<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 333-62021
HOME INTERIORS & GIFTS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
TEXAS 75-0981828
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4550 SPRING VALLEY ROAD
DALLAS, TEXAS 75244
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (972) 386-1000.
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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. [ X ]
The common stock of the registrant is not publicly registered or traded and
therefore no market value, whether held by affiliates or non-affiliates, can
readily be ascertained.
As of March 10, 1999, 15,234,422 shares of the Company's Common Stock, par
value $0.10 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1957, Home Interiors & Gifts, Inc., a Dallas based Texas
corporation (the "Company"), believes it is the largest direct seller of home
decorative accessories in the United States, as measured by sales. The
Company's products include framed artwork and mirrors, plaques, candles and
candle holders, figurines, planters, artificial floral displays, wall shelves
and sconces (the "Products"). The Company sells the Products to non-employee,
independent contractor sales representatives ("Displayers") who resell the
Products using the "party-plan" method to conduct in-home gatherings or shows
("Shows") for potential customers. The Company believes that in-home Shows
provide a comfortable environment where the unique benefits and attributes of
the Company's Products can be demonstrated in a more effective manner than the
typical retail setting. As of December 31, 1998, the Company sold its Products
to approximately 54,500 Displayers, 52,800 of whom were located in the United
States and the remainder of whom were located in Mexico and Puerto Rico.
The Company purchases Products from a select number of independent
suppliers and its own subsidiaries. Approximately one-third of the dollar
volume of Products purchased by the Company in 1998 were purchased from and
manufactured by the Company's subsidiaries. The Company's subsidiaries sell
substantially all of their products to the Company. The following is a brief
description of the Company's subsidiaries, each of which is wholly-owned except
as indicated:
o Dallas Woodcraft, Inc. ("DWC") manufactures framed art work and
mirrors using custom-designed equipment.
o GIA, Inc. ("GIA") and Homco, Inc. ("Homco") manufacture various
types of molded plastic products using custom-designed equipment.
o Laredo Candle Company L.L.P. ("Laredo Candle"), which is owned
60% by the Company, was recently established and is anticipated
to begin manufacturing candles in late 1999.
o Spring Valley Scents, Inc. ("SVS") purchased candles from a third
party and resold the candles to the Company until February 1999.
Once Laredo Candle is operational in late 1999, it will replace
the business previously done through SVS. In the interim, candles
will be purchased directly from such third party.
o Homco de Mexico, S.A. de C.V. and Homco Puerto Rico, Inc. provide
sales support services to the international Displayers.
Since its inception, the Company has sold a coordinated line of
Products to Displayers, a group of independent and self-confident women who
operate their own businesses by purchasing the Products from the Company and
reselling them to customers. The Company continues to stress the importance and
dignity of women, a philosophy adopted by its founder, Mary Crowley. This
philosophy remains deeply imbedded in the Company's training, motivation and
selling strategies. The Company believes that this philosophy has contributed
to its ability to attract and retain loyal Displayers and to distinguish its
products in the marketplace by the value placed on the integrity of Displayers
and quality of the Company's customer service and products. The Company also
believes that by providing Displayers with the appropriate support and
encouragement, Displayers can achieve personally satisfying and financially
rewarding careers by enhancing the home environments of their customers.
See also "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- The Recapitalization."
PRODUCTS
Product Line. The Company's product line consists of approximately 850
items. The best selling Products are framed artwork and mirrors, plaques,
figurines, candles and candle holders, sconces and artificial floral displays.
Most of the Products are designed for display and sale in coordinated
decorative groupings, which encourages customers to purchase several
accessories to achieve a "complete" look. In general, the Products fit within
design categories that are favored by Displayers and their customers, such as
American (including Western and Country themes), Victorian and Traditional. The
Company offers a limited selection of seasonal Products, primarily for the
Christmas season.
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Prices. Products are targeted to women who are interested in
decorating their homes, but have a limited budget. The Company's Products are
primarily sold throughout the continental United States at suggested retail
prices generally below $100 per item, with approximately 80% of the Products
ranging in price from $7 to $30. Although Displayers may sell the Products at
any price, the Company believes that most Displayers charge the Company's
suggested retail prices. The Company believes that the suggested retail prices
of the Products are lower than the prices of products of similar quality and
design available from other sources, thereby offering the Displayers' customers
excellent value. In addition, unlike many other direct sales companies which
the Company believes charge their customers shipping costs, the Company
delivers its Products to the Displayers free of charge if minimum order sizes
are met.
Product Design and Introduction Process. Because the Company believes
that it is important to its success to develop and introduce new Products that
anticipate and reflect changing consumer preferences, the Company's merchandise
department regularly coordinates new Product introductions. Members of that
department attend furniture and home-furnishings trade markets, frequently meet
with Displayers and suppliers and assemble information from retail stores and
retail research sources to determine consumer buying trends, thereby enabling
them to analyze the marketability of existing Products and identify and design
new Products. Products are frequently evaluated to determine whether they
should be modified or removed from the product line. The Company annually
distributes numerous proposed or prototype items to selected Displayers for
review, including a determination of whether the proposed suggested retail
prices are attractive. Based on that review, the Company replaces approximately
one-third of its Products each year with new items.
SALES METHODS AND ORGANIZATION
Displayers. The Company's marketing and sales strategy is focused on
motivating Displayers to purchase the Products from the Company and resell them
to their customers. Because the Company does not use mail-order catalogs,
retail outlets or other methods of distribution, it is entirely dependent on
Displayers to purchase and sell the Products. No Displayer is an employee of
the Company, and, as independent contractors, all Displayers are responsible
for operating their own businesses. Displayers generally work on a part-time
basis.
Displayers can profit from the difference between the purchase price
of the Products paid to the Company and the sales price charged to their
customers, which for Displayers who are not directors is their principal source
of profit. If Displayers sell the Products at the suggested retail prices, they
generally can earn 40% gross profit. Displayers can also earn money and prizes
based on the dollar amount of Products purchased from the Company by them and
the Displayers they have recruited. In addition, Displayers can benefit from
periodic discounts and incentives offered by the Company. See "-- Training and
Sales Support."
Generally, Displayers pay for Products ordered from the Company at the
time the order is placed, although the Company typically provides each
Displayer an unsecured line of credit of up to $2,000. The Company periodically
modifies each Displayer's credit limit based on her sales volumes.
Displayers are contractually prohibited from marketing goods other
than the Products at Shows conducted for the purpose of selling Products. In
addition, Displayers who become qualified trainers ("Trainers") or directors
are prohibited from working for or selling the products of any other direct
selling company whose products or services directly compete with the Company's.
Shows. The principal sales method used by Displayers is the "party
plan," in which Displayers conduct Shows in the homes of other women who, by
arrangement with the Displayers, serve as hostesses for the Shows
("Hostesses"). Each Show is attended by guests who have been invited by the
Hostess for that Show. At a Show, a Displayer will display representative
groups of Products and color brochures showing the Company's entire product
line. The typical Show lasts several hours. Initially, the Displayer
demonstrates the Products, but most of the time is devoted to each guest's
decorating interests or needs and to taking orders for Products. Typically,
Products are paid for at the time they are ordered and are delivered to the
Hostess within two weeks after the Show. The Company believes that Shows create
group enthusiasm for the Products, enable Displayers to increase sales, offer
the opportunity for Displayers to develop new customers and provide Displayers
the opportunity to recruit new Hostesses and Displayers. At each Show, in
addition to selling Products, Displayers promote to the guests the benefits of
being a Hostess or Displayer.
Hostesses are critical to a Displayer's success. A Hostess is
responsible for inviting the guests, or prospective customers, to a Show and
later for distributing the purchased Products to each customer. To reward the
Hostess for her efforts, the Displayer purchases redeemable coupons ("Hostess
merits") from the Company and provides her Hostess
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with Hostess merits commensurate with the sales generated at the Show and with
the number of guests who agree to become a Hostess for a future Show. The
Hostesses may redeem Hostess merits for Products which are available
exclusively to Hostesses. In mid-1996, the Company introduced an incentive
program (the "Hostess Bonus Buy Program") which allowed Hostesses who achieved
specified Show sales levels to purchase Products at substantial discounts.
In addition to sales generated at Shows, Displayers also receive
orders generated from Product brochures which are distributed at Shows or by
Displayers and Hostesses at other locations. Each brochure is produced by the
Company's in-house photography studio and contains pictures of the Products.
The Company produces both quarterly brochures containing the Company's complete
product line and supplemental monthly brochures containing the newest and most
popular Products. All brochures have a place for the Displayer to insert her
personal contact information since Products cannot be purchased by customers
directly from the Company.
TRAINING AND SALES SUPPORT
Field Organization. The Company's training and sales support for
Displayers is designed to promote contact between less experienced or active
Displayers and more experienced or active Displayers. The Company groups
Displayers into "Units" for training and motivational purposes. In the United
States, the number of Displayers in a Unit ranges from 15 to 280, with an
average of approximately 68 Displayers. Approximately 770 Units are headed by
either a "Branch director" or a "Unit director" and each Unit is grouped with
other Units to constitute a "Branch." The number of Units in a Branch ranges
from five to twelve, with an average of approximately eight Units. As of
December 31, 1998, there were approximately 100 Branches in the United States,
each of which was headed by a Branch director. In addition, Branches are
grouped into "Districts," and twelve District directors travel the United
States, Mexico and Puerto Rico, motivating, training and inspiring Branch
directors. All "directors" are independent contractors and not employees of the
Company.
Recruiting and Training. Because the average annual Displayer turnover
during the last three years approximated 40%, it is vital to the Company's
success to consistently recruit new Displayers. Accordingly, the Company
provides Displayers with additional financial rewards and the possibility of
promotions to different director categories for recruiting Displayers who
become successful saleswomen. The Company's ability to recruit, train, motivate
and retain Displayers depends upon, among other things:
o the managerial capabilities and personal charisma of the
Company's senior management;
o the Company's ability to offer an attractive business opportunity
to Displayers by enabling them to achieve acceptable profit
margins on the resale of Products;
o the Company's ability to provide adequate and timely recruiting
and training incentives to existing Displayers;
o the introduction of new Products and marketing concepts;
o the effectiveness of the Company's commission and incentive
programs and discounts; and
o general economic conditions.
As part of their marketing and sales activities, Displayers seek to
identify and recruit new Displayers, typically women who have attended Shows.
Once a candidate is identified, a qualified person in the recruiting
Displayer's Unit typically interviews the candidate to explain the
opportunities, time commitment, start-up costs, training and other activities a
Displayer can expect to experience.
Though any Displayer can recruit an individual, only Displayers who
are Trainers may train a Displayer candidate. To become a Trainer, a Displayer
must have demonstrated previous recruiting success, have been recommended by
her Branch director and have attended training classes at the Company's
headquarters. The Company has certified approximately 2,000 of its Displayers
as Trainers who earn commissions on the Product sales of recruits they train.
In 1998, Trainers earned commissions of $3.2 million. When the recruiting and
sales volume of a Trainer and her recruits reach certain levels, she may be
permitted to form a new Unit and become a Unit director.
The Company believes that training is a critical component of a
Displayer's success. The Company emphasizes sales of the Products and typically
requires all recruits to participate in an intensive sales-education program.
The Company encourages Displayers to recruit new Displayers who will sell
Products to customers rather than merely purchasing items for personal
consumption. In contrast, the Company believes that many other direct selling
companies encourage recruiting of new sales people irrespective of the future
sales potential of the new recruits. The training
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program includes studying a "training portfolio," instruction by a Trainer and
observing several Shows conducted by experienced Displayers. The training
portfolio consists of video tapes, audio tapes and a corresponding workbook
that describe the Company, the process of contacting Hostesses and booking
Shows, conducting Shows and managing a home-based business. New Displayers also
obtain detailed instructions from their Trainer about the Products, fundamental
elements of home decorating and methods for conducting successful Shows.
Continuing Training and Motivation. The Company believes that
Company-sponsored continuing training and motivation of Displayers is critical
to Displayer morale and, therefore, to the Company's sales. The Company hosts a
three-day annual seminar for all Displayers. At that seminar, the Company
provides motivational speakers, product displays, entertainment and meals, and
conducts ceremonies to recognize the Displayers. The Company also sponsors
one-day or two-day "rallies" every August, at locations across the United
States, to introduce the Company's fall product line, including its Christmas
seasonal merchandise.
Every two weeks, the Company mails each Displayer a newsletter that
announces new incentive programs or discounts, discusses selling techniques,
motivational strategies and Product status, as well as recognizes successful
Displayers. Unit directors typically hold weekly sales meetings for the
Displayers in their Unit, and Branch directors hold quarterly meetings for the
Unit directors and the Displayers in their Branch to discuss selling
techniques, motivation strategies, Product introductions and sales recognition.
Incentive Programs. In addition to the 40% gross profit Displayers can
earn through the purchase and resale of the Products, the Company provides
incentives to Displayers by rewarding top-performing Displayers with cash,
vacation trips, gifts and other prizes. The incentive rewards, which vary
annually, are based on the volume of Products purchased from the Company by a
Displayer. The Company also provides a variety of discount programs in
connection with Product purchases and rewards Displayers who recruit other
Displayers who become successful saleswomen.
Remuneration. Directors can earn commissions at varying rates based on
the volume of Product purchases of the Displayers they service. Directors are
also eligible for performance bonuses. Branch and Unit Directors earned
commissions, including performance bonuses, of $40.0 million in 1998. District
directors also receive a monthly amount for each Unit they service, plus an
annual payment based on the percentage of their District's annual increase in
Product purchases. District directors earned $3.1 million in 1998. In addition,
Branch directors and District directors are reimbursed for certain travel and
other expenses. Reimbursed expenses totaled $4.3 million in 1998.
PRODUCT SUPPLY AND MANUFACTURING
Approximately one-third of the dollar volume of Products purchased by
the Company in 1998 were purchased from and manufactured by the Company's
subsidiaries. The Company manufactures framed artwork and mirrors, plaques, and
various types of molded plastic products through the use of custom-designed
equipment. To date, the Company has been able to secure an adequate supply of
raw materials for its manufacturing operations from numerous sources and the
Company does not expect any material interruptions in the supply of raw
materials it uses to manufacture Products.
Products not manufactured by the Company are purchased from
approximately 25 foreign and domestic suppliers. The Company is either the
largest or the only customer of many of its suppliers and most of its Products
are manufactured exclusively for the Company. The Company believes that its
relationships with its suppliers are good. The Company has not had any material
interruptions in the supply of Products it purchases from suppliers. Other than
H.T. Ardinger & Son Company and Oxford International, which supplied the
Company with 14% and 12%, respectively, of its Products in 1998, no third-party
supplier furnished the Company with more than 10% of its Products during 1998.
See "Item 13. Certain Relationships and Related Transactions -- Relationships
with H.T. Ardinger & Son Company." Many of the Company's supplier relationships
have existed for more than 20 years, and the Company has experienced little
supplier turnover in the recent years. However, because the Company has no
written supply agreement with any supplier, each relationship may be terminated
at any time by either party.
PRODUCT DISTRIBUTION
Displayers typically submit purchase orders to the Company's
headquarters weekly, with each Displayer being assigned one order processing
day. Upon receipt, orders are recorded and the Displayer's recent sales
activity and credit and accounts receivable status are automatically verified.
Each purchase order is then forwarded to one of the Company's distribution
centers, where it is filled and shipped generally on the same day it is
received.
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Because the Products vary significantly in size, the Company fills
orders manually. The Company has been able to achieve freight savings, minimize
Product damage and returns and increase timely delivery by, among other things,
(i) using an order-checking system which uses electronic scanners and bar codes
to minimize errors in filling orders, (ii) packaging each order in
standard-sized boxes, and (iii) preparing shipping labels that are tailored to
the requirements of each specific common carrier. The Company is able to track
each order shipped through approximately 100 common carriers.
To minimize shipping costs, the Company utilizes a two-step process in
which common carriers ship full truck loads of Products to approximately 190
regional delivery sites where locally-based freight distributors ("Local
Distributors") sort the full loads and deliver the Products to each Displayer.
Approximately 75% of the Products shipped by the Company are delivered in this
manner. In cases where Local Distributors are not used, the Products are
shipped by common carriers directly to Displayers.
When the Displayer receives her bulk packaged order, she unwraps,
inspects and repackages the items for individual customers and typically
delivers them to her Hostesses for delivery to the customers. Displayers
sometimes contact customers to confirm their satisfaction with their Products.
Multiple contacts with Hostesses and customers provide Displayers with
opportunities to provide information regarding the Company and its Products,
which assist in the Displayers' sales and recruiting efforts.
COMPETITION
The Company operates in a highly competitive environment. Products
sold by the Company compete with products sold elsewhere, including department
and specialty stores, mail order catalogs and other direct-sales companies. The
Company competes in the sale of Products on the basis of quality, price and
service. Because of the number of Products it manufactures and its relatively
small number of suppliers of finished Products, the Company is able to exercise
some control over the quality and price of the Products. This allows Displayers
to charge prices within a range believed to be acceptable to their customers.
The Company also competes with other direct-selling organizations,
even those whose products may not compete with the Products, in recruiting and
retaining Displayers. The Company's future success will also require the
recruitment, retention and integration into the Company's business of other
highly qualified management and sales, marketing and product development
personnel.
EMPLOYEES
At December 31, 1998, the Company employed approximately 1,400
persons, principally in the Dallas, Texas metropolitan area. None of the
employees of the Company are represented by a labor union or covered by a
collective bargaining agreement. The Company considers its employee relations
to be good.
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ITEM 2. PROPERTIES.
The Company owns the following properties used for the purposes set
forth below:
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APPROXIMATE
LOCATION(1) PURPOSE SQUARE FOOTAGE
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Farmers Branch Headquarters (office and warehouse facility) 325,000
Dallas Manufacturing facility 209,000
McKinney Manufacturing and warehouse facility 192,000
Grand Island, Nebraska Manufacturing facility 140,000
Frisco Distribution facility 86,000
Coppell Distribution facility 79,000
North Carrollton Distribution facility 54,000
Garland Distribution facility 54,000
Lewisville Warehouse 25,000
Coppell Meeting and training facility 16,000
Laredo (2) Manufacturing facility 103,000
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(1) All cities are located in Texas, except as noted
(2) Laredo Candle (owned 60% by the Company) has commenced
construction on its candle manufacturing facility in Laredo,
Texas. It is anticipated that this facility will be completed in
late 1999.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company is from time to
time threatened with or named as a defendant in various lawsuits, including
product liability claims. The Company is not currently a party to any material
litigation and is not aware of any litigation threatened against it that could
have a material adverse effect on the Company's business, financial condition
or results of operations. The Company is also subject to certain environmental
proceedings. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 13 to Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Company's common
stock, $0.10 par value. As of March 10, 1999, the Company had outstanding
15,234,422 shares of common stock held by approximately 187 shareholders.
Holders of common stock are entitled to share ratably in dividends, if
and when declared by the Company's Board of Directors (the "Board") out of
funds legally available therefor. Dividends of $0.0625 per share of common
stock were paid for each of the first three quarters of 1997 and a dividend of
$0.1125 was paid for the fourth quarter of 1997. Dividends of $0.075 were paid
for the first quarter of 1998. The Company has not paid any dividends on its
common stock since the closing in June 1998 of the transactions that were the
subject of the Agreement and Plan of Merger, dated April 13, 1998, by and
between the Company and Crowley Investments, Inc. ("CII") (the "Merger
Agreement"). The Company is also restricted in the amount of dividends that may
be paid to holders of common stock pursuant to the credit agreement with its
principal lenders (the "Senior Credit Facility") and the Indenture, dated as of
June 4, 1998 (the "Indenture"), between the Company, certain of its
subsidiaries, as guarantors, and United States Trust Company of New York, as
trustee, pursuant to which the Company issued its 10 1/8 % Senior Subordinated
Notes Due 2008 (the "Notes"). Since the terms of the Notes and the Company's
Senior Credit Facility restrict the Company's ability to pay dividends, the
Company does not anticipate the payment of dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The following summary is intended to highlight certain information
contained elsewhere in this report. Refer to "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Consolidated Financial Statements" elsewhere in this report for greater
detail.
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YEAR ENDED DECEMBER 31,
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1994 1995 1996 1997 1998
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(Dollars in thousands, except Displayer data)
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STATEMENT OF OPERATIONS DATA:
Net sales $ 515,341 $ 482,950 $ 434,299 $ 468,845 $ 490,223
Cost of goods sold 262,623 261,806 225,137 239,664 242,343
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Gross profit 252,718 221,144 209,162 229,181 247,880
Selling, general and administrative:
Selling 73,276 72,857 69,964 74,010 81,124
Freight, warehouse and distribution 43,116 41,041 37,842 41,844 44,718
General and administrative 28,841 25,398 20,096 23,921 21,204
(Gains) losses on the sale of assets 209 (14) (2,077) (198) (6,375)
Recapitalization expenses(1) -- -- -- -- 6,198
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Total selling, general and administrative 145,442 139,282 125,825 139,577 146,869
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Operating income 107,276 81,862 83,337 89,604 101,011
Other income (expense):
Interest income 6,439 2,470 5,113 7,985 5,563
Interest expense (93) (2) (503) (362) (27,532)
Other income 88 529 456 2,884 1,020
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Other income (expense), net 6,434 2,997 5,066 10,507 (20,949)
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Income before income taxes 113,710 84,859 88,403 100,111 80,062
Income taxes 42,737 35,315 33,957 37,919 31,807
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Income from continuing operations $ 70,973 $ 49,544 $ 54,446 $ 62,192 $ 48,255
========= ========= ========= ========= =========
Net income(2) $ 70,522 $ 49,544 $ 54,446 $ 62,192 $ 48,255
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
Gross profit percentage 49.0% 45.8% 48.2% 48.9% 50.6%
EBITDA(3) $ 112,171 $ 85,944 $ 84,610 $ 92,019 $ 104,567
EBITDA margin(4) 21.8% 17.8% 19.5% 19.6% 21.3%
Cash flows provided by (used in):
Operating activities $ 66,850 $ 64,746 $ 57,507 $ 60,285 $ 59,147
Investing activities (152,376) (1,394) (8,808) (67,023) 69,083
Financing activities (11,242) (16,760) (6,086) (21,760) (191,329)
Depreciation and amortization 4,686 4,096 3,350 2,613 3,170
Capital expenditures 3,135 1,408 2,126 4,617 8,443
DOMESTIC DISPLAYER DATA:
Number of orders shipped 754,439 782,996 710,008 732,202 765,967
Average order size(5) $ 683 $ 617 $ 610 $ 635 $ 632
Number of Displayers at end of period(6) 38,300 45,200 37,800 44,200 52,800
Average number of Displayers during period(6) 38,300 41,200 39,900 42,400 50,100
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<CAPTION>
AS OF DECEMBER 31,
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1994 1995 1996 1997 1998
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(dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 43,643 $ 90,235 $ 132,848 $ 104,262 $ 41,024
Property, plant and equipment, net 20,116 17,478 15,481 17,353 21,774
Total assets(7) 252,458 147,110 195,774 244,190 132,448
Total debt (including current maturities) -- -- -- -- 487,000
Shareholders' equity (deficit) 62,373 99,461 141,227 189,931 (414,074)
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(1) Recapitalization expenses consist of amounts paid to the Company's
financial advisor and attorneys in connection with the Recapitalization.
(2) Net income differs from income from continuing operations for 1994 due
to the loss from discontinued operations of $451,000, net of taxes.
(3) EBITDA represents operating income plus depreciation and amortization,
Recapitalization expenses and non-cash expenses for stock options ($563,000 for
1998), but excludes any gains or losses on the sale of assets. EBITDA is
generally considered to provide information regarding a company's ability to
service and/or incur debt, and it is included herein to provide additional
information with respect to the ability of the Company to meet its future debt
service, capital expenditure and working capital requirements. EBITDA should
not be considered in isolation, as a substitute for net income, cash flows from
operations or other consolidated income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure of a
company's profitability or liquidity.
(4) Defined as EBITDA as a percentage of net sales.
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(5) Average order size is calculated based on net sales divided by number
of orders. For purposes of this calculation, international sales of
approximately $1.2 million, $4.1 million and $6.4 million for 1996, 1997 and
1998 have been excluded from net sales.
(6) Prior to July 1997, the Company had a policy of removing from its
Displayer count Displayers who had failed to place an order within the 14 prior
weeks. The Company revised this policy in mid-1997 by retaining these
Displayers to encourage them to reinitiate sales activity. At December 31, 1997
and 1998, the Company had included in its Displayer count approximately 1,400
and 2,700 Displayers, respectively, who had not placed an order within the
14-week period ended as of such dates.
(7) As of December 31, 1994, total assets included approximately $136.7
million of certain assets held for transfer to Carter-Crowley Properties, Inc.
("CCP") in connection with the distribution of CCP stock to the Company's
shareholders (the "Spin-Off").
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
COMPANY BACKGROUND
The Company believes it is the largest direct seller of home
decorative accessories in the United States, as measured by sales. As of
December 31, 1998, the Company sold its Products to approximately 54,500
Displayers, 52,800 of whom were located in the United States and the remainder
of whom were located in Mexico and Puerto Rico. The Company's sales are
dependent upon the number of Displayers selling the Company's Products and
Displayer productivity. The Displayers' productivity fluctuates from time to
time based on the implementation and timing of discounts and new incentive
programs and seasonality.
Primarily because of the nature of the direct selling industry, and as
a result of numerous general and economic factors, the Company experienced
average annual Displayer turnover of approximately 40% during the last three
years. The Company believes that new Displayers are generally among the least
productive Displayers and that the majority of Displayers who terminate their
status as Displayers in any particular year are Displayers recruited in that
year or in the immediately preceding year. The Company's ability to maintain
its sales volume and to achieve growth depends upon its ability to attract a
significant number of new Displayers each year.
To stimulate sales, the Company offers a variety of discounts and
incentives to Displayers. The amount and timing of discounts and incentives
vary from year to year and throughout each year. The cost of discounts is
reflected in the Company's net sales while the cost of incentives is reflected
in selling expense.
Historically, the Company has benefitted from relatively stable gross
profit and operating profit margins. Once a Product is introduced into the
Company's product line, the price at which the Company purchases the Product
from its suppliers and the price at which the Company sells the Product to
Displayers seldom changes. The Company delivers its Products to Displayers via
common carrier and a network of Local Distributors. Unlike many other direct
sales companies that the Company believes charge their customers shipping
costs, the Company delivers its Products to Displayers free of charge if
minimum order sizes are met. The Company realizes substantial cost savings from
volume discounts it receives from its common carriers and its use of Local
Distributors. The use of Local Distributors enables the Company to avoid the
premiums charged by common carriers for delivery to private residences, which
is where most Displayers receive deliveries. In addition, the Company believes
that, as a result of its good relationships with its common carriers and the
Local Distributors, it is able to quickly deliver its Products with minimal
shipping mistakes or Product damage.
- 9 -
<PAGE> 10
THE RECAPITALIZATION
The Company completed a recapitalization (the "Recapitalization") on
June 4, 1998 through the following simultaneous transactions:
o contribution of $182.6 million by Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse") in exchange for 10,111,436 shares of
common stock, or approximately 66% of all outstanding shares upon
completion of the Recapitalization;
o issuance of $200.0 million of the Notes;
o borrowing of $300.0 million under the Senior Credit Facility; and
o use of the above proceeds, together with available cash of $169.3
million, to:
-- redeem 45,836,584 shares of common stock for $827.6 million;
and
-- pay fees and expenses of $24.3 million associated with the
Recapitalization consisting of:
o an $11.2 million financial advisory fee paid to Hicks
Muse for its role in obtaining financing for the
Recapitalization;
o $11.6 million of debt issuance costs paid primarily
to the bank syndicate group for the Senior Credit
Facility and the initial purchasers of the Notes; and
o $1.5 million of legal and accounting fees.
In addition to the $24.3 million of fees and expenses related to the
Recapitalization, the Company paid additional financial advisory and legal fees
of approximately $6.2 million in connection with the Recapitalization. The
Company paid its financial advisor approximately $5.7 million to assist with
the development of strategic alternatives, identify potential buyers, evaluate
proposals and assist in the negotiation of the Hicks Muse offer. These
financial advisory and legal fees were expensed as incurred and are reflected
as Recapitalization expenses in the accompanying statement of operations.
RESULTS OF OPERATIONS
The following table sets forth the relative percentages that certain
income and expense items bear to net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997
---------------------- ------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales ............................... $ 434,299 100.0% $ 468,845 100.00%
Cost of goods sold ...................... 225,137 51.8% 239,664 51.1%
--------- --------- --------- ---------
Gross profit ............................ 209,162 48.2% 229,181 48.9%
Selling, general and administrative:
Selling ............................... 69,964 16.1% 74,010 15.8%
Freight, warehouse and distribution ... 37,842 8.7% 41,844 8.9%
General and administrative ............ 20,096 4.6% 23,921 5.1%
Gains on the sale of assets ........... (2,077) (0.4)% (198) --
Recapitalization expenses ............. -- -- -- --
--------- --------- --------- ---------
Total selling, general and
administrative ................ 125,825 29.0% 139,577 29.8%
--------- --------- --------- ---------
Operating income ........................ 83,337 19.2% 89,604 19.1%
Other income (expense), net ............. 5,066 1.2% 10,507 2.2%
--------- --------- --------- ---------
Income before income taxes .............. 88,403 20.4% 100,111 21.3%
Income taxes ............................ 33,957 7.8% 37,919 8.1%
--------- --------- --------- ---------
Net income .............................. $ 54,446 12.6% $ 62,192 13.2%
========= ========= ========= =========
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998
--------------------------
(dollars in thousands)
Net sales ............................... $ 490,223 100.0%
Cost of goods sold ...................... 242,343 49.4%
--------- ---------
Gross profit ............................ 247,880 50.6%
Selling, general and administrative:
Selling ............................... 81,124 16.5%
Freight, warehouse and distribution ... 44,718 9.1%
General and administrative ............ 21,204 4.3%
Gains on the sale of assets ........... (6,375) (1.3)%
Recapitalization expenses ............. 6,198 1.3%
--------- ---------
Total selling, general and
administrative ................ 146,869 29.9%
--------- ---------
Operating income ........................ 101,011 20.7%
Other income (expense), net ............. (20,949) (4.3)%
--------- ---------
Income before income taxes .............. 80,062 16.4%
Income taxes ............................ 31,807 6.5%
--------- ---------
Net income .............................. $ 48,255 9.9%
========= =========
</TABLE>
1998 COMPARED TO 1997
Net sales. Net sales increased $21.4 million, or 4.6%, to $490.2
million in 1998 from $468.8 million in 1997. This increase was primarily
attributable to an increase in the number of orders shipped, which more than
offset a slight decrease in average order size. The increase in orders shipped
was primarily due to growth in the Displayer base and the introduction of
several new incentive programs and discounts in the first six months of 1998.
The decline in the average order size was primarily due to a reduction in
minimum order size requirements, and to a lesser extent, an increase in
- 10 -
<PAGE> 11
the Displayer base that resulted in a greater portion of less experienced and
less productive sales representation. The Company expects the trend of more
orders shipped and lower average order sizes to continue in 1999.
Gross profit. Gross profit increased $18.7 million, or 8.2%, to $247.9
million in 1998 from $229.2 million in 1997. As a percentage of net sales,
gross profit increased to 50.6% in 1998 from 48.9% in 1997. This increase was
attributable to the introduction of new Products with higher profit margins.
Selling expense. Selling expense increased $7.1 million, or 9.6%, to
$81.1 million in 1998 from $74.0 million in 1997. As a percentage of net sales,
selling expense increased to 16.5% in 1998 from 15.8% in 1997. This increase
was primarily attributable to higher bonuses for directors and higher costs for
incentive programs in 1998.
Freight, warehouse and distribution expense. Freight, warehouse and
distribution expense increased $2.9 million, or 6.9%, to $44.7 million in 1998
from $41.8 million in 1997. As a percentage of net sales, freight, warehouse
and distribution expense increased to 9.1% in 1998 from 8.9% in 1997.
General and administrative expense. General and administrative expense
decreased $2.7 million, or 11.4%, to $21.2 million in 1998 from $23.9 million
in 1997. General and administrative expense was higher in 1997 than 1998 due to
nonrecurring costs incurred in 1997 associated with the settlement of
litigation, larger charitable contributions and a change in the estimated
redemption rate for Hostess merits which caused an increase in the related
Hostess merit liability in 1997. These higher costs in 1997 more than offset
increased personnel and other administrative costs in 1998.
Gains on the sale of assets. The Company recorded gains on the sale of
assets of approximately $6.4 million in 1998 principally from the sale of two
aircraft and a building.
Recapitalization expenses. Recapitalization expenses of $6.2 million
consisted of fees and expenses paid to the Company's financial advisor and
attorneys in connection with the Recapitalization.
Interest Income. Interest income decreased $2.4 million, or 30.3%, to
$5.6 million in 1998 from $8.0 million in 1997 due to lower average investment
balances as a result of the Recapitalization.
Interest Expense. Interest expense increased to $27.5 million in 1998
due to interest expense incurred in connection with the Senior Credit Facility
and the Notes.
Income Taxes. Income taxes decreased $6.1 million, or 16.1%, to $31.8
million in 1998 from $37.9 million in 1997. Income taxes as a percentage of
income before income taxes increased to 39.7% in 1998 from 37.9% in 1997. This
increase was primarily due to higher effective taxes in 1998 as a result of
certain nondeductible Recapitalization expenses.
1997 COMPARED TO 1996
Net sales. Net sales increased $34.5 million, or 8.0%, to $468.8
million in 1997 from $434.3 million in 1996. This increase was primarily due to
an increase in the average number of domestic Displayers and an increase in the
average order size resulting in part from a full-year impact of the Hostess
Bonus Buy Program implemented in mid-1996.
Gross profit. Gross profit increased $20.0 million, or 9.6%, to $229.2
million in 1997 from $209.2 million in 1996. As a percentage of net sales,
gross profit increased to 48.9% in 1997 from 48.2% in 1996. This increase was
primarily due to the success of the Hostess Bonus Buy Program that
disproportionately increased the percentage of sales of Products manufactured
by the Company which, in turn, resulted in improved manufacturing efficiencies
at the Company's manufacturing subsidiaries.
Selling. Selling expense increased $4.0 million, or 5.8%, to $74.0
million in 1997 from $70.0 million in 1996. As a percentage of net sales,
selling expense decreased to 15.8% in 1997 from 16.1% in 1996 primarily due to
several incentive programs which were offered in 1996 but not in 1997. The 1996
incentives included providing free Product brochures and other marketing
materials to Displayers who met certain sales criteria. In 1997, the Company
offered more discounts rather than incentive programs.
- 11 -
<PAGE> 12
Freight, warehouse and distribution. Freight, warehouse and
distribution expense increased $4.0 million, or 10.6%, to $41.8 million in 1997
from $37.8 million in 1996. As a percentage of net sales, freight, warehouse
and distribution expense increased to 8.9% in 1997 from 8.7% in 1996.
General and administrative. General and administrative expense
increased $3.8 million, or 19.0%, to $23.9 million in 1997 from $20.1 million
in 1996. This increase was primarily attributable to several items, including
training costs incurred in 1997 relating to the implementation of the new and
significantly more sophisticated management information system (the "Computer
System"), nonrecurring costs in 1997 resulting from the settlement of
litigation and a change in the estimated redemption rate for Hostess merits
which caused an increase in the related Hostess prepayments liability.
Interest income. Interest income increased $2.9 million, or 56.1%, to
$8.0 million in 1997 from $5.1 million in 1996 primarily as a result of a
change in the Company's investment policies, and to a lesser extent, higher
average investment balances. Prior to 1997, the Company did not make any
material investments. The Company revised its investment policy in 1997 to
purchase investments with a high fixed rate of return and low risk.
Other income. Other income increased $2.4 million to $2.9 million in
1997 from $0.5 million in 1996 primarily as a result of a gain on the sale of a
single investment.
SEASONALITY
The Company's business is influenced by the Christmas holiday season
and promotional events. Historically, a higher portion of the Company's sales
and net income has been realized during the fourth quarter, and net sales and
net income have generally been slightly lower during the first quarter as
compared to the second and third quarters. Working capital requirements also
fluctuate during the year and reach their highest levels during the third and
fourth quarters as the Company increases its inventory for the peak season. In
addition to the Company's peak season fluctuations, quarterly results of
operations may fluctuate depending on the timing of, and amount of sales from,
discounts, incentive promotions and/or the introduction of new Products. As a
result, the Company's business activity and results of operations in any
quarter are not necessarily indicative of any future trends in the Company's
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has satisfied its historical requirements for capital
through cash flow from operations. As a result of the borrowings under the
Senior Credit Facility and the issuance of the Notes, the Company is subject to
cash requirements which are significantly greater than its historical
requirements. Net cash provided by operating activities totaled $57.5 million,
$60.3 million and $59.1 million in 1996, 1997 and 1998. The Company had capital
expenditures of $2.1 million, $4.6 million and $8.4 million in 1996, 1997 and
1998. The Company's other significant cash outlays have historically been the
payment of dividends to shareholders totaling $6.1 million, $22.2 million and
$9.6 million in 1996, 1997 and 1998. Since the terms of the Notes and the
Senior Credit Facility restrict the Company's ability to pay dividends, the
Company does not anticipate the payment of dividends in the foreseeable future.
Additionally, on December 31, 1996, the Company purchased from CCP
certain notes receivable from the Company's suppliers totaling $5.7 million.
Payments received on those and other notes totaled $1.8 million and $2.0
million in 1997 and 1998. The Company revised its investment policy in 1997 and
as a result purchased investments totaling $204.3 million and sold investments
totaling $142.4 million during the year.
The Company's revised investment policy focused on investments with a
high fixed rate of return and low risk. In April 1997, as a result of this new
policy, the Company invested approximately $63.4 million of cash and cash
equivalents through a two step process. Funds were initially invested in fixed
income funds on a short-term basis and then subsequently invested in tax exempt
bonds, corporate bonds and preferred stock. Approximately $42.4 million of
these fixed income funds were sold and reinvested in tax exempt funds. These
tax exempt funds and the remainder of the initial investment in fixed income
funds were subsequently sold and reinvested in tax exempt bonds, corporate
bonds and preferred stock. Throughout the remainder of 1997, proceeds for the
sale of tax exempt bonds, corporate bonds and preferred stock, and interest
income on these investments were subsequently reinvested through the two step
process described above. As a result of this two step investment process, a
majority of the investment purchase and sales activity occurred during the
three months ended June 30, 1997. There were no material amounts of realized
gains or losses on sales of investments in 1997. The investments were
classified as "available for sale" in accordance with the provisions
- 12 -
<PAGE> 13
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
The Company generated significantly higher cash flow from investing
activities during 1998 than in 1997. Prior to June 4, 1998, the Company
liquidated substantially all of its investments held as of December 31, 1997 to
meet the cash requirements of the Recapitalization. As a result, proceeds from
the sale of investments during 1998 totaled $155.2 million, or $12.8 million
more than in 1997. Prior to 1997, the Company did not make any material
investments. The Company revised its investment policy in 1997 and as a result
used its existing cash and cash equivalents to purchase investments with a high
fixed rate of return and low risk, consisting primarily of tax exempt and fixed
income mutual funds, tax exempt and corporate bonds and preferred stock
totaling $204.3 million during 1997. The proceeds from the sale of those
investments totaled $142.4 million during 1997. Purchases of investments
totaled $87.5 million during 1998, or $116.8 million less than in 1997. In
addition to its other investing activities, the Company sold two aircraft and a
building in 1998 for proceeds of $7.8 million.
The Company increased its capital expenditures to $8.4 million during
1998 from $4.6 million in 1997 due to several nonrecurring expenditures. These
nonrecurring expenditures included approximately $2.5 million for the
implementation of the Computer System and approximately $1.8 million in
expenditures related to candle operations in 1998. Costs for the Computer
System consist of hardware and software costs, including program enhancements
and upgrades. Expenditures related to candle operations consist of building
improvements and machinery and equipment.
The Company estimates that its 1999 capital expenditures will be
approximately $10.0 million principally as a result of continued enhancements
to the Computer System and construction of the building and purchase of
equipment for the Laredo Candle manufacturing operation.
The Company's use of cash for financing activities increased to $191.3
million during 1998 from $21.8 million in 1997. This increased use of cash was
due to the Recapitalization. The Company used proceeds of $182.6 million from
the contribution of equity by Hicks Muse, $200.0 million from the issuance of
the Notes and $300.0 million of borrowings under the Senior Credit Facility,
together with proceeds from the sale of investments as described above, to pay
$827.6 million for the redemption of common stock, and to pay $24.3 million of
fees and expenses associated with the Recapitalization. Prior to the
Recapitalization, the Company's primary financing activity was the payment of
dividends. Dividends paid during 1998 decreased to $9.6 million from $22.2
million in 1997. Since the terms of the Notes and the Senior Credit Facility
restrict the Company's ability to pay dividends, the Company does not
anticipate the payment of dividends in the foreseeable future.
Payments on the Notes and the Senior Credit Facility represent
significant cash requirements for the Company. Interest payments on the Notes
commenced in December 1998 and will continue semi-annually until the Notes
mature in 2008. Borrowings under the Senior Credit Facility require quarterly
interest and principal payments. In addition, the Senior Credit Facility
includes $40.0 million of Revolving Loans, which mature on June 30, 2004. The
Revolving Loans remained undrawn as of December 31, 1998.
The Company paid a total of $35.4 million in debt service for 1998,
consisting of principal payments under the Senior Credit Facility of $13.0
million, interest under the Senior Credit Facility of approximately $12.5
million and interest of $9.9 million on the Notes.
The terms of the Notes and Senior Credit Facility include significant
operating and financial restrictions, such as limits on the Company's ability
to incur indebtedness, create liens, sell assets, engage in mergers or
consolidations, make investments and pay dividends. In addition, under the
Senior Credit Facility, the Company is required to comply with specified
financial ratios and tests, including minimum interest coverage and maximum
leverage ratios. Subject to the financial ratios and tests, the Company will be
required to make certain mandatory prepayments of the term loans on an annual
basis. The Company is required to prepay $7.7 million on the term loans on
March 31, 1999. As a result of the timing and magnitude of the prepayment
amount, the Company may have to utilize the Revolving Loans at varying times
subsequent to March 31, 1999 primarily to meet working capital needs and to
make capital expenditures. The Company anticipates that use of the Revolving
Loans, if any, will be on a short-term basis, and borrowings thereunder will be
repaid by the end of 1999.
The Company anticipates that its debt service requirements will total
$73.3 million in 1999, consisting of principal payments due under the Senior
Credit Facility of $26.0 million, a mandatory prepayment of $7.2 million under
- 13 -
<PAGE> 14
the Senior Credit Facility, interest due under the Senior Credit Facility of
$19.9 million and interest of $20.2 million due on the Notes. A one percentage
point change in interest rates would not have a significant impact on interest
expense since the Company entered into six-month and twelve-month borrowings on
December 9, 1998 for a majority of its variable-rate debt.
Current maturities of long-term debt as of December 31, 1998 excluding
the impact of the mandatory pre-payment of $7.7 million discussed above, were
as follows (in thousands):
<TABLE>
<CAPTION>
TRANCHE A TRANCHE B
LOAN LOAN NOTES TOTAL
---- ---- ----- -----
<S> <C> <C> <C> <C>
1999 ............... $ 25,000 $ 1,000 $ -- $ 26,000
2000 ............... 27,500 1,000 -- 28,500
2001 ............... 32,500 1,000 -- 33,500
2002 ............... 37,500 1,000 -- 38,500
2003 ............... 42,500 1,000 -- 43,500
Thereafter ......... 22,500 94,500 200,000 317,000
--------- --------- --------- ---------
$ 187,500 $ 99,500 $ 200,000 $ 487,000
========= ========= ========= =========
</TABLE>
On July 1, 1998, the Company entered into an interest rate swap
agreement to limit the effect of changes in interest rates on the Senior Credit
Facility. The swap provides the Company with a fixed interest rate until
December 31, 2001 on a notional amount of $75.0 million. See
"--Market-Sensitive Instruments and Risk Management."
The Company believes that net cash flow from operations and borrowings
under the Revolving Loans, if any, will be sufficient to fund its cash
requirements over the next twelve months, which will consist primarily of
payment of principal and interest on outstanding indebtedness, working capital
requirements and capital expenditures. The Company's future operating
performance and ability to service or refinance its current indebtedness will
be subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To mitigate risks on
changes in interest rates, the Company utilizes derivative financial
instruments. The Company does not use derivative financial instruments for
speculative or trading purposes. The Company's international operations are not
significant, and as a result, changes in foreign currency exchange rates do not
have a material effect on the Company.
In July 1998, the Company entered into an interest rate swap agreement
to limit the effect of changes in interest rates on long-term borrowings. Under
the swap, the Company pays interest at 5.50% on a notional amount of $75.0
million and receives interest thereon at three-month LIBOR on a quarterly
basis. Beginning June 9, 1999, if LIBOR is greater than 6.44% at the
commencement of any quarterly reset period, a knockout provision provides for
no payment under the swap during such period. The knockout provision is
separately adjusted to market on a quarterly basis. The total adjustment for
1998 was income of approximately $159,000, which is included in other income.
The level of variable-rate debt, after the effect of the swap has been
considered, is approximately 44% of the total interest-bearing debt outstanding
at December 31, 1998. During 1998, the average rate received on the notional
amount of the swap was 5.64% and the average rate paid was 5.50%.
- 14 -
<PAGE> 15
The following table presents principal cash flows of variable rate
debt by maturity date and the related average interest rate. The table also
presents the notional amount of the swap and knockout provisions and their
expected future interest rates and strike prices. The notional amount is used
to calculate the contractual payments to be exchanged. The interest rates are
weighted between the Tranche A and Tranche B loans based on debt outstanding
and are estimated based on implied forward rates using a yield curve at
December 31, 1998.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-----------------------------------------------------------
(dollars in thousands)
1999 2000 2001 2002
---- ---- ---- ----
<S> <C> <C> <C> <C>
LIABILITIES
Variable-rate debt (2) ............... $ 26,000 $ 28,500 $ 33,500 $ 38,500
Average interest rate ................ 7.27% 7.29% 7.33% 7.45%
INTEREST RATE DERIVATIVES:
Interest rate swap:
Notional Amount ................... -- -- $ 75,000 --
Average pay rate .................. 5.50% 5.50% 5.50% --
Average receive rate .............. 5.08% 5.08% 5.09% --
Interest rate knockout provision:
Contract amount ................... -- -- $ 75,000 --
Weighted average strike price ..... 6.44% 6.44% 6.44% --
<CAPTION>
EXPECTED MATURITY DATE
-----------------------------------------------------------
(dollars in thousands)
FAIR
2003 THEREAFTER TOTAL VALUE(1)
---- ---------- ----- --------
<S> <C> <C> <C> <C>
LIABILITIES
Variable-rate debt (2) ............... $ 43,500 $ 117,000 $ 287,000 $ 287,000
Average interest rate ................ 7.64% 7.69% -- --
INTEREST RATE DERIVATIVES:
Interest rate swap:
Notional Amount ................... -- -- $ 75,000 $ 876
Average pay rate .................. -- -- -- --
Average receive rate .............. -- -- -- --
Interest rate knockout provision:
Contract amount ................... -- -- $ 75,000 $ 478
Weighted average strike price ..... -- -- -- --
</TABLE>
- ------------------------
(1) The combined fair value of the interest rate swap and the related
knockout provision represents the estimated amount the Company would
have to pay to terminate the swap.
(2) Current maturities of variable-rate debt exclude the impact of the
mandatory prepayment of $7.7 million.
The Company sells its products in Mexico, and as a result, is subject
to market risk exposure of foreign currency devaluation. Because the Company's
international operations are not significant, any decrease in value of the peso
would not have a material adverse effect on the Company's results of operations
or liquidity.
INFLATION
Although the Company's operations are affected by general economic
trends, inflation and changing prices did not have a material impact on the
Company's operations in 1996, 1997 or 1998.
ENVIRONMENTAL ISSUES
In 1989, DWC was named as a potentially responsible party ("PRP")
based on allegedly having sent 2,640 gallons of waste to the Chemical
Recycling, Inc. facility in Wylie, Texas. The Company believes that DWC's share
of the total cleanup costs based on a volumetric allocation would be less than
one percent. In the future, DWC and the other PRPs, who are jointly and
severally liable, may incur additional costs related to the cleanup of
hazardous substances at the facility. DWC did not incur any cleanup related
costs during 1996, 1997 or 1998. Because the site has been dormant for several
years, the Company does not believe it is probable that any additional costs
will be incurred and, accordingly, has not established any accruals for future
cleanup costs at this site.
In 1997, Homco was named as a PRP based on allegedly having
transported hazardous waste to the Materials Recovery Enterprises, Inc.
facility in Ovalo, Texas. In the future, Homco and the other PRPs, who are
jointly and severally liable, will incur costs related to the cleanup of
hazardous substances at the facility. The cleanup of the site is in the early
stages. The PRP group has hired an environmental consultant to conduct a
remedial investigation and feasibility study, which is expected to be completed
in 1999. The Company believes that Homco's share of the total cleanup costs
based on a volumetric allocation would be less than one percent. The Company
did not incur any cleanup related costs during 1997 or 1998 and has not
established any accrual for such costs as no determination of the cleanup costs
for the site has been made.
In 1996, the United States Environmental Protection Agency ("EPA")
issued a Notice of Violation claiming that the Company's wholly-owned
subsidiary, GIA had violated the Clean Air Act and Nebraska Air Regulations by
failing to obtain one or more Construction Permits for plant expansions that
occurred in the 1970s and 1980s. In January 1997, GIA responded to the Notice
of Violation and in January 1998, a combined construction and operating permit
was proposed for the facility. The permit has been issued and GIA did not incur
penalties for the activities covered by the Notice of Violation.
- 15 -
<PAGE> 16
On February 9, 1999, the EPA conducted an inspection at GIA to
determine compliance with the toxic chemical release reporting requirements for
1997 pursuant to the Emergency Planning and Community Right To Know Act of 1986
(the "EPCRA"), Section 313. A final determination has not been issued, but
several possible calculation errors in the Form R Report were noted during the
inspection. The EPA will make its final determination upon receipt and
verification of the Company's revised 1997 Form R calculation. It is possible
that the EPA could seek administrative penalties for these errors.
The ultimate outcome and aggregate cost of resolving all of the above
contingencies will be based on a number of factors and will be determined over
a number of years. Accordingly, the total cost to the Company cannot currently
be determined with certainty. It is management's opinion, however, that the
total cost of resolving such contingencies should not have a material adverse
effect on the Company's business, financial condition and results of
operations.
YEAR 2000 ISSUES; MANAGEMENT INFORMATION SYSTEM
As a result of certain computer programs being written using two
digits rather than four digits to define the applicable year, any of the
Company's computer programs that have date sensitive software may recognize a
date using "00" as the Year 1900 rather than the Year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.
The Company has established a Year 2000 compliance team to address the
issue of computer programs and systems that are unable to distinguish between
the year 1900 and the year 2000 (the "Project"). The Project is divided into
three categories: infrastructure, subsidiaries, and third party suppliers and
service providers. The Company has substantially completed the assessment
phase, which consisted of identifying and inventorying items, prioritizing,
determining critical items and establishing a timetable for Year 2000
compliance and is engaged in the remediation and testing phases of the Project.
The Computer System is a critical aspect of the Project.
The Company implemented its new and significantly more sophisticated
Computer System which replaced a significant portion of the Company's existing
infrastructure. Substantially all of the hardware and software previously in
use at the Company was replaced with the implementation of the Computer System.
A limited amount of peripheral equipment was retained and testing for Year 2000
compliance will continue throughout the first quarter of 1999. The Computer
System includes a mainframe computer, certain business applications and
upgraded or replacement peripheral equipment associated with the Company's core
business systems. The Company upgraded the software for the Computer System
through the purchase of certain software products developed by Distribution
Architects International ("DAI"). DAI has been engaged to assist with the
implementation and enhancement process. Each supplier (including DAI) of the
hardware and software incorporated or to be incorporated into the Computer
System has provided to the Company a compliance statement or other
documentation certifying that its products will function properly in all
material respects beyond 1999.
The DAI software was installed in January 1999 and the Computer System
is presently operational. In addition, Year 2000 remediation of other aspects
of the Company's infrastructure is substantially complete. Remediation of the
Company's subsidiaries was substantially completed during the first quarter of
1999 and testing will continue throughout the second quarter. As a result, the
Company believes that Year 2000 remediation of its infrastructure and its
subsidiaries will be complete in all material respects by the end of the second
quarter of 1999.
The Company is currently enhancing the effectiveness of the DAI
software and the Computer System in general. The Company's core business
functions, including inventory, purchasing and accounting are dependent on a
properly functioning management information system. Because the Computer System
replaced a significant portion of such system, the failure of the DAI software
to function as anticipated would require the Company to reassess its Year 2000
compliance and its Computer System in general. On-site systems testing will
continue throughout the second quarter of 1999. Specific testing of the DAI
software for Year 2000 compliance will take place in the second quarter of
1999.
If testing identifies a business function at risk, the Company will
aggressively seek to locate alternative sources of software as a contingency
plan. There can be no assurance that such software could be obtained and
installed in a timely fashion or that such software would be Year 2000
compliant. Non-compliance could potentially result in a disruption of
operations, including, among other things, a temporary inability to process
transactions, ship products or engage in normal business activities, which
could have a material adverse effect on the Company's business, financial
condition,
- 16 -
<PAGE> 17
results of operations and liquidity of a magnitude, which the Company presently
is unable to predict. However, if some or all of the Company's remediated or
replaced internal computer systems fail to correctly distinguish between years
before and after Year 2000, or if any software applications critical to the
Company's operations are overlooked in the Company's assessment of its Year
2000 compliance, there could be a material adverse effect on the Company's
business, financial condition, results of operations and liquidity of a
magnitude which the Company presently is not able to predict.
In addition to the foregoing, the Company has identified and surveyed
its subsidiaries, critical third party suppliers and service providers, and
continues to monitor and assess their progress toward Year 2000 compliance to
determine the extent to which the Company is vulnerable to the failure of such
suppliers and service providers to remediate their own Year 2000 issues.
Remediation for the Company's critical third party suppliers and service
providers is partially complete and on schedule. Progress is being monitored
and contingency planning is ongoing. The failure of such third parties to
adequately address their respective Year 2000 issues could have a material
adverse effect on the Company's business, financial condition, results of
operations and liquidity of a magnitude which the Company is presently not able
to predict.
The Company spent approximately $5.0 million on the Computer System as
of December 31, 1998, which represents substantially all of the costs to
implement the first phase of the rollout of the Computer System. The Company
expects that the additional costs associated with remediating its subsidiaries
and its remaining infrastructure will be less than $1.0 million.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard is effective for fiscal
years beginning after December 15, 1999. The Company has not yet determined the
effect the new standard will have on its financial statements.
FORWARD-LOOKING STATEMENTS
The forward-looking statements provided throughout this report
(collectively, "Forward-Looking Statements") involve certain risks and
uncertainties that could cause actual results to differ materially from those
projected in the Forward-Looking Statements. The Company cautions that the
Forward-Looking Statements are subject to all the risks and uncertainties
discussed under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Securities and Exchange Commission requires that registrants
include information about potential effects of changes in interest rates and
currency exchange in their financial statements. Refer to the information
appearing under the subheading "Market-Sensitive Instruments and Risk
Management" under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation," which information is hereby incorporated
by reference into this Item 7A. All statements other than historical
information incorporated into this Item 7A are forward-looking statements. The
actual impact of future market changes could differ materially due to, among
other things, the factors discussed in this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company and its
subsidiaries required by this Item 8 are listed in Part IV, Item 14(a) of this
report. Such consolidated financial statements are included herein beginning on
page F-1.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
- 17 -
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information as of March 10, 1999 with
respect to those individuals who are serving as members of the Board or as
executive officers of the Company.
<TABLE>
<CAPTION>
NAME Age Position
- ---------------------------------------- --- --------
<S> <C> <C>
Donald J. Carter, Jr.................... 38 Chairman of the Board and Chief Executive Officer
Barbara J. Hammond...................... 68 Director and President
Christina L. Carter Urschel............. 35 Director and Executive Vice President
Leonard A. Robertson.................... 53 Chief Financial Officer
James W. Livingston..................... 51 Vice President of Operations
Bettina S. Simon........................ 49 Vice President, General Counsel and Secretary
Thomas O. Hicks......................... 53 Director
Jack D. Furst........................... 40 Director
Lawrence D. Stuart, Jr.................. 53 Director
Daniel S. Dross......................... 40 Director
Sheldon I. Stein........................ 45 Director
Gretchen M. Williams.................... 42 Director
</TABLE>
Set forth below is a description of the backgrounds of those persons
who are serving as members of the Board and as executive officers of the
Company. All of the Company's officers are appointed by the Board and serve at
its discretion.
Donald J. Carter, Jr. has served as Chief Executive Officer of the
Company since October 1997 and in June 1998 became Chairman of the Board
following the Recapitalization. Mr. Carter provides leadership in sales,
marketing and operational areas of the Company. Since he joined the Company in
1984, Mr. Carter has also served the Company in various executive capacities,
including as Executive Vice President of Sales from 1994 to 1997. Mr. Carter is
the son of Donald J. Carter and the brother of Christina L. Carter Urschel and
Ronald L. Carter.
Barbara J. Hammond has served as President of the Company since 1995,
and is responsible for all domestic sales, development of incentive programs
and training and motivation of directors. Ms. Hammond has served the Company in
various executive capacities since 1986, including as National Sales Manager
and Executive Vice President of Sales. Ms. Hammond originally joined the
Company as a Displayer in 1960, when she was personally trained by Mary C.
Crowley, and rose to become one of the Company's top Displayers and directors.
Christina L. Carter Urschel has served the Company as Executive Vice
President since 1997, and is responsible for overseeing the training,
development and motivation of the Displayers and directors. Ms. Urschel served
as Vice President of the Company from 1994 to 1997. Ms. Urschel joined the
Company in 1987 and, since that time, has undertaken various sales and
marketing responsibilities. Christina L. Carter Urschel is the daughter of
Donald J. Carter and the sister of Donald J. Carter, Jr. and Ronald L. Carter.
Leonard A. Robertson has served as Chief Financial Officer of the
Company since 1995. Before joining the Company, Mr. Robertson held various
positions, most recently as partner, with Judd, Thomas, Smith & Company, P.C.,
an independent public accounting firm that provides accounting, auditing and
tax services to the Company. Mr. Robertson is a Certified Public Accountant.
- 18 -
<PAGE> 19
James W. Livingston has served as Vice President of Operations of the
Company since August 1997. From 1984 through 1997, Mr. Livingston was the Chief
Financial Officer of the Dallas Mavericks of the National Basketball
Association. He also served as Vice President of Business Operations for the
Dallas Mavericks from 1995 through 1997. From 1975 through 1984, Mr. Livingston
was the Controller for the Company. Mr. Livingston serves as a director of
Baylor Medical Center Foundation and Charles W. Weaver Manufacturing Company, a
supplier to the Company.
Bettina S. Simon has served as the Vice President, General Counsel,
and Secretary of the Company since July 1998. Before joining the Company, from
1984 through 1996, Ms. Simon was the Associate General Counsel and Assistant
Secretary of Zale Corporation, and was a partner at Simon & Simon from 1996
through July 1998.
Thomas O. Hicks became a director of the Company in June 1998. Mr.
Hicks has been Chairman and Chief Executive Officer of Hicks Muse since
co-founding Hicks Muse in 1989 and has over 25 years of experience in leveraged
acquisitions and private investments. Mr. Hicks serves as a director of
Chancellor Media Corporation, International Home Foods, Inc., D.A.C. Vision,
Inc., Sybron International Corporation, Capstar Broadcasting Corporation,
Cooperative Computing Holding Company, Inc., Lin Holdings Corp., and Viasystems
Group, Inc.
Jack D. Furst became a director of the Company in June 1998. Mr. Furst
is a Partner of Hicks Muse and has held such position since 1989. Mr. Furst has
approximately 15 years of experience in leveraged acquisitions and private
investments. Mr. Furst is involved in all aspects of Hicks Muse's business and
has been actively involved in originating, structuring and monitoring its
investments. Prior to joining Hicks Muse, Mr. Furst was a Vice President and
subsequently a Partner of Hicks & Haas, Incorporated, a Dallas based, private
investment firm from 1987 to 1989. From 1984 to 1986, Mr. Furst was a Merger
and Acquisitions/Corporate Finance Specialist for The First Boston Corporation
in New York. Before joining First Boston, Mr. Furst was a Financial Consultant
at Price Waterhouse. Mr. Furst serves on the Board of Directors of Omni America
Holdings Corporation, International Wire Holding Company, Cooperative
Computing, Inc. and Viasystems Group, Inc.
Lawrence D. Stuart, Jr. became a director of the Company in June 1998.
Mr. Stuart has been a Partner of Hicks Muse since 1995. At Hicks Muse, Mr.
Stuart coordinates all aspects of negotiating and closing the firm's leveraged
acquisition transactions and managing the firm's relationships with
professional service firms. Prior to joining Hicks Muse, Mr. Stuart had served
for over 20 years as the principal outside legal counsel for the investment
firms and portfolio companies led by Thomas O. Hicks. From 1989 to 1995, Mr.
Stuart was the Managing Partner of the Dallas office of Weil, Gotshal & Manges
L.L.P. Prior thereto, he was a Partner at Johnson & Gibbs, where he was
employed from 1973 to 1989. Prior to joining Johnson & Gibbs, he was employed
at Rain, Harrell, Emery, Young & Doke. Mr. Stuart serves on the Board of
Directors of Omni America Holdings Corporation and Chancellor Media
Corporation.
Daniel S. Dross became a director of the Company in June 1998. Mr.
Dross serves as a Principal of Hicks Muse where he has been employed since
1991. Prior to joining Hicks Muse, Mr. Dross was employed for five years as a
Vice President in the investment banking division of Prudential Securities in
New York and Dallas. Mr. Dross serves on the Board of Directors of STC
Broadcasting, Inc.
Sheldon I. Stein became a director in July 1998. Mr. Stein is a Senior
Managing Director and oversees United States Regional Investment Banking for
Bear Stearns. Prior to joining Bear Stearns in 1986, Mr. Stein was a partner in
the Dallas law firm of Hughes & Luce, where he specialized in corporate finance
and mergers and acquisitions. Mr. Stein serves on the Boards of Directors of
several public companies including CellStar Corporation, FirstPlus Financial
Group, Inc., Fresh America Corp., The Men's Wearhouse, Inc., Precept Business
Services, Inc. and Tandycrafts, Inc. He is a member of the Board of Trustees of
the Greenhill School and a Trustee of Brandeis University.
Gretchen M. Williams became a director of the Company in December
1998. Ms. Williams is Co-Chairman of the Board and Co-Chief Executive Officer
of Minyard Food Stores, Inc., its divisions, Sack 'N Save and Carnival Food
Stores and its subsidiary, Minyard Properties. She has been employed by Minyard
Food Stores, Inc. since 1978. Ms. Williams also serves as a director of Chase
Bank of Texas N.A.
Following the Recapitalization, the number of directors of the Company
was increased to eleven, resulting in four vacancies on the Board. The
Shareholders Agreement (as defined) provides that Hicks Muse has the right to
designate two additional directors and that Donald J. Carter, Jr., Barbara J.
Hammond and Christina L. Carter Urschel, as designees (the "Carter Designees")
of the Carter Shareholders (as defined), and Hicks Muse will mutually designate
two independent directors. In 1998, Hicks Muse designated Sheldon I. Stein as
one of its two remaining directors pursuant to the
- 19 -
<PAGE> 20
Shareholders Agreement and the Carter Designees and Hicks Muse mutually
designated Gretchen M. Williams as an independent director. See "Item 13.
Certain Relationships and Related Transactions -- The Shareholders Agreement."
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Company does not have any class of equity securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended. Therefore,
the shareholders of the Company are not required to file reports pursuant to
Section 16(a) thereof. Additionally, the Company has not been subject to the
filing requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, for the past 90 days.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid during each of
the three years in the period ended December 31, 1998 to the Chief Executive
Officer and the other four most highly compensated executive officers who were
serving as executive officers at December 31, 1998. In addition, information is
included for Donald J. Carter who served as Chairman of the Board of the
Company prior to June 1998 and is currently employed as an advisor of the
Company as Chairman Emeritus.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- ------------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS
- --------------------------- ---------- ------------ -------------- ------------------------
<S> <C> <C> <C> <C>
Donald J. Carter, Jr.................. 1998 371,787 262,500 338,481
Chairman of the Board and 1997 192,288 190,500 --
Chief Executive Officer 1996 192,288 11,614 --
Barbara J. Hammond.................... 1998 443,753 249,375 --
President and Director 1997 400,008 190,500 --
1996 400,008 22,000 --
Christina L. Carter Urschel........... 1998 313,453 210,000 338,481
Executive Vice President 1997 192,288 190,500 --
and Director 1996 192,288 11,911 --
Leonard A. Robertson.................. 1998 180,000 48,600 11,080
Chief Financial Officer 1997 180,000 15,000 --
1996 180,000 11,000 --
James W. Livingston................... 1998 157,083 43,200 11,080
Vice President-Operations 1997 51,683 10,417 --
Donald J. Carter...................... 1998 126,667 610,683(1) --
Chairman of the Board until 1997 3,600 1,539,949(1) --
June 1998 and Chairman 1996 3,600 1,480,572(1) --
Emeritus
</TABLE>
- ---------------
(1) This amount represents commissions in an amount equal to 0.4% of the
Company's domestic sales (before discounts and sales of Products to
Hostesses).
- 20 -
<PAGE> 21
SUMMARY OF OPTION GRANTS
The following table provides certain summary information concerning grants
of options to the Named Executive Officers of the Company during the 1998
fiscal year:
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION PRESENT
NAME GRANTED (#) FISCAL YEAR PER SHARE ($) DATE VALUE $(1)
- ---- ----------- ------------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Donald J. Carter, Jr. 338,481 34.4% $ 18.05451 6/04/08 $ 5.06
Barbara J. Hammond -- -- -- -- --
Christina L. Carter Urschel 338,481 34.4% $ 18.05451 6/04/08 $ 5.06
Leonard A. Robertson 11,080 1.1% $ 18.05451 7/30/08 $ 5.03
James W. Livingston 11,080 1.1% $ 18.05451 7/30/08 $ 5.03
Donald J. Carter -- -- -- -- --
</TABLE>
- ---------
(1) The grant date present value was determined using the Minimum Value
method of option pricing with the following assumptions: dividend
yield of zero, risk-free interest rate of 5.61% and expected term of
six years.
COMPENSATION OF DIRECTORS
Persons serving as independent directors on the Board are paid $2,500
per meeting. As the only independent directors serving on the Board in 1998,
Sheldon Stein and Gretchen Williams each received $2,500 for their attendance
at the December 1998 meeting.
In addition, the initial independent directors were given the right to
purchase up to $100,000 of common stock and were granted stock options of up to
$100,000 based on the amount of their investment in common stock. Ms. Williams
purchased 2,770 shares of common stock for an aggregate purchase price of
$50,000 and was granted options for 2,770 shares at an exercise price equal to
$18.05451. Mr. Stein's investment in HMIP qualified him to receive options for
5,540 shares at an exercise price of $18.05451. All such options were granted
on December 14, 1998 and vest in 20% increments in five equal, consecutive
annual installments on each anniversary of the grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee and all decisions
regarding compensation of executive officers (other than those executive
officers with employment agreements) are made by Donald J. Carter, Jr.
EXECUTIVE EMPLOYMENT AND CONSULTING AGREEMENTS
On June 4, 1998, following the Recapitalization, the Company entered
into Executive Employment Agreements with each of Donald J. Carter, Jr.,
Barbara J. Hammond, Christina L. Carter Urschel and Donald J. Carter, and
entered into a Consulting Agreement with Ronald L. Carter. Pursuant to the
terms of the Executive Employment Agreements, Donald J. Carter, Jr. will be
employed as Chairman of the Board and Chief Executive Officer of the Company
for five years with a base salary of $500,000 and with total annual
compensation (including bonuses) ranging from $500,000 to $1,125,000; Barbara
J. Hammond will be employed as President of the Company for two years with a
base salary of $475,000 and with total annual compensation (including bonuses)
that ranges from $475,000 to $1,068,750; and Christina L. Carter Urschel will
be employed as Executive Vice President of the Company until the retirement of
Barbara J. Hammond (and as President thereafter) for five years with a base
salary of $400,000 ($475,000 as President thereafter) and with total annual
compensation (including bonuses) that ranges from $400,000 to $900,000
($475,000 to $1,068,750 at such time as Mrs. Carter Urschel becomes President).
The Executive Employment Agreements with Donald J. Carter, Jr., Barbara J.
Hammond and Christina L. Carter Urschel each provide for lump sum severance
payments in the event such individuals are terminated by the Company without
Cause (as defined in such Executive Employment Agreements) or such individuals
terminate their employment for Good Reason (as defined in such Executive
Employment Agreements). Subject to certain exceptions, the amount of such lump
sum severance payments equals (i) five times the applicable executive's base
salary if such executive is terminated within one year after the
Recapitalization or (ii) the greater of (a) the aggregate
- 21 -
<PAGE> 22
base salary payable to the executive from the date of termination through the
expiration of the remainder of the term of the Executive Employment Agreement
and (b) three times the total base salary and annual bonus, if any, received by
the executive in the fiscal year preceding the fiscal year in which such
executive was terminated. In addition, each executive has agreed pursuant to
his or her Executive Employment Agreement not to compete with the Company
during his or her employment and for a period of three years after termination
of such executive's employment for any reason.
Under the terms of his Executive Employment Agreement, Donald J.
Carter will remain with the Company as Chairman Emeritus but will not work
full-time. Donald J. Carter's Executive Employment Agreement provides for an
employment term of five years and annual compensation of $200,000, plus
reimbursement for certain business-related aviation expenses, as well as the
use of a Company-owned vehicle. Donald J. Carter's Executive Employment
Agreement generally requires the Company to pay Mr. Carter's salary throughout
the five-year term unless Mr. Carter voluntarily terminates his employment
during such term. Donald J. Carter has agreed pursuant to his Executive
Employment Agreement not to compete with the Company during his employment and
for three years thereafter (or, if earlier, until such time as one of Mr.
Carter's direct lineal descendants is no longer the Chief Executive Officer of
the Company).
The Company also entered into a one-year Consulting Agreement with
Ronald L. Carter, pursuant to which he will be paid $200,000 for his consulting
services. The Consulting Agreement with Ronald L. Carter includes provisions
prohibiting Mr. Carter from competing with the Company until June 4, 2001.
1998 STOCK OPTION PLAN FOR KEY EMPLOYEES
On April 11, 1998, the Board adopted the 1998 Stock Option Plan for
Key Employees, pursuant to which options could be granted, after the
consummation of the Recapitalization, to key employees and eligible
non-employees of the Company and its subsidiaries for the purchase of shares of
common stock. The 1998 Stock Option Plan for Key Employees was approved by the
shareholders of the Company at its annual general meeting on May 16, 1998.
The employees eligible for options under the 1998 Stock Option Plan
for Key Employees are those employees whose performance and responsibilities
are determined by the Board (or a committee thereof) (in either case, the
"Committee") to be essential to the success of the Company and its
subsidiaries. A total of 1,353,924 shares of common stock are available for
grant under the 1998 Stock Option Plan for Key Employees. Generally, the option
period (i.e., the term under which an option is exercisable) may not be more
than ten years from the date the option is granted. The Committee will
determine, in its discretion, the key employees and eligible non-employees who
will receive grants, the number of shares subject to each option granted, the
exercise price and the option period and will administer and interpret the 1998
Stock Option Plan for Key Employees.
Pursuant to the Merger Agreement and the applicable Executive
Employment Agreements, immediately after the consummation of the
Recapitalization in June 1998, options for 338,481 shares were granted to each
of Donald J. Carter, Jr. and Christina L. Carter Urschel at an exercise price
equal to $18.05451. The options vest in 20% increments in five equal,
consecutive annual installments on each anniversary of the grant. Additionally,
in July 1998, options for 11,080 shares were granted to each of Leonard A.
Robertson, James W. Livingston and Bettina S. Simon, executive officers of the
Company, at the same exercise price and with substantially similar terms. As of
December 31, 1998, options for 984,432 shares of common stock at an exercise
price of $18.05451 had been granted under the 1998 Stock Option Plan for Key
Employees.
Although the Committee has full discretion to determine the terms of
any option, it is expected that options will generally vest or become
exercisable in equal annual installments over a five-year period. All
installments that become exercisable will be cumulative and may be exercised at
any time after they become exercisable until the expiration of the option
period. Incentive stock options and, unless otherwise specified in the
applicable stock option agreements, nonqualified stock options may not be
transferred other than by will or by the laws of descent and distribution. The
Committee shall have the right, but not the obligation, to accelerate the
vesting of any option upon the occurrence of, or the entering into an agreement
providing for, a Change of Control (as defined in the 1998 Stock Option Plan
for Key Employees). Both incentive stock options and nonqualified stock options
may be granted under the 1998 Stock Option Plan for Key Employees.
Unless terminated sooner in accordance with its terms, the 1998 Stock
Option Plan for Key Employees will terminate on April 11, 2008, and no options
may be granted under the 1998 Stock Option Plan for Key Employees thereafter.
The Committee may amend, modify, suspend or terminate the 1998 Stock Option
Plan for Key Employees
- 22 -
<PAGE> 23
without the shareholders' approval, except that, without shareholder approval,
the Committee will not have the power or authority to increase the number of
shares of common stock that may be issued pursuant to the exercise of options
under the 1998 Stock Option Plan for Key Employees, decrease the minimum
exercise price of any incentive stock options or modify the requirements
relating to eligibility with respect to incentive options. The Committee may,
however, make appropriate adjustments in the number and/or kind of shares
and/or interests subject to an option and the per share price or value thereof
to reflect any merger, consolidation, combination, liquidation, reorganization,
recapitalization, stock dividend, stock split, split-up, split-off, spin-off,
combination of shares, exchange of shares or other like change in capital
structure of the Company.
PURCHASE OPTION
Except in the case of options held by Donald J. Carter, Jr. and
Christina Carter Urschel, until such time as the Company has consummated an
underwritten public offering with the result that the ownership of the then
outstanding shares of Common Stock held by the Hicks Muse Shareholders (as
defined) is less than 10% of the fully diluted Common Stock, the Company shall
have the right, but not the obligation, to purchase an optionee's options or
any shares of Common Stock acquired pursuant to the exercise of his or her
options in the event of an optionee's termination of employment or the
occurrence of a Change of Control. "Change of Control" shall mean, generally,
(a) any sale, lease, exchange or other transfer of all or substantially all of
the assets of the Company to an unaffiliated person or entity or (b) a majority
of the Board shall consist of individuals other than those nominated by the
majority of the directors then serving on the Board or affiliates of the Hicks
Muse Shareholders. If the Company exercises its right to purchase any
optionee's options or shares of Common Stock, the purchase price shall be equal
to the fair market value (as defined in the 1998 Stock Option Plan for Key
Employees).
STOCK OPTION TRUST
Effective on June 4, 1998, the Company adopted the Home Interiors &
Gifts, Inc. 1998 Stock Option Plan for Unit directors, Branch directors and
Certain Other Independent Contractors (the "1998 Independent Contractor Stock
Option Plan"), in order to afford certain Unit directors, Branch directors and
other independent contractors an opportunity to acquire a proprietary interest
in the Company. Options for a total of 338,481 shares of common stock were
available for grant under the 1998 Independent Contractor Stock Option Plan. As
of December 31, 1998, options for 275,338 shares of common stock at an exercise
price of $18.05451 had been granted to a trustee (the "Trust Options"), to be
held in trust (the "Stock Option Trust") for the benefit of such Unit
directors, Branch directors and other independent contractors. Under the terms
of the Stock Option Trust, the Trust Options vest in five equal annual
installments from the date of grant or, if earlier, upon the consummation of an
underwritten initial public offering of common stock satisfying certain
requirements. The Trust Options expire on the tenth anniversary of the date of
grant. The Trust Options are not exercisable until the first to occur of the
90th day following the consummation of an underwritten initial public offering
of common stock satisfying certain requirements and the eighth anniversary of
the consummation of the Recapitalization. At such time as the Trust Options
become exercisable, the trust created under the Stock Option Trust will be
liquidated and the Trust Options will be distributed to the respective
beneficiaries. Under certain circumstances, the Company shall have the right to
purchase the Trust Options, or the shares of common stock issuable upon
exercise thereof, for the difference between the fair market value of the
common stock underlying such Trust Options and the option exercise price
thereof.
- 23 -
<PAGE> 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 10, 1999 certain
information regarding the beneficial ownership of the Common Stock by (i) each
person who owns beneficially more than 5% of the issued and outstanding shares
of Common Stock, (ii) each director of the Company, (iii) each executive
officer of the Company named in "Item 11. Executive Compensation" and (iv) all
directors and executive officers of the Company as a group. The Company
believes that each such holder has sole voting and dispositive power over the
shares of Common Stock held, except as otherwise indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
COMMON STOCK
-----------------------------------------
NO. OF PERCENTAGE OF
5% SHAREHOLDERS SHARES CLASS
------------------ -----------------
<S> <C> <C>
Donald J. Carter 942,151(1) 6.2%
8024 FM 428
Denton, Texas 76028
Hicks Muse Shareholders 10,111,436(2) 66.4%
c/o Hicks, Muse, Tate & Furst Incorporated
100 Crescent Court, Suite 1600
Dallas, Texas 75201
DIRECTORS AND EXECUTIVE OFFICERS
Donald J. Carter, Jr. 598,557(3) 3.9%
Barbara J. Hammond 535,714(4) 3.5%
Christina L. Carter Urschel 598,198(5) 3.9%
Thomas O. Hicks 10,111,436(2) 66.4%
Leonard A. Robertson 278,644(6) 1.8%
James W. Livingston 1,500 *
Daniel S. Dross -- --
Jack D. Furst --(7) --
Sheldon I. Stein --(8) --
Lawrence D. Stuart, Jr. --(7) --
Gretchen M. Williams 2,770 *
All directors and executive officers as a group (12 persons) 11,849,675 77.8%
</TABLE>
- ---------
* less than 1%.
(1) Includes 33,996 shares held by Linda J. Carter, Donald J. Carter's
wife. Donald J. Carter disclaims beneficial ownership of all shares held by
Linda J. Carter.
(2) Consists of (i) 9,779,081 shares of Common Stock owned of record
by HI Equity Partners, L.P. ("HIEP"), a limited partnership whose sole general
partner is TOH Home Interiors LLC ("Home Interiors LLC"), (ii) 55,388 shares of
Common Stock owned of record by HM/SS Investment Partners, L.P., ("HMIP"), a
limited partnership whose sole general partner is Home Interiors LLC and (iii)
276,967 shares of Common Stock owned of record by HM/BST Investment Partners,
L.P. ("HM BST"), a limited partnership whose sole general partner is Home
Interiors LLC. Thomas O. Hicks is the sole member and director of Home
Interiors LLC and, accordingly, may be deemed to be the beneficial owner of
Common Stock held by HIEP, HMIP and HM BST (collectively, the "Hicks Muse
Shareholders"). In addition, Mr. Hicks is an indirect minority limited partner
in HIEP. Mr. Hicks disclaims beneficial ownership of Common Stock owned of
record by the Hicks Muse Shareholders.
(3) Includes 235 shares held by Penni W. Carter, Donald J. Carter,
Jr.'s wife, and a total of 422 shares held by Donald J. Carter, Jr. as
custodian for his three children. Donald J. Carter, Jr. disclaims beneficial
ownership of all shares held by Penni W.
Carter.
(4) Consists of 258,570 shares held in the name of Barbara J. Hammond
and Howard L. Hammond, Trustees of the Hammond Family Trust, and 277,144 shares
held in the name of David and Mary Crowley Family Partnership, Ltd. Barbara J.
Hammond shares voting and dispositive power with Howard L. Hammond as Trustee
of the Hammond Family Trust. Barbara J. Hammond is one of three directors of
David and Mary Crowley Corporation, a Texas corporation that is the sole
general partner of David and Mary Crowley Family Partnership, Ltd., and
therefore may be deemed to share voting and dispositive power with the other
directors. Barbara J. Hammond disclaims beneficial ownership of all shares held
in the name of David and Mary Crowley Family Partnership, Ltd.
- 24 -
<PAGE> 25
(5) Includes 174 shares held by Harold Clifton Urschel, III, Christina
L. Carter Urschel's husband, and 124 shares held by Christina L. Carter Urschel
as custodian for her child. Christina L. Carter Urschel disclaims beneficial
ownership of all shares held by Harold Clifton Urschel, III.
(6) Includes 277,144 shares held in the name of David and Mary Crowley
Family Partnership, Ltd. Leonard A. Robertson is one of three directors of
David and Mary Crowley Corporation, a Texas corporation, that is the sole
general partner of David and Mary Crowley Family Partnership, Ltd., and
therefore may be deemed to share voting and dispositive power with the other
directors. Leonard A. Robertson disclaims beneficial ownership of all shares
held in the name of David and Mary Crowley Family Partnership, Ltd.
(7) Each of Messrs. Furst and Stuart hold indirect minority limited
partnership interests in HIEP. Each of Messrs. Furst and Stuart disclaims
beneficial ownership of Common Stock owned of record by HIEP.
(8) Mr. Stein holds a limited partnership interest in HMIP. Mr. Stein
disclaims beneficial ownership of Common Stock owned of record by HMIP.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Set forth below is a description of transactions entered into between
the Company and certain of its shareholders or affiliates during 1998.
RELATIONSHIPS WITH CCP
Pursuant to a written consulting agreement which was cancellable upon
30 days notice, since July 1997 CCP acted as a consultant to assist the Company
in reviewing proposals for potential transactions in order to select a third
party whose objectives were consistent with those of the Company. The Company
paid CCP $11,000 per month for its services. The consulting agreement with CCP
was terminated in connection with the closing of the Recapitalization in June
1998.
RELATIONSHIP WITH H.T. ARDINGER & SON COMPANY
Horace T. Ardinger, Jr., a former director and current shareholder of
the Company, owns H.T. Ardinger & Son Company, which supplies Products to the
Company. The Company paid H.T. Ardinger & Son Company approximately $37.0
million during 1998 for purchases of Products.
RELATIONSHIP WITH GARDERE & WYNNE, L.L.P.
M. Douglas Adkins, a former director and current shareholder of the
Company, is a Partner at Gardere & Wynne, L.L.P., the Company's principal
outside counsel. The Company paid Gardere & Wynne, L.L.P. approximately
$798,000 during 1998 for legal services of which approximately $398,000 was
incurred in connection with the Recapitalization.
RELATIONSHIP WITH CHARLES W. WEAVER MANUFACTURING COMPANY
The Company owns 21% of the common stock of Charles W. Weaver
Manufacturing Company ("Weaver"), a supplier whose primary customer is the
Company. The Company paid Weaver approximately $11.4 million during 1998 for
purchases of Products.
PARTICIPATION OF DIRECTORS AND EXECUTIVE OFFICERS IN THE RECAPITALIZATION
In connection with the Recapitalization, certain executive officers,
directors and members of management were entitled to retain all of their equity
interest in the Company or a higher percentage of their equity interest in the
Company than that available to other shareholders. Donald J. Carter, Jr.,
Christina L. Carter Urschel, Barbara J. Hammond and Ronald L. Carter (a former
director and current consultant of the Company) retained 597,900, 597,900,
258,570 and 357,400 shares of Common Stock, respectively. In addition, Barbara
J. Hammond and Ronald L. Carter received approximately $15.2 million and $4.3
million, respectively, in connection with the Recapitalization.
- 25 -
<PAGE> 26
THE MANOR
In April 1998, the Company purchased from Donald J. Carter, the
Company's former Chairman of the Board, the real estate and building which was
Donald J. Carter's former residence (the "Manor") in exchange for two airplane
hangers and cash in the amount of approximately $340,000. The Manor was valued
by an independent appraiser at approximately $1.9 million, and the airplane
hangers were appraised at an aggregate value of approximately $1.6 million. The
Manor is used by the Company's personnel to train and motivate selected
Displayers throughout the year.
CARTER & SONS FREIGHTWAYS, INC.
Ronald L. Carter, a former director of the Company, is President and
Chief Executive Officer of Carter & Sons Freightways, Inc. ("Carter & Sons"), a
trucking company that handles a small portion of the Company's freight. Ronald
L. Carter and Donald J. Carter own all of the outstanding stock of Carter &
Sons. During 1998, the Company paid Carter & Sons approximately $87,000 for its
services.
MIRACLE CANDLE COMPANY
The Company entered into a partnership agreement with Miracle Candle
Company ("Miracle") on December 14, 1998 to form Laredo Candle. In December
1998, the Company contributed $762,000 for its share of land, which was
purchased for $1.3 million. The land will be used to build a candle
manufacturing plant in Laredo, Texas, which the Company expects to have
operational by late 1999. Donald J. Carter provided a bridge loan of $2.8
million to Miracle at the prime rate plus 1.0% per annum until Miracle obtains
alternative financing. The bridge loan is collateralized by Miracle's 40%
interest in Laredo Candle. Miracle is also a current supplier to the Company.
The Company paid Miracle $4.1 million in 1998 for Products.
THE SHAREHOLDERS AGREEMENT
The Hicks Muse Shareholders and Adkins Family Partnership, Ltd., M.
Douglas Adkins, Estate of Fern Ardinger, Ardinger Family Partnership, Ltd.,
Donald J. Carter, Linda J. Carter, Donald J. Carter, Jr., Christina L. Carter
Urschel, Ronald L. Carter, Carter 1997 Charitable Remainder Unitrust and
Hammond Family Trust (collectively, the "Carter Shareholders") entered into a
Shareholders Agreement (the "Shareholders Agreement") upon the consummation of
the Recapitalization, which provides that the Board will consist of eleven
members, including six directors designated by Hicks Muse, three directors
designated by the Carter Designees and two independent directors mutually
designated by the Carter Designees and Hicks Muse. As of the date hereof, Hicks
Muse is still entitled to designate one director and one director has yet to be
designated by mutual agreement. The number of directors to be designated by
Hicks Muse and the Carter Designees is subject to adjustment based upon the
ownership of Common Stock by the Hicks Muse Shareholders and the Carter
Shareholders. See "Item 10. Directors and Executive Officers of the
Registrant."
The Shareholders Agreement also includes the Company's grant of
certain registration rights to the Hicks Muse Shareholders and the Carter
Shareholders, pursuant to which they may require, after, if ever, the Company
effects an underwritten initial public offering of Common Stock for gross
proceeds of in excess of $25.0 million under the Securities Act, and subject to
certain restrictions, the Company to register under the Securities Act the
shares of Common Stock owned by them. In addition, if the Company proposes to
register any of its securities under the Securities Act, the Hicks Muse
Shareholders and the Carter Shareholders shall have the right, subject to
certain restrictions, to include in such registration their shares of Common
Stock.
If any Hicks Muse Shareholders desires to transfer shares of Common
Stock representing more than 20% of the shares of Common Stock then held by the
Hicks Muse Shareholders, the Hicks Muse Shareholders must, subject to certain
restrictions, offer the Carter Shareholders the opportunity to include in the
proposed sale their proportionate share of the Carter Shareholders' Common
Stock. In addition, if through multiple sales of less than 20% of the shares of
Common Stock then held by the Hicks Muse Shareholders, the Hicks Muse
Shareholders desire to sell shares that, when aggregated with such prior sales,
would result in the Hicks Muse Shareholders holding less than 50% of the shares
of Common Stock held by them immediately after consummation of the
Recapitalization, the Carter Shareholders will have the right to sell shares of
their Common Stock in an amount equal to the same percentage of the shares they
owned immediately after consummation of the Recapitalization as the percentage,
in the aggregate, previously sold by the Hicks Muse Shareholders.
- 26 -
<PAGE> 27
CERTAIN OTHER TRANSACTIONS
In connection with the Recapitalization, the Company entered into an
agreement (the "Monitoring and Oversight Agreement") with Hicks, Muse & Co.
Partners, L.P. ("Hicks Muse Partners"), an affiliate of Hicks Muse. The
Monitoring and Oversight Agreement makes available to the Company and its
management on an ongoing basis the resources of Hicks Muse Partners concerning
a wide variety of financial and operational matters. The Company does not
believe that the services that have been and will continue to be provided to
the Company by Hicks Muse Partners could otherwise be obtained by the Company
without the addition of personnel or the engagement of outside professional
advisors. Pursuant to the Monitoring and Oversight Agreement, the Company will
pay Hicks Muse Partners a fee, payable quarterly, in an initial amount equal to
$1.0 million annually for monitoring and oversight services to be provided to
the Company. The initial fee will be adjusted, but not below the amount of the
initial fee, on January 1 of each calendar year to an amount equal to 1.0% of
the consolidated annual earnings of the Company before interest, taxes,
depreciation and amortization, but in no event shall such fee exceed $1.5
million annually. The Company paid Hicks Muse Partners $574,000 for monitoring
and oversight services for the period from June 5, 1998 through December 31,
1998. Effective January 1, 1999, the annual fee for monitoring and oversight
services was adjusted to $1.2 million.
In addition, the Company entered into an agreement (the "Financial
Advisory Agreement") with Hicks Muse Partners pursuant to which Hicks Muse
Partners received a financial advisory fee in an amount equal to $11.2 million
for its services as financial advisor to the Company in connection with the
Recapitalization and the transactions related thereto. If the Board requests
financial advisory services from Hicks Muse Partners from time to time after
the Recapitalization, Hicks Muse Partners also will be entitled to receive a
fee equal to 1.5% of the "transaction value" (as defined in the Financial
Advisory Agreement) for each "subsequent transaction" (as defined in the
Financial Advisory Agreement) in which the Company is involved. Each of the
Monitoring and Oversight Agreement and the Financial Advisory Agreement
terminates upon the earlier to occur of (a) the tenth anniversary of its
execution, (b) at any time prior to an underwritten initial public offering of
Common Stock pursuant to the Securities Act that meets certain requirements, if
Hicks Muse and its affiliates do not beneficially own at least 25% of the then
outstanding shares of Common Stock and Hicks Muse has not designated at least
one member of the Board or (c) at any time after such an underwritten initial
public offering of Common Stock, if Hicks Muse and its affiliates do not
beneficially own at least 10% of the then outstanding shares of Common Stock
and Hicks Muse has not designated at least one member of the Board.
- 27 -
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements:
(1) and (2) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Schedules"
on page F-1. All other financial statements and schedules not
listed are omitted either because they are not applicable, not
required or the required information is included in the
consolidated financial statements.
(3) Exhibits:
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger, dated April 13, 1998, merging
Crowley Investments, Inc. into the Company (incorporated by
reference to Exhibit 2.1 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
2.2 Articles of Merger, dated June 4, 1998 (incorporated by
reference to Exhibit 2.2 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form S-4, No.
333-62021, filed on November 30, 1998).
4.1 Indenture, dated as of June 4, 1998, among the Company, as
issuer, the Guarantors named therein and United States Trust
Company of New York (incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form S-4, No.
333-62021, filed on November 30, 1998).
4.2 Purchase Agreement, dated as of May 28, 1998, among the
Company, as issuer, the Guarantors named therein and Bear,
Stearns & Co., Inc., Chase Securities, Inc., Morgan Stanley
Dean Witter and NationsBanc Montgomery Securities LLC, as
initial purchasers (incorporated by reference to Exhibit 4.2 of
the Company's Registration Statement on Form S-4, No.
333-62021, filed on November 30, 1998).
4.3 Exchange and Registration Rights Agreement, dated as of June 4,
1998, among the Company, the Guarantors named therein and Bear,
Stearns & Co., Inc., Chase Securities, Inc., Morgan Stanley
Dean Witter and NationsBanc Montgomery Securities LLC.
(incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-4, No. 333-62021, filed on
November 30, 1998).
10.1 Credit Agreement, dated as of June 4, 1998, among Home
Interiors & Gifts, Inc., the Lenders from time to time party
thereto, The Chase Manhattan Bank, as syndication agent,
National Westminster Bank, PLC, as documentation agent, The
Prudential Insurance Company of America, as a co- agent,
Societe Generale, as a co-agent, Citicorp USA, Inc., as a
co-agent, and Nationsbank, N.A., as administrative agent for
the Lenders (incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-4, No. 333-62021,
filed on November 30, 1998).
10.1.1* First Amendment to Credit Agreement, dated as of December 18,
1998, among Home Interiors & Gifts, Inc., the Lenders from time
to time party thereto, The Chase Manhattan Bank, as syndication
agent, National Westminster Bank, PLC, as documentation agent,
The Prudential Insurance Company of America, as a co-agent,
Societe Generale, as a co-agent, Citicorp USA, Inc., as a co-
agent, and Nationsbank, N.A., as administrative agent for the
Lenders.
10.1.2* Second Amendment to Credit Agreement, dated as of March 12,
1999, among Home Interiors & Gifts, Inc., the Lenders from time
to time party thereto, The Chase Manhattan Bank, as syndication
agent, National Westminster Bank, PLC, as documentation agent,
The Prudential Insurance Company of America, as a co-agent,
Societe Generale, as a co-agent, Citicorp USA, Inc., as a co-
agent, and Nationsbank, N.A., as administrative agent for the
Lenders.
- 28 -
<PAGE> 29
10.2 Financial Advisory Agreement, dated June 4, 1998, between the
Company, Dallas Woodcraft, Inc., GIA, Inc., Homco, Inc., Homco
Puerto Rico, Inc., Spring Valley Scents, Inc., Homco de Mexico,
S.A. de C.V., and Hicks, Muse & Co. Partners, L.P.
(incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement on Form S-4, No. 333-62021, filed on
November 30, 1998).
10.3 Monitoring and Oversight Agreement, dated June 4, between the
Company, Dallas Woodcraft, Inc., GIA, Inc., Homco, Inc., Homco
Puerto Rico, Inc., Spring Valley Scents, Inc., Homco de Mexico,
S.A. de C.V., and Hicks, Muse & Co. Partners, L.P.
(incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-4, No. 333-62021, filed on
November 30, 1998).
10.4 Consulting Agreement, dated June 4, 1998, between Company and
Ronald L. Carter (incorporated by reference to Exhibit 10.4 of
the Company's Registration Statement on Form S-4, No. 333-
62021, filed on November 30, 1998).
10.5* Home Interiors & Gifts, Inc. 1998 Stock Option Plan for Key
Employees, dated June 4, 1998.
10.6 Executive Employment Agreement, dated June 4, 1998, between
Company and Donald J. Carter (incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement on Form
S-4, No. 333-62021, filed on November 30, 1998).
10.7 Executive Employment Agreement, dated June 4, 1998, between
Company and Donald J. Carter Jr. (incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement on Form S-
4, No. 333-62021, filed on November 30, 1998).
10.8 Executive Employment Agreement, dated June 4, 1998, between
Company and Barbara J. Hammond (incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on Form
S-4, No. 333-62021, filed on November 30, 1998).
10.9 Executive Employment Agreement, dated June 4, 1998, between
Company and Christina L. Carter Urschel (incorporated by
reference to Exhibit 10.9 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
10.10 Home Interiors & Gifts, Inc., 1998 Stock Option Plan for Unit
Directors, Branch Directors and Certain Other Independent
Contractors (incorporated by reference to Exhibit 10.10 of the
Company's Registration Statement on Form S-4, No. 333-62021,
filed on November 30, 1998).
10.11 Home Interiors & Gifts, Inc. 1998 Stock Option Trust, dated
June 4, 1998 (incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-4, No. 333-62021,
filed on November 30, 1998).
10.12 Agreement, dated February 26, 1997, by and between the Company
and Distribution Architects International, Inc. (incorporated
by reference to Exhibit 10.12 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
10.13 ISDA Master Agreement, dated as of June 25, 1998, by and
between NationsBank, N.A. and the Company (incorporated by
reference to Exhibit 10.13 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
10.14 Shareholders Agreement, as of June 4, 1998 between Company,
Adkins Family Partnership, LTD., M. Douglas Adkins, Estate of
Fern Ardinger, Ardinger Family Partnership, LTD., Donald J.
Carter, Jr., Linda J. Carter, Ronald Lee Carter, Donald J.
Carter, William J. Hendrix, as Independent Special Trustee of
the Carter 1997 Charitable Remainder Unit Trust, Howard L.
Hammond and Barbara J. Hammond, Trustees of the Hammond Family
Trust and Christina Lynne Carter Urschel (incorporated by
reference to Exhibit 10.14 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
10.15* Agreement of Partnership of Laredo Candle Company, dated as of
December 14, 1998, between the Company and Miracle Candle
Company.
10.15.1* First Amendment to Agreement of Partnership of Laredo Candle
Company, dated as of February 1, 1999, between the Company and
Miracle Candle Company.
21.1* Subsidiaries of the Company.
27.1* Financial Data Schedule (EDGAR only).
- ----------
* Filed herewith.
(b) Reports on Form 8-K; Not applicable.
-29-
<PAGE> 30
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.
Date: March 15, 1999 HOME INTERIORS & GIFTS, INC.
By: /s/ DONALD J. CARTER, JR.
-----------------------------------
Donald J. Carter, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Donald J. Carter, Jr. Chairman of the Board and March 15, 1999
- -------------------------------- Chief Executive Officer
Donald J. Carter, Jr. (principal executive officer)
/s/ Barbara J. Hammond Director and President March 15, 1999
- --------------------------------
Barbara J. Hammond
/s/ Christina L. Carter Urschel Director and Executive March 15, 1999
- -------------------------------- Vice President
Christina L. Carter Urschel
/s/ Leonard A. Robertson Chief Financial Officer March 15, 1999
- -------------------------------- (principal financial and
Leonard A. Robertson accounting officer)
/s/ Thomas O. Hicks Director March 15, 1999
- --------------------------------
Thomas O. Hicks
/s/ Jack D. Furst Director March 15, 1999
- --------------------------------
Jack D. Furst
/s/ Lawrence D. Stuart, Jr. Director March 15, 1999
- --------------------------------
Lawrence D. Stuart, Jr.
/s/ Daniel S. Dross Director March 15, 1999
- --------------------------------
Daniel S. Dross
/s/ Sheldon I. Stein Director March 15, 1999
- --------------------------------
Sheldon I. Stein
/s/ Gretchen M. Williams Director March 15, 1999
- --------------------------------
Gretchen M. Williams
</TABLE>
- 30 -
<PAGE> 31
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.......................... F-3
Consolidated Statements of Operations and Comprehensive Income for the years
ended December 31, 1996, 1997 and 1998............................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1996, 1997 and 1998................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998..................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Home Interiors & Gifts, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income,
shareholders' equity and cash flows present fairly, in all material respects,
the consolidated financial position of Home Interiors & Gifts, Inc. and
Subsidiaries as of December 31, 1997 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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 the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 12, 1999
F-2
<PAGE> 33
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 104,262 $ 41,024
Marketable securities .......................................... 2,003 --
Accounts receivable, net ....................................... 11,577 7,975
Inventories .................................................... 30,531 31,010
Deferred income tax benefit .................................... 3,031 2,164
Other current assets ........................................... 440 1,040
---------- ----------
Total current assets ................................... 151,844 83,213
Property, plant and equipment, net ............................... 17,353 21,774
Investments ...................................................... 67,681 1,667
Debt issuance costs, net ......................................... -- 19,132
Other assets ..................................................... 7,312 6,662
---------- ----------
Total assets ........................................... $ 244,190 $ 132,448
========== ==========
Current liabilities:
Accounts payable ............................................... $ 8,702 $ 13,119
Accrued seminars and incentive awards .......................... 12,398 12,422
Royalties payable .............................................. 6,770 6,922
Hostess prepayments ............................................ 7,812 8,719
Income taxes payable ........................................... 3,107 4,101
Current maturities and prepayment of long-term debt ............ -- 33,723
Other current liabilities ...................................... 14,791 14,063
---------- ----------
Total current liabilities .............................. 53,580 93,069
Long-term debt, net of current maturities ........................ -- 453,277
Deferred income tax liability .................................... 679 176
---------- ----------
Total liabilities ...................................... 54,259 546,522
---------- ----------
Commitments and contingencies (see Note 13)
Shareholders' equity (deficit):
Common stock, par value $0.10 per share, 75,000,000
shares authorized, 58,942,500 and
15,234,422 shares issued, respectively ...................... 5,894 1,523
Additional paid-in capital ..................................... 1,120 178,944
Retained earnings (accumulated deficit) ........................ 256,121 (594,314)
Less treasury stock 7,985,700 shares as of December
31, 1997, at cost ........................................... (73,814) --
Unrealized gains on investments and other ...................... 610 (227)
---------- ----------
Total shareholders' equity (deficit) ................... 189,931 (414,074)
---------- ----------
Total liabilities and shareholders' equity (deficit) ... $ 244,190 $ 132,448
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 34
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net sales ........................................ $ 434,299 $ 468,845 $ 490,223
Cost of goods sold ............................... 225,137 239,664 242,343
---------- ---------- ----------
Gross profit ..................................... 209,162 229,181 247,880
Selling, general and administrative:
Selling ........................................ 69,964 74,010 81,124
Freight, warehouse and
distribution ................................ 37,842 41,844 44,718
General and administrative ..................... 20,096 23,921 21,204
Gains on the sale of assets .................... (2,077) (198) (6,375)
Recapitalization expenses ...................... -- -- 6,198
---------- ---------- ----------
Total selling, general and
administrative ....................... 125,825 139,577 146,869
---------- ---------- ----------
Operating income ................................. 83,337 89,604 101,011
Other income (expense):
Interest income ................................ 5,113 7,985 5,563
Interest expense ............................... (503) (362) (27,532)
Other income, net .............................. 456 2,884 1,020
---------- ---------- ----------
Other income (expense), net ...................... 5,066 10,507 (20,949)
---------- ---------- ----------
Income before income taxes ....................... 88,403 100,111 80,062
Income taxes ..................................... 33,957 37,919 31,807
---------- ---------- ----------
Net income ....................................... 54,446 62,192 48,255
Other comprehensive income (loss), before tax:
Cumulative translation adjustment .............. -- (88) (139)
Unrealized gains (losses) on
investments ................................. -- 1,074 (1,074)
---------- ---------- ----------
Other comprehensive income (loss),
before tax ................................ -- 986 (1,213)
Income tax (expense) benefit related to
items of other comprehensive
income ......................................... -- (376) 376
---------- ---------- ----------
Other comprehensive income (loss),
net of tax ................................ -- 610 (837)
---------- ---------- ----------
Comprehensive income ............................. $ 54,446 $ 62,802 $ 47,418
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 35
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON COMMON PAID-IN (ACCUMULATED
SHARES STOCK CAPITAL DEFICIT)
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 ................. 58,704,900 $ 5,870 $ -- $ 167,405
Net income ............................... 54,446
Dividends, $0.25 per share ............... (12,680)
------------ ----------- ----------- -----------
Balance, December 31, 1996 ................. 58,704,900 5,870 -- 209,171
Net income ............................... 62,192
Issuance of common stock ................. 237,600 24 1,120
Cumulative translation adjustment ........
Unrealized gains on investments ..........
Dividends, $0.30 per share ............... (15,242)
------------ ----------- ----------- -----------
Balance, December 31, 1997 ................. 58,942,500 5,894 1,120 256,121
Net income ............................... 48,255
Recapitalization adjustments (see Note 3):
Issuance of common stock to
Hicks Muse ........................... 10,111,436 1,011 181,546
Purchase and retirement of
common stock ......................... (45,836,584) (4,584) (1,120) (821,853)
Retirement of treasury stock ........... (7,985,700) (798) (73,016)
Transaction fees and expenses .......... (3,215)
Issuance of common stock ................. 2,770 -- 50
Cumulative translation adjustment ........
Unrealized losses on investments .........
Stock option expense ..................... 563
Dividends, $0.075 per share .............. (3,821)
------------ ----------- ----------- -----------
Balance, December 31, 1998 ................. 15,234,422 $ 1,523 $ 178,944 $ (594,314)
============ =========== =========== ===========
<CAPTION>
UNREALIZED
GAINS ON
TREASURY INVESTMENTS
STOCK AND OTHER TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
Balance, December 31, 1995 ................. $ (73,814) $ -- $ 99,461
Net income ............................... 54,446
Dividends, $0.25 per share ............... (12,680)
----------- ----------- -----------
Balance, December 31, 1996 ................. (73,814) -- 141,227
Net income ............................... 62,192
Issuance of common stock ................. 1,144
Cumulative translation adjustment ........ (88) (88)
Unrealized gains on investments .......... 698 698
Dividends, $0.30 per share ............... (15,242)
----------- ----------- -----------
Balance, December 31, 1997 ................. (73,814) 610 189,931
Net income ............................... 48,255
Recapitalization adjustments (see Note 3):
Issuance of common stock to
Hicks Muse ........................... 182,557
Purchase and retirement of
common stock ......................... (827,557)
Retirement of treasury stock ........... 73,814 --
Transaction fees and expenses .......... (3,215)
Issuance of common stock ................. 50
Cumulative translation adjustment ........ (139) (139)
Unrealized losses on investments ......... (698) (698)
Stock option expense ..................... 563
Dividends, $0.075 per share .............. (3,821)
----------- ----------- -----------
Balance, December 31, 1998 ................. $ -- $ (227) $ (414,074)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 36
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 54,446 $ 62,192 $ 48,255
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................. 3,350 2,613 3,170
Amortization of debt issuance costs and other ................. -- 146 1,986
Provision for doubtful accounts ............................... 461 753 664
Gains on the sale of assets ................................... (2,077) (198) (6,375)
Stock option expense .......................................... -- -- 563
Realized gains on investments ................................. -- (1,859) (203)
Equity in earnings of affiliate ............................... -- (180) (159)
Deferred tax expense (benefit) ................................ 367 (577) 364
Provision for inventory obsolescence .......................... 850 1,561 --
Changes in assets and liabilities:
Accounts receivable ......................................... (2,497) (1,754) 1,023
Inventories ................................................. 2,385 (8,958) (479)
Other current assets ........................................ (91) (32) (600)
Other assets ................................................ (59) (491) 470
Accounts payable ............................................ 767 1,229 4,418
Income taxes payable ........................................ 4,810 (989) 994
Other accrued liabilities ................................... (5,205) 6,829 5,056
--------- --------- ---------
Total adjustments ....................................... 3,061 (1,907) 10,892
--------- --------- ---------
Net cash provided by operating activities ............... 57,507 60,285 59,147
--------- --------- ---------
Cash flows from investing activities:
Purchases of investments and other assets ..................... (2,392) (204,315) (87,482)
Proceeds from the sale of investments ......................... 1,000 142,388 155,163
Purchases of property, plant and equipment .................... (2,126) (4,617) (8,443)
Purchases of notes receivable ................................. (5,691) -- --
Issuance of notes receivable .................................. -- (2,520) --
Payments received on notes receivable ......................... -- 1,812 2,045
Proceeds from the sale of property, plant and equipment ....... 401 229 7,800
--------- --------- ---------
Net cash (used in) provided by investing activities ..... (8,808) (67,023) 69,083
--------- --------- ---------
Cash flows from financing activities:
Dividends paid ................................................ (6,086) (22,190) (9,554)
Capital contribution from Laredo Candle minority owner ........ -- -- 508
Proceeds from issuance of common stock ........................ -- 430 182,607
Purchase of treasury stock .................................... -- -- (827,557)
Proceeds from issuance of the Notes ........................... -- -- 200,000
Proceeds from borrowings under the Senior Credit Facility ..... -- -- 300,000
Payments under the Senior Credit Facility ..................... -- -- (13,000)
Debt issuance costs ........................................... -- -- (21,118)
Other transaction fees and expenses ........................... -- -- (3,215)
--------- --------- ---------
Net cash used in financing activities ................... (6,086) (21,760) (191,329)
--------- --------- ---------
Effect of cumulative translation adjustment ..................... -- (88) (139)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............ 42,613 (28,586) (63,238)
Cash and cash equivalents at beginning of year .................. 90,235 132,848 104,262
--------- --------- ---------
Cash and cash equivalents at end of period ...................... $ 132,848 $ 104,262 $ 41,024
========= ========= =========
Supplemental disclosures:
Income taxes paid ............................................. $ 29,396 $ 38,723 $ 29,935
Interest paid ................................................. $ -- $ 19 $ 22,354
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 37
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND
Home Interiors & Gifts, Inc., together with its subsidiaries (the
"Company"), is a direct seller of home decorative accessories using the "party
plan" method whereby members of its non-employee, independent sales
representatives ("Displayers") conduct shows in the homes of potential
customers. The Company believes that in-home shows provide a comfortable
environment where the unique benefits and attributes of the Company's products
can be demonstrated in a more effective manner than the typical retail setting.
The Company has been located in Dallas, Texas since its inception in
1957. Approximately one-third of the dollar volume of products purchased by the
Company in 1998 were purchased from and manufactured by the Company's
subsidiaries. The Company's subsidiaries sell substantially all of their
products to the Company. The Company purchases the remainder of its product line
from a select number of independent suppliers, most of whom sell their products
exclusively to the Company. The Company expanded its operations internationally
in 1995.
The following is a brief description of the Company's subsidiaries,
each of which is wholly-owned except as indicated:
o Dallas Woodcraft, Inc. ("DWC") manufactures framed art work and
mirrors using custom-designed equipment.
o GIA, Inc. ("GIA") and Homco, Inc. ("Homco") manufacture various
types of molded plastic products using custom-designed equipment.
o Laredo Candle Company, L.L.P. ("Laredo Candle"), which is owned
60% by the Company, was recently established and is anticipated to
begin manufacturing candles in late 1999.
o Spring Valley Scents, Inc. ("SVS") purchased candles from a third
party and resold the candles to the Company until February 1999.
Once Laredo Candle is operational in late 1999, it will replace
the business previously done through SVS. In the interim, candles
will be purchased directly from such third party.
o Homco de Mexico, S.A. de C.V. ("Homco de Mexico") and Homco Puerto
Rico, Inc. ("Homco PR") provide sales support services to the
international Displayers.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company maintains its accounting records and prepares financial
statements on the accrual basis of accounting, which conforms with generally
accepted accounting principles. Following these principles, management makes
estimates and assumptions that affect the amounts reported in the financial
statements and notes. Actual results may differ from these estimates.
Principles of Consolidation
These consolidated financial statements include the accounts of the
Company. Accordingly, all significant intercompany transactions have been
eliminated.
Financial Instruments
The Company considers all liquid interest-bearing instruments with a
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash and cash equivalents at financial institutions in excess
of federally insured limits. Marketable securities are certificates of deposit
which mature between three months and one year from the date of purchase.
Marketable securities are stated at cost, which approximates fair market value.
Investments in debt and equity securities are classified as available for sale
and are recorded at market value, based upon quoted market prices. Unrealized
gains or losses are included in shareholders' equity (deficit). Realized gains
and losses are recorded based on the specific identification method and are
included in other income. Accreted discounts and amortized premiums are included
in interest income.
F-7
<PAGE> 38
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company uses an interest rate swap agreement to limit the effect of
changes in interest rates on its variable rate long-term borrowings. Periodic
amounts paid or received under the swap agreement are recorded as part of
interest expense. The swap contains a knockout provision, which is separately
valued and adjusted to market quarterly. Any resulting gain or loss is included
in other income (expense).
Inventories
Inventories are stated at the lower of cost or current market price
using the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at the cost of the asset less
accumulated depreciation. Depreciation is computed using the declining balance
and straight-line methods over estimated useful lives. Major expenditures for
property, plant and equipment and those which substantially increase useful
lives are capitalized. Direct external costs of developing software, including
programming and enhancements, are capitalized and amortized over the estimated
useful lives once the software is placed in service. Software training costs,
maintenance and repairs are expensed as incurred. When assets are sold or
otherwise disposed of, costs and related accumulated depreciation are removed
from the financial statements and any resulting gains or losses are included in
operating income.
Income Taxes
The Company files its federal income tax return on a consolidated
basis. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and income tax purposes, based upon enacted tax rates in
effect for the periods the tax differences are expected to be settled or
realized.
Sales Recognition
Sales are recognized when products are shipped.
Hostess Prepayments
As a sales incentive, hostesses earn certificates redeemable for an
exclusive line of hostess merchandise. The amount of certificates awarded to
hostesses varies depending, among other things, upon the sales of the show, the
number of customers attending the show and whether any promotional program is in
effect. The Company issues these certificates to its Displayers in exchange for
cash and establishes a liability for the amount of certificates issued. These
certificates are later redeemed by Displayers as payment for hostess
merchandise. The Company reduces the liability for these hostess certificates to
the extent that purchased certificates are not expected to be redeemed based on
historical redemption rates.
Foreign Currency Translation
The balance sheet accounts of the Company's foreign operations are
translated into U.S. dollars at the year-end exchange rate. Revenues and
expenses are translated at the weighted average exchange rate for each period.
Translation gains and losses are included in shareholders' equity (deficit).
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The new standard is
effective for fiscal years beginning after December 15, 1999. The Company has
not yet determined the effect the new standard will have on its financial
statements.
F-8
<PAGE> 39
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Reclassifications
Certain reclassifications have been made to prior years' balances to
conform with current year presentation.
3. THE RECAPITALIZATION
The Company completed a recapitalization (the "Recapitalization") on
June 4, 1998 through the following simultaneous transactions:
o contribution of $182.6 million by Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse") in exchange for 10,111,436 shares of
the common stock, or approximately 66% of all outstanding shares
upon completion of the Recapitalization;
o issuance of $200.0 million of senior subordinated notes (the
"Notes");
o borrowing of $300.0 million under a $340.0 million senior credit
facility (the "Senior Credit Facility");
o use of the above proceeds, together with available cash of $169.3
million, to:
-- redeem 45,836,584 shares of common stock for $827.6 million;
and
-- pay fees and expenses of $24.3 million associated with the
Recapitalization consisting of:
o an $11.2 million financial advisory fee paid to Hicks
Muse for its role in obtaining financing for the
Recapitalization;
o $11.6 million of debt issuance costs paid primarily
to the bank syndicate group for the Senior Credit
Facility and the initial purchasers of the Notes; and
o $1.5 million of legal and accounting fees.
The Company allocated the Hicks Muse financial advisory fee and the
legal and accounting fees on a proportionate basis to the debt and equity
financing for the Recapitalization. Accordingly, the Company allocated $9.5
million to debt issuance costs and $3.2 million to additional paid-in capital.
The total debt issuance costs of $21.1 million are being amortized using the
effective interest method over the term of the related indebtedness.
In addition to the $24.3 million of fees and expenses related to the
Recapitalization, the Company paid another financial advisor and attorneys
approximately $6.2 million in connection with the Recapitalization. The Company
paid the financial advisor approximately $5.7 million to assist with the
development of strategic alternatives, identify potential buyers, evaluate
proposals and assist in the negotiation of the Hicks Muse offer. These financial
advisory and legal fees were expensed as incurred and are reflected as
Recapitalization expenses in the accompanying statement of operations.
As a result of the Recapitalization, the issued and outstanding shares
of common stock decreased to 15,231,652 shares as of June 4, 1998, all treasury
stock was retired and Hicks Muse acquired a controlling interest in the Company.
Hicks Muse and Adkins Family Partnership, Ltd., M. Douglas Adkins,
Estate of Fern Ardinger, Ardinger Family Partnership, Ltd., Donald J. Carter,
Linda J. Carter, Donald J. Carter, Jr., Christina L. Carter Urschel, Ronald L.
Carter, Carter 1997 Charitable Remainder Unitrust and Hammond Family Trust
(collectively, the "Carter Shareholders") entered into a Shareholders Agreement
(the "Shareholders Agreement") upon the consummation of the Recapitalization.
The Shareholders Agreement provides that the Company's Board of Directors (the
"Board") shall consist of six directors designated by Hicks Muse, three
directors designated by Donald J. Carter, Jr., Barbara J. Hammond and Christina
L. Carter Urschel, as designees of the Carter Shareholders, and two independent
directors mutually designated. Hicks Muse is still entitled to designate one
director and one director has yet to be designated by mutual agreement.
The Shareholders Agreement provides certain registration rights to
Hicks Muse and the Carter Shareholders. Hicks Muse and the Carter Shareholders
may require the Company to register or include their shares in any future
registration of securities. The Carter Shareholders also have the right to be
included, on a proportionate basis, in any proposed sale of common stock by
Hicks Muse if (i) such sale individually represents more than 20% of the shares
then held by Hicks Muse or (ii) in the aggregate, such sale would result in
Hicks Muse having sold more than 50% of the shares held by Hicks Muse
immediately subsequent to the Recapitalization.
F-9
<PAGE> 40
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Trade receivables ........................... $ 6,122 $ 5,090
Current portion of notes receivable ......... 3,398 1,485
Other ....................................... 2,296 1,748
---------- ----------
11,816 8,323
Allowance for doubtful accounts ............. (239) (348)
---------- ----------
$ 11,577 $ 7,975
========== ==========
</TABLE>
5. INVENTORIES
Inventories consisted of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Raw materials ............................... $ 5,036 $ 6,134
Work in process ............................. 1,152 1,742
Finished goods .............................. 24,343 23,134
---------- ----------
$ 30,531 $ 31,010
========== ==========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of December
31 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE 1997 1998
------------- ------------ ------------
<S> <C> <C> <C>
Land................................................ $ 3,260 $ 5,388
Buildings and improvements.......................... 5-40 years 18,952 18,416
Equipment, furniture and fixtures................... 3-10 years 33,195 32,589
------------ ------------
55,407 56,393
Accumulated depreciation............................ (39,220) (36,882)
------------ ------------
16,187 19,511
Software and hardware implementation in process..... 3-5 years 1,166 2,263
------------ ------------
$ 17,353 $ 21,774
============ ============
</TABLE>
7. INVESTMENTS
The Company revised its investment policy in April 1997, and, as a
result of this new policy, the Company invested a large portion of its cash and
cash equivalents in investments with a high fixed rate of return and low risk.
This policy continued until June 4, 1998 when the Company liquidated
substantially all of its investments to meet the cash requirements of the
Recapitalization.
F-10
<PAGE> 41
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated market value of available for sale investments by type of security
issue as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
TYPE OF SECURITY COST GAINS LOSSES VALUE
- ---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Tax exempt bonds ............. $ 50,521 $ 895 $ (40) $ 51,376
Corporate bonds .............. 8,955 165 (1) 9,119
Preferred Stock .............. 4,777 75 (15) 4,837
Mutual funds and other ....... 2,349 -- -- 2,349
------------ ------------ ------------ ------------
$ 66,602 $ 1,135 $ (56) $ 67,681
============ ============ ============ ============
</TABLE>
8. OTHER ASSETS
Prior to December 31, 1994, the Company owned several companies that
were unrelated to its core business of home decorative accessories. On December
31, 1994, the Company and Carter-Crowley Properties, Inc. ("CCP") entered into a
spin-off agreement whereby the Company disposed of all of its non-core business.
In connection therewith, the Company contributed to CCP approximately $10.0
million of notes receivable from certain of its suppliers whose primary customer
is the Company. These notes originally arose in connection with expansion needs
of these suppliers. On December 31, 1996, the Company purchased the remaining
principal balance on these notes from CCP for approximately $5.7 million. Notes
receivable from these and other suppliers, including current maturities, totaled
$6.8 million and $5.4 million as of December 31, 1997 and 1998.
On November 26, 1996, the Company sold one of its aircraft for $3.0
million. In exchange for its aircraft, the Company received a note receivable
for $2.5 million and another aircraft valued at $500,000. The transaction
resulted in a gain of approximately $1.7 million.
9. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following as of December 31,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Interest payable ....................... $ -- $ 2,959
Accrued compensation ................... 3,394 3,606
Employee benefit plan contributions .... 2,159 2,264
Sales taxes payable .................... 2,122 1,871
Dividends payable ...................... 5,733 --
Other current liabilities .............. 1,383 3,363
---------- ----------
$ 14,791 $ 14,063
========== ==========
</TABLE>
10. LONG-TERM DEBT
In connection with the Recapitalization, the Company issued $200.0
million of Notes and entered into a $340.0 million Senior Credit Facility, which
includes $40.0 million of revolving loans (the "Revolving Loans"). The Revolving
Loans remained undrawn as of December 31, 1998. Prior to the Recapitalization,
the Company had no indebtedness. The Senior Credit Facility provides for a
$200.0 million term loan (the "Tranche A Loan"), a $100.0 million term loan (the
"Tranche B Loan"), and $40.0 million of Revolving Loans. The Company may use the
Revolving Loans for letters of credit of up to $15.0 million. Letters of credit
of $2.2 million were outstanding as of December 31, 1998.
Borrowings under the Senior Credit Facility require quarterly principal
and interest payments. The Tranche A Loan and Revolving Loans mature on June 30,
2004. The Tranche B Loan matures on June 30, 2006. The Company
F-11
<PAGE> 42
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
may, at its option, prepay the term loans without premium or penalty.
Additionally, the Company may reduce or eliminate its revolving loan commitment
prior to maturity. The Senior Credit Facility is guaranteed unconditionally on a
senior basis by the Company's wholly-owned domestic subsidiaries and is
collateralized by a lien on substantially all assets of the Company and its
wholly-owned subsidiaries. There are no material restrictions on the Company's
ability to obtain funds from its wholly-owned subsidiaries by dividend or
otherwise.
The loans under the Senior Credit Facility bear interest, at the
Company's election, at either the LIBOR Rate plus an applicable margin or the
Base Rate Basis plus an applicable margin. The Base Rate Basis is the higher of
the prime rate of NationsBank, N.A. or the federal funds effective rate plus
0.5%. The applicable LIBOR margin is 2.0% for the Tranche A Loan and the
Revolving Loans and 2.5% for the Tranche B Loan. The applicable Base Rate Basis
margin is 0.75% for the Tranche A Loan and the Revolving Loans, and 1.25% for
the Tranche B Loan. The interest rates on all borrowings outstanding under the
Senior Credit Facility as of December 31, 1998 were based on LIBOR. The
applicable margin with respect to the loans will be eligible for certain
performance pricing step-downs.
Interest rates for the Senior Credit Facility are based on borrowings
entered into on December 9, 1998. Long-term debt consisted of the following as
of December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
INTEREST APPLICABLE ADJUSTED
AMOUNT RATE MARGIN RATE
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Senior Credit Facility:
Tranche A Loan:
3 month borrowings................ $ 6,250 5.24% 2.00% 7.24%
6 month borrowings................ 181,250 5.10% 2.00% 7.10%
-------------
187,500
Tranche B Loan:
12 month borrowings............... 99,500 5.02% 2.50% 7.52%
Notes.................................. 200,000 10.125% -- --
-------------
487,000
Less current maturities................ (26,000)
Less prepayment amount................. (7,723)
-------------
$ 453,277
=============
</TABLE>
Actual interest rates as of December 31, 1998 were as follows:
<TABLE>
<S> <C>
3 month LIBOR............................................................ 5.07%
6 month LIBOR............................................................ 5.07%
12 Month LIBOR........................................................... 5.10%
NationsBank, N.A. prime rate............................................. 7.75%
Federal funds effective rate ............................................ 4.80%
</TABLE>
The Revolving Loans are subject to a commitment fee based on the
undrawn portion of the Revolving Loans. The commitment fee is eligible for
certain performance pricing step-downs and was 0.5% per annum as of December 31,
1998. Commitment fees of $114,000 are included in interest expense in 1998.
The Notes bear interest at 10.125% per year, payable semi-annually in
arrears on June 1 and December 1 of each year. The Notes mature on June 1, 2008
and are guaranteed, unconditionally, jointly and severally, on an unsecured
senior subordinated basis by all of the Company's wholly-owned domestic
subsidiaries. Except as set forth below, the Notes are not redeemable by the
Company prior to June 1, 2003. Thereafter, the Notes are subject to redemption
by the Company, in whole or in part, at specified redemption prices. In
addition, prior to June 1, 2001, the Company may, subject to certain
requirements, redeem up to 35% of the aggregate principal amount of the Notes
outstanding at a redemption price equal to 110.125% plus accrued and unpaid
interest.
F-12
<PAGE> 43
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Current maturities of long-term debt as of December 31, 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
TRANCHE A TRANCHE B
LOAN LOAN NOTES TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999 ......................... $ 25,000 $ 1,000 $ -- $ 26,000
2000 ......................... 27,500 1,000 -- 28,500
2001 ......................... 32,500 1,000 -- 33,500
2002 ......................... 37,500 1,000 -- 38,500
2003 ......................... 42,500 1,000 -- 43,500
Thereafter ................... 22,500 94,500 200,000 317,000
---------- ---------- ---------- ----------
$ 187,500 $ 99,500 $ 200,000 $ 487,000
========== ========== ========== ==========
</TABLE>
The terms of the Notes and the Senior Credit Facility contain a number
of covenants which will, among other things, limit or restrict the ability of
the Company and its subsidiaries to make investments, incur additional
indebtedness, create liens on assets, enter into mergers or consolidations or
liquidate, wind up or dissolve, dispose of assets, pay dividends and redeem
stock, redeem or make prepayments on the Notes, make capital expenditures in
excess of certain amounts and engage in certain transactions with subsidiaries
and affiliates. In addition, under the Senior Credit Facility, the Company is
required to comply with specified financial ratios and tests, including minimum
interest coverage and maximum leverage ratios. Subject to these financial ratios
and tests, the Company will be required to make certain mandatory prepayments of
the term loans annually on March 31. The Company is required to prepay $7.7
million of the term loans on March 31, 1999. The impact of this prepayment is
not reflected in the table above.
Interest Rate Swap Agreement
The Company is exposed to market risks related to changes in interest
rates. On July 1, 1998, the Company entered into an interest rate swap agreement
to limit the effect of changes in interest rates on the Senior Credit Facility.
The swap provides the Company with a fixed interest rate until December 31,
2001, on a notional amount of $75.0 million. Under the swap, the Company pays
interest at 5.50% on the notional amount and receives interest thereon at three
month LIBOR on a quarterly basis. Beginning June 9, 1999, if LIBOR is greater
than 6.44% at the commencement of any quarterly reset period, a knockout
provision provides for no payment under the swap during such period. The
knockout provision is separately adjusted to market on a quarterly basis. The
total adjustment for 1998 was income of approximately $159,000, which is
included in other income. The level of variable-rate debt, after the effect of
the swap has been considered, is 44% of the total interest-bearing debt
outstanding. During 1998, the average rate received on the notional amount was
5.64% and the average rate paid was 5.50%. The swap is collateralized and
guaranteed under the same terms as the Senior Credit Facility.
11. INCOME TAXES
The components of income tax expense for the years ended December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal .............................. $ 30,354 $ 33,144 $ 29,095
State ................................ 3,236 5,352 2,348
---------- ---------- ----------
33,590 38,496 31,443
Deferred, net .......................... 367 (577) 364
---------- ---------- ----------
$ 33,957 $ 37,919 $ 31,807
========== ========== ==========
</TABLE>
F-13
<PAGE> 44
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A reconciliation of income tax expense computed at the federal
statutory rate to income tax expense at the Company's effective tax rate for the
years ended December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory rate applied to earnings before
income taxes ........................................ $ 30,941 $ 35,039 $ 28,022
State income taxes, net of federal benefit ............ 2,103 3,479 1,526
Nondeductible Recapitalization expenses ............... -- -- 2,169
Other ................................................. 913 (599) 90
---------- ---------- ----------
$ 33,957 $ 37,919 $ 31,807
========== ========== ==========
</TABLE>
The components of the net deferred tax balances as of December 31 are
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Inventories ................................................ $ 799 $ 272
Allowance for doubtful accounts ............................ 83 122
Accrued employee benefits and displayer incentives ......... 2,148 1,791
Other ...................................................... 1 (21)
---------- ----------
Gross deferred tax assets ............................... 3,031 2,164
Investments ................................................ (381) --
Property, plant and equipment .............................. (298) (176)
---------- ----------
Net deferred tax asset .................................. 2,352 1,988
Less current deferred tax asset ............................ 3,031 2,164
---------- ----------
Noncurrent deferred income tax liability ................ $ 679 $ 176
========== ==========
</TABLE>
12. BENEFIT PLANS
Employee Benefit Plans
In 1993, the Company established an Employee Stock Ownership Plan (the
"ESOP") for all full-time employees who had at least one year of service and
were age 18 or older. Historically, the Company made annual contributions to the
ESOP at the discretion of the Board. Cash contributions, which were paid in the
following year, totaled approximately $1.9 million and $2.2 million for 1996 and
1997. Shares owned by the ESOP attributable to employees of the Company totaled
2,386,741 as of December 31, 1997.
In connection with the Recapitalization, the ESOP was converted into a
401(k) plan and the shares of common stock previously held by the ESOP were
redeemed for cash. The 401(k) plan covers all full-time employees who have at
least six months of service and are age 18 or older. Beginning in 1999, the
401(k) plan generally allows employees to contribute up to 16% of their base
salary in various investment alternatives and provides for Company matching
contributions of up to 4%. Additionally, the Board may make discretionary
contributions to the 401(k) plan at any time. The Board approved a discretionary
contribution of $2.3 million to the 401(k) for 1998, which will be paid in 1999.
Stock-Based Compensation Plans
In connection with the Recapitalization, the Company adopted stock
option plans for key employees (the "Key Employee Stock Option Plan") and for
Displayers and other independent contractors (the "Independent Contractor Stock
Option Plan"). A trust (the "Stock Option Trust") holds and distributes stock
options granted under the Independent Contractor Stock Option Plan.
Options under both plans are issued at an exercise price equal to the
estimated fair market value of common stock on the date of grant. The option
exercise period is specified when the option is granted, not to exceed 10 years.
F-14
<PAGE> 45
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Options granted under both plans in 1998 vest ratably over five years and have a
10 year term; however, if an initial public offering occurs, vesting is
accelerated for options issued under the Independent Contractor Stock Option
Plan. All options issued to date under both plans have an exercise price of
$18.05451, the price per share paid in connection with the Recapitalization.
There were no expired or exercisable options under either plan as of December
31, 1998.
Key Employee Stock Option Plan
Options for a total of 1,353,924 shares of common stock are available
for grant under the Key Employee Stock Option Plan. As common stock is not
publicly traded, the fair value of options granted to key employees was
estimated on the date of grant using the Minimum Value method of option pricing
and the assumptions set forth below in order to determine compensation expense
for disclosure purposes only in accordance with SFAS No. 23, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The Company accounts for options issued
under the Key Employee Stock Option Plan in accordance with Accounting
Principles Board Opinion No. 25 ("APB 25").
Independent Contractor Stock Option Plan
Options for a total of 338,481 shares are available for grant to the
Stock Option Trust for the benefit of certain Displayers and other independent
contractors under the Independent Contractor Stock Option Plan. The fair value
of each stock option grant is estimated on the date of the grant using the
Black-Scholes method of option pricing based on the assumptions set forth below
in order to determine compensation expense for the period. As common stock is
not publicly traded, a volatility factor for a peer group of public companies is
utilized in the Black-Scholes model. The Company accounts for options issued
under the Independent Contractor Stock Option Plan in accordance with SFAS 123.
Key information related to the Company's stock-based compensation plans
is summarized below:
<TABLE>
<CAPTION>
KEY EMPLOYEE INDEPENDENT
STOCK CONTRACTOR
OPTION PLAN STOCK OPTION PLAN
-------------- -----------------
<S> <C> <C>
Options outstanding as of December 31, 1997............. -- --
Granted.............................................. 984,432 275,338
Exercised............................................ -- --
Forfeited............................................ -- (3,047)
----------- ----------
Options outstanding as of December 31, 1998............. 984,432 272,291
=========== ===========
Weighted average fair value of all options granted...... $ 5.04 $ 7.92
Weighted average remaining contractual life............. 9.6 years 9.5 years
Valuation assumptions:
Expected term........................................ 6.0 years 5.5 years
Expected dividend yield.............................. 0.00% 0.00%
Expected volatility.................................. -- 37.51%
Risk-free interest rate.............................. 5.61% 5.53%
</TABLE>
F-15
<PAGE> 46
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SFAS 123 establishes a fair value basis of accounting for stock-based
compensation plans. The effects of applying SFAS 123 as shown below are not
indicative of future amounts. Had the compensation cost for the Company's
stock-based compensation plans been determined consistent with SFAS 123, the
Company's compensation cost and net income for 1998 would approximate (in
thousands):
<TABLE>
<CAPTION>
KEY EMPLOYEE INDEPENDENT
STOCK CONTRACTOR
OPTION PLAN STOCK OPTION PLAN TOTAL
------------- ----------------- -------------
<S> <C> <C> <C>
SFAS 123 COMPENSATION COST:
as reported ......................... -- $ 563 $ 563
pro forma ........................... $ 518 -- $ 518
NET INCOME:
as reported ......................... $ 48,255
pro forma ........................... $ 47,943
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal proceedings incidental to its
normal business activities. Because most of the claims are covered by insurance,
management believes that the amounts, if any, which ultimately may be due in
connection with such lawsuits and claims would not have a material effect upon
the Company.
State Income Taxes
Various states, in which the Company does not currently file income or
franchise tax returns, have occasionally made inquiries to determine whether the
Company is subject to their income tax laws. To date, only one such state has
made a final assessment, which the Company has settled under protest. The
Company continues to believe that its current activities in such states in which
it is not filing income or franchise tax returns are exempt from state income or
franchise tax under federal law and that no provision for these taxes is
necessary.
Environmental Issues at DWC
In 1989, DWC was named as a potentially responsible party ("PRP") based
on allegedly having sent 2,640 gallons of waste to the Chemical Recycling, Inc.
facility in Wylie, Texas. The Company believes that DWC's share of the total
cleanup costs based on a volumetric allocation would be less than one percent.
In the future, DWC and the other PRPs, who are jointly and severally liable, may
incur additional costs related to the cleanup of hazardous substances at the
facility. DWC did not incur any cleanup related costs during 1996, 1997 and
1998. Because the site has been dormant for several years, the Company does not
believe it is probable that any additional costs will be incurred and,
accordingly, has not established any accruals for future cleanup costs at this
site.
Environmental Issues at Homco
In 1997, Homco was named as a PRP based on allegedly having transported
hazardous waste to the Materials Recovery Enterprises, Inc. facility in Ovalo,
Texas. In the future, Homco and the other PRPs, who are jointly and severally
liable, will incur costs related to the cleanup of hazardous substances at the
facility. The cleanup of the site is in the early stages. The PRP group has
hired an environmental consultant to conduct a remedial investigation and
feasibility study, which is expected to be completed in 1999. The Company
believes that Homco's share of the total cleanup costs based on a volumetric
allocation would be less than one percent. The Company did not incur any cleanup
related costs during 1997 or 1998 and has not established any accrual for such
costs as no determination of the cleanup costs for the site has been made.
F-16
<PAGE> 47
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Environmental Issues at GIA
On February 9, 1999, the EPA conducted an inspection at GIA to
determine compliance with the toxic chemical release reporting requirements for
1997 pursuant to the Emergency Planning and Community Right To Know Act of 1986
(the "EPCRA"), Section 313. A final determination has not been issued, but
several possible calculation errors in the Form R Report were noted during the
inspection. The EPA will make its final determination upon receipt and
verification of the Company's revised 1997 Form R calculation. It is possible
that the EPA could seek administrative penalties for these errors.
14. RELATED PARTY TRANSACTIONS
A majority of the Company's inventory purchases are from suppliers
whose primary customer is the Company.
A shareholder and former director of the Company is a partner of a law
firm that renders various legal services for the Company. The Company paid the
firm approximately $395,000, $269,000 and $798,000 for legal services during
1996, 1997 and 1998. Approximately $398,000 of the fees paid in 1998 were
incurred in connection with the Recapitalization and accordingly are reflected
in Recapitalization expenses in the accompanying statements of operations.
Amounts due to the law firm totaled $134,000 and $25,000 as of December 31, 1997
and 1998.
Another shareholder and former director of the Company owns a company
which supplies inventory items to the Company and whose primary customer is the
Company. The Company paid the supplier approximately $46.9 million, $45.6
million and $37.0 million during 1996, 1997 and 1998. Amounts due to this
supplier totaled approximately $2.3 million and $14,000 as of December 31, 1997
and 1998.
The Company owns 21% of the common stock of Charles W. Weaver
Manufacturing Company, a supplier whose primary customer is the Company. The
investment was purchased on December 31, 1996 from a former affiliate for
approximately $1.3 million and had a balance of approximately $1.5 million and
$1.6 million as of December 31, 1997 and 1998. The Company paid the supplier
approximately $10.6 million, $10.5 million and $11.4 million during 1996, 1997
and 1998. Amounts due to this supplier totaled $0 and $438,000 as of December
31, 1997 and 1998.
In connection with the Recapitalization, CCP acted as a consultant to
the Company from July 1997 under a consulting agreement, which was cancellable
upon 30 days notice. CCP assisted the Company in reviewing proposals for
potential transactions in order to select a third party whose objectives were
consistent with those of the Company. The Company paid CCP $11,000 per month for
its services. The consulting agreement was terminated upon the closing of the
Recapitalization in June 1998. Additionally, the Dallas Mavericks, an NBA
franchise that was controlled by CCP, leased an athletic facility owned by the
Company for approximately $40,000 during 1996. The Company also purchased an
airplane hangar from CCP on December 31, 1996 for approximately $565,000.
The Company leased improved real estate from its former chief executive
officer for $52,000 per year plus expenses during 1996, 1997 and the three month
period ended March 31, 1998. CCP subleased a portion of the real estate from the
Company from June through December 1997 for monthly payments of $2,000. In April
1998, the Company exchanged such real estate, which was valued at approximately
$1.9 million, for two airplane hangers and cash of approximately $340,000. The
real estate was recorded by the Company at an amount equal to the sum of the net
book value of the two airplane hangars exchanged of $858,000 and the cash paid.
During 1996, 1997 and 1998, the Company leased a condominium from a
related party for approximately $24,000 per year.
The Company engages the services of a freight company to handle a small
portion of its freight. The freight company is controlled by former directors of
the Company. The Company paid this freight company $139,000, $96,000 and $87,000
during 1996, 1997 and 1998 for its services.
F-17
<PAGE> 48
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In conjunction with the Recapitalization, the Company entered into an
agreement requiring payment of a quarterly management fee to Hicks Muse. The
management fee will be adjusted annually, but in no event will the annual fee be
less than $1.0 million or exceed $1.5 million. Management fees incurred during
1998 totaled $574,000. In addition, if the Board requests Hicks Muse to perform
additional financial advisory services in the future, Hicks Muse will receive a
financial advisory fee. The management agreement with Hicks Muse terminates on
June 4, 2008 or earlier under certain circumstances.
On June 4, 1998, the Company entered into a five-year employment
agreement with its former chief executive officer with annual compensation of
$200,000, plus reimbursement for certain expenses. The agreement generally
requires the Company to pay the former chief executive officer's salary
throughout the five-year term unless he voluntarily terminates his employment
during such term. The agreement, which contains a covenant not to compete with
the Company during the employment term and for three years thereafter, can be
voluntarily terminated only by the employee.
On June 4, 1998, the Company also entered into a one-year consulting
agreement with a former employee and former director for $200,000. The agreement
also contains a three-year covenant not to compete.
15. LAREDO CANDLE COMPANY
The Company entered into a partnership agreement with Miracle Candle
Company ("Miracle") on December 14, 1998 to form Laredo Candle. In December
1998, the Company contributed $762,000 for its share of land which was purchased
for approximately $1.3 million. The land will be used to build a candle
manufacturing plant, which the Company expects to have operational by late 1999.
The Company's former chief executive officer has provided a bridge loan of $2.8
million to Miracle at the prime rate plus 1.0% per annum until Miracle obtains
alternative financing. The bridge loan is collateralized by Miracle's 40%
interest in Laredo Candle. Miracle is also a current supplier to the Company.
The Company paid Miracle $4.1 million in 1998 for inventory items, and no
amounts were due to Miracle as of December 31, 1998. In January 1999, the
Company entered into a $1.4 million contract with a construction company to
build the candle manufacturing plant.
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, marketable
securities, accounts receivable, accounts payable and other current liabilities
approximate fair market value due to their short maturities. The carrying
amounts of notes receivable and variable rate long-term debt also approximate
fair market value as their interest rates are based on current interest rates.
Available for sale investments are stated at fair market value based on quoted
market prices. The Notes had a carrying value of $200.0 million, which
approximated fair value as of December 31, 1998. The interest rate swap had a
carrying value of $68,000 and negative fair value of approximately $1.4 million
as of December 31, 1998. The negative fair value of the swap reflects the
estimated amount that the Company would have to pay to terminate the swap.
F-18
<PAGE> 49
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited quarterly results of
operations for the quarters ended (in thousands):
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1996
Net sales ................ $ 85,799 $ 104,221 $ 105,911 $ 138,368 $ 434,299
Gross profit ............. 42,221 51,472 50,416 65,053 209,162
Operating income ......... 13,722 18,463 22,069 29,083 83,337
Net income ............... 9,287 12,260 14,556 18,343 54,446
1997
Net sales ................ $ 85,784 $ 122,736 $ 113,579 $ 146,746 $ 468,845
Gross profit ............. 41,779 60,216 53,841 73,345 229,181
Operating income ......... 14,409 26,403 19,268 29,524 89,604
Net income ............... 9,634 17,575 13,216 21,767 62,192
1998
Net sales ................. $ 108,321 $ 127,752 $ 111,132 $ 143,018 $ 490,223
Gross profit .............. 53,997 65,989 56,561 71,333 247,880
Operating income .......... 24,435 21,161 23,271 32,144 101,011
Net income ................ 16,010 12,179 7,287 12,779 48,255
</TABLE>
18. ISSUANCE OF COMPANY COMMON STOCK
In October 1997, a former employee of the Company purchased 237,600
shares of common stock for approximately $430,000 under an exclusive stock
option agreement. The transaction resulted in a tax benefit for the Company of
$714,000, which has been credited to additional paid-in capital.
F-19
<PAGE> 50
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
19. GUARANTOR FINANCIAL DATA
DWC, GIA, Homco, SVS and Homco PR (collectively, the "Guarantors")
unconditionally, on a joint and several basis, guarantee the Notes. The
Company's other subsidiaries, Homco de Mexico and Laredo Candle have not
guaranteed the Notes. Financial statements for the nonguarantor subsidiaries
have been omitted because the assets, equity, income and cash flows of the
nonguarantor subsidiaries are less than 3% of those for the Company on a
consolidated basis for all periods presented. Guarantor financial statements on
an individual basis are not significant and have been omitted. Accordingly, the
following financial information presents the combined financial statements of
the Guarantors (in thousands):
COMBINED BALANCE SHEETS OF THE GUARANTORS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1997 1998
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................ $ 22,734 $ 440
Inventories ...................................... 9,185 10,558
Intercompany receivable, net ..................... 1,377 4,484
Other current assets ............................. 553 754
---------- ----------
Total current assets ..................... 33,849 16,236
Property, plant and equipment, net ................. 7,600 8,421
Other assets ....................................... 1,525 1,105
---------- ----------
Total assets ............................. $ 42,974 $ 25,762
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable ................................. $ 1,131 $ 1,963
Income taxes payable ............................. 1,448 410
Other current liabilities ........................ 2,916 3,133
---------- ----------
Total current liabilities ................ 5,495 5,506
Deferred income tax liability ...................... 254 266
---------- ----------
Total liabilities ........................ 5,749 5,772
---------- ----------
Commitments and contingencies
Shareholder's equity:
Common stock ..................................... 1,010 1,010
Additional paid-in capital ....................... 9,592 10,292
Retained earnings ................................ 26,623 8,688
---------- ----------
Total shareholder's equity ............... 37,225 19,990
---------- ----------
Total liabilities and shareholder's equity $ 42,974 $ 25,762
========== ==========
</TABLE>
F-20
<PAGE> 51
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
COMBINED STATEMENTS OF OPERATIONS OF THE GUARANTORS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net sales .............................. $ 66,741 $ 77,363 $ 87,900
Cost of goods sold ..................... 49,226 55,931 64,483
---------- ---------- ----------
Gross profit ........................... 17,515 21,432 23,417
Selling, general and administrative .... 4,000 4,038 4,164
---------- ---------- ----------
Operating income ....................... 13,515 17,394 19,253
Other income, net ...................... 697 1,120 860
---------- ---------- ----------
Income before income taxes ............. 14,212 18,514 20,113
Income taxes ........................... 5,329 6,686 7,268
---------- ---------- ----------
Net income ............................. $ 8,883 $ 11,828 $ 12,845
========== ========== ==========
</TABLE>
COMBINED STATEMENTS OF CASH FLOWS OF GUARANTORS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 8,883 $ 11,828 $ 12,845
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................ 1,592 1,619 1,747
(Gains) losses on the sale of assets ..................... (1) (190) 58
Deferred tax expense (benefit) ........................... 28 (135) (42)
Changes in assets and liabilities:
Inventories ........................................... 681 947 (1,373)
Intercompany receivable, net .......................... 519 (245) (3,109)
Other current and non-current assets .................. (38) (341) 274
Income taxes payable .................................. (509) 545 (1,038)
Accounts payable and other current liabilities ........ 390 489 1,048
-------- -------- --------
Total adjustments ................................ 2,662 2,689 (2,435)
-------- -------- --------
Net cash provided by operating activities ........ 11,545 14,517 10,410
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment ............... (685) (1,573) (2,625)
-------- -------- --------
Net cash used in investing activities ............ (685) (1,573) (2,625)
-------- -------- --------
Cash flows from financing activities:
Dividends paid to parent ................................. -- (17,600) (30,779)
Capital contributions from parent ........................ -- 201 700
-------- -------- --------
Net cash used in financing activities ............ -- (17,399) (30,079)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 10,860 (4,455) (22,294)
Cash and cash equivalents at beginning of year ............. 16,329 27,189 22,734
-------- -------- --------
Cash and cash equivalents at end of year ................... $ 27,189 $ 22,734 $ 440
======== ======== ========
</TABLE>
F-21
<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
---------- ---------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated April 13, 1998, merging
Crowley Investments, Inc. into the Company (incorporated by
reference to Exhibit 2.1 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
2.2 Articles of Merger, dated June 4, 1998 (incorporated by
reference to Exhibit 2.2 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form S-4, No.
333-62021, filed on November 30, 1998).
4.1 Indenture, dated as of June 4, 1998, among the Company, as
issuer, the Guarantors named therein and United States Trust
Company of New York (incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form S-4, No.
333-62021, filed on November 30, 1998).
4.2 Purchase Agreement, dated as of May 28, 1998, among the
Company, as issuer, the Guarantors named therein and Bear,
Stearns & Co., Inc., Chase Securities, Inc., Morgan Stanley
Dean Witter and NationsBanc Montgomery Securities LLC, as
initial purchasers (incorporated by reference to Exhibit 4.2 of
the Company's Registration Statement on Form S-4, No.
333-62021, filed on November 30, 1998).
4.3 Exchange and Registration Rights Agreement, dated as of June 4,
1998, among the Company, the Guarantors named therein and Bear,
Stearns & Co., Inc., Chase Securities, Inc., Morgan Stanley
Dean Witter and NationsBanc Montgomery Securities LLC.
(incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-4, No. 333-62021, filed on
November 30, 1998).
10.1 Credit Agreement, dated as of June 4, 1998, among Home
Interiors & Gifts, Inc., the Lenders from time to time party
thereto, The Chase Manhattan Bank, as syndication agent,
National Westminster Bank, PLC, as documentation agent, The
Prudential Insurance Company of America, as a co-agent,
Societe Generale, as a co-agent, Citicorp USA, Inc., as a
co-agent, and Nationsbank, N.A., as administrative agent for
the Lenders (incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-4, No. 333-62021,
filed on November 30, 1998).
10.1.1* First Amendment to Credit Agreement, dated as of December 18,
1998, among Home Interiors & Gifts, Inc., the Lenders from time
to time party thereto, The Chase Manhattan Bank, as syndication
agent, National Westminster Bank, PLC, as documentation agent,
The Prudential Insurance Company of America, as a co-agent,
Societe Generale, as a co-agent, Citicorp USA, Inc., as a co-
agent, and Nationsbank, N.A., as administrative agent for the
Lenders.
10.1.2* Second Amendment to Credit Agreement, dated as of March 12,
1999, among Home Interiors & Gifts, Inc., the Lenders from time
to time party thereto, The Chase Manhattan Bank, as syndication
agent, National Westminster Bank, PLC, as documentation agent,
The Prudential Insurance Company of America, as a co-agent,
Societe Generale, as a co-agent, Citicorp USA, Inc., as a co-
agent, and Nationsbank, N.A., as administrative agent for the
Lenders.
10.2 Financial Advisory Agreement, dated June 4, 1998, between the
Company, Dallas Woodcraft, Inc., GIA, Inc., Homco, Inc., Homco
Puerto Rico, Inc., Spring Valley Scents, Inc., Homco de Mexico,
S.A. de C.V., and Hicks, Muse & Co. Partners, L.P.
(incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement on Form S-4, No. 333-62021, filed on
November 30, 1998).
10.3 Monitoring and Oversight Agreement, dated June 4, between the
Company, Dallas Woodcraft, Inc., GIA, Inc., Homco, Inc., Homco
Puerto Rico, Inc., Spring Valley Scents, Inc., Homco de Mexico,
S.A. de C.V., and Hicks, Muse & Co. Partners, L.P.
(incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-4, No. 333-62021, filed on
November 30, 1998).
10.4 Consulting Agreement, dated June 4, 1998, between Company and
Ronald L. Carter (incorporated by reference to Exhibit 10.4 of
the Company's Registration Statement on Form S-4, No.
333-62021, filed on November 30, 1998).
10.5* Home Interiors & Gifts, Inc. 1998 Stock Option Plan for Key
Employees, dated June 4, 1998.
</TABLE>
<PAGE> 53
<TABLE>
<S> <C>
10.6 Executive Employment Agreement, dated June 4, 1998, between
Company and Donald J. Carter (incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement on Form
S-4, No. 333-62021, filed on November 30, 1998).
10.7 Executive Employment Agreement, dated June 4, 1998, between
Company and Donald J. Carter Jr. (incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement on Form
S-4, No. 333-62021, filed on November 30, 1998).
10.8 Executive Employment Agreement, dated June 4, 1998, between
Company and Barbara J. Hammond (incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on Form
S-4, No. 333-62021, filed on November 30, 1998).
10.9 Executive Employment Agreement, dated June 4, 1998, between
Company and Christina L. Carter Urschel (incorporated by
reference to Exhibit 10.9 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
10.10 Home Interiors & Gifts, Inc., 1998 Stock Option Plan for Unit
Directors, Branch Directors and Certain Other Independent
Contractors (incorporated by reference to Exhibit 10.10 of the
Company's Registration Statement on Form S-4, No. 333-62021,
filed on November 30, 1998).
10.11 Home Interiors & Gifts, Inc. 1998 Stock Option Trust, dated
June 4, 1998 (incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-4, No. 333-62021,
filed on November 30, 1998). 10.12 Agreement, dated February
26, 1997, by and between the Company and Distribution
Architects International, Inc. (incorporated by reference to
Exhibit 10.12 of the Company's Registration Statement on Form
S-4, No. 333-62021, filed on November 30, 1998).
10.13 ISDA Master Agreement, dated as of June 25, 1998, by and
between NationsBank, N.A. and the Company (incorporated by
reference to Exhibit 10.13 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
10.14 Shareholders Agreement, as of June 4, 1998 between Company,
Adkins Family Partnership, LTD., M. Douglas Adkins, Estate of
Fern Ardinger, Ardinger Family Partnership, LTD., Donald J.
Carter, Jr., Linda J. Carter, Ronald Lee Carter, Donald J.
Carter, William J. Hendrix, as Independent Special Trustee of
the Carter 1997 Charitable Remainder Unit Trust, Howard L.
Hammond and Barbara J. Hammond, Trustees of the Hammond Family
Trust and Christina Lynne Carter Urschel (incorporated by
reference to Exhibit 10.14 of the Company's Registration
Statement on Form S-4, No. 333-62021, filed on November 30,
1998).
10.15* Agreement of Partnership of Laredo Candle Company, dated as of
December 14, 1998, between the Company and Miracle Candle
Company.
10.15.1* First Amendment to Agreement of Partnership of Laredo Candle
Company, dated as of February 1, 1999, between the Company and
Miracle Candle Company.
21.1* Subsidiaries of the Company.
27.1* Financial Data Schedule (EDGAR only).
</TABLE>
- ----------
* Filed herewith.
(b) Reports on Form 8-K; Not applicable.
<PAGE> 1
EXHIBIT 10.1.1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment") is
entered into as of the 18th day of December, 1998, by and among the Persons
executing this First Amendment as lenders (such Persons, and their successors
and assigns, are collectively referred to herein as the "Lenders"), HOME
INTERIORS & GIFTS, INC., a Texas corporation (the "Borrower"), and NATIONSBANK,
N.A., as Administrative Agent for the Lenders (the "Administrative Agent") to
the extent and in the manner provided for in the Credit Agreement (defined below
and herein so called)
BACKGROUND
A. The Lenders, the Borrower, certain co-agents, and the Administrative
Agent are parties to that certain Credit Agreement, dated as of June 4, 1998
(said Credit Agreement, as amended, the "Credit Agreement"; terms defined in the
Credit Agreement and not otherwise defined herein shall be used as defined in
the Credit Agreement).
B. As a result of a change in the proposed ownership structure of the
Candle Making Joint Venture, the Borrower will own more than 50% of the Candle
Making Joint Venture, the result of which would be to cause the Candle Making
Joint Venture to become a Subsidiary under the Credit Agreement. The Borrower
has requested that the Candle Making Joint Venture not be deemed to be a
Subsidiary under the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the parties
hereto covenant and agree as follows:
1. AMENDMENTS.
(a) The definition of "Candle Making Joint Venture" set forth in
Section 1.1 of the Credit Agreement is hereby amended to read as follows:
"Candle Making Joint Venture" means (a) prior to about
December 18, 1998, that certain joint venture of the Borrower to be
engaged in the making of candles in which the Borrower will initially
contribute real estate and equipment having a fair market value not to
exceed $2,500,000 in aggregate amount and (b) on or about December 18,
1998 and thereafter, Laredo Candle Company L.L.P. or any Person a
successor in interest thereto."
(b) The definition of "Subsidiary" set forth in Section 1.1 of the
Credit Agreement is hereby amended by adding the following sentence to the end
thereof:
-1-
<PAGE> 2
"Notwithstanding anything in this Agreement or in the other Loan
Documents to the contrary, the Candle Making Joint Venture shall not be
a Subsidiary of the Borrower."
2. WAIVER. Subject to the satisfaction of the conditions of
effectiveness set forth in Section 4 hereof, the Lenders hereby (a) waive the
requirement of clause (iv) of Section 7.3(m) of the Credit Agreement with
respect to the Investment in the Candle Making Joint Venture and (b) agree that
the Investment in the Candle Making Joint Venture shall not be included in the
calculation of the Dollar limitations set forth in clause (viii) of Section
7.3(m) of the Credit Agreement. The waiver provided herein does not affect any
other covenants or provisions of the Credit Agreement.
3. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
execution and delivery hereof, the Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendment set forth in the
foregoing Section 1 and the waiver set forth in the foregoing Section 2:
(a) the representations and warranties contained in the Credit
Agreement (other than those representations and warranties that specifically
relate to an earlier date) are true and correct in all material respects on and
as of the date hereof as if made on and das of such date; and
(b) no event has occurred and is continuing which constitutes a Default
or an Event of Default.
4. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be effective
as of December 18, 1998, subject to the following:
(a) the representations and warranties set forth in Section 3 of this
First Amendment shall be true and correct;
(b) the Administrative Agent shall have received counterparts of this
First Amendment executed by Borrower and the Determining Lenders and
acknowledged by each Guarantor; and
(c) the Administrative Agent shall have received, in form and substance
satisfactory to the Administrative Agent and its counsel, such other documents,
certificates and instruments as the Administrative Agent shall reasonably
require.
5. GUARANTOR, ACKNOWLEDGMENT. By signing below, each Guarantor (i)
acknowledges, consents and agrees to the execution by the Borrower of this First
Amendment, (ii) acknowledges and agrees that its obligations in respect of the
Subsidiary Guaranty are not released, diminished, waived, modified, impaired or
affected in any manner by this First Amendment or any of the provisions
contemplated herein, (iii) ratifies and confirms its obligations under the
Subsidiary Guaranty, and (iv) acknowledges and agrees that it has no claims or
setoffs against, or defenses or counterclaims to, the Subsidiary Guaranty.
-2-
<PAGE> 3
6. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness off this First Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", or words of like import
shall mean and be a reference to the Credit Agreement, as affected and amended
by this First Amendment.
(b) The Credit Agreement, as amended by this First Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
7. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
reasonable out-of-pocket costs and expenses of the Administrative Agent in
connection with the preparation, reproduction, execution and delivery of this
First Amendment and the other instruments and documents to be delivered
hereunder.
8. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each which when so executed and delivered shall be deemed to be an
original and all of which when taken together shall constitute but one and the
same instrument.
9. GOVERNING LAW; BINDING EFFECT. This First Amendment shall be
governed by and construed in accordance with the laws of the State of Texas
(without regard to the principles of conflict of laws) and the United States of
America, and shall be binding upon the Borrower, the Administrative Agent, each
Lender and their respective successors and assigns.
10. HEADINGS. Section headings in this First Amendment are included
herein for convenience of reference only and shall not constitute a part of this
First Amendment for any other purpose.
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as the date first above written.
HOME INTERIORS & GIFTS, INC.
By: /s/ Leonard A. Robertson
-------------------------------------
Name: Leonard A. Robertson
Title: Chief Financial Officer
NATIONSBANK, N.A., as Administrative
Agent and as a Lender
By: /s/ Thomas Blake
-------------------------------------
Name: Thomas Blake
Title: Senior Vice President
THE CHASE MANHATTAN BANK, as
Syndication Agent and as a Lender
By: /s/ William J. Caggiano
-------------------------------------
Name: William J. Caggiano
Title: Managing Director
NATIONAL WESTMINSTER BANK,
PLC, as Documentation Agent and as a
Lender
By: /s/ Andrew S. Weinberg
-------------------------------------
Name: Andrew S. Weinberg
Title: Senior Vice President
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA, as Co-Agent
and as a Lender
By: /s/ Randall M. Kob
-------------------------------------
Name: Randall M. Kob
Title: Vice President
-4-
<PAGE> 5
SOCIETE GENERALE, as Co-Agent and as
a Lender
By: /s/ Edward J. Grimm
-------------------------------------
Name: Edward J. Grimm
Title: Vice President
CITCORP USA, INC., as Co-Agent and as a
Lender
By: /s/ Timothy L. Freeman
-------------------------------------
Name: Timothy L. Freeman
Title: Vice President
BANK ONE, TEXAS, N.A.
By: /s/ Gina A. Norris
-------------------------------------
Name: Gina A. Norris
Title: Vice President
BANKERS TRUST COMPANY
By: /s/ David J. Bell
-------------------------------------
Name: David J. Bell
Title: Vice President
BHF-BANK AKTIENGESELLSCHAFT
By: /s/ Anthony Heyman
-------------------------------------
Name: Anthony Heyman
Title: Assistant Vice President
By: /s/ John Sykes
-------------------------------------
Name: John Sykes
Title: Vice President
-5-
<PAGE> 6
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC. (formerly
known as Creditanstalt Corporate Finance,
Inc.)
By: /s/ Carl G. Drake
------------------------------------
Name: Carl G. Drake
Title: Vice President
By: /s/ Gary Andresen
------------------------------------
Name: Gary Andresen
Title: Associate
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Janet K. Williams
------------------------------------
Name: Janet K. Williams
Title: Duly Authorized Signatory
HELLER FINANCIAL, INC.
By: /s/ K. Craig Gallehugh
------------------------------------
Name: K. Craig Gallehugh
Title: Vice President
NATIONAL CITY BANK OF
KENTUCKY
By: /s/ Tom Gurbach
------------------------------------
Name: Tom Gurbach
Title: Vice President
-6-
<PAGE> 7
BALANCED HIGH-YIELD FUND LTD.
By: /s/ Anthony Heyman
-------------------------------------
Name: Anthony Heyman
Title: Assistant Vice President
By: /s/ John Sykes
-------------------------------------
Name: John Sykes
Title: Vice President
KZH ING-2 LLC
By: /s/ Virginia Conway
-------------------------------------
Name: Virginia Conway
Title: Authorized Agent
VAN KAMPEN CLO II, LIMITED
By: /s/ Jeffrey W. Maillet
-------------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President &
Director
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Manager
By: /s/ Scott H. Page
-------------------------------------
Name: Scott H. Page
Title: Vice President
-7-
<PAGE> 8
AG CAPITAL FUNDING PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P., as
Investment Advisor
By: /s/ Jeffrey H. Aronson
-------------------------------------
Name: Jeffrey H. Aronson
Title: Authorized Signatory
ALLIANCE CAPITAL MANAGEMENT, L.P.,
as Manager on behalf of Alliance
Capital Funding, L.L.C.
By: Alliance Capital Management
Corporation, General Partner of
Alliance Capital Management L.P.
By: /s/ L. I. Savitri Alex
-------------------------------------
Name: Savitri Alex
Title: Vice President
FIRST DOMINION FUNDING I
By: /s/ Andrew H. Marshak
-------------------------------------
Name: Andrew Harshak
Title: Authorized Signatory
-8-
<PAGE> 9
AGREED AND ACCEPTED:
DALLAS WOODCRAFT, INC., a Texas corporation
GIA, INC., a Nebraska corporation
HOMCO, INC., a Texas corporation
By: /s/ Leonard A. Robertson
-------------------------------------
Name: Leonard A. Robertson
Title: Secretary
HOMCO PUERTO RICO, INC., a Delaware corporation
SPRING VALLEY SCENTS, INC., a Texas corporation
By: /s/ Leonard A. Robertson
-------------------------------------
Name: Leonard A. Robertson
Title: Secretary
-9-
<PAGE> 1
EXHIBIT 10.1.2
SECOND AMENDMENT TO
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment"),
dated as of March 12, 1999, is entered into among HOME INTERIORS & GIFTS, INC.,
a Texas corporation (the "Borrower"), the institutions listed on the signature
pages hereof that are parties to the Credit Agreement defined below
(collectively, the "Lenders"), THE CHASE MANHATTAN BANK, as syndication agent
(in said capacity, the "Syndication Agent"), NATIONAL WESTMINSTER BANK, PLC , as
documentation agent (the "Documentation Agent'), THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA, as a co-agent, SOCIETE GENERALE, as a co-agent, CITICORP
USA. INC., as a co-agent (collectively, the "Co-Agents'), and NATIONSBANK, N.A.,
as administrative agent (in said capacity, the "Administrative Agent").
BACKGROUND
A. The Borrower, the Lenders, the Documentation Agent, the Syndication
Agent, the Co- Agents, and the Administrative Agent are parties to that certain
Credit Agreement, dated as of June 4, 1998, as amended by that certain First
Amendment to Credit Agreement, dated as of December 18, 1998 (said Credit
Agreement, as amended, the "Credit Agreement"; the terms defined in the Credit
Agreement and not otherwise defined herein shall be used herein as defined in
the Credit Agreement).
B. The Borrower, the Lenders, the Documentation Agent, the Syndication
Agent, the Co- Agents, and the Administrative Agent desire to make certain
amendments to the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Borrower, the
Lenders, the Documentation Agent, the Syndication Agent, the Co-Agents, and the
Administrative Agent covenant and agree as follows:
1. AMENDMENT TO CREDIT AGREEMENT. The definition of "Excess Cash Flow"
set forth in Section 1.1 of the Credit Agreement is hereby amended by (a)
deleting the "." at the end of the definition thereof and inserting ";" in lieu
thereof and (b) adding the following proviso at the end thereof to read as
follows:
"; provided, however, notwithstanding the above, there shall be
excluded from the definition of Current Liabilities for purposes of
calculating Working Capital for the period ending December 31, 1998,
accounts payable, which otherwise would have been payable in the
ordinary course, in the aggregate amount of $5,977,000, which were the
result of a delay in processing during the implementation of the
Borrower's new computer system in January, 1999."
<PAGE> 2
2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
execution and delivery hereof, the Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendment contemplated by the
foregoing Section 1:
(a) the representations and warranties contained in the Credit
Agreement (other than those representations and warranties that specifically
relate to an earlier date) and the other Loan Documents are true and correct in
all material respects on and as of the date hereof as made on and as of such
date;
(b) no event has occurred and is continuing which constitutes a Default
or an Event of Default;
(c) the Borrower has full corporate power and authority to execute and
deliver this Second Amendment, and this Second Amendment constitutes the legal,
valid and binding obligations of the Borrower, enforceable in accordance with
its terms, except as enforceability may be limited by applicable Debtor Relief
Laws and by general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law) and except as rights to indemnity
may be limited by federal or state securities laws;
(d) neither the execution, delivery and performance of this Second
Amendment nor the consummation of any transactions contemplated herein will
conflict with any material Applicable Law, the articles of incorporation, bylaws
or other governance document of the Borrower or any of its Subsidiaries, or any
material indenture, agreement or other instrument to which the Borrower or any
of its Subsidiaries or any of their respective property may be bound; and
(e) no authorization, approval, consent, or other action by, notice to,
or filing with, any governmental authority or other Person (including the Board
of Directors of the Borrower or any Guarantor), is required for the execution,
delivery or performance by the Borrower of this Second Amendment or the
acknowledgment of this Second Amendment by any Guarantor other than (i) those
approvals and consents already obtained, and (ii) consents under immaterial
contractual obligations.
3. CONDITIONS OF EFFECTIVENESS. This Second Amendment shall be
effective as of March 12, 1999, subject to the following:
(a) the Administrative Agent shall receive counterparts of this Second
Amendment executed by the Required Facility A Term Lenders and the Required
Facility B Term Lenders;
(b) the Administrative Agent shall receive counterparts of this Second
Amendment executed by the Borrower and acknowledged by each Guarantor; and
- 2 -
<PAGE> 3
(c) the Administrative Agent shall receive, in form and substance
satisfactory to the Administrative Agent and its counsel, such other documents,
certificates and instruments as the Administrative Agent shall reasonably
require.
4. GUARANTOR ACKNOWLEDGMENT. By signing below, each of the Guarantors
(i) acknowledges, consents and agrees to the execution and delivery of this
Second Amendment, (ii) acknowledges and agrees that its obligations in respect
of its Subsidiary Guaranty are not released, diminished, waived, modified,
impaired or affected in any manner by this Second Amendment or any of the
provisions contemplated herein, (iii) ratifies and confirms its obligations
under its Subsidiary Guaranty, and (iv) acknowledges and agrees that it has no
claims or offsets against, or defenses or counterclaims to, its Subsidiary
Guaranty as a result of this Second Amendment.
5. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this Second Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", or words of like import
shall mean and be a reference to the Credit Agreement, as amended by this Second
Amendment.
(b) The Credit Agreement, as amended by this Second Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
6. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
reasonable out-of-pocket costs and expenses of the Administrative Agent in
connection with the preparation, reproduction, execution and delivery of this
Second Amendment and the other instruments and documents to be delivered
hereunder (including the reasonable fees and out-of-pocket expenses of counsel
for the Administrative Agent with respect thereto and with respect to advising
the Administrative Agent as to its rights and responsibilities under the Credit
Agreement, as amended by this Second Amendment).
7. EXECUTION IN COUNTERPARTS. This Second Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each which when so executed and delivered shall be deemed to be an
original and all of which taken together shall constitute but one and the same
instrument.
8. GOVERNING LAW: BINDING EFFECT. This Second Amendment shall be
governed by and construed in accordance with the Laws of the State of Texas
without regard to the principles of the conflicts of Laws and the applicable
federal Laws and shall be binding upon the Borrower, the Administrative Agent,
the Syndication Agent, the Documentation Agent and each Lender and their
respective successors and assigns.
- 3 -
<PAGE> 4
9. HEADINGS. Section headings in this Second Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Second Amendment for any other purpose.
10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS SECOND
AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as the date first above written.
HOME INTERIORS & GIFTS, INC.
By: /s/ Leonard A. Robertson
--------------------------------------------
Name: Leonard A. Robertson
Title: Chief Financial Officer
NATIONSBANK, N.A., as Administrative Agent and
as a Lender
By: /s/ Natalie Hebert
--------------------------------------------
Natalie Hebert
Vice President
THE CHASE MANHATTAN BANK, as Syndication
Agent and as a Lender
By: /s/ William J. Caggiano
--------------------------------------------
Name: William J. Caggiano
Title: Managing Director
NATIONAL WESTMINSTER BANK, PLC, as
Documentation Agent and as a Lender
By: /s/ Andrew S. Weinberg
--------------------------------------------
Name: Andrew S. Weinberg
Title: Senior Vice President
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, as Co-Agent and as a Lender
By: /s/ Ric E. Abel
--------------------------------------------
Name: Ric E. Abel
Title: Vice President
- 5 -
<PAGE> 6
SOCIETE GENERALE, as Co-Agent and as a Lender
By: /s/ Edward J. Grimm
--------------------------------------------
Name: Edward J. Grimm
Title: Vice President
CITICORP USA, INC., as Co-Agent and as a Lender
By: /s/ Timothy L. Freeman
--------------------------------------------
Name: Timothy L. Freeman
Title: Managing Director/SCO
BANK ONE, TEXAS, N.A.
By: /s/ Gina A. Norris
--------------------------------------------
Name: Gina A. Norris
Title: Managing Director
BANKERS TRUST COMPANY
By: /s/ David J. Bell
--------------------------------------------
Name: David J. Bell
Title: Principal
BHF-BANK AKTIENGESELLSCHAFT
By: /s/ Geoffrey C. Gwin
--------------------------------------------
Name: Geoffrey C. Gwin
Title: Assistant Treasurer
By: /s/ Dan Dobrjanskyj
--------------------------------------------
Name: Dan Dobrjanskyj
Title: Assistant Vice President
- 6 -
<PAGE> 7
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By: /s/ RICHARD VARALLA
--------------------------------------------
Name: Richard Varalla
---------------------------------------
Title: Associate
--------------------------------------
By: /s/ ROBERT M. BIRINGER
--------------------------------------------
Name: Robert M. Biringer
---------------------------------------
Title: Executive Vice President
--------------------------------------
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ WILLIAM E. MAGEE
--------------------------------------------
Name: William E. Magee
---------------------------------------
Title: Duly Authorized Signatory
--------------------------------------
HELLER FINANCIAL, INC.
By: /s/ CRAIG GALLEHUGH
--------------------------------------------
Name: Craig Gallehugh
---------------------------------------
Title: Vice President
--------------------------------------
NATIONAL CITY BANK OF KENTUCKY
By: /s/ TOM GURBACH
--------------------------------------------
Name: Tom Gurbach
---------------------------------------
Title: Vice President
--------------------------------------
- 7 -
<PAGE> 8
BALANCED HIGH-YIELD FUND I LTD.
By: BHF-BANK Aktiengesellschaft, acting
through its New York Branch, as attorney-in-
fact
By: /s/ GEOFFREY C. GWIN
--------------------------------------------
Name: Geoffrey C. Gwin
---------------------------------------
Title: Assistant Treasurer
--------------------------------------
By: /s/ DAN DOBRJANSKYJ
--------------------------------------------
Name: Dan Dobrjanskyj
---------------------------------------
Title: Assistant Vice President
--------------------------------------
KZH ING-2 LLC
By: /s/ VIRGINIA CONWAY
--------------------------------------------
Name: Virginia Conway
---------------------------------------
Title: Authorized Agent
--------------------------------------
DELANO COMPANY
By: Pacific Investment Management Company, as
its Investment Advisor
By: PIMCO Management, Inc.,
a general partner
By: /s/ BRADLEY W. PAULSON
--------------------------------------------
Name: Bradley W. Paulson
---------------------------------------
Title: Vice President
--------------------------------------
VAN KAMPEN CLO II, LIMITED
By: Van Kampen American Capital Management,
Inc., as Collateral Manager
By: /s/ JEFFREY W. MAILLET
--------------------------------------------
Name: Jeffrey W. Maillet
---------------------------------------
Title: Senior Vice President and Director
--------------------------------------
- 8 -
<PAGE> 9
SENIOR DEBT PORTFOLIO
By: Boston Management and Research, as
Investment Manager
By: /s/ SCOTT H. PAGE
--------------------------------------------
Name: Scott H. Page
---------------------------------------
Title: Vice President
--------------------------------------
AG CAPITAL FUNDING PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P., as Investment
Manager
By: /s/ JEFFREY H. ARONSON
--------------------------------------------
Name: Jeffrey H. Aronson
---------------------------------------
Title: Authorized Signatory
--------------------------------------
ALLIANCE CAPITAL MANAGEMENT L.P., as Manager on
behalf of Alliance Capital Funding, L.L.C.
By: Alliance Capital Management Corporation,
General Partner of Alliance Capital
Management L.P.
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
FIRST DOMINION FUNDING I
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
- 9 -
<PAGE> 10
TCW LEVERAGED INCOME TRUST, L.P.
By: TCW Advisers (Bermuda), Ltd., as General
Partner
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
By: TCW Investment Management Company, as
Investment Manager
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
TCW LEVERAGED INCOME TRUST II, L.P.
By: TCW Advisers (Bermuda), Ltd., as General
Partner
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
By: TCW Investment Management Company, as
Investment Manager
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
CAPTIVA III FINANCE LTD., as advised by Pacific
Investment Management Company
By: /s/ JOHN H. CULLINANE
--------------------------------------------
Name: John H. Cullinane
---------------------------------------
Title: Director
--------------------------------------
- 10 -
<PAGE> 11
ACKNOWLEDGED AND AGREED:
DALLAS WOODCRAFT, INC., a Texas corporation
GIA, INC., a Nebraska corporation
HOMCO, INC., a Texas corporation
By: /s/ LEONARD A. ROBERTSON
--------------------------------------------
Name: Leonard A. Robertson
---------------------------------------
Title: Secretary
--------------------------------------
HOMCO PUERTO RICO, INC., a Delaware corporation
SPRING VALLEY SCENTS, INC., a Texas corporation
By: /s/ LEONARD A. ROBERTSON
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Name: Leonard A. Robertson
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Title: Secretary
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EXHIBIT 10.5
HOME INTERIORS & GIFTS, INC.
1998 STOCK OPTION PLAN
FOR KEY EMPLOYEES
1. Purpose.
Home Interiors & Gifts, Inc., a Texas corporation (herein, together
with its successors, referred to as the "Company"), by means of this 1998 Stock
Option Plan for Key Employees (the "Plan"), desires to afford certain
individuals and key employees of the Company and any direct or indirect
subsidiary or parent corporation thereof now existing or hereafter formed or
acquired (such parent and subsidiary corporations sometimes referred to herein
as "Related Entities") who are responsible for the continued growth of the
Company an opportunity to acquire a proprietary interest in the Company, and
thus to create in such persons an increased interest in and a greater concern
for the welfare of the Company and any Related Entities.
The stock options described in Sections 6 and 7 (the "Options"), and
the shares of Common Stock (as hereinafter defined) acquired pursuant to the
exercise of such Options, are a matter of separate inducement and are not in
lieu of any salary or other compensation for services. As used in the Plan, the
terms "parent corporation" and "subsidiary corporation" shall mean,
respectively, a corporation within the definition of such terms contained in
Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").
2. Administration.
The Plan shall be administered by the Option Committee, or any
successor thereto, of the Board of Directors of the Company (the "Board of
Directors"), or by any other committee appointed by the Board of Directors to
administer the Plan (the "Committee"); provided, the entire Board of Directors
may act as the Committee if it chooses to do so. The number of individuals that
shall constitute the Committee shall be determined from time to time by a
majority of all the members of the Board of Directors, and, unless a majority of
the Board of Directors determines otherwise, shall be no less than two
individuals. The Chairman of the Board of Directors of the Company shall be a
member of the Committee at all times. A majority of the Committee shall
constitute a quorum (or if the Committee consists of only two members, then both
members shall constitute a quorum), and subject to the provisions of Section 5,
the acts of a majority of the members present at any meeting at which a quorum
is present, or acts approved in writing by all members of the Committee, shall
be the acts of the Committee. Whenever the Company shall have a class of equity
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), each member of the Committee shall be
required to be a "Non-Employee Director" within the meaning of Rule 16b-3, as
amended ("Rule 16b-3"), or other applicable rules under Section 16(b) of the
Exchange Act and the Committee shall administer the Plan so as to comply at all
times with the Exchange Act.
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The members of the Committee shall serve at the pleasure of the Board
of Directors, which shall have the power, at any time and from time to time, to
remove members from or add members to the Committee. Removal from the Committee
may be with or without cause. Any individual serving as a member of the
Committee shall have the right to resign from membership on the Committee by
written notice to the Board of Directors. The Board of Directors, and not the
remaining members of the Committee, shall have the power and authority to fill
vacancies on the Committee, however caused. The Board of Directors shall
promptly fill any vacancy that causes the number of members of the Committee to
be less than two or, if the Company has a class of equity securities registered
pursuant to Section 12 of the Exchange Act, any other number that Rule 16b-3 may
require from time to time.
3. Shares Available.
Subject to the adjustments provided in Section 10, the maximum
aggregate number of shares of common stock, par value $0.10 per share, of the
Company ("Common Stock") in respect of which Options may be granted for all
purposes under the Plan shall be 1,353,924 shares. If, for any reason, any
shares as to which Options have been granted cease to be subject to purchase
thereunder, including the expiration of any such Option, the termination of any
such Option prior to exercise, or the forfeiture of any such Option, such shares
shall thereafter be available for grants under the Plan. Options granted under
the Plan may be fulfilled in accordance with the terms of the Plan with (i)
authorized and unissued shares of the Common Stock, (ii) issued shares of Common
Stock held in the Company's treasury, or (iii) issued shares of Common Stock
reacquired by the Company in each situation as the Board of Directors or the
Committee may determine from time to time.
4. Eligibility and Basis of Participation.
Grants of Incentive Options (as hereinafter defined) and Non-Qualified
Options (as hereinafter defined) may be made under the Plan, subject to and in
accordance with Section 6, to Key Employees. As used herein, the term "Key
Employee" shall mean any employee of the Company or any Related Entity,
including officers and directors of the Company or any Related Entity who are
also employees of the Company or any Related Entity, who are regularly employed
on a salaried basis and who are so employed on the date of such grant, whom the
Committee identifies as having a direct and significant effect on the
performance of the Company or any Related Entity.
Grants of Non-Qualified Options may be made, subject to and in
accordance with Section 7, to any Eligible Non-Employee. As used herein, the
term "Eligible Non-Employee" shall mean any person or entity of any nature
whatsoever, specifically including an individual, firm, company, corporation,
partnership, trust, or other entity (collectively, a "Person"), that the
Committee designates as eligible for a grant of Options pursuant to the Plan
because such Person performs bona fide consulting, advisory, or other services
for the Company or any Related Entity (other than services in connection with
the offer or sale of securities in a capital- raising transaction) and the Board
of Directors or the Committee determines that the Person
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has a direct and significant effect on the financial development of the Company
or any Related Entity.
The adoption of the Plan shall not be deemed to give any Person a right
to be granted any Options.
5. Authority of Committee.
Subject to and not inconsistent with the express provisions of the
Plan, the Code and, if applicable, Rule 16b-3, the Committee shall have plenary
authority to:
a. determine the Key Employees and Eligible Non-Employees to whom
Options shall be granted, the time when such Options shall be
granted, the number of Options, the purchase price or exercise
price of such Options, the period(s) during which such Options
shall be exercisable (whether in whole or in part, including
whether such Options shall become immediately exercisable upon
the consummation of a Change in Control), the restrictions to
be applicable to Options and all other terms and provisions
thereof (which need not be identical);
b. require, as a condition to the granting of any Option, that
the Person receiving such Option agree not to sell or
otherwise dispose of such Option, any Common Stock acquired
pursuant to such Option, or any other "derivative security"
(as defined by Rule 16a-1(c) under the Exchange Act) for a
period of six months following the later of (i) the date of
the grant of such Option or (ii) the date when the exercise
price of such Option is fixed if such exercise price is not
fixed at the date of grant of such Option, or for such other
period as the Committee may determine;
c. provide an arrangement through registered broker-dealers
whereby temporary financing may be made available to an
optionee by the broker-dealer, under the rules and regulations
of the Board of Governors of the Federal Reserve, for the
purpose of assisting the optionee in the exercise of an
Option, such authority to include the payment by the Company
of the commissions of the broker-dealer;
d. provide the establishment of procedures for an optionee (i) to
have withheld from the total number of shares of Common Stock
to be acquired upon the exercise of an Option that number of
shares having a Fair Market Value which, together with such
cash as shall be paid in respect of fractional shares, shall
equal the aggregate exercise price under such Option for the
number of shares then being acquired (including the shares to
be so withheld), and (ii) to exercise a portion of an Option
by delivering that number of shares of Common Stock already
owned by such optionee having an aggregate Fair Market Value
which shall equal the partial Option exercise price and to
deliver the shares thus acquired by such optionee in payment
of shares to be received pursuant to the exercise of
additional portions of such Option, the effect of which shall
be that
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such optionee can in sequence utilize such newly acquired
shares in payment of the exercise price of the entire Option,
together with such cash as shall be paid in respect of
fractional shares;
e. provide (in accordance with Section 13 or otherwise) the
establishment of a procedure whereby a number of shares of
Common Stock or other securities may be withheld from the
total number of shares of Common Stock or other securities to
be issued upon exercise of an Option to meet the obligation of
withholding for income, social security and other taxes
incurred by an optionee upon such exercise or required to be
withheld by the Company or a Related Entity in connection with
such exercise;
f. prescribe, amend, modify and rescind rules and regulations
relating to the Plan; and
g. make all determinations permitted or deemed necessary,
appropriate or advisable for the administration of the Plan,
interpret any Plan or Option provision, perform all other
acts, exercise all other powers, and establish any other
procedures determined by the Committee to be necessary,
appropriate, or advisable in administering the Plan or for the
conduct of the Committee's business. Any act of the Committee,
including interpretations of the provisions of the Plan or any
Option and determinations under the Plan or any Option, made
in good faith, shall be final, conclusive and binding on all
applicable interested parties.
The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee or any Person to whom it has delegated duties as aforesaid may employ
one or more Persons to render advice with respect to any responsibility the
Committee or such Person may have under the Plan; provided, however, that
whenever the Company has a class of equity securities registered under Section
12 of the Exchange Act, the Committee may not delegate any duties to a member of
the Board of Directors who, if elected to serve on the Committee, would not
qualify as a "Non-Employee Director" to administer the Plan as contemplated by
Rule 16b-3, as amended, or other applicable rules under the Exchange Act. The
Committee may employ attorneys, consultants, accountants, or other Persons and
the Committee, the Company, and its officers and directors shall be entitled to
rely upon the advice, opinions, or valuations of any such Persons. No member or
agent of the Committee shall be personally liable for any action, determination
or interpretation made in good faith with respect to the Plan and all members
and agents of the Committee shall be fully protected by the Company in respect
of any such action, determination or interpretation.
6. Stock Options for Key Employees.
Subject to the express provisions of the Plan, the Committee shall have
the authority to grant incentive stock options pursuant to Section 422 of the
Code ("Incentive Options"), to
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grant non-qualified stock options (options which do not qualify under Section
422 of the Code) ("Non-Qualified Options"), and to grant both types of Options
to Key Employees. No Incentive Option shall be granted pursuant to the Plan
after the earlier of ten years from the date of adoption of the Plan or ten
years from the date of approval of the Plan by the shareholders of the Company.
Incentive Options may be granted only to Key Employees. The terms and conditions
of the Options granted under this Section 6 shall be determined from time to
time by the Committee; provided, however, that the Options granted under this
Section 6 shall be subject to all terms and provisions of the Plan (other than
Section 7), including the following:
a. Option Exercise Price. Subject to Section 4, the Committee
shall establish the Option exercise price at the time any
Option is granted at such amount as the Committee shall
determine; provided, that, in the case of an Incentive Option,
such price shall not be less than the Fair Market Value per
share of Common Stock at the date the Option is granted; and
provided, further, that in the case of an Incentive Option
granted to a person who, at the time such Incentive Option is
granted, owns shares of the Company or any Related Entity
which possess more than 10% of the total combined voting power
of all classes of shares of the Company or of any Related
Entity, the Option exercise price shall not be less than 110%
of the Fair Market Value per share of Common Stock at the date
the Option is granted. The Option exercise price shall be
subject to adjustment in accordance with the provisions of
Section 10 of the Plan.
b. Payment. The price per share of Common Stock with respect to
each Option exercise shall be payable at the time of such
exercise. Such price shall be payable in cash or by any other
means acceptable to the Committee, including by the delivery
to the Company of shares of Common Stock owned by the optionee
or by the delivery or withholding of shares pursuant to a
procedure created pursuant to Section 5.d. of the Plan. Shares
delivered to or withheld by the Company in payment of the
Option exercise price shall be valued at the Fair Market Value
of the Common Stock on the day preceding the date of the
exercise of the Option.
c. Exercisability of Stock Option. Unless otherwise determined by
the Committee at the time of grant, stock options granted
hereunder shall become exercisable according to the vesting
schedule set forth below:
one-fifth of the shares of Common Stock underlying the stock
option grant shall become exercisable on the first anniversary
of the date of grant and remain exercisable until the stock
option expires; and
one-fifth of the shares of Common Stock underlying the stock
option grant shall become exercisable on the second
anniversary of the date of grant and remain exercisable until
the stock option expires; and
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one-fifth of the shares of Common Stock underlying the stock
option grant shall become exercisable on the third anniversary
of the date of grant and remain exercisable until the stock
option expires; and
one-fifth of the shares of Common Stock underlying the stock
option grant shall become exercisable on the fourth
anniversary of the date of grant and remain exercisable until
the stock option expires; and
one-fifth of the shares of Common Stock underlying the stock
option grant shall become exercisable on the fifth anniversary
of the date of grant and remain exercisable until the stock
option expires.
No Option by its terms shall be exercisable after the
expiration of ten years from the date of grant of the Option,
unless, as to any Non-Qualified Option, otherwise expressly
provided in such Option; provided, however, that no Incentive
Option granted to a person who, at the time such Option is
granted, owns stock of the Company, or any Related Entity,
possessing more than 10% of the total combined voting power of
all classes of stock of the Company, or any Related Entity,
shall be exercisable after the expiration of five years from
the date such Option is granted.
d. Death. If an optionee's employment with the Company or a
Related Entity terminates due to the death of such optionee,
the estate of such optionee, or a Person who acquired the
right to exercise such Option by bequest or inheritance or by
reason of the death of the optionee, shall have the right to
exercise such Option in accordance with its terms at any time
and from time to time within 180 days after the date of death
unless a longer or shorter period is expressly provided in
such Option or established by the Committee pursuant to
Section 8 (but in no event after the expiration date of such
Option).
e. Disability. If the employment of an optionee terminates
because of his Disability (as defined below), such optionee or
his legal representative shall have the right to exercise the
Option in accordance with its terms at any time and from time
to time within 180 days after the date of such termination
unless a longer or shorter period is expressly provided in
such Option or established by the Committee pursuant to
Section 8 (but in no event after the expiration date of the
Option); provided, however, that in the case of an Incentive
Option, the optionee or his legal representative shall in any
event be required to exercise the Incentive Option within one
year after termination of the optionee's employment due to his
Disability.
f. Termination for Good Cause; Voluntary Termination. Unless an
optionee's Option expressly provides otherwise, such optionee
shall immediately forfeit all rights under his Option, except
as to the shares of Common Stock already purchased thereunder,
if the employment of such optionee with the Company or
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a Related Entity is terminated by the Company or any Related
Entity for Good Cause (as defined below) or if such optionee
voluntarily terminates employment without the consent of the
Company or any Related Entity. The determination that there
exists Good Cause for termination shall be made by the
Committee (unless otherwise agreed to in writing by the
Company and the optionee).
g. Other Termination of Employment. If the employment of an
optionee with the Company or a Related Entity terminates for
any reason other than those specified in subsections 6(d), (e)
or (f) above, such optionee shall have the right to exercise
his Option in accordance with its terms, within 30 days after
the date of such termination, unless a longer or shorter
period is expressly provided in such Option or established by
the Committee pursuant to Section 8 (but in no event after the
expiration date of the Option); provided, that no Incentive
Option shall be exercisable more than three months after such
termination.
h. Maximum Exercise. The aggregate Fair Market Value of Common
Stock (determined at the time of the grant of the Option) with
respect to which Incentive Options are exercisable for the
first time by an optionee during any calendar year under all
plans of the Company and any Related Entity shall not exceed
$100,000. However, notwithstanding such limitations, to the
extent the aggregate Fair Market Value of the Common Stock
with respect to Options which are designated as Incentive
Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company and
any Related Entity) exceeds $100,000 (whether due to
acceleration of exercisability, miscalculation or error) such
excess Options shall be treated as Non-Qualified Options. In
the event that only a portion of the Options granted at the
same time can be applied to the $100,000 limit, the Company
shall issue separate share certificate(s) for such number of
shares as does not exceed the $100,000 limit, and shall
designate such shares as Incentive Option stock in its share
transfer records.
7. Stock Option Grants to Eligible Non-Employees.
Subject to the express provisions of the Plan, the Committee shall have
the authority to grant Non-Qualified Options (and not Incentive Options) to
Eligible Non-Employees; provided, however, that whenever the Company has any
class of equity securities registered pursuant to Section 12 of the Exchange
Act, no Eligible Non-Employee then serving on the Committee shall be granted
Options hereunder if the grant of such Options would cause such Eligible Non-
Employee to no longer be a "Non-Employee Director" as set forth in Section 2
hereof. The terms and conditions of the Options granted under this Section 7
shall be determined from time to time by the Committee; provided, however, that
the Options granted under this Section 7 shall be subject to all terms and
provisions of the Plan (other than Section 6), including the following:
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a. Option Exercise Price. Subject to Section 4, the Committee
shall establish the Option exercise price at the time any
Non-Qualified Option is granted at such amount as the
Committee shall determine. The Option exercise price shall be
subject to adjustment in accordance with the provisions of
Section 10 of the Plan.
b. Payment. The price per share of Common Stock with respect to
each Option exercise shall be payable at the time of such
exercise. Such price shall be payable in cash or by any other
means acceptable to the Committee, including by the delivery
to the Company of shares of Common Stock owned by the optionee
or by the delivery or withholding of shares pursuant to a
procedure created pursuant to Section 5.d. of the Plan. Shares
delivered to or withheld by the Company in payment of the
Option exercise price shall be valued at the Fair Market Value
of the Common Stock on the day preceding the date of the
exercise of the Option.
c. Exercisability of Stock Option. Subject to Section 8, each
Option shall be exercisable in one or more installments as the
Committee may determine at the time of the grant. No Option
shall be exercisable after the expiration of ten years from
the date of grant of the Option, unless otherwise expressly
provided in such Option.
d. Death. If the retention by the Company or any Related Entity
of the services of any Eligible Non-Employee terminates
because of his death, the estate of such optionee, or a Person
who acquired the right to exercise such Option by bequest or
inheritance or by reason of the death of the optionee, shall
have the right to exercise such Option in accordance with its
terms, at any time and from time to time within 180 days after
the date of death unless a longer or shorter period is
expressly provided in such Option or established by the
Committee pursuant to Section 8 (but in no event after the
expiration date of such Option).
e. Disability. If the retention by the Company or any Related
Entity of the services of any Eligible Non-Employee terminates
because of his Disability, such optionee or his legal
representative shall have the right to exercise the Option in
accordance with its terms at any time and from time to time
within 180 days after the date of the optionee's termination
unless a longer or shorter period is expressly provided in
such Option or established by the Committee pursuant to
Section 8 (but in no event after the expiration of the
Option).
f. Termination for Good Cause; Voluntary Termination. If the
retention by the Company or any Related Entity of the services
of any Eligible Non-Employee is terminated (i) for Good Cause,
(ii) as a result of removal of the optionee from office as a
director of the Company or of any Related Entity for cause by
action of the shareholders of the Company or such Related
Entity in accordance with the by-laws of the Company or such
Related Entity, as applicable, and the
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corporate law of the jurisdiction of incorporation of the
Company or such Related Entity, or (iii) as a result of the
voluntary termination by the optionee of such optionee's
service without the consent of the Company or any Related
Entity, then such optionee shall immediately forfeit his
rights under his Option except as to the shares of Common
Stock already purchased. The determination that there exists
Good Cause for termination shall be made by the Committee
(unless otherwise agreed to in writing by the Company and the
optionee).
g. Other Termination of Relationship. If the retention by the
Company or any Related Entity of the services of any Eligible
Non-Employee terminates for any reason other than those
specified in subsections 7(d), (e) or (f) above, such optionee
shall have the right to exercise his or its Option in
accordance with its terms within 30 days after the date of
such termination, unless a longer or shorter period is
expressly provided in such Option or established by the
Committee pursuant to Section 8 (but in no event after the
expiration date of the Option).
h. Ineligibility for Other Grants. Any Eligible Non-Employee who
receives an Option pursuant to this Section 7 shall be
ineligible to receive any Options under any other Section of
the Plan.
8. Change of Control.
If (i) a Change of Control shall occur, (ii) the Company shall enter
into an agreement providing for a Change of Control, or (iii) any member of the
HMC Group shall enter into an agreement providing for a Change of Control, then
the Committee may declare any or all Options outstanding under the Plan to be
exercisable in full at such time or times as the Committee shall determine,
notwithstanding the express provisions of such Options. Each Option accelerated
by the Committee pursuant to the preceding sentence shall terminate,
notwithstanding any express provision thereof or any other provision of the
Plan, on such date (not later than the stated exercise date) as the Committee
shall determine.
9. Purchase Option.
a. Except as otherwise expressly provided in any particular
Option, if (i) any optionee's employment (or, in the case of
any Option granted under Section 7, the optionee's
relationship) with the Company or a Related Entity terminates
for any reason at any time or (ii) a Change of Control occurs,
the Company and/or its designee(s) shall have the option (the
"Purchase Option") to purchase, and if the option is
exercised, the optionee (or, with respect to Common Stock
acquired pursuant to the exercise of an Option, the optionee's
assignee, or the optionee's executor or the administrator of
the optionee's estate, in the event of the optionee's death,
or the optionee's legal representative in the event of the
optionee's incapacity (hereinafter, collectively with such
optionee, the "Grantor")) shall sell to the Company and/or its
assignee(s), all or any portion
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(at the Company's option) of the shares of Common Stock and/or
Options held by the Grantor (such shares of Common Stock and
Options collectively being referred to as the "Purchasable
Shares").
b. The Company shall give notice in writing to the Grantor of the
exercise of the Purchase Option within one year after the
earlier of the date of the termination of the optionee's
employment or engagement or such Change of Control. Such
notice shall state the number of Purchasable Shares to be
purchased and the purchase price of such Purchasable Shares.
If no notice is given within the time limit specified above,
the Purchase Option shall terminate.
c. The purchase price to be paid for the Purchasable Shares
purchased pursuant to the Purchase Option shall be, in the
case of any Common Stock, the Fair Market Value per share as
of the date of the notice of exercise of the Purchase Option
times the number of shares being purchased, and in the case of
any Option, the Fair Market Value per share times the number
of vested shares (including by acceleration) subject to such
Option which are being purchased, less the applicable per
share Option exercise price. The purchase price shall be paid
in cash. The closing of such purchase shall take place at the
Company's principal executive offices within ten days after
the purchase price has been determined. At such closing, the
Grantor shall deliver to the purchaser(s) the certificates or
instruments evidencing the Purchasable Shares being purchased,
duly endorsed (or accompanied by duly executed stock powers)
and otherwise in good form for delivery, against payment of
the purchase price by check of the purchaser(s). In the event
that, notwithstanding the foregoing, the Grantor shall have
failed to obtain the release of any pledge or other
encumbrance on any Purchasable Shares by the scheduled closing
date, at the option of the purchaser(s) the closing shall
nevertheless occur on such scheduled closing date, with the
cash purchase price being reduced to the extent of, and paid
to the holder of, all unpaid indebtedness for which such
Purchasable Shares are then pledged or encumbered.
d. To assure the enforceability of the Company's rights under
this Paragraph 9, each certificate or instrument representing
Common Stock or an Option held by him or it shall bear a
conspicuous legend in substantially the following form:
"THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE
PURSUANT TO THIS AGREEMENT] ARE SUBJECT TO AN OPTION TO
REPURCHASE PROVIDED UNDER THE PROVISIONS OF THE COMPANY'S
1998 STOCK OPTION PLAN FOR KEY EMPLOYEES AND A STOCK OPTION
AGREEMENT ENTERED INTO PURSUANT THERETO. A COPY OF SUCH
OPTION PLAN AND OPTION AGREEMENT ARE AVAILABLE UPON WRITTEN
REQUEST TO THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES."
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The Company's rights under this Section 9 shall terminate upon the
consummation of a Qualifying Public Offering.
10. Adjustment of Shares and Price.
Unless otherwise expressly provided in a particular Option, in the
event that, by reason of any merger, consolidation, combination, liquidation,
reorganization, recapitalization, stock dividend, stock split, split-up,
split-off, spin-off, combination of shares, exchange of shares or other like
change in capital structure of the Company (collectively, a "Reorganization"),
the Common Stock is substituted, combined, or changed into any cash, property,
or other securities, or the shares of Common Stock are changed into a greater or
lesser number of shares of Common Stock, the number and/or kind of shares and/or
interests subject to an Option and the per share price or value thereof shall be
appropriately and equitably adjusted by the Committee to give appropriate effect
to such Reorganization. Any fractional shares or interests resulting from such
adjustment shall be eliminated. Notwithstanding the foregoing, (i) each such
adjustment with respect to an Incentive Option shall comply with the rules of
Section 424(a) of the Code, and (ii) in no event shall any adjustment be made
which would render any Incentive Option granted hereunder other than an
"incentive stock option" for purposes of Section 422 of the Code.
In the event the Company is not the surviving entity of a
Reorganization and, following such Reorganization, any optionee will hold
Options issued pursuant to the Plan which have not been exercised, cancelled, or
terminated in connection therewith, the Company shall cause such Options to be
assumed (or cancelled and replacement Options issued) by the surviving entity or
a Related Entity.
11. Assignment or Transfer.
Except as otherwise expressly provided in any Non-Qualified Option, no
Option granted under the Plan or any rights or interests therein shall be
assignable or transferable by an optionee except by will or the laws of descent
and distribution, and during the lifetime of an optionee, Options granted to him
or her hereunder shall be exercisable only by the optionee or, in the event that
a legal representative has been appointed in connection with the Disability of
an optionee, such legal representative.
12. Compliance with Securities Laws.
The Company shall not in any event be obligated to file any
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or any applicable state securities laws, to permit exercise
of any Option or to issue any shares of Common Stock. Each optionee (or, in the
event of his death or, in the event a legal representative has been appointed in
connection with his Disability, the Person exercising the Option) shall, as a
condition to his right to exercise any Option, deliver to the Company an
agreement or certificate containing such representations, warranties and
covenants as the Company may deem necessary or appropriate to ensure that the
issuance of shares of Common Stock pursuant
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to such exercise is not required to be registered under the Securities Act or
any applicable state securities laws.
Certificates for shares of Common Stock, when issued, may have
substantially the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately transferable:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED
FOR SALE, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF
UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE
ISSUER (WHICH, IN THE DISCRETION OF THE ISSUER, MAY INCLUDE AN
OPINION OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH
OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT
VIOLATE APPLICABLE FEDERAL OR STATE LAWS."
This legend shall not be required for shares of Common Stock issued
pursuant to an effective registration statement under the Securities Act and in
accordance with applicable state securities laws.
13. Withholding Taxes.
By acceptance of the Option, the optionee will be deemed to (i) agree
to reimburse the Company or any Related Entity by which the optionee is employed
for any federal, state, or local taxes required by any government to be withheld
or otherwise deducted by such corporation in respect of the optionee's exercise
of all or a portion of the Option; (ii) authorize the Company or any Related
Entity by which the optionee is employed to withhold from any cash compensation
paid to the optionee or on the optionee's behalf, an amount sufficient to
discharge any federal, state, and local taxes imposed on the Company or the
Related Entity by which the optionee is employed, and which otherwise has not
been reimbursed by the optionee, in respect of the optionee's exercise of all or
a portion of the Option; and (iii) agree that the Company may, in its
discretion, hold the stock certificate to which the optionee is entitled upon
exercise of the Option as security for the payment of the aforementioned
withholding tax liability, until cash sufficient to pay that liability has been
accumulated, and may, in its discretion, effect such withholding by retaining
shares issuable upon the exercise of the Option having a Fair Market Value on
the date of exercise which is equal to or less than the amount to be withheld.
- 12 -
<PAGE> 13
14. Costs and Expenses.
The costs and expenses of administering the Plan shall be borne by the
Company and shall not be charged against any Option nor to any optionee.
15. Other Incentive Plans
The adoption of the Plan does not preclude the adoption by appropriate
means of any other incentive plan.
16. Effect on Employment.
Nothing contained in the Plan or any agreement related hereto or
referred to herein shall affect, or be construed as affecting, the terms of
employment of any Key Employee except to the extent specifically provided herein
or therein. Nothing contained in the Plan or any agreement related hereto or
referred to herein shall impose, or be construed as imposing, an obligation on
(i) the Company or any Related Entity to continue the employment of any Key
Employee, and (ii) any Key Employee to remain in the employ of the Company or
any Related Entity.
17. Tax Treatment.
Notwithstanding any provisions in this Plan or any agreement to the
contrary, neither the Company nor any Related Entity shall have any liability to
any employee if any Option intended to be an Incentive Option is not treated as
an incentive stock option under Section 422 of the Code.
18. Definitions.
In addition to the terms specifically defined elsewhere in the Plan, as
used in the Plan, the following terms shall have the respective meanings
indicated:
"Affiliate" shall mean, as to any Person, a Person that directly, or
indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person.
"Board of Directors" shall have the meaning set forth in Section 2
hereof.
"Change of Control" shall mean the first to occur of the following
events: (i) any sale, lease, exchange, or other transfer (in one
transaction or series of related transactions) of all or substantially
all of the assets of the Company to any Person or group of related
Persons for purposes of Section 13(d) of the Exchange Act, other than
one or more members of the HMC Group, (ii) a majority of the Board of
Directors of the Company shall consist of Persons who are not
Continuing Directors; or (iii) the acquisition by
- 13 -
<PAGE> 14
any Person or Group (other than one or more members of the HMC Group)
of the power, directly or indirectly, to vote or direct the voting of
securities having more than 50% of the ordinary voting power for the
election of directors of the Company.
"Code" shall have the meaning set forth in Section 1 hereof.
"Committee" shall have the meaning set forth in Section 2 hereof.
"Common Stock" shall have the meaning set forth in Section 3 hereof.
"Company" shall have the meaning set forth in Section 1 hereof.
"Continuing Director" shall mean, as of the date of determination, any
Person who (i) was a member of the Board of Directors of the Company on
the date of adoption of the Plan, (ii) was nominated for election or
elected to the Board of Directors of the Company with the affirmative
vote of a majority of the Continuing Directors who were members of such
Board of Directors at the time of such nomination or election, or (iii)
is a member of the HMC Group.
"Disability" shall mean (i) permanent disability as defined under the
appropriate provisions of the applicable long-term disability plan
maintained for the benefit of employees of the Company or any Related
Entity who are regularly employed on a salaried basis or (ii) if no
such long-term disability plan exists, an inability to perform a
participant's employment duties and responsibilities by reason of any
physical or mental condition for a period of 26 consecutive weeks or a
period of 26 weeks during any 12- month period in connection with the
same physical or mental condition or (iii) another meaning agreed to in
writing by the Committee and the optionee; provided, however, that in
the case of the optionee holding an Incentive Option "disability" shall
have the meaning specified in Section 22(e)(3) of the Code.
"Eligible Non-Employee" shall have the meaning set forth in Section 4
hereof.
"Exchange Act" shall have the meaning set forth in Section 2 hereof.
"Fair Market Value" shall, as it relates to the Common Stock, mean the
average of the daily market prices of such Common Stock as reported on
the principal national securities exchange on which the shares of
Common Stock are then listed for each day during the ten consecutive
trading days prior to the date of determination, or if such Common
Stock is not listed on a national securities exchange, the last
reported bid price in the over-the-counter market, or if such shares
are not traded in the over-the-counter market, the per share cash price
for which all of the outstanding Common Stock could be sold to a
willing purchaser in an arm's-length transaction (without regard to
minority discount, absence of liquidity, or transfer restrictions
imposed by any applicable law or agreement) at the date of the event
giving rise to a need for a determination. Except as may be otherwise
expressly provided in a
- 14 -
<PAGE> 15
particular Option, Fair Market Value shall be determined in good faith
by the Committee.
"Good Cause", with respect to any Key Employee, shall mean (unless
another definition is agreed to in writing by the Company and the
optionee) termination by action of the Board of Directors because of:
(A) the optionee's conviction of, or plea of nolo contendere to, a
felony or a crime involving moral turpitude; (B) the optionee's
personal dishonesty, incompetence, willful misconduct, willful
violation of any law, rule, or regulation (other than minor traffic
violations or similar offenses) or breach of fiduciary duty which
involves personal profit; (C) the optionee's commission of material
mismanagement in the conduct of his duties as assigned to him by the
Board of Directors or the optionee's supervising officer or officers of
the Company; (D) the optionee's willful failure to execute or comply
with the policies of the Company or his stated duties as established by
the Board of Directors or the optionee's supervising officer or
officers of the Company, or the optionee's intentional failure to
perform the optionee's stated duties; or (E) substance abuse or
addiction on the part of the optionee. "Good Cause", with respect to
any Eligible Non-Employee, shall mean (unless another definition is
agreed to in writing by the Company and the optionee) termination by
action of the Board of Directors because of: (A) the optionee's
conviction of, or plea of nolo contendere to, a felony or a crime
involving moral turpitude; (B) the optionee's personal dishonesty,
incompetence, willful misconduct, willful violation of any law, rule,
or regulation (other than minor traffic violations or similar offenses)
or breach of fiduciary duty which involves personal profit; (C) the
optionee's commission of material mismanagement in providing services
to the Company or any Related Entity; (D) the optionee's willful
failure to comply with the policies of the Company in providing
services to the Company or any Related Entity, or the optionee's
intentional failure to perform the services for which the optionee has
been engaged; (E) substance abuse or addiction on the part of the
optionee; or (F) the optionee's willfully making any material
misrepresentation or willfully omitting to disclose any material fact
to the board of directors of the Company or any Related Entity with
respect to the business of the Company or any Related Entity.
"Grantor" has the meaning set forth in Section 9 hereof.
"Group" shall have the meaning given such term in Regulation 13D under
the Exchange Act.
"HMC Group" shall mean Hicks, Muse, Tate & Furst Incorporated, its
Affiliates and their respective employees, officers, and directors (and
members of their respective families and trusts for the primary benefit
of such family members).
"Incentive Options" shall have the meaning set forth in Section 6
hereof.
The term "including" when used herein shall mean "including, but not
limited to".
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<PAGE> 16
"Key Employee" shall have the meaning set forth in Section 4 hereof.
"Non-Qualified Options" shall have the meaning set forth in Section 6
hereof.
"Options" shall have the meaning set forth in Section 1 hereof.
"Person" shall have the meaning set forth in Section 4 hereof.
"Plan" shall have the meaning set forth in Section 1 hereof.
"Purchasable Shares" shall have the meaning set forth in Section 9
hereof.
"Purchase Option" shall have the meaning set forth in Section 9 hereof.
"Qualifying Public Offering" shall mean a firm commitment underwritten
public offering of Common Stock the result of which is that the HMC
Group shall own less than 10% of the fully diluted Common Stock of the
Company.
"Related Entities" shall have the meaning set forth in Section 1
hereof.
"Reorganization" shall have the meaning set forth in Section 10 hereof.
"Rule 16b-3" shall have the meaning set forth in Section 2 hereof.
"Securities Act" shall have the meaning set forth in Section 12 hereof.
"Subsidiary" shall mean, with respect to any Person, (i) a corporation
a majority of whose outstanding shares of capital stock or other equity
interests with voting power, under ordinary circumstances, to elect
directors, is at the time, directly or indirectly, owned by such
Person, by one or more subsidiaries of such Person or by such Person
and one or more subsidiaries of such Person, and (ii) any other Person
(other than a corporation) in which such Person, a subsidiary of such
Person or such Person and one or more subsidiaries of such Person,
directly or indirectly, at the date of determination thereof, has (x)
at least a majority ownership interest or (y) the power to elect or
direct the election of the directors or other governing body of such
Person.
19. Amendment of Plan.
The Board of Directors shall have the right to amend, modify, suspend
or terminate the Plan at any time; provided, that no amendment shall be made
which shall increase the total number of shares of Common Stock which may be
issued and sold pursuant to Options granted under the Plan or decrease the
minimum Option exercise price in the case of an Incentive Option, or modify the
provisions of the Plan relating to eligibility with respect to Incentive Options
unless such amendment is made by or with the approval of the shareholders. The
Board of Directors shall be authorized to amend the Plan and the Options granted
thereunder
- 16 -
<PAGE> 17
(i) to qualify as "incentive stock options" within the meaning of Section 422 of
the Code or (ii) to comply with Rule 16b-3 (or any successor rule) under the
Exchange Act (or any successor law) and the regulations (including any temporary
regulations) promulgated thereunder. No amendment, modification, suspension or
termination of the Plan shall alter or impair any Options previously granted
under the Plan, without the consent of the holder thereof.
20. Effective Date.
The Plan shall be effective as of June 4, 1998, and shall be void
retroactively if not approved by the shareholders of the Company within twelve
months thereafter.
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<PAGE> 1
EXHIBIT 10.15
AGREEMENT
OF
PARTNERSHIP
OF
LAREDO CANDLE COMPANY L.L.P.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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ARTICLE I
GENERAL...................................................................1
1.1 Formation........................................................1
1.2 Name.............................................................1
1.3 Purpose..........................................................1
1.4 Term.............................................................2
1.5 Principal Office of Partnership; Addresses of Partners...........2
(a) Partnership Offices.....................................2
(b) Addresses of Partners...................................2
ARTICLE II
DEFINITIONS...............................................................2
ARTICLE III
CAPITAL CONTRIBUTIONS AND ACCOUNTS........................................5
3.1 Initial Capital Contributions....................................5
(a) HIGI....................................................5
(b) Miracle.................................................5
3.2 Additional Capital Contributions.................................5
3.3 Working Capital Loans and Other Credit Support...................6
(a) Partnership Loans.......................................6
(b) Contingent Liability....................................6
3.4 Capital Accounts.................................................6
(a) In General..............................................6
(b) Negative Capital Accounts...............................9
(c) Interest................................................9
(d) No Withdrawal...........................................9
(e) No Preemptive Rights....................................9
ARTICLE IV
ALLOCATIONS OF PROFIT AND LOSS AND DISTRIBUTIONS.........................10
4.1 General Allocations of Profits and Losses.......................10
(a) General Allocations....................................10
(b) Limitation on Loss Allocations.........................10
</TABLE>
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<TABLE>
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4.2 Distributions.............................................................10
(a) General..........................................................10
(b) Overriding Distribution..........................................11
(c) Withheld Amounts.................................................11
(d) Distributions in Liquidation of Partner's Partnership Interest...11
4.3 Special Allocations of Profits and Losses.................................12
(a) Special Allocations..............................................12
(b) Curative Allocations.............................................13
(c) Tax Allocations: Code Section 704(c)............................14
(d) Other Allocation Rules...........................................14
ARTICLE V
MANAGEMENT.........................................................................15
5.1 Management of the Partnership.............................................15
(a) Management Committee.............................................15
(b) Compensation.....................................................17
(c) Notices..........................................................17
5.2 Managing Officers.........................................................17
(a) General..........................................................17
(b) Chairman.........................................................18
(c) President........................................................18
(d) Vice Presidents..................................................18
(e) Secretary and Assistant Secretaries..............................19
(f) Treasurer and Assistant Treasurers...............................19
5.3 Contracts with Related Parties............................................20
5.4 Time Devoted to Partnership...............................................20
5.5 Other Businesses and Undertakings.........................................20
5.6 Scope of Authority; Indemnification.......................................21
(a) Partners.........................................................21
(b) Management Committee, Officer, and Employee Indemnities..........21
ARTICLE VI
SALE, TRANSFER, OR MORTGAGE........................................................23
6.1 General...................................................................23
(a) Transfer Restrictions and Procedures....................23
(b) Distributions and Allocations in Respect of
Transferred Partnership Interests...............24
</TABLE>
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<PAGE> 4
<TABLE>
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ARTICLE VII
DEFAULT AND DISSOLUTION............................................................25
7.1 Events of Default.........................................................25
7.2 Causes of Termination or Dissolution......................................26
7.3 Election of Non-Defaulter.................................................26
(a) Purchase of Defaulter's Interest.................................26
(b) Closing..........................................................27
(c) Election to Dissolve.............................................27
7.4 Procedure in Dissolution and Liquidation..................................27
(a) Winding Up.......................................................27
(b) Management Rights During Winding Up..............................27
(c) Allocation of Profits and Losses.................................28
(d) Distributions in Liquidation.....................................28
(e) Non-Cash Assets..................................................28
7.5 Disposition of Documents and Records......................................29
ARTICLE VIII
APPRAISAL..........................................................................29
ARTICLE IX
FINANCIAL MATTERS..................................................................30
9.1 Books, Records, Accounting, and Reports...................................30
(a) Records and Accounting...........................................30
(b) Fiscal Year......................................................30
9.2 Tax Matters...............................................................30
(a) Preparation of Tax Returns.......................................30
(b) Tax Elections....................................................30
(c) Tax Controversies................................................30
</TABLE>
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<TABLE>
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ARTICLE X
GENERAL PROVISIONS...........................................................31
10.1 Addresses and Notices...............................................31
10.2 Titles and Captions.................................................31
10.3 Pronouns and Plurals................................................32
10.4 Further Action......................................................32
10.5 Binding Effect......................................................32
10.6 Integration.........................................................32
10.7 Creditors...........................................................32
10.8 Waiver..............................................................32
10.9 Counterparts........................................................32
10.10 Applicable Law......................................................32
10.11 Invalidity of Provisions............................................33
10.12 Amendment...........................................................33
10.13 Entire Agreement....................................................33
10.14 Confidential Information............................................33
</TABLE>
-iv-
<PAGE> 6
THE PARTNERSHIP INTERESTS REPRESENTED BY THIS PARTNERSHIP AGREEMENT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
ACTS IN RELIANCE UPON EXEMPTIONS UNDER THOSE ACTS. THE SALE OR OTHER
DISPOSITION OF THE PARTNERSHIP INTERESTS IS PROHIBITED UNLESS SUCH SALE OR
DISPOSITION IS MADE IN COMPLIANCE WITH ALL SUCH APPLICABLE ACTS. ADDITIONAL
RESTRICTIONS ON TRANSFER OF THE PARTNERSHIP INTERESTS ARE SET FORTH IN THIS
AGREEMENT.
AGREEMENT
OF
PARTNERSHIP
OF
LAREDO CANDLE COMPANY L.L.P.
THIS AGREEMENT OF PARTNERSHIP is entered into by and among Home
Interiors & Gifts, Inc., a Texas corporation, and Miracle Candle Company, a
Texas corporation.
Capitalized terms used in this Agreement are defined in Article II
hereof.
ARTICLE I
GENERAL
1.1 FORMATION. Subject to the provisions of this Agreement, the
Partners hereby form the Partnership as a registered limited liability
partnership pursuant to the provisions of the Texas Act, including Section 3.08
of the Texas Act. Except as expressly provided herein, the rights and
obligations of the Partners and the administration and termination of the
Partnership shall be governed by the Texas Act.
1.2 NAME. The name of the Partnership shall be, and the business
of the Partnership shall be conducted under the name of, Laredo Candle Company
L.L.P.
1.3 PURPOSE. The purpose and business of the Partnership shall be
to acquire, construct, and operate a candle manufacturing facility and to
conduct any business or activity related thereto that may lawfully be conducted
by a partnership organized pursuant to the Texas Act. Any or all of the
foregoing activities may be conducted directly by the Partnership or indirectly
through another partnership, joint venture, or other arrangement.
<PAGE> 7
1.4 TERM. The Partnership shall continue in existence until
termination or dissolution of the Partnership in accordance with the provisions
of Section 7.2 of this Agreement.
1.5 PRINCIPAL OFFICE OF PARTNERSHIP; ADDRESSES OF PARTNERS.
(a) Partnership Offices. The principal office of the
Partnership shall be 4550 Spring Valley Road, Dallas, Texas 75244 or such other
place as the Management Committee may from time to time designate. The
Partnership may maintain offices at such other place or places as the
Management Committee deems advisable.
(b) Addresses of Partners. The address of each Partner
shall be the address of such Partner appearing on the books of the Partnership
from time to time, as provided for in Section 10.1 of this Agreement.
ARTICLE II
DEFINITIONS
The following definitions shall apply to the terms used in this
Agreement, unless otherwise clearly indicated to the contrary in this
Agreement.
"Additional Capital Contributions" has the meaning set forth in
Section 3.2.
"Adjusted Capital Account Deficit" means, with respect to any Partner,
the deficit balance, if any, in such Partner's Capital Account as of the end of
the relevant fiscal year or other period, after giving effect to the following
adjustments: (a) any amounts that such Partner is, or is deemed to be,
obligated to restore pursuant to Section 1.704-1(b)(2)(ii)(c) of the
Regulations, the penultimate sentence of Section 1.704-2(g)(1) of the
Regulations, or the penultimate sentence of Section 1.704-2(i)(5) of the
Regulations, shall be credited to such Capital Account; and (b) the items
described in Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6) of the Regulations
shall be debited to such Capital Account. For these purposes, no Partner who
has an unconditional obligation to restore any deficit balance in his Capital
Account in accordance with the requirements of Section 1.704-1(b)(2)(ii)(b)(3)
of the Regulations shall have an Adjusted Capital Account Deficit. The
foregoing definition of Adjusted Capital Account Deficit is intended to comply
with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and
shall be interpreted consistently therewith.
"Affiliate" means any Person that directly or indirectly controls, is
controlled by, or is under common control with, the Person in question. As
used in this definition, the term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of voting securities, by
contract, or otherwise.
-2-
<PAGE> 8
"Agreement" means this Agreement of Partnership, as it may be amended,
supplemented, or restated from time to time.
"Book Depreciation" means for any asset for any fiscal year or other
period an amount that bears the same ratio to the Gross Asset Value of that
asset at the beginning of such fiscal year or other period as the federal
income tax depreciation, amortization, or other cost recovery deduction
allowable for that asset for such year or other period bears to the adjusted
tax basis of that asset at the beginning of such year or other period. If the
federal income tax depreciation, amortization, or other cost recovery deduction
allowable for any asset for such year or other period is zero, then Book
Depreciation for that asset shall be determined with reference to such
beginning Gross Asset Value using any reasonable method selected by the
Management Committee.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 3.4.
"Capital Contribution" means any asset or property of any nature
contributed by a Partner to the Partnership pursuant to the provisions of this
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time.
"Commencement Date" means the date of execution of this Agreement by
the Partners.
"Damages" has the meaning set forth in Section 5.6(a)(i).
"Defaulter" has the meaning set forth in Section 7.3(a).
"Event of Default" has the meaning set forth in Section 7.1(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and any successor to such statute.
"Gross Asset Value" has the meaning set forth in Section 3.4(a)(iii).
"HIGI" means Home Interiors & Gifts, Inc., a Texas corporation, and
any Person that shall succeed to the entire interest of such corporation as a
partner of the Partnership in accordance with the provisions of this Agreement.
"Indemnified Person" has the meaning set forth in Section 5.6(b).
"Initiating Partner" has the meaning set forth in Section 6.1(a)(i).
-3-
<PAGE> 9
"Losses" has the meaning set forth in Section 3.4(a)(ii).
"Management Committee" has the meaning set forth in Section 5.1(a).
"Miracle" means Miracle Candle Company, a Texas corporation, and any
Person that shall succeed to the entire interest of such corporation as a
partner of the Partnership in accordance with the provisions of this Agreement.
"Non-Defaulter" has the meaning set forth in Section 7.3(a).
"Partner" means HIGI or Miracle. "Partners" means HIGI and Miracle,
collectively.
"Partner Minimum Gain" means partnership minimum gain attributable to
partner nonrecourse debt as determined under the rules of Section 1.704-2(i) of
the Regulations.
"Partner Nonrecourse Deductions" has the meaning set forth in Section
1.704-2(i)(2) of the Regulations.
"Partnership" means the registered limited liability partnership
established pursuant to this Agreement.
"Partnership Interest" means the interest acquired by a Partner in the
Partnership, including the Partner's right: (a) to its allocable share of the
Profits, Losses, deductions, and credits of the Partnership, (b) to its
distributive share of the assets of the Partnership, (c) to vote on those
matters described in this Agreement, and (d) to participate in the management
and operation of the Partnership.
"Partnership Loans" has the meaning set forth in Section 3.3(a).
"Partnership Minimum Gain" has the meaning set forth in Section
1.704-2(b)(2) of the Regulations.
"Percentage Interest" means the percentage set forth opposite each
Partner's name on Exhibit A to this Agreement, as such Exhibit may be amended
from time to time in accordance with this Agreement.
"Person" means an individual or a corporation, partnership, trust,
estate, unincorporated organization, association, or other entity.
"Profits" has the meaning set forth in Section 3.4(a)(ii).
-4-
<PAGE> 10
"Receiving Partner" has the meaning set forth in Section 6.1(a)(i).
"Regulations" means the Department of Treasury Regulations promulgated
under the Code, whether proposed, temporary, or final, as amended and in effect
(including corresponding provisions of succeeding regulations).
"Regulatory Allocations" has the meaning set forth in Section 4.3(b).
"Response Notice" has the meaning set forth in Section 6.1(a)(ii).
"Securities Act" means the Securities Act of 1933, as amended, and any
successor to such statute.
"Texas Act" means the Texas Revised Partnership Act, Article 6132b of
Title 105 of the Texas Civil Statutes, as it may be amended from time to time,
and any successor to such statute.
"Transfer Notice" has the meaning set forth in Section 6.1(a)(i).
ARTICLE III
CAPITAL CONTRIBUTIONS AND ACCOUNTS
3.1 INITIAL CAPITAL CONTRIBUTIONS.
(a) HIGI. On the Commencement Date, HIGI shall
contribute to the Partnership the property described opposite HIGI's name in
Exhibit B hereto. The Partners acknowledge and agree that the Gross Asset
Value of such contributions is as set forth in Exhibit B hereto.
(b) Miracle. On the Commencement Date, Miracle shall
contribute to the Partnership the property described opposite Miracle's name in
Exhibit B hereto. The Partners acknowledge and agree that the Gross Asset
Value of such contributions is as set forth in Exhibit B hereto.
3.2 ADDITIONAL CAPITAL CONTRIBUTIONS. Except as otherwise agreed
by the Partners, each Partner shall be required to contribute to the
Partnership as a contribution to capital in addition to the initial capital
contributions described in Section 3.1, cash necessary to fund the working
capital or other cash requirements of the Partnership as determined by the
Management Committee (the "Additional Contributions"). The Additional
Contributions of the Partners shall be made in proportion to their respective
Percentage Interests. This obligation to make Additional Contributions shall
not be considered an asset of the Partnership and shall not be for the benefit
of any creditor of the Partnership.
-5-
<PAGE> 11
3.3 WORKING CAPITAL LOANS AND OTHER CREDIT SUPPORT.
(a) Partnership Loans. The Partners may agree from time
to time to make loans to the Partnership which in each such case shall be in
proportion to their Percentage Interests (the "Partnership Loans"). All
Partnership Loans shall be made on not less than five days' prior written
request to the Partners by the Partnership. Partnership Loans shall not be
construed as contributions to the capital of the Partnership and shall not
affect the Partners' Capital Accounts. Partnership Loans shall be due and
payable, unless extended by agreement of the Partners, within one year from the
date made. Partnership Loans shall be evidenced by written promissory notes
and shall bear interest on a quarterly basis at a rate equal to the higher of
(x) the base rate paid by HIGI under its principal bank credit agreement or (y)
the prime rate of Nationsbank, N.A. (or its successor) plus 1%, in effect on
the first day of each calendar quarter (but in no event to exceed the maximum
rate permitted by law).
(b) Contingent Liability. To the extent that the
operations of the Partnership require that the Partners guarantee, endorse, or
otherwise become contingently liable upon (by direct or indirect agreement,
contingent or otherwise, to provide funds for payment to, to supply funds to,
or otherwise assure a creditor against loss) any debt, obligation, or other
liability of the Partnership, such contingent liability shall be assumed
severally by the Partners, pro rata in accordance with their Percentage
Interests and on equivalent terms. The Partners shall be subrogated to the
rights of the applicable creditor or creditors of the Partnership in respect of
any payments pursuant to such liability. No such payment shall be construed as
a Capital Contribution nor shall any such payment affect the Partners' Capital
Accounts.
3.4 CAPITAL ACCOUNTS.
(a) In General.
(i) The Partnership shall maintain for each Partner
a separate Capital Account in accordance with this Section 3.4(a), which shall
control the division of assets upon liquidation of the Partnership to the
extent provided in Section 7.4(d). Each Capital Account shall be maintained in
accordance with the following provisions:
(A) The Capital Account shall be
increased by the amount of cash and the Gross Asset Value of any other
Capital Contributions made by a Partner to the Partnership pursuant to
this Agreement, by the Partner's allocable share of Profits and any
item of income or gain specially allocated to the Partner pursuant to
Section 4.3(a) or 4.3(b), and by the amount of any Partnership
liabilities assumed by the Partner or that are secured by any property
distributed to the Partner.
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(B) The Capital Account shall be decreased
by the amount of cash and the Gross Asset Value of any other property
distributed to the Partner pursuant to this Agreement, by the
Partner's allocable share of Losses and any items of expense or loss
specially allocated to the Partner pursuant to Section 4.3(a) or
4.3(b), and by the amount of any liabilities of the Partner assumed by
the Partnership or any liabilities secured by any property contributed
by the Partner to the Partnership.
(C) If all or a portion of a Partnership
Interest is transferred in accordance with the terms of this
Agreement, the transferee shall succeed to the Capital Account of the
transferor to the extent the Capital Account relates to the
transferred Partnership Interest.
(D) The principal amount of a promissory
note that is not readily traded on an established securities market
and that is contributed to the Partnership by the maker of the note
shall not be included in the Capital Account of any Partner until the
Partnership makes a taxable disposition of the note or until and to
the extent that principal payments are made on the note, all in
accordance with Section 1.704-1(b)(2)(iv)(d)(2) of the Regulations.
The foregoing provisions and the other provisions of this Agreement relating to
the maintenance of Capital Accounts are intended to comply with Section
1.704-1(b)(2)(iv) of the Regulations and shall be interpreted and applied in a
manner consistent with such Regulations.
(ii) "Profits" and "Losses" mean, for each fiscal
year or other period, an amount equal to the Partnership's taxable income or
loss for such year or period, determined in accordance with Section 703(a) of
the Code (for this purpose, all items of income, gain, loss, or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code
shall be included in taxable income or loss), but with the following
adjustments for such fiscal year or other period:
(A) Income of the Partnership that is
exempt from federal income tax as described in Section 705(a)(1)(B) of
the Code, and not otherwise taken into account in computing Profits
and Losses, shall be added to such taxable income or loss as if it
were taxable income.
(B) Any expenditures of the Partnership
described in Section 705(a)(2)(B) of the Code, or treated as
expenditures under Section 705(a)(2)(B) of the Code pursuant to
Section 1.704-1(b)(2)(iv)(i) of the Regulations, and not otherwise
taken into account in computing Profits and Losses, shall be
subtracted from such taxable income or loss as if such expenditures
were deductible items.
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(C) If the Gross Asset Value of any
Partnership asset is adjusted pursuant to this Agreement, the amount
of the adjustment shall be taken into account as gain or loss from the
disposition of the asset for purposes of computing such taxable income
or loss.
(D) Gain or loss resulting from any
disposition of property with respect to which gain or loss is
recognized for federal income tax purposes shall be computed by
reference to the Gross Asset Value of the property disposed of,
notwithstanding that the adjusted tax basis of the property differs
from the Gross Asset Value of the property.
(E) In lieu of the deduction for
depreciation, cost recovery, or amortization taken into account in
computing such taxable income or loss, there shall be taken into
account Book Depreciation for such fiscal year or other period.
(F) Notwithstanding any other provision
of this Agreement, any items that are specially allocated pursuant to
Section 4.3(a) or Section 4.3(b) shall not be taken into account as
taxable income or loss for purposes of computing Profits and Losses.
If the Partnership's taxable income or taxable loss for the year or period, as
adjusted pursuant to subparagraphs (A)-(F) above, is a positive amount, that
amount shall be the Partnership's Profit for such fiscal year or other period;
and if negative, that amount shall be the Partnership's Loss for such fiscal
year or other period.
(iii) "Gross Asset Value" means, for any asset, the
asset's adjusted basis for federal income tax purposes, except as set forth
below:
(A) The initial Gross Asset Value of any
asset contributed by a Partner to the Partnership shall be the gross
fair market value of the asset on the date of contribution, as
determined by the Management Committee.
(B) The Gross Asset Values of all
Partnership assets shall be adjusted to equal their gross fair market
values, as determined by the Management Committee, as of the following
times: (1) the contribution of more than a de minimis amount of money
or other property to the Partnership as a Capital Contribution by a
new or existing Partner, or the distribution by the Partnership to a
retiring or continuing Partner of more than a de minimis amount of
property as consideration for an interest in the Partnership, if the
Management Committee reasonably determines that such adjustment is
necessary or appropriate to reflect the relative economic interests of
the Partners in the Partnership; or (2) the liquidation of the
Partnership within the meaning of Section 1.704-1(b)(2)(ii)(g) of the
Regulations.
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(C) The Gross Asset Value of any
Partnership asset distributed to any Partner shall be the gross fair
market value of such asset on the date of distribution, as determined
by the Management Committee.
(D) The Gross Asset Values of any
Partnership asset shall be increased (or decreased) to reflect any
adjustment to the adjusted basis of such asset pursuant to Section
734(b) of the Code or Section 743(b) of the Code, but only to the
extent that such adjustment is taken into account in determining
Capital Accounts pursuant to Section 1.704-1(b) (2)(iv)(m) of the
Regulations and Section 4.3(a)(iv) provided, however, that Gross Asset
Values shall not be adjusted pursuant to this Section 3.4(a)(iii)(D)
to the extent the Management Committee determines that an adjustment
pursuant to Section 3.4(a)(iii)(B) is necessary or appropriate in
connection with a transaction that would otherwise result in an
adjustment pursuant to this Section 3.4(a)(iii)(D).
(E) If the Gross Asset Value of an asset
has been determined or adjusted pursuant to Section 3.4(a)(iii)(A),
3.4(a)(iii)(B), or 3.4(a)(iii)(D), such Gross Asset Value shall
thereafter be adjusted by the Book Depreciation taken into account
with respect to such asset for purposes of computing Profits and
Losses.
(b) Negative Capital Accounts. If any Partner has a
negative balance in its Capital Account on the date of the liquidation of such
Partner's "interest in the partnership" (within the meaning of Section
1.704-1(b)(2)(ii)(g) of the Regulations) after taking into account allocations
of Profits, Losses, and other items of income, gain, loss, deduction or credit,
and distributions of cash or property (in each case as provided in this Article
III or Article IV), that Partner shall contribute to the Partnership an amount
of cash equal to (but in no event will it be obligated to contribute more than)
the negative balance in the Partner's Capital Account. Any amount contributed
by a Partner shall be paid to the creditors of the Partnership or distributed
to the other Partners, in either case as provided in Section 7.4(d). Any
Capital Contribution required hereunder shall be made on or before the later of
(i) the end of the taxable year of the Partnership in which such Partner's
Partnership Interest is liquidated, or (ii) the 90th day following the date of
such liquidation.
(c) Interest. No interest shall be paid by the
Partnership on Capital Contributions or on balances in Capital Accounts.
(d) No Withdrawal. No Partner shall be entitled to
withdraw any part of his Capital Contribution or his Capital Account or to
receive any distribution from the Partnership, except as provided in Section
4.2 and Article VII.
(e) No Preemptive Rights. No Partner shall have any
preemptive, preferential, or other right with respect to (i) additional Capital
Contributions; (ii) issuance or sale of Partnership Interests; (iii) issuance
of any obligations, evidences of indebtedness, or other securities of the
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Partnership convertible into or exchangeable for, or carrying or accompanied by
any rights to receive, purchase, or subscribe to, any such Partnership
Interests; (iv) issuance of any right to, subscription to, or right to receive,
or any warrant or option for the purchase of, any of the foregoing securities;
or (v) issuance or sale of any other securities that may be issued or sold by
the Partnership.
ARTICLE IV
ALLOCATIONS OF PROFIT AND LOSS AND DISTRIBUTIONS
4.1 GENERAL ALLOCATIONS OF PROFITS AND LOSSES.
(a) General Allocations. After giving effect to the
allocations set forth in Sections 4.3(a) and 4.3(b) of this Agreement, Profits
and Losses for any fiscal year or other period shall be allocated as follows:
(i) Profits. Profits shall be allocated to
the Partners in proportion to their Percentage Interests.
(ii) Losses. Subject to the limitation in Section
4.1(b), Losses shall be allocated to the Partners in proportion to their
Percentage Interests.
(b) Limitation on Loss Allocations. The aggregate amount
of Losses allocated pursuant to Section 4.1(a) hereof and the next sentence of
this Section 4.1(b) to any Partner for any fiscal year shall not exceed the
maximum amount of Losses that may be allocated to such Partner without causing
such Partner to have an Adjusted Capital Account Deficit at the end of such
fiscal year. All Losses in excess of the limitation in this Section 4.1(b)
with respect to any Partner shall be allocated solely to the other Partners in
proportion to their Percentage Interests. If no other Partner may receive an
additional allocation of Losses pursuant to this Section 4.1(b), such
additional Losses not allocated pursuant to Section 4.1(a) of this Agreement or
the preceding sentence shall be allocated solely to those Partners that bear
the economic risk for such additional Losses within the meaning of Section
704(b) of the Code and the Regulations thereunder. If it is necessary to
allocate Losses under the preceding sentence, the Management Committee shall
determine those Partners that bear the economic risk for such additional
Losses.
4.2 DISTRIBUTIONS.
(a) General. The Management Committee shall review the
Partnership's available cash at the end of each calendar quarter to determine
whether distributions are appropriate. The Management Committee may make such
distributions as it may determine in its sole discretion, without being limited
to current or accumulated income or gains, but no such distribution shall be
made out of funds required to make current payments on Partnership indebtedness
and no distributions of Partnership property (other than cash) shall be made to
any Partner except as
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otherwise provided in Section 7.4(e). Except to the extent Section 7.4(d) is
applicable, all distributions pursuant to this Section 4.2 shall be made in
proportion to the Partners' Percentage Interests.
(b) Overriding Distribution. Notwithstanding the
provisions of (a) above, if at any time distributions to a Partner would create
or increase an Adjusted Capital Account Deficit and if another Partner has a
positive Capital Account balance [after such Adjusted Capital Account Deficit
and Capital Account balances have been adjusted to reflect the allocation of
Profits and Losses pursuant to this Article IV, taking into account interim
Profits and Losses (determined using such accounting methods as shall be
selected by HIGI) for the period ending on or before such distribution], such
cash flow shall be distributed first to the Partner having a positive Capital
Account balance in an amount equal to such positive balance, and the remaining
cash, if any, shall be distributed in accordance with Section 4.2(a).
(c) Withheld Amounts. Notwithstanding any other
provision of this Section 4.2 to the contrary, each Partner hereby authorizes
the Partnership to withhold and to pay over, or otherwise pay, any withholding
or other taxes payable by the Partnership with respect to the Partner as a
result of the Partner's participation in the Partnership; and if and to the
extent that the Partnership shall be required to withhold or pay any such
taxes, such Partner shall be deemed for all purposes of this Agreement to have
received a payment from the Partnership as of the time such withholding or tax
is paid, which payment shall be deemed to be a distribution with respect to
such Partner's Partnership Interest to the extent that the Partner (or any
successor to such Partner's Partnership Interest) is then entitled to receive a
distribution. To the extent that the aggregate amount of such payments to a
Partner for any period exceeds the distributions to which such Partner is
entitled for such period, the amount of such excess shall be considered a loan
from the Partnership to such Partner. Such loan shall bear interest (which
interest shall be treated as an item of income to the Partnership) at the
lesser of the maximum rate permitted by law and the rate of interest per annum
most recently established by Nationsbank, N.A. (or its successor) as such
bank's general reference rate of interest (which rate may or may not be the
lowest rate of interest then charged by such bank), as determined hereunder
from time to time, until discharged by such Partner by repayment, which may be
made in the sole discretion of the Management Committee out of distributions to
which such Partner would otherwise be subsequently entitled. Any withholdings
authorized by this Section 4.2(c) shall be made at the maximum applicable
statutory rate under the applicable tax law unless the Management Committee
shall have received an opinion of counsel or other evidence satisfactory to the
Management Committee to the effect that a lower rate is applicable, or that no
withholding is applicable.
(d) Distributions in Liquidation of Partner's Partnership
Interest. For purposes of this Agreement, a liquidation of a Partner's
Partnership Interest means the termination of the Partner's entire Partnership
Interest other than in connection with the dissolution, winding up, and
termination of the Partnership. Where a Partner's Partnership Interest is to
be liquidated by a series
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of distributions, the Partnership Interest shall not be considered as
liquidated until the final distribution has been made. If a Partner's
Partnership Interest is to be liquidated, liquidating distributions shall be
made in accordance with the positive Capital Account balance of that Partner
(as determined after taking into account all Capital Account adjustments with
respect to that Partner's Partnership Interest for the taxable year during
which the liquidation occurs, as determined by the Management Committee in
accordance with Section 706 of the Code). A distribution in liquidation of a
Partner's Partnership Interest shall be made by the end of the taxable year in
which such liquidation occurs, or, if later, within 90 days after the Partner's
Partnership Interest is liquidated.
4.3 SPECIAL ALLOCATIONS OF PROFITS AND LOSSES.
(a) Special Allocations.
(i) Minimum Gain Chargeback--Partnership
Nonrecourse Liabilities. If there is a net decrease in Partnership Minimum
Gain during any Partnership taxable year, certain items of income and gain
shall be allocated (on a gross basis) to the Partners in the amounts and manner
described in Section 1.704-2(f) of the Regulations. This Section 4.3(a)(i) is
intended to comply with the minimum gain chargeback requirement (set forth in
Section 1.704-2(f) of the Regulations) relating to Partnership nonrecourse
liabilities (as defined in Section 1.704-2(b)(3) of the Regulations) and shall
be so interpreted.
(ii) Minimum Gain Chargeback--Partner Nonrecourse
Debt. If there is a net decrease in Partner Minimum Gain during any
Partnership taxable year, certain items of income and gain shall be allocated
(on a gross basis) to those Partners who had a share of the Partner Minimum
Gain (determined pursuant to Section 1.704-2(i)(5) of the Regulations) in the
amounts and manner described in Section 1.704-2(i)(4) of the Regulations. This
Section 4.3(a)(ii) is intended to comply with the minimum gain chargeback
requirement (set forth in Section 1.704-2(i)(4) of the Regulations) relating to
partner nonrecourse debt (as defined in Section 1.704-2(b)(4) of the
Regulations) and shall be so interpreted.
(iii) Qualified Income Offset. If any Partner has
an Adjusted Capital Account Deficit, items of Partnership income and gain shall
be specially allocated (on a gross basis) to each such Partner in an amount and
manner sufficient to eliminate the Adjusted Capital Account Deficit of such
Partner as quickly as possible; provided, however, that an allocation pursuant
to this Section 4.3(a)(iii) shall be made only if and to the extent that a
Partner would have an Adjusted Capital Account Deficit after all other
allocations provided for in this Article IV have been tentatively made as if
this Section 4.3(a)(iii) were not a part of this Agreement. This Section
4.3(a)(iii) is intended to constitute a "qualified income offset" within the
meaning of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be so
interpreted.
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(iv) Gross Income Allocation. If any Partner has
a deficit Capital Account at the end of any fiscal year, and such deficit
Capital Account is in excess of the sum of (A) the amount such Partner is
obligated to restore pursuant to any provisions of this Agreement and (B) the
amount such Partner is deemed to be obligated to restore pursuant to the
penultimate sentences of Regulations Section 1.704-2(g)(l) and 1.704-2(i)(5),
each such Partner shall be specially allocated items of Partnership income and
gain in the amount of such excess as quickly as possible, provided that an
allocation pursuant to this Section 4.3(a)(iv) shall be made only if and to the
extent that such Partner would have a deficit Capital Account in excess of such
sum after all other allocations provided for in Sections 4.1 and 4.3 have been
made as if Section 4.3(a)(iii) and this Section 4.3(a)(iv) were not a part of
the Agreement.
(v) Basis Adjustments. To the extent an
adjustment to the adjusted tax basis of any Partnership asset pursuant to
Section 734(b) or 743(b) of the Code is required, pursuant to Section
1.704-1(b)(2)(iv)(m) of the Regulations, to be taken into account in
determining Capital Accounts, the amount of such adjustment to the Capital
Accounts shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis), and such
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to be
adjusted pursuant to such Section of the Regulations.
(vi) Nonrecourse Deductions. Partner Nonrecourse
Deductions shall be allocated in accordance with Section 1.704-2(i)(l) of the
Regulations to the Partner who bears the economic risk of loss with respect to
such deductions.
(vii) Allocation of Proceeds of Nonrecourse
Liability. The determination of whether any distribution by the Partnership is
allocable to the proceeds of a nonrecourse liability of the Partnership shall
be made by the Management Committee under any reasonable method that complies
with Section 1.704-2(h) of the Regulations.
(b) Curative Allocations. The allocations set forth in
Sections 4.1(b) and 4.3(a) (the "Regulatory Allocations") are intended to
comply with certain requirements of Section 1.704-1(b) of the Regulations. The
Partners hereby acknowledge and agree that the Regulatory Allocations may not
be consistent with the manner in which the Partners intend to make Partnership
distributions. Accordingly, the Management Committee is hereby authorized and
directed to make other allocations of Profit, Loss, or Book Depreciation among
the Partners in any reasonable manner that the Management Committee deems
appropriate, in its sole discretion, so as to prevent the Regulatory
Allocations from distorting the manner in which the Partnership distributions
would otherwise be divided among the Partners pursuant to Sections 4.2, 7.4(d)
and 7.4(e). In general, the Partners anticipate that this will be accomplished
by specially allocating other Profits, Losses, or Book Depreciation among the
Partners so that, after such offsetting special allocations are made, the
amount of each Partner's Capital Account will be, to the extent possible, equal
to the Capital Account
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balance such Partner would have had if the Regulatory Allocations were not a
part of this Agreement and all Partnership items had been allocated to the
Partners solely pursuant to Section 4.1(a).
(c) Tax Allocations: Code Section 704(c). In accordance
with Section 704(c) of the Code and the Regulations thereunder, income, gain,
loss, and deduction with respect to any property contributed to the capital of
the Partnership shall, solely for tax purposes, be allocated among the Partners
so as to take account of any variation between the adjusted basis of such
property to the Partnership for federal income tax purposes and the initial
Gross Asset Value of such property (determined in accordance with Section
3.4(a)(iii)(A) hereof). In accordance with the requirements of Section
1.704-1(b)(4)(i) of the Regulations, if the Gross Asset Value of any
Partnership asset is adjusted pursuant to Section 3.4(a)(iii)(B), subsequent
allocations of income, gain, loss, and deduction with respect to such asset
shall take into account of any variation between the adjusted basis of such
asset for federal income tax purposes and the Gross Asset Value of such asset
in the same manner as such variations are taken into account under Section
704(c) of the Code and the Regulations thereunder with respect to property
contributed to the Partnership. Any elections or other decisions relating to
such allocation shall be made by the Management Committee in any manner that
reasonably reflects the purpose and intention of this Agreement. Allocations
pursuant to this Section 4.3(c) are solely for purposes of federal, state, and
local taxes and shall not affect or be taken into account in computing any
Partner's Capital Account or share of Profits, Losses, other items, or
distributions pursuant to this Agreement.
(d) Other Allocation Rules.
(i) For purposes of determining the Profits,
Losses, or any other item allocable to any period (including periods before and
after the admission of a new Partner), Profits, Losses, and any such other item
shall be determined on a daily, monthly, or other basis, as determined and
allocated by the Management Committee using any permissible method under
Section 706 of the Code and the Regulations thereunder.
(ii) For federal income tax purposes, every item
of income, gain, loss, and deduction shall be allocated among the Partners in
accordance with the allocations under Sections 4.1, 4.3(a), 4.3(b), and 4.3(c).
(iii) The Partners are aware of the income tax
consequences of the allocations made by this Section 4.3 and Section 4.1 and
hereby agree to be bound by the provisions of this Section 4.3 and Section 4.1
in reporting their shares of Partnership income and loss for income tax
purposes.
(iv) To the extent permissible under Section 704
of the Code and the Regulations thereunder, in making allocations provided for
in this Section 4.3 and Section 4.1, ordinary income realized by the
Partnership from recapture of previously reported deductions shall
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be allocated to those Partners (or their successors in interest) to whom such
deductions were originally allocated and in proportion to such original
allocations. Any obligation relating to the recapture of previously reported
credits shall be allocated to those Partners (or their successors in interest)
to whom such credits were originally allocated and in proportion to such
original allocations.
(v) It is intended that the allocations in
Sections 4.1, 4.3(a), 4.3(b), and 4.3(c) effect an allocation for federal
income tax purposes consistent with Section 704 of the Code and comply with any
limitations or restrictions therein. The Management Committee shall have
complete discretion to make the allocations pursuant to this Section 4.3 and
Section 4.1 in any reasonable manner consistent with Section 704 of the Code
and to amend the provisions of this Agreement as appropriate to comply with the
Regulations promulgated under Section 704 of the Code, if in the opinion of
counsel to the Partnership, such an amendment is advisable to reflect
allocations among the Partners consistent with those Regulations.
(vi) The Partners agree that their Percentage
Interests represent their interests in Partnership profits for purposes of
allocating excess nonrecourse liabilities pursuant to Section 1.752-3(a)(3) of
the Regulations.
ARTICLE V
MANAGEMENT
5.1 MANAGEMENT OF THE PARTNERSHIP.
(a) Management Committee.
(i) The management and control of the business
and affairs of the Partnership shall be vested in the Partners, who shall
exercise such management and control solely through and by virtue of their
selection of a management committee (the "Management Committee"). Except as
expressly provided herein to the contrary, all decisions with respect to the
management and control of the Partnership that are duly authorized by the
Management Committee shall be binding on the Partnership and each of the
Partners, and no Partner shall have any right or authority to participate in
the management and control of the Partnership other than through the Management
Committee, except as expressly provided otherwise in this Agreement. The
Management Committee shall be composed of three representatives of HIGI and two
representatives of Miracle. The initial members of the Management Committee
are as follows:
HIGI Representatives: Donald J. Carter, Jr.
Leonard A. Robertson
Jim Livingston
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Miracle Representatives: Jorge Garcia
Richard Garcia
Each Partner shall have complete discretion with respect to
the designation of its representatives on the Management Committee and any
change in such representatives shall become effective upon receipt of written
notice thereof by the Partnership and the other Partner.
(ii) A majority of the entire Management Committee
shall constitute a quorum for the transaction of business or any specified item
of business, except that a quorum shall not exist at any meeting unless at
least one representative of each Partner is present at the commencement of such
meeting. If a quorum shall not be present at any meeting of the Management
Committee, the members thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present.
(iii) Except as otherwise provided in subparagraph
(v) of this Section 5.1(a), the Management Committee shall act at meetings
thereof duly convened and held as provided in this Agreement. The vote of a
majority of the members of the Management Committee present at the time of the
vote, if a quorum is present at such time, shall be the act of the Management
Committee.
(iv) Any one or more members of the Management
Committee may participate in a meeting thereof by means of conference telephone
or similar communications equipment allowing all individuals participating in
the meeting to hear each other at the same time. Participation by such means
shall constitute presence in person at a meeting. Any individual appointed by
a Partner to serve as a member of the Management Committee may, by an
instrument in writing, in such form as the members of the Management Committee
may determine, authorize another individual (including another member of the
Management Committee) as such individual's proxy to act for such member at any
meeting or meetings or by written consent and to vote on behalf of such member;
provided, however, that unless otherwise specified in the written
authorization, such proxy shall be authorized to act for such member only at a
single, specified meeting of the Management Committee, including any
adjournment or adjournments thereof. Any individual authorized to serve as a
proxy for a member shall have a vote on any matter submitted to the Management
Committee equal to the vote of the member for whom such proxy is authorized to
serve.
(v) Any action required or permitted by this
Agreement to be taken by the Management Committee may be taken if a majority of
the members of the Management Committee consent in writing to the adoption of a
resolution authorizing the action. Such resolution and the written consents
thereto shall be filed with the minutes of the proceedings of the Management
Committee.
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(vi) The Management Committee may hold meetings,
both regular and special, either within or without the State of Texas.
(vi) Regular meetings of the Management Committee
may be held without notice at such time and at such place as shall from time to
time be determined by the Management Committee.
(vii) Special meetings of the Management Committee
may be called by the Chairman or the President, or by the Chairman or the
President or Secretary on the written request of either Partner, on two days'
prior notice to each member of the Management Committee.
(b) Compensation. Unless otherwise agreed to by the
Partners, the members of the Management Committee shall not be entitled to
compensation for their services as such. The members of the Management
Committee may be paid their expenses, if any, of attendance at each meeting of
the Management Committee. No such payment shall preclude any member from
serving the Partnership in any other capacity and receiving compensation
therefor.
(c) Notices.
(i) Whenever, under the provisions of this
Agreement, notice is required to be given to any member of the Management
Committee, such notice may be given in writing, (1) by delivery in person, (2)
by telecopy or (3) by mail, addressed to such member, at his address as it
appears on the records of the Partnership, with postage thereon prepaid.
Notices delivered in person shall be deemed given upon receipt, notices
delivered by telecopy shall be deemed given upon receipt of the confirmation
and notices delivered by mail shall be deemed to be given three business days
after the same shall be deposited in the United States mail.
(ii) Whenever notice is required to be given under
the provisions of this Agreement, a waiver thereof in writing, signed by the
Person or Persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
5.2 MANAGING OFFICERS.
(a) General.
(i) The Partnership shall have officers for
purposes of the day-to-day administration of the business of the Partnership.
The officers of the Partnership shall be chosen by the Management Committee,
and shall be a Chairman, a President, a Vice President, a Secretary and a
Treasurer. Other than the Chairman and the President, it shall not be
necessary for officers of the Partnership to be members of the Management
Committee. The Management Committee may also
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choose additional Vice Presidents, and one or more Assistant Secretaries and
Assistant Treasurers. Any number of offices may be held by the same individual.
(ii) The Management Committee may appoint such
other officers and agents as it shall deem necessary, each of whom shall hold
office for such term and shall exercise such powers and perform such duties as
shall be determined from time to time by the Management Committee.
(iii) The compensation, if any, of all officers of
the Partnership shall be fixed by the Management Committee, which compensation
shall be an expense of the Partnership.
(iv) The officers of the Partnership shall hold
office until their successors are chosen and qualify. Any officer may be
removed at any time by the Management Committee. Any vacancy occurring in any
office of the Partnership shall be filled by the Management Committee.
(b) Chairman. The Chairman shall be the chief executive
officer of the Partnership and shall preside at all meetings of the Management
Committee and do and perform such other duties and have such other powers as
the Management Committee may from time to time prescribe. The Chairman's
office shall be held by a representative of HIGI unless otherwise agreed by the
Partners.
(c) President. The President shall be the chief executive
officer of the Partnership (unless there is a Chairman, in which case the
President shall be the chief operating officer), shall preside at all meetings
of the Management Committee if the office of Chairman shall be vacant or at any
such meetings from which the Chairman is absent, shall have general and active
management of the business of the Partnership, shall ensure that all orders and
resolutions of the Management Committee are implemented, and shall perform such
other duties and have such other powers as the Management Committee or the
Chairman may from time to time prescribe. The President's office shall be held
by a representative of HIGI unless otherwise agreed by the Partners.
(d) Vice Presidents. In the absence of the President or
in the event of his inability or refusal to act, the Vice President (or in the
event there be more than one Vice President, the Vice Presidents in the order
designated by the members of the Management Committee, or in the absence of any
designation, then in the order of their election) shall perform the duties of
the President, and when so acting, shall have all the powers of and be subject
to all the restrictions upon the President. The Vice Presidents shall perform
such other duties and have such other powers as the Management Committee or the
President may from time to time prescribe.
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(e) Secretary and Assistant Secretaries.
(i) The Secretary shall attend all meetings of
the Management Committee and record all the proceedings of such meetings in a
book to be kept for that purpose. The Secretary shall give, or cause to be
given, notice of all special meetings of the Management Committee, and shall
perform such other duties and have such other powers as the Management
Committee, the Chairman or the President may from time to time prescribe.
(ii) The Assistant Secretary, or if there be more
than one, the Assistant Secretaries, in the order determined by the Management
Committee (or if there be no such determination, then in the order of their
election) shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Management Committee, the President, or the Secretary may from time to time
prescribe.
(f) Treasurer and Assistant Treasurers.
(i) The Treasurer shall have the custody of
Partnership funds and securities and shall deposit all moneys and other
valuable effects in the name and to the credit of the Partnership in such
depositories as may be designated by the Management Committee.
(ii) The Treasurer shall disburse funds of the
Partnership as ordered by or on behalf of the Management Committee, taking
proper vouchers for each disbursements, and shall render to the President and
the Management Committee, at the Management Committee's regular meetings, or
when the Management Committee so requires, an account of all his transactions
as Treasurer and of the financial condition of the Partnership.
(iii) If required by the Management Committee, the
Treasurer shall give the Partnership a bond, in such sum and with such surety
or sureties as shall be satisfactory to the Management Committee, for the
faithful performance of the duties of his office and for the restoration to the
Partnership, in case of his death, resignation, retirement, or removal from
office, of all books, papers, vouchers, money, and other property of whatever
kind in his possession or under his control belonging to the Partnership.
(iv) The Assistant Treasurer, or if there shall be
more than one, the Assistant Treasurers in the order determined by the
Management Committee (or if there be no such determination, then in the order
of their election) shall, in the absence of the Treasurer or in the event of
his inability or refusal to act, perform the duties and exercise the powers of
the Treasurer and shall perform such other duties and have such other powers as
the Management Committee, the President, or the Treasurer may from time to time
prescribe.
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5.3 CONTRACTS WITH RELATED PARTIES. Services, if any, rendered to
the Partnership by a Partner (or Affiliate of such Partner) shall not
constitute a Capital Contribution and shall not be reimbursable by the
Partnership except as specifically provided in this Section 5.3, or as
otherwise agreed by the Partners. Goods supplied and services rendered by the
Partnership to any Partner or its Affiliates shall not be deemed a return of
capital to such Partner. The Partnership shall purchase goods or services
from, or provide goods or services to, or borrow funds from, any Partners or
their Affiliates only pursuant to a written agreement containing terms approved
by the Management Committee which are no less favorable to the Partnership than
could be obtained form an unaffiliated Person on an arms-length basis.
5.4 TIME DEVOTED TO PARTNERSHIP. The Partners shall, and shall
cause their respective representatives on the Management Committee to, devote
such time to the Partnership as is reasonably necessary to carry out the
provisions of this Agreement. The Partners recognize and agree that HIGI has
no experience or expertise in the design, acquisition, construction, or
operation of a candle manufacturing facility and is entering into this
Agreement based on the representations made to it by Miracle that Miracle has
such experience and expertise. Accordingly, Miracle shall be solely
responsible for advising the Partnership with respect to the design,
acquisition, construction, and operation of the Partnership's candle
manufacturing facility, including without limitation compliance with all
applicable federal, state, and other laws, rules, and regulations.
5.5 OTHER BUSINESSES AND UNDERTAKINGS. Each Partner understands
that the other Partner and its Affiliates may be interested, directly or
indirectly, in various other businesses and undertakings not related to the
Partnership's business. Each Partner also understands that the conduct of the
business of the Partnership may involve business dealings with such other
businesses or undertakings. The Partners hereby agree that the creation of the
Partnership and the assumption by each of the Partners of their duties
hereunder shall be without prejudice to their rights (or the rights of their
Affiliates) to have such other businesses and undertakings and to receive and
enjoy profits or compensation therefrom, and each Partner waives any rights it
might otherwise have to share or participate in such other businesses and
undertakings of the other Partner or its Affiliates. The Partners may engage
in or possess any interest in any other business venture of any nature or
description independently or with others, and neither the Partnership nor the
other Partner shall have any right by virtue of this Agreement in and to such
venture or the income or profits derived therefrom. Each Partner shall give
notice to the other Partner and the Partnership of its interest, or the
interest of any of its Affiliates, in any other business or undertaking that
proposes to enter into any business transactions with the Partnership.
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5.6 SCOPE OF AUTHORITY; INDEMNIFICATION.
(a) Partners.
(i) Neither of the Partners shall, without the
consent of the Management Committee, take any action on behalf of or in the
name of the Partnership, or enter into any commitment or obligation binding
upon the Partnership, except as expressly provided for in this Agreement. Each
Partner shall indemnify and hold harmless the Partnership as well as the other
Partner and its Affiliates, directors and officers from and against any and all
claims, demands, losses, damages, liabilities, lawsuits and other proceedings,
judgments and awards, penalties, and costs and expenses (including but not
limited to reasonable attorneys' fees) (collectively, "Damages") (1) arising
out of or relating to, directly or indirectly, in whole or in part, any breach
of the foregoing provisions by such Partner or its Affiliates or (2) in the
case of Miracle, arising out of or relating to, directly or indirectly, in
whole or in part, the design, construction, and operation of the Partnership's
candle manufacturing facility to be constructed in Laredo, Texas, including
without limitation any violation or failure to comply with any federal, state
or other governmental law, rule or regulation.
(ii) Except as otherwise expressly provided herein
(including, without limitation, the provisions of paragraph (i) of this Section
5.6(a), each Partner agrees to contribute to the satisfaction of any Damages,
and to indemnify and hold harmless the other Partner from and against such
Damages in an amount equal to its Percentage Interest multiplied by the total
amount of such Damages, if such Damages are attributable to any debt,
liability, or obligation of the Partnership that the Partnership is unable to
satisfy and in respect of which a Partner is liable by virtue of its status as
a Partner.
(b) Management Committee, Officer, and Employee
Indemnities.
(i) The Partnership shall indemnify each officer
of the Partnership and each member of the Management Committee (each an
"Indemnified Person"), made or threatened to be made a party to any threatened,
pending or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative by reason of the fact that he is or was a
member of the Management Committee or is or was an officer of the Partnership,
or is or was serving at the request of the Partnership as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
or other enterprise, against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by him
in connection with such action, suit, or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Partnership, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the Indemnified Person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the
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best interests of the Partnership, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(ii) Any indemnification under subparagraph (i) of
this Section 5.6(b) (unless ordered by a court) shall be made by the
Partnership only as authorized in the specific case upon a determination that
indemnification is proper in the circumstances because the member of the
Management Committee or the officer has met the applicable standard of conduct
set forth in subparagraph (i) of this Section 5.6(b). Such determination shall
be made (1) by the Management Committee by a majority vote of a quorum
consisting of members who were not parties to such action, suit, or proceeding,
or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested members so directs, by independent legal counsel in a written
opinion, or (3) by the Partners.
(iii) Expenses incurred by any Indemnified Person
in defending a civil or criminal action, suit, or proceeding may be paid by the
Partnership in advance of the final disposition of such action, suit, or
proceeding as authorized by the Management Committee in the specific case upon
receipt of an undertaking by or on behalf of such member or officer to repay
such amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Partnership as authorized herein.
(iv) The indemnification provided by this Section
5.6(b) shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any agreement of the Partnership, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to an individual who has ceased to
be a member of the Management Committee or an officer of the Partnership and
shall inure to the benefit of his or her heirs, executors, and administrators.
(v) The Partnership shall have the power to
purchase and maintain insurance on behalf of any individual who is or was a
member of the Management Committee or an officer of the Partnership, or is or
was serving at the request of the Partnership as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
enterprise against any liability asserted against him or her and incurred by
him or her in any such capacity, or arising out of his or her status as such.
(vi) For purposes of this Section 5.6, references
to "other enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a Person with respect to an
employee benefit plan; and references to "serving at the request of the
Partnership" shall include any service as a member of the Management Committee
or as an officer of the Partnership which imposes duties on, or involves
services by, such member or such officer with respect to an employee benefit
plan, its participants, or beneficiaries; and a Person who acted in good faith
and in a manner he reasonably believed to be in the interest of the
participants and
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beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interest of the Partnership" as referred to in
this Section 5.6.
ARTICLE VI
SALE, TRANSFER OR MORTGAGE
6.1 GENERAL.
(a) Transfer Restrictions and Procedures. Each of the
Partners agrees that it will not, directly or indirectly (through the sale,
transfer, pledge, hypothecation, or other disposition of any capital stock of
any subsidiary then owning any Partnership Interest as permitted by
subparagraph (iv) of this Section 6.1(a) or otherwise), sell, transfer, pledge,
hypothecate, or otherwise dispose of all or any part of its Partnership
Interest, without the prior written consent of the other Partner, which consent
may be given or withheld in the sole discretion of such other Partner. Each of
the Partners further agrees that it will not, directly or indirectly (through
the sale, transfer, pledge, hypothecation, or other disposition of any capital
stock of any subsidiary then owning any Partnership Interest as permitted by
subparagraph (iv) of this Section 6.1(a) or otherwise), sell or otherwise
dispose of all or any part of its Partnership Interest, except in accordance
with the following procedures:
(i) Either Partner (the "Initiating Partner")
wishing to dispose of not less than all of its Partnership Interest, shall give
written notice thereof (the "Transfer Notice") to the other Partner (the
"Receiving Partner") specifying the cash purchase price (stated in terms of
price per each 1% of the total Percentage Interest to be sold) at which it is
willing to effect such disposition.
(ii) Not later than 90 days following receipt of
the Transfer Notice, the Receiving Partner shall notify the Initiating Partner
in writing (the "Response Notice") of its election to either (A) purchase the
Initiating Partner's entire Partnership Interest at the cash purchase price
(stated in terms of price per each 1% of the total Percentage Interest to be
purchased) specified in the Transfer Notice, or (B) sell to the Initiating
Partner the Receiving Partner's entire Partnership Interest at a cash purchase
price equal to the same price per each 1% of the total Partnership Interest to
be sold as set forth in the Transfer Notice. A failure by the Receiving
Partner to deliver a Response Notice shall be deemed to be a Response Notice to
purchase the Initiating Partner's entire Partnership Interest at the cash
purchase price set forth in the Transfer Notice, given on the 90th day
following receipt of the Transfer Notice. The Response Notice shall be
irrevocable and shall be binding upon the Initiating Partner and the Receiving
Partner.
(iii) The closing of the purchase of any
Partnership Interest in accordance with the Response Notice shall take place
within 90 days after receipt (or deemed receipt) of such
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Response Notice. The time and date of such closing shall be specified in the
Response Notice furnished pursuant to subparagraph (ii) of this Section 6.1(a).
If a Response Notice is deemed to have been given pursuant to such subparagraph
(ii), the closing shall take place at 10:00 a.m., Central Time, on the 120th
day following receipt of the Transfer Notice. At the closing, the Partner that
is purchasing the Partnership interest shall pay the purchase price therefor by
delivering to the Partner that is selling the Partnership Interest, Federal or
other immediately available funds to the order of such selling Partner.
Concurrently with the delivery of such purchase price, the Partner that is
selling the Partnership interest shall execute or cause to be executed such
instruments of transfer as shall be sufficient to fully vest such Partnership
Interest in the other Partner. The closing shall take place at the principal
executive office of the Partnership or at such other place as may be mutually
agreed upon by the Partners.
(iv) Notwithstanding anything to the contrary in
this Section 6.1(a), either Partner, subject to the prior written consent of
the other Partner, which consent shall not be unreasonably withheld, shall be
entitled to transfer its entire Partnership Interest to a wholly owned
subsidiary of such Partner, provided that such subsidiary agrees in writing to
be bound by the terms of this Agreement to the same extent as if it were
originally a party hereto and provided further that the Partner so assigning or
transferring such Partnership Interest shall guarantee the performance of the
obligations of said wholly owned subsidiary.
(b) Distributions and Allocations in Respect of
Transferred Partnership Interests. If any Partnership Interest is transferred
during any fiscal year in compliance with the provisions of this Article VI,
Profits, Losses, and all other items attributable to the transferred interest
for such period shall be allocated between the transferor and the transferee by
taking into account their varying interests during the period in accordance
with Section 706 of the Code, using any conventions permitted by law and
selected by the Management Committee. All distributions on or before the date
of the transfer shall be made to the transferor. Solely for purposes of making
such allocations and distributions, the Partnership shall recognize the
transfer not later than the end of the calendar month during which it is given
notice of the transfer; provided, however, that if the Partnership does not
receive a notice stating the date the Partnership Interest was transferred and
such other information as the General Partner may reasonably require within 30
days after the end of the fiscal year during which the transfer occurs, then
all of such items shall be allocated, and all distributions shall be made, to
the Person who, according to the books and records of the Partnership, on the
last day of the fiscal year during which the transfer occurs, was the owner of
the Partnership Interest. Neither the Partnership nor any Partner shall incur
any liability for making allocations and distributions in accordance with the
provisions of this Section 6.1(b), whether or not any Partner or the
Partnership has knowledge of any transfer of ownership of any Partnership
Interest.
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ARTICLE VII
DEFAULT AND DISSOLUTION
7.1 EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an event of default ("Event of Default") hereunder on
the part of the Partner with respect to which such event occurs:
(i) the failure by a Partner to make a Capital
Contribution, Additional Contribution or Partnership Loan to the Partnership as
required pursuant to the provisions of Sections 3.1, 3.2 and 3.3, respectively,
and such failure has not been remedied with 10 days following receipt of notice
of such failure from the other Partner;
(ii) the violation by a Partner of any of its
obligations under Article VI of this Agreement, and such violation has not been
remedied within 30 days following the receipt of notice of such violation from
the other Partner;
(iii) the institution by a Partner of proceedings
of any nature under any laws of the United States or of any state, whether now
existing or subsequently enacted or amended, for the relief of debtors wherein
such Partner is seeking relief as debtor;
(iv) a general assignment by a Partner for the
benefit of creditors;
(v) the institution by a Partner of a case or
other proceeding under any section or chapter of the federal Bankruptcy Code as
now existing or hereafter amended or becoming effective;
(vi) the institution against a Partner of a case
or other proceeding under any section or chapter of the federal Bankruptcy Code
as now existing or hereafter amended or becoming effective, which proceeding is
not dismissed, stayed, or discharged within a period of 60 days after the
filing thereof or if stayed, which stay is thereafter lifted without a
contemporaneous discharge or dismissal of such proceeding;
(vii) a proposed plan of arrangement or other
action by a Partner's creditors taken as a result of a general meeting of the
creditors of such Partner;
(viii) the appointment of a receiver, custodian,
trustee or like officer, to take possession of assets having a value in excess
of $1,000,000 of a Partner if the pendency of said receivership would
reasonably tend to have a materially adverse effect upon the performance by
said Partner of its obligations under this Agreement; which receivership
remains undischarged for a period of 30 days from the date of its imposition;
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(ix) the admission by a Partner in writing of its
inability to pay its debts as they mature;
(x) the attachment, execution, or other judicial
seizure of all or any substantial part of a Partner's assets or of a Partner's
Partnership Interest, or any part thereof, such attachment, execution, or
seizure being with respect to an amount not less than $1,000,000 and remaining
undismissed or undischarged for a period of 15 days after the levy thereof, if
the occurrence of such attachment, execution, or other judicial seizure would
reasonably tend to have a materially adverse effect upon the performance by
such Partner of its obligations under this Agreement; provided, however, that
said attachment, execution, or seizure shall not constitute an Event of Default
hereunder if such Partner posts a bond sufficient to fully satisfy the amount
of such claim or judgment within 15 days after the levy thereof and the
Partner's assets are thereby released from the lien of such attachment; and
(xi) a material default in performance of or
failure to comply with any other material agreements, obligations, or
undertakings of a Partner contained in this Agreement, and such default has not
been cured within 30 days upon the receipt of notice of such default from the
other Partner (provided, however, that such 30-day period shall be extended for
a reasonable additional period of time if necessary to remedy such default if
such remedy is commenced during such 30-day period and is being pursued
continuously and diligently).
7.2 CAUSES OF TERMINATION OR DISSOLUTION. The Partnership shall
be terminated or dissolved only if:
(a) an Event of Default has occurred and the
Non-Defaulter elects to terminate or dissolve the Partnership as provided in
Section 7.3:
(b) the Partners mutually agree to terminate or dissolve
the Partnership; or
(c) the Partnership by its terms, as set forth in this
Agreement, is terminated.
7.3 ELECTION OF NON-DEFAULTER.
(a) Purchase of Defaulter's Interest. Upon the
occurrence of any Event of Default by either Partner ("Defaulter"), the other
Partner (a "Non-Defaulter") shall have the right to acquire the entire
Partnership Interest of the Defaulter for cash, except as provided in Section
7.3(b), at a price determined pursuant to the appraisal procedure set forth in
Article VIII. In furtherance of such right, the Non-Defaulter may notify the
Defaulter at any time following an Event of Default of its election to
institute the appraisal procedure set forth in Article VIII. Upon receipt of
notice of determination of the net fair market value of the Defaulter's
Partnership Interest, the Non-Defaulter may notify the Defaulter of its
election to purchase the entire Partnership Interest of the
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Defaulter. Notwithstanding the foregoing, in the case of an Event of Default
specified in subparagraph (ii) of Section 7.1(a), nothing herein shall be
construed to limit the right of the Non-Defaulter to seek specific performance
of the Defaulter's obligations under Article VI of this Agreement.
(b) Closing. The closing of any purchase pursuant to
this Section 7.3 shall take place at the principal office of the Partnership,
unless otherwise mutually agreed by the Partners, on a date specified by the
Non- Defaulter that is not less than 10 days following receipt of notice of
determination of the net fair market value of the Defaulter's Partnership
Interest pursuant to Article VIII. Upon the closing of such purchase, the
Non-Defaulter may elect to offset against the purchase price the amount of any
loss, damage, or injury, the amount of which has been established by a final
nonappealable judgment, caused to it by the Event of Default.
(c) Election to Dissolve. If the Non-Defaulter does not
elect to acquire the entire interest of the Defaulter as set forth in Section
7.3(a), the Non-Defaulter may elect to dissolve and terminate the Partnership
pursuant to Section 7.2 by written notice to the Defaulter. The right of the
Non-Defaulter to institute the procedures for purchase of the Defaulter's
Partnership Interest as set forth in this Section 7.3 shall continue until such
Non- Defaulter elects to exercise its right to terminate the Partnership as
provided in this Section 7.3(c).
7.4 PROCEDURE IN DISSOLUTION AND LIQUIDATION.
(a) Winding Up. Upon any dissolution of the Partnership
pursuant to Section 7.2, the Partnership shall immediately commence to wind up
its affairs and the Partners shall proceed with reasonable promptness to
liquidate the business of the Partnership.
(b) Management Rights During Winding Up. During the
period of the winding up of the affairs of the Partnership, the rights and
obligations of the Partners set forth herein with respect to the management of
the Partnership shall continue. For purposes of winding up, the Management
Committee shall continue to act as such and shall make all decisions relating
to the conduct of any business or operations during the winding up period and
to the sale or other disposition of Partnership assets; provided that if the
termination of the Partnership results from an Event of Default, the Defaulter
whether directly or through its representatives on the Management Committee,
shall have no further right to participate in the management or affairs of the
Partnership or to attend Management Committee meetings or vote on decisions by
the Management Committee, but shall nonetheless be bound by all decisions made
by the Non-Defaulter. Each Partner hereby waives any claims it may have
against the Non-Defaulter that may arise out of the management by the
Non-Defaulter of the Partnership after the Event of Default, so long as the
Non-Defaulter acts in good faith.
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(c) Allocation of Profits and Losses.
(i) Profits and Losses of the Partnership
following the date of dissolution shall be determined in accordance with the
provisions of this Agreement and shall be credited or charged to the Capital
Accounts of each Partner in the same manner as Profits and Losses of the
Partnership would have been credited or charged if there were no termination,
dissolution, and liquidation of the Partnership.
(ii) For tax purposes, any taxable gain or any
loss upon the sale, transfer, or other disposition of Partnership assets
following the date of dissolution shall be allocated to the Partners in
accordance with the allocation of profits and losses set forth in subparagraph
(i) of this Section 7.4(c).
(d) Distributions in Liquidation. The assets of the
Partnership shall be applied or distributed in liquidation in the following
order of priority; provided, however, that if a Partner shall have a negative
balance in its Capital Account, such Partner shall immediately, and prior to
any distributions made pursuant to this Section 7.4(d), pay to the Partnership
in cash for distribution as provided in this Section 7.4(d) an amount equal to
the negative balance in said Partner's Capital Account:
(i) In payment of debts and obligations of the
Partnership; and
(ii) To the Partners in payment of any positive
balances remaining in their Capital Accounts as provided in Section
1.704-1(b)(2)(ii)(b)(2) of the Regulations, provided however, that the
Management Committee may place in escrow a reserve of cash or other assets of
the Partnership for payment of contingent liabilities in an amount determined
by the Management Committee to be appropriate for such purposes.
(e) Non-Cash Assets.
(i) Every reasonable effort shall be made to
dispose of the assets of the Partnership so that all distributions may be made
to the Partners in cash. Notwithstanding the foregoing, the Partners agree
that, in the event of liquidation, the particular patents, patent applications,
trademarks, and trade names contributed to the Partnership shall be distributed
to the Partner that contributed such patents, patent applications, trademarks,
or trade names, and shall be valued at an amount equal to the then current
Gross Asset Value of such patents, patent applications, trademarks, or trade
names, as determined by the Management Committee.
(ii) If the Partnership makes distributions in
kind to the Partners in connection with the liquidation of the Partnership, for
purposes of determining the Capital Account balances of the Partners, the
Partnership shall be deemed to have sold the assets to be distributed in
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kind to a third party for cash at their Gross Asset Value, as determined by the
Management Committee.
7.5 DISPOSITION OF DOCUMENTS AND RECORDS. All documents and
records of the Partnership including, without limitation, all financial
records, vouchers, canceled checks, and bank statements, shall be delivered to
HIGI upon termination of the Partnership. Unless otherwise approved by the
other Partner, HIGI shall retain such documents and records for a period of not
less than seven years and shall make such documents and records available
during normal business hours to the other Partner for inspection and copying at
the other Partner's cost and expense. If either Partner for any reason ceases
as provided herein to be a Partner at any time prior to termination of the
Partnership, and the Partnership is continued without the such Partner, the
other Partner shall maintain the then-existing documents and records of the
Partnership for a period of not less than seven years thereafter; provided,
however, that if there is an audit or threat of audit, such documents and
records shall be retained until the audit is completed and any tax liability
finally determined. All documents and records as maintained shall be available
for inspection, examination and copying by the withdrawing Partner upon
reasonable notice and at reasonable times.
ARTICLE VIII
APPRAISAL
Whenever Article VII provides for the valuation of a
Partnership Interest to be purchased or sold, the Partners Interest shall first
attempt to agree upon the "net fair market value" of the Partnership Interest
to be purchased or sold. The "net fair market value" of the Partnership
Interest shall mean the cash price at which a sophisticated purchaser would
purchase, and a sophisticated seller would sell, such Partnership Interest, (a)
with neither party being under any compulsion to effect such transaction, (b)
with both parties being reasonably informed as to all material facts and (c)
after application of any appropriate lack of marketability and minority
interest discounts.
If the Partners are unable to mutually agree upon the net fair
market value of the Partnership Interest to be sold or purchased within 10 days
of the date the appraisal procedure of this Article VIII is instituted as
provided in this Agreement, the Partners shall then attempt to agree upon the
appointment of three disinterested appraisers who shall be members of the
American Institute of Appraisers. If the Partners are unable to agree upon the
selection of three appraisers within 20 days of the date the appraisal
procedure is instituted as provided in this Agreement, then each Partner shall,
within five days thereafter, select a single appraiser so qualified and such
two appraisers shall select a third appraiser so qualified. Each appraiser so
selected shall furnish the Partners with a written appraisal within 30 days of
his selection, setting forth his determination of the net fair market value of
the Partnership Interest to be purchased or sold. The average of the two
closest valuations of such appraisers shall be treated as the net fair market
value of the Partnership Interest to be purchased or sold and such amount shall
be final and binding on the Partners. The cost of the
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appraisal shall be an expense of the Partnership, except that if the appraisal
is instituted pursuant to Section 7.3(a), the cost shall be at the expense of
the Defaulter.
ARTICLE IX
FINANCIAL MATTERS
9.1 BOOKS, RECORDS, ACCOUNTING, AND REPORTS.
(a) Records and Accounting. The Treasurer of the
Partnership shall keep or cause to be kept appropriate books and records with
respect to the Partnership's business, which shall at all times be kept at the
principal office of the Partnership or such other office as the Management
Committee may designate for such purpose. The books of the Partnership shall
be maintained for financial reporting purposes on the accrual basis using
generally accepted accounting principles, or on the cash basis, as the
Management Committee shall determine in its sole discretion, in accordance with
applicable law.
(b) Fiscal Year. The fiscal year of the Partnership for
tax and accounting purposes shall be the calendar year unless otherwise
determined by the Management Committee and allowable under the Code.
9.2 TAX MATTERS.
(a) Preparation of Tax Returns. The Treasurer of the
Partnership shall arrange for the preparation and timely filing of all returns
of Partnership income, gain, loss, deduction, credit, and other items necessary
for federal, state, and local income tax purposes and shall use all reasonable
efforts to furnish to the Partners within 10 days after the Partnership returns
are filed the tax information reasonably required for federal and state income
tax reporting purposes. The classification, realization, and recognition of
income, gain, loss, deduction, credit, and other items shall be on the cash or
accrual method of accounting for federal income tax purposes, as the Management
Committee shall determine.
(b) Tax Elections. Except as otherwise provided herein,
the Management Committee shall determine whether to make any available tax
election.
(c) Tax Controversies. Subject to the provisions hereof,
HIGI is designated the Tax Matters Partner (as defined in Section 6231(a)(7) of
the Code), and is authorized and required to represent the Partnership, at the
Partnership's expense, in connection with all examinations of the Partnership's
affairs by tax authorities, including resulting administrative and judicial
proceedings, and to expend Partnership funds for professional services and
costs associated therewith. Miracle shall cooperate with HIGI and do or
refrain from doing any or all things reasonably requested by
-30-
<PAGE> 36
HIGI to conduct such proceedings. Miracle may participate in such
administrative proceedings at the Partnership level, but any expenses incurred
by Miracle in connection therewith shall not be deemed a Partnership expense,
but shall be paid by Miracle.
ARTICLE X
GENERAL PROVISIONS
10.1 NOTICES.
(a) Any notices or other communications required or
permitted hereunder shall be in writing, and shall be sufficiently given if
made by hand delivery, telecopier or registered or certified mail, postage
prepaid, return receipt requested, addressed as follows (or at such other
address as may be substituted by notice given as herein provided):
If to HIGI, to: Home Interiors and Gifts, Inc.
4550 Spring Valley Road
Dallas, Texas 75244
Attention: Donald J. Carter, Jr.
Telecopier: (972) 386-1008
With a copy (which shall
not constitute notice) to: Gardere & Wynne, L.L.P.
1601 Elm Street, Suite 3000
Dallas, Texas 75201
Attention: Alan J. Perkins
Telecopier: (214) 999-4667
If to Miracle, to: Miracle Candle Company
3100 Guadalupe Street
Laredo, Texas 78043
Attention: Jorge Garcia
Telecopier: (956) 722-6741
(b) Any notice or communication hereunder shall be deemed
to have been given or made as of the date so delivered if personally delivered;
when the confirmation is received, if telecopied; and three business days after
mailing if sent by registered or certified mail.
10.2 TITLES AND CAPTIONS. All article and section titles and
captions in this Agreement are for convenience only, shall not be deemed part
of this Agreement, and in no way shall define, limit, extend, or describe the
scope or intent of any provisions hereof. Except as specifically
-31-
<PAGE> 37
provided otherwise, references to "Articles" and "Sections" are to Articles and
Sections of this Agreement.
10.3 PRONOUNS AND PLURALS. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine, or neuter forms, and the singular form of nouns, pronouns, and verbs
shall include the plural and vice versa.
10.4 FURTHER ACTION. The parties shall execute all documents,
provide all information, and take or refrain from taking all actions as may be
necessary or appropriate to achieve the purposes of this Agreement.
10.5 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives, and permitted assigns.
10.6 INTEGRATION. This Agreement constitutes the entire agreement
among the parties hereto pertaining to the subject matter hereof and supersedes
all prior agreements and understandings pertaining thereto.
10.7 CREDITORS. None of the provisions of this Agreement shall be
for the benefit of or enforceable by any creditors of the Partnership.
10.8 WAIVER. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement, or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach or any other covenant, duty, agreement, or
condition. Each Partner expressly waives any right that he might have to
require a partition of any Partnership property or a dissolution of the
Partnership, except as otherwise provided in this Agreement.
10.9 COUNTERPARTS. This Agreement may be executed in counterparts,
all of which together shall constitute one agreement binding on all the parties
hereto, notwithstanding that all parties are not signatories to the original or
the same counterpart.
10.10 APPLICABLE LAW. This Agreement shall be construed in
accordance with and governed by the laws of the State of Texas, without regard
to the principles of conflicts of law. The Partners acknowledge and agree that
this Agreement and the obligations and undertakings of the parties hereunder
will be performable in Dallas, Dallas County, Texas. If any action is brought
to enforce or interpret this Agreement, venue for such action shall be in
Dallas County, Texas, and each Partner expressly agrees to the personal
jurisdiction and venue of the federal and state courts located in Dallas
County, Texas.
-32-
<PAGE> 38
10.11 INVALIDITY OF PROVISIONS. If any provision of this Agreement
is declared or found to be illegal, unenforceable, or void, in whole or in
part, then the parties shall be relieved of all obligations arising under that
provision, but only to the extent that it is illegal, unenforceable, or void.
It is the intent and agreement of the parties that this Agreement shall be
deemed amended by modifying such provision to the extent necessary to make it
legal and enforceable while preserving its intent or, if that is not possible,
by substituting therefor another provision that is legal and enforceable and
achieves the same objectives.
10.12 AMENDMENT. This Agreement may not be amended, altered, or
modified, except by a writing signed by a duly authorized representative of
both Partners.
10.13 ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the Partners and any prior understanding and agreements
between them respecting the subject matter of this Agreement.
10.14 CONFIDENTIAL INFORMATION. All confidential information
which each of the Partners may obtain during the term of this Agreement
relating to the financial condition, results or operations, business,
properties, assets, liabilities, or future prospects of the Partnership or of
any customer or supplier of the Partnership, shall not be published, disclosed,
or made accessible by either Partner or any of its personnel, representatives,
or agents to any other Person either during or after the term of this Agreement
or used by either Partner, except for the benefit of the Partnership. Each
Partner agrees that, upon termination of its status as a Partner, all
documents, records, notebooks, manuals, and similar repositories containing any
information regarding the business of the Partnership and its customers and
prospects, including all copies thereof, then in its possession, whether
prepared by it or others, will be the property of the Partnership and will be
left with or returned to the Partnership.
-33-
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of December 14, 1998.
HOME INTERIORS & GIFTS, INC.
By: /s/ Donald J. Carter, Jr.
--------------------------------------------
Title: CEO
-----------------------------------------
MIRACLE CANDLE COMPANY
By: /s/ Richard Garcia
--------------------------------------------
Title: President
-----------------------------------------
-34-
<PAGE> 40
EXHIBIT A
<TABLE>
<CAPTION>
Partner Percentage Interest
- ------- -------------------
<S> <C>
HIGI 60%
Miracle 40%
</TABLE>
<PAGE> 41
EXHIBIT B
DESCRIPTION OF PROPERTY INITIALLY
CONTRIBUTED BY THE PARTNERS
1. Contributed by HIGI:
(a) $3,088,920 in cash
(b) Equipment:
<TABLE>
<S> <C>
HI COST @ 60% $3,624,247
EQUIPMENT FROM HI
Candle Conveyor Line $ 148,450
4 - 12,000 gal Storage Tanks $ 70,399
6 - 500 gal Stainless Steel Tanks $ 42,713
Wick Coater & Wick Sustainer $ 36,512
Wick Machine $ 18,621
Boiler & Equipment $ 34,455
Geneve Drive Index Machine $ 4,245
Label Conveyor $ 2,332
Hot Melt Glue Machine $ 4,896
Label Applicator $ 7,219
Stretchwrap Machine $ 11,048
200' of Conveyor Frames $ 6,629
Dryer Unit $ 5,674
Steam, Wax Lines, Hook up $ 80,082
Catwalk, frame & stairs $ 15,725
Pack Off Conveyor $ 2,052
Pipe for Air Lines $ 1,417
4 - Used Stainless Steel Tanks $ 1,125
Painting 200' of Conveyor Frame $ 540
Parts & Motors for conveyor equipment $ 41,193
Total Equipment Cost $ 535,327
</TABLE>
2. Contributed by Miracle:
(a) $2,416,165 in cash
(b) Non-exclusive, paid-up licenses covering all formulas and
other proprietary information now owned by Miracle relating to
its candle making operations.
(c) Non-exclusive, paid-up licenses covering all computer software
developed by Miracle and used in its candle making operations.
<PAGE> 1
EXHIBIT 10.15.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LAREDO CANDLE COMPANY L.L.P
(a Texas registered limited liability partnership)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FIRST AMENDMENT
to
AGREEMENT
OF
PARTNERSHIP
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Effective as of February 1, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
FIRST AMENDMENT TO AGREEMENT OF PARTNERSHIP
This First Amendment to Agreement of Partnership ("First Amendment") is
entered into effective as of the 1st day of February, 1999, by and between Home
Interiors & Gifts, Inc., a Texas corporation ("HIGI"), and Miracle Candle
Company, a Texas corporation ("Miracle").
BACKGROUND
The HIGI and Miracle are parties to that certain Agreement of
Partnership dated as of December 14, 1998 (the "Agreement"), pursuant to which
Laredo Candle Company L.L.P., a Texas registered limited liability partnership
(the "Partnership"), was formed pursuant to the Texas Revised Partnership Act,
Article 6132b of Title 105 of the Revised Texas Civil Statutes.
The HIGI and Miracle are executing this First Amendment to amend and
supplement the Agreement, as more particularly described below.
SUPPLEMENTAL AGREEMENT
In consideration of the mutual covenants and agreements herein
contained, and for other good and valuable consideration, the HIGI and Miracle
agree as follows:
ARTICLE I
DEFINITION OF TERMS
1.01 Definitions Incorporated. Capitalized terms used herein that are
defined (or to which a definition is attributed) in the Agreement are used in
this First Amendment with the meanings ascribed to such terms in the Agreement,
as amended by this First Amendment, unless otherwise defined herein.
ARTICLE II
AMENDMENTS
2.01 Amendment to Section 7.1 of the Agreement. Section 7.1 of the
Agreement is hereby amended as follows:
(a) Section 7.1(x) of the Agreement is hereby amended by deleting
the word "and" as the last word thereof;
(b) Section 7.1(xi) of the Agreement is hereby amended by deleting
the "period" at the end thereof and substituting therefor "; and"; and
(c) Section 7.1 of the Agreement is hereby amended by adding a new
subsection "(xii)" thereto to read in its entirety to read as follows:
(xii) a default by a Partner, which extends beyond any stated
period of grace applicable thereto, under, or in payment or
performance under, any loan agreement, promissory note, mortgage,
deed of trust, security agreement, pledge agreement, guaranty, or
other instrument, agreement or document to which such Partner is a
party that evidences, governs and/or secures all or any part of
any indebtedness or other obligation
<PAGE> 3
of such Partner and/or any other person or entity (irrespective of
the level or extent of such Partner's personal, recourse liability
for such indebtedness or other obligation) that is secured, in
whole or in part, by any lien or encumbrance on, or security
interest in, or assignment or pledge of, all or any portion of
such Partner's Partnership Interest, or any interest therein,
including, without limitation, the failure, which extends beyond
any stated period of grace applicable thereto, by such Partner to
pay all or any portion of such indebtedness or other obligation
when due, whether on any installment payment date, at stated
maturity, by reason of the acceleration of maturity, or otherwise,
provided, that nothing contained in this Section 7.1(xii) shall be
deemed or construed as a consent by any Partner to, or as a waiver
by any Partner of any of the terms and provisions of this
Agreement relating to, any purported pledge, assignment or other
encumbrance by any other Partner of, or the grant by any other
Partner of any security interest in, all or any portion of such
other Partner's Partnership Interest, or any interest therein.
ARTICLE III
MISCELLANEOUS
3.01 Agreement. The term "Agreement", as used in the Agreement, shall
mean and refer to the Agreement, as amended and supplemented by this First
Amendment.
3.02 Incorporation by Reference. Except to the extent inconsistent with
the express provisions set forth elsewhere in this First Amendment, the
provisions of Article X of the Agreement are incorporated by reference herein
and shall be applicable to this First Amendment in the same manner as if fully
set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment effective as of the date first written above.
HIGI:
HOME INTERIORS & GIFTS, INC.,
a Texas corporation
By: /s/ Jim Livingston
----------------------------------------
Name: Jim Livingston
--------------------------------------
Title: Vice President of Operations
-------------------------------------
MIRACLE:
MIRACLE CANDLE COMPANY,
a Texas corporation
By: /s/ Jorge L. Garcia
----------------------------------------
Name: Jorge L. Garcia
--------------------------------------
Title: Vice President
-------------------------------------
-2-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
---- -----------------------------
<S> <C>
Dallas Woodcraft, Inc. Texas
GIA, Inc. Nebraska
Homco, Inc. Texas
Homco de Mexico, S.A. de C.V. Mexico
Homco Puerto Rico, Inc. Delaware
Spring Valley Scents, Inc. Texas
Laredo Candle Company L.L.P. Texas
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001067541
<NAME> HOME INTERIORS & GIFTS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 41,024
<SECURITIES> 0
<RECEIVABLES> 8,323
<ALLOWANCES> 348
<INVENTORY> 31,010
<CURRENT-ASSETS> 83,213
<PP&E> 58,656
<DEPRECIATION> 36,882
<TOTAL-ASSETS> 132,448
<CURRENT-LIABILITIES> 93,069
<BONDS> 0
0
0
<COMMON> 1,523
<OTHER-SE> (415,597)
<TOTAL-LIABILITY-AND-EQUITY> 132,448
<SALES> 490,223
<TOTAL-REVENUES> 490,223
<CGS> 242,343
<TOTAL-COSTS> 389,212
<OTHER-EXPENSES> (6,583)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,532
<INCOME-PRETAX> 80,062
<INCOME-TAX> 31,807
<INCOME-CONTINUING> 48,255
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,255
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
