##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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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,
2002

Commission file numbers:

333-44473


333-77905



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The Holmes Group, Inc.

(Exact name of registrant as specified in its
charter)

|                                                                                                                                                                      |  |                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------
|Massachusetts(State or other jurisdiction of
    incorporation or organization)One Holmes Way, Milford,
    Massachusetts(Address of principal executive
    offices) |  | 04-2768914(I.R.S. Employer
    Identification No.)01757(Zip Code)

(508) 634-8050

(Registrants telephone number)


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

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

Title of Class: Not Applicable

Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

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

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

Documents incorporated by reference: Not
Applicable



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TABLE OF CONTENTS



|                                                  |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS  
|PART I                                           
|                                                  | Item 1. Business                                                                             
|                                                  | Item 2. Properties                                                                           
|                                                  | Item 3. Legal Proceedings                                                                    
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                  | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|                                                  | Item 6. Selected Financial Data                                                              
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                  | Item 8. Financial Statements and Supplementary Data                                          
|                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                         
|                                                  | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                  | Item 11. Executive Compensation                                                              
|                                                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                  | Item 13. Certain Relationships and Related Transactions                                      
|                                                  | Item 14. Controls and Procedures                                                             
|PART IV                                          
|                                                  | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|EX-10.30 AMEND. TO EXECUTIVE EMPLOYMENT AGREEMENT
|EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS  LLP   



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THE HOLMES GROUP, INC.

FORM 10-K

Fiscal Year Ended December 31,
2002


TABLE OF CONTENTS

|        |  |                                                                                           |  |      |    | 
|------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                                                           |  | Page
|        |  |                                                                                           |  |     
|        |  | PART I                                                                                    |  |      |    | 
|Item 1  |  | Business                                                                                  |  |      | 4  | 
|Item 2  |  | Properties                                                                                |  |      | 14 | 
|Item 3  |  | Legal Proceedings                                                                         |  |      | 15 | 
|Item 4  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 15 | 
|        |  | PART II                                                                                   |  |      |    | 
|Item 5  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 15 | 
|Item 6  |  | Selected Financial Data                                                                   |  |      | 16 | 
|Item 7  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 18 | 
|Item 7A |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 28 | 
|Item 8  |  | Financial Statements and Supplementary Data                                               |  |      | 29 | 
|Item 9  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 66 | 
|        |  | PART III                                                                                  |  |      |    | 
|Item 10 |  | Directors and Executive Officers of the Registrant                                        |  |      | 66 | 
|Item 11 |  | Executive Compensation                                                                    |  |      | 67 | 
|Item 12 |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 69 | 
|Item 13 |  | Certain Relationships and Related Transactions                                            |  |      | 70 | 
|        |  | PART IV                                                                                   |  |      |    | 
|Item 14 |  | Controls and Procedures                                                                   |  |      | 71 | 
|Item 15 |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |      | 71 | 

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DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS

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

Risks and uncertainties that may affect future
performance are detailed from time to time in reports we file
with the Securities and Exchange Commission (SEC),
including Forms 10-Q and 10-K and our most recent
Registration Statement on Form S-4
(File No. 333-77095), and include, among others, the
following:



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | Our degree of leverage and continued compliance
    with debt covenants.                                               
|
| |  | Our dependence on major customers.                                                                                     
|
| |  | Any significant decline in purchases by our
    larger customers or pressure from these customers to reduce
    prices.
|
| |  | The bankruptcy or loss of any major retail
    customer or supplier.                                                   
|
| |  | Weakness in the U.S. retail market.                                                                                    
|
| |  | The financial condition of the retail industry.                                                                        
|
| |  | The infringement or loss of our rights with
    respect to patents and trademarks related to our products.             
|
| |  | Fluctuations in cost and availability of raw
    materials and components.                                             
|
| |  | Product recalls and product liability claims
    against us or other regulatory actions.                               
|
| |  | Changes in demand for the Companys products.                                                                          
|
| |  | Changing conditions in foreign countries.                                                                              
|
| |  | An extended interruption in the operation of our
    manufacturing facilities in China.                                
|
| |  | Changes in trade relations with China.                                                                                 
|
| |  | Currency fluctuations in our international
    operations.                                                             
|
| |  | Difficulties in implementing and maintaining new
    computer systems.                                                 
|
| |  | Changes in retailer inventory management or
    failure of our order processing and logistical systems.                
|
| |  | Interruptions in data and communications systems.                                                                      
|
| |  | Our ability to develop new and innovative
    products and customer acceptance of such products.                       
|
| |  | Seasonality of our operating results.                                                                                  
|
| |  | Competition with other large companies that
    produce similar products.                                              
|
| |  | The success of our marketing and promotional
    programs.                                                             

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






PART I







Item 1.Business


General

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

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

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

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

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Our Business Strategy

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



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

Our Products

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

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

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



|  |                 
|- | ----------------
| | Home Environment

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

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

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

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

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

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

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

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

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

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



|  |                
|- | ---------------
| | 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, the Raider Motor facility manufactures many of the
motors for our home environment product line. The motor is an
integral component of our fans, humidifiers, heaters and air
purifiers and is a key element of product quality to our
consumers. In October, 1998, we entered into a joint venture
with General Electric Company for motor manufacturing, sales and
distribution to General Electric subsidiaries and other third
parties. In 2001, Raider Motor became the first Chinese motor
manufacturer to receive GEs Six Sigma status
for product quality. The joint venture entity is owned 49% by
Holmes and 51% by GE with capital expenditures necessary to
support the growth of the joint venture shared equally between
the parties. Earnings from the joint venture, which is

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

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

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

Our Marketing and Distribution

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

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

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

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

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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 43% of our net sales during
2002. Individually, Wal-Mart and Target each accounted for
over 10% of our net sales during 2002. We do not have long-term
agreements with our major customers, and purchases are generally
made through the use of individual purchase orders. A
significant reduction in purchases by any of these customers
could have a material adverse effect on our business.

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

The Seasonality of Our Business

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

Our Competition

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

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

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

9



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Our Patents and Trademarks

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

The Regulation of Our Industry

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

Our Employees

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

Certain Risk Factors Which May Affect Our
Future Operating Results

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



|  |                                                                             
|- | ----------------------------------------------------------------------------
| | Our Substantial Debt Levels Could Adversely
    Affect Our Financial Health.

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

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

10



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##### Table of Contents



the Credit Facility included $91.5 million
in term loans due in 2005 and 2007 and $84.2 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 have provided a
total of $171 million of borrowing capacity under the
Revolving Credit Facility, subject to the existence of specified
levels of accounts receivable and inventories. At
December 31, 2002 we had $78.3 million of availability
under the Revolving Credit Facility.


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

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



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



|  |                                                                                              
|- | ---------------------------------------------------------------------------------------------
| | Our Financial Results Would Suffer If We
    Were to Lose One or More of Our Major Customers.

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



|  |                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------
| | Our Dependence on Manufacturing in China
    Subjects Us to the Risks of Doing Business
    Internationally.

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

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

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



| |   |                                      
| | - | -------------------------------------
| |  | Import duties and trade restrictions;

11



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



|  |                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------
| | We May Not Be Able to Compete Effectively
    in the Highly Competitive Home Environment and Kitchen Electric
    Business.

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

 Price;

 Access to retail shelf space;

 Product features and enhancements;

 Brand names;

 New product introductions, and

 Marketing support and distribution
approaches.

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



|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
| | Our Ability to Grow Will Be Limited If We
    Do Not Effectively Introduce New Products.

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.



|  |                                                                                                         
|- | --------------------------------------------------------------------------------------------------------
| | Our Financial Results Will Be Adversely
    Affected by an Economic Slowdown in the Retail
    Industry.

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



|  |                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------
| | Our Efforts to Expand International Sales
    Will Subject Us to Additional Business Risks and Increased
    Costs.

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

12



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##### Table of Contents



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.



|  |                                                                                               
|- | ----------------------------------------------------------------------------------------------
| | Extended Lead Times and Changing Customer
    Demand May Cause Us to Carry Excess Inventories.

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



|  |                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------
| | Product Recalls or Lawsuits Relating to
    Defective Products Could Adversely Impact Our Financial
    Results.

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



|  |                                                                                                         
|- | --------------------------------------------------------------------------------------------------------
| | The Infringement or Loss of Our Proprietary
    Rights Could Have an Adverse Effect on Our
    Business.

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



|  |                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------
| | Litigation and Infringement Claims Could
    Cause Us to Incur Significant Expenses or Prevent Us From
    Selling Our Products.

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

13



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##### Table of Contents





|  |                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------
| | Compliance With Governmental Regulations
    Could Significantly Increase Our Operating Costs or Prevent Us
    From Selling Our Products.

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.



|  |                                                                                 
|- | --------------------------------------------------------------------------------
| | Our Dependence on West Coast Ports Could
    Interrupt Service to Our Customers.

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

Additional Information

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




Item 2.Properties

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

|                       |  |                       |  |                                          |  |           
|---------------------- |  | --------------------- |  | ---------------------------------------- |  | ----------
|                       |  |                       |  |                                          |  | Lease     
|Location               |  | Size                  |  | Primary Use                              |  | Expiration
|                       |  |                       |  |                                          |  |           
|Milford, Massachusetts |  | 415,000 square feet   |  | Corporate Headquarters and Distribution  |  | 2015      
|El Paso, Texas         |  | 161,000 square feet   |  | Distribution                             |  | 2005      
|Fontana, California    |  | 828,000 square feet   |  | Distribution                             |  | 2008      
|Dongguan, China        |  | 466,000 square feet   |  | Manufacturing and Assembly               |  | 2003      
|Dongguan, China        |  | 269,000 square feet   |  | Motor Manufacturing                      |  | 2004      
|Dongguan, China        |  | 1,160,000 square feet |  | Manufacturing, Assembly and Distribution |  | Owned/2004
|Hong Kong, China       |  | 21,000 square feet    |  | Office                                   |  | 2005      
|London, England        |  | 2,700 square feet     |  | Office                                   |  | 2004      
|Mississaugua, Ontario  |  | 9,100 square feet     |  | Office                                   |  | 2012      
|Taipei, Taiwan         |  | 1,700 square feet     |  | Office                                   |  | 2004      

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

14



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##### Table of Contents



manufacturing and assembly activity from our
existing Dongguan assembly facility to the new complex in the
first six months of 2003 and we do not expect to renew the
existing lease which is due to expire in December 2003.


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

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

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




Item 3.Legal
Proceedings

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




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

Not applicable.

PART II




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

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

15



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##### Table of Contents






Item 6.Selected
Financial Data

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

|                                                           |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         |  
|---------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- |  |  | - | ------- | -
|                                                           |  |                        
|                                                           |  | Year Ended December 31,
|                                                           |  |                        
|                                                           |  | 2002                    |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                           |  |                         |         |      |  |      |         |      |  |     
|                                                           |  |                        
|                                                           |  | (Dollars in thousands) 
|Statement of Operations Data:                              |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         |  
|Net sales(1)                                               |  | $                       | 608,554 |      |  | $    | 612,240 |      |  | $    | 500,810 |   |  | $ | 497,860 |  |  | $ | 207,541 |  
|Gross profit(2)                                            |  |                         | 163,977 |      |  |      | 149,969 |      |  |      | 118,605 |   |  |   | 133,552 |  |  |   | 63,263  |  
|Selling and administrative expenses(1)(3)                  |  |                         | 120,566 |      |  |      | 124,315 |      |  |      | 110,663 |   |  |   | 99,307  |  |  |   | 38,683  |  
|Restructuring and plant closing costs(4)                   |  |                         | 28,006  |      |  |      | 1,744   |      |  |      | 340     |   |  |   | 2,439   |  |  |   |        |  
|Operating income                                           |  |                         | 15,405  |      |  |      | 23,910  |      |  |      | 7,602   |   |  |   | 31,806  |  |  |   | 24,580  |  
|Income (loss) before extraordinary item                    |  |                         | (454    | )    |  |      | (15,555 | )    |  |      | (32,170 | ) |  |   | 1,812   |  |  |   | 8,961   |  
|Extraordinary gain(5)                                      |  |                         | 22,388  |      |  |      |        |      |  |      |        |   |  |   |        |  |  |   |        |  
|Cumulative effect of change in accounting
    principle(6) |  |                         | (79,838 | )    |  |      |        |      |  |      |        |   |  |   |        |  |  |   |        |  
|Net income (loss)                                          |  |                         | (57,904 | )    |  |      | (15,555 | )    |  |      | (32,170 | ) |  |   | 1,812   |  |  |   | 8,961   |  
|Other Data:                                                |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         |  
|Ratio of earnings to fixed charges(7)                      |  |                         | 0.9x    |      |  |      | 0.7x    |      |  |      | 0.3x    |   |  |   | 1.0x    |  |  |   | 1.7x    |  
|EBITDA(8)                                                  |  |                         | 42,002  |      |  |      | 42,242  |      |  |      | 24,331  |   |  |   | 50,330  |  |  |   | 32,264  |  
|Depreciation and amortization                              |  |                         | 13,989  |      |  |      | 16,180  |      |  |      | 15,737  |   |  |   | 15,133  |  |  |   | 7,248   |  
|Capital expenditures                                       |  |                         | 14,554  |      |  |      | 17,020  |      |  |      | 28,341  |   |  |   | 17,614  |  |  |   | 4,749   |  
|Balance Sheet Data:                                        |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         |  
|Cash and cash equivalents                                  |  |                         | 8,426   |      |  |      | 10,115  |      |  |      | 3,017   |   |  |   | 6,647   |  |  |   | 5,379   |  
|Working capital                                            |  |                         | 140,137 |      |  |      | 171,081 |      |  |      | 203,473 |   |  |   | 211,646 |  |  |   | 71,089  |  
|Total assets                                               |  |                         | 322,844 |      |  |      | 438,355 |      |  |      | 452,854 |   |  |   | 455,492 |  |  |   | 131,357 |  
|Total long-term debt                                       |  |                         | 266,100 |      |  |      | 344,704 |      |  |      | 360,361 |   |  |   | 338,710 |  |  |   | 115,139 |  
|Total stockholders equity (deficit)                       |  |                         | (74,516 | )    |  |      | (9,383  | )    |  |      | 5,474   |   |  |   | 37,800  |  |  |   | (15,389 | )



---



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

16



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Selling and administrative expenses in 2002 and
    2001 include charges of $0.7 million and
    $14.1 million, respectively, taken in connection with the
    Kmart bankruptcy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | Restructuring costs in 2002 represent expenses
    and asset impairment charges related to the Companys
    decision to exit manufacturing operations in the United States.
    Restructuring costs in 2001, 2000 and 1999 relates to facility
    closings associated with the integration of the Rival business.
    See Note 7 to the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(5) | The extraordinary item in 2002 represents a gain
    on the repurchase of $36.2 million of the Companys
    Senior Subordinated Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(6) | The Company adopted Statement of Financial
    Accounting Standards No. 142, Goodwill and Other
    Intangible Assets effective January 1, 2002. In
    connection with the adoption of the new Standard, the Company
    recorded a non-cash impairment charge of $79.8 million                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(7) | For purposes of determining the ratio of earnings
    to fixed charges, earnings represent income before income taxes,
    plus fixed charges as presented, without adjustment for one-time
    items as discussed in (8) below. Fixed charges consist of
    interest expense on all indebtedness plus a portion of rental
    payments on operating leases that is considered representative
    of the interest factor.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(8) | EBITDA, which includes our share of our joint
    ventures earnings, represents income before interest
    expense, income tax expense (benefit) and depreciation and
    amortization. EBITDA is presented because it is a widely
    accepted measure to provide information regarding a
    companys ability to service and/or incur debt. EBITDA
    should not be considered in isolation or as a substitute for net
    income, cash flows from operations or other income or cash flow
    data prepared in accordance with generally accepted accounting
    principles (GAAP), or as a measure of a companys
    profitability or liquidity. Additionally, our calculation of
    EBITDA may differ from that performed by other companies, and
    thus the amounts disclosed may not be directly comparable to
    those disclosed by other companies. A reconciliation between
    operating income presented in accordance with GAAP in the
    Consolidated Statements of Operations, EBITDA as presented and
    adjusted EBITDA after removing restructuring charges and other
    unusual items for the five years ended December 31, 2002 is
    as follows:

|                        |                                                              |      |        |        |   |         |        |        |   |      |        |        |  |   |        |        |   |   |        |       | 
|----------------------- | ------------------------------------------------------------ | ---- | ------ | ------ | - | ------- | ------ | ------ | - | ---- | ------ | ------ |  | - | ------ | ------ | - | - | ------ | ----- | 
|                        |                                                              | 2002 |        | 2001   |   | 2000(a) |        | 1999   |   | 1998
|                        |                                                              |      |        |        |   |         |        |        |   |     
|Operating Income  GAAP |                                                              | $    | 15,405 |        |   | $       | 23,910 |        |   | $    | 7,602  |        |  | $ | 31,806 |        |   | $ | 24,580 |      
|                        | Depreciation and amortization, net(b)                        |      |        | 12,989 |   |         |        | 12,876 |   |      |        | 12,763 |  |   |        | 12,433 |   |   |        | 7,248 | 
|                        | Amortization of goodwill(c)                                  |      |        |       |   |         |        | 2,494  |   |      |        | 2,597  |  |   |        | 2,700  |   |   |        |      | 
|                        | Other income                                                 |      |        | 10,618 |   |         |        | 608    |   |      |        | 758    |  |   |        | 2,489  |   |   |        | 436   | 
|                        | Equity in earnings from joint venture                        |      |        | 2,990  |   |         |        | 2,354  |   |      |        | 611    |  |   |        | 902    |   |   |        |      | 
|                        |                                                              |      |        |        |   |         |        |        |   |      |        |        |  |   |        |        |   |   |        |      
|EBITDA  As Presented   |                                                              |      | 42,002 |        |   |         | 42,242 |        |   |      | 24,331 |        |  |   | 50,330 |        |   |   | 32,264 |      
|                        | Restructuring and plant closing costs                        |      |        | 28,006 |   |         |        | 1,744  |   |      |        | 340    |  |   |        | 2,439  |   |   |        |      | 
|                        | Inventory writedowns related manufacturing
    restructuring |      |        | 7,236  |   |         |        |       |   |      |        |       |  |   |        |       |   |   |        |      | 
|                        | Trade credits asset impairment charge                        |      |        | 1,200  |   |         |        |       |   |      |        |       |  |   |        |       |   |   |        |      | 
|                        | Credit Facility amendment costs                              |      |        | 459    |   |         |        | 2,271  |   |      |        | 1,000  |  |   |        |       |   |   |        |      | 
|                        | Kmart bankruptcy                                             |      |        | 1,089  |   |         |        | 14,082 |   |      |        |       |  |   |        |       |   |   |        |      | 
|                        | Cost of faulty heater component                              |      |        |       |   |         |        |       |   |      |        | 3,118  |  |   |        | 2,196  |   |   |        |      | 
|                        | Acquisition integration costs                                |      |        |       |   |         |        |       |   |      |        | 2,689  |  |   |        | 3,380  |   |   |        |      | 
|                        | Gains on asset sales from restructuring                      |      |        | (9,488 | ) |         |        | (559   | ) |      |        |       |  |   |        | (1,700 | ) |   |        |      | 
|                        | Operating results of divested businesses                     |      |        |       |   |         |        |       |   |      |        |       |  |   |        | 4,755  |   |   |        |      | 
|                        |                                                              |      |        |        |   |         |        |        |   |      |        |        |  |   |        |        |   |   |        |      
|EBITDA  Adjusted       |                                                              | $    | 70,504 |        |   | $       | 59,780 |        |   | $    | 31,478 |        |  | $ | 61,400 |        |   | $ | 32,264 |      
|                        |                                                              |      |        |        |   |         |        |        |   |      |        |        |  |   |        |        |   |   |        |      



---



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



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



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

17



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Background

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

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

A summary of the risks and uncertainties which
may affect our future performance is presented on page 3 of this
Form 10-K and a discussion of the risk factors
affecting our business is presented on pages 10 through 14
of this Annual Report. Risks and uncertainties are detailed from
time to time in reports filed by the Company with the SEC,
including Forms 10-Q and 10-K and the Companys most
recent Registration Statement on Form S-4 (File
No. 333-77095).

Critical Accounting Policies and
Estimates

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

We believe the most significant accounting
estimates inherent in the preparation of the financial
statements include estimates associated with managements
evaluation of the allowances for doubtful accounts and customer
deductions, reserves for inventory valuation, accruals for
product returns and the determination of liabilities related to
taxation and restructuring actions.

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



|  |                                                             
|- | ------------------------------------------------------------
| | Allowances for Doubtful Accounts and
    Customer Deductions



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

18



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##### Table of Contents



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



|  |                   
|- | ------------------
| | Inventory Reserves



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



|  |                
|- | ---------------
| | Product Returns



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



|  |             
|- | ------------
| | Income Taxes



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

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##### Table of Contents





|  |                       
|- | ----------------------
| | Restructuring Reserves



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

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

Results of Operations

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

|                                                                              |  |                        |       |      |  |      |       |    |  |  |       |   
|----------------------------------------------------------------------------- |  | ---------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                                              |  |                       
|                                                                              |  | Year Ended December 21
|                                                                              |  |                       
|                                                                              |  | 2002                   |       | 2001 |  | 2000
|                                                                              |  |                        |       |      |  |     
|Net sales                                                                     |  |                        | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|Cost of sales                                                                 |  |                        | 73.1  | %    |  |      | 75.5  | %  |  |  | 76.3  | % 
|                                                                              |  |                        |       |      |  |      |       |    |  |  |       |   
|Gross profit                                                                  |  |                        | 26.9  | %    |  |      | 24.5  | %  |  |  | 23.7  | % 
|Selling and administrative expenses                                           |  |                        | 19.8  | %    |  |      | 20.3  | %  |  |  | 22.1  | % 
|                                                                              |  |                        |       |      |  |      |       |    |  |  |       |   
|Operating income before restructuring costs                                   |  |                        | 7.1   | %    |  |      | 4.2   | %  |  |  | 1.6   | % 
|Restructuring and plant closing costs                                         |  |                        | 4.6   | %    |  |      | 0.3   | %  |  |  | 0.1   | % 
|                                                                              |  |                        |       |      |  |      |       |    |  |  |       |   
|Operating income                                                              |  |                        | 2.5   | %    |  |      | 3.9   | %  |  |  | 1.5   | % 
|Interest expense                                                              |  |                        | 4.9   | %    |  |      | 6.2   | %  |  |  | 7.7   | % 
|Other income, net                                                             |  |                        | (1.7  | )%   |  |      | (0.1  | )% |  |  | (0.2  | )%
|Income tax expense (benefit)                                                  |  |                        | (0.1  | )%   |  |      | 0.7   | %  |  |  | 0.5   | % 
|Equity in earnings from joint venture                                         |  |                        | (0.5  | )%   |  |      | (0.4  | )% |  |  | (0.1  | )%
|                                                                              |  |                        |       |      |  |      |       |    |  |  |       |   
|Loss before extraordinary item and cumulative
    effect of accounting change |  |                        | (0.1  | )%   |  |      | (2.5  | )% |  |  | (6.4  | )%
|                                                                              |  |                        |       |      |  |      |       |    |  |  |       |   

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

Net
Sales

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

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

20



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##### Table of Contents



largest sales decline occurred in the fan product
line due, in part, 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 12% from
2001 due to higher sales in Canada and Europe. Sales of motors,
which are manufactured by our facility in China, to our joint
venture with General Electric totaled $17.6 million in 2002
compared to $17.1 in motor sales during 2001.

Gross
Profit

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

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

Selling
and Administrative Expenses

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

Restructuring
and Plant Closing Costs

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

21



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##### Table of Contents



Interest Expense
and Other Income

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

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

Income
Taxes

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

Equity in
Earnings of Joint Venture

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

Extraordinary
Gain

In conjunction with the Fifth Amendment of the
Credit Facility in March 2002, the Company repurchased from two
Berkshire Partners investment funds an aggregate principal
amount of approximately $36.2 million of the Senior
Subordinated Notes. The purchase price of the Notes,
representing Berkshire Partners cost, was
$11.5 million plus accrued interest, which was funded with
proceeds of the Revolving Credit Facility. The Notes repurchased
were retired and cancelled. This transaction resulted in an
extraordinary gain on the early retirement of debt totaling
$22.4 million. The gain is net of approximately
$1.9 million of debt issuance costs and $0.3 million
of debt issuance discount written off as part of the transaction
and $0.1 million of transaction fees. A provision for
income taxes has not been recorded in connection with this
transaction as the Company expects to offset the gain with
available net operating loss carry forwards.

Cumulative
Effect of Accounting Change

The Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets effective January 1, 2002. In
connection with adopting this Standard, the Company, assisted by
independent valuation consultants, completed the transitional
testing of goodwill using a measurement date of January 1,
2002. The Companys consolidated balance sheet as of
December 31, 2001 included goodwill with a net book value
of $79.8 million as a result of the Rival acquisition in 1999.
The results of this testing indicate that the carrying values of
the goodwill asset for both the home environment and kitchen
reporting units significantly exceeded the estimated fair value
of the units as

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determined utilizing various valuation
techniques, including discounted cash flow and comparative
market analysis. Accordingly, a non-cash impairment charge has
been recognized as a change in accounting principle as of the
beginning of 2002. The impairment charge was $79.8 million
on a before and after-tax basis.


Net Loss and
EBITDA

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

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

Net
Sales

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

Gross
Profit

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

Selling and
Administrative Expenses

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

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Restructuring
and Plant Closing Costs

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

Interest Expense
and Other Income

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

Income Tax
Expense

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

Equity in
Earnings from Joint Venture

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

Net Loss and
EBITDA

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

Liquidity and Capital Resources

Analysis of
Cash Flows

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

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

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and 2001 was $50.9 million and
$36.2 million, respectively. In 2002, operating earnings,
adjusted for non-cash items, improved to $39.8 million as
compared to adjusted operating earnings of $24.8 million
for the year ended December 31, 2001. Changes in other
operating assets and liabilities provided $11.1 million of
cash in 2002 compared to $11.4 million in 2001. After
adjusting for the sale of the Pollenex business, inventory
levels at December 31, 2002 were above last year by
$11.5 million or 11.7%. Accounts receivable balances
decreased substantially from the year ago levels, down
$13.2 million or 9.3% from the accounts receivable amount
at December 31, 2001. Days sales outstanding (DSO) at
December 31, 2002 stood at 57 days, 12% below the DSO
statistic in 2001. Inventory turnover was 3.7 in 2002, slightly
improved from the 3.6 turnover statistic in 2001. The increased
inventory levels at December 31, 2002 included higher
quantities of domestically manufactured slow-cookers and ice
cream freezers to help insure a smooth transition to the Far
East production.


Cash provided by investing activities for the
year ended December 31, 2002 was $3 million compared
to a use of cash of $12.2 million in 2001. The 2002 amount
includes $15.1 million in cash proceeds received in
connection with the sale of the Pollenex division in January
2002. The proceeds were offset by $14.6 million invested in
capital expenditures for property and equipment during 2002
compared to capital expenditures of $17 million in 2001. We
expect to spend approximately $15 million on capital
expenditures in 2003, primarily related to the expansion of our
China manufacturing facilities, the implementation of computer
systems and on-going tooling costs to support new product
development initiatives. The Company also received
$2.5 million in earnings distributions from its joint
venture with General Electric in 2002 compared to earnings
distributions of $1.9 million in 2001.

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

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

Financing
Arrangements

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

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privately negotiated transactions. As of
November 15, 2002, the Notes are also subject to redemption
at any time at our option, in whole or in part, at stated
redemption prices. The payment of principal and interest on the
Notes is subordinated to the prior payment in full of all of our
senior debt, including borrowings under the Credit Facility. The
notes are cross-defaulted to payment defaults under the Credit
Facility.


We entered into an amended and restated Credit
Facility agreement in February 1999 in connection with the Rival
acquisition. This Credit Facility consisted of a Term Loan A of
$40.0 million that matures in February, 2005, a Term Loan B
of $85.0 million that matures in February, 2007 and a
Revolving Credit Facility maturing in February, 2005. The Credit
Facility, and the guarantees thereof by our domestic
subsidiaries, are secured by substantially all of our domestic
and certain foreign assets. The Credit Facility is
cross-defaulted to the Notes Indentures.

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

On March 22, 2002, Holmes and the Bank Group
agreed to a Fifth Amendment to the Credit Facility. The Fifth
Amendment further revised certain of the financial ratio
covenants for the periods ending December 31, 2001 through
June 30, 2004, in order to reflect our current business
plan and to accommodate the $14.1 million bad debt charge in the
fourth quarter of 2001 due to the Kmart bankruptcy. Under the
Fifth Amendment, the lenders have committed to a Revolving
Credit Loan A of $131 million and a Revolving Credit
Loan B of $40 million. Revolving Credit Loan B
continues to be supported by the Berkshire Partners
guarantee entered into in connection with the Fourth Amendment.
Actual availability under these revolving credit facilities is
subject to a borrowing base formula based on inventory and
accounts receivable. Under the Fifth Amendment, the maturity
date of the Revolving Credit Loan B was extended from
July 1, 2002 through July 1, 2004. The maturity date
of the Revolving Credit Loan A and the Term Loan A remain at
February 5, 2005, although the availability under the
Revolving Credit Loan A commitment will terminate on
July 1, 2004 unless otherwise approved by a majority in
interest of the lenders. The maturity date of the Term
Loan B remains at February 5, 2007. As part of the
Fifth Amendment, the applicable interest rate margins on the
Revolving Credit Loan B were reduced, while the margins on
the Revolving Credit Loan A and Term Loans A and B
were increased. We expect to refinance our borrowing
arrangements during the first six months of 2004.

The Credit Facility, as amended, and the Notes
Indentures include certain financial and operating covenants,
which, among other things, restrict our ability to incur
additional indebtedness, grant liens, make investments and take
certain other actions. Our ability to meet our debt service
obligations will be dependent upon our future performance, which
will be impacted by general economic conditions and other
factors. See Business  Certain Risk Factors
Which May Affect Our Future Operating Results above.

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

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

|                                              |  |       |         |                |  |           |       |         |  |   |         |  |  |   |        | 
|--------------------------------------------- |  | ----- | ------- | -------------- |  | --------- | ----- | ------- |  | - | ------- |  |  | - | ------ | 
|                                              |  |       |         | Less Than      |  |           |       | After  
|                                              |  | Total |         | 1 Year         |  | 1-3 Years |       | 3 Years
|                                              |  |       |         |                |  |           |       |        
|                                              |  |       |         |                |  |          
|                                              |  |       |         | (in thousands) |  |          
|Long-term debt  variable rate                |  | $     | 175,634 |                |  | $         | 9,078 |         |  | $ | 131,453 |  |  | $ | 35,103 | 
|Long-term debt  fixed rate                   |  |       | 99,544  |                |  |           |      |         |  |   |        |  |  |   | 99,544 | 
|Non-cancelable operating lease obligations    |  |       | 62,706  |                |  |           | 7,009 |         |  |   | 16,365  |  |  |   | 39,332 | 
|Outstanding letters of credit                 |  |       | 8,918   |                |  |           | 8,918 |         |  |   |        |  |  |   |       | 
|Purchase commitments for capital expenditures |  |       | 9,057   |                |  |           | 9,057 |         |  |   |        |  |  |   |       | 

Recently Issued Accounting Standards

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

The FASB issued Statement No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections in April 2002. This statement updates,
clarifies and simplifies existing accounting pronouncements.
Specifically, the statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of
Debt, FASB Statement No. 64, Extinguishment of
Debt Made to Satisfy, Sinking Fund Requirements and FASB
Statement No. 44 Accounting for Intangible Assets of
Motor Carriers. The Statement also amends FASB Statement
No. 13, Accounting for Leases and certain other
existing authoritative pronouncements to make technical
corrections or clarifications. FAS No. 145 will be
effective for the Company related to the rescission of FAS
No. 4 and FAS No. 64 on January 1, 2003. FAS
No. 145 will be effective related to the amendment of FAS
No. 13 for all transactions occurring after May 15,
2002. All other provisions of FAS No. 145 will be effective
for financial statements issued after May 15, 2002. The
Company expects that the provisions of FAS 145 will require the
reclassification of the gain related to the senior notes
repurchase, which was treated as an extraordinary item in 2002,
to other income in future financial presentations.

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

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

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interpretation of FASB Statements No. 5, 57
and 107 and rescission of FASB Interpretation No. 34. This
interpretation clarifies the requirements of FASB Statement
No. 5, Accounting for Contingencies relating to
the guarantors accounting for, and disclosure of, this
issuance of certain types of guarantees. Information required by
the disclosure provisions of the interpretation, which are
effective for financial statements of interim or annual periods
that end after December 15, 2002, is presented in Note 14
to the consolidated financial statements. The provisions for
initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified
after December 31, 2002. The Company is currently
evaluating the provisions of this interpretation to determine
the impact of adoption.


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

Investor Conference Call

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






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

At December 31, 2002, the carrying value of
our debt totaled $275.2 million. The fair value approximated
$245.4 million. This debt includes amounts at both fixed
and variable interest rates. For fixed rate debt, interest rate
changes affect the fair market value but do not impact earnings
or cash flows. Conversely, for variable rate debt, interest rate
changes generally do not affect the fair market value but do
impact earnings and cash flows, assuming other factors are held
constant.

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

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Item 8.Financial
Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                       |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                       |  | Page
|                                                                                                                       |  |     
|Report of PricewaterhouseCoopers LLP, Independent
    Accountants                                                      |  |      | 30 | 
|Consolidated Balance Sheets at December 31,
    2001 and 2002                                                          |  |      | 31 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2000, 2001 and 2002                         |  |      | 32 | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the years ended December 31, 2000,
    2001 and 2002 |  |      | 33 | 
|Consolidated Statements of Comprehensive Income
    (Loss) for the years ended December 31, 2000, 2001 and 2002        |  |      | 34 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2000, 2001 and 2002                         |  |      | 35 | 
|Notes to Consolidated Financial Statements                                                                             |  |      | 36 | 
|Financial Statement Schedule: For each of the
    three years in the period ended December 31, 2002:                   |  |      |    | 
|II  Valuation and Qualifying Accounts                                                                                 |  |      | 65 | 

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.

29



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and

Stockholders of The Holmes Group, Inc.:


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

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



| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

March 7, 2003


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THE HOLMES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                       |                                                |         |              |    |   |         |         |    | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------- | ------- | ------------ | -- | - | ------- | ------- | -- | 
|                                                   |                                                                                       | December 31,                                   |         | December 31,
|                                                   |                                                                                       | 2002                                           |         | 2001        
|                                                   |                                                                                       |                                                |         |             
|                                                   |                                                                                       |                                               
|                                                   |                                                                                       | (in thousands except share and                
|                                                   |                                                                                       | per share amounts)                            
|ASSETS                                            
|Current assets:                                    |                                                                                       |                                                |         |              |    |   |         |        
|                                                   | Cash and cash equivalents                                                             |                                                | $       | 8,426        |    |   | $       | 10,115  |   
|                                                   | Accounts receivable, net of allowances of $18,351
    in 2002
    and $18,202 in 2001 |                                                |         | 128,409      |    |   |         | 141,629 |   
|                                                   | Inventories                                                                           |                                                |         | 110,236      |    |   |         | 103,195 |   
|                                                   | Prepaid expenses and other current assets                                             |                                                |         | 4,817        |    |   |         | 5,317   |   
|                                                   | Deferred income taxes                                                                 |                                                |         | 5,067        |    |   |         | 5,249   |   
|                                                   |                                                                                       |                                                |         |              |    |   |         |        
|                                                   | Total current assets                                                                  |                                                |         | 256,955      |    |   |         | 265,505 |   
|Assets held for sale                               |                                                                                       |                                                | 6,466   |              |    |   | 86      |        
|Property and equipment, net                        |                                                                                       |                                                | 42,446  |              |    |   | 69,096  |        
|Goodwill, net                                      |                                                                                       |                                                |        |              |    |   | 79,838  |        
|Deposits and other assets                          |                                                                                       |                                                | 837     |              |    |   | 4,985   |        
|Debt issuance costs, net                           |                                                                                       |                                                | 10,184  |              |    |   | 13,071  |        
|Deferred income taxes                              |                                                                                       |                                                | 5,956   |              |    |   | 5,774   |        
|                                                   |                                                                                       |                                                |         |              |    |   |         |        
|                                                   |                                                                                       | $                                              | 322,844 |              |    | $ | 438,355 |        
|                                                   |                                                                                       |                                                |         |              |    |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)
|Current liabilities:                               |                                                                                       |                                                |         |              |    |   |         |        
|                                                   | Accounts payable                                                                      |                                                |         | 44,267       |    |   |         | 36,743  |   
|                                                   | Current portion of Credit Facility                                                    |                                                |         | 9,078        |    |   |         | 8,476   |   
|                                                   | Accrued income taxes                                                                  |                                                |         | 7,405        |    |   |         | 6,457   |   
|                                                   | Deferred income taxes                                                                 |                                                |         | 2,967        |    |   |         | 2,209   |   
|                                                   | Accrued expenses and other current liabilities                                        |                                                |         | 53,101       |    |   |         | 40,539  |   
|                                                   |                                                                                       |                                                |         |              |    |   |         |        
|                                                   | Total current liabilities                                                             |                                                |         | 116,818      |    |   |         | 94,424  |   
|Long-term portion of Credit Facility               |                                                                                       |                                                | 166,556 |              |    |   | 209,406 |        
|Senior Subordinated Notes                          |                                                                                       |                                                | 99,544  |              |    |   | 135,298 |        
|Pension obligation                                 |                                                                                       |                                                | 5,840   |              |    |   |        |        
|Other liabilities                                  |                                                                                       |                                                | 7,613   |              |    |   | 7,485   |        
|Deferred income taxes                              |                                                                                       |                                                | 989     |              |    |   | 1,125   |        
|Commitments and contingencies                      |                                                                                       |                                                |         |              |    |   |         |        
|Stockholders equity (deficit):                    |                                                                                       |                                                |         |              |    |   |         |        
|                                                   | Common stock, $.001 par value.
    Authorized  28,500,000 shares;                    |                                                |         |              |    |   |         |         |   
|                                                   |                                                                                       | Issued and outstanding 
    20,302,995 shares |         |              | 20 |   |         |         | 20 | 
|                                                   | Additional paid in capital                                                            |                                                |         | 68,874       |    |   |         | 68,874  |   
|                                                   | Accumulated other comprehensive income (loss)                                         |                                                |         | (7,231       | )  |   |         | (2      | ) 
|                                                   | Treasury stock, at cost (18,627,450 shares)                                           |                                                |         | (62,076      | )  |   |         | (62,076 | ) 
|                                                   | Retained earnings (deficit)                                                           |                                                |         | (74,103      | )  |   |         | (16,199 | ) 
|                                                   |                                                                                       |                                                |         |              |    |   |         |        
|                                                   | Total stockholders equity (deficit)                                                  |                                                |         | (74,516      | )  |   |         | (9,383  | ) 
|                                                   |                                                                                       |                                                |         |              |    |   |         |        
|                                                   |                                                                                       | $                                              | 322,844 |              |    | $ | 438,355 |        
|                                                   |                                                                                       |                                                |         |              |    |   |         |        

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

31



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##### Table of Contents



THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                                                    |                   |                                  |         |         |   |      |         |        |   |   |         |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------------------------------- | ------- | ------- | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                                                                                                    |                   |                                 
|                                                                                                                                                    |                   | For the Years Ended December 31,
|                                                                                                                                                    |                   |                                 
|                                                                                                                                                    |                   | 2002                             |         | 2001    |   | 2000
|                                                                                                                                                    |                   |                                  |         |         |   |     
|                                                                                                                                                    |                   |                                 
|                                                                                                                                                    |                   | (in thousands)                  
|Net sales                                                                                                                                           |                   | $                                | 608,554 |         |   | $    | 612,240 |        |   | $ | 500,810 |       
|Cost of sales                                                                                                                                       |                   |                                  | 444,577 |         |   |      | 462,271 |        |   |   | 382,205 |       
|                                                                                                                                                    |                   |                                  |         |         |   |      |         |        |   |   |         |       
|Gross profit                                                                                                                                        |                   |                                  | 163,977 |         |   |      | 149,969 |        |   |   | 118,605 |       
|Selling and administrative expenses                                                                                                                 |                   |                                  | 120,566 |         |   |      | 124,315 |        |   |   | 110,663 |       
|Restructuring and plant closing costs                                                                                                               |                   |                                  | 28,006  |         |   |      | 1,744   |        |   |   | 340     |       
|                                                                                                                                                    |                   |                                  |         |         |   |      |         |        |   |   |         |       
|Operating income                                                                                                                                    |                   |                                  | 15,405  |         |   |      | 23,910  |        |   |   | 7,602   |       
|Other income and expense:                                                                                                                           |                   |                                  |         |         |   |      |         |        |   |   |         |       
|                                                                                                                                                    | Interest expense  |                                  |         | 29,615  |   |      |         | 37,900 |   |   |         | 38,550 |  
|                                                                                                                                                    | Other income, net |                                  |         | (10,618 | ) |      |         | (608   | ) |   |         | (758   | )
|                                                                                                                                                    |                   |                                  |         |         |   |      |         |        |   |   |         |       
|                                                                                                                                                    |                   |                                  | 18,997  |         |   |      | 37,292  |        |   |   | 37,792  |       
|                                                                                                                                                    |                   |                                  |         |         |   |      |         |        |   |   |         |       
|Loss before income taxes, equity in earnings from
    joint venture, extraordinary item and cumulative effect of
    change in accounting principle |                   |                                  | (3,592  | )       |   |      | (13,382 | )      |   |   | (30,190 | )     
|Income tax expense (benefit)                                                                                                                        |                   |                                  | (148    | )       |   |      | 4,527   |        |   |   | 2,591   |       
|Equity in earnings from joint venture                                                                                                               |                   |                                  | (2,990  | )       |   |      | (2,354  | )      |   |   | (611    | )     
|                                                                                                                                                    |                   |                                  |         |         |   |      |         |        |   |   |         |       
|Loss before extraordinary item and cumulative
    effect of change in accounting principle                                                          |                   |                                  | (454    | )       |   |      | (15,555 | )      |   |   | (32,170 | )     
|Extraordinary gain                                                                                                                                  |                   |                                  | 22,388  |         |   |      |        |        |   |   |        |       
|Cumulative effect of change in accounting
    principle                                                                                             |                   |                                  | (79,838 | )       |   |      |        |        |   |   |        |       
|                                                                                                                                                    |                   |                                  |         |         |   |      |         |        |   |   |         |       
|Net loss                                                                                                                                            |                   | $                                | (57,904 | )       |   | $    | (15,555 | )      |   | $ | (32,170 | )     
|                                                                                                                                                    |                   |                                  |         |         |   |      |         |        |   |   |         |       

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

32



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##### Table of Contents



THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                                                                |  |                                  |        |            |  |               |    |               |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | -------------------------------- | ------ | ---------- |  | ------------- | -- | ------------- |  | -------- | ------ | ------------- |  | --------- | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                |  |                                  |        |            |  |               |    |               |  |          |        |              
|                                                                |  | Common                           |        |            |  |               |    |               |  |          |        |              
|                                                                |  | Stock                            |        |            |  |               |    |               |  |          |        |              
|                                                                |  | $.001                            |        |            |  | Accumulated   |    |               |  |          |        | Total        
|                                                                |  | Par Value                        |        | Additional |  | Other         |    |               |  | Retained |        | Stockholders
|                                                                |  |                                  |        | Paid In    |  | Comprehensive |    | Treasury      |  | Earnings |        | Equity       
|                                                                |  | Shares                           |        | Par        |  | Capital       |    | Income/(loss) |  | Stock    |        | (Deficit)     |  | (Deficit)
|                                                                |  |                                  |        |            |  |               |    |               |  |          |        |               |  |          
|                                                                |  |                                 
|                                                                |  | (in thousands, except par value)
|Balance at December 31, 1999                                    |  |                                  | 20,308 |            |  | $             | 20 |               |  | $        | 67,915 |               |  | $         | 397    |   |  | $ | (62,058 | ) |  | $ | 31,526  |   |  | $ | 37,800  |  
|Foreign currency translation adjustments                        |  |                                  |       |            |  |               |   |               |  |          |       |               |  |           | (156   | ) |  |   |        |   |  |   |        |   |  |   | (156    | )
|Net loss                                                        |  |                                  |       |            |  |               |   |               |  |          |       |               |  |           |       |   |  |   |        |   |  |   | (32,170 | ) |  |   | (32,170 | )
|                                                                |  |                                  |        |            |  |               |    |               |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                    |  |                                  | 20,308 |            |  | $             | 20 |               |  | $        | 67,915 |               |  | $         | 241    |   |  | $ | (62,058 | ) |  | $ | (644    | ) |  | $ | 5,474   |  
|Issuance of stock warrants and repurchase of
    treasury stock |  |                                  | (5     | )          |  |               |   |               |  |          | 959    |               |  |           |       |   |  |   | (18     | ) |  |   |        |   |  |   | 941     |  
|Foreign currency translation adjustments                        |  |                                  |       |            |  |               |   |               |  |          |       |               |  |           | (243   | ) |  |   |        |   |  |   |        |   |  |   | (243    | )
|Net loss                                                        |  |                                  |       |            |  |               |   |               |  |          |       |               |  |           |       |   |  |   |        |   |  |   | (15,555 | ) |  |   | (15,555 | )
|                                                                |  |                                  |        |            |  |               |    |               |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                    |  |                                  | 20,303 |            |  | $             | 20 |               |  | $        | 68,874 |               |  | $         | (2     | ) |  | $ | (62,076 | ) |  | $ | (16,199 | ) |  |   | (9,383  | )
|Foreign currency translation adjustments                        |  |                                  |       |            |  |               |   |               |  |          |       |               |  |           | (187   | ) |  |   |        |   |  |   |        |   |  |   | (187    | )
|Minimum pension liability adjustment                            |  |                                  |       |            |  |               |   |               |  |          |       |               |  |           | (7,042 | ) |  |   |        |   |  |   |        |   |  |   | (7,042  | )
|Net loss                                                        |  |                                  |       |            |  |               |   |               |  |          |       |               |  |           |       |   |  |   |        |   |  |   | (57,904 | ) |  |   | (57,904 | )
|                                                                |  |                                  |        |            |  |               |    |               |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                    |  |                                  | 20,303 |            |  | $             | 20 |               |  | $        | 68,874 |               |  | $         | (7,231 | ) |  | $ | (62,076 | ) |  | $ | (74,103 | ) |  | $ | (74,516 | )
|                                                                |  |                                  |        |            |  |               |    |               |  |          |        |               |  |           |        |   |  |   |         |   |  |   |         |   |  |   |         |  

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

33



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##### Table of Contents



THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

|                            |                                          |                                  |         |        |   |      |         |      |   |   |         |      |  
|--------------------------- | ---------------------------------------- | -------------------------------- | ------- | ------ | - | ---- | ------- | ---- | - | - | ------- | ---- | -
|                            |                                          |                                 
|                            |                                          | For the Years Ended December 31,
|                            |                                          |                                 
|                            |                                          | 2002                             |         | 2001   |   | 2000
|                            |                                          |                                  |         |        |   |     
|                            |                                          |                                 
|                            |                                          | (in thousands)                  
|Net loss                    |                                          | $                                | (57,904 | )      |   | $    | (15,555 | )    |   | $ | (32,170 | )   
|Other comprehensive income: |                                          |                                  |         |        |   |      |         |      |   |   |         |     
|                            | Foreign currency translation adjustments |                                  |         | (187   | ) |      |         | (243 | ) |   |         | (156 | )
|                            | Minimum pension liability adjustment     |                                  |         | (7,042 | ) |      |         |     |   |   |         |     |  
|                            |                                          |                                  |         |        |   |      |         |      |   |   |         |     
|Comprehensive income (loss) |                                          | $                                | (65,133 | )      |   | $    | (15,798 | )    |   | $ | (32,326 | )   
|                            |                                          |                                  |         |        |   |      |         |      |   |   |         |     

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

34



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##### Table of Contents



THE HOLMES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |         |         |         |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ----------------------------------------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | -
|                                                         |                                                                                                |                                                                   
|                                                         |                                                                                                | For the Years Ended December 31,                                  
|                                                         |                                                                                                |                                                                   
|                                                         |                                                                                                | 2002                                                               |                                           | 2001    |         | 2000   
|                                                         |                                                                                                |                                                                    |                                           |         |         |        
|                                                         |                                                                                                |                                                                   
|                                                         |                                                                                                | (in thousands)                                                    
|Cash flows from operating activities:                    |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|                                                         | Net loss                                                                                       |                                                                    | $                                         | (57,904 | )       |         | $      | (15,555 | )       |         | $      | (32,170 | )      
|                                                         | Adjustments to reconcile net loss to net cash
    provided by (used for) operating activities: |                                                                    |                                           |         |         |         |        |         |         |         |        |         |        
|                                                         |                                                                                                | Depreciation and amortization                                      |                                           |         | 13,989  |         |        |         | 16,180  |         |        |         | 15,737  |        
|                                                         |                                                                                                | Amortization of debt related costs and other
    non-cash interest |                                           |         | 7,010   |         |        |         | 5,678   |         |        |         | 4,129   |        
|                                                         |                                                                                                | Provision for doubtful accounts                                    |                                           |         | 6,134   |         |        |         | 15,219  |         |        |         | 4,543   |        
|                                                         |                                                                                                | Loss on disposal of assets                                         |                                           |         | 884     |         |        |         | 564     |         |        |         |        |        
|                                                         |                                                                                                | Gain on sale of business                                           |                                           |         | (9,488  | )       |        |         |        |         |        |         |        |        
|                                                         |                                                                                                | Extraordinary gain                                                 |                                           |         | (22,388 | )       |        |         |        |         |        |         |        |        
|                                                         |                                                                                                | Cumulative effect of change in accounting
    principle            |                                           |         | 79,838  |         |        |         |        |         |        |         |        |        
|                                                         |                                                                                                | Deferred income taxes                                              |                                           |         | 622     |         |        |         | 2,332   |         |        |         | (425    | )      
|                                                         |                                                                                                | Restructuring and other asset impairment charges                   |                                           |         | 21,090  |         |        |         | 417     |         |        |         |        |        
|                                                         |                                                                                                | Changes in operating assets and liabilities:                       |                                           |         |         |         |        |         |         |         |        |         |         |        
|                                                         |                                                                                                |                                                                    | Accounts receivable                       |         |         | 4,614   |        |         |         | (34,969 | )      |         |         | 13,222  |  
|                                                         |                                                                                                |                                                                    | Inventories                               |         |         | (11,539 | )      |         |         | 27,855  |        |         |         | (18,390 | )
|                                                         |                                                                                                |                                                                    | Prepaid expenses and other current assets |         |         | 500     |        |         |         | 1,140   |        |         |         | 7,284   |  
|                                                         |                                                                                                |                                                                    | Deposits and other assets                 |         |         | 1,094   |        |         |         | 305     |        |         |         | (1,080  | )
|                                                         |                                                                                                |                                                                    | Accounts payable                          |         |         | 7,524   |        |         |         | 6,311   |        |         |         | 3,746   |  
|                                                         |                                                                                                |                                                                    | Accrued expenses and other liabilities    |         |         | 7,929   |        |         |         | 9,033   |        |         |         | (2,911  | )
|                                                         |                                                                                                |                                                                    | Accrued income taxes                      |         |         | 948     |        |         |         | 1,740   |        |         |         | 794     |  
|                                                         |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|                                                         |                                                                                                | Net cash provided by (used for) operating
    activities           |                                           |         | 50,857  |         |        |         | 36,250  |         |        |         | (5,521  | )      
|Cash flows from investing activities:                    |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|                                                         | Proceeds from sale of business and assets held
    for sale                                    |                                                                    |                                           | 15,100  |         |         |        | 2,228   |         |         |        | 4,753   |        
|                                                         | Distribution of earnings from joint venture                                                    |                                                                    |                                           | 2,472   |         |         |        | 1,876   |         |         |        | 1,375   |        
|                                                         | Purchases of property, plant and equipment                                                     |                                                                    |                                           | (14,554 | )       |         |        | (17,020 | )       |         |        | (28,341 | )      
|                                                         | Cash received from joint venture partner                                                       |                                                                    |                                           |        |         |         |        | 700     |         |         |        | 1,893   |        
|                                                         |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|                                                         |                                                                                                | Net cash provided by (used for) investing
    activities           |                                           |         | 3,018   |         |        |         | (12,216 | )       |        |         | (20,320 | )      
|Cash flows from financing activities:                    |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|                                                         | Repayments of Credit Facility, net of issuance
    costs                                       |                                                                    |                                           | (42,248 | )       |         |        | (14,543 | )       |         |        | 22,350  |        
|                                                         | Redemption of long-term debt                                                                   |                                                                    |                                           | (11,550 | )       |         |        |        |         |         |        |        |        
|                                                         | Debt issuance costs                                                                            |                                                                    |                                           | (1,579  | )       |         |        | (2,393  | )       |         |        |        |        
|                                                         | Principal payments on capital lease obligations                                                |                                                                    |                                           |        |         |         |        |        |         |         |        | (139    | )      
|                                                         |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|                                                         |                                                                                                | Net cash provided by (used for) financing
    activities           |                                           |         | (55,377 | )       |        |         | (16,936 | )       |        |         | 22,211  |        
|Effect of exchange rate changes on cash                  |                                                                                                |                                                                    | (187                                      | )       |         |         |       |         |         |         |       |        
|                                                         |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                |                                                                    | (1,689                                    | )       |         |         | 7,098  |         |         |         | (3,630 | )      
|Cash and cash equivalents, beginning of period           |                                                                                                |                                                                    | 10,115                                    |         |         |         | 3,017  |         |         |         | 6,647  |        
|                                                         |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|Cash and cash equivalents, end of period                 |                                                                                                | $                                                                  | 8,426                                     |         |         | $       | 10,115 |         |         | $       | 3,017  |        
|                                                         |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|Supplemental disclosure of cash flow information:        |                                                                                                |                                                                    |                                           |         |         |         |        |         |         |         |        |        
|                                                         | Cash paid for interest                                                                         |                                                                    | $                                         | 23,252  |         |         | $      | 33,305  |         |         | $      | 32,181  |        
|                                                         | Cash paid for (refund of) income taxes                                                         |                                                                    | $                                         | (2,716  | )       |         | $      | 1,041   |         |         | $      | (4,753  | )      

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

35



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##### Table of Contents



THE HOLMES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1. Nature of Business

The Holmes Group, Inc. (THG), along with its
wholly-owned subsidiaries, including The Rival Company (Rival),
which was acquired in February 1999, designs, develops,
manufactures, imports and sells consumer durable goods,
including fans, heaters, humidifiers, air purifiers, small
kitchen electric appliances and lighting products to retailers
throughout the United States and Canada, and to a lesser
extent, Europe, Latin America and Asia. The Companys
majority stockholder is Berkshire Partners LLC.

Holmes Products (Far East) Limited
(HPFEL) and its subsidiaries manufacture, source and sell
consumer durable goods, mainly to THG and its subsidiaries.
HPFEL operates facilities in China and Taiwan.

2. Summary of Significant Accounting
Policies

In preparing financial statements in conformity
with accounting principles generally accepted in the United
States of America, management is required to make estimates and
assumptions about future events that affect the amounts reported
in the financial statements and accompanying notes. Future
events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires
the exercise of judgment. Actual results inevitably will differ
from those estimates, and such differences may be material to
the financial statements.

The most significant accounting estimates
inherent in the preparation of the Companys financial
statements include estimates associated with managements
evaluation of the recoverability of goodwill as well as those
used in the determination of liabilities related to warranty
activity, taxation and restructuring allowances, collectibility
of accounts receivable, inventory valuations and certain
benefits provided to current employees. Various assumptions and
other factors underlie the determination of these significant
estimates. The process of determining significant estimates is
fact specific and takes into account factors such as historical
experience, current and expected economic conditions, product
mix, and in some cases, actuarial techniques. The Company
constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate.

A summary of the Companys significant
accounting policies consistently applied in the preparation of
the accompanying consolidated financial statement is as follows:

Basis of
Consolidation

The accompanying financial statements include the
accounts of THG and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been
eliminated. THG and its consolidated subsidiaries, including
Rival, HPFEL and their respective subsidiaries, are referred to
herein as the Company.

Reclassifications

Certain amounts in the prior years
financial statements have been reclassified to conform to the
current period presentation.

Translation
of Foreign Currencies

The functional currency for the Companys
foreign operations is either the U.S. dollar or the
subsidiarys local currency. Assets and liabilities are
translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Stockholders equity (deficit) is
translated at historical exchange rates and income, expense and
cash flow items are translated at average exchange rates for the
period. Adjustments resulting from the translation of foreign
functional currency financial statements into U.S. dollars are

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recorded as an adjustment to the accumulated
other comprehensive income component of stockholders
equity (deficit). Gains and losses resulting from remeasurement
of balances denominated in other than the local currency,
totaling a net gain of $62,000 in 2002 and a net loss of
$792,000 in 2001, are included in other income, net in the
consolidated statement of operations. Exchange gains and losses
in 2000 were immaterial.

Cash and Cash
Equivalents

All highly liquid debt instruments with original
maturities of three months or less are considered to be cash
equivalents. Such investments consist of a money market account.
Cash overdrafts are classified as accounts payable in the
consolidated balance sheets.

Business and
Credit Concentrations

THG sells its products to retailers throughout
the United States, Canada, Mexico and Europe. Two customers
accounted for approximately 26% and 10%, of total sales in 2000
and approximately 31% and 12% of sales in 2002, respectively.
Three customers accounted for approximately 32%, 12% and 10%,
respectively, of total sales in 2001. Accounts receivable due
from these customers amounted to 53% and 39% of total accounts
receivable at December 31, 2001 and 2002, respectively.

Certain of THGs retail customers have filed
for bankruptcy protection during the last three years.
Management monitors and evaluates the credit status of its
customers, and adjusts sales terms as appropriate. The Company
maintains reserves for potential credit losses based on
managements estimates of the creditworthiness of its
customers. Should conditions warrant, the Company may need to
increase these reserves, which may have an adverse impact on the
Companys earnings. THG has also entered into an agreement
with an insurance company to insure THGs receivables from
certain pre-determined customers, up to specified limits, if the
customer defaults on payment. In exchange, THG pays a
semi-annual fee.

On January 22, 2002, Kmart Corporation, a
significant customer of the Company during fiscal 2001, filed a
petition for voluntary bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code. Management estimated and recorded an
allowance for doubtful accounts of approximately
$14.1 million related to the accounts receivable balances
due from Kmart Corporation at December 31, 2001, which were
uninsured and remained uncollected at January 22, 2002.
During 2002, the Company recorded an additional $700,000 of bad
debt expense to adjust the remaining net book value of the
pre-bankruptcy accounts receivable to their estimated net
realizable value. In addition, the Company recorded losses of
$389,000 in 2002 related to the disposal of private label
inventory which the Company had manufactured for Kmart prior to
the bankruptcy filing.

Management does not believe that the Company is
subject to any other unusual risks beyond the normal credit risk
attendant to operating its business.

Inventories

All inventories are stated at the lower of cost
or market. Cost is determined using the first-in, first-out
(FIFO) method on approximately 86% of inventories and the
last-in, first-out method (LIFO) for the domestically
manufactured component of Rivals inventory, which
represents the remaining 14% of inventory.

Property and
Equipment

Property and equipment are recorded at cost.
Depreciation is computed over the estimated useful lives of the
assets using the straight-line method. Repairs and maintenance
costs are expensed as incurred.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Impairment of
Long-Lived Assets

The Company adopted the provisions of Statement
of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets as of
January 1, 2002. The Company reviews long-lived assets for
impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no
longer appropriate. An impairment loss would be recognized when
estimated, undiscounted cash flows are less than the recorded
value of the asset. If an impairment is indicated, the asset is
written down to its estimated fair value as determined using an
appraisal or a valuation using discounted cash flows.

Goodwill and
Other Intangible Assets

Effective at the beginning of fiscal year 2002,
the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
which establishes financial accounting and reporting standards
for acquired goodwill and other intangible assets. Under
FAS 142, goodwill and indefinite lived intangible assets
are no longer amortized, but are reviewed at least annually for
impairment. Separate intangible assets that have finite useful
lives continue to be amortized over their useful lives.

FAS 142 requires that goodwill be tested annually
for impairment using a two-step process. The first step is to
identify a potential impairment and, in transition, this step
must be measured as of the beginning of the year of adoption.
The second step of the impairment test measures the amount of
the impairment loss. The Company completed the transitional and
annual impairment test in 2002 and concluded its goodwill was
impaired. Intangible assets deemed to have an indefinite life
are tested for impairment using a one-step process which
compares the fair value to the carrying amount of the asset.
There are no finite or indefinite lived intangible assets
recorded as of December 31, 2001 or 2002.

Revenue
Recognition

Sales are recorded net of returns from retail
customers. The Company recognizes revenue in accordance with
Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. Revenue is recognized
upon transfer of title and risk of loss, which generally occurs
upon shipment, or for certain shipments, upon delivery to the
customer.

Upon the recognition of revenue, the Company
estimates and records, as a component of net sales, provisions
for anticipated sales returns and other customer sales
incentives such as volume rebates, co-operative advertising
programs, warranty programs, other trade allowances. These
provisions are estimated based on historical experience and
negotiated arrangements with certain customers.

Revenues for shipping and handling are recorded
as net sales, while the associated costs are recorded in selling
and administrative expenses in the consolidated statements of
operations. The freight costs included in selling and
administrative expenses were approximately $9.6 million,
$11.7 million and $12.6 million in 2000, 2001 and
2002, respectively.

Product
Development

Research, engineering and product development
costs are expensed as incurred. These expenses totaled
$11 million, $11 million and $9 million in 2000,
2001 and 2002, respectively.

Advertising

Advertising costs are expensed as incurred. In
conjunction with transfers of inventory in 1998, the Company
received trade credits totaling $2,352,000 to be used for the
purchase of advertising media,

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

merchandise or services, subject to certain
limitations and cash co-payments. The credits, which were
originally due to expire in February 2003, have been extended to
February, 2006. The remaining balance of these credits
approximated $2,322,000 at December 31, 2001 and $1,122,000
at December 31, 2002, which is included in prepaid expenses
and other assets in the consolidated balance sheets. While the
Company is currently evaluating several other alternatives to
use the remaining trade credits before they expire, an
impairment charge of $1.2 million was recorded during
the fourth quarter of 2002 related to these assets based on a
re-examination of the Companys plan to use these credits.
The Company expects to use approximately $1.1 million of the
credits in fiscal 2003 in connection with a consumer advertising
campaign which is currently under development.

Advertising expenses, which are included in
selling and administrative expenses in the accompanying
statements of operations, totaled $2,292,000, $831,000 and
$1,681,000 in 2000, 2001 and 2002. The Company also offers
co-operative advertising arrangements to its retail customers.
In November 2001, FASB Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 01-9
(formerly EITF Issue 00-25), Accounting for
Consideration Given to a Customer or a Reseller of the
Vendors Products. This issue addresses the
recognition, measurement and income statement classification of
consideration from a vendor to a customer in connection with the
customers purchase or promotion of the vendors
products. This consensus only impacts revenue and expense
classifications and does not change reported net income. In
accordance with the consensus, the Company adopted the required
accounting as of January 1, 2002, and reclassified
approximately $12,439,000 and $15,759,000 of co-operative
advertising expenses as deductions from net sales for the years
ended December 31, 2000 and 2001, respectively. These costs
were previously classified as selling and administrative
expenses in the consolidated statements of operations.

Income
Taxes

The Company utilizes the asset and liability
method of accounting for income taxes, as set forth in Statement
of Financial Accounting Standards No. 109, Accounting
for Income Taxes. FAS 109 requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled.

Pension
Obligations

The Company recognized obligations associated
with its defined benefit pension plans in accordance with
Statement of Financial Accounting Standards No. 87
Employers Accounting for Pensions. Liabilities and
expenses are calculated by accredited independent actuaries. As
required by FAS 87, the Company is required to make certain
assumptions to value liabilities and estimate the components of
pension costs. These assumptions are reviewed annually, or
whenever otherwise required by FAS 87, based on reviews of
current plan information and current market information. The
selection of assumptions requires a high degree of judgment and
may materially change from period to period. The Company does
not offer other defined benefits associated with post-retirement
benefit plans.

Stock Based
Compensation

As permitted under Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation, the Company accounts for its
stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and FASB
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation  an
interpretation of APB 25. All awards were granted
with an exercise price

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

equal to fair value of the Companys stock.
Accordingly, no stock compensation expense has been recognized
in the consolidated statement of operations in 2000, 2001 or
2002.

FAS 123 requires the presentation of certain
pro forma information as if the Company has accounted for its
employee stock options under the fair value method. For purposes
of this disclosure, the fair value of the fixed option grants
was estimated using the Block Scholes option-pricing model. The
weighted average fair value of the Companys option grants
for 2000, 2001 and 2002 was $1.54, $.80 and $0.84, respectively
calculated utilizing the following weighted average assumptions:

|                                       |  |      |      |      |  |      |      |   |  |  |      |  
|-------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                       |  | 2002 |      | 2001 |  | 2000
|                                       |  |      |      |      |  |     
|Risk free interest rate                |  |      | 4.62 | %    |  |      | 4.39 | % |  |  | 6.17 | %
|Weighted average expected life (years) |  |      | 6.0  |      |  |      | 6.0  |   |  |  | 6.0  |  

Had compensation expense for the Companys
option grants been determined consistent with the provisions of
FAS 123, the Companys net loss for the three years
ended December 31, 2002 would have been increased to the
pro forma amounts indicated below.

|                                                                                            |  |      |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                            |  | 2002 |         | 2001 |  | 2000
|                                                                                            |  |      |         |      |  |     
|Reported net loss                                                                           |  | $    | (57,904 | )    |  | $    | (15,555 | ) |  | $ | (32,170 | )
|Stock-based employee compensation included in net
    loss                                  |  |      |        |      |  |      |        |   |  |   |        |  
|Stock-based employee compensation determined
    under the fair value method for all awards |  |      | (1,164  | )    |  |      | (1,086  | ) |  |   | (979    | )
|                                                                                            |  |      |         |      |  |      |         |   |  |   |         |  
|Pro forma net loss                                                                          |  | $    | (59,068 | )    |  | $    | (16,641 | ) |  | $ | (33,149 | )
|                                                                                            |  |      |         |      |  |      |         |   |  |   |         |  

No tax benefits have been assumed in calculating
the pro forma net loss as a valuation allowance would be
recorded against these benefits.

Joint
Venture

In October 1998, the Company entered into an
agreement with General Electric Company creating a limited
liability corporation engaged in the manufacturing, sales and
distribution of motors. The Company sells motors manufactured by
HPFEL to the joint venture at fair market prices. The joint
venture, GE Holmes Industries, LLC (GEHI), is owned 49% by a
subsidiary of THG. The Companys investment in the joint
venture is accounted for in the consolidated financial
statements using the equity method of accounting. Under this
method, the Companys share of the joint ventures
income or loss is included in the consolidated statement of
operations. The Companys portion of the joint venture
earnings and the gross profit earned by HPFEL, which
manufactures the motors, were as follows for the three years
ended December 31, 2002 (in thousands):

|     |  |              |       |                    |  |              |       |  |  |   |       | 
|---- |  | ------------ | ----- | ------------------ |  | ------------ | ----- |  |  | - | ----- | 
|     |  |              |       | Recorded as        |  |             
|     |  | Recorded as  |       | Equity in Earnings |  |             
|     |  | Gross Profit |       | from Joint Venture |  | Total Income
|     |  |              |       |                    |  |             
|2002 |  | $            | 1,939 |                    |  | $            | 2,990 |  |  | $ | 4,929 | 
|2001 |  |              | 2,058 |                    |  |              | 2,354 |  |  |   | 4,412 | 
|2000 |  |              | 995   |                    |  |              | 611   |  |  |   | 1,606 | 

At December 31, 2001 and 2002, accounts
receivable in the consolidated balance sheet included
$2.8 million and $3.1 million, respectively,
representing amounts due from GEHI. The Companys sales to
GEHI were approximately $11.9 million, $17.1 million
and $17.6 million during the years ended December 31,
2000, 2001 and 2002, respectively.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Comprehensive
Income (Loss)

The Company accounts for comprehensive income in
accordance with Statement of Financial Accounting Standard
No. 130, Reporting Comprehensive Income. As it
relates to the Company, comprehensive income (loss) is
defined as net income (loss) plus the change in currency
translation adjustments and the minimum pension liability
adjustment.

Financial
Instruments

The Company enters into various types of
financial instruments in the normal course of business. Fair
values are estimated based on assumptions concerning the amount
and timing of estimated future cash flows and assumed discount
rates reflecting varying degrees of perceived risk. Accordingly,
the fair values may not represent actual values of the financial
instruments that could have been realized as of year end or that
will be realized in the future.

Fair values for cash and cash equivalents,
accounts receivable, other receivables, income taxes receivable,
accounts payable, accrued expenses and accrued income taxes
approximate their carrying values at December 31, 2001 and
2002, due to their relatively short maturity. The fair values of
the Companys Credit Facility approximate its carrying
values at December 31, 2001 and 2002 because the interest
rates on these borrowings approximate current market rates. The
fair value of the Companys Senior Subordinated Notes was
approximately 40% in 2001 and 70% in 2002 of their carrying
value.

Recent
Accounting Pronouncements

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

The FASB issued Statement No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections in April 2002. This statement updates,
clarifies and simplifies existing accounting pronouncements.
Specifically, the statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of
Debt, FASB Statement No. 64, Extinguishment of
Debt Made to Satisfy Sinking Fund Requirements and FASB
Statement No. 44, Accounting for Intangible Assets of
Motor Carriers. This statement also amends FASB Statement
No. 13, Accounting for Leases and certain other
existing authoritative pronouncements to make technical
corrections or clarifications. FAS 145 will be effective for THG
related to the rescission of FAS 4 and FAS 64 on January 1,
2003. FAS 145 is effective related to the amendment of FAS 13
for all transactions occurring after May 15, 2002. All
other provisions of FAS 145 are effective for financial
statements issued after May 15, 2002. The Company expects
that the provisions of FAS 145 will require the reclassification
of the gain related to the Senior Notes repurchase, which was
treated as an extraordinary item in 2002, to other income in
future financial presentations.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities,
which nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). FAS
146 requires a

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

liability for a cost associated with an exit or
disposal activity be recognized and measured initially at its
fair value in the period in which the liability is incurred. If
fair value cannot be reasonable estimated, the liability shall
be recognized initially in the period in which fair value can be
reasonably estimated. The provisions of FAS 146 will be
effective for the Company prospectively for exit or disposal
activities initiated after December 31, 2002. Adoption of
this Standard is expected to impact the timing of recognition of
costs associated with future exit and disposal activities.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, including
indirect guarantees of indebtedness of others, an interpretation
of FASB Statements No. 5, 57 and 107 and rescission of FASB
Interpretation No. 34. This interpretation clarifies the
requirements of FASB Statement No. 5, Accounting for
Contingencies relating to the guarantors accounting
for, and disclosure of, the issuance of certain types of
guarantees. Information required by the disclosure provisions of
the interpretation, which are effective for financial statements
of interim or annual periods that end after December 15,
2002, is presented in Note 14 below. The provisions for initial
recognition and measurement are effective on a prospective basis
for guarantees that are issued or modified after
December 31, 2002. The Company is currently evaluation the
provision of this interpretation to determine the impact of
adoption.

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

3. Change in Accounting
Principle

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized,
but are reviewed annually at a minimum for potential impairment
by comparing the carrying value to the fair value of the
reporting unit to which they are assigned. The provisions of
FAS 142 were effective for the Companys 2002 fiscal
year and, accordingly, the Company adopted the new standard
effective January 1, 2002. The Companys goodwill is
associated with its Consumer Durables segment. There were no
other finite or infinite lived intangible assets recorded as a
result of this acquisition. In accordance with the new standard,
the Company has ceased goodwill amortization as of the beginning
of fiscal 2002. FAS 142 requires that goodwill be tested for
impairment at the reporting unit level at adoption utilizing a
two-step methodology. The initial step requires the Company to
determine the fair value of each reporting unit and compare it
to the carrying value, including the goodwill of such unit. If
the fair value exceeds the carrying value, no impairment loss
would be recognized. However, if the carrying value of the
reporting unit exceeds the corresponding fair value, the
goodwill of this unit may be impaired. The amount, if any, of
the impairment would then be evaluated in the second step of the
impairment testing which compares the implied fair value of the
reporting units goodwill with the carrying amount of the
units goodwill.

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.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 Companys policy is to value goodwill and
other intangible assets using the discounted cash flow method.
The results of the transitional impairment testing indicated
that the carrying values of the goodwill asset for both the home
environment and kitchen reporting units significantly exceeded
the estimated fair value of the units. A non-cash impairment
charge of $79.8 million has been recognized as a change in
accounting principle as of the beginning of 2002. The impairment
charge, which relates to the Companys Consumer Durables
segment, was $79.8 million on a before and after-tax basis.

The results for the years ended December 31,
2000 and 2001 do not reflect the provisions of FAS 142. The
Companys application of the non-amortization provisions of
FAS 142 resulted in a reduction in the reported net loss for
2002 by approximately $2.5 million. If the Company has
adopted FAS 142 in earlier periods, the net losses in 2000 and
2001 would have been reduced by $2.6 million and
$2.5 million, respectively, resulting in an adjusted loss
of $29.6 million for 2000 and $13.1 million for 2001.

4. Inventories

Inventories in the consolidated balance sheets
are as follows:

|                |  |                |         |      |  |   |         |  
|--------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                |  |               
|                |  | December 31,  
|                |  |               
|                |  | 2002           |         | 2001
|                |  |                |         |     
|                |  |               
|                |  | (in thousands)
|Finished goods  |  | $              | 95,789  |      |  | $ | 80,212  |  
|Raw materials   |  |                | 12,501  |      |  |   | 17,142  |  
|Work-in-process |  |                | 2,312   |      |  |   | 6,041   |  
|                |  |                |         |      |  |   |         |  
|                |  |                | 110,602 |      |  |   | 103,395 |  
|LIFO allowance  |  |                | (366    | )    |  |   | (200    | )
|                |  |                |         |      |  |   |         |  
|                |  | $              | 110,236 |      |  | $ | 103,195 |  
|                |  |                |         |      |  |   |         |  

5. Property and Equipment

Property and equipment in the consolidated
balance sheets are as follows:

|                                                     |  |                   |                          |                |  |      |         |   |  |   |         |  
|---------------------------------------------------- |  | ----------------- | ------------------------ | -------------- |  | ---- | ------- | - |  | - | ------- | -
|                                                     |  |                   |                          |               
|                                                     |  |                   |                          | December 31,  
|                                                     |  |                   |                          |               
|                                                     |  | Depreciable Lives |                          | 2002           |  | 2001
|                                                     |  |                   |                          |                |  |     
|                                                     |  |                   |                          |               
|                                                     |  |                   |                          | (in thousands)
|Mold costs and tooling                               |  |                   | 1 1/2  5 years          |                |  | $    | 34,204  |   |  | $ | 37,011  |  
|Machinery and equipment                              |  |                   | 7  10 years             |                |  |      | 31,879  |   |  |   | 39,662  |  
|Buildings and leasehold improvements                 |  |                   | Life of lease  40 years |                |  |      | 14,400  |   |  |   | 31,671  |  
|Computer equipment and software                      |  |                   | 5  7 years              |                |  |      | 11,451  |   |  |   | 6,049   |  
|Furniture and fixtures                               |  |                   | 5  10 years             |                |  |      | 2,777   |   |  |   | 5,880   |  
|Land                                                 |  |                   | Not applicable           |                |  |      | 1,418   |   |  |   | 712     |  
|Motor vehicles                                       |  |                   | 4  5 years              |                |  |      | 490     |   |  |   | 492     |  
|                                                     |  |                   |                          |                |  |      |         |   |  |   |         |  
|                                                     |  |                   |                          |                |  |      | 96,619  |   |  |   | 121,477 |  
|Less  accumulated depreciation and
    amortization |  |                   |                          |                |  |      | (54,173 | ) |  |   | (52,381 | )
|                                                     |  |                   |                          |                |  |      |         |   |  |   |         |  
|                                                     |  |                   |                          |                |  | $    | 42,446  |   |  | $ | 69,096  |  
|                                                     |  |                   |                          |                |  |      |         |   |  |   |         |  

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6. Accrued Expenses

Accrued expenses in the consolidated balance
sheets consists of the following:

|                                    |  |                |        |      |  |   |        | 
|----------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                    |  |               
|                                    |  | December 31,  
|                                    |  |               
|                                    |  | 2002           |        | 2001
|                                    |  |                |        |     
|                                    |  |               
|                                    |  | (in thousands)
|Sales returns and allowances        |  | $              | 7,674  |      |  | $ | 6,819  | 
|Payroll and incentive compensation  |  |                | 9,188  |      |  |   | 6,180  | 
|Interest                            |  |                | 2,377  |      |  |   | 3,286  | 
|Co-operative advertising allowances |  |                | 5,974  |      |  |   | 7,551  | 
|Restructuring costs                 |  |                | 7,083  |      |  |   | 446    | 
|Other                               |  |                | 20,805 |      |  |   | 16,257 | 
|                                    |  |                |        |      |  |   |        | 
|                                    |  | $              | 53,101 |      |  | $ | 40,539 | 
|                                    |  |                |        |      |  |   |        | 

7. Restructuring Charges and Other
Business Divestitures

On February 5, 1999, the Company completed
its acquisition of The Rival Company for an aggregate purchase
price of $279.6 million, including $129.4 million of cash
payments in connection with a tender offer for all of the
outstanding shares of common stock of Rival (including payments
to optionees), $142.9 million to refinance Rivals
outstanding debt and $7.3 million in acquisition costs. The
acquisition was accounted for as a purchase, and the results of
operations of Rival are included in the consolidated financial
statements since the date of acquisition.

In connection with the acquisition, the Company
recorded a restructuring reserve of $6.4 million as an
assumed liability in accordance with EITF 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination. Management determined that certain
restructuring actions would be required to effectively integrate
the Rival operations. These restructuring actions were comprised
primarily of the elimination of certain overlapping positions
within the management and support staff layers of the combined
company, the relocation of key home environment personnel from
Kansas City, Missouri to Milford, Massachusetts, the
consolidation of the Rival Hong Kong and Canadian offices into
other existing local offices, and the closure of the
Warrensburg, Missouri manufacturing facility. These actions
resulted in the elimination of 216 Rival employees. Severance
for some of these employees was paid during fiscal 2001 and
2002. Exit costs related to these restructuring plans were
comprised primarily of lease termination costs in Canada and
Hong Kong and facility closure and exit costs related to the
Warrensburg facility. All actions were completed during 1999 and
2000 with the Warrensburg facility being sold during the first
quarter of 2001 for $1,965,000 in cash, resulting in a gain of
$559,000 which is included in other income in the 2001
consolidated statement of operations.

Subsequent to the acquisition of the Rival
business, the Company initiated certain restructuring actions to
further integrate and consolidate Rivals operations and to
reduce operating costs. In June 2001, the Company announced the
closure of Rivals Sedalia, Missouri manufacturing
facility. The activities of this plant were moved to
Rivals other plants resulting in the elimination of
approximately 300 manufacturing, engineering and office
positions. In connection with the closure, the Company recorded
a restructuring charge of $727,000 to cover severance and other
employee related costs. Severance payments to these employees
were paid during 2001 and 2002. The Company also recorded
$467,000 in restructuring charges related to the Sedalia plant
closure, including asset write-downs of redundant property and
equipment of $417,000 and facility exit costs of $50,000.
Additionally, the 2001 statement of operations includes $550,000
of plant closing costs which were expensed as incurred during
the year. The remaining net book value of this facility, which
is immaterial, is classified as assets held for sale in the
consolidated balance sheet.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In January 2002, the Company announced the
closing of its Sedalia, Missouri distribution center. The
activities of this facility were moved to the other existing
distribution centers. In connection with this facility closure,
the Company recorded restructuring charges totaling $3,649,000
in the first nine months of 2002, which included $2,971,000 of
asset write-downs of redundant property and equipment to their
estimated net realizable value, facility exit costs of $612,000
and $66,000 in severance payments for employees who elected not
to transfer to other facilities. During the fourth quarter of
2002, the Company recorded additional restructuring costs of
$1,249,000 to further write-down the value of the Sedalia real
estate. The net realizable value of this facility has been
classified as assets held for sale in the consolidated balance
sheet.

On December 2, 2002, the Company announced
the closure of its remaining US manufacturing operations
effective January 31, 2003, in an effort to enhance
efficiencies and to reduce operating costs. The production
activities of the facilities in Flowood, Mississippi, Sweet
Springs, Missouri and Clinton, Missouri will be shifted to the
Companys expanded manufacturing complex in southern China
and to other independent suppliers in the Far East. As part of
this restructuring action, the Company also announced the
closure of an administrative office in Kansas City, Missouri and
the phase out of two distribution and service centers in
Clinton, Missouri and Worcester, Massachusetts during the first
half of 2003. As a result of these changes, the Company recorded
restructuring charges totaling $23,108,000 during the fourth
quarter of 2002. The charges included $3,935,000 for severance
payments to 706 employees, $15,670,000 of non-cash asset
write-downs of redundant property and equipment to their
estimated net realizable value, $1,531,000 of liabilities
related to outstanding lease obligations and facility exit costs
of $1,972,000. The remaining net realizable value of these
facilities and equipment is classified as assets held for sale
in the consolidated balance sheet as of December 31, 2002.
In addition, cost of sales in 2002 includes $7,625,000 of
inventory losses related to the restructuring actions as the
Company anticipates disposing of certain products at selling
prices below cost as part of the facility closures.

A reconciliation of the restructuring reserve
activity for the three years ended December 31, 2002 is as
follows:

|                             |  |                  |        |             |  |               |       |   |  |   |        |  
|---------------------------- |  | ---------------- | ------ | ----------- |  | ------------- | ----- | - |  | - | ------ | -
|                             |  | Employee         |        | Facility    |  | Total        
|                             |  | Severance and    |        | Exit and    |  | Accrued      
|                             |  | Relocation Costs |        | Other Costs |  | Restructuring
|                             |  |                  |        |             |  |              
|                             |  |                 
|                             |  | (in thousands)  
|Balance at December 31, 1999 |  | $                | 4,217  |             |  | $             | 427   |   |  | $ | 4,644  |  
|Cash payments made           |  |                  | (2,451 | )           |  |               |      |   |  |   | (2,451 | )
|Adjustments                  |  |                  | (1,054 | )           |  |               | (194  | ) |  |   | (1,248 | )
|                             |  |                  |        |             |  |               |       |   |  |   |        |  
|Balance at December 31, 2000 |  |                  | 712    |             |  |               | 233   |   |  |   | 945    |  
|Restructuring charges        |  |                  | 727    |             |  |               | 50    |   |  |   | 777    |  
|Cash payments                |  |                  | (1,043 | )           |  |               |      |   |  |   | (1,043 | )
|Adjustments                  |  |                  |       |             |  |               | (233  | ) |  |   | (233   | )
|                             |  |                  |        |             |  |               |       |   |  |   |        |  
|Balance at December 31, 2001 |  |                  | 396    |             |  |               | 50    |   |  |   | 446    |  
|Restructuring charges        |  |                  | 4,001  |             |  |               | 4,115 |   |  |   | 8,116  |  
|Cash payments                |  |                  | (766   | )           |  |               | (713  | ) |  |   | (1,479 | )
|                             |  |                  |        |             |  |               |       |   |  |   |        |  
|Balance at December 31, 2002 |  | $                | 3,631  |             |  | $             | 3,452 |   |  | $ | 7,083  |  
|                             |  |                  |        |             |  |               |       |   |  |   |        |  

The adjustments made in fiscal 2000 and 2001
include a reduction of the original severance and relocation
accruals and a reduction of the facility exit cost accruals as
part of the closure of the Warrensburg, Missouri facility
initially recorded in accordance with EITF 95-3. Accordingly,
these adjustments were recorded as reductions of goodwill.

Following the Rival acquisition, the Company
divested three of Rivals non-core business units. On
October 8, 1999, the Company sold the assets of
Rivals sump and utility pumps division for
$11.4 million.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On December 21, 1999, the Company sold the
net assets of Rivals industrial and building supply
products businesses for proceeds of $11.9 million. As these
transactions were contemplated as of the original Rival
acquisition date, the net loss on these transactions of
$2.5 million was recorded as an increase in goodwill.
During 2001, the Company finalized the Rival industrial and
building supply products businesses divestiture. Additional
consideration of $1.2 million was also recorded as a
reduction of goodwill. On January 14, 2002, the Company
sold substantially all of the assets of its Pollenex®
division, which marketed personal care products, for
approximately $15.1 million. The cash proceeds received in
this transaction exceeded the net assets of the business, which
consisted primarily of inventory and property and equipment, by
approximately $9.5 million, resulting in a gain which has
been recorded as other income in the consolidated statement of
operations for the year ended December 31, 2002.

8. Long-Term Debt

Long-term debt in the consolidated balance sheet
consists of the following:

|                                                                                         |  |                |         |              |  |   |         |  
|---------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | -
|                                                                                         |  | December 31,   |         | December 31,
|                                                                                         |  | 2002           |         | 2001        
|                                                                                         |  |                |         |             
|                                                                                         |  |               
|                                                                                         |  | (in thousands)
|Revolving Credit Facility                                                                |  | $              | 84,209  |              |  | $ | 111,500 |  
|Term Loan A due February 2005                                                            |  |                | 15,397  |              |  |   | 24,777  |  
|Term Loan B due February 2007                                                            |  |                | 76,028  |              |  |   | 81,605  |  
|                                                                                         |  |                |         |              |  |   |         |  
|Total Credit Facility                                                                    |  |                | 175,634 |              |  |   | 217,882 |  
|9 7/8% Senior Subordinated Notes, net of
    unamortized discount, due November 15, 2007 |  |                | 99,544  |              |  |   | 135,298 |  
|                                                                                         |  |                |         |              |  |   |         |  
|Total debt                                                                               |  |                | 275,178 |              |  |   | 353,180 |  
|Less current maturities of Credit Facility                                               |  |                | (9,078  | )            |  |   | (8,476  | )
|                                                                                         |  |                |         |              |  |   |         |  
|                                                                                         |  | $              | 266,100 |              |  | $ | 344,704 |  
|                                                                                         |  |                |         |              |  |   |         |  

Credit
Facility

On March 22, 2002, the Company and its Bank
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 of Credit Facility is supported by
the guarantee of Berkshire Partners, the Companys majority
shareholder. The Berkshire Partners guarantee was
established in connection with the Fourth Amendment of the
Credit Facility in May 2001. Actual availability under these
Revolving Credit Facilities is subject to a borrowing base
formula based on inventory and accounts receivable. Under the
Fifth Amendment, the maturity date of the Revolving Credit Loan
B was extended from July 1, 2002 through July 1, 2004.
The maturity date of the Revolving Credit Loan A and the Term
Loan A remained February 5, 2005, although the availability
under the Revolving Credit Loan A commitment will terminate
on July 1, 2004 unless otherwise approved by a majority of
the lenders. The maturity date of the Term Loan B remained
February 5, 2007. As part of the Fifth Amendment, the
applicable interest rate margins on the Revolving Credit
Loan B were reduced, while the margins on the Revolving
Credit Loans A and B were increased.

The Companys financial performance in the
fourth quarter of 2000 resulted in a default, as of
December 31, 2000, of certain financial ratio covenants in
the Credit Facility as previously amended. On May 7, 2001,
the Credit Facility was amended to waive the defaults, revise
certain of the financial ratio covenants and change the maximum
availability. As partial consideration for the amendments, the
Company issued warrants to the lenders to acquire up to 5% of
THGs common stock on a fully-diluted basis. The warrants
are currently exercisable at a price of $5.04 per share, and
expire May 7, 2006. The

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fair value of the warrants amounted to
$1.0 million, which was recorded as a charge to interest
expense during 2001.

Effective May 7, 2001, the Company agreed to
pay Berkshire Partners a fee of $1.1 million as
consideration for Berkshires guarantee of up to
$43.5 million of the obligations under the Credit Facility.
As amended effective March 22, 2002, the guarantee fee
arrangement provides for a fee of 2.25% per annum, compounded
annually, on the $40.0 million Revolving Credit Loan B
commitment, less the portion of this facility designated as
subordinated debt funding loans (which portion is subordinated
to the other obligations under the Credit Facility). The
guarantee fee related to the subordinated debt funding loan is
calculated at 20% per annum, compounded annually. At
December 31, 2002, the subordinated debt funding loan
totaled $18.8 million. The guarantee fees have not been
paid, but have been accrued as debt issuance costs and are
included as non-cash interest in the statement of operations for
2001 and 2002. Payment of these fees is subordinated to the
Companys obligations under the Credit Facility.

As of December 31, 2001 and 2002, the
Companys availability was $63.7 million and
$78.3 million, respectively, net of outstanding letters of
credit totaling $4.8 million and $8.9 million,
respectively. The Credit Facility bears interest at variable
rates based on either the prime rate or eurodollar rate at the
Companys option, plus a margin which, in the case of the
Term Loan A and a portion of the Revolving Credit Facility,
varies depending upon certain financial ratios. The weighted
average interest rate of borrowings under the Credit Facility
was 6.2% at December 31, 2001 and 5.6% at December 31,
2002. The Credit Facility, and the guarantees thereof by the
Companys domestic subsidiaries, are collateralized by
substantially all of the Companys domestic and certain
foreign assets.

Senior
Subordinated Notes

The Companys Senior Subordinated Notes were
issued as part of a recapitalization transaction in 1997
($105 million) and to partially finance the Rival
acquisition in 1999 ($31.3 million). The Notes, which are
due November 15, 2007, bear interest at 9 7/8% and are
subordinated to the Companys other debt, including the
Credit Facility.

In conjunction with the Fifth Amendment of the
Credit Facility, as described above, the Company repurchased
from two Berkshire Partners investment funds an aggregate
principal amount of approximately $36.2 million of the
Senior Subordinated Notes. The purchase price of the Notes,
representing Berkshire Partners cost, was
$11.5 million plus accrued interest. The repurchase was
funded with proceeds of the Revolving Credit Loan B and the
Notes repurchased were retired and cancelled. This transaction
resulted in an extraordinary gain on the early retirement of
debt totaling $22.4 million, which has been reflected in
the consolidated statement of operations for the year ended
December 31, 2002. The gain is net of approximately
$1.9 million of debt issuance costs and $0.3 million
of debt issuance discount written off as part of the transaction
and $0.1 million of transaction fees. A provision for
income taxes has not been recorded in connection with this
transaction as the Company expects to offset the gain with
available net operating loss carry forwards. The Company may
consider repurchases of additional Notes in the future, and may
utilize the proceeds of the Credit Facility for this purpose.

The Credit Facility as amended, and the Notes
Indentures include certain financial and operating covenants,
which, among other things, restricts the ability of the Company
to incur additional indebtedness, grant liens, make investments
and take certain other actions. The ability of the Company to
meet its debt service obligations is dependent upon the future
performance of the Company, which will be impacted by general
economic conditions and other factors.

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The aggregate maturities of long-term debt are as
follows as of December 31, 2002 (in thousands):

|     |  |   |        | 
|---- |  | - | ------ | 
|2004 |  | $ | 91,745 | 
|2005 |  |   | 39,708 | 
|2006 |  |   | 34,714 | 
|2007 |  |   | 99,933 | 

9. Stock Options

In connection with the recapitalization
transaction described above, THGs Board of Directors
adopted and the stockholders approved the 1997 Stock Option Plan
(the Plan). The Plan provides for the grant of incentive stock
options and non-qualified stock options to employees, officers,
directors, and consultants of the Company, except that incentive
stock options may not be issued to consultants or non-employee
directors. A total of 1,563,020 shares of THGs common
stock were reserved for issuance under the Plan. In order to
provide for the Companys larger size and the addition of
Rivals employees following the acquisition, the Plan was
amended in 2000 and 2001 to increase the number of shares
available for grant to 5,960,978. The exercise price and period
over which options become exercisable will be determined by the
Board of Directors. However, the exercise price of incentive
stock options is equal to at least 100% of the fair market value
of THGs common stock on the date of grant (110% for
individuals holding more than 10% of THGs common stock).
Options expire no later than ten years after date of grant (five
years for individuals holding more than 10% of THGs common
stock). The Plan expires in November 2006.

The following table summarizes stock option
activity under the Plan for the three years ended
December 31, 2002:

|                                    |  |        |           |                |  |          |              |  |  |   |      | 
|----------------------------------- |  | ------ | --------- | -------------- |  | -------- | ------------ |  |  | - | ---- | 
|                                    |  |        |           |                |  | Weighted
|                                    |  |        |           |                |  | Average 
|                                    |  |        |           | Exercise Price |  | Exercise
|                                    |  | Shares |           | Range          |  | Price   
|                                    |  |        |           |                |  |         
|Outstanding as of December 31, 1999 |  |        | 3,667,086 |                |  | $        | 3.50  $5.04 |  |  | $ | 4.46 | 
|Granted                             |  |        | 843,550   |                |  |          | 5.04         |  |  |   | 5.04 | 
|Forfeited                           |  |        | (243,730  | )              |  |          | 3.50   5.04 |  |  |   | 4.78 | 
|                                    |  |        |           |                |  |          |              |  |  |   |      | 
|Outstanding as of December 31, 2000 |  |        | 4,266,906 |                |  |          | 3.50   5.04 |  |  |   | 4.55 | 
|Granted                             |  |        | 1,544,840 |                |  |          | 3.50         |  |  |   | 3.50 | 
|Forfeited                           |  |        | (169,750  | )              |  |          | 3.50   5.04 |  |  |   | 4.70 | 
|                                    |  |        |           |                |  |          |              |  |  |   |      | 
|Outstanding as of December 31, 2001 |  |        | 5,641,996 |                |  |          | 3.50   5.04 |  |  |   | 4.26 | 
|Granted                             |  |        | 219,000   |                |  |          | 3.50         |  |  |   | 3.50 | 
|Forfeited                           |  |        | (406,780  | )              |  |          | 3.50   5.04 |  |  |   | 4.50 | 
|                                    |  |        |           |                |  |          |              |  |  |   |      | 
|Outstanding as of December 31, 2002 |  |        | 5,454,216 |                |  | $        | 3.50  $5.04 |  |  | $ | 4.21 | 
|                                    |  |        |           |                |  |          |              |  |  |   |      | 

As of December 31, 2000, 2001 and 2002,
exercisable options and options available for future grants are
as follows:

|     |  |             |           |                  |  |                   |      |  |  |  |         | 
|---- |  | ----------- | --------- | ---------------- |  | ----------------- | ---- |  |  |  | ------- | 
|     |  | Exercisable |           | Weighted Average |  | Options Available
|     |  | Options     |           | Exercise Price   |  | For Future Grant 
|     |  |             |           |                  |  |                  
|2000 |  |             | 991,802   |                  |  | $                 | 4.16 |  |  |  | 194,072 | 
|2001 |  |             | 2,122,347 |                  |  |                   | 4.36 |  |  |  | 318,983 | 
|2002 |  |             | 2,924,166 |                  |  |                   | 4.31 |  |  |  | 506,762 | 

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

No options were exercised during the three year
period ended December 31, 2002. The following table
summarizes information about stock options under the 1997 plan
which were outstanding at December 31, 2002:

|         |      |                     |  |                     |           |          |  |                |     |          |  |   |      |  |  |  |           |  |  |   |      | 
|-------- | ---- | ------------------- |  | ------------------- | --------- | -------- |  | -------------- | --- | -------- |  | - | ---- |  |  |  | --------- |  |  | - | ---- | 
|         |      |                     |  |                    
|         |      | Options Outstanding |  | Options Exercisable
|         |      |                     |  |                    
|         |      |                     |  | Weighted            |           |          |  |               
|         |      | Number              |  | Average             |           | Weighted |  | Number         |     | Weighted
|Range of |      | Outstanding at      |  | Remaining           |           | Average  |  | Exercisable at |     | Average 
|Exercise |      | December 31,        |  | Contractual         |           | Exercise |  | December 31,   |     | Exercise
|Prices   |      | 2002                |  | Life (Years)        |           | Price    |  | 2002           |     | Price   
|         |      |                     |  |                     |           |          |  |                |     |         
|$        | 3.50 |                     |  |                     | 2,931,512 |          |  |                | 7.4 |          |  | $ | 3.50 |  |  |  | 1,380,144 |  |  | $ | 3.50 | 
|$        | 5.04 |                     |  |                     | 2,522,704 |          |  |                | 6.5 |          |  |   | 5.04 |  |  |  | 1,544,022 |  |  |   | 5.04 | 
|         |      |                     |  |                     |           |          |  |                |     |          |  |   |      |  |  |  |           |  |  |   |      | 
|         |      |                     |  |                     | 5,454,216 |          |  |                |     |          |  | $ | 4.21 |  |  |  | 2,924,166 |  |  | $ | 4.31 | 
|         |      |                     |  |                     |           |          |  |                |     |          |  |   |      |  |  |  |           |  |  |   |      | 

All of the holders of THGs outstanding
stock are subject to stockholders agreements. These
agreements provide the Company with a right of first refusal on
any proposed sales of stock to outside parties. Additionally,
THG has certain rights to repurchase shares of Common Stock and
options from employees upon their termination of employment.

10. Income Taxes

Pre-tax income (loss) is summarized as
follows:

|         |  |                         |         |      |  |      |         |   |  |   |         |  
|-------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|         |  |                        
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2002                    |         | 2001 |  | 2000
|         |  |                         |         |      |  |     
|         |  |                        
|         |  | (in thousands)         
|Domestic |  | $                       | (27,129 | )    |  | $    | (38,035 | ) |  | $ | (45,100 | )
|Foreign  |  |                         | 23,537  |      |  |      | 24,653  |   |  |   | 14,910  |  
|         |  |                         |         |      |  |      |         |   |  |   |         |  
|         |  | $                       | (3,592  | )    |  | $    | (13,382 | ) |  | $ | (30,190 | )
|         |  |                         |         |      |  |      |         |   |  |   |         |  

Income tax expense (benefit) consists of the
following:

|               |         |                         |      |        |   |      |       |       |  |   |       |       | 
|-------------- | ------- | ----------------------- | ---- | ------ | - | ---- | ----- | ----- |  | - | ----- | ----- | 
|               |         |                        
|               |         | Year Ended December 31,
|               |         |                        
|               |         | 2002                    |      | 2001   |   | 2000
|               |         |                         |      |        |   |     
|               |         |                        
|               |         | (in thousands)         
|Current:       |         |                         |      |        |   |      |       |       |  |   |       |      
|               | Federal |                         | $    | (4,937 | ) |      | $     |      |  |   | $     |      | 
|               | State   |                         |      | 700    |   |      |       | 357   |  |   |       | 226   | 
|               | Foreign |                         |      | 3,299  |   |      |       | 2,642 |  |   |       | 1,433 | 
|               |         |                         |      |        |   |      |       |       |  |   |       |      
|Total current  |         |                         | (938 | )      |   |      | 2,999 |       |  |   | 1,659 |      
|               |         |                         |      |        |   |      |       |       |  |   |       |      
|Deferred:      |         |                         |      |        |   |      |       |       |  |   |       |      
|               | Federal |                         | $    |       |   |      | $     |      |  |   | $     |      | 
|               | State   |                         |      |       |   |      |       |      |  |   |       |      | 
|               | Foreign |                         |      | 790    |   |      |       | 1,528 |  |   |       | 932   | 
|               |         |                         |      |        |   |      |       |       |  |   |       |      
|Total deferred |         |                         | 790  |        |   |      | 1,528 |       |  |   | 932   |      
|               |         |                         |      |        |   |      |       |       |  |   |       |      
|               |         | $                       | (148 | )      |   | $    | 4,527 |       |  | $ | 2,591 |      
|               |         |                         |      |        |   |      |       |       |  |   |       |      

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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation between the Companys
actual income tax expense (benefit) and amounts determined using
the statutory U.S. federal tax rate of 35% is as follows:

|                                           |  |                         |        |      |  |      |        |   |  |   |         |  
|------------------------------------------ |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                           |  |                        
|                                           |  | Year Ended December 31,
|                                           |  |                        
|                                           |  | 2002                    |        | 2001 |  | 2000
|                                           |  |                         |        |      |  |     
|Statutory U.S. federal tax                 |  | $                       | (1,258 | )    |  | $    | (3,978 | ) |  | $ | (10,302 | )
|State taxes, net of federal tax benefit    |  |                         | 455    |      |  |      | (1,750 | ) |  |   | (1,939  | )
|Federal tax refund due to NOL carryback    |  |                         | (5,123 | )    |  |      |       |   |  |   |        |  
|Foreign earnings taxed at different rates  |  |                         | (4,149 | )    |  |      | (4,458 | ) |  |   | (2,939  | )
|Valuation allowance on deferred tax assets |  |                         | 9,732  |      |  |      | 13,890 |   |  |   | 16,891  |  
|Goodwill amortization                      |  |                         |       |      |  |      | 748    |   |  |   | 751     |  
|Other                                      |  |                         | 195    |      |  |      | 75     |   |  |   | 129     |  
|                                           |  |                         |        |      |  |      |        |   |  |   |         |  
|Actual income tax expense (benefit)        |  | $                       | (148   | )    |  | $    | 4,527  |   |  | $ | 2,591   |  
|                                           |  |                         |        |      |  |      |        |   |  |   |         |  

Deferred income taxes reflect the tax impact of
temporary differences between the amount of assets and
liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. Under FAS 109, the benefit
associated with future deductible temporary differences and
operating loss or credit carryforwards is recognized if it is
more likely than not that a benefit will be realized. Deferred
tax assets and liabilities are comprised of the following at
December 31, 2001 and 2002:

|                                                   |                                  |                |         |        |   |   |         |        |  
|-------------------------------------------------- | -------------------------------- | -------------- | ------- | ------ | - | - | ------- | ------ | -
|                                                   |                                  |               
|                                                   |                                  | December 31,  
|                                                   |                                  |               
|                                                   |                                  | 2002           |         | 2001  
|                                                   |                                  |                |         |       
|                                                   |                                  |               
|                                                   |                                  | (in thousands)
|Deferred tax assets:                               |                                  |                |         |        |   |   |         |       
|                                                   | Net operating losses             |                | $       | 15,268 |   |   | $       | 29,001 |  
|                                                   | Contribution carryover           |                |         | 69     |   |   |         | 54     |  
|                                                   | Accrued expenses                 |                |         | 6,545  |   |   |         | 6,116  |  
|                                                   | Inventory                        |                |         | 2,686  |   |   |         |       |  
|                                                   | Property and equipment           |                |         | 5,306  |   |   |         |       |  
|                                                   | Intangibles                      |                |         | 4,173  |   |   |         |       |  
|                                                   | Employee pension plan            |                |         | 2,196  |   |   |         |       |  
|                                                   | Interest limitation carryforward |                |         | 964    |   |   |         | 964    |  
|                                                   | Accounts receivable              |                |         | 14,014 |   |   |         | 12,985 |  
|                                                   |                                  |                |         |        |   |   |         |       
|                                                   | Gross deferred tax assets        |                |         | 51,221 |   |   |         | 49,120 |  
|                                                   |                                  |                |         |        |   |   |         |       
|Deferred tax liabilities:                          |                                  |                |         |        |   |   |         |       
|                                                   | Inventory                        |                |         | (548   | ) |   |         | (2,082 | )
|                                                   | Intangibles                      |                |         |       |   |   |         | (140   | )
|                                                   | Property and equipment           |                |         | (989   | ) |   |         | (5,940 | )
|                                                   | Employee pension plan            |                |         |       |   |   |         | (838   | )
|                                                   | Accrued expenses                 |                |         | (2,419 | ) |   |         |       |  
|                                                   |                                  |                |         |        |   |   |         |       
|                                                   | Gross deferred tax liability     |                |         | (3,956 | ) |   |         | (9,000 | )
|                                                   |                                  |                |         |        |   |   |         |       
|Net deferred tax assets before valuation allowance |                                  |                | 47,265  |        |   |   | 40,120  |       
|Valuation allowance                                |                                  |                | (40,198 | )      |   |   | (32,431 | )     
|                                                   |                                  |                |         |        |   |   |         |       
|Net deferred tax assets                            |                                  | $              | 7,067   |        |   | $ | 7,689   |       
|                                                   |                                  |                |         |        |   |   |         |       

As of December 31, 2002, the Company had
gross net operating loss carryforwards for federal and state
income tax purposes of approximately $29.4 million and
$52.7 million, respectively, expiring between 2004 and
2021. The Companys tax loss carryforwards will increase
during 2003 as the asset impairment charges and other
restructuring costs that were accrued at December 31, 2002
become deductible for tax purposes. During 2002, the Company
received a cash refund of $5,123,000 related to additional net
operating loss carrybacks which were made possible by recent tax
law changes. The Company has

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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

increased its valuation allowance from
$32.4 million to $40.2 million primarily due to the
realizability of deferred tax assets created by the
restructuring actions reflected in the 2002 financial
statements. The Company has recorded the balance of the deferred
tax asset in the belief that it is more likely than not that it
will be realized. The utilization of the net operating loss
carryforwards may also be further limited in the event of a
change of ownership as defined under Internal Revenue Code
Section 382.

The Company does not provide for U.S. income tax
liabilities on undistributed earnings of foreign subsidiaries as
it is managements intention that these earnings will
continue to be reinvested. Total undistributed earnings of
foreign subsidiaries as of December 31, 2002 are
approximately $99.2 million.

With respect to its new manufacturing complex in
Dongguan, China, the Company received a tax holiday under
Chinas New Foreign Investment Enterprise Program. The tax
program, which should be effective for the 2003 fiscal year,
provides for a 100% exemption for the first two years of
profitable operations and a 50% tax exemption for the next three
years.

No income taxes have been recorded with respect
to joint venture earnings or the extraordinary gain related to
the debt repurchase because the Company will use available net
operating loss carryforwards to offset this income.

11. Leases

The Company has various non-cancelable operating
leases for facilities, vehicles and office equipment that expire
at various dates through 2015. Certain of these leases contain
options for renewal or purchase of the underlying asset. Rent
expense was $7,575,000, $9,300,000 and $10,003,000 in 2000, 2001
and 2002, respectively.

At December 31, 2002, future minimum rental
payments under non-cancelable lease arrangements are as follows
(in thousands):

|                    |  |           |        | 
|------------------- |  | --------- | ------ | 
|                    |  | Operating
|                    |  | Leases   
|                    |  |          
|2003                |  | $         | 7,009  | 
|2004                |  |           | 8,900  | 
|2005                |  |           | 7,465  | 
|2006                |  |           | 6,796  | 
|2007 and thereafter |  |           | 32,536 | 
|                    |  |           |        | 
|                    |  | $         | 62,706 | 
|                    |  |           |        | 

In March 2003, the Company entered into a lease
for a distribution center totaling 828,000 square feet in
Fontana, California. The future minimum rental commitment under
this five-year lease, which will commence May 15, 2003, is
included in the table above.

12. Employee Benefit Plans

THG provides its employees with two defined
contribution retirement plans under section 401(k) of the
Internal Revenue Code. The Holmes Group 401K Plan  Plant
Employees is for employees at the Companys domestic
manufacturing facilities. Plant employees are eligible to
contribute up to 15% of their compensation, which is then
invested in one or more investment funds. Holmes matches 50% of
the contribution per year for employees who work 1000 hours in
the year and are employed as of year end. The Holmes Group
Savings and Investment Plan is for all salaried, hourly and
clerical workers not working in the manufacturing facilities.
Employees are eligible to contribute up to 25% of their
compensation, which is then invested in one or more investment
funds. The Company does not provide a matching contribution in
this plan. In addition, HPFEL provides its Hong Kong based
employees with a

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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

defined contribution retirement plan. All Hong
Kong based employees of HPFEL and Esteem Industries Ltd. may
contribute 5% of their compensation, with the Company
contributing an additional 5% to 7 1/2% of an
employees compensation. The Companys contributions
to these plans approximated $298,000, $261,000 and $501,000 in
2000, 2001 and 2002, respectively.

As part of the Rival acquisition in 1999, THG
acquired three Rival Company defined benefit pension plans: The
Rival Company Jackson Plant Employees Retirement Plan, The
Rival Manufacturing Company Clinton Plant Employees
Retirement Plan, and The Rival Company Plan for Sales,
Administrative and Clerical Employees (SAC Plan). Benefits for
plant employees are primarily based on years of service. Sales,
administrative and clerical employees receive a retirement
benefit based on final pay at retirement and years of service.
During fiscal 2000, the SAC Plan was amended and restated to
allow the vesting of benefits for certain plan participants
under a cash balance plan formula. All employees who were aged
50 with 5 years of credited service on February 28,
2000 were grandfathered under the old plan formula. The new plan
was renamed The Holmes Group Retirement Benefit Accumulation
Plan. Effective December 30, 2000, The Rival Company
Jackson Plant Employees Retirement Plan and The Rival
Manufacturing Company Clinton Plant Employees Retirement
Plan were merged into the Holmes Group Retirement Benefit
Accumulation Plan, but retained their respective benefit
formulas. All benefits under the Plan are noncontributory. The
Companys funding policy is consistent with the funding
requirements under ERISA and the Internal Revenue Code. During
2001 and 2002, approximately 52% and 57%, respectively, of the
defined benefit plans assets were invested in equity
investments with the remaining 48% and 43%, respectively,
invested in fixed income securities.

During 2001, the Company recognized $487,000 of
expense in accordance with the provisions of Financial
Accounting Standard Board Standard No. 88,
Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits. Included in the 2001 FAS 88 expense
is a charge for contractual termination benefits of $235,000
offset by a curtailment gain of $220,000 primarily due to the
Companys restructuring actions. In addition, a FAS 88
charge for a partial plan settlement of $472,000 was recognized
due to the level of lump sum benefits paid to employees during
2001.

Pension expense, including the amortization of
prior service costs over the remaining service periods of active
employees and the remaining lives of vested and retired
employees, consists of the following for the three years in the
period ended December 31, 2002:

|                                    |  |                   |        |              |  |              |        |   |  |   |        |  
|----------------------------------- |  | ----------------- | ------ | ------------ |  | ------------ | ------ | - |  | - | ------ | -
|                                    |  |                  
|                                    |  | Fiscal Year Ended
|                                    |  |                  
|                                    |  | December 31,      |        | December 31, |  | December 31,
|                                    |  | 2002              |        | 2001         |  | 2000        
|                                    |  |                   |        |              |  |             
|                                    |  |                  
|                                    |  | (in thousands)   
|Service cost                        |  | $                 | 1,151  |              |  | $            | 991    |   |  | $ | 563    |  
|Interest cost                       |  |                   | 1,089  |              |  |              | 1,062  |   |  |   | 932    |  
|Expected return on plan assets      |  |                   | (1,312 | )            |  |              | (1,496 | ) |  |   | (1,514 | )
|Amortization of prior service cost  |  |                   | (49    | )            |  |              | (58    | ) |  |   | (69    | )
|Amortization of net actuarial loss  |  |                   | 147    |              |  |              | 35     |   |  |   | (24    | )
|                                    |  |                   |        |              |  |              |        |   |  |   |        |  
|Net periodic pension cost (benefit) |  | $                 | 1,026  |              |  | $            | 534    |   |  | $ | (112   | )
|                                    |  |                   |        |              |  |              |        |   |  |   |        |  
|FAS 88 expense (benefit)            |  | $                 |       |              |  | $            | 487    |   |  | $ | (308   | )
|                                    |  |                   |        |              |  |              |        |   |  |   |        |  

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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following provides a reconciliation of
benefit obligations, plan assets, the funded status and various
assumptions related to the Companys defined benefit
pension plan:

|                                                               |  |                   |        |              |  |   |        |  
|-------------------------------------------------------------- |  | ----------------- | ------ | ------------ |  | - | ------ | -
|                                                               |  |                  
|                                                               |  | Fiscal Year Ended
|                                                               |  |                  
|                                                               |  | December 31,      |        | December 31,
|                                                               |  | 2002              |        | 2001        
|                                                               |  |                   |        |             
|Change in Benefit Obligation:                                  |  |                   |        |              |  |   |        |  
|Benefit obligation at beginning of year                        |  | $                 | 15,183 |              |  | $ | 13,567 |  
|Service cost                                                   |  |                   | 1,151  |              |  |   | 991    |  
|Interest cost                                                  |  |                   | 1,089  |              |  |   | 1,062  |  
|Amendments                                                     |  |                   |       |              |  |   | 74     |  
|Actuarial loss                                                 |  |                   | 2,177  |              |  |   | 2,042  |  
|Special termination benefit                                    |  |                   |       |              |  |   | 235    |  
|Settlements                                                    |  |                   |       |              |  |   | (2,113 | )
|Benefits paid                                                  |  |                   | (1,483 | )            |  |   | (675   | )
|                                                               |  |                   |        |              |  |   |        |  
|Benefit obligation at end of year                              |  | $                 | 18,117 |              |  | $ | 15,183 |  
|                                                               |  |                   |        |              |  |   |        |  
|Change in Plan Assets:                                         |  |                   |        |              |  |   |        |  
|Fair value of plan assets at beginning of year                 |  |                   | 14,998 |              |  |   | 17,349 |  
|Actual investment income (loss) on plan
    assets             |  |                   | (1,923 | )            |  |   | 295    |  
|Employer contribution                                          |  |                   |       |              |  |   | 142    |  
|Settlements                                                    |  |                   |       |              |  |   | (2,113 | )
|Benefits paid                                                  |  |                   | (1,483 | )            |  |   | (675   | )
|                                                               |  |                   |        |              |  |   |        |  
|Fair value of plan assets at end of year                       |  | $                 | 11,592 |              |  | $ | 14,998 |  
|                                                               |  |                   |        |              |  |   |        |  
|Funded Status:                                                 |  |                   |        |              |  |   |        |  
|Difference between benefit obligations and plan
    assets     |  |                   | (6,525 | )            |  |   | (185   | )
|Unrecognized prior service cost                                |  |                   | (606   | )            |  |   | (654   | )
|Unrecognized net actuarial loss                                |  |                   | 8,333  |              |  |   | 3,067  |  
|                                                               |  |                   |        |              |  |   |        |  
|Net amount recognized                                          |  | $                 | 1,202  |              |  | $ | 2,228  |  
|                                                               |  |                   |        |              |  |   |        |  
|Amounts Recognized in the Statement of
    Financial Position: |  |                   |        |              |  |   |        |  
|Prepaid benefit cost                                           |  |                   |       |              |  |   | 2,228  |  
|Accrued benefit liability                                      |  |                   | (5,840 | )            |  |   |       |  
|Accumulated other comprehensive income                         |  |                   | 7,042  |              |  |   |       |  
|                                                               |  |                   |        |              |  |   |        |  
|Net amount recognized                                          |  | $                 | 1,202  |              |  | $ | 2,228  |  
|                                                               |  |                   |        |              |  |   |        |  
|Weighted-Average Assumptions:                                  |  |                   |        |              |  |   |        |  
|Discount rate                                                  |  |                   | 6.5%   |              |  |   | 7.0%   |  
|Expected return on plan assets                                 |  |                   | 9.0%   |              |  |   | 9.0%   |  
|Rate of compensation increase                                  |  |                   | 4.5%   |              |  |   | 4.5%   |  

As the accumulated benefit obligation exceeded
the fair value of plan assets as of December 31, 2002, a
minimum pension liability adjustment of $7,042,000 has been
recognized. The discount rate, which is used to value our
pension obligations, was reduced to 6.5% during 2002 to reflect
the decrease in high quality bond yields over the past year. The
expected long-term rate of return on our plan assets was
developed by examining historical return rates based on the
pension plans asset allocation and considering such
factors as return differentials for active investment
management. The expected long-term rate of return for fiscal
2003 will be 8.0%, which is lower than the 9.0% rate used in
2002. The calculation of pension expense is dependent on the
determination of the assumptions used. A 50 basis
point change is in the discount rate will change pension expense
by approximately $200,000. A 100 basis point change in
the expected long-term return on assets will result in an
approximate change of $100,000 in the expense.

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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13. Business Segments

SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information
established standards for reporting information about business
segments in annual financial statements. It also established
standards for related disclosures about products and services,
major customers and geographic areas. Business segments are
defined as components of a business about which separate
financial information is available that is evaluated regularly
by the chief operating decision maker, or decision making group,
in deciding how to allocate resources and in assessing
performance. The business segments are managed separately
because each segment represents a strategic business unit whose
main business is entirely different.

The Company currently manages its operations
through three business segments: Consumer Durables,
International and Far East. The Consumer Durables segment sells
products including fans, heaters, humidifiers, air purifiers,
Crock-Pot® slow cookers, toasters, ice cream freezers, can
openers and lighting products to retailers throughout the U.S.
The Consumer Durables segment is made up of home environment
products and kitchen electric products and is considered one
business segment due to the similar customer base, distribution
channels and economic characteristics. The International segment
sells the Companys products outside the U.S. The Far East
segment is the manufacturing and sourcing operation located
primarily at HPFEL.

The other category represents the divested
industrial and building supply businesses that were considered a
separate segment prior to 2000. The 2000 amounts represent the
final shipments under supply agreements with the purchasers of
these businesses. Segment information is as follows for the
three years ended December 31, 2002 (in thousands):

|                              |  |  |      |          |  |          |         |               |  |       |         |              |  |              |        |   |  |   |        |   |  |   |          |   |  |   |         |  
|----------------------------- |  |  | ---- | -------- |  | -------- | ------- | ------------- |  | ----- | ------- | ------------ |  | ------------ | ------ | - |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                              |  |  |      | Consumer |  |          |         |               |  |       |         |              |  | Consolidated
|                              |  |  |      | Durables |  | Far East |         | International |  | Other |         | Eliminations |  | Totals      
|                              |  |  |      |          |  |          |         |               |  |       |         |              |  |             
|Net sales to customers        |  |  | 2002 |          |  | $        | 523,922 |               |  | $     | 20,475  |              |  | $            | 64,157 |   |  |   |       |   |  |   |         |   |  | $ | 608,554 |  
|                              |  |  | 2001 |          |  |          | 537,700 |               |  |       | 21,862  |              |  |              | 52,678 |   |  |   |       |   |  |   |         |   |  |   | 612,240 |  
|                              |  |  | 2000 |          |  |          | 436,939 |               |  |       | 14,427  |              |  |              | 45,717 |   |  | $ | 3,727  |   |  |   |         |   |  |   | 500,810 |  
|Intersegment net sales        |  |  | 2002 |          |  |          | 7,021   |               |  |       | 309,736 |              |  |              | 186    |   |  |   |       |   |  | $ | (316,943 | ) |  |   |        |  
|                              |  |  | 2001 |          |  |          |        |               |  |       | 290,162 |              |  |              |       |   |  |   |       |   |  |   | (290,162 | ) |  |   |        |  
|                              |  |  | 2000 |          |  |          |        |               |  |       | 219,558 |              |  |              |       |   |  |   |       |   |  |   | (219,558 | ) |  |   |        |  
|Depreciation and amortization |  |  | 2002 |          |  |          | 5,828   |               |  |       | 7,926   |              |  |              | 235    |   |  |   |       |   |  |   |         |   |  |   | 13,989  |  
|                              |  |  | 2001 |          |  |          | 8,728   |               |  |       | 7,292   |              |  |              | 160    |   |  |   |       |   |  |   |         |   |  |   | 16,180  |  
|                              |  |  | 2000 |          |  |          | 8,660   |               |  |       | 6,818   |              |  |              | 259    |   |  |   |       |   |  |   |         |   |  |   | 15,737  |  
|Net interest expense (income) |  |  | 2002 |          |  |          | 29,545  |               |  |       | (12     | )            |  |              | 82     |   |  |   |       |   |  |   |         |   |  |   | 29,615  |  
|                              |  |  | 2001 |          |  |          | 37,940  |               |  |       | (40     | )            |  |              |       |   |  |   |       |   |  |   |         |   |  |   | 37,900  |  
|                              |  |  | 2000 |          |  |          | 38,650  |               |  |       | (100    | )            |  |              |       |   |  |   |       |   |  |   |         |   |  |   | 38,550  |  
|Other costs                   |  |  | 2002 |          |  |          | 492,590 |               |  |       | 305,557 |              |  |              | 61,238 |   |  |   |       |   |  |   | (316,369 | ) |  |   | 543,016 |  
|                              |  |  | 2001 |          |  |          | 526,275 |               |  |       | 286,211 |              |  |              | 51,731 |   |  |   |       |   |  |   | (290,502 | ) |  |   | 573,715 |  
|                              |  |  | 2000 |          |  |          | 431,525 |               |  |       | 211,918 |              |  |              | 47,288 |   |  |   | 6,541  |   |  |   | (218,579 | ) |  |   | 478,693 |  
|Segment income (loss)         |  |  | 2002 |          |  |          | 2,980   |               |  |       | 16,740  |              |  |              | 2,788  |   |  |   |       |   |  |   | (574     | ) |  |   | 21,934  |  
|                              |  |  | 2001 |          |  |          | (35,243 | )             |  |       | 18,561  |              |  |              | 787    |   |  |   |       |   |  |   | 340      |   |  |   | (15,555 | )
|                              |  |  | 2000 |          |  |          | (41,896 | )             |  |       | 15,349  |              |  |              | (1,830 | ) |  |   | (2,814 | ) |  |   | (979     | ) |  |   | (32,170 | )
|Segment assets                |  |  | 2002 |          |  |          | 509,265 |               |  |       | 140,803 |              |  |              | 51,613 |   |  |   |       |   |  |   | (378,837 | ) |  |   | 322,844 |  
|                              |  |  | 2001 |          |  |          | 610,519 |               |  |       | 126,130 |              |  |              | 38,148 |   |  |   |       |   |  |   | (336,442 | ) |  |   | 438,355 |  
|                              |  |  | 2000 |          |  |          | 635,566 |               |  |       | 87,861  |              |  |              | 33,786 |   |  |   |       |   |  |   | (303,344 | ) |  |   | 453,869 |  
|Segment capital expenditures  |  |  | 2002 |          |  |          | 5,333   |               |  |       | 9,024   |              |  |              | 197    |   |  |   |       |   |  |   |         |   |  |   | 14,554  |  
|                              |  |  | 2001 |          |  |          | 6,769   |               |  |       | 10,203  |              |  |              | 48     |   |  |   |       |   |  |   |         |   |  |   | 17,020  |  
|                              |  |  | 2000 |          |  |          | 10,571  |               |  |       | 17,263  |              |  |              | 507    |   |  |   |       |   |  |   |         |   |  |   | 28,341  |  

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The accounting policies of the reportable
segments are the same as those described in Note 2 to
consolidated financial statements. The results are disaggregated
using a management approach, which is consistent with the manner
in which the Companys management internally disaggregates
financial information for the purposes of assisting in making
internal operational decisions. Other costs include: cost of
sales, operating expenses, other (income) expense, net,
equity in earnings from joint venture and income taxes.
Operating costs in the Consumer Durables segment include
restructuring and plant closing costs of $340,000, $1,744,000
and $28,006,000 for 2000, 2001 and 2002, respectively. In 2002,
the Consumer Durables income excludes goodwill impairment
charges of $79,838,000 related to the adoption of FAS 142,
effective January 1, 2002, and includes the extraordinary
gain of $22,388,000 related to the repurchase of the
Companys Senior Subordinated Notes (see Note 8).

The following information (in thousands) is
summarized by geographic area. Net sales are grouped based on
the geographic origin of the transaction.

|                   |                              |               |   |          |  |                |   |              |  |  |   |        |  |  |   |         | 
|------------------ | ---------------------------- | ------------- | - | -------- |  | -------------- | - | ------------ |  |  | - | ------ |  |  | - | ------- | 
|                   |                              |               |   |          |  | Canada, Mexico |   | Consolidated
|                   |                              | United States |   | Far East |  | and Europe     |   | Total       
|                   |                              |               |   |          |  |                |   |             
|Net sales:         |                              |               |   |          |  |                |   |              |  |  |   |        |  |  |   |        
|                   | Year ended December 31, 2002 |               | $ | 523,922  |  |                | $ | 20,475       |  |  | $ | 64,157 |  |  | $ | 608,554 | 
|                   | Year ended December 31, 2001 |               |   | 537,700  |  |                |   | 21,862       |  |  |   | 52,678 |  |  |   | 612,240 | 
|                   | Year ended December 31, 2000 |               |   | 440,666  |  |                |   | 14,427       |  |  |   | 45,717 |  |  |   | 500,810 | 
|Long-lived assets: |                              |               |   |          |  |                |   |              |  |  |   |        |  |  |   |        
|                   | December 31, 2002            |               |   | 16,226   |  |                |   | 33,028       |  |  |   | 495    |  |  |   | 49,749  | 
|                   | December 31, 2001            |               |   | 120,997  |  |                |   | 32,443       |  |  |   | 565    |  |  |   | 154,005 | 

The Companys manufacturing entities in the
Far East sell completed products to THG in the
United States at intercompany transfer prices which reflect
managements estimate of amounts which would be charged by
an unrelated third party. These sales are excluded from the
above table and are eliminated in consolidation. The remaining
Far East sales are to the GEHI joint venture and unrelated
third parties.

14. Commitments, Guarantees and
Contingencies

At December 31, 2002, the Company had
commitments outstanding for capital expenditures under purchase
orders and contracts of approximately $9.1 million.

THG is a party to several agreements to license
certain technologies and products. These license agreements
generally provide for royalties based on sales of the related
products by THG. Such royalties have not been material to date.
In June 2000, THG entered into a trademark agreement that
provides for annual minimum royalties for use of a licensed mark
expiring June 30, 2003. The annual minimum royalties are on
selected products sold by THG. The minimum royalties for the
agreement years ended June 30, 2001, 2002 and 2003 are
$179,000, $282,000 and $401,000, respectively, and are payable
on a quarterly basis.

The Company entered into employment and
non-competition agreements with its senior executives in
November 1997, the original terms of which expired on
December 31, 2001, but which are automatically renewable
for additional annual periods. These agreements provide that if
employment is terminated without cause, the employees will
receive severance payments of their respective salaries for
12 months. Effective August 1, 2001, the Company
entered into an employment and non-competition agreement with
Peter J. Martin, the Companys Chief Executive Officer, for
an initial term expiring on December 31, 2002, subject to
additional annual renewal periods. This agreement provides that
if Mr. Martins employment is terminated by Holmes
without cause or by Mr. Martin for good reason (as defined
therein), Mr. Martin will receive severance payments of up
to 18 months salary, as well as a pro-rated bonus
payment and certain other benefits.

55



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Effective February 1, 2002, the Company
entered into an amended employment and non-competition agreement
with Jordan A. Kahn for a term expiring on
January 31, 2003. In March 2003, the term of this agreement
was extended to January 31, 2004. Under this agreement, the
Company agreed to accelerate the vesting of Mr. Kahns
stock options upon a termination of employment and to extend the
post-termination exercise period for the full duration of the
option term. The agreement provides that upon termination
without cause, non-renewal of the agreement, death or
disability, Mr. Kahn will receive a lump-sum severance of
$375,000 plus 25% of his base salary, as well as a pro-rated
bonus payment and certain other benefits. The lump-sum severance
payment, but not the other benefits, would be payable in the
event of termination for cause.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees. While the
provisions of the new interpretation will be applied
prospectively for guarantees issued or modified after
December 31, 2002, the disclosure requirements of the
interpretation are effective currently. The Company issues
warranties to consumers for certain of its home environment and
kitchen appliances. Warranty costs, representing the value of
replacement goods sent to consumers making warranty claims, are
expensed as incurred. The Company maintains a warranty reserve
for consumer claims in process at year-end and for estimated
future claims. A reconciliation of the warranty reserve for the
year ended December 31, 2002 is as follows (in thousands):

|                                             |  |   |     |  
|-------------------------------------------- |  | - | --- | -
|Balance at beginning of period               |  | $ | 373 |  
|Accruals for warranties issued during period |  |   | 47  |  
|Settlements made during the period           |  |   | (45 | )
|                                             |  |   |     |  
|Balance at end of period                     |  | $ | 375 |  
|                                             |  |   |     |  

15. Related Party Transactions

The Company has retained
Jordan Kahn Co., Inc. (JKC), a
corporation owned principally by a director and stockholder of
the Company, to serve as a sales representative for the Company
in the northeastern United States. Pursuant to a representation
agreement between the Company and JKC, the Company has agreed to
pay to JKC a commission on net sales to JKCs customers in
its territory, which fee is the same fee paid by the Company to
other unaffiliated sales representative organizations
representing the Company in other territories throughout the
United States. Pursuant to this arrangement, the Company paid a
total of $337,000, $215,000 and $235,000 to JKC for the years
ended December 31, 2000, 2001 and 2002, respectively.

In addition, the Company entered into a
consulting agreement with its new majority stockholder, to
provide management, financial, advisory and strategic support
and analysis. The agreement expires in November 2003, or earlier
if the stockholders ownership percentage declines to less
than 40% or less than the percentage owned by management of the
Company, taken as a group. Fees under this agreement are
$500,000 per year.

Effective May 7, 2001, Holmes agreed to pay
the Companys majority stockholder a guarantee fee of
$1.1 million as consideration for Berkshires
guarantee of up to $43.5 million of the obligations under
the Credit Facility. Payment of these fees is subordinated to
the Companys obligations under the Credit Facility. As
amended effective March 22, 2002, the guarantee fee
arrangement provides for payment of a fee of 2.25% per annum,
compounded annually, on the $40.0 million Revolving Credit
Loan B commitment, less the portion of this facility designated
as subordinated debt funding loans (which portion is
subordinated to the other obligations under the Credit
Facility), on which portion such fee is 20% per annum,
compounded annually.

During the fourth quarter of 2001, the
Companys majority stockholder purchased $36.2 million
aggregate principal amount of the Companys Senior
Subordinated Notes Due 2007 on the open market.

56



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company repurchased these notes from the
majority stockholder at the majority stockholders cost
plus accrued interest as part of the Fifth Amendment to the
Credit Facility as fully described in Note 8.

16. Distribution of Profit

Amounts that can be distributed by HPFELs
subsidiaries in China are based on the financial regulations of
China, which differ from accounting principles generally
accepted in the United States.

HPFELs two Chinese operating subsidiaries,
Dongguan Huixun Electrical Products Company, Ltd. and Dongguan
Raider Motor Corp. Ltd., are deemed to be wholly-owned foreign
enterprises and, as such, Chinese laws and regulations require
these companies to transfer a certain portion of after-tax
profit each year to a reserve fund and an employee bonus and
welfare fund. The Companys subsidiary,
Dongguan Holmes Electrical Products Company, Ltd.,
which owns and operates its new manufacturing complex in
southern China, will commence operations in 2003.

The amount transferred to the reserve fund must
be at least 10% of the after-tax profit each year, determined in
accordance with the financial regulations of China, up to a
cumulative maximum of 50% of the entitys registered
capital stock. As the Company has contributed the statutory
maximum to the reserve fund, no contributions were paid in the
three years ended December 31, 2002. Transfers to the staff
welfare fund are voluntary and are determined by the
Companys management. No transfers were made to the
employee staff welfare fund in 2002, 2001, or 2000.

The retained earnings of these companies,
including earnings attributable to the former minority
stockholders, on the basis of accounting principles generally
accepted in the United States, are as follows (in thousands):

|                                                  |  |      |        |      |  |   |        | 
|------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                  |  | 2002 |        | 2001
|                                                  |  |      |        |     
|Dongguan Raider Motor Corp. Ltd.                  |  | $    | 11,955 |      |  | $ | 11,261 | 
|Dongguan Huixun Electrical Products Company, Ltd. |  |      | 16,450 |      |  |   | 13,386 | 
|Dongguan Holmes Electrical Products Company, Ltd. |  |      |       |      |  |   |       | 

The currency of China, the renminbi, is not
freely convertible and the ability of these subsidiaries to
remit retained earnings to the parent company is dependent on
their ability to generate foreign currency denominated earnings
or to obtain government approval for the purchase of foreign
currency.

17. Condensed Consolidating
Information

The Senior Subordinated Notes described in Note 8
were issued by THG and are guaranteed by Rival and its three
domestic subsidiaries and Holmes Manufacturing Corp.
(Manufacturing), Holmes Motor Corp. (Motor) and Holmes Air
(Taiwan) Corp. (Taiwan), but are not guaranteed by THGs
other subsidiaries, HPFEL and Holmes Air (Canada) Corp.
(Canada), or Rivals five foreign subsidiaries. The
guarantor subsidiaries are directly or indirectly wholly-owned
by THG, and the guarantees are full, unconditional and joint and
several. The following condensed consolidating financial
information presents the financial position, results of
operations and cash flows of (i) THG, as parent, as if it
accounted for its subsidiaries on the equity method, (ii) Rival
(on a consolidated basis following its acquisition by THG),
Manufacturing, Motor and Taiwan, the guarantor subsidiaries, and
(iii) HPFEL, Canada, Bionaire International B.V., The Rival
Company of Canada, Ltd., Waverly Products Company, Ltd., and
Rival de Mexico S.A. de C.V. the non-guarantor subsidiaries.
There were no transactions between Rival, Manufacturing, Motor
and Taiwan, or between HPFEL and Canada, during any of the
periods presented. Taiwan had no revenues or operations during
the periods presented, and Manufacturing ceased operations in
March 1997. As further described in Note 16, certain of
HPFELs subsidiaries in China have restrictions on
distributions to their parent companies.

57



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING BALANCE SHEET

|                                                   |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |         |         |  
|-------------------------------------------------- | ----------------------------------------- | -------------------------- | ------- | ------------ | ------- | ------------- | ------- | ------------ | ------- | ------------ | ------- | ------ | ------- | - | -------- | -------- | -------- | - | ------- | ------- | ------- | -
|                                                   |                                           |                           
|                                                   |                                           | December 31, 2002         
|                                                   |                                           |                           
|                                                   |                                           |                            |         | Guarantor    |         | Non-Guarantor |         |             
|                                                   |                                           | Parent                     |         | Subsidiaries |         | Subsidiaries  |         | Eliminations |         | Consolidated
|                                                   |                                           |                            |         |              |         |               |         |              |         |             
|                                                   |                                           |                           
|                                                   |                                           | (in thousands)            
|ASSETS                                            
|Current assets:                                    |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   | Cash and cash equivalents                 |                            | $       | 2,599        |         |               | $       | (488         | )       |              | $       | 6,315  |         |   |          |         |          |   | $       | 8,426   |        
|                                                   | Accounts receivable, net                  |                            |         | 21,383       |         |               |         | 77,428       |         |              |         | 29,598 |         |   |          |         |          |   |         | 128,409 |        
|                                                   | Inventories                               |                            |         | 30,357       |         |               |         | 53,394       |         |              |         | 31,935 |         |   | $        | (5,450   | )        |   |         | 110,236 |        
|                                                   | Prepaid expenses and other current assets |                            |         | 2,360        |         |               |         | 237          |         |              |         | 2,220  |         |   |          |         |          |   |         | 4,817   |        
|                                                   | Deferred income taxes                     |                            |         | 4,689        |         |               |         | 378          |         |              |         |       |         |   |          |         |          |   |         | 5,067   |        
|                                                   | Due from affiliates                       |                            |         | 283,734      |         |               |         | 89           |         |              |         | 84,673 |         |   |          | (368,496 | )        |   |         |        |        
|                                                   |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | Total current assets       |         |              | 345,122 |               |         |              | 131,038 |              |         |        | 154,741 |   |          |          | (373,946 | ) |         |         | 256,955 |  
|Assets held for sale                               |                                           |                            |        |              |         |               | 6,466   |              |         |              |        |        |         |   |         |          |          |   | 6,466   |        
|Property and equipment, net                        |                                           |                            | 9,073   |              |         |               | 238     |              |         |              | 33,135  |        |         |   |         |          |          |   | 42,446  |        
|Goodwill, net                                      |                                           |                            |        |              |         |               |        |              |         |              |        |        |         |   |         |          |          |   |        |        
|Deposits and other assets                          |                                           |                            | 5,212   |              |         |               | 1       |              |         |              | 515     |        |         |   | (4,891   | )        |          |   | 837     |        
|Debt issuance costs, net                           |                                           |                            | 10,184  |              |         |               |        |              |         |              |        |        |         |   |         |          |          |   | 10,184  |        
|Deferred income taxes                              |                                           |                            | 5,513   |              |         |               | 443     |              |         |              |        |        |         |   |         |          |          |   | 5,956   |        
|Investment in consolidated subsidiaries            |                                           |                            | 16,247  |              |         |               |        |              |         |              | 3,701   |        |         |   | (19,948  | )        |          |   |        |        
|                                                   |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | $                          | 391,351 |              |         | $             | 138,186 |              |         | $            | 192,092 |        |         | $ | (398,785 | )        |          | $ | 322,844 |        
|                                                   |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)
|Current liabilities:                               |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   | Accounts payable                          |                            |         | 4,604        |         |               |         | 7,709        |         |              |         | 36,845 |         |   |          | (4,891   | )        |   |         | 44,267  |        
|                                                   | Current portion of credit facility        |                            |         | 9,078        |         |               |         |             |         |              |         |       |         |   |          |         |          |   |         | 9,078   |        
|                                                   | Accrued income taxes                      |                            |         | 3,543        |         |               |         | (1,074       | )       |              |         | 4,936  |         |   |          |         |          |   |         | 7,405   |        
|                                                   | Deferred income taxes                     |                            |         | (1,892       | )       |               |         | 2,582        |         |              |         | 2,277  |         |   |          |         |          |   |         | 2,967   |        
|                                                   | Accrued expenses and other liabilities    |                            |         | 28,741       |         |               |         | 17,846       |         |              |         | 6,514  |         |   |          |         |          |   |         | 53,101  |        
|                                                   | Due to affiliates                         |                            |         | 156,324      |         |               |         | 178,249      |         |              |         | 37,624 |         |   |          | (372,197 | )        |   |         |        |        
|                                                   |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | Total current liabilities  |         |              | 200,398 |               |         |              | 205,312 |              |         |        | 88,196  |   |          |          | (377,088 | ) |         |         | 116,818 |  
|                                                   |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|Long-term portion of Credit Facility               |                                           |                            | 166,556 |              |         |               |        |              |         |              |        |        |         |   |         |          |          |   | 166,556 |        
|Senior Subordinated Notes                          |                                           |                            | 99,544  |              |         |               |        |              |         |              |        |        |         |   |         |          |          |   | 99,544  |        
|Pension obligation                                 |                                           |                            |        |              |         |               | 5,840   |              |         |              |        |        |         |   |         |          |          |   | 5,840   |        
|Other liabilities                                  |                                           |                            |        |              |         |               |        |              |         |              | 7,613   |        |         |   |         |          |          |   | 7,613   |        
|Deferred income taxes                              |                                           |                            | (631    | )            |         |               | 861     |              |         |              | 759     |        |         |   |         |          |          |   | 989     |        
|Stockholders equity:                              |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   | Common stock, $.001 par value             |                            |         | 20           |         |               |         | 2            |         |              |         |       |         |   |          | (2       | )        |   |         | 20      |        
|                                                   | Common stock, $1 par value                |                            |         |             |         |               |         |             |         |              |         | 3,810  |         |   |          | (3,810   | )        |   |         |        |        
|                                                   | Additional paid in capital                |                            |         | 68,874       |         |               |         |             |         |              |         |       |         |   |          |         |          |   |         | 68,874  |        
|                                                   | Accumulated other comprehensive income    |                            |         | (7,231       | )       |               |         |             |         |              |         | (189   | )       |   |          | 189      |          |   |         | (7,231  | )      
|                                                   | Treasury stock                            |                            |         | (62,076      | )       |               |         |             |         |              |         |       |         |   |          |         |          |   |         | (62,076 | )      
|                                                   | Retained earnings (deficit)               |                            |         | (74,103      | )       |               |         | (73,829      | )       |              |         | 91,903 |         |   |          | (18,074  | )        |   |         | (74,103 | )      
|                                                   |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | Total stockholders equity |         |              | (74,516 | )             |         |              | (73,827 | )            |         |        | 95,524  |   |          |          | (21,697  | ) |         |         | (74,516 | )
|                                                   |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | $                          | 391,351 |              |         | $             | 138,186 |              |         | $            | 192,092 |        |         | $ | (398,785 | )        |          | $ | 322,844 |        
|                                                   |                                           |                            |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        

58



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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING BALANCE SHEET

|                                                   |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |         |         |  
|-------------------------------------------------- | ----------------------------------------- | ------------------------------------ | ------- | ------------ | ------- | ------------- | ------- | ------------ | ------- | ------------ | ------- | ------ | ------- | - | -------- | -------- | -------- | - | ------- | ------- | ------- | -
|                                                   |                                           |                                     
|                                                   |                                           | December 31, 2001                   
|                                                   |                                           |                                     
|                                                   |                                           |                                      |         | Guarantor    |         | Non-Guarantor |         |             
|                                                   |                                           | Parent                               |         | Subsidiaries |         | Subsidiaries  |         | Eliminations |         | Consolidated
|                                                   |                                           |                                      |         |              |         |               |         |              |         |             
|                                                   |                                           |                                     
|                                                   |                                           | (in thousands)                      
|ASSETS                                            
|Current assets:                                    |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   | Cash and cash equivalents                 |                                      | $       | 4,083        |         |               | $       | 1,312        |         |              | $       | 4,720  |         |   |          |         |          |   | $       | 10,115  |        
|                                                   | Accounts receivable, net                  |                                      |         | 36,553       |         |               |         | 82,725       |         |              |         | 22,351 |         |   |          |         |          |   |         | 141,629 |        
|                                                   | Inventories                               |                                      |         | 34,042       |         |               |         | 49,055       |         |              |         | 24,922 |         |   | $        | (4,824   | )        |   |         | 103,195 |        
|                                                   | Prepaid expenses and other current assets |                                      |         | 2,136        |         |               |         | 42           |         |              |         | 3,139  |         |   |          |         |          |   |         | 5,317   |        
|                                                   | Deferred income taxes                     |                                      |         | 1,131        |         |               |         | 4,118        |         |              |         |       |         |   |          |         |          |   |         | 5,249   |        
|                                                   | Due from affiliates                       |                                      |         | 198,932      |         |               |         | 89           |         |              |         | 71,859 |         |   |          | (270,880 | )        |   |         |        |        
|                                                   |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | Total current assets                 |         |              | 276,877 |               |         |              | 137,341 |              |         |        | 126,991 |   |          |          | (275,704 | ) |         |         | 265,505 |  
|Assets held for sale                               |                                           |                                      |        |              |         |               | 86      |              |         |              |        |        |         |   |         |          |          |   | 86      |        
|Property and equipment, net                        |                                           |                                      | 7,585   |              |         |               | 28,503  |              |         |              | 33,008  |        |         |   |         |          |          |   | 69,096  |        
|Goodwill, net                                      |                                           |                                      |        |              |         |               | 79,838  |              |         |              |        |        |         |   |         |          |          |   | 79,838  |        
|Deferred income taxes                              |                                           |                                      | 1,312   |              |         |               | 4,462   |              |         |              |        |        |         |   |         |          |          |   | 5,774   |        
|Deposits and other assets                          |                                           |                                      | 20,139  |              |         |               | 2,229   |              |         |              | 579     |        |         |   | (4,891   | )        |          |   | 18,056  |        
|Investments in consolidated subsidiaries           |                                           |                                      | 59,523  |              |         |               |        |              |         |              | 3,700   |        |         |   | (63,223  | )        |          |   |        |        
|                                                   |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | $                                    | 365,436 |              |         | $             | 252,459 |              |         | $            | 164,278 |        |         | $ | (343,818 | )        |          | $ | 438,355 |        
|                                                   |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)
|Current liabilities:                               |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   | Accounts payable                          |                                      |         | 3,906        |         |               |         | 6,945        |         |              |         | 30,783 |         |   |          | (4,891   | )        |   |         | 36,743  |        
|                                                   | Current portion of Credit Facility        |                                      |         | 8,476        |         |               |         |             |         |              |         |       |         |   |          |         |          |   |         | 8,476   |        
|                                                   | Accrued expenses and other liabilities    |                                      |         | 16,492       |         |               |         | 16,672       |         |              |         | 7,375  |         |   |          |         |          |   |         | 40,539  |        
|                                                   | Accrued income taxes                      |                                      |         |             |         |               |         | 2,600        |         |              |         | 3,857  |         |   |          |         |          |   |         | 6,457   |        
|                                                   | Deferred income taxes                     |                                      |         | 828          |         |               |         |             |         |              |         | 1,381  |         |   |          |         |          |   |         | 2,209   |        
|                                                   | Due to affiliates                         |                                      |         |             |         |               |         | 237,911      |         |              |         | 36,669 |         |   |          | (274,580 | )        |   |         |        |        
|                                                   |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | Total current liabilities            |         |              | 29,702  |               |         |              | 264,128 |              |         |        | 80,065  |   |          |          | (279,471 | ) |         |         | 94,424  |  
|                                                   |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|Long-term portion of Credit Facility               |                                           |                                      | 209,406 |              |         |               |        |              |         |              |        |        |         |   |         |          |          |   | 209,406 |        
|Senior Subordinated Notes                          |                                           |                                      | 135,298 |              |         |               |        |              |         |              |        |        |         |   |         |          |          |   | 135,298 |        
|Other liabilities                                  |                                           |                                      |        |              |         |               |        |              |         |              | 7,485   |        |         |   |         |          |          |   | 7,485   |        
|Deferred income taxes                              |                                           |                                      | 413     |              |         |               |        |              |         |              | 712     |        |         |   |         |          |          |   | 1,125   |        
|Stockholders equity (deficit):                    |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   | Common stock, $.001 par value             |                                      |         | 20           |         |               |         | 2            |         |              |         |       |         |   |          | (2       | )        |   |         | 20      |        
|                                                   | Common stock, $1 par value                |                                      |         |             |         |               |         |             |         |              |         | 3,800  |         |   |          | (3,800   | )        |   |         |        |        
|                                                   | Additional paid in capital                |                                      |         | 68,874       |         |               |         |             |         |              |         |       |         |   |          |         |          |   |         | 68,874  |        
|                                                   | Accumulated other comprehensive income    |                                      |         | (2           | )       |               |         |             |         |              |         | (160   | )       |   |          | 160      |          |   |         | (2      | )      
|                                                   | Treasury stock                            |                                      |         | (62,076      | )       |               |         |             |         |              |         |       |         |   |          |         |          |   |         | (62,076 | )      
|                                                   | Retained earnings (deficit)               |                                      |         | (16,199      | )       |               |         | (11,671      | )       |              |         | 72,376 |         |   |          | (60,705  | )        |   |         | (16,199 | )      
|                                                   |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | Total stockholders equity (deficit) |         |              | (9,383  | )             |         |              | (11,669 | )            |         |        | 76,016  |   |          |          | (64,347  | ) |         |         | (9,383  | )
|                                                   |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        
|                                                   |                                           | $                                    | 365,436 |              |         | $             | 252,459 |              |         | $            | 164,278 |        |         | $ | (343,818 | )        |          | $ | 438,355 |        
|                                                   |                                           |                                      |         |              |         |               |         |              |         |              |         |        |         |   |          |          |          |   |         |        

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF
OPERATIONS

|                                                                                |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |         |  
|------------------------------------------------------------------------------- | --------------------------- | ---------------------------- | ------- | ------------ | - | ------------- | ------- | ------------ | - | ------------ | ------- | --- |  | - | -------- | - |  | - | ------- | ------- | -
|                                                                                |                             |                             
|                                                                                |                             | Year Ended December 31, 2002
|                                                                                |                             |                             
|                                                                                |                             |                              |         | Guarantor    |   | Non-Guarantor |         |             
|                                                                                |                             | Parent                       |         | Subsidiaries |   | Subsidiaries  |         | Eliminations |   | Consolidated
|                                                                                |                             |                              |         |              |   |               |         |              |   |             
|Net sales                                                                       |                             | $                            | 173,489 |              |   | $             | 350,247 |              |   | $            | 394,554 |     |  | $ | (309,736 | ) |  | $ | 608,554 |        
|Cost of sales                                                                   |                             |                              | 158,466 |              |   |               | 249,412 |              |   |              | 345,943 |     |  |   | (309,244 | ) |  |   | 444,577 |        
|                                                                                |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Gross profit (loss)                                                             |                             |                              | 15,023  |              |   |               | 100,835 |              |   |              | 48,611  |     |  |   | (492     | ) |  |   | 163,977 |        
|Selling and administrative expenses                                             |                             |                              | 38,942  |              |   |               | 57,922  |              |   |              | 23,702  |     |  |   |         |   |  |   | 120,566 |        
|Restructuring costs                                                             |                             |                              |        |              |   |               | 28,006  |              |   |              |        |     |  |   |         |   |  |   | 28,006  |        
|                                                                                |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Operating profit (loss)                                                         |                             |                              | (23,919 | )            |   |               | 14,907  |              |   |              | 24,909  |     |  |   | (492     | ) |  |   | 15,405  |        
|Other income and expense:                                                       |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|                                                                                | Interest expense, net       |                              |         | 20,351       |   |               |         | 9,194        |   |              |         | 70  |  |   |          |  |  |   |         | 29,615  |  
|                                                                                | Other expense (income), net |                              |         | (1,846       | ) |               |         | (9,582       | ) |              |         | 810 |  |   |          |  |  |   |         | (10,618 | )
|                                                                                |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|                                                                                |                             |                              | 18,505  |              |   |               | (388    | )            |   |              | 880     |     |  |   |         |   |  |   | 18,997  |        
|                                                                                |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Income (loss) before income taxes and equity in
    earnings from joint venture |                             |                              | (42,424 | )            |   |               | 15,295  |              |   |              | 24,029  |     |  |   | (492     | ) |  |   | (3,592  | )      
|Income tax expense (benefit)                                                    |                             |                              | (2,265  | )            |   |               | (2,385  | )            |   |              | 4,502   |     |  |   |         |   |  |   | (148    | )      
|Equity in earnings from joint venture                                           |                             |                              | (2,990  | )            |   |               |        |              |   |              |        |     |  |   |         |   |  |   | (2,990  | )      
|                                                                                |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Income (loss) before equity in income of
    consolidated subsidiaries          |                             |                              | (37,169 | )            |   |               | 17,680  |              |   |              | 19,527  |     |  |   | (492     | ) |  |   | (454    | )      
|Equity in income of consolidated subsidiaries                                   |                             |                              | (43,123 | )            |   |               |        |              |   |              |        |     |  |   | 43,123   |   |  |   |        |        
|                                                                                |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Income (loss) before extraordinary item                                         |                             |                              | (80,292 | )            |   |               | 17,680  |              |   |              | 19,527  |     |  |   | 42,631   |   |  |   | (454    | )      
|Extraordinary gain                                                              |                             |                              | 22,388  |              |   |               |        |              |   |              |        |     |  |   |         |   |  |   | 22,388  |        
|Cumulative effect of change in accounting
    principle                         |                             |                              |        |              |   |               | (79,838 | )            |   |              |        |     |  |   |         |   |  |   | (79,838 | )      
|                                                                                |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        
|Net income (loss)                                                               |                             | $                            | (57,904 | )            |   | $             | (62,158 | )            |   | $            | 19,527  |     |  | $ | 42,631   |   |  | $ | (57,904 | )      
|                                                                                |                             |                              |         |              |   |               |         |              |   |              |         |     |  |   |          |   |  |   |         |        

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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF
OPERATIONS

|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |        |  
|------------------------------------------------------------------------------- | --------------------------- | ---------------------------- | ------- | ------------ |  | ------------- | ------- | ------------ |  | ------------ | ------- | ------ | - | - | -------- | - |  | - | ------- | ------ | -
|                                                                                |                             |                             
|                                                                                |                             | Year Ended December 31, 2001
|                                                                                |                             |                             
|                                                                                |                             |                              |         | Guarantor    |  | Non-Guarantor |         |             
|                                                                                |                             | Parent                       |         | Subsidiaries |  | Subsidiaries  |         | Eliminations |  | Consolidated
|                                                                                |                             |                              |         |              |  |               |         |              |  |             
|Net sales                                                                       |                             | $                            | 221,275 |              |  | $             | 315,301 |              |  | $            | 365,826 |        |   | $ | (290,162 | ) |  | $ | 612,240 |       
|Cost of sales                                                                   |                             |                              | 183,279 |              |  |               | 244,918 |              |  |              | 324,576 |        |   |   | (290,502 | ) |  |   | 462,271 |       
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Gross profit                                                                    |                             |                              | 37,996  |              |  |               | 70,383  |              |  |              | 41,250  |        |   |   | 340      |   |  |   | 149,969 |       
|Selling and administrative expenses                                             |                             |                              | 42,096  |              |  |               | 62,153  |              |  |              | 20,066  |        |   |   |          |   |  |   | 124,315 |       
|Restructuring and plant closing costs                                           |                             |                              |        |              |  |               | 1,744   |              |  |              |        |        |   |   |          |   |  |   | 1,744   |       
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Operating profit (loss)                                                         |                             |                              | (4,100  | )            |  |               | 6,486   |              |  |              | 21,184  |        |   |   | 340      |   |  |   | 23,910  |       
|Other income and expense:                                                       |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|                                                                                | Interest expense, net       |                              |         | 27,698       |  |               |         | 10,242       |  |              |         | (40    | ) |   |          |  |  |   |         | 37,900 |  
|                                                                                | Other expense (income), net |                              |         | 945          |  |               |         | 259          |  |              |         | (1,812 | ) |   |          |  |  |   |         | (608   | )
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|                                                                                |                             |                              | 28,643  |              |  |               | 10,501  |              |  |              | (1,852  | )      |   |   |         |   |  |   | 37,292  |       
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Income (loss) before income taxes and equity in
    earnings from joint venture |                             |                              | (32,743 | )            |  |               | (4,015  | )            |  |              | 23,036  |        |   |   | 340      |   |  |   | (13,382 | )     
|Income tax expense (benefit)                                                    |                             |                              | 73      |              |  |               | 766     |              |  |              | 3,688   |        |   |   |         |   |  |   | 4,527   |       
|Equity in earnings from joint venture                                           |                             |                              | (2,354  | )            |  |               |        |              |  |              |        |        |   |   |         |   |  |   | (2,354  | )     
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Income (loss) before equity in income of
    consolidated subsidiaries          |                             |                              | (30,462 | )            |  |               | (4,781  | )            |  |              | 19,348  |        |   |   | 340      |   |  |   | (15,555 | )     
|Equity in income of consolidated subsidiaries                                   |                             |                              | 14,907  |              |  |               |        |              |  |              |        |        |   |   | (14,907  | ) |  |   |        |       
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Net income (loss)                                                               |                             | $                            | (15,555 | )            |  | $             | (4,781  | )            |  | $            | 19,348  |        |   | $ | (14,567  | ) |  | $ | (15,555 | )     
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF
OPERATIONS

|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |        |  
|------------------------------------------------------------------------------- | --------------------------- | ---------------------------- | ------- | ------------ |  | ------------- | ------- | ------------ |  | ------------ | ------- | ------ | - | - | -------- | - |  | - | ------- | ------ | -
|                                                                                |                             |                             
|                                                                                |                             | Year Ended December 31, 2000
|                                                                                |                             |                             
|                                                                                |                             |                              |         | Guarantor    |  | Non-Guarantor |         |             
|                                                                                |                             | Parent                       |         | Subsidiaries |  | Subsidiaries  |         | Eliminations |  | Consolidated
|                                                                                |                             |                              |         |              |  |               |         |              |  |             
|Net sales                                                                       |                             | $                            | 226,019 |              |  | $             | 215,640 |              |  | $            | 278,709 |        |   | $ | (219,558 | ) |  | $ | 500,810 |       
|Cost of sales                                                                   |                             |                              | 181,075 |              |  |               | 176,398 |              |  |              | 243,996 |        |   |   | (219,264 | ) |  |   | 382,205 |       
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Gross profit (loss)                                                             |                             |                              | 44,944  |              |  |               | 39,242  |              |  |              | 34,713  |        |   |   | (294     | ) |  |   | 118,605 |       
|Selling and administrative expenses                                             |                             |                              | 50,256  |              |  |               | 39,456  |              |  |              | 20,951  |        |   |   |         |   |  |   | 110,663 |       
|Restructuring and plant closing costs                                           |                             |                              |        |              |  |               | 340     |              |  |              |        |        |   |   |         |   |  |   | 340     |       
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Operating profit (loss)                                                         |                             |                              | (5,312  | )            |  |               | (554    | )            |  |              | 13,762  |        |   |   | (294     | ) |  |   | 7,602   |       
|Other income and expense:                                                       |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|                                                                                | Interest expense, net       |                              |         | 27,905       |  |               |         | 10,745       |  |              |         | (100   | ) |   |          |  |  |   |         | 38,550 |  
|                                                                                | Other expense (income), net |                              |         | 23           |  |               |         | 891          |  |              |         | (1,672 | ) |   |          |  |  |   |         | (758   | )
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|                                                                                |                             |                              | 27,928  |              |  |               | 11,636  |              |  |              | (1,772  | )      |   |   |         |   |  |   | 37,792  |       
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Income (loss) before income taxes and equity
    in earnings from joint venture |                             |                              | (33,240 | )            |  |               | (12,190 | )            |  |              | 15,534  |        |   |   | (294     | ) |  |   | (30,190 | )     
|Income tax expense (benefit)                                                    |                             |                              | 226     |              |  |               | 350     |              |  |              | 2,015   |        |   |   |         |   |  |   | 2,591   |       
|Equity in earnings from joint venture                                           |                             |                              | (611    | )            |  |               |        |              |  |              |        |        |   |   |         |   |  |   | (611    | )     
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Income (loss) before equity in income of
    consolidated subsidiaries          |                             |                              | (32,855 | )            |  |               | (12,540 | )            |  |              | 13,519  |        |   |   | (294     | ) |  |   | (32,170 | )     
|Equity in income of consolidated subsidiaries                                   |                             |                              | 685     |              |  |               |        |              |  |              |        |        |   |   | (685     | ) |  |   |        |       
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       
|Net income (loss)                                                               |                             | $                            | (32,170 | )            |  | $             | (12,540 | )            |  | $            | 13,519  |        |   | $ | (979     | ) |  | $ | (32,170 | )     
|                                                                                |                             |                              |         |              |  |               |         |              |  |              |         |        |   |   |          |   |  |   |         |       

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##### Table of Contents



THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS

|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------------------------------------- | ------- | ------------ | ------ | ------------- | ------ | ------------ | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                         |                                                                          |                                                          |         | Guarantor    |        | Non-Guarantor |        |             
|                                                         |                                                                          | Parent                                                   |         | Subsidiaries |        | Subsidiaries  |        | Consolidated
|                                                         |                                                                          |                                                          |         |              |        |               |        |             
|Year Ended December 31, 2002                             |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Net cash provided by (used for) operating
    activities |                                                                          | $                                                        | (12,623 | )            |        | $             | 40,168 |              |         | $ | 23,312  |         |         | $ | 50,857  |        
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Cash flows from investing
    activities:                |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|                                                         | Proceeds from sale of business and assets held
    for sale              |                                                          |         |             |        |               |        | 15,100       |         |   |         |        |         |   |         | 15,100  |        
|                                                         | Distribution of earnings from joint venture                              |                                                          |         | 2,472        |        |               |        |             |         |   |         |        |         |   |         | 2,472   |        
|                                                         | Purchases of property and equipment                                      |                                                          |         | (4,961       | )      |               |        | (907         | )       |   |         | (8,686  | )       |   |         | (14,554 | )      
|                                                         | Cash received from joint venture partner                                 |                                                          |         |             |        |               |        |             |         |   |         |        |         |   |         |        |        
|                                                         |                                                                          |                                                          |         |             |        |               |        |             |         |   |         |        |         |   |         |        |        
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|                                                         |                                                                          | Net cash provided by (used for) investing
    activities |         |              | (2,489 | )             |        |              | 14,193  |   |         |         | (8,686  | ) |         |         | 3,018   |  
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Cash flows from financing
    activities:                |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|                                                         | Repayments of credit facility, net of issuance
    costs                 |                                                          |         | (42,248      | )      |               |        |             |         |   |         |        |         |   |         | (42,248 | )      
|                                                         | Other activity with Parent, net                                          |                                                          |         | 69,005       |        |               |        | (56,161      | )       |   |         | (12,844 | )       |   |         |        |        
|                                                         | Redemption of long-term debt                                             |                                                          |         | (11,550      | )      |               |        |             |         |   |         |        |         |   |         | (11,550 | )      
|                                                         | Debt issuance costs                                                      |                                                          |         | (1,579       | )      |               |        |             |         |   |         |        |         |   |         | (1,579  | )      
|                                                         | Principal payments on capital lease obligations                          |                                                          |         |             |        |               |        |             |         |   |         |        |         |   |         |        |        
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|                                                         |                                                                          | Net cash provided by (used for) financing
    activities |         |              | 13,628 |               |        |              | (56,161 | ) |         |         | (12,844 | ) |         |         | (55,377 | )
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|                                                         | Effect of exchange rate changes on cash                                  |                                                          |         |             |        |               |        |             |         |   |         | (187    | )       |   |         | (187    | )      
|Net increase in cash and cash equivalents                |                                                                          |                                                          | (1,484  | )            |        |               | (1,800 | )            |         |   | 1,595   |         |         |   | (1,689  | )      
|Cash and cash equivalents, beginning of period           |                                                                          |                                                          | 4,083   |              |        |               | 1,312  |              |         |   | 4,720   |         |         |   | 10,115  |        
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Cash and cash equivalents, end of period                 |                                                                          | $                                                        | 2,599   |              |        | $             | (488   | )            |         | $ | 6,315   |         |         | $ | 8,426   |        
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Year Ended December 31, 2001                             |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Net cash provided by (used for) operating
    activities |                                                                          | $                                                        | 8,352   |              |        | $             | 37,900 |              |         | $ | (10,002 | )       |         | $ | 36,250  |        
|Cash flows from investing
    activities:                |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|                                                         | Proceeds from sale of assets held for sale and
    business divestitures |                                                          |         |             |        |               |        | 2,228        |         |   |         |        |         |   |         | 2,228   |        
|                                                         | Distribution in earnings from joint venture                              |                                                          |         | 1,876        |        |               |        |             |         |   |         |        |         |   |         | 1,876   |        
|                                                         | Purchases of property and equipment                                      |                                                          |         | (3,890       | )      |               |        | (2,879       | )       |   |         | (10,251 | )       |   |         | (17,020 | )      
|                                                         | Cash received from joint venture partners                                |                                                          |         |             |        |               |        |             |         |   |         | 700     |         |   |         | 700     |        
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Net cash used for investing activities                   |                                                                          | $                                                        | (2,014  | )            |        | $             | (651   | )            |         | $ | (9,551  | )       |         | $ | (12,216 | )      
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Cash flows from financing
    activities:                |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|                                                         | Borrowings on credit facility, net of issuance
    costs                 |                                                          |         | (14,543      | )      |               |        |             |         |   |         |        |         |   |         | (14,543 | )      
|                                                         | Principle payments on capital lease obligations                          |                                                          |         |             |        |               |        |             |         |   |         |        |         |   |         |        |        
|                                                         | Debt issuance costs                                                      |                                                          |         | (2,393       | )      |               |        |             |         |   |         |        |         |   |         | (2,393  | )      
|                                                         | Other net activity with Parent                                           |                                                          |         | 14,506       |        |               |        | (36,896      | )       |   |         | 22,390  |         |   |         |        |        
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|                                                         | Net cash provided by (used for) financing
    activities                 |                                                          |         | (2,430       | )      |               |        | (36,896      | )       |   |         | 22,390  |         |   |         | (16,936 | )      
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Net increase in cash and cash equivalents                |                                                                          |                                                          | 3,908   |              |        |               | 353    |              |         |   | 2,837   |         |         |   | 7,098   |        
|Cash and cash equivalents, beginning of period           |                                                                          |                                                          | 175     |              |        |               | 959    |              |         |   | 1,883   |         |         |   | 3,017   |        
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        
|Cash and cash equivalents, end of period                 |                                                                          | $                                                        | 4,083   |              |        | $             | 1,312  |              |         | $ | 4,720   |         |         | $ | 10,115  |        
|                                                         |                                                                          |                                                          |         |              |        |               |        |              |         |   |         |         |         |   |         |        

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THE HOLMES GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS


|                                                         |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------ | ------ | ------ | ------------ | - | ------------- | ------- | ------------ | - | - | ------ | ------- | - | - | ------ | ------- | -
|                                                         |                                                                          |        |        | Guarantor    |   | Non-Guarantor |         |             
|                                                         |                                                                          | Parent |        | Subsidiaries |   | Subsidiaries  |         | Consolidated
|                                                         |                                                                          |        |        |              |   |               |         |             
|Year Ended December 31, 2000                             |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |        
|Net cash provided by (used for) operating
    activities |                                                                          | $      | (4,170 | )            |   | $             | (10,286 | )            |   | $ | 8,935  |         |   | $ | (5,521 | )      
|Cash flows from investing
    activities:                |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |        
|                                                         | Proceeds from sale of assets held for sale and
    business divestitures |        |        | 701          |   |               |         | 4,052        |   |   |        |        |   |   |        | 4,753   |  
|                                                         | Distribution in earnings from joint venture                              |        |        | 1,375        |   |               |         |             |   |   |        |        |   |   |        | 1,375   |  
|                                                         | Purchases of property and equipment                                      |        |        | (3,376       | ) |               |         | (7,195       | ) |   |        | (17,770 | ) |   |        | (28,341 | )
|                                                         | Cash received from joint venture partners                                |        |        |             |   |               |         |             |   |   |        | 1,893   |   |   |        | 1,893   |  
|                                                         |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |        
|                                                         | Net cash used for investing activities                                   |        |        | (1,300       | ) |               |         | (3,143       | ) |   |        | (15,877 | ) |   |        | (20,320 | )
|                                                         |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |        
|Cash flows from financing
    activities:                |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |        
|                                                         | Borrowings (repayments) on credit facility,
    net of issuance costs    |        |        | 22,350       |   |               |         |             |   |   |        |        |   |   |        | 22,350  |  
|                                                         | Principle payments on capital lease obligations                          |        |        |             |   |               |         |             |   |   |        | (139    | ) |   |        | (139    | )
|                                                         | Other net activity with Parent                                           |        |        | (16,897      | ) |               |         | 13,593       |   |   |        | 3,304   |   |   |        |        |  
|                                                         |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |        
|                                                         | Net cash provided by financing activities                                |        |        | 5,453        |   |               |         | 13,593       |   |   |        | 3,165   |   |   |        | 22,211  |  
|                                                         |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                          |        | (17    | )            |   |               | 164     |              |   |   | (3,777 | )       |   |   | (3,630 | )      
|Cash and cash equivalents, beginning of period           |                                                                          |        | 192    |              |   |               | 795     |              |   |   | 5,660  |         |   |   | 6,647  |        
|                                                         |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |        
|Cash and cash equivalents, end of period                 |                                                                          | $      | 175    |              |   | $             | 959     |              |   | $ | 1,883  |         |   | $ | 3,017  |        
|                                                         |                                                                          |        |        |              |   |               |         |              |   |   |        |         |   |   |        |        

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SCHEDULE II

THE HOLMES GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS

|                                 |                              |                |   |            |  |            |   |               |  |           |  |   |  |  |   |       |  |  |   |        | 
|-------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ------------- |  | --------- |  | - |  |  | - | ----- |  |  | - | ------ | 
|                                 |                              |                |   |            |  |            |   |              
|                                 |                              |                |   | Additions  |  | Deductions |   |              
|                                 |                              |                |   |            |  |            |   |              
|                                 |                              | Balance at     |   | Charged to |  | Charged    |   | Write-off of  |  | Balance  
|                                 |                              | Beginning      |   | Costs and  |  | to Other   |   | Uncollectible |  | at End   
|                                 |                              | of Period      |   | Expenses   |  | Accounts   |   | Accounts      |  | of Period
|                                 |                              |                |   |            |  |            |   |               |  |          
|                                 |                              |               
|                                 |                              | (in thousands)
|Allowance for doubtful accounts: |                              |                |   |            |  |            |   |               |  |           |  |   |  |  |   |       |  |  |   |       
|                                 | Year ended December 31, 2000 |                | $ | 9,046      |  |            | $ | 4,543         |  |           |  |  |  |  | $ | 3,967 |  |  | $ | 9,622  | 
|                                 | Year ended December 31, 2001 |                |   | 9,622      |  |            |   | 15,219        |  |           |  |  |  |  |   | 6,639 |  |  |   | 18,202 | 
|                                 | Year-ended December 31, 2002 |                |   | 18,202     |  |            |   | 6,134         |  |           |  |  |  |  |   | 5,985 |  |  |   | 18,351 | 

|                                  |                              |                |   |            |  |             |   |           |  |          |  |           |  |  |   |        |  |  |  |   |  |  |   |        | 
|--------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ----------- | - | --------- |  | -------- |  | --------- |  |  | - | ------ |  |  |  | - |  |  | - | ------ | 
|                                  |                              |                |   |            |  |             |   |          
|                                  |                              |                |   | Additions  |  | Deductions  |   |          
|                                  |                              |                |   |            |  |             |   |          
|                                  |                              |                |   |            |  | Net         |   |           |  |         
|                                  |                              |                |   | Charged to |  | Operating   |   | Net       |  |          |  |          
|                                  |                              | Balance at     |   | Income     |  | Losses      |   | Operating |  | Charged  |  | Balance  
|                                  |                              | Beginning      |   | Tax        |  | Without Tax |   | Losses    |  | to Other |  | at End   
|                                  |                              | of Period      |   | Expense    |  | Benefit     |   | Utilized  |  | Accounts |  | of Period
|                                  |                              |                |   |            |  |             |   |           |  |          |  |          
|                                  |                              |               
|                                  |                              | (in thousands)
|Deferred tax valuation allowance: |                              |                |   |            |  |             |   |           |  |          |  |           |  |  |   |        |  |  |  |   |  |  |   |       
|                                  | Year ended December 31, 2000 |                | $ | 1,650      |  |             | $ | 16,891    |  |          |  |          |  |  |   |       |  |  |  |  |  |  | $ | 18,541 | 
|                                  | Year ended December 31, 2001 |                |   | 18,541     |  |             |   | 13,890    |  |          |  |          |  |  |   |       |  |  |  |  |  |  |   | 32,431 | 
|                                  | Year-ended December 31, 2002 |                |   | 32,431     |  |             |   | 22,659    |  |          |  |          |  |  | $ | 14,892 |  |  |  |  |  |  |   | 40,198 | 

|                                |                              |                |   |            |  |            |   |           |  |  |   |       |  |  |   |        | 
|------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | --------- |  |  | - | ----- |  |  | - | ------ | 
|                                |                              |                |   | Additions  |  | Deductions |   |          
|                                |                              |                |   |            |  |            |   |          
|                                |                              | Balance at     |   | Charged to |  | Write-off  |   | Balance  
|                                |                              | Beginning      |   | Costs and  |  | of         |   | at End   
|                                |                              | of Period      |   | Expenses   |  | Inventory  |   | of Period
|                                |                              |                |   |            |  |            |   |          
|                                |                              |               
|                                |                              | (in thousands)
|Inventory obsolescence reserve: |                              |                |   |            |  |            |   |           |  |  |   |       |  |  |   |       
|                                | Year ended December 31, 2000 |                | $ | 10,932     |  |            | $ | 17,347    |  |  | $ | 9,854 |  |  | $ | 18,425 | 
|                                | Year ended December 31, 2001 |                |   | 18,425     |  |            |   | 1,667     |  |  |   | 9,780 |  |  |   | 10,312 | 
|                                | Year-ended December 31, 2002 |                |   | 10,312     |  |            |   | 9,491     |  |  |   | 7,443 |  |  |   | 12,360 | 

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Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.




PART III




Item 10.Directors
and Executive Officers of the Registrant

The following table sets forth certain
information with respect to our directors and executive
officers. The directors are elected annually by the
stockholders. Pursuant to the terms of a Stockholders
Agreement entered into in connection with the 1997
recapitalization transactions, the stockholders have agreed to
vote in favor of the election of the persons named as directors
below.

|                     |  |     |    |          |  |                                                                         
|-------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Jordan A. Kahn       |  |     | 61 |          |  | Chairman of the Board of Directors                                      
|Peter J. Martin      |  |     | 47 |          |  | President, Chief Executive Officer and Director                         
|Gregory F. White     |  |     | 39 |          |  | Director                                                                
|(Tommy) Woon Fai Liu |  |     | 50 |          |  | Managing Director of Holmes Far East
    Operations and Director       
|Richard K. Lubin     |  |     | 56 |          |  | Director                                                                
|Randy Peeler         |  |     | 38 |          |  | Director                                                                
|Fred J. Musone       |  |     | 58 |          |  | Director                                                                
|Louis F. Cimini      |  |     | 48 |          |  | Senior Vice President  Human Resources and
    Organization Performance
|John M. Kelliher     |  |     | 51 |          |  | Senior Vice President and Chief Financial Officer                       

Jordan A. Kahn,
Holmes founder and Chairman of the Board of Directors, had
served as President and Chief Executive Officer and a director
since Holmes organization in 1982. Since 1968,
Mr. Kahn has also been President of Jordan Kahn Co., Inc. a
manufacturers representative providing services to small
electric personal appliance manufacturers, including the
Company, to retailers across the Northeast.

Peter J. Martinjoined the Company in August 2001 as President and Chief
Executive Officer and director. Prior thereto, he was Group
President Home Décor business for Newell Rubbermaid, a
NYSE-listed housewares company, since November 2000. From
December 1997 through October 2000 he was President of Newell
Window Fashions Europe. From May 1994 to November 1997 he was
Vice President  Group Controller.

Gregory F. Whiteresigned as an executive officer effective March 14, 2003,
but will remain a Director of the Company. Mr. White served
as Executive Vice President, Sales and Marketing since 1995, and
from 1993 to 1995 as Vice President Marketing. He became a
director of Holmes in 1997. Mr. White served as Account
Supervisor at Ammirati & Puris, an advertising agency, from
1992 to 1993 and as Account Manager at the advertising agency
DArcy, Masius, Benton & Bowles from 1991 to 1992.

(Tommy) Woon Fai Liubecame Managing Director of Holmes Far East operations
upon the closing of the 1997 recapitalization transactions. From
1993 to 1997, Mr. Liu served as Chief Financial Officer and
Executive Director of Asco General Supplies Far East Limited, a
subsidiary of Pentland Group plc, our former majority
stockholder, as well as Executive Director of Holmes Far East
since 1994. From 1989 to 1993, Mr. Liu was Finance Director
for Johnson & Johnson Hong Kong. He became a director of
Holmes during 1999.

Richard K. Lubinis
a Managing Director of Berkshire Partners, which he co-founded
in 1986. He became a director of Holmes in 1997, and has been a
director of many of Berkshires manufacturing, retailing
and transportation investments, including, among others, U.S.
Can Corporation and English Welsh & Scottish Railway, Ltd.

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Randy Peeleris a
Managing Director of Berkshire Partners, where he has been
employed since 1996. From 1994 to 1996, he was responsible for
new business ventures at Health Advances, a healthcare industry
consulting firm. From 1993 to 1994, he served as Chief of Staff
to the Assistant Secretary for Economic Policy at the U.S.
Department of the Treasury. Prior to that, he was a consultant
with Cannon Associates. Mr. Peeler became a director of
Holmes in 1997, and also serves as a director of Casella Waste
Systems, Inc. and Weigh-Tronix, LLC.

Fred J. Musonejoined the Holmes Board of Directors upon the annual
stockholders meeting in April 2002. Mr. Musone is
currently a consultant with several companies in the automotive
industry. From 1995 to 1998, he was President of Morton Auto
Safety Products, the worlds largest manufacturer of air
bag modules and inflators. Prior to that, Mr. Musone spent over
25 years at Federal Mogul, a worldwide automotive parts
supplier, in various executive and senior management positions.

Louis F. Ciminijoined Holmes in December 1999 from CGU, an insurance company,
where he was Vice President of Human Resources for two years.
Prior to joining CGU, Mr. Cimini spent nine years with PHH
(now Cendant Mobility), a Fortune 500 corporate services
organization, as Senior Vice President of Human Resources and
Quality, where he led the human resources elements of
restructuring and re-engineering during several acquisitions.

John M. Kelliher,
Senior Vice President and Chief Financial Officer, joined Holmes
in February 2002 from The Stride Rite Corporation, a NYSE-listed
footwear marketer, where he spent twenty years in a number of
financial management positions, including Chief Financial
Officer and Treasurer from February 1998 to April 2001 and Vice
President  Finance and Treasurer from February 1993 to
January 1998.




Item 11.     Executive
Compensation

Summary

The following Summary Compensation Table sets
forth information concerning the compensation paid or accrued by
Holmes to the Chief Executive Officer and certain other persons
who served as executive officers during the fiscal year ended
December 31, 2002.

|                     |                           |  |      |                     |  |                        |         |              |  |           |         |              |  |   |        |        |     |  |        |           |  |  |  |  | 
|-------------------- | ------------------------- |  | ---- | ------------------- |  | ---------------------- | ------- | ------------ |  | --------- | ------- | ------------ |  | - | ------ | ------ | --- |  | ------ | --------- |  |  |  |  | 
|                     |                           |  |      |                     |  |                       
|                     |                           |  |      | Annual Compensation |  | Long-Term Compensation
|                     |                           |  |      |                     |  |                       
|Name and             |                           |  |      |                     |  | Other annual(1)        |         | Stock Option |  | All Other
|Principal Position   |                           |  |      | Salary              |  | Bonus                  |         | Compensation |  | Shares    |         | Compensation
|                     |                           |  |      |                     |  |                        |         |              |  |           |         |             
|Jordan A. Kahn       |                           |  | 2002 |                     |  | $                      | 503,663 |              |  | $         | 315,188 |              |  | $ | 14,400 |        |     |  |        |           |  |  |  | 
|                     | Chairman of the Board of  |  |      | 2001                |  |                        |         | 501,430      |  |           |         | 115,000      |  |   |        | 15,600 |     |  |        |           |  |  |  |  | 
|                     | Directors                 |  |      | 2000                |  |                        |         | 501,986      |  |           |         |              |  |   |        | 15,600 |     |  |        |           |  |  |  |  | 
|Peter J. Martin      |                           |  | 2002 |                     |  |                        | 450,845 |              |  |           | 378,935 |              |  |   | 49,344 | (2)    |     |  |        |           |  |  |  | 
|                     | President and Chief       |  |      | 2001                |  |                        |         | 178,200      |  |           |         | 89,100       |  |   |        | 60,765 | (2) |  |        | 1,000,000 |  |  |  |  | 
|                     | Executive Officer         |  |      |                     |  |                        |         |              |  |           |         |              |  |   |        |        |     |  |        |           |  |  |  |  | 
|Gregory F. White(3)  |                           |  | 2002 |                     |  |                        | 314,488 |              |  |           | 262,674 |              |  |   | 12,000 |        |     |  |        |           |  |  |  | 
|                     | Executive Vice President  |  |      | 2001                |  |                        |         | 317,217      |  |           |         | 71,760       |  |   |        | 11,400 |     |  |        |           |  |  |  |  | 
|                     | Sales and Marketing       |  |      | 2000                |  |                        |         | 321,006      |  |           |         |             |  |   |        | 10,200 |     |  |        |           |  |  |  |  | 
|(Tommy) Woon Fai Liu |                           |  | 2002 |                     |  |                        | 260,000 |              |  |           | 218,530 |              |  |   | 44,701 | (4)    |     |  |        |           |  |  |  | 
|                     | Managing Director of      |  |      | 2001                |  |                        |         | 260,000      |  |           |         | 59,800       |  |   |        | 44,701 | (4) |  |        |           |  |  |  |  | 
|                     | Holmes Far East           |  |      | 2000                |  |                        |         | 260,000      |  |           |         |              |  |   |        | 44,701 | (4) |  |        |           |  |  |  |  | 
|John M. Kelliher(5)  |                           |  | 2002 |                     |  |                        | 214,355 |              |  |           | 121,035 |              |  |   | 7,700  |        |     |  | 50,000 |           |  |  |  | 
|                     | Senior Vice President and |  |      |                     |  |                        |         |              |  |           |         |              |  |   |        |        |     |  |        |           |  |  |  |  | 
|                     | Chief Financial Officer   |  |      |                     |  |                        |         |              |  |           |         |              |  |   |        |        |     |  |        |           |  |  |  |  | 






|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Primarily represents automobile allowances or
    annual lease payments on automobile provided by Holmes, except
    as described in Notes (2) and (4) below.

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|    |                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | In 2001, represents the payment of a signing
    bonus and related relocation expenses in connection with joining
    the Company in August 2001. In 2002, represents reimbursed
    relocation expenses and annual lease payments on automobile
    provided by Holmes.
|   
|(3) | Mr. White resigned his position effective
    March 14, 2003, but will remain a Director of the Company.                                                                                                                                                                
|   
|(4) | Represents annual living expense allowance and
    annual lease payments on an automobile provided by Holmes.                                                                                                                                                           
|   
|(5) | Mr. Kelliher joined the Company effective
    February 1, 2002.                                                                                                                                                                                                         

Option Grants in Last Fiscal Year

The following table describes stock options
granted during 2002 to the executive officers set forth in the
Summary Compensation Table above.

|                 |  |                |        |               |  |              |      |            |  |                        |      |     |  |  |            |  |  |   |         |  |  |   |         | 
|---------------- |  | -------------- | ------ | ------------- |  | ------------ | ---- | ---------- |  | ---------------------- | ---- | --- |  |  | ---------- |  |  | - | ------- |  |  | - | ------- | 
|                 |  |                |        |               |  |              |      |            |  |                       
|                 |  |                |        |               |  |              |      |            |  | Potential Realizable  
|                 |  |                |        |               |  |              |      |            |  | Value at Assumed      
|                 |  |                |        |               |  |              |      |            |  | Annual Rate of        
|                 |  | Number of      |        | Percent of    |  |              |      |            |  | Stock Price           
|                 |  | Securities     |        | Total Options |  |              |      |            |  | Appreciation          
|                 |  | Underlying     |        | Granted to    |  |              |      |            |  | for Option Term ($)(2)
|                 |  | Options        |        | Employees     |  | Exercise     |      | Expiration |  |                       
|Name             |  | Granted (#)(1) |        | in 2002       |  | Price ($/Sh) |      | Date       |  | 5%                     |      | 10%
|                 |  |                |        |               |  |              |      |            |  |                        |      |    
|John M. Kelliher |  |                | 50,000 |               |  |              | 22.8 | %          |  | $                      | 3.50 |     |  |  | 04/02/2012 |  |  | $ | 110,000 |  |  | $ | 279,000 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These options to purchase Holmes common
    stock were granted under Holmes 1997 Stock Option Plan. An
    independent valuation was made of the common stock during 2002
    that valued the common stock at $3.50 per share. This value was
    used in setting all of the option grants during 2002.                                                                                                                                                                    
|   
|(2) | Net gains from potential stock option exercises
    are estimated based on assumed rates of stock price appreciation
    over the option term as set forth in rules promulgated by the
    Securities and Exchange Commission, and are not intended to
    forecast future appreciation of Holmes common stock. The
    actual net gains, if any, are dependent on the actual future
    performance of the common stock, for which there is currently no
    public market.

Aggregated Option Exercises and Fiscal Year
End Values

The following table sets forth certain
information concerning the number and value of unexercised
options to purchase Holmes common stock at December 31,
2002.

|                     |  |             |   |             |  |                             |   |                      |  |             |         |               |  |  |         |  |  |  |   |  |  |  |   | 
|-------------------- |  | ----------- | - | ----------- |  | --------------------------- | - | -------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  |  | - |  |  |  | - | 
|                     |  |             |   |             |  |                             |   |                     
|                     |  |             |   |             |  | Number of Shares Underlying |   | Value of Unexercised
|                     |  |             |   |             |  | Unexercised Options         |   | In-the-Money        
|                     |  |             |   |             |  | at Year-End(#)              |   | Options($)(2)       
|                     |  |             |   |             |  |                             |   |                     
|Name                 |  | Exercise(#) |   | Realized($) |  | Exercisable(1)              |   | Unexercisable        |  | Exercisable |         | Unexercisable
|                     |  |             |   |             |  |                             |   |                      |  |             |         |              
|Jordan A. Kahn       |  |             |  |             |  |                             |  |                      |  |             | 561,195 |               |  |  | 227,060 |  |  |  |  |  |  |  |  | 
|Peter J. Martin      |  |             |  |             |  |                             |  |                      |  |             | 200,000 |               |  |  | 800,000 |  |  |  |  |  |  |  |  | 
|Gregory F. White     |  |             |  |             |  |                             |  |                      |  |             | 459,114 |               |  |  | 206,506 |  |  |  |  |  |  |  |  | 
|(Tommy) Woon Fai Liu |  |             |  |             |  |                             |  |                      |  |             | 78,000  |               |  |  | 32,000  |  |  |  |  |  |  |  |  | 
|John M. Kelliher     |  |             |  |             |  |                             |  |                      |  |             |        |               |  |  | 50,000  |  |  |  |  |  |  |  |  | 






|    |                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes non-qualified options whose vesting is
    tied to specific Holmes performance measures.                                                                                                                                                                                                 
|   
|(2) | Represents the assumed value of shares of
    Holmes common stock covered by outstanding in-the-money
    options, less the aggregate option exercise price. All
    outstanding options are currently at- or out-of-the-money. There
    is currently no public market for Holmes common stock.

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##### Table of Contents



Equity Compensation Plan Information

The following table provides information as of
December 31, 2002 about our equity compensation plans and
arrangements, in the aggregate.

|                                                           |  |                      |           |                     |  |                      |      |  |  |  |         | 
|---------------------------------------------------------- |  | -------------------- | --------- | ------------------- |  | -------------------- | ---- |  |  |  | ------- | 
|                                                           |  | (a)                  |           |                     |  | (c)                 
|                                                           |  | Number of Securities |           | (b)                 |  | Number of Securities
|                                                           |  | to be Issued Upon    |           | Weighted-Average    |  | Remaining Available 
|                                                           |  | Exercise of          |           | Exercise Price of   |  | for Future Issuance 
|Plan Category                                              |  | Outstanding Options  |           | Outstanding Options |  | Under Plans(2)      
|                                                           |  |                      |           |                     |  |                     
|Equity Compensation Plans Approved
    by Stockholders(1)  |  |                      | 5,424,568 |                     |  | $                    | 4.22 |  |  |  | 536,410 | 
|Equity Compensation Plans Not Approved
    by Stockholders |  |                      |          |                     |  |                      |     |  |  |  |        | 
|                                                           |  |                      |           |                     |  |                      |      |  |  |  |         | 
|Total                                                      |  |                      | 5,424,568 |                     |  | $                    | 4.22 |  |  |  | 536,410 | 
|                                                           |  |                      |           |                     |  |                      |      |  |  |  |         | 






|    |                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of Holmes 1997 Stock Option Plan,
    under which Holmes may grant incentive and non-qualified stock
    options to purchase common stock as well as restricted stock
    awards.
|   
|(2) | Excluding shares of common stock reflected in
    column (a).                                                                                                                              




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The following table sets forth certain
information regarding the beneficial ownership of Holmes
common stock. Except as indicated in the footnotes to this
table, the Company believes that the persons named in this table
have sole voting and investment power with respect to all shares
of common stock indicated.

|                                                                                            |                            |            |  |             |      |   | 
|------------------------------------------------------------------------------------------- | -------------------------- | ---------- |  | ----------- | ---- | - | 
|                                                                                            |                            |            |  | Percent of 
|                                                                                            |                            | Number of  |  | Outstanding
|Name and Address of Beneficial Owner(1)                                                     |                            | Shares     |  | Shares(2)  
|                                                                                            |                            |            |  |            
|Berkshire Fund IV, Limited Partnership(3)                                                   |                            | 15,052,594 |  |             | 74.1 | %
|Berkshire Fund V, Limited Partnership                                                       |                            |            |  |             |      |  
|                                                                                            | c/o Berkshire Partners LLC |            |  |             |      |   | 
|                                                                                            | One Boston Place           |            |  |             |      |   | 
|                                                                                            | Boston, MA 02108           |            |  |             |      |   | 
|Jordan A. Kahn(4)                                                                           |                            | 3,052,264  |  |             | 14.6 | %
|Peter J. Martin                                                                             |                            | 200,000    |  |             | *    |  
|Gregory F. White(4)                                                                         |                            | 704,233    |  |             | 3.4  | %
|(Tommy) Woon Fai Liu(4)                                                                     |                            | 222,203    |  |             | *    |  
|Richard Lubin(5)                                                                            |                            | 15,052,594 |  |             | 74.1 | %
|Randy Peeler(5)                                                                             |                            | 15,052,594 |  |             | 74.1 | %
|Fred Musone                                                                                 |                            |           |  |             | *    |  
|John M. Kelliher                                                                            |                            |           |  |             | *    |  
|All directors and executive officers as of
    December 31, 2002, as a group (9 persons)(6) |                            | 19,246,284 |  |             | 81.9 | %



---



|  |               
|- | --------------
|* | Less than 1.0%



|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless otherwise specified, the address of each
    person is c/o The Holmes Group, Inc., One Holmes Way, Milford,
    MA 01757.                                                                                                                                                                                                                                                                
|   
|(2) | Beneficial ownership is determined in accordance
    with the rules of the Commission and reflects general voting
    power and/or investment power with respect to securities. In
    addition to the 20,302,995 shares of common stock
    outstanding as of the date hereof, shares of common stock
    subject to options or warrants exercisable within 60 days
    are deemed outstanding.
|   
|(3) | Includes shares held by various investment
    entities affiliated with Berkshire Partners LLC.                                                                                                                                                                                                                                                                                                 

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Includes shares which may be held by family
    members or affiliates. Includes the following shares subject to
    vested stock options: Mr. Kahn  659,303 shares;
    Mr. Martin  200,000 shares;
    Mr. White  532,695 shares;
    Mr. Liu  88,000 shares. With respect to
    Mr. Kahn, includes 189,472 shares held in trust for
    employees of the Company as to which Mr. Kahn is voting
    trustee. Mr. Kahn disclaims beneficial ownership of such
    shares.
|   
|(5) | This person is affiliated with Berkshire Partners
    LLC and may be deemed to have a beneficial interest in certain
    of the shares held by its affiliates. This person disclaims
    beneficial ownership of shares in which he has no pecuniary
    interest.                                                                                                                                                                                                             
|   
|(6) | Includes stock options and voting trust shares
    referred to in Note 4 and the shares referred to in
    Note 5, as well as an additional 15,000 exercisable option
    shares issued to Mr. Cimini.                                                                                                                                                                                                                                                                         




Item 13.Certain
Relationships and Related Transactions

Pursuant to a letter agreement dated
December 10, 1998 with two investment funds affiliated with
Berkshire Partners (the letter Agreement), Berkshire Partners
received a fee of $2.0 million from Holmes as of the
closing of the Rival acquisition. Pursuant to a Management
Agreement (the Management Agreement), entered into in November
1997 in connection with the 1997 Transactions, Berkshire
Partners received a $1.5 million fee from Holmes and an
annual fee of $400,000 per year for the provision of management
and advisory services. The Letter Agreement increased the annual
management fee to $500,000 following the closing of the Rival
acquisition. The Management Agreement will be in effect until
November, 2003, provided that the Management Agreement will
terminate on the later of the first date that (i) Berkshire
Partners owns less than 40.0% of Holmes common stock on a
fully diluted basis, and (ii) Berkshire Partners owns fewer
common shares than the members of Holmes management, taken
as a group, or fewer shares than any other single stockholder.
Berkshire Partners is also entitled to designate two of
Holmes directors and has the right, at its election, to
increase the size of the Board of Directors and the number of
directors designated by it by an additional two directors.
From time to time, Holmes may pay additional consulting or other
fees to Berkshire Partners.

Effective May 7, 2001, Holmes agreed to pay
the two investment funds affiliated with Berkshire Partners a
guarantee fee as consideration for Berkshires guarantee of
up to $43.5 million of the obligations under the Credit
Facility. Payment of these fees is subordinated to our
obligations under the Credit Facility. As amended effective
March 22, 2002, the guarantee fee arrangement provides for
payment of a fee of 2.25% per annum, compounded annually, on the
$40.0 million Revolving Credit Loan B commitment, less
the portion of this facility designated as subordinated debt
funding loans (which potion is subordinated to the other
obligations under the Credit Facility), on which portion such
fee is 20% per annum, compounded annually.

During 2001, investment funds affiliated with
Berkshire Partners purchased the Companys Senior
Subordinated Notes due 2007 on the open market. They purchased
approximately $36.2 million principal amount of bonds,
which the Company purchased from the Berkshire Partners funds at
cost plus accrued interest (approximately $12.8 million) as
part of the Fifth Amendment to the Credit Facility as fully
described in Note 8 of Notes to Consolidated Financial
Statements under Item 8 of this Report.

Since its inception in 1982, Holmes has retained
Jordan Kahn Co, Inc. (JKC), a corporation owned by
Jordan A. Kahn, to serve as a sales representative for
Holmes in the northeastern United States. Pursuant to a
representation agreement between Holmes and JKC, Holmes has
agreed to pay to JKC a commission on net sales to JKCs
customers in its territory, which fee is the same fee paid by
Holmes to other unaffiliated sales representative organizations
representing Holmes in other territories throughout the United
States. Pursuant to this arrangement, Holmes paid a total of
$337,000, $215,000 and $235,000 to JKC for the years ended
December 31, 2000, 2001 and 2002, respectively.

In connection with the November 1997
recapitalization transactions, Holmes purchased a portion of the
shares of common stock of Holmes beneficially owned by an
affiliate of Pentland, its former majority stockholder. At that
time, Holmes entered into new employment agreements with
Messrs. Kahn, Rosenzweig, White and Liu, and made certain
payments to Messrs. Kahn and White in connection with

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the 1997 transactions. The agreement with
Mr. Kahn was modified during fiscal 2001 and in March 2003.
Holmes entered into an employment agreement with Peter Martin in
connection with his joining Holmes in August 2001. The material
terms of these employment agreements are described above in
Note 14 of Notes to Consolidated Financial Statements under
Item 8 of this Report.





Item 14.Controls
and Procedures

(a) Evaluation of disclosure controls and
procedures.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Within 90 days prior to the date of this
    report, Holmes carried out an evaluation under the supervision
    and with the participation of management, including the
    Companys Chief Executive Officer and Chief Financial
    Officer, of the effectiveness of the design and operation of our
    disclosure controls and procedures pursuant to Exchange Act
    Rule 13a-14. Based upon that evaluation, the Chief
    Executive Officer and Chief Financial Officer concluded that our
    disclosure controls and procedures are effective in timely
    alerting them to material information relating to Holmes
    (including its consolidated subsidiaries) required to be
    included in its periodic filings with the Securities and
    Exchange Commission.

(b) Changes in internal controls.



| |      
| | -----
| | None.




PART IV




Item 15.Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

(a) The following documents are filed as a
part of this Report.



| |    |                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Financial Statements are listed in the Index to
    Consolidated Financial Statements contained in Item 8 of
    this Report.                                  
|
| | 2. | Financial Statement Schedules, to the extent
    required, are listed in the Index to Consolidated Financial
    Statements contained in Item 8 of this Report.
|
| | 3. | Exhibits are listed in subsection (c) below.                                                                                                                   

(b) Reports on Form 8-K:



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We filed a Current Report on Form 8-K on
    December 10, 2002 reporting certain restructuring actions
    including the closure of the Companys domestic
    manufacturing facilities.

(c) Exhibits:

|        |      |             |  |                                                                                                   
|------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 3.1  |             |  | Articles of Organization (as amended) of The
    Holmes Group, Inc. f/k/a Holmes Products Corp.(1)
|        | 3.2  |             |  | Articles of Organization of Holmes Manufacturing
    Corp.(1)                                     
|        | 3.3  |             |  | Articles of Organization of Holmes Air (Taiwan)
    Corp.(1)                                      
|        | 3.4  |             |  | Certificate of Incorporation of Holmes Motor
    Corp.(4)                                         
|        | 3.5  |             |  | Restated Certificate of Incorporation (as
    amended) of The Rival Company(4)                    
|        | 3.6  |             |  | Certificate of Incorporation (as amended) of
    Rival Consumer Sales Corporation(4)              
|        | 3.7  |             |  | Bylaws (as amended) of The Holmes Group, Inc.
    f/k/a Holmes Products Corp.(1)                  
|        | 3.8  |             |  | By-laws of Holmes Manufacturing Corp.(1)                                                          
|        | 3.9  |             |  | By-laws of Holmes Air (Taiwan) Corp.(1)                                                           
|        | 3.10 |             |  | By-laws of Holmes Motor Corp.(4)                                                                  
|        | 3.11 |             |  | By-laws of The Rival Company(4)                                                                   
|        | 3.12 |             |  | By-laws of Rival Consumer Sales Corporation(4)                                                    

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|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 4.1   |             |  | Stockholders Agreement dated November 26,
    1997 among The Holmes Group, Inc. f/k/a Holmes Products Corp.
    and certain stockholders thereof(1)                                                                                                                                                                                                                                                                     
|        | 4.2   |             |  | Registration Rights Agreement dated November 26,
    1997 among The Holmes Group, Inc. f/k/a Holmes Products Corp.
    and certain stockholders thereof(1)                                                                                                                                                                                                                                                               
|        | 4.3   |             |  | Indenture dated November 26, 1997 among The
    Holmes Group, Inc. f/k/a Holmes Products Corp., Holmes
    Manufacturing Corp., Holmes Air (Taiwan) Corp. and State Street
    Bank and Trust Company(1)                                                                                                                                                                                                                 
|        | 4.4   |             |  | Form of Senior Subordinated Notes due 2007 
    (Included in Exhibit 4.3)(1)                                                                                                                                                                                                                                                                                                                                            
|        | 4.5   |             |  | Form of Note Guaranty  (Included in Exhibit
    4.3)(1)                                                                                                                                                                                                                                                                                                                                                                 
|        | 4.6   |             |  | First Supplemental Indenture and Guarantee dated
    October 14, 1998 among The Holmes Group, Inc. f/k/a Holmes
    Products Corp., Holmes Manufacturing Corp., Holmes Air (Taiwan)
    Corp., Holmes Motor Corp. and State Street Bank and Trust
    Company(4)                                                                                                                                                         
|        | 4.7   |             |  | Indenture dated February 5, 1999 among The Holmes
    Group, Inc. f/k/a Holmes Products Corp., Holmes Manufacturing
    Corp., Holmes Air (Taiwan) Corp., Holmes Motor Corp., The Rival
    Company, Patton Electric Company, Inc., Patton Building
    Products, Inc., Rival Consumer Sales Corporation and State
    Street Bank and Trust Company(3)                                                                  
|        | 4.8   |             |  | First Amendment to Registration Rights Agreement
    dated February 5, 1999 among The Holmes Group, Inc. f/k/a
    Holmes Products Corp. and certain stockholders thereof(4)                                                                                                                                                                                                                                             
|        | 4.9   |             |  | First Amendment to Stockholders Agreement
    dated February 5, 1999 among The Holmes Group, Inc. f/k/a
    Holmes Products Corp. and certain stockholders thereof(4)                                                                                                                                                                                                                                                   
|        | 4.10  |             |  | Second Supplemental Indenture and Guarantee dated
    February 5, 1999 among The Holmes Group, Inc. f/k/a Holmes
    Products Corp., Holmes Manufacturing Corp., Holmes Air (Taiwan)
    Corp., Holmes Motor Corp., Moriarty Acquisition Corp., The Rival
    Company, Patton Electric Company, Inc., Patton Building
    Products, Inc., Rival Consumer Sales Corporation and State
    Street Bank and Trust Company(4)
|        | 10.1  |             |  | Stock Purchase and Redemption Agreement dated as
    of October 27, 1997, as amended as of November 25,
    1997, among Asco Investments Ltd., Jordan A. Kahn, The
    Holmes Group, Inc. f/k/a Holmes Products Corp., Holmes Products
    (Far East) Limited and Holmes Acquisition LLC(1)                                                                                                                              
|        | 10.2  |             |  | Stock Purchase Agreement dated as of
    October 27, 1997 among Jordan A. Kahn and Holmes
    Acquisition LLC(1)                                                                                                                                                                                                                                                                                                         
|        | 10.3  |             |  | Executive Employment and Non-Competition
    Agreement dated November 26, 1997 among The Holmes Group,
    Inc. f/k/a Holmes Products Corp. and Jordan A. Kahn
    (superceded by Exhibit 10.27)(1)                                                                                                                                                                                                                      
|        | 10.4  |             |  | Executive Employment and Non-Competition
    Agreement dated November 26, 1997 among The Holmes Group,
    Inc. f/k/a Holmes Products Corp. and Stanley Rosenzweig(1)                                                                                                                                                                                                                                                    
|        | 10.5  |             |  | Executive Employment and Non-Competition
    Agreement dated November 26, 1997 among The Holmes Group,
    Inc. f/k/a Holmes Products Corp. and Gregory F. White(1)                                                                                                                                                                                                                                                      
|        | 10.6  |             |  | Employment Agreement dated November 16, 1997
    among Holmes Products (Far East) Limited and (Tommy) Woon Fai
    Liu(1)                                                                                                                                                                                                                                                                                                
|        | 10.7  |             |  | The Holmes Group, Inc. f/k/a Holmes Products
    Corp. Amended and Restated 1997 Stock Option Plan(4)                                                                                                                                                                                                                                                                                                                    
|        | 10.8  |             |  | The Holmes Group, Inc. f/k/a Holmes Products
    Corp. Employee Stock Purchase Plan(4)                                                                                                                                                                                                                                                                                                                                   
|        | 10.9  |             |  | Agreement and Plan of Merger dated
    December 17, 1998, by and among The Holmes Group, Inc.
    f/k/a Holmes Products Corp., Moriarty Acquisition Corp. and The
    Rival Company(2)                                                                                                                                                                                                                                   
|        | 10.10 |             |  | Confidentiality Agreement dated October 1,
    1998, by and between The Holmes Group, Inc. f/k/a Holmes
    Products Corp. and BancAmerica Securities, Inc., on behalf of
    The Rival Company(2)                                                                                                                                                                                                                       
|        | 10.11 |             |  | Purchase Agreement dated as of January 29,
    1999 among The Holmes Group, Inc. f/k/a Holmes Products Corp.,
    BancBoston Robertson Stephens Inc. and Lehman Brothers Inc.(2)                                                                                                                                                                                                                                         
|        | 10.12 |             |  | Investors Subscription Agreement dated
    February 5, 1999 by and among The Holmes Group, Inc. f/k/a
    Holmes Products Corp. and certain investors(3)                                                                                                                                                                                                                                                                 

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|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.13 |             |  | Amended and Restated Revolving Credit and Term
    Loan Agreement dated as of February 5, 1999 among The
    Holmes Group, Inc. f/k/a Holmes Products Corp., Moriarty
    Acquisition Corp., The Rival Company, Holmes Products (Far East)
    Limited, Esteem Industries Limited, Raider Motor Corporation,
    Holmes Products (Europe) Limited, Bionaire International B.V.,
    Patton Electric Hong Kong, Limited, and The Rival Company of
    Canada, Ltd., BankBoston, and the other lending institutions
    party thereto, BankBoston, N.A. as Administrative Agent and
    Lehman Commercial Paper Inc. as Documentation Agent, with
    BancBoston Robertson Stephens Inc. as Syndication Agent and
    Arranger and Lehman Brothers Inc. as Co-Arranger(3)
|        | 10.14 |             |  | Asset Purchase Agreement dated October 1,
    1999 by and among The Holmes Group, Inc. f/k/a Holmes Products
    Corp., The Rival Company and Sta-Rite Industries(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.15 |             |  | Agreement of Purchase and Sale of Assets dated
    December 21, 1999 by and among The Holmes Group, Inc., The
    Rival Company, Patton Building Products, Inc., Patton Electric
    Company, Inc. and The Marley Company(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.16 |             |  | Employee Stockholders Agreement dated
    April 23, 1998(7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.17 |             |  | Voting Trust Agreement dated April 23, 1998(7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.18 |             |  | Lease Agreement between The Holmes Group, Inc.
    and ACRE HPC, LLC dated as of January 7, 2000(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.19 |             |  | Form of Second Amendment to Amended and Restated
    Revolving Credit and Term Loan Agreement dated as of
    June 30, 2000 by and among The Holmes Group, Inc., its
    subsidiaries party thereto, and the lenders party thereto(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.20 |             |  | Amendment to Lease Agreement between The Holmes
    Group, Inc. and ACRE HPC, LLC dated as of December 21,
    2000(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.21 |             |  | Form of Forbearance Agreement and Third Amendment
    dated as of April 13, 2001 by and among The Holmes Group,
    Inc., its subsidiaries party thereto, and the lenders party
    thereto(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.22 |             |  | Form of Fourth Amendment to Amended and Restated
    Revolving Credit and Term Loan Agreement and Limited Waiver
    dated as of May 7, 2001 by and among The Holmes Group,
    Inc., its subsidiaries party thereto, and the lenders party
    thereto(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.23 |             |  | Form of Warrant Purchase Agreement and Common
    Stock Purchase Warrant dated as of May 7, 2001 by and among
    The Holmes Group, Inc. and the lenders party thereto, as
    investors(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.24 |             |  | Form of Co-Sale Agreement dated as of May 7,
    2001 by and among The Holmes Group, Inc., certain affiliates of
    Berkshire Partners LLC, and the lenders party thereto, as
    investors(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10.25 |             |  | Executive Employment and Non-Competition
    Agreement dated August 1, 2001 between The Holmes Group, Inc.
    and Peter J. Martin(11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.26 |             |  | Agreement of Purchase and Sale of Assets relating
    to the Pollenex division dated January 11, 2002, among The
    Holmes Group, Inc., The Rival Company, and Conair Corporation(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.27 |             |  | Executive Employment and Non-Competition
    Agreement dated February 1, 2002 between The Holmes Group,
    Inc. and Jordan A. Kahn(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.28 |             |  | Form of Fifth Amendment to Amended and Restated
    Revolving Credit and Term Loan Agreement dated as of
    March 22, 2002 by and among The Holmes Group, Inc., its
    subsidiaries party thereto, and the lenders party thereto(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.29 |             |  | Letter agreement regarding guaranty fees dated
    March 22, 2002 by and among The Holmes Group, Inc., its
    subsidiaries party thereto, and certain affiliates of Berkshire
    Partners LLC(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.30 |             |  | Amendment to Executive Employment and
    Non-Competition Agreement dated March 17, 2003 between The
    Holmes Group, Inc. and Jordan A. Kahn(14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 21.1  |             |  | Subsidiaries of Registrant(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 23.1  |             |  | Consent of PricewaterhouseCoopers LLP(14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              






| |     |                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the
    Registrants Registration Statement on Form S-4, as
    amended (Registration No. 333-44473). 
|
| | (2) | Incorporated by reference to the
    Registrants Tender Offer Statement on Schedule 14D-1
    dated December 23, 1998, as amended.
|
| | (3) | Incorporated by reference to the
    Registrants Current Report on Form 8-K dated
    February 5, 1999.                           

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##### Table of Contents





| |     |                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------
| | (4) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 1998.     
|
| | (5) | Incorporated by reference to the
    Registrants Current Report on Form 8-K dated
    October 8, 1999.                           
|
| | (6) | Incorporated by reference to the
    Registrants Current Report on Form 8-K dated
    December 21, 1999.                         
|
| | (7) | Incorporated by reference to the
    Registrants Registration Statement on Form S-4, as
    amended (Registration No. 333-77905).
|
| | (8) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 1999.     
|
| | (9) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2000.          



|     |                                                                                                                              
|---- | -----------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2000.
|    
|(11) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.
|    
|(12) | Incorporated by reference to the
    Registrants Current Report on Form 8-K dated
    January 14, 2002.                     
|    
|(13) | Incorporated by reference to Registrants
    Annual Report on Form 10-K for the fiscal year ended
    December 31, 2001.    
|    
|(14) | Filed herewith.                                                                                                              

74



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                       
| | ----------------------
| | THE HOLMES GROUP, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ PETER J. MARTIN

| |                           
| | --------------------------
| |                           
| | Peter J. Martin, President
| | Chief Executive Officer   

Dated: March 27, 2003

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                             |  |                                                                                                    |  |               
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                    |  | Title                                                                                              |  | Date          
|                                             |  |                                                                                                    |  |               
|/s/ PETER J. MARTINPeter J. Martin           |  | President, Chief Executive Officer and
    Director (Principal Executive Officer)                  |  | March 27, 2003
|/s/ JOHN M. KELLIHERJohn M. Kelliher         |  | Senior Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | March 27, 2003
|/s/ JORDAN A. KAHNJordan A. Kahn             |  | Chairman of the Board of Directors                                                                 |  | March 27, 2003
|/s/ GREGORY F. WHITEGregory F. White         |  | Director                                                                                           |  | March 27, 2003
|/s/ RICHARD LUBINRichard Lubin               |  | Director                                                                                           |  | March 27, 2003
|/s/ RANDY PEELERRandy Peeler                 |  | Director                                                                                           |  | March 27, 2003
|/s/ FRED J. MUSONEFred J. Musone             |  | Director                                                                                           |  | March 27, 2003
|/s/ (TOMMY) WOON FAI LIU(Tommy) Woon Fai Liu |  | Director                                                                                           |  | March 27, 2003

75



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##### Table of Contents



CERTIFICATION PURSUANT TO SECTION 302
OF

THE SARBANES-OXLEY ACT OF 2002


I, Peter J. Martin, certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this Annual Report on
    Form 10-K for the year ended December 31, 2002 of The
    Holmes Group, Inc.                                                                                                                                                                                                                      
|
| | 2. Based on my knowledge, this Annual Report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    Annual Report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    Annual Report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    Registrant as of, and for, the periods presented in this report;                              
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the Registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. Designed such disclosure controls and
    procedures to ensure that material information relating to the
    Registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this Annual Report is being prepared;
|
| | b. Evaluated the effectiveness of the
    Registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of the Annual
    Report (the Evaluation Date); and                                                                                                       
|
| | c. Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The Registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the Registrants auditors and the Audit
    Committee of Registrants Board of Directors
    (or persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the Registrants ability to record, process,
    summarize and report financial data and have identified for the
    Registrants auditors any material weaknesses in internal
    controls; and
|
| | b. Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The Registrants other certifying
    officer and I have indicated in the Annual Report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/  PETER J. MARTIN                     
| |                                          
| | Peter J. Martin                          
| | President and Chief Executive
    Officer

Date: March 27, 2003

76



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##### Table of Contents



CERTIFICATION PURSUANT TO SECTION 302
OF

THE SARBANES-OXLEY ACT OF 2002


I, John M. Kelliher, certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this Annual Report on
    Form 10-K for the year ended December 31, 2002 of The
    Holmes Group, Inc.                                                                                                                                                                                                                      
|
| | 2. Based on my knowledge, this Annual Report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    Annual Report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    Annual Report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    Registrant as of, and for, the periods presented in this report;                              
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the Registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. Designed such disclosure controls and
    procedures to ensure that material information relating to the
    Registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this Annual Report is being prepared;
|
| | b. Evaluated the effectiveness of the
    Registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of the Annual
    Report (the Evaluation Date); and                                                                                                       
|
| | c. Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The Registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the Registrants auditors and the Audit
    Committee of Registrants Board of Directors
    (or persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the Registrants ability to record, process,
    summarize and report financial data and have identified for the
    Registrants auditors any material weaknesses in internal
    controls; and
|
| | b. Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The Registrants other certifying
    officer and I have indicated in the Annual Report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                          
| | -------------------------
| | /s/  JOHN M. KELLIHER    
| |                          
| | John M. Kelliher         
| | Senior Vice President and
| | Chief Financial Officer  

Date: March 27, 2003

77