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 JUNE 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. QUANTIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 5. OTHER INFORMATION
SIGNATURES
CERTIFICATION OF PETER J. MARTIN
CERTIFICATION OF JOHN M. KELLIHER

THE HOLMES GROUP, INC.
FORM 10-Q

QUARTER ENDED JUNE 30, 2003

TABLE OF CONTENTS


		PAGE
PART I.	FINANCIAL INFORMATION:
ITEM 1.	FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2003 (UNAUDITED), DECEMBER 31, 2002 AND JUNE 30, 2002 (UNAUDITED)	3
	CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002	4
	CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002	5
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	6-23
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24-30
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30
ITEM 4.	CONTROLS AND PROCEDURES	31
PART II.	OTHER INFORMATION:
ITEM 1.	LEGAL PROCEEDINGS	32
ITEM 5.	OTHER INFORMATION	32
	SIGNATURES AND OFFICER CERTIFICATES	33-35

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE HOLMES GROUP, INC.

CONSOLIDATED BALANCE SHEETS


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

			(in thousands except share and per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	6,386		$	8,426		$	5,770
	Accounts receivable, net			74,058			128,409			84,068
	Inventories			127,022			110,236			120,594
	Prepaid expenses and other current assets			3,843			4,817			9,747
	Deferred income taxes			5,067			5,067			5,249

		Total current assets		216,376			256,955			225,428
Assets held for sale				405			6,466			6,288
Property and equipment, net				43,044			42,446			62,424
Deposits and other assets				1,162			837			4,847
Debt issuance costs, net				7,683			10,184			13,863
Deferred income taxes				5,956			5,956			5,774

			$	274,626		$	322,844		$	318,624

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable			35,703			44,267			45,620
	Current portion of Credit Facility			9,078			9,078			8,778
	Accrued income taxes			7,518			7,405			6,495
	Accrued expenses and other current liabilities			38,123			53,101			38,272
	Deferred income taxes			3,124			2,967			2,194

		Total current liabilities		93,546			116,818			101,359
Long-term portion of Credit facility				142,090			166,556			169,895
Senior Subordinated Notes				99,587			99,544			99,503
Pension obligation				7,974			5,840			—
Other liabilities				7,775			7,613			7,050
Deferred income taxes				1,241			989			1,125
Commitments and contingencies
Stockholders’ equity (deficit):
	Common stock, $.001 par value. Authorized 28,500,00 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)			(6,524	)		(7,231	)		543
	Treasury stock, at cost (18,627,450 shares)			(62,076	)		(62,076	)		(62,076	)
	Retained earnings (deficit)			(77,881	)		(74,103	)		(67,669	)

		Total stockholders’ equity (deficit)		(77,587	)		(74,516	)		(60,308	)

			$	274,626		$	322,844		$	318,624

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

THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


		THREE MONTHS ENDED						SIX MONTHS ENDED

		June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002

		(in thousands)						(in thousands)
Net sales		$	115,752		$	131,912		$	231,052		$	249,254
Cost of sales			82,858			99,599			165,751			188,491

Gross profit			32,894			32,313			65,301			60,763
Selling and administrative expenses			27,494			26,908			55,326			52,041
Restructuring costs			1,730			—			1,609			1,787

Operating income			3,670			5,405			8,366			6,935
Other expense (income):
	Interest expense		6,281			7,142			12,870			15,098
	Gain on sale of business		—			—			—			(9,088	)
	Gain on retirement of debt		—			—			—			(22,388	)
	Other, net		(958	)		723			(1,196	)		(280	)

			5,323			7,865			11,674			(16,658	)

Income (loss) before income taxes, equity in earnings from joint venture, and cumulative effect of change in accounting principle			(1,653	)		(2,460	)		(3,308	)		23,593
Income tax expense (benefit)			526			(2,009	)		1,469			(3,434	)
Equity in earnings from joint venture			(517	)		(741	)		(999	)		(1,341	)

Income (loss) before cumulative change in accounting principle			(1,662	)		290			(3,778	)		28,368
Cumulative effect of change in accounting principle			—			—			—			(79,838	)

Net income (loss)		$	(1,662	)	$	290		$	(3,778	)	$	(51,470	)

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

THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


					SIX MONTHS ENDED

					June 30,			June 30,
					2003			2002

					(in thousands)
Cash flows from operating activities:
	Net loss				$	(3,778	)	$	(51,470	)
	Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
		Depreciation and amortization				5,437			6,462
		Amortization of debt related costs and other non-cash interest				3,337			3,291
		Provision for (recovery of) doubtful accounts				(305	)		557
		Loss on disposal of assets				5			132
		Gain on sale of business				—			(9,088	)
		Gain on retirement of debt				—			(22,388	)
		Cumulative effect of change in accounting principle				—			79,838
		Deferred income taxes				—			(2,602	)
		Restructuring and other asset impairment charges				1,122			1,687
		Pension plan settlement charge, net				1,335			—
		Changes in operating assets and liabilities:
			Accounts receivable			53,178			55,164
			Inventories			(16,786	)		(21,897	)
			Prepaid expenses and other current assets			(148	)		(1,843	)
			Deposits and other assets			(1,249	)		(2,466	)
			Accounts payable			(8,564	)		8,394
			Accrued expenses and other current liabilities			(14,035	)		(4,699	)
			Accrued income taxes			113			38

		Net cash provided by operating activities				19,662			39,110
Cash flows from investing activities:
	Proceeds from sale of business and assets held for sale					6,192			15,100
	Distribution of earnings from joint venture					1,478			1,522
	Purchases of property and equipment					(5,906	)		(7,547	)
	Cash received from joint venture partner					293			—

				Net cash provided by investing activities		2,057			9,075
Cash flows from financing activities:
	Repayments of Credit Facility					(24,466	)		(39,209	)
	Redemption of Senior Subordinated Notes					—			(11,549	)
	Debt issuance costs					—			(1,579	)

				Net cash used for financing activities		(24,466	)		(52,337	)
Effect of exchange rate changes on cash						707			(193	)

Net decrease in cash and cash equivalents						(2,040	)		(4,345	)
Cash and cash equivalents, beginning of period						8,426			10,115

Cash and cash equivalents, end of period					$	6,386		$	5,770

Supplemental disclosure of cash flow information:
	Cash paid for interest				$	9,713		$	12,154
	Cash paid for income taxes				$	1,311		$	425

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

THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 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 June 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 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.

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.

THE HOLMES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 93% of the inventories and the last-in, first-out method (LIFO) for the remaining 7% of the inventory. Inventories are as follows (in thousands):


	June 30, 2003			December 31, 2002			June 30, 2002

Finished goods	$	113,177		$	95,789		$	98,553
Raw materials		11,758			12,501			20,391
Work in process		2,274			2,312			2,075

		127,209			110,602			121,019
LIFO allowance		(187	)		(366	)		(425	)

	$	127,022		$	110,236		$	120,594

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 $1,787,000 in the first quarter 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 during the first half of 2003. 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 655 employees were separated during the first six 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 June 30, 2003 during the balance of fiscal 2003 and fiscal 2004. A reconciliation of the restructuring reserve activity for the six months ended June 30, 2003 is as follows:


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

	(in thousands)
Balance at December 31, 2002	$	3,631		$	3,452		$	7,083
Cash Payments		(3,033	)		(1,087	)		(4,120	)
Adjustments		—			(214	)		(214	)

Balance at June 30, 2003	$	598		$	2,151		$	2,749

During the first half of 2003, the Company incurred $1,609,000 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. The restructuring expenses in the first six months of 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,” includes 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 six months of 2003 includes $868,000 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 June 30, 2003 includes $405,000 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. While there was no significant gain or loss related to these asset sales, restructuring charges in the second quarter of 2003 were reduced by $214,000 as actual facility exit costs were lower than the amounts accrued at December 31, 2002. The Company expects to sell the majority of the remaining assets in the second half 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 half 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):


	June 30, 2003			December 31, 2002			June 30, 2002

Revolving Credit Facility	$	69,109		$	84,209		$	83,009
Term Loan A due February 2005		10,443			15,397			19,332
Term Loan B due February 2007		71,616			76,028			76,332

Total Credit Facility		151,168			175,634			178,673
9 7/8% Senior Subordinated Notes, net of unamortized discount, due November 15, 2007		99,587			99,544			99,503

Total Debt		250,755			275,178			278,176
Less current maturities of Credit Facility		(9,078	)		(9,078	)		(8,778	)

	$	241,677		$	266,100		$	269,398

Credit Facility

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 guarantee of investment funds managed by Berkshire Partners, the Company’s majority shareholder. The maturity date of Revolving Credit Loan B is July 1, 2004. 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. Actual availability under these Revolving Credit facilities is subject to a borrowing base formula based on inventory and accounts receivable.

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 is calculated at 20% per annum, compounded annually. At June 30, 2003, the subordinated debt funding loan totaled $12.8 million. 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 June 30, 2003, December 31, 2002 and June 30, 2002, the Company’s availability under the revolving credit portions of the Credit Facility was $46 million, $62.7 million and $41.2 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 5.3% at June 30, 2003, 5.6% at December 31, 2002 and 5.8% at June 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. 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 six months ended June 30, 2002. This gain is net of approximately $1.9 million of debt issuance costs, $0.3 million of debt issuance discount associated with the Senior Subordinated

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

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 as presented in the following table (in thousands):


	Three months ended					Six months ended

	June 30, 2003			June 30, 2002		June 30, 2003			June 30, 2002

Net income (loss)	$	(1,662	)	$	290	$	(3,778	)	$	(51,470	)
Foreign currency translation adjustments		408			403		707			545

Comprehensive income (loss)	$	(1,254	)	$	693	$	(3,071	)	$	(50,925	)

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 six month periods ended June 30, 2003 and 2002 is as follows (in thousands):


			Consumer										Consolidated
			Durables			Far East		International		Eliminations			Total

		Three Months Ended
June 30, 2003:
	Net sales		$	95,245		$	65,474	$	14,899	$	(59,866	)	$	115,752
	Segment income (loss)			(6,219	)		4,207		34		316			(1,662	)
June 30, 2002:
	Net sales		$	114,114		$	80,558	$	13,558	$	(76,318	)	$	131,912
	Segment income (loss)			(4,879	)		5,692		272		(795	)		290
		Six Months Ended
June 30, 2003:
	Net sales		$	191,561		$	148,236	$	28,630	$	(137,375	)	$	231,052
	Segment income (loss)			(12,685	)		8,493		275		139			(3,778	)
June 30, 2002:
	Net sales		$	217,224		$	151,941	$	23,349	$	(143,260	)	$	249,254
	Segment income (loss)			17,696			11,450		412		(1,190	)		28,368

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

In 2002, income for the Consumer Durables segment includes the gains of $22,388,000 related to the repurchase of the Company’s Senior Subordinated Notes and $9,088,000 realized on the sale of the Pollenex® business, but excludes the goodwill impairment charge of $79,838,000 related to the adoption of FAS 142.

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


		United
		States		Far East		International		Consolidated Total

Net Sales:
	Three months ended June 30, 2003	$	94,550	$	6,513	$	14,689	$	115,752
	Three months ended June 30, 2002		114,114		4,240		13,558		131,912
	Six months ended June 30, 2003		189,972		13,006		28,074		231,052
	Six months ended June 30, 2002		217,224		8,681		23,349		249,254
Long-lived assets:
	June 30, 2003		10,089		34,041		456		44,586
	December 31, 2002		16,226		33,028		495		49,749
	June 30, 2002		40,224		32,782		553		73,559

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						Six Months Ended

	June 30,			June 30,			June 30,			June 30,
	2003			2002			2003			2002

Reported net income (loss)	$	(1,662	)	$	290		$	(3,778	)	$	(51,470	)
Stock-based employee compensation included in net loss		—			—			—			—
Stock-based employee compensation determined under the fair value method for all awards		(271	)		(291	)		(546	)		(582	)

Pro forma net loss	$	(1,933	)	$	(1	)	$	(4,324	)	$	(52,052	)

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.

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

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 six months ended June 30, 2003 is as follows (in thousands):


Balance at beginning of period	$	375
Accruals for warranties issued during period		312
Settlements made during the period		(108	)

Balance at end of period	$	579

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 JUNE 30, 2003 (IN THOUSANDS)
(UNAUDITED)


						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	2,679		$	(488	)	$	4,195		—		$	6,386
	Accounts receivable, net			12,519			36,290			25,249		—			74,058
	Inventories			40,473			50,090			41,769	$	(5,310	)		127,022
	Prepaid expenses and other current assets			2,415			58			1,370					3,843
	Deferred income taxes			4,689			378			—					5,067
	Due from affiliates			283,283			89			88,497		(371,869	)		—

		Total current assets		346,058			86,417			161,080		(377,179	)		216,376

Assets held for sale				—			405			—		—			405
Property and equipment, net				9,183			205			33,656		—			43,044
Deposits and other assets				5,534			1			840		(5,213	)		1,162
Debt issuance costs, net				7,683			—			—		—			7,683
Deferred income taxes				5,513			443			—		—			5,956
Investment in consolidated subsidiaries				23,159			—			3,701		(26,860	)		—

			$	397,130		$	87,471		$	199,277	$	(409,252	)	$	274,626

Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable			5,405			559			34,952		(5,213	)		35,703
	Current portion of Credit Facility			9,078			—			—		—			9,078
	Accrued income taxes			3,135			(1,271	)		5,654		—			7,518
	Deferred income taxes			(2,144	)		2,582			2,686		—			3,124
	Accrued expenses and other current liabilities			18,950			11,390			7,783		—			38,123
	Due to affiliates			199,784			142,105			33,681		(375,570	)		—

		Total current liabilities		234,208			155,365			84,756		(380,783	)		93,546

Long-term portion of Credit facility				142,090			—			—		—			142,090
Long-term debt				99,587			—			—		—			99,587
Pension obligation				200			7,774			—		—			7,974
Other long-term liabilities				—			—			7,775		—			7,775
Deferred income taxes				(1,368	)		861			1,748		—			1,241
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			(6,524	)		—			517		(517	)		(6,524	)
	Treasury stock			(62,076	)		—			—		—			(62,076	)
	Retained earnings (deficit)			(77,881	)		(76,531	)		100,671		(24,140	)		(77,881	)

		Total stockholders’ equity (deficit)		(77,587	)		(76,529	)		104,998		(28,469	)		(77,587	)

			$	397,130		$	87,471		$	199,277	$	(409,252	)	$	274,626

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
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 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 JUNE 30, 2002 (IN THOUSANDS)
(UNAUDITED)


						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	1,974		$	(489	)	$	4,285		—		$	5,770
	Accounts receivable, net			14,654			49,742			19,672		—			84,068
	Inventories			34,477			64,690			27,501	$	(6,074	)		120,594
	Prepaid expenses and other current assets			1,633			5,433			2,681		—			9,747
	Deferred income taxes			600			4,649			—		—			5,249
	Due from affiliates			283,283			89			81,464		(364,836	)		—

		Total current assets		336,621			124,114			135,603		(370,910	)		225,428

Assets held for sale				—			6,288			—		—			6,288
Property and equipment, net				9,978			20,064			32,382		—			62,424
Deposits and other assets				6,242			2,543			953		(4,891	)		4,847
Debt issuance costs, net				13,863			—			—		—			13,863
Deferred income taxes				5,774			—			—		—			5,774
Investment in consolidated subsidiaries				22,651			—			3,700		(26,351	)		—

			$	395,129		$	153,009		$	172,638	$	(402,152	)	$	318,624

Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable			7,833			3,752			38,926		(4,891	)		45,620
	Current portion of Credit Facility			8,778			—			—		—			8,778
	Accrued income taxes			(859	)		3,216			4,138		—			6,495
	Deferred income taxes			114			—			2,080		—			2,194
	Accrued expenses and other current liabilities			15,403			16,127			6,742		—			38,272
	Due to affiliates			157,504			184,577			26,455		(368,536	)		—

		Total current liabilities		188,773			207,672			78,341		(373,427	)		101,359

Long-term portion of Credit facility				169,895			—			—		—			169,895
Long-term debt				99,503			—			—		—			99,503
Pension obligation				—			—			—		—			—
Other long-term liabilities				—			—			7,050		—			7,050
Deferred income taxes				(2,734	)		3,859			—		—			1,125
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			543			—			383		(383	)		543
	Treasury stock			(62,076	)		—			—		—			(62,076	)
	Retained earnings (deficit)			(67,669	)		(58,524	)		83,064		(24,540	)		(67,669	)

		Total stockholders’ equity (deficit)		(60,308	)		(58,522	)		87,247		(28,725	)		(60,308	)

			$	395,129		$	153,009		$	172,638	$	(402,152	)	$	318,624

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


					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales		$	29,939		$	64,401		$	80,373		$	(58,961	)	$	115,752
Cost of sales			23,271			49,040			69,824			(59,277	)		82,858

Gross profit			6,668			15,361			10,549			316			32,894

Selling and administrative expenses			6,721			15,005			5,768			—			27,494
Restructuring costs			—			1,730			—			—			1,730

Operating income (loss)			(53	)		(1,374	)		4,781			316			3,670

Other expense (income):
	Interest expense		6,278			4			(1	)		—			6,281
	Other, net		(482	)		(516	)		40			—			(958	)

			5,796			(512	)		39			—			5,323

Income (loss) before income taxes and equity in earnings from joint venture			(5,849	)		(862	)		4,742			316			(1,653	)
Income tax expense			26			—			500			—			526
Equity in earnings from joint venture			(517	)		—			—			—			(517	)

Income (loss) before equity in income of consolidated subsidiaries			(5,358	)		(862	)		4,242			316			(1,662	)
Equity in income of consolidated subsidiaries			3,696			—			—			(3,696	)		—

Net income (loss)		$	(1,662	)	$	(862	)	$	4,242		$	(3,380	)	$	(1,662	)

THE HOLMES GROUP, INC.

CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS)
(UNAUDITED)


					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales		$	69,672		$	119,744		$	176,866		$	(135,230	)	$	231,052
Cost of sales			54,803			92,189			154,128			(135,369	)		165,751

Gross profit			14,869			27,555			22,738			139			65,301

Selling and administrative expenses			15,028			29,350			10,948			—			55,326
Restructuring costs			—			1,609			—			—			1,609

Operating income (loss)			(159	)		(3,404	)		11,790			139			8,366

Other expense (income):
	Interest expense		12,875			4			(9	)		—			12,870
	Other, net		(1,120	)		(706	)		630			—			(1,196	)

			11,755			(702	)		621			—			11,674

Income (loss) before income taxes and equity in earnings from joint venture			(11,914	)		(2,702	)		11,169			139			(3,308	)
Income tax expense (benefit)			(931	)		—			2,400			—			1,469
Equity in earnings from joint venture			(999	)		—			—			—			(999	)

Income (loss) before equity in income of consolidated subsidiaries			(9,984	)		(2,702	)		8,769			139			(3,778	)
Equity in income of consolidated subsidiaries			6,206			—			—			(6,206	)		—

Net income (loss)		$	(3,778	)	$	(2,702	)	$	8,769		$	(6,067	)	$	(3,778	)

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


					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales		$	34,609		$	79,505		$	94,116			(76,318	)	$	131,912
Cost of sales			33,585			58,314			83,223			(75,523	)		99,599

Gross profit (loss)			1,024			21,191			10,893			(795	)		32,313

Selling and administrative expenses			16,862			5,151			4,895			—			26,908
Restructuring costs			—			—			—			—			—

Operating income (loss)			(15,838	)		16,040			5,998			(795	)		5,405

Other expense (income):
	Interest expense		7,153			(8	)		(3	)		—			7,142
	Gain on sale of business		—			—			—			—			—
	Gain on retirement of debt		—			—			—			—			—
	Other, net		757			(642	)		608			—			723

			7,910			(650	)		605			—			7,865

Income (loss) before income taxes and equity in earnings from joint venture			(23,748	)		16,690			5,393			(795	)		(2,460	)
Income tax expense (benefit)			(2,583	)		125			449			—			(2,009	)
Equity in earnings from joint venture			(741	)		—			—			—			(741	)

Income (loss) before equity in income of consolidated subsidiaries			(20,424	)		16,565			4,944			(795	)		290
Equity in income of consolidated subsidiaries			20,714			—			—			(20,714	)		—

Income (loss) before change in accounting			290			16,565			4,944			(21,509	)		290
Cumulative effect of change in accounting principle			—			—			—			—			—

Net income (loss)		$	290		$	16,565		$	4,944		$	(21,509	)	$	290

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


					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales		$	75,746		$	141,478		$	175,290		$	(143,260	)	$	249,254
Cost of sales			70,160			106,584			153,817			(142,070	)		188,491

Gross profit (loss)			5,586			34,894			21,473			(1,190	)		60,763

Selling and administrative expenses			30,376			12,054			9,611						52,041
Restructuring costs			—			1,787			—			—			1,787

Operating income (loss)			(24,790	)		21,053			11,862			(1,190	)		6,935

Other expense (income):
	Interest expense		15,077			27			(6	)		—			15,098
	Gain on sale of business		—			(9,088	)		—			—			(9,088	)
	Gain on retirement of debt		(22,388	)		—			—			—			(22,388	)
	Other, net		560			(613	)		(227	)		—			(280	)

			(6,751	)		(9,674	)		(233	)		—			(16,658	)

Income (loss) before income taxes and equity in earnings from joint venture			(18,039	)		30,727			12,095			(1,190	)		23,593
Income tax expense (benefit)			(2,583	)		(2,258	)		1,407			—			(3,434	)
Equity in earnings from joint venture			(1,341	)		—			—			—			(1,341	)

Income (loss) before equity in income of consolidated subsidiaries			(14,115	)		32,985			10,688			(1,190	)		28,368
Equity in income of consolidated subsidiaries			(37,355	)		—			—			37,355			—

Income (loss) before change in accounting			(51,470	)		32,985			10,688			36,165			28,368
Cumulative effect of change in accounting principle			—			(79,838	)		—			—			(79,838	)

Net income (loss)		$	(51,470	)	$	(46,853	)	$	10,688		$	36,165		$	(51,470	)

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


						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries			Consolidated

Net cash provided by operating activities			$	(28,772	)	$	40,733		$	7,701		$	19,662

Cash flows from investing activities:
	Proceeds from sale of business and assets held for sale			—			6,192			—			6,192
	Distribution of earnings from joint venture			1,478			—			—			1,478
	Purchases of property and equipment			(1,102	)		—			(4,804	)		(5,906	)
	Cash received from joint venture partner			293			—			—			293

		Net cash provided by (used for) investing activities		669			6,192			(4,804	)		2,057

Cash flows from financing activities:
	Repayments of Credit Facility			(24,466	)		—			—			(24,466	)
	Other activity with Parent, net			52,649			(46,925	)		(5,724	)		—

		Net cash provided by (used for) financing activities		28,183			(46,925	)		(5,724	)		(24,466	)

	Effect of exchange rate changes on cash			—			—			707			707
Net increase (decrease) in cash and cash equivalents				80			—			(2,120	)		(2,040	)
Cash and cash equivalents, beginning of period				2,599			(488	)		6,315			8,426

Cash and cash equivalents, end of period			$	2,679		$	(488	)	$	4,195		$	6,386

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


						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries			Consolidated

Net cash provided by operating activities			$	17,974		$	2,874		$	18,262		$	39,110

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			1,522			—			—			1,522
	Purchases of property and equipment			(3,354	)		(718	)		(3,475	)		(7,547	)

		Net cash provided by (used for) investing activities		(1,832	)		14,382			(3,475	)		9,075

Cash flows from financing activities:
	Repayments of Credit Facility			(39,209	)		—			—			(39,209	)
	Other activity with Parent, net			34,086			(19,057	)		(15,029	)		—
	Redemption of Senior Subordinated Notes			(11,549	)		—			—			(11,549	)
	Debt issuance costs			(1,579	)		—			—			(1,579	)

		Net cash used for financing activities		(18,251	)		(19,057	)		(15,029	)		(52,337	)

	Effect of exchange rate changes on cash			—			—			(193	)		(193	)
Net increase (decrease) in cash and cash equivalents				(2,109	)		(1,801	)		(435	)		(4,345	)
Cash and cash equivalents, beginning of period				4,083			1,312			4,720			10,115

Cash and cash equivalents, end of period			$	1,974		$	(489	)	$	4,285		$	5,770

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. The Company’s 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, vacuum food sealers 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 periodic reports filed by the Company with the SEC, including Quarterly Reports on Form 10-Q and Annual Reports on Form 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 six month periods ended June 30, 2003 and 2002 as a percentage of net sales:


	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		71.6	%		75.5	%		71.7	%		75.6	%

Gross profit		28.4	%		24.5	%		28.3	%		24.4	%
Selling and administrative expenses		23.7	%		20.4	%		24.0	%		20.9	%

Operating income before restructuring costs		4.7	%		4.1	%		4.3	%		3.5	%
Restructuring costs		1.5	%		0.0	%		0.7	%		0.7	%

Operating profit		3.2	%		4.1	%		3.6	%		2.8	%
Interest expense		5.4	%		5.4	%		5.6	%		6.1	%
Other expense (income), net		(0.8	)%		0.5	%		(0.6	)%		(0.1	)%
Gain on retirement of debt		—			—			—			(9.0	)%
Gain on sale of business		—			—			—			(3.6	)%
Income tax expense (benefit)		0.4	%		(1.4	)%		0.6	%		(1.5	)%
Equity in earnings from joint venture		(0.4	)%		(0.6	)%		(0.4	)%		(0.5	)%

Income (loss) before cumulative effect of accounting change		(1.4	)%		0.2	%		(1.6	)%		11.4	%

Comparison of Three Months Periods Ended June 30, 2003 and June 30, 2002

Net Sales

During the second quarter of 2003, net sales decreased $16.2 million or 12.3% from the sales level in the comparable period of fiscal 2002. The lower revenues occurred in both the kitchen appliance and home environment businesses as 2003 sales in these categories were below last year by 10% and 23%, respectively, due to the generally weak retail selling environment in the second quarter of 2003. Sales of home environment products in 2003 were also negatively impacted by competitive conditions in the fan product line and by the generally cool weather in the spring season. International sales in the second quarter of 2003 increased $3.4 million or 19.1% from the 2002 level due to favorable trends in Canada and Europe and increased motor sales to the Company’s joint venture with General Electric.

Gross Profit

Despite the lower net sales level in the period, gross profit during the second quarter of 2003 increased $0.6 million or 1.8% above the 2002 level. The Company’s gross profit percent improved 3.9 percentage points during the second quarter to 28.4% in 2003 as compared to 24.5% in 2002. The improved profitability in the second quarter of 2003 was driven by the kitchen appliance business, building on the trends established during the second half of 2002 as well as benefiting 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 $1.3 million or 1% of net sales in the 2002 second quarter.

Selling and Administrative Expenses

In the second quarter of 2003, operating expenses increased $0.6 million or 2.2% above the comparable period in 2002. These expenses represented 23.7% of net sales in 2003 compared to 20.4% in 2002. Expenses in the second quarter of 2003 included a non-cash impairment charge of $1.1 million as the Company re-evaluated its plan to use available trade credits to procure advertising media for its consumer advertising campaign in the second half of 2003. This charge was partially offset by a bad debt recovery of $0.9 million related to the Kmart bankruptcy. Operating expenses in 2003 also included higher freight costs and increased warehousing costs as the Company transitioned its midwest distribution operations to a new facility in California.

THE HOLMES GROUP, INC.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (CONTINUED)

Restructuring Costs

During the second quarter of 2003, the Company incurred $1.7 million of restructuring costs associated with the facility closings that were announced in 2002. The restructuring amount included a non-cash charge of $1.7 million related to a partial plan settlement of its defined benefit pension plan due to the closing of its domestic manufacturing facilities. Other restructuring costs incurred in the second quarter of 2003 were offset by a favorable accrual adjustment of $0.2 million as facility exit costs were lower than anticipated due to the prompt sale of two closed facilities.

Interest Expense and Other Income

During the second quarter of 2003, interest expense decreased $0.9 million from the comparable period of 2002 due to lower interest rates and the repurchase of $36.2 million of the Company’s Senior Subordinated Notes in March 2002. Other income increased earnings by $1.0 million in the second quarter of 2003 due primarily to foreign exchange gains related to international operations.

Income Taxes

During the second quarter of 2003, the Company recorded income tax expense of $0.5 million compared to tax benefits of $2.0 million in 2002. The 2003 tax expense was primarily related to the taxable profits of foreign operations. The 2002 tax benefits included the effect of additional net operating loss carrybacks which were made possible by 2002 tax law changes in the United States.

Equity in Earnings from Joint Venture

The Company’s share of the earnings of its joint venture with General Electric totaled $0.5 million in the second quarter of 2003 down $0.2 million, or 30.2% from the 2002 earnings level.

Net Loss

The Company incurred a net loss of $1.7 million in the second quarter of 2003 compared to net income of $0.3 million in the 2002 second quarter as restructuring charges and increased income taxes in 2003 adversely affected the comparison with last year’s results.

EBITDA

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 June 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

		June 30, 2003			June 30, 2002

Operating income – GAAP		$	3,670		$	5,405
Depreciation and amortization, net			2,490			2,582
Other income (expense)			958			(723	)
Equity in earnings from joint venture			517			741

EBITDA		$	7,635		$	8,005

Restructuring and certain significant income (expense) items included in EBITDA:
	Pension plan settlement charge		(1,665	)		—
	Other restructuring costs, net		(65	)		—
	Kmart bad debt recovery		904			—
	Trade credit asset impairment		(1,122	)		—
	Credit Facility amendment costs		—			(135	)

		$	(1,948	)	$	(135	)

Comparison of Six Month Periods Ended June 30, 2003 and June 30, 2002

Net Sales

During the first six months of 2003, net sales decreased $18.2 million or 7.3% below the sales level in the comparable period of fiscal 2002. The kitchen appliance product line posted a 10% sales decline due to the generally weak retail selling environment in the first half of 2003. Sales of home environment products in the first six months of 2003 were also below last year, down 13% from the sales level in the first half of 2002. A decline in the fan category due to unseasonably cool weather and competitive conditions was the most significant factor leading to the lower sales. International sales in the first half of 2003 increased $9.1 million or 28.4% from the 2002 level due to favorable trends in Canada and Europe and increased motor sales to the Company’s joint venture with General Electric.

Gross Profit

Despite the sales decline, gross profit in the first six months of 2003 increased $4.5 million or 7.5% from the gross profit earned in the first half of 2002. The Company’s gross profit percent improved 3.9 percentage points during the first half to 28.3% in 2003 as compared to 24.4% in 2002. The profitability of the kitchen appliance business improved in the first half of 2003 as the transfer of production to China started to impact manufacturing costs during the second quarter of 2003. While the profitability of the home environment business in the first six months of 2003 was slightly below 2002 levels, the majority of the decline in gross profit percent was caused by the more aggressive disposal of discontinued products. 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 $0.9 million or 0.4% of net sales in the first six months of 2003 compared to variances of $2.7 million or 1.1% of net sales in 2002.

Selling and Administrative Expenses

During the first six months of 2003, selling and administrative expenses increased $3.3 million or 6.3% from operating expenses in the comparable period of 2002. As a percent to net sales, operating expenses represented 24% of sales in 2003 compared to 20.9% in the first half of 2002. Expenses in 2003 included $0.8 million related to increased spending on new product development efforts, additional freight costs of $1 million and $0.5 million in higher distribution and warehousing costs. In the first six months of 2002, operating costs included $2.3 million of expenses associated with the implementation of a new computer system.

THE HOLMES GROUP, INC.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (CONTINUED)

Restructuring Costs

In the first six months of 2003, restructuring costs totaled $1.6 million, 10% below the restructuring charges included 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. During the first six months of 2003, the Company paid $4.1 million in employee severance and facility exit costs, reducing the reserves which were established in the fourth quarter of 2002.

Interest Expense and Other Income

During the first six months of 2003, interest expense was $2.2 million lower than in the comparable period of 2002 due to 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 six 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.

Income Taxes

During the first half of 2003, the Company recorded income tax expense of $1.5 million compared to tax benefits of $3.4 million in 2002. The 2003 tax expense was primarily related to the taxable profits of foreign operations. The 2002 tax benefits included the effect of additional net operating loss carrybacks which were made possible by 2002 tax law changes in the United States.

Equity in Earnings from Joint Venture

The Company’s share of the earnings of its joint venture with General Electric totaled $1 million in the first six months of 2003, down $0.3 million or 25.5% 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 Loss

The Company incurred a net loss of $3.8 million in the first six months of 2003 compared to a net loss of $51.5 million in the 2002 first half. The 2002 loss included the goodwill impairment charge of $79.8 million and one-time gains of $31.5 million related to the Pollenex® and debt retirement transactions described above.

EBITDA

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 for the six months ended June 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)


		Six Months Ended

		June 30, 2003			June 30, 2002

Operating Income – GAAP		$	8,366		$	6,935
Depreciation and amortization, net			4,927			5,984
Other income			1,196			31,756
Equity in earnings from joint venture			999			1,341

EBITDA		$	15,488		$	46,016

Restructuring and certain significant income (expense) items included in EBITDA:
	Pension plan settlement charge		(1,335	)		—
	Other restructuring costs, net		(274	)		(1,787	)
	Gain of sale of business		—			9,088
	Gain on retirement of debt		—			22,388
	Kmart bad debt recovery		904			—
	Trade credit asset impairment		(1,122	)		—
	Credit Facility amendment costs		(18	)		(379	)

		$	(1,845	)	$	29,310

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. While there can be no assurance, we believe that existing cash resources, cash flows from operations and borrowings under the amended Credit Facility will be sufficient to meet our liquidity needs for the next twelve months.

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 commitment terminates on July 1, 2004 unless otherwise approved by a majority of the lenders. We intend to refinance our borrowing arrangements during the first six months of 2004.

The Company’s cash and cash equivalents decreased to $6.4 million at June 30, 2003, from $8.4 million at December 31, 2002. Cash provided by operations for the six months ended June 30, 2003 and 2002 was $19.7 million and $39.1 million, respectively. For the six months ended June 30, 2003, operating earnings, adjusted for non-cash items, improved to $7.2 million as compared to adjusted operating earnings of $6.4 million in the comparable period of 2002. Changes in other operating assets and liabilities provided $12.5 million of cash in the six months of 2003 compared to $32.7 million in 2002. Inventory levels at June 30, 2003 totaled $127 million, an increase of $6.4 million or 5.3% over the same period of 2002. While the increased inventory levels in 2003 included higher quantities of slow cookers and ice cream freezers to help insure a smooth transition to Far East production, the inventory increase at the end of the second quarter in 2003 was also impacted by lower demand due to generally slow retail selling conditions. Accounts receivable balances decreased from the year ago levels, down $10 million or 11.9% from the accounts receivable amount at June 30, 2002. Days sales outstanding (DSO) at June 30, 2003, stood at 58 days, unchanged from the DSO statistic in June 2002. During the first quarter of 2003, the Company also expended $4.1 million of cash related to severance and other facility exit costs which were accrued as restructuring charges at December 31, 2002.

THE HOLMES GROUP, INC.


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

Cash provided by investing activities during the six months ended June 30, 2003 was $2.1 million compared to $9.1 million of cash provided in 2002. The 2002 amount includes $15.1 million in proceeds received in connection with the sale of the Pollenex business in January 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 Company invested $5.9 million in capital expenditures for property and equipment during 2003 compared to capital expenditures of $7.5 million in the first six 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 six months ended June 30, 2003 and 2002 was $24.5 million and $52.3 million, respectively. Cash used for financing in 2003 and 2002 reflected repayments on the Revolving Credit Facility using cash flow from operations and also, in the 2002 first quarter, 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 credit loans is subject to a borrowing base formula based on inventory and accounts receivable.

During the first six months of 2003, the weighted average borrowings outstanding under the Revolving Credit Facility totaled $71.4 million, 2% below the average outstanding borrowings of $72.8 million in the comparable period of 2002. As of June 30, 2003, our availability was $46 million, net of outstanding letters of credit totaling $7.1 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 to the Credit Facility 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 June 30, 2003, $99.6 million of Senior Subordinated Notes were outstanding. Total debt at June 30, 2003 amounted to $250.8 million, down $27.4 million or 9.8% from the level of debt outstanding at June 30, 2002. Over the past two years, the Company has repaid or retired $109.4 million of debt, reducing total debt by 30% from the $360.2 million of debt outstanding at June 30, 2001.

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 June 30, 2003, the financial institution held $1.1 million of accounts receivable which had been purchased for cash from the Company.

THE HOLMES GROUP, INC.


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

RECENTLY ISSUED ACCOUNTING STANDARDS

The FASB issued Statement 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.” The Statement also amends FASB Statement No. 13, “Accounting for Leases” and certain other existing authoritative pronouncements to make technical corrections or clarifications. FAS No. 145 became effective for THG related to the rescission of FAS 4, 44 and FAS 64 on January 1, 2003. FAS 145 will be 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.


ITEM 3.		QUANTIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2003, the carrying value of our debt totaled $250.8 million. The fair value approximated $241 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 June 30, 2003, the Company had fixed rate debt of $99.6 million and variable rate debt of $151.2 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 June 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 $1.5 million, holding other variables constant.

THE HOLMES GROUP, INC.

ITEM 4. CONTROLS AND PROCEDURES

(a)

Evaluation of disclosure controls and procedures.

Within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to applicable federal securities laws and regulations, including Exchange Act Rules 13a-15 and 15d-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to record, process, summarize and report financial data in an effective and timely manner sufficient to alert them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

	(b)		Changes in internal controls.

There have been no changes in the Company’s internal control over financial reporting which could materially affect, or are reasonably likely to materially affect, 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 it 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 Thursday, August 14, 2003 at 11 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 six 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 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Registrant


August 11, 2003		By: /s/ Peter J. Martin

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

August 11, 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