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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBERS:
333-44473
333-77905
THE HOLMES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2768914
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE HOLMES WAY, 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, 2000
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....................................... 10
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...................................................... 17
Item 8 Financial Statements and Supplementary Data................. 18
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 51
PART III.
Item 10 Directors and Executive Officers of the Registrant.......... 52
Item 11 Executive Compensation...................................... 53
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 54
Item 13 Certain Relationships and Related Transactions.............. 55
PART IV.
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 56
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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," "intends" 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 (including the need to comply with covenants
in our various financing agreements), 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 this report, in our most
recent Registration Statement on Form S-4 (File No. 333-77905), 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 64% of our net sales for the fiscal year ended December 31,
2000. Our kitchen appliances include Crock-Pot(R) slow cookers, can openers, ice
cream freezers and other small kitchen electric appliances where we believe we
hold the number one or two market share. Kitchen appliances accounted for
approximately 32% of our net sales for fiscal 2000. Our personal care products
include massagers and showerheads. We believe that our strong market position
and success are attributable to our continuous product innovation, engineering
and manufacturing expertise, close customer partnerships, breadth of product
offerings, reputation for quality and presence and experience in the Far East.
Our products are sold under the Holmes(R), Rival(R), Crock-Pot(R), White
Mountain(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, Lowes, Home Depot,
Costco, BJ's Wholesale Club, TruServ 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
four manufacturing facilities in the United States. 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 One Holmes Way, 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.
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, the Company divested two of Rival's
non-core business units. On October 8, 1999, the Company sold the assets of
Rival's sump and utility pump division for $11.4 million. The proceeds received
for the assets exceeded the net asset values recorded by $0.7 million. On
December 21, 1999, the Company sold the assets of Rival's industrial and
building supply products businesses for proceeds of $9.7 million, net of
contingent consideration of $2.7 million. Approximately $1.0 million of the
contingent consideration, net of applicable costs and deferred taxes, was earned
during 2000. The remaining amount may be earned during fiscal 2001 and will also
be recorded as a decrease to goodwill as the contingencies are received.
Excluding the contingent consideration, the book value of the assets sold
exceeded the proceeds by $5.5 million. Due to the proximity of the transactions
to the original Rival acquisition date, the net loss on these transactions of
$4.7 million was recorded as an increase to goodwill.
Since the Rival acquisition, we have closed and disposed of a number of
underutilized or redundant facilities. During 2000, we sold the Fayetteville,
North Carolina facility and closed Rival's Warrensburg, Missouri manufacturing
plant, and subsequent to December 31, 2000 the property was sold.
Our ability to capitalize on the Rival acquisition will depend on factors
such as 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 assets, or other business combination transactions within the consumer
products industry.
BUSINESS STRATEGY
Our strategy is to capitalize on our core strengths to achieve 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.
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We intend to continue our pursuit of 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 believe we enjoy a leading market share in can
openers and ice cream freezers. We intend to leverage our expertise in
product innovation, manufacturing, sourcing, 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), we 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. These products began to ship in 2000, with increased shipments
expected in 2001.
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 the QVC electronic retailing
network. We also have developed unique brands and product offerings to
further penetrate the national chain food and 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.
We believe an important challenge in the year ahead will be to complete the
integration of Rival's operations in order to capitalize on the full potential
of the acquisition. Due to a number of factors, not all of which are under our
control, as described in more detail below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Results of
Operations," there can be no assurances that we will be able to successfully
implement all of our strategic initiatives.
PRODUCTS
Holmes is a leading developer, manufacturer and marketer of quality,
branded home appliances, including home environment, small kitchen and personal
care appliances.
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HOME ENVIRONMENT
Home environment products allow consumers to better control the air
quality, temperature and lighting of their home and office environments. These
products accounted for approximately 64% of our net sales in 2000.
Fans. We currently manufacture and market approximately 100 different fan
models under the Holmes(R) and Patton(R) brand names and selected private label
brands, including table, stand, window, window-to-floor, box, high velocity and
oscillating fans, typically for purchase and use by household consumers. Retail
prices for our fans range from $5 to $200.
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 75
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 $100.
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
Family Care(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), Family Care(R), and Pollenex(R) brand names. Retail
prices for our air purifiers range between $10 and $280.
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. 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 32% of our net
sales in 2000. The kitchen electrics business unit sells products including slow
cookers under the Crock-Pot(R) brand, ice cream freezers under the Rival and
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 we believe the Company continues to maintain a leading
market share. We believe that the combination of innovative product development
and global manufacturing and sourcing strengths helps position our kitchen
business for growth and share gain in the future.
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PERSONAL CARE
We 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.
INTERNATIONAL
Our products are sold in Canada and Europe from our sales and distribution
facilities in Toronto and the United Kingdom. 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 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 $9.4 million, $17.6 million and $18.0 million for the years ended
December 31, 1998, 1999 and 2000, respectively.
MANUFACTURING
We manufacture over 70% 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, injection molded
plastic components, stampings and stoneware. Three of these manufacturing and
assembly facilities are located in rural Missouri (Clinton, Sedalia and Sweet
Springs), near Kansas City. The fourth facility, in Flowood, Mississippi,
produces the stoneware for our slow cookers and other products.
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
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manufacturing facilities, we have control over the quality and production timing
of our products from design through final distribution.
MARKETING AND DISTRIBUTION
Our products are sold in the United States, Canada and Europe to the retail
trade by an internal sales staff of 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 is responsible for market analysis, new product
development, pricing strategy, promotions, key cooperative partnerships 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
2000. Individually, Wal-Mart and Kmart each accounted for over 10% of our net
sales during 2000. 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 our kitchen and personal care products 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.
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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, Applica, Catalina Lighting,
Cheyenne, Homedics, Honeywell Consumer Products (maker of Duracraft and
Enviracare brands), Hamilton Beach/Proctor Silex, Lasko, Masco, Salton/Maxim
(Toastmaster), Sunbeam, Tensor and Teledyne. 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, the Food and Drug Administration 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, 2000, of which
approximately 1,700 were located in the United States, Europe and Canada,
approximately 5,700 were located at our manufacturing facilities in Dongguan,
China, and approximately 100 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.
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LOCATION SIZE PRIMARY USE LEASE EXPIRATION
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Milford, MA(1)............... 415,000 square feet Headquarters and Distribution 2015
City of Industry, CA......... Varies Distribution At will
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(2)............... 157,000 square feet Manufacturing and Assembly Owned
67,000 square feet Manufacturing and Assembly Owned
216,000 square feet Warehousing and Distribution Owned
Sweet Springs, MO............ 125,000 square feet Manufacturing/Return Owned
Processing
Flowood, MS.................. 154,000 square feet Manufacturing Owned
El Paso, TX.................. 161,000 square feet Distribution 2005
Dongguan, China(3)........... 466,000 square feet Manufacturing and Assembly 2003
Dongguan, China(3)........... 269,000 square feet Motor Manufacturing 2003
Hong Kong.................... 21,000 square feet Office 2001
London, England.............. 2,700 square feet Office 2008
Mississaugua, Ontario........ Varies Distribution At will
Mississaugua, Ontario........ 55,000 square feet General Office, Warehousing 2005
and Distribution
Taipei, Taiwan............... 1,700 square feet Office 2002
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(1) We moved our headquarters into this newly-constructed facility in February,
2001, having outgrown our previous Milford location in part due to the
consolidation of Rival.
(2) The 67,000 square-foot portion of the Sedalia plant is occupied under a
long-term lease which gives the Company the option to purchase the property
at a nominal cost.
(3) 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. During 2000, we began construction of a new
manufacturing facility on land that was purchased in Guangdong Province.
This facility should be completed during 2003.
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.
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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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended
December 31, 1996, 1997, 1998, 1999 and 2000 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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1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales......................... $194,331 $191,555 $212,248 $507,487 $513,249
Cost of goods sold................ 145,915 136,142 144,278 364,308 382,205
-------- -------- -------- -------- --------
Gross profit.................... 48,416 55,413 67,970 143,179 131,044
Selling, general and
administrative expenses......... 27,308 36,530(1) 37,095 98,486 112,102
Product development expenses...... 5,520 5,463 6,295 10,448 11,000
Plant closing costs............... -- -- -- 2,439 340
-------- -------- -------- -------- --------
Operating profit................ 15,588 13,420 24,580 31,806 7,602
Interest expense, net............. 6,491 7,096 13,833 33,472 38,550
Other (income) expense, net....... (319) 56 (436) (2,489) (758)
-------- -------- -------- -------- --------
Income (loss) before income
taxes, equity in earnings
from joint venture and
minority interest............ 9,416 6,268 11,183 823 (30,190)
Income tax expense (benefit)...... 2,787 2,196 2,222 (87) 2,591
Equity in earnings from joint
venture......................... -- -- -- (902) (611)
-------- -------- -------- -------- --------
Income (loss) before minority
interest..................... 6,629 4,072 8,961 1,812 (32,170)
Minority interest in net income of
majority-owned
subsidiaries(2)................. 408 225 -- -- --
-------- -------- -------- -------- --------
Net income (loss)............... $ 6,221 $ 3,847 $ 8,961 $ 1,812 $(32,170)
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(3)......................... $ 22,774 $ 20,837 $ 32,264 $ 50,330(4) $ 24,331(4)
Ratio of earnings to fixed
charges(5)...................... 2.2x 1.8x 1.7x 1.0x 0.3x
Depreciation and amortization..... 6,867 7,473 7,248 15,133 15,737
Capital expenditures.............. 8,594 5,815 4,749 17,614 28,341
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YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents......... $ 4,462 $ 5,141 $ 5,379 $ 6,647 $ 3,017
Working capital (deficit)......... (2,883) 78,318 71,089 211,646 203,473
Total assets...................... 128,286 135,165 131,357 456,496 453,869
Total long-term debt including
capital leases.................. 737 134,294 115,139 338,710 360,361
Total stockholders' equity
(deficit)....................... 17,708 (24,991)(6) (15,389)(6) 37,800 5,474
- ---------------
(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.
(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.
(4) EBITDA as presented for 1999 and 2000 does not reflect the addback of
integration expenses, amortization of acquired profit in inventory, plant
closing costs and reduction for a legal settlement. Adjusting for these
items and excluding both the costs related to the purchase of a faulty
heater component and the operating results of the divested businesses would
result in EBITDA of $61.4 million for 1999. For 2000, adjusting for the
addback of integration expenses, plant closing costs and the costs related
to the purchase of a faulty heater component, as disclosed in our Form 10-Q
for the quarterly period ended June 30, 2000 previously filed with the
Securities and Exchange Commission, would result in EBITDA of $31.5 million
which includes a fourth quarter charge for inventory and accounts receivable
of approximately $25.6 million (total discounts and allowances, inventory
write-downs, co-operative advertising expense and bad debt expense were
approximately $58.4 million and $34.9 in 2000 and 1999, respectively).
(5) 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
(4) 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.
(6) 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
BACKGROUND
Sales of most of our products follow seasonal patterns that affect our
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 our kitchen and
personal care products are given as gifts and, as such, sell at larger volumes
during the holiday season. When holiday shipments are
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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 (the "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
The financial statement amounts for fiscal 2000 set forth below include a
full twelve months of Rival's operations, while (as required by purchase
accounting) the financial statement amounts for fiscal 1999 include
approximately eleven months of Rival's operations, from the acquisition on
February 5, 1999 onward. We have also provided a number of proforma,
twelve-month comparisons for 1999 that include Rival's comparable results from
January 1, 1999 onward, and exclude the impact of the divested Rival pump and
industrial businesses, as applicable, which management believes to be a more
meaningful comparison.
The financial results for fiscal 2000 were below what we had anticipated.
We incurred a net loss of $32.2 million in 2000 compared to net income of $1.8
million in 1999, primarily as a result of over $20.0 million in charges for
write-downs against accounts receivable and inventory during the fourth quarter
of 2000 which were substantially greater than our historical levels. These
charges were attributable to a number of factors, including a slowing economy in
the fourth quarter of 2000, customer bankruptcies, information technology
integration issues and inventory rationalization by the Company. The economic
downturn and weaker retail environment during the fourth quarter led to an
unusually high level of customer deductions against accounts receivable. In
addition, several large customers filed for bankruptcy protection late in 2000,
including Bradlees, Homeplace and Montgomery Wards. We also experienced
difficulties in integrating the Rival information technology systems that
prevented us from properly monitoring certain customer deductions for discounts
and allowances, limiting our ability to request repayment from customers for
these deductions on a timely basis. During the fourth quarter of 2000, a portion
of these deductions was deemed uncollectible. We also performed a SKU
rationalization of each product line during the fourth quarter resulting in
revaluations of selected inventory. Management believes that a significant
portion of these increased charges were a result of business and operational
issues of the acquired Rival Company and its integration with Holmes. Management
is actively addressing these issues.
Comparison of Years Ended December 31, 2000 and December 31, 1999
Net Sales. Net sales for fiscal 2000 were $513.2 million compared to
$507.5 million for fiscal 1999, an increase of $5.7 million or 1.1%. Comparing
2000 to the proforma twelve-month 1999 results, and excluding the impact of the
divested pump and industrial businesses, net sales increased approximately $20.8
million or 4.3%. The increase was primarily due to increased shipments of home
environment products, increased international shipments, primarily driven by
shipments in Mexico, and increased shipments in the Far East due to sales growth
by our motor joint venture with General Electric. Partially offsetting these
increases was a decline in shipments of kitchen electric products. Also
offsetting the increases was a charge in the fourth quarter for discounts and
allowances of approximately $9.9 million. Total discounts and allowances were
approximately $21.9 million and $11.5 million in 2000 and 1999, respectively.
Shipments for the divested businesses in 2000 were $4.6 million pursuant to a
supply agreement with the buyers, which represented a decrease of approximately
$42.4 million from the prior year proforma.
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Gross Profit. Gross profit for fiscal 2000 was $131.0 million compared to
$143.2 million for fiscal 1999, a decrease of $12.2 million or 8.5%. As a
percentage of net sales, gross profit was 25.5% in 2000 and 28.2% in 1999.
Compared to the proforma full year ended December 31, 1999 gross profit
decreased approximately $17.2 million to 25.5% of net sales in 2000 from 28.0%
of net sales in 1999. The 2000 gross profit amount includes costs and related
impact of approximately $3.1 million related to the purchase of a faulty heater
component. Adjusting for the divested businesses, the impact of the faulty
component and the amortization of acquired profit in inventory in 1999 would
result in gross profit of approximately $134.4 million or 26.4% of net sales and
$148.2 million or 30.3% of net sales for 2000 and 1999 respectively. The
decrease in our gross profit was primarily due to a charge in the fourth quarter
for write-downs of inventory of approximately $9.9 million and the above
mentioned charge for discounts and allowances. Total charges for inventory
write-downs were approximately $17.3 million and $9.4 million in 2000 and 1999,
respectively. We did show an increase in home environment sales volume, lower
unfavorable domestic manufacturing variances and improved Far East performance
that helped our gross profit versus 1999. These were partially offset by the
lower kitchen electric sales volumes and gross margins, higher raw material
costs and higher warehousing costs.
Selling Expenses. Selling expenses for 2000 were $73.5 million compared to
$67.5 million in 1999, an increase of $6.0 million or 8.9%. As a percentage of
net sales, selling expenses increased to 14.3% for 2000 compared to 13.3% in
1999. Comparing the full year 2000 selling expenses to the selling expenses of
$71.1 million for the proforma full year 1999 would result in a increase of
approximately $2.4 million, or 3.4%. The increase was primarily due to a $2.1
million charge in the fourth quarter for accounts receivable write-offs in
connection with co-operative advertising deductions. Total co-operative
advertising expenses were approximately $14.7 million and $12.7 million in 2000
and 1999, respectively. As noted above, we had integration issues related to
adopting the Rival information technology system. In addition, loss of personnel
at Rival contributed to prior deductions becoming uncollectible. The selling
expense increase was also partially due to increased packaging and other related
sales tools expenses associated with developing and marketing our new and
existing products.
General and Administrative Expenses. General and administrative expenses
for 2000 were $36.0 million compared to $28.3 million in 1999, an increase of
$7.7 million or 27.2%. As a percentage of net sales, general and administrative
expenses increased to 7.0% for 2000 from 5.6% for 1999. For the proforma full
year 1999 general and administrative expenses were approximately $29.2 million,
or 5.5% of proforma net sales. Several of our larger customers filed for
bankruptcy in 2000 due to the worsening retail environment which caused
write-offs in excess of our historical levels. The general and administrative
expense increase was primarily due to a $3.6 million charge in the fourth
quarter for customer bad debt related charges. Total bad debt expenses were
approximately $4.5 million and $1.3 million in 2000 and 1999, respectively.
Approximately $1.8 million of the general and administrative expense increase
was directly attributable to the Far East operations to support the increased
sales, production and support of the combined businesses, as well as continued
support of the GE joint venture. Total integration related expenses in 2000 were
approximately $3.7 million versus approximately $3.4 million in 1999.
Product Development Expenses. Product development expenses for 2000 were
$11.0 million compared to $10.4 million for 1999, an increase of $0.6 million or
5.8%. As a percentage of net sales, product development expenses increased to
2.1% of net sales for 2000 from 2.0% in 1999. The increase in dollars relates to
the expenditures on new products both in the home environment and kitchen
product lines.
Plant Closing Costs. We recorded $0.3 million in plant closing costs
associated with the closing of the Warrensburg, Missouri manufacturing plant.
Interest and Other Expense, Net. Interest and other expense, net for 2000
was $37.8 million compared to $31.0 million for 1999, an increase of $6.8
million or 21.9%. Approximately $4.9 million of the increase in interest expense
was primarily due to an additional month of borrowing in 2000 related to the
Rival acquisition as well as higher interest rates and a higher debt level
during 2000 versus 1999 on the outstanding debt. Finally, we recorded income
from a legal settlement from a previous Rival acquisition in 1999 in the amount
of $1.6 million.
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Income Tax Expense (Benefit). The income tax expense for 2000 was $2.6
million compared to a benefit of $0.9 million for 1999. The income tax expense
in 2000 is largely due to the establishment of a valuation reserve of $16.9
million primarily against losses experienced in the U.S. and a tax expense of
$2.4 million on income taxed in foreign jurisdictions.
Equity in Earnings from Joint Venture. We recorded $0.6 million in equity
in earnings from our joint venture with General Electric for the shipment of
motors from our factory in the Far East in 2000 versus $0.9 million in 1999.
Net Income. As a result of the foregoing factors, net loss for 2000 was
$32.2 million, compared to net income of $1.8 million for 1999.
Comparison of Years Ended December 31, 1999 and December 31, 1998
Net Sales. Net sales for fiscal 1999 were $507.5 million compared to
$212.3 million for fiscal 1998, an increase of $295.2 million or 139.0%,
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
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 32.0% 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
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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 9.7% 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
2.0% for 1999 from 3.0% 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.
LIQUIDITY AND CAPITAL RESOURCES
General
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 have been for working capital and to service our
indebtedness. While there can be no assurance, we believe that existing cash
resources, cash flows from operations and borrowings under the Credit Facility
as most recently amended will be sufficient to meet our liquidity needs
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for the next twelve months, during which time we will continue to carefully
evaluate our financing requirements.
Cash provided by (used for) operations for the years ended December 31,
2000 and 1999 was $(5.5) million and $7.1 million, respectively. Cash used for
operations for 2000 reflected an $18.4 million increase in inventory levels.
Higher inventory levels at the end of the year reflected cooler summer weather
and slower than anticipated retail sales in the fourth quarter of 2000.
Partially offsetting the inventory increase was a reduction in accounts
receivable of approximately $17.2 million mainly due to the fourth quarter
charges as previously described.
Cash used for investing for the year ended December 31, 2000 included $28.3
million invested in capital expenditures for property and equipment offset by
additional proceeds from the sale of the sump and utility pump division and
additional contingent consideration from the sale of the commercial and
industrial division. We also received additional cash contributions of
approximately $1.9 million from our joint venture partner as part of their
contribution towards joint venture capital equipment, which partially offsets
our cash used for capital expenditures of $28.3 million above. Finally, we also
received $1.6 million from the sale of the Fayetteville, North Carolina
facility.
Cash provided by financing activities for the years ended December 31, 2000
and 1999 was $22.2 million and $265.2 million, respectively. Cash provided by
financing for the year 2000 reflected borrowings on the revolving line of credit
used to fund cash flows for operations. The cash provided by financing
activities for the year 1999 reflected the borrowings under the Credit Facility,
and proceeds from the issuance of the Notes and common stock associated with the
Rival acquisition.
Financing Arrangements
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 amended and restated Credit Facility agreement in
February, 1999 in connection with the Rival acquisition. This Credit Facility
consists of a tranche A term loan of $40.0 million that matures February 5,
2005, a tranche B term loan of $85.0 million that matures February 5, 2007 and a
$140.0 million revolving credit facility that matures February 5, 2005. The
Credit Facility bears interest at variable rates based on either the prime rate
or eurodollar rate 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 is cross-defaulted to the Notes
Indentures.
Our financial performance in the fourth quarter of 2000 resulted in a
default, as of December 31, 2000, of certain financial ratio covenants in the
Credit Facility as previously amended. The lending group agreed to a Forbearance
Agreement with respect to such defaults on April 13, 2001. On May 7, 2001, the
Credit Facility was further amended to waive the defaults and to revise certain
of the financial ratio covenants through June 30, 2002. In addition, the maximum
revolving credit availability under the Credit Facility has been increased from
$140.0 million to an aggregate of $180.0 million through January 31, 2002,
decreasing to an aggregate of $155.0 million through July 1, 2002, subject to a
borrowing base formula. As partial consideration for the amendments, we issued
warrants to the lenders to acquire up to 5% of Holmes' common stock on a
fully-diluted basis. The warrants are exercisable at a price of $5.04 per share,
and expire May 7, 2006. Additionally, Berkshire Partners, our majority
stockholder, agreed to provide a $43.5 million guarantee in support of the
increased revolving credit commitment.
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The Credit Facility, as amended, 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 the future performance of the Company, which will be impacted by
general economic conditions and other factors. See "-- Results of Operations"
and "Forward-Looking Statements" above.
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. We do not expect the impact of SFAS 133, which will be
effective for fiscal 2001, to be significant given our limited use of
derivatives.
INVESTOR CONFERENCE CALL
We will hold a telephone conference call on May 17, 2001 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, 2000. If you are interested in accessing the call,
please fax the following information to Kay Ford, Executive Assistant, at
508-422-1676:
- 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, 2000, the carrying value of our debt totaled $367.6 million
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, 2000, the Company had fixed rate debt of $135.2 million and
variable rate debt of $232.4 million. Holding other variables constant (such as
foreign exchange rates and debt levels), a one percentage point decrease in
interest rates would increase the unrealized fair market value of fixed rate
debt by approximately $6.9 million. Based on the amounts of variable rate debt
outstanding at December 31, 2000, the earnings and cash flows impact for the
next year resulting from a one percentage point increase in interest rates would
be approximately $2.3 million, holding other variables constant.
In order to help hedge our interest rate exposure, effective May 7, 1999,
we entered into an interest rate collar transaction agreement with our 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............................................... 19
Consolidated Balance Sheet at December 31, 1999 and 2000.... 20
Consolidated Statement of Income for the years ended
December 31, 1998, 1999 and 2000.......................... 21
Consolidated Statement of Stockholders' Equity (Deficit) for
the years ended December 31, 1998, 1999 and 2000.......... 22
Consolidated Statement of Comprehensive Income for the years
ended December 31, 1998, 1999 and 2000.................... 23
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1999 and 2000.......................... 24
Notes to Consolidated Financial Statements.................. 25
Financial Statement Schedule:
For each of the three years in the period ended December
31, 2000:
II-Valuation and Qualifying Accounts...................... 51
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.
18
20
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
accompanying 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, 1999 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying 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 the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
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 of America, 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
May 7, 2001
19
21
THE HOLMES GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,647 $ 3,017
Accounts receivable, net of allowances of $9,046 and
$9,622, respectively................................... 142,264 124,499
Inventories............................................... 112,660 131,050
Prepaid expenses and other current assets................. 3,997 6,457
Deferred income taxes..................................... 11,877 14,725
Income taxes receivable................................... 7,852 --
-------- --------
Total current assets................................... 285,297 279,748
Assets held for sale...................................... 2,434 1,624
Property and equipment, net............................... 54,348 67,582
Goodwill, net............................................. 89,493 83,779
Deposits and other assets................................. 5,610 5,850
Debt issuance costs, net.................................. 19,314 15,286
-------- --------
$456,496 $453,869
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations and other
liabilities............................................ $ 589 $ 784
Current portion of credit facility........................ 6,450 7,250
Accounts payable.......................................... 26,433 30,179
Accrued expenses.......................................... 36,256 33,345
Accrued income taxes...................................... 3,923 4,717
-------- --------
Total current liabilities.............................. 73,651 76,275
Credit facility............................................. 203,625 225,175
Long-term debt.............................................. 135,085 135,186
Other long-term liabilities................................. 4,054 7,055
Deferred income taxes....................................... 2,281 4,704
Commitments and contingencies
Stockholders' Equity:
Common stock, $.001 par value. Authorized 25,000,000
shares as of December 31, 1999 and December 31, 2000;
issued and outstanding 20,307,995 shares at December
31, 1999 and December 31, 2000......................... 20 20
Additional paid in capital.................................. 67,915 67,915
Accumulated other comprehensive income...................... 397 241
Treasury stock, at cost (18,620,450 shares)................. (62,058) (62,058)
Retained earnings (deficit)................................. 31,526 (644)
-------- --------
Total stockholders' equity........................ 37,800 5,474
-------- --------
$456,496 $453,869
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
20
22
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Net sales.................................................. $212,248 $507,487 $513,249
Cost of goods sold......................................... 144,278 364,308 382,205
-------- -------- --------
Gross profit.......................................... 67,970 143,179 131,044
-------- -------- --------
Operating expenses:
Selling.................................................. 20,456 67,452 73,521
General and administrative............................... 16,639 28,334 35,984
Product development...................................... 6,295 10,448 11,000
Plant closing costs...................................... -- 2,439 340
Amortization of goodwill and other intangible assets..... -- 2,700 2,597
-------- -------- --------
Total operating expenses.............................. 43,390 111,373 123,442
-------- -------- --------
Operating profit...................................... 24,580 31,806 7,602
-------- -------- --------
Other income and expense:
Other (income), net...................................... (436) (2,489) (758)
Interest expense, net.................................... 13,833 33,472 38,550
-------- -------- --------
13,397 30,983 37,792
-------- -------- --------
Income (loss) before income taxes and equity in earnings
from
joint venture............................................ 11,183 823 (30,190)
Income tax expense (benefit)............................... 2,222 (87) 2,591
Equity in earnings from joint venture...................... -- (902) (611)
-------- -------- --------
Net income (loss)..................................... $ 8,961 $ 1,812 $(32,170)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
21
23
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK,
$.001 PAR VALUE
------------------------- ACCUMULATED TOTAL
ADDITIONAL OTHER STOCKHOLDERS'
PAID IN COMPREHENSIVE TREASURY RETAINED EQUITY
SHARES PAR CAPITAL INCOME STOCK EARNINGS (DEFICIT)
------ --- ---------- ------------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PAR VALUE)
BALANCE AT DECEMBER 31, 1997.... 10,006 $10 $16,304 $ -- $(62,058) $ 20,753 $(24,991)
Issuance of common stock, Net of
related costs................. 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
Foreign currency translation
adjustments................... -- -- -- (156) -- -- (156)
Net income (loss)............... -- -- -- -- -- (32,170) (32,170)
------ --- ------- ----- -------- -------- --------
BALANCE AT DECEMBER 31, 2000.... 20,308 $20 $67,915 $ 241 $(62,058) $ (644) $ 5,474
====== === ======= ===== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
22
24
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
------- ------- ---------
(IN THOUSANDS)
Net income (loss)........................................... $8,961 $1,812 $(32,170)
Other comprehensive income:
Foreign currency translation adjustments.................. (40) 437 (156)
------ ------ --------
Comprehensive income (loss)................................. $8,921 $2,249 $(32,326)
====== ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
23
25
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
-------- --------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $ 8,961 $ 1,812 $(32,170)
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization.......................... 7,248 15,133 15,737
Amortization of debt issuance costs.................... 1,182 3,983 4,129
Change in allowance for doubtful accounts.............. 260 1,297 576
(Gain) Loss on disposition of property, plant and
equipment............................................ 1,356 (31) --
Deferred income taxes.................................. (741) (1,477) (425)
Changes in operating assets and liabilities:
Accounts receivable.................................. 875 (36,518) 17,189
Inventories.......................................... 2,210 26,219 (18,390)
Prepaid expenses and other current assets............ (807) (2,214) 7,284
Deposits and other assets............................ (2,493) 5,366 (1,080)
Accounts payable..................................... 1,254 (7,607) 3,746
Accrued expenses..................................... 2,467 2,211 (2,911)
Accrued income taxes................................. 2,483 (1,044) 794
-------- --------- --------
Net cash provided by (used for) operating
activities........................................ 24,255 7,130 (5,521)
-------- --------- --------
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 4,753
Distribution of earnings from joint venture............... -- 138 1,375
Purchase of property and equipment........................ (4,749) (17,614) (28,341)
Purchase of minority interest............................. (451) -- --
Cash received from joint venture partner.................. -- 2,252 1,893
-------- --------- --------
Net cash used for investing activities............... (5,200) (271,033) (20,320)
-------- --------- --------
Cash flows from financing activities:
Net (repayment) of line of credit......................... (18,502) (10,000) --
Issuance of common stock.................................. 681 50,400 --
Borrowings of long-term debt, net of issuance costs....... -- 27,329 --
Borrowings on credit facility, net of issuance costs...... -- 198,704 22,350
Debt issuance costs....................................... (295) (658) --
Principal payments on capital lease obligations........... (701) (604) (139)
-------- --------- --------
Net cash provided by (used for) financing
activities........................................ (18,817) 265,171 22,211
-------- --------- --------
Net increase(decrease)in cash and cash equivalents... 238 1,268 (3,630)
Cash and cash equivalents, beginning of period....... 5,141 5,379 6,647
-------- --------- --------
Cash and cash equivalents, end of period.................... $ 5,379 $ 6,647 $ 3,017
======== ========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 13,283 $ 28,812 $ 32,181
Cash paid for (refund of)income taxes..................... $ 268 $ 190 $ (4,753)
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.
24
26
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. and Holmes Motor 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. (which has
subsequently been merged into Rival), Patton Electric Company, Inc. (which has
subsequently been merged into Rival), Patton Electric (Hong Kong) Limited, Rival
Consumer Sales Corporation, The Holmes Group Canada, Ltd., Rival de Mexico S.A.
de C.V. and Waverly Products Company, Ltd. and HPFEL's wholly-owned
subsidiaries, Esteem Industries Ltd., Raider Motor Corp., Dongguan Huixin
Electrical Products Company, Ltd., Holmes Products (Europe) Ltd., Dongguan
Holmes Products Ltd. and Dongguan Raider Motor Corp. Ltd. All significant
inter-company balances and transactions have been eliminated.
THG and its consolidated subsidiaries, including Rival, HPFEL and their
respective subsidiaries, are referred to herein as the "Company."
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
remeas-
25
27
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
urement 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 81% of
the inventories and the last-in, first-out method (LIFO) for the remaining 19%
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 U.S. domestic 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
Sales are recorded net of returns. The Company adopted Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" in 2000 with no
material impact on the results of operations or financial position of the
Company. Revenue is recognized upon transfer of title and risk of loss. 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
$2,346,000 at December 31, 1999 and December 31, 2000 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
1998, 1999, and 2000 were approximately $6,564,000, $12,716,000 and $14,731,000,
respectively which are included in selling expenses in the accompanying
statement of income.
26
28
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 2000 was approximately $1,606,000 of which $611,000 is recorded as
equity in earnings from joint venture and $995,000 is recorded as part of gross
profit. The Company's portion of the joint venture earnings in 1999 were
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, 1999 and 2000, 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 $88.7 million and $91.8
million, before $4.9 million and $2.3 million of accumulated amortization at
December 31, 2000 and 1999, respectively 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
27
29
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
overlapping positions within the management and support staff layers of the
combined company, relocation of key home environment personnel from Kansas City,
MO to Milford, MA, consolidation of the Rival Hong Kong and Canadian offices
into other existing local offices, and closure of the Warrensburg, MO
manufacturing facility.
These actions resulted in the elimination of 216 Rival employees from a
combination of the Rival Warrensburg facility and the Kansas City, Canada and
Hong Kong offices. Severance for some of these employees will be paid during
fiscal 2001.
Exit costs related to these restructuring plans are comprised primarily of
lease exit costs for Canada and Hong Kong and facility closure and exit costs
related to the Warrensburg facility. At December 31, 1999, the Hong Kong
consolidation was completed resulting in exit costs of $0.1 million. The
Montreal, Canada and Warrensburg closures were completed during fiscal 2000. The
estimated fair value of the Warrensburg facility has been reflected in the
December 31, 2000 balance sheet as assets held for sale. Subsequent to December
31, 2000, the facility was sold which resulted in a gain of approximately
$500,000.
The reserve activity for fiscal 1999 and 2000 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 fiscal 1999.............. (1,647) (136) (1,783)
------- ----- -------
Balance at December 31, 1999................ $ 4,217 $ 427 $ 4,644
Cash payments made fiscal 2000.............. (2,451) -- (2,451)
Adjustments made fiscal 2000................ (1,054) (194) (1,248)
------- ----- -------
Balance at December 31, 2000................ $ 712 $ 233 $ 945
The adjustments made in fiscal 2000 include a reduction of the original
severance and relocation amount and a reduction of the facility exit costs
amount as part of the closure of the Warrensburg, Missouri facility. These
adjustments were recorded as reductions of goodwill.
Prior to the acquisition by THG, Rival recorded an $8.4 million
restructuring charge relating to the closing of three facilities. Each of these
facilities was closed during fiscal 1999. 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 final property was sold in April, 2000. Proceeds from this sale were
$1,595,000 net of selling expenses and also resulted in no gain or loss.
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 was 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.
During 2000, goodwill was decreased by approximately $1.0 million to
reflect contingent consideration received during the year, net of applicable
costs and deferred taxes. Any remaining contingent consideration received in
2001 will be recorded as a reduction of goodwill.
28
30
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma data summarizes the Company's results of
operations for the period indicated as if the acquisition had been completed as
of the beginning of the period presented. These unaudited pro forma results have
been prepared for comparative purposes only and include certain adjustments,
such as increased interest expense on acquisition debt and additional
amortization expense as a result of the goodwill. They do not purport to be
indicative of the results of operations that actually would have resulted had
the acquisitions been in effect on January 1, 1999, or of future results of
operations.
YEAR ENDED
DECEMBER 31, 1999
-----------------
(UNAUDITED)
(IN THOUSANDS)
Net sales................................................... $529,890
Net income (loss)........................................... (6,465)
4. RELATED PARTY TRANSACTIONS
THG pays a sales commission to Jordan Kahn Co. Inc., owned principally by
an officer and stockholder of the Company. Such commissions approximated
$368,000, $287,000 and $337,000 in 1998, 1999 and 2000, respectively, which are
included in selling expenses in the accompanying statement of income.
As part of the recapitalization transactions described in Note 9, the
Company entered into a consulting agreement with its new majority stockholder,
to provide management, financial, advisory and strategic 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,
upon the Rival acquisition.
In connection with the amendments to the Credit Facility described in Note
8, the majority stockholder guaranteed a portion of the facility, for which the
Company has agreed to pay a guarantee fee of $1.1 million for the next 12
months, continuing at an annual rate of $1.1 million thereafter through July 1,
2002. Payment of these fees is subordinated to our obligations under the Credit
Facility.
5. INVENTORIES
Inventories are as follows:
DECEMBER 31,
----------------------------
1999 2000
------------ ------------
Finished goods.......................................... $ 61,154,000 $ 97,375,000
Raw materials........................................... 39,117,000 25,322,000
Work-in-process......................................... 11,288,000 7,977,000
------------ ------------
111,559,000 130,674,000
LIFO allowance.......................................... 1,101,000 376,000
------------ ------------
$112,660,000 $131,050,000
============ ============
29
31
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment are as follows:
DECEMBER 31,
---------------------------
DEPRECIABLE LIVES 1999 2000
------------------------ ----------- ------------
Mold costs and tooling............ 1 1/2 - 5 years $26,377,000 $ 33,527,000
Plant and machinery............... 7 - 10 years 30,564,000 38,155,000
Buildings and leasehold
improvements.................... life of lease - 40 years 16,581,000 27,059,000
Equipment and computer
equipment....................... 5 - 7 years 6,059,000 6,862,000
Furniture and fixtures............ 5 - 10 years 4,385,000 6,223,000
Land.............................. N/A 712,000 712,000
Motor vehicles.................... 4 - 5 years 506,000 508,000
----------- ------------
85,184,000 113,046,000
Less -- accumulated depreciation
and amortization................ 30,836,000 45,464,000
----------- ------------
$54,348,000 $ 67,582,000
=========== ============
There are no assets recorded under capital leases as of December 31, 2000.
Property and equipment recorded under capital leases amounted to approximately
$1,321,000 at December 31, 1999. Total accumulated amortization related to these
assets is approximately $567,000 at December 31, 1999.
7. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
Sales returns and allowances.............................. $ 7,812,000 $ 8,279,000
Payroll and bonuses....................................... 8,179,000 5,796,000
Interest payable.......................................... 2,144,000 4,416,000
Advertising............................................... 6,613,000 8,640,000
Other..................................................... 11,508,000 6,214,000
----------- -----------
$36,256,000 $33,345,000
=========== ===========
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
30
32
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and other enumerated exceptions). The Notes are cross-defaulted
to payment defaults under the Credit Facility.
Credit Facility
The Company entered into an amended and restated Credit Facility agreement
in February, 1999 in connection with the Rival acquisition. This Credit Facility
consisted of a tranche A term loan of $40.0 million that matures February 5,
2005, a tranche B term loan of $85.0 million that matures February 5, 2007 and a
$140.0 million revolving credit facility that matures February 5, 2005.
Availability under the Credit Facility is reduced by outstanding letters of
credit. As of December 31, 2000, the Company's availability was $18.7 million,
net of outstanding letters of credit totalling $4.3 million. 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. The Credit Facility, and the guarantees thereof by the
Company's domestic subsidiaries, are secured by substantially all of the
Company's domestic and certain foreign assets. The Credit Facility is
cross-defaulted to the Notes Indentures.
The Company's financial performance in the fourth quarter of 2000 resulted
in a default, as of December 31, 2000, of certain financial ratio covenants in
the Credit Facility as previously amended. The lending group agreed to a
Forbearance Agreement with respect to such defaults on April 13, 2001. On May 7,
2001, the Credit Facility was further amended to waive the defaults and to
revise certain of the financial ratio covenants through June 30, 2002. In
addition, the maximum revolving credit availability under the Credit Facility
has been increased from $140.0 million to an aggregate of $180.0 million through
January 31, 2002, decreasing to an aggregate of $155.0 million through July 1,
2002 and $115.0 million thereafter, subject to a borrowing base formula. As
partial consideration for the amendments, the Company issued warrants to the
lenders to acquire up to 5% of THG's common stock on a fully-diluted basis. The
warrants are exercisable at a price of $5.04 per share, and expire May 7, 2006.
Additionally, the majority stockholder agreed to provide a $43.5 million
guarantee in support of the increased revolving credit commitment.
The Credit Facility as amended, 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.
31
33
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following:
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
(IN THOUSANDS)
Credit Facility, with a weighted average interest rate of
10.1% at December 31, 2000............................... $210,075 $232,425
9 7/8% Senior Subordinated Notes, net of unamortized
discount of $1.2 million at December 31, 1999 and $1.1
million at December 31, 2000............................. 135,085 135,186
-------- --------
Total debt................................................. 345,160 367,611
Less current maturities.................................... 6,450 7,250
-------- --------
Long-term debt............................................. $338,710 $360,361
Aggregate maturities of long-term debt (excluding obligations under capital
leases) are as follows:
DECEMBER 31,
2000
--------------
(IN THOUSANDS)
2001........................................................ $ 7,250
2002........................................................ 8,850
2003........................................................ 9,450
2004........................................................ 8,375
2005........................................................ 11,063
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, 2000 was 6.66%, therefore
the Company will be due approximately $40,000 in the first quarter of 2001 from
the lending bank.
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.
32
34
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. In October of 2000, the Plan was
further amended to increase the number of shares available for grant to
4,460,978. 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:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE RANGE 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
Granted during 2000............................... 843,550 $5.04 $5.04
Exercised during 2000............................. -- -- --
Forfeited during 2000............................. (243,730) $3.50 - $5.04 $4.78
--------- ------------- -----
Outstanding as of December 31, 2000............... 4,266,906 $3.50 - $5.04 $4.55
--------- ------------- -----
Number of shares exercisable as of December 31,
2000............................................ 991,802 $3.50 - $5.04 $4.16
Total available for grant as of December 31,
2000............................................ 194,072 -- --
33
35
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the 1997 Plan stock
options outstanding at December 31, 2000:
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISES DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 2000 LIFE (YEARS) PRICE 2000 PRICE
- --------- -------------- ------------ -------- -------------- --------
$3.50 1,349,652 7.4 $3.50 569,521 $3.50
$5.04 2,917,254 8.5 $5.04 422,281 $5.04
--------- ----- ------- -----
4,266,906 $4.55 991,802 $4.16
========= ===== ======= =====
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, 1999 and 2000,
consistent with the provisions of FAS 123, the Company's net income would have
been reduced to the pro forma amounts indicated below. The pro forma net income
reflected below does not include a tax benefit for 2000 as a full valuation
allowance would have been provided against any such benefit.
1998 1999 2000
------ ------ --------
(IN THOUSANDS)
Net income (loss) -- as reported....................... $8,961 $1,812 $(32,170)
Net income(loss) -- pro forma.......................... 8,805 1,286 $(33,149)
The fair value of options granted at date of grant was estimated using the
Black-Sholes model with the following assumptions:
1998 1999 2000
------ ------ ------
Weighted average expected life (years)................... 6.0 6.0 6.0
Weighted average interest rate........................... 5.32% 5.12% 6.17%
The weighted average grant date fair value of options granted during 1998,
1999 and 2000 was $1.17, $1.30 and $1.54 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.
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.
34
36
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, THG has certain rights to purchase shares of Common Stock and
options from employees upon their termination of employment.
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,
-------------------------------------------
1998 1999 2000
----------- ------------ ------------
Current:
Federal................................. $ 1,844,000 $ (7,309,000) $ --
State................................... 366,000 115,000 226,000
Foreign................................. 753,000 2,046,000 1,433,000
----------- ------------ ------------
Total current........................... 2,963,000 (5,148,000) 1,659,000
----------- ------------ ------------
Deferred:
Federal................................. $ (609,000) $ 2,770,000 $ --
State................................... (132,000) 92,000 --
Foreign................................. -- 2,199,000 932,000
----------- ------------ ------------
Total deferred.......................... (741,000) 5,061,000 932,000
----------- ------------ ------------
$ 2,222,000 $ (87,000) $ 2,591,000
=========== ============ ============
Pre-tax income (loss) is summarized as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1999 2000
----------- ------------ ------------
Domestic.................................. $ 988,000 $(16,464,000) $(44,489,000)
Foreign................................... 10,195,000 18,189,000 14,910,000
----------- ------------ ------------
$11,183,000 $ 1,725,000 $(29,579,000)
=========== ============ ============
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 passed the tax holiday. Dongguan Huixin Electrical Products
Company, Ltd. has made profits since 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.
35
37
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 16.0% 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,
------------------------
1998 1999 2000
----- ------ -----
Statutory U.S. federal tax rate............................ 35.0% 35.0% (35.0)%
State taxes, net of federal tax benefit.................... 1.4 (30.1) (6.6)
Foreign earnings taxed at different rates.................. (17.1) (102.7) (10.0)
Valuation allowance on deferred tax assets................. -- 16.4 57.4
Goodwill amortization...................................... -- 41.2 2.7
Non-deductible expenses.................................... .3 3.8 --
Other...................................................... .3 31.4 .3
----- ------ -----
Effective tax rate......................................... 19.9% (5.0)% 8.8%
===== ====== =====
Deferred tax assets and deferred tax liabilities are comprised of the
following at December 31, 1999 and 2000:
DECEMBER 31,
-------------------------
1999 2000
---------- -----------
Deferred tax assets:
Net operating losses..................................... 3,729,000 21,122,000
Contribution carryover................................... -- 38,000
Accrued expenses......................................... 4,712,000 3,097,000
Inventory................................................ 1,910,000 2,303,000
Interest limitation carryforward......................... 964,000 964,000
Intangibles.............................................. 997,000 --
Accounts receivable...................................... 5,348,000 9,325,000
---------- -----------
Gross deferred tax assets............................. 17,660,000 36,849,000
Deferred tax liabilities:
Intangibles.............................................. -- (127,000)
Property and equipment................................... (5,653,000) (6,991,000)
Employee pension plan.................................... (867,000) (1,169,000)
---------- -----------
Net deferred tax assets before valuation allowance.... 11,140,000 28,562,000
Valuation allowance...................................... (1,650,000) (18,541,000)
---------- -----------
Net deferred tax assets.................................. 9,490,000 10,021,000
========== ===========
As of December 31, 2000, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $45.9 million
expiring between 2004 and 2020. The Company has increased its valuation
allowance from $1,650,000 to $18,541,000 primarily related to the realizability
of federal and state net operating loss carryforwards generated in the current
year. The Company has recorded the balance of the deferred tax asset in the
belief that it is more likely than not that it will be realized. This belief is
based upon a review of all available evidence, including historical operating
results, projections of taxable income, and tax planning strategies. The
utilization of the net operating loss carryforwards may also be further limited
in the event of a change of ownership as defined under Internal Revenue Code
Section 382.
36
38
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, the Company had a valuation allowance of
$1,650,000 provided for certain state operating losses and certain interest
deductions which were limited on payments to the former majority shareholder due
to compensation recorded in conjunction with the recapitalization transaction
described in Note 9.
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, 2000 are approximately $52,438,000.
11. LEASES
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 $3,916,000 in 1998, $7,052,000
in 1999 and $7,575,000 in 2000.
The Company signed a 15 year lease agreement for its new corporate
headquarters facility and distribution center on January 7, 2000. Construction
was completed and the Company moved in February 2001. The lease payments
commenced September 1, 2000 for a portion of the facility and December 1, 2000
for the full facility. Yearly lease payments of $2,374,339 increase every three
years by a factor of up to 6.75%.
At December 31, 2000, future minimum rental payments under noncancellable
lease arrangements (including the new corporate headquarters facility and
distribution center) are as follows:
OPERATING
LEASES
-----------
2001........................................................ $ 6,608,000
2002........................................................ 6,229,000
2003........................................................ 5,620,000
2004........................................................ 5,379,000
2005 and thereafter......................................... 35,548,000
-----------
$59,384,000
===========
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. 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.
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 $308,000, $542,000
and $298,000 in 1998, 1999 and 2000, respectively.
37
39
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pensions and other Postretirement Benefits
As part of the acquisition as described in Note 3, THG acquired three Rival
Company defined benefit pension plans: The Rival Company Jackson Plant
Employees' Retirement Plan, The Rival Manufacturing Company Clinton Plant
Employees' Retirement Plan, and The Rival Company Plan for Sales, Administrative
and Clerical Employees ("SAC plan"). Benefits for plant employees are primarily
based on years of service. Sales, administrative and clerical employees receive
a retirement benefit based on final pay at retirement and years of service.
During the first quarter of fiscal 2000 the SAC plan was amended and
restated to allow the vesting of benefits for certain plan participants under a
cash balance plan formula. All employees who were aged 50 with 5 years of
credited service on February 28, 2000 were grandfathered under the old plan
formula. The new plan was renamed The Holmes Group Retirement Benefit
Accumulation Plan.
Effective December 30, 2000, The Rival Company Jackson Plant Employees'
Retirement Plan and The Rival Manufacturing Company Clinton Plant Employees'
Retirement Plan were merged into the Holmes Group Retirement Benefit
Accumulation Plan, but retained their respective benefit formulas. All benefits
under the Plan are noncontributory.
The Company's funding policy is consistent with the funding requirements
under ERISA and the Internal Revenue Code.
38
40
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ -- $15,421,297
Service cost................................................ 729,989 563,251
Interest cost............................................... 930,357 932,113
Amendments.................................................. -- (1,189,722)
Actuarial (gain)............................................ (1,080,411) (821,255)
Acquisition................................................. 15,374,393 --
Curtailment................................................. -- (194,742)
Benefits paid............................................... (533,031) (1,143,541)
----------- -----------
Benefit obligation at end of year........................... $15,421,297 $13,567,401
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. -- $16,939,348
Actual return on plan assets................................ $ (410,186) 1,132,048
Acquisition................................................. 17,550,509 --
Employer contribution....................................... 332,056 422,148
Benefits paid............................................... (533,031) (1,143,541)
----------- -----------
Fair value of plan assets at end of year.................... 16,939,348 17,350,003
Funded status............................................... 1,518,051 3,782,602
Unrecognized prior service cost............................. -- (1,006,422)
Unrecognized net actuarial loss............................. 748,142 333,238
----------- -----------
Prepaid benefit cost........................................ $ 2,266,193 $ 3,109,418
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate............................................... 8.00% 7.50%
Expected return on plan assets.............................. 9.00% 9.00%
Rate of compensation increase............................... 4.50% 4.50%
COMPONENTS OF NET PERIODIC PENSION COST (INCOME)
Service cost................................................ $ 729,989 $ 563,251
Interest cost............................................... 930,357 932,113
Expected return on plan assets.............................. (1,418,368) (1,514,581)
Amortization of prior service cost.......................... -- (69,548)
Amortization of net actuarial (gain)........................ -- (23,818)
----------- -----------
Net periodic pension cost (income).......................... $ 241,978 $ (112,583)
FAS 88 (income)............................................. $ -- $ (308,494)
WEIGHTED-AVERAGE ASSUMPTIONS AS OF ACQUISITION DATE
Discount rate............................................... 6.75%
Expected return on plan assets.............................. 9.00%
Rate of compensation increase............................... 4.50%
39
41
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. BUSINESS AND CREDIT CONCENTRATIONS AND BUSINESS SEGMENTS
Business and Credit Concentrations
THG sells its products to retailers throughout the United States, Canada,
Mexico and Europe. 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 and
approximately 26% and 10%, respectively, of total sales in 2000. Accounts
receivable due from the three largest customers amounted to 29% and 33% of total
accounts receivable at December 31, 1999 and 2000, respectively.
Certain of THG's retail customers have filed for bankruptcy protection
during 1999 and 2000. Management monitors and evaluates the credit status of its
customers, and adjusts sales terms as appropriate. The Company maintains
reserves for potential credit losses. 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 currently manages its operations through three business
segments: consumer durables, international and Far East. The consumer durables
segment sells products including fans, heaters, humidifiers, air purifiers,
Crock-Pot(R) slow cookers, toasters, ice cream freezers, can openers,
showerheads, massagers and lighting products to retailers throughout the U.S.
The consumer 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 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.
40
42
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The other category represents the divested industrial and building supply
businesses that were considered a separate segment prior to 2000. The 2000
amounts represent the final shipments under supply agreements with the
purchasers of these businesses.
CONSUMER CONSOLIDATED
DURABLES FAR EAST INTERNATIONAL OTHER ELIMINATIONS TOTALS
(IN THOUSANDS) -------- --------- ------------- ------- ------------ ------------
Net sales to customers... 2000 $449,378 $ 14,427 $45,717 $ 3,727 -- $513,249
1999 437,297 6,566 38,953 24,671 -- 507,487
1998 201,709 5,070 5,469 -- -- 212,248
Intersegment net sales... 2000 -- (219,558) -- -- (219,558) --
1999 -- 154,501 -- -- (154,501) --
1998 -- 106,241 -- -- (106,241) --
Depreciation and
amortization........... 2000 8,660 6,818 259 -- -- 15,737
1999 8,432 4,764 170 1,767 -- 15,133
1998 2,770 4,571 7 -- (100) 7,248
Net interest expense
(income)............... 2000 38,650 (100) -- -- -- 38,550
1999 33,489 (25) -- 8 -- 33,472
1998 14,337 (890) 404 -- (18) 13,833
Other operating costs.... 2000 443,964 211,918 47,288 6,541 (218,579) 491,132
1999 402,541 144,678 36,240 27,802 (154,191) 457,070
1998 185,239 97,261 4,872 -- (105,166) 182,206
Segment income (loss).... 2000 (41,896) 15,349 (1,830) (2,814) (979) (32,170)
1999 (7,165) 11,650 2,543 (4,906) (310) 1,812
1998 (637) 10,369 186 -- (957) 8,961
Segment assets........... 2000 635,566 87,861 33,786 -- (303,344) 453,869
1999 656,448 63,828 29,620 5,624 (299,024) 456,496
1998 103,418 41,734 4,821 -- (18,616) 131,357
Segment capital
expenditures........... 2000 10,571 17,263 507 -- -- 28,341
1999 4,212 12,534 240 628 -- 17,614
1998 2,784 1,963 2 -- -- 4,749
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, equity in earnings from joint venture and income taxes.
41
43
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information is summarized by geographic area:
CANADA CONSOLIDATED
UNITED STATES FAR EAST AND EUROPE TOTAL
------------- ----------- ----------- ------------
Net sales:
Year ended December 31, 1998...... $201,709,000 $ 5,070,000 $ 5,469,000 $212,248,000
Year ended December 31, 1999...... 461,968,000 6,566,000 38,953,000 507,487,000
Year ended December 31, 2000...... 453,105,000 14,427,000 45,717,000 513,249,000
Identifiable assets:
December 31, 1999................. 35,991,000 20,264,000 527,000 56,782,000
December 31, 2000................. 37,777,000 30,654,000 775,000 69,206,000
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 2000, THG entered into a one year exclusive license and supply
agreement for certain chemical additives. The agreement provided for a minimum
annual royalty payment by THG of $170,000. THG had an annual minimum purchase
obligation under this agreement of $80,000 in 2000. A two year renewal of this
agreement is currently being negotiated by the parties that will contain the
same or lower minimum royalty and purchase commitment payments.
At December 31, 2000, the Company had commitments outstanding for capital
expenditures under purchase orders and contracts of approximately $12.4 million.
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. 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, as currently in effect, expire on December 31, 2001, renewable for
additional 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.
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,
42
44
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 a certain portion of after-tax profit each year to a
reserve fund and employee bonus and welfare fund.
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 2000.
The retained earnings 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:
1999 2000
---------- -----------
Dongguan Raider Motor Corp. Ltd. .......................... $9,633,000 $10,449,000
Dongguan Huixin Electrical Products Company, Ltd. ......... 4,780,000 8,872,000
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, 1999 and 2000, due to their relatively short maturity.
The fair values of the Company's Notes and Credit Facility approximate their
carrying values at December 31, 2000 because the interest rates on these
borrowings approximate current market rates.
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.
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................. 3,148 228,861 19,057 $(251,066) --
-------- -------- ------- --------- --------
Total current liabilities....... 23,779 253,850 49,388 (253,366) 73,651
-------- -------- ------- --------- --------
Credit facility..................... 203,625 -- -- -- 203,625
-------- -------- ------- --------- --------
Long-term debt...................... 135,085 -- -- -- 135,085
-------- -------- ------- --------- --------
Other long-term liabilities......... -- -- 4,054 -- 4,054
-------- -------- ------- --------- --------
Deferred income taxes............... -- 2,281 -- -- 2,281
-------- -------- ------- --------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value..... 20 2 -- (2) 20
Common stock, $1 par value........ -- -- 100 (100) --
Additional paid in capital........ 67,915 -- -- -- 67,915
Accumulated other comprehensive
income.......................... 397 -- 397 (397) 397
Treasury stock.................... (62,058) -- -- -- (62,058)
Retained earnings................. 31,526 5,650 39,509 (45,159) 31,526
-------- -------- ------- --------- --------
Total stockholders' equity
(deficit)............... 37,800 5,652 40,006 (45,658) 37,800
-------- -------- ------- --------- --------
$400,289 $261,783 $93,448 $(299,024) $456,496
======== ======== ======= ========= ========
44
46
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents......... $ 175 $ 959 $ 1,883 -- $ 3,017
Accounts receivable, net.......... 51,725 49,459 23,315 -- 124,499
Inventories....................... 51,181 52,637 32,396 $ (5,164) 131,050
Prepaid expenses and other current
assets.......................... 2,922 74 3,461 -- 6,457
Deferred income taxes............. 5,300 9,911 (486) -- 14,725
Income taxes receivable........... -- -- -- -- --
Due from affiliates............... 223,445 89 29,138 (252,672) --
-------- -------- -------- --------- --------
Total current assets............ 334,748 113,129 89,707 (257,836) 279,748
-------- -------- -------- --------- --------
Assets held for sale................ -- 1,624 -- -- 1,624
Property and equipment, net......... 5,482 30,671 31,429 -- 67,582
Goodwill, net....................... -- 83,779 -- -- 83,779
Deferred income taxes............... -- -- -- -- --
Deposits and other assets........... 21,806 3,110 511 (4,291) 21,136
Investments in consolidated
subsidiaries...................... 41,217 -- -- (41,217) --
-------- -------- -------- --------- --------
$403,253 $232,313 $121,647 $(303,344) $453,869
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease
obligations and other debt...... $ -- $ -- $ 784 -- $ 784
Current portion of credit
facility........................ 7,250 -- -- -- 7,250
Accounts payable.................. 7,367 (2,261) 29,264 (4,191) 30,179
Accrued expenses.................. 15,835 12,298 5,212 -- 33,345
Accrued income taxes.............. (10) 2,521 2,206 -- 4,717
Due to affiliates................. 6,976 221,939 23,757 $(252,672) --
-------- -------- -------- --------- --------
Total current liabilities....... 37,418 234,497 61,223 (256,863) 76,275
-------- -------- -------- --------- --------
Credit facility..................... 225,175 -- -- -- 225,175
-------- -------- -------- --------- --------
Long-term debt...................... 135,186 -- -- -- 135,186
-------- -------- -------- --------- --------
Other long-term liabilities......... -- -- 7,055 -- 7,055
-------- -------- -------- --------- --------
Deferred income taxes............... -- 4,704 -- -- 4,704
-------- -------- -------- --------- --------
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.......................... 241 -- 241 (241) 241
Treasury stock.................... (62,058) -- -- -- (62,058)
Retained earnings (deficit)....... (644) (6,890) 53,028 (46,138) (644)
-------- -------- -------- --------- --------
Total stockholders' equity
(deficit)............... 5,474 (6,888) 53,369 (46,481) 5,474
-------- -------- -------- --------- --------
$403,253 $232,313 $121,647 $(303,344) $453,869
======== ======== ======== ========= ========
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........................... $201,709 $-- $116,780 $(106,241) $212,248
Cost of goods sold.................. 152,505 -- 97,039 (105,266) 144,278
-------- --- -------- --------- --------
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)
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales........................... $216,457 $245,512 $200,019 $(154,501) $507,487
Cost of goods sold.................. 160,272 191,448 166,778 (154,190) 364,308
-------- -------- -------- --------- --------
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)
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales........................... $231,340 $221,765 $279,702 $(219,558) $513,249
Cost of goods sold.................. 181,075 176,398 243,996 (219,264) 382,205
-------- -------- -------- --------- --------
Gross profit (loss)............... 50,265 45,367 35,706 (294) 131,044
-------- -------- -------- --------- --------
Operating expenses:
Selling........................... 32,322 30,362 10,837 -- 73,521
General and administrative........ 14,426 10,451 11,107 -- 35,984
Product development............... 8,829 2,171 -- -- 11,000
Plant closing costs............... -- 340 -- -- 340
Amortization of goodwill and other
intangible assets............... -- 2,597 -- -- 2,597
-------- -------- -------- --------- --------
Total operating expenses........ 55,577 45,921 21,944 -- 123,442
-------- -------- -------- --------- --------
Operating profit (loss)......... (5,312) (554) 13,762 (294) 7,602
-------- -------- -------- --------- --------
Other income and expense:
Other (income) expense, net....... 23 891 (1,672) -- (758)
Interest and other expense, net... 27,905 10,745 (100) -- 38,550
-------- -------- -------- --------- --------
Total other (income) expense.... 27,928 11,636 (1,772) -- 37,792
-------- -------- -------- --------- --------
Income (loss) before income taxes
and equity in income of and equity
in earnings from joint venture.... (33,240) (12,190) 15,534 (294) (30,190)
-------- -------- -------- --------- --------
Income tax expense (benefit)........ 226 350 2,015 -- 2,591
Equity in earnings from joint
venture........................... (611) -- -- -- (611)
-------- -------- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries...................... (32,855) (12,540) 13,519 (294) (32,170)
Equity in income of consolidated
subsidiaries...................... 685 -- -- (685) --
-------- -------- -------- --------- --------
Net income (loss)................... $(32,170) $(12,540) $ 13,519 $ (979) $(32,170)
======== ======== ======== ========= ========
48
50
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, 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 $ 12,845 $ 7,130
--------- -------- -------- ---------
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............................... -- -- 2,252 2,252
--------- -------- -------- ---------
Net cash used for investing
activities........................... (281,158) 20,647 (10,522) (271,033)
--------- -------- -------- ---------
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
--------- -------- -------- ---------
49
51
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
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
========= ======== ======== =========
Year Ended December 31, 2000
Net cash provided by operating activities... $ (4,170) $(10,286) $ 8,935 $ (5,521)
--------- -------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of assets held for sale
and business divestitures.............. 701 4,052 -- 4,753
Distribution in earnings from joint
venture................................ 1,375 -- -- 1,375
Purchases of property and equipment....... (3,376) (7,195) (17,770) (28,341)
Cash received from joint venture
partners............................... -- -- 1,893 1,893
--------- -------- -------- ---------
Net cash used for investing
activities........................... (1,300) (3,143) (15,877) (20,320)
--------- -------- -------- ---------
Cash flows from financing activities:
Borrowings on credit facility, net of
issuance costs......................... 22,350 -- -- 22,350
Principle payments on capital lease
obligations............................ -- -- (139) (139)
Other net activity with Parent............ (16,897) 13,593 3,304 --
--------- -------- -------- ---------
Net cash used for financing
activities........................... 5,453 13,593 3,165 22,211
--------- -------- -------- ---------
Net increase in cash and cash equivalents... (17) 164 (3,777) (3,630)
Cash and cash equivalents, beginning of
period.................................... 192 795 5,660 6,647
--------- -------- -------- ---------
Cash and cash equivalents, end of period.... $ 175 $ 959 $ 1,883 $ 3,017
========= ======== ======== =========
50
52
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 PERIOD EXPENSES ACCOUNTS ACQUISITION ACCOUNTS OF PERIOD
---------- ---------- -------- ----------- ------------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1998..... $ 459 $ 523 $ -- $ -- $ 263 $ 719
Year ended December 31, 1999..... 719 1,297 -- 7,740 710 9,046
Year ended December 31, 2000..... 9,046 4,543 -- -- 3,967 9,622
ADDITIONS DEDUCTIONS
----------------------- --------------------
NET
OPERATING
CHARGED TO LOSSES NET
BALANCE AT INCOME WITHOUT OPERATING CHARGED BALANCE
BEGINNING TAX TAX LOSSES TO OTHER AT END
OF PERIOD EXPENSE BENEFIT(1) UTILIZED ACCOUNTS OF PERIOD
---------- ---------- ---------- --------- -------- ---------
Deferred tax valuation allowance:
Year ended December 31, 1998........ $1,447 $ -- $ -- $ -- $80 $ 1,367
Year ended December 31, 1999........ 1,367 283 -- -- -- 1,650
Year ended December 31, 2000........ 1,650 16,891 -- -- -- 18,541
ADDITIONS DEDUCTIONS
----------------------- --------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND WRITE-OFF AT END
OF PERIOD EXPENSES ACQUISITION OF INVENTORY OF PERIOD
---------- ---------- ----------- ------------ ---------
Inventory obsolescence reserve:
Year ended December 31, 1998.......... $ 3,464 $ 1,522 $ -- $ 1,069 $ 3,917
Year ended December 31, 1999.......... 3,917 9,356 10,082 12,423 10,932
Year ended December 31, 2000.......... 10,932 17,347 -- 9,854 18,425
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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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 recapitalization 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......................... 59 President, Chief Executive Officer and Director
Stanley Rosenzweig..................... 36 Chief Operating Officer and Director
Gregory F. White....................... 37 Executive Vice President, Sales and Marketing and
Director
Ira B. Morgenstern..................... 48 Chief Financial Officer and Treasurer
(Tommy) Woon Fai Liu................... 48 Managing Director of Holmes' Far East Operations and
Director
Louis F. Cimini........................ 46 Senior Vice President -- Human Resources and
Organization Performance
Richard K. Lubin....................... 54 Director
Randy Peeler........................... 36 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 recapitalization 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 Group plc, our
former majority stockholder, 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 Holmes 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 with PHH (now Cendant Mobility), a
Fortune 500 corporate services organization, as Senior Vice President of
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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, U.S. Can Corporation and English Welsh &
Scottish Railway, Ltd. In addition, Mr. Lubin is Treasurer of the Dana-Farber
Cancer Institute.
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 Casella Waste Systems, Inc. and Weigh-Tronix, Inc.
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, 2000.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- ------------------------------
NAME AND OTHER ANNUAL STOCK OPTION ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) SHARES COMPENSATION(2)
- ------------------ -------- -------- --------------- ------------ ---------------
Jordan A. Kahn............. 2000 $501,986 $ -- $15,600 -- $ --
President and Chief 1999 488,804 112,500 15,600 490,538 --
Executive Officer 1998 402,776 200,000 23,400 297,717 --
Stanley Rosenzweig......... 2000 377,250 -- 15,600 -- --
Chief Operating Officer 1999 353,441 112,500 15,600 367,903 4,800
1998 253,960 125,000 15,600 297,717 4,800
Gregory F. White........... 2000 321,006 -- 10,200 -- --
Executive Vice President 1999 277,638 112,500 10,200 367,903 4,800
Sales and Marketing 1998 205,054 100,000 10,200 297,717 4,800
(Tommy) Woon Fai Liu....... 2000 260,000 -- 44,701 -- --
Managing Director of 1999 250,000 112,500 43,701 50,000 --
Holmes Far East 1998 200,000 100,000 43,701 60,000 4,800
Ira B. Morgenstern(3)...... 2000 224,103 -- -- -- --
Chief Financial Officer 1999 207,818 112,500 50,000(4) 135,000 4,800
- ---------------
(1) Primarily represents automobile allowance, annual living expense allowance
or annual lease payments on automobile provided by Holmes.
(2) Represents Holmes' matching contribution under its 401(k) plan.
(3) Mr. Morgenstern joined Holmes in August, 1998.
(4) Represents the 1999 payment of a relocation bonus in connection with joining
the Company.
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted during 2000 to the executive officers.
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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, 2000.
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......... -- -- 184,207 604,048 132,594 325,890
Stanley Rosenzweig..... -- -- 159,680 505,940 132,594 325,890
Gregory F. White....... -- -- 159,680 505,940 132,594 325,890
(Tommy) Woon Fai Liu... -- -- 21,568 88,432 17,815 74,585
Ira B. Morgenstern..... -- -- 29,892 120,108 4,454 18,646
- ---------------
(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 independent
valuation of such common stock existed as of December 31, 2000. The price of
the common stock, valued on February 5, 1999, the date of the Rival
acquisition closing, was $5.04 per share.
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.
PERCENT OF
NUMBER OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OF SHARES 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)........................................... 2,678,730 13.1
Bain Securities, Inc.(5).................................... 1,028,214 5.1
c/o Bain Capital, Inc.
2 Copley Place
Boston, MA 02116
Stanley Rosenzweig(4)....................................... 371,996 1.8
Gregory F. White(4)......................................... 257,638 1.3
(Tommy) Woon Fai Liu(4)..................................... 151,555 *
Ira B. Morgenstern(4)....................................... 60,035 *
Richard Lubin(6)............................................ 15,052,594 74.0
Randy Peeler(6)............................................. 15,052,594 74.0
All directors and executive officers as a group (8
persons)(7)............................................... 18,577,548 90.1
- ---------------
* Less than 1.0%
(1) Unless otherwise specified, the address of each person is c/o The Holmes
Group, Inc., One Holmes Way, 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
exercisable within 60 days are deemed outstanding.
(3) Includes shares held by various investment entities affiliated with
Berkshire Partners LLC.
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(4) Includes shares which may be held by family members or affiliates. Includes
the following shares subject to vested stock options: 86,100 option shares
held by each of Messrs. Kahn, Rosenzweig and White, 17,352 option shares
held by Mr. Liu, and 2,892 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 and voting trust shares referred to in Note 4 and the
shares referred to in Note 6, as well as an additional 5,000 option shares.
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, 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.
Effective May 7, 2001, Holmes agreed to pay the two investment funds
affiliated with Berkshire Partners an aggregate guarantee fee of $1.1 million
for the next 12 months, continuing at an annual rate of $1.1 million thereafter
through July 1, 2002, as consideration for Berkshire's guarantee of up to $43.5
million of the obligations under the Credit Facility. Payment of these fees is
subordinated to our obligations under the Credit Facility.
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 $368,000, $287,000
and $337,000 to JKC for the years ended December 31, 1998, 1999 and 2000,
respectively.
In connection with the 1997 recapitalization transactions, Holmes purchased
a portion of the shares of common stock of Holmes beneficially owned by an
affiliate of Pentland, its former majority stockholder. At this time, 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. The material terms of the employment
agreements are described above in Note 14 of Notes to Consolidated Financial
Statements under Item 8 of this Report.
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.
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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:
Not applicable
(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 Rival Consumer
Sales Corporation(4)
3.7 Bylaws (as amended) of The Holmes Group, Inc. f/k/a Holmes
Products Corp.(1)
3.8 By-laws of Holmes Manufacturing Corp.(1)
3.9 By-laws of Holmes Air (Taiwan) Corp.(1)
3.10 By-laws of Holmes Motor Corp.(4)
3.11 By-laws of The Rival Company(4)
3.12 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)
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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)
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 The Holmes Group, Inc. f/k/a Holmes Products Corp. Employee
Stock Purchase Plan(4)
10.9 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)
10.10 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)
10.11 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)
10.12 Investors Subscription Agreement dated February 5, 1999 by
and among The Holmes Group, Inc. f/k/a Holmes Products Corp.
and certain investors(3)
10.13 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)
10.14 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)
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.15 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)
10.16 Employee Stockholders' Agreement dated April 23, 1998(7)
10.17 Voting Trust Agreement dated April 23, 1998(7)
10.18 Lease Agreement between The Holmes Group, Inc. and ACRE HPC,
LLC dated as of January 7, 2000(8)
10.19 Form of Second Amendment to Amended and Restated Revolving
Credit and Term Loan Agreement dated as of June 30, 2000 by
and among The Holmes Group, Inc., its subsidiaries party
thereto, and the lenders party thereto(9)
10.20 Amendment to Lease Agreement between The Holmes Group, Inc.
and ACRE HPC, LLC dated as of December 21, 2000(10)
10.21 Form of Forbearance Agreement and Third Amendment dated as
of April 13, 2001 by and among The Holmes Group, Inc., its
subsidiaries party thereto, and the lenders party
thereto(10)
10.22 Form of Fourth Amendment to Amended and Restated Revolving
Credit and Term Loan Agreement and Limited Waiver dated as
of May 7, 2001 by and among The Holmes Group, Inc., its
subsidiaries party thereto, and the lenders party
thereto(10)
10.23 Form of Warrant Purchase Agreement and Common Stock Purchase
Warrant dated as of May 7, 2001 by and among The Holmes
Group, Inc. and the lenders party thereto, as investors(10)
10.24 Form of Co-Sale Agreement dated as of May 7, 2001 by and
among The Holmes Group, Inc., certain affiliates of
Berkshire Partners LLC, and the lenders party thereto, as
investors(10)
10.25 Letter agreement regarding guaranty fees dated May 7, 2001
by and among The Holmes Group, Inc., its subsidiaries party
thereto, and certain affiliates of Berkshire Partners
LLC(10)
21.1 Subsidiaries of Registrant(10)
23.1 Consent of PricewaterhouseCoopers LLP(10)
- ---------------
(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) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.
(10) 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: May 11, 2001
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 May 11, 2001
- --------------------------------------------------- Officer and Director
Jordan A. Kahn (Principal Executive Officer)
/s/ IRA B. MORGENSTERN Chief Financial Officer and May 11, 2001
- --------------------------------------------------- Treasurer (Principal
Ira B. Morgenstern Financial and Accounting
Officer)
/s/ STANLEY ROSENZWEIG Chief Operating Officer and May 11, 2001
- --------------------------------------------------- Director
Stanley Rosenzweig
/s/ GREGORY F. WHITE Executive Vice President Sales May 11, 2001
- --------------------------------------------------- and Marketing and Director
Gregory F. White
/s/ RICHARD LUBIN Director May 11, 2001
- ---------------------------------------------------
Richard Lubin
/s/ RANDY PEELER Director May 11, 2001
- ---------------------------------------------------
Randy Peeler
/s/ (TOMMY) WOON FAI LIU Director May 11, 2001
- ---------------------------------------------------
(Tommy) Woon Fai Liu
59