1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
COMMISSION FILE NUMBERS: 333-44473
333-77905
THE HOLMES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2768914
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE HOLMES WAY, MILFORD MASSACHUSETTS 01757
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) 634-8050
(REGISTRANT'S TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
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THE HOLMES GROUP, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONSOLIDATED BALANCE SHEET AT
DECEMBER 31, 2000 AND MARCH 31, 2001 (UNAUDITED) 3
CONSOLIDATED STATEMENT OF INCOME FOR
THE THREE MONTHS ENDED MARCH 31, 2000 AND
MARCH 31, 2001 (UNAUDITED) 4
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2000 AND
MARCH 31, 2001 (UNAUDITED) 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
PART II. OTHER INFORMATION 22
SIGNATURES 23
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HOLMES GROUP, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
MARCH 31,
DECEMBER 31, 2001
2000 (UNAUDITED)
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 3,017 $ 2,656
Accounts receivable, net of allowance of $9,622 and $9,793 respectively.. 124,499 109,945
Inventories ................................................................ 131,050 135,080
Prepaid expenses and other current assets .................................. 6,457 7,063
Deferred income taxes ...................................................... 14,725 14,749
-------- --------
Total current assets ..................................................... 279,748 269,493
Assets held for sale ....................................................... 1,624 218
Property and equipment, net ................................................ 67,582 69,477
Goodwill, net............................................................... 83,779 82,896
Deposits and other assets .................................................. 5,850 5,395
Debt issuance costs, net ................................................... 15,286 14,560
-------- --------
$453,869 $442,039
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of other liabilities.......... $ 784 $ 845
Current portion of credit facility ......................................... 7,250 7,652
Accounts payable ........................................................... 30,179 35,382
Accrued expenses ........................................................... 33,345 33,237
Accrued income taxes ....................................................... 4,717 6,016
-------- --------
Total current liabilities ................................................ 76,275 83,132
Credit facility ................................................................ 225,175 210,660
Long-term debt ................................................................. 135,186 135,213
Other long-term liabilities..................................................... 7,055 7,608
Deferred income taxes .......................................................... 4,704 4,704
Commitments and contingencies Stockholders' equity:
Common stock, $.001 par value. Authorized 25,000,000 shares as of
December 31, 2000 and March 31, 2001; issued and outstanding
20,307,995 shares at December 31, 2000 and March 31, 2001 ................ 20 20
Additional paid in capital ................................................... 67,915 67,915
Accumulated other comprehensive income ....................................... 241 (85)
Treasury stock, at cost (18,620,450 shares) .................................. (62,058) (62,058)
Retained earnings (deficit)................................................... (644) (5,070)
-------- --------
Total stockholders' equity ..................................... 5,474 722
-------- --------
$453,869 $442,039
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
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THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 2001
-------------- --------------
Net sales ..................................................... $118,557 $127,233
Cost of goods sold ............................................ 83,193 93,858
-------- --------
Gross profit ................................................ 35,364 33,375
-------- --------
Operating expenses:
Selling ..................................................... 17,320 16,212
General and administrative .................................. 7,846 8,345
Product development ......................................... 2,805 2,566
Plant closing costs ......................................... 144 --
Amortization of goodwill and other intangible assets ........ 662 650
-------- --------
Total operating expenses .................................. 28,777 27,773
-------- --------
Operating profit .......................................... 6,587 5,602
-------- --------
Other income and expense:
Interest and other expense, net ............................. 9,154 9,380
-------- --------
Income (loss) before income taxes and equity in earnings
from joint venture .......................................... (2,567) (3,778)
Income tax expense (benefit) .................................. (121) 1,264
Equity in earnings from joint venture ......................... 143 616
-------- --------
Net income (loss) ......................................... $ (2,303) $ (4,426)
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 2001
-------------- --------------
Cash flows from operating activities:
Net income (loss).............................................................. $ (2,303) $ (4,426)
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization................................................ 4,188 4,011
Amortization of debt issuance costs and discounts............................ 1,444 753
Change in allowance for doubtful accounts.................................... 292 171
(Gain) loss on disposal of assets............................................ -- (559)
Deferred income taxes........................................................ (286) (24)
Changes in operating assets and liabilities:
Accounts receivable........................................................ 34,689 14,383
Inventories................................................................ (21,559) (4,030)
Prepaid expenses and other current assets.................................. 919 (606)
Deposits and other assets.................................................. (4,009) 2,847
Accounts payable........................................................... 12,042 5,013
Accrued expenses........................................................... (3,321) (108)
Accrued income taxes....................................................... 1,052 1,299
--------- ---------
Net cash provided by operating activities.................................... 23,148 18,724
--------- ---------
Cash flows from investing activities:
Proceeds from sale of assets held for sale and business divestitures........... 2,757 --
Distribution of earnings from joint venture.................................... 764 --
Purchases of property and equipment............................................ (6,451) (5,256)
Cash received from joint venture partner, net.................................. 1,124 420
--------- ---------
Net cash used for investing activities....................................... (1,806) (4,836)
--------- ---------
Cash flows from financing activities:
Borrowings (repayment) of credit facility, net of issuance costs............... (24,912) (14,113)
Principal payments on capital lease obligations................................ (69) --
--------- ---------
Net cash provided by (used for) financing activities......................... (24,981) (14,113)
--------- ---------
Effect of exchange rate changes on cash.......................................... (90) (136)
--------- ---------
Net increase (decrease) in cash and cash equivalents............................. (3,729) (361)
Cash and cash equivalents, beginning of period................................... 6,647 3,017
--------- ---------
Cash and cash equivalents, end of period......................................... $ 2,918 $ 2,656
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest........................................................ $ 4,726 $ 5,673
Cash paid for (refund of) income taxes........................................ $ (799) $ 54
The accompanying notes are an integral part of these consolidated financial
statements.
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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
1. NATURE OF BUSINESS
The Holmes Group, Inc. ("THG"), formerly known as Holmes Products Corp.,
along with its wholly-owned subsidiary, The Rival Company ("Rival") and its
subsidiaries, acquired on February 5, 1999, designs, develops, imports and
sells consumer durable goods, including fans, heaters, humidifiers, air
purifiers, small kitchen electric appliances, personal care appliances,
filters and accessories and lighting products, to retailers throughout the
United States and Canada, and to a lesser extent, Europe, Latin America and
Asia.
Holmes Products (Far East) Limited ("HPFEL") and its subsidiaries
manufacture, source and sell consumer durable goods, including fans,
heaters and humidifiers and kitchen electrics, mainly to THG. HPFEL
operates facilities in Hong Kong, Taiwan and The People's Republic of
China.
HPFEL is a wholly-owned subsidiary of THG. Prior to the recapitalization
transaction described in Note 4, THG and HPFEL were both directly or
indirectly 80%-owned subsidiaries of Asco Investments Ltd., a subsidiary of
Pentland Group plc ("Pentland").
2. BASIS OF CONSOLIDATION
The accompanying unaudited financial statements include the accounts of THG
and its wholly-owned subsidiaries, Rival, HPFEL, Holmes Manufacturing
Corp., Holmes Air (Taiwan) Corp. and Holmes Motor Corp. The accompanying
unaudited financial statements also include the accounts of Rival's direct
and indirect wholly-owned subsidiaries, Bionaire International B.V., Patton
Building Products, Inc. (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."
3. ACQUISITION
On February 5, 1999, THG completed its acquisition of Rival for an
aggregate of $279.6 million, including $129.4 million cash paid in
connection with a tender offer for all of the outstanding shares of Common
Stock of Rival (including payments to optionees), $142.9 million to
refinance Rival's outstanding debt and $7.3 million in acquisition costs.
The acquisition was made utilizing cash on hand, borrowings under an
amended and restated Credit Facility entered into in connection with the
acquisition, the issuance of $31.3 million of senior subordinated notes and
proceeds of $50.0 million from the sale of THG's common stock to investment
funds affiliated with THG's majority shareholder, certain members of
Holmes' management and to certain other co-investors. This acquisition has
been accounted for as a purchase, and the results of operations of Rival
have been included in the consolidated financial statements since the date
of acquisition. The excess of the purchase price over the fair value of the
net assets acquired was approximately $88.5 million and $88.7 million,
before $5.6 million and $4.9 million of accumulated amortization at
March 31, 2001 and December 31, 2000, respectively and is being amortized
on a straight-line basis over 35 years.
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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In connection with the acquisition, THG recorded a restructuring reserve of
$6.4 million as an assumed liability in accordance with EITF 95-3,
"Recognition of Liabilities in Connection with a Purchase Business
Combination."
Management determined that certain restructuring actions would be required
to effectively integrate the Rival operations into THG. These restructuring
actions were comprised primarily of the elimination of certain overlapping
positions within the management and support staff layers of the combined
company, relocation of key home environment 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 the remainder of 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 the Warrensburg, Missouri facility closures were
completed during fiscal 2000. The Warrensburg facility was sold during the
first quarter of 2001 which resulted in a gain of approximately $559,000.
Proceeds from the sale were approximately $1,965,000. The proceeds were
received subsequent to March 31, 2001, and therefore are shown on the March
31, 2001 consolidated balance sheet as a current asset.
The reserve activity for fiscal 2000 is as follows (in thousands):
Employee Facility Total
Severance and Exit and Accrued
Relocation Costs Other Costs Restructuring
---------------- ----------- ------------
Balance at December 31, 2000 $ 712 $233 $ 945
Cash payments/adjustments
made fiscal 2001 (188) (233) (421)
------ ---- ------
Balance at March 31, 2001 $ 524 $ -- $ 524
The cash payments/adjustments made in fiscal 2001 primarily include the
cash payments made for severance in the first quarter of 2001.
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 net assets of Rival's
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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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.
4. RECAPITALIZATION
On November 26, 1997, the Company and its stockholders consummated an
agreement to perform the following: (i) the stockholders of HPFEL
contributed their shares of common stock to THG in exchange for 2,750,741
shares of THG's common stock (ii) THG issued 4,718,579 shares of its common
stock to outside investors and certain executive officers of the Company
for approximately $15.5 million, net of related issuance costs, (iii) the
Company repaid all amounts outstanding to Pentland affiliates and repaid
all amounts outstanding on the Company's trade acceptances, including
accrued interest, and (iv) THG redeemed 18,620,450 shares of its common
stock held by Pentland for approximately $62.1 million. In connection with
these transactions, THG issued $105.0 million of 9 7/8% Senior Subordinated
Notes due in November 2007 and borrowed $27.5 million under a new line of
credit facility.
The transactions described above have been accounted for as a leveraged
recapitalization of the Company. The Company has retained its historical
cost basis of accounting, due to the significant minority shareholders
which remained. The shares redeemed from Pentland have been recorded as
treasury stock, at cost.
5. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation of
the Company's financial position as of March 31, 2001 and the Company's
results of operations and cash flows for the three months ended March 31,
2000 and 2001. This interim financial information and notes thereto should
be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 2000. Due to the seasonality of the Company's
business, the Company's consolidated results of operations for the three
month period ended March 31, 2001 are not necessarily indicative of the
results to be expected for any other interim period or the entire fiscal
year.
6. INVENTORIES
All inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method on approximately 80%
of the inventories and the last-in, first-out method (LIFO) for the
remaining 20% of the inventory. Inventories are as follows:
December 31, 2000 March 31, 2001
----------------- --------------
Finished goods $ 97,375,000 $100,192,000
Raw materials and Work-in-process 33,299,000 34,737,000
------------ ------------
130,674,000 134,929,000
LIFO allowance 376,000 151,000
------------ ------------
$131,050,000 $135,080,000
============ ============
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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT
Senior Subordinated Notes
In connection with the recapitalization transactions described in Note 4
and the Rival acquisition described in Note 3, THG issued $105.0 million
and $31.3 million, respectively, in senior subordinated notes, maturing on
November 15, 2007 (the "Notes"). The Notes bear interest at 9 7/8%, payable
semi-annually on May 15 and November 15. No principal is due until the
maturity date.
The Notes are subordinated to the Company's other debt, including the
Credit Facility (as described below) and capital leases. The Notes are
guaranteed by THG's current and future domestic subsidiaries (see Note 12)
on a full, unconditional and joint and several basis, but are otherwise
unsecured.
THG can, at its option, redeem the Notes at any time after November 15,
2002, subject to a fixed schedule of redemption prices which declines from
104.9% to 100% of the face value. However, THG may redeem up to $43.3
million of the Notes prior to such date at a price of 109.875% of face
value upon issuance of equity securities. Additionally, upon certain sales
of stock or assets or a change of control of THG, THG must offer to
repurchase all or a portion of the Notes at a redemption price of 101% of
face value.
The Notes contain certain restrictions and covenants, including limitations
(based on certain financial ratios) on THG's ability to pay dividends,
repurchase stock or incur additional debt (other than borrowings under the
Credit Facility 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. The 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 March 31, 2001, the Company's
availability was $31.5 million, net of outstanding letters of credit
totaling $3.7 million. The Credit Facility bears interest at variable
rates based on either the prime rate or eurodollar, 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.
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THE HOLMES GROUP, INC. NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking
Statements."
Long term debt consists of the following:
(in thousands) December 31, 2000 March 31,2001
----------------- -------------
Credit Facility, with a weighted average interest rate of
10.1% and 8.7% at December 31, 2000
and March 31, 2001, respectively...................... $232,425 $218,312
9 7/8% Senior Subordinated Notes, net of unamortized
discount of $1.1 million at December 31, 2000 and $1.0
million at March 31, 2001............................. 135,186 135,213
-------- --------
Total debt.............................................. 367,611 353,525
Less current maturities................................ 7,250 7,652
-------- --------
Long-term debt......................................... $360,361 $345,873
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 March 31, 2001 was 6.44%.
8. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income consists of net earnings and foreign currency
translation adjustments as presented in the following table.
Three months ended
(in thousands) March 31, 2000 March 31,2001
-------------- -------------
Net Earnings (loss).......................................... $(2,303) $ (4,426)
Foreign currency translation adjustments..................... (623) (326)
-------- --------
Comprehensive income (loss)................................ $(2,926) $ (4,752)
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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. BUSINESS SEGMENTS
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), during 1998. SFAS 131
established standards for reporting information about business segments in
annual financial statements. It also established standards for related
disclosures about products and services, major customers and geographic
areas. Business segments are defined as components of a business about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group,
in deciding how to allocate resources and in assessing performance. The
business segments are managed separately because each segment represents a
strategic business unit whose main business is entirely different. The
adoption of SFAS 131 did not affect the Company's results of operations or
financial position.
The Company 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, electric space heaters and lighting
products to retailers throughout the U.S. The consumer durables segment is
made up of home environment products and kitchen electric products, which
are considered one business segment due to the similar customer base and
distribution channels. The international segment sells the Company's
products outside the U.S. The Far East segment is the manufacturing and
sourcing operation located primarily at HPFEL.
The International and Other category in 2001 represents the International
segment. For 2000, the other category represented the International segment
and the divested industrial and building supply segment combined as neither
accounted for over 10% of net sales individually. Summary financial
information for each reportable segment for the three-month periods ended
March 31, 2001 and 2000 is as follows (in thousands):
Consumer International Consolidated
Durables Far East and Other Eliminations Total
-------- -------- ------------- ------------ ------------
March 2001
- ----------
Net sales ....................... $110,989 $64,719 $10,447 $(58,922) $ 127,233
Operating income(loss) .......... (1,779) 6,748 308 325 5,602
March 2000
- ----------
Net sales ....................... $102,827 $58,785 $11,804 $(54,859) $ 118,557
Operating income(loss) .......... 1,629 6,275 (1,347) 30 6,587
The following information is summarized by geographic area (in thousands):
Other Consolidated
United States Far East International Total
------------- -------- ------------- ------------
Net sales:
Three months ended March 31, 2001 ........................ $ 110,989 $ 5,797 $10,447 $127,233
Three months ended March 31, 2000 ........................ 106,014 3,926 8,617 118,557
Identifiable assets:
March 31, 2001 ........................................... 36,637 32,392 666 69,695
December 31, 2000 ........................................ 37,777 30,654 775 69,206
Net sales are grouped based on the geographic origin of the transaction.
The "Other International" area is comprised of sales of products that
originated in Europe, Mexico, Latin America and Canada.
The Company's manufacturing entities in the Far East sell completed
products to THG in the United States at intercompany transfer prices which
reflect management's estimate of amounts which would be charged by an
unrelated third party. These sales are eliminated in consolidation. The
remaining Far East sales are to unrelated third parties.
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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. CONTINGENCIES
The Company is involved in litigation and is the subject of claims arising
in the normal course of its business. In the opinion of management, based
upon discussions with legal counsel, no existing litigation or claims will
have a materially adverse effect on the Company's financial position or
results of operations and cash flows.
11. RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
12. CONDENSED CONSOLIDATING INFORMATION
The senior subordinated notes described in Note 7 were issued by THG and
are guaranteed by Rival and its three domestic subsidiaries and Holmes
Manufacturing Corp. ("Manufacturing"), Holmes Motor Corp. ("Motor") and
Holmes Air (Taiwan) Corp. ("Taiwan"), but are not guaranteed by THG's
other subsidiaries, HPFEL and Holmes Air (Canada) Corp. ("Canada"), or
Rival's five foreign subsidiaries. The guarantor subsidiaries are directly
or indirectly wholly-owned by THG, and the guarantees are full,
unconditional and joint and several. The following condensed consolidating
financial information presents the financial position, results of
operations and cash flows of (i) THG, as parent, as if it accounted for
its subsidiaries on the equity method, (ii) Rival (on a consolidated basis
following its acquisition by THG, Manufacturing, Motor and Taiwan, the
guarantor subsidiaries, and (iii) HPFEL and Canada, Bionaire International
B.V., The Holmes Group 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 of the
Company's audited financial statements for the year ended December 31,
2000, included in the Company's Form 10-K, as amended, as filed with the
Securities and Exchange Commission, certain of HPFEL's subsidiaries in
China have restrictions on distributions to their parent companies.
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CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000 (IN THOUSANDS)
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
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
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
other liabilities ... $ -- $ -- $ 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
======== ======== ======= ======== ========
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CONSOLIDATING BALANCE SHEET MARCH 31, 2001 (IN THOUSANDS)
(UNAUDITED)
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 189 $ 331 $ 2,136 -- $ 2,656
Accounts receivable, net........ 48,904 44,603 16,438 -- 109,945
Inventories..................... 44,497 68,379 27,029 $ (4,825) 135,080
Prepaid expenses and other
current assets............... 2,274 1,976 2,813 -- 7,063
Deferred income taxes........... 5,300 9,911 (462) -- 14,749
Due from affiliates............. 216,616 89 44,987 (261,692) --
-------- -------- -------- --------- --------
Total current assets......... 317,780 125,289 92,941 (266,517) 269,493
-------- -------- -------- --------- --------
Assets held for sale.............. -- 218 -- -- 218
Property and equipment, net....... 6,346 30,073 33,058 -- 69,477
Goodwill, net..................... -- 82,896 -- -- 82,896
Deposits and other assets......... 21,376 3,190 -- (4,611) 19,955
Investments in consolidated
subsidiaries.................... 47,854 -- -- (47,854) --
-------- -------- -------- --------- --------
$393,356 $241,666 $125,999 $(318,982) $442,039
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of
other liabilities ... $ -- $ -- $ 845 -- $ 845
Current portion of
credit facility.............. 7,652 -- -- -- 7,652
Accounts payable................. 3,713 9,732 26,548 $ (4,611) 35,382
Accrued expenses................. 17,480 11,059 4,698 -- 33,237
Accrued income taxes............. 280 2,690 3,046 -- 6,016
Due to affiliates................ 17,636 219,930 24,026 (261,592) --
-------- -------- -------- --------- --------
Total current liabilities.... 46,761 243,411 59,163 (266,203) 83,132
-------- -------- -------- --------- --------
Credit facility................... 210,660 -- -- -- 210,660
-------- -------- -------- --------- --------
Long-term debt.................... 135,213 -- -- -- 135,213
-------- -------- -------- --------- --------
Other long-term liabilities....... -- -- 7,608 -- 7,608
-------- -------- -------- --------- --------
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....................... (85) -- (85) 85 (85)
Treasury stock.................. (62,058) -- -- -- (62,058)
Retained earnings(deficit)...... (5,070) (6,451) 59,213 (52,762) (5,070)
-------- -------- -------- --------- --------
Total stockholders' equity
(deficit).................. 722 (6,449) 59,228 (52,779) 722
-------- -------- -------- --------- --------
$393,356 $241,666 $125,999 $(318,982) $442,039
======== ======== ======== ========= ========
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CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 2000 (IN THOUSANDS)
(UNAUDITED)
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales..................... $ 65,775 $ 40,239 $ 67,402 $ (54,859) $118,557
Cost of goods sold............ 50,528 31,524 56,030 (54,889) 83,193
-------- -------- -------- --------- --------
Gross profit (loss)......... 15,247 8,715 11,372 30 35,364
-------- -------- -------- --------- --------
Operating expenses:
Selling..................... 8,308 6,842 2,170 -- 17,320
General and
administrative........... 2,307 2,426 3,113 -- 7,846
Product development......... 2,147 658 -- -- 2,805
Plant closing costs......... -- 144 -- -- 144
Amortization of goodwill and
other intangible
assets................... -- 646 16 -- 662
-------- -------- -------- --------- --------
Total operating expenses.... 12,762 10,716 5,299 -- 28,777
-------- -------- -------- --------- --------
Operating profit (loss)..... 2,485 (2,001) 6,073 30 6,587
-------- -------- -------- --------- --------
Other income and expense:
Other (income) expense,
net...................... (3) 98 (403) -- (308)
Interest and other expense,
net...................... 9,522 (51) (9) -- 9,462
-------- -------- -------- --------- --------
Total other (income)
expense................ 9,519 47 (412) -- 9,154
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of and equity in earnings
from joint venture.......... (7,034) (2,048) 6,485 30 (2,567)
Equity in earnings from joint
venture..................... 143 -- -- -- 143
Income tax expense
(benefit)................... (199) (545) 623 -- (121)
-------- -------- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries................ (6,692) (1,503) 5,862 30 (2,303)
Equity in income of
consolidated subsidiaries... 4,389 -- -- (4,389) --
-------- -------- -------- --------- --------
Net income (loss)............. $ (2,303) $ (1,503) $ 5,862 $ (4,359) $ (2,303)
======== ======== ======== ========= ========
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CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS)
(UNAUDITED)
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales..................... $ 63,584 $ 47,405 $ 75,166 $ (58,922) $127,233
Cost of goods sold............ 53,803 36,216 63,086 (59,247) 93,858
-------- -------- -------- --------- --------
Gross profit (loss)......... 9,781 11,189 12,080 325 33,375
-------- -------- -------- --------- --------
Operating expenses:
Selling..................... 7,904 5,969 2,339 -- 16,212
General and
administrative........... 4,262 1,398 2,685 -- 8,345
Product development......... 2,088 478 -- -- 2,566
Amortization of goodwill and
other intangible
assets................... -- 650 -- -- 650
-------- -------- -------- --------- --------
Total operating expenses.... 14,254 8,495 5,024 -- 27,773
-------- -------- -------- --------- --------
Operating profit (loss)..... (4,473) 2,694 7,056 325 5,602
-------- -------- -------- --------- --------
Other income and expense:
Other (income) expense,
net...................... 585 (531) (10) -- 44
Interest and other expense,
net...................... 6,553 2,786 (3) -- 9,336
-------- -------- -------- --------- --------
Total other (income)
expense................ 7,138 2,255 (13) -- 9,380
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of and equity in earnings
from joint venture.......... (11,611) 439 7,069 325 (3,778)
Equity in earnings from joint
venture..................... 616 -- -- -- 616
Income tax expense
(benefit)................... 380 -- 884 -- 1,264
-------- -------- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries................ (11,375) 439 6,185 325 (4,426)
Equity in income of
consolidated subsidiaries... 6,949 -- -- (6,949) --
-------- -------- -------- --------- --------
Net income (loss)............. $ (4,426) $ 439 $ 6,185 $ (6,624) $ (4,426)
======== ======== ======== ========= ========
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 2001 (IN THOUSANDS)
(UNAUDITED)
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
THREE MONTHS ENDED MARCH 31, 2000
Net cash provided by operating activities ................. $ (14,034) $ 22,276 $ 14,906 $ 23,148
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ........... -- -- -- --
Contribution in joint venture ........................... -- -- -- --
Distribution of earnings from joint venture ............. 764 -- -- 764
Cash received from joint venture partner ................ -- -- 1,124 1,124
Proceeds from assets held for sale
And business divestitures ............................. 701 2,056 -- 2,757
Purchases of property and equipment ..................... (1,115) (783) (4,553) (6,451)
--------- --------- --------- ---------
350 1,273 (3,429) (1,806)
--------- --------- --------- ---------
Cash flows from financing activities:
Net repayment of line of credit ......................... -- -- -- --
Issuance of common stock ................................ -- -- -- --
Borrowings (repayments) of long-term debt,
net of issuance costs ................................... -- -- -- --
Borrowings on credit facility,
net of issuance costs ................................... (24,912) -- -- (24,912)
Principal payments on capital lease obligations ......... -- -- (69) (69)
Other net activity with Parent .......................... 38,506 (23,645) (14,861) --
--------- --------- --------- ---------
Net cash used for financing activities ................ 13,594 (23,645) (14,930) (24,981)
--------- --------- --------- ---------
Effect of exchange rate changes on cash ................... -- -- (90) (90)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...... (90) (96) (3,543) (3,729)
Cash and cash equivalents, beginning of period ............ 192 795 5,660 6,647
--------- --------- --------- ---------
Cash and cash equivalents, end of period .................. $ 102 $ 699 $ 2,117 $ 2,918
========= ========= ========= =========
THREE MONTHS ENDED MARCH 31, 2001
Net cash provided by operating activities ................. $ 11,596 $ (7,120) $ 14,248 $ 18,724
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ........... -- -- -- --
Contribution in joint venture ........................... -- -- -- --
Distribution of earnings from joint venture ............. -- -- -- --
Cash received from joint venture partner ................ -- -- 420 420
Proceeds from assets held for sale
And business divestitures ............................. -- -- -- --
Purchases of property and equipment ..................... (1,244) (422) (3,590) (5,256)
--------- --------- --------- ---------
(1,244) (422) (3,170) (4,836)
--------- --------- --------- ---------
Cash flows from financing activities:
Net repayment of line of credit ......................... -- -- -- --
Issuance of common stock ................................ -- -- -- --
Borrowings (repayments) of long-term debt,
net of issuance costs ................................... -- -- -- --
Borrowings on credit facility,
net of issuance costs ................................... (14,113) -- -- (14,113)
Principal payments on capital lease obligations ......... -- -- -- --
Other net activity with Parent .......................... 3,775 6,914 (10,689) --
--------- --------- --------- ---------
Net cash used for financing activities ................ (10,338) 6,914 (10,689) (14,113)
--------- --------- --------- ---------
Effect of exchange rate changes on cash ................... -- -- (136) (136)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...... 14 (628) 253 (361)
Cash and cash equivalents, beginning of period ............ 175 959 1,883 3,017
--------- --------- --------- ---------
Cash and cash equivalents, end of period .................. $ 189 $ 331 $ 2,136 $ 2,656
========= ========= ========= =========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Holmes Group, Inc. formerly known as Holmes Products Corp., is a leading
developer, manufacturer and marketer of quality, branded home appliances,
including home environment, small kitchen and personal care appliances. Our home
environment products include fans, heaters, humidifiers and air purifiers. We
believe that we have the leading U.S. market share in each of these product
categories. Our kitchen appliances include Crock-Pot(R) slow cookers, can
openers, ice cream freezers and other similar small kitchen electric appliances
where we hold a leading market share. Our personal care products include
massagers and showerheads. We believe that our strong market position and
success are attributable to our continuous product innovation, engineering and
manufacturing expertise, close customer partnerships, breadth of product
offerings, reputation for quality, and presence and experience in the Far East.
Our products are sold under the Holmes(R), Rival(R), Crock-Pot(R), 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 drug store chains. We
believe that the strength, scope and visibility of our retail account base
provide a competitive advantage with respect to brand recognition, access to
shelf space and penetration of the consumer market.
Sales of our products are highly seasonal, and counter-seasonal weather can
adversely affect our results of operations. Within the home environment product
line, sales of fans occur predominantly from January through June, and sales of
heaters and humidifiers occur predominantly from July through December. Although
kitchen appliances, personal care products and certain home environment products
such as air purifiers and lighting products are used year-round, the nature of
these products tend to draw increased sales during the winter months when people
are indoors and, as a result, sales of these products tend to be greatest in
advance of the winter months from July through December. Additionally, because
many of the kitchen and personal care products we sell are given as gifts, we
sell more of these products in anticipation of the holiday season. When holiday
shipments are combined with seasonal products such as heaters and humidifiers,
our sales during the months of August through November are generally at a higher
level than during the other months of the year. In addition to the seasonal
fluctuations in sales, we experience seasonality in gross profit, as margins
realized on fan products tend to be lower than those realized on heater,
humidifier and air purifier products.
On February 5, 1999 Holmes completed its acquisition of Rival. In connection
with the acquisition, as described in Note 3 of the Company's Notes to
Consolidated Financial Statements included herein, we issued an additional $31.3
million of senior subordinated notes due in November 2007, bearing interest at 9
7/8%, and amended and restated our existing $100 million credit facility to have
a total availability of $325 million. We also sold $50 million of common stock
in a private placement to investment funds affiliated with Berkshire Partners
LLC (Holmes' majority shareholder), and to members of management and certain
other co-investors. The initial borrowings under the credit facility, together
with the net proceeds of the equity investment and the offering of the Notes,
were used to consummate the Rival acquisition, refinance Rival's then existing
indebtedness, and pay the fees and expenses of the transaction.
Holmes had completed a recapitalization transaction in November 1997, in which
it issued $105 million of senior subordinated notes due in November 2007,
bearing interest at 9 7/8%, and entered into a $100 million line of credit
facility, of which approximately $27.5 million was initially drawn. The proceeds
of these borrowings were used to repay all existing indebtedness (primarily a
line of credit and other current debt facilities) and redeem a significant
portion of the previous majority shareholder's common stock.
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19
Accordingly, commencing in November 1997, we had a significantly higher level of
borrowing and a corresponding higher level of interest expense than in the past.
The Rival acquisition and the related financing transactions consummated on
February 5, 1999 further increased our indebtedness and interest expense
substantially.
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 2001 AND MARCH 31, 2000
Net Sales. Net sales for the first quarter of fiscal 2001, which ended March 31,
2001, were $127.2 million compared to $118.6 million for the first quarter of
fiscal 2000, which ended March 31, 1999, an increase of $8.6 million or 7.3%.
Excluding the sales related to the residual sourcing agreements for the pump and
industrial businesses, which were divested in the fourth quarter of 1999, net
sales increased approximately 10.2% versus the first quarter of 2000. This
increase was primarily due to increased shipments of kitchen electric products
over the corresponding period of 2000. International shipments also increased in
the first quarter of 2001 versus the first quarter of 2000, driven by shipments
in Mexico and Latin America and in the Far East. The Far East increase was due
to increased sales by our motor joint venture with General Electric. Returns in
the first quarter of 2001 also decreased and contributed to the net sales
increase during the quarter. Sales for the divested businesses in the first
quarter of 2000 were $3.2 million pursuant to supply agreements with the buyers.
Gross Profit. Gross profit for the first quarter of 2001 was $33.4 million
compared to $35.4 million for the first quarter of 2000, a decrease of $2.0
million or 5.7%. This was due to a higher proportion of third-party sourced
items (particularly kitchen electrics), which have a lower margin, and lower
in-house manufacturing of fans due to the higher carryover inventory from the
cooler than anticipated 2000 summer season. Also, the retail fan shipments
during the first quarter of 2001 were at lower overall margins due to the
carryover inventory at higher 2000 season costs. Distribution and warehousing
costs were also higher, again due to the carryover fan inventory from the 2000
summer season. We also had sales of low margin closeouts which increased sales
with no gross profit impact. Lastly, discounts and allowances were slightly
higher during the first quarter of 2001 versus 2000, which also negatively
impacted gross margin.
Selling Expenses. Selling expenses for the first quarter of 2001 were $16.2
million compared to $17.3 million for the first quarter of 2000, a decrease of
$1.1 million or 6.4%. As a percentage of net sales, selling expenses decreased
to 12.7% for the first quarter of 2001 from 14.6% for the first quarter of 2000.
The selling expense decrease was due to a reduction in several sales and
marketing expense line items such as sales samples, print and trade advertising
and sales travel expenses. These reductions resulted from our continued effort
to lower discretionary spending throughout the Company.
General and Administrative Expenses. General and administrative expenses for the
first quarter of 2001 were $8.3 million compared to $7.8 million for the first
quarter of 2000, an increase of $0.5 million or 6.4%. As a percentage of net
sales, general and administrative expenses decreased to 6.5% for the first
quarter of 2001 from 6.6% for the first quarter of 2000. The increase in general
and administrative expense was attributable to a number of factors including MIS
infrastructure and legal and professional costs.
Product Development Expenses. Product development expenses for the first quarter
of 2001 were $2.6 million compared to $2.8 million for the first quarter of
2000, a decrease of $0.2 million or 7.1%. The expenditures in 2001, which are in
line with expenditures in 2000, relate to the development of a number of new
products in the home environment and kitchen product lines.
Plant Closing Costs. There were no plant closing costs in the first quarter of
2001. The closing costs in 2000 were associated with the closing of the
Fayetteville, North Carolina plant.
Interest and Other Expense, Net. Interest and other expense, net for the first
quarter of 2001 was $9.4 million compared to $9.2 million for the first quarter
of 2000, an increase of $0.2 million or 2.2%. The increase in interest expense
was primarily due to higher debt levels during the first quarter of 2001 versus
2000.
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20
Income Tax Expense (Benefit). The income tax expense for the first quarter of
2001 was $1.3 million compared to a benefit of $0.1 million in 2000. The income
tax expense in 2001 was largely due to the establishment of a valuation reserve
primarily against losses experienced in the U.S. and a tax expense 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 the Joint Venture in 2001 versus $0.1 million in 2000.
Net Income. As a result of the foregoing factors, our net loss for the first
quarter of 2001 was $4.4 million, compared to a net loss of $2.3 million in the
first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Analysis of Cash Flows.
Following the recapitalization transaction in November 1997 and the Rival
acquisition in February 1999, we have funded our liquidity requirements with
cash flows from operations and borrowings under the Credit Facility. Our primary
liquidity requirements are for working capital and to service our indebtedness.
While there can be no assurance, we believe that existing cash resources, cash
flows from operations and borrowings under the recently amended Credit Facility
will be sufficient to meet our liquidity needs for the next twelve months,
during which time we will continue to carefully evaluate our financing
requirements.
Cash provided by operations for the three months ended March 31, 2000 and 2001
was $23.1 million and $18.7 million, respectively. Cash provided by operations
in the first quarter of 2001 primarily reflected a $14.4 million decrease in
accounts receivable levels, as heavy cash collection activity typically follows
the seasonally higher sales activity during the fourth quarter of the fiscal
year.
Cash used for investing for the three months ended March 31, 2000 and 2001 was
$1.8 million and $4.8 million, respectively. Cash used for investing in the
first quarter of 2001 reflected capital expenditures of approximately $5.3
million offset by additional cash received from our joint venture partner as
part of their contribution towards joint venture capital equipment.
Cash used for financing activities for the three months ended March 31, 2000 and
2001 was $25.0 million and $14.1 million, respectively. Cash used for financing
in the first quarter of 2001 reflected repayments of the credit facility using
cash flows from operations.
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 our senior debt, including borrowings under the Credit Facility. The
Notes are guaranteed by our domestic subsidiaries but are otherwise unsecured.
We entered into an amended and restated Credit Facility with a syndicate of
banks in February, 1999 in connection with the Rival acquisition. The 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.
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21
Availability under the Credit Facility is reduced by outstanding letters of
credit. As of March 31, 2001, our availability was $31.5 million, net of
outstanding letters of credit totaling $3.7 million. 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 and
$115.0 million thereafter, 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 LLC, our equity partners, 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 our
ability to incur additional indebtedness, make investments and take certain
other actions. Our ability to meet our debt service obligations will be
dependent upon the future performance, which will be impacted by general
economic conditions and other factors. See "Forward-Looking Statements."
FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
quarterly report, are or may be forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "intends," "expects,"
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 discussed in our most
recent Registration Statement on Form S-4 (File No. 333-77905), and from time
to time in our reports filed with the Securities and Exchange Commission.
Accordingly, such forward-looking statements do not purport to be predictions
of future events or circumstances and may not be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2001, the carrying value of our debt totaled $353.5 million
(including capital leases), which approximated its fair value. This debt
includes amounts at both fixed and variable interest rates. For fixed rate debt,
interest rate changes affect the fair market value but do not impact earnings or
cash flows. Conversely, for variable rate debt, interest rate changes generally
do not affect the fair market value but do impact earnings and cash flows,
assuming other factors are held constant.
At March 31, 2001, the Company had fixed rate debt of $135.2 million (including
capital leases) and variable rate debt of $218.3 million. Holding other
variables constant (such as foreign exchange rates and debt levels), a one
percentage point decrease in interest rates would increase the unrealized fair
market value of fixed rate debt by approximately $6.7 million. Based on the
amounts of variable rate debt outstanding at March 31, 2001, the earnings and
cash flows impact, net of taxes, for the next year resulting from a one
percentage point increase in interest rates would be approximately $2.2 million,
holding other variables constant.
In order to help hedge our interest rate exposure, effective May 7, 1999, we
entered into an interest rate collar transaction agreement with our agent bank.
This arrangement is described in Note 7 of Notes to Consolidated Financial
Statements.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings incident to our normal business
operations, including product liability and patent and trademark litigation.
Management believes that the outcome of such litigation will not have a material
adverse effect on our business, financial condition or results of operations. We
have product liability and general liability insurance policies in amounts
management believes to be reasonable. There can be no assurance, however, that
such insurance will be adequate to cover all potential product or other
liability claims against us. We also face exposure to voluntary or mandatory
product recalls in the event that our products are alleged to have manufacturing
or safety defects. We do not maintain product recall insurance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held a Special Meeting in lieu of an Annual Meeting of Stockholders on May
16, 2001. At the meeting, each of the following matters was approved by a vote
of 17,759,583 shares of Common Stock, out of 20,336,567 shares outstanding and
eligible to vote:
(a) Re-election of our six incumbent directors;
(b) Increasing our authorized Common Stock from 25,000,000 shares to
28,500,000 shares; and
(c) Increasing the number of shares of Common Stock reserved for
issuance under our 1997 Stock Option Plan from 4,260,978 shares
to 4,460,978 shares.
ITEM 5. OTHER INFORMATION
Investor Conference Call
We will hold a telephone conference call on June 12, 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 first quarter of
2001. If you are interested in accessing the call in listen-only mode, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Not applicable
b. Reports on Form 8-K:
Not applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE HOLMES GROUP, INC.
------------------------------------
Registrant
May 31, 2001 By: /s/ Jordan A. Kahn
--------------------------------
Jordan A. Kahn, President,
Chief Executive Officer
(Principal Executive Officer)
May 31, 2001 By: /s/ Ira B. Morgenstern
--------------------------------
Ira B. Morgenstern,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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