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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission file numbers:

333-77905

The Holmes Group, Inc.

(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

THE HOLMES GROUP, INC.

Form 10-K

TABLE OF CONTENTS

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THE HOLMES GROUP, INC.

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 ability to obtain adequate financing to replace the Revolving Credit and Term Loan Facility expiring in January 2005.

	•	Our dependence on major customers and key employees.
	•	Any significant decline in purchases by our larger customers or pressure from these customers to reduce prices.
	•	The bankruptcy or loss of any major retail customer or supplier.
	•	Weakness in the U.S. retail market.
	•	The financial condition of the retail industry.
	•	The infringement or loss of our rights with respect to patents and trademarks related to our products.
	•	Fluctuations in cost and availability of raw materials and components.
	•	Product recalls and product liability claims against us or other regulatory actions.
	•	Changes in demand for the Company’s products.
	•	Changing conditions in foreign countries.
	•	An extended interruption in the operation of our manufacturing facilities in China.
	•	Changes in trade relations with China.

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

	•	Currency fluctuations in our international operations.
	•	Difficulties in implementing and maintaining new computer systems.
	•	Changes in retailer inventory management or failure of our order processing and logistical systems.
	•	Interruptions in data and communications systems.
	•	Our ability to develop new and innovative products and customer acceptance of such products.

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	•	Seasonality of our operating results, including counter-seasonal weather patterns.
	•	Competition with other large companies that produce similar products.
	•	The success of our marketing and promotional programs.

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

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PART I

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, 2003, 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, vacuum food sealers 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 market share in the major kitchen appliance categories in which we compete. Kitchen appliances accounted for approximately 51% of our net sales for fiscal 2003. We believe that our strong market position and success are attributable to our well-known brand names, 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, Sears, 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 a manufacturing complex in China where we produce 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.

Our Business Strategy

      Our strategy is to capitalize on our core strengths to achieve growth in net sales, profitability and cash flow. Continuous product innovation is the key element supporting all of our business strategies. 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,

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      Expand Our Home Environment Brands. The addition of Rival’s home environment brands in 1999 allowed us to increasingly differentiate our home comfort offerings among retailers and consumers. Through these additional brands, such as Bionaire® and Patton®, we can offer a step-up brand strategy for increased presence in the department and specialty store and home center channels.

      Further Penetrate Existing Distribution Channels. Our goal is to 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.

      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.

      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 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. Effective January 31, 2003, we closed Rival’s manufacturing facilities in the United States and shifted all manufacturing to the Far East as a major step in achieving our objectives.

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 activities relating to improving existing products. The product design and research development team consists of employees located in our corporate headquarters and our facilities in the Far East. We also retain the services of outside consultants to assist our internal teams.

      We utilize state-of-the-art design technology including advanced computer-aided 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

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

     • Home Environment Appliances

      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 include added convenience features including Accutemp™ thermostat controls and remote control features. Retail prices for our fans range from $5 to $100.

      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. Some of the Bionaire® products include our Galileo™ wireless climate center, which 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.

      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 $300.

      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 believe that sales of filters and accessories increase brand awareness and customer loyalty. Accessories should represent one of the fastest growing categories in the home environment product line.

      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.

     • Kitchen Electric Appliances

      Small kitchen electric appliances have constituted the Rival brand’s primary product line for over 60 years. Rival has been responsible for the invention of several small appliances that can be found today in

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      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 and deep fryers. We also enhanced our product line in the griddle category during this period. 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 the #1 market share in our retail distribution channels for these new categories so that we now hold the leading position in five product segments within the cooking appliance category. The Rival product line also includes toasters, toaster ovens, can openers, food slicers and other kitchen appliances. In April 2003, Rival introduced updated products in its Seal-A-Meal® vacuum food storage device product line. We view this product category as a growth opportunity in 2004 and beyond.

      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 soft serve 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 known 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.

     • Electric Motors

      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, we manufacture many of the motors for our home environment product line in our China motor facility. The motor is obviously 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 accounted for in our financial statements under the equity method, are distributed in cash to each partner on a quarterly basis.

Our Manufacturing Capabilities

      In 2003, we manufactured approximately 50% of our products through our operations in southern China. Holmes has been manufacturing quality products at its own facilities in China for over fourteen years. Over the past three years, we have invested in the development of a manufacturing complex in southern China to further strengthen our capabilities. In December 2002, we announced the decision to close our manufacturing facilities in the United States, which specialized in the production of selected small kitchen appliances, particularly our Crock-Pot® slow cookers. The US facilities were closed on January 31, 2003 and all production activities were shifted to our expanded manufacturing facilities in southern China or to independent suppliers in the Far East.

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      We manufacture most of our home environment products at our manufacturing facilities in China. These facilities are highly integrated and produce many 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 and Seal-A-Meal®vacuum food storage devices and Rival® ice cream appliances in 2003. We expect to manufacture other Rival kitchen products in our facilities in future years. 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 sales support staff, field sales associates and regional independent manufacturers’ representative organizations. We market our products through all major channels of retail 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. Our 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 and Massachusetts and service our international retailers from warehouses in Canada, Mexico, the United Kingdom and the Netherlands. 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 instructions, safety features and product operation. We have an in-house art department that develops much of our packaging and marketing materials on state-of-the-art desktop graphics systems.

Our Major Customers

      Our two largest retail customers, Wal-Mart (including Sam’s Wholesale Club) and Target (including Mervyns) accounted for approximately 44% of our net sales during 2003. Individually, Wal-Mart and Target each accounted for over 10% of our net sales during 2003. 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 and emerged from Bankruptcy Court protection in May 2003. Kmart closed

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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, 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.

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®, Crock-Pot®, Bionaire®, Patton®, White Mountain®, Family Care® and Titan®. We have additional patent and trademark 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

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Our Employees

      We had approximately 7,500 employees as of December 31, 2003, of which approximately 350 were located in the United States, Europe and Canada. Approximately 7,150 of our employees were located at our manufacturing facilities in Dongguan, China, and our product sourcing offices in Hong Kong and Taiwan.

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 may 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 in Notes and an amended and restated Credit Facility.

      At December 31, 2003, our total debt was $204.8 million, which included $105.2 million of borrowings under our amended Credit Facility and $99.6 million of our Notes. Borrowings under the Credit Facility included $77.0 million in term loans due in 2005 and 2007 and $28.2 of outstanding obligations under the Revolving Credit portion of the Credit Facility. Under the Fifth Amendment to the Credit Facility, which was established in March 2002, lenders provided a total of $171 million of borrowing capacity under the Revolving Credit Facility, subject to the existence of appropriate levels of accounts receivable and inventories. At December 31, 2003, we had $115.1 million of availability under the Revolving Credit Facility. The existing Revolving Credit Facility, as amended, expires in January 2005. The Company anticipates that it will refinance its existing borrowing arrangements prior to July 1, 2004.

      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 Agreement or a new 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 facility on commercially reasonable terms, or at all.

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      Our high level of debt could have important consequences, 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 2003 were approximately 44% 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 these 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 50% of our total production requirements during the year ended December 31, 2003. 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 facility and our independent suppliers are subject to the risks of dong business abroad, including:

	•	Import duties and trade restrictions;
	•	Production delays due to unavailability of parts or components;
	•	Increases in transportation costs and transportation delays;
	•	Work stoppages;
	•	Public health concerns;
	•	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;

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	•	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. General slowdowns in the retail sector may adversely impact the net sales of our products, our operating margins and our net income. In the first half of 2003, the general slowdown in the retail sector resulted in additional pricing and marketing support pressures. The risks of terrorist attacks and potential hostilities could prolong or worsen the current economic downturn. We expect these market pressures to continue in the future. 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, 2003, our international sales accounted for 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 on these investments, if any, are realized. International operations are subject to a number of other risks and potential costs, including:

	•	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 manufacture and purchase products, and thereby increase inventories, based on anticipated sales and forecasts provided by our customers and our sales personnel. In an extended

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      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. There can be no assurance 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. We do not maintain product recall insurance. As a result, product recalls and product liability claims may adversely affect our business.

      Our patents, copyrights, trademarks, service marks and similar intellectual property are important to our success. We rely on patent, copyright 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 any of these rights were infringed or invalidated, our business could be materially adversely affected.

      We face claims that our proprietary or licensed products are infringing the intellectual property rights of other parties. There can be no assurance that we do not in fact infringe those intellectual property rights. If someone claimed that our proprietary or licensed 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 sale of our proprietary or licensed products. A successful claim of patent or other intellectual property infringement against us could harm our financial condition.

      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 increased beginning in 2003, as the restructuring actions, which were announced in December 2002, included the phase-out of our distribution facilities in Missouri and the transfer of these activities to our California operations. Actions taken by the Pacific Maritime Association (“PMA”) and the International Longshore and Warehouse Union (“ILWU”) related to a labor contract which expired on July 1, 2002, did adversely impact our ability to deliver products to retailers during the fourth quarter of 2002. While the disruptive actions were resolved with the PMA and ILWU agreeing to a new, long-term contract in December 2002 and we did not encounter similar disruptions during 2003, future disputes could affect our operations.

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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.

      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 Tangxia Town, Dongguan City in Guangdong Province, which is approximately 70 miles northwest of Hong Kong. In 2001, we began to move manufacturing activity to this facility and it became fully operational during 2003. As of December 31, 2003, the construction of the new complex was close to completion, with the last major assembly facility, consisting of approximately 219,000 square feet, under construction and scheduled to be occupied in November 2004. Most of the buildings in the complex are owned by the Company. A portion of the office and manufacturing space and certain worker dormitories are leased with the initial term of the leases expiring in December 2004 and November 2006. The Company has the option to renew the leases or to purchase the underlying asset at the end of each lease. When complete, the new Dongguan complex will total approximately 1.8 million square feet. We transferred manufacturing and assembly activity from our existing 466,000 square foot Dongguan facility to the new complex during 2003 and we did not renew the existing lease when it expired in December 2003. In February 2004, the Company executed a fifteen year lease for a new motor manufacturing facility, totaling 558,000 square feet, in Dongguan, China which is presently under construction. The Company expects to shift manufacturing activity to the new facility when the lease on its existing motor facility expires in March 2005.

      We also contract for distribution and warehousing services at 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, 2003, these facilities represented approximately 140,000 square feet of space.

      Over the past two years, we initiated restructuring actions that affected several of the 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, was shifted to our

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      The Company is 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 all pending litigation will not have a material adverse effect on our business, financial condition or results of operations. In the case of product liability litigation, the Company has product liability and general liability insurance policies in amounts management believes to be reasonable.

      During 2003, Tilia International, Inc. filed a patent infringement action against The Rival Company in the United States District Court in San Francisco, California. In addition, Tilia International requested that the International Trade Commission (ITC) investigate the Company and two other unrelated companies. In both the federal court action and in its complaint to the ITC, Tilia International claimed that the Rival Seal-A-Meal® vacuum seal food storage device infringes certain patent claims allegedly owned by Tilia International. In the federal court action, Tilia International also contended that the Company’s food storage bags infringe certain patent claims allegedly owned by Tilia International. The Company denied these allegations and aggressively litigated the matter. Following a December 2003 decision by the ITC which denied Tilia’s request for a temporary exclusion order against Rival, the Company and Tilia reached an agreement which resulted in the dismissal of both the ITC action and the federal court case.

      The Company also faces exposure to voluntary or mandatory product recalls in the event that our products are alleged to present a “substantial product hazard” under applicable law. In 2003, the Company received communications from the United States Consumer Products Safety Commission (“CPSC”), requesting information concerning a limited number of Crock-Pot® slow cooker models. The CPSC and the Company currently are assessing the situation, in particular, whether the models identified present a substantial product hazard and whether corrective action, such as a recall, is warranted. On March 17, 2004, Company representatives met with the CPSC to discuss the situation further, and discussions are likely to continue in the second quarter of 2004. At the present time, the Company is unable to determine whether, and if so to what extent, corrective action, in the form of a product recall or otherwise, will be necessary and/or taken. As a result, the Company is unable to determine the costs, if any, which will be incurred by the Company as a result of any action taken following the conclusion of the discussions with the CPSC. The Company does not maintain product recall insurance.

      Not applicable.

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

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PART II

      The following selected financial data as of and for the years ended December 31, 1999 through December 31, 2003, set forth below, have been derived from our audited consolidated financial statements. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements, including the notes thereto, included elsewhere in the Annual Report. A reconciliation between operating income presented in accordance with GAAP in the consolidated statement of operations and EBITDA, along with restructuring charges and certain significant items which impacted results during the five years ended December 31, 2003 is provided as part of this table.

(1)	Net sales and operating costs for 1999 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. Net sales included $16.8 million in 2001, $11.6 million in 2000 and $12.1 million in 1999 related to the Pollenex® personal comfort business which was sold in January 2001.
(2)	Gross profit in 2002 included $7.2 million of inventory writedowns in connection with the Company’s decision to exit its domestic manufacturing operations.
(3)	Selling and administrative expenses in 2001 included a charge of $14.1 million taken in connection with the Kmart bankruptcy.
(4)	Restructuring costs in 2003 and 2002 represent expenses and asset impairment charges primarily related to the Company’s decision to exit manufacturing operations in the United States. Restructuring costs in 2001, 2000 and 1999 related to facility closings associated with the integration of the Rival business. See Note 7 to the consolidated financial statements.

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(5)	Net income (loss) in 2002 included pre-tax gains of $9.5 million related to the sale of the Pollenex® business and $22.4 million on the repurchase of $36.2 million principal amount 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 equity in earnings from joint venture and fixed charges as presented, without adjustment for the items discussed in (8) below. Fixed charges consist of interest expense on all indebtedness plus the portion of rental payments on operating leases that is considered representative of the interest factor.
(8)	The Company defines EBITDA as the total of operating income before depreciation and amortization, other income and expense items and joint venture earnings. EBITDA is presented because it is a widely accepted measure to provide information regarding a company’s ability to service and/or incur debt. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operations or other income or cash flow data prepared in accordance with generally accepted accounting principles (GAAP), or as a measure of a company’s profitability or liquidity. Additionally, our calculation of EBITDA may differ from that performed by other companies, and thus the amounts disclosed may not be directly comparable to those disclosed by other companies. A reconciliation between operating income presented in accordance with GAAP in the consolidated statements of operations and EBITDA, along with restructuring charges and certain significant items for the five years ended December 31, 2003 is as follows:

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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. Our home environment products include fans, heaters, humidifiers, air purifiers and lighting products. Our kitchen appliances include Crock-Pot® slow cookers, Seal-A-Meal® vacuum food sealers and Rival® roaster ovens, skillets and deep fryers, and other similar small kitchen electric appliances. Our products are sold under the Holmes®, Rival®, Crock-Pot®, Bionaire®, Seal-A-Meal®, White Mountain®, 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 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 future performance is presented on pages 2 and 3 of this Form 10-K and a discussion of the “risk factors” affecting our business is presented on pages 10 through 13 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 allowance for doubtful accounts, reserves for inventory valuation, accruals for product returns, as well as those used in the determination of liabilities related to litigation, product liability and taxation. In addition, significant estimates are used for reserves associated with warranty obligations, restructuring actions and employee benefits.

      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 experience, publicly available information regarding our customers and

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      We value our inventory at the lower of cost or market, and regularly review the book value of discontinued product lines and current and expected market conditions, 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, 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 throughout the year and subsequent to the year-end based on ongoing customer communications. If necessary, we record additional accruals to reflect unfavorable trends, such as counterseasonal weather that may increase returns.

      We record income tax liabilities utilizing 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, 2003, the Company had $17.1 million and $62.0 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. We also have a federal tax refund claim, which is pending at December 31, 2003, involving the carryback of $11.7 million of net operating losses. We have established valuation allowances against deferred tax assets as the Company’s ability to generate sufficient taxable income to ensure realization of all deferred tax assets cannot be assured. An assessment of the realization of deferred tax assets requires estimates of future taxable income. 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. In 2003, after considering all available positive and negative evidence, the Company decreased the valuation allowance by $5.6 million. 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 the recorded valuation allowance. Also, 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.

      During 2002, we established reserves and accruals related to the costs associated primarily 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.

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      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, 2003 as a percentage of net sales:

      During 2003, net sales increased $15.2 million or 2.5% as compared to the net sales achieved in 2002. Sales of Rival® kitchen appliances increased 1% during 2003, following the 24% revenue gain achieved in 2002. During 2003, the initial shipments of the Seal-A-Meal® vacuum food sealer product line and a 65% sales increase in the Rival® roaster oven and skillet product categories offset a 6% decline in sales of Crock-Pot® slow cookers.

      Sales of Holmes® and Bionaire® home environment products decreased 2% during 2003 as the fan segment of the market remained extremely competitive. Fan sales decreased 23% in 2003 as compared to 2002 with the Company focusing on higher price point models in an effort to improve profitability. The unseasonably cool start to the 2003 summer season also negatively affected sales in the fan category. This sales decrease was offset to a large extent by a successful winter season as sales of heaters and humidifiers in 2003 increased by 19% from the 2002 sales level.

      International sales in 2003 increased 21% from 2002 with all of the Company’s major markets posting higher revenues. The sales growth was led by continuing increases in Canada and Europe. Currency exchange rates had a favorable impact on international sales trends, accounting for approximately 5% of the revenue increase in 2003. Sales of motors, which are manufactured by our facility in China, to our joint venture with General Electric totaled $21.1 million in 2003, an increase of 20% from 2002’s net sales.

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      Gross profit totaled $191.1 million in 2003, an increase of $27.1 million or 16.5% above the 2002 level. The Company’s gross profit percent improved 3.7 percentage points during the year, finishing at 30.6% in 2003 compared to 26.9% in 2002. The 2002 gross profit performance was reduced by $7.2 million of inventory writedowns related to closure of the Company’s domestic manufacturing operations. After removing the effects of these writedowns, the 2003 gross profit percent improved 2.5 percentage points from 2002’s adjusted rate of 28.1%. Both the kitchen and the home environment businesses showed improved margins in 2003 due to the shift of production to lower cost resources in the Far East. Changes in sales mix also helped the gross profit performance in the home environment business as margins on the growing winter product lines tend to be better than on the fan category. During 2003, the Company incurred $1.1 million of unfavorable manufacturing variances related to the domestic facilities which were closed effective January 31, 2003. These variances were lower than in 2002 when the domestic manufacturing performance reduced gross profit by $3.5 million or 0.6% of net sales. Gross profit in 2003 was also favorably impacted by a cost recovery of $0.9 million from the settlement of a claim against a former supplier.

      In 2003, selling and administrative expenses decreased $4.9 million or 4.1% below the spending level in 2002. Operating expenses represented 18.5% of net sales in 2003 compared to 19.8% in 2002. Bad debt expense decreased $5.9 million in 2003 as compared to 2002. The current year’s provision includes a recovery of $0.7 million realized upon the sale of the Company’s Kmart bankruptcy claim to a financial institution, while the 2002 expense included a charge of $3 million related to the bankruptcy of a distributor and a provision of $0.7 million based on an updated assessment of the fair value of the Company’s Kmart receivables. Information technology expenses decreased $2.4 million during 2003 as costs in 2002 included $4.7 million of expenses related to the implementation of new computer systems. Distribution and warehousing costs were also lower in 2003, decreasing $1.1 million or 5.4% from 2002 due to the facility consolidations included in last year’s restructuring actions. In 2003, these cost decreases were partially offset by $1.5 million of higher legal expenses, $2.2 million of increased international expenses to support the sales growth of 21%, $1.5 million of additional engineering costs related to new product development initiatives and $1.4 million of increased advertising spending related to product introductions in the Company’s Crock-Pot® slow cookers, Seal-A-Meal® vacuum food sealers and Holmes® air purifier product lines.

      Restructuring costs totaled $1.9 million in 2003, substantially below the $28 million of restructuring costs incurred in 2002, which were primarily related to the closing of the Company’s domestic manufacturing operations. The 2003 restructuring expenses include a non-cash charge of $1.6 million related to the Company’s pension plan for employees at the closed facilities. During 2003, the Company expended $5.1 million of cash to pay for severance and facility exit costs that were accrued in 2002 and expects to disburse approximately $1.5 million of cash for remaining accruals during 2004 and 2005. The Company does not expect any material changes to the accruals for these restructuring actions.

      During 2003, interest expense decreased $4.2 million or 14.3% below 2002 due primarily to reduced levels of bank borrowings. The weighted average borrowings outstanding under the Company’s Revolving Credit Facility totaled $63.7 million in 2003, a reduction of 25.1% from the average borrowings of $85 million in 2002. The Company also repaid $14.5 million of term loans during 2003 through scheduled principal payments and the proceeds from asset sales. Interest rates on the Company’s Credit Facility borrowings averaged 5.3% during 2003, a reduction of 50 basis points from the 5.8% rate in 2002 due to the generally favorable interest rate environment during the year.

      Other income and expense items reduced pre-tax earnings by $0.5 million in 2003 compared to an income increase of $33 million in 2002. Other expense in 2003 includes $1.0 million of losses related to the sale of

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      During 2003, the Company recorded an income tax benefit of $1.9 million compared to a tax benefit of $0.1 million in 2002. The tax benefit in 2003 includes a $5.6 million impact associated with a reduction in the Company’s deferred tax valuation allowance based on a reassessment made during the fourth quarter of 2003 concerning the realizability of future tax benefits. In 2002, the tax benefit included $5.1 million in tax refunds related to additional net operating loss carrybacks which were made possible by recent tax law changes.

      Under the equity method of accounting, the Company recorded $2.5 million of income in 2003 and $3 million in 2002 related to its joint venture with General Electric Company involving the manufacture and sale of motors.

      Net income in 2003 totaled $52.2 million compared to a net loss of $57.9 million in 2002. The 2002 net loss included a non-cash impairment charge of $79.8 million representing the cumulative effect of an accounting change related to implementation of Statement of Financial Accounting Standards. No. 142, “Goodwill and Other Intangible Assets.” Income before cumulative effect of change in accounting principle increased $30.3 million during 2003 as compared to the adjusted net income of $21.9 million in 2002. In 2003, EBITDA totaled $85.4 million, above the 2002 EBITDA of $64.4 million by $21 million or 32.6%. EBITDA was reduced by restructuring costs and certain significant income and expense items totaling $1.4 million in 2003 and $6.1 million in 2002.

      During 2002, net sales decreased $3.7 million or 0.6% as compared to the sales total achieved in 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’s 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 kitchen sales increase was partially offset by reduced sales of Holmes® and Bionaire® home environment products due to increased competition during 2002. Sales levels were below 2001 by 15% with all product lines in the home environment business producing lower revenues during the year. The largest sales decline occurred in the fan product line due to the Company’s decision to de-emphasize lower margin categories in 2002 in an effort to improve overall profitability.

      International sales in 2002 increased 17% from 2001 due to increased activity in Canada and Europe. Sales of motors, which are manufactured by our facility in China, to the joint venture with General Electric totaled $17.6 million in 2002 compared to $17.1 in motor sales during 2001.

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      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 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 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.

      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, $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. 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 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 an 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.

      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 and the shutdown of an administrative office in Kansas City, Missouri. The Company also announced the closing of a distribution center in Sedalia, Missouri during 2002. 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.

      Interest expense was lower by $8.3 million 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 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 also included a charge of $1 million related to the issuance of warrants to the 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

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      Other income in 2002 totaled $33.0 million compared to $0.6 million of income in 2001. The 2002 amount included gains of $9.5 million related to the sale of the Pollenex® business in January 2002 and $22.4 million from the repurchase of $36.2 million of the Company’s Senior Subordinated Notes in March 2002. 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.

      During 2002, the Company recorded an income tax benefit of $0.1 million compared to income 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 2001 were not recorded in the consolidated financial statements as there was no assurance that these tax benefits would be realized.

      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.

      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 indicated that the carrying values of the goodwill asset for both the home environment and kitchen reporting units exceeded the estimated fair value of the units as determined utilizing various valuation techniques, including discounted cash flow and comparative market analysis. Accordingly, a non-cash impairment charge was recognized as a change in accounting principle as of the beginning of 2002. The impairment charge was $79.8 million on a before and after-tax basis.

      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. In 2002, EBITDA totaled $64.4 million, an increase of $22.2 million or 52.6% above the $42.2 million of EBITDA earned in 2001. EBITDA was reduced by restructuring costs and certain significant income and expense items totaling $6.1 million in 2002 and $17.5 million in 2001.

Liquidity and Capital Resources

      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. The Company’s $171 million Revolving Credit Facility expires in January 2005. We are in the process of carefully evaluating our financing requirements and we expect to refinance our borrowing arrangements during the second quarter of 2004.

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      The Company’s cash and cash equivalents decreased to $6.1 million at December 31, 2003, from $8.4 million at December 31, 2002. Cash provided by operations was $70.0 million in 2003 and $50.9 million in 2002. Operating earnings, adjusted for non-cash items, improved to $69.0 million in 2003 as compared to adjusted operating earnings of $40.0 million in 2002. Changes in other operating assets and liabilities provided $1.0 million of cash in 2003 compared to $10.9 million in 2002. While inventory levels at December 31, 2003 were essentially even with last year, accounts receivable balances decreased from the year ago levels, down $8.8 million or 6.8% from the accounts receivable amount at December 31, 2002. Days sales outstanding (DSO) at December 31, 2003 stood at 52 days, 8.8% below the DSO statistic of 57 days in 2002. Inventory turnover was 3.4 times during 2003, below the 3.7 turnover statistic in 2002 by 8.1%. The Company carried higher inventory levels in the first half of 2003 to ensure that the manufacturing transition to the Far East did not impact service to its customers.

      Cash used for investing activities in 2003 totaled $3 million, while investing activities provided $3 million of cash in 2002. In both years, cash flows included proceeds from asset sales with the 2003 amount including $6.9 million in cash from the sale of assets related to the domestic manufacturing operations shut down in January 2003 and the 2002 amount including $15.1 million in cash proceeds received in connection with the sale of the Pollenex® division in January 2002. These cash proceeds were offset by amounts invested in capital expenditures for property and equipment, $12.9 million during 2003 and $14.6 million in 2002. We expect to spend approximately $16 million on capital expenditures in 2004, primarily related to the expansion of our China manufacturing facilities, and on-going tooling costs to support new product development initiatives. The Company also received $2.7 million in earnings distributions from its joint venture with General Electric in 2003 compared to cash distributions of $2.5 million in 2002.

      Cash used for financing activities in 2003 and 2002 was $70.5 million and $55.4 million, respectively, as borrowings outstanding under the Company’s Credit Facility were repaid. Cash used for financing in 2002 also included the use of $11.5 million in cash to repurchase $36.2 million of our outstanding Senior Subordinated Notes. The outstanding Revolver portion of our Credit Facility totaled $28.2 million at December 31, 2003, a reduction of $56.0 from the $84.2 million outstanding balance at the end of 2002. During 2003, the average outstanding balance on the Revolver portion of the Credit Facility totaled $63.7 million, 25.1% below the average outstanding balance of $85.0 million during 2002.

      The Company recorded pension liabilities at December 31, 2003 and 2002, which totaled $6.5 million and $5.8 million, respectively. These liabilities were created based on the shortfall of plan assets versus the accumulated benefit obligation. The Company’s 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 used for fiscal year 2003 was 8.0%, which is lower than the 9.0% rate used 2002, primarily due to market conditions. The discount rate used for the calculation of plan liabilities at December 31, 2003 was 6.25%, which is 25 basis points below the 6.5% rate used in 2002. We consider market conditions, including changes in interest and investment rates, in developing these assumptions. Pension expense was $3.3 million in 2003 and $1.0 million in 2002. The 2003 pension expense amount included a charge of $1.6 million under the plan curtailment accounting provisions of FAS No. 88. Pension expense, determined in accordance with FAS 87, is expected to be approximately $1.6 million in fiscal 2004. During 2002 and 2003, we were not required to make cash contributions to the Company’s defined benefit pension plan. Current actuarial estimates anticipate a pension cash contribution of approximately $2.3 million for 2004, and as such, this portion of the minimum pension liability is included in current liabilities at December 31, 2003.

      As part of the 1997 recapitalization transaction, we issued $105.0 million of 9.875% Senior Subordinated Notes due November 2007 (the Notes), and an additional $31.3 million of Notes to partially finance the Rival acquisition in 1999. While we may repurchase Notes from time to time in open market or privately negotiated transactions, the Notes are also subject to redemption at any time at our option, in whole or in part, at stated

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      In March 2002, the Company and its lending group agreed to a Fifth Amendment to the Credit Facility. The Fifth Amendment revised certain of the financial ratio covenants for the periods ending December 31, 2001 through June 30, 2004. Under the Fifth Amendment, the lenders committed to a Revolving Credit Loan A of $131 million and a Revolving Credit Loan B of $40 million. Revolving Credit Loan B is supported by the guarantee of Berkshire Partners, the Company’s majority shareholder. Actual availability under these revolving credit facilities, which was $115.1 million at December 31, 2003, is subject to a borrowing base formula based on inventory and accounts receivable. In December 2003, the Company and its lending group agreed to a Sixth Amendment to the Credit Facility which extended the maturity dates of Revolving Credit Loans A and B to January 3, 2005 and January 4, 2005, respectively. The maturity dates of Term Loans A and B remained February 5, 2005 and February 5, 2007, respectively. As a result of maturity dates of the Revolving Credit Facility and Term Loan A, the current portion of the Credit Facility will substantially increase in the Company’s financial statements for the three-month period ending March 31, 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.

      In conjunction with the Fifth Amendment in March 2002, the Company repurchased from two Berkshire Partners’ investment funds an aggregate principal amount of approximately $36.2 million of the 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 a gain of $22.4 million, which is included in other income in the consolidated statement of operations for the year ended December 31, 2002. The Company may consider repurchases of additional Notes in the future utilizing utilize the proceeds of the Credit Facility for this purpose.

      As a result of the Note repurchase transaction, the January 2002 sale of the Pollenex® business and improvements in profitability and operating cash flow, we made substantial progress in reducing our debt level during the last two years. Total debt amounted to $204.8 million at December 31, 2003, a reduction of $70.4 million or 25.6% below the 2002 year-end debt level of $275.2 million. Total debt has been reduced by $148.4 million in the past two years such that the debt level at December 31, 2003 is 42% lower than the outstanding borrowings of $353.2 million in December 2001. The following summarizes our contractual obligations at December 31, 2003, and the effect such obligations are expected to have on the Company’s liquidity and cash flow in future periods.

Investor Conference Call

      Following our press release announcing fourth quarter results, Holmes’ management held a telephone conference call on March 4, 2004 in order for investors and other interested stakeholders to hear management’s views on our results of operations during the year ended December 31, 2003. A replay of this call is

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      At December 31, 2003, the carrying value of our debt totaled $204.8 million. The fair value approximated $208.0 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, 2003, the Company had fixed rate debt of $99.6 million and variable rate debt of $105.2 million. Assuming a constant debt level, a one percentage point decrease in interest rates would increase the unrealized fair market value of fixed rate debt by approximately $1.0 million. Based on the amounts of variable rate debt outstanding at December 31, 2003, the earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates would be approximately $1.0 million, net of tax, holding other variables constant.

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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 AUDITORS

To the Board of Directors and Stockholders

      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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with 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 COMPREHENSIVE INCOME (LOSS)

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)