UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

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

THE HOLMES GROUP, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


		MASSACHUSETTS (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		04-2768914 (I.R.S. EMPLOYER IDENTIFICATION NO.)

		ONE HOLMES WAY, MILFORD MASSACHUSETTS (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		01757 (ZIP CODE)

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

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

YES
x
NO
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


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 5. OTHER INFORMATION
SIGNATURES
EX-31.1 SECTION 302 CERTIFICATION OF THE C.E.O.
EX-31.2 SECTION 302 CERTIFICATION OF THE C.F.O.

THE HOLMES GROUP, INC.
FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS


		PAGE
PART I.	FINANCIAL INFORMATION:
ITEM 1.	FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2003 (UNAUDITED), DECEMBER 31, 2002 AND SEPTEMBER 30, 2002 (UNAUDITED)	3
	CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002	4
	CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002	5
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	6-21
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22-30
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30
ITEM 4.	CONTROLS AND PROCEDURES	30
PART II.	OTHER INFORMATION:
ITEM 1.	LEGAL PROCEEDINGS	31
ITEM 5.	OTHER INFORMATION	31
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS 31.1 AND 31.2 - OFFICER CERTIFICATES	31
	SIGNATURES	32

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

THE HOLMES GROUP, INC.
CONSOLIDATED BALANCE SHEETS


			SEPTEMBER 30,						SEPTEMBER 30,
			2003			DECEMBER 31,			2002
			(UNAUDITED)			2002			(UNAUDITED)

			(in thousands except share and per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	4,478		$	8,426		$	4,686
	Accounts receivable, net			121,802			128,409			107,406
	Inventories			135,293			110,236			138,766
	Prepaid expenses and other current assets			4,306			4,817			9,935
	Deferred income taxes			5,067			5,067			5,249

		Total current assets		270,946			256,955			266,042
Assets held for sale				444			6,466			5,659
Property and equipment, net				42,665			42,446			61,038
Deposits and other assets				1,441			837			4,395
Debt issuance costs, net				6,904			10,184			12,023
Deferred income taxes				5,956			5,956			5,774

			$	328,356		$	322,844		$	354,931

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	73,144		$	44,267		$	58,107
	Current portion of Credit Facility			62,343			9,078			8,928
	Accrued income taxes			8,636			7,405			9,705
	Accrued expenses and other current liabilities			48,584			53,101			43,140
	Deferred income taxes			3,124			2,967			2,194

		Total current liabilities		195,831			116,818			122,074
Long-term portion of Credit Facility				70,855			166,556			181,825
Senior Subordinated Notes				99,609			99,544			99,523
Pension obligation				8,448			5,840			—
Other liabilities				7,729			7,613			7,645
Deferred income taxes				1,194			989			843
Commitments and contingencies
Stockholders’ equity (deficit):
Common stock, $.001 par value. Authorized — 28,500,000 shares;
	Issued and outstanding — 20,302,995 shares			20			20			20
Additional paid in capital				68,874			68,874			68,874
Accumulated other comprehensive income (loss)				(6,558	)		(7,231	)		(159	)
Treasury stock, at cost (18,627,450 shares)				(62,076	)		(62,076	)		(62,076	)
Retained earnings (deficit)				(55,570	)		(74,103	)		(63,638	)

		Total stockholders’ equity (deficit)		(55,310	)		(74,516	)		(56,979	)

			$	328,356		$	322,844		$	354,931

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

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


		THREE MONTHS ENDED						NINE MONTHS ENDED

		September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002

		(in thousands)
Net sales		$	183,358		$	153,549		$	414,410		$	402,803
Cost of sales			125,046			111,320			290,797			299,811

Gross profit			58,312			42,229			123,613			102,992
Selling and administrative expenses			28,568			27,626			83,894			79,667
Restructuring costs (income)			(185	)		1,350			1,424			3,137

Operating income			29,929			13,253			38,295			20,188
Other expense (income):
	Interest expense		6,212			7,286			19,082			22,384
	Gain on sale of business		—			—			—			(9,088	)
	Gain on retirement of debt		—			—			—			(22,388	)
	Other, net		791			(591	)		(405	)		(871	)

			7,003			6,695			18,677			(9,963	)

Income before income taxes, equity in earnings from joint venture, and cumulative effect of change in accounting principle			22,926			6,558			19,618			30,151
Income tax expense (benefit)			1,313			3,180			2,782			(254	)
Equity in earnings from joint venture			(698	)		(653	)		(1,697	)		(1,994	)

Income before cumulative effect of change in accounting principle			22,311			4,031			18,533			32,399
Cumulative effect of change in accounting principle			—			—			—			(79,838	)

	Net income (loss)	$	22,311		$	4,031		$	18,533		$	(47,439	)

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

THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


				NINE MONTHS ENDED

				September 30, 2003			September 30, 2002

				(in thousands)
Cash flows from operating activities:
	Net income (loss)			$	18,533		$	(47,439	)
	Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
			Depreciation and amortization		8,056			10,236
			Amortization of debt related costs and other non-cash interest		4,932			5,151
			Provision for doubtful accounts		(542	)		1,532
			(Gain)/Loss on disposal of assets		44			(386	)
			Gain on sale of business		—			(9,088	)
			Extraordinary gain		—			(22,388	)
			Cumulative effect of change in accounting principle		—			79,838
			Restructuring and other asset impairment charges		1,122			2,971
			Pension plan settlement charge, net		1,335			—
Changes in operating assets and liabilities:
			Accounts receivable		5,154			30,328
			Inventories		(25,057	)		(40,069	)
			Prepaid expenses and other current assets		(611	)		(4,618	)
			Deposits and other assets		(2,382	)		(590	)
			Accounts payable		28,877			21,364
			Accrued expenses and other current liabilities		(3,188	)		(2,180	)
			Accrued income taxes		1,232			3,248

		Net cash provided by operating activities			37,505			27,910
Cash flows from investing activities:
	Proceeds from sale of business and assets held for sale				6,213			15,100
	Distribution of earnings from joint venture				1,995			1,819
	Purchases of property, plant and equipment				(8,191	)		(9,843	)
	Cash received from joint venture partner				293			—

		Net cash provided by investing activities			310			7,076
Cash flows from financing activities:
	Repayments of Credit Facility				(42,436	)		(27,129	)
	Redemption of Senior Subordinated Notes				—			(11,550	)
	Debt issuance costs				—			(1,579	)

		Net cash used for financing activities			(42,436	)		(40,258	)
Effect of exchange rate changes on cash					673			(157	)

Net decrease in cash and cash equivalents					(3,948	)		(5,429	)
Cash and cash equivalents, beginning of period					8,426			10,115

Cash and cash equivalents, end of period				$	4,478		$	4,686

Supplemental disclosure of cash flow information:
		Cash paid for interest		$	11,912		$	15,224
		Cash paid for income taxes		$	1,469		$	920

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

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.

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):


	September 30, 2003			December 31, 2002			September 30, 2002

Finished goods	$	123,829		$	95,789		$	116,373
Raw materials		9,284			12,501			21,040
Work in process		2,367			2,312			2,003

		135,480			110,602			139,416
LIFO allowance		(187	)		(366	)		(650	)

	$	135,293		$	110,236		$	138,766

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.

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:


	Employee
	Severance and			Facility Exit and			Total Accrued
	Relocation Costs			Other Costs			Restructuring

	(in thousands)
Balance at December 31, 2002	$	3,631		$	3,452		$	7,083
Cash Payments		(3,169	)		(1,350	)		(4,519	)
Adjustments		(60	)		(438	)		(498	)

Balance at September 30, 2003	$	402		$	1,664		$	2,066

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.

THE HOLMES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

6. LONG-TERM DEBT

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


	September 30, 2003			December 31, 2002			September 30, 2002

Revolving Credit Facility (Loans A and B)	$	53,409		$	84,209		$	97,208
Term Loan A due February 2005		8,326			15,397			17,365
Term Loan B due February 2007		71,463			76,028			76,180

Total Credit Facility		133,198			175,634			190,753
9 7/8% Senior Subordinated Notes, net of unamortized discount, due November 15, 2007		99,609			99,544			99,523

Total Debt		232,807			275,178			290,276
Less current portion of Credit Facility		(62,343	)		(9,078	)		(8,928	)

	$	170,464		$	266,100		$	281,348

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.

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):


	Three months ended						Nine months ended

	September 30,			September 30,			September 30,		September 30,
	2003			2002			2003		2002

Net income (loss)	$	22,311		$	4,031		$	18,533	$	(47,439	)
Foreign currency translation adjustments		(34	)		(702	)		673		(157	)

Comprehensive income (loss)	$	22,277		$	3,329		$	19,206	$	(47,596	)

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):


		Consumer										Consolidated
		Durables			Far East		International		Eliminations			Total

THREE MONTHS ENDED
September 30, 2003:
	Net sales	$	160,332		$	137,668	$	17,488	$	(132,130	)	$	183,358
	Segment income (loss)		13,058			10,863		80		(1,690	)		22,311
September 30, 2002:
	Net sales	$	132,054		$	100,252	$	16,270	$	(95,027	)	$	153,549
	Segment income (loss)		(2,510	)		5,563		1,548		(570	)		4,031
NINE MONTHS ENDED
September 30, 2003:
	Net sales	$	351,893		$	285,904	$	46,118	$	(269,505	)	$	414,410
	Segment income (loss)		373			19,356		355		(1,551	)		18,533
September 30, 2002:
	Net sales	$	349,278		$	252,193	$	39,619	$	(238,287	)	$	402,803
	Segment income (loss)		15,186			17,013		1,960		(1,760	)		32,399

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.

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

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


								Consolidated
		United States		Far East		International		Total

Net Sales:
	Three months ended September 30, 2003	$	159,592	$	6,278	$	17,488	$	183,358
	Three months ended September 30, 2002		132,054		5,225		16,270		153,549
	Nine months ended September 30, 2003		349,564		19,284		45,562		414,410
	Nine months ended September 30, 2002		349,278		13,906		39,619		402,803
Long-lived assets:
	September 30, 2003		9,825		34,048		677		44,550
	December 31, 2002		16,226		33,028		495		49,749
	September 30, 2002		37,727		32,854		511		71,092

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:


	Three Months Ended						Nine Months Ended

	September 30,			September 30,			September 30,			September 30,
	2003			2002			2003			2002

Reported net income (loss)	$	22,311		$	4,031		$	18,533		$	(47,439	)
Stock-based employee compensation included in net income (loss)		—			—			—			—
Stock-based employee compensation determined under the fair value method for all awards		(200	)		(291	)		(746	)		(873	)

Pro forma net income (loss)	$	22,111		$	3,740		$	17,787		$	(48,312	)

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):


Balance at beginning of period	$	375
Accruals for warranties issued during period		349
Settlements made during the period		(180	)

Balance at end of period	$	544

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.

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


						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated

Assets
Current Assets:
	Cash and cash equivalents		$	1,571		$	—		$	2,907		—		$	4,478
	Accounts receivable, net			34,809			58,600			28,393		—			121,802
	Inventories			53,478			49,497			39,318	$	(7,000	)		135,293
	Prepaid expenses and other current assets			2,139			58			2,109		—			4,306
	Deferred income taxes			4,689			378			—		—			5,067
	Due from affiliates			279,582			89			142,631		(422,302	)		—

		Total current assets		376,268			108,622			215,358		(429,302	)		270,946

Assets held for sale				—			444			—		—			444
Property and equipment, net				8,520			205			33,940		—			42,665
Deposits and other assets				5,582			1			1,071		(5,213	)		1,441
Debt issuance costs, net				6,904			—			—		—			6,904
Deferred income taxes				5,513			443			—		—			5,956
Investment in consolidated subsidiaries				35,968			—			3,701		(39,669	)		—

			$	438,755		$	109,715		$	254,070	$	(474,184	)	$	328,356

Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
	Accounts payable			7,018			861			70,478		(5,213	)		73,144
	Current portion of Credit Facility			62,343			—			—		—			62,343
	Accrued income taxes			3,064			(1,291	)		6,863		—			8,636
	Accrued expenses and other current liabilities			26,355			10,168			12,061		—			48,584
	Deferred income taxes			(2,097	)		2,582			2,639		—			3,124
	Due to affiliates			228,333			157,164			36,805		(422,302	)		—

		Total current liabilities		325,016			169,484			128,846		(427,515	)		195,831

Long-term portion of Credit Facility				70,855			—			—		—			70,855
Senior Subordinated Notes				99,609			—			—		—			99,609
Pension obligation				—			8,448			—		—			8,448
Other long-term liabilities				—			—			7,729		—			7,729
Deferred income taxes				(1,415	)		861			1,748		—			1,194
Stockholders’ equity (deficit):
	Common stock, $.001 par value			20			2			—		(2	)		20
	Common stock, $1 par value			—			—			3,810		(3,810	)		—
	Additional paid in capital			68,874			—					—			68,874
	Accumulated other comprehensive income			(6,558	)		—			323		(323	)		(6,558	)
	Treasury stock			(62,076	)		—					—			(62,076	)
	Retained earnings (deficit)			(55,570	)		(69,080	)		111,614		(42,534	)		(55,570	)

		Total stockholders’ equity (deficit)		(55,310	)		(69,078	)		115,747		(46,669	)		(55,310	)

			$	438,755		$	109,715		$	254,070	$	(474,184	)	$	328,356

THE HOLMES GROUP, INC.
CONDENSED CONSOLIDATING BALANCE SHEET AT DECEMBER 31, 2002 (IN THOUSANDS)


						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Assets
Current Assets:
	Cash and cash equivalents		$	2,599		$	(488	)	$	6,315					$	8,426
	Accounts receivable, net			21,383			77,428			29,598						128,409
	Inventories			30,357			53,394			31,935		$	(5,450	)		110,236
	Prepaid expenses and other current assets			2,360			237			2,220						4,817
	Deferred income taxes			4,689			378			—						5,067
	Due from affiliates			283,734			89			84,673			(368,496	)		—

		Total current assets		345,122			131,038			154,741			(373,946	)		256,955

Assets held for sale				—			6,466									6,466
Property and equipment, net				9,073			238			33,135			—			42,446
Deposits and other assets				5,212			1			515			(4,891	)		837
Debt issuance costs, net				10,184			—			—			—			10,184
Deferred income taxes				5,513			443			—						5,956
Investment in consolidated subsidiaries				16,247			—			3,701			(19,948	)		—

			$	391,351		$	138,186		$	192,092		$	(398,785	)	$	322,844

Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
	Accounts payable			4,604			7,709			36,845			(4,891	)		44,267
	Current portion of Credit Facility			9,078			—			—						9,078
	Accrued income taxes			3,543			(1,074	)		4,936			—			7,405
	Deferred income taxes			(1,892	)		2,582			2,277						2,967
	Accrued expenses and other current liabilities			28,741			17,846			6,514						53,101
	Due to affiliates			156,324			178,249			37,624			(372,197	)		—

		Total current liabilities		200,398			205,312			88,196			(377,088	)		116,818

Long-term portion of Credit Facility				166,556			—			—			—			166,556
Senior Subordinated Notes				99,544			—			—			—			99,544
Pension obligation				—			5,840			—			—			5,840
Other long-term liabilities				—			—			7,613			—			7,613
Deferred income taxes				(631	)		861			759			—			989
Stockholders’ equity (deficit):
	Common stock, $.001 par value			20			2			—			(2	)		20
	Common stock, $1 par value			—			—			3,810			(3,810	)		—
	Additional paid in capital			68,874			—						—			68,874
	Accumulated other comprehensive income			(7,231	)		—			(189	)		189			(7,231	)
	Treasury stock			(62,076	)		—						—			(62,076	)
	Retained earnings (deficit)			(74,103	)		(73,829	)		91,903			(18,074	)		(74,103	)

		Total stockholders’ equity (deficit)		(74,516	)		(73,827	)		95,524			(21,697	)		(74,516	)

			$	391,351		$	138,186		$	192,092		$	(398,785	)	$	322,844

THE HOLMES GROUP, INC.
CONDENSED CONSOLIDATING BALANCE SHEET AT SEPTEMBER 30, 2002 (IN THOUSANDS)
(UNAUDITED)


						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Assets
Current Assets:
	Cash and cash equivalents		$	2,811		$	(489	)	$	2,364					$	4,686
	Accounts receivable, net			31,643			49,742			26,021						107,406
	Inventories			48,260			64,690			32,641		$	(6,825	)		138,766
	Prepaid expenses and other current assets			1,671			5,433			2,831						9,935
	Deferred income taxes			600			4,649			—						5,249
	Due from affiliates			279,582			89			97,779			(377,450	)		—

		Total current assets		364,567			124,114			161,636			(384,275	)		266,042

Assets held for sale				(629	)		6,288									5,659
Property and equipment, net				8,483			20,064			32,491			—			61,038
Deposits and other assets				5,697			2,543			1,046			(4,891	)		4,395
Debt issuance costs, net				12,023			—			—			—			12,023
Deferred income taxes				5,774			—			—						5,774
Investment in consolidated subsidiaries				12,358			—			3,701			(16,059	)		—

			$	408,273		$	153,009		$	198,874		$	(405,225	)	$	354,931

Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
	Accounts payable			11,200			3,752			48,046			(4,891	)		58,107
	Current portion of Credit Facility			8,928			—			—						8,928
	Accrued income taxes			(1,310	)		3,216			7,799			—			9,705
	Accrued expenses and other current liabilities			21,035			16,127			5,978						43,140
	Deferred income taxes			396			—			1,798						2,194
	Due to affiliates			146,671			198,000			32,779			(377,450	)		—

		Total current liabilities		186,920			221,095			96,400			(382,341	)		122,074

Long-term portion of Credit Facility				181,825			—			—			—			181,825
Senior Subordinated Notes				99,523			—			—			—			99,523
Other long-term liabilities				—			—			7,645			—			7,645
Deferred income taxes				(3,016	)		3,859			—			—			843
Stockholders’ equity (deficit):
	Common stock, $.001 par value			20			2			—			(2	)		20
	Common stock, $1 par value			—			—			3,800			(3,800	)		—
	Additional paid in capital			68,874			—						—			68,874
	Accumulated other comprehensive income			(159	)		—			(320	)		320			(159	)
	Treasury stock			(62,076	)		—						—			(62,076	)
	Retained earnings (deficit)			(63,638	)		(71,947	)		91,349			(19,402	)		(63,638	)

		Total stockholders’ equity (deficit)		(56,979	)		(71,945	)		94,829			(22,884	)		(56,979	)

			$	408,273		$	153,009		$	198,874		$	(405,225	)	$	354,931

THE HOLMES GROUP, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS)
(UNAUDITED)


					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated

Net sales		$	60,153		$	99,439		$	155,156		(131,390	)	$	183,358
Cost of sales			40,055			79,063			135,628		(129,700	)		125,046

Gross profit (loss)			20,098			20,376			19,528		(1,690	)		58,312

	Selling and administrative expenses		9,814			12,691			6,063		—			28,568
	Restructuring costs (income)		—			(185	)		—		—			(185	)

Operating profit (loss)			10,284			7,870			13,465		(1,690	)		29,929

Other expense (income) :
	Interest expense		6,210			—			2		—			6,212
	Other, net		(881	)		419			1,253		—			791

			5,329			419			1,255		—			7,003

Income (loss) before income taxes and equity in earnings from joint venture			4,955			7,451			12,210		(1,690	)		22,926
Income tax expense			45			—			1,268		—			1,313
Equity in earnings from joint venture			(698	)		—			—		—			(698	)

Income (loss) before equity in income of consolidated subsidiaries			5,608			7,451			10,942		(1,690	)		22,311
Equity in income of consolidated subsidiaries			16,703			—			—		(16,703	)		—

Net income (loss)		$	22,311		$	7,451		$	10,942	$	(18,393	)	$	22,311

THE HOLMES GROUP, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS)
(UNAUDITED)


					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales		$	50,304		$	81,751		$	116,521			(95,027	)	$	153,549
Cost of sales			38,341			67,022			100,414			(94,457	)		111,320

Gross profit (loss)			11,963			14,729			16,107			(570	)		42,229

Selling and administrative expenses			(3,477	)		25,947			5,156			—			27,626
	Restructuring costs		—			1,350			—			—			1,350

Operating profit (loss)			15,440			(12,568	)		10,951			(570	)		13,253

Other expense (income):
	Interest expense		7,275			(1	)		12			—			7,286
	Other, net		(921	)		983			(653	)		—			(591	)

			6,354			982			(641	)		—			6,695

Income (loss) before income taxes and equity in earnings from joint venture			9,086			(13,550	)		11,592			(570	)		6,558
Income tax expense (benefit)			—			(127	)		3,307			—			3,180
Equity in earnings from joint venture			(653	)		—			—			—			(653	)

Income (loss) before equity in income of consolidated subsidiaries			9,739			(13,423	)		8,285			(570	)		4,031
Equity in income of consolidated subsidiaries			(5,708	)		—			—			5,708			—

Income (loss) before accounting charge			4,031			(13,423	)		8,285			5,138			4,031
Cumulative effect of change in accounting principle			—			—			—			—			—

Net income (loss)		$	4,031		$	(13,423	)	$	8,285		$	5,138		$	4,031

THE HOLMES GROUP, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS)
(UNAUDITED)


					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales		$	129,825		$	219,183		$	332,022		$	(266,620	)	$	414,410
Cost of sales			94,858			171,252			289,756			(265,069	)		290,797

Gross profit (loss)			34,967			47,931			42,266			(1,551	)		123,613

Selling and administrative expenses			24,842			42,041			17,011			—			83,894
Restructuring costs			—			1,424			—			—			1,424

Operating profit (loss)			10,125			4,466			25,255			(1,551	)		38,295

Other expense (income):
	Interest expense		19,085			4			(7	)		—			19,082
	Other, net		(2,001	)		(287	)		1,883			—			(405	)

			17,084			(283	)		1,876			—			18,677

Income (loss) before income taxes and equity in earnings from joint venture			(6,959	)		4,749			23,379			(1,551	)		19,618
Income tax expense (benefit)			(886	)		—			3,668			—			2,782
Equity in earnings from joint venture			(1,697	)		—			—			—			(1,697	)

Income (loss) before equity in income of consolidated subsidiaries			(4,376	)		4,749			19,711			(1,551	)		18,533
Equity in income of consolidated subsidiaries			22,909			—			—			(22,909	)		—

Net income (loss)		$	18,533		$	4,749		$	19,711		$	(24,460	)	$	18,533

THE HOLMES GROUP, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS)
(UNAUDITED)


					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales		$	126,050		$	223,229		$	291,811		$	(238,287	)	$	402,803
Cost of sales			108,501			173,606			254,231			(236,527	)		299,811

Gross profit (loss)			17,549			49,623			37,580			(1,760	)		102,992

Selling and administrative expenses			26,899			38,001			14,767						79,667
Restructuring costs			—			3,137			—						3,137

Operating profit (loss)			(9,350	)		8,485			22,813			(1,760	)		20,188

Other expense (income):
	Interest expense		22,352			26			6			—			22,384
	Gain on sale of business		—			(9,088	)		—			—			(9,088	)
	Gain on retirement of debt		(22,388	)		—			—			—			(22,388	)
	Other, net		(361	)		370			(880	)		—			(871	)

			(397	)		(8,692	)		(874	)		—			(9,963	)

Income (loss) before income taxes and equity in earnings from joint venture			(8,953	)		17,177			23,687			(1,760	)		30,151
Income tax expense (benefit)			(2,583	)		(2,385	)		4,714			—			(254	)
Equity in earnings from joint venture			(1,994	)		—			—			—			(1,994	)

Income (loss) before equity in income of consolidated subsidiaries			(4,376	)		19,562			18,973			(1,760	)		32,399
Equity in income of consolidated subsidiaries			(43,063	)		—			—			43,063			—

Income (loss) before accounting charge			(47,439	)		19,562			18,973			41,303			32,399
Cumulative effect of change in accounting principle			—			(79,838	)		—			—			(79,838	)

Net income (loss)		$	(47,439	)	$	(60,276	)	$	18,973		$	41,303		$	(47,439	)

THE HOLMES GROUP, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS)
(UNAUDITED)


						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries			Consolidated

Net cash provided by (used for) operating activities			$	(49,691	)	$	26,749		$	60,447		$	37,505

Cash flows from investing activities:
	Proceeds from sale of business and assets held for sale			—			6,213			—			6,213
	Distribution of earnings from joint venture			1,995			—			—			1,995
	Purchases of property and equipment			(1,421	)		—			(6,770	)		(8,191	)
	Cash received from joint venture partner			293			—			—			293
				—			—			—			—

		Net cash provided by (used for) investing activities		867			6,213			(6,770	)		310

Cash flows from financing activities:
	Repayments of credit facility, net of issuance costs			(42,436	)		—			—			(42,436	)
	Other activity with Parent, net			90,232			(32,474	)		(57,758	)		—

		Net cash provided by (used for) financing activities		47,796			(32,474	)		(57,758	)		(42,436	)
	Effect of exchange rate changes on cash			—			—			673			673

Net increase (decrease) in cash and cash equivalents				(1,028	)		488			(3,408	)		(3,948	)
Cash and cash equivalents, beginning of period				2,599			(488	)		6,315			8,426

Cash and cash equivalents, end of period			$	1,571		$	—		$	2,907		$	4,478

THE HOLMES GROUP, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS)
(UNAUDITED)


						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries			Consolidated

Net cash provided by (used for) operating activities			$	(17,190	)	$	3,090		$	42,010		$	27,910

Cash flows from investing activities:
	Proceeds from sale of business and assets held for sale			—			15,100			—			15,100
	Distribution of earnings from joint venture			1,819			—			—			1,819
	Purchases of property and equipment			(3,635	)		(744	)		(5,464	)		(9,843	)

		Net cash provided by (used for) investing activities		(1,816	)		14,356			(5,464	)		7,076

Cash flows from financing activities:
	Repayments of credit facility, net of issuance costs			(27,129	)		—			—			(27,129	)
	Other activity with Parent, net			57,990			(19,247	)		(38,743	)		—
	Redemption of long-term debt			(11,550	)		—			—			(11,550	)
	Debt issuance costs			(1,579	)		—			—			(1,579	)

		Net cash provided by (used for) financing activities		17,732			(19,247	)		(38,743	)		(40,258	)
	Effect of exchange rate changes on cash			—			—			(157	)		(157	)

Net increase (decrease) in cash and cash equivalents				(1,274	)		(1,801	)		(2,354	)		(5,429	)
Cash and cash equivalents, beginning of period				4,083			1,312			4,720			10,115

Cash and cash equivalents, end of period			$	2,809		$	(489	)	$	2,366		$	4,686

THE HOLMES GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BACKGROUND

The Holmes Group, Inc. is a leading developer, manufacturer and marketer of quality, branded home appliances, including home environment and small kitchen electric appliances. Our financial information includes the results of The Rival Company since its acquisition on February 5, 1999. Our home environment products include fans, heaters, humidifiers and air purifiers. Our kitchen appliances include Crock-Pot^® slow cookers, roaster ovens, skillets, and deep fryers, and other similar small kitchen electric appliances. Our products are sold under the Holmes^®, Rival^®, Crock-Pot^®, White Mountain^®, Bionaire^®, Patton^®, Family Care^® and Titan^® brand names. We also sell products to certain retailers under licensed brand names, including General Electric^®, Sunbeam^®; and Halls^®. Our products are sold to consumers through major retail chains, including mass merchants, do-it-yourself home centers, warehouse clubs, hardware, department and specialty stores and national drug store chains.

Sales of most of our products follow seasonal patterns that affect our results of operations. In general, sales of fans occur predominantly from January through June, and sales of heaters and humidifiers occur predominantly from July to December. Although kitchen electrics, air purifiers, lighting products and accessories generally are used year-round, these products tend to draw increased sales during the winter months when people are indoors and, as a result, sales of these products tend to be greatest in advance of the winter months from July through December. Additionally, many of our kitchen products are given as gifts and, as such, sell at larger volumes during the holiday season. When holiday shipments are combined with seasonal products, our sales during the months of August through November are generally at a higher level than during the other months of the year. In addition to the seasonal fluctuations in sales, we experience seasonality in gross profit, as margins realized on fan products tend to be lower than those realized on kitchen electrics and other home environment products.

A summary of the risks and uncertainties which may affect our future performance is presented below. Our Form 10-K for the year ended December 31, 2002 includes a more detailed discussion of the “risk factors” affecting our business. Risks and uncertainties are detailed from time to time in reports filed by the Company with the SEC, including Forms 10-Q and 10-K and the Company’s most recent Registration Statement on Form S-4 (File No. 333-77905).

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. We caution investors that any forward-looking statements presented in this report and presented elsewhere by management from time to time are based on beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “might”, “plan”, “estimate”, “project”, “should”, “will be”, “will result” and similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known or unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update forward-looking statements. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Risks and uncertainties that may affect future performance include, among others, the following:

•		Our degree of leverage and continued compliance with debt covenants.

•		Our ability to obtain adequate financing to replace the Revolving Credit Facility expiring in 2004.

•		Our dependence on major customers and key employees.

•		Any significant decline in purchases by our larger customers or pressure from these customers to reduce prices.

•		The bankruptcy or loss of any major retail customer or supplier.

•		Weakness in the U.S. retail market.

•		The financial condition of the retail industry.

•		The infringement or loss of our rights with respect to patents and trademarks related to our products.

•		Fluctuations in cost and availability of raw materials and components.

•		Product recalls and product liability claims against us or other regulatory actions.

THE HOLMES GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (CONTINUED)

•		Changes in demand for the Company’s products.

•		Changing conditions in foreign countries.

•		An extended interruption in the operation of our manufacturing facilities in China.

•		Changes in trade relations with China.

•		Potential disruption in our supply chain due to health concerns relating to the disease known as severe acute respiratory syndrome or other related illnesses.

•		Currency fluctuations in our international operations.

•		Difficulties in implementing and maintaining new computer systems.

•		Changes in retailer inventory management or failure of our order processing and logistical systems.

•		Interruptions in data and communications systems.

•		Our ability to develop new and innovative products and customer acceptance of such products.

•		Seasonality of our operating results.

•		Competition with other large companies that produce similar products.

•		The success of our marketing and promotional programs.

The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect the Company’s business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations is based upon financial statements of The Holmes Group, Inc. which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and accompanying notes. Future events cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may differ from those estimates under different assumptions and conditions.

We believe the most significant accounting estimates inherent in the preparation of the financial statements include estimates associated with management’s evaluation of the allowance for doubtful accounts and customer deductions, reserves for inventory valuation, accruals for product returns and the determination of liabilities related to taxation and restructuring actions. These critical accounting policies are described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K.

THE HOLMES GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (CONTINUED)

RESULTS OF OPERATIONS

The following table presents our operating results for the three and nine month periods ended September 30, 2003 and 2002 as a percentage of net sales:


	Three Months Ended September 30,						Nine Months Ended September 30,

	2003			2002			2003			2002

Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		68.2	%		72.5	%		70.2	%		74.4	%

Gross profit		31.8	%		27.5	%		29.8	%		25.6	%
Selling and administrative expenses		15.6	%		18.0	%		20.2	%		19.8	%

Operating income before restructuring costs		16.2	%		9.5	%		9.6	%		5.8	%
Restructuring costs (income)		(0.1	)%		0.9	%		0.4	%		0.8	%

Operating income		16.3	%		8.6	%		9.2	%		5.0	%
Interest expense		3.4	%		4.8	%		4.6	%		5.6	%
Other expense (income), net		0.4	%		(0.4	)%		(0.1	)%		(0.2	)%
Gain on early retirement of debt		—			—			—			(5.6	)%
Gain on sale of business		—			—			—			(2.2	)%
Income tax expense (benefit)		0.7	%		2.0	%		0.6	%		(0.1	)%
Equity in earnings from joint venture		(0.4	)%		(0.4	)%		(0.4	)%		(0.5	)%

Income before cumulative effect of accounting change		12.2	%		2.6	%		4.5	%		8.0	%

Comparison of Three Months Ended September 30, 2003 and September 30, 2002

Net Sales

During the third quarter of 2003, net sales increased $29.8 million or 19.4% from the sales level in the comparable period of fiscal 2002. Both the kitchen appliance and home environment businesses contributed to the higher revenues as 2003 sales in these categories were above last year by 35% and 9%, respectively, due to an improving retail selling environment in the third quarter of 2003 and favorable trends related to the sell-in of seasonal products for the Fall/Winter period. International sales of home environment and kitchen appliances in the third quarter of 2003 increased $1.3 million or 8% from the 2002 level due to favorable trends in Canada and Europe. Sales of motors to the Company’s joint venture with General Electric also improved, increasing $1.1 million or 24% above the third quarter of 2002.

Gross Profit

Gross profit during the third quarter of 2003 increased $16.1 million or 38.1% above the 2002 level. The Company’s gross profit percent improved 4.3 percentage points during the third quarter to 31.8% in 2003 as compared to 27.5% in 2002. The improved profitability in the third quarter of 2003 was driven by higher margins in the kitchen appliance business and also benefited from the transfer of production to lower cost resources in the Far East. The Company completed the shutdown of its domestic manufacturing operations in January 2003. Unfavorable manufacturing variances related to the closed facilities totaled $0.8 million or 0.5% of net sales in the 2002 third quarter. Gross profit in the third quarter of 2003 also benefited from the recovery of $0.9 million from a settlement with a supplier of faulty heater components which impacted product quality during fiscal 1999 and 2000.

Selling and Administrative Expenses

In the third quarter of 2003, selling and administrative expenses increased $0.9 million or 3.4% above the comparable period in 2002. This rate of expense increase was well below the revenue growth rate of 19.4% in the third quarter of 2003. As a percent of net sales, operating expenses represented 15.6% of sales in the third quarter of 2003 compared to 18% of sales in 2002. Operating expenses in 2003 included higher freight costs and increased spending related to new product development initiatives. During the third quarter of 2003, legal fees were also higher, increasing $1.1 million from the 2002 spending level. Despite the higher sales level in the third quarter of 2003, warehousing costs decreased

THE HOLMES GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (CONTINUED)

$0.6 million as the Company closed a facility in Massachusetts and transitioned its Midwest distribution operations to a new facility in California. Bad debt expense was also lower in the 2003 quarterly period as expenses in the third quarter of 2002 included a $700,000 provision related to the pre-bankruptcy receivables of Kmart.

Restructuring Costs

During the third quarter of 2003, operating income was increased due to a favorable restructuring accrual adjustment of $0.2 million as facility exit costs were lower than anticipated due to the prompt sale of two closed facilities. In the third quarter of 2002, the Company recorded $1.4 million of restructuring costs related to the closure of its distribution center in Sedalia, Missouri.

Interest Expense and Other Expense (Income)

During the third quarter of 2003, interest expense decreased $1.1 million from the comparable period of 2002 due to reduced borrowing levels and lower interest rates. Other expense decreased earnings by $0.8 million in the third quarter of 2003 due primarily to factoring expenses related to Kmart receivables and foreign exchange losses related to international operations.

Income Taxes

During the third quarter of 2003, the Company recorded income tax expense of $1.3 million compared to $3.2 million in 2002. The tax expense was primarily related to the taxable profits of foreign operations.

Equity in Earnings from Joint Venture

The Company’s share of the earnings of its joint venture with General Electric totaled $0.7 million in the third quarter of 2003, slightly above the 2002 earnings level.

Net Income and EBITDA

The Company’s net income of $22.3 million in the third quarter of 2003 was significantly above the net income of $4 million in the 2002 third quarter due to the increased level of net sales, improved gross profit performance and reduced interest expense.

The table below includes non-GAAP financial information to provide a better understanding of the Company’s results and the trends from which to measure performance. EBITDA, which includes our share of our joint venture’s earnings, represents income before interest expense, income tax expense (benefit) and depreciation and amortization. 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 (GAAP), or as a measure of a company’s profitability or liquidity. Additionally, our 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. A reconciliation between operating income presented in accordance with GAAP in the consolidated statements of operations and EBITDA, along with the restructuring charges and certain significant items which impacted results for the three months ended September 30, 2003 and 2002 is as follows:

THE HOLMES GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (CONTINUED)


		Three months ended

		September 30, 2003			September 30, 2002

Operating Income – GAAP		$	29,929		$	13,253
Depreciation and amortization, net			2,364			3,532
Other income (expense)			(791	)		591
Equity in earnings from joint venture			698			653

EBITDA		$	32,200		$	18,029

Restructuring and certain significant income (expense) items included in EBITDA:
	Restructuring income (costs), net		185			(1,350	)
	Cost recovery from former supplier of faulty heater components		950			—
	Kmart bad debt provision		—			(700	)
	Credit Facility amendment costs		(18	)		17

Total		$	1,117		$	(2,033	)

Comparison of Nine Month Periods Ended September 30, 2003 and September 30, 2002

Net Sales

During the first nine months of 2003, net sales increased $11.6 million or 2.9% above the sales level in the comparable period of fiscal 2002. The kitchen appliance product line posted a 6% sales increase as the higher sales level in the third quarter of 2003 offset the generally weak retail selling environment in the first half of 2003. Sales of home environment products in the first nine months of 2003 were below the sales level in the comparable period of 2002. A decline in the fan category due to unseasonably cool weather, the de-emphasis of lower margin product lines and other competitive conditions offset the favorable sell-in of the Company’s heater and humidifier product lines. International sales in the first nine months of 2003 increased $9 million or 22% from the 2002 level due to favorable trends in Canada and Europe. Currency exchange rates had a favorable impact on international sales accounting for approximately 3% of the revenue increase in the nine-month period. Sales of motors to the Company’s joint venture with General Electric were also higher in 2003, increasing $2.9 million or 24% above the sales level in the first nine months of 2002.

Gross Profit

Gross profit in the first nine months of 2003 increased $20.6 million or 20% from the gross profit earned in the first nine months of 2002. The Company’s gross profit percent improved 4.2 percentage points during the first nine months to 29.8% in 2003 as compared to 25.6% in 2002. The profitability of the kitchen appliance business improved in the first nine months of 2003 as the transfer of production to the Far East favorably impacted manufacturing costs. The profitability of the home environment business in the first nine months of 2003 was slightly below 2002 levels. The closure of the Company’s domestic manufacturing facilities in January 2003 contributed to the improvement in gross profit percent during 2003 as unfavorable manufacturing variances totaled $1.1 million or 0.3% of net sales in the first nine months of 2003 compared to variances of $3.5 million or 0.9% of net sales in 2002. Gross profit in 2003 was also favorably impacted by the cost recovery of $0.9 million from the settlement of a claim against a former supplier.

Selling and Administrative Expenses

Selling and administrative expenses in the first nine months of 2003 increased $4.2 million or 5.3% from the operating expenses in the comparable period of 2002. As a percentage of net sales, operating expenses represented 20.2% of sales in the first nine months of 2003 compared to 19.8% in 2002. Expenses in 2003 included $1.2 million related to increased spending on new product development initiatives and $1.6 million of additional freight costs. In addition, legal expenses in the 2003 nine-month period were $2.3 million higher than in 2002. Expenses in 2003 also included a non-cash impairment charge of $1.1 million as the Company re-evaluated its plan to use available trade credits to partially fund consumer advertising media costs. Operating expense levels in the first nine months of 2003 were favorably impacted by a bad debt recovery of $0.9 million related to the Kmart bankruptcy, while 2002 expenses included an additional Kmart bad debt provision of $0.7 million.

THE HOLMES GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (CONTINUED)

Restructuring Costs

In the first nine months of 2003, restructuring costs totaled $1.4 million, 55% below the restructuring charges of $3.1 million in the 2002 period. The restructuring costs in 2003 included $1.3 million of non-cash settlement charges related to the Company’s pension plan as a result of the facility closings in 2002.

Interest Expense and Other Expense (Income)

During the first nine months of 2003, interest expense was $3.3 million lower than in the comparable period of 2002 due to reduced borrowings, lower interest rates and the repurchase of $36.2 million of the Company’s Senior Subordinated Notes in March 2002. Other income in 2003 was significantly lower than the first nine months of 2002 as last year’s amount included a $9.1 million gain on the sale of the Company’s Pollenex^© business in January 2002 and a gain of $22.4 million related to the repurchase of Senior Subordinated Notes. In 2003, other expense included $0.4 million of factoring expenses related to Kmart receivables.

Income Taxes

During the first nine months of 2003, the Company recorded income tax expense of $2.8 million compared to tax benefits of $0.3 million in 2002. The 2003 tax expense was primarily related to the taxable profits of foreign operations. The 2002 tax benefit included a $5.1 million benefit associated with additional net operating loss carrybacks, which were made possible by 2002 tax law changes in the United States, offset by tax provisions related to foreign operations.

Equity in Earnings from Joint Venture

The Company’s share of the earnings of its joint venture with General Electric totaled $1.7 million in the first nine months of 2003, down $0.3 million or 14.9% from the 2002 earnings level.

Cumulative Effect of Accounting Change

The Company adopted Statement of financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, 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 connection with adopting this standard, the Company, assisted by independent valuation consultants, completed the transitional testing of goodwill using a measurement date of January 1, 2002. The results of this 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 as determined utilizing various valuation techniques, including discounted cash flow and comparative market analysis. Accordingly, a non-cash impairment charge has been recognized as a change in accounting principle as of the beginning of 2002. The impairment charge was $79.8 million on a before and after-tax basis.

Net Income (Loss) and EBITDA

Net income in the first nine months of 2003 totaled $18.5 million compared to a net loss of $47.4 million in the comparable period of 2002. The 2002 loss included the goodwill impairment charge of $79.8 million and gains of $31.5 million related to the Pollenex^© and subordinated debt transactions described above. The improved results in 2003 reflected the Company’s higher sales level, improved gross profit performance and reduced interest expense.

THE HOLMES GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (CONTINUED)

The table below includes non-GAAP financial information to provide a better understanding of the Company’s results and the trends from which to measure performance. A reconciliation between operating income presented in accordance with GAAP in the consolidated statements of operations and EBITDA, along with the restructuring charges and certain significant items for the nine months ended September 30, 2003 and 2002 is as follows:


		Nine months ended

		September 30, 2003			September 30, 2002

Operating Income – GAAP		$	38,295		$	20,188
Depreciation and amortization, net			7,291			9,516
Other income			405			32,347
Equity in earnings from joint venture			1,697			1,994

EBITDA		$	47,688		$	64,045

Restructuring and certain significant income (expense) items included in EBITDA:
	Pension plan settlement charge		(1,335	)		—
	Other restructuring costs, net		(89	)		(3,137	)
	Gain of sale of business		—			9,088
	Gain on retirement of debt		—			22,388
	Trade credit asset impairment		(1,122	)		—
	Kmart bad debt recovery (provision)		904			(700	)
	Cost recovery from former supplier of faulty heater components		950			—
	Credit Facility amendment costs		(36	)		(362	)

		$	(728	)	$	27,277

LIQUIDITY AND CAPITAL RESOURCES

Analysis of Cash Flows

Following our recapitalization transaction in November 1997 and the acquisition of the Rival business in February 1999, we have funded our liquidity requirements with cash flows from operations and borrowings under our Credit Facility. Our primary liquidity requirements are for working capital, to fund capital expenditures and to service our indebtedness. The Company’s $40 million Revolving Credit Loan B, which is supported by the guarantee of Berkshire Partners, the Company’s majority shareholder, matures on July 1, 2004. While the maturity date of the Company’s $131 million Revolving Credit Loan A is February 5, 2005, the availability of the Revolving Credit Loan A commitment will terminate on July 1, 2004 unless otherwise approved by a majority of the lenders. As a result of the maturity dates and the termination provisions, 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 in the Company’s consolidated balance sheet as of September 30, 2003 includes $53.4 million representing the outstanding amounts with respect to Revolving Credit Loan A ($40.6 million) and Revolving Credit Loan B ($12.8 million). The Company’s existing cash resources, cash flow from operations and borrowings under the Credit Facility will be sufficient to meet our liquidity needs through June 30, 2004. We are in the process of refinancing our Credit Facility and anticipate concluding these negotiations prior to July 1, 2004.

THE HOLMES GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (CONTINUED)

The Company’s cash and cash equivalents decreased to $4.5 million at September 30, 2003, from $8.4 million at December 31, 2002. Cash provided by operations for the nine months ended September 30, 2003 was $37.5 million, an increase of $9.6 million on 34.4% from the operating cash flow of $27.9 million in the comparable period of 2002. For the nine months ended September 30, 2003, operating earnings, adjusted for non-cash items, improved to $33.5 million, a 64.2% increase from the adjusted operating earnings of $20.4 million in the comparable period of 2002. Changes in other operating assets and liabilities provided $4 million of cash in the nine months of 2003 compared to $7.5 million in 2002. Accounts receivable balances increased from the year ago levels, up $14.4 million or 13.4% from the accounts receivable amount at September 30, 2002 due to the 19.4% sales increase in the third quarter of 2003. Days sales outstanding (DSO) at September 30, 2003, stood at 61 days, a 5% improvement from the DSO statistic in September 2002. Inventory levels at September 30, 2003 totaled $135.3 million, a decrease of $3.5 million or 2.5% over the same period of 2002. Accounts payable at September 30, 2003 increased $15 million from the year ago levels due to the timing of purchases and more favorable payment terms from foreign suppliers. During the first nine months of 2003, the Company also expended $4.5 million of cash related to severance and other facility exit costs which were accrued as restructuring charges at December 31, 2002.

Cash provided by investing activities for the nine months ended September 30, 2003 was $0.3 million compared to $7.1 million in 2002. During the second quarter of 2003, the Company received cash proceeds of $6.2 million from the sale of real estate and equipment that was formerly used in the Company’s domestic manufacturing operations which were closed in January 2003. The Company used $4.8 million of these cash proceeds to reduce outstanding borrowings under the Credit Facility’s term loans. The 2002 cash flow amount includes $15.1 million in proceeds received in connection with the sale of the Pollenex^® business in January 2002. The Company invested $8.2 million in capital expenditures for property and equipment during 2003 compared to capital expenditures of $9.8 million in the first nine months of 2002. The Company expects to spend approximately $15 million on capital expenditures in 2003, primarily related to the expansion of our China manufacturing facilities, the implementation of computer systems and on-going tooling costs to support product development needs.

Cash used for financing activities for the nine months ended September 30, 2003 and 2002 was $42.4 million and $40.3 million, respectively, reflecting repayments on the Revolving Credit Facility. In the 2002 first nine month period, cash used for financing activities included the repurchase of a portion of the outstanding Senior Subordinated Notes and debt issuance costs associated with the March 2002 Credit Facility amendment.

Financing Arrangements

Under the Fifth Amendment to the Company’s Credit Facility, which was executed in March 2002, the lenders have committed to a Revolving Credit Loan A of $131 million and a Revolving Credit Loan B of $40 million. Revolving Credit Loan B is supported by the Berkshire Partners’ guarantee. Actual availability under these revolving s subject to a borrowing base formula based on inventory and accounts receivable

During the first nine months of 2003, the weighted average borrowings outstanding under the Revolving Credit Facility totaled $69.6 million, 13% below the average outstanding borrowings of $80.1 million in the comparable period of 2002. As of September 30, 2003, our availability under the Credit Facility was $100.1 million, net of outstanding letters of credit totaling $9.4 million. The Credit Facility bears interest at variable rates based on either the prime rate or eurodollar rate, at our option, plus a margin which, in the case of the Term Loan A and the Revolving Credit Facility, varies depending upon certain financial ratios. The Credit Facility, and the guarantees thereof by our domestic subsidiaries, are secured by substantially all of our domestic and certain foreign assets. The Credit Facility is cross-defaulted to the Notes Indentures.

In conjunction with the Fifth Amendment in March 2002, 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. The Notes repurchased were retired and cancelled. The Company may consider repurchases of additional Notes in the future, and we may utilize the proceeds of the Credit Facility for this purpose. As of September 30, 2003, $99.6 million of Senior Subordinated Notes were outstanding. Total debt at September 30, 2003 amounted to $232.8 million, down $57.5 million or 19.8% below the level of debt outstanding at September 30, 2002. Over the past two years, the Company has repaid or retired $105.8 million of debt, reducing total debt by 31% from the $338.6 million of debt outstanding at September 30, 2001.

THE HOLMES GROUP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (CONTINUED)

The Credit Facility, as amended, and the Notes Indentures include certain financial and operating covenants which, among other things, restrict our ability to incur additional indebtedness, make investments and take certain other actions. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be impacted by general economic conditions and other factors, including those described under the caption “Forward Looking Statements”.

In April 2003, the Company entered into an agreement with a financial institution covering the sale of accounts receivable from certain customers, including Kmart Corporation. These arrangements are strictly for the purpose of insuring selected receivables. The Company pays fees based upon a percentage of the gross amount of each receivable purchased by the financial institution. In certain circumstances, the Company is obligated to repurchase the accounts receivable from the financial institution if the balance remains unpaid for a period of 60 days beyond the due date of the receivable. However, if within 90 days of the repurchase transaction the customer files a voluntary or involuntary bankruptcy petition or publicly declares a general moratorium on payment of trade vendor obligations, the financial institution is required to repurchase the unpaid receivable from the Company. At September 30, 2003, the financial institution held $1.6 million of accounts receivable which had been purchased for cash from the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2003, the carrying value of our debt totaled $232.8 million. The fair value approximated $225 million. 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 September 30, 2003, the Company had fixed rate debt of $99.6 million and variable rate debt of $133.2 million. Assuming a constant debt level, a one percentage point decrease in interest rates would increase the unrealized fair market value of fixed rate debt by approximately $4.7 million. Based on the amounts of variable rate debt outstanding at September 30, 2003, the earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates would be approximately $1.3 million, holding other variables constant.

ITEM 4. CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Securities Exchange Act) as of September 30, 2003. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that, as of September 30, 2003, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)

Changes in Internal Controls.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

THE HOLMES GROUP, INC.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings incident to our normal business operations, including product liability and patent and trademark litigation. A patent infringement action, Tilia International, Inc. v. The Rival Company, is pending in the United States District Court in San Francisco, California. In addition, Tilia International has requested that the International Trade Commission (ITC) investigate the Company and two other unrelated companies. In both the federal court action and in its complaint to the ITC, Tilia International claims that the Rival Seal-A-Meal vacuum seal food storage device infringes certain patent claims allegedly owned by Tilia International. In the federal court action, Tilia International also contends that the Company’s food storage bags infringe certain patent claims allegedly owned by Tilia International. The Company denies these allegations and is aggressively litigating the matter. Management believes that the outcome of all pending litigations will not have a material adverse effect on our business, financial condition or results of operations. In the case of product liability litigation, the Company has product liability and general liability insurance policies in amounts management believes to be reasonable. The Company also faces exposure to voluntary or mandatory product recalls in the event that our products are alleged to have manufacturing or safety defects. The Company does not maintain product recall insurance.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Investor Conference Call

We will hold a telephone conference call on Monday, November 17, 2003 at 10 a.m., Eastern Time, in order for investors and other interested stakeholders to hear management’s views on our results of operations during the first nine months of 2003. If you are interested in accessing the call, please fax the following information to Kay Ford, Executive Assistant, at 508-422-1676:

•		Name of Participant(s)

•		Company Affiliation

•		Nature of Business

•		Address

•		Phone, Fax and E-mail

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits:


31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

b. Reports on Form 8-K:

Not applicable

THE HOLMES GROUP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1034, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Registrant


November 10, 2003		By: /s/ Peter J. Martin


		Peter J. Martin, President and
		Chief Executive Officer
		(Principal Executive Officer)

November 10, 2003		By: /s/ John M. Kelliher


		John M. Kelliher, Senior Vice President and
		Chief Financial Officer
		(Principal Financial and
		Accounting Officer)

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HOLMES GROUP INC 10-Q