UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER: 333-44473
HOLMES PRODUCTS CORP.
(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.)
233 FORTUNE BOULEVARD, MILFORD, MASSACHUSETTS 01757
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) 634-8050
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
TITLE OF CLASS: NOT APPLICABLE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. X
---
-------------------
DOCUMENTS INCORPORATED BY REFERENCE: NOT APPLICABLE
HOLMES PRODUCTS CORP.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
PART I.
ITEM 1. Business.................................................................. 3
ITEM 2. Properties................................................................ 11
ITEM 3. Legal Proceedings......................................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders....................... 12
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 12
ITEM 6. Selected Financial Data................................................... 13
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 14
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk................ 19
ITEM 8. Financial Statements and Supplementary Data............................... 20
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................................... 51
PART III.
ITEM 10. Directors and Executive Officers of the Registrant........................ 51
ITEM 11. Executive Compensation.................................................... 52
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............ 55
ITEM 13. Certain Relationships and Related Transactions............................ 56
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 57
2
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
report, are or may be forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. Various economic and
competitive factors could cause actual results or events to differ materially
from those discussed in such forward-looking statements, including without
limitation, the Company's degree of leverage, its dependence on major customers
and key personnel, the integration of the Rival Acquisition (as defined herein),
competition, risks associated with foreign manufacturing, risks of the retail
industry, potential product liability claims, the cost of labor and raw
materials and the other factors which are described in the Company's
Registration Statement on Form S-4 (file No. 333-44473), its Current Report on
Form 8-K (filed January 26, 1999), and from time to time in the Company's other
periodic reports filed with the Securities and Exchange Commission. Accordingly,
such forward-looking statements do not purport to be predictions of future
events or circumstances and may not be realized.
PART I
ITEM 1. BUSINESS
Except as otherwise noted, the historical financial and other information set
forth herein for the fiscal year ended December 31, 1998 and prior periods
relates only to the business and operations of Holmes Products Corp. and its
subsidiaries prior to the Rival Acquisition (as defined herein), which occurred
on February 5, 1999. The Rival Acquisition will be accounted for as a purchase,
and Rival's results of operations will be included in the Company's financial
information in future periods.
Background of the Company Prior to the Rival Acquisition
Holmes Products Corp. ("Holmes" and, together with its subsidiaries on a
consolidated basis, the "Company") is a leading developer, manufacturer and
marketer of quality, branded home comfort products, including fans, heaters,
humidifiers and air purifiers. Holmes believes that it has the leading U.S.
market share in each of these product categories, which, in the aggregate,
accounted for approximately 93% of Holmes' net sales for the fiscal year ended
December 31, 1998. In addition, Holmes markets and distributes a variety of
decorative and home office lighting products, as well as various replacement
filters and accessories for its products. Holmes believes that its strong market
position and success are attributable to its continuous product innovation,
engineering and manufacturing expertise, close customer partnerships, breadth of
product offerings and reputation for quality. From 1993 to 1998, Holmes' net
sales increased from $61.8 million to $214.5 million, a compound annual growth
rate of 28.3%.
The Company's products are sold to consumers through major retail chains,
including mass merchants, do-it-yourself home centers, warehouse clubs, hardware
stores and national drugstore chains. Major customers in these channels include
Wal-Mart, Kmart, Target, Home Depot, Costco, BJ's Wholesale Club, TruServ
(formerly True Value and ServiStar) and Walgreens. Holmes believes that the
strength, scope and visibility of its retail account base provide a competitive
advantage with respect to brand recognition, access to shelf space and
penetration of the consumer market.
Holmes was founded in 1982 by its current Chief Executive Officer, Jordan A.
Kahn, an innovator in the home comfort market with over 30 years of industry
experience. Holmes opened its first manufacturing facility in China in 1989, and
currently operates two facilities in China where it manufactures its products
and electric motors for use in its products. The Company's vertically integrated
manufacturing facilities provide the Company with control over the production
process and product quality. These facilities also enhance operational
flexibility and allow the Company to quickly respond to changes in consumer
demand and to specialized production needs. The Company maintains offices in
Hong Kong and Taiwan that are responsible for sourcing raw materials, processing
orders and shipping the Company's products. The Company coordinates product
development, marketing, sales and distribution from the Company's Milford,
3
Massachusetts headquarters. The Company markets and distributes products
primarily under the Holmes(R) brand name. The principle executive offices of the
Company are located at 233 Fortune Boulevard, Milford, Massachusetts 01757 and
the telephone number is (508) 634-8050.
The Rival Company Acquisition
On December 17, 1998, Holmes entered into a definitive agreement to acquire The
Rival Company ("Rival"). Pursuant to the Agreement and Plan of Merger (the
"Merger Agreement") among Holmes, Moriarty Acquisition Corp., a wholly owned
subsidiary of Holmes ("Merger Sub"), and Rival, Holmes acquired all of Rival's
outstanding shares of common stock for $13.75 per share in cash, or an aggregate
consideration of approximately $129.4 million, including payments to the holders
of certain Rival stock options. Holmes also refinanced $141.5 million of Rival's
outstanding debt.
Rival is a leading designer, manufacturer and marketer of a variety of products
including small kitchen appliances, such as Crock-Pot(R) slow cookers and Rival
can openers; products for the home environment, such as heaters, air purifiers,
showerheads, utility pumps, humidifiers and fans; and building supply and
industrial products, such as household ventilation systems, door chimes, ceiling
fans and industrial fans. Rival markets its products under a variety of well
known brand names, including Rival(R), Crock-Pot(R), Bionaire(R), Pollenex(R),
Patton(R), Simer(R), and White Mountain(R). Holmes believes Rival has the
leading market share for slow cookers and enjoys a leading market share in
several of its other product categories.
On February 5, 1999, Holmes and Merger Sub completed a cash tender offer for all
outstanding shares of common stock of Rival and purchased approximately 98.4% of
Rival's common stock. Immediately following the tender offer, Merger Sub was
merged with and into Rival, with Rival surviving the merger as a wholly owned
subsidiary of Holmes (the "Rival Acquisition").
On January 29, 1999, in connection with the Rival Acquisition, the Company
offered and sold $31.3 million of 9 7/8% Senior Subordinated Notes due in
November 2007 (the "Offering").
In connection with the Rival Acquisition and the Offering, the Company entered
into a $325.0 million Senior Credit Facility with BankBoston N.A. and a
syndicate of other lenders (the "Credit Facility"). In addition, Holmes sold
$50.0 million of common stock to investment funds affiliated with Berkshire
Partners LLC ("Berkshire Partners"), Holmes' majority stockholder, and to
certain other investors (the "Equity Commitment"). The initial borrowings under
the Credit Facility together with the net proceeds of the Equity Commitment and
Offering were used to consummate the Rival Acquisition and refinance Rival's
existing indebtedness. Holmes had no outstanding borrowings under its existing
credit facility at the Acquisition date. The Rival Acquisition, the tender
offer, the merger, the Offering, the Equity Commitment, the entering into and
borrowings under the Credit Facility and the refinancing of existing
indebtedness of Rival are collectively referred to herein as the "Transactions."
The following table sets forth the approximate sources and uses of
funds in connection with the Transactions. ($ in millions)
Sources of Funds: Uses of funds:
Credit Facility(a) $212.9 Cash purchase price(b) $129.4
Issuance of the Notes 30.0 Refinance Rival indebtedness 141.5
Equity Commitment 50.0 Estimated fees and expenses(c) 22.0
------ ------
Total sources of funds $292.9 Total uses of funds $292.9
====== ======
(a) Total availability of $325.0 million
(b) $13.75 per share for approximately 9.3 million shares, plus net option
proceeds of $1.6 million.
(c) Includes prepayment premium on Rival debt of approximately $6 million.
4
Business Strategy
The Company's strategy is to capitalize on Holmes' and Rival's core strengths to
achieve further growth in net sales, profitability and cash flow by: (1) growing
Rival's core kitchen franchise, (2) consolidating home environment product
lines, (3) penetrating new and existing distribution channels, (4) improving the
Company's overall cost structure and (5) expanding geographically.
Leverage Core Competencies to Strengthen Kitchen Franchise. Holmes has become a
leader in the home comfort appliance market as a result of its successful
product innovations that meet consumer and customer needs, coupled with its
expertise in marketing and distribution. Rival has a long-standing reputation as
a leader in the small kitchen appliance market. Holmes believes that combining
its strengths with Rival's core kitchen franchise will enhance growth in Rival's
existing product lines and the development of new products.
Leverage and Grow Brands. The addition of Rival's home comfort brands allows
Holmes to increasingly differentiate its home comfort offerings among customers
and consumers. Through additional brands, the Company can offer a step-up brand
strategy for increased presence in both mass merchandise and other distribution
channels.
Further Penetrate Existing Distribution Channels. The Company believes that it
can further penetrate its existing distribution channels as a result of
favorable industry dynamics and Holmes' and Rival's strong relationships and
execution with mass merchant retailers. Management believes that mass merchants
will continue to consolidate their vendor base and focus on a smaller number of
sophisticated suppliers that can (1) provide a broad array of differentiated,
quality products, (2) efficiently and consistently fulfill logistical
requirements and volume demands and (3) provide full product support from design
to category management, point-of-sale and after-market service with the
consumer.
Develop New Distribution Channels. The Company continues to develop new channels
of distribution by providing customized product offerings that appeal to the
specific needs of each channel. For example, since 1996, Holmes has marketed
selected products through an arrangement with the QVC electronic retailing
network. Holmes has also partnered with Evenflo to market Holmes' products under
the Evenflo brand name and expand into the juvenile distribution channel.
Pursue Targeted Marketing Opportunities. As part of its strategy, Holmes enters
into strategic alliances in order to promote awareness of its products. For
example, Holmes has established a marketing affiliation with the Allergy and
Asthma Foundation of America and has developed a strategic marketing partnership
with the Brita Products Company, a subsidiary of Clorox Company, to market a
humidifier that integrates the Brita(R) water filter. Holmes also markets
humidifiers and filters with the Microban(R) anti-bacterial technology. In
addition, Holmes has entered into a variety of cross-merchandising relationships
with other manufacturers including Stanley Tools, Toro, Vaseline and Benadryl.
Improve the Overall Cost Structure. Holmes, through its manufacturing facilities
in China and related Far East sourcing capabilities, is a low-cost, high
quality, flexible producer of appliance products. By applying these capabilities
to certain of Rival's products, along with Rival's two recent plant closings,
the Company believes it can reduce overall manufacturing costs.
Expand into New Geographic Regions. The Company believes that the European,
Latin American and Asian home comfort markets are underdeveloped and represent
significant growth opportunities. As a result, Holmes has begun to focus on
marketing its products in these regions. Holmes currently sells its products in
Europe and Asia on a original equipment manufacturer basis and its branded home
comfort products in France. Rival has warehouse and distribution facilities in
Ontario, Canada and the Netherlands, as well as a distribution arrangement in
Mexico. The Company believes that combining Rival's larger international
presence with Holmes' product offerings will accelerate international growth.
5
Products
General
Holmes is a leading developer, manufacturer and marketer of quality, branded
home comfort products, including fans, heaters, humidifiers and air purifiers,
which allow consumers to better control aspects of their home environment, such
as temperature and air quality. In addition, Holmes markets and distributes a
variety of decorative and home office lighting products, including table, floor
and wall-mounted lighting products used principally in residential and
commercial settings, as well as various replacement filters and accessories for
its products.
Rival is a leading developer, manufacturer and marketer of small kitchen and
personal care appliances including Crock-Pot(R) slow cookers, toasters, can
openers and massagers. In addition, Rival also develops, manufactures and
markets home comfort products in many of the same product categories as Holmes,
including fans, heaters, humidifiers and air purifiers.
Holmes' and Rival's respective product lines are discussed separately below, as
are certain other aspects of the Company's business. The Rival Acquisition was
consummated less than two months ago, and the Company is in the process of
assessing Rival's products and operations relative to those of Holmes. Among
other things, the Company may determine to combine certain product lines, to
reduce or eliminate certain redundant products, to market products produced by
one company under a brand name of the other, or to rationalize each of the
business lines as part of the combined Company's overall integration strategy.
Holmes
Holmes' product categories are as follows:
Fans. Holmes currently manufactures and markets approximately 60 different fan
models, including table, stand, window, window-to-floor, box, commercial grade,
high velocity and oscillating fans, typically for purchase and use by household
consumers. Retail prices for Holmes' fans range from $5 to $80.
Heaters. Portable electric space heaters are used to heat areas of the house not
adequately reached by central heat and to heat an individual room while that
room is in use. Holmes currently manufactures and markets approximately 50
different heater models, including plastic, ceramic, metal, radiant and
baseboard styles. Retail prices for Holmes' heaters range from $20 to $70. In
recent years, Holmes has expanded its products to cover virtually every segment
and price point in the heater category, and to include innovations with strong
consumer appeal.
Humidifiers. Consumers use humidifiers to provide greater comfort by increasing
moisture in the home environment. Holmes currently manufactures and markets
approximately 33 different humidifiers, including cool mist, warm mist,
ultrasonic and console models that range in moisture output from one to 12
gallons per day. Retail prices for Holmes' humidifiers range between $20 and
$150. Holmes also sells a variety of humidifier accessories, replacement parts
and chemical treatments.
Air Purifiers. Air purifiers circulate a room's air through filters that remove
contaminants from the air. In recent years, high efficiency particulate
arresting ("HEPA") filters have come to dominate the industry. This product
category has experienced tremendous growth as consumers have become more
concerned with their home environment and have learned about the benefits of air
purifiers. Holmes currently manufactures and markets approximately 22 different
air purifier models. Retail prices for Holmes' air purifiers range between $20
and $280. Air purifiers represent one of the fastest growing categories of
Holmes' home comfort product line.
Filters/Accessories. Most humidifiers and air purifiers require accessories
including replacement filters and chemical treatments. Air purifiers
periodically need new replacement filter cartridges and humidifiers need new
replacement wick filters. As the installed base of these products continues to
expand, the
6
Company expects that the market for these accessories will grow as well. In
addition, the Company believes that sales of filters and accessories increase
brand awareness and customer loyalty.
Lighting Products. Holmes began marketing portable lighting equipment in 1993,
and currently sells over 90 different lighting models. These products complement
Holmes' traditional home comfort product line, provide an additional
non-seasonal category for the Company, and are distributed through the same
distribution channels as the Company's home comfort appliances. Holmes' lighting
products are manufactured by subcontractors in China and in the United States.
Retail prices for these products range between $5 and $100.
Electric Motors. Holmes' indirect wholly owned subsidiary, Raider Motor
Corporation ("Raider"), has proven strengths in the design and manufacture of a
variety of electric motors for use in home and commercial appliances. In
addition to supplying most of the motors for Holmes' products, Raider has
sufficient manufacturing capacity to supply other manufacturers of appliances
with electric motors. In October, 1998, Holmes entered into a joint venture with
General Electric ("GE") for motor manufacturing, sales and distribution to third
parties. The joint venture entity is owned 49% by Holmes and 51% by GE.
Rival
Rival manages its operations through four business units, divided by product
line and geography as follows:
Kitchen Electrics and Personal Care. Kitchen electric appliances constituted
Rival's primary product line for over sixty years, and continue to account for
approximately 50% of Rival's net sales. The kitchen electrics and personal care
business unit sells products including Crock-Pot(R) slow cookers, toasters, ice
cream freezers, can openers, food slicers, mixers, indoor grills, irons,
potpourri simmerers, fryers, skillets and massagers to retailers and
distributors throughout the United States.
Home Environment. This group sells products including fans, air purifiers,
humidifiers, electric space heaters, sump, well and utility pumps, showerheads,
and household ventilation systems to retail customers throughout the United
States.
Industrial and Building Supply. This group sells products including industrial
fans and drum blowers, household ventilation systems, ceiling fans, door chimes,
electric heaters and household convenience items to electrical and industrial
wholesale distributors throughout the United States.
International. This group sells Rival's products in Canada and Europe from its
sales and distribution facilities in Toronto and the Netherlands. It also ships
products from the United States to distributors in Latin America and Asia.
Rival's future sales growth is expected to be generated primarily from the
introduction of new products and product lines, as well as through geographic
expansion.
Product Development
Holmes has an internal product development team dedicated to new product
development and product enhancements. Holmes maintains its own engineering and
product development department to research new product concepts as well as
activities relating to improving existing products. The product design and
research development team consists of an aggregate of approximately 50 employees
located in both Milford, Massachusetts and in the Far East. Holmes also retains
the services of outside consultants to assist its internal team.
7
Holmes utilizes state-of-the-art design technology including advanced CAD design
software and a laser-based stereolithography technique to design and engineer
new products. Management believes this technology allows the company to design
and develop new products quickly thus enabling Holmes to accurately assess the
feasibility, cost and tooling requirements of new products before manufacturing
the products. Management believes this technology gives Holmes a competitive
advantage in the design and development of new products and product line
extensions.
Holmes' expenditures for new product development and tooling totaled
approximately $9.9 million, $9.5 million and $9.4 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
Rival also has an internal product development team dedicated to product line
enhancements and the introduction of new products. As part of this effort, Rival
maintains its own engineering and development department consisting of over 60
people, including engineers, product designers, draftsmen and product managers.
Rival also retains the services of outside engineering and design consultants
from time to time.
Rival's expenditures for product engineering and development (excluding tooling)
were $3.1 million, $4.5 million, and $5.4 million for Rival's fiscal years ended
June 30, 1996, 1997 and 1998, respectively.
Manufacturing
Holmes manufactures most of its products at its manufacturing facilities in
China. These facilities are highly integrated and produce most of the electric
motors, injection molded plastic components and other components used in the
manufacturing and assembly process. The balance of Holmes' products are produced
through subcontracted manufacturers in China and the United States, generally
under the supervision of Holmes employees. The management, coordination and
control of all manufacturing operations are centralized at the Company's
principal offices in Milford, Massachusetts.
Rival's manufacturing plants, all of which are located in the United States,
manufacture and assemble more than 60% of the products Rival sells. Rival's
remaining products are produced to its specifications, primarily in China.
Rival's plants are highly integrated and produce electric motors, injection
molded plastic components, screw machine parts, stampings and stoneware.
Rival operates four manufacturing and assembly facilities in rural Missouri
(Clinton, Sedalia, Sweet Springs and Warrensburg), near Kansas City, which
specialize in the production of kitchen electrics. A facility in Flowood,
Mississippi produces the stoneware for Rival's Crock-Pot(R) slow cookers and
other products.
In July, 1998, Rival announced plans to close its New Haven, Indiana and
Fayetteville, North Carolina manufacturing plants, as well as its Peru, Indiana
warehouse facility, and to expand its current operations in Warrensburg and
Sedalia, Missouri. The New Haven manufacturing facility was closed in December,
1998, and the Fayetteville facility was closed in March, 1999. These facilities
produced home environment and building supply products. The majority of the
products manufactured in these facilities will be moved to Rival's Missouri
plants while some production will be outsourced to overseas suppliers, which may
include Holmes. Concentrating production in fewer facilities will increase
efficiency by more closely aligning capacity with the seasonal nature of Rival's
products, taking advantage of vertical integration in its Missouri plants and
reducing the infrastructure associated with transportation of materials,
production planning and other activities.
The Company believes that it has a cost advantage as a result of its degree of
vertical integration, its purchasing power, and low labor costs at its Chinese
manufacturing facilities. In addition, by operating its own manufacturing
facilities, the Company has control over the quality of its products from design
through final distribution. The Company believes that the addition of Rival's
domestic manufacturing capabilities will improve inventory management and
enhance its flexibility in order to satisfy customers' needs for just-in-time
delivery.
8
Marketing and Distribution
Holmes' products are sold in the United States, Canada and Europe to the retail
trade by an internal sales staff consisting of ten sales managers. Holmes relies
on its management's ability to determine the existence and extent of available
markets for its products. The internal sales managers, with assistance from an
internal sales support staff and from regional independent manufacturers
representative organizations, market Holmes' products through all major channels
of distribution including mass merchants, do-it-yourself home centers, warehouse
clubs, hardware stores and national drugstore chains. Holmes' sales managers are
actively involved in servicing all aspects of each retail account.
In order to respond most efficiently to the demands of its retail customers and
ensure timely delivery, Holmes balances direct shipments from its manufacturing
facilities with shipments from its domestic and international warehouses.
Holmes' marketing department consists of 12 individuals who are responsible for
market analysis, new product development, pricing strategy, promotions and
overall category development. Holmes believes that its packaging is one of its
most powerful marketing tools because most consumers typically purchase fans,
heaters and humidifiers without the benefit of knowledgeable retail sales staff.
Holmes' packaging and point-of-purchase support provide written information and
illustrations regarding product features, usage instructions, safety features
and product operation. Holmes has an in-house art department that develops most
of the packaging and marketing materials on state-of-the-art desktop graphics
systems.
Rival's products are sold in the same channels of distribution as Holmes', with
mass merchants representing the largest class of customer. In addition, Rival's
products are sold through department stores, household specialty stores,
military exchanges, mail order companies and premium companies. Rival also sells
industrial and building supply products to electrical and industrial wholesale
distributors. Rival reaches its customers through its sales organization, which
consists of a combination of in-house sales managers, field sales associates and
independent manufacturers' representative firms.
The Company believes that the addition of Rival's extensive domestic
distribution capabilities will further enhance the Company's ability to satisfy
customer demands.
Major Customers
Holmes' three largest retail customers, Wal-Mart (including Sam's Wholesale
Club), Kmart and Target, each accounted for over 10%, and in the aggregate
approximately 48%, of Holmes' net sales during 1998. Rival's largest customer,
Wal-Mart (including Sam's Wholesale Club), accounted for 26% of Rival's net
sales in each of Rival's three fiscal years ended June 30, 1998. Rival's next
five largest customers represented an aggregate of 21% of net sales during
fiscal 1998. Holmes and Rival do not have long-term agreements with their major
customers, and purchases are generally made through the use of individual
purchase orders. A significant reduction in purchases by any of these customers
could have a material adverse effect on the Company's business.
Seasonality
Sales of Holmes' products are highly seasonal, and counter-seasonal weather can
adversely affect the Company's results of operations. In general, Holmes' sales
of fans and dehumidifiers occur predominantly from January through June, and
sales of heaters and humidifiers occur predominantly from July through December.
Although air purifiers, lighting products and accessories generally 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.
In addition to the seasonal fluctuations in sales, Holmes experiences
seasonality in
9
gross profit, as margins realized on fan products tend to be lower than those
realized on heater, humidifier, and air purifier products.
Rival's sales are also highly seasonal. A significant percentage of the products
sold by Rival are given as gifts and, as such, sell at larger volumes during the
holiday season. When holiday shipments are combined with seasonal products such
as heaters and humidifiers, Rival's sales during the months of August through
November are generally at a higher level than during the other months of the
year.
Competition
The Company believes that the markets for its products are developed and highly
competitive. Management believes that competition is based on several factors,
including price, access to retail shelf space, product features, product
enhancements, brand names, new product introductions, and marketing support and
distribution systems.
The Company competes with many well-established companies, some of which have
substantially greater facilities, personnel, financial and other resources than
those of the Company. Holmes' major competitors include AdobeAir, Catalina
Lighting, Cheyenne, Fedders, Frigidaire, Honeywell Consumer Products (maker of
Duracraft and Enviracare brands), Kenmore, Norelco, Sunbeam, Tensor and
Windmere. Holmes also competes with importers and foreign manufacturers of
unbranded products.
Rival's home environment products compete with many of the same companies as
Holmes'. Rival also competes with a number of other companies across its broader
product line. Significant competitors include Sunbeam/Oster, Hamilton
Beach/Proctor Silex, Wayne Home Equipment, Masco, Nortek, Teledyne, National
Presto, Salton/Maxim (Toastmaster) and West Bend. Several of these competitors
each generate higher annual sales of small electric household appliances than
Rival. Smaller manufacturers compete with Rival on a limited basis. A few
European manufacturers, such as Braun, Group SEB and Moulinex, have established
niches in the small electric household appliance market, particularly in the
high-end department store trade.
The Company believes that its most important competitive strengths are the
quality, design and competitive pricing of its products, its attention to
retailer and consumer needs, its access to major channels of distribution, the
development of new products and innovation in existing products, its ability to
provide timely shipment through its manufacturing and distribution facilities
and the capabilities of its management team.
Patents and Trademarks
Holmes holds a number of patents and trademarks registered in the United States,
Canada, and other countries for various products and technologies. Additional
patent applications are pending in the United States, Canada and Mexico. Holmes
also registers trademarks on product names and unique features in the United
States and other countries. The Company believes that none of Holmes' product
lines is dependent upon any single patent, group of patents or other
intellectual property rights.
Rival holds many United States and foreign trademarks, and considers its various
trademarks to be a valuable tool in the marketing of its products. Of particular
importance are the Rival(R), Rival Select(R), Simer(R), Pollenex(R), Patton(R),
Bionaire(R), White Mountain(R) and Crock-Pot(R) trademarks. In the course of its
operations, Rival also files patent applications covering various aspects of the
items produced. While Rival's mechanical and design patents in the aggregate are
considered to be important, the Company believes that Rival's business is not
dependent upon any single patent or group of patents.
10
Regulation
The Company is subject to federal, state and local regulations concerning the
environment, occupational safety and health, trade-related issues and consumer
products safety. Most of the Company's products are listed by Underwriters
Laboratories, Inc. ("UL"), the Canadian Underwriters Laboratories, Inc. ("CUL"),
or similar organizations in other markets. UL and CUL are independent,
not-for-profit corporations engaged in the testing of products for compliance
with certain public safety standards. The Company is also regulated by, and
holds ongoing discussions regarding specific products with, the United States
Consumer Products Safety Commission and the Canadian Standards Association. The
Company believes that it is in material compliance with all of the regulations
applicable to it. There can be no assurance, however, that such regulations will
not negatively affect the Company in the future. The Company's operations could
also be adversely affected by other regulations relating to its foreign
operations, including changes in trade laws, increased import duties,
import/export regulations and changes in foreign laws.
Employees
Holmes has approximately 4,300 employees, of which approximately 4,064 were
located at the Company's manufacturing facilities in Dongguan, China,
approximately 60 were located in Hong Kong and Taiwan and 176 were located in
the United States and Canada.
Rival has approximately 2,100 full-time employees, including 250 salaried
personnel. Historically, during August through November, employment increases by
approximately 15%. Approximately 320 hourly employees at Rival's Flowood,
Mississippi plant are represented by a labor organization under a collective
bargaining agreement, which expires in December 2001.
ITEM 2. PROPERTIES
Holmes
The following table sets forth Holmes' principal facilities (all of which are
leased), the primary activity at each of the facilities listed and the
expiration date of the applicable lease.
Location Size Primary Use Lease Expiration
- -------- ---- ----------- ----------------
Milford, MA 83,000 square feet Headquarters and Distribution 2001
Dongguan, China (1) 466,000 square feet Manufacturing and Assembly 2006
Dongguan, China (1) 269,000 square feet Motor Manufacturing 2006
Clinton, MA 207,000 square feet Distribution 2000
Worcester, MA 156,000 square feet Distribution 2003
Vernon, CA Varies Distribution At will
Mississaugua, Ontario Varies Distribution At will
Hong Kong 10,300 square feet Office 1999
Taipei, Taiwan 1,700 square feet Office 2000
(1) These facilities are located in Guangdong Province, China, approximately 70
miles from Hong Kong. These facilities include 20 buildings on two separate
campuses that include manufacturing, assembly, warehousing, and employee
dormitory operations. The lease expiration date assumes the exercise of the
Company's options to extend the lease on the primary manufacturing building.
11
Rival
The following table sets forth information regarding Rival's principal
facilities.
Location Size Primary Use Owned/Leased
- -------- ---- ----------- ------------
Kansas City, MO 32,000 square feet General Offices Leased
Sedalia, MO 157,000 square feet Manufacturing and Assembly Owned
67,000 square feet Manufacturing and Assembly Leased
216,000 square feet Warehousing and Distribution Owned
Clinton, MO 164,000 square feet Manufacturing and Assembly Owned
279,000 square feet Warehousing and Distribution Owned
Sweet Springs, MO 125,000 square feet Manufacturing/Return Processing Owned
Warrensburg, MO 68,000 square feet Manufacturing and Assembly Owned
Flowood, MS 142,000 square feet Manufacturing Owned
Mississaugua, Ontario 55,000 square feet General Office, Warehousing
and Distribution Leased
Oosterhout, Netherlands 50,000 square feet General Office, Warehousing
and Distribution Leased
New Haven, IN* 302,000 square feet Manufacturing and Distribution Owned
Peru, IN* 172,000 square feet Warehousing Owned
Fayetteville, NC* 282,500 square feet Manufacturing and assembly Owned
The Warrensburg plant and 67,000 square feet of the Sedalia plant are occupied
under long-term leases, which give Rival the option to purchase the relevant
property at a nominal cost. The general offices are occupied under a lease
through 2005. The Mississauga and Netherlands facilities are each leased through
July 2002.
* Each of these facilities has been closed or is scheduled to be closed during
1999, and Rival plans to sell the properties. The New Haven, Indiana property is
currently under agreement to be sold.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incident to its normal
business operations, including product liability and patent and trademark
litigation. The Company believes that the outcome of such litigation will not
have a material adverse effect on its business, financial condition or results
of operations. The Company has product liability and general liability insurance
policies in amounts it 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 the Company. The Company also faces exposure to
product recalls in the event that its products are alleged to have manufacturing
or safety defects. The Company does not maintain product recall insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company is privately-owned and there is no public trading market for the
Company's equity securities.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended December 31,
1994, 1995, 1996, 1997 and 1998 have been derived from the audited Consolidated
Financial Statements of the Company. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements,
including the notes thereto, included elsewhere herein.
Year Ended December 31,
(Dollars in thousands)
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
Income Statement Data:
Net sales .............................. $ 114,509 $ 178,132 $ 194,331 $ 192,153 $ 214,479
Cost of goods sold ..................... 84,672 141,226 145,915 136,740 146,509
--------- --------- --------- --------- ---------
Gross profit ....................... 29,837 36,906 48,416 55,413 67,970
Selling, general and
Administrative expenses .............. 17,522 22,500 27,308 36,530(1) 37,095
Product development expenses ........... 2,742 3,154 5,520 5,463 6,295
--------- --------- --------- --------- ---------
Operating profit ................... 9,573 11,252 15,588 13,420 24,580
Interest expense, net .................. 2,087 5,219 6,491 7,096 13,833
Other (income) expense, net ............ (244) (337) (319) 56 (436)
--------- --------- --------- --------- ---------
Income before income taxes
and minority interest ............ 7,730 6,370 9,416 6,268 11,183
Income tax expense (benefit) ........... 3,214 2,614 2,787 2,196 2,222
--------- --------- --------- --------- ---------
Income before minority interest .... 4,516 3,756 6,629 4,072 8,961
Minority interest in net income
Of majority-owned subsidiaries (2) ... 282 518 408 225 --
--------- --------- --------- --------- ---------
Net income ......................... $ 4,234 $ 3,238 $ 6,221 $ 3,847 $ 8,961
========= ========= ========= ========= =========
Other Data:
EBITDA (3) ............................. $ 12,798 $ 16,098 $ 22,774 $ 20,837 $ 32,265
Ratio of earnings to fixed charges (4) 3.9x 2.1x 2.2x 1.8x 1.7x
Depreciation and amortization .......... 2,981 4,509 6,867 7,473 7,248
Capital expenditures ................... 8,821 9,706 8,594 5,815 4,749
Balance Sheet Data (at end of period):
Cash and cash equivalents .............. $ 1,578 $ 3,368 $ 4,462 $ 5,141 $ 5,379
Working capital (deficit) .............. (5,021) (6,770) (2,883) 78,318 71,089
Total assets ........................... 72,490 118,524 128,286 135,165 131,357
Total long-term debt
Including capital leases ............. -- 217 737 134,294 115,139
Total stockholders' equity (deficit).... 8,249 11,487 17,708 (24,991)(5) (15,389)(5)
(1) Includes approximately $6.9 million of incremental compensation expense,
which was paid to certain executives in conjunction with Holmes' November,
1997 recapitalization.
(2) In May and June, 1997, Holmes repurchased the shares held by 30% minority
stockholders in one of Holmes' subsidiaries for a total of $900,000.
13
(3) EBITDA represents income before interest expense, income tax expense,
depreciation and amortization and the minority interest in net income of
majority-owned subsidiaries. EBITDA is presented because it is a widely
accepted measure to provide information regarding a company's ability to
service and/or incur debt. EBITDA should not be considered in isolation or
as a substitute for net income, cash flows from operations or other income
or cash flow data prepared in accordance with generally accepted accounting
principles, or as a measure of a company's profitability or liquidity.
Additionally, Holmes' calculation of EBITDA may differ from that performed
by other companies, and thus the amounts disclosed may not be directly
comparable to those disclosed by other companies.
(4) For purposes of determining the ratio of earnings to fixed charges,
earnings represent income before income taxes and minority interest, plus
fixed charges. Fixed charges consist of interest expense on all
indebtedness plus a portion of rental payments on operating leases that is
considered representative of the interest factor.
(5) Total stockholders' equity (deficit) as of December 31, 1997 and 1998
reflects a reduction attributable to Holmes' 1997 recapitalization. See
Note 8 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sales of most of Holmes' products follow seasonal patterns that affect the
Company's results of operations. In general, sales of fans and dehumidifiers
occur predominantly from January through June, and sales of heaters and
humidifiers occur predominantly from July through December. Although air
purifiers, lighting products and accessories generally are used year-round,
these products tend to draw increased sales during the winter months when people
are indoors and, as a result, the Company's sales of these products tend to be
greatest in advance of the winter months from July through December. In addition
to the seasonal fluctuations in sales, the Company experiences seasonality in
gross profit, as margins realized on fan products tend to be lower than those
realized on heater, humidifier and air purifier products.
Holmes 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 (collectively, the "1997
Transactions"). Accordingly, commencing in November, 1997, the Company 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 the
Company's indebtedness and will further increase interest expense substantially.
RESULTS OF OPERATIONS
The Company's historical results of operations discussed below do not include
Rival's results of operations. The Rival Acquisition will be accounted for as a
purchase, and Rival's results of operations will be included in the Company's
financial information in future periods.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Net Sales. Net sales for fiscal 1998 were $214.5 million compared to $192.2
million for fiscal 1997, an increase of $22.3 million or 11.6%. This increase
was attributable to an increase in all of the major product categories: fans,
heaters, humidifiers and air purifiers, which resulted from a strong 1998 for
retailers, as well as continued growth in filter and accessory sales due to the
growing installed base of products requiring filters and accessories. The
Company's Far East operations also had a significant increase in external sales
versus 1997.
14
Gross Profit. Gross profit for fiscal 1998 was $68.0 million compared to $55.4
million for fiscal 1997, an increase of $12.6 million or 22.7%. As a percentage
of net sales, gross profit increased to 31.7% for fiscal 1998 from 28.8% for
fiscal 1997. The increase was primarily due to the above mentioned increases in
net sales in humidifiers, heaters and filters and accessories which are
relatively higher margin contributors, as well as continued reductions in raw
material prices at the Company's manufacturing operations in the Far East.
Selling Expenses. Selling expenses for fiscal 1998 were $20.5 million compared
to $15.6 million for fiscal 1997, an increase of $4.9 million or 31.4%. As a
percentage of net sales, selling expenses increased to 9.6% for fiscal 1998 from
8.1% for fiscal 1997. The increase in selling expenses was primarily due to an
increase in co-operative advertising of higher margin products and new sales
promotions with several major retailers. To a lesser extent, shipping costs
increased as a result of the higher sales level. Also, there were continued
expenses associated with the redesign of some of the Company's product
packaging.
General and Administrative Expenses. General and administrative expenses for
fiscal 1998 were $16.6 million compared to $20.9 million for fiscal 1997, a
decrease of $4.3 million or 20.6%. As a percentage of net sales, general and
administrative expenses decreased to 7.7% for fiscal 1998 from 10.9% for fiscal
1997. The higher amount in 1997 resulted from incremental incentive compensation
expenses paid in connection with the 1997 Transactions. This overall decrease
was offset in part by increased expenditures on management and information
systems support, increases in personnel costs to improve operating efficiencies
at all the Company's locations and on-going expenses associated with the
recapitalization of the Company in November, 1997.
Product Development Expenses. Product development expenses for fiscal 1998 were
$6.3 million compared to $5.5 million for fiscal 1997, an increase of $.8
million or 14.6%. As a percentage of net sales, product development expenses
remained constant at 2.9% for fiscal 1998 and 1997. The increase was primarily
due to increased expenditures for royalties and outside consultants as part of
the Company's continuing effort in developing new technologies for both existing
and new product lines.
Interest and Other Expense, Net. Interest and other expense, net for fiscal 1998
was $13.4 million compared to $7.2 million for fiscal 1997, an increase of $6.2
million or 86.1%. The increase in interest expense was primarily due to the
additional borrowings resulting from the recapitalization of the Company in
November, 1997. The Company's interest expense in future periods will be higher
than 1998 as a result of the Rival Acquisition.
Income Tax Expense. In 1997, the Company recorded a $3.6 million valuation
allowance related to deferred tax assets generated as a result of certain
limitations on the deductibility of interest paid to Pentland. This 1997
non-recurring charge comprises the majority of the 15% change in the Company's
effective tax rate from 35% in 1997 to 20% in 1998.
Net Income. As a result of the foregoing factors, net income for
fiscal 1998 was $9.0 million, compared to net income of $3.8 million in
fiscal 1997.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Net Sales. Net sales for fiscal 1997 were $192.2 million compared to $194.3
million for fiscal 1996, a decrease of $2.2 million or 1.1%. The decrease in net
sales was primarily due to a reduction in sales of $10.9 million of
dehumidifiers and air conditioners resulting from a strategic management
decision to reduce dehumidifier volume and eliminate the air conditioner
category because of the relatively low profit margins of these product lines. In
addition, an increase in sales of heaters was offset by decreases in sales of
fans, air purifiers and lighting products.
Gross Profit. Gross profit for fiscal 1997 was $55.4 million compared to $48.4
million for fiscal 1996, an increase of $7.0 million or 14.5%. As a percentage
of net sales, gross profit increased to 28.8% for fiscal 1997 from 24.9% for
fiscal 1996. The increase in gross profit is attributable, in large part, to the
factors
15
described above. In addition, air purifier filter and humidifier filter sales,
which generate relatively high gross profit margins, increased significantly for
the year ended December 31, 1997 as compared to the year ended December 31,
1996.
Selling Expenses. Selling expenses for fiscal 1997 were $15.6 million compared
to $13.2 million for fiscal 1996, an increase of $2.4 million or 18.3%. As a
percentage of net sales, selling expenses increased to 8.1% for fiscal 1997 from
6.8% for fiscal 1996. The increase in selling expenses was primarily due to an
increase in co-operative advertising of higher margin products with a number of
major retailers.
General and Administrative Expenses. General and administrative expenses for
fiscal 1997 were $20.9 million compared to $14.1 million for fiscal 1996, an
increase of $6.8 million or 48.3%. As a percentage of net sales, general and
administrative expenses increased to 10.9% for fiscal 1997 from 7.2% for fiscal
1996. The increase in general and administrative expenses was primarily due to
approximately $6.9 million of incremental incentive compensation expenses paid
in connection with the closing of the 1997 Transactions. These incentive
compensation amounts were deducted from the purchase price of the capital stock
in the 1997 Transactions. In addition, general and administrative expenses
increased due to additional management and information systems support to
improve operating efficiencies at the Company's manufacturing facilities in
China.
Product Development Expenses. Product development expenses for fiscal 1997 were
$5.4 million compared to $5.5 million for fiscal 1996, a decrease of $.1 million
or 0.1%. As a percentage of net sales, product development expenses remained
relatively constant at 2.9% and 2.8% for fiscal 1997 and 1996, respectively.
Interest and Other Expense, Net. Interest and other expense, net for fiscal 1997
was $7.2 million compared to $6.2 million for fiscal 1996, an increase of $1.0
million or 15.9%. The increase in interest expense was primarily due to the
additional borrowings resulting from the 1997 Transactions, which were
outstanding for one month in 1997. On a proforma basis, giving effect to the
1997 Transactions as if they had occurred on January 1, 1997, interest expense
would have been approximately $14.3 million.
Income Tax Expense. The Company's effective tax rate increased to 35.0% of
pre-tax income for fiscal 1997 from 29.6% of pre-tax income for fiscal 1996. The
increase in the effective tax rate was principally a result of limitations
placed on the Company's ability to deduct for tax purposes approximately $3.6
million of interest paid to or guaranteed by the Company's former majority
stockholder, Pentland Group plc ("Pentland") and its affiliates. This was offset
by an increase in profitability of the Company's manufacturing operations in
China, which are taxed at significantly lower rates than the Company's U.S.
operations. While the interest limitation may be carried forward indefinitely,
because of the Company's current highly leveraged structure it is uncertain
whether the Company will be able to deduct this amount in the future. Therefore,
management has recorded a valuation allowance on the entire amount of deferred
tax asset arising from this carryforward, which has the impact of increasing the
effective tax rate. This limitation primarily arose as a result of the incentive
compensation expenses described above. The Company had no such limitation in
previous years, and because interest is no longer paid to foreign affiliates,
this limitation is not expected to be applicable in the future. If the Company
is able to utilize this deduction, it will reduce income tax expense in future
years.
Net Income. As a result of the foregoing factors, net income for
fiscal 1997 was $3.8 million, compared to net income of $6.2 million in
fiscal 1996.
16
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used for) operations during fiscal 1998 and 1997 was $24.3
million and $(46.4) million, respectively. Cash provided by operations in fiscal
1998 primarily reflected the Company's net income of $9.0 million and increases
in accrued expenses and accrued income taxes, and decreases in accounts
receivable and inventories, which were partially offset by increases in prepaid
expenses and other current assets and deposits and other assets. The increase in
accrued liabilities was due to the accrued interest on the long-term debt, an
increase in the accrual for advertising costs and increases in commissions and
duties payable. The $2.5 million increase in accrued income taxes payable was
primarily due to the higher profitability of the Company. The decrease in
inventory was mainly due to increased levels of warehouse shipments. The
increase in prepaid expenses and other current assets and deposits and other
assets was due to an increase in advertising credits arising from a transfer of
inventory to be used to purchase advertising media, merchandise or services.
Cash used for operations in 1997 primarily reflected the repayment of trade
acceptance and amounts due to affiliates in connection with the 1997
Transactions.
Cash provided by (used for) financing activities for fiscal 1998 and 1997 was
$(18.8) million and $53.3 million, respectively. Cash used for financing
activities in fiscal 1998 reflected the payback of borrowings under the credit
facility entered into as part of the 1997 Transactions. The cash provided by
financing activities in fiscal 1997 reflected borrowings for working capital
purposes under the previous line of credit from Pentland, the issuance of
long-term debt and common stock and the repurchase of treasury stock associated
with the 1997 Transactions.
The Company's capital expenditures, including assets acquired under capital
leases, for fiscal 1998 and 1997 were $4.7 million and $5.8 million,
respectively, primarily for molds and tooling. The Company is also subject to
certain minimum royalty payment commitments under various license agreements.
See Note 13 of Notes to Consolidated Financial Statements.
The Company 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. The Notes are not redeemable at the Company's option
prior to November 15, 2002. Thereafter, the Notes are subject to redemption at
any time at the option of the Company, 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 senior debt of the Company, including borrowings under
the Credit Facility.
The Company entered into the Credit Facility in February, 1999. The Credit
Facility amended and restated the Company's prior $100 million credit facility.
The Credit Facility consists of a six-year tranche A term loan of $40.0 million,
an eight-year tranche B term loan of $85.0 million and a $200.0 million,
six-year revolving credit facility. The Credit Facility bears interest at
variable rates based on either the prime rate or LIBOR, at the Company's option,
plus a margin which, in the case of the tranche A term loan and the revolving
credit facility, varies depending upon certain financial ratios of the Company.
The Credit Facility, and the guarantees thereof by the Company's domestic
subsidiaries, are secured by substantially all of the Company's domestic and
certain foreign assets. The Credit Facility and the Notes Indentures include
certain financial and operating covenants, which, among other things, restrict
the ability of the Company to incur additional indebtedness, grant liens, make
investments and take certain other actions. The ability of the Company to meet
its debt service obligations will be dependent upon the future performance of
the Company, which will be impacted by general economic conditions and other
factors. See "Disclosure Regarding Forward-Looking Statements."
Following the closing of the Rival Acquisition and the other Transactions on
February 5, 1999, the Company will fund its liquidity requirements with cash
flows from operations and borrowings under the Credit Facility. The Company's
primary liquidity requirements are for working capital and to service the
Company's indebtedness. The Company believes that existing cash resources, cash
flows from operations and borrowings under the Credit Facility will be
sufficient to meet the Company's liquidity needs for the foreseeable future.
YEAR 2000
The Year 2000 problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19",
but may not properly read the Year 2000. If a system used by the Company or by a
third party fails because of the inability to properly read the Year 2000 date,
the results could have a material adverse effect on the Company. As described
below, Holmes and Rival have developed plans to address the possible exposures
related to their computer systems from the Year 2000. However, there can be
assurance that such measures will be sufficient to avoid Year 2000-related
problems.
17
Holmes
Holmes has identified its Year 2000 risk to be in two general categories:
Information Technology Systems, including Electronic Data Interchange Systems
(EDI), and General Business Systems.
Information Technology Systems Including EDI. Holmes is currently in the process
of implementing a new company wide computer software system. The new system will
be fully Year 2000 compliant, according to the vendor, and the Company
anticipates that it will be operational by the third quarter of 1999. In
addition, all of Holmes' computer hardware has or is in the process of being
tested for Year 2000 compliance. Those systems that fail will be upgraded or
replaced during the second quarter of 1999. As part of its transition to a new
system, Holmes is implementing a new EDI system that will be fully Year 2000
compliant to prevent any interruption of data interchange from the many
customers using this platform. Holmes anticipates that this system will be
completed during the second quarter of 1999. Holmes intends to use both internal
and external resources to test, reprogram or replace the software and hardware
for Year 2000 modifications. The total specific project costs are difficult to
determine as many of the upgrades and new implementations would have been made
regardless of the Year 2000 issue. The majority of project costs, related to the
purchase of hardware and software to meet both Year 2000 and company specific
requirements, will be capitalized. All other remaining project costs will be
expensed during 1999 and 2000.
General Business Systems. Holmes' general business systems encompass the
following: telecommunications systems, departmental specific application
systems, machinery and equipment, building and utility systems and, finally,
third party vendors and service providers. Holmes has created a Year 2000
committee consisting of one member from each department. The committee is in the
final stages of reviewing all aspects of Holmes' business systems to determine
if they are Year 2000 compliant, and testing systems as necessary. This process
will continue through the second quarter of 1999.
Holmes has sent out a comprehensive questionnaire to all significant customers
and suppliers regarding their Year 2000 compliance. The questionnaires that
Holmes has received back to date have tended to provide only vague assurances
regarding Year 2000 matters, however. While Holmes intends to carefully monitor
its supplier risks, Holmes cannot fully control each supplier, and there can be
no guarantee that a Year 2000 problem that may originate with a supplier will
not materially adversely affect Holmes. Holmes has not designed a specific
contingency plan in the event of a Year 2000 failure caused by a supplier or
other third party, but is working to identify issues as soon as possible.
Finally, Holmes has determined that products that it manufactures and sells have
no exposure related to the Year 2000 issue.
Rival
Information Technology Systems Including EDI. Rival implemented its current
corporate computer system in 1995. The system is Year 2000 compliant, according
to the vendor, as confirmed by full systems testing performed on August 8, 1998.
The testing included rolling the date forward to January 15, 2000 and testing
all function programs. The EDI system installation was completed by September
30, 1998. Rival has used both internal and external resources for testing. EDI
transactions sets have been verified and registered with the National Retailers
Foundation. Rival believes that any additional issues with computers will be
limited to stand alone personal computers. The upgrade of these computers is
expected to be completed by June 30, 1999.
General Business Systems. Rival's business systems encompass the following:
telecommunications systems, machinery and equipment, building and utility
systems and third party vendors and service providers. Rival created a
cross-departmental Year 2000 committee in 1997. The committee reviewed all
aspects of Rival's business systems to determine if they are Year 2000
compliant. Any vendor supplying goods and/or services to Rival was required to
submit a letter stating their Year 2000 status. Rival has determined that
products that it manufactures and sells have no exposure to the Year 2000 issue.
18
Adoption of Recently Issued Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements.
The Company has adopted Statement of Financial Accounting Standard No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This
Statement requires an enterprise to report financial and descriptive information
about its reportable operating income. Operating segments are components that
are evaluated regularly by chief operating decision makers in deciding how to
allocate resources and in assessing performance. This Statement requires a
business enterprise to report a measure of segment profit or loss, certain
specific revenue and expense items (including interest, depreciation, and income
taxes), and segment assets. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Financial Accounting Standards Board issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. This Statement is required to be adopted in the Company's fiscal
year ending December 31, 2000. Management anticipates that, due to its limited
use of derivative instruments, the adoption of this Statement will not have a
significant effect on the Company's results of operations or its financial
position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1998, the carrying value of the Company's debt totaled $115.7
million, which approximated its fair value. This debt includes amounts at both
fixed and variable interest rates. For fixed rate debt, interest rate changes
affect the fair market value but do not impact earnings or cash flows.
Conversely, for variable rate debt, interest rate changes generally do not
affect the fair market value but do impact earnings and cash flows, assuming
other factors are held constant.
At December 31, 1998, the Company had fixed rate debt of $105.7 million
(including capital leases) and variable rate debt of $10.0 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 $6.4 million. Based on the
amounts of variable rate debt outstanding at December 31, 1998, the earnings and
cash flows impact for the next year resulting from a one percentage point
increase in interest rates would be approximately $100,000, holding other
variables constant.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Holmes Products Corp.
Page
Report of PricewaterhouseCoopers LLP, Independent Accountants ...................................... 21
Consolidated Balance Sheet at December 31, 1997 and 1998 ........................................... 22
Consolidated Statement of Income for the years ended December 31, 1996, 1997 and 1998 .............. 23
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended December 31, 1996,
1997 and 1998 .................................................................................... 24
Consolidated Statement of Comprehensive Income for the years ended December 31, 1996,
1997 and 1998 .................................................................................... 25
Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1997 and 1998 .......... 26
Notes to Consolidated Financial Statements ......................................................... 27
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Of Holmes Products Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity (deficit), of
comprehensive income and of cash flows present fairly, in all material respects,
the financial position of Holmes Products Corp. and its subsidiaries (the
"Company") at December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 12, 1999
21
HOLMES PRODUCTS CORP.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31, December 31,
1997 1998
Assets
Current assets:
Cash and cash equivalents ............................ $ 5,141 $ 5,379
Accounts receivable, net ............................. 38,102 36,967
Inventories .......................................... 55,550 53,340
Prepaid expenses and other current assets ............ 1,116 2,027
Deferred income taxes ................................ 4,167 4,983
Income taxes receivable .............................. 104 --
--------- ---------
Total current assets ............................... 104,180 102,696
Property and equipment, net .......................... 19,607 15,752
Deferred income taxes ................................ 638 563
Deposits and other assets ............................ 681 3,174
Debt issuance costs, net ............................. 10,059 9,172
--------- ---------
$ 135,165 $ 131,357
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of capital lease obligations and
other debt ......................................... $ 1,103 $ 604
Accounts payable ..................................... 13,710 15,004
Accrued expenses ..................................... 9,825 12,292
Accrued income taxes ................................. 1,224 3,707
--------- ---------
Total current liabilities .......................... 25,862 31,607
Capital lease obligations ................................ 792 139
Line of credit ........................................... 28,502 10,000
Long-term debt ........................................... 105,000 105,000
Commitments and contingencies
Stockholders' (Deficit):
Common stock, $.001 par value. Authorized 12,500,000
shares; issued and outstanding 10,006,343 shares and
10,200,815 shares at December 31, 1997 and
December 31, 1998, respectively ...................... 10 10
Additional paid in capital ............................. 16,304 16,985
Accumulated other comprehensive income ................. -- (40)
Treasury stock, at cost (18,620,450 shares) ............ (62,058) (62,058)
Retained earnings ...................................... 20,753 29,714
--------- ---------
Total stockholders' (deficit) ..................... (24,991) (15,389)
--------- ---------
$ 135,165 $ 131,357
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
22
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED
December December December
31, 1996 31, 1997 31, 1998
Net sales ............................. $194,331 $192,153 $214,479
Cost of goods sold .................... 145,915 136,740 146,509
-------- -------- --------
Gross profit ........................ 48,416 55,413 67,970
-------- -------- --------
Operating expenses:
Selling ............................. 13,225 15,647 20,456
General and administrative .......... 14,083 20,883 16,639
Product development ................. 5,520 5,463 6,295
-------- -------- --------
Total operating expenses .......... 32,828 41,993 43,390
-------- -------- --------
Operating profit .................. 15,588 13,420 24,580
-------- -------- --------
Other income and expense:
Other (income) expense, net .......... (319) 56 (436)
Interest expense, net ............... 6,491 7,096 13,833
-------- -------- --------
6,172 7,152 13,397
-------- -------- --------
Income before income taxes and minority
interest ............................. 9,416 6,268 11,183
Income tax expense .................... 2,787 2,196 2,222
-------- -------- --------
Income before minority interest ....... 6,629 4,072 8,961
Minority interest in net income of
majority-owned subsidiaries .......... 408 225 --
-------- -------- --------
Net income ........................ $ 6,221 $ 3,847 $ 8,961
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
23
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PAR VALUE)
Common Stock,
$.001 par value
Common Stock, -------------------------------
$ 1 par value Additional
------------ Paid in
Shares Amount Shares Par Capital
------ ------ ------ ------ ----------
Balance at December 31,1995 ......... 100,000 $100 21,159 $21 $ 681
Net Income .......................... -- -- -- -- --
------- ---- ------ --- ------
Balance at December 31, 1996 ........ 100,000 100 21,159 21 681
Issuance of additional shares in
conjunction with contribution
of Holmes Products (Far East)
Limited (see Note 8) ............... (100,000) (100) 2,750 3 97
Issuance of common stock,
Net of related costs .............. -- -- 4,718 5 15,507
Redemption of common stock .......... -- -- (18,621) (19) 19
Foreign currency translation
adjustments ....................... -- -- -- -- --
Net income .......................... -- -- -- -- --
------- ---- ------ --- ------
Balance at December 31, 1997 ........ -- -- 10,006 10 16,304
Issuance of common stock ............ -- -- 195 -- 681
Foreign currency translation
adjustments ....................... -- -- -- -- --
Net income .......................... -- -- -- -- --
------- ---- ------ --- ------
Balance at December 31, 1998 ........ -- -- 10,201 10 16,985
======= ==== ====== === ======
Accumulated Total
Other Stockholders'
Comprehensive Treasury Retained Equity
Income Stock Earnings (Deficit)
------------- -------- -------- -------------
Balance at December 31,1995 ......... $ -- $ -- $10,685 $11,487
Net Income .......................... -- -- 6,221 6,221
---- ------- ------- -------
Balance at December 31, 1996 ........ -- -- 16,906 17,708
Issuance of additional shares in
conjunction with contribution
of Holmes Products (Far East)
Limited (see Note 8) ............... -- -- -- --
Issuance of common stock,
Net of related costs .............. -- -- -- 15,512
Redemption of common stock .......... -- (62,058) -- (62,058)
Net income .......................... -- -- 3,847 3,847
---- ------- ------- -------
Balance at December 31, 1997 ........ -- (62,058) 20,753 (24,991)
Issuance of common stock ............ -- -- -- 681
Foreign currency translation
adjustments ....................... (40) -- -- (40)
Net income .......................... -- -- 8,961 8,961
---- ------- ------- -------
Balance at December 31, 1998 ........ (40) (62,058) 29,714 (15,389)
==== ======= ======= =======
24
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED
-------------------------------------------
December 31, December 31, December 31,
1996 1997 1998
------ ------ ------
Net earnings ................................... $6,221 $3,847 $8,961
Other comprehensive income:
Foreign currency translation adjustments ..... -- -- (40)
------ ------ ------
Comprehensive income ........................... $6,221 $3,847 $8,921
====== ====== ======
See accompanying notes to consolidated financial statements
25
HOLMES PRODUCTS CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
December December December
31, 1996 31, 1997 31, 1998
Cash flows from operating activities:
Net income ........................................ $ 6,221 $ 3,847 $ 8,961
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization ................... 6,867 7,473 7,248
Amortization of debt issuance costs ............. -- 98 1,182
Change in allowance for doubtful accounts ....... (381) (654) 260
Loss on disposition of property, plant and
equipment ..................................... -- -- 1,356
Deferred income taxes ........................... (2,674) (715) (741)
Minority interest in net income of majority-owned
subsidiaries ................................... 408 225 --
Changes in operating assets and liabilities:
Accounts receivable ........................... 3,584 (5,776) 875
Inventories ................................... (6,418) 5,702 2,210
Prepaid expenses and other current assets ..... 114 94 (911)
Income taxes receivable ....................... 1,214 (104) 104
Deposits and other assets ..................... (1,594) 3,836 (2,493)
Accounts payable .............................. (8,698) (58,558) 1,254
Accrued expenses .............................. 2,335 (816) 2,467
Accrued income taxes .......................... 1,824 (1,025) 2,483
-------- -------- -------
Net cash provided by (used for) operating
activities .................................... 2,802 (46,373) 24,255
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment ............... (8,594) (5,815) (4,749)
Purchase of Minority Interest ..................... -- (451) (451)
-------- -------- -------
Net cash used for investing activities .......... (8,594) (6,266) (5,200)
-------- -------- -------
Cash flows from financing activities:
Borrowings (repayments) on line of credit, net of
issuance costs .................................. -- 27,136 (18,502)
Borrowing of long-term debt, net of issuance
costs ........................................... -- 96,209 --
Issuance of common stock, net of issuance costs ... -- 15,512 681
Net borrowings from (repayments to) affiliate...... 7,000 (23,000) --
Purchase of treasury stock ........................ -- (62,058) --
Debt issuance costs ............................... -- -- (295)
Principal payments on capital lease obligations ... (114) (481) (701)
-------- -------- -------
Net cash provided by (used for) financing
activities .................................... 6,886 53,318 (18,817)
-------- -------- -------
Net increase in cash and cash equivalents ........... 1,094 679 238
Cash and cash equivalents, beginning of period ...... 3,368 4,462 5,141
-------- -------- -------
Cash and cash equivalents, end of period ............ $ 4,462 $ 5,141 $ 5,379
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid for interest ........................... $ 6,780 $ 7,079 $13,283
Cash paid for income taxes ....................... $ 2,423 $ 4,040 $ 268
The accompanying notes are an integral part
of these consolidated financial statements.
26
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Holmes Products Corp. ("HPC") designs, develops, imports and sells consumer
durable goods, including fans, heaters, humidifiers, air purifiers,
dehumidifiers and lighting products, to retailers throughout the United
States and Canada, and to a lesser extent, Europe.
Holmes Products (Far East) Limited ("HPFEL") and its subsidiaries
manufacture and sell consumer durable goods, including fans, heaters and
humidifiers, mainly to HPC. HPFEL operates facilities in Hong Kong, Taiwan
and The People's Republic of China.
HPFEL is a wholly-owned subsidiary of HPC. Prior to the recapitalization
transaction described in Note 8, HPC and HPFEL (together as "the Company")
were both directly or indirectly 80% owned subsidiaries of Asco Investments
Ltd., a subsidiary of Pentland Group plc ("Pentland").
2. Summary of Significant Accounting Principles
Basis of Consolidation
The accompanying financial statements include the accounts of HPC and its
wholly-owned subsidiaries, HPFEL, Holmes Manufacturing Corp., Holmes Air
(Taiwan) Corp. and Holmes Air (Canada) Corp. The accompanying financial
statements also include the accounts of HPFEL's wholly-owned subsidiaries,
Esteem Industries Ltd., Raider Motor Corp., Dongguan Huixin Electrical
Products Company, Ltd. and Dongguan Raider Motor Corp. Ltd. Prior to the
recapitalization transaction described in Note 8, the financial statements
combined the accounts of HPC and HPFEL on the basis of common ownership.
All significant inter-company balances and transactions have been
eliminated.
Minority Interest
Prior to May 1997, HPFEL owned 70% of Raider Motor Corp., which owns 100%
of Dongguan Raider Motor Corp. Ltd. The minority stockholders' interests in
the net income and net assets of Raider Motor Corp. and Dongguan Raider
Motor Corp. Ltd. were presented separately in the accompanying financial
statements.
In May and June 1997, the Company reached agreements to acquire the capital
stock held by the minority stockholders. The book value of the minority
interest exceeded the repurchase price by approximately $650,000. The
excess of the fair market value of the assets and liabilities of Raider
Motor Corp. on the date of acquisition over the purchase price has been
recorded as a reduction of property and equipment during the year ended
December 31, 1997.
27
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Translation of Foreign Currencies
The functional currency for the Company's foreign operations is the local
currency. Assets and liabilities are translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Income, expense and
cash flow items are translated at average exchange rates for the
period. Adjustments resulting from the translation of foreign functional
currency financial statements into U.S. dollars are recorded in the
accumulated other comprehensive income component of stockholders equity
(deficit). For periods prior to 1998, translation gains and losses were
immaterial and were included in net income. Accordingly, net income
equaled comprehensive income for all periods prior to 1998. Gains and
losses resulting from remeasurement of balances denominated in other than
the local currency are not material and are included in other (income)
expense, net.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets using an accelerated method,
except for mold costs, tooling and plant and machinery, which are
depreciated using the straight-line method. Repairs and maintenance are
expensed as incurred.
Revenue Recognition
Revenue is recognized upon shipment of goods from the Company's warehouses.
Revenue for goods sent directly from HPFEL to a retail customer is
recognized when the customer takes ownership of the goods. Estimates for
returned goods and warranty costs are accrued at the time of shipment.
Product Development
Research, engineering and product development costs are expensed as
incurred.
28
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Statement of Cash Flows
All highly liquid debt instruments with original maturities of three months
or less are considered to be cash equivalents. Such investments consist of
a money market account.
Advertising
Advertising costs are expensed as incurred. In conjunction with transfers
of inventory in 1998 and 1993, the Company received advertising credits
totaling $2,352,000 and $980,000, respectively, to be used for the purchase
of advertising media, merchandise or services, subject to certain
limitations and cash co-payments. The credits expire in February 2003 and
October 1999, respectively. The remaining balance of these credits
approximated $218,000 at December 31, 1997 and $2,352,000 and $209,000 at
December 31, 1998, respectively, which are reported as prepaid expenses and
other current assets and deposits and other assets. Total advertising
expenses in 1996, 1997, and 1998 were approximately $4,446,000, $5,968,000
and $6,564,000, respectively which are included in selling expenses in the
accompanying statement of income.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109 requires
recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled.
Joint Venture
In October 1998, the Company signed an agreement with General Electric
creating a limited liability company for a motor manufacturing, sales and
distribution company. The limited liability company, GE Holmes Industries,
is owned 49% by a subsidiary of Holmes Products Corp. The Joint Venture had
no transactions during the year ended December 31, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies at December 31, 1997 and 1998, and the
reported amounts of revenues and expenses during the periods presented.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current period presentation.
29
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. Related Party Transactions
Prior to the 1997 recapitalization described in Note 8, the Company had
numerous business relationships with Pentland and Asco General Supplies
(Far East) Ltd. ("Asco"), an affiliated entity. These arrangements were
generally terminated in conjunction with the recapitalization of the
Company, and all outstanding amounts were repaid.
Asco provided the Company with letter of credit financing for their
purchases from foreign manufacturers. The Company paid a commission to Asco
for administrative services related to the processing of these trade
acceptances. Total commissions approximated $1,984,000 and $1,834,000 in
1996 and 1997, respectively, which is included in cost of goods sold in the
accompanying statement of income. This arrangement has been terminated in
connection with the completion of the recapitalization transaction
described in Note 8.
HPC had a revolving credit facility agreement with Pentland Management
Services Limited ("PMSL"), an affiliated company, whereby PMSL would
provide short-term loans to HPC. The facility was increased several times
between 1993 and 1997, reaching a peak of $38,000,000. Total borrowings
under the agreement were limited to a defined borrowing base of eligible
accounts receivable and inventory, and were secured by all assets of the
Company. Individual loans under the agreement had maturities which ranged
from one to six months, at HPC's option. Interest rates on individual loans
were at the prime rate as of the inception date of the loan, and were fixed
through the maturity of the loan. Interest was payable at the expiration of
each loan, and totaled approximately $2,385,000 in 1996 and $2,410,000 in
1997. This agreement included certain financial covenants, as well as
restrictions on the incurrence of additional debt. This facility was
terminated in conjunction with the completion of the recapitalization
transaction described in Note 8.
Esteem Industries Ltd. had purchased certain raw materials from an entity
owned by the brother of a former minority stockholder of Raider Motor Corp.
and Dongguan Raider Motor Corp. Ltd. Such purchases totaled $181,000 in
1996 and are included in cost of goods sold in the accompanying statement
of income. There were no such purchases in 1997 or 1998.
HPC pays a sales commission to Jordan Kahn Co. Inc., owned principally by
an officer and stockholder of the Company. Such commissions approximated
$480,000, $367,000 and $368,000 in 1996, 1997 and 1998, respectively, which
are included in selling expenses in the accompanying statement of income.
Asco had advanced HPFEL monies for working capital purposes from time to
time. All advances were repaid during 1997 in conjunction with the
recapitalization of the Company. The interest rate on these advances was
8.5%. Interest expense incurred on amounts due from HPFEL to Asco was
$531,000 in 1996 and $446,000 in 1997.
The salaries and related benefits of certain employees of Dongguan Raider
Motor Corp Ltd. were paid through Asco, which is reimbursed by Raider Motor
Corp. for such costs. These costs amounted to $47,000 and $128,000 in 1996
and 1997, respectively.
HPFEL also paid $78,000 in 1996 and $12,000 in 1997 to Asco for the use of
certain shared computer facilities.
30
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition, beginning in March 1995, HPFEL occupied facilities owned by
the spouse of a director of HPFEL. Total rent expense paid on this property
amounted to $452,000 and $475,000 in 1996 and 1997, respectively.
Certain employees of Pentland and Asco have performed various management
and administrative services for HPFEL, for which no amounts have been
charged to HPFEL. Management has estimated such costs, which consist of
allocations of salary and related benefits costs and travel expenses, to be
insignificant in 1996 and 1997. Accordingly, no amounts have been recorded
in the accompanying financial statements for such costs.
As part of the recapitalization transactions described in Note 8, the
Company entered into a consulting agreement with the new majority
stockholder, to provide management, financial, advisory and strategic
support and analysis. The agreement expires in November 2002, or earlier if
the stockholder's ownership percentage declines to less than 40% or less
than the percentage owned by management of the Company, taken as a group.
Fees under this agreement are $400,000 per year and will increase to
$500,000 per year as of February 5, 1999, related to the Rival Acquisition.
4. Inventories
Inventories are as follows:
December 31,
----------------------------
1997 1998
----------- -----------
Finished goods..................................... $34,305,000 $34,620,000
Raw materials...................................... 8,844,000 7,930,000
Work-in-process.................................... 12,401,000 10,790,000
----------- -----------
$55,550,000 $53,340,000
=========== ===========
5. Property and Equipment
Property and equipment are as follows:
December 31,
----------------------------------
Depreciable lives 1997 1998
--------------------- ----------- -----------
Mold costs and tooling.............. 1 1/2 - 5 years $18,363,000 $15,241,000
Plant and machinery................. 7 years 9,805,000 11,283,000
Leasehold improvements.............. life of lease-7 years 4,025,000 4,048,000
Equipment and computer equipment.... 5 years 3,233,000 3,282,000
Furniture and fixtures.............. 5-7 years 2,310,000 2,347,000
Motor vehicles...................... 4 years 323,000 412,000
----------- -----------
38,059,000 36,613,000
Less-accumulated depreciation and amortization 18,452,000 20,861,000
----------- -----------
$19,607,000 $15,752,000
=========== ===========
31
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Property and equipment recorded under capital leases amounted to
approximately $2,067,000 and $2,055,000 at December 31, 1997 and 1998,
respectively. Total accumulated amortization related to these assets is
approximately $411,000 and $582,000 at December 31, 1997 and 1998,
respectively. Amortization expense for the period is included in
depreciation and amortization in the accompanying statement of cash flows.
As described in Note 2, approximately $650,000 has been recorded as a
reduction of plant and machinery during 1997 in conjunction with the
repurchase of the capital stock held by the former minority stockholders of
Raider Motor Corp.
6. Accrued Expenses
Accrued expenses are as follows:
December 31,
------------------------------
1997 1998
---------- -----------
Sales returns and allowances $3,246,000 $ 3,540,000
Payroll and bonuses 1,122,000 1,606,000
Interest payable 1,026,000 1,576,000
Advertising 825,000 1,210,000
Other 3,606,000 4,360,000
---------- -----------
$9,825,000 $12,292,000
========== ===========
7. Long-Term Debt
Senior Subordinated Notes
In connection with the recapitalization transactions described in Note 8,
HPC issued $105,000,000 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 Line
of Credit (as defined below) and capital leases. The Notes are guaranteed
by HPC's current and future domestic subsidiaries (see Note 17) on a full,
unconditional and joint and several basis, but are otherwise unsecured.
HPC 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, HPC may redeem up to $33 million
of the Notes prior to this 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 HPC, HPC 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 HPC's ability to pay dividends,
repurchase stock or incur additional debt (other than borrowings under the
Line of Credit). The Notes and Line of Credit contain cross-default
provisions.
32
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company issued an additional $31.3 million of notes in February 1999
with the same terms as the previous notes in connection with the Rival
Acquisition.
Debt issuance costs of $9,086,000 associated with the Notes are being
amortized over the 10 year life of the Notes.
Line of Credit
The Company entered into a $100,000,000 revolving line of credit with a
bank (the "Line of Credit") as part of the recapitalization transactions
described in Note 8. Of the total amount, up to $15,000,000 can be borrowed
by HPFEL and its subsidiaries, and up to $20,000,000 can be used to secure
letters of credit.
Borrowings under the Line of Credit are due on January 2, 2003 and may
remain outstanding until that time. Accordingly, such amounts are
classified as non-current liabilities on the accompanying consolidated
balance sheet. However, upon certain sales of stock or assets or the
issuance of equity securities, the Company must repay a portion of the
Line of Credit generally equal to the net cash proceeds received. Such
repayment is not required if the proceeds of an equity offering are used to
acquire other companies.
Amounts outstanding under the Line of Credit bear interest at either a
prime rate-based rate or a LIBOR-based rate, at the Company's option, plus
a specified margin. The margin varies from none to 0.75% for prime-based
loans and 1.25% to 2.25% for LIBOR-based loans, depending on a defined
ratio of the Company's financial results (the "Leverage Ratio"). Borrowings
outstanding at December 31, 1997, of which $1,002,000 is outstanding at
HPFEL, bear interest at a weighted average rate of 7.98%. Borrowings
outstanding at December 31, 1998 bear interest at a rate of 7.66%. Interest
is payable no less frequently than quarterly in arrears.
The Company must pay a quarterly commitment fee on the unused portion of
the Line of Credit. The fee varies from 0.375% to 0.5% per annum, depending
on the Leverage Ratio. The Company must also pay a quarterly fee on open
letters of credit which varies from 0.75% to 2.5% of the face amount per
annum, depending on the type of credit issued and the Leverage Ratio.
Borrowings by HPC under the Line of Credit are secured by all assets of HPC
and a pledge of all of the capital stock of domestic subsidiaries and 66%
of the capital stock of foreign subsidiaries. Borrowings by HPFEL are
secured by all assets of HPFEL and certain of its subsidiaries. The Line of
Credit is also guaranteed by HPC's current and future domestic
subsidiaries.
The Line of Credit agreement contains certain restrictions and covenants,
including limitations on the Company's ability to pay dividends, invest in
certain types of securities, repurchase stock or incur additional debt.
However, among other uses, the Company may issue debt which is subordinated
to the Line of Credit, used to finance certain permitted acquisitions of
other companies or used to repurchase shares of stock under the terms of
the stockholders' agreement described in Note 8. The Company is also
required to maintain certain financial ratios. The Notes and Line of Credit
contain cross-default provisions.
Issuance costs of $1,366,000 associated with the Line of Credit are being
amortized over the 5-year life of the Line of Credit.
33
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company entered into an amended and restated Credit Facility agreement
in February, 1999 in connection with the Rival Acquisition. The new Credit
Facility consists of a six-year tranche A term loan of $40.0 million, an
eight-year tranche B term loan of $85.0 million and a $200.0 million,
six-year revolving credit facility. The Credit Facility bears interest at
variable rates based on either the prime rate or LIBOR, at the Company's
option, plus a margin which, in the case of the tranche A term loan and the
revolving credit facility, varies depending upon certain financial ratios
of the Company. The Credit Facility, and the guarantees thereof by the
Company's domestic subsidiaries, are secured by substantially all of the
Company's domestic and certain foreign assets. The Credit Facility and the
Notes Indentures include certain financial and operating covenants, which,
among other things, restrict the ability of the Company to incur additional
indebtedness, grant liens, make investments and take certain other actions.
The ability of the Company to meet its debt service obligations will be
dependent upon the future performance of the Company, which will be
impacted by general economic conditions and other factors.
8. Stockholders' Equity
Recapitalization
On November 26, 1997, the Company and its stockholders consummated an
agreement to perform the following: (i) the stockholders of HPFEL
contributed their shares of common stock, $1 par value, to HPC in exchange
for 2,750,741 shares of HPC's common stock, no par value, (ii) HPC 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) HPC redeemed
18,620,450 shares of HPC common stock held by Pentland for approximately
$62.1 million. In connection with these transactions, HPC issued
$105,000,000 of 9 7/8% Senior Subordinated Notes due in November 2007 and
borrowed $27,500,000 under a new Line of Credit facility, both described in
Note 7.
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.
In connection with certain previous employment agreements, incremental
compensation in the amount of $6,901,000 was paid at the time of closing in
1997, and the related agreements were terminated. These costs have been
recorded in general and administrative expenses in the accompanying
consolidated statement of income.
Stock Option Plan
In connection with the recapitalization transaction described above, HPC's
Board of Directors adopted and the stockholders approved the 1997 Stock
Option Plan (the "Plan"). The Plan provides for the grant of incentive
stock options and non-qualified stock options to employees, officers,
directors, and consultants of the Company's, except that incentive stock
options may not be issued to consultants or non-employee directors. A total
of 1,563,020 shares of HPC's common stock were reserved for issuance under
the Plan. The exercise price and period over which options become
exercisable will be determined by the Board of Directors. However, the
exercise price of incentive stock options will be equal to at least 100% of
the fair market value of HPC's common stock on the date of grant (110% for
34
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
individuals holding more than 10% of HPC's common stock). Options will
expire no later than 10 years after date of grant (5 years for individuals
holding more than 10% of HPC's common stock). The Plan will expire in
November 2006.
The following summarizes stock option activity for 1998:
Exercise
Shares Price Range
--------- -----------
Outstanding as of December 31, 1997 - -
Granted during 1998 1,474,152 $3.50
Exercised during 1998 - -
Forfeited during 1998 (25,800) $3.50
--------- ------
Outstanding as of December 31, 1998 1,448,352 $3.50
--------- ------
Number of shares exercisable
As of December 31, 1998 86,100 $3.50
Total available for grant as of
December 31, 1998 114,668 $3.50
Stock-based compensation
The Company accounts for stock-based compensation using the method
prescribed in Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees". Accordingly, no compensation cost has been
recognized for the Company's stock option plan. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). Had
compensation cost been determined based on fair value at the grant dates
for awards in 1998, consistent with the provisions of FAS 123, the
Company's net income would have been reduced to a pro forma net income of
$8.8 million.
The fair value of options granted at date of grant was estimated using the
Black-Sholes model with an assumed weighted average expected term of 7.30
years and a weighted average interest rate of 5.32%.
The weighted average grant date fair value of options granted during 1998
was $1.17. All outstanding and exercisable options have an exercise price
of $3.50. Options outstanding have a weighted average remaining contractual
life of 8.9 years.
Stock Split
In April 1998, the Company's Board of Directors approved an increase in the
number of authorized shares of common stock from 15,000 with no par value
to 12.5 million with a $.001 par value. The change in par value did not
affect any of the existing rights of shareholders and has been recorded as
an adjustment to additional paid-in capital and common stock. In addition,
the Company's Board of Directors approved a 21,159-for-1 stock split.
Shares outstanding have been adjusted for all periods presented to reflect
post-split amounts.
Warrant
In conjunction with the recapitalization transaction described above, HPC
issued a warrant to Pentland to purchase 24 shares of common stock at an
exercise price of $74,012 per share (pre stock split). This warrant is
exercisable only upon the occurrence of one of the following by November
26, 1999: (a) an initial public offering of equity securities by HPC,
provided that this offering includes or is followed within specified time
periods by sales of shares offered by selling stockholders, (b) a sale of
the Company, (c) a sale by the new majority stockholder and its affiliates
of all or substantially all of their holdings of HPC's common stock or (d)
a further recapitalization of the Company through the issuance of
additional debt. The warrant expires on November 26, 1999. Management has
determined that the value of the warrant is not material to the Company's
consolidated financial statements.
Stockholders' Agreement
All of the holders of HPC's outstanding stock are subject to a
stockholders' agreement. This agreement provides the Company with a right
of first refusal on any proposed sales of stock to outside parties.
Additionally, HPC has certain rights to purchase shares of Common Stock
from employees upon their termination of employment.
35
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. Income Taxes
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations. Under
SFAS 109, the benefit associated with future deductible temporary
differences and operating loss or credit carryforwards is recognized if it
is more likely than not that a benefit will be realized. Deferred tax
expense (benefit) represents the change in the net deferred tax asset or
liability balance.
Income tax expense (benefit) consists of the following:
Year ended December 31,
------------------------------------------------
1996 1997 1998
---------- ---------- ----------
Current:
Federal ..... $ 3,888,000 $1,514,000 $1,844,000
State ....... 1,176,000 534,000 366,000
Foreign ..... 397,000 863,000 753,000
----------- ---------- ----------
Total current 5,461,000 2,911,000 2,963,000
----------- ---------- ----------
Deferred:
Federal ..... $(1,943,000) $ (547,000) $ (609,000)
State ....... (594,000) (168,000) (132,000)
Foreign ..... (137,000) -- --
----------- ---------- ----------
Total current (2,674,000) (715,000) (741,000)
----------- ---------- ----------
$ 2,787,000 $2,196,000 $2,222,000
=========== ========== ==========
Pre-tax income (loss) is summarized as follows:
Year ended December 31,
---------------------------------------------------
1996 1997 1998
---------- ---------- ----------
Domestic $5,842,000 $ (715,000) $ 988,000
Foreign 3,574,000 6,983,000 10,195,000
---------- ---------- -----------
$9,416,000 $6,268,000 $11,183,000
========== ========== ===========
The two subsidiaries which are incorporated and based in the People's
Republic of China have a two-year tax holiday on the basis that they expect
to operate in China for ten or more years. The tax holiday provides for an
exemption from income tax in the first two profit-making years and for a
50% reduction in the subsequent three years. The first profit-making year
is defined as the year in which the foreign enterprise recognizes profit on
a cumulative basis for the first time, after offsetting prior years'
losses. Losses can be carried forward for a maximum of five years.
Dongguan Raider Motor Corp. Ltd. was profitable in both 1994 and 1995 and
as such is now subject to income tax in China. Dongguan Huixin Electrical
Products Company, Ltd. had previously experienced losses but has become
profitable on a cumulative basis in 1997, and is thus within the tax
holiday. Net operating losses at December 31, 1996 were approximately
$1,952,000, which were fully utilized during the year ended December 31,
1997.
36
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
If not exempt, the statutory tax rate which applies to these companies in
China is 24% (prior to the 50% reduction described above for the first
three years after the exemption expires), as their operations are located
in a region of China where tax incentives are applicable.
The Bahamas registered companies (HPFEL and Raider Motor Corp.) are subject
to tax in Hong Kong at 16.5% only to the extent that their income is deemed
to be onshore Hong Kong.
The Company's effective tax rate varies from the statutory U.S. federal
tax rate as a result of the following:
Year ended December 31,
------------------------------------
1996 1997 1998
---- ---- ----
Statutory U.S. federal tax rate................ 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit........ 4.0 .5 1.4
Foreign earnings taxed at different rates...... (9.4) (17.6) (17.1)
Valuation allowance on deferred tax assets..... (.6) 15.6 -
Non-deductible expenses ....................... .3 .5 .3
Other ......................................... .3 1.0 .3
---- ---- ----
Effective tax rate ............................ 29.6% 35.0% 19.9%
==== ==== ====
Deferred tax assets and deferred tax liabilities are comprised of the
following at December 31, 1997 and 1998:
December 31,
----------------------------
1997 1998
----------- ----------
Deferred tax assets:
Accrued expenses ........................ $ 1,932,000 $2,632,000
Inventory ............................... 2,053,000 2,144,000
Interest limitation carryforward......... 1,447,000 1,367,000
Accounts receivable ..................... 182,000 287,000
Property and equipment .................. 638,000 483,000
----------- ----------
Gross deferred tax assets ............. 6,252,000 6,913,000
Deferred tax asset valuation allowance .. (1,447,000) (1,367,000)
----------- ----------
Net deferred tax assets ............... $ 4,805,000 $5,546,000
=========== ==========
The deductibility of interest paid to or guaranteed by Pentland and its
affiliates while HPC was a majority-owned subsidiary of Pentland was
subject to certain limitations under the U.S. Internal Revenue Code.
Primarily as a result of the compensation recorded in conjunction with the
recapitalization transaction described in Note 8, approximately $3,600,000
of interest expense incurred by HPC during the year ended December 31, 1997
was not deductible for income tax purposes. Such amounts can be carried
forward indefinitely. However, due to the impact of the Company's current
37
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
debt structure on future operating results and the Internal Revenue Code
limitations, management has provided a valuation allowance of $1,367,000
against the deferred tax asset arising from this carryforward. The
utilization of this carryforward may be further limited as a result of the
change in ownership that occurred as part of the recapitalization of the
Company, although this limitation will primarily impact only the timing
of any possible utilization. If the Company is able to utilize this
deduction, it will reduce income tax expense in future years.
In general, no provision has been recorded for U.S. or additional foreign
taxes on undistributed earnings of foreign subsidiaries, as it is
management's intention that these earnings will continue to be reinvested.
It is not practicable to estimate the amount of additional tax that might
be payable on such earnings. Total undistributed earnings of foreign
subsidiaries as of December 31, 1998 are approximately $ 24,137,000.
10. Leases
In addition to leasing property and equipment under various capital leases
(Note 5), the Company has various noncancellable operating leases for
facilities, vehicles and office equipment which expire at various dates
through 2005. Certain of these leases contain options for renewal or
purchase of the underlying asset. Rent expense was approximately $3,064,000
in 1996, $3,099,000 in 1997 and $3,916,000 in 1998.
At December 31, 1998, future minimum rental payments under noncancellable
lease arrangements are as follows:
Operating Capital
leases leases
----------- ---------
1999 $ 3,264,000 $639,000
2000 2,302,000 143,000
2001 1,816,000 -
2002 1,675,000 -
2003 and thereafter 4,703,000 -
----------- --------
$13,760,000 $782,000
===========
Less: amount representing interest 39,000
--------
Present value of obligations under
capital leases $743,000
========
Comprised of:
Current portion $604,000
Non-current portion 139,000
--------
$743,000
========
38
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. Employee Benefit Plan
HPC provides its employees with a defined contribution retirement plan
under section 401(k) of the Internal Revenue Code. All employees are
eligible to participate in the plan and contribute up to 15% of their
compensation, which is then invested in one or more investment funds. HPC
matches up to 3% of an employee's contribution.
HPFEL provides its Hong Kong based employees with a defined contribution
retirement plan. All Hong Kong based employees of HPFEL and Esteem
Industries Ltd. may contribute 5% of their compensation, with the Company
contributing an additional 5% to 7 1/2% of an employee's compensation.
The Company's contributions to these plans approximated $223,000, $277,000
and $308,000 in 1996, 1997 and 1998, respectively.
12. Business and Credit Concentrations and Business Segments
Business and Credit Concentrations
HPC sells its products to retailers throughout the United States, Canada and
Europe. Three customers accounted for approximately 18%, 12% and 10%,
respectively of total sales for 1996. These same three customers accounted for
approximately 17%, 11% and 11%, respectively, of total sales in 1997. These same
three customers accounted for approximately 22%, 14% and 12%, respectively, of
total sales in 1998. Accounts receivable due from the single largest customers
amounted to 13% and 27% of total accounts receivable at December 31, 1997 and
1998, respectively. HPC has also entered into an agreement with an insurance
company to purchase HPC's receivables from certain pre-determined customers, up
to specified limits, if the customer defaults on payment. In exchange, HPC pays
a monthly fee.
Certain of HPC's retail customers have filed for bankruptcy protection during
1997 and 1998. Management monitors and evaluates the credit status of its
customers, and adjusts sales terms as appropriate. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
exceeded management's expectations. Management does not believe that the Company
is subject to any other unusual risks beyond the normal credit risk attendant to
operating their business.
Business Segments
The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" ("SFAS 131"), during 1998. SFAS 131 established
standards for reporting information about business segments in annual financial
statements. It also established standards for related disclosures about products
and services, major customers and geographic areas. Business segments are
defined as components of a business about which separate financial information
is available that is evaluated regularly by the chief operating decision maker,
or decision making group, in deciding how to allocate resources and in assessing
performance. The business segments are managed separately because each segment
represents a strategic business unit whose main business is entirely different.
The adoption of SFAS 131 did not affect the Company's results of operations or
financial position.
The Company manages its operations through two business segments:
o Manufacturing. This business segment is the manufacturing part of the
Company. The manufacturing is performed primarily at HPFEL.
39
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
o Distribution. This segment sells the Company's products throughout the United
States, Canada and Europe. All of the Company's products share common
distribution attributes.
As the Rival Acquisition is integrated, HPC intends to re-evaluate its
characterization of its business segments, and may determine in future periods
to expand or revise its segment presentation. The following table summarizes the
segment information for the fiscal years ended December 31 for the years shown
(in thousands USD's):
Manufacturing Distribution Eliminations Consolidated
------------- ------------ ------------ ------------
Net sales to customers 1998 $ 5,070 $ 209,409 $ - $ 214,479
1997 2,428 189,725 - 192,153
1996 1,202 193,129 - 194,331
_____________________________________________________________________
Intersegment net sales 1998 106,241 - (106,241) -
1997 83,626 - (83,626) -
1996 85,918 - (85,918) -
_____________________________________________________________________
Depreciation and amortization 1998 4,571 2,777 (100) 7,248
1997 2,077 5,526 (130) 7,473
1996 2,196 4,793 (122) 6,867
_____________________________________________________________________
Net interest expense (income) 1998 (890) 14,741 (18) 13,833
1997 579 6,517 - 7,096
1996 839 5,652 - 6,491
_____________________________________________________________________
Other operating costs 1998 97,261 192,342 (105,166) 184,437
1997 76,616 179,564 (82,443) 173,737
1996 80,523 179,448 (85,219) 174,752
_____________________________________________________________________
Segment income (loss) 1998 10,369 (451) (957) 8,961
1997 6,782 (1,882) (1,053) 3,847
1996 3,562 3,236 (577) 6,221
_____________________________________________________________________
Segment assets 1998 41,734 108,239 (18,616) 131,357
1997 32,621 119,036 (16,492) 135,165
1996 33,980 101,403 (7,097) 128,286
_____________________________________________________________________
Segment capital expenditures 1998 1,963 2,786 - 4,749
1997 1,304 4,511 - 5,815
1996 4,166 4,428 - 8,594
The accounting policies of the reportable segments are the same as those
described in Note 2 of the Notes to Consolidated Financial Statements. The
results are disaggregated using a management approach, which is consistent with
the manner in which the Company's management internally disaggregates financial
information for the purposes of assisting in making internal operational
decisions.
40
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other operating costs include: cost of sales, selling, general and
administrative expenses, product development expenses, other (income) expense,
net and income taxes.
The following information is summarized by geographic area:
Consolidated
United States Far East Canada Total
------------- -------- ------ -----
Net sales:
Year ended December 31, 1996....... $189,943,000 $1,202,000 $3,186,000 $194,331,000
Year ended December 31, 1997....... 184,626,000 2,428,000 5,099,000 192,153,000
Year ended December 31, 1998....... 203,940,000 5,070,000 5,469,000 214,479,000
Identifiable assets:
December 31, 1997.................. 88,519,000 32,621,000 3,966,000 125,106,000
December 31, 1998.................. 83,384,000 33,980,000 4,821,000 122,185,000
Corporate assets at
December 31, 1998.............. 9,172,000
------------
Total assets at
December 31, 1998............. $131,357,000
Net sales are grouped based on the geographic origin of the transaction. Net
sales in the United States include direct export sales to Europe.
The Company's manufacturing entities in the Far East sell completed products to
HPC 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.
Corporate assets at December 31, 1998 represent debt issuance costs associated
with the Company's senior subordinated notes and line of credit facility. As
these borrowings support operations on a worldwide basis, these deferred costs
have been excluded from the individual geographic areas. All of the Company's
other assets are used in the operations of individual entities in the different
geographic areas. Corporate assets at December 31, 1997 were $10,059,000.
13. Commitments and Contingencies
HPC is a party to several agreements to license certain technologies and
products. These license agreements generally provide for royalties based on
sales of the related products by HPC. Such royalties have not been material
to date.
In January 1998, HPC entered into an exclusive license and supply
agreement for certain chemical additives. The agreement provides for a
minimum annual royalty payment by HPC of
41
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$240,000 that commenced in September 1998. HPC has an annual minimum
purchase obligation under this agreement of $100,000 in 1998 and $110,000
in 1999.
The Company is involved in litigation and is the subject of claims arising
in the normal course of its business. HPFEL has a contingent liability
related to potential withholding taxes (and the surcharges thereon) on rent
paid to the spouse of one of the directors (see Note 3). Although the
individual has accepted responsibility for the payment of these taxes, the
Company would be accountable for these tax payments in the event that the
individual did not fulfill this obligation. These withholdings and
surcharges amounted to $724,000 at December 31, 1997 and 1998. In the
opinion of management, based upon discussions with legal counsel, no
existing litigation or claims will have a materially adverse effect on the
Company's financial position or results of operations and cash flows.
The Company has entered into employment agreements with several
executives, which expire on December 31, 2000, renewable for annual periods
by mutual consent. These agreements provide that if employment is
terminated without cause, the employees will receive severance payments of
their respective salaries for the longer of 12 months or the remainder of
the term, in the case of the Company's president, or for 12 months, in the
case of the other executives.
Beginning July 1, 1997, Hong Kong has been governed by the People's
Republic of China. Management does not believe that this event will
materially affect the Company's financial position or results of
operations and cash flows.
14. Distribution of Profit
Amounts that can be distributed by HPFEL's subsidiaries in China are based
on the financial regulations of China, which differ from accounting
principles generally accepted in the United States. In particular, HPFEL's
two Chinese incorporated subsidiaries, Dongguan Huixin Electrical Products
Company, Ltd. and Dongguan Raider Motor Corp. Ltd., are deemed to be wholly
owned foreign enterprises and, as such, Chinese laws and regulations
require these companies to transfer to separate reserves a certain portion
of after-tax profit each year for specific purposes. These purposes include
enterprise expansion, repair and maintenance of fixed assets and staff
welfare. These reserves are deemed to be non-deductible to the parent
company.
The amount transferred to the reserve fund must be at least 10% of the
after-tax profit each year, determined in accordance with the financial
regulations of China, up to a cumulative maximum of 50% of the entity's
registered capital stock. Transfers to the staff welfare fund can be
determined by management. Management has decided that no transfers are to
be made to the employee staff welfare fund in 1998.
Consistent with standard practice in China, Dongguan Huixin Electrical
Products Company, Ltd. and Dongguan Raider Motor Corp. Ltd. account for
their staff welfare commitments on a monthly basis and the amounts involved
are charged directly to the profit and loss account. Such expenses were not
material in 1996, 1997 and 1998.
The retained earnings (accumulated losses) of these companies, including
earnings attributable to the former minority stockholders, on the basis of
accounting principles generally accepted in the United States, are as
follows:
42
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1997 1998
---------- ----------
Dongguan Raider Motor Corp. Ltd.......................... $6,394,000 $8,860,000
Dongguan Huixin Electrical Products Company, Ltd. ....... 554,000 1,997,000
The currency of China, the reminbi, is not freely convertible and the
ability of these subsidiaries to remit retained earnings to the parent
company is dependent on their ability to generate foreign currency
denominated earnings or to obtain government approval for the purchase of
foreign currency.
15. Financial Instruments
The company enters into various types of financial instruments in the
normal course of business. Fair values are estimated based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates reflecting varying degrees of perceived risk. Accordingly,
the fair values may not represent actual values of the financial
instruments that could have been realized as of year end or that will be
realized in the future.
Fair values for cash and cash equivalents, accounts receivable, other
receivables, income taxes receivable, accounts payable, accrued expenses,
accrued income taxes and capital lease obligations approximate their
carrying values at December 31, 1997 and 1998, due to their relatively
short maturity. The fair values of the Company's Notes and Line of Credit
approximate their carrying values at December 31, 1998 because the interest
rates on these borrowings approximate current market rates.
16. Subsequent Events
On February 5, 1999, HPC and a wholly owned subsidiary completed a cash
tender offer and a contemporaneous second-step merger for all outstanding
shares of Common Stock of The Rival Company ("Rival") at a price of $13.75
per share. All of Rival's outstanding shares were tendered and accepted for
purchase or acquired in the merger at a total cash purchase price of
approximately $129.4 million (including payments to optionees). The Company
also refinanced approximately $141.5 million of Rival's debt. Rival is now
held as a wholly owned subsidiary of HPC. The Company also issued an
additional $31.3 million of notes and amended and restated its existing
credit facility in February, 1999 in connection with the Rival
Acquisition. See Note 7 for additional information.
This acquisition will be accounted for as a purchase, and therefore the
results of Rival will be included in the Company's Consolidated Financial
Statements as of and for the period beginning February 5, 1999.
Rival is a leading designer, manufacturer and marketer of a variety of
products including small kitchen and personal care appliances such as
Crock-Pot(R) slow cookers, can openers and massagers; products for the home
environment including space heaters, air purifiers, showerheads, utility
pumps, humidifiers and fans; and building supply and industrial products
such as household ventilation, door chimes, ceiling fans and industrial
fans.
43
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. Condensed Consolidating Information
The senior subordinated notes described in Note 7 were issued by HPC and
are guaranteed by HPC's domestic subsidiaries, which consisted of Holmes
Manufacturing Corp. ("Manufacturing"), Holmes Air (Taiwan) Corp. ("Taiwan")
and Holmes Motor Corp. ("Motor") as of December 31, 1998, but are not
guaranteed by HPC's other direct subsidiaries, HPFEL and Holmes Air
(Canada) Corp. ("Canada"). The guarantor subsidiaries are wholly-owned by
HPC, 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) HPC, as
parent, as if it accounted for its subsidiaries on the equity method, (ii)
Manufacturing, Taiwan, and Motor, the guarantor subsidiaries, and (iii)
HPFEL and Canada, the non-guarantor subsidiaries. There were no
transactions between Manufacturing, Taiwan and Motor, or between HPFEL and
Canada, during any of the periods presented. Separate financial statements
of Manufacturing, Taiwan and Motor are not presented herein as management
does not believe that such statements would be material to investors.
Taiwan had no revenues or operations during the periods presented, and
Manufacturing ceased operations in March 1997. Motor was formed in October,
1998 and engaged in no activities during 1998. As further described in Note
14, certain of HPFEL's subsidiaries in China have restrictions on
distributions to the parent company. Following the Rival Acquisition on
February 5, 1999, the senior subordinated notes are now guaranteed by Rival
and by Rival's domestic subsidiaries.
44
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATING BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents .................. $ 3,741 $ -- $ 1,400 -- $ 5,141
Accounts receivable, net ................... 36,775 -- 1,327 -- 38,102
Inventories ................................ 47,592 -- 11,433 $ (3,475) 55,550
Prepaid expenses and other
current assets ........................... 813 -- 303 -- 1,116
Deferred income taxes ...................... 4,167 -- -- -- 4,167
Income taxes receivable .................... 104 -- -- -- 104
Due from affiliates ........................ 5,426 89 10,605 (16,120) --
--------- ------- -------- --------- ---------
Total current assets ..................... 98,618 89 25,068 (19,595) 104,180
--------- ------- -------- --------- ---------
Property and equipment,net ................... 8,607 -- 11,093 (93) 19,607
Deferred income taxes ........................ 638 -- -- -- 638
Deposits and other assets .................... 10,313 1 426 -- 10,740
Investments in consolidated subsidiaries ..... 10,178 -- -- (10,178) --
--------- ------- -------- --------- ---------
$ 128,354 $ 90 $ 36,587 $ (29,866) $ 135,165
========= ======= ======== ========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of capital lease obligations
and other debt ............................ $ -- $ -- $ 1,103 -- $ 1,103
Accounts payable ........................... 3,253 -- 10,457 -- 13,710
Accrued expenses ........................... 6,898 -- 2,927 -- 9,825
Accrued income taxes ....................... -- -- 1,298 $ (74) 1,224
Due to affiliates .......................... 10,694 -- 5,426 (16,120) --
--------- ------- -------- --------- ---------
Total current liabilities ................ 20,845 -- 21,211 (16,194) 25,862
--------- ------- -------- --------- ---------
Capital lease obligations .................... -- -- 792 -- 792
--------- ------- -------- --------- ---------
Line of credit ............................... 27,500 -- 1,002 -- 28,502
--------- ------- -------- --------- ---------
Long-term debt ............................... 105,000 -- -- -- 105,000
--------- ------- -------- --------- ---------
Stockholders' equity (deficit):
Common stock, $.001 par value .............. 10 1 -- (1) 10
Common stock, $1 par value ................. -- -- 100 (100) --
Additional paid in capital ................. 16,304 -- -- -- 16,304
Treasury stock ............................. (62,058) -- -- -- (62,058)
Retained earnings .......................... 20,753 89 13,482 (13,571) 20,753
--------- ------- -------- --------- ---------
Total stockholders' equity (deficit) ..... (24,991) 90 13,582 (13,672) (24,991)
--------- ------- -------- --------- ---------
$ 128,354 $ 90 $ 36,587 $ (29,866) $ 135,165
========= ======= ======== ========= =========
45
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATING BALANCE SHEET DECEMBER 31, 1998 (IN THOUSANDS)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents .................. $ 1,545 $ -- $ 3,834 -- $ 5,379
Accounts receivable, net ................... 35,558 -- 1,409 -- 36,967
Inventories ................................ 44,748 -- 13,142 $ (4,550) 53,340
Prepaid expenses and other current assets .. 869 -- 1,158 -- 2,027
Deferred income taxes ...................... 4,983 -- -- -- 4,983
Income taxes receivable .................... -- -- -- -- --
Due from affiliates ........................ (89) 89 14,066 (14,066) --
--------- ------- -------- --------- ---------
Total current assets ..................... 87,614 89 33,609 (18,616) 102,696
--------- ------- -------- --------- ---------
Property and equipment,net ................... 3,132 -- 12,520 100 15,752
Deferred income taxes ........................ 563 -- -- -- 563
Deposits and other assets .................... 12,020 1 425 (100) 12,346
Investments in consolidated subsidiaries ..... 19,677 -- -- (19,677) --
--------- ------- -------- --------- ---------
$ 123,006 $ 90 $ 46,554 $ (38,293) $ 131,357
========= ======= ======== ========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of capital lease obligations
and other debt ............................ $ -- $ -- $ 604 -- $ 604
Accounts payable ........................... 2,400 -- 12,604 -- 15,004
Accrued expenses ........................... 8,960 -- 3,332 -- 12,292
Accrued income taxes ....................... 1,922 -- 1,785 -- 3,707
Due to affiliates .......................... 10,113 -- 3,953 $ (14,066) --
--------- ------- -------- --------- ---------
Total current liabilities ................ 23,395 -- 22,278 (14,066) 31,607
--------- ------- -------- --------- ---------
Capital lease obligations .................... -- -- 139 -- 139
--------- ------- -------- --------- ---------
Line of credit ............................... 10,000 -- -- -- 10,000
--------- ------- -------- --------- ---------
Long-term debt ............................... 105,000 -- -- -- 105,000
--------- ------- -------- --------- ---------
Stockholders' equity (deficit):
Common stock, $.001 par value .............. 10 1 -- (1) 10
Common stock, $1 par value ................. -- -- 100 (100) --
Additional paid in capital ................. 16,985 -- -- -- 16,985
Accumulated other comprehensive income ..... (40) -- -- -- (40)
Treasury stock ............................. (62,058) -- -- -- (62,058)
Retained earnings .......................... 29,714 89 24,037 (24,126) 29,714
--------- ------- -------- --------- ---------
Total stockholders' equity (deficit) ..... (15,389) 90 24,137 (24,227) (15,389)
--------- ------- -------- --------- ---------
$ 123,006 $ 90 $ 46,554 $ (38,293) $ 131,357
========= ======= ======== ========= =========
46
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net sales ................................... $182,992 $6,951 $ 90,306 $(85,918) $ 194,331
Cost of goods sold .......................... 146,648 6,864 77,778 (85,375) 145,915
-------- ------ -------- -------- ---------
Gross profit .............................. 36,344 87 12,528 (543) 48,416
-------- ------ -------- -------- ---------
Operating expenses:
Selling ................................... 12,735 -- 490 -- 13,225
General and administrative ................ 6,733 72 7,278 -- 14,083
Product development ....................... 5,454 -- 66 -- 5,520
-------- ------ -------- -------- ---------
Total operating expenses ................ 24,922 72 7,834 -- 32,828
-------- ------ -------- -------- ---------
Operating profit ........................ 11,422 15 4,694 (543) 15,588
-------- ------ -------- -------- ---------
Other income and expense:
Other (income) expense, net ............... -- -- (353) 34 (319)
Interest expense, net ..................... 5,595 -- 896 -- 6,491
-------- ------ -------- -------- ---------
Total other income (expense) ............ 5,595 -- 543 34 6,172
-------- ------ -------- -------- ---------
Income (loss) before income taxes, equity in
income of consolidated subsidiaries
and minority interest ..................... 5,827 15 4,151 (577) 9,416
Income tax expense (benefit) ................ 2,497 -- 290 -- 2,787
-------- ------ -------- -------- ---------
Income before equity in income of
consolidated subsidiaries and
minority interest ......................... 3,330 15 3,861 (577) 6,629
Equity in income of consolidated subsidiaries 2,891 -- -- (2,891) --
-------- ------ -------- -------- ---------
Income (loss) before minority interest ...... 6,221 15 3,861 (3,468) 6,629
Minority interest in net income of majority
owned subsidiaries ........................ -- -- 408 -- 408
-------- ------ -------- -------- ---------
Net income (loss) ........................... $ 6,221 $ 15 $ 3,453 $ (3,468) $ 6,221
======== ====== ======== ======== =========
47
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net sales ................................... $ 183,386 $ 1,240 $91,153 $(83,626) $192,153
Cost of goods sold .......................... 143,584 1,244 74,425 (82,513) 136,740
--------- ------- ------- -------- --------
Gross profit .............................. 39,802 (4) 16,728 (1,113) 55,413
--------- ------- ------- -------- --------
Operating expenses:
Selling ................................... 15,317 -- 330 -- 15,647
General and administrative ................ 13,401 15 7,467 -- 20,883
Product development ....................... 5,348 -- 115 -- 5,463
--------- ------- ------- -------- --------
Total operating expenses ................ 34,066 15 7,912 -- 41,993
--------- ------- ------- -------- --------
Operating profit (loss) ................. 5,736 (19) 8,816 (1,113) 13,420
--------- ------- ------- -------- --------
Other income and expense:
Other (income) expense, net ............... -- -- 42 14 56
Interest expense, net ..................... 6,432 -- 664 -- 7,096
--------- ------- ------- -------- --------
Total other income (expense) ............ 6,432 -- 706 14 7,152
--------- ------- ------- -------- --------
Income (loss) before income taxes and equity
in income of consolidated subsidiaries ... (696) (19) 8,110 (1,127) 6,268
Income tax expense (benefit) ................ 1,330 -- 940 (74) 2,196
--------- ------- ------- -------- --------
Income (loss) before equity in income of
consolidated subsidiaries ................ (2,026) (19) 7,170 (1,053) 4,072
Equity in income of consolidated subsidiaries 5,873 -- -- (5,873) --
--------- ------- ------- -------- --------
Income (loss) before minority interest ...... 3,847 (19) 7,170 (6,926) 4,072
Minority interest in net income of majority
owned subsidiaries ........................ -- -- 225 -- 225
--------- ------- ------- -------- --------
Net income (loss) ........................... $ 3,847 $ (19) $ 6,945 $ (6,926) $ 3,847
========= ======= ======= ======== ========
48
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net sales ................................... $ 203,940 $ -- $116,780 $(106,241) $ 214,479
Cost of goods sold .......................... 154,736 -- 97,039 (105,266) 146,509
--------- --------- -------- --------- ---------
Gross profit (loss) ....................... 49,204 -- 19,741 (975) 67,970
--------- --------- -------- --------- ---------
Operating expenses:
Selling ................................... 19,740 -- 716 -- 20,456
General and administrative ................ 8,328 -- 8,311 -- 16,639
Product development ....................... 6,213 -- 82 -- 6,295
--------- --------- -------- --------- ---------
Total operating expenses ................ 34,281 -- 9,109 -- 43,390
--------- --------- -------- --------- ---------
Operating profit (loss) ................. 14,923 -- 10,632 (975) 24,580
--------- --------- -------- --------- ---------
Other income and expense:
Other (income) expense, net ............... (216) -- (220) -- (436)
Interest and other expense, net ........... 14,337 -- (486) (18) 13,833
--------- --------- -------- --------- ---------
Total other (income) expense ............ 14,121 -- (706) (18) 13,397
--------- --------- -------- --------- ---------
Income (loss) before income taxes and equity
in income of consolidated subsidiaries
and minority interest ..................... 802 -- 11,338 (957) 11,183
Income tax expense .......................... 1,439 -- 783 -- 2,222
--------- --------- -------- --------- ---------
Income (loss) before equity in income of
consolidated subsidiaries and minority
interest .................................. (637) -- 10,555 (957) 8,961
Equity in income of consolidated subsidiaries 9,598 -- -- (9,598) --
--------- --------- -------- --------- ---------
Income (loss) before minority interest ...... 8,961 -- 10,555 (10,555) 8,961
Minority interest in net income of majority
owned subsidiaries ........................ -- -- -- -- --
--------- --------- -------- --------- ---------
Net income (loss) ........................... $ 8,961 $ -- $ 10,555 $ (10,555) $ 8,961
========= ========= ======== ========= =========
49
HOLMES PRODUCTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------- ------------
(dollars in thousands)
Year Ended December 31, 1996
Net cash provided by (used for) operating activities ... $ (1,578) $ 386 $ 3,994 $ 2,802
-------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment .................. (4,417) -- (4,177) (8,594)
-------- -------- -------- --------
Cash flows from financing activities:
Net borrowings from affiliate ........................ 7,000 -- -- 7,000
Principal payments on capital lease obligations ...... -- -- (114) (114)
Other net activity with Parent ....................... 181 (386) 205 --
-------- -------- -------- --------
Net cash provided by (used for) financing activities 7,181 (386) 91 6,886
-------- -------- -------- --------
Net increase in cash and cash equivalents .............. 1,186 -- (92) 1,094
Cash and cash equivalents, beginning of period ......... 98 -- 3,270 3,368
-------- -------- -------- --------
Cash and cash equivalents, end of period ............... $ 1,284 $ -- $ 3,178 $ 4,462
======== ======== ======== ========
Year Ended December 31, 1997
Net cash provided by (used for) operating activities ... $(45,543) $ 459 $ (1,289) $(46,373)
-------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment .................. (4,509) -- (1,306) (5,815)
Purchase of minority interest ........................ -- -- (451) (451)
-------- -------- -------- --------
Net cash used for investing activities ............. (4,509) -- (1,757) (6,266)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings of long-term debt ......................... 96,209 -- -- 96,209
Net borrowing of line of credit ...................... 26,134 -- 1,002 27,136
Net repayments to affiliate .......................... (23,000) -- -- (23,000)
Principal payments on capital lease obligations ...... -- -- (481) (481)
Issuance of common stock ............................. 15,512 -- -- 15,512
Purchase of treasury stock ........................... (62,058) -- -- (62,058)
Other net activity with Parent ....................... (288) (459) 747 --
-------- -------- -------- --------
Net cash provided by (used for) financing activities 52,509 (459) 1,268 53,318
-------- -------- -------- --------
Net increase in cash and cash equivalents .............. 2,457 -- (1,778) 679
Cash and cash equivalents, begining of period .......... 1,284 -- 3,178 4,462
-------- -------- -------- --------
Cash and cash equivalents, end of period ............... $ 3,741 $ -- $ 1,400 $ 5,141
======== ======== ======== ========
Year Ended December 31, 1998
Net cash provided by operating activities .............. $ 18,454 $ -- $ 5,801 $ 24,255
-------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment .................. (2,784) -- (1,965) (4,749)
Purchase of minority interest ........................ -- -- (451) (451)
-------- -------- -------- --------
Net cash used for investing activities.............. (2,784) -- (2,416) (5,200)
-------- -------- -------- --------
Cash flows from financing activities:
Debt issuance costs .................................. (295) -- -- (295)
Net borrowing of line of credit ...................... (17,500) -- (1,002) (18,502)
Principal payments on capital lease obligations ...... -- -- (701) (701)
Issuance of common stock ............................. 681 -- -- 681
Other net activity with Parent ....................... (752) -- 752 --
-------- -------- -------- --------
Net cash used for financing activities ............. (17,866) -- (951) (18,817)
-------- -------- -------- --------
Net increase in cash and cash equivalents .............. (2,196) -- 2,434 238
Cash and cash equivalents, beginning of period ......... 3,741 -- 1,400 5,141
-------- -------- -------- --------
Cash and cash equivalents, end of period ............... $ 1,545 $ -- $ 3,834 $ 5,379
======== ======== ======== ========
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the persons
who are directors and executive officers of the Company. The Company's directors
are elected annually by the stockholders. Pursuant to the terms of a
Stockholders' Agreement entered into in connection with the Transactions, the
Company's stockholders have agreed to vote in favor of the election of the
persons named as directors below.
Name Age Position
---- --- --------
Jordan A. Kahn 56 President, Chief Executive Officer and Director
Stanley Rosenzweig 34 Chief Operating Officer and Director
Gregory F. White 34 Executive Vice President, Sales and Marketing
and Director
Ira B. Morgenstern 45 Senior Vice President - Finance
Fred Adair 48 Senior Vice President, Human Resources
and Organizational Performance
(Tommy) Woon Fai Liu 46 Managing Director of Holmes' Far East operations
David Dusseault 44 Chief Financial Officer
Richard K. Lubin 52 Director
Randy Peeler 34 Director
Thomas K. Manning 57 Director
Jordan A. Kahn, founder of the Company, has served as President and Chief
Executive Officer and a director since its organization in 1982. Since 1968, Mr.
Kahn has also been President of Jordan Kahn Co., Inc. a manufacturer's
representative representing small electric personal appliance manufacturers,
including the Company, to retailers across the Northeast.
Stanley Rosenzweig has served the Company since 1991, initially as Vice
President - Operations, and since 1993 as Chief Operating Officer and a
director. From 1987 to 1988, Mr. Rosenzweig served as a management consultant
with Bain & Company, and from 1988 to 1989 as a sales manager with Jolson
Corporation, a Canadian appliance company.
Gregory F. White has served as Executive Vice President, Sales and Marketing
since 1995, and from 1993 to 1995 as Vice President Marketing. He became a
director of the Company in 1997. Mr. White served as Account Supervisor at
Ammirati & Puris, an advertising agency, from 1992 to 1993 and as Account
Manager at the advertising agency D'Arcy, Masius, Benton & Bowles from 1991 to
1992.
Ira B. Morgenstern joined the Company as Senior Vice President Finance in
August, 1998 from Diageo, PLC, a combination of the food and beverage businesses
of Grand Metropolitan PLC and Guinness PLC, where he spent over six years in a
number of financial management positions in the U.S. and London, including Vice
President of Strategic Marketing Finance in the U.S. drinks division. Prior to
Diageo, Mr. Morgenstern served as Vice President of Ditri Associates, Inc., a
leveraged acquisition firm, consultant for Touche Ross, and internal auditor
with Atlantic Richfield.
51
Fred Adair joined Holmes as Senior Vice President, Human Resources and
Organizational Performance in May, 1998 following a 17-year career at Mercer
Management Consulting. Mr. Adair was Vice President and Partner in charge of
Mercer's reengineering and organization change practice from 1992 to 1996, and
built a significant practice focused on the organizational performance
challenges of growth companies.
(Tommy) Woon Fai Liu became Managing Director of the Company's Far East
operations upon the closing of the 1997 Transactions. From 1993 to 1997, Mr. Liu
served as Chief Financial Officer and Executive Director of Asco General
Supplies Far East Limited, a subsidiary of Pentland, as well as Executive
Director of Holmes Far East since 1994. From 1989 to 1993, Mr. Liu was Finance
Director for Johnson & Johnson Hong Kong.
David Dusseault has served as Chief Financial Officer of the Company since 1992
and from 1988 to 1992 as Controller of the Company. From 1981 to 1987, Mr.
Dusseault served as Controller at Leach and Garner Refining.
Richard K. Lubin is a Managing Director of Berkshire Partners, which he
co-founded in 1986. He became a director of Holmes in 1997, and has been a
director of many of Berkshire's manufacturing, retailing and transportation
investments, including, among others, InteSys Technologies, Inc. and English
Welsh & Scottish Railway, Ltd. In addition, Mr. Lubin is Treasurer of the
Dana-Farber Cancer Institute and a Trustee of Beth Israel Deaconess Medical
Center.
Randy Peeler is a Vice President of Berkshire Partners, where he has been
employed since 1996. From 1994 to 1996, he was responsible for new business
ventures at Health Advances, a healthcare industry consulting firm. From 1993 to
1994, he served as Chief of Staff to the Assistant Secretary for Economic Policy
at the U.S. Department of the Treasury. Prior to that, he was a consultant with
Cannon Associates. Mr. Peeler became a director of Holmes in 1997, and also
serves as a director of Miami Cruisline Services, B.V., Charrette Corporation
and Weigh-Tronix, Inc.
Thomas K. Manning became a director of the Company in February, 1999 upon the
closing of the Rival Acquisition. He was Chairman of the Board and Chief
Executive Officer of Rival, and has served with Rival for over 20 years.
ITEM 11. EXECUTIVE COMPENSATION
Summary
The following Summary Compensation Table sets forth information concerning the
compensation paid or accrued by the Company with respect to the Company's Chief
Executive Officer and certain other persons who served as executive officers of
the Company during the fiscal year ended December 31, 1998.
52
Annual Compensation Long-Term Compensation
------------------- ----------------------------
Other Annual Stock Option All Other
Salary Bonus Compensation(1) Shares Compensation
------ -------- --------------- ------------ ------------
Name and Principal Position
- ---------------------------
Jordan A. Kahn 1998 $402,776 $200,000 $ 23,400 297,717 $ -
President and Chief 1997 311,905 770,000 31,200 - 3,964,000(2)
Executive Officer 1996 300,000 825,000 31,200 - -
Stanley Rosenzweig 1998 253,960 125,000 15,600 297,717 4,800(6)
Chief Operating Officer 1997 228,859 296,000 15,600 - 1,984,324(3)
1996 200,000 225,000 15,600 - 632,892(4)
Gregory F. White 1998 205,054 100,000 10,200 297,717 4,800(6)
Executive Vice President, 1997 173,800 148,000 10,200 - 509,237(5)
Sales and Marketing 1996 150,000 112,500 10,200 - 4,673(6)
(Tommy) Woon Fai Liu 1998 200,000 100,000 43,701 60,000 -
Managing Director of 1997 270,513(7) 66,667(8) 2,083 - -
Holmes Far East 1996 200,000(7) 25,000(8) - - -
David Dusseault (9) 1998 109,739 25,000 - 14,100 4,073(6)
Chief Financial Officer 1997 90,803 50,000 - - 4,552(6)
(1) Primarily represents automobile allowance, annual living expense allowance
or annual lease payments on automobile provided by the Company.
(2) Represents bonuses paid in connection with the 1997 Transactions pursuant
to a previous employment agreement with the Company.
(3) Includes $9,500 representing the Company's matching contribution under its
401(k) plan, $20,824 paid in 1997 on account of a previous employment
agreement with the Company and $1,954,000 which was paid in connection
with the 1997 Transactions.
(4) Includes $9,500 representing the Company's matching contribution under its
401 (k) plan, $77,392 paid in 1996 on account of a previous employment
agreement with the Company and $546,000 accrued for 1996 which was paid in
connection with the 1997 Transactions.
(5) Includes $9,237 representing the Company's matching contribution under its
401(k) plan and $500,000 which was paid in connection with the 1997
Transactions.
(6) Represents the Company's matching contribution under its 401(k)
plan.
(7) Includes compensation paid to Mr. Liu by the Company and by an affiliate
of Pentland.
(8) Does not include any amounts paid by affiliates of Pentland for services
rendered to such affiliates.
(9) Mr. Dusseault did not earn in excess of $100,000 in 1996.
53
Option Grants in Last Fiscal Year
The following table describes stock options granted during 1998 to the executive
officers set forth in the Summary Compensation Table above.
Potential
Realizable
Value at Assumed
Number of Percent of Annual Rate of
Securities Total Stock Price
Underlying Options Appreciation for
Options Granted to Exercise Option Term ($) (2)
Granted Employees Price Expiration -------------------
Name (#) (1) in 1997 ($/Sh) Date 5% 10%
---- ------- -------- ------ ---- -- ---
Jordan A. Kahn 297,717 20.2% 3.50 11-26-07 574,489 1,414,994
Stanley Rosenzweig 297,717 20.2% 3.50 11-26-07 574,489 1,414,994
Gregory F. White 297,717 20.2% 3.50 11-26-07 574,489 1,414,994
(Tommy) Woon Fai Liu 60,000 4.1% 3.50 11-26-07 115,779 285,169
David Dusseault 14,100 1.0% 3.50 11-26-07 59,858 147,432
(1) These options to purchase the Company's common stock were granted under
the Company's 1997 Stock Option Plan. Approximately one-half of each
option grant consists of "incentive stock options" (except for Mr. Kahn,
who received only non-qualified options), vesting over a five-year period.
The remaining options are non-qualified options whose vesting is tied to
specific Company performance measures.
(2) Net gains from potential stock option exercises are estimated based on
assumed rates of stock price appreciation over the options' terms, as set
forth in rules promulgated by the Securities and Exchange Commission, and
are not intended to forecast future appreciation of the Company's common
stock. The actual net gains, if any, are dependent on the actual future
performance of the common stock, for which there is currently no public
market.
Aggregated Option Exercises and Fiscal Year End Values
The following table sets forth certain information concerning the number and
value of unexercised options to purchase the Company's common stock at February
5, 1999, the date the Rival Acquisition was consummated.
Value of Unexercised
Number of Shares In-the-Money
Underlying Unexercised Options
Shares Options at Year-End (#) ($) (1)
Acquired on Value ----------------------- -------
Name Exercise(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ------------------------- ----------- -------------
Jordan A. Kahn - - 28,700 269,017 44,198 414,286
Stanley Rosenzweig - - 28,700 269,017 44,198 414,286
Gregory F. White - - 28,700 269,017 44,198 414,286
(Tommy) Woon Fai Liu - - - 60,000 - 92,400
David Dusseault - - - 14,100 - 21,714
(1) Represents the assumed value of shares of the Company's common stock
covered by outstanding options, less the aggregate option exercise price.
There is currently no public market for the Company's common stock, and no
valuation of such common stock existed as of December 31, 1998. The price
of the common stock, valued on February 5, 1999, the date of the Rival
Acquisition closing, was $5.04 per share.
54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock. Except as indicated in the footnotes to
this table, the Company believes that the persons named in this table have sole
voting and investment power with respect to all shares of common stock
indicated.
Name and Address of No. of Percent of
Beneficial Owner (1) Shares Outstanding Shares (2)
-------------------- ------ ----------------------
Berkshire Fund IV, Limited Partnership (3) 15,052,594 74.2%
Berkshire Fund V, Limited Partnership
c/o Berkshire Partners LLC
One Boston Place
Boston, MA 02108
Jordan A. Kahn (4) 2,621,330 12.9
Bain Securities, Inc. (5) 928,992 4.6
C/o Bain Capital, Inc.
2 Copley Place
Boston, MA 02116
Stanley Rosenzweig (4) 314,596 1.6
Gregory F. White (4) 200,238 *
(Tommy) Woon Fai Liu (4) 139,987 *
David Dusseault (4) 14,359 *
Richard Lubin (6) 15,052,594 74.2
Thomas K. Manning 100,000 *
Randy Peeler (6) 15,052,594 74.2
All directors and executive
officers as a group
(10 persons) (7) (8) 18,531,711 91.0
* Less than 1.0%
(1) Unless otherwise specified, the address of each person is c/o Holmes
Products Corp., 233 Fortune Boulevard, Milford, MA 01757.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and reflects general voting power and/or investment power with
respect to securities. Shares of common stock subject to options or
warrants currently exercisable are deemed outstanding.
(3) Includes shares beneficially owned by certain other affiliates of
Berkshire Partners.
(4) Includes shares which may be held by family members or affiliates and
shares subject to stock options. With respect to Mr. Kahn, includes
194,472 shares held in trust for employees of the Company as to which Mr.
Kahn is voting trustee. Mr. Kahn disclaims beneficial ownership of such
shares.
(5) Includes shares beneficially owned by an affiliated investment entity.
(6) This person is affiliated with Berkshire Partners and may be deemed to
have a beneficial interest in certain of the shares held by its
affiliates. This person disclaims beneficial ownership of such shares.
(7) Includes shares referred to in Note 6.
(8) Includes the following shares subject to stock options that are
exercisable: 28,700 option shares held by each of Messrs. Kahn, Rosenzweig
and White, 5,784 option shares held by Mr. Liu and 1,359 option shares
held by Mr. Dusseault.
55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a letter agreement dated December 10, 1998 with two investment funds
affiliated with Berkshire Partners (the "Letter Agreement"), Berkshire Partners
received a fee of $2.0 million from the Company as of the closing of the Rival
Acquisition. Pursuant to a Management Agreement (the "Management Agreement"),
entered into in November, 1997 in connection with the 1997 Transactions,
Berkshire Partners received a $1.5 million fee from the Company and an annual
fee of $400,000 per year for the provision of management and advisory services
to the Company. The Letter Agreement increases the annual management fee to
$500,000 following the closing of the Rival Acquisition. The Management
Agreement will be in effect until November, 2002, provided that the Management
Agreement will terminate on the later of the first date that (i) Berkshire
Partners owns less than 40.0% of the Company's common stock on a fully diluted
basis, and (ii) Berkshire Partners owns fewer common shares than the members of
the Company's management, taken as a group, or fewer shares than any other
single stockholder. Berkshire Partners is also entitled to designate two of the
Company's directors and has the right, at its election, to increase the size of
the Board of Directors and the number of directors designated by it by an
additional two directors. From time to time, the Company may pay additional
consulting or other fees to Berkshire Partners.
Since its inception in 1982, the Company has retained Jordan Kahn Co., Inc.
("JKC"), a corporation owned by Jordan A. Kahn, to serve as a sales
representative for the Company in the northeastern United States. Pursuant to a
representation agreement between the Company and JKC, the Company has agreed to
pay to JKC a commission on net sales to JKC's customers in its territory, which
fee is the same fee paid by the Company to other unaffiliated sales
representatives organizations representing the Company in other territories
throughout the United States. Pursuant to this arrangement, the Company paid a
total of $480,000, $367,000 and $368,000 to JKC for the years ended December 31,
1996, 1997 and 1998, respectively.
In connection with the 1997 Transactions, the Company purchased a portion of the
shares of common stock of Holmes beneficially owned by an affiliate of Pentland,
the Company's former majority stockholder, and issued to the Pentland affiliate
a warrant to purchase shares of the Company's common stock under certain
circumstances. In addition, the Company entered into new employment agreements
with Messrs. Kahn, Rosenzweig, White and Liu, and made certain payments to
Messrs. Kahn, Rosenzweig and White in connection with the 1997 Transactions.
During 1993, the Company entered into a revolving credit facility with an
affiliate of Pentland, pursuant to which such affiliate provided short-term
loans to the Company. Another affiliate of Pentland provided the Company with
trade acceptance and letter of credit financing for its purchases from foreign
manufacturers. The Company paid a commission for administrative services related
to the processing of these trade acceptances. In conjunction with the 1997
Transactions, all of the financing facilities provided by Pentland and its
affiliates were terminated and paid in full. In addition, a net payable of $10.0
million due to affiliates of Pentland was repaid in connection with the 1997
Transactions. See Note 3 of Notes to Consolidated Financial Statements.
In connection with the Transactions, the Company retained an affiliate of Bain
Securities, Inc., a stockholder of the Company, to perform acquisition
consulting services, for which the Company paid approximately $300,000 during
1998.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
1. Financial Statements are listed in the Index to Consolidated
Financial Statements contained in Item 8 of this Report.
2. Financial Statement Schedules, to the extent required, are
listed in the Index to Consolidated Financial Statements
contained in Item 8 of this Report.
3. Exhibits are listed in subsection (c) below.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K dated December 17, 1998 reporting under Item
5, Other Events the signing of the Merger Agreement with Rival.
2. Current Report on Form 8-K dated January 25, 1999 reporting under Item
5, Other Events disclosing certain information contained in an offering
memorandum in connection with the Company's private placement of notes.
3. Current Report on Form 8-K dated February 5, 1999 reporting under Item
2, Acquisition or Disposition of Assets the Company's acquisition of Rival.
(c) Exhibits:
Exhibit
Number Description
- ------ -----------
3.1 Articles of Organization (as amended) of Holmes Products Corp. (1)
3.2 Articles of Organization of Holmes Manufacturing Corp. (1)
3.3 Articles of Organization of Holmes Air (Taiwan) Corp. (1)
3.4 Certificate of Incorporation of Holmes Motor Corp. (4)
3.5 Restated Certificate of Incorporation (as amended) of The Rival Company
(4)
3.6 Certificate of Incorporation (as amended) of Patton Electric Company,
Inc. (4)
3.7 Certificate of Incorporation (as amended) of Patton Building Products,
Inc. (4)
3.8 Certificate of Incorporation (as amended) of Rival Consumer Sales
Corporation (4)
3.9 Bylaws (as amended) of Holmes Products Corp. (1)
3.10 By-laws of Holmes Manufacturing Corp. (1)
3.11 By-laws of Holmes Air (Taiwan) Corp. (1)
3.12 By-laws of Holmes Motor Corp. (4)
57
3.13 By-laws of The Rival Company (4)
3.14 By-laws of Patton Electric Company, Inc. (4)
3.15 By-laws of Patton Building Products, Inc. (4)
3.16 By-laws of Rival Consumer Sales Corporation (4)
4.1 Stockholders' Agreement dated November 26, 1997 among Holmes Products
Corp. and certain stockholders thereof (1)
4.2 Registration Rights Agreement dated November 26, 1997 among Holmes
Products Corp. and certain stockholders thereof (1)
4.3 Registration Rights Agreement dated November 26, 1997 among Holmes
Products Corp., Holmes Manufacturing Corp., Holmes Air (Taiwan) Corp.,
BancBoston Securities Inc. and Lehman Brothers Inc. (1)
4.4 Indenture dated November 26, 1997 among Holmes Products Corp., Holmes
Manufacturing Corp., Holmes Air (Taiwan) Corp. and State Street Bank
and Trust Company (1)
4.5 Form of Notes - (Included in Exhibit 4.4) (1)
4.6 Form of Guaranty - (Included in Exhibit 4.4) (1)
4.7 First Supplemental Indenture and Guarantee dated October 14, 1998 among
Holmes Products Corp., Holmes Manufacturing Corp., Holmes Air (Taiwan)
Corp., Holmes Motor Corp. and State Street Bank and Trust Company (4)
4.8 Registration Rights Agreement dated February 5, 1999 among Holmes
Products Corp., Holmes Manufacturing Corp., Holmes Air (Taiwan) Corp.,
Holmes Motor Corp., The Rival Company, Patton Electric Company, Inc.,
Patton Building Products, Inc., Rival Consumer Sales Corporation,
BancBoston Robertson Stephens Inc. and Lehman Brothers Inc. (3)
4.9 Indenture dated February 5, 1999 among Holmes Products Corp., Holmes
Manufacturing Corp., Holmes Air (Taiwan) Corp. , Holmes Motor Corp.,
The Rival Company, Patton Electric Company, Inc., Patton Building
Products, Inc., Rival Consumer Sales Corporation and State Street Bank
and Trust Company (3)
4.10 First Amendment to Registration Rights Agreement dated February 5, 1999
among Holmes Products Corp. and certain stockholders thereof (4)
4.11 First Amendment to Stockholders' Agreement dated February 5, 1999 among
Holmes Products Corp. and certain stockholders thereof (4)
4.12 Second Supplemental Indenture and Guarantee dated February 5, 1999
among Holmes Products Corp., Holmes Manufacturing Corp., Holmes Air
(Taiwan) Corp., Holmes Motor Corp., Moriarty Acquisition Corp., The
Rival Company, Patton Electric Company,
58
Inc., Patton Building Products, Inc., Rival Consumer Sales Corporation
and State Street Bank and Trust Company (4)
10.1 Stock Purchase and Redemption Agreement dated as of October 27, 1997,
as amended as of November 25, 1997, among Asco Investments Ltd., Jordan
A. Kahn, Holmes Products Corp., Holmes Products (Far East) Limited and
Holmes Acquisition LLC (1)
10.2 Stock Purchase Agreement dated as of October 27, 1997 among Jordan A.
Kahn and Holmes Acquisition LLC (1)
10.3 Executive Employment and Non-Competition Agreement dated November 26,
1997 among Holmes Products Corp. and Jordan A. Kahn (1)
10.4 Executive Employment and Non-Competition Agreement dated November 26,
1997 among Holmes Products Corp. and Stanley Rosenzweig (1)
10.5 Executive Employment and Non-Competition Agreement dated November 26,
1997 among Holmes Products Corp. and Gregory F. White (1)
10.6 Employment Agreement dated November 16, 1997 among Holmes Products (Far
East) Limited and (Tommy) Woon Fai Liu (1)
10.7 Holmes Products Corp. Amended and Restated 1997 Stock Option Plan (4)
10.8 Non-transferable Common Stock Purchase Warrant dated November 26, 1997
issued to Pentland Group plc (1)
10.9 Holmes Products Corp. Employee Stock Purchase Plan (4)
10.10 Agreement and Plan of Merger dated December 17, 1998, by and among
Holmes Products Corp., Moriarty Acquisition Corp. and The Rival Company
(2)
10.11 Tender and Voting Agreement dated December 17, 1998, by and among
Holmes Products Corp., Moriarty Acquisition Corp. and the directors and
certain executive officers of The Rival Company (2)
10.12 Confidentiality Agreement dated October 1, 1998, by and between Holmes
Products Corp. and BancAmerica Securities, Inc., on behalf of Holmes
Products Corp (2)
10.13 Purchase Agreement dated as of January 29, 1999 among Holmes Products
Corp., BancBoston Robertson Stephens Inc. and Lehman Brothers Inc (2)
10.14 Investors Subscription Agreement dated February 5, 1999 by and among
Holmes Products Corp. and certain investors (3)
10.15 Amended and Restated Revolving Credit and Term Loan Agreement dated as
of February 5, 1999 among Holmes Products Corp., Moriarty Acquisition
Corp., The Rival Company, Holmes Products (Far East) Limited, Esteem
Industries Limited, Raider Motor Corporation, Holmes Products (Europe)
Limited, Bionaire International B.V., Patton Electric Hong Kong,
Limited, and The Rival Company of Canada, Ltd., BankBoston, and the
other lending institutions party thereto, BankBoston, N.A. as
Administrative Agent
59
and Lehman Commercial Paper Inc. as Documentation Agent, with
BancBoston Robertson Stephens Inc. as Syndication Agent and Arranger
and Lehman Brothers Inc. as Co-Arranger (3)
21.1 Subsidiaries of Registrant (4)
27.1 Financial Data Schedule (4)
- ------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-4, as amended (Registration No. 333-44473).
(2) Incorporated by reference to the Registrant's Tender Offer Statement on
Schedule 14D-1 dated December 23, 1998, as amended.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated February 5, 1999.
(4) Filed herewith.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOLMES PRODUCTS CORP.
Dated: March 31, 1999 By: /s/ Jordan A. Kahn
------------------
Jordan A. Kahn, President,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
March 31, 1999 /s/ Jordan A. Kahn
------------------
Jordan A. Kahn, President,
Chief Executive Officer and Director
(Principal Executive Officer)
March 31, 1999 /s/ Ira B. Morgenstern
----------------------
Ira B. Morgenstern,
Senior Vice President of Finance
(Principal Financial and Accounting Officer)
March 31, 1999 /s/ Stanley Rosenzweig
----------------------
Stanley Rosenzweig,
Chief Operating Officer and Director
March 31, 1999 /s/ Gregory F. White
--------------------
Gregory F. White,
Executive Vice President
Sales and Marketing and Director
March 31, 1999 /s/ Richard Lubin
-----------------
Richard Lubin,
Director
March 31, 1999 /s/ Randy Peeler
----------------
Randy Peeler,
Director
March 31, 1999 /s/ Thomas K. Manning
---------------------
Thomas K. Manning,
Director