1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K/A* (AMENDMENT NO. 1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBERS: 333-44473 333-77905 THE HOLMES GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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 *AMENDMENT TO PART II, ITEM 7, AS SET FORTH HEREIN. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 AMENDMENT TO FORM 10-K We are filing this Amendment to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999. Part II, Item 7 ("Management's Discussion and Analysis of Financial Condition and Results of Operations") is being amended to revise certain information regarding the net sales and gross profit of our Rival subsidiary, as set forth in the second and third paragraphs under "Comparison of Years Ended December 31, 1999 and December 31, 1998." As required by the regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, the complete text of Item 7 as amended is set forth herein. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS All statements, other than statements of historical fact, included in this amended report, are or may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Various economic and competitive factors could cause actual results or events to differ materially from those discussed in such forward-looking statements, including without limitation, our degree of leverage, our dependence on major customers and key personnel, the integration of the Rival acquisition, competition, risks associated with foreign manufacturing, risks of the retail industry, potential product liability claims, the cost of labor and raw materials and the other factors which are described in our most recent Annual Report on Form 10-K, our most recent Registration Statement on Form S-4 (File No. 333-77905), our Current Reports on Form 8-K (filed February 10, 1999, October 12, 1999 and January 13, 2000), and from time to time in our other periodic reports filed with the Securities and Exchange Commission. Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized. Except as amended hereby, statements in our Annual Report on Form 10-K speak only as to the date of its filing. 1 3 PART II. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Sales of most of our products follow seasonal patterns that affect results of operations. In general, sales of fans occur predominantly from January through June, and sales of heaters and humidifiers occur predominantly from July through December. Although kitchen electrics, air purifiers, lighting products and accessories generally are used year-round, these products tend to draw increased sales during the winter months when people are indoors and, as a result, sales of these products tend to be greatest in advance of the winter months from July through December. Additionally, many of the kitchen and personal care products we sell are given as gifts and, as such, sell at larger volumes during the holiday season. When holiday shipments are combined with seasonal products, our sales during the months of August through November are generally at a higher level than during the other months of the year. In addition to the seasonal fluctuations in sales, we experience seasonality in gross profit, as margins realized on fan products tend to be lower than those realized on kitchen electrics and other home environment products. On February 5, 1999, we completed the acquisition of The Rival Company, a leading developer, manufacturer and marketer of a variety of products including small kitchen, home environment and personal care appliances. In connection with this acquisition, we issued $31.3 million of senior subordinated notes due in November 2007, bearing interest at 9 7/8% (the "Notes"), amended and restated our existing $100.0 million credit facility to provide for a total availability of $325.0 million, and sold $50.0 million of common stock in a private placement. In November 1997, we completed a recapitalization transaction in which we issued $105.0 million of Notes and entered into the $100.0 million line of credit facility, of which approximately $27.5 million was initially drawn (collectively, the "1997 Transactions"). As a result of these transactions, we have a significantly higher level of borrowing and a corresponding higher level of interest expense than in the past. RESULTS OF OPERATIONS Our historical results of operations for the year 1998 discussed below do not include any of Rival's operations. The Rival acquisition was accounted for as a purchase, and accordingly, Rival's results of operations are included in the Company's financial information beginning on February 5, 1999. Rival's larger size relative to Holmes greatly influences the comparison of 1999 and 1998 below. Therefore, we have provided supplemental information for Holmes and its subsidiaries other than Rival on a stand-alone basis, and for Rival and its subsidiaries on a stand-alone basis. Comparison of Years Ended December 31, 1999 and December 31, 1998 Net Sales. Net sales for fiscal 1999 were $506.8 million compared to $214.5 million for fiscal 1998, an increase of $292.3 million or 136.3%, primarily due to the Rival acquisition. On a stand-alone basis, Holmes' net sales increased approximately $17.5 million, or 8.2%, in 1999 versus 1998. Holmes' U.S. fan shipments increased approximately $5 million in 1999 over 1998 as warm summer weather improved customer response. Winter season U.S. shipments of heaters and humidifiers increased by approximately $4 million and $3 million, respectively, in 1999 versus 1998 as increased product offerings and improved placement resulted in increased volume. Lighting product shipments increased as well in 1999 by approximately $2 million when compared to 1998, and U.S. sales of accessory products increased by $5 million from 1998 to 1999. Dehumidifier shipments decreased in 1999 by approximately $5 million versus 1998 following a management decision to exit this low margin category. U.S. sales of air purifiers also decreased from 1998 to 1999 by approximately $4 million as stock levels at retailers slowed shipping demand in 1999. A reduction in returns and allowances of approximately $4 million from 1998 to 1999 also favorably impacted net sales. Increases in other categories accounted for the balance of the sales gain. On a stand-alone basis, Rival's net sales decreased by approximately $41 million for the full calendar year 1999 compared with 1998, excluding the divested businesses. Rival's U.S. shipments of kitchen appliances decreased by approximately $11 million in 1999 when compared to 1998. Decreased sales of can 2 4 openers made up approximately 40% of this decrease as an increase in shipments from new product introductions in 1998 did not repeat in 1999. In addition, approximately 30% of the overall kitchen decrease was attributable to reduced shipments of toasters and irons as we de-emphasized the existing lower margin opening price point products on several categories. Despite price erosion, U.S. sales of Crock-Pot(R)slow cookers were flat in dollars but shipments in units were up from 1998 to 1999. The remainder of the kitchen shortfall was spread over a number of the smaller categories. Rival U.S. home environment shipments decreased approximately $23 million in 1999 versus 1998 with the retail fan and air purifier product categories making up over 80% of the decrease. Anticipated retail placement losses and negative impacts from shelf transitions at several key retailers were the primary factors for these category decreases. Shipments from Rival's industrial and pump business units decreased by approximately $5 million and $4 million, respectively, in 1999 versus 1998. The sale of both of these divisions, which accounted for net sales of approximately $43.0 million in 1999, took place in the fourth quarter of 1999. Rival's international shipments decreased by approximately $2 million in 1999 versus 1998, driven by shortfalls in Latin America (excluding Mexico, where sales were up significantly). Rival also experienced an increase in credits for returns and discounts of approximately $5 million from 1998 to 1999, which further reduced its overall net sales. Gross Profit. Gross profit for fiscal 1999 was $143.2 million compared to $68.0 million for fiscal 1998, an increase of $75.2 million or 110.6%, with the increase again in large part due to the Rival acquisition. As a percentage of net sales, gross profit decreased to 28.2% in 1999 from 31.7% in 1998 as a result of the decreased gross margins realized by Rival in 1999. On a stand-alone basis, Holmes' gross profit margin increased over three percentage points for the year 1999 versus 1998. Holmes' product mix in 1999 included a decrease in low margin dehumidifier sales and an increase in higher margin sales as discussed above which favorably impacted overall Holmes' margins. In addition, positive contribution was realized from improved efficiencies in our Far East factories. On a stand-alone basis for the full calendar year 1999, Rival's gross profit decreased approximately $21 million from 1998, primarily due to the sales volume shortfall discussed above and due to amortization of acquired profit in inventory in connection with the Rival acquisition. Rival's gross profit percentage was approximately 24.0% in 1999 versus 24.5% in 1998 (before the impact of the amortization of acquired profit in inventory in 1999). Selling Expenses. Selling expenses for 1999 were $67.5 million compared to $20.5 million in 1998, an increase of $47.0 million or 229.3%, primarily as a result of the Rival acquisition. As a percentage of net sales, selling expenses increased to 13.3% for 1999 compared to 9.5% in 1998. A significant portion of this percentage increase was due to the traditionally higher levels of co-operative advertising done by Rival and increased freight costs related to both continuing Rival businesses and businesses sold during 1999. In addition to the Rival impact, there were increases in some sales related expense items such as shipping freight costs and supplies, particularly in regards to the overall Holmes sales increases and to the increase in accessory sales. In addition, salaries and related benefits and travel costs increased as we developed an infrastructure to support the integration of Rival and future initiatives. General and Administrative Expenses. General and administrative expenses for 1999 were $28.3 million compared to $16.6 million in 1998, an increase of $11.7 million or 70.5%. As a percentage of net sales, general and administrative expenses decreased to 5.6% for 1999 from 7.8% for 1998. The increase in dollars was primarily attributable to the Rival acquisition. In addition, the increase in dollars was due to expenses incurred for consulting, travel and other costs to support the Rival integration process. Total integration related expenses in 1999 were approximately $3.4 million. Product Development Expenses. Product development expenses for 1999 were $10.4 million compared to $6.3 million for 1998, an increase of $4.1 million or 65.1%. As a percentage of net sales, product development expenses decreased to 2.1% for 1999 from 2.9% for 1998. The increase in dollars and the decrease as a percentage of net sales were primarily due to the Rival acquisition. Plant Closing Costs. The Company recorded $2.4 million in plant closing costs associated with Rival's previously announced closing of its New Haven, Indiana and Fayetteville, North Carolina plants. Approximately $1.7 million related to the expenses associated with the wind down of these two facilities which were expensed as incurred and $0.7 million related to the write down of fixed assets at these facilities. 3 5 Interest and Other Expense, Net. Interest and other expense, net for 1999 was $31.0 million compared to $13.4 million for 1998, an increase of $17.6 million or 131.3%. The increase in interest expense was primarily due to the additional borrowings resulting from the new debt associated with the Rival acquisition. This increase was offset by an increase in other income largely related to a favorable legal settlement in 1999. Income Tax Expense (Benefit). The income tax benefit for 1999 was $0.1 million compared to expense of $2.2 million for 1998. This was largely due to the losses experienced in the U.S. creating benefits at higher rates than the foreign income taxed at lower rates. Equity in Earnings from Joint Venture. We recorded $0.9 million in equity in earnings from our joint venture with General Electric for the shipment of motors from our factory in the Far East. There were no such earnings recorded in 1998. Net Income. As a result of the foregoing factors, net income for 1999 was $1.8 million, compared to net income of $9.0 million for 1998. Comparison of Years Ended December 31, 1998 and December 31, 1997 Net Sales. Net sales for fiscal 1998 were $214.5 million compared to $192.2 million for fiscal 1997, an increase of $22.3 million or 11.6%. This increase was attributable to increases in each of what were then our four major product categories: fans, heaters, humidifiers and air purifiers, which resulted from a strong 1998 for retailers, as well as continued growth in filter and accessory sales due to the growing installed base of products requiring filters and accessories. Our Far East operations also had a significant increase in external sales versus 1997. Gross Profit. Gross profit for fiscal 1998 was $68.0 million compared to $55.4 million for fiscal 1997, an increase of $12.6 million or 22.7%. As a percentage of net sales, gross profit increased to 31.7% for fiscal 1998 from 28.8% for fiscal 1997. The increase was primarily due to the above mentioned increases in net sales in humidifiers, heaters and filters and accessories which are relatively higher margin contributors, as well as continued reductions in raw material prices at our manufacturing operations in the Far East. Selling Expenses. Selling expenses for fiscal 1998 were $20.5 million compared to $15.6 million for fiscal 1997, an increase of $4.9 million or 31.4%. As a percentage of net sales, selling expenses increased to 9.6% for fiscal 1998 from 8.1% for fiscal 1997. The increase in selling expenses was primarily due to an increase in co-operative advertising of higher margin products and new sales promotions with several major retailers. To a lesser extent, shipping costs increased as a result of the higher sales level. Also, there were continued expenses associated with the redesign of some of our product packaging. General and Administrative Expenses. General and administrative expenses for fiscal 1998 were $16.6 million compared to $20.9 million for fiscal 1997, a decrease of $4.3 million or 20.6%. As a percentage of net sales, general and administrative expenses decreased to 7.7% for fiscal 1998 from 10.9% for fiscal 1997. The higher amount in 1997 resulted from incremental incentive compensation expenses paid in connection with the 1997 Transactions. This overall decrease was offset in part by increased expenditures on management and information systems support, increases in personnel costs to improve operating efficiencies at all of our locations and on-going expenses associated with the recapitalization in November, 1997. Product Development Expenses. Product development expenses for fiscal 1998 were $6.3 million compared to $5.5 million for fiscal 1997, an increase of $.8 million or 14.6%. As a percentage of net sales, product development expenses remained constant at 2.9% for fiscal 1998 and 1997. The increase was primarily due to increased expenditures for royalties and outside consultants as part of our continuing effort in developing new technologies for both existing and new product lines. Interest and Other Expense, Net. Interest and other expense, net for fiscal 1998 was $13.4 million compared to $7.2 million for fiscal 1997, an increase of $6.2 million or 86.1%. The increase in interest expense was primarily due to the additional borrowings resulting from the recapitalization in November 1997. Our interest expense in future periods has been higher than 1998 as a result of the Rival acquisition. 4 6 Income Tax Expense. In 1997, we recorded a $3.6 million valuation allowance related to deferred tax assets generated as a result of certain limitations on the deductibility of interest paid to Pentland. This 1997 non-recurring charge comprises the majority of the 15% change in our effective tax rate from 35% in 1997 to 20% in 1998. Net Income. As a result of the foregoing factors, net income for fiscal 1998 was $9.0 million, compared to net income of $3.8 million in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES Following the recapitalization transaction in November 1997 and the Rival acquisition in February 1999, we have funded our liquidity requirements with cash flows from operations and borrowings under the Credit Facility. Our primary liquidity requirements are for working capital and to service our indebtedness. We believe that existing cash resources, cash flows from operations and borrowings under the Credit Facility will be sufficient to meet our liquidity needs for the foreseeable future. Cash provided by operations for the years ended December 31, 1999 and 1998 was $4.9 million and $24.3 million, respectively. Cash provided by operations for 1999 reflected a $36.5 million increase in receivables as a significant percentage of Rival's sales are shipped and billed in the fourth quarter which results in an increase in open receivables at year end from the February 5, 1999 balance. Partially offsetting the increase in receivables was a decrease in inventory levels of approximately $26.2 million at December 31, 1999, which included the amortization of acquired profit in inventory. This decrease related to an increase in shipping activity during the fourth quarter as well as our increased focus on management of raw material and finished goods inventory levels. Finally, cash provided by operations in 1999 included a decrease in accounts payable which was in large part related to Rival's overall sales activity decline in 1999. Cash used for investing for the year ended December 31, 1999 included $279.6 million paid in connection with the Rival acquisition. In addition, we invested $17.6 million in capital expenditures for property and equipment during 1999. We also received net proceeds of $23.8 million in 1999 in connection with the sale of two of Rival's closed manufacturing facilities and from the sale of the Rival's commercial and industrial and Simer pump business units. Cash provided by (used for) financing activities for the years ended December 31, 1999 and 1998 was $265.2 million and $(18.8) million, respectively. Cash used for financing for the year 1998 reflected repayments of the prior line of credit used to fund cash flows for operations. The cash provided by financing activities for the year 1999 reflected the borrowings on the Credit Facility, and proceeds from the issuance of the Notes and common stock associated with the Rival acquisition. We issued $105.0 million of 9 7/8% Senior Subordinated Notes due November 2007 (the "Notes") in November 1997, and an additional $31.3 million of Notes in February, 1999. While we may repurchase Notes from time to time in open market or privately negotiated transactions, the Notes are not redeemable at our option prior to November 15, 2002. Thereafter, the Notes are subject to redemption at any time at our option, in whole or in part, at stated redemption prices. Annual interest payments on the Notes are approximately $13.5 million. The payment of principal and interest on the Notes is subordinated to the prior payment in full of all of our senior debt, including borrowings under the Credit Facility. We entered into the Credit Facility in February, 1999. The Credit Facility amended and restated our prior $100.0 million credit facility. The Credit Facility consists of a six-year tranche A term loan of $40.0 million, an eight-year tranche B term loan of $85.0 million and a $200.0 million, six-year revolving credit facility which was reduced to $170.0 million on August 20, 1999 and further reduced to $140.0 million on February 8, 2000. The Credit Facility bears interest at variable rates based on either the prime rate or LIBOR, at our option, plus a margin which, in the case of the tranche A term loan and the revolving credit facility, varies depending upon certain financial ratios. The Credit Facility, and the guarantees thereof by our domestic subsidiaries, are secured by substantially all of our domestic and certain foreign assets. The Credit Facility and the Notes Indentures include certain financial and operating covenants, which, among other things, restrict our ability to incur additional indebtedness, grant liens, make investments and take certain other actions. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be 5 7 impacted by general economic conditions and other factors. See "Disclosure Regarding Forward-Looking Statements." YEAR 2000 Over the past year, we developed and implemented plans to address possible Year 2000 exposures related to computer systems used by us and by third parties, as described below. We have not experienced any material Year 2000 problems subsequent to the date change on January 1, 2000. We had identified our Year 2000 risk to be in two general categories: Information Technology Systems, including Electronic Data Interchange Systems (EDI), and General Business Systems. Information Technology Systems Including EDI. We transitioned to Rival's computer software system approximately six months following the Rival acquisition, during the third quarter of 1999. Rival had implemented its corporate computer system in 1995. This system is Year 2000 compliant, according to the vendor, as confirmed by full systems testing performed by Rival. The Company used both internal and external resources to test, reprogram or replace the software and hardware for Year 2000 modifications, the cost of which was approximately $320,000 as of December 31, 1999. The majority of project costs, related to the purchase of hardware and software to meet both Year 2000 and company specific requirements, have been capitalized. All other remaining project costs were expensed in 1999 or will be expensed in 2000. General Business Systems. Our general business systems encompass the following: telecommunications systems, departmental specific application systems, machinery and equipment, building and utility systems and, finally, third party vendors and service providers. We created a Year 2000 committee consisting of one member from each department. The committee reviewed all aspects of our internal business systems and determined that they were Year 2000 compliant. Rival had created its own cross-departmental Year 2000 committee in 1997, and determined that its internal systems were Year 2000 compliant as well. We have not experienced any material Year 2000 problems subsequent to the date change with respect to our significant customers and suppliers. While we have carefully monitored our supplier and customer risks, and will continue to do so, we cannot fully control suppliers and customers, and there can be no guarantee that a Year 2000 problem that may originate with a supplier will not materially adversely affect us in a subsequent accounting period. Finally, we determined that products that we manufacture and sell have no exposure related to the Year 2000 issue. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the balance sheet, and the corresponding gains and losses be reported either in the statement of income or as a component of comprehensive income, depending on the type of hedging relationship that exists. The Company does not expect the impact of SFAS 133, which will be effective for fiscal 2001, to be significant given its limited use of derivatives. INVESTOR CONFERENCE CALL We will hold a telephone conference call on Friday, April 14, 2000 at 2 p.m., Eastern time, in order for investors and other interested stakeholders to hear management's views on our results of operations during the fourth quarter and year ended December 31, 1999, as well as our current financial position. If you are interested in participating in the call in listen-only mode, please fax the following information to Sandy LaBree, Executive Assistant, at 508-634-7942: - Name of Participant(s) - Company Affiliation - Nature of Business - Address - Phone, Fax and E-mail 6 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized. THE HOLMES GROUP, INC. By: /s/ JORDAN A. KAHN ------------------------------------ Jordan A. Kahn, President, Chief Executive Officer Dated: April 11, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ JORDAN A. KAHN President, Chief Executive Officer April 11, 2000 - --------------------------------------------------- and Director (Principal Executive Jordan A. Kahn Officer) /s/ IRA B. MORGENSTERN Chief Financial Officer and April 11, 2000 - --------------------------------------------------- Treasurer (Principal Financial and Ira B. Morgenstern Accounting Officer) /s/ STANLEY ROSENZWEIG Chief Operating Officer and April 11, 2000 - --------------------------------------------------- Director Stanley Rosenzweig /s/ GREGORY F. WHITE Executive Vice President Sales and April 11, 2000 - --------------------------------------------------- Marketing and Director Gregory F. White /s/ RICHARD LUBIN Director April 11, 2000 - --------------------------------------------------- Richard Lubin /s/ RANDY PEELER Director April 11, 2000 - --------------------------------------------------- Randy Peeler /s/ THOMAS K. MANNING Director April 11, 2000 - --------------------------------------------------- Thomas K. Manning /s/ (TOMMY) WOON FAI LIU Director April 11, 2000 - --------------------------------------------------- (Tommy) Woon Fai Liu 7