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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
COMMISSION FILE NUMBERS: 333-44473
333-77905

THE HOLMES GROUP, INC.

(508) 634-8050
(REGISTRANT’S TELEPHONE NUMBER)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES
x
NO
o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).

YES
o
NO
x

Table of Contents

THE HOLMES GROUP, INC.
FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

THE HOLMES GROUP, INC.
CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

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THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements

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THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements

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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003

1. UNAUDITED INTERIM FINANCIAL STATEMENTS

The financial information included in this Form 10-Q of The Holmes Group, Inc. (“THG” or the “Company”) for the periods ended September 30, 2003 and 2002 is unaudited. However, such information includes all adjustments (including all normal recurring adjustments) which, in the opinion of management, are considered necessary for a fair presentation of the consolidated results for those periods. The results of operations for the periods ended September 30, 2003 and 2002 are not necessarily indicative of the results of operations that may be expected for the complete fiscal year. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The Company filed its audited consolidated financial statements for the year ended December 31, 2002 on Form 10-K which included all information and footnotes necessary for such presentation.

Certain amounts in the financial statements for prior periods have been reclassified to conform to the current period presentation.

2. RECENTLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” in April 2002. This statement updates, clarifies and simplifies existing accounting pronouncements. Specifically, the statement rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, FASB Statement No. 64, “Extinguishment of Debt Made to Satisfy Sinking Fund Requirements” and FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” This statement also amends FASB Statement No. 13, “Accounting for Leases” and certain other existing authoritative pronouncements to make technical corrections or clarifications. FAS 145 became effective for THG related to the rescission of FAS 4 and FAS 64 on January 1, 2003. FAS 145 was effective related to the amendment of FAS 13 for all transactions occurring after May 15, 2002. All other provisions of FAS 145 became effective for financial statements issued after May 15, 2002. In accordance with the new standard, the Company reclassified the gain related to the Senior Notes repurchase, which was treated as an extraordinary item in 2002, as a component of other income in the consolidated statement of operations.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”. This interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risk will not be consolidated unless a single party holds an interest or combination of interest that effectively recombines risks that were previously dispersed. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. As of July 1, 2003, the standard applies to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 should not have a material effect on the Company’s financial position or results of operations.

In April 2003, the FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging.” FAS 149 amends and clarifies financial accounting and reporting for derivative instruments and hedging activities to ensure consistent reporting for contracts with comparable characteristics. The Company adopted FAS 149 on July 1, 2003 with no material impact on the Company’s financial position or results of operations.

In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 established standards for how to classify and measure certain financial instruments with characteristics of both liabilities and equity. The provisions as of FAS 150 are effective immediately for all financial instruments entered into or modified after May 31, 2003. The Company adopted these provisions as of June 1, 2003 with no material impact on the Company’s financial position or results of operations. For all other instruments, the Standard goes into effect as of July 1, 2003, except for mandatorily redeemable financial instruments of a non-public entity, which is effective for existing or new contracts as of January 1, 2004. The Company is currently in process of assessing the impact of these provisions.

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THE HOLMES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In May 2003, the Emerging Issues Task Force (EITF) reached consensus on EITF Issue No. 01-08, “Determining Whether an Arrangement is a Lease,” which is intended to provided guidance in determining whether an arrangement should be considered a lease subject to the requirements of FAS 13, “Accounting for Leases.” The Task Force reached a consensus that the evaluation of whether an arrangement contains a lease within the scope of FAS 13 should be based on the substance of the arrangement using certain guidance specified in the consensus. EITF 01-08 is required to be applied to Company arrangements agreed or committed to, modified, or acquired in business combinations initiated after July 1, 2003. The Company is currently in process of assessing the impact of EITF 01-08.

3. CHANGE IN ACCOUNTING PRINCIPLE

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, but are reviewed annually for potential impairment by comparing the carrying value to the fair value of the reporting unit to which they are assigned. FAS 142 requires that goodwill be tested for impairment at the reporting unit level at adoption utilizing a two-step methodology. The provisions of FAS 142 were effective for the Company’s 2002 fiscal year and, accordingly, the Company adopted the new standard effective January 1, 2002. The Company’s consolidated balance sheet as of December 31, 2001 included goodwill with a net book value of $79.8 million as a result of the Rival acquisition in 1999. In accordance with the new standard, the Company ceased goodwill amortization as of the beginning of fiscal 2002.

In connection with adopting this standard, the Company established a policy to value goodwill and other intangible assets using a discounted cash flow method. With the assistance of independent valuation consultants, the Company completed the transitional testing of goodwill using a measurement date of January 1, 2002. The results of the transitional impairment testing indicated that the carrying values of the goodwill asset for both the home environment and kitchen reporting units significantly exceeded the estimated fair value of the units. Accordingly, step two of the testing, which measures the amount of asset impairment, was completed in 2002. As a result, a non-cash impairment charge of $79.8 million was recognized as a change in accounting principle as of the beginning of 2002. The impairment charge, which relates to the Company’s Consumer Durables segment, was $79.8 million on a before and after-tax basis.

4. INVENTORIES

All inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method on approximately 95% of the inventories and the last-in, first-out method (LIFO) for the remaining 5% of the inventory. Inventories are as follows (in thousands):

5. RESTRUCTURING CHARGES AND OTHER BUSINESS DIVESTITURES

On February 5, 1999, the Company completed its acquisition of The Rival Company for an aggregate purchase price of $279.6 million. The acquisition was accounted for as a purchase, and the results of operations of Rival are included in the consolidated financial statements since the date of acquisition. Since the acquisition, the Company has taken several restructuring actions to integrate Rival’s operations into THG, to enhance efficiencies and to reduce costs. In January 2002, the Company announced the closing of its Sedalia, Missouri distribution center. The activities of this facility were moved to the other existing distribution centers. In connection with this facility closure, the Company recorded restructuring charges totaling $3,137,000 in the first nine months of 2002. For the 2002 fiscal year, restructuring charges related to this facility closure totaled $4,898,000, which included $4,220,000 of asset write-downs of redundant property and equipment to their estimated net realizable value, facility exit costs of $612,000 and $66,000 in severance payments for employees who elected not to transfer to other facilities.

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THE HOLMES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

On December 2, 2002, the Company announced the closure of its remaining US manufacturing operations effective January 31, 2003, in an effort to enhance efficiencies and to reduce operating costs. The production activities of the facilities in Flowood, Mississippi, Sweet Springs, Missouri and Clinton, Missouri have been shifted to the Company’s expanded manufacturing complex in southern China and to other independent suppliers in the Far East. As part of this restructuring action, the Company also announced the closure of an administrative office in Kansas City, Missouri and the phase out of two distribution and service centers in Clinton, Missouri and Worcester, Massachusetts. As a result of these changes, the Company recorded restructuring charges totaling $23,108,000 during the fourth quarter of 2002. The charges included $3,935,000 for severance payments to 706 employees, $15,670,000 of non-cash asset write-downs of redundant property and equipment to their estimated net realizable value, $1,531,000 of liabilities related to outstanding lease obligations and facility exit costs of $1,972,000.

Approximately 682 employees were separated during the first nine months of 2003 as a result of the facility closings. The Company expects to pay the remaining severance and facility exit costs, which are accrued as of September 30, 2003, during the balance of fiscal 2003 and fiscal 2004. A reconciliation of the restructuring reserve activity for the nine months ended September 30, 2003 is as follows:

During the first nine months of 2003, the Company incurred $1,424,000 of expenses associated with the 2002 restructuring actions which were not accrued at December 31, 2002 in accordance with Emerging Issues Task Force Issue No. 94-3. These restructuring charges were reduced by $498,000 as actual severance and facility exit costs in the first nine months of 2003 were lower than the amounts accrued at December 31, 2002. The restructuring expenses in 2003 included a non-cash charge of $1,335,000 related to the Company’s pension plan for employees at the closed manufacturing facilities. This charge, which was accrued in accordance with the provisions of Financial Accounting Standards Board No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” included a partial plan settlement of $1,665,000 due to lump sum benefits paid to terminated employees at the closed facilities, partially offset by a pension plan curtailment gain of $330,000 that was recorded in the first quarter of 2003. In addition, cost of sales in the first nine months of 2003 includes $1,109,000 of unfavorable manufacturing variances incurred during the shutdown of the domestic facilities and $223,000 of freight costs associated with the transfer of distribution activities from Missouri to a new facility in California.

Assets held for sale in the consolidated balance sheet at September 30, 2003 includes $444,000 related to the facilities which were closed in January 2003. During the second quarter of 2003, the Company sold two facilities in Missouri and certain manufacturing equipment for cash proceeds of $6.2 million. There was no significant gain or loss related to these asset sales. The Company expects to sell the remaining assets which were affected by the restructuring actions during the fourth quarter of 2003.

On January 14, 2002, the Company sold substantially all of the assets of its Pollenex® division, which marketed personal care products, for approximately $15.1 million. The cash proceeds received in this transaction exceeded the net assets of the business, which consisted primarily of inventory and property and equipment, by approximately $9.5 million, resulting in a gain during 2002. In the first nine months of 2002, other income in the consolidated statement of operations included a gain of $9.1 million related to this transaction.

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THE HOLMES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

6. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

Credit Facility

Under the Fifth Amendment to the Company’s Credit Facility, the lenders have committed to a Revolving Credit Loan A of $131 million and a Revolving Credit Loan B of $40 million, which is supported by the guarantee of investment funds managed by Berkshire Partners, the Company’s majority shareholder. Actual availability under these Revolving Credit facilities is subject to a borrowing base formula based on inventory and accounts receivable. The maturity date of Revolving Credit Loan A is February 5, 2005, although the availability under the Revolving Credit Loan A commitment will terminate on July 1, 2004 unless otherwise approved by a majority of the lenders. The maturity date of Revolving Credit Loan B is July 1, 2004. As a result of the maturity dates and the termination provisions of the Credit Facility, the Company is obligated to repay all amounts outstanding under the Revolving Credit Facility on July 1, 2004. Accordingly, the current portion of the Credit Facility at September 30, 2003 includes $53.4 million representing the outstanding amounts of Revolving Credit Loan A ($40.6 million) and Revolving Credit Loan B ($12.8 million). The Company is in the process of refinancing its borrowing arrangements and anticipates concluding these negotiations prior to July 1, 2004.

In connection with the Fifth Amendment, the Company entered into a guarantee fee arrangement with Berkshire Partners which provides for a fee of 2.25% per annum, compounded annually, on the $40 million Revolving Credit Loan B commitment, less the portion of this facility designated as subordinated debt funding loans (which portion is subordinated to the other obligations under the Credit Facility). The guarantee fee related to the subordinated debt funding loan, which was $12.8 million at September 30, 2003, is calculated at 20% per annum, compounded annually. The guarantee fees have not been paid, but have been accrued and are included as non-cash interest in the statement of operations for 2002 and 2003. Payment of these fees is subordinated to the Company’s obligations under the Credit Facility.

As of September 30, 2003, December 31, 2002 and September 30, 2002, the Company’s availability under the revolving credit portions of the Credit Facility was $100.1 million, $62.7 million and $47.4 million, respectively, net of outstanding letters of credit. The Credit Facility bears interest at variable rates based on either the prime rate or Eurodollar rate at the Company’s option, plus a margin which, in the case of the Term Loan A and a portion of the Revolving Credit Facility, varies depending upon certain financial ratios. The weighted average interest rate of borrowings under the Credit Facility was 5.2% at September 30, 2003, 5.6% at December 31, 2002 and 5.8% at September 30, 2002. The Credit Facility, and the guarantees thereof by the Company’s domestic subsidiaries, are collateralized by substantially all of the Company’s domestic and certain foreign assets.

Senior Subordinated Notes

The Company’s Senior Subordinated Notes were issued as part of a recapitalization transaction in 1997 ($105 million) and to partially finance the Rival acquisition in 1999 ($31.3 million). The Notes, which are due November 15, 2007, are subordinated to the Company’s other debt, including the Credit Facility.

In conjunction with the Fifth Amendment of the Credit Facility, as described above, the Company repurchased from two Berkshire Partners’ investment funds an aggregate principal amount of approximately $36.2 million of the Senior Subordinated Notes. The purchase price of the Notes, representing Berkshire Partners’ cost, was $11.5 million plus accrued interest, which was funded with proceeds of the Revolving Credit Loan B described above. The Notes repurchased were retired and cancelled.

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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

This transaction resulted in a gain on the early retirement of debt totaling $22.4 million, which has been reflected in the consolidated statement of operations for the nine months ended September 30, 2002. This gain is net of approximately $1.9 million of debt issuance costs and $0.3 million of debt issuance discount associated with the Senior Subordinated Notes and $0.1 million of transaction fees. A provision for income taxes was not recorded in connection with this transaction as the Company has offset the gain with available net operating loss carry forwards. In accordance with the provisions of FAS 145, this gain, which was originally reported as an extraordinary item in 2002, has been reclassified as a component of other income in the statement of operations. The Company may consider repurchases of additional Notes in the future, and may utilize the proceeds of the Credit Facility for this purpose.

7. COMPREHENSIVE INCOME (LOSS)

Comprehensive income consists of net earnings and foreign currency translation adjustments as presented in the following table (in thousands):

8. BUSINESS SEGMENTS

The Company currently manages its operations through three business segments: Consumer Durables, International and Far East Manufacturing. The Consumer Durables segment sells products including fans, heaters, humidifiers, air purifiers, lighting products, Crock-Pot ® slow cookers and other small kitchen electric appliances to retailers throughout the United States. The Consumer Durables segment is made up of home environment products and kitchen electric products, which are considered one business segment due to the similar customer base, distribution channels, and economic characteristics. The International segment sells the Company’s products outside the United States, predominantly in Canada, Latin America and Europe. The Far East Manufacturing segment represents the Company’s manufacturing and sourcing operations located primarily at Holmes Products (Far East) Limited (HPFEL).

Summary financial information for each reportable segment for the three month and nine month periods ended September 30, 2003 and 2002 is as follows (in thousands):

In 2002, income for the Consumer Durables segment includes the gain of $22,388,000 related to the repurchase of the Company’s Senior Subordinated Notes, but excludes the goodwill impairment charge of $79,838,000 related to the adoption of FAS 142.

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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

     The following information is summarized by geographic area (in thousands):

Net sales are grouped based on the geographic origin of the transaction. The Company’s manufacturing entities in the Far East sell completed products to the subsidiaries of The Holmes Group at intercompany transfer prices which reflect management’s estimate of amounts which would be charged by an unrelated third party. These sales are excluded from the above table and are eliminated in consolidation. The remaining Far East sales are to the Company’s motor manufacturing joint venture with General Electric or to unrelated third parties.

9. STOCK-BASED COMPENSATION

During the first quarter of fiscal 2003, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure”. FAS No. 148 amends FAS No. 123, “Accounting for Stock-Based Compensation”, to provide two additional alternative transition methods if a company voluntarily decides to change its method of accounting for stock-based employee compensation to the fair-value method. FAS No. 148 also amends the disclosure requirements of FAS No. 123 by requiring that companies make quarterly disclosures regarding the pro forma effects of using the fair-value method of accounting for stock-based compensation, effective for interim periods beginning after December 15, 2002.

The Company’s stock-based compensation plan is described fully in Note 9 to the Company’s consolidated financial statements for the year ended December 31, 2002, as contained in the Annual Report on Form 10-K. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. The following table provides the effect on net income (loss) if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based compensation:

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THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

10. PRODUCT WARRANTIES

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees.” The Company adopted FIN 45 effective January 1, 2003 and will apply the provisions of the new interpretation to any guarantees issued or modified after that date. The Company issues warranties to consumers for certain of its home environment and kitchen appliances. Warranty costs, representing the value of replacement goods sent to consumers making warranty claims, are expensed as incurred. The Company maintains a warranty reserve for consumer claims in process at the end of the period. A reconciliation of the warranty reserve for the nine months ended September 30, 2003 is as follows (in thousands):

11. CONTINGENCIES

The Company is involved in litigation and is the subject of claims arising in the normal course of its business. In the opinion of management, based upon discussions with legal counsel, no existing litigation or claims will have a materially adverse effect on the Company’s financial position or results of operations or cash flows.

12. CONDENSED CONSOLIDATING INFORMATION

The Company’s Senior Subordinated Notes are guaranteed by Rival and its domestic subsidiary and Holmes Manufacturing Corp. (“Manufacturing”), Holmes Motor Corp. (“Motor”) and Holmes Air (Taiwan) Corp. (“Taiwan”), but are not guaranteed by THG’s other subsidiary, HPFEL, or Rival’s five foreign subsidiaries. The guarantor subsidiaries are directly or indirectly wholly-owned by THG, and the guarantees are full, unconditional and joint and several. The following condensed consolidating financial information presents the financial position, results of operations and cash flows of (i) THG, as parent, as if it accounted for its subsidiaries on the equity method, (ii) Rival (on a consolidated basis following its acquisition by THG, Manufacturing, Motor and Taiwan, the guarantor subsidiaries, and (iii) HPFEL, Bionaire International B.V., The Holmes Group Canada, Ltd., Waverly Products Company, Ltd., and Rival de Mexico S.A. de C.V., the non-guarantor subsidiaries. There were no transactions between Rival, Manufacturing, Motor and Taiwan during any of the periods presented. Taiwan and Manufacturing had no revenues or operations during the periods presented. As further described in Note 16 of the Company’s financial statements for the year ended December 31, 2002, which are included in its Annual Report on Form 10-K, certain of HPFEL’s subsidiaries in China have restrictions on distributions to their parent companies.

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THE HOLMES GROUP, INC.
CONDENSED CONSOLIDATING BALANCE SHEET AT SEPTEMBER 30, 2003 (IN THOUSANDS)
(UNAUDITED)