UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
as of September 30, 1998, for the year ended December 31, 1997, for the nine
months ended September 30, 1998 and the twelve months ended September 30, 1998
("the Pro Forma Financial Statements") have been derived by the application of
pro forma adjustments to the combination of the historical financial statements
of each of Holmes Products Corp. ("Holmes") and The Rival Company ("Rival").
The pro forma combined condensed balance sheet assumes that the
Transactions (as defined below) took place September 30, 1998 and combines
Holmes' unaudited September 30, 1998 balance sheet and Rival's unaudited
September 30, 1998 balance sheet. The pro forma combined condensed statements of
operations assume that the Transactions and the 1997 Transactions (as defined
below) took place as of January 1, 1997 and combine Holmes' statement of
operations for the year ended December 31, 1997, unaudited nine months ended
September 30, 1998 and the unaudited twelve months ended September 30, 1998 and
Rival's unaudited statement of operations for the year ended December 31, 1997,
unaudited nine months ended September 30, 1998 and unaudited twelve months ended
September 30, 1998, respectively. The pro forma combined condensed statements of
operations also reflect employment and management agreements entered into in
conjunction with the 1997 Transactions.
The Pro Forma Financial Statements do not purport to represent what Holmes'
financial position or results of operations would have actually been had the
Transactions and the 1997 Transactions in fact occurred on such dates, or to
project results of operations for any future period. The Pro Forma Financial
Statements should be read in conjunction with the historical financial
statements of each of Holmes and Rival, including the notes thereto.
The "1997 Transactions" consist of (1) the November 1997 leveraged
recapitalization of Holmes in which affiliates of Berkshire Partners, LLC,
certain members of Holmes senior management and certain other investors made an
equity investment in Holmes, the proceeds of which, together with the proceeds
of a $105 million offering of Senior Subordinated Notes (the "Existing Notes"),
borrowings under Holmes' existing credit facility (the "Existing Credit
Facility") and available cash, were used to redeem a portion of the common stock
held by Holmes' prior majority owner, to repay certain outstanding indebtedness
and to pay fees and expenses of the recapitalization; and (2) the May and June
1997 repurchase by Holmes of the 30% minority interest held by certain
stockholders in one of Holmes' subsidiaries for a total of $900,000.
The "Transactions" consist of the issuance by Holmes of $31,250,000
principal amount of new Senior Subordinated Notes (the "Notes"), the receipt of
the proceeds from the sale of $50,000,000 of Holmes' common stock (the "Equity
Commitment"), initial borrowings under Holmes' new $325,000,000 senior credit
facility (the "Credit Facility"), the acquisition of Rival by Holmes (the
"Acquisition"), the refinancing of Rival's existing indebtedness, the
refinancing of outstanding borrowings under the Existing Credit Facility and the
payment of fees and expenses of the Transactions.
HOLMES PRODUCTS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(in thousands except par value)
Adjustments
Holmes Rival ----------------------------------
September 30, September 30, Financing Acquisition Pro
1998(1) 1998(1) Adjustments Adjustments Forma
--------------- --------------- ----------------- ---------------- -----------
Assets
Current assets:
Cash and cash equivalents ................ $ 5,738 $ 1,209 $291,975(2) $(291,975)(2) $ 6,947
Accounts receivable ...................... 39,632 73,837 -- -- 113,469
Inventories .............................. 57,114 113,008 -- 9,720 (4) 179,842
Prepaid expenses and other
current assets .......................... 1,637 2,044 -- 3,291 (4) 6,972
Deferred income taxes .................... 4,651 2,361 -- (2,361)(4) 4,651
--------- -------- -------- --------- ---------
108,772 192,459 291,975 (281,325) 311,881
Property, plant & equipment .............. 17,950 37,606 -- -- 55,556
Deferred income taxes .................... 638 -- -- -- 638
Goodwill ................................. -- 59,859 -- 23,895 (4) 83,754
Deposits and other assets ................ 2,397 10,004 -- (229)(4) 12,172
Debt issuance costs, net ................. 9,437 -- 12,000 (2) -- 20,299
(1,138)(3)
--------- -------- -------- --------- ---------
$ 139,194 $299,928 $302,837 $(257,659) $ 484,300
========= ======== ======== ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank .................... $ -- $ 66,335 $ -- $ (66,335)(2) $ --
Current portion of long-term debt ........ -- 6,000 1,063 (2) (6,000)(2) 1,063
Current portion of capital leases ........ 584 -- -- -- 584
Accounts payable ......................... 16,593 19,823 -- -- 36,416
Accrued expenses ......................... 14,580 13,894 (54)(2) 2,620 (4) 31,040
Deferred tax liabilities ................. -- -- -- 1,527 (4) 1,527
Accrued income taxes ..................... 2,074 -- (455)(3) -- 1,619
--------- -------- -------- --------- ---------
33,831 106,052 554 (68,188) 72,249
Capital lease obligations ................ 320 -- -- -- 320
Line of credit ........................... 19,500 -- (19,500)(2) -- --
Long-term debt (less current
portion) ................................ 105,000 78,000 272,466 (2) (78,000)(2) 377,466
Other liabilities and deferred
income tax .............................. -- 5,085 -- (680)(4) 4,405
--------- -------- -------- --------- ---------
158,651 189,137 253,520 (146,868) 454,440
Commitments & contingencies .............. -- -- -- -- --
Stockholders' equity:
Common stock, $.001 par .................. 10 -- 50 (2) -- 60
Common stock, $.01 par ................... -- 98 -- (98)(5) --
Paid in capital .......................... 16,985 45,972 49,950 (2) (45,972)(5) 66,935
Treasury stock, at cost .................. (62,058) (6,952) -- 6,952 (5) (62,058)
Retained earnings ........................ 25,606 71,673 (683)(3) (71,673)(5) 24,923
--------- -------- -------- --------- ---------
Total stockholders' equity (deficit) ..... (19,457) 110,791 49,317 (110,791) 29,860
--------- -------- -------- --------- ---------
$ 139,194 $299,928 $302,837 $(257,659) $ 484,300
========= ======== ======== ========= =========
-2-
NOTES TO THE UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEET
(in thousands)
Basis of Presentation
(1) The pro forma combined condensed balance sheet assumes that the
Transactions took place September 30, 1998 and combines Holmes' unaudited
September 30, 1998 balance sheet and Rival's unaudited September 30, 1998
balance sheet.
Pro Forma Adjustments
(2) Reflects the issuance of the Notes, initial borrowings under the Credit
Facility, the funding of the Equity Commitment, the repayment of the
Existing Credit Facility and all of Rival's indebtedness and the related
adjustments to cash assuming consummation of the Transactions as of
September 30, 1998, computed as follows:
Financing Acquisition Total
----------- ----------- ----------
Sources of Funds:
Initial borrowings under Credit Facility -- long-term .......... $242,466 $ -- $ 242,466
Initial borrowings under Credit Facility -- short-term ......... 1,063 -- 1,063
Issuance of the Notes .......................................... 30,000 -- 30,000
Issuance of common stock ....................................... 50,000 -- 50,000
-------- --------- ---------
323,529 -- 323,529
-------- --------- ---------
Uses of Funds:
Repayment of existing Rival credit facility .................... -- (66,335) (66,335)
Repayment of existing Rival notes -- long-term ................. -- (78,000) (78,000)
Repayment of existing Rival notes -- short-term ................ -- (6,000) (6,000)
Repayment of the Existing Credit Facility ...................... (19,500) -- (19,500)
Redemption of Rival common stock ............................... -- (127,785) (127,785)
Redemption of certain Rival options ............................ -- (1,575) (1,575)
Prepayment premium on Rival debt ............................... -- (8,000) (8,000)
Accrued interest at September 30, 1998 ......................... (54) (2,280) (2,334)
Estimated fees and expenses .................................... (12,000) (2,000) (14,000)
-------- --------- ---------
(31,554) (291,975) (323,529)
-------- --------- ---------
Net adjustment to cash ......................................... $291,975 $(291,975) $ --
======== ========= =========
Short-term debt incurred under the Credit Facility is comprised of $875 on
Term Loan A and $188 on Term Loan B, which are the total of quarterly
payments due under the Credit Facility within one year of September 30,
1998.
(3) Reflects the write-off of $683 of debt issuance costs, net of $455 tax
benefit, related to the Holmes debt extinguished in connection with the
Transactions. This amount has not been included in the pro forma combined
condensed statements of operations due to its extraordinary nature.
(4) Reflects management's preliminary allocation of purchase price for the
Acquisition in accordance with the purchase method of accounting, as
follows:
Purchase price:
Cash used to purchase shares and options ......... $129,360
Retirement of Rival indebtedness ................. 150,335
Prepayment premium on debt ....................... 8,000
Accrued interest on debt ......................... 2,280
Estimated fees and expenses ...................... 2,000
--------
$291,975
========
-3-
Rival
September 30, Pro
1998 Adjustments Forma
--------------- ------------ -----------
Cash and cash equivalents ......................... $ 1,209 $ -- $ 1,209
Accounts receivable ............................... 73,837 -- 73,837
Inventories ....................................... 113,008 9,720 (a) 122,728
Deferred income taxes ............................. 2,361 (2,361)(b) --
Prepaid expenses and other current assets ......... 2,044 3,291 (c) 5,335
-------- --------- --------
Total current assets ............................ 192,459 10,650 203,109
Property, plant & equipment ....................... 37,606 -- 37,606
Deferred income taxes ............................. 3,606 -- 3,606
Deposits and other assets ......................... 6,398 (229)(d) 6,169
Goodwill .......................................... 59,859 23,895 (e) 83,754
-------- --------- --------
Total assets .................................... 299,928 34,316 334,244
Current portion of long-term debt ................. 72,335 (72,335)(f) --
Accounts payable .................................. 19,823 -- 19,823
Accrued expenses .................................. 13,894 (2,280)(g) 16,514
-- 4,900 (h) --
Deferred tax liabilities .......................... -- 1,527 (i) 1,527
-------- --------- --------
Total current liabilities ....................... 106,052 (68,188) 37,864
Long-term debt (less current portion) ............. 78,000 (78,000)(f) --
Other liabilities and deferred income tax ......... 5,085 (680)(j) 4,405
-------- --------- --------
Total liabilities ............................... 189,137 (146,868) 42,269
-------- --------- --------
Net assets acquired ............................. $110,791 $ 181,184 $291,975
======== ========= ========
(a) Reflects the increase in inventories to estimated fair value based on
preliminary purchase price allocation and elimination of the LIFO
reserve. This write-up will result in a non-recurring charge to the
Company in the year subsequent to the Acquisition.
Elimination of LIFO reserve ................................ $6,090
Increase in inventories to their estimated fair market value 3,630
------
$9,720
======
(b) Reflects the netting of the existing current deferred tax assets
against the deferred tax liabilities generated in the Acquisition.
(c) Reflects the current tax benefits related to the prepayment premium on
the extinguished debt of Rival, as well as the current tax benefits
related to the deferred financing fees written-off.
(d) Reflects the write-off of deferred financing fees relating to the debt
that has been extinguished in the Transactions.
(e) Reflects the excess purchase price over the fair value of net assets
acquired based on a preliminary purchase price allocation.
(f) Reflects the reduction in current and long-term debt repaid in
connection with the Transactions.
(g) Reflects the payment of $2,280 in accrued interest paid in connection
with the Transactions.
(h) Reflects a $4,900 estimate of accrued restructuring charges to be
incurred in connection with the Acquisition. Management is in the
process of assessing and formulating its integration plans.
(i) Reflects adjustments to deferred income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, as a result of adjustments made to historical assets and
liabilities in connection with the purchase price --netted by the
current deferred tax assets in note (b) above.
(j) Reflects the elimination of an unrealized gain on a swap transaction
previously entered into by Rival.
(5) Reflects the elimination of Rival's historical common stock, additional
paid in capital and retained earnings accounts in connection with the
Acquisition.
-4-
HOLMES PRODUCTS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(in thousands)
Rival Adjustments
Holmes Twelve Months ------------------------------------------
Year Ended Ended 1997 Financing Acquisition Pro
December 31, 1997(1) December 31, 1997(1) Transactions Adjustments Adjustments Forma
---------------------- ---------------------- ------------ ----------- ----------- ---------
Net sales ................ $192,153 $379,798 $ -- $ -- $ -- $571,951
Cost of goods sold ....... 136,740 285,667 (1,834)(2) -- -- 420,573
-------- -------- ------- -------- ----- --------
Gross profit ............ 55,413 94,131 1,834 -- -- 151,378
Restructuring ............ -- 3,000 -- -- -- 3,000
Selling, general and
administrative
expenses ................ 41,993 67,578 (6,901)(3) -- 154 (10) 103,224
400 (4)
-------- -------- ------- -------- ----- --------
Operating profit ........ 13,420 23,553 8,335 -- (154) 45,154
Other (income) expense:
Interest expense, net 7,096 10,310 7,248 (5) 11,611(8) -- 36,265
Other (income)
expense, net .......... 56 (65) -- -- -- (9)
-------- -------- ------- -------- ----- --------
Income (loss) before
taxes and
minority interest ..... 6,268 13,308 1,087 (11,611) (154) 8,898
Income tax expense
(benefit) ............... 2,196 5,330 (1,012)(6) (4,644)(9) -- 1,870
-------- -------- ------- -------- ----- --------
Income (loss) before
minority interest ..... 4,072 7,978 2,099 (6,967) (154) 7,028
Minority interest ........ 225 -- (225)(7) -- -- --
-------- -------- ------- -------- ----- --------
Net income (loss) ....... $ 3,847 $ 7,978 $ 2,324 $ (6,967) $(154) $ 7,028
======== ======== ======= ======== ===== ========
-5-
HOLMES PRODUCTS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands)
Holmes Rival Adjustments
Nine Months Nine Months ---------------------------
Ended Ended Financing Acquisition Pro
September 30, 1998(1) September 30, 1998(1) Adjustments Adjustments Forma
----------------------- ----------------------- ------------ ----------- -----------
Net sales ........................ $157,602 $232,422 $ -- $ -- $390,024
Cost of sales, plant
restructuring ................... -- 2,833 -- -- 2,833
Cost of goods sold ............... 110,523 175,821 -- -- 286,344
-------- -------- ------- ------ --------
Gross profit .................... 47,079 53,768 -- -- 100,847
Restructuring .................... -- 4,887 -- -- 4,887
Selling, general and
administrative .................. 31,252 45,519 -- 115 (10) 76,886
-------- -------- ------- ------ --------
Operating profit ................ 15,827 3,362 -- (115) 19,074
Other (income) expense:
Interest expense, net ........... 10,369 7,124 9,562 (8) -- 27,055
Other (income) expense, net ..... (268) 4,312 -- -- 4,044
-------- -------- ------- ------ --------
Income (loss) before taxes ...... 5,726 (8,074) (9,562) (115) (12,025)
Income tax expense (benefit) ..... 873 (2,284) (3,825)(9) -- (5,236)
-------- -------- ------- ------ --------
Net income (loss) ............... $ 4,853 $ (5,790) $(5,737) $ (115) $ (6,789)
======== ======== ======= ====== ========
-6-
HOLMES PRODUCTS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands)
Holmes Rival Adjustments
Twelve Months Twelve Months --------------------------------------------
Ended Ended 1997 Financing Acquisition Pro
September 30, 1998(1) September 30, 1998(1) Transactions Adjustments Adjustments Forma
----------------------- ----------------------- ------------- ------------- ----------- --------
Net sales .............. $212,988 $360,274 $ -- $ -- $ -- $573,262
Cost of sales, plant
restructuring ......... -- 2,833 -- -- -- 2,833
Cost of goods sold ..... 144,821 269,501 (165)(2) -- -- 414,157
-------- -------- ------- -------- ------ --------
Gross profit .......... 68,167 87,940 165 -- -- 156,272
Plant restructuring
expenses .............. -- 4,887 -- -- -- 4,887
Selling, general and
administrative ........ 48,176 64,905 (6,838)(3) -- 154 (10) 106,497
100 (4)
-------- -------- ------- -------- ------ --------
Operating profit ...... 19,991 18,148 6,903 -- (154) 44,888
Other (income) expense:
Interest expense,
net ................. 12,741 9,996 1,085 (5) 12,862 (8) -- 36,684
Other (income)
expense, net ........ (254) 4,217 -- -- -- 3,963
-------- -------- ------- -------- ------ --------
Income (loss)
before taxes ........ 7,504 3,935 5,818 (12,862) (154) 4,241
Income tax expense
(benefit) ............. 2,777 2,288 880 (6) (5,145)(9) -- 800
-------- -------- ------- -------- ------ --------
Income (loss)
before minority
interest ............ 4,727 1,647 4,938 (7,717) (154) 3,441
Minority interest ...... 5 -- (5)(7) -- -- --
-------- -------- ------- -------- ------ --------
Net income (loss) $ 4,722 $ 1,647 $ 4,943 $ (7,717) $ (154) $ 3,441
======== ======== ======= ======== ====== ========
-7-
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
(in thousands)
Basis of Presentation
(1) The pro forma statements of operations assume the Transactions and the 1997
Transactions took place as of January 1, 1997 and combine Holmes'
statements of operations for the year ended December 31, 1997, the
unaudited nine months ended September 30, 1998 and the unaudited twelve
months ended September 30, 1998 and Rival's unaudited statements of
operations for the year ended December 31, 1997, the unaudited nine months
ended September 30, 1998 and the unaudited twelve months ended September
30, 1998, respectively.
Rival operates on a June 30 fiscal year end. Accordingly, Rival's twelve
month period ended December 31, 1997 has been derived by combining the
unaudited results for the quarters ended March 31, June 30, September 30,
and December 31, 1997. Rival's nine month period ended September 30,1998
has been derived by combining the unaudited results for the quarters ended
March 31, June 30, and September 30, 1998. Rival's twelve month period
ended September 30, 1998 has been derived by combining the unaudited
results for the quarters ended December 31, 1997, March 31, June 30, and
September 30, 1998.
The pro forma provision for income taxes may not represent the amounts that
would have resulted had Holmes and Rival filed consolidated income tax
returns during the period presented.
Pro Forma Adjustments
(2) Reflects the elimination of historical commissions paid to a related entity
for financing.
(3) Certain executives of Holmes signed employment agreements at the closing of
the 1997 Transactions which specify such executives' compensation through
the term of the agreements, which run initially for three years. This
adjustment reflects the difference between the historical compensation
expense recorded for these executives and the contractual amounts reflected
in the employment agreements, computed as the specified base compensation
plus the maximum amount of annual performance bonus specified in the
agreements. Included in historical compensation expense is approximately
$6,901 for the year ended December 31, 1997 and $6,838 for the period
October 1, 1997 to November 26, 1997 of incremental compensation paid under
the terms of previous agreements as a result of the 1997 Transactions.
(4) Reflects fees which were paid by Holmes to Berkshire Partners under a
management agreement signed in connection with the 1997 Transactions.
(5) Reflects adjustments to interest expense on debt incurred in connection
with the 1997 Transactions in excess of historical interest expense
assuming consummation of the 1997 Transactions on January 1, 1997, computed
as follows (all amounts relate to the period from January 1, 1997 through
the actual consummation of the 1997 Transactions on November 26, 1997):
October 1,
Year Ended 1997 to
December 31, November 26,
1997 1997
-------------- -------------
Interest expense on the Existing Notes .............................. $ 9,361 $ 1,584
Interest expense on the Existing Credit Facility at a LIBOR-based
rate, assumed to be 7.71% and 7.85% for each of the pro forma
periods respectively, based on estimated average outstanding
balances of $33,819 and $31,333 for each of the pro forma
periods, respectively ............................................. 2,390 383
Commitment fee of 0.5% on unused availability under the Existing
Credit Facility ................................................... 303 51
Amortization of debt issuance costs ................................. 1,079 196
Elimination of historical interest expense associated with the
previous credit facility and affiliate borrowings which were repaid (5,885) (1,129)
------- -------
$ 7,248 $ 1,085
======= =======
-8-
(6) Reflects an adjustment for the income tax effects of the items described in
Notes (2)-(5) computed at an assumed tax rate of 40%. Additionally this
adjustment includes the elimination of $1,447 of income tax expense
associated with the limitation on deductibility of interest expense paid on
the previous credit facility and affiliated borrowings, which limitation
primarily resulted from the incremental bonuses described above.
(7) In May and June 1997, Holmes repurchased the shares held by the 30%
minority stockholders in one of Holmes' subsidiaries for a total of $900.
The adjustment reflects the elimination of minority interest in net income
of majority-owned subsidiaries.
(8) Reflects adjustments to interest expense on debt incurred in connection
with the Transactions in excess of historical interest expense assuming
consummation of the Transactions on January 1, 1997, computed as follows:
Nine Months Twelve
Year Ended Ended Months
December 31, September 30, Ended
1997 1998 September 30, 1998
-------------- --------------- -------------------
Interest expense on the Notes, including discount
amortization ....................................... $ 3,192 $ 2,393 $ 3,192
Interest expense on $50,000 Term Loan A at a
LIBOR based rate + 3.0% ......................... 4,049 3,037 4,049
Interest expense on $75,000 Term Loan B at a
LIBOR based rate + 3.5% ......................... 6,449 4,836 6,449
Interest expense on remaining Credit Facility
borrowings at a LIBOR based rate + 3.0% ......... 9,518 6,896 9,896
Commitment fee of 0.5% on unused availability
under the Credit Facility ....................... 412 324 389
Amortization of deferred financing costs .......... 1,500 1,125 1,500
----- ------- -------
Net increase in interest expense .................. 25,120 18,611 25,475
Elimination of historical interest expense
(Holmes) ........................................ (2,515) (1,624) (2,198)
Elimination of historical interest expense (Rival) (10,634) (7,155) (10,055)
Amortization of historical deferred financing
costs (Holmes) .................................. (276) (207) (276)
Amortization of historical deferred financing
costs (Rival) ................................... (84) (63) (84)
------- ------- --------
Net increase in interest expense .................. $11,611 $ 9,562 $12,862
======= ======= ========
A 0.125% increase in the interest rate under the Credit Facility would
increase interest expense by $303, $223, and $309, for the year ended
December 31, 1997, the nine months ended September 30, 1998 and the twelve
months ended September 30, 1998, respectively.
(9) Reflects the income tax benefits generated on the pro forma interest
expense and the write-off of the existing Rival deferred financing costs as
a result of the Transactions. Weighted average statutory (federal, state,
and foreign) tax rates of approximately 40% were assumed in the pro forma
adjustments for the year ended December 31, 1997, the twelve months ended
September 30, 1998, and the nine months ended September 30, 1998.
(10) Reflects incremental expense required to properly reflect amortization of
goodwill generated in the Acquisition based on an estimated useful life of
35 years.
-9-