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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

For the fiscal year ended December 31, 2002

Commission file numbers:

333-77905

The Holmes Group, Inc.

(Exact name of registrant as specified in its charter)

(508) 634-8050

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Title of Class: Not Applicable

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes o          No þ

Documents incorporated by reference: Not Applicable

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THE HOLMES GROUP, INC.

FORM 10-K

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

      This Form 10-K 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 management’s 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 are detailed from time to time in reports we file with the Securities and Exchange Commission (“SEC”), including Forms 10-Q and 10-K and our most recent Registration Statement on Form S-4 (File No. 333-77095), and include, among others, the following:

	•	Our degree of leverage and continued compliance with debt covenants.
	•	Our dependence on major customers.
	•	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.
	•	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.
	•	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.

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      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.

General

      The Holmes Group, Inc. is a leading developer, manufacturer and marketer of quality, branded home appliances, including home environment and small kitchen appliances. Our home environment products include fans, heaters, humidifiers and air purifiers. We believe that we have the leading market share in each of these product categories in the United States. Our home environment product offering also includes lighting products. Home environment products, which in the aggregate, accounted for approximately 46% of our net sales for the fiscal year ended December 31, 2002, are sold under our brand names including: Holmes®, Bionaire®, Patton®, Family Care® and Titan®. Our kitchen appliances include slow cookers, roaster ovens, skillets, deep fryers, griddles, ice cream makers and other small kitchen electric appliances which are sold under the Rival®, Crock-Pot® and White Mountain® brand names. We believe we hold the #1 or #2 market share in the major kitchen appliance categories in which we compete. Kitchen appliances accounted for approximately 51% of our net sales for fiscal 2002. We believe that our strong market position and success are attributable to our continuous product innovation, engineering and manufacturing expertise, close customer partnerships, breadth of product offerings, reputation for quality and manufacturing presence and experience in the Far East.

      We sell our products to consumers through major retail chains, including mass merchants, do-it-yourself home centers, warehouse clubs, hardware, department and specialty stores and national drugstore chains. Major customers in these channels include Wal-Mart, Target, Kmart, Kohl’s, Lowes, Home Depot, Costco, BJ’s Wholesale Club, TruServ and Walgreens. We also market our products, especially replacement filters for our home environment appliances, directly to consumers through our various branded websites and our direct mail program. We believe that the strength, scope and visibility of our retail account base provide a competitive advantage with respect to brand recognition, access to shelf space and penetration of the consumer market.

      Our Company was founded in 1982 by our Chairman of the Board of Directors, Jordan (Jerry) Kahn, an innovator in the home environment market with over 30 years of industry experience. We added to our strength in the home environment business and entered the kitchen appliance business with our acquisition of The Rival Company in February 1999. Holmes opened its first manufacturing facility in China in 1989, and currently operates three facilities in China where we manufacture many of our products and electric motors for use in our products. Our vertically integrated manufacturing facilities provide direct control over the production process and product quality. These facilities also enhance operational flexibility and allow us to quickly respond to changes in consumer demand and to specialized production needs. We maintain distribution facilities in the United States, Canada, Mexico, China and Europe, as well as offices in Hong Kong and Taiwan which are responsible for sourcing raw materials and overseeing the manufacture, quality control and shipment of our products from our Chinese factories and independent suppliers. We coordinate product development, marketing, sales and distribution from our Milford, Massachusetts headquarters.

      Our principal executive offices are located at One Holmes Way, Milford, Massachusetts 01757. Our telephone number is (508) 634-8050 and our corporate web site is located at www.theholmesgroup.com.

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Our Business Strategy

      Our strategy is to capitalize on our core strengths to achieve growth in net sales, profitability and cash flow. We intend to continue our pursuit of the following initiatives as part of our strategy:

	Strengthen the Kitchen Franchise. The long-standing reputation of the Rival® brand as a leader in the small kitchen appliance market added a strong, complementary business to our home environment product line. We are the leading manufacturer and marketer of slow cookers through Rival’s Crock-Pot® brand, and believe we hold the #1 or #2 market share in other key cooking categories, including roaster ovens, skillets, griddles and deep fryers. We intend to leverage our expertise in product innovation, manufacturing, sourcing, marketing and distribution to further strengthen the Rival® and Crock-Pot® kitchen franchise and to enter new kitchen appliance product categories.
	Expand Our Home Environment Brands. The addition of Rival’s home environment brands in 1999 has allowed us to increasingly differentiate our home comfort offerings among retailers and consumers. Through these additional brands, such as Bionaire®, we can offer a step-up brand strategy for increased presence in the department and specialty store channels.
	Further Penetrate Existing Distribution Channels. We believe that we can further penetrate our existing distribution channels as a result of favorable industry dynamics and our strong relationships and execution with mass merchant retailers. We believe that mass merchants will continue to consolidate their vendor base and focus on a smaller number of service-oriented suppliers that can (1) provide a broad array of differentiated, quality products, (2) efficiently and consistently fulfill logistical requirements and volume demands and (3) provide full product support from design to category management, point-of-sale and after-market service with the consumer. We work closely with key customers such as Wal-Mart, where we have been selected to design and produce home environment and selected kitchen products for their General Electric® branded product program.
	Develop New Distribution Channels. We continue to develop new channels of distribution by providing customized product offerings that appeal to the specific needs of each channel. We are also expanding our internet sales through the websites of our Holmes®, Bionaire®, Rival® and Crock-Pot® brands and independent on-line retail sites.
	Develop Our Brand Portfolio. We believe our wide portfolio of brands allows us to increase market share by penetrating new segments of distribution, as well as by expanding our share of shelf space in existing retail channels. Our brand development focuses on both consumer brand awareness vehicles and the development of new technologies and feature enhancements unique to our products.
	Improve the Overall Cost Structure. Through our manufacturing facilities in China and our sourcing capabilities with independent Far East resources, we have the ability to be a low-cost, high quality, flexible producer of appliance products. In December 2002, we announced the decision to close Rival’s remaining manufacturing facilities in the United States and to shift all manufacturing to the Far East.
	Expand Distribution into New Geographic Regions. Currently, our international sales represent 13% of our consolidated revenues. We believe that the European, Latin American and Asian home comfort and kitchen appliance markets are underdeveloped and represent substantial growth opportunities. We intend to leverage the greater international recognition of Rival’s brands in Europe and Latin America with our low cost flexible supply in Asia to increase sales in these regions.

Our Products

      At The Holmes Group, product innovation is viewed as a major priority in both the home environment and kitchen businesses. We maintain internal product teams dedicated to new product development and product enhancements. We staff our own engineering and product development department to research new product concepts as well as to conduct activities relating to the improvement

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      We utilize state-of-the-art design technology including advanced CAD design software and a laser-based stereolithography technique to design and engineer new products. We believe this technology allows us to design and develop new products quickly, enabling us to accurately assess the feasibility, cost and tooling requirements of new products prior to manufacturing. We believe this technology gives us a competitive advantage in the design and development of new products and product line extensions. Our expenditures, including amounts expensed as incurred and capitalized as property and equipment, for new product development and tooling, totaled approximately $18.0 million, $14.5 million and $12.6 million for the years ended December 31, 2000, 2001 and 2002, respectively.

      The following paragraphs describe the major product initiatives in each of our major businesses.

      Our home environment products allow consumers to better control the air quality, temperature and lighting of their home and office environments. Many of our home environment products include digital temperature displays and allow for remote control adjustments.

      Fans. We currently manufacture and market approximately 100 different fan models under the Holmes®, Bionaire® and Patton® brand names and selected private label brands, including table, stand, window, window-to-floor, high velocity and oscillating fans, typically for purchase and use by household consumers. Many of our higher-priced products offer consumers added convenience features including Accutemp™ thermostat controls and remote control features. Retail prices for our fans range from $5 to $200.

      Heaters. Portable electric heaters are used to heat areas of the house not adequately reached by central heat and to heat an individual room while that room is in use. We currently manufacture and market approximately 75 different heater models under the Holmes®, Patton®, Bionaire®, HeatSafe® and Titan® brand names, including plastic, ceramic, metal, radiant, oil filled and baseboard styles. Our Galileo™ wireless climate center uses radio frequency control to set the temperature from anywhere in the room. Retail prices for our heaters range from $20 to $100.

      Humidifiers. Consumers use humidifiers to provide greater comfort by increasing moisture in their home environment during the winter months. We currently manufacture and market approximately 50 different humidifiers under the Holmes®, Bionaire®, and Family Care® brand names, including cool mist, warm mist, ultrasonic and console models that range in moisture output from one to 12 gallons per day. We also market products under a licensing arrangement for the Halls® brand. Some of our Bionaire® humidifiers include Galileo™ radio frequency controls so that humidity levels can be set remotely for individual preferences. Retail prices for our humidifiers range between $15 and $150. We also sell a variety of humidifier accessories, replacement parts and chemical treatments.

      Air Purifiers. Air purifiers circulate a room’s air through filters that remove certain contaminants from the air. In recent years, high efficiency particulate arresting (HEPA) filters have come to dominate the industry. We currently manufacture and market approximately 30 different air purifier models containing HEPA filters under the Holmes®, Bionaire® and Family Care® brand names. Our Holmes Harmony™ air purifier product line, which is powered by GE motors manufactured in our facilities in China, offers a simplified replacement filter system making it easier for consumers to maintain the appliance at top functionality. Retail prices for our air purifiers range between $10 and $280.

      Accessories. Many of our products require accessories, including replacement filters, chemical treatments and replacement parts. For example, air purifiers periodically need new replacement filter cartridges and humidifiers need new replacement wick filters. As the installed base of these products continues to expand, we expect that the market for these accessories will grow as well. In addition, we

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      Lighting Products. We market over 150 different decorative and home/office lighting products, including table, floor and wall-mounted models. These products complement our traditional home environment appliance line, provide an additional non-seasonal category, and are distributed through the same distribution channels as our other products. Holmes’ lighting products are manufactured by independent suppliers in China. Retail prices for these products range between $4 and $90.

      Small kitchen electric appliances constituted the Rival brand’s primary product line for over 60 years. Over its history, Rival has been responsible for the invention of several small appliances that can be found today in many American households, including the electric can opener and the slow cooker, which we sell under our Crock-Pot® trademark. We believe that Rival is the dominant manufacturer and marketer of slow cookers in the United States, with the brand maintaining, by far, the #1 market share in this product category. “Slow-cooking” is often viewed as a healthy method of food preparation and our Crock-Pot® slow cooker represents a convenience for today’s time-starved consumers. We market over 25 models of slow cookers which retail for between $10 and $80. In 2000, Rival introduced our Smart-Pot® line of slow cookers which added programmable features to certain models allowing for increased cooking convenience.

      As part or our strategy to make Rival “the cooking company”, we introduced an expanded line of kitchen electric appliances in the second half of 2001. The Rival brand entered new product categories including roaster ovens, skillets, griddles and deep fryers. These new products built upon the heritage that the Rival® and Crock-Pot® brand names had established in the slow cooker category. Over the past two years, we believe that Rival has earned either the #1 or #2 market share in our retail distribution channels for these new cooking categories. The Rival product line also includes toasters, toaster ovens, can openers, food slicers and other kitchen appliances. In April 2003, Rival will introduce updated products in its Seal-A-Meal® vacuum food storage device product line.

      In addition, we believe that we maintain a leading market share in the ice cream freezer product category. Under the Rival® and White Mountain® brands, we market small electric appliances that allow consumers to make ice cream, both traditional and softserve varieties, in their homes. The Rival “treats” products also include ice shavers and other associated appliances, as well as mixes and syrups for use with our products. The White Mountain® brand has been a factor in the ice cream freezer business since 1853. In fact, our White Mountain® wooden bucket ice cream maker helped to launch one of America’s leading premium ice cream brands in the 1970’s.

      We believe that the combination of our innovative product development and our global manufacturing and sourcing capabilities positions our kitchen business for growth and market share gains in the future. We expect to grow in our existing product categories and to enter new product categories in the coming years.

      One of our Far East subsidiaries, Raider Motor Corporation, has proven strengths in the design and manufacture of a variety of electric motors for use in home and commercial appliances. As part of our vertically integrated manufacturing strategy, the Raider Motor facility manufactures many of the motors for our home environment product line. The motor is an integral component of our fans, humidifiers, heaters and air purifiers and is a key element of product quality to our consumers. In October, 1998, we entered into a joint venture with General Electric Company for motor manufacturing, sales and distribution to General Electric subsidiaries and other third parties. In 2001, Raider Motor became the first Chinese motor manufacturer to receive GE’s “Six Sigma” status for product quality. The joint venture entity is owned 49% by Holmes and 51% by GE with capital expenditures necessary to support the growth of the joint venture shared equally between the parties. Earnings from the joint venture, which is

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Our Manufacturing Capabilities

      In 2002, we manufactured approximately 50% of our products, utilizing a combination of our foreign and domestic manufacturing facilities. Holmes has been manufacturing quality products at its own facilities in China for over thirteen years. We have recently invested in the development of an expanded manufacturing complex in southern China to further strengthen our capabilities. In December 2002, we announced the decision to close our remaining manufacturing facilities in the United States. Our domestic manufacturing plants specialized in the production of selected small kitchen appliances, particularly our slow cookers. The US facilities were closed on January 31, 2003 and all production activities have been shifted to our expanded manufacturing facilities in southern China or to independent suppliers in the Far East.

      We manufacture most of our home environment products at our manufacturing facilities in China. These facilities are highly integrated and produce most of the electric motors, injection molded plastic components and other components used in the manufacturing and assembly process. The balance of our home environment products are produced through subcontracted manufacturers in China and the United States, generally under the supervision of Holmes employees. Our expanded China manufacturing complex began the production of Crock-Pot® slow-cookers during 2002. Other Rival kitchen products will also be produced in our facilities beginning in 2003. We will also continue to maintain relationships with independent resources in China for many items in the Rival product line.

      We believe that we have a cost advantage as a result of our degree of vertical integration, purchasing power and low labor costs at our Chinese manufacturing facilities. In addition, by operating our own manufacturing facilities, we have control over the quality and production timing of our products from design through final distribution.

Our Marketing and Distribution

      Our products are sold in the United States, Canada, Latin America, Europe and Asia to the retail trade by an internal staff of regional sales managers, with assistance from an internal sales support staff, field sales associates and regional independent manufacturers representative organizations. We market our products through all major channels of distribution including mass merchants, do-it-yourself home centers, warehouse clubs, hardware stores, department stores, home and kitchen specialty stores, national drugstore chains and mail order and premium companies. The sales managers are actively involved in servicing all aspects of each retail account.

      In order to respond most efficiently to the demands of our retail customers and ensure timely delivery, we balance direct shipments from our Far East manufacturing facilities with shipments from our domestic and international warehouses. We operate distribution centers in California, Texas, Missouri and Massachusetts and service our international retailers from warehouses in Canada, Mexico and the United Kingdom. We employ an electronic data interchange (EDI) system with selected retail customers to expedite order and invoice processing.

      We also market certain of our products, predominantly filters and accessories for our home environment appliances, directly to consumers through our call center and distribution facility in El Paso, Texas. This operation also processes consumer orders taken over our internet web sites.

      Our marketing department is responsible for market analysis, new product development, pricing strategy, promotions, key cooperative partnerships and overall category development. We believe that our packaging is one of our most powerful marketing tools because most consumers typically purchase small appliances without the benefit of knowledgeable retail sales staff. Holmes’ innovative packaging and point-of-purchase support provide written information and illustrations regarding product features, usage

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Our Major Customers

      Our two largest retail customers, Wal-Mart (including Sam’s Wholesale Club) and Target (including Mervyns) accounted for approximately 43% of our net sales during 2002. Individually, Wal-Mart and Target each accounted for over 10% of our net sales during 2002. We do not have long-term agreements with our major customers, and purchases are generally made through the use of individual purchase orders. A significant reduction in purchases by any of these customers could have a material adverse effect on our business.

      In January 2002, Kmart Corporation and certain of its U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In January 2003, Kmart filed a reorganization plan with the Bankruptcy Court which included a timetable allowing the Company to emerge from Chapter 11 by April 30, 2003. Kmart closed 283 stores in 2002 and recently announced plans to close an additional 316 stores in the first half of 2003. The Company’s sales to Kmart totaled approximately 6% of consolidated sales in 2002 compared to 10% of consolidated sales in 2001. We are currently evaluating what effect Kmart’s plans will have on our sales in 2003.

The Seasonality of Our Business

      Sales of our products are highly seasonal, and counter-seasonal weather can adversely affect our results of operations. Within the home environment product line, sales of fans occur predominantly from January through June, and sales of heaters and humidifiers occur predominantly from July through December. Although kitchen appliances and certain home environment products, such as air purifiers and lighting products, are used year-round, the nature of these products tend to draw increased sales during the winter months when people are indoors. As a result, sales of these products tend to be greatest in advance of the winter months from July through December. Additionally, because many of our kitchen products are given as gifts, we sell more of these products in anticipation of the holiday season. When holiday shipments are combined with seasonal products such as heaters and humidifiers, 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, due 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 heater, humidifier, and air purifier products.

Our Competition

      The markets for most of our product categories are developed and highly competitive. Management believes that competition is based on several factors, including price, access to retail shelf space, product features, product enhancements, brand names, new product introductions, and marketing support and distribution systems.

      We compete with many well-established companies, some of which have substantially greater facilities, personnel and financial and other resources than Holmes. Our major competitors include Applica, Hamilton Beach/Proctor Silex, Kaz (including its recently acquired business, Honeywell Consumer Products), Salton and Sunbeam. We also compete with many importers and foreign manufacturers of branded and unbranded products.

      We believe that our most important competitive strengths are the quality, design and competitive pricing of our products, our attention to retailer and consumer needs, our stable of recognized brands, our access to major channels of distribution, the development of new products and innovation in existing products, our ability to provide timely shipments through our manufacturing and distribution facilities and the capabilities of our management team.

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Our Patents and Trademarks

      We hold a number of patents and trademarks registered in the United States, Canada, and other countries for various products and technologies. Of particular importance are our trademarks: Holmes®, Rival®, Patton®, Bionaire®, White Mountain®, Family Care®, Titan® and Crock-Pot®. We have additional patent applications pending in the United States, Canada and Mexico. We also register trademarks on product names and unique features in the United States and other countries. We believe that, other than with respect to the Crock-Pot® trademark, none of our product lines is dependent upon any single trademark, patent, group of patents or other intellectual property rights.

The Regulation of Our Industry

      We are subject to federal, state and local regulations concerning the environment, occupational safety and health, trade-related issues and consumer products safety. Most of our products are listed by Underwriters Laboratories, Inc. (UL), the Canadian Underwriters Laboratories, Inc. (CUL), or similar organizations in other markets. UL and CUL are independent, not-for-profit corporations engaged in the testing of products for compliance with certain public safety standards. We are also regulated by, and hold ongoing discussions regarding specific products with, the United States Consumer Products Safety Commission, the Food and Drug Administration and the Canadian Standards Association. We believe that we are in material compliance with all of the regulations applicable to us. There can be no assurance, however, that such regulations will not negatively affect us in the future. Our operations could also be adversely affected by other regulations relating to our foreign operations, including changes in trade laws, increased import duties, import/export regulations and changes in foreign laws.

Our Employees

      We had approximately 7,300 employees as of December 31, 2002, of which approximately 1,000 were located in the United States, Europe and Canada. Approximately 6,300 of our employees were located at our manufacturing facilities in Dongguan, China, and our product sourcing offices in Hong Kong and Taiwan. As a result of the restructuring actions related to our domestic manufacturing operations which were announced in December 2002, the Company expects to reduce our employee base in the United States by approximately 750 people during the first six months of 2003.

Certain Risk Factors Which May Affect Our Future Operating Results

      Investors should carefully consider the following risk factors, together with the other information contained in the Annual Report on Form 10-K, in evaluating our company and our business. In particular, investors should note that this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and that actual results could differ materially from those contemplated by such statements. See “Disclosure Regarding Forward-Looking Statements.” The factors listed below represent certain important factors which we believe could cause such results to differ. These factors are not intended to represent a complete list of the general or specific risks that my affect us. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated.

      Holmes and Berkshire Partners LLC, a Boston-based investment firm which is the Company’s majority shareholder, completed a recapitalization transaction in November 1997. In that transaction, the Company issued $105 million of Senior Subordinated Notes (the “Notes”) due in November 2007 and entered into a Credit Facility totaling $100 million. The Company’s debt level increased substantially with the February 1999 acquisition of The Rival Company. The Rival acquisition was partially funded by the issuance of an additional $31.3 million of Notes and an amended and restated Credit Facility.

      At December 31, 2002, our total debt was $275.2 million, which included $175.7 million of borrowings under our amended Credit Facility and $99.5 million of outstanding Notes. Borrowings under

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      Our ability to service our debt obligations, including the Notes, and to fund planned capital expenditures will depend upon our future operating performance, which will be affected by prevailing economic conditions in the markets we serve and financial, business and other factors, certain of which are beyond our control. We cannot give assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under our Amended Credit Facility in an amount sufficient to enable us to service our indebtedness, including the Notes, or to fund our other liquidity needs. We cannot assure investors that we will be able to effect any refinancing of our existing borrowing facilities on commercially reasonable terms, or at all.

      Our high level of debt could have important consequences for investors, such as:

	•	Our leverage makes us more vulnerable to general adverse economic and industry conditions;
	•	Our ability to obtain additional financing for acquisitions, or to fund future working capital, capital expenditures or other general corporate requirements may be limited;
	•	We will need to use a substantial portion of our cash flow from operations for the payment of principal of, and interest on, our indebtedness, which will reduce the amount of money available to fund working capital, capital expenditures or other general corporate purposes;
	•	We are required to comply with financial ratio and other restrictive covenants, which may place us in default or may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete, and
	•	Our debt level may place us at a competitive disadvantage to our less leveraged competitors.

      Our success depends on sales to our significant customers. Sales to our two largest customers during 2002 were approximately 43% of consolidated net sales. We do not have long-term agreements with our major customers, and purchases are generally made through the use of individual purchase orders. A significant reduction in purchases by any of our major customers or a general economic downturn in retail sales could have a material adverse effect on our business, financial condition and results of operations.

      Our owned manufacturing facilities in southern China provided 32% of our total production requirements during the year ended December 31, 2002. Beginning in 2003, this dependence is expected to increase due to the restructuring actions announced in December 2002, which included the closing of our manufacturing facilities in the United States. In addition, we also source a large portion of our remaining products from independent suppliers located in China.

      We believe that the loss of any one independent supplier would not have a long term material adverse effect on our business because other suppliers with which we do business would be able to increase production to fulfill our requirements. However, the loss of a supplier could, in the short term, adversely affect our business until alternative supply arrangements are secured.

      Our arrangements with our China manufacturing facilities and our independent suppliers are subject to the risks of doing business abroad, including:

	•	Import duties and trade restrictions;

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	•	Production delays due to unavailability of parts or components;
	•	Increases in transportation costs and transportation delays;
	•	Work stoppages;
	•	Foreign currency fluctuations, and
	•	Political and economic instability.

      We believe that competition is based upon several factors, including:

      • Price;

      • Access to retail shelf space;

      • Product features and enhancements;

      • Brand names;

      • New product introductions, and

      • Marketing support and distribution approaches.

      We compete with established companies, some of which have substantially greater facilities, personnel and financial and other resources than we have. Significant new competitors or increased competition from existing competitors may adversely affect our business, financial condition and results of operations.

      We believe that our future success will depend in part upon our ability to continue to introduce innovative designs in our existing products and to develop, manufacture and market new products. We may not successfully introduce new products or product innovations or develop and introduce, in a timely manner, innovations to our existing products, which satisfy customer needs or achieve market acceptance. Our failure to develop products and introduce them successfully and in a timely manner would harm our ability to grow our business.

      We sell our product to consumers through major retail channels, primarily mass merchandisers, department stores, specialty stores, hardware stores and mail order catalogs. As a result, our business and financial results can fluctuate with the financial condition of our retail customers and the retail industry. The current general slowdown in the retail sector has adversely impacted the net sales of our products, our operating margins and our net income and has resulted in, and we expect it to continue to result in, additional pricing and marketing support pressures. A number of our retail customers, including Kmart, have filed for bankruptcy protection during this slowdown. The risks of terrorist attacks and potential hostilities could prolong or worsen the current economic downturn. If such conditions continue or worsen, it could have a material adverse effect on our business, financial condition and results of operations.

      For the year ended December 31, 2002, our international sales accounted for only 13% of our consolidated sales. We intend to increase our international activities in the future. Our pursuit of international growth opportunities may require significant investments for an extended period before returns

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      • The risk that our brand names may not be locally recognized;

      • Unexpected changes in regulatory requirements;

      • Inadequate protection of intellectual property in foreign countries;

      • Foreign currency fluctuations;

      • Transportation costs;

      • Adverse tax consequences, and

      • Political and economic instability.

      We cannot assure investors that we will not incur higher costs in addressing these potential risks.

      Manufacturing lead times and a strong concentration of our sales occurring during the August through December time period require that we purchase raw materials and manufacture products, and thereby increase inventories, based on anticipated sales and forecasts provided by our customers and our sales personnel. In an extended general economic slowdown, we cannot be assured that our customers will order these inventories as anticipated.

      We face exposure to product recalls and product liability claims in the event that our products are alleged to have manufacturing or safety defects or to have resulted in injury or other adverse effects. We cannot assure investors that we will be able to maintain our product liability insurance on acceptable terms, if at all, or that product liability claims will not exceed the amount of our insurance coverage. Additionally, we do not maintain product recall insurance. As a result, we cannot assure investors that product recalls and product liability claims will not adversely affect our business.

      We regard our patents, trademarks, service marks and similar intellectual property as important to our success. We rely on patent and trademark laws in the United States and other jurisdictions to protect our proprietary rights. We seek to register our trademarks in the United States and elsewhere. These registrations could be challenged by others or invalidated through administrative process or litigation. If certain of these rights, particularly our Rival® and Crock-Pot® trademarks, were infringed or invalidated, our business could be materially adversely affected.

      We cannot assure investors that others will not claim that our proprietary products are infringing their intellectual property rights or that we do not in fact infringe those intellectual property rights. If someone claimed that our proprietary products infringed their intellectual property rights, any resulting litigation could be costly and time consuming and would divert the attention of management and key personnel from other business issues. We also may be subject to significant damages or an injunction against use of our proprietary products. A successful claim of patent or other intellectual property infringement against us could harm our financial condition.

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      Most federal, state and local authorities require certification by Underwriters Laboratory, Inc. (UL), an independent, not-for-profit corporation engaged in the testing of products for compliance with certain public safety standards, or other safety regulation certification prior to marketing electrical appliances. Foreign jurisdictions also have regulatory authorities overseeing the safety of consumer products. Our products, or additional electrical appliances which may be developed by us, may not meet the specifications required by these authorities. A determination that we are not in compliance with these rules and regulations could result in the imposition of fines or an award of damages to private litigants.

      Because of our Far East manufacturing and sourcing activities, we rely on the West Coast ports and our distribution facilities in California to process a large portion of the shipments to our retail customers. This reliance will increase beginning in 2003, as the restructuring actions, which were announced in December 2002, include the phase-out of our distribution facilities in Missouri and the transfer of these activities to our California operations during the first half of 2003. Actions taken by the Pacific Maritime Association (“PMA”) and the International Longshore and Warehouse Union (“ILWU”), related to a labor contract which expired July 1, 2002, adversely impacted our ability to deliver products to retailers during the fourth quarter of 2002. While the disruptive actions were resolved and the PMA and ILWU agreed to a new, long-term contract in December 2002, future disputes could affect our operations.

Additional Information

      We will provide paper or electronic copies of any of our filings with the Securities and Exchange Commission free of charge upon request to Paul Izzo, Esq., Corporate Clerk, The Holmes Group, Inc., One Holmes Way, Milford, MA 01757. Such filings may also be obtained at the Commission’s web site, www.sec.gov. Our corporate web site, www.theholmesgroup.com, is primarily designed for end users of our products, and accordingly does not currently include such filings.

Item 2.     Properties

      The following table sets forth our principal facilities, the primary activity at each of the facilities listed and the expiration date of the applicable lease, in the case of leased facilities.

      During 2000, we began construction of a new manufacturing complex on land that was purchased in Guangdong Province, which is approximately 70 miles northwest of Hong Kong. In 2001, we began to move manufacturing to this facility and it should be fully operational during 2003. As of December 31, 2002, there were twelve buildings completed out of a total of twenty in the master plan. Ten of the twelve are owned and two are leased under a two-year lease that expires on December 31, 2004. The eight remaining buildings, which we expect to complete in 2003 and 2004, could be owned or leased. When complete, the new Dongguan complex will total approximately 1.9 million square feet. We plan to transfer

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      We also contract for distribution and warehousing services at two facilities in California and facilities in Mexico City, Mexico, Brampton, Ontario, Waddington, England and Rotterdam in the Netherlands, which are managed by independent third party providers. At December 31, 2002, these facilities represented approximately 820,000 square feet of space. In March 2003, the Company executed a lease for 828,000 square feet of distribution space in a facility in Fontana, California. During the first half of 2003, we expect to shift distribution activities from one of our existing California facilities to the new site. The Fontana facility will also provide distribution capacity to accommodate the transfer of operations from the Company’s Midwest distribution facilities which were affected by the restructuring actions described below.

      Over the past two years, we have initiated restructuring actions that have affected several of our manufacturing and distribution facilities in the United States which were acquired as part of our 1999 acquisition of The Rival Company. In June 2001 and January 2002, we announced the closing of a manufacturing facility and a distribution center in Sedalia, Missouri. On December 2, 2002, we announced the closure of all remaining manufacturing facilities in the United States, effective January 31, 2003, which affected our production activities in Flowood, Mississippi, Sweet Springs, Missouri and Clinton, Missouri. Production at these facilities, which consisted primarily of Rival’s Crock-Pot® slow-cooker product line, has been shifted to our expanded facilities in southern China or to other independent manufacturers in the Far East. As part of this restructuring, we also announced that a distribution center in Clinton, Missouri, an administrative office in Kansas City, Missouri and a returns processing facility in Worcester, Massachusetts will be closed during the first half of 2003. The activities at these facilities will be shifted to other company facilities in Massachusetts and California.

      As a result of these actions, the Company is presently offering for sale seven former manufacturing/distribution facilities, totaling approximately 1.5 million square feet of space. The net book value of these properties has been reduced to net realizable value so as to reflect the impaired condition of the assets. At December 31, 2002, assets held for sale in the consolidated balance sheet includes $6 million related to these properties.

Item 3.     Legal Proceedings

      We are involved in various legal proceedings incident to our normal business operations, including product liability and patent and trademark litigation. Management believes that the outcome of such litigation will not have a material adverse effect on our business, financial condition or results of operations. We have product liability and general liability insurance policies in amounts management believes to be reasonable. There can be no assurance, however, that such insurance will be adequate to cover all potential product or other liability claims against us. We also face exposure to voluntary or mandatory product recalls in the event that our products are alleged to have manufacturing or safety defects. We do not maintain product recall insurance.

Item 4.     Submission of Matters to a Vote of Security Holders

      Not applicable.

PART II

Item 5.     Market for the Registrant’s Common Equity and Related Stockholder Matters

      The Holmes Group is privately-owned and there is no public trading market for our equity securities.

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Item 6.     Selected Financial Data

      The following selected financial data as of and for the years ended December 31, 1998 through December 31, 2002, set forth below, have been derived from our audited Consolidated Financial Statements. Operating results in 2002 were affected by the sale of the Pollenex® personal comfort business in January 2002. Net sales of the Pollenex® business, which was part of the Rival acquisition in February 1999, amounted to $16.8 million, $11.6 million and $12.1 million for 2001, 2000 and 1999, respectively. The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and our Consolidated Financial Statements, including the notes thereto, included elsewhere in the Annual Report. In certain cases, pro forma results and other non-GAAP financial information are presented in this table and in the MD&A discussion below, in order to provide a better understanding of the Company’s results and the trends from which to measure performance. A reconciliation between the pro forma or adjusted results and GAAP results is provided as part of this table.

(1)	Net sales and operating costs for 1998 through 2001 have been restated to reflect the reclassification of co-operative advertising costs, which had previously been included in expenses, as a deduction from net sales.
(2)	Gross profit in 2002 includes $7.2 million of inventory writedowns in connection with the Company’s decision to exit its domestic manufacturing operations and $0.4 million of inventory writedowns related to Kmart private label merchandise.

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(3)	Selling and administrative expenses in 2002 and 2001 include charges of $0.7 million and $14.1 million, respectively, taken in connection with the Kmart bankruptcy.
(4)	Restructuring costs in 2002 represent expenses and asset impairment charges related to the Company’s decision to exit manufacturing operations in the United States. Restructuring costs in 2001, 2000 and 1999 relates to facility closings associated with the integration of the Rival business. See Note 7 to the consolidated financial statements.
(5)	The extraordinary item in 2002 represents a gain on the repurchase of $36.2 million of the Company’s Senior Subordinated Notes.
(6)	The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. In connection with the adoption of the new Standard, the Company recorded a non-cash impairment charge of $79.8 million
(7)	For purposes of determining the ratio of earnings to fixed charges, earnings represent income before income taxes, plus fixed charges as presented, without adjustment for one-time items as discussed in (8) below. Fixed charges consist of interest expense on all indebtedness plus a portion of rental payments on operating leases that is considered representative of the interest factor.
(8)	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, EBITDA as presented and adjusted EBITDA after removing restructuring charges and other unusual items for the five years ended December 31, 2002 is as follows:

(a)	Operating income and EBITDA amounts in 2000 were reduced by a fourth quarter charge of $25.6 million related to inventory and accounts receivable writedowns.

(b)	Net of amounts rebilled to the Company’s joint venture with General Electric.

(c)	The Company ceased amortizing goodwill in 2002 in accordance with the provisions of SFAS No. 142.

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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, 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 season 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 in kitchen electrics and other home environment products.

      A summary of the risks and uncertainties which may affect our future performance is presented on page 3 of this Form 10-K and a discussion of the “risk factors” affecting our business is presented on pages 10 through 14 of this Annual Report. 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. 333-77095).

Critical Accounting Policies and Estimates

      The discussion and analysis of our financial condition and results of operations are 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 allowances 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.

      The following critical accounting policies affect the most significant estimates used in the preparation of our consolidated financial statements:

	We record allowances for estimated losses resulting from the inability of our customers to make required payments. We assess the credit worthiness of our customers using multiple sources of information and analyze such factors as our historical bad debt experiences, publicly available

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information regarding our customers and the inherent credit risk related to them, information from subscription based credit reporting companies, trade association data and reports, current economic trends and changes in customer payment terms or payment patterns. We also establish reserves to cover potential costs related to deductions taken by our customers when payments are remitted and to accrue for co-operative advertising, volume incentives and other sales allowances when they are earned by our customers. These assessments require significant judgment. If the financial condition of our customers were to worsen, or if our customers claim allowances in excess of our accruals, additional write-offs may be required, resulting in costs that are not included in the allowances for doubtful accounts and customer deductions at December 31, 2002.

We value our inventory at the lower of cost or market, and regularly review the book value of discontinued product lines to determine if these items are properly valued. If market value is less than cost, we write down the related inventory to net realizable value using estimates of our eventual selling price for the products. We regularly evaluate the composition of our inventory to identify slow-moving and obsolete inventories to determine if additional write-offs are required. Changes in consumer purchasing patterns or in our product mix, however, could result in the need for additional write-offs.

	We establish reserves for product returns based on historical experience due to the seasonal nature of our business. In addition, we monitor product quality and returns activity subsequent to the year-end. If necessary, we record additional accruals to reflect unfavorable trends, such as counter-seasonal weather that may increase returns.

We record income tax liabilities for known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine if a valuation allowance is necessary. At December 31, 2002, the Company had $29.4 million and $52.7 million of federal and state net operating loss carryforwards, respectively, which can be used to offset future taxes on income earned in the United States. This amount excludes certain asset impairment charges and restructuring cost accruals which are not presently deductible for tax purposes. We have established valuation allowances against deferred tax assets as the Company’s ability to generate sufficient taxable income cannot be assured. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflects the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to deferred tax asset balances. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances known at that time, while the actual effective tax rate is calculated at year-end. This estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the period in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate. The preparation of federal and state tax returns requires interpretations, judgments and estimates which are subject to the review and audit of taxing authorities. We believe that the results of audits will not materially change tax filings or adversely affect earnings.

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We established reserves and accruals related to the costs associated with our decisions to close certain manufacturing and distribution facilities in the United States. We made judgments and estimates on the net realizable value and timing of the sales of the assets associated with these decisions. If our estimates of the sales proceeds are too high, the losses could exceed the dollar amount of our reserves. If we do not sell the idle facilities in a reasonable period, the costs to exit the facilities could be greater than our established reserves.

      We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances including current and expected economic conditions, product mix and in some cases actuarial valuations. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Results of Operations

      The following table presents our operating results for the three years ended December 31, 2002 as a percentage of net sales:

     Comparison of Years Ended December 31, 2002 and December 31, 2001

     Net Sales

      During 2002, net sales decreased $3.7 million or 0.6% as compared to net sales during 2001. After excluding $16.8 million in sales of the Pollenex® business, a line of personal care products which the Company sold in January 2002, from the 2001 net sales total, the Company experienced a sales increase of $13.1 million in 2002, or 2.2% above the adjusted 2001 sales level. The Company’s sales performance in 2002 was highlighted by the Rival® kitchen appliance business which produced a 24% sales increase as compared to 2001’s revenue total. A more diverse product line in new cooking appliance categories such as roaster ovens, skillets and deep fryers contributed to the sales increase in the kitchen business. Rival’s core product categories of Crock-Pot® slow cookers and ice cream freezers also showed higher sales in 2002 as new products delivered increased revenues. The 2001 net sales amount has been restated to reflect the reclassification of $15.8 million in co-operative advertising costs as a reduction from net sales. Previously, these costs were included in selling and administrative expenses.

      The kitchen appliance sales increase was partially offset by reduced sales of Holmes® and Bionaire® home environment products due to increased competition during 2002. Sales levels were 15% below 2001 with all product lines in the home environment business producing lower revenues during the year. The

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      International sales in 2002 increased 12% from 2001 due to higher sales in Canada and Europe. Sales of motors, which are manufactured by our facility in China, to our joint venture with General Electric totaled $17.6 million in 2002 compared to $17.1 in motor sales during 2001.

     Gross Profit

      Gross profit totaled $164 million in 2002, an increase of $14 million or 9.3% above the 2001 level. The Company’s gross profit percent improved 2.4 percentage points during the year to finish at 26.9% in 2002 compared to 24.5% in 2001. During 2002, the Company’s gross profit was reduced by $7.2 million of inventory writedowns related to the decision to close its domestic manufacturing operations. Excluding these one-time writedowns, gross profit would have been 28.1% of net sales, an improvement of 3.6 percentage points above the 2001 gross profit rate. Both of the Company’s major businesses showed gross profit improvements, with the kitchen business benefiting from product innovation and favorable sales trends and the profitability of the home environment business favorably affected by the move away from less profitable, opening price point products.

      The Company’s decision to shift manufacturing activities to its manufacturing complex in southern China and to independent suppliers in the Far East is expected to result in improved profitability in 2003. The Company’s domestic manufacturing operations, which were closed effective January 31, 2003, had unfavorable variances of $3.5 million during 2002, slightly below the unfavorable variances of $4 million incurred in 2001. The Company expects to incur unfavorable variances of approximately $1 million during the first quarter of 2003 as a result of closure.

     Selling and Administrative Expenses

      In 2002, selling and administrative expenses decreased $3.7 million or 3% from the spending total in 2001. These expenses represented 19.8% of net sales in 2002 compared to 20.3% in 2001. The Company’s bad debt provision decreased substantially during 2002 to $6.1 million in 2002 compared to $15.2 million last year, as the 2001 expense included charges of $14.1 million related to the bankruptcy filing of Kmart in January 2002. The 2002 bad debt expense included a charge of $0.7 million to further adjust the Kmart pre-bankruptcy receivables to net realizable value and a charge of $3 million related to the bankruptcy of a distributor. After removing the impact of the Kmart bankruptcy, selling and administrative expenses increased $9.7 million or 8.8% during 2002 as compared to 2001. The increased spending in 2002 included $4.7 million of expenses related to the implementation of new computer systems, higher legal costs of $1 million and $1 million in increased insurance costs. Expenses in 2002 also included a non-cash impairment charge of $1.2 million related to unused trade credits based on a re-examination of the Company’s plan to use these credits.

     Restructuring and Plant Closing Costs

      During 2002, the Company provided for $28 million in restructuring costs related to actions initiated during the year. Restructuring costs were substantially higher than in 2001 when the Company incurred $1.7 million of costs related to the closure of a manufacturing facility in Missouri. In December 2002, the Company announced the shift of all manufacturing activities to its facilities in southern China and to independent suppliers in the Far East resulting in the closure of three domestic manufacturing facilities in January 2003, the phase-out of two distribution centers in Clinton, Missouri and Worcester, Massachusetts during the first half of 2003 and the shutdown of an administrative office in Kansas City, Missouri. In January 2002, the Company had also announced the closing of a distribution center in Sedalia, Missouri. The restructuring costs in 2002 included $19.9 million of non-cash asset impairment charges to writedown redundant property and equipment to their net realizable value, $4 million of severance and benefit costs for approximately 750 employees and $4.1 million of facility exit and lease termination costs. The Company expects to pay the majority of the severance costs during the first six months of 2003, with cash disbursements for facility exit and lease costs occurring throughout 2003 and 2004.

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     Interest Expense and Other Income

      Interest expense was $8.3 million lower in 2002 than in 2001 reflecting the Company’s lower debt level and reduced interest rates, which were in effect during 2002. The repurchase of $36.2 million of the Company’s 9 7/8% Senior Subordinated Notes in March 2002 reduced interest expense by approximately $2.2 million during 2002. Interest expense related to the Company’s Credit Facility was also lower in 2002 as the Term Loan portion of the Facility was reduced by continuing principal payments and the application of the $15.1 million in cash proceeds from the sale of the Pollenex® business in January 2002. During 2002, the average outstanding balance on the Revolver portion of the Credit Facility totaled $85 million, a reduction of 23% below the average outstanding balance of $ 110.2 million during 2001. In 2001, interest expense had included a charge of $1 million related to the issuance of warrants to our bank lenders to acquire up to 5% of the Company’s common stock at $5.04 per share. Non-cash interest costs, representing the amortization of debt issuance costs and fees related to the guaranties provided by Berkshire Partners, totaled $7 million in 2002 compared to $5.7 million in 2001.

      Other income in 2002 totaled $10.6 million compared to $0.6 million of income in 2001. The 2002 amount included a gain of $9.5 million related to the sale of the Pollenex® business in January 2002, while other income in 2001 included a gain of $0.6 million related to the sale of a manufacturing facility which had been closed during 2000.

     Income Taxes

      During 2002, the Company recorded an income tax benefit of $0.1 million compared to tax expense of $4.5 million in 2001. In 2002, a tax benefit of $5.1 million related to additional net operating loss carrybacks, which were made possible by recent tax law changes in the United States, more than offset other income tax expense. Tax benefits related to domestic losses during 2002 and 2001 were not recorded in the consolidated financial statements as there was no assurance that these tax benefits would be realized.

     Equity in Earnings of Joint Venture

      The Company recorded $3 million in earnings from our joint venture with General Electric during 2002 compared to earnings of $2.4 million in 2001.

     Extraordinary Gain

      In conjunction with the Fifth Amendment of 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 Facility. The Notes repurchased were retired and cancelled. This transaction resulted in an extraordinary gain on the early retirement of debt totaling $22.4 million. The gain is net of approximately $1.9 million of debt issuance costs and $0.3 million of debt issuance discount written off as part of the transaction and $0.1 million of transaction fees. A provision for income taxes has not been recorded in connection with this transaction as the Company expects to offset the gain with available net operating loss carry forwards.

     Cumulative Effect of Accounting Change

      The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. 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 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. The results of this testing indicate 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

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     Net Loss and EBITDA

      As a result of the cumulative effect of the accounting change and the restructuring charges described above, the Company incurred a net loss of $57.9 million during 2002 compared to a net loss of $15.6 million in 2001. The Selected Financial Data table on page 16 of this Annual Report includes pro forma results and other non-GAAP financial information to provide a better understanding of the Company’s results and the trends from which to measure performance. EBITDA represents operating income, including the Company’s share of joint venture earnings, plus depreciation and amortization. In 2002, EBITDA totaled $42 million, slightly below the $42.2 million of EBITDA earned in 2001. On a pro forma basis, after removing the effects of the restructuring activities initiated during 2002 and other one-time items, adjusted EBITDA totaled $70.5 million in 2002, an increase of $10.7 million or 18% above the adjusted EBITDA of $59.8 million in 2001.

     Comparison of Years Ended December 31, 2001 and December 31, 2000

     Net Sales

      During 2001, net sales increased $111.4 million or 22.2% above the sales level achieved in 2000. After adjusting the fiscal 2000 sales level for $4.6 million of revenues from residual sourcing agreements related to our former pump and industrial products businesses, which were divested in the fourth quarter of 1999, net sales increased $116 million or 23.4% during 2001. The Rival kitchen business was the largest factor contributing to the higher sales, as revenues benefited from a product line expansion into other cooking categories. During 2001, international sales were also higher, increasing $16.5 million or 27% from 2000, with subsidiaries in Mexico and Europe posting higher sales and Far East revenues benefiting from increased shipments of motors to our joint venture with General Electric.

     Gross Profit

      Gross Profit totaled $150 million in 2001, an increase of $31.4 million or 26.4% above the gross profit of $118.6 million earned in fiscal 2000 due to the increased sales level achieved in 2001. The gross profit increase in 2001 was partially offset by higher discounts and allowances than in 2000 and the shipment of higher cost fan inventory carried over due to the cool summer season in fiscal 2000. As a percent to net sales, gross profit performance improved by 0.8 percentage points during 2001, 24.5% as compared to 23.7% in 2000.

     Selling and Administrative Expenses

      During 2001, selling and administrative costs increased $13.7 million or 12.3% above the expense level in fiscal 2000. Selling and administrative expenses have been restated, reducing previously reported amounts by $15.8 million in 2001 and $12.4 million in 2000, to reflect the reclassification of co-operative advertising costs as a reduction from net sales. Operating costs in 2001 included bad debt expenses of $15.2 million, a substantial increase from the $4.5 million bad debt provision in 2000, due primarily to the $14.1 million charge caused by Kmart’s bankruptcy filing on January 22, 2002. Excluding the bad debt loss related to the Kmart bankruptcy, selling and administrative costs in 2001 decreased $0.4 million or 0.4% from 2000 as compared to the net sales increase of 22.2% achieved during the year. Expenses in 2001 were also affected by increased bank and consulting fees associated with the May 2001 amendment to our Credit Facility and by higher insurance costs. Operating costs were lower in certain selling expense categories, such as sales commissions, print advertising and travel costs, as part of a company-wide effort to reduce spending levels.

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     Restructuring and Plant Closing Costs

      Restructuring costs for 2001 totaled $1.2 million. These costs related to the closing of the Company’s Sedalia, Missouri manufacturing plant in June 2001. The costs were made up of certain employee termination benefits and property and equipment write-downs. The activities of this plant were moved to other domestic facilities which were acquired as part of the Rival acquisition in 1999. As a result, approximately 300 manufacturing, engineering and office positions were eliminated. The Company also recorded $0.5 million in plant closing costs, which were expensed as incurred, associated with the closing of the Sedalia facility.

     Interest Expense and Other Income

      Interest and other expense, net for 2001 was $37.3 million compared to $37.8 million for 2000, a decrease of $0.5 million or 1.3% during 2001. Borrowings under the Revolver portion of the Credit Facility averaged $110.2 million, 20% higher than the average borrowings of $91.4 million in 2000. Lower interest rates in effect during 2001 offset the impact of the increased borrowing level. Interest expense for 2001 also included a non-cash charge of $1.0 million for the issuance of warrants to our bank lenders and increased financing fees of $0.5 million related to the amended Credit Facility. Interest expense also included non-cash amortization of debt issuance costs totaling $4.2 million and $4.1 million in 2001 and 2000, respectively.

     Income Tax Expense

      The income tax expense for 2001 was $4.5 million compared to $2.6 million for 2000. The resulting effective tax rate for these periods is not meaningful primarily due to domestic losses for which a tax benefit was not recorded, as there was no assurance such benefit would be realized.

     Equity in Earnings from Joint Venture

      The Company recorded $2.4 million in earnings from its joint venture with General Electric in 2001 versus $0.6 million in 2000. Sales of motors manufactured by the Company’s facility in southern China to the joint venture were approximately $17.1 million in 2001 as compared to $11.9 million in 2000.

     Net Loss and EBITDA

      Despite the higher bad debt provision due to the Kmart bankruptcy, the Company’s net loss decreased substantially during 2001 to $15.6 million compared to a loss of $32.2 million in 2000. The higher sales level and the improved gross profit performance during 2001 were the most significant factors contributing to this improvement. In 2001, EBITDA totaled $42.2 million compared to EBITDA of $24.3 million in 2000. On a pro forma basis, after removing the impact of the Kmart bankruptcy in 2001 and certain other one-time items in the 2001 and 2000 results, adjusted EBITDA totaled $59.8 million in 2001, an increase of $28.3 million above the adjusted EBITDA of $31.5 million in 2000.

Liquidity and Capital Resources

     Analysis of Cash Flows

      Following the Company’s recapitalization transaction in November 1997 and the Rival acquisition in February 1999, we have funded our liquidity requirements with cash flows from operations and borrowings under our Credit Facility. Our primary liquidity requirements have been for working capital, to service our indebtedness and to fund capital expenditures. While there can be no assurance, we believe that existing cash resources, cash flows from operations and borrowings under the Credit Facility, as most recently amended, will be sufficient to meet our liquidity needs for the next twelve months, during which time we will continue to carefully evaluate our financing requirements.

      The Company’s cash and cash equivalents decreased to $8.4 million at December 31, 2002, from $10.1 million at December 31, 2001. Cash provided by operations for the years ended December 31, 2002

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      Cash provided by investing activities for the year ended December 31, 2002 was $3 million compared to a use of cash of $12.2 million in 2001. The 2002 amount includes $15.1 million in cash proceeds received in connection with the sale of the Pollenex division in January 2002. The proceeds were offset by $14.6 million invested in capital expenditures for property and equipment during 2002 compared to capital expenditures of $17 million in 2001. We expect 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 new product development initiatives. The Company also received $2.5 million in earnings distributions from its joint venture with General Electric in 2002 compared to earnings distributions of $1.9 million in 2001.

      Cash used for financing activities for the years ended December 31, 2002 and 2001 was $55.4 million and $16.9 million, respectively. Cash used for financing in 2002 reflected $42.2 million of repayments on the Credit Facility using cash flow from operations, the Pollenex® sale proceeds and also the use of $11.5 million in cash to repurchase $36.2 million of our outstanding Senior Subordinated Notes. The Revolver portion of our Credit Facility totaled $84.2 million at December 31, 2002, a reduction of $27.3 from the $111.5 million outstanding balance at the end of 2001. During 2002, the weighted average outstanding balance on the Revolver portion of the Credit Facility totaled $85 million, 23% below the average outstanding balance of $110.2 million during 2001.

      The Company’s pension liabilities increased significantly in 2002 due to the declines in investment performance and interest rates. These pension liabilities are developed from actuarial calculations and valuations. Inherent in these valuations are assumptions, including discount rates and the expected return on plan assets. The expected long-term rate of return on our plan assets was developed by examining historical return rates based on the pension plan’s asset allocation and considering such factors as return differentials for active investment management. The expected long-term rate of return for fiscal year 2003 will be 8.0%, which is lower than the 9.0% rate used 2002. The discount rate used for the calculation of plan liabilities at December 31, 2002 was 6.5%, which is 50 basis points below the 7.0% rate used in 2001. We consider market conditions, including changes in interest and investment rates, in developing these assumptions. At year end 2002 we recorded a non-cash minimum pension liability of $7 million. This liability was created based on the shortfall of plan assets versus the accumulated benefit obligation. Pension expense, a non-cash item for 2002, was $1 million during the year, even with the pension expense recorded in 2001, which included a charge of $0.5 million under the plan curtailment accounting provisions of FAS No. 88. Pension expense is expected in increase to approximately $3.5 million in fiscal 2003, with $1.8 million of the increase related to a FAS No. 88 charge related to the facility closings described above. During 2002, we were not required to make a cash contribution to the Company’s defined benefit pension plan. Current actuarial estimates anticipate a pension cash contribution of approximately $1 million for 2003.

     Financing Arrangements

      As part of the 1997 recapitalization transaction, we issued $105.0 million of 9 7/8% Senior Subordinated Notes due November 2007 (the Notes), and an additional $31.3 million of Notes to partially finance the Rival acquisition in 1999. We may determine to repurchase Notes from time to time in open market or

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      We entered into an amended and restated Credit Facility agreement in February 1999 in connection with the Rival acquisition. This Credit Facility consisted of a Term Loan A of $40.0 million that matures in February, 2005, a Term Loan B of $85.0 million that matures in February, 2007 and a Revolving Credit Facility maturing in February, 2005. 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.

      Our financial performance in the fourth quarter of 2000 resulted in a default, as of December 31, 2000, of certain financial ratio covenants in the Credit Facility as previously amended. On May 7, 2001, the Company and the Bank Group agreed to a Fourth Amendment to the Credit Facility which waived the defaults, revised certain of the financial ratio covenants and changed the maximum availability. As partial consideration for the amendments, we issued warrants to the lenders to acquire up to 5% of Holmes’ common stock on a fully-diluted basis. The warrants are exercisable at a price of $5.04 per share, and expire May 7, 2006. Additionally, investment funds affiliated with Berkshire Partners, our majority stockholder, agreed to provide an aggregate $43.5 million guarantee in support of the increased revolving credit commitment.

      On March 22, 2002, Holmes and the Bank Group agreed to a Fifth Amendment to the Credit Facility. The Fifth Amendment further revised certain of the financial ratio covenants for the periods ending December 31, 2001 through June 30, 2004, in order to reflect our current business plan and to accommodate the $14.1 million bad debt charge in the fourth quarter of 2001 due to the Kmart bankruptcy. Under the Fifth Amendment, 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 continues to be supported by the Berkshire Partners’ guarantee entered into in connection with the Fourth Amendment. Actual availability under these revolving credit facilities is subject to a borrowing base formula based on inventory and accounts receivable. Under the Fifth Amendment, the maturity date of the Revolving Credit Loan B was extended from July 1, 2002 through July 1, 2004. The maturity date of the Revolving Credit Loan A and the Term Loan A remain at 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 in interest of the lenders. The maturity date of the Term Loan B remains at February 5, 2007. As part of the Fifth Amendment, the applicable interest rate margins on the Revolving Credit Loan B were reduced, while the margins on the Revolving Credit Loan A and Term Loans A and B were increased. We expect to refinance our borrowing arrangements during the first six months of 2004.

      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, grant liens, 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. See “Business — Certain Risk Factors Which May Affect Our Future Operating Results” above.

      In conjunction with the Fifth Amendment, Holmes repurchased from two Berkshire Partners’ investment funds an aggregate principal amount of approximately $36.2 million of the Notes. The purchase price of the Notes, representing Berkshire Partners’ cost, was $11.5 million plus accrued interest on the Notes, which was funded with proceeds of the Revolving Credit Loan B. The Notes repurchased were retired and cancelled. This transaction resulted in an extraordinary gain of $22.4 which is included in the consolidated statement of operations for the year ended December 31, 2002. The Company may consider repurchases of additional Notes in the future and may utilize the proceeds of the Credit Facility for this purpose.

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      As a result of the Note repurchase transaction, the January 2002 sale of the Pollenex business and improvements in operating cash flow, we made substantial progress in reducing our debt level during 2002. Total debt amounted to $275.2 million at December 31, 2002, a reduction of $78 million or 22% below the 2001 year-end debt level of $353.2 million. The following summarizes our contractual obligations at December 31, 2002, and the effect such obligations are expected to have on the Company’s liquidity and cash flow in future periods.

Recently Issued Accounting Standards

      In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”. FAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity is required to capitalize the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. FAS 143 is effective for fiscal years beginning after June 15, 2002 and will be adopted by the Company effective fiscal 2003. The Company believes adoption of this Standard will not have material effect on its consolidated financial statements.

      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 will be effective for the Company related to the rescission of FAS No. 4 and FAS No. 64 on January 1, 2003. FAS No. 145 will be effective related to the amendment of FAS No. 13 for all transactions occurring after May 15, 2002. All other provisions of FAS No. 145 will be effective for financial statements issued after May 15, 2002. The Company expects that the provisions of FAS 145 will require the reclassification of the gain related to the senior notes repurchase, which was treated as an extraordinary item in 2002, to other income in future financial presentations.

      In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring).” FAS 146 requires a liability for a cost associated with an exit or disposal activity be recognized and measured initially at it fair value in the period in which the liability is incurred. If fair value cannot be reasonably estimated, the liability shall be recognized initially in the period in which fair value can be reasonably estimated. The provisions of FAS 146 will be effective for the Company prospectively for exit or disposal activities initiated after December 31, 2002. Adoption of this Standard is expected to impact the timing of recognition of costs associated with future exit and disposal activities.

      In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees”, including indirect guarantees of indebtedness of others, an

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      In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, which amended FAS 123 “Accounting for Stock-Based Compensation.” FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The statement also amends FAS 123 disclosure requirements to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual disclosure requirements of FAS 123 are effective for the Company as of December 28, 2002 and the interim disclosure requirements will be effective during its first quarter of fiscal year 2003. As permitted under both FAS 123 and FAS 148, the company continues to follow the intrinsic value method of accounting under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.”

Investor Conference Call

      Following our press release to announce fourth quarter results, Holmes’ management held a telephone conference call on March 17, 2003, in order for investors and other interested stakeholders to hear management’s views on our results of operations during the year ended December 31, 2002. A replay of this call is available until April 7, 2003. If you are interested in accessing the replay, please call Kay Ford, Executive Assistant, at 508-422-1642 for access instructions.

      At December 31, 2002, the carrying value of our debt totaled $275.2 million. The fair value approximated $245.4 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 December 31, 2002, the Company had fixed rate debt of $99.5 million and variable rate debt of $175.7 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 $1.2 million. Based on the amounts of variable rate debt outstanding at December 31, 2002, the earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates would be approximately $1.8 million, holding other variables constant.

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Item 8.     Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

      All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and

      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Holmes Group, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      As discussed in Note 3 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, and changed its method of accounting for goodwill and other intangible assets as of January 1, 2002.

	/s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

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THE HOLMES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

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THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)