Pentland and its
affiliates were terminated and paid in full. In addition, a net payable of $10.0
million due to affiliates of Pentland was repaid in connection with the 1997
Transactions. See Note 4 of Notes to Consolidated Financial Statements.
In connection with the Rival acquisition, Holmes retained an affiliate of
Bain Securities, Inc., a stockholder of Holmes, to perform acquisition
consulting services, for which Holmes paid approximately $300,000 during 1998
and approximately $1,925,000 during 1999. Approximately $500,000 of the 1999
fees were paid in the form of 99,222 shares of Holmes' common stock. The Company
also paid $350,000 for professional fees related to the divestiture of Rival's
commercial and industrial and pump division business assets during 1999. The
remaining fees were paid in connection with the acquisition and for other
general consulting services.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
1. Financial Statements are listed in the Index to Consolidated
Financial Statements contained in Item 8 of this Report.
2. Financial Statement Schedules, to the extent required, are listed
in the Index to Consolidated Financial Statements contained in Item 8 of
this Report.
3. Exhibits are listed in subsection (c) below.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K dated October 8, 1999 reporting under
Item 5, Other Events, the consummation of the sale of Rival's Simer Pump
business unit.
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2. Current Report on Form 8-K dated December 21, 1999 reporting under
Item 5, Other Events, the consummation of the sale of Rival's industrial
and building supply products businesses.
(c) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Organization (as amended) of The Holmes Group,
Inc. f/k/a Holmes Products Corp.(1)
3.2 Articles of Organization of Holmes Manufacturing Corp.(1)
3.3 Articles of Organization of Holmes Air (Taiwan) Corp.(1)
3.4 Certificate of Incorporation of Holmes Motor Corp.(4)
3.5 Restated Certificate of Incorporation (as amended) of The
Rival Company(4)
3.6 Certificate of Incorporation (as amended) of Patton Electric
Company, Inc.(4)
3.7 Certificate of Incorporation (as amended) of Patton Building
Products, Inc.(4)
3.8 Certificate of Incorporation (as amended) of Rival Consumer
Sales Corporation(4)
3.9 Bylaws (as amended) of The Holmes Group, Inc. f/k/a Holmes
Products Corp.(1)
3.10 By-laws of Holmes Manufacturing Corp.(1)
3.11 By-laws of Holmes Air (Taiwan) Corp.(1)
3.12 By-laws of Holmes Motor Corp.(4)
3.13 By-laws of The Rival Company(4)
3.14 By-laws of Patton Electric Company, Inc.(4)
3.15 By-laws of Patton Building Products, Inc.(4)
3.16 By-laws of Rival Consumer Sales Corporation(4)
4.1 Stockholders' Agreement dated November 26, 1997 among The
Holmes Group, Inc. f/k/a Holmes Products Corp. and certain
stockholders thereof(1)
4.2 Registration Rights Agreement dated November 26, 1997 among
The Holmes Group, Inc. f/k/a Holmes Products Corp. and
certain stockholders thereof(1)
4.3 Indenture dated November 26, 1997 among The Holmes Group,
Inc. f/k/a Holmes Products Corp., Holmes Manufacturing
Corp., Holmes Air (Taiwan) Corp. and State Street Bank and
Trust Company(1)
4.4 Form of Senior Subordinated Notes due 2007 -- (Included in
Exhibit 4.3)(1)
4.5 Form of Note Guaranty -- (Included in Exhibit 4.3)(1)
4.6 First Supplemental Indenture and Guarantee dated October 14,
1998 among The Holmes Group, Inc. f/k/a Holmes Products
Corp., Holmes Manufacturing Corp., Holmes Air (Taiwan)
Corp., Holmes Motor Corp. and State Street Bank and Trust
Company(4)
4.7 Indenture dated February 5, 1999 among The Holmes Group,
Inc. f/k/a Holmes Products Corp., Holmes Manufacturing
Corp., Holmes Air (Taiwan) Corp., Holmes Motor Corp., The
Rival Company, Patton Electric Company, Inc., Patton
Building Products, Inc., Rival Consumer Sales Corporation
and State Street Bank and Trust Company(3)
4.8 First Amendment to Registration Rights Agreement dated
February 5, 1999 among The Holmes Group, Inc. f/k/a Holmes
Products Corp. and certain stockholders thereof(4)
4.9 First Amendment to Stockholders' Agreement dated February 5,
1999 among The Holmes Group, Inc. f/k/a Holmes Products
Corp. and certain stockholders thereof(4)
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.10 Second Supplemental Indenture and Guarantee dated February
5, 1999 among The Holmes Group, Inc. f/k/a Holmes Products
Corp., Holmes Manufacturing Corp., Holmes Air (Taiwan)
Corp., Holmes Motor Corp., Moriarty Acquisition Corp., The
Rival Company, Patton Electric Company, Inc., Patton
Building Products, Inc., Rival Consumer Sales Corporation
and State Street Bank and Trust Company(4)
10.1 Stock Purchase and Redemption Agreement dated as of October
27, 1997, as amended as of November 25, 1997, among Asco
Investments Ltd., Jordan A. Kahn, The Holmes Group, Inc.
f/k/a Holmes Products Corp., Holmes Products (Far East)
Limited and Holmes Acquisition LLC(1)
10.2 Stock Purchase Agreement dated as of October 27, 1997 among
Jordan A. Kahn and Holmes Acquisition LLC(1)
10.3 Executive Employment and Non-Competition Agreement dated
November 26, 1997 among The Holmes Group, Inc. f/k/a Holmes
Products Corp. and Jordan A. Kahn(1)
10.4 Executive Employment and Non-Competition Agreement dated
November 26, 1997 among The Holmes Group, Inc. f/k/a Holmes
Products Corp. and Stanley Rosenzweig(1)
10.5 Executive Employment and Non-Competition Agreement dated
November 26, 1997 among The Holmes Group, Inc. f/k/a Holmes
Products Corp. and Gregory F. White(1)
10.6 Employment Agreement dated November 16, 1997 among Holmes
Products (Far East) Limited and (Tommy) Woon Fai Liu(1)
10.7 The Holmes Group, Inc. f/k/a Holmes Products Corp. Amended
and Restated 1997 Stock Option Plan(4)
10.8 Non-transferable Common Stock Purchase Warrant dated
November 26, 1997 issued to Pentland Group plc(1)
10.9 The Holmes Group, Inc. f/k/a Holmes Products Corp. Employee
Stock Purchase Plan(4)
10.10 Agreement and Plan of Merger dated December 17, 1998, by and
among The Holmes Group, Inc. f/k/a Holmes Products Corp.,
Moriarty Acquisition Corp. and The Rival Company(2)
10.11 Confidentiality Agreement dated October 1, 1998, by and
between The Holmes Group, Inc. f/k/a Holmes Products Corp.
and BancAmerica Securities, Inc., on behalf of The Rival
Company(2)
10.12 Purchase Agreement dated as of January 29, 1999 among The
Holmes Group, Inc. f/k/a Holmes Products Corp., BancBoston
Robertson Stephens Inc. and Lehman Brothers Inc(2)
10.13 Investors Subscription Agreement dated February 5, 1999 by
and among The Holmes Group, Inc. f/k/a Holmes Products Corp.
and certain investors(3)
10.14 Amended and Restated Revolving Credit and Term Loan
Agreement dated as of February 5, 1999 among The Holmes
Group, Inc. f/k/a Holmes Products Corp., Moriarty
Acquisition Corp., The Rival Company, Holmes Products (Far
East) Limited, Esteem Industries Limited, Raider Motor
Corporation, Holmes Products (Europe) Limited, Bionaire
International B.V., Patton Electric Hong Kong, Limited, and
The Rival Company of Canada, Ltd., BankBoston, and the other
lending institutions party thereto, BankBoston, N.A. as
Administrative Agent and Lehman Commercial Paper Inc. as
Documentation Agent, with BancBoston Robertson Stephens Inc.
as Syndication Agent and Arranger and Lehman Brothers Inc.
as Co-Arranger(3)
10.15 Asset Purchase Agreement dated October 1, 1999 by and among
The Holmes Group, Inc. f/k/a Holmes Products Corp., The
Rival Company and Sta-Rite Industries(5)
10.16 Agreement of Purchase and Sale of Assets dated December 21,
1999 by and among The Holmes Group, Inc., The Rival Company,
Patton Building Products, Inc., Patton Electric Company,
Inc. and The Marley Company(6)
10.17 Employee Stockholders' Agreement dated April 23, 1998(7)
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.18 Voting Trust Agreement(7)
10.19 Lease Agreement between The Holmes Group, Inc. and ACRE HPC
LLC dated as of January 7, 2000(8)
21.1 Subsidiaries of Registrant(8)
23.1 Consent of PricewaterhouseCoopers LLP(8)
27.1 Financial Data Schedule(8)
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-4, as amended (Registration No. 333-44473).
(2) Incorporated by reference to the Registrant's Tender Offer Statement on
Schedule 14D-1 dated December 23, 1998, as amended.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated February 5, 1999.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the Fiscal Year ended December 31, 1998.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated October 8, 1999.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 21, 1999.
(7) Incorporated by reference to the Registrant's Registration Statement on Form
S-4, as amended (Registration No. 333-77905).
(8) Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE HOLMES GROUP, INC.
By: /s/ JORDAN A. KAHN
------------------------------------
Jordan A. Kahn, President,
Chief Executive Officer
Dated: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ JORDAN A. KAHN President, Chief Executive March 30, 2000
- --------------------------------------------------- Officer and Director (Principal
Jordan A. Kahn Executive Officer)
/s/ IRA B. MORGENSTERN Chief Financial Officer and March 30, 2000
- --------------------------------------------------- Treasurer (Principal Financial
Ira B. Morgenstern and Accounting Officer)
/s/ STANLEY ROSENZWEIG Chief Operating Officer and March 30, 2000
- --------------------------------------------------- Director
Stanley Rosenzweig
/s/ GREGORY F. WHITE Executive Vice President Sales March 30, 2000
- --------------------------------------------------- and Marketing and Director
Gregory F. White
/s/ RICHARD LUBIN Director March 30, 2000
- ---------------------------------------------------
Richard Lubin
/s/ RANDY PEELER Director March 30, 2000
- ---------------------------------------------------
Randy Peeler
/s/ THOMAS K. MANNING Director March 30, 2000
- ---------------------------------------------------
Thomas K. Manning
/s/ (TOMMY) WOON FAI LIU Director March 30, 2000
- ---------------------------------------------------
(Tommy) Woon Fai Liu
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