<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1998
REGISTRATION NO. 333-62021
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
HOME INTERIORS & GIFTS, INC.
AND THE GUARANTORS NAMED IN FOOTNOTE (1) BELOW
(Exact name of Co-Registrants as specified in their charters)
<TABLE>
<S> <C>
TEXAS 5023
(State or Other Jurisdiction of (Primary Standard Industrial
Incorporation or Organization) Classification Code Number)
<CAPTION>
<S> <C>
TEXAS 75-0981828
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
DONALD J. CARTER, JR.
CHIEF EXECUTIVE OFFICER
4550 SPRING VALLEY ROAD
DALLAS, TEXAS 75244-3705
(972) 386-1000
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Principal Executive Offices and Agent for Service)
Copies to:
GLENN D. WEST
WEIL, GOTSHAL & MANGES LLP
100 CRESCENT COURT, SUITE 1300
DALLAS, TEXAS 75201
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is a compliance
with General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to the Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C>
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PROPOSED
MAXIMUM
PROPOSED AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING OFFERING
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT PRICE(2)
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10 1/8% Senior Subordinated Notes due 2008............ $200,000,000 100% $200,000,000
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Senior Subordinated Guarantees(4)..................... -- -- --
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<CAPTION>
<S> <C>
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AMOUNT OF
TITLE OF EACH CLASS OF REGISTRATION
SECURITIES TO BE REGISTERED FEE(3)
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10 1/8% Senior Subordinated Notes due 2008............ $59,000
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Senior Subordinated Guarantees(4)..................... --
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</TABLE>
(1) Dallas Woodcraft, Inc., a Texas corporation (I.R.S. Employer Identification
No. 75-1248263), GIA, Inc., a Nebraska corporation (I.R.S. Employer
Identification No. 75-2819682), Homco, Inc., a Texas corporation (I.R.S.
Employer Identification No. 75-1725861), Homco Puerto Rico, Inc., a Delaware
corporation (I.R.S. Employer Identification No. 75-2695262), and Spring
Valley Scents, Inc., a Texas corporation (I.R.S. Employer Identification No.
75-2729831).
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid in connection with the original filing.
(4) The 10 1/8% Senior Subordinated Notes due 2008 are guaranteed by the
Co-Registrants on a senior subordinated basis. No separate consideration
will be paid in respect of the guarantees.
------------------------------
THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE CO-REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to the registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION, DATED NOVEMBER 13, 1998
PROSPECTUS
OFFER TO EXCHANGE ALL OUTSTANDING
10 1/8% SENIOR SUBORDINATED NOTES DUE 2008
FOR
10 1/8% SENIOR SUBORDINATED NOTES DUE 2008
OF
HOME INTERIORS & GIFTS, INC.
Home Interiors & Gifts, Inc., a Texas corporation (the "Company") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the letter of transmittal accompanying this Prospectus (the
"Letter of Transmittal," which together constitute the "Exchange Offer"), to
exchange $1,000 principal amount of 10 1/8% Senior Subordinated Notes due 2008
(the "New Notes") issued by the Company for each $1,000 principal amount of
10 1/8% Senior Subordinated Notes due 2008 (the "Old Notes") issued by the
Company (the "Original Offering"), of which an aggregate principal amount of
$200.0 million is outstanding. The form and terms of the New Notes are identical
to the form and terms of the Old Notes except that the New Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and will not bear any legends restricting their transfer. The New Notes will
evidence the same debt as the Old Notes and will be issued pursuant to, and
entitled to the benefits of, the Indenture (as defined) governing the Old Notes.
The Exchange Offer is being made in order to satisfy certain contractual
obligations of the Company. See "The Exchange Offer" and "Description of New
Notes." The New Notes and the Old Notes are sometimes collectively referred to
herein as the "Notes".
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW
NOTES.
------------------------------
The New Notes will bear interest at the rate of 10 1/8% per annum, payable
semi-annually in arrears on June 1 and December 1 of each year, commencing on
December 1, 1998, and will mature on June 1, 2008. The New Notes will be fully
and unconditionally guaranteed (the "Guarantees"), jointly and severally, on an
unsecured senior subordinated basis, subject to the limitations of applicable
federal and state fraudulent conveyance statutes, by all of the Company's
present and future Restricted Subsidiaries (as defined), other than Restricted
Subsidiaries organized under the laws of a jurisdiction other than the United
States or any state thereof, provided that such subsidiary's assets and
principal place of business are located outside of the United States. As of the
date hereof, all of the Company's subsidiaries are Restricted Subsidiaries and
each one, except for Homco de Mexico, S.A. de C.V., is a Guarantor (as defined).
Except as set forth below, the New Notes will not be redeemable at the option of
the Company prior to June 1, 2003. Thereafter, the New Notes will be subject to
redemption at any time at the option of the Company, in whole or in part, at the
redemption prices set forth herein, plus accrued and unpaid interest and
Additional Amounts (as defined), if any, thereon to the redemption date. In
addition, at any time and from time to time on or prior to June 1, 2001, the
Company may, subject to certain requirements, redeem up to an aggregate of 35%
of the aggregate principal amount of New Notes at a redemption price equal to
110.125% of the principal amount thereof, plus accrued and unpaid interest and
Additional Amounts, if any, thereon to the redemption date, with the net cash
proceeds of one or more Equity Offerings (as defined) by the Company, provided
that at least 65% of the originally-issued aggregate principal amount of New
Notes remain outstanding immediately following each such redemption. The New
Notes will not be subject to any sinking fund requirement. Upon a Change of
Control (as defined), the Company will be required to make an offer to
repurchase the New Notes at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
repurchase. However, there can be no assurance that in the event of a Change of
Control the Company will be able to raise sufficient funds to meet its
obligations or that, in any event, the Company would be permitted to do so under
the Senior Credit Facility (as defined). See "Description of New Notes."
The New Notes will be general obligations of the Company. The New Notes will
be unsecured and will be subordinated in right of payment to all existing and
future Senior Indebtedness (as defined) of the Company and Guarantor Senior
Indebtedness (as defined) and will rank pari passu in right of payment with all
Senior Subordinated Indebtedness (as defined) of the Company. The Indenture
permits the Company to incur additional indebtedness, including indebtedness of
subsidiaries, and Senior Indebtedness, subject to certain limitations. In
connection with the Recapitalization (as defined), the Company obtained a senior
credit facility in an aggregate amount of $340.0 million (the "Senior Credit
Facility"), which includes a $40.0 million revolving credit facility (the
"Revolving Loans"). The Senior Credit Facility is guaranteed on a senior basis
by the Company's Restricted Subsidiaries and is secured by a lien on
substantially all of the assets of the Company and its subsidiaries. As of
September 30, 1998 the aggregate principal amount of the Company's outstanding
Senior Indebtedness was $293.5 million, all of which ranked senior to the Notes,
and the Company had no indebtedness ranking pari passu or junior to the Notes.
As of September 30, 1998, the aggregate amount of the Guarantor Senior
Indebtedness was $293.5 million (consisting solely of guarantees of outstanding
borrowing under the Senior Credit Facility), all of which ranks senior in right
of payment to the Guarantees, and none of the Guarantors had any indebtedness or
guarantees ranking pari passu or junior in right of payment to the Guarantees.
See "Risk Factors," "Description of Senior Credit Facility" and "Description of
New Notes."
------------------------------
THE COMPANY AND THE GUARANTORS WILL ACCEPT FOR EXCHANGE ANY AND ALL OLD
NOTES VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED (AS SO EXTENDED, SUCH TIME AND DATE BEING
THE "EXPIRATION DATE"). TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR
TO THE EXPIRATION DATE. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY
CONDITIONS. SEE "THE EXCHANGE OFFER."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guarantors contained in the Registration
Rights Agreement (as defined). Based on interpretations by the staff of the U.S.
Securities and Exchange Commission (the "Commission"), as set forth in no-action
letters issued to certain third parties unrelated to the Company and the
Guarantors, the Company and the Guarantors believe that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any
holder which is an "affiliate" of the Company or the Guarantors within the
meaning of Rule 405 promulgated under the Securities Act or a broker-dealer who
purchased Old Notes directly
(Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
(continued from previous page)
from the Company to resell pursuant to Rule 144A or any other available
exemption promulgated under the Securities Act), without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to engage
in a distribution of New Notes. However, the Commission has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Furthermore,
each holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of such New Notes and has
no arrangement or understanding to participate in a distribution of New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will comply with the prospectus delivery
requirements of the Securities Act in connection with any resale of such New
Notes. Broker-dealers who acquired Old Notes directly from the Company and not
as a result of market-making activities or other trading activities may not rely
on the staff's interpretations discussed above or participate in the Exchange
Offer and must comply with the prospectus delivery requirements of the
Securities Act in order to resell the Old Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed, for a period of 90 days after the
Registration Statement (as defined) has been declared effective, to make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
No public market existed for the Old Notes before the Exchange Offer. The
Company currently does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system, and no active public market for the New Notes is currently anticipated.
The Company will pay all the expenses incident to the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange pursuant to the Exchange Offer.
<PAGE> 4
AVAILABLE INFORMATION
The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will file reports and other information with the
Commission. Such reports and other information may be inspected and copied at
the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60611, and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
also be obtained at prescribed rates by writing to the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549.
This Prospectus does not contain all the information set forth in the
Registration Statement filed with the Commission on Form S-4 with respect to the
New Notes (the "Registration Statement") and the exhibits and schedules thereto,
certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document set forth all material
elements of such documents, but are not necessarily complete. With respect to
each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is hereby made to such exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. Copies of the Registration
Statement and the exhibits thereto are on file with the Commission and may be
examined without charge at the public reference facilities of the Commission
described above. Copies of such materials can also be obtained at prescribed
rates by writing to the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The reports, proxy
statements and other information may also be obtained from the web site that the
Commission maintains at http://www.sec.gov.
The Company is required by the Indenture to furnish the holders of the
Notes with copies of the annual reports and the information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act, as long as any
Notes are outstanding.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "UNAUDITED PRO
FORMA CONSOLIDATED FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY
MANAGEMENT OF THE COMPANY WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE
INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH
ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES
OR STATEMENTS WILL BE REALIZED AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE
SUCH DIFFERENCES INCLUDE: (1) LOSS OF DISPLAYERS; (2) LOSS OR RETIREMENT OF KEY
MEMBERS OF MANAGEMENT; (3) LOSS OF SUPPLIERS; (4) IMPOSITION OF STATE TAXES; (5)
CHANGE IN STATUS OF INDEPENDENT CONTRACTORS; AND (6) INCREASED COMPETITION. MANY
OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND ITS MANAGEMENT.
THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS
OR CIRCUMSTANCES. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT
THE FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD-LOOKING STATEMENTS, SEE
"RISK FACTORS."
i
<PAGE> 5
PROSPECTUS SUMMARY
The following summary should be read in conjunction with the more detailed
information, financial statements and notes thereto appearing elsewhere in this
Prospectus. Unless the context otherwise requires, all references herein to the
"Company" or "Home Interiors" include Home Interiors & Gifts, Inc. and its
consolidated subsidiaries and all references to the "Recapitalization" include
the Merger, the Recapitalization Financings (as defined) and the transactions
related thereto. All capitalized terms used in this Prospectus without a
definition are defined as set forth below under the caption "Description of New
Notes -- Certain Definitions."
THE COMPANY
Founded in 1957, Home Interiors 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 approximately
57,100 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
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. For the year ended
December 31, 1997, the Company's net sales, operating income and net income were
$468.8 million, $89.6 million and $62.2 million, respectively.
The Company's product line consists of approximately 600 to 700 items. 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. Products are targeted to women who are interested in
decorating their homes, but have a limited budget. The Company's Products are
sold throughout the continental United States at suggested retail prices ranging
from $2 to $93 per item, with approximately 80% of the Products ranging in price
from $7 to $30.
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. Each year, members of the merchandise department
circulate approximately 900 proposed or prototype items to selected Displayers
for their review. Based on that review, the Company introduces approximately 150
to 225 new Products each year to replace less popular items. Approximately 28%
of the dollar volume of Products purchased by the Company in 1996 and 1997 were
purchased from and manufactured by the Company's subsidiaries. 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
Home Interiors.
The Company's marketing and sales strategy is focused on motivating the
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 sales methods, it is entirely dependent on the Displayers to purchase
and sell the Products. 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, and can also earn money and prizes based on the dollar
amount of Products purchased from the Company by them and Displayers they have
recruited. In addition, Displayers can benefit from periodic discounts and
incentives offered by the Company to stimulate sales. Recruiting new Displayers
and retaining existing Displayers is critical to the Company's ability to
maintain and increase its revenues. Home Interiors 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, irrespective of
the future sales potential of the new recruits. The Company offers a variety of
training materials to assist new and experienced Displayers and sponsors a
variety of training and motivational meetings, mailings and rallies for all
Displayers.
1
<PAGE> 6
Home Interiors believes that its success and its opportunities for
continued growth and increased profitability primarily result from the following
factors:
Trained and Productive Sales Force. The Company believes that its
sales force is one of the best trained in the direct sales industry. The
Company believes that its high retention rates contribute to a well trained
and productive sales force. In 1997, the average domestic Displayer of the
Company sold Products with a suggested retail price of $15,800, while the
average independent salesperson of other companies in the direct selling
industry sold items worth $4,800 (at retail), according to the Direct
Selling Association (the "DSA"), an industry trade association.
Consumer Focused Product Line. Annually, the Company introduces
approximately 150 to 225 new Products, which are tested and selected from
approximately 900 proposed or prototype items, to replace other less
popular items.
Stable Margins. The Company has generated relatively stable gross
profit and operating profit margins.
Efficient Delivery System. The Company has established a delivery
system to achieve quick and cost-effective delivery of Products to its
Displayers through (i) volume discounts it receives from common carriers
and (ii) its use of locally-based freight distributors ("Local
Distributors"). Local Distributors enable the Company to avoid the premiums
charged by common carriers for delivery to private residences, which is
where most Displayers receive deliveries.
Popularity of Direct Sales. The Company believes that the direct
selling industry is an established, growing and well received sales method.
In 1997, 9.3 million Americans sold approximately $22.2 billion of products
on a direct sales basis, according to the DSA.
BUSINESS STRATEGY
The Company's business strategy is to maintain its position as a leader in
the direct selling industry and to maximize new growth opportunities. To achieve
these goals, the Company intends to:
- Improve Displayer productivity with training and incentive programs and
the use of technology.
- Expand and retain the Displayer base through incentives that encourage
recruiting and retention.
- Maximize Product attractiveness through the offering of coordinated
Products at attractive values.
- Maximize its production of high-quality, price competitive Products.
- Expand on its growth opportunities in international markets.
2
<PAGE> 7
THE RECAPITALIZATION
On June 4, 1998, Home Interiors and Crowley Investments, Inc. ("CII"), a
newly formed corporation organized by Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse"), concurrently with the closing of the Original Offering, merged,
with the Company being the surviving corporation and the Company's pre-
Recapitalization shareholders receiving approximately $827.6 million in cash
(the "Consideration") for approximately 90% of their pre-Recapitalization
shares. In connection with the Recapitalization, (i) HM/RB Partners, L.P., a
Delaware limited partnership ("HM Partners"), and other affiliates of Hicks Muse
(the "Hicks Muse Shareholders"), contributed approximately $182.6 million in
cash to the equity of the Company and, as of the date of this Prospectus, held
approximately 66% of the outstanding shares of the Company's common stock, $0.10
par value per share ("Company Common Stock") and (ii) the Company's pre-
Recapitalization shareholders retained 10% of their pre-Recapitalization shares,
which, as of the date of this Prospectus, constituted approximately 34% of the
outstanding Company Common Stock.
The funding required to pay the cash Consideration paid to
pre-Recapitalization shareholders in the Recapitalization and the fees and
expenses incurred in connection with the Recapitalization was approximately
$851.9 million. These cash requirements were funded by (i) $169.3 million of
cash and cash equivalents held by the Company, (ii) an aggregate of $300.0
million in borrowings under a $340.0 million syndicated, senior secured credit
facility entered into by the Company as part of the Recapitalization (the
"Senior Credit Facility"), (iii) the issuance by the Company of $200.0 million
aggregate principal amount of the Notes in the Original Offering and (iv)
approximately $182.6 million in cash provided to the equity of the Company in
connection with the Recapitalization by the Hicks Muse Shareholders
(collectively, the "Recapitalization Financings"). See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations -- Recapitalization" and "-- Liquidity and Capital Resources."
The following table sets forth the sources and uses of funds for the
Recapitalization (dollars in millions):
<TABLE>
<S> <C>
SOURCES:
Existing cash...................... $ 169.3
Senior Credit Facility(1).......... 300.0
Notes(2)........................... 200.0
Hicks Muse Shareholders
contributions.................... 182.6
--------
Total Sources................. $ 851.9
========
USES:
Consideration...................... $ 827.6
Transaction fees and expenses(3)... 24.3
--------
Total Uses.................... $ 851.9
========
</TABLE>
- ---------------
(1) Consists of $200.0 million aggregate principal amount of the Tranche A Loan
(as defined) and $100.0 million aggregate principal amount of the Tranche B
Loan (as defined). As of September 30, 1998, the interest rates payable on
outstanding Tranche A Loan and Tranche B Loan were approximately 7 3/4% and
8 1/4%, respectively. In addition, as of September 30, 1998 the Company had
$40.0 million of Revolving Loans which were available and undrawn. See
"Description of Senior Credit Facility."
(2) Represents gross proceeds to the Company from the issuance of $200.0
million aggregate principal amount of the Notes.
(3) Includes discount to the initial purchasers of the Notes, expenses in
connection with the Original Offering, fees and expenses in connection with
the Senior Credit Facility and other legal and accounting fees and expenses
incurred in connection with the Recapitalization. The $24.3 million of
transaction fees and expenses consists of a financial advisory fee of
approximately $11.2 million paid to Hicks Muse, debt issuance costs of
approximately $11.6 million paid primarily to the bank syndicate group for
the Senior Credit Facility and the initial purchasers of the Notes, and
other transaction fees and expenses, consisting primarily of legal and
accounting costs, of approximately $1.5 million. Approximately $21.1
million of the total transaction fees and expenses have been recorded as
debt issuance costs and will be amortized over the term of the related
indebtedness. The remaining transaction fees and expenses of $3.2 million
have been charged to additional paid-in capital. In addition to the $24.3
million of transaction 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. These
costs are reflected as Recapitalization expenses in the Company's
consolidated statement of operations for the nine months ended September
30, 1998.
3
<PAGE> 8
MANAGEMENT AND OWNERSHIP
The Company's management team has been led by Donald J. Carter, the son of
the Company's founder Mary C. Crowley, who has been Chairman of the Board of the
Company since 1986 and with the Company since the early 1960's. Following the
Recapitalization, Donald J. Carter remained with the Company on a part-time
basis and his son, Donald J. Carter, Jr., became Chairman of the Board. In
addition, Barbara J. Hammond remained with the Company as President and
Christina L. Carter Urschel remained with the Company as Executive Vice
President. See "Management." In connection with the Recapitalization, certain
executive officers, directors and members of management (i) 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
and (ii) were granted options to acquire additional shares of Company Common
Stock. See "Management -- 1998 Stock Option Plan for Key Employees." Donald J.
Carter, Jr., Christina L. Carter Urschel, Barbara J. Hammond and Ronald L.
Carter (a former director of the Company) retained 597,900, 597,900, 258,570 and
357,440 shares of Company Common Stock, respectively, in the Recapitalization.
In addition, Barbara J. Hammond and Ronald L. Carter received $15,155,497 and
$4,341,387, respectively, in connection with the Recapitalization.
In connection with the Recapitalization, Thomas O. Hicks, Jack D. Furst,
Lawrence D. Stuart, Jr. and Daniel S. Dross, officers of Hicks Muse, became
directors of the Company. Pursuant to the Shareholders Agreement (as defined),
the Board will eventually be reconstituted to consist of six directors
designated by Hicks Muse, three designated by the Committed Shareholders (as
defined) and two independent directors to be mutually designated by the
Committed Shareholders and Hicks Muse. On July 30, 1998, Hicks Muse designated
Sheldon I. Stein as one of its two remaining directors pursuant to the
Shareholders Agreement. See "Certain Transactions -- The Shareholders
Agreement."
Hicks Muse is a leading private investment firm with offices in Dallas, New
York, St. Louis, London and Mexico City that specializes in leveraged
acquisitions, recapitalizations and other principal investing activities. Hicks
Muse and its predecessor firm have completed or have pending over 230
transactions having a combined transaction value of more than $30 billion.
The Company's principal executive office is located at 4550 Spring Valley
Road, Dallas, Texas 75244-3705, telephone (972) 386-1000.
4
<PAGE> 9
THE EXCHANGE OFFER
SECURITIES TO BE
EXCHANGED.................. On June 4, 1998, the Company issued $200.0 million
aggregate principal amount of Old Notes to certain
initial purchasers in a transaction exempt from the
registration requirements of the Securities Act.
The terms of the New Notes and the Old Notes are
substantially identical in all material respects,
except that the New Notes will be freely
transferable by the holders thereof except as
otherwise provided herein. See "Description of New
Notes."
THE EXCHANGE OFFER......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date hereof, Old Notes representing $200.0
million aggregate principal amount are outstanding.
Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to certain third parties unrelated to the
Company and the Guarantors, the Company and the
Guarantors believe that New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may
be offered for resale, resold or otherwise
transferred by holders thereof (other than any
holder which is an "affiliate" of the Company or
the Guarantors within the meaning of Rule 405
promulgated under the Securities Act, or a
broker-dealer who purchased Old Notes directly from
the Company to resell pursuant to Rule 144A or any
other available exemption promulgated under the
Securities Act), without compliance with the
registration and prospectus delivery requirements
of the Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holders' business and such holders have no
arrangement with any person to engage in a
distribution of New Notes. However, the Commission
has not considered the Exchange Offer in the
context of a no-action letter and there can be no
assurance that the staff of the Commission would
make a similar determination with respect to the
Exchange Offer as in such other circumstances.
Furthermore, each holder, other than a
broker-dealer, must acknowledge that it is not
engaged in, and does not intend to engage in, a
distribution of such New Notes and has no
arrangement or understanding to participate in a
distribution of New Notes. Each broker-dealer that
receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will
comply with the prospectus delivery requirements of
the Securities Act in connection with any resale of
such New Notes. Broker-dealers who acquired Old
Notes directly from the Company and not as a result
of market-making activities or other trading
activities may not rely on the staff's
interpretations discussed above or participate in
the Exchange Offer and must comply with the
prospectus delivery requirements of the Securities
Act in order to resell the Old Notes.
REGISTRATION RIGHTS
AGREEMENT.................. The Old Notes were issued by the Company on June 4,
1998, in a private placement in reliance on Section
4(2) of the Securities Act and immediately resold
by the initial purchasers thereof in reliance on
Rule 144A under the Securities Act. In connection
with the sale, the Company and the Guarantors
entered into a Registration Rights Agreement with
the initial purchasers of the Old Notes (the
"Registration Rights Agreement") requiring the
Company and the Guarantors to make the Exchange
Offer. The Registration Rights Agreement further
provides that the Company and the Guarantors must
use their reasonable best efforts to (i) cause the
Registration Statement with respect to the
5
<PAGE> 10
Exchange Offer to be declared effective on or
before December 1, 1998 and (ii) consummate the
Exchange Offer on or before the 45th business day
following the date on which the Registration
Statement is declared effective. See "The Exchange
Offer -- Purpose and Effect."
EXPIRATION DATE............ The Exchange Offer will expire at 5:00 p.m., New
York City time, , 1998 or such later
date and time to which it is extended by the
Company and the Guarantors.
WITHDRAWAL................. The tender of the Old Notes pursuant to the
Exchange Offer may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date. Any Old Notes not accepted for exchange for
any reason will be returned without expense to the
tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange
Offer.
INTEREST ON THE NEW NOTES
AND THE OLD NOTES.......... Interest on each New Note will accrue from the date
of issuance of the Old Note for which the New Note
is exchanged or from the date of the last periodic
payment of interest on such Old Note, whichever is
later. No additional interest will be paid on Old
Notes tendered and accepted for exchange.
CONDITIONS TO THE EXCHANGE
OFFER.................... The Exchange Offer is subject to certain customary
conditions, certain of which may be waived by the
Company. See "The Exchange Offer -- Certain
Conditions to Exchange Offer."
PROCEDURES FOR TENDERING
OLD NOTES.................. Each holder of the Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a copy thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver the
Letter of Transmittal, or the copy, together with
the Old Notes and any other required documentation,
to the Exchange Agent (as defined) at the address
set forth herein. Persons holding the Old Notes
through the Depository Trust Company ("DTC") and
wishing to accept the Exchange Offer must do so
pursuant to the DTC's Automated Tender Offer
Program ("ATOP"), by which each tendering
participant will agree to be bound by the Letter of
Transmittal. By executing or agreeing to be bound
by the Letter of Transmittal, each holder will
represent to the Company and the Guarantors that,
among other things, (i) the New Notes acquired
pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person
receiving such New Notes, whether or not such
person is the registered holder of the Old Notes,
(ii) neither the holder nor any such other person
is engaging in or intends to engage in a
distribution of such New Notes, (iii) neither the
holder nor any such other person has an arrangement
or understanding with any person to participate in
the distribution of such New Notes, and (iv)
neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 promulgated
under the Securities Act, of the Company or the
Guarantors. Pursuant to the Registration Rights
Agreement if (i) the Company determines that it is
not permitted to effect the Exchange Offer as
contemplated hereby because of any change in
applicable law or Commission policy, or (ii) any
Holder of Transfer Restricted Securities (as
defined) notifies
6
<PAGE> 11
the Company prior to the 20th day following
consummation of the Exchange Offer (a) that it is
prohibited by law or Commission policy from
participating in the Exchange Offer (b) that it may
not resell the New Notes acquired by it in the
Exchange Offer to the public without delivering a
prospectus and that this Prospectus is not
appropriate or available for such resales or (c)
that it is a broker-dealer and owns Old Notes
acquired directly from the Company or an affiliate
of the Company, the Company is required to file a
"shelf" registration statement for a continuous
offering pursuant to Rule 415 under the Securities
Act in respect of the Old Notes.
The Company will accept for exchange any and all
Old Notes which are properly tendered (and not
withdrawn) in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer
will be delivered promptly following the Expiration
Date. See "The Exchange Offer -- Terms of the
Exchange Offer."
EXCHANGE AGENT............. United States Trust Company of New York is serving
as Exchange Agent (the "Exchange Agent") in
connection with the Exchange Offer.
FEDERAL INCOME TAX
CONSIDERATIONS........... The exchange pursuant to the Exchange Offer will
not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
EFFECT OF NOT TENDERING.... Old Notes that are not tendered or that are
tendered but not accepted will, following the
completion of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer
thereof. The Company and the Guarantors will have
no further obligation to provide for the
registration under the Securities Act of such Old
Notes.
7
<PAGE> 12
THE NEW NOTES
ISSUER..................... Home Interiors & Gifts, Inc.
SECURITIES OFFERED......... $200.0 million aggregate principal amount of
10 1/8% Senior Subordinated Notes due 2008.
MATURITY................... June 1, 2008.
INTEREST................... June 1 and December 1 of each year, commencing
December 1, 1998.
SINKING FUND............... None.
OPTIONAL REDEMPTION........ Except as described below, the Company may not
redeem the Notes prior to June 1, 2003. On or after
such date, the Company may, subject to certain
requirements, redeem the New Notes, in whole or in
part, at the redemption prices set forth herein,
together with accrued and unpaid interest and
Additional Amounts, if any, thereon to the date of
redemption. In addition, at any time and from time
to time on or prior to June 1, 2001, the Company
may, subject to certain requirements, redeem up to
35% of the aggregate principal amount of the New
Notes with the net cash proceeds of one or more
Equity Offerings by the Company, at a redemption
price equal to 110.125% of the principal amount to
be redeemed, together with accrued and unpaid
interest and Additional Amounts, if any, thereon to
the date of redemption, provided that at least 65%
of the originally issued aggregate principal amount
of the New Notes remains outstanding after each
such redemption. See "Description of New
Notes -- Optional Redemption."
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase the New Notes at a price equal to 101%
of the principal amount thereof, together with
accrued and unpaid interest and Additional Amounts
if any, to the date of purchase. There can be no
assurance that in the event of a Change of Control
the Company will be able to raise sufficient funds
to meet its repurchase obligations or that, in any
event, the Company would be permitted to do so
under the Senior Credit Facility. Any offer made
pursuant to the Change in Control provisions will
comply with any applicable rules and regulations
promulgated under the Securities Act and the
Exchange Act, including Exchange Act Rules 13e-4
and 14e-1. See "Description of New Notes -- Change
of Control."
GUARANTEES................. The New Notes will be fully and unconditionally
guaranteed, jointly and severally, on an unsecured
senior subordinated basis, by the Company's direct
and indirect, existing and future, Restricted
Subsidiaries, other than Subsidiaries organized
under the laws of a jurisdiction other than the
United States or any State thereof, provided that
such subsidiary's assets and principal place of
business are located outside the United States. As
of the date hereof, all of the Company's
subsidiaries are Restricted Subsidiaries and each
one, except for Homco de Mexico, S.A. de C.V., is a
Guarantor. The Guarantors also guarantee all
obligations of the Company under the Senior Credit
Facility. The Company's obligations under the
Senior Credit Facility are secured by substantially
all of the assets of the Company and the
Guarantors. The obligations of each Guarantor under
its Guarantee will be subordinated in right of
payment to the prior payment in full of all
Guarantor Senior Indebtedness (as defined) of such
Guarantor to substantially the same extent as the
New Notes are subordinated to all existing and
future Senior Indebtedness of
8
<PAGE> 13
the Company. As of September 30, 1998, the
aggregate principal amount of the Guarantor Senior
Indebtedness was $293.5 million. See "Description
of New Notes -- Ranking and Subordination" and
"-- Guarantees of New Notes."
RANKING.................... The Notes will be unsecured and will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Company and
will rank pari passu in right of payment with all
Senior Subordinated Indebtedness of the Company. As
of September 30, 1998 the aggregate principal
amount of the Company's outstanding Senior
Indebtedness was $293.5 million (representing
outstanding borrowings under the Senior Credit
Facility) and the Company had no Senior
Subordinated Indebtedness outstanding other than
the Notes and had no indebtedness ranking pari
passu or junior to the Notes. See "Description of
New Notes -- Ranking and Subordination."
RESTRICTIVE COVENANTS...... The Indenture will limit, among other things, (i)
the incurrence of additional indebtedness and
issuance of capital stock, (ii) layering of
indebtedness, (iii) the payment of dividends on,
and redemption of, capital stock of the Company,
(iv) liens, (v) mergers, consolidations and sales
of all or substantially all of the Company's
assets, (vi) asset sales, (vii) dividend and other
payment restrictions affecting Restricted
Subsidiaries and (viii) transactions with
affiliates of the Company. See "Description of New
Notes -- Certain Covenants."
USE OF PROCEEDS............ The Company and the Guarantors will not receive any
proceeds from the exchange of New Notes for Old
Notes pursuant to the Exchange Offer. The Company
used the net proceeds from the Original Offering to
(i) pay a portion of the cash portion of the
Consideration (approximately $827.6 million) and
(ii) pay fees and expenses related to the
recapitalization (approximately $24.3 million).
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" for risks involved with an investment in
the New Notes.
9
<PAGE> 14
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data of the Company for the five fiscal years ended December 31, 1997 and for
the nine months ended September 30, 1997 and 1998. The historical consolidated
financial data for each of the three years in the period ended December 31, 1997
have been derived from, and should be read in conjunction with, the Company's
consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent auditors, that are included elsewhere in
this Prospectus. The historical consolidated financial data for each of the two
years in the period ended December 31, 1994 have been derived from the Company's
consolidated financial statements, which have also been audited by
PricewaterhouseCoopers LLP, independent auditors, not included elsewhere herein.
The historical consolidated financial data for the nine-month periods ended
September 30, 1997 and 1998 have been derived from the unaudited consolidated
financial statements of the Company and include, in the opinion of management,
all adjustments necessary to present fairly the data for such periods. Due to
the seasonality of operations and other factors, the results of operations for
the nine-months ended September 30, 1998 are not indicative of the results that
may be expected for the full year. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Consolidated Financial Statements"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT DISPLAYER DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $490,977 $515,341 $482,950 $434,299 $468,845 $322,099 $ 347,205
Cost of goods sold.............................. 258,137 262,623 261,806 225,137 239,664 166,262 170,658
-------- -------- -------- -------- -------- -------- ---------
Gross profit.................................... 232,840 252,718 221,144 209,162 229,181 155,837 176,547
Selling, general and administrative:
Selling....................................... 71,815 73,276 72,857 68,489 72,172 48,393 58,294
Freight, warehouse and distribution........... 44,020 43,116 41,041 37,167 41,284 28,660 31,146
General and administrative.................... 18,518 28,841 25,398 22,246 26,319 18,712 18,391
(Gains) losses on the sale of assets.......... (919) 209 (14) (2,077) (198) (8) (6,349)
Recapitalization expenses(1).................. -- -- -- -- -- -- 6,198
-------- -------- -------- -------- -------- -------- ---------
Total selling, general and administrative... 133,434 145,442 139,282 125,825 139,577 95,757 107,680
-------- -------- -------- -------- -------- -------- ---------
Operating income................................ 99,406 107,276 81,862 83,337 89,604 60,080 68,867
Other income (expense):
Interest income............................... 5,420 6,439 2,470 5,113 7,985 5,225 4,841
Interest expense.............................. (287) (93) (2) (503) (362) (14) (15,913)
Other income.................................. 352 88 529 456 2,884 466 1,027
-------- -------- -------- -------- -------- -------- ---------
Other income (expense), net..................... 5,485 6,434 2,997 5,066 10,507 5,677 (10,045)
-------- -------- -------- -------- -------- -------- ---------
Income before income taxes...................... 104,891 113,710 84,859 88,403 100,111 65,757 58,822
Income taxes.................................... 38,313 42,737 35,315 33,957 37,919 25,332 23,346
-------- -------- -------- -------- -------- -------- ---------
Income from continuing operations before
cumulative effect of accounting change........ $ 66,578 $ 70,973 $ 49,544 $ 54,446 $ 62,192 $ 40,425 $ 35,476
======== ======== ======== ======== ======== ======== =========
Net income(2)................................... $ 68,889 $ 70,522 $ 49,544 $ 54,446 $ 62,192 $ 40,425 $ 35,476
======== ======== ======== ======== ======== ======== =========
OTHER FINANCIAL DATA:
Gross profit percentage......................... 47.4% 49.0% 45.8% 48.2% 48.9% 48.4% 50.8%
EBITDA(3)....................................... $104,046 $112,171 $ 85,944 $ 84,610 $ 92,019 $ 61,897 $ 71,413
EBITDA margin(4)................................ 21.2% 21.8% 17.8% 19.5% 19.6% 19.2% 20.6%
Cash flows provided by (used in):
Operating activities.......................... $ 77,027 $ 66,850 $ 64,746 $ 57,507 $ 60,285 $ 38,533 $ 53,939
Investing activities.......................... (64,148) (152,376) (1,394) (8,808) (67,023) (69,164) 70,079
Financing activities.......................... (47,234) (11,242) (16,760) (6,086) (21,760) (19,020) (185,387)
Depreciation and amortization................... 5,559 4,686 4,096 3,350 2,613 1,825 2,368
Capital expenditures(5)......................... 26,751 3,135 1,408 2,126 4,617 3,115 6,227
Ratio of earnings to fixed charges(6)........... -- -- -- -- -- -- 4.7x
DOMESTIC DISPLAYER DATA:
Number of orders................................ 716,081 754,439 782,996 710,008 732,202 521,728 552,508
Average order size(7)........................... $ 686 $ 683 $ 617 $ 610 $ 635 $ 613 $ 620
Number of Displayers at end of period(8)........ 37,500 38,300 45,200 37,800 44,200 48,900 55,500
Average number of Displayers during period(8)... 33,800 38,300 41,200 39,900 42,400 42,000 49,500
</TABLE>
10
<PAGE> 15
- ---------------
(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 before cumulative
effect of accounting change for the year ended December 31, 1993 due to the
cumulative effect of change in accounting principle of $2,056,000 that
resulted from the Company's adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," and income from
discontinued operations of $255,000, net of taxes. Net income differs from
income from continuing operations before cumulative effect of accounting
change for the year ended December 31, 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 ($329,000
for the nine months ended September 30, 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.
(5) Capital expenditures for the year ended December 31, 1993 include
$22,715,000 for the purchase of a building, which was transferred to CCP (as
defined herein) on December 31, 1994 in connection with the Spin-Off (as
defined herein).
(6) The ratio of earnings to fixed charges has been omitted for the years ended
December 31, 1993 through 1997 and the nine months ended September 30, 1997
because fixed charges were de minimis during these periods. For purposes of
determining the ratio of earnings to fixed charges, earnings are defined as
income before income taxes less the undistributed equity in earnings of an
affiliate plus fixed charges. Fixed charges consists of interest expense on
all indebtedness, which includes amortization of debt issuance costs.
(7) Average order size is calculated based on net sales divided by number of
orders. For purposes of this calculation, international sales of $1,224,000
and $4,093,000 for the years ended December 31, 1996 and 1997, respectively,
and $2,080,000 and $4,541,000 for the nine months ended September 30, 1997
and 1998, respectively, have been excluded from net sales.
(8) 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
September 30, 1997 and 1998, the Company had included in the Displayer count
approximately 1,400, 3,500 and 9,700 Displayers, respectively, who had not
placed an order within the 14-week period ended as of such dates.
11
<PAGE> 16
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary unaudited pro forma consolidated
financial data of the Company for the year ended December 31, 1997, and the nine
months ended September 30, 1997 and 1998. The historical consolidated financial
data as of September 30, 1998 has been derived from the unaudited consolidated
balance sheet of the Company and include, in the opinion of management, all
adjustments necessary to present fairly the data for such period. The unaudited
summary pro forma consolidated financial data give effect to the
Recapitalization, and are derived from, and should be read in conjunction with,
the Unaudited Pro Forma Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus. The unaudited summary pro forma
consolidated financial data are presented for illustrative purposes only and are
not necessarily indicative of the operating results or financial position that
would have occurred if the Recapitalization had been consummated on the date
indicated, nor are they necessarily indicative of the future operating results
or financial position of the Company. The information set forth below should
also be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Consolidated Financial
Statements," including the related notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1997 1997 1998
------------ -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT DISPLAYER DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $468,845 $322,099 $347,205
Cost of goods sold.......................................... 239,664 166,262 170,658
-------- -------- --------
Gross profit................................................ 229,181 155,837 176,547
Selling, general and administrative:
Selling................................................... 72,172 48,393 58,294
Freight, warehouse and distribution....................... 41,284 28,660 31,146
General and administrative................................ 26,319 18,712 18,391
Gains on the sale of assets............................... (198) (8) (6,349)
Recapitalization expenses(1).............................. -- -- 6,198
-------- -------- --------
Total selling, general and administrative............... 139,577 95,757 107,680
-------- -------- --------
Operating income............................................ 89,604 60,080 68,867
Other income (expense):
Interest expense.......................................... (47,261) (35,401) (33,964)
Other income.............................................. 2,884 466 1,027
-------- -------- --------
Total other expense, net................................ (44,377) (34,935) (32,937)
-------- -------- --------
Income before income taxes.................................. 45,227 25,145 35,930
Income taxes................................................ 16,789 9,696 14,533
-------- -------- --------
Net income.................................................. $ 28,438 $ 15,449 $ 21,397
======== ======== ========
OTHER FINANCIAL DATA:
Gross profit percentage..................................... 48.9% 48.4% 50.8%
EBITDA(2)................................................... $ 92,019 $ 61,897 $ 71,413
EBITDA margin(3)............................................ 19.6% 19.2% 20.6%
Depreciation and amortization............................... $ 2,613 $ 1,825 $ 2,368
Capital expenditures........................................ 4,617 3,115 6,227
Ratio of EBITDA to cash interest expense.................... 2.1x 1.9x 2.3x
Ratio of earnings to fixed charges(4)....................... 2.0x 1.7x 2.1x
DOMESTIC DISPLAYER DATA:
Number of orders............................................ 732,202 521,728 552,508
Average order size(5)....................................... $ 635 $ 613 $ 620
Number of Displayers at end of period(6).................... 44,200 48,900 55,500
Average number of Displayers during period(6)............... 42,400 42,000 49,500
</TABLE>
<TABLE>
<CAPTION>
ACTUAL AS OF
SEPTEMBER 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 42,859
Property, plant and equipment, net.......................... 20,251
Total assets................................................ 148,883
Total debt (including current maturities)................... 493,500
Shareholders' deficit....................................... (427,032)
</TABLE>
12
<PAGE> 17
- ---------------
(1) Consists of nonrecurring fees and expenses paid to the Company's financial
advisor and attorneys in connection with the Recapitalization.
(2) EBITDA represents operating income plus depreciation and amortization,
Recapitalization expenses and non-cash expenses for stock options ($329,000
for the nine months ended September 30, 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.
(3) Defined as EBITDA as a percentage of net sales.
(4) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income before income taxes less the undistributed
equity in earnings of an affiliate plus fixed charges. Fixed charges
consists of interest expense on all indebtedness, which includes
amortization of debt issuance costs.
(5) Average order size is calculated based on net sales divided by number of
orders. For purposes of this calculation, international sales of $4,093,000
for the year ended December 31, 1997, $2,080,000 and $4,541,000 for the
nine months ended September 30, 1997 and 1998, respectively, have been
excluded from net sales.
(6) Prior to July 1997, the Company had a policy of removing from its Displayer
count Displayers who 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
September 30, 1997 and 1998, the Company had included in its Displayer
count approximately 1,400, 3,500 and 9,700 Displayers, respectively, who
had not placed an order within the 14-week period ended as of such dates.
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RISK FACTORS
Prospective investors should carefully consider the risk factors set forth
below, as well as the other information set forth in this Prospectus, before
making an investment in the New Notes. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, the risk factors set forth below.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company incurred substantial indebtedness in connection with the
Recapitalization. As of September 30, 1998 the Company had (i) $493.5 million of
consolidated indebtedness, of which $293.5 million was Senior Indebtedness,
$200.0 was indebtedness under the Notes and none was indebtedness ranking pari
passu or junior to the Notes), (ii) $40.0 million of revolving credit
availability (the "Revolving Loans") under its Senior Credit Facility and (iii)
approximately $427.0 million of consolidated shareholders' deficit. On a pro
forma basis, the Company's ratio of earnings to fixed charges would have been
2.2 to 1.0 for the twelve months ended September 30, 1998. See "Capitalization"
and "Unaudited Pro Forma Consolidated Financial Data." The Company may incur
additional indebtedness in the future, subject to certain limitations contained
in the instruments and documents governing its indebtedness. Accordingly, the
Company will have significant debt service obligations. See "Description of the
Senior Credit Facility" and "Description of New Notes."
The Company's high degree of leverage could have important consequences to
holders of the Notes, including the following: (i) the Company's ability to
obtain additional financing for working capital, capital expenditures, future
acquisitions (if any) and general corporate or other purposes may be impaired,
or any such financing may not be on terms favorable to the Company; (ii) a
substantial portion of the Company's cash flow available from operations after
satisfying certain liabilities arising in the ordinary course of business will
be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing funds that would otherwise be available to the Company; (iii) a
substantial decrease in net operating cash flow or an increase in expenses of
the Company could make it difficult for the Company to meet its debt service
requirements or force it to modify its operations; (iv) high leverage may place
the Company at a competitive disadvantage and may make it vulnerable to a
downturn in its business or the economy generally; (v) because a portion of the
Company's borrowings may be at variable rates of interest, the Company may be
exposed to risks inherent in interest rate fluctuations; and (vi) all of the
indebtedness incurred in connection with the Senior Credit Facility is secured
and is scheduled to become due prior to the time the principal payments on the
Notes are scheduled to become due. As of September 30, 1998, $293.5 million of
the Company's indebtedness was subject to variable interest rates. On July 1,
1998 the Company entered into an interest rate swap agreement to limit the
effects of increases of interest rates on $75.0 million under the Senior Credit
Facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 12 to the
Consolidated Financial Statements.
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness (including the Notes) and to
satisfy its other debt obligations will depend on the future performance of the
Company and its subsidiaries, which to a certain extent will be subject to
economic, financial, competitive and other factors beyond the Company's control.
Based upon the Company's current operations and anticipated growth, management
believes that future cash flow from operations, together with the Company's
available borrowings under the Senior Credit Facility, will be adequate to meet
the Company's anticipated requirements for capital expenditures, interest
payments and scheduled principal payments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." However, if the Company's future operating cash flows are
less than currently anticipated, it may be forced, in order to meet its debt
service obligations, to reduce or delay acquisitions or capital expenditures,
sell assets or reduce operating expenses, including, but not limited to,
investment spending such as selling and marketing expenses, expenditures on
management information systems and expenditures to develop new Products. If the
Company were unable to meet its debt service obligations, it could attempt to
restructure or refinance its indebtedness or to seek additional equity capital.
There can be no assurance that
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the Company will be able to effect any of the foregoing on satisfactory terms,
if at all. In addition, subject to the restrictions and limitations of the
Recapitalization Financings, the Company may incur significant additional
indebtedness to finance acquisitions, which could materially and adversely
affect the Company's operating cash flows and its ability to service its
indebtedness. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Description of Senior Credit Facility" and
"Description of New Notes."
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will register
Old Notes under the Securities Act. See "The Exchange Offer -- Purpose and
Effect." Based on interpretations by the staff of the Commission, as set forth
in no-action letters issued to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by holders thereof (other
than any such holder which is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders, other than broker-dealers, have no arrangement or understanding with
any person to participate in the distribution of such New Notes. However, the
Commission has not considered the Exchange Offer in the context of a no-action
letter and there can be no assurance that the staff of the Commission would make
a similar determination with respect to the Exchange Offer as in such other
circumstances. Each holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement or understanding to participate in a distribution
of New Notes. If any holder is an affiliate of the Company or the Guarantors or
is engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such holder (i) may not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes pursuant to the Exchange Offer must
acknowledge that such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities and that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 90 days after the Registration Statement is declared effective, it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution." In addition, to comply with
the securities laws of certain jurisdictions, if applicable, the New Notes may
not be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. The Company and the Guarantors have agreed,
pursuant to the Registration Rights Agreement, subject to certain limitations
specified therein, to cooperate with the holders to register or qualify the New
Notes for offer or sale under the securities laws of such jurisdiction as any
holder reasonably requests. Unless a holder so requests, the Company does not
currently intend to register or qualify the sale of the New Notes in any such
jurisdictions. See "The Exchange Offer."
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<PAGE> 20
RELIANCE ON DISPLAYERS
The Company's business is significantly dependent upon its Displayers. As
of September 30, 1998, the Company had approximately 57,100 Displayers, 55,500
of whom were located in the United States and 1,400 and 200 of whom were located
in Mexico and Puerto Rico, respectively. Primarily because of the nature of the
direct selling industry, and as a result of numerous general and economic
factors, Displayer turnover, which averaged approximately 46% annually during
the two-year period ended December 31, 1997, is generally higher than the
turnover of sales personnel in other industries. Accordingly, the success of the
Company's business depends on the Company's ability to recruit, train, motivate
and retain the Displayers, including Unit and Branch directors and Trainers (as
defined). The recruiting, motivation and retention levels of Displayers depend
upon, among other things, (i) the managerial capabilities and personal charisma
of the Company's senior management, (ii) 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, (iii) the Company's ability
to provide adequate and timely recruiting and training incentives to existing
Displayers, (iv) the introduction of new Products and marketing concepts, (v)
the effectiveness of the Company's commission and incentive programs and
discounts and (vi) general economic conditions. The Company competes with other
direct selling organizations, even with those whose products do not compete with
the Company's Products, in recruiting and retaining Displayers. There can be no
assurance that the Company's efforts to recruit, train, motivate and retain new
Displayers will be successful, and any failure by the Company to successfully
recruit, train, motivate and retain its Displayers could have a material adverse
effect on the Company's business, financial condition and results of operations
or its ability to pay interest and principal on the Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ENCUMBRANCES ON ASSETS TO SECURE SENIOR INDEBTEDNESS
The Company's obligations under the Senior Credit Facility are secured by a
first priority pledge of, or a first priority security interest in, as the case
may be, substantially all of the assets of the Company and its subsidiaries
(including the common stock of such subsidiaries). If the Company becomes
insolvent or is liquidated, or if payment under the Senior Credit Facility or in
respect of any other secured Senior Indebtedness is accelerated, the lenders
under the Senior Credit Facility or holders of such other secured Senior
Indebtedness will be entitled to exercise the remedies available to a secured
lender under applicable law (in addition to any remedies that may be available
under documents pertaining to the Senior Credit Facility or such other Senior
Indebtedness). The Notes will not be secured. Accordingly, holders of such
secured Senior Indebtedness will have a prior claim with respect to the assets
securing such indebtedness. See "Description of Senior Credit Facility" and
"Description of New Notes."
SUBORDINATION OF THE NOTES AND THE GUARANTEES
The New Notes will be unsecured senior subordinated obligations of the
Company and the indebtedness evidenced by each Guarantee will be unsecured
senior subordinated indebtedness of the relevant Guarantor. The payment of
principal, premium (if any), and interest on the Notes and the payment of any
Guarantee will be subordinated in right of payment to all Senior Indebtedness of
the Company or all Senior Indebtedness ("Guarantor Senior Indebtedness") of the
relevant Guarantor, as the case may be, including all indebtedness and
obligations of the Company under the Senior Credit Facility and such Guarantor's
guarantee of such indebtedness and obligations. As of September 30, 1998, Senior
Indebtedness of the Company and Guarantor Senior Indebtedness of the Guarantors
were $293.5 million, respectively. In addition to the foregoing, the Company had
$40.0 million of availability under the Revolving Loans under the Senior Credit
Facility. The Company does not expect to borrow funds under the Revolving Loans
during 1998. Borrowings under the Revolving Loans, if any, will constitute
Senior Indebtedness. The Indenture will permit the Company to incur additional
Senior Indebtedness, provided that certain conditions are met. In addition, the
Indenture will permit Senior Indebtedness to be secured. By reasons of the
subordination provisions of the Indenture, in the event of insolvency,
liquidation, reorganization, dissolution or other winding-up of the Company or a
Guarantor, holders of Senior Indebtedness of the Company or Guarantor Senior
Indebtedness, as the case may be, will have to be paid in full before the
Company makes payments in respect of the Notes or a
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<PAGE> 21
Guarantor makes payments in respect of its Guarantee. In addition, no payment
will be able to be made in respect of the Notes if (i) any Senior Indebtedness
is not paid when due or (ii) any other default on Senior Indebtedness occurs and
the maturity of such Senior Indebtedness is accelerated in accordance with its
terms. Accordingly, there may be insufficient assets remaining after such
payments to pay amounts due on the Notes. Furthermore, if certain other defaults
exist with respect to Designated Senior Indebtedness (as defined), the holders
of such Designated Senior Indebtedness will be able to prevent payments on the
New Notes for certain periods of time. See "Description of New Notes -- Ranking
and Subordination."
SUBSTANTIAL RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Senior Credit Facility and the Indenture contain numerous restrictive
covenants, including, but not limited to, covenants that restrict the Company's
ability to incur or refinance indebtedness, pay dividends, create liens, sell
assets and engage in certain mergers and acquisitions. In addition, the Senior
Credit Facility requires the Company to maintain certain financial ratios. The
ability of the Company to comply with the covenants and other terms of the
Senior Credit Facility and the Indenture, to make cash payments with respect to
the Notes and to satisfy its other debt obligations (including, without
limitation, borrowings and other obligations under the Senior Credit Facility)
will depend on the future operating performance of the Company and its
subsidiaries. In the event the Company fails to comply with the various
covenants contained in the Senior Credit Facility or the Indenture, as
applicable, it would be in default under such agreements, and in any such case,
the maturity of substantially all of its long-term indebtedness could be
accelerated. A default under the Indenture would also constitute an event of
default under the Senior Credit Facility. The Senior Credit Facility prohibits
the repayment, purchase, redemption, defeasance or other payment of any of the
principal of the Notes at any time prior to their stated maturity. See
"Description of Senior Credit Facility" and "Description of New Notes."
DEPENDENCE ON KEY PERSONNEL
The continued success of the Company will depend to a significant extent on
the efforts of Donald J. Carter, Jr., Barbara J. Hammond and Christina L. Carter
Urschel, as well as other senior management personnel. Although the Company
entered into Executive Employment Agreements with these three individuals at the
time the Recapitalization, there can be no assurance that the Company will be
able to retain their services. Although the Company might be able (if necessary)
to find replacements for these key executives, the loss or unavailability of
their services could have a material adverse effect on the Company's business,
financial condition and results of operations and its ability to pay interest
and principal on the Notes. For more than ten years prior to October 1997,
Donald J. Carter was the Chief Executive Officer of the Company and the
principal officer in charge of its daily operations. Although Donald J. Carter
entered into a five-year Executive Employment Agreement with the Company at the
time the Recapitalization was consummated, he became Chairman Emeritus of the
Company and will not work on a full-time basis. The Company does not intend to
obtain key-man insurance with respect to any senior management personnel. See
"-- Control of the Company" and "Management."
The Company's future success will also require the recruitment, retention
and integration into the Company's business of other highly qualified
management, sales, marketing and product development personnel. Although
management of the Company believes that such qualified personnel can be
recruited, retained and integrated into the Company's business, the market for
such individuals is highly competitive, and there can be no assurance that the
Company will be able to do so on a timely or economic basis.
CONTROL OF THE COMPANY
As of the date of this Prospectus, the Hicks Muse Shareholders owned
approximately 66% of the outstanding shares of Company Common Stock. As a
result, the Hicks Muse Shareholders, subject to the terms of the Shareholders
Agreement, are able to elect a majority of the members of the Board and thereby
control the management and policies of the Company. In addition, as the owners
of more than a majority of the outstanding shares of Company Common Stock, the
Hicks Muse Shareholders are able to approve any action requiring the approval of
the holders of Company Common Stock, including the adoption of
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amendments to the Company's Amended and Restated Articles of Incorporation and
the approval of mergers or sales of all or substantially all of the Company's
assets.
RELIANCE ON RELATIONSHIPS WITH SUPPLIERS
The Company's business depends to a significant extent on its relationships
with certain outside suppliers. Other than H.T. Ardinger & Son Company, which
supplied the Company with 19%, 19% and 17% of the dollar volume of Products
purchased by the Company in 1995, 1996 and 1997, respectively, and Oxford
International, which supplied the Company with 13% of the dollar volume of
Products purchased by the Company in 1997, no supplier furnished the Company
more than 10% of the dollar volume of Products purchased by the Company during
any of the last three fiscal years. The Company utilizes a relatively small
number of suppliers that manufacture finished Products for the Company. Many of
these supplier relationships have existed for many years, and the Company has
relied upon long-standing arrangements with these suppliers, many of which sell
exclusively to the Company. The Company has no written supply agreements with
any of its suppliers and the Company's relationship with any supplier may be
terminated at any time by either party. The Company has from time to time in the
past made loans to its suppliers for various business purposes. However, as a
result of the Recapitalization Financings, the Company's ability to continue
this practice is restricted. If the Company's relationships with its suppliers
were significantly impaired or terminated, or if its suppliers were to
experience financial or other business difficulties, it could have a material
adverse effect on the Company's business, financial condition and results of
operations or its ability to pay interest and principal on the Notes.
POTENTIAL ADVERSE TAX CONSEQUENCES OF THE SPIN-OFF
On December 31, 1994, the Company distributed the stock of Carter-Crowley
Properties, Inc. ("CCP") to the Company's shareholders (the "Spin-Off"). The
Spin-Off was structured and intended to qualify as a tax-free distribution to
the Company and its shareholders under Section 355 of the Code (as defined
herein). No ruling regarding the Spin-Off was obtained from the Internal Revenue
Service ("IRS"), however, so there can be no assurance that the IRS will not
assert that the Spin-Off did not qualify for tax-free treatment under Section
355. If the IRS were to successfully make such an assertion, the Company would
be taxed at prevailing corporate federal income tax rates on the excess of the
fair market value of the stock of CCP at the time of the Spin-Off over the
Company's tax basis in the stock of CCP. If the Company were obligated to pay
this tax, it would have a material adverse effect on the Company's business,
financial condition and results of operations or its ability to pay interest and
principal on the Notes.
In connection with the Spin-Off, the Company and CCP executed a Joint and
Mutual Release pursuant to which CCP agreed to indemnify the Company for CCP's
share of any deficiencies in consolidated federal income taxes when and to the
extent that CCP actually realizes a tax benefit as a result of the adjustment
giving rise to such deficiency. If the IRS were to assert a deficiency for
consolidated taxes that was attributable to CCP, the Company would be required
to pay such tax deficiency in full and would receive indemnification from CCP
only to the extent and at such time, if ever, that CCP actually realizes a tax
benefit as a result of such adjustment. Furthermore, since CCP has liquidated
substantially all of its assets, the Company's ability to enforce its rights
against CCP may be limited. The IRS is not currently auditing the consolidated
federal income tax group of which the Company is the common parent. The statute
of limitations for the assessment of any federal income tax deficiency against
the Company in relation to the Spin-Off or with respect to taxable periods of
CCP subject to the Joint and Mutual Release expired on September 15, 1998.
POTENTIAL ACCUMULATED EARNINGS TAX LIABILITY
In connection with the Company's federal income tax audit with respect to
1992 and 1993, the IRS asserted that the Company had accumulated cash in excess
of its reasonable business needs and therefore was subject to the accumulated
earnings tax. Following discussions with the Company, the IRS concluded that the
accumulated earnings tax was not applicable to the Company in 1992 and 1993.
Because significant cash has been earned and retained by the Company since 1993,
it is possible that the IRS might assert the application
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of the accumulated earnings tax with respect to tax years subsequent to 1993.
The Company believes that the accumulated earnings tax, which is imposed at a
rate of 39.6% on accumulated taxable income, is not applicable to the Company
with respect to tax years subsequent to 1993. However, because the application
of the accumulated earnings tax depends upon a subjective standard regarding
whether cash is accumulated in excess of the "reasonable" business needs of the
Company, it is possible that the Company might not prevail on such issue with
respect to one or more tax periods, in which case the Company might be subject
to significant additional liabilities for accumulated earnings taxes, which
could have a material adverse effect on the Company's business, financial
condition and results of operations or its ability to pay interest and principal
on the Notes.
POTENTIAL STATE TAX LIABILITY
Many states attempt to impose income and other similar taxes on companies
that solicit orders in those states. In the past, the Company has successfully
defended itself in two states against, and settled claims by a third state on a
basis unfavorable to the Company in connection with, allegations that it should
be subject to state income tax. Recently, the Company determined that in some
states certain changes in the nature of its business activity require the
Company to begin paying state income or other similar taxes for the first time.
There can be no assurance, however, that the Company will not be required to pay
income taxes and associated penalties for past periods in any state,
particularly if that state should assert that the Company must pay income or
other similar taxes in the future. In addition, one state has successfully
asserted that the Company owed sales taxes for past periods and there can be no
assurance that other states will not successfully impose sales, use or other
similar taxes which the Company may not be able to recover from the Displayers.
Any imposition of state or local income, sales, use or other similar taxes and
the Company's inability to recover some or all of taxes from the Displayers
could have a material adverse effect on the Company's business, financial
condition and results of operations or its ability to pay interest and principal
on the Notes.
DIFFICULTY OF SATISFYING PAYMENT OBLIGATIONS UPON A CHANGE OF CONTROL
Upon a Change of Control, each holder of a Note may require the Company to
repurchase such Note at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of repurchase.
There can be no assurance that the Company will be able to raise sufficient
funds to meet its repurchase obligations upon a Change of Control or that, in
any event, the Company would be permitted to do so under the terms of the Senior
Credit Facility. See "Description of New Notes -- Change of Control."
POTENTIAL TAX LIABILITY IF INDEPENDENT CONTRACTOR STATUS CHANGES
The Company treats the Displayers (including directors) as independent
contractors. The Company believes that this treatment complies with applicable
law. Nevertheless, there can be no assurance that Displayers or others will not
claim, or that a court would not rule, that the Displayers are employees rather
than independent contractors for labor and employment law or third-party
liability purposes, in which case the Company could be liable for substantial
damages. In addition, if federal or state authorities should successfully assert
that the Displayers should be treated as employees, the Company may be liable
for failure to withhold and pay income, unemployment and other taxes, including
any applicable penalties and interest, or to participate in state-mandated
workers compensation programs. Any such liability could have a material adverse
effect on the Company's business, financial condition and results of operations
or its ability to pay interest and principal on the Notes.
PRODUCT COMPETITION
The home decorative accessories market is highly competitive. Products sold
by the Company compete with products sold elsewhere, including by department and
specialty stores, mail order catalogs and other direct sales companies. Certain
of the Company's competitors have greater financial, distribution and marketing
resources than the Company, and products similar to the Products can be
purchased elsewhere.
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The Company competes in the sale of Products on the basis of quality, price
and service. The Company manufactures many of the Products and purchases
finished Products from a limited number of outside suppliers, which allows it to
exercise some control over the manufacturing process, the quality of the
Products and the prices it charges to Displayers. This control allows the
Displayers to charge prices within a range believed to be acceptable to their
customers. If the Company's relationship with its suppliers or the availability
of raw materials should adversely change, or if the cost of raw materials or the
Company's manufacturing process should significantly increase, the Company could
suffer a competitive disadvantage. Any adverse change in the Company's
relationship with its suppliers or the availability of raw materials could have
a material adverse effect on the Company's business, financial condition and
results of operations or its ability to pay interest and principal on the Notes.
See "Business -- Competition."
POTENTIAL DELAYS IN PRODUCT INTRODUCTION
Due to changing consumer preferences, the Company's success is dependent
upon the continuous introduction and acceptance of new Products. The Company's
product line consists of approximately 600 to 700 Products, and each year
approximately 150 to 225 Products are discontinued and replaced with new or
modified Products. Delays in new Product introductions can result from a number
of causes, including changes to a Product's features, failure of finished
Products supplied by others to meet specifications and the lack of availability
of finished Products or raw materials. Significant delays in the introduction
and availability of new or enhanced Products could have a material adverse
effect on the Company's business, financial condition and results of operations
or its ability to pay interest and principal on the Notes.
The Company currently develops Products for its manufacturing subsidiaries
and is in the process of further expanding its internal merchandise department.
Although the Company continues to use the services of some third party design
firms, the expansion of its internal merchandise department has allowed it to
terminate its relationship with two firms that had designed Products for the
Company for a number of years. The Company intends to continue to create,
manufacture and test market new competitive Products through its internal design
department. The Company's future success will depend in part on its ability to
select and adequately test-market new competitive Products, as well as to
enhance its existing Products, in a timely manner. See "Business -- Products."
POTENTIAL LIABILITY UNDER CERTAIN ENVIRONMENTAL REGULATIONS
The Company's manufacturing operations are subject to federal, state, local
and foreign laws and regulations relating to the storage, handling, generation,
treatment, emission, release, discharge and disposal of certain substances and
wastes. As a result, the Company is involved from time to time in administrative
or legal proceedings relating to environmental matters and has in the past and
may in the future continue to incur capital costs and other expenditures
relating to environmental matters. Liability under environmental laws may be
imposed on current and prior owners and operators of property or businesses
without regard to fault or knowledge about the condition or action causing the
liability. The Company may be required to incur costs relating to the
remediation of properties, including properties at which the Company disposes of
waste, and environmental conditions could lead to claims for personal injury,
property damage or damages to natural resources. The Company is aware of
environmental conditions at certain properties which it now owns or leases or
previously owned or leased which are undergoing remediation and the Company has
in the past and may in the future be named a potentially responsible party
("PRP") at off-site disposal sites to which it has sent waste. In addition, from
time to time, the Company has purchased and sold real estate that may have had
environmental contamination.
The Company believes, based on current information, that any costs it may
incur relating to environmental matters will not have a material adverse effect
on the Company's business, financial condition and results of operations and its
ability to pay interest and principal on the Notes. There can be no assurance,
however, that the Company will not incur significant fines, penalties or other
liabilities associated with noncompliance or clean-up liabilities or that future
events, such as changes in laws or the interpretation thereof, the development
of new facts or the failure of other PRPs to pay their share of cleanup costs
will not cause the Company to incur additional costs that could have a material
adverse effect on the Company's business, financial condition
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<PAGE> 25
and results of operations or its ability to pay interest and principal on the
Notes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 14 to the Consolidated Financial Statements.
INTERNATIONAL OPERATIONS
The Company has recently expanded its sales efforts into Mexico and Puerto
Rico. Although management of the Company believes that growth opportunities in
Mexico and Puerto Rico and other countries exist, the Company cannot accurately
predict whether it will be successful in its international operations. Various
political and economic conditions may affect the Company's success in
international markets, including import or export restrictions, increases or
variations in taxes, unexpected changes in regulatory environments and currency
exchange fluctuations. These conditions, with the resulting adverse impact on
local economies, may make it difficult for the Company to achieve adequate
operating margins in such markets.
MANAGEMENT INFORMATION SYSTEM
The Company is in the process of implementing a new and significantly more
sophisticated management information system (the "Computer System"), which will
replace a significant portion of the Company's existing infrastructure.
Substantially all of the hardware and software currently in use at the Company
will be eliminated with the implementation of the Computer System. The Computer
System includes a mainframe computer, certain business applications and upgraded
or replacement peripheral equipment associated with the core business systems.
The Company is upgrading the software for the Computer System through the
purchase of certain software products developed by Distribution Architects
International ("DAI"). DAI has also been engaged to modify the software to meet
the Company's particular business requirements and to assist with the
implementation process. As of September 30, 1998, the Company had spent
approximately $4.1 million on the Computer System. The Company believes that the
DAI software will be installed and integrated, and that the Computer System will
be operational, prior to the end of the first quarter of 1999.
However, until the DAI software products are installed and integrated, the
Company is unable to fully assess the effectiveness of the DAI software or 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 will replace a
significant portion of such system, the failure of the DAI software to be
installed, integrated and implemented in a timely fashion or to function as
anticipated would require the Company to reassess its Computer System in
general. If, by the end of the first quarter of 1999, on-site systems
integration 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, potentially resulting 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,
results of operations and liquidity.
YEAR 2000
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's infrastructure consists of
hardware and software used for mainframes, file servers and personal computers,
machinery and equipment and other non-information technology ("IT") items. The
Computer System will replace a significant portion of the Company's existing
infrastructure. 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.
21
<PAGE> 26
The Company believes that the DAI software will be installed and
integrated, and that the Computer System will be operational, prior to the end
of the first quarter of 1999. However, because the Computer System will replace
a significant portion of such system, the failure of the DAI software to be
installed, integrated and implemented in a timely fashion or to function as
anticipated would require the Company to reassess its Year 2000 compliance and
its Computer System in general. If, by the end of the first quarter of 1999,
on-site systems integration 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, potentially resulting 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, results of operations and
liquidity of a magnitude which the Company presently is not able to predict. In
addition, while 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 first quarter of 1999, 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
critical third party suppliers and service providers, and is in the process of
monitoring and assessing 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
will commence by the end of the fourth quarter of 1998. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000."
SEASONALITY
The Company's business is influenced by the Christmas holiday season and
promotional events. Historically, a significantly higher portion of the
Company's sales and net income has been realized during the fourth quarter, and
levels of 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, 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.
FRAUDULENT CONVEYANCE STATUTES
Various laws enacted for the protection of creditors may apply to the
incurrence of indebtedness and other obligations in connection with the
Recapitalization and to the subsequent transfer of a portion of the proceeds
thereof to the Company's shareholders to pay the Consideration. If a court were
to find in a lawsuit by an unpaid creditor or representative of creditors that
the Company did not receive fair consideration or reasonably equivalent value
for incurring such indebtedness or obligations in connection with the
Recapitalization and, at the time thereof, the Company (i) was insolvent, (ii)
was rendered insolvent by reason of the Recapitalization, (iii) was engaged in a
business or transaction for which the assets remaining in the Company
constituted unreasonably small capital, or (iv) intended to incur or believed it
would incur obligations beyond its ability to pay such obligations as they
mature, such court, subject to applicable statutes of limitations, could void
the Company's obligations under the Notes, subordinate the Notes to other
indebtedness of the
22
<PAGE> 27
Company, or take other action detrimental to the holders of the Notes. Some
courts have held that an obligor's purchase of its own capital stock does not
constitute reasonably equivalent value or fair consideration for indebtedness
incurred to finance that purchase.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction which is being applied. Generally, however, a
company would be considered insolvent at a particular time if the sum of its
debts was then greater than all of its property at a fair valuation or if the
present fair saleable value of its assets was then less than the amount that
would be required to pay its probable liabilities on its existing debts as they
become absolute and matured. On the basis of the Company's historical financial
information, its recent operating history as discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other factors, management of the Company believes that after the
Recapitalization the Company was not insolvent, it had sufficient capital for
the businesses in which it is engaged and it is able to pay its debts as they
mature. There can be no assurance, however, as to what standard a court would
apply to evaluate the parties' intent or to determine whether the Company was
insolvent at the time of, or rendered insolvent upon consummation of, the
Recapitalization or that, regardless of the standard, a court would not
determine that the Company was insolvent at the time of, or rendered insolvent
upon consummation of, the Recapitalization.
In addition, the Guarantees may be subject to review under relevant federal
and state fraudulent conveyance and similar statutes in a bankruptcy or
reorganization case or a lawsuit by or on behalf of creditors of any of the
Guarantors. In such a case, the analysis set forth above would generally apply,
except that the Guarantees could also be subject to the claim that, since the
Guarantees were incurred for the benefit of the Company (and only indirectly for
the benefit of the Guarantors), the obligations of the Guarantors thereunder
were incurred for less than reasonably equivalent value or fair consideration.
If such a claim was successfully asserted a court could avoid a Guarantor's
obligation under its Guarantee, subordinate the Guarantee to other indebtedness
of a Guarantor or take other action detrimental to the holders of the Notes.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the holders of the Old Notes. The New
Notes constitute a new class of securities with no established trading market.
The Old Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages Market. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for the
remaining untendered Old Notes could be adversely affected. There is no existing
trading market for the New Notes, and there can be no assurance regarding the
future development of a market for the New Notes, or the ability of holders of
the New Notes to sell their New Notes or the price at which such holders may be
able to sell their New Notes. If such a market were to develop, the New Notes
could trade at prices that may be higher or lower than their principal amount or
purchase price, depending on many factors, including prevailing interest rates,
the Company's operating results and the market for similar securities. Each
initial purchaser has advised the Company that it currently intends to make a
market in the New Notes. The initial purchasers are not obligated to do so,
however, and any market-making with respect to the New Notes may be discontinued
at any time without notice. Therefore, there can be no assurance as to the
liquidity of any trading market for the New Notes or that an active public
market for the New Notes will develop. The Company does not intend to apply for
listing or quotation of the New Notes on any securities exchange or stock
market.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on holders of the New Notes.
23
<PAGE> 28
THE RECAPITALIZATION
On June 4, 1998, Home Interiors and CII, a newly formed corporation
organized by Hicks Muse, concurrently with the closing of the Original Offering,
merged, with the Company being the surviving corporation and the Company's
pre-Recapitalization shareholders receiving approximately $827.6 million in cash
for approximately 90% of their pre-Recapitalization shares. In connection with
the Recapitalization, (i) the Hicks Muse Shareholders contributed approximately
$182.6 million in cash to the equity of the Company and, as of the date of this
Prospectus, held approximately 66% of the outstanding Company Common Stock and
(ii) the Company's pre-Recapitalization shareholders retained 10% of their pre-
Recapitalization shares, which, as of the date of this Prospectus constituted
approximately 34% of the outstanding Company Common Stock.
The funding required to pay the cash Consideration and pay fees and
expenses incurred in connection with the Recapitalization was approximately
$851.9 million. These cash requirements were funded by (i) $169.3 million of
cash and cash equivalents held by the Company, (ii) an aggregate of $300.0
million in borrowings under the Senior Credit Facility, (iii) the issuance by
the Company of $200.0 million aggregate principal amount of the Notes and (iv)
approximately $182.6 million in cash provided to the equity of the Company in
connection with the Recapitalization by the Hicks Muse Shareholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
24
<PAGE> 29
USE OF PROCEEDS
The Company and the Guarantors will not receive any proceeds from the
exchange of New Notes for Old Notes pursuant to the Exchange Offer. The proceeds
from the Original Offering were used by the Company to (i) pay a portion of the
cash portion of the Consideration (approximately $827.6 million) and (ii) pay
fees and expenses related to the Recapitalization (approximately $24.3 million).
The following table sets forth the sources and uses of funds for the
Recapitalization (dollars in millions):
<TABLE>
<S> <C>
SOURCES:
Existing cash...................... $ 169.3
Senior Credit Facility(1).......... 300.0
Senior Subordinated Notes(2)....... 200.0
Hicks Muse Shareholders
contributions.................... 182.6
--------
Total Sources................. $ 851.9
========
USES:
Consideration...................... $ 827.6
Transaction fees and expenses(3)... 24.3
--------
Total Uses.................... $ 851.9
========
</TABLE>
- ---------------
(1) Consists of $200.0 million aggregate principal amount of the Tranche A Loan
(as defined) and $100.0 million aggregate principal amount of the Tranche B
Loan (as defined). As of September 30, 1998, the interest rates payable on
outstanding Tranche A Loan and Tranche B Loan were approximately 7 3/4% and
8 1/4%, respectively. In addition, as of September 30, 1998 the Company had
$40.0 million of Revolving Loans which were available and undrawn. See
"Description of Senior Credit Facility."
(2) Represents gross proceeds to the Company from the issuance of $200.0
million aggregate principal amount of the Notes.
(3) Includes discount to the initial purchasers of the Notes, expenses in
connection with the Original Offering, fees and expenses in connection with
the Senior Credit Facility and other legal and accounting fees and expenses
incurred in connection with the Recapitalization. The $24.3 million of
transaction fees and expenses consists of a financial advisory fee of
approximately $11.2 million paid to Hicks Muse, debt issuance costs of
approximately $11.6 million paid primarily to the bank syndicate group for
the Senior Credit Facility and the initial purchasers of the Notes, and
other transaction fees and expenses, consisting primarily of legal and
accounting costs, of approximately $1.5 million. Approximately $21.1
million of the total transaction fees and expenses have been recorded as
debt issuance costs and will be amortized over the term of the related
indebtedness. The remaining transaction fees and expenses of $3.2 million
have been charged to additional paid-in capital. In addition to the $24.3
million of transaction 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. These
costs are reflected as Recapitalization expenses in the Company's
consolidated statement of operations for the nine months ended September
30, 1998.
25
<PAGE> 30
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998. The information set forth below should be read in
conjunction with the "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL AS OF
SEPTEMBER 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 42,859
=========
Long-term debt (including current maturities):
Senior Credit Facility(1)
Tranche A Loan due 2004.............................. $ 193,750
Tranche B Loan due 2006.............................. 99,750
10 1/8% Senior Subordinated Notes due 2008................ 200,000
---------
Total long-term debt.............................. 493,500
Shareholders' deficit:
Common stock.............................................. 1,523
Additional paid-in capital................................ 178,660
Accumulated deficit....................................... (607,093)
Other..................................................... (122)
---------
Total shareholders' deficit....................... (427,032)
---------
Total capitalization......................... $ 66,468
=========
</TABLE>
- ---------------
(1) The Senior Credit Facility consists of six-year Revolving Loans providing up
to $40.0 million of availability, a six-year Tranche A Loan and an
eight-year Tranche B Loan. Payments on the Tranche A Loan are due quarterly
over six years as follows: $25.0 million in years one and two, $30.0 million
in year three, $35.0 million in year four, $40.0 million in year five and
$45.0 million in year six. Payments on the Tranche B Loan are due quarterly
over eight years as follows: $1.0 million in each of years one through six,
$45.0 million in year seven and $49.0 million in year eight.
26
<PAGE> 31
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company for the five fiscal years ended December 31, 1997 and for
the nine months ended September 30, 1997 and 1998. The historical consolidated
financial data for each of the three years in the period ended December 31, 1997
have been derived from, and should be read in conjunction with, the Company's
consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent auditors, that are included elsewhere in
this Prospectus. The historical consolidated financial data for each of the two
years in the period ended December 31, 1994 have been derived from the Company's
consolidated financial statements, which have also been audited by
PricewaterhouseCoopers LLP, independent auditors, not included elsewhere herein.
The historical consolidated financial data as of September 30, 1997 and 1998 and
for the nine-month periods then ended have been derived from the unaudited
consolidated financial statements of the Company and include, in the opinion of
management, all adjustments necessary to present fairly the data for such
periods. Due to the seasonality of operations and other factors, the results of
operations for the nine-months ended September 30, 1998 are not indicative of
the results that may be expected for the full year. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Consolidated Financial
Statements" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT DISPLAYER DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $490,977 $515,341 $482,950 $434,299 $468,845 $322,099 $ 347,205
Cost of goods sold.............................. 258,137 262,623 261,806 225,137 239,664 166,262 170,658
-------- -------- -------- -------- -------- -------- ---------
Gross profit.................................... 232,840 252,718 221,144 209,162 229,181 155,837 176,547
Selling, general and administrative:
Selling....................................... 71,815 73,276 72,857 68,489 72,172 48,393 58,294
Freight, warehouse and distribution........... 44,020 43,116 41,041 37,167 41,284 28,660 31,146
General and administrative.................... 18,518 28,841 25,398 22,246 26,319 18,712 18,391
(Gains) losses on the sale of assets.......... (919) 209 (14) (2,077) (198) (8) (6,349)
Recapitalization expenses(1).................. -- -- -- -- -- -- 6,198
-------- -------- -------- -------- -------- -------- ---------
Total selling, general and administrative... 133,434 145,442 139,282 125,825 139,577 95,757 107,680
-------- -------- -------- -------- -------- -------- ---------
Operating income................................ 99,406 107,276 81,862 83,337 89,604 60,080 68,867
Other income (expense):
Interest income............................... 5,420 6,439 2,470 5,113 7,985 5,225 4,841
Interest expense.............................. (287) (93) (2) (503) (362) (14) (15,913)
Other income.................................. 352 88 529 456 2,884 466 1,027
-------- -------- -------- -------- -------- -------- ---------
Other income (expense), net..................... 5,485 6,434 2,997 5,066 10,507 5,677 (10,045)
-------- -------- -------- -------- -------- -------- ---------
Income before income taxes...................... 104,891 113,710 84,859 88,403 100,111 65,757 58,822
Income taxes.................................... 38,313 42,737 35,315 33,957 37,919 25,332 23,346
-------- -------- -------- -------- -------- -------- ---------
Income from continuing operations before
cumulative effect of accounting change........ $ 66,578 $ 70,973 $ 49,544 $ 54,446 $ 62,192 $ 40,425 $ 35,476
======== ======== ======== ======== ======== ======== =========
Net income(2)................................... $ 68,889 $ 70,522 $ 49,544 $ 54,446 $ 62,192 $ 40,425 $ 35,476
======== ======== ======== ======== ======== ======== =========
OTHER FINANCIAL DATA:
Gross profit percentage......................... 47.4% 49.0% 45.8% 48.2% 48.9% 48.4% 50.8%
EBITDA(3)....................................... $104,046 $112,171 $ 85,944 $ 84,610 $ 92,019 $ 61,897 $ 71,413
EBITDA margin(4)................................ 21.2% 21.8% 17.8% 19.5% 19.6% 19.2% 20.6%
Cash flows provided by (used in):
Operating activities.......................... $ 77,027 $ 66,850 $ 64,746 $ 57,507 $ 60,285 $ 38,533 $ 53,939
Investing activities.......................... (64,148) (152,376) (1,394) (8,808) (67,023) (69,164) 70,079
Financing activities.......................... (47,234) (11,242) (16,760) (6,086) (21,760) (19,020) (185,387)
Depreciation and amortization................... 5,559 4,686 4,096 3,350 2,613 1,825 2,368
Capital expenditures(5)......................... 26,751 3,135 1,408 2,126 4,617 3,115 6,227
Ratio of earnings to fixed charges(6)........... -- -- -- -- -- -- 4.7x
DOMESTIC DISPLAYER DATA:
Number of orders................................ 716,081 754,439 782,996 710,008 732,202 521,728 552,508
Average order size(7)........................... $ 686 $ 683 $ 617 $ 610 $ 635 $ 613 $ 620
Number of Displayers at end of period(8)........ 37,500 38,300 45,200 37,800 44,200 48,900 55,500
Average number of Displayers during period(8)... 33,800 38,300 41,200 39,900 42,400 42,000 49,500
</TABLE>
27
<PAGE> 32
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $140,411 $ 43,643 $ 90,235 $132,848 $104,262 $ 83,145 $ 42,859
Marketable securities and investments..... 26,947 3,251 3,251 4,643 69,684 71,740 1,509
Property, plant and equipment, net........ 32,543 20,116 17,478 15,481 17,353 16,809 20,251
Total assets(9)........................... 471,177 252,458 147,110 195,774 244,190 232,278 148,883
Total debt (including current
maturities)............................. -- -- -- -- -- -- 493,500
Shareholders' equity (deficit)............ 416,294 62,373 99,461 141,227 189,931 174,441 (427,032)
</TABLE>
- ---------------
(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 before cumulative
effect of accounting change for the year ended December 31, 1993 due to the
cumulative effect of change in accounting principle of $2,056,000 that
resulted from the Company's adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," and income from
discontinued operations of $255,000, net of taxes. Net income differs from
income from continuing operations before cumulative effect of accounting
change for the year ended December 31, 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 ($329,000
for the nine months ended September 30, 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.
(5) Capital expenditures for the year ended December 31, 1993 include
$22,715,000 for the purchase of a building, which was transferred to CCP on
December 31, 1994 in connection with the Spin-Off.
(6) The ratio of earnings to fixed charges has been omitted to the years ended
December 31, 1993 through 1997 and the nine months ended September 30, 1997
because fixed charges were de minimis during these periods. For purposes of
determining the ratio of earnings to fixed charges, earnings are defined as
income before income taxes less the undistributed equity in earnings of an
affiliate plus fixed charges. Fixed charges consists of interest expense on
all indebtedness, which includes amortization of debt issuance costs.
(7) Average order size is calculated based on net sales divided by number of
orders. For purposes of this calculation, international sales of $1,224,000
and $4,093,000 for the years ended December 31, 1996 and 1997, respectively,
and $2,080,000 and $4,541,000 for the nine months ended September 30, 1997
and 1998, respectively, have been excluded from net sales.
(8) 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
September 30, 1997 and 1998, the Company had included in its Displayer count
approximately 1,400, 3,500 and 9,700 Displayers, respectively, who had not
placed an order within the 14-week period ended as of such dates.
(9) As of December 31, 1993, total assets included $220,370,000 of net assets of
CCP. As of December 31, 1994, total assets included $136,748,000 of certain
assets held for transfer to CCP in connection with the Spin-Off.
28
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statements of operations for
the year ended December 31, 1997 and the nine months ended September 30, 1997
and 1998 (the "Pro Forma Financial Statements") give effect to the
Recapitalization as if it had occurred on January 1, 1997.
The Company financed the Recapitalization through the following
simultaneous transactions: (i) the Hicks Muse Shareholders contributed
approximately $182.6 million in cash to the equity of the Company in exchange
for 10,111,436 shares of Company Common Stock; (ii) the Company borrowed $500.0
million consisting of $200.0 million of Notes and $300.0 million under the
Senior Credit Facility; and (iii) the Company used the proceeds from the
contribution of equity, issuance of Notes and the borrowings under the Senior
Credit Facility, together with approximately $169.3 million of cash and cash
equivalents held by the Company to pay approximately $827.6 million for the
redemption of 45,836,584 shares of Company Common Stock, and to pay fees and
expenses of approximately $24.3 million associated with the Recapitalization.
These fees and expenses consisted of a financial advisory fee of approximately
$11.2 million paid to Hicks Muse, debt issuance costs of approximately $11.6
million paid primarily to the bank syndicate group for the Senior Credit
Facility and the initial purchasers of the Notes, and other transaction fees and
expenses, consisting primarily of legal and accounting costs, of approximately
$1.5 million. Approximately $21.1 million of the total transaction fees and
expenses have been recorded as debt issuance costs and will be amortized over
the term of the related indebtedness. The remaining transaction fees and
expenses of $3.2 million have been charged to additional paid-in capital.
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. These
costs are reflected as Recapitalization expenses in the Company's consolidated
statement of operations for the nine months ended September 30, 1998.
The Pro Forma Financial Statements are based upon the historical financial
information appearing elsewhere in this Prospectus. The pro forma adjustments
are based upon available information and certain assumptions that management of
the Company believes are reasonable and are described in the notes accompanying
the Pro Forma Financial Statements. The Pro Forma Financial Statements are
provided for information purposes only and do not purport to represent what the
Company's results of operations or financial position would actually have been
had the transactions in fact occurred at such dates or to project the Company's
results of operations or financial position at or for any future date or period.
The Pro Forma Financial Statements and accompanying notes should also be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto contained elsewhere herein. It is expected that the
Recapitalization will be treated as a combined stock purchase and redemption for
federal income tax purposes and as a recapitalization for financial accounting
purposes.
29
<PAGE> 34
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR THE
ACTUAL ADJUSTMENTS RECAPITALIZATION
-------- ----------- ----------------
<S> <C> <C> <C>
Net sales............................................... $468,845 $468,845
Cost of goods sold...................................... 239,664 239,664
-------- --------
Gross profit............................................ 229,181 229,181
Selling, general and administrative:
Selling............................................... 72,172 72,172
Freight, warehouse and distribution................... 41,284 41,284
General and administrative............................ 26,319 26,319
Gains on the sale of assets........................... (198) (198)
-------- --------
Total selling, general and administrative..... 139,577 139,577
-------- --------
Operating income........................................ 89,604 89,604
Other income (expense):
Interest income....................................... 7,985 (7,985)(1) --
Interest expense...................................... (362) (46,899)(2) (47,261)
Other income.......................................... 2,884 2,884
-------- -------- --------
Total other income (expense), net............. 10,507 (54,884) (44,377)
-------- -------- --------
Income before income taxes.............................. 100,111 (54,884) 45,227
Income taxes............................................ 37,919 (21,130)(3) 16,789
-------- -------- --------
Net income.............................................. $ 62,192 $(33,754) $ 28,438
======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges(4)................. 2.0x
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Statements of
Operations.
30
<PAGE> 35
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR THE
ACTUAL ADJUSTMENTS RECAPITALIZATION
-------- ----------- ----------------
<S> <C> <C> <C>
Net sales............................................... $322,099 $322,099
Cost of goods sold...................................... 166,262 166,262
-------- --------
Gross profit............................................ 155,837 155,837
Selling, general and administrative:
Selling............................................... 48,393 48,393
Freight, warehouse and distribution................... 28,660 28,660
General and administrative............................ 18,712 18,712
Gains on the sale of assets........................... (8) (8)
-------- --------
Total selling, general and administrative..... 95,757 95,757
-------- --------
Operating income........................................ 60,080 60,080
Other income (expense):
Interest income....................................... 5,225 (5,225)(1) --
Interest expense...................................... (14) (35,387)(2) (35,401)
Other income.......................................... 466 466
-------- -------- --------
Total other income (expense), net............. 5,677 (40,612) (34,935)
-------- -------- --------
Income before income taxes.............................. 65,757 (40,612) 25,145
Income taxes............................................ 25,332 (15,636)(3) 9,696
-------- -------- --------
Net income.............................................. $ 40,425 $(24,976) $ 15,449
======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges(4)................. 1.7x
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Statements of
Operations.
31
<PAGE> 36
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR THE
ACTUAL ADJUSTMENTS RECAPITALIZATION
-------- ----------- ----------------
<S> <C> <C> <C>
Net sales............................................... $347,205 $347,205
Cost of goods sold...................................... 170,658 170,658
-------- --------
Gross profit............................................ 176,547 176,547
Selling, general and administrative:
Selling............................................... 58,294 58,294
Freight, warehouse and distribution................... 31,146 31,146
General and administrative............................ 18,391 18,391
Gains on the sale of assets........................... (6,349) (6,349)
Recapitalization expenses(5).......................... 6,198 6,198
-------- --------
Total selling, general and administrative..... 107,680 107,680
-------- --------
Operating income........................................ 68,867 68,867
Other income (expense):
Interest income....................................... 4,841 (4,841)(1) --
Interest expense...................................... (15,913) (18,051)(2) (33,964)
Other income.......................................... 1,027 1,027
-------- -------- --------
Total other expense, net...................... (10,045) (22,892) (32,937)
-------- -------- --------
Income before income taxes.............................. 58,822 (22,892) 35,930
Income taxes............................................ 23,346 (8,813)(3) 14,533
-------- -------- --------
Net income.............................................. $ 35,476 $(14,079) $ 21,397
======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges(4)................. 2.1x
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Statements of
Operations.
32
<PAGE> 37
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) The adjustment reflects the elimination of interest income derived from
certain cash and cash equivalents, marketable securities and investments
which will be used in connection with the Recapitalization.
(2) The adjustment reflects increase in interest expense associated with (i)
the Revolving Loans, (ii) the Senior Credit Facility, (iii) the Notes and
(iv) the amortization of the related debt issuance costs. Interest rates
utilized in the accompanying unaudited pro forma consolidated financial
statements are based on contractual interest rates in effect as of
September 30, 1998. Pro forma interest expense consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1997 1997 1998
------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest Expense:
Revolving Loans (commitment fee)......... $ (200) $ (150) $ (150)
Senior Credit Facility Tranche A Loan due
2004 $200,000 @ 7 3/4%................ (14,773) (11,262) (9,809)
Senior Credit Facility Tranche B Loan due
2006 $100,000 @ 8 1/4%................ (8,220) (6,172) (6,110)
Senior Subordinated Notes due 2008 @
10 1/8%............................... (20,250) (15,188) (15,188)
Other interest expense................... (362) (14) (276)
-------- -------- --------
Cash interest expense................. (43,805) (32,786) (31,533)
Amortization of debt issuance costs...... (3,456) (2,615) (2,431)
-------- -------- --------
Pro forma interest expense................. $(47,261) $(35,401) $(33,964)
======== ======== ========
</TABLE>
Pro Forma adjustments for interest expense are based on the following
assumptions:
- Revolving Loans -- Commitment fee of 0.5% of the unused portion, which
is assumed to be $40,000,000 (or the maximum available amount) for all
periods presented
- Tranche A Loan -- interest at 7 3/4% (LIBOR plus 2.0%) with scheduled
quarterly principal payments of $6,250,000 commencing March 31, 1997
- Tranche B Loan -- interest at 8 1/4% (LIBOR plus 2.5%) with scheduled
quarterly principal payments of $250,000 commencing March 31, 1997
- Amortization of debt issuance costs -- $21,118,000 in debt issuance
costs are being amortized using the effective interest method over the
term of the related indebtedness
(3) The adjustment represents the income tax effect of the pro forma
adjustments at a weighted average statutory tax rate of 38.5%.
(4) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income before income taxes less the undistributed
equity in the earnings of an affiliate plus fixed charges. Fixed charges
include interest expense on all indebtedness, which includes amortization
of debt issuance costs.
(5) Consists of nonrecurring fees and expenses paid to the Company's financial
advisor and attorneys in connection with the Recapitalization.
33
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Historical Consolidated Financial Data and the Consolidated
Financial Statements and notes thereto included elsewhere in this Prospectus.
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 September 30,
1998, the Company sold its Products to approximately 57,100 Displayers,
including 55,500 located in the United States and 1,400 and 200 of whom were
located in Mexico and Puerto Rico, respectively. 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 seasonality and the implementation and timing of discounts and new
incentive programs.
Primarily because of the nature of the direct selling industry, and as a
result of numerous general and economic factors, during the two-year period
ended December 31, 1997, the Company experienced average annual Displayer
turnover of approximately 46%. 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.
The Company's ability to recruit, train, motivate and retain the Displayers
depends upon, among other things, (i) the managerial capabilities and personal
charisma of the Company's senior management, (ii) 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, (iii) the Company's ability
to provide adequate and timely recruiting and training incentives to existing
Displayers, (iv) the introduction of new Products and marketing concepts, (v)
the effectiveness of the Company's commission and incentive programs and
discounts and (vi) general economic conditions.
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 such product to the
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 the 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.
From the Company's inception until 1995, the Company allowed Displayers up
to two weeks to pay for their orders and Displayers did not collect the purchase
price of the Products from their customers until the Products were delivered. In
1995, management of the Company reviewed its credit and collection policies and
determined that Displayers were spending increased time collecting money from
their customers or reselling merchandise not accepted by their customers when
delivered. Primarily in an effort to further assist Displayers, management
implemented a "pay-with-the-order" policy (the "New Credit Policy"). This
significant change in payment policy contributed to an overall decline in many
Displayers' sales volumes in 1995 and 1996 because the Displayers' customers
were unwilling or unable to maintain their historical buying patterns under the
New Credit Policy. This reaction by their customers negatively affected the
Displayers'
34
<PAGE> 39
morale. Although management believes that the New Credit Policy improved the
Displayers' ability to collect the purchase price for Products sold to their
customers (thereby allowing the Displayers to focus on selling Products), the
adverse impact of the New Credit Policy on the Displayers and their sales
volumes was not adequately anticipated. Management spent much of 1996 rebuilding
Displayer morale through increased incentive programs and better educating the
Displayers about the benefits of the New Credit Policy. Management believes that
the mid-1996 introduction of an incentive program (the "Hostess Bonus Buy
Program") which allowed Hostesses (as defined) who achieved specified Show sales
levels to purchase Products at substantial discounts and acceptance by
Displayers of the New Credit Policy caused 1997 sales to exceed 1996 sales. See
"Business -- Sales Methods and Organization."
THE RECAPITALIZATION
On June 4, 1998, the Company financed the Recapitalization through the
following simultaneous transactions: (i) the Hicks Muse Shareholders contributed
approximately $182.6 million in cash to the equity of the Company in exchange
for 10,111,436 shares of Company Common Stock; (ii) the Company borrowed $500.0
million consisting of $200.0 million of the Notes and $300.0 million under the
Senior Credit Facility; and (iii) the Company used the proceeds from the
contribution of equity, issuance of the Notes and borrowings under the Senior
Credit Facility, together with approximately $169.3 million of cash and cash
equivalents held by the Company to pay approximately $827.6 million for the
redemption of 45,836,584 shares of Company Common Stock, and to pay fees and
expenses of approximately $24.3 million associated with the Recapitalization.
These fees and expenses included an $11.2 million financial advisory fee paid to
Hicks Muse for its role in obtaining financing for the Recapitalization, legal
and accounting fees of approximately $1.5 million and debt issuance costs of
$11.6 million paid primarily to the bank syndicate group for the Senior Credit
Facility and the initial purchasers of the Notes. The Hicks Muse financial
advisory fee and the legal and accounting fees have been allocated on a
proportionate basis to the debt and equity financing for the Recapitalization.
Accordingly, approximately $9.5 million of such fees have been recorded as debt
issuance costs and the remaining $3.2 million have been charged 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 additional financial advisory and legal fees
of 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. The financial
advisory and legal fees are reflected as Recapitalization expenses in the
Company's consolidated statement of operations for the nine months ended
September 30, 1998.
35
<PAGE> 40
RESULTS OF OPERATIONS
The following table is derived from the Company's consolidated financial
statements included elsewhere in this Prospectus and sets forth, for the periods
indicated, the relative percentages that certain income and expense items bear
to net sales:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- --------------------
1995 1996 1997 1997 1998
------ ------ ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................. 54.2% 51.8% 51.1% 51.6% 49.2%
------ ------ ------ ------ ------
Gross profit........................ 45.8% 48.2% 48.9% 48.4% 50.8%
Selling, general and administrative:
Selling........................... 15.1% 15.8% 15.4% 15.0% 16.8%
Freight, warehouse and
distribution................... 8.5% 8.6% 8.8% 8.9% 9.0%
General and administrative........ 5.3% 5.1% 5.6% 5.8% 5.2%
Gains on the sale of assets....... -- (0.5)% -- -- (1.8)%
Recapitalization expenses......... -- -- -- -- 1.8%
------ ------ ------ ------ ------
Total selling, general and
administrative............ 28.9% 29.0% 29.8% 29.7% 31.0%
------ ------ ------ ------ ------
Operating income.................... 16.9% 19.2% 19.1% 18.7% 19.8%
Other income (expense), net......... 0.6% 1.2% 2.2% 1.8% (2.9)%
------ ------ ------ ------ ------
Income before income taxes.......... 17.5% 20.4% 21.3% 20.5% 16.9%
Income taxes........................ 7.3% 7.8% 8.1% 7.9% 6.7%
------ ------ ------ ------ ------
Net income.......................... 10.2% 12.6% 13.2% 12.6% 10.2%
====== ====== ====== ====== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net sales. Net sales increased $25.1 million, or 7.8%, to $347.2 million in
the nine months ended September 30, 1998 from $322.1 million in the comparable
period in 1997. This increase was primarily attributable to an increase in the
number of orders placed, and to a lesser extent, a slight increase in average
order size. The increase in orders and order sizes was primarily due to the
introduction of several new incentive programs and discounts in the first six
months of the 1998 period.
Gross profit. Gross profit increased $20.7 million, or 13.3%, to $176.5
million in the nine months ended September 30, 1998 from $155.8 million in the
comparable period in 1997. As a percentage of net sales, gross profit increased
to 50.8% in the 1998 period from 48.4% in the 1997 period. This increase was
primarily attributable to the introduction of new Products with higher profit
margins.
Selling expense. Selling expense increased $9.9 million, or 20.5%, to $58.3
million in the nine months ended September 30, 1998 from $48.4 million in the
comparable period in 1997. As a percentage of net sales, selling expense
increased to 16.8% in the 1998 period from 15.0% in the 1997 period. This
increase was primarily attributable to higher bonus accruals for directors and
higher costs for incentive programs in the 1998 period.
Freight, warehouse and distribution expense. Freight, warehouse and
distribution expense increased $2.4 million, or 8.7%, to $31.1 million in the
nine months ended September 30, 1998 from $28.7 million in the comparable period
in 1997. As a percentage of net sales, freight, warehouse and distribution
expense increased to 9.0% in the 1998 period from 8.9% in the 1997 period. This
increase was primarily due to increased discounts in the 1998 period. Excluding
discounts, freight, warehouse and distribution expense as a percentage of net
sales was flat in both periods.
General and administrative expense. General and administrative expense
decreased $0.3 million, or 1.7%, to $18.4 million in the nine months ended
September 30, 1998 from $18.7 million in the comparable
36
<PAGE> 41
period in 1997. Costs incurred in 1997 associated with the settlement of
litigation and a reduction in charitable contributions expense in 1998 more than
offset increased training and costs associated with the implementation of the
Computer System in 1998.
Gains on the sale of assets. The Company recorded gains on the sale of
assets of $6.3 million in the nine months ended September 30, 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 $0.4 million, or 7.3%, to $4.8
million in the nine months ended September 30, 1998 from $5.2 million in the
comparable period in 1997 due to lower average investment balances as a result
of the Recapitalization.
Interest Expense. Interest expense increased to $15.9 million in the nine
months ended September 30, 1998 due to interest expense incurred in connection
with the Senior Credit Facility and the Notes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 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 attributable 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 attributable 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 $3.7 million, or 5.4%, to $72.2 million
in 1997 from $68.5 million in 1996. As a percentage of net sales, selling
expense decreased to 15.4% in 1997 from 15.8% in 1996. This decrease was
primarily attributable 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.
Freight, warehouse and distribution. Freight, warehouse and distribution
expense increased $4.1 million, or 11.1%, to $41.3 million in 1997 from $37.2
million in 1996. As a percentage of net sales, freight, warehouse and
distribution expense increased to 8.8% in 1997 from 8.6% in 1996.
General and administrative. General and administrative expense increased
$4.1 million, or 18.3%, to $26.3 million in 1997 from $22.2 million in 1996. As
a percentage of net sales, general and administrative expenses increased to 5.6%
in 1997 from 5.1% in 1996. This increase was primarily attributable to several
items, including (i) training costs incurred in 1997 relating to the
implementation of the Computer System, (ii) nonrecurring costs in 1997 resulting
from the settlement of litigation and (iii) a change in the estimated redemption
rate for Hostess merits (as defined) 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.
37
<PAGE> 42
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales. Net sales decreased $48.7 million, or 10.1%, to $434.3 million
in 1996 from $483.0 million in 1995. This decrease was attributable to a
decrease in number of orders placed largely as a result of a decline in the
average number of domestic Displayers and, to a lesser extent, a decrease in the
average order size. Contributing to these decreases were several factors,
including (i) the adoption of the New Credit Policy in 1995, (ii) a less
effective discount program in 1996 and (iii) a 1995 recruiting campaign that
offered heavy discounting of initial Product demonstration cases to new
Displayers. This had the unintended consequence of attracting unproductive
Displayers, many of whom subsequently terminated their Displayer status.
Gross profit. Gross profit decreased by $11.9 million, or 5.4%, to $209.2
million in 1996 from $221.1 million in 1995. As a percentage of net sales, gross
profit increased to 48.2% in 1996 from 45.8% in 1995. This increase was
primarily attributable to the cessation of the 1995 recruiting program which
offered discounted Product demonstration cases to new Displayers and a lower
level of discounts offered to Displayers in 1996.
Selling. Selling expense decreased $4.4 million, or 6.0%, to $68.5 million
in 1996 from $72.9 million in 1995. As a percentage of net sales, selling
expense increased to 15.8% in 1996 from 15.1% in 1995. This increase was
primarily attributable to an increase in incentive programs, such as providing
free brochures and other marketing materials to Displayers for meeting certain
sales criteria.
Freight, warehouse and distribution. Freight, warehouse and distribution
expense decreased $3.8 million, or 9.4%, to $37.2 million in 1996 from $41.0
million in 1995. As a percentage of net sales, freight, warehouse and
distribution expense increased to 8.6% in 1996 from 8.5% in 1995.
General and administrative. General and administrative expense decreased
$3.2 million, or 12.4%, to $22.2 million in 1996 from $25.4 million in 1995. As
a percentage of net sales, general and administrative expenses decreased to 5.1%
in 1996 from 5.3% in 1995. This decrease was primarily attributable to the
dissolution of the Company's aircraft subsidiary at the end of 1995, which
resulted in lower aircraft operating costs in 1996 and a non-cash non-recurring
charge related to the ESOP in 1995.
Gains on the sale of assets. The Company recorded gains of $2.1 million on
the sale of two aircraft in 1996.
Interest income. Interest income increased $2.6 million, or 107.0%, to $5.1
million in 1996 from $2.5 million in 1995 due to higher average investment
balances.
Income taxes. Income taxes as a percentage of income before income taxes
decreased to 38.4% in 1996 from 41.6% in 1995. The higher percentage in 1995 was
due to certain non-recurring items, including an adjustment recorded in 1995 for
the actual tax effect of the 1994 Spin-Off.
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, 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. Net cash provided by operating activities totaled
$64.7 million, $57.5 million and $60.3 million in 1995, 1996 and 1997,
respectively. The Company had capital expenditures of $1.4 million, $2.1 million
and $4.6 million in
38
<PAGE> 43
1995, 1996 and 1997, respectively. The Company's other significant cash outlays
have historically been the payment of dividends to shareholders totaling $8.8
million, $6.1 million and $22.2 million in 1995, 1996 and 1997, respectively. In
addition, the Company purchased $10.2 million of treasury stock in 1995.
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 notes totaled $1.8 million in 1997. 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.
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. The Company generated
significantly higher cash flow from operations during the nine months ended
September 30, 1998 than in the comparable period in 1997. Net cash provided by
operating activities in the nine months ended September 30, 1998 increased $15.4
million to $53.9 million from $38.5 million in the comparable period in 1997.
The increase was primarily attributable to greater increases in accounts
payable, income taxes payable, prepaid sales orders and other accrued
liabilities in the nine months ended September 30, 1998 as compared to the same
period in 1997, partially offset by a decline in net income as adjusted for
non-cash items in the nine months ended September 30, 1998 as compared to in the
same period in 1997. A large portion of the increases in the Company's payable
and liability balances as of September 30, 1998 is a result of the timing of
payments and interest payable on the Senior Credit Facility and the Notes.
The Company also generated significantly higher cash flow from investing
activities during the nine months ended September 30, 1998 than in the
comparable period 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 the nine months ended September 30, 1998 totaled $154.6
million, or $75.5 million more than the comparable period 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 $143.8 million during
the nine months ended September 30, 1997. The proceeds from the sale of those
investments totaled $79.1 million during the 1997 period. Purchases of
investments totaled $87.6 million during the nine months ended September 30,
1998, or $56.2 million less than the comparable period in 1997. In addition to
its other investing activities, the Company sold two aircraft and a building in
the nine months ended September 30, 1998 for proceeds of $6.7 million.
The Company increased its capital expenditures to $6.2 million during the
nine months ended September 30, 1998 from $3.1 million in the 1997 period due to
several nonrecurring expenditures. These nonrecurring expenditures included
approximately $1.8 million for the implementation of the Computer System and
approximately $1.0 million in expenditures related to SVS in the 1998 period.
Costs for the Computer System consist of hardware and software costs, including
program enhancements and upgrades. Expenditures related to SVS consist of
building improvements and machinery and equipment.
The Company estimates that its 1998 capital expenditures will be
approximately $8.8 million principally as a result of continued implementation
of the Computer System and the purchase of land for a candle manufacturing
operation. In addition to its normal recurring capital expenditures, the Company
also expects to incur $2.0 million to $3.0 million of capital expenditures in
1999 in connection with a candle manufacturing operation.
The Company's use of cash for financing activities significantly increased
to $185.4 million during the nine months ended September 30, 1998 from $19.0
million in the comparable period in 1997. This increased use of cash was as a
result of the Recapitalization, pursuant to which 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 Company 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 the nine months
39
<PAGE> 44
ended September 30, 1998 decreased to $9.6 million from $19.0 million in the
comparable period 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. The Notes require semi-annual interest
payments commencing in December 1998 and will 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
September 30, 1998, and the Company does not expect to utilize the Revolving
Loans during 1998.
The Company anticipates that its debt service requirements will total $35.0
million for 1998, consisting of principal payments due under the Senior Credit
Facility of $13.0 million, interest due under the Senior Credit Facility of
approximately $11.9 million and interest of $10.1 million due on the Notes.
Principal and interest payments under the Senior Credit Facility and the Notes
totaled $6.5 million and $6.8 million, respectively, through September 30, 1998.
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. Payments on the Tranche A
Loan are due quarterly over six years as follows: $25.0 million in years one and
two, $30.0 million in year three, $35.0 million in year four, $40.0 million in
year five and $45.0 million in year six. Payments on the Tranche B Loan are due
quarterly over eight years as follows: $1.0 million in each of years one through
six, $45.0 million in year seven and $49.0 million in year eight. The Revolving
Loans terminate and all outstanding amounts thereunder mature on June 30, 2004.
See "Unaudited Pro Forma Consolidated Financial Data," "Description of Senior
Credit Facility" and "Description of New Notes."
On July 1, 1998, the Company entered into an interest rate swap agreement
to limit the effect of increases in interest rates on the Senior Credit
Facility. The swap agreement provides the Company with a fixed rate of interest
until December 31, 2001, on $75.0 million. Pursuant to the swap agreement, the
Company is guaranteed a fixed 3-month LIBOR rate of 5.50% until June 9, 1999.
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. See "Risk
Factors -- Substantial Leverage."
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 1995, 1996 or 1997 or for the six-month period ended June 30,
1998.
ENVIRONMENTAL ISSUES
In 1989, Dallas Woodcraft, Inc., a wholly-owned subsidiary of the Company
("DWC"), was named as a 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 1995, 1996 and 1997 or in the nine months ended
September 30, 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.
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In 1997, Homco, Inc., a wholly-owned subsidiary of the Company ("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
during the nine months ended September 30, 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 issued a Notice
of Violation claiming that the Company's wholly-owned subsidiary, GIA, Inc.
("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 Company believes that the permit will be issued and it is
not likely that GIA will incur penalties for the activities covered by the
Notice of Violation.
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. In the opinion of the Company's management, however,
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 or its ability to pay interest and principal on the Notes.
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
of the Project, which consists of identifying and inventorying items,
prioritizing, determining critical items, and establishing a timetable for Year
2000 compliance. The Computer System is a critical aspect of the Project.
The Company is in the process of implementing its new and significantly
more sophisticated Computer System, which will replace a significant portion of
the Company's existing infrastructure. Substantially all of the hardware and
software currently in use at the Company will be eliminated with the
implementation of the Computer System. A limited amount of peripheral equipment
will be retained and is scheduled to be tested for Year 2000 compliance by the
end of 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 is
upgrading the software for the Computer System through the purchase of certain
software products developed by DAI. DAI has also been engaged to modify the
software to meet the Company's particular business requirements and to assist
with the implementation 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 Company believes that the DAI software will be installed and
integrated, and that the Computer System will be operational, prior to the end
of the first quarter of 1999. In addition, Year 2000 remediation of other
aspects of the Company's infrastructure is substantially complete. Remediation
of the Company's subsidiaries is expected to be completed in the first quarter
of 1999. As a result, the Company believes that
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remediation of its infrastructure and its subsidiaries will be complete in all
material respects by the end of the first quarter of 1999.
However, until the DAI software products are installed and integrated, the
Company is unable to fully assess the effectiveness of the DAI software or 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 will replace a
significant portion of such system, the failure of the DAI software to be
installed, integrated and implemented in a timely fashion or to function as
anticipated would require the Company to reassess its Year 2000 compliance and
its Computer System in general. If, by the end of the first quarter of 1999,
on-site systems integration 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, potentially resulting 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, results of operations and
liquidity of a magnitude which the Company presently is unable to predict. In
addition, while 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 first quarter of 1999, 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
critical third party suppliers and service providers, and is in the process of
monitoring and assessing 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
will commence by the end of the fourth quarter of 1998. 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 had spent approximately $4.1 million on the Computer System as
of September 30, 1998, and expects that it will incur an additional $1.7 million
to implement the first phase of the rollout of the Computer System in early
1999. 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 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure About
Segments of an Enterprise and Related Information." The new standard is
effective for financial statements for fiscal years beginning after December 15,
1997. 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
effects the new standards will have on its financial statements.
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BUSINESS
GENERAL
Founded in 1957, Home Interiors believes it is the largest direct seller of
home decorative accessories in the United States, as measured by sales. The
Company sells the Products to Displayers who resell the Products using the
"party-plan" method to conduct Shows for potential customers. As of September
30, 1998, the Company sold Products to approximately 57,100 Displayers, 55,500
of whom were located in the United States and 1,400 and 200 of whom were located
in Mexico and Puerto Rico, respectively. In 1996 and 1997, approximately 28% of
the dollar volume of Products purchased by the Company were purchased from and
manufactured by the Company's subsidiaries. The Company's headquarters are in
Dallas, Texas.
The Company purchases products from various suppliers, including its
wholly-owned subsidiaries. The Company's wholly-owned subsidiaries consist of:
DWC, which manufactures framed artwork and mirrors using custom-designed
equipment; GIA and Homco, which manufacture various types of molded plastic
products using custom-designed equipment; and SVS, which purchases candles from
a third party and resells the candles to the Company. The Company established
Homco de Mexico, S.A. de C.V. in 1995 and Homco Puerto Rico, Inc. in 1996 to
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 a loyal Displayer direct sales organization, and to
distinguish its products in the marketplace by the value placed on the integrity
of Displayers and quality of 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.
Home Interiors believes that its success and its opportunities for
continued growth and increased profitability primarily result from the following
factors:
Trained and Productive Sales Force. The Company believes that its
sales force is one of the best trained in the direct sales industry. New
Displayers are introduced to the Company through a series of
Company-developed video cassettes and other training materials and are
trained by experienced Displayers who have attended a training course at
the Company's Dallas headquarters focusing on developing new recruits. The
Company continually provides direct communications to each Displayer
through mailings, meetings, seminars and rallies designed to recognize
exceptional Displayer performance, discuss selling "tips," introduce new
Products and programs and provide motivation. In 1997, the average Company
domestic Displayer sold Products with a suggested retail price of $15,800,
while the average independent salesperson of other companies in the direct
selling industry sold items worth $4,800 (at retail), according to the DSA.
In addition, the Company believes that the retention rate for its
Displayers is higher than that of other direct sales companies. At December
31, 1996 and 1997, 40% and 45%, respectively, of Displayers had been
Displayers for two or more years, compared to the industry average of 24%
in 1996 according to the DSA.
Consumer Focused Product Line. Because the Company believes 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.
Merchandise department personnel attend home decor trade shows, analyze
other market information and meet with Displayers and suppliers to
identify, evaluate and design new Products. The Company distributes
approximately 900 proposed or prototype items annually to selected
Displayers for review, including a determination of whether the suggested
retail prices are attractive. Based in large part on the Displayers'
review, Home Interiors introduces approximately 150 to 225 new Products
each year to replace other less popular items.
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Stable Margins. The Company has generated relatively stable gross
profit and operating profit margins primarily due to (i) the Company's
practice of generally maintaining stable cost and selling prices on all
Products after introduction to the Product line and (ii) the low level of
fixed assets and corporate overhead required for the Company's business.
Efficient Delivery System. The Company has established a delivery
system to achieve quick and cost-effective delivery of Products to its
Displayers. Home Interiors believes that most other direct sales companies
deliver products directly to the end customer and assess a freight charge
to the customer. In contrast, the Company delivers Products to the
Displayers free of charge if minimum order sizes are met. Deliveries are
usually made within four to five days of the Company's receipt of an order.
The Company is able to provide free delivery because of (i) volume
discounts it receives from common carriers and (ii) its use of Local
Distributors enabling the Company to avoid the premiums charged by common
carriers for delivery to private residences, which is where most Displayers
receive deliveries.
Popularity of Direct Sales. The Company believes that direct selling
is an established, growing and well received sales method. According to the
DSA, approximately 9.3 million Americans sold approximately $22.2 billion
of products on a direct sales basis in 1997. This represented a 9% increase
in the number of direct salespeople and a 7% increase in the dollar amount
of direct sales from 1996. The growth rates in the industry are not
necessarily indicative of the growth rates of the Company.
BUSINESS STRATEGY
The Company's business strategy is to maintain its position as a leader in
the direct selling industry and to maximize new growth opportunities. To achieve
these goals, the Company intends to:
Improve the Productivity of Displayers. In order to improve Displayer
productivity, the Company provides training programs, rallies, seminars and
incentive programs designed to maintain and increase Displayers' knowledge
of, and motivation and enthusiasm for, the Products and the Company. In
addition, the Company is exploring the application of technology which
could reduce the time a Displayer must allocate to the administration of
her business, thereby increasing the time Displayers have available to sell
Products.
Expand and Retain the Displayer Base. The Company seeks to attract new
Displayers with programs that encourage existing Displayers to recruit new
Displayers. In addition, Home Interiors designs incentives and training and
motivational programs to improve its Displayer retention rate.
Maximize Product Attractiveness. The Company continually works with
its manufacturing subsidiaries, independent suppliers and Displayers to
design and sell a coordinated Product line that provides an attractive
value to the Displayers' customers.
Improve and Diversify Manufacturing Capability. The Company frequently
reviews its manufacturing processes to maximize its ability to produce
high-quality, price-competitive Products.
Expand International Operations. The Company intends to continue
expanding its operations in Mexico and Puerto Rico and will consider
opportunities in other countries as well. The Company also plans to hire
one or more management personnel with international direct selling
experience to expand its international sales efforts.
PRODUCTS
Product Line. The Company's product line consists of approximately 600 to
700 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.
Prices. Products are targeted to women who are interested in decorating
their homes, but have a limited budget. The Company's Products are sold
throughout the continental United States at suggested retail prices
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ranging from $2 to $93 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
approximately 900 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 introduces approximately 150 to
225 new Products each year to replace less popular items.
SALES METHODS AND ORGANIZATION
Displayers. The Company's marketing and sales strategy is focused on
motivating the 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. See "Risk Factors -- Independent Contractor
Status."
According to a 1994 survey conducted on behalf of the Company by a market
research firm, the typical Displayer is a 39-year old married woman, with a high
school (and perhaps some college) education, who has an annual household income
of approximately $40,000. Displayers generally work as such 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 the Company's Products.
In addition, Displayers who become Trainers or directors are prohibited from
working for or selling the products of any other direct selling company.
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 approximately ten 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 between two and two and one-half 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
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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 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 also
began the Hostess Bonus Buy Program.
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 20 to 285, with an average of approximately
78 Displayers. Approximately 645 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 four to thirteen, with an
average of approximately seven Units. As of September 30, 1998, there were
approximately 100 Branches in the United States, each of which was headed by a
Branch director. In addition, seven Branch directors, who are also Associate
District directors, and six District directors travel the United States, Mexico
and Puerto Rico, motivating, training and inspiring Branch directors. All
"directors," which includes Unit directors, Branch directors, Associate District
directors and District directors, are independent contractors and not employees
of the Company.
Recruiting and Training. Because the average annual Displayer turnover
during the two-year period ended December 31, 1997 approximated 46% (which
compares favorably to the most recently published averages for the direct sales
industry), 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 the Displayers depends
upon, among other things, (i) the managerial capabilities and personal charisma
of the Company's senior management, (ii) 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, (iii) the Company's ability
to provide adequate and timely recruiting and training incentives to existing
Displayers, (iv) the introduction of new Products and marketing concepts, (v)
the effectiveness of the Company's commission and incentive programs and
discounts and (vi) 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
qualified trainers ("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. Trainers may earn commissions on the Product sales
of recruits they train. Trainers
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earned commissions of $2.9 million in 1997. 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. Home Interiors
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 program includes studying a
"training portfolio," instruction by a Trainer and observing several Shows
conducted by experienced Displayers. The training portfolio consists of five
video tapes, two 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 $37.0 million in 1997. District directors and
Associate 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 and Associate District
directors earned $3.8 million in 1997. In addition, Branch directors, Associate
District directors and District directors are reimbursed for certain travel and
other expenses. Reimbursed expenses totaled $5.2 million in 1997.
PRODUCT SUPPLY AND MANUFACTURING
Approximately 28% of the dollar volume of Products purchased by the Company
in 1996 and 1997 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 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 Home Interiors. The Company believes that its relationships with
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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, which supplied the Company with 19%, 19% and 17% of the dollar
volume of Products purchased by the Company in 1995, 1996 and 1997,
respectively, and Oxford International, which supplied the Company with 13% of
the dollar volume of Products purchased by the Company in 1997, no supplier
furnished the Company with more than 10% of the dollar volume of Products
purchased by the Company during any of the last three fiscal years. See "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.
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 130 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 Local Distributors sort the full loads and deliver
the Products to each Displayer. Approximately 70% to 80% 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 the
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 the
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. See "Risk Factors -- Reliance on Displayers," "-- Dependence on Key
Personnel" and "-- Product Competition."
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<PAGE> 53
EMPLOYEES
At September 30, 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.
PROPERTIES AND FACILITIES
The Company owns the following properties used for the purposes set forth
below:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION(1) PURPOSE SQUARE FOOTAGE
- ----------- ------- --------------
<S> <C> <C>
Farmers Branch Headquarters (office, distribution and 325,000
warehouse facility)
Dallas Manufacturing facility 209,000
McKinney Manufacturing and distribution 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 and retail outlet 25,000
Coppell Meeting and training facility 16,000
</TABLE>
- ---------------
(1) All cities are located in Texas, except as noted
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 uninsured 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
and results of operations and its ability to pay interest and principal on the
Notes. The Company is also subject to certain environmental proceedings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 14 to Consolidated Financial Statements.
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<PAGE> 54
MANAGEMENT
Set forth below is certain information as of November 12, 1998 with respect
to those individuals who are serving as members of the Board of Directors 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.......... 67 Director and President
Christina L. Carter 34 Director and Executive Vice President
Urschel...................
Leonard A. Robertson........ 53 Chief Financial Officer
Jim W. Livingston........... 51 Vice President of Operations
Bettina S. Simon............ 48 Vice President, General Counsel and Secretary
Thomas O. Hicks............. 52 Director
Jack D. Furst............... 39 Director
Lawrence D. Stuart, Jr. .... 53 Director
Daniel S. Dross............. 40 Director
Sheldon I. Stein............ 45 Director
</TABLE>
Set forth below is a description of the backgrounds of those persons who
are serving as members of the Board of Directors and as executive officers of
the Company. All of the Company's officers are appointed by the Board of
Directors 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.
Jim 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
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<PAGE> 55
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.
Mr. Hicks is also Vice Chairman of the Board of Regents of the University of
Texas System.
Jack D. Furst became a director of the Company in June 1998. Mr. Furst is a
Managing Director and Principal 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 Managing Director and Principal 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 Senior Vice President 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.
Sheldon I. Stein became a director in July 1998. Mr. Stein is a Senior
Managing Director and heads the Southwest Investment Banking Group of 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.
Following the Recapitalization, the number of directors of the Company was
increased to eleven, resulting in four vacancies on the Board. The Shareholders
Agreement provides that Hicks Muse shall have the right to designate two
additional directors and that the Committed Shareholders (as defined) and Hicks
Muse shall mutually designate two independent directors. On July 30, 1998, Hicks
Muse designated Sheldon I. Stein as one of its two remaining directors pursuant
to the Shareholders Agreement. See "Certain Relationships and Related
Transactions -- The Shareholders Agreement."
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<PAGE> 56
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during each of the
three years in the period ended December 31, 1997 to the Chief Executive Officer
and the other four most highly compensated executive officers who were serving
as executive officers at December 31, 1997:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)
- --------------------------- ---- --------- ---------
<S> <C> <C> <C>
Donald J. Carter, Chairman of the Board and 1997 3,600 1,539,949(1)
(until October 1997) Chief Executive Officer 1996 3,600 1,480,572(1)
1995 3,600 1,713,744(1)
Donald J. Carter, Jr., Chief Executive 1997 192,288 190,500
Officer (since October 1997) and Director 1996 192,288 11,614
1995 192,288 --
Barbara J. Hammond, President and Director 1997 400,008 190,500
1996 400,008 22,000
1995 400,008 --
Christina L. Carter Urschel, Executive 1997 192,288 190,500
Vice President and Director 1996 192,288 11,911
1995 192,288 --
Leonard A. Robertson, Chief Financial Officer 1997 180,000 15,000
1996 180,000 11,000
1995 90,000 --
</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).
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 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.
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<PAGE> 57
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 descendents 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 for a three-year period
after the consummation of the Merger.
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 Merger, to key employees and eligible non-employees of the Company and its
subsidiaries for the purchase of shares of Company 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 Company 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 that certain Agreement and Plan of Merger dated April 13, 1998,
by and between the Company and CII (the "Merger Agreement"), and the applicable
Executive Employment Agreements, immediately after the consummation of the
Recapitalization, 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 will vest in 20% increments in five equal, consecutive
annual installments on each anniversary of the grant. Additionally, options for
11,080 shares were granted to each of Leonard A. Robertson, Jim W. Livingston
and Bettina S. Simon, executive officers of the Company, at the same exercise
price and with substantially similar terms.
Although the Committee will have 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.
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<PAGE> 58
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 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 Company 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 Company Common Stock held by the Hicks Muse Shareholders is less than
10% of the fully diluted Company Common Stock, the Company shall have the right,
but not the obligation, to purchase an optionee's options or any shares of
Company 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 Company 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 Company Common Stock were
available for grant under the 1998 Independent Contractor Stock Option Plan. As
of July 30, 1998, options for 248,469 shares of Company 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 Company 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 Company 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 Company Common Stock issuable upon
exercise thereof, for the difference between the fair market value of the
Company Common Stock underlying such Trust Options and the option exercise price
thereof.
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<PAGE> 59
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 the last three
years.
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 Merger in June 1998. In
addition, CCP subleased a portion of the Manor (as defined) from the Company
from June through December 1997 for monthly rental payments of $2,000. On or
about December 31, 1996, the Company purchased from CCP, for a total price of
approximately $7,543,000, various assets including 10,000 shares of the stock of
Charles W. Weaver Manufacturing Company, certain promissory notes in the
aggregate principal amount of $5,691,000, which the Company originally issued
prior to the Spin-Off and transferred to CCP in connection with the Spin-Off,
and an airplane hanger in Addison, Texas. CCP was a subsidiary of the Company
until it was disposed of in the Spin-Off, and Ronald L. Carter is President of
CCP. Generally, the shareholders of the Company prior to the Recapitalization
own approximately the same percentage of CCP as they do of the Company. The
Dallas Mavericks, an NBA franchise that was controlled by CCP, leased an
athletic facility owned by the Company pursuant to which it paid the Company
approximately $37,000 and $40,000 in 1995 and 1996, respectively. In connection
with the Spin-Off, the Company and CCP executed a Joint and Mutual Release
pursuant to which CCP agreed to indemnify the Company for CCP's share of any
deficiencies in consolidated federal income taxes when and to the extent that
CCP actually realizes a tax benefit as a result of the adjustment giving rise to
such deficiency. In 1995, the Company paid to CCP approximately $900,000 in
satisfaction of its obligations under a tax sharing agreement between the
Company and CCP related to periods prior to the Spin-Off.
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 $50,756,000,
$46,920,000 and $45,601,000 during the Company's fiscal years ended December 31,
1995, 1996 and 1997, respectively, 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
$546,000, $395,000, and $269,000 during the Company's fiscal years ended
December 31, 1995, 1996 and 1997, respectively, for legal services.
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 Company Common Stock, respectively. In addition,
Barbara J. Hammond and Ronald L. Carter received $15,155,497 and $4,341,387,
respectively, in connection with the Recapitalization.
THE MANOR
The Company recently 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
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<PAGE> 60
two airplane hangers and cash in the amount of approximately $340,000. The Manor
was valued by an independent appraiser at $1,925,000, and the airplane hangers
were appraised at an aggregate value of $1,580,000. The Manor is used by the
Company's personnel to train and motivate selected Displayers throughout the
year. Prior to the Company purchasing the Manor from Donald J. Carter, for each
of the three years in the period ended December 31, 1997, it leased the Manor
for rental payments of approximately $52,000 per year plus reimbursement of
expenses.
DALLAS, TEXAS CONDOMINIUM
During 1995 and 1996, the Company leased a condominium in Dallas, Texas
from CCP for use by Barbara J. Hammond, a resident of California. Beginning in
1997, the condominium was leased from Donald J. Carter. The Company paid
approximately $24,000 annually during such three-year period.
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 of which he and Donald J. Carter own all of the outstanding
stock. During the Company's fiscal years ended December 31, 1995, 1996 and 1997,
the Company paid Carter & Sons for its services as a common carrier an aggregate
of approximately $43,000, $139,000 and $96,000, respectively.
RELATIONSHIP WITH RONALD L. CARTER
The Company engaged Ronald L. Carter as a consultant for a period of time
after he left the Company in 1995 to serve as President of CCP. In 1995 and
1996, the Company paid $108,000 and $115,400, respectively, for such services.
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 "Committed Shareholders") entered into a Shareholders
Agreement (the "Shareholders Agreement") upon the consummation of the
Recapitalization, which provides that the Board shall consist of eleven members.
The Board will eventually be reconstituted to include six directors designated
by Hicks Muse, three directors designated by the Committed Shareholders and two
independent directors mutually designated by the Committed Shareholders and
Hicks Muse. As of the date hereof, the Board consists of four directors
designated by the Committed Shareholders and five directors designated by Hicks
Muse. Hicks Muse is entitled to designate one additional representative under
the Shareholders Agreement. The number of directors to be designated by Hicks
Muse and the Committed Shareholders is subject to adjustment based upon the
ownership of Company Common Stock by the Hicks Muse Shareholders and the
Committed Shareholders. See "Management."
The Shareholders Agreement also includes the Company's grant of certain
registration rights to the Hicks Muse Shareholders and the Committed
Shareholders, pursuant to which they may require, after, if ever, the Company
effects an underwritten initial public offering of Company 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 Company 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 Committed Shareholders shall have the right,
subject to certain restrictions, to include in such registration their shares of
Company Common Stock.
If any Hicks Muse Shareholders desires to transfer shares of Company Common
Stock representing more than 20% of the shares of Company Common Stock then held
by the Hicks Muse Shareholders, the Hicks Muse Shareholders must, subject to
certain restrictions, offer the Committed Shareholders the opportunity to
include in the proposed sale their proportionate share of the Committed
Shareholders'
56
<PAGE> 61
Company Common Stock. In addition, if through multiple sales of less than 20% of
the shares of Company 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 Company Common Stock held by them immediately after
consummation of the Recapitalization, the Committed Shareholders will have the
right to sell shares of their Company 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.
CERTAIN OTHER TRANSACTIONS
Pursuant to the Merger Agreement, 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
shall 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. 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 will terminate 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 Company common stock pursuant to the
Securities Act that meets certain requirements, (c) if Hicks Muse and its
affiliates do not beneficially own at least 25% of the then outstanding shares
of Company Common Stock and Hicks Muse has not designated at least one member of
the Board or (d) at any time after such an underwritten initial public offering
of Company Common Stock, if Hicks Muse and its affiliates do not beneficially
own at least 10% of the then outstanding shares of Company Common Stock and
Hicks Muse has not designated at least one member of the Board.
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<PAGE> 62
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of November 12, 1998, certain information
regarding the beneficial ownership of the Company Common Stock by (i) each
person who owns beneficially more than 5% of the issued and outstanding shares
of Company Common Stock, (ii) each director of the Company, (iii) each executive
officer of the Company named in "Management -- 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 Company Common Stock held, except as otherwise indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
COMPANY COMMON STOCK
FOLLOWING RECAPITALIZATION
-----------------------------
NO. OF PERCENTAGE OF
SHARES CLASS
5% SHAREHOLDERS ---------- -------------
<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%
Thomas O. Hicks............................................. 10,111,436(2) 66.4%
Leonard A. Robertson........................................ 278,644(5) 1.8%
Christina L. Carter Urschel................................. 598,198(6) 3.9%
Daniel S. Dross............................................. -- --
Jack D. Furst............................................... --(7) --
Sheldon I. Stein............................................ --(8) --
Lawrence D. Stuart, Jr. .................................... --(7) --
All directors and executive officers as a group (9
persons).................................................. 11,845,405 77.8%
</TABLE>
- ---------------
(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 Company 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 Company 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 Company 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 Company Common Stock held by HIEP, HMIP and HM
BST. In addition, Mr. Hicks is an indirect minority limited partner in HIEP.
Mr. Hicks disclaims beneficial ownership of Company Common Stock owned of
record by HIEP, HMIP and HM BST.
(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.
(5) 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.
(6) 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.
(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 Company Common Stock owned of record by HIEP.
(8) Mr. Stein holds a limited partnership interest in HMIP. Mr. Stein disclaims
beneficial ownership of Company Common Stock owned of record by HMIP.
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<PAGE> 63
DESCRIPTION OF SENIOR CREDIT FACILITY
In connection with the consummation of the Recapitalization, the Company
entered into a Senior Credit Facility as described below. The description below
sets forth all material elements of the Senior Credit Facility, but does not
purport to be complete and is qualified in its entirety by reference to certain
agreements setting forth the principal terms and conditions of the Senior Credit
Facility, which are available upon request from the Company. Capitalized terms
used but not otherwise defined in this "Description of Senior Credit Facility"
shall have the meaning to be ascribed to them in the Senior Credit Facility.
The Company, the Lenders party thereto, NationsBank, N.A., as
administrative agent, The Chase Manhattan Bank, as syndication agent, National
Westminister Bank, PLC, as documentation agent, Prudential Insurance Company of
America, as a co-agent, Societe Generale, as a co-agent, and Citicorp USA, Inc.,
as a co-agent, entered into the Senior Credit Facility providing for (i) $200.0
million of tranche A term loans (the "Tranche A Loan"), (ii) $100.0 million of
tranche B term loans (the "Tranche B Loan" and together with the "Tranche A
Loan," the "Term Loans"), and (iii) a $40.0 million revolving credit facility
(the "Revolving Loans," and together with the Term Loans, the "Loans"). As of
September 30, 1998, the aggregate principal amount outstanding under the Senior
Credit Facility was $293.5 million.
The Tranche A Loan amortizes quarterly over six years as follows: $25.0
million in years one and two, $30.0 million in year three, $35.0 million in year
four, $40.0 million in year five and $45.0 million in year six. The Tranche B
Loan amortizes quarterly over eight years as follows: $1.0 million in each of
years one through six, $45.0 million in year seven and $49.0 million in year
eight.
The Company may use the Revolving Loans for letters of credit in an amount
not to exceed $15.0 million. The Revolving Loans will be available until June
30, 2004.
The Company may optionally prepay the Term Loans from time to time in whole
or in part, without premium or penalty. The first $20.0 million of optional
prepayments on the Term Loans may be applied in such manner as the Company
elects and thereafter shall be applied to the Tranche A Loan and the Tranche B
Loan pro rata and within each such Tranche, pro rata based on the remaining
number of payments. At the Company's option, Revolving Loans may be prepaid, and
revolving credit commitments may be permanently reduced, in whole or in part, at
any time.
So long as the Company's ratio of Total Debt to EBITDA (as defined in the
Senior Credit Facility) is greater than 3.5 to 1.0, the Company will be required
to make mandatory prepayments of Term Loans, at the times and subject to
exceptions to be agreed upon, (a) in respect of 70% of Excess Cash Flow (as
defined in the Senior Credit Facility) of the Company and its subsidiaries, (b)
100% of the net cash proceeds of certain dispositions of assets, and (c) 50% of
the net proceeds from issuances of stock of the Company or its subsidiaries, in
each case subject to certain exceptions as set forth in the Senior Credit
Facility. Such prepayments shall be applied pro rata to the Tranche A Loan and
the Tranche B Loan and, within each such Tranche, pro rata based on the
remaining number of installments.
The obligations of the Company under the Senior Credit Facility are
unconditionally and irrevocably guaranteed by all domestic subsidiaries of the
Company (collectively, the "Guarantors"). In addition, the Company and the
Guarantors granted and/or pledged a first priority or equivalent security
interests in all of their respective tangible and intangible assets and the
capital stock of, or other equity interests in, each direct and indirect
domestic subsidiary (which is limited to 65% of the voting capital stock of, or
other equity interests in, each foreign subsidiary of the Company or such
Guarantor).
The Loans bear interest, at the Company's election, at either (i) the LIBOR
Rate plus (x) 2.0% in the case of the Tranche A Loan and the Revolving Loans and
(y) 2.5% in the case of the Tranche B Loan, or (ii) the Base Rate Basis (as
defined in the Senior Credit Facility) plus (x) 0.75% in the case of the Tranche
A Loan and the Revolving Loans, and (y) 1.25% in the case of the Tranche B Loan.
The Base Rate Basis is to be defined as the higher of (i) the NationsBank, N.A.
"Prime Rate" and (ii) the Federal Funds Effective Rate plus 0.5%.
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<PAGE> 64
The applicable margin with respect to the Loans will be eligible for
certain performance pricing step-downs based on the Company's ratio of Total
Debt to EBITDA, to be negotiated, commencing with the receipt of the Company's
December 31, 1998 financial statements.
The Company will pay a credit fee equal to the applicable margin on the
Revolving Loans, which bear interest at the LIBOR Rate (0.25% of which is a
fronting fee payable to the issuing bank) multiplied by the average daily amount
of outstanding Letters of Credit (as defined). The Company will pay a commitment
fee equal to 0.5% on the undrawn portion of the Revolving Loans. The Commitment
Fee will be eligible for certain performance pricing step-downs based on the
Company's ratio of Total Debt to EBITDA, commencing with the receipt of the
Company's December 31, 1998 financial statements.
The Senior Credit Facility contains a number of covenants customary for
facilities similar to the Senior Credit Facility which include, among other
things, restrictions on the ability of the Company and its subsidiaries to make
investments, incur additional indebtedness, create liens on assets, enter into
mergers, consolidations or amalgamations or liquidate, wind up or dissolve,
dispose of assets, pay dividends and redeem stock, redeem or make prepayments on
the Notes, make capital expenditures and engage in certain transactions with
subsidiaries and affiliates. In addition, under the Senior Credit Facility, the
Company is required to maintain a ratio of Total Debt to EBITDA no greater than
(i) 5.60 to 1 at the end of any fiscal quarter occurring during the period from
June 4, 1998 through September 30, 1999, (ii) 5.10 to 1 at the end of any fiscal
quarter occurring during the period from and including December 31, 1999 through
September 30, 2000, (iii) 4.50 to 1 at the end of any fiscal quarter occurring
during the period from and including December 31, 2000 through September 30,
2001, and (iv) 3.90 to 1 at December 31, 2001 and at the end of any fiscal
quarter thereafter. The Company is required to maintain a minimum ratio of
EBITDA to cash interest expense of no less than (a) 2.00 to 1 at the end of any
fiscal quarter occurring during the period from and including September 30, 1998
through September 30, 1999, (b) 2.15 to 1 at the end of any fiscal quarter
occurring during the period from and including December 31, 1999 through
September 30, 2000, and (c) 2.40 to 1 at December 31, 2000 and at the end of any
fiscal quarter thereafter.
The Senior Credit Facility also contains customary events of default
including failure to pay principal on any Loan when due or any interest, fees or
other amounts that become due within five business days after the due date
thereof, any representation or warranty made or deemed made is incorrect in any
material respect on or as of the date made or deemed made, the default in the
performance of negative covenants or a default in the performance of certain
other covenants or agreements for a period of thirty days, cross-defaults in
other material indebtedness in excess of $10.0 million, certain insolvency
events, certain ERISA events, and other customary events of default for a
facility similar to the Senior Credit Facility. Upon an Event of Default (as
defined in the Senior Credit Facility), the Lenders may accelerate the Loans,
terminate the commitment to make further Revolving Loans, require that the
Letters of Credit be cash-collateralized and foreclose on the collateral.
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<PAGE> 65
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were issued by the Company on June 4, 1998 in the Original
Offering. In connection with that placement, the Company entered into the
Registration Rights Agreement, which requires that the Company file the
Registration Statement under the Securities Act with respect to the New Notes
and, upon the effectiveness of that Registration Statement, offer to the holders
of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, which will be issued without a restrictive legend
and which generally may be reoffered and resold by the holder without
registration under the Securities Act. The Registration Rights Agreement further
provides that the Company must use its reasonable best efforts to (i) cause the
Registration Statement with respect to the Exchange Offer to be declared
effective on or before December 1, 1998 and (ii) consummate the Exchange Offer
on or before the 45th business day following the date on which the Registration
Statement is declared effective. Except as provided below, upon the completion
of the Exchange Offer, the Company's obligations with respect to the
registration of the Old Notes and the New Notes will terminate. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement, of which this Prospectus is a part, and the summary herein of the
material provisions thereof does not purport to be complete and is qualified in
its entirety by reference thereto. As a result of the timely filing and the
effectiveness of the Registration Statement, certain liquidated damages provided
for in the Registration Rights Agreement will not become payable by the Company.
Following the completion of the Exchange Offer (except as set forth in the
paragraph immediately below), holders of Old Notes not tendered will not have
any further registration rights and those Old Notes will continue to be subject
to certain restrictions on transfer. Accordingly, the liquidity of the market
for the Old Notes could be adversely affected upon consummation of the Exchange
Offer.
In order to participate in the Exchange Offer, a holder must represent to
the Company and the Guarantors, among other things, that (i) the New Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the holder, (ii) the holder is not engaging in and does
not intend to engage in a distribution of the New Notes, (iii) the holder does
not have an arrangement or understanding with any person to participate in the
distribution of the New Notes and (iv) the holder is not an "affiliate," as
defined under Rule 405 promulgated under the Securities Act, of the Company and
the Guarantors. Pursuant to the Registration Rights Agreement if (i) the Company
determines that it is not permitted to effect the Exchange Offer as contemplated
hereby because of any change in applicable law or Commission policy, or (ii) any
Holder of Transfer Restricted Securities notifies the Company prior to the 20th
day following consummation of the Exchange Offer (a) that it is prohibited by
law or Commission policy from participating in the Exchange Offer, (b) that it
may not resell the New Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and that this Prospectus is not appropriate or
available for such resales or (c) that it is a broker-dealer and owns Old Notes
acquired directly from the Company or an affiliate of the Company, the Company
is required to file a "shelf" registration statement for a continuous offering
pursuant to Rule 415 under the Securities Act in respect of the Old Notes. For
purposes of the foregoing, "Transfer Restricted Securities" means each Old Note
until (i) the date on which such Note has been exchanged by a person other than
a broker-dealer for a New Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Old Note for a New Note,
the date on which such New Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of this Prospectus,
(iii) the date on which such Old Note has been electively registered under the
Securities Act and disposed of in accordance with such "shelf" registration
statement or (iv) the date on which such Old Note is distributed to the public
pursuant to Rule 144 under the Act or may be distributed to the public pursuant
to Rule 144(k) under the Act. Other than as set forth in this paragraph, no
holder will have the right to participate in the "shelf" registration statement
nor otherwise require that the Company register such holder's shares of Old
Notes under the Securities Act. See "-- Procedures for Tendering."
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to the Company and the Guarantors, the
Company believes that, with the exceptions set forth below, New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale,
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<PAGE> 66
resold and otherwise transferred by any person receiving such New Notes, whether
or not such person is the registered holder (other than any such holder or such
other person which is an "affiliate" of the Company or the Guarantors within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the New Notes are acquired in the ordinary course of business of the holder
or such other person and neither the holder nor such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Notes. Any holder who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes cannot rely on this
interpretation by the Commission's staff and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Following the completion of the Exchange Offer (except as set forth in the
second paragraph under "-- Purpose and Effect" above), holders of Old Notes not
tendered will not have any further registration rights and those Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for a holder's Old Notes could be adversely affected
upon completion of the Exchange Offer if the holder does not participate in the
Exchange Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes accepted
in the Exchange Offer. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000 in principal amount.
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes except that the New Notes have been registered under
the Securities Act and will not bear legends restricting their transfer. The New
Notes will evidence the same debt as the Old Notes and will be issued pursuant
to, and entitled to the benefits of, the Indenture pursuant to which the Old
Notes were issued.
As of November 12, 1998, Old Notes representing $200.0 million aggregate
principal amount were outstanding and there was one registered holder, a nominee
of DTC. This Prospectus, together with the Letter of Transmittal, is being sent
to such registered holder and to others believed to have beneficial interests in
the Old Notes. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company. If any tendered Old
Notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
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<PAGE> 67
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, the Company will notify the Exchange Agent and each registered
holder of any extension by oral or written notice prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth under "-- Conditions to Exchange Offer" shall not have been
satisfied, to terminate the Exchange Offer, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (ii) to amend the
terms of the Exchange Offer in any manner. In the event that the Company makes a
material or fundamental change to the terms of the Exchange Offer, the Company
will file a post-effective amendment to the Registration Statement.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender the Old Notes in the Exchange Offer.
Except as set forth under "-- Book Entry Transfer," to tender in the Exchange
Offer a holder must complete, sign, and date the Letter of Transmittal, or a
copy thereof, have the signatures thereon guaranteed if required by the Letter
of Transmittal, and mail or otherwise deliver the Letter of Transmittal or copy
to the Exchange Agent prior to the Expiration Date. In addition, (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal prior to the Expiration Date, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if that procedure is available, into the Exchange Agent's account at DTC
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set forth under "-- Exchange Agent" prior to the Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date
will constitute an agreement between that holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the Letter of Transmittal and delivering the owner's
Old Notes, either make appropriate arrangements to register ownership of the Old
Notes in the beneficial owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration Instruction"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. If signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be
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<PAGE> 68
guaranteed, the guarantee must be by any eligible guarantor institution that is
a member of or participant in the Securities Transfer Agents Medallion Program,
the New York Stock Exchange Medallion Signature Program or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, the Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as that registered holder's name appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal unless waived by the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent, nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
Expiration Date or, as set forth under "-- Conditions to the Exchange Offer," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions, or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder will represent to the Company and the Guarantors
that, among other things, (i) the New Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the registered holder,
(ii) neither the holder nor any such other person is engaging in or intends to
engage in a distribution of such New Notes, (iii) neither the holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes and (iv) neither the holder
nor any such other person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company and the Guarantors.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the Letter of Transmittal), and all other required
documents. If any tendered Old Notes are not accepted for any reason set forth
in the terms and conditions of the Exchange Offer or if Old Notes are submitted
for a greater principal amount than the holder desires to exchange, such
unaccepted or non-exchanged Old Notes will be returned without expense to the
tendering Holder thereof (or, in the case of Old Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
nonexchanged Old Notes will be
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<PAGE> 69
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or copy thereof, with
any required signature guarantees and any other required documents, must, in any
case other than as set forth in the following paragraph, be transmitted to and
received by the Exchange Agent at the address set forth under "-- Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
ATOP is the only method of processing exchange offers through DTC. To
accept the Exchange Offer through ATOP, participants in DTC must send electronic
instructions to DTC through DTC's communication system in lieu of sending a
signed, hard copy Letter of Transmittal. DTC is obligated to communicate those
electronic instructions to the Exchange Agent. To tender Old Notes through ATOP,
the electronic instructions sent to DTC and transmitted by DTC to the Exchange
Agent must contain the character by which the participant acknowledges its
receipt of and agrees to be bound by the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and any other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or
(for DTC participants) electronic ATOP transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth under "-- Exchange
Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. Any such
notice
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<PAGE> 70
of withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Old Notes into the name of the person withdrawing the tender, and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form, and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender, or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures under "-- Procedures for Tendering" at any time on or prior to
the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended. In any such event the Company is required to use every reasonable
effort to obtain the withdrawal of any stop order at the earliest possible time.
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<PAGE> 71
EXCHANGE AGENT
All executed Letters of Transmittal should be directed to the Exchange
Agent. United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions, requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand or Overnight Delivery before 4:30 p.m.:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 843, Cooper Station 111 Broadway
New York, New York 10276 New York, New York 10006
Attention: Corporate Trust Attention: Lower Level Corporate
Services Trust Window
</TABLE>
By Facsimile (for Eligible Institutions):
(212) 780-0592
Attention: Customer Service
For Information or
Confirmation by Telephone:
(212) 568-6565
(Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail,
by hand or by overnight delivery service.)
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$ , which includes fees and expenses of the Exchange Agent, accounting,
legal, printing, and related fees and expenses.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
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DESCRIPTION OF NEW NOTES
GENERAL
The New Notes are to be issued under the Indenture, dated as of June 4,
1998 (the "Indenture"), between the Company, the Guarantors and United States
Trust Company of New York, as trustee (the "Trustee"), a copy of which is
available upon request to the Company. The following summary of certain
provisions of the Indenture and the New Notes does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Indenture (including the definitions of certain terms therein
and those terms made a part thereof by the Trust Indenture Act of 1939, as
amended) and the New Notes. Capitalized terms used herein and not otherwise
defined shall have the meanings given to them in the Indenture. For definitions
of certain terms used in this section, see "-- Certain Definitions" below. For
the purposes of this "Description of New Notes" section, the term "Company"
refers only to Home Interiors & Gifts, Inc. and not to any of its Subsidiaries.
Principal of, premium, if any, interest and liquidated damages (such
liquidated damages being called herein "Additional Amounts"), if any, on the
Notes will be payable, and the Notes may be exchanged or transferred, at the
office or agency of the Company in the Borough of Manhattan, The City of New
York (which initially shall be the corporate trust office of the Trustee in New
York, New York), except that, at the option of the Company, payment of interest
may be made by check mailed to the address of the holders as such address
appears in the Note Register.
The Notes have been issued in fully registered form only, without coupons,
in denominations of $1,000 and integral multiples thereof. Initially, the
Trustee will act as Paying Agent and Registrar for the Notes. The Notes may be
presented for registration of transfer and exchange at the offices of the
Registrar, which initially will be the Trustee's corporate trust office. The
Company may change any Paying Agent and Registrar without notice to holders of
the Notes.
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company. As of September 30, 1998, the Company had approximately $293.5
million of Senior Indebtedness outstanding, representing outstanding borrowings
under the Senior Credit Facility, no Senior Subordinated Indebtedness other than
the Notes and no indebtedness ranking pari passu or junior to the Notes. In
addition, the Company had $40.0 million of revolving credit availability under
the Revolving Loans. The Indenture permits the Company and its Restricted
Subsidiaries to incur additional indebtedness, including additional Senior
Indebtedness, subject to certain restrictions. See "-- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness and Issuance of
Capital Stock."
As of the Issue Date, all of the Company's Subsidiaries were Restricted
Subsidiaries. However, under certain circumstances, the Company will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture. The Company's payment obligations under
the Notes are guaranteed, on a senior subordinated basis, by certain of the
Company's existing Restricted Subsidiaries and certain Restricted Subsidiaries
created or acquired by the Company in the future. See "-- Guarantees of the
Notes."
PRINCIPAL, MATURITY AND INTEREST
The Notes are unsecured, senior subordinated obligations of the Company and
are limited to $200.0 million aggregate principal amount, and will mature on
June 1, 2008. Interest on the Notes accrues at a rate of 10 1/8% per annum and
is payable in cash semi-annually on each June 1 and December 1, commencing on
December 1, 1998, to the holders of record of Notes at the close of business on
May 15 and November 15, respectively, immediately preceding such interest
payment date. Interest on the Notes accrues from the most recent interest
payment date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Interest is computed on the basis of a
360-day year comprised of twelve 30-day months.
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<PAGE> 73
OPTIONAL REDEMPTION
The Notes may be redeemed at any time on or after June 1, 2003, in whole or
in part, at the option of the Company at the redemption prices (expressed as a
percentage of the principal amount thereof on the applicable redemption date)
set forth below, plus accrued and unpaid interest, if any, to the redemption
date, if redeemed during the 12-month period beginning on of each of the years
set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003............................................ 105.063%
2004............................................ 103.375%
2005............................................ 101.688%
2006 and thereafter............................. 100.000%
</TABLE>
In addition, prior to June 1, 2001, the Company may, at its option, use the
net cash proceeds of one or more Equity Offerings to redeem up to 35% of the
principal amount of the Notes at a redemption price equal to 110.125% of the
principal amount thereof plus accrued and unpaid interest, if any, to the
redemption date; provided, however, that after any such redemption, at least 65%
of the aggregate principal amount of the Notes would remain outstanding
immediately after giving effect to such redemption. Any such redemption will be
required to occur on or prior to the date that is 90 days after the receipt by
the Company of the proceeds of each such Equity Offering. The Company shall
effect such redemption on a pro rata basis.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, in the absence of such requirements or if the Notes are not
so listed, on a pro rata basis, provided that no such Notes of $1,000 or less
shall be redeemed in part. Notice of redemption shall be mailed by first class
mail at least 30 but not more than 60 days before the redemption date to each
holder of Notes to be redeemed at its registered address. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. On and after
the redemption date, interest ceases to accrue on Notes or portions of them
called for redemption.
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control,
each holder will have the right to require that the Company purchase all or a
portion of such holder's Notes in cash pursuant to the offer described below
(the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase. There can be no assurance that in the event of a Change of Control
the Company will be able to raise sufficient funds to meet its obligations or
that, in any event, the Company would be permitted to do so under the Senior
Credit Facility. Any offer made pursuant to the Change of Control provisions
will comply with any applicable rules and regulations promulgated under the
Securities Act and the Exchange Act, including Exchange Act Rules 13e-4 and
14e-1.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following the date on which the Company
becomes aware that a Change of Control has occurred, if the purchase of the
Notes would violate or constitute a default under any other Indebtedness of the
Company, then the Company shall, to the extent needed to permit such purchase of
Notes, either (i) repay all such Indebtedness and terminate all commitments
outstanding thereunder or (ii) obtain the requisite consents, if any, under such
Indebtedness to permit the purchase of the Notes as provided below. The Company
will first comply with the covenant in the preceding sentence before it will be
required to make the Change of Control Offer or purchase the Notes pursuant to
the provisions described below.
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<PAGE> 74
Within 30 days following the date on which the Company becomes aware that a
Change of Control has occurred, the Company must send, by first-class mail
postage prepaid, a notice to each holder of Notes, which notice shall govern the
terms of the Change of Control Offer. Such notice shall state, among other
things, the purchase date, which must be no earlier than 30 days nor later than
45 days from the date such notice is mailed, other than as may be required by
law (the "Change of Control Payment Date"). Holders electing to have any Notes
purchased pursuant to a Change of Control Offer will be required to surrender
such Notes to the Paying Agent and Registrar for the Notes at the address
specified in the notice prior to the close of business on the business day prior
to the Change of Control Payment Date.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act, to the extent applicable in connection with the purchase of Notes
pursuant to a Change of Control Offer.
These "Change of Control" covenants will not apply in the event of (a)
changes in a majority of the board of directors of the Company so long as a
majority of such board of directors continues to consist of Continuing Directors
and (b) certain transactions with Permitted Holders (including Hicks Muse, its
officers and directors, and their respective Affiliates). In addition, the
Change of Control Offer requirement is not intended to afford holders of Notes
protection in the event of certain highly leveraged transactions,
reorganizations, restructurings, mergers and other similar transactions that
might adversely affect the holders of Notes, but would not constitute a Change
of Control. The Company could, in the future, enter into certain transactions
including certain recapitalizations of the Company, that would not constitute a
Change of Control with respect to the Change of Control purchase feature of the
Notes, but would increase the amount of Indebtedness outstanding at such time.
However, the Indenture contains limitations on the ability of the Company to
incur additional Indebtedness and to engage in certain mergers, consolidations
and sales of assets, whether or not a Change of Control is involved, subject, in
each case, to limitations and qualifications. See "-- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness and Issuance of
Capital Stock" and "-- Certain Covenants -- Merger, Consolidation and Sale of
Assets" below.
With respect to the sale of "all or substantially all" the assets of the
Company, which would constitute a Change of Control for purposes of the
Indenture, the meaning of the phrase "all or substantially all" varies according
to the facts and circumstances of the subject transaction, has no clearly
established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company and,
therefore, it may be unclear whether a Change of Control has occurred and
whether the Notes should be subject to a Change of Control Offer.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Senior Credit Facility. Future
Senior Indebtedness of the Company and its Subsidiaries may also contain
prohibitions of certain events that would constitute a Change of Control or
require such Senior Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such Senior Indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. Even if sufficient
funds were otherwise available, the terms of the Senior Credit Facility may
prohibit the Company's prepayment of Notes prior to their scheduled maturity.
Consequently, if the Company is not able to prepay the Indebtedness under the
Senior Credit Facility and any other Senior Indebtedness containing similar
restrictions or obtain the requisite consents, as described above, the Company
will be unable to fulfill its repurchase obligations if holders of Notes
exercise their repurchase rights following a Change of Control, thereby
resulting in a default under the Indenture.
None of the provisions in the Indenture relating to a purchase of Notes
upon a Change of Control is waivable by the board of directors of the Company.
Without the consent of each holder of Notes affected thereby, after the mailing
of the notice of a Change of Control Offer, no amendment to the Indenture may,
directly or indirectly, affect the Company's obligation to purchase the
outstanding Notes or amend, modify or
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<PAGE> 75
change the obligation of the Company to consummate a Change of Control Offer or
waive any default in the performance thereof or modify any of the provisions of
the definitions with respect to any such offer.
RANKING AND SUBORDINATION
The payment of the principal of, premium, if any, and interest on the
Notes, and any Additional Amounts under the Registration Rights Agreement, is
subordinated in right of payment, to the extent set forth in the Indenture, to
the payment when due of all existing and future Senior Indebtedness of the
Company. However, payment from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust described under "Satisfaction and
Discharge of Indenture; Defeasance" below is not subordinate to any Senior
Indebtedness or subject to the restrictions described herein. As of September
30, 1998, the Company had $293.5 million of Senior Indebtedness outstanding
(excluding unused commitments). Although the Indenture contains limitations on
the amount of additional Indebtedness that the Company and its subsidiaries may
incur, under certain circumstances the amount of such additional Indebtedness
could be substantial and, in any case, all or a portion of such Indebtedness may
be Senior Indebtedness and may be secured; provided, however, that the Indenture
restricts the Company and the Guarantors from incurring any secured Indebtedness
(other than in respect of Senior Indebtedness or Guarantor Senior Indebtedness)
unless the New Notes or the Guarantees, as applicable, are ratably and equally
secured. See "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness and Issuance of Capital Stock."
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not incur, directly or indirectly, any Indebtedness that is subordinate or
junior in ranking in any respect to Senior Indebtedness unless such Indebtedness
is Senior Subordinated Indebtedness or is contractually subordinated in right of
payment to Senior Subordinated Indebtedness. Unsecured Indebtedness is not
deemed to be subordinate or junior to Secured Indebtedness merely because it is
unsecured, nor is any Indebtedness deemed to be subordinate or junior to other
Indebtedness merely because it matures after such other Indebtedness. Secured
Indebtedness is not deemed to be Senior Indebtedness merely because it is
secured.
The Company may not pay principal of, premium, if any, or interest on or
Additional Amounts with respect to, the Notes or make any deposit pursuant to
the provisions described under "-- Satisfaction and Discharge of Indenture;
Defeasance" below and may not otherwise redeem, purchase or retire any Notes
(collectively, "pay the Notes") if (i) any Senior Indebtedness is not paid when
due or (ii) any other default on Senior Indebtedness occurs and the maturity of
such Senior Indebtedness is accelerated in accordance with its terms unless, in
either case, the default has been cured or waived and/or any such acceleration
has been rescinded or such Senior Indebtedness has been paid; provided, however,
that the Company may pay the Notes without regard to the foregoing if the
Company and the Trustee receive written notice approving such payment from the
Representative of the Senior Indebtedness with respect to which either of the
events set forth in clause (i) or (ii) of the immediately preceding sentence has
occurred and is continuing. During the continuance of any default (other than a
default described in clause (i) or (ii) of the preceding sentence) with respect
to any Designated Senior Indebtedness pursuant to which the maturity thereof may
be accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, the Company may not pay the Notes (except (i) in Qualified Capital
Stock issued by the Company to pay interest on the Notes or issued in exchange
for the Notes, (ii) in securities substantially identical to the Notes issued by
the Company in payment of interest accrued thereon or (iii) in securities issued
by the Company which are subordinated to the Senior Indebtedness at least to the
same extent as the Notes and having a Weighted Average Life to Maturity at least
equal to the remaining Weighted Average Life to Maturity of the Notes) for a
period (a "Payment Blockage Period") commencing upon the receipt by the Trustee
(with a copy to the Company) of written notice (a "Blockage Notice") of such
default from the Representative of the holders of such Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Trustee and the Company from the Person
or Persons who gave such Blockage Notice, (ii) because the default giving rise
to such Blockage Notice has been
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<PAGE> 76
cured or waived or is no longer continuing or (iii) because such Designated
Senior Indebtedness has been repaid in full). Notwithstanding the provisions
described in the immediately preceding sentence, but subject to the provisions
of the first sentence of this paragraph and the provisions of the immediately
succeeding paragraph, the Company may resume payments on the Notes after the end
of such Payment Blockage Period. Not more than one Blockage Notice may be given,
and not more than one payment Blockage Period may occur, in any consecutive
360-day period, irrespective of the number of defaults with respect to
Designated Senior Indebtedness during such period. However, if any Blockage
Notice within such 360-day period is given by or on behalf of any holders of
Designated Senior Indebtedness (other than the agent under the Senior Credit
Facility), the agent under the Senior Credit Facility may give another Blockage
Notice within such period. In no event, however, may the total number of days
during which any Payment Blockage Period or Payment Blockage Periods are in
effect exceed 179 days in the aggregate during any 360-consecutive-day period.
No nonpayment default that existed or was continuing on the date of delivery of
any Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Blockage Notice unless such default shall have been cured or waived
for a period of not less than 90 consecutive days.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization or bankruptcy of or
similar proceeding relating to the Company or its property, the holders of
Senior Indebtedness will be entitled to receive payment in full, in cash or Cash
Equivalents, of the Senior Indebtedness before the holders of the Notes are
entitled to receive any payment or distribution, and until the Senior
Indebtedness is paid in full, in cash or Cash Equivalents, any payment or
distribution to which holders of the Notes would be entitled but for the
subordination provisions of the Indenture will be made to holders of the Senior
Indebtedness as their interests may appear. If a distribution is made to the
Trustee or to holders of the Notes that, due to the subordination provisions,
should not have been made to them, the Trustee or such holders are required to
hold it in trust for the holders of Senior Indebtedness and pay it over to them
as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the Representative, if any, of any
issue of Designated Senior Indebtedness which is then outstanding; provided,
however, that the Company and the Trustee shall be obligated to notify such a
Representative (other than with respect to the Senior Credit Facility) only if
such Representative has delivered or caused to be delivered an address for the
service of such a notice to the Company and the Trustee (and the Company and the
Trustee shall be obligated only to deliver the notice to the address so
specified). If a notice is required pursuant to the immediately preceding
sentence, the Company may not pay the Notes (except payment (i) in Qualified
Capital Stock issued by the Company to pay interest on the Notes or issued in
exchange for the Notes, (ii) in securities substantially identical to the Notes
issued by the Company in payment of interest accrued thereon or (iii) in
securities issued by the Company which are subordinated to the Senior
Indebtedness at least to the same extent as the Notes and have a Weighted
Average Life to Maturity at least equal to the remaining Weighted Average Life
to Maturity of the Notes), until five Business Days after the respective
Representative of the Designated Senior Indebtedness receives notice (at the
address specified in the preceding sentence) of such acceleration and,
thereafter, may pay the Notes only if the subordination provisions of the
Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of liquidation or insolvency, creditors of the Company who are holders
of Senior Indebtedness may recover more, ratably, than the holders of the Notes,
and creditors of the Company who are not holders of Senior Indebtedness
(including holders of the Notes) may recover less, ratably, than holders of
Senior Indebtedness. In addition, the Indenture does not prohibit the transfer
or contribution of assets of the Company to its Restricted Subsidiaries. In the
event of any such transfer or contribution, holders of the Notes will be
effectively subordinated to the claims of creditors of such Restricted
Subsidiaries with respect to such assets.
GUARANTEES OF THE NOTES
Each of the Guarantors will unconditionally guarantee on a joint and
several basis (the "Guarantees") all of the Company's obligations under the
Notes, including its obligations to pay principal, premium, if any, and interest
with respect to the Notes. The Guarantees will be unsecured senior subordinated
obligations of the
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Guarantors. The obligations of each Guarantor under its Guarantee will be
subordinated and junior in right of payment to the prior payment in full of
existing and future Guarantor Senior Indebtedness of such Guarantor
substantially to the same extent as the Notes are subordinated to all existing
and future Senior Indebtedness of the Company. As of September 30, 1998, the
aggregate principal amount of the Guarantor Senior Indebtedness was $293.5
million. The Guarantors will also guarantee all obligations under the Senior
Credit Facility, and each Guarantor has granted a security interest in all or
substantially all of its assets to secure the obligations under the Senior
Credit Facility. The obligations of each Guarantor are limited to the maximum
amount which, after giving effect to all other contingent and fixed liabilities
of such Guarantor and after giving effect to any collections or payments from or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations of
such Guarantor under its Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state fraudulent conveyance statutes. See
"Risk Factors -- Fraudulent Conveyance Statutes." Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in a pro rata amount, based on the net assets of each
Guarantor determined in accordance with GAAP.
The Indenture will provide that the Company shall cause each Restricted
Subsidiary issuing a Guarantee after the Issue Date pursuant to "Certain
Covenants -- Guarantees by Restricted Subsidiaries" to (i) execute and deliver
to the Trustee a supplemental indenture in a form reasonably satisfactory to the
Trustee pursuant to which such Restricted Subsidiary shall become a party to the
Indenture and thereby unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on the terms set forth therein and (ii)
deliver to the Trustee an Opinion of Counsel that such supplemental indenture
has been duly authorized, executed and delivered by such Restricted Subsidiary
and constitutes a valid, binding and enforceable obligation of such Restricted
Subsidiary (which opinion may be subject to customary assumptions and
qualifications). Thereafter, such Restricted Subsidiary shall (unless released
in accordance with the terms of the Indenture) be a Guarantor for all purposes
of the Indenture.
Each Guarantee will be a continuing Guarantee and will (i) remain in full
force and effect until payment of all of the obligations covered thereby, except
as provided below, (ii) be binding upon each Guarantor and (iii) inure to the
benefit of and be enforceable by the Trustee, holders of the Notes and their
successors, transferees and assigns.
The Indenture will provide that if the Notes thereunder are defeased in
accordance with the terms of the Indenture, or if all or substantially all of
the assets of any Guarantor or all of the equity interest in any Guarantor are
sold (including through merger, consolidation, by issuance or otherwise) by the
Company in a transaction constituting an Asset Sale, and if (i) the Net Cash
Proceeds from such Asset Sale are used in accordance with the covenant described
under "-- Certain Covenants -- Limitation on Asset Sales" or (ii) the Company
delivers to the Trustee an Officer's Certificate to the effect that the Net Cash
Proceeds from such Asset Sale shall be used in accordance with the covenant
described under "-- Certain Covenants -- Limitation on Asset Sales" and within
the time limits specified by such covenant, then such Guarantor (in the event of
a sale or other disposition of all of the equity interests of such Guarantor) or
the Person acquiring the assets (in the event of a sale or other disposition of
all or substantially all of the assets of such Guarantor) shall be released and
discharged of its Guarantee obligations in respect of the Indenture and the
Notes.
Any Guarantor that is designated an Unrestricted Subsidiary shall upon such
designation be released and discharged of its Guarantee obligations in respect
of the Indenture and the Notes and any Unrestricted Subsidiary that is
redesignated as a Restricted Subsidiary shall upon such redesignation be
required to become a Guarantor.
CERTAIN COVENANTS
Set forth below is a summary of those covenants contained in the New Notes
which the Company believes are material. The following summary does not purport
to be a complete summary of all covenants contained in the Indenture and is
subject to, and is qualified in its entirety by reference to, all of the
provisions of the Indenture.
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Limitation on Incurrence of Additional Indebtedness and Issuance of Capital
Stock. The Indenture will provide that:
(a) the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness) and the Company will not issue any Disqualified Capital Stock and
its Restricted Subsidiaries will not issue any Preferred Stock (except Preferred
Stock issued to the Company or a Restricted Subsidiary of the Company so long as
it is so held); provided, however, that the Company and its Restricted
Subsidiaries may incur Indebtedness or issue shares of such Capital Stock if, in
either case, the Company's Fixed Charge Coverage Ratio at the time of incurrence
of such Indebtedness or the issuance of such Capital Stock, as the case may be,
after giving pro forma effect to such incurrence or issuance as of such date and
to the use of proceeds therefrom would have been at least 2.0 to 1.
(b) the Company will not incur or suffer to exist, or permit any of its
Restricted Subsidiaries to incur or suffer to exist, any Obligations with
respect to an Unrestricted Subsidiary that would violate the provisions set
forth in the definition of Unrestricted Subsidiary.
Limitation on Layering. The Indenture will provide that the Company will
not incur any Indebtedness if such Indebtedness is subordinate or junior in
ranking in any respect to any Senior Indebtedness unless such Indebtedness is
Senior Subordinated Indebtedness or is contractually subordinated in right of
payment to all Senior Subordinated Indebtedness (including the Notes).
Limitation on Restricted Payments. The Indenture will provide that (a) the
Company will not, and will not cause or permit any of its Restricted
Subsidiaries, to, directly or indirectly, make any Restricted Payment if at the
time of such Restricted Payment and immediately after giving effect thereto:
(i) a Default or Event of Default shall have occurred and be
continuing; or
(ii) the Company is not able to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness and Issuance of Capital Stock"
covenant; or
(iii) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (the amount expended for such purposes,
if other than in cash, being the fair market value of such property as
determined by the board of directors of the Company in good faith), exceeds
the sum of (a) 50% of the cumulative Consolidated Net Income of the Company
for the period (taken as one accounting period) from the beginning of the
first fiscal quarter commencing after the Issue Date to the most recent
date for which internal financial statements are available at the time of
such Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus (b) 100% of the
aggregate net proceeds, including the fair market value of property other
than cash as determined by the board of directors of the Company in good
faith, received subsequent to the Issue Date by the Company from any Person
(other than a Restricted Subsidiary of the Company) from the issuance and
sale subsequent to the Issue Date of Qualified Capital Stock of the Company
(excluding (i) any net proceeds from issuances and sales financed directly
or indirectly using funds borrowed from the Company or any Restricted
Subsidiary of the Company, until and to the extent such borrowing is
repaid, but including the proceeds from the issuance and sale of any
securities convertible into or exchangeable for Qualified Capital Stock to
the extent such securities are so converted or exchanged and including any
additional proceeds received by the Company upon such conversion or
exchange and (ii) any net proceeds received from issuances and sales that
are used to consummate a transaction described in clause (2) of paragraph
(b) below), plus (c) without duplication of any amount included in clause
(iii)(b) above, 100% of the aggregate net proceeds, including the fair
market value of property other than cash (valued as provided in clause
(iii)(b) above), received by the Company as a capital contribution
subsequent to the Issue Date, plus (d) the amount equal to the net
reduction in Investments (other than Permitted Investments) made by the
Company or any of its Restricted Subsidiaries in any Person resulting from,
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and without duplication, (i) repurchases or redemptions of such Investments
by such Person, proceeds realized upon the sale of such Investment to an
unaffiliated purchaser and repayments of loans or advances or other
transfers of assets by such Person to the Company or any Restricted
Subsidiary of the Company or (ii) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in
the definition of "Investment") not to exceed, in the case of any
Restricted Subsidiary, the amount of Investments previously made by the
Company or any of its Restricted Subsidiaries in such Unrestricted
Subsidiary, which amount was included in the calculation of Restricted
Payments; provided, however, that no amount shall be included under this
clause (d) to the extent it is already included in Consolidated Net Income,
plus (e) the aggregate net cash proceeds received by a Person in
consideration for the issuance of such Person's Capital Stock (other than
Disqualified Capital Stock) that are held by such Person at the time such
Person is merged with and into the Company in accordance with the "Merger,
Consolidation and Sale of Assets" covenant subsequent to the Issue Date;
provided, however, that concurrently with or immediately following such
merger the Company uses an amount equal to such net cash proceeds to redeem
or repurchase the Company's Capital Stock, plus (f) $20.0 million.
(b) Notwithstanding the foregoing, these provisions will not prohibit: (1)
the payment of any dividend or the making of any distribution within 60 days
after the date of its declaration if such dividend or distribution would have
been permitted on the date of declaration; (2) the purchase, redemption or other
acquisition or retirement of any Capital Stock of the Company or any warrants,
options or other rights to acquire shares of any class of such Capital Stock
either (x) solely in exchange for shares of Qualified Capital Stock or other
rights to acquire Qualified Capital Stock, (y) through the application of the
net proceeds of a substantially concurrent sale for cash (other than to a
Restricted Subsidiary of the Company) of shares of Qualified Capital Stock or
warrants, options or other rights to acquire Qualified Capital Stock or (z) in
the case of Disqualified Capital Stock, solely in exchange for, or through the
application of the net proceeds of a substantially concurrent sale for cash
(other than to a Restricted Subsidiary of the Company) of, Disqualified Capital
Stock; (3) payments made pursuant to any merger, consolidation or sale of assets
effected in accordance with the "Merger, Consolidation and Sale of Assets"
covenant; provided, however, that no such payment may be made pursuant to this
clause (3) unless, after giving effect to such transaction (and the incurrence
of any Indebtedness in connection therewith and the use of the proceeds
thereof), the Company would be able to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness and Issuance of Capital Stock" covenant
such that after incurring that $1.00 of additional Indebtedness, the Company
will have a Fixed Charge Coverage Ratio of at least 2.0 to 1; (4) payments to
enable the Company or a Holding Company (as defined) to pay dividends on its
Capital Stock (other than Disqualified Capital Stock) after the first Public
Equity Offering in an annual amount not to exceed 6.0% of the gross proceeds
(before deducting underwriting discounts and commissions and other fees and
expenses of the offering) received from shares of Capital Stock (other than
Disqualified Capital Stock) sold for the account of the issuer thereof (and not
for the account of any stockholder) in such initial Public Equity Offering; (5)
payments by the Company to fund the payment by any company as to which the
Company is, directly or indirectly, a Subsidiary (a "Holding Company") of audit,
accounting, legal or other similar expenses, to pay franchise or other similar
taxes and to pay other corporate overhead expenses, so long as such dividends
are paid as and when needed by its respective direct or indirect Holding Company
and so long as the aggregate amount of payments pursuant to this clause (5) does
not exceed $1.0 million in any calendar year; (6) payments by the Company to
repurchase, or to enable a Holding Company to repurchase, Capital Stock or other
securities from employees or independent contractors of the Company or a Holding
Company in an aggregate amount not to exceed $20.0 million; (7) payments by the
Company to redeem or repurchase, or to enable a Holding Company to redeem or
repurchase, stock purchase or similar rights granted by the Company or a Holding
Company with respect to its Capital Stock in an aggregate amount not to exceed
$500,000; (8) payments, not to exceed $200,000 in the aggregate, to enable the
Company or a Holding Company to make cash payments to holders of its Capital
Stock in lieu of the issuance of fractional shares of its Capital Stock; (9)
payments by the Company to Hicks Muse Partners in accordance with the terms of
the Financial Advisory Agreement and the Monitoring and Oversight Agreement;
provided, however, that in the case of clauses (3), (6), (7) and (8), no Event
of Default shall have occurred or be
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continuing at the time of such payment or as a result thereof. In determining
the aggregate amount of Restricted Payments made subsequent to the Issue Date,
amounts expended pursuant to clauses (1), (4), (6), (7) and (8) shall be
included in such calculation.
Limitation on Liens. The Indenture will provide that the Company will not,
and will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur or assume any Lien securing Indebtedness on any asset
now owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, unless contemporaneously therewith
effective provision is made, in the case of the Company, to secure the Notes and
all other amounts due under the Indenture, and in the case of a Restricted
Subsidiary which is a Guarantor, to secure such Restricted Subsidiary's
Guarantee of the Notes and all other amounts due under the Indenture, equally
and ratably with such Indebtedness (or, in the event that such Indebtedness is
subordinated in right of payment to the Notes or such Subsidiary's Guarantee,
prior to such Indebtedness) with a Lien on the same properties and assets
securing such Indebtedness for so long as such Indebtedness is secured by such
Lien, except for (i) Liens securing Senior Indebtedness and Guarantor Senior
Indebtedness, and (ii) Liens securing Indebtedness described in clause (xi) of
the definition of Permitted Indebtedness; provided that such Liens cover only
the property referred to in such definition.
Merger, Consolidation and Sale of Assets. The Indenture will provide that
the Company shall not, in a single transaction or a series of related
transactions, consolidate with or merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the Company's
or any Guarantor's assets determined on a consolidated basis for the Company to
another Person or adopt a plan of liquidation unless (i) either (1) the Company
is the Surviving Person or (2) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or the Person that
acquires by conveyance, transfer or lease the properties and assets of the
Company or such Guarantor substantially as an entirety or in the case of a plan
of liquidation, the Person to which assets of the Company have been transferred,
shall be a corporation, partnership, limited liability company or trust
organized and existing under the laws of the United States or any State thereof
or the District of Columbia; (ii) such Surviving Person shall assume all of the
obligations of the Company or such Guarantor under the Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) immediately after giving effect to such transaction and the use
of the proceeds therefrom (on a pro forma basis, including giving effect to any
Indebtedness incurred or anticipated to be incurred in connection with such
transaction), (x) no Default or Event of Default shall have occurred and be
continuing and (y) the Company (in the case of clause (1) of the foregoing
clause (i)) or such Person (in the case of clause (2) of the foregoing clause
(i)) shall be able to incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness and Issuance of Capital Stock" covenant; and (iv) the
Company has delivered to the Trustee prior to the consummation of the proposed
transaction an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer complies with the Indenture and that
all conditions precedent in the Indenture relating to such transaction have been
satisfied. For purposes of the foregoing, the transfer (by lease, assignment,
sale or otherwise, in a single transaction or series of related transactions) of
all or substantially all of the properties and assets of one or more Restricted
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
the properties or assets of the Company, will be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
Notwithstanding the foregoing clauses (ii) and (iii), (1) any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company and (2) the Company may merge
with an Affiliate thereof organized solely for the purpose of reorganizing the
Company in another jurisdiction in the U.S. to realize tax or other benefits.
Notwithstanding the foregoing, clauses (ii), (iii) and (iv) shall not apply to
the Recapitalization.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company, as the case may be, is not the Surviving Person and the
Surviving Person is to assume all the obligations of the Company under the Notes
and the Indenture pursuant to a supplemental indenture, such Surviving Person
shall succeed to, and be substituted for, and may exercise every right and power
of the Company, as the case may be, and the Company shall be discharged from its
Obligations under the Indenture and the Notes.
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Limitation on Asset Sales. The Indenture will provide that the Company will
not, and will not permit any of its Restricted Subsidiaries to, consummate an
Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by management of the Company or, if such Asset Sale
involves consideration in excess of $10.0 million, by the board of directors of
the Company, as evidenced by a board resolution), (ii) at least 75% of the
consideration received by the Company or such Restricted Subsidiary, as the case
may be, from such Asset Sale is in the form of cash or Cash Equivalents and is
received at the time of such disposition and (iii) upon the consummation of an
Asset Sale, the Company applies, or causes such Restricted Subsidiary to apply,
such Net Cash Proceeds within 180 days of receipt thereof either (A) to repay
any Senior Indebtedness of the Company or any Indebtedness of a Restricted
Subsidiary of the Company (and, to the extent such Senior Indebtedness relates
to principal under a revolving credit or similar facility, to obtain a
corresponding reduction in the commitments thereunder, except that the Company
may temporarily repay Senior Indebtedness using the Net Cash Proceeds from such
Asset Sale and thereafter use such funds to reinvest pursuant to clause (B)
below within the period set forth therein without having to obtain a
corresponding reduction in the commitments thereunder), (B) to reinvest, or to
be contractually committed to reinvest pursuant to a binding agreement, in
Productive Assets and, in the latter case, to have so reinvested within 360 days
of the date of receipt of such Net Cash Proceeds or (C) to purchase the Notes
and other Senior Subordinated Indebtedness, pro rata, tendered to the Company
for purchase at a price equal to 100% of the principal amount thereof (or the
accreted value of such other Senior Subordinated Indebtedness, if such other
Senior Subordinated Indebtedness is issued at a discount) plus accrued interest
thereon, if any, to the date of purchase pursuant to an offer to purchase made
by the Company as set forth below (a "Net Proceeds Offer"); provided, however,
that the Company may defer making a Net Proceeds Offer until the aggregate Net
Cash Proceeds from Asset Sales not otherwise applied in accordance with this
covenant equal or exceed $15.0 million.
Subject to the deferral right set forth in the final proviso of the
preceding paragraph, each notice of a Net Proceeds Offer will be mailed, by
first-class mail, to holders of Notes not more than 180 days after the relevant
Asset Sale or, in the event the Company or a Restricted Subsidiary has entered
into a binding agreement as provided in (B) above, within 180 days following the
termination of such agreement but in no event later than 360 days after the
relevant Asset Sale. Such notice will specify, among other things, the purchase
date (which will be no earlier than 30 days nor later than 45 days from the date
such notice is mailed, except as otherwise required by law) and will otherwise
comply with the procedures set forth in the Indenture. Upon receiving notice of
the Net Proceeds Offer, holders of Notes may elect to tender their Notes in
whole or in part in integral multiples of $1,000. To the extent holders properly
tender Notes in an amount which, together with all other Senior Subordinated
Indebtedness so tendered, exceeds the Net Proceeds Offer, the Notes and other
Senior Subordinated Indebtedness of tendering holders will be repurchased on a
pro rata basis (based upon the aggregate principal amount tendered, or, if
applicable, the aggregate accreted value thereof). To the extent that the
aggregate principal amount of Notes tendered pursuant to any Net Proceeds Offer,
which, together with the aggregate principal amount or aggregate accreted value,
as the case may be, of all other Senior Subordinated Indebtedness so tendered,
is less than the amount of Net Cash Proceeds subject to such Net Proceeds Offer,
the Company may use any remaining portion of such Net Cash Proceeds not required
to fund the repurchase of tendered Notes and other Senior Subordinated
Indebtedness for any purposes not otherwise prohibited by the Indenture. Upon
the consummation of any Net Proceeds Offer, the amount of Net Cash Proceeds
subject to any future Net Proceeds Offer from the Asset Sales giving rise to
such Net Cash Proceeds shall be deemed to be zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act to the extent applicable in connection with the repurchase of Notes
pursuant to a Net Proceeds Offer.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause to permit to exist or become effective, by operation of the
charter of such Restricted Subsidiary or by reason of any agreement, instrument,
judgment, decree, rule, order, statute or governmental regulation, any
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay
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dividends or make any other distributions on its Capital Stock; (b) make loans
or advances or pay any Indebtedness or other obligation owed to the Company or
any of its Restricted Subsidiaries; or (c) transfer any of its property or
assets to the Company, except for such encumbrances or restrictions existing
under or by reason of: (1) applicable law; (2) the Indenture; (3) customary
non-assignment provisions of any lease governing a leasehold interest of the
Company or any Restricted Subsidiary; (4) any instrument governing Acquired
Indebtedness or Acquired Preferred Stock, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired; (5)
agreements existing on the Issue Date (including the Senior Credit Facility) as
such agreements are from time to time in effect; provided, however, that any
amendments or modifications of such agreements that affect the encumbrances or
restrictions of the types subject to this covenant shall not result in such
encumbrances or restrictions being less favorable to the Company in any material
respect, as determined in good faith by the board of directors of the Company,
than the provisions as in effect before giving effect to the respective
amendment or modification; (6) any restriction with respect to such a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition; (7) an
agreement effecting a refinancing, replacement or substitution of Indebtedness
issued, assumed or incurred pursuant to an agreement referred to in clause (2),
(4) or (5) above or any other agreement evidencing Indebtedness permitted under
the Indenture; provided, however, that the provisions relating to such
encumbrance or restriction contained in any such refinancing, replacement or
substitution agreement or any such other agreement are no less favorable to the
Company in any material respect as determined in good faith by the board of
directors of the Company than the provisions relating to such encumbrance or
restriction contained in agreements referred to in such clause (2), (4) or (5);
(8) restrictions on the transfer of the assets subject to any Lien imposed by
the holder of such Lien; (9) a licensing agreement to the extent such
restrictions or encumbrances limit the transfer of property subject to such
licensing agreement; (10) restrictions relating to Subsidiary Preferred Stock
that require that due and payable dividends thereon to be paid in full prior to
dividends on such Subsidiary's common stock; or (11) any agreement or charter
provision evidencing Indebtedness or Capital Stock permitted under the
Indenture; provided, however, that the provisions relating to such encumbrance
or restriction contained in such agreement or charter provision are not less
favorable to the Company in any material respect as determined in good faith by
the board of directors of the Company than the provisions relating to such
encumbrance or restriction contained in the Indenture.
Limitations on Transactions with Affiliates. The Indenture will provide
that the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction (including, without limitation, the purchase, sale, lease,
contribution or exchange of any property or the rendering of any service) with
or for the benefit of any of its Affiliates (other than transactions between the
Company and a Restricted Subsidiary of the Company or among Restricted
Subsidiaries of the Company) (an "Affiliate Transaction"), other than Affiliate
Transactions on terms that are no less favorable than those that might
reasonably have been obtained in a comparable transaction on an arm's-length
basis from a person that is not an Affiliate; provided, however, that for a
transaction or series of related transactions involving value of $5.0 million or
more, such determination will be made in good faith by a majority of members of
the board of directors of the Company and by a majority of the disinterested
members of the board of directors of the Company, if any; provided, further,
that for a transaction or series of related transactions involving value of
$15.0 million or more, the board of directors of the Company has received an
opinion from an independent investment banking firm of nationally recognized
standing that such Affiliate Transaction is fair, from a financial point of
view, to the Company or such Restricted Subsidiary. The foregoing restrictions
will not apply to (1) reasonable and customary directors' fees, indemnification
and similar arrangements and payments thereunder; (2) any obligations of the
Company under any employment agreement, noncompetition or confidentiality
agreement with any officer of the Company, as in effect on the Issue Date
(provided that each amendment of any of the foregoing agreements shall be
subject to the limitations of this covenant); (3) any Restricted Payment
permitted to be made pursuant to the covenant described under "Limitation on
Restricted Payments"; (4) any issuance of securities, or other payments, awards
or grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
board of directors of the Company; (5) loans or advances to employees in the
ordinary course of
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business of the Company or any of its Restricted Subsidiaries consistent with
past practices; (6) payments made in connection with the Recapitalization,
including, without limitation, fees to Hicks Muse, as described in the
Prospectus; (7) payments by the Company to Hicks Muse Partners in accordance
with the terms of the Financial Advisory Agreement and the Monitoring and
Oversight Agreement; (8) the existence of, or the performance by the Company or
any of its Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement related
thereto) to which it is a party as of the Issue Date or any amendment thereto
(so long as any such amendment, taken as a whole, is not disadvantageous to the
Holders in any material respect); (9) transactions with suppliers or purchasers
or sellers of goods or services, in each case in the ordinary course of business
and otherwise in compliance with the terms of the Indenture, which are fair to
the Company or its Restricted Subsidiaries, in the reasonable determination of
the Board of Directors of the Company or the management thereof, or are on terms
(taken as a whole) at least as favorable as might reasonably have been obtained
at such time from an unaffiliated party; and (10) any agreement as in effect as
of the Issue Date or any amendment thereto (so long as any such amendment, taken
as a whole, is not disadvantageous to the Holders in any material respect) or
any transaction contemplated thereby.
Guarantees by Restricted Subsidiaries. The Indenture will provide that the
Company will not create or acquire, nor cause or permit any of its Restricted
Subsidiaries, directly or indirectly, to create or acquire, any Subsidiary other
than (A) an Unrestricted Subsidiary in accordance with the other terms of the
Indenture or (B) a Restricted Subsidiary that, simultaneously with such creation
or acquisition, executes and delivers a supplemental indenture to the Indenture
pursuant to which it will become a Guarantor under the Indenture in accordance
with "-- Guarantees of the Notes" above, unless such Restricted Subsidiary is
organized under the laws of the jurisdiction other than the United States, any
State thereof, or the District of Columbia.
Reports. The Indenture will provide that so long as any of the Notes are
outstanding, the Company will provide to the Trustee and the holders of Notes
and file with the Commission, to the extent such submissions are accepted for
filing by the Commission, copies of the annual reports and of the information,
documents and other reports that the Company would have been required to file
with the Commission pursuant to Sections 13 or 15(d) of the Exchange Act,
regardless of whether the Company is then obligated to file such reports.
Payments for Consent. The Indenture will provide that neither the Company
nor any of its Restricted Subsidiaries will, directly or indirectly, pay or
cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder of any Notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the Indenture or the
Notes unless such consideration is offered to be paid or is paid to all Holders
of the Notes that consent, waive or agree to amend in the time frame set forth
in the solicitation documents relating to such consent, waiver or agreement.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on the Notes when the same becomes due and
payable and the Default continues for a period of 30 days (whether or not such
payment is prohibited by the provisions described under "-- Ranking and
Subordination" above); (ii) the failure to pay principal of or premium, if any,
on any Notes when such principal or premium, if any, becomes due and payable, at
maturity, upon redemption or otherwise (whether or not such payment is
prohibited by the provisions described under "-- Ranking and Subordination"
above); (iii) a default in the observance or performance of any other covenant
or agreement contained in the Notes or the Indenture, which default continues
for a period of 30 days after the Company receives written notice thereof
specifying the default from the Trustee or holders of at least 25% in aggregate
principal amount of outstanding Notes; (iv) the failure to pay at the stated
maturity (giving effect to any extensions thereof) the principal amount of any
Indebtedness of the Company or any Restricted Subsidiary of the Company, or the
acceleration of the final stated maturity of any such Indebtedness, if the
aggregate principal amount of such Indebtedness, together with the aggregate
principal amount of any other such Indebtedness in default for failure to pay
principal at the final stated maturity (giving effect to any extensions thereof)
or which has been accelerated, aggregates $10.0 million or more at any time in
each case after a 10-day period during which such default shall not have been
cured or such acceleration rescinded; (v) one or more judgments in an aggregate
amount in
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excess of $15.0 million (which are not covered by insurance as to which the
insurer has not disclaimed coverage) being rendered against the Company or any
of its Significant Restricted Subsidiaries and such judgment or judgments remain
undischarged or unstayed for a period of 60 days after such judgment or
judgments become final and nonappealable; and (vi) certain events of bankruptcy,
insolvency or reorganization affecting the Company or any of its Significant
Restricted Subsidiaries.
Upon the happening of any Event of Default specified in the Indenture, the
Trustee may, and the Trustee upon the request of holders of 25% in principal
amount of the outstanding Notes shall, or the holders of at least 25% in
principal amount of outstanding Notes may, declare the principal of all the
Notes, together with all accrued and unpaid interest and premium, if any, to be
due and payable by notice in writing to the Company and the Trustee specifying
the respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Senior Credit
Facility, will become due and payable upon the first to occur of an acceleration
under the Senior Credit Facility or five Business Days after receipt by the
Company and the agent under the Senior Credit Facility of such Acceleration
Notice (unless all Events of Default specified in such Acceleration Notice have
been cured or waived). If an Event of Default with respect to bankruptcy
proceedings relating to the Company or any Significant Restricted Subsidiaries
occurs and is continuing, then such amount will ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of the Notes.
At any time after a declaration of acceleration with respect to the Notes
as described in the preceding paragraph, the holders of a majority in principal
amount of the Notes then outstanding (by notice to the Trustee) may rescind and
cancel such declaration and its consequences if (i) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction, (ii)
all existing Defaults and Events of Default have been cured or waived except
nonpayment of principal of or interest on the Notes that has become due solely
by such declaration of acceleration, (iii) to the extent the payment of such
interest is lawful, interest (at the same rate specified in the Notes) on
overdue installments of interest and overdue payments of principal, which has
become due otherwise than by such declaration of acceleration has been paid,
(iv) the Company has paid the Trustee its reasonable compensation and reimbursed
the Trustee for its reasonable expenses, disbursements and advances and (v) in
the event of the cure or waiver of a Default or Event of Default of the type
described in clause (vi) of the first paragraph of "-- Events of Default" above,
the Trustee has received an Officers' Certificate and Opinion of Counsel that
such Default or Event of Default has been cured or waived. The holders of a
majority in principal amount of the Notes may waive any existing Default or
Event of Default under the Indenture, and its consequences, except a default in
the payment of the principal of or interest on any Notes.
The Company is required to deliver to the Trustee, within 120 days after
the end of the Company's fiscal year, a certificate indicating whether the
signing officers know of any Default or Event of Default that occurred during
the previous year and whether the Company has complied with its obligations
under the Indenture. In addition, the Company will be required to notify the
Trustee of the occurrence and continuation of any Default or Event of Default
promptly after the Company becomes aware of the same.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default thereunder should occur and be continuing,
the Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders of the
Notes unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Subject to such provision for
security or indemnification and certain limitations contained in the Indenture,
the holders of a majority in principal amount of the outstanding Notes have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Company may terminate its obligations under the Indenture at any time
by delivering all outstanding Notes to the Trustee for cancellation and paying
all sums payable by it thereunder. The Company, at its
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option, (i) will be discharged from any and all obligations with respect to the
Notes (except for certain obligations of the Company to register the transfer or
exchange of such Notes, replace stolen, lost or mutilated Notes, maintain paying
agencies and hold moneys for payment in trust) or (ii) need not comply with
certain of the restrictive covenants with respect to the Indenture, if the
Company deposits with the Trustee, in trust, U.S. legal tender or U.S.
Government Obligations or a combination thereof that, through the payment of
interest and premium thereon and principal in respect thereof in accordance with
their terms, will be sufficient to pay all the principal of and interest and
premium on the Notes on the dates such payments are due or through any date of
redemption, if earlier than the dates such payments are due, in any case in
accordance with the terms of such Notes, as well as the Trustee's fees and
expenses. To exercise either such option, the Company is required to deliver to
the Trustee (A) an Opinion of Counsel or a private letter ruling issued to the
Company by the Internal Revenue Service (the "IRS") to the effect that the
holders of the Notes will not recognize income, gain or loss for federal income
tax purposes as a result of the deposit and related defeasance and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such option had not been exercised
and, in the case of an Opinion of Counsel furnished in connection with a
discharge pursuant to clause (i) above, accompanied by a private letter ruling
issued to the Company by the IRS to such effect, (B) subject to certain
qualifications, an Opinion of Counsel to the effect that funds so deposited will
not be subject to avoidance under applicable bankruptcy law and (C) an Officers'
Certificate and an Opinion of Counsel to the effect that the Company has
complied with all conditions precedent to the defeasance. Notwithstanding the
foregoing, the Opinion of Counsel required by clause (A) above need not be
delivered if all Notes not theretofore delivered to the Trustee for cancellation
(i) have become due and payable, (ii) will become due and payable on the
maturity date within one year or (iii) are to be called for redemption within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, together, without the
consent of the holders of the Notes, may amend or supplement the Indenture for
certain specified purposes, including curing ambiguities, defects or
inconsistencies. Other modifications and amendments of the Indenture may be made
with the consent of the holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes),
except that, without the consent of each holder of the Notes affected thereby,
no amendment may, directly or indirectly: (i) reduce the amount of Notes whose
holders must consent to an amendment; (ii) reduce the rate of or change the time
for payment of interest, including defaulted interest, on any Notes; (iii)
reduce the principal of or change the fixed maturity of any Notes, or change the
date on which any Notes may be subject to redemption or repurchase, or reduce
the redemption or repurchase price therefor; (iv) make any Notes payable in
money other than that stated in the Notes and the Indenture; (v) make any change
in provisions of the Indenture protecting the right of each holder of a Note to
receive payment of principal of, premium on and interest on such Note on or
after the due date thereof or to bring suit to enforce such payment or
permitting holders of a majority in principal amount of the Notes to waive a
Default or Event of Default; or (vi) after the Company's obligation to purchase
the Notes arises under the Indenture, amend, modify or change the obligation of
the Company to make or consummate a Change of Control Offer or a Net Proceeds
Offer or waive any default in the performance thereof or modify any of the
provisions or definitions with respect to any such offers.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest, it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
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The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of such person's own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the laws of another jurisdiction would be required thereby.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain copies of the Indenture and
Registration Rights Agreement without charge by writing to Home Interiors &
Gifts, Inc., 4550 Spring Valley Road, Dallas, Texas 75244-3705, Attention: Vice
President of Legal Affairs.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered notes in global form without coupons (each a
"Global Note"). Each Global Note will be deposited on the date of the closing of
the sale of the New Notes (the "Closing Date") with, or on behalf of, the DTC
and registered in the name of Cede & Co., as nominee of the DTC, or will remain
in the custody of the Trustee pursuant to the FAST Balance Certificate Agreement
between DTC and the Trustee.
The DTC has advised the Company that it is (i) a limited purpose trust
company organized under the laws of the State of New York, (ii) a member of the
Federal Reserve System, (iii) a "clearing corporation" within the meaning of the
Uniform Commercial Code, as amended, and (iv) a "Clearing Agency" registered
pursuant to Section 17A of the Exchange Act. The DTC was created to hold
securities for its participants (collectively, the "Participants") and
facilitates the clearance and settlement of securities transactions between
Participants through electronic book entry changes to the accounts of its
Participants, thereby eliminating the need for physical transfer and delivery of
certificates. The DTC's Participants include securities brokers and dealers,
banks and trust companies, clearing corporations and certain other
organizations. Access to the DTC's system is also available to other entities
such as banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly.
The Company expects that pursuant to procedures established by the DTC (i)
upon deposit of the Global Notes, the DTC will credit, on its internal system,
the principal amount of New Notes to the respective accounts of Participants
with an interest in such Global Notes and (ii) ownership of the New Notes will
be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by the DTC (with respect to the interest of
Participants), the Participants and the Indirect Participants. The laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own and that security interests in negotiable instruments
can only be perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer New Notes or to pledge the New Notes as
collateral will be limited to such extent.
So long as the DTC or its nominee is the registered owner of the Global
Notes, the DTC or such nominee, as the case may be, will be considered the sole
owner or Holder of the New Notes represented by such Global Notes for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Note will not be entitled to have New Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Securities (as defined
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below), and will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to giving of any directions,
instruction or approval to the Trustee thereunder. As a result, the ability of a
person having a beneficial interest in New Notes represented by a Global Note to
pledge such interest to persons or entities that do not participate in the DTC's
system or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each holder of a beneficial interest in a Global Note must
rely on the procedures of the DTC and, if such holder is not a Participant or an
Indirect Participant, on the procedures of the Participant through which such
holder owns its interest, to exercise any rights of a Holder under the Indenture
or such Global Note. The Company understands that under existing industry
practice, in the event the Company requests any action of holders or an owner of
a beneficial interest in a Global Note desires to take any action that the DTC,
as the holder of such Global Note, is entitled to take, the DTC would authorize
the Participants to take such action and the Participant would authorize such
holders owning through such Participants to take such action or would otherwise
act upon the instruction of such holders. Neither the Company nor the Trustee
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of New Notes by the DTC, or for maintaining,
supervising or reviewing any records of the DTC relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any New Notes represented by a Global Note registered in the name of the DTC or
its nominee on the applicable record date will be payable by the Trustee to or
at the direction of the DTC or its nominee in its capacity as the registered
holder of the Global Notes representing such New Notes under the Indenture.
Under the terms of the Indenture, the Company and the Trustee may treat the
persons in whose names the New Notes, including the Global Notes, are registered
as the owners thereof for the purpose of receiving such payment and for any and
all other purposes whatsoever. Consequently, neither the Company nor the Trustee
has or will have any responsibility or liability for the payment of such amounts
to beneficial owners of New Notes (including principal, premium, if any, and
interest), or to immediately credit the accounts of the relevant Participants
with such payment, in amounts proportionate to their respective holdings in
principal amount of beneficial interest in the Global Notes as shown on the
records of the DTC. Payments by the Participants and the Indirect Participants
to the beneficial owners of New Notes will be governed by standing instructions
and customary practice and will be the responsibility of the Participants or the
Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the DTC is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, or (iii) upon the occurrence of certain
other events, then, upon surrender by the DTC of its Global Notes, securities in
registered definitive form without coupons ("Certificated Securities") will be
issued to each person that the DTC identifies as the beneficial owner of the
Notes represented by the Global Notes. In addition, subject to certain
conditions, any person having a beneficial interest in a Global Note may, upon
request to the Trustee, exchange such beneficial interest for Certificated
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of such person or persons (or the nominee of
any thereof) and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
DTC or any Participant or Indirect Participant in identifying the beneficial
owners of the related Notes and each such person may conclusively rely on, and
shall be protected in relying on, instructions from the DTC for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the New Notes to be issued).
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or assumed in connection with the acquisition of
assets from such Person and not incurred by such Person in connection with, or
in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary of the Company or such acquisition, merger or consolidation.
"Acquired Preferred Stock" means the Preferred Stock of any Person at such
time as such Person becomes a Restricted Subsidiary of the Company or at the
time it merges or consolidates with the Company or any of its Restricted
Subsidiaries and not issued by such Person in connection with, or in
anticipation or contemplation of, such acquisition, merger or consolidation.
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, such Person. 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 the
ownership of voting securities, by contract or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control. Bear, Stearns & Co. Inc., Chase Securities Inc., Morgan
Stanley & Co. Incorporated and NationsBanc Montgomery Securities LLC or
NationsBank, N.A. and each of their respective Affiliates shall not be deemed
Affiliates of the Company by reason of their direct or indirect investments in
any fund managed by Hicks Muse or any Person in which any such fund is invested
or the Senior Credit Facility, as applicable.
"Asset Acquisition" means (i) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or shall be
consolidated or merged with the Company or any Restricted Subsidiary of the
Company or (ii) the acquisition by the Company or any Restricted Subsidiary of
the Company of assets of any Person comprising a division or line of business of
such Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (excluding any sale and leaseback transaction or any
pledge of assets or stock by the Company or any of its Restricted Subsidiaries)
to any Person other than the Company or a Restricted Subsidiary of the Company
of (i) any Capital Stock of any Restricted Subsidiary of the Company (other than
directors' qualifying shares) or (ii) any other property or assets of the
Company or any Restricted Subsidiary of the Company other than in the ordinary
course of business; provided, however, that for purposes of the "Limitation on
Asset Sales" covenant, Asset Sales shall not include (a) a transaction or series
of related transactions in which the Company or any of its Restricted
Subsidiaries receive aggregate consideration of less than $1.0 million, (b)
transactions covered by the "Merger, Consolidation and Sale of Assets" covenant,
(c) a Restricted Payment that otherwise qualifies under the "Limitation on
Restricted Payments" covenant, (d) any disposition of obsolete or worn out
equipment or equipment that is no longer useful in the conduct of the business
of the Company and its Subsidiaries and that is disposed of, in each case, in
the ordinary course of business and (e) any transaction that constitutes a
Change of Control. Solely for purposes of the second to last paragraph of
"-- Guarantees of the Notes" an Asset Sale is deemed to include a sale,
conveyance or transfer by the Representative following a foreclosure on such
assets.
"Business Day" means any day (other than a day which is a Saturday, Sunday
or legal holiday in the State of New York) on which banks are open for business
in New York, New York.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated) of capital stock of such Person and (ii) with respect to any Person
that is not a corporation, any and all partnership or other equity interests of
such Person.
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"Capitalized Lease Obligation" means, as to any Person, the obligation of
such Person to pay rent or other amounts under a lease to which such Person is a
party that is required to be classified and accounted for as a capital lease
obligation under GAAP, and for purposes of this definition, the amount of such
obligation at any date shall be the capitalized amount of such obligation at
such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation or Moody's Investors
Service, Inc.; (iii) commercial paper maturing no more than 270 days from the
date of creation thereof and, at the time of acquisition, having a rating of at
least A-1 from Standard & Poor's Corporation or at least P-1 from Moody's
Investors Service, Inc.; (iv) certificates of deposit or bankers' acceptances
maturing within one year from the date of acquisition thereof issued by any
commercial bank organized under the laws of the United States of America or any
state thereof or the District of Columbia or any U.S. branch of a foreign bank
having at the date of acquisition thereof combined capital and surplus of not
less than $200.0 million; (v) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (i)
above entered into with any bank meeting the qualifications specified in clause
(iv) above; and (vi) investments in money market funds that invest substantially
all of their assets in securities of the types described in clauses (i) through
(v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
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 (a "Group") (whether or not otherwise in compliance with the
provisions of the Indenture), other than to Hicks Muse or any of its Affiliates,
officers or directors, and Donald J. Carter, Jr. or Christina L. Carter Urschel
or any of his or her Affiliates (the "Permitted Holders"); or (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 any Person or Group (other
than the Permitted Holders or any direct or indirect subsidiary of any Permitted
Holder) 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.
"Commodity Agreement" means any commodity futures contract, commodity
option or other similar agreement or arrangement.
"Consolidated Cash Flow" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income, (ii) to the extent
Consolidated Net Income has been reduced thereby, (a) all income taxes of such
Person and its Restricted Subsidiaries accrued in accordance with GAAP for such
period (other than income taxes attributable to extraordinary or nonrecurring
gains or losses), (b) Consolidated Interest Expense and (c) Consolidated
Non-Cash Charges, all as determined on a consolidated basis for such Person and
its Restricted Subsidiaries in conformity with GAAP and (iii) the lesser of (x)
dividends or distributions paid in cash to such Person or its Restricted
Subsidiary by another Person whose results are reflected as a minority interest
in the consolidated financial statements of such first Person and (y) such
Person's equity interest in the Consolidated Cash Flow of such other Person (but
in no event less than zero).
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, the sum of (i) the interest expense of such Person
and its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP, including, without limitation, (a) any
amortization of debt issuance costs and original issue discount, (b) the net
cost under Interest Swap Agreements (including any amortization of discounts),
(c) the interest portion of any deferred payment obligation, (d) all
commissions, discounts and other fees and charges owed with respect to letters
of credit, bankers' acceptance financing or similar facilities, and (e) all
accrued interest and (ii) the interest component
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of Capitalized Lease Obligations paid or accrued by such Person and its
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or loss) of such Person and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided, however, that there shall be excluded therefrom, without duplication,
(a) gains and losses from Asset Sales (without regard to the $1.0 million
limitation set forth in the definition thereof) or abandonments or reserves
relating thereto and the related tax effects, (b) items classified as
extraordinary or nonrecurring gains and losses, and the related tax effects
according to GAAP, (c) the net income (or loss) of any Person acquired in a
pooling of interests transaction accrued prior to the date it becomes a
Restricted Subsidiary of such first referred to Person or is merged or
consolidated with it or any of its Restricted Subsidiaries, (d) the net income
of any Restricted Subsidiary to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by contract, operation of law or otherwise, (e) the net income or loss of any
Person, other than a Restricted Subsidiary, (f) the cumulative effect of a
change of accounting principles, and (g) any non-cash compensation expense in
connection with the issuance of employee or independent contractor stock
options.
"Consolidated Non-Cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such person and its Restricted Subsidiaries (excluding any such charges
constituting an extraordinary or nonrecurring item) reducing Consolidated Net
Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
"Continuing Director" means, as of the date of determination, any Person
who (i) was a member of the board of directors of the Company on the Issue Date,
(ii) was nominated for election or elected to the board of directors of the
Company, as the case may be, 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 representative of a Permitted Holder.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all obligations under the Senior
Credit Facility and (ii) any other Senior Indebtedness of the Company which, at
the date of determination, has an aggregate principal amount outstanding of, or
under which, at the date of determination, the holders thereof are committed to
lend up to, at least $50.0 million and is specifically designated by the Company
in the instrument evidencing or governing such Senior Indebtedness as
"Designated Senior Indebtedness" for purposes of the Indenture.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, or transfer, lease, conveyance
or other disposition of all or substantially all of such Person's assets.
"Disqualified Capital Stock" means any Capital Stock that, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof (except, in each case,
upon the occurrence of a Change of Control), in whole or in part, on or prior to
the final maturity date of the Notes; provided that only the portion of Capital
Stock which so matures or is mandatorily redeemable or is so redeemable at the
sole option of the holder thereof prior to such date shall be deemed
Disqualified Capital Stock.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
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"Equity Offering" means a private sale or public offering of Capital Stock
(other than Disqualified Capital Stock) of the Company or a Holding Company (to
the extent, in the case of a Holding Company, that the net cash proceeds thereof
are contributed to the common or non-redeemable preferred equity capital of the
Company).
"Financial Advisory Agreement" means the Financial Advisory Agreement by
and among the Company and Hicks Muse Partners, as in effect on the Issue Date.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the Consolidated Interest Expense for such period,
(ii) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period and (iii) the amount of all
cash dividend payments or payments in Disqualified Capital Stock on Preferred
Stock of Restricted Subsidiaries of such Person or on Disqualified Capital Stock
of such Person held by Persons other than the Company or any Restricted
Subsidiaries paid, accrued or scheduled to be paid or accrued during such
period.
"Fixed Charge Coverage Ratio" means with respect to any Person for the four
full fiscal quarters (the "Four Quarter Period") ending on or prior to the date
of determination, the ratio of the Consolidated Cash Flow of such Person for
such period to the Fixed Charges of such Person and its Restricted Subsidiaries
for such period.
For purposes of this definition, "Consolidated Cash Flow" and, except with
respect to clause (iv) below, "Fixed Charges" shall be calculated on a pro forma
basis after giving effect to (i) the Recapitalization, (ii) the incurrence of
the Indebtedness, and the issuance of Disqualified Capital Stock and Preferred
Stock, of such Person and its Restricted Subsidiaries (and the application of
the proceeds therefrom) giving rise to the need to make such calculation and any
incurrence (and the application of the proceeds therefrom) or repayment of other
Indebtedness, other than the incurrence or repayment of Indebtedness pursuant to
working capital facilities, and the issuance of other Disqualified Capital Stock
or Preferred Stock, at any time subsequent to the beginning of the Four Quarter
Period and on or prior to the date of determination, as if such incurrence and
issuance (and the application of the proceeds thereof), or the repayment, as the
case may be, occurred on the first day of the Four Quarter Period, (iii) any
Asset Sales (including those excluded from the definition thereof by clauses (b)
and (c) of the definition thereof) or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Subsidiaries (including any
Person that becomes a Restricted Subsidiary as a result of such Asset
Acquisition) incurring, assuming or otherwise becoming liable for Indebtedness
or issuing Disqualified Capital Stock or Preferred Stock) at any time on or
subsequent to the first day of the Four Quarter Period and on or prior to the
date of determination, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Indebtedness or issuance of
such Disqualified Capital Stock or Preferred Stock and also including any
Consolidated Cash Flow associated with such Asset Acquisition) occurred on the
first day of the Four Quarter Period and (iv) cost savings resulting from
employee termination, facilities consolidations and closings, standardization of
employee benefits and compensation practices, consolidation of property,
casualty and other insurance coverage and policies, standardization of sales
representation commissions and other contract rates, and reductions in taxes
other than income taxes (collectively, "Cost Savings Measures"), which cost
savings the Company reasonably believes in good faith could have been achieved
during the Four Quarter Period as a result of such Asset Acquisition (regardless
of whether such cost savings could then be reflected in pro forma financial
statements under GAAP, Regulation S-X promulgated by the Commission or any other
regulation or policy of the Commission), less the amount of any additional
expenses that the Company reasonably estimates would result from anticipated
replacement of any items constituting Cost Savings Measures in connection with
such Asset Acquisitions; provided, however, that both (A) such cost savings and
Cost Savings Measures were identified and such cost savings were quantified in
an officer's certificate delivered to the Trustee at the time of the
consummation of the Asset Acquisition and (B) with respect to each Asset
Acquisition completed prior to the 90th day preceding such date of
determination, actions were commenced or initiated by the Company within 90 days
of such Asset Acquisition to effect the Cost Savings Measures identified in such
officer's certificate (regardless, however, of whether the corresponding cost
savings have been achieved). Furthermore, in calculating "Consolidated Interest
Expense" for purposes of the calculation of "Fixed Charge Coverage Ratio," (i)
interest on Indebtedness determined on a
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fluctuating basis as of the date of determination (including Indebtedness
actually incurred on the date of the transaction giving rise to the need to
calculate the Fixed Charge Coverage Ratio) and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness as in effect on the date of
determination and (ii) notwithstanding (i) above, interest determined on a
fluctuating basis, to the extent such interest is covered by Interest Swap
Agreements, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or the Commission or
in such other statements by such other entity as approved by a significant
segment of the accounting profession. All ratios and computations based on GAAP
contained in the Indenture shall be computed in conformity with GAAP.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Guarantor" means each of the Company's direct and indirect, existing and
future, Restricted Subsidiaries, other than a Subsidiary organized under the
laws of a jurisdiction other than the United States or any State thereof,
provided that such Subsidiary's assets and principal place of business are
located outside the United States.
"Guarantor Senior Indebtedness" means, as to any Guarantor, Senior
Indebtedness of such Guarantor, it being understood that for the purpose of this
definition, all references to the Company in the definition of Senior
Indebtedness shall be deemed references to such Guarantor.
"Indebtedness" means with respect to any Person, without duplication, any
liability of such Person (i) for borrowed money, (ii) evidenced by bonds,
debentures, notes or other similar instruments, (iii) constituting Capitalized
Lease Obligations, (iv) incurred or assumed as the deferred purchase price of
property, or pursuant to conditional sale obligations and title retention
agreements (but excluding trade accounts payable arising in the ordinary course
of business), (v) for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (vi) for Indebtedness of
others guaranteed by such Person, (vii) for Interest Swap Agreements, Commodity
Agreements and Currency Agreements, (viii) for Indebtedness incurred in
connection with, or in contemplation of, another Person merging with or into or
becoming a Subsidiary of the former Person and (ix) for Indebtedness of any
other Person of the type referred to in clauses (i) through (viii) which is
secured by any Lien on any property or asset of such first referred to Person,
the amount of such Indebtedness being deemed to be the lesser of the value of
such property or asset or the amount of the Indebtedness so secured. The amount
of Indebtedness of any Person at any date shall be (i) the outstanding principal
amount of all unconditional obligations described above, as such amount would be
reflected on a balance sheet prepared in accordance with GAAP, and the maximum
liability at such date of such Person for any contingent obligations described
above, (ii) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount and (iii) the principal amount thereof, together
with any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
"Interest Swap Agreements" means any interest rate protection agreement,
interest rate future, interest rate option, interest rate swap, interest rate
cap or other interest rate hedge or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (in each case, including by way of Guarantee or
similar arrangement, but excluding (i) any debt or extension of credit
represented by a bank deposit other than a time deposit and (ii) advances to
customers and independent contractors in the ordinary course of business) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For
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purposes of the "Limitation on Restricted Payments" covenant, (A) "Investment"
shall include the portion (proportionate to the Company's equity interest in a
Restricted Subsidiary to be designated as an Unrestricted Subsidiary) of the
fair market value of the net assets of such Restricted Subsidiary of the Company
at the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary; provided, however, that upon a redesignation of such Unrestricted
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" (if positive) equal to (1) the Company's
"Investment" in such Unrestricted Subsidiary at the time of such redesignation
less (2) the portion (proportionate to the Company's equity interest in such
Unrestricted Subsidiary) of the fair market value of the net assets of such
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is so
redesignated from an Unrestricted Subsidiary to a Restricted Subsidiary; and (B)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer, in each case as
determined in good faith by the board of directors of the Company.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means, with respect to any asset, any lien, mortgage, deed of trust,
pledge, security interest, charge or encumbrance of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof and any agreement to give any security interest).
"Monitoring and Oversight Agreement" means the Monitoring and Oversight
Agreement by and among the Company and Hicks Muse Partners, as in effect on the
Issue Date.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents (including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents)
received by the Company or any of its Subsidiaries from such Asset Sale net of
(i) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions, recording fees, relocation costs, title insurance
premiums, appraisers fees and costs reasonably incurred in preparation of any
asset or property for sale), (ii) taxes paid or reasonably estimated to be
payable (calculated based on the combined state, federal and foreign statutory
tax rates applicable to the Company or the Restricted Subsidiary engaged in such
Asset Sale), (iii) all distributions and other payments required to be made to
any Person owning a beneficial interest in the assets subject to sale or
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Sale, (iv) any reserves established in accordance with GAAP for adjustment
in respect of the sales price of the asset or assets subject to such Asset Sale
or for any liabilities associated with such Asset Sale and (v) repayment of
Indebtedness secured by assets subject to such Asset Sale; provided, however,
that if the instrument or agreement governing such Asset Sale requires the
transferor to maintain a portion of the purchase price in escrow (whether as a
reserve for adjustment of the purchase price or otherwise) or to indemnify the
transferee for specified liabilities in a maximum specified amount, the portion
of the cash or Cash Equivalents that is actually placed in escrow or segregated
and set aside by the transferor for such indemnification obligation shall not be
deemed to be Net Cash Proceeds until the escrow terminates or the transferor
ceases to segregate and set aside such funds, in whole or in part, and then only
to the extent of the proceeds released from escrow to the transferor or that are
no longer segregated and set aside by the transferor.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing, or otherwise relating to, any
Indebtedness.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Indebtedness" means, without duplication, (i) Indebtedness
outstanding on the Issue Date; (ii) Indebtedness of the Company and any of its
Restricted Subsidiaries (a) outstanding under the Senior Credit Facility
(including letter of credit obligations) (provided that the aggregate principal
amount at any time outstanding does not exceed $340.0 million) or (b) incurred
under the Senior Credit Facility pursuant to and in compliance with (x) clause
(v) of this definition or (y) the proviso in the covenant described under the
caption "-- Limitation on Incurrence of Additional Indebtedness and Issuance of
Capital Stock" above;
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(iii) Indebtedness evidenced by or arising under the Notes and the Indenture;
(iv) Interest Swap Agreements, Commodity Agreements and Currency Agreements;
provided, however, that such agreements are entered into for bona fide hedging
purposes and not for speculative purposes; (v) additional Indebtedness of the
Company or any of its Restricted Subsidiaries not to exceed $50.0 million in
principal amount outstanding at any time (which amount may, but need not, be
incurred under the Senior Credit Facility); (vi) Refinancing Indebtedness; (vii)
Indebtedness owed by the Company to any Restricted Subsidiary of the Company or
by any Restricted Subsidiary of the Company to the Company or any Restricted
Subsidiary of the Company; (viii) guarantees by the Company or Restricted
Subsidiaries of any Indebtedness permitted to be incurred pursuant to the
Indenture; (ix) Indebtedness in respect of letters of credit to support workers
compensation obligations, performance bonds, bankers' acceptances and surety or
appeal bonds provided by the Company or any of its Restricted Subsidiaries to
their customers in the ordinary course of their business; (x) Indebtedness
arising from agreements providing for indemnification, adjustment of purchase
price or similar obligations, or from guarantees or letters of credit, surety
bonds or performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in each case incurred in
connection with the disposition of any business assets or Restricted
Subsidiaries of the Company (other than guarantees of Indebtedness or other
obligations incurred by any Person acquiring all or any portion of such business
assets or Restricted Subsidiaries of the Company for the purpose of financing
such acquisition) in a principal amount not to exceed the gross proceeds
actually received by the Company or any of its Restricted Subsidiaries in
connection with such disposition; and (xi) Indebtedness represented by
Capitalized Lease Obligations, mortgage financings or purchase money
obligations, in each case incurred for the purpose of financing all or any part
of the purchase price or cost of construction or improvement of property or
assets used in the direct selling, direct marketing or home furnishings business
or incurred to refinance any such purchase price or cost of construction or
improvement, in each case incurred no later than 365 days after the date of such
acquisition or the date of completion of such construction or improvement;
provided, however, that the principal amount of any Indebtedness incurred
pursuant to this clause (xi) shall not exceed $30.0 million at any time
outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company to acquire the stock or assets of any
Person (or Acquired Indebtedness or Acquired Preferred Stock acquired in
connection with a transaction in which such Person becomes a Restricted
Subsidiary of the Company) engaged in the direct selling, direct marketing or
home furnishings business or businesses reasonably related thereto; provided,
however, that if any such Investment or series of related Investments involves
an Investment by the Company in excess of $5.0 million, the Company is able, at
the time of such Investment and immediately after giving effect thereto, to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "Limitation on Incurrence of Additional
Indebtedness and Issuance of Capital Stock" covenant, (ii) Investments received
by the Company or its Restricted Subsidiaries as consideration for a sale of
assets made in compliance with the other terms of the Indenture, (iii)
Investments by the Company or any Restricted Subsidiary of the Company in any
Restricted Subsidiary of the Company (whether existing on the Issue Date or
created thereafter) or any Person that after such Investments, and as a result
thereof, becomes a Restricted Subsidiary of the Company and Investments in the
Company or any Restricted Subsidiary by any Restricted Subsidiary of the
Company, (iv) Investments in cash and Cash Equivalents, (v) Investments in
securities of trade creditors, wholesalers, suppliers or customers received
pursuant to any plan of reorganization or similar arrangement, (vi) loans or
advances to employees or independent contractors of the Company or any
Restricted Subsidiary thereof for purposes of purchasing the Company's or a
Holding Company's Capital Stock and other loans and advances to employees or
independent contractors made in the ordinary course of business consistent with
past practices of the Company or such Restricted Subsidiary, and (vii)
additional Investments in an aggregate amount not to exceed $50.0 million at any
time outstanding.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
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"Productive Assets" means assets of a kind used or usable by the Company
and its Restricted Subsidiaries in the direct selling, direct marketing or home
furnishings business or businesses reasonably related, ancillary or
complementary thereto, and specifically includes assets acquired through Asset
Acquisitions (it being understood that "assets" may include Capital Stock of a
Person that owns such Productive Assets, provided that after giving effect to
such transaction, such Person would be a Restricted Subsidiary of the Company).
"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Disqualified Capital Stock) of the Company or a Holding
Company (to the extent, in the case of a Holding Company, that the net cash
proceeds thereof are contributed to the common or non-redeemable preferred
equity capital of the Company), pursuant to an effective registration statement
filed with the Commission in accordance with the Securities Act.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinancing Indebtedness" means any refinancing by the Company of
Indebtedness of the Company or any of its Restricted Subsidiaries incurred in
accordance with the "Limitation on Incurrence of Additional Indebtedness and
Issuance of Capital Stock" covenant (other than pursuant to clause (iii) or (iv)
of the definition of Permitted Indebtedness) that does not (i) result in an
increase in the aggregate principal amount of Indebtedness (such principal
amount to include, for purposes of this definition, any premiums, penalties or
accrued interest paid with the proceeds of the Refinancing Indebtedness) of such
Person, or (ii) create Indebtedness with (A) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being refinanced or (B) a final maturity earlier than the final maturity of the
Indebtedness being refinanced.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Senior Indebtedness; provided, however, that
if, and for so long as, any issue of Senior Indebtedness lacks such a
representative, then the Representative for such issue of Senior Indebtedness
shall at all times constitute the holders of a majority in outstanding principal
amount of such issue of Senior Indebtedness.
"Restricted Payment" means (i) the declaration or payment of any dividend
or the making of any other distribution (other than dividends or distributions
payable in Qualified Capital Stock or in options, rights or warrants to acquire
Qualified Capital Stock) on shares of the Company's Capital Stock, (ii) the
purchase, redemption, retirement or other acquisition for value of any Capital
Stock of the Company, or any warrants, rights or options to acquire shares of
Capital Stock of the Company, other than through the exchange of such Capital
Stock or any warrants, rights or options to acquire shares of any class of such
Capital Stock for Qualified Capital Stock or warrants, rights or options to
acquire Qualified Capital Stock or (iii) the making of any Investment (other
than a Permitted Investment).
"Restricted Subsidiary" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing as of the Issue Date. The board of directors of the Company may
designate any Unrestricted Subsidiary or any person that is to become a
Subsidiary as a Restricted Subsidiary if immediately after giving effect to such
action (and treating any Acquired Indebtedness as having been incurred at the
time of such action), the Company could have incurred at least $1.00 of
additional indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Incurrence of Additional Indebtedness and Issuance of Capital
Stock" covenant.
"Secured Indebtedness" means any Indebtedness of the Company or a
Restricted Subsidiary secured by a Lien.
"Senior Credit Facility" means the Senior Credit Facility, under that
certain Credit Agreement entered into in connection with the consummation of the
Recapitalization, among the Company, NationsBank, N.A., as administrative agent,
The Chase Manhattan Bank, N.A., as syndication agent and National Westminster
Bank, PLC, as documentation agent, Prudential Insurance Company of America, as a
co-agent, Societe Generale, as a co-agent, Citicorp USA, Inc., as a co-agent,
and the other financial institutions from time to time party thereto, together
with the related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any
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agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including by way of adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders (or other
institutions).
"Senior Indebtedness" means, whether outstanding on the Issue Date or
thereafter issued, all Indebtedness of the Company, including interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company or any Restricted
Subsidiary whether or not a claim for post-filing interest is allowed in such
proceeding) and premium, if any, thereon, and other monetary amounts (including
fees, expenses, reimbursement obligations under letters of credit and
indemnities) owing in respect thereof unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that the obligations in respect of such Indebtedness ranks pari passu with the
Notes; provided, however, that Senior Indebtedness will not include (1) any
obligation of the Company to any Restricted Subsidiary, (2) any liability for
federal, state, foreign, local or other taxes owed or owing by the Company, (3)
any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness, Guarantee or obligation of
the Company that is expressly subordinate or junior in right of payment to any
other Indebtedness, Guarantee or obligation of the Company, including any Senior
Subordinated Indebtedness or (5) obligations in respect of any Capital Stock.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Notes in right of payment and is not subordinated by
its terms in right of payment to any Indebtedness or other obligation of the
Company which is not Senior Indebtedness.
"Significant Restricted Subsidiary" means, at any date of determination,
any Restricted Subsidiary that would be a "significant subsidiary" as defined in
Article I, Rule 1-03 of Regulation S-X under the Act, as such rule is in effect
on the Issue Date.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly through one or more
intermediaries, by such Person or (ii) any other Person of which at least a
majority of the voting interest under ordinary circumstances is at the time,
directly or indirectly, through one or more intermediaries, owned by such
Person. Notwithstanding anything in the Indenture to the contrary, all
references to the Company and its consolidated Subsidiaries or to financial
information prepared on a consolidated basis in accordance with GAAP shall be
deemed to include the Company and its Subsidiaries as to which financial
statements are prepared on a combined basis in accordance with GAAP and to
financial information prepared on such a combined basis. Notwithstanding
anything in the Indenture to the contrary, an Unrestricted Subsidiary shall not
be deemed to be a Restricted Subsidiary for purposes of the Indenture.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"Unrestricted Subsidiary" means a Subsidiary of the Company created after
the Issue Date and so designated by a resolution adopted by the board of
directors of the Company; provided, however, that (a) neither the Company nor
any of its other Restricted Subsidiaries (1) provides any credit support for any
Indebtedness or other Obligations of such Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness) or (2) is directly or
indirectly liable for any Indebtedness or other Obligations of such Subsidiary
and (b) at the time of designation of such Subsidiary, such Subsidiary has no
property or assets (other than de minimis assets resulting from the initial
capitalization of such Subsidiary). The board of directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
immediately after giving effect to such designation (x) the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional Indebtedness and
Issuance of Disqualified Capital Stock" covenant and (y) no Default or Event of
Default shall have occurred or be continuing. Any designation pursuant to this
definition by the board of directors of the Company shall be evidenced to the
Trustee by the filing with the Trustee of a certified copy of
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the resolution of the Company's board of directors giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Weil, Gotshal & Manges LLP, counsel to the Company, is of the opinion that,
except as noted otherwise and to the extent relating to legal conclusions and
matters of law, the following are the material United States federal income tax
consequences of the Exchange Offer to holders of Old Notes exchanging such Notes
for New Notes.
The following discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the applicable Treasury
Regulations promulgated and proposed thereunder, and judicial authority and
current administrative rulings and practice, all of which are subject to change,
possibly with retroactive effect. This discussion does not purport to deal with
all aspects of U.S. federal income taxation that might be relevant to particular
holders in light of their personal investment circumstances or status, nor does
it discuss the U.S. federal income tax consequences to certain types of holders
subject to special treatment under the U.S. federal income tax laws (for
example, financial institutions, insurance companies, dealers in securities,
tax-exempt organizations or taxpayers holding the Notes as part of a "straddle,"
"hedge" or "conversion transaction"). Moreover, the effect of any applicable
state, local or foreign tax laws is not discussed.
Except as otherwise indicated below, this discussion assumes that the Notes
are held as capital assets (as defined in Section 1221 of the Code) by the
holders thereof. The Company will treat the Notes as indebtedness for U.S.
federal income tax purposes, and the balance of this discussion is based on the
assumption that such treatment will be respected.
PROSPECTIVE HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS OF THE ACQUISITION,
OWNERSHIP AND DISPOSITION OF THE NOTES.
References in this discussion to a "Note" or the "Notes" are references to
both the Old Notes and the New Notes. Specific references to the Old Notes or
New Notes are made when the context requires.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Note who or which is (i) an individual
who is a citizen or resident (as defined in section 7701(b) of the Code) of the
United States, (ii) a corporation or other entity created or organized under the
laws of the United States, or any political subdivision thereof, (iii) an estate
whose income is subject to United States federal income tax regardless of its
source or that is otherwise subject to United States federal income tax on a net
income basis in respect of the Notes, or (iv) a trust if a U.S. court is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust (each, a "U.S. Holder"). Certain U.S. federal income tax consequences
relevant to a holder other than a U.S. Holder are discussed separately below
under the heading "Non-U.S. Holders."
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<PAGE> 98
Stated Interest on the Notes. The Old Notes were not issued with any
original issue discount. Further, it is anticipated that the New Notes will not
be issued with original issue discount. Accordingly, the stated interest on the
Notes will be included in income by a U.S. Holder when it is paid or accrued in
accordance with such U.S. Holder's usual method of tax accounting.
Exchange Offer. The exchange of Old Notes for New Notes pursuant to the
Exchange Offer will not constitute an exchange for U.S. federal income tax
purposes. The holder will have a basis for the New Notes equal to the basis of
the Old Notes and the holder's holding period for the New Notes will include the
period during which the Old Notes were held. Accordingly, there will be no
United States federal income tax consequences to U.S. Holders of Old Notes as a
result of the Exchange Offer.
Market Discount. If a Note is acquired at a "market discount," some or all
of any gain realized upon a subsequent sale, other disposition, or full or
partial principal payment, of such Note may be treated as ordinary income, and
not capital gain, as described below. For this purpose, "market discount" is the
excess (if any) of the stated redemption price at maturity of a debt obligation
over the basis of such debt obligation immediately after its acquisition by the
taxpayer, subject to a statutory de minimis exception. Unless a U.S. Holder has
elected to include the market discount in income as it accrues, gain, if any,
realized on any subsequent disposition (other than in connection with certain
non-recognition transactions) or full or partial principal payment of such Note
will be treated as ordinary income to the extent of the accrued market discount
that has not previously been included in income.
The amount of market discount treated as having accrued will be determined
either (i) on a straight-line basis multiplying the market discount times a
fraction, the numerator of which is the number of days the Note was held by the
U.S. Holder and the denominator of which is the total number of days after the
date such U.S. Holder acquired the Note up to and including the date of its
maturity or (ii) if the U.S. Holder so elects, on a constant interest rate
method. A U.S. Holder may make the constant interest method election with
respect to any Note but, once made, such election is irrevocable.
A U.S. Holder of a Note acquired at a market discount may elect to include
market discount in income currently, through the use of the straight-line
inclusion method or the elective constant interest method in lieu of
recharacterizing gain upon disposition as ordinary income to the extent of
accrued market discount at the time of disposition. Once made, this election
will apply to all notes and other obligations acquired by the electing U.S.
Holder at a market discount during the taxable year for which the election is
made, and all subsequent taxable years, unless the IRS consents to a revocation
of the election. If an election is made to include market discount in income
currently, the basis of the Note in the hands of the U.S. Holder will be
increased by the market discount thereon as it is included in income.
Unless a U.S. Holder who acquires a Note at a market discount elects to
include market discount in income currently, such U.S. Holder may be required to
defer deductions for any interest paid on indebtedness incurred or continued to
purchase or carry such Note in an amount not exceeding the deferred income,
until such income is realized.
Bond Premium. If a U.S. Holder purchases a Note and immediately after the
purchase the adjusted basis of the Note exceeds the principal amount of the
Note, the Note will be treated as having been acquired with "bond premium." A
U.S. Holder may elect to amortize such bond premium over the remaining term of
such Note (or, if it results in a smaller amount of amortizable bond premium,
until an earlier call date).
If bond premium is amortized, the amount of interest that must be included
in the U.S. Holder's income for each period ending on an interest payment date
or at the stated maturity, as the case may be, will, except as Treasury
Regulations may otherwise provide, be reduced by the portion of premium
allocable to such period based on the Note's yield to maturity. If such an
election to amortize bond premium is not made, a U.S. Holder must include the
full amount of each interest payment in income in accordance with its regular
method of accounting and such holder will decrease the gain or increase the loss
otherwise recognized upon the sale or other disposition or full or partial
principal payment of the Note by the amount of the bond premium.
94
<PAGE> 99
An election to amortize bond premium will apply to amortizable bond premium
on all notes and other bonds, the interest on which is includible in the U.S.
Holder's gross income, held at the beginning of the U.S. Holder's first taxable
year to which the election applies or that are thereafter acquired, and may be
revoked only with the consent of the IRS. A U.S. Holder who elects to amortize
bond premium must reduce its adjusted basis in the Notes by the amount of such
allowable amortization.
Sale or Redemption. Unless a nonrecognition provision applies, the sale,
exchange, redemption or other disposition of Notes will be a taxable event for
U.S. federal income tax purposes. In such event, a U.S. Holder will recognize
gain or loss equal to the difference between the amount realized on the
disposition (other than amounts attributable to accrued interest not yet taken
into income). A U.S. Holder's tax basis in a Note generally will equal the cost
of the Note to the U.S. Holder, increased by any amounts includible in income as
market discount (if the holder elects to include market discount on a current
basis), and reduced by any amortized bond premium previously deducted from
income. U.S. Holders are advised to consult their tax advisors concerning the
new provisions on the taxation of capital gains. The deductibility of capital
losses is subject to limitations.
Backup Withholding and Information Reporting. Under the Code, U.S. Holders
of Notes may be subject, under certain circumstances, to information reporting
and "backup withholding" at a 31% rate with respect to cash payments in respect
of principal (and premium, if any), interest, and the gross proceeds from
dispositions thereof. Backup withholding applies only if the U.S. Holder (i)
fails to furnish its social security or other taxpayer identification number
("TIN") within a reasonable time after a request therefor, (ii) furnishes an
incorrect TIN, (iii) fails to report properly interest or dividends, or (iv)
fails, under certain circumstances, to provide a certified statement, signed
under penalty of perjury, that the TIN provided is its correct number and that
it is not subject to backup withholding. Any amount withheld from a payment to a
U.S. Holder under the backup withholding rules is allowable as a credit (and may
entitle such holder to a refund) against such U.S. Holder's U.S. federal income
tax liability, provided that the required information is furnished to the IRS.
Certain persons are exempt from backup withholding, including corporations and
financial institutions. U.S. Holders of Notes should consult their tax advisors
as to their qualification for exemption from backup withholding and the
procedure for obtaining such exemption.
The Company will furnish annually to the IRS and to record holders of the
Notes (to whom it is required to furnish such information) information relating
to the amount of interest paid with respect to the Note.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Note other than a U.S. Holder (A
"Non-U.S. Holder"). This discussion does not deal with all aspects of U.S.
federal income and estate taxation that may be relevant to the purchase,
ownership or disposition of the Notes by a Non-U.S. Holder in light of such
holder's particular circumstances, including holding the Notes through a
partnership. In addition, persons who hold the Notes through hybrid entities
(i.e., entities that are fiscally transparent for U.S. tax purposes but not for
foreign law purposes) may not be entitled to any applicable treaty benefits. For
example, persons who are partners in foreign partnerships or beneficiaries of
foreign trusts or estates and who are subject to U.S. federal income tax because
of their own status, such as U.S. residents or foreign persons engaged in a
trade or business in the United States, may be subject to U.S. federal income
tax even though the foreign partnership, trust or estate is not itself subject
to U.S. federal income tax on the disposition of its Note. For purposes of the
following discussion, interest and gain on the sale, exchange or other
disposition of the Note will be considered "U.S. trade or business income" if
such income or gain is (i) effectively connected with the conduct of a U.S.
trade or business or (ii) in the case of a resident of a country with which the
United States has an income tax treaty, attributable to a U.S. permanent
establishment (or to a fixed base) in the United States.
Stated Interest on the Notes. Generally, any interest paid to a Non-U.S.
Holder of a Note that is not U.S. trade or business income will not be subject
to U.S. federal income tax if the interest qualifies as "portfolio interest."
Interest on the Notes will qualify as portfolio interest if (i) the Non-U.S.
Holder (a) does not actually or constructively own 10% or more of the total
voting power of all voting interests of the Company,
95
<PAGE> 100
(b) is not a "controlled foreign corporation" with respect to which the Company
is a "related person" within the meaning of the Code, or (c) is not a bank
extending credit pursuant to a loan agreement entered into in the ordinary
course of its trade or business; and (ii) either (a) the beneficial owner, under
penalty of perjury, certifies that it is not a U.S. person and such certificate
provides the beneficial owner's name and address or (b) a securities clearing
organization or other financial institution that holds customers' securities in
the ordinary course of its trade or business, and holds the Notes in such
capacity, certifies to the Company (or its agent), under penalties of perjury,
that such certificate has been received from the beneficial owner of the Notes
by it and furnishes the Company (or its agent) with a copy thereof. The
foregoing certification may be provided by the Non-U.S. Holder on IRS Form W-8
(or any successor form).
The gross amount of interest paid to a Non-U.S. Holder that does not
qualify for the portfolio interest exception and that is not U.S. trade or
business income will be subject to U.S. withholding tax at the rate of 30%,
unless a U.S. income tax treaty reduces or eliminates withholding. U.S. trade or
business income is taxed on a net basis at regular U.S. federal income tax rates
rather than the 30% gross rate. To claim the benefit of a tax treaty or to claim
exemption from withholding because the income is U.S. trade or business income,
the Non-U.S. Holder must provide a properly executed Form 1001 or 4224 (or such
successor forms as the IRS designates), as applicable, prior to the payment of
interest. These forms must be periodically updated. Under new final regulations,
not currently in effect, the Forms 1001 and 4224 will be replaced by Form W-8.
Also, under these new final regulations, a Non-U.S. Holder who is claiming the
benefits of a tax treaty may be required to obtain a U.S. taxpayer
identification number and to provide certain documentary evidence issued by
foreign governmental authorities to prove residence in the foreign country.
Certain special procedures are provided in these new final regulations for
payments through qualified intermediaries. These new final regulations are
generally effective January 1, 2000.
NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
APPLICATION OF THE CERTIFICATION REQUIREMENTS IN THE NEW FINAL REGULATIONS.
Sale, Exchange or Redemption of Notes. Except as described below and
subject to the discussion of backup withholding, any gain realized by a Non-U.S.
Holder on the sale, exchange or redemption of a Note generally will not be
subject to a U.S. federal income tax, unless (i) the gain is U.S. trade or
business income, (ii) subject to certain exceptions, the Non-U.S. Holder is an
individual who holds the Note as a capital asset and is present in the United
States for 183 days or more during the taxable year of the disposition or (iii)
the Non-U.S. Holder is subject to rules applicable to certain former citizens
and residents of the United States. The exchange by a Non-U.S. Holder of Old
Notes for New Notes pursuant to the Exchange Offer will result in the same
federal income tax treatment as a U.S. Holder. See "-- U.S. Holders -- Exchange
Offer."
Federal Estate Tax. Notes held (or treated as held) by an individual who is
a Non-U.S. Holder at the time of his or her death will not be subject to U.S.
federal estate tax, provided the individual did not actually or constructively
own 10% or more of the total voting power of all voting interests of the Company
and provided income on the Notes was not U.S. trade or business income.
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and to each Non-U.S. Holder any interest that is subject to
U.S. withholding tax or that is exempt from withholding pursuant to a tax treaty
or the portfolio interest exception. Copies of these information returns also
may be made available under the provisions of a specific treaty or agreement to
the tax authorities of the country in which the Non-U.S. Holder resides. In the
case of interest paid to Non-U.S. Holders, information reporting and backup
withholding (at a rate of 31%) does not apply to such payments if the holder
makes the requisite certification or otherwise establishes an exemption
(provided that neither the payor nor its paying agent has actual knowledge that
the holder is not a Non-U.S. Holder or that the conditions of any other
exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of Notes to or through the
U.S. office of any broker, U.S. or foreign, are subject to information reporting
and possible backup withholding unless the owner certifies as to its non-U.S.
status under penalty of perjury or otherwise establishes an exemption, provided
that the broker does not have actual knowledge that the holder is not a Non-U.S.
Holder or that the conditions of any other exemption are not, in fact,
satisfied.
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<PAGE> 101
The payment of the proceeds from the disposition of a Note to or through a
non-U.S. office or a non-U.S. broker that is not a "U.S. related person" will
not be subject to information reporting or backup withholding (for this purpose,
a "U.S. related person" is a foreign person that has certain relationships with
the United States).
In the case of the payment of proceeds from the disposition of Notes to or
through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding does not apply to payments made through foreign offices of a broker
that is not a U.S. person or a U.S. related person(absent actual knowledge that
the payee is not a Non-U.S. Holder).
Any amounts withheld from a payment to a Non-U.S. Holder under the backup
withholding rules will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY
PROPOSED CHANGES IN APPLICABLE LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes pursuant to the Exchange Offer, where such Old Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 90 days after the
Registration Statement is declared effective, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until , 1998, all dealers
effecting transactions in the New Notes may be required to deliver a Prospectus.
The Company and the Guarantors will not receive any proceeds from any sale
of New Notes by broker-dealers. New Notes received by broker-dealers for their
own account pursuant to the Exchange Offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Registration Statement is declared
effective, the Company will promptly send additional copies of this Prospectus
and any amendment or supplement to this Prospectus to any broker-dealer that
requests such documents in the Letter of Transmittal or otherwise. The Company
has agreed to pay all expenses incident to the Exchange Offer (including the
expenses of one counsel for the holders of the
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<PAGE> 102
Notes) other than commissions or concessions of any broker-dealers and will
indemnify holders of the Old Notes (including any broker-dealers) against
certain liabilities, including certain liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby and certain tax matters in
connection with the Exchange Offer have been passed upon for the Company by
Weil, Gotshal & Manges LLP, Dallas, Texas.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1997 and the consolidated statements of operations and comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997, included in this Prospectus, have been included herein
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
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HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997
and September 30, 1998 (Unaudited)........................ F-3
Consolidated Statements of Operations and Comprehensive
Income for the years ended December 31, 1995, 1996 and
1997 and for the nine months ended September 30, 1997 and
1998 (Unaudited).......................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997 and
for the nine months ended September 30, 1998
(Unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and for the nine months
ended September 30, 1997 and 1998 (Unaudited)............. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 104
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, 1996 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, 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.
PricewaterhouseCoopers LLP
Dallas, Texas
February 20, 1998
F-2
<PAGE> 105
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997 AND AS OF SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................. $132,848 $104,262 $ 42,859
Marketable securities................................. 2,203 2,003 --
Accounts receivable, net.............................. 9,097 11,577 11,531
Inventories........................................... 23,134 30,531 42,137
Deferred income tax benefit........................... 2,375 3,031 2,371
Other current assets.................................. 408 440 504
-------- -------- ---------
Total current assets.......................... 170,065 151,844 99,402
Property, plant and equipment, net...................... 15,481 17,353 20,251
Investments............................................. 2,440 67,681 1,509
Debt issuance costs, net................................ -- -- 19,995
Other assets............................................ 7,788 7,312 7,726
-------- -------- ---------
Total assets.................................. $195,774 $244,190 $ 148,883
======== ======== =========
Current liabilities:
Accounts payable...................................... $ 7,473 $ 8,702 $ 15,740
Accrued seminars and incentive awards................. 11,349 12,398 11,342
Royalties payable..................................... 3,496 6,770 11,578
Hostess prepayments................................... 6,332 7,812 8,777
Income taxes payable.................................. 4,810 3,107 6,239
Prepaid sales orders.................................. -- -- 6,477
Dividends payable..................................... 12,680 5,733 --
Current maturities of long-term debt.................. -- -- 26,000
Other current liabilities............................. 8,183 9,058 22,105
-------- -------- ---------
Total current liabilities..................... 54,323 53,580 108,258
Long-term debt, net of current portion.................. -- -- 467,500
Deferred income tax liability........................... 224 679 157
-------- -------- ---------
Total liabilities............................. 54,547 54,259 575,915
-------- -------- ---------
Commitments and contingencies (see Note 15)
Shareholders' equity (deficit):
Common stock, par value $0.10 per share, 75,000,000
shares authorized, 58,704,900, 58,942,500 and
15,231,652 shares issued, respectively............. 5,870 5,894 1,523
Additional paid-in capital............................ -- 1,120 178,660
Retained earnings (accumulated deficit)............... 209,171 256,121 (607,093)
Less treasury stock 7,985,700 shares as of December
31, 1996 and 1997, at cost......................... (73,814) (73,814) --
Unrealized gains on investments and other............. -- 610 (122)
-------- -------- ---------
Total shareholders' equity (deficit).......... 141,227 189,931 (427,032)
-------- -------- ---------
Total liabilities and shareholders' equity
(deficit)................................... $195,774 $244,190 $ 148,883
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 106
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $482,950 $434,299 $468,845 $322,099 $347,205
Cost of goods sold..................... 261,806 225,137 239,664 166,262 170,658
-------- -------- -------- -------- --------
Gross profit........................... 221,144 209,162 229,181 155,837 176,547
Selling, general and administrative:
Selling.............................. 72,857 68,489 72,172 48,393 58,294
Freight, warehouse and
distribution...................... 41,041 37,167 41,284 28,660 31,146
General and administrative........... 25,398 22,246 26,319 18,712 18,391
Gains on the sale of assets.......... (14) (2,077) (198) (8) (6,349)
Recapitalization expenses............ -- -- -- -- 6,198
-------- -------- -------- -------- --------
Total selling, general and
administrative............. 139,282 125,825 139,577 95,757 107,680
-------- -------- -------- -------- --------
Operating income....................... 81,862 83,337 89,604 60,080 68,867
Other income (expense):
Interest income...................... 2,470 5,113 7,985 5,225 4,841
Interest expense..................... (2) (503) (362) (14) (15,913)
Other income, net.................... 529 456 2,884 466 1,027
-------- -------- -------- -------- --------
Other income (expense), net............ 2,997 5,066 10,507 5,677 (10,045)
-------- -------- -------- -------- --------
Income before income taxes............. 84,859 88,403 100,111 65,757 58,822
Income taxes........................... 35,315 33,957 37,919 25,332 23,346
-------- -------- -------- -------- --------
Net income............................. 49,544 54,446 62,192 40,425 35,476
Other comprehensive income (loss),
before tax:
Cumulative translation adjustment.... -- -- (88) (52) (34)
Unrealized gains (losses) on
investments....................... -- -- 1,074 2,351 (1,074)
-------- -------- -------- -------- --------
Other comprehensive income (loss),
before tax...................... -- -- 986 2,299 (1,108)
Income tax (expense) benefit related to
items of other comprehensive
income............................... -- -- (376) (886) 376
-------- -------- -------- -------- --------
Other comprehensive income (loss),
net of tax...................... -- -- 610 1,413 (732)
-------- -------- -------- -------- --------
Comprehensive income................... $ 49,544 $ 54,446 $ 62,802 $ 41,838 $ 34,744
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 107
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
RETAINED UNREALIZED
ADDITIONAL EARNINGS GAINS ON
COMMON COMMON PAID-IN (ACCUMULATED TREASURY INVESTMENTS
SHARES STOCK CAPITAL DEFICIT) STOCK AND OTHER TOTAL
----------- -------- ---------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.............. 391,366 $ 391 $ 1,025 $ 126,825 $(63,598) $(2,270) $ 62,373
Net income............................ 49,544 49,544
Purchase of 7,144 treasury shares..... (10,216) (10,216)
Payment received for Company Common
Stock held by the ESOP.............. 2,270 2,270
Appreciation in Company Common Stock
released to the ESOP................ 1,576 1,576
Dividends, $0.12 per share (see Note
4).................................. (6,086) (6,086)
Effect of 150-for-one stock split..... 58,313,534 5,479 (2,601) (2,878) --
----------- -------- -------- --------- -------- ------- ---------
Balance, December 31, 1995.............. 58,704,900 5,870 -- 167,405 (73,814) -- 99,461
Net income............................ 54,446 54,446
Dividends, $0.25 per share............ (12,680) (12,680)
----------- -------- -------- --------- -------- ------- ---------
Balance, December 31, 1996.............. 58,704,900 5,870 -- 209,171 (73,814) -- 141,227
Net income............................ 62,192 62,192
Issuance of Company Common Stock...... 237,600 24 1,120 1,144
Cumulative translation adjustment..... (88) (88)
Unrealized gains on investments....... 698 698
Dividends, $0.30 per share............ (15,242) (15,242)
----------- -------- -------- --------- -------- ------- ---------
Balance, December 31, 1997.............. 58,942,500 5,894 1,120 256,121 (73,814) 610 189,931
Net income (unaudited)................ 35,476 35,476
Recapitalization adjustments (see Note
3):
Issuance of Company Common Stock to
Hicks Muse (unaudited)............ 10,111,436 1,011 181,546 182,557
Purchase and retirement of Company
Common Stock (unaudited).......... (45,836,584) (4,584) (1,120) (821,853) (827,557)
Retirement of treasury stock
(unaudited)....................... (7,985,700) (798) (73,016) 73,814 --
Transaction fees and expenses
(unaudited)....................... (3,215) (3,215)
Cumulative translation adjustment
(unaudited)......................... (34) (34)
Unrealized losses on investments
(unaudited)......................... (698) (698)
Stock option expense (unaudited)...... 329 329
Dividends, $0.075 per share
(unaudited)......................... (3,821) (3,821)
----------- -------- -------- --------- -------- ------- ---------
Balance, September 30, 1998
(unaudited)........................... 15,231,652 $ 1,523 $178,660 $(607,093) $ -- $ (122) $(427,032)
=========== ======== ======== ========= ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 108
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ---------------------
1995 1996 1997 1997 1998
-------- -------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 49,544 $ 54,446 $ 62,192 $ 40,425 $ 35,476
-------- -------- --------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 4,096 3,350 2,613 1,825 2,368
Amortization of debt issuance costs and other............. -- -- 146 100 1,138
Provision for doubtful accounts........................... 656 461 753 660 589
Gains on the sale of assets............................... (14) (2,077) (198) (8) (6,349)
Stock option expense...................................... -- -- -- -- 329
Realized gains on investments............................. -- -- (1,859) -- (203)
Equity in earnings of affiliate........................... -- -- (180) -- --
Deferred tax expense (benefit)............................ (3) 367 (577) -- 138
Appreciation in common stock released to the ESOP......... 1,576 -- -- -- --
Provision for inventory obsolescence...................... 1,650 850 1,561 -- --
Changes in assets and liabilities:
Accounts receivable..................................... 3,907 (2,497) (1,754) (3,827) (2,677)
Inventories............................................. 5,945 2,385 (8,958) (13,039) (11,606)
Other current assets.................................... 188 (91) (32) (222) (63)
Other assets............................................ 18 (59) (491) (180) 11
Accounts payable........................................ (783) 767 1,229 2,434 7,038
Income taxes payable.................................... (873) 4,810 (989) (1,837) 3,132
Prepaid sales orders.................................... -- -- -- -- 6,477
Other accrued liabilities............................... (1,161) (5,205) 6,829 12,202 18,141
-------- -------- --------- --------- ---------
Total adjustments................................... 15,202 3,061 (1,907) (1,892) 18,463
-------- -------- --------- --------- ---------
Net cash provided by operating activities........... 64,746 57,507 60,285 38,533 53,939
-------- -------- --------- --------- ---------
Cash flows from investing activities:
Purchases of investments and other assets................. -- (2,392) (204,315) (143,822) (87,581)
Proceeds from the sale of investments..................... -- 1,000 142,388 79,077 154,568
Purchases of property, plant and equipment................ (1,408) (2,126) (4,617) (3,115) (6,227)
Issuance of notes receivable.............................. -- -- (2,520) (2,520) --
Payments received on notes receivable..................... -- -- 1,812 1,208 1,619
Proceeds from the sale of property, plant and equipment... 14 401 229 8 7,700
-------- -------- --------- --------- ---------
Net cash (used in) provided by investing
activities........................................ (1,394) (8,808) (67,023) (69,164) 70,079
-------- -------- --------- --------- ---------
Cash flows from financing activities:
Dividends paid............................................ (8,814) (6,086) (22,190) (19,020) (9,554)
Proceeds from issuance of Company Common Stock............ -- -- 430 -- 182,557
Cost of unearned Company Common Stock held by the ESOP.... 2,270 -- -- -- --
Purchase of treasury stock................................ (10,216) -- -- -- (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................. -- -- -- -- (6,500)
Debt issuance costs....................................... -- -- -- -- (21,118)
Other transaction fees and expenses....................... -- -- -- -- (3,215)
-------- -------- --------- --------- ---------
Net cash used in financing activities............... (16,760) (6,086) (21,760) (19,020) (185,387)
-------- -------- --------- --------- ---------
Effect of cumulative translation adjustment................. -- -- (88) (52) (34)
-------- -------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 46,592 42,613 (28,586) (49,703) (61,403)
Cash and cash equivalents at beginning of year.............. 43,643 90,235 132,848 132,848 104,262
-------- -------- --------- --------- ---------
Cash and cash equivalents at end of period.................. $ 90,235 $132,848 $ 104,262 $ 83,145 $ 42,859
======== ======== ========= ========= =========
Income taxes paid........................................... $ 40,921 $ 29,396 $ 38,723
======== ======== =========
Interest paid............................................... $ 2 $ -- $ 19
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 109
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND
Home Interiors & Gifts, Inc. and its wholly-owned subsidiaries (the
"Company") are in the business of direct sales of home decorative accessories
using the "party plan" method whereby members of its non-employee, independent
contractor direct sales force ("Displayers") conduct shows in the homes of
potential customers. The Company's home office is in Dallas, Texas; however,
Displayers conduct shows throughout the United States, in Mexico and in Puerto
Rico. Three of the Company's wholly-owned subsidiaries, Dallas Woodcraft, Inc.
("DWC"), Homco, Inc. ("Homco") and GIA, Inc. ("GIA" and collectively with DWC
and Homco, the "Manufacturing Companies") sell substantially all of their
products to the Company and are major suppliers of its direct sales business.
The Company expanded its operations internationally with its wholly-owned
subsidiaries Homco de Mexico in 1995 and Homco Puerto Rico ("PR") in 1996. These
subsidiaries provide sales support services to the international Displayers.
Another wholly-owned subsidiary, Spring Valley Scents, Inc., ("SVS") began
selling its products exclusively to the Company in 1998.
Prior to December 31, 1994, the Company owned several companies that were
unrelated to the 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 subsidiaries
except for the Manufacturing Companies (collectively referred to as the
"Spin-Off").
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may, in some instances, differ from previously
estimated amounts.
The consolidated financial information as of September 30, 1998 and for the
nine months ended September 30, 1997 and 1998 is unaudited. In the opinion of
management, the accompanying unaudited consolidated financial information and
related notes thereto contain all adjustments consisting only of normal,
recurring adjustments, necessary to present fairly the consolidated financial
information as of September 30, 1998 and the operating results and cash flows
for the nine months ended September 30, 1997 and 1998. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
Principles of Consolidation
These consolidated financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have been
eliminated. The Company's quarterly reporting periods consist of thirteen weeks.
The third quarters of 1997 and 1998 ended on September 27 and October 3,
respectively.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all
certificates of deposit, municipal bonds and short-term highly liquid debt
instruments, such as U.S. Treasury bills and notes with maturities of three
months or less when purchased, to be cash equivalents.
F-7
<PAGE> 110
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Marketable Securities
Short-term marketable securities, consisting of certificates of deposit
with original maturities in excess of three months, are stated at cost, which
approximates fair market value.
Inventories
Inventories are stated at lower of cost or market. Cost is determined by
the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost 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, repairs and minor renewals are expensed as incurred. When assets
are retired or otherwise disposed of, costs and related accumulated depreciation
are removed from the respective accounts and resulting gains or losses are
included in general and administrative expense.
Investments
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires certain debt and
equity securities to be adjusted to market value at the end of each accounting
period. Management determines the proper classification of investments in
obligations with fixed maturities and equity securities at the time of purchase
and reevaluates such designations quarterly. All investments are classified as
available for sale. Accordingly, these investments are stated at fair market
value, based on quoted market prices, with net unrealized gains and losses
reported as a separate component of shareholders' equity, net of tax. 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. Investments in 20% to 50% owned affiliates are
accounted for on the equity method.
Income Taxes
The Company files its federal income tax return on a consolidated basis.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements and tax returns. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to be settled or realized.
Sales Recognition
Sales are recognized when the Company's products are shipped.
Hostess Prepayments
As a sales incentive, the Company issues certificates to its Displayers in
exchange for cash. 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.
F-8
<PAGE> 111
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation
The accounts of the Company's foreign operations are translated into U.S.
dollars at the exchange rate in effect at the end of each period. Revenues and
expenses are translated at the weighted average exchange rate for each period.
Gains and losses resulting from translation are accumulated and reported as a
separate component of shareholders' equity.
Environmental Liabilities
The Company records liabilities related to environmental issues at such
time as information becomes available and is sufficient to support a reasonable
estimate or range of probable loss. If the Company is unable to determine that a
single amount in an estimated range of probable loss is more likely, the minimum
amount of the range is recorded.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." The new standard is effective for financial statements for fiscal
years beginning after December 15, 1997. 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 effects the new standards will have on its
financial statements.
Reclassifications
Certain reclassifications have been made to prior years' balances to
conform with current year presentation.
3. THE RECAPITALIZATION
On June 4, 1998, the Company financed a recapitalization (the
"Recapitalization") through the following simultaneous transactions: (i) HM/RB
Partners, L.P. and other affiliates of Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse") contributed $182,557,000 in cash to the equity of the Company in
exchange for 10,111,436 shares of the Company's common stock ("Company Common
Stock"); (ii) the Company borrowed $500,000,000 consisting of $200,000,000 of
senior subordinated notes (the "Notes") and $300,000,000 under a $340,000,000
senior credit facility (the "Senior Credit Facility"); and (iii) the Company
used the proceeds from the contribution of equity, the issuance of the Notes and
borrowings under the Senior Credit Facility, together with approximately
$169,333,000 of cash and cash equivalents held by the Company to pay
approximately $827,557,000 for the redemption of 45,836,584 shares of Company
Common Stock, and to pay fees and expenses of approximately $24,333,000
associated with the Recapitalization. These fees and expenses included an
$11,250,000 financial advisory fee paid to Hicks Muse for its role in obtaining
financing for the Recapitalization, legal and accounting fees of approximately
$1,474,000 and debt issuance costs of approximately $11,609,000 paid primarily
to the bank syndicate group for the Senior Credit Facility and the initial
purchasers of the Notes. The Hicks Muse financial advisory fee and the legal and
accounting fees have been allocated on a proportionate basis to the debt and
equity financing for the Recapitalization. Accordingly, approximately $9,509,000
of such fees have been recorded as debt issuance costs and the remaining
$3,215,000 has been charged to additional paid-in capital. The total debt
issuance costs of $21,118,000, are being amortized using the effective interest
method over the term of the related indebtedness.
In addition to the $24,333,000 of fees and expenses related to the
Recapitalization, the Company paid another financial advisor and attorneys
$6,198,000 in connection with the Recapitalization. The Company paid the
financial advisor approximately $5,704,000 to assist with the development of
strategic alternatives, identify
F-9
<PAGE> 112
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
potential buyers, evaluate proposals and assist in the negotiation of the Hicks
Muse offer. The financial advisory and legal fees were expensed as incurred and
are included in the Company's statement of operations for the nine months ended
September 30, 1998.
As a result of the Recapitalization, the issued and outstanding shares of
Company 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 "Committed Shareholders") entered into a Shareholders
Agreement (the "Shareholders Agreement") upon the consummation of the
Recapitalization, which provides that the Company's Board of Directors (the
"Board") shall consist of six directors designated by Hicks Muse, three
directors designated by the Committed Shareholders and two independent directors
mutually designated by the Committed Shareholders and Hicks Muse subject to
adjustment based upon the ownership of Company Common Stock by Hicks Muse and
the Committed Shareholders.
The Shareholders Agreement provides certain registration rights to Hicks
Muse and the Committed Shareholders, pursuant to which, in certain circumstances
and subject to certain restrictions, they may require the Company to register
their shares of Company Common Stock or include their shares of Company Common
Stock in any registration of securities proposed by the Company.
The Committed Shareholders also have the right to be included, on a
proportionate basis, in any proposed sale of Company 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 consummation of the Recapitalization.
4. STOCK SPLIT
Effective June 9, 1995, the Board declared a 150-for-one split of the
Company's common shares. In connection therewith, the Board increased the
Company's authorized capital from 10,000,000 shares of Company Common Stock,
with a par value of $1.00 per share, to 75,000,000 shares of Company Common
Stock, with a par value of $0.10 per share. All references in the consolidated
financial statements to numbers of shares outstanding, per share amounts and
ESOP data have been adjusted to reflect the split.
5. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Accounts receivable, trade.................................. $5,994 $ 6,122
Accounts receivable, other.................................. 1,402 2,296
Notes receivable, current................................... 1,919 3,398
------ -------
9,315 11,816
Allowance for doubtful accounts............................. (218) (239)
------ -------
$9,097 $11,577
====== =======
</TABLE>
F-10
<PAGE> 113
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORIES
Inventories consist of the following as of December 31, 1996 and 1997 and
September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials...................................... $ 5,230 $ 5,036 $ 5,796
Work in process.................................... 1,219 1,152 1,495
Finished goods..................................... 16,685 24,343 34,846
------- ------- -------
$23,134 $30,531 $42,137
======= ======= =======
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of December 31
(in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE 1996 1997
---------- -------- --------
<S> <C> <C> <C>
Land.............................................. $ 3,260 $ 3,260
Buildings and improvements........................ 5-40 years 18,634 18,952
Equipment, furniture and fixtures................. 3-10 years 31,180 33,195
-------- --------
53,074 55,407
Accumulated depreciation.......................... (37,593) (39,220)
-------- --------
15,481 16,187
Software and hardware implementation in process... 3-5 years -- 1,166
-------- --------
$ 15,481 $ 17,353
======== ========
</TABLE>
8. INVESTMENTS
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 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>
1996
Mutual funds and other.................... $ 2,440 $ -- $ -- $ 2,440
======= ====== ==== =======
1997
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>
F-11
<PAGE> 114
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of debt securities classified
as available for sale investments as of December 31, 1997 by contractual
maturity, are as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- -------
<S> <C> <C>
Due in one year............................................. $ -- $ --
Due after one year through five years....................... 43,388 44,048
Due after five years through ten years...................... 3,268 3,300
Due after ten years......................................... 12,820 13,147
------- -------
$59,476 $60,495
======= =======
</TABLE>
9. OTHER ASSETS
In connection with the Spin-Off in 1994, the Company contributed to CCP
approximately $9,969,000 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 a total of
$5,691,000, of which $4,287,000 is outstanding as of December 31, 1997.
On November 26, 1996, the Company sold one of its aircraft for $3,000,000.
In exchange for its aircraft, the Company received a note receivable for
$2,500,000 and another aircraft valued at $500,000. The transaction resulted in
a gain of $1,676,000.
10. PREPAID SALES ORDERS
Sales are recognized when products are shipped. The Company generally ships
products to Displayers on the same day orders are received. The Company received
an unusually high volume of orders during the final week of September in
connection with a significant discount program. The Company was unable to fill
and ship all orders received during the final week of September; however, all of
the unfilled orders were shipped by the following week. Payments received from
Displayers for the backlog of unfilled orders totaling approximately $6,477,000
have been reflected as prepaid sales orders as of September 30, 1998. The
Company believes that backlog is unusual in its business, and as a result, does
not expect to have any significant backlog in the near future.
11. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following as of December 31, 1996
and 1997 and September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Interest payable....................................... $ -- $ -- $ 7,973
Accrued compensation................................... 2,527 3,394 5,492
Employee retirement plan contribution.................. 1,961 2,159 1,943
Sales taxes payable.................................... 2,312 2,122 3,970
Other current liabilities.............................. 1,383 1,383 2,727
------ ------ -------
$8,183 $9,058 $22,105
====== ====== =======
</TABLE>
F-12
<PAGE> 115
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. LONG-TERM DEBT
In connection with the Recapitalization, the Company issued $200,000,000 of
Notes and entered into a $340,000,000 Senior Credit Facility, which includes a
$40,000,000 revolving credit facility (the "Revolving Loans"). The Revolving
Loans remained undrawn as of September 30, 1998. Prior to the Recapitalization,
the Company had no indebtedness.
Long-term debt consists of the following as of September 30, 1998
(unaudited) (in thousands):
<TABLE>
<S> <C>
Tranche A Loan @ 7 3/4% due 2004............................ $193,750
Tranche B Loan @ 8 1/4% due 2006............................ 99,750
Notes @ 10 1/8% due 2008.................................... 200,000
--------
493,500
Less current maturities..................................... (26,000)
--------
$467,500
========
</TABLE>
The Senior Credit Facility provides for (i) a $200,000,000 term loan (the
"Tranche A Loan"), (ii) a $100,000,000 term loan (the "Tranche B Loan"), and
(iii) $40,000,000 of Revolving Loans. The Company may use the Revolving Loans
for letters of credit of up to $15,000,000. A letter of credit of $1,300,000 was
issued and outstanding under the Revolving Loans as of September 30, 1998. The
Company may, at its option, prepay the term loans without premium or penalty.
Additionally, the Company may reduce or eliminate its revolving credit
commitment prior to its maturity on June 30, 2004. 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 (3 month rate of 5.31% and 6 month rate of
5.25% in each case as of September 30, 1998) plus an applicable margin or the
Base Rate Basis plus an applicable margin. 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 Base Rate Basis is
defined as the higher of the prime rate of NationsBank, N.A. (8.25% as of
September 30, 1998) or the federal funds effective rate (6.14% as of September
30, 1998) plus 0.5%. The applicable margin with respect to the loans will be
eligible for certain performance pricing step-downs.
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% as of September 30, 1998. The cost
of the commitment fee is included in interest expense.
The Notes bear interest at 10 1/8% per year, payable semi-annually in
arrears on June 1 and December 1 of each year, commencing on December 1, 1998,
and maturing on June 1, 2008. The Notes 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
Notes outstanding at a redemption price equal to 110.125% plus accrued and
unpaid interest. The Notes may be redeemed at any time on or after June 1, 2003,
in whole or in part by the Company.
The Company has filed a registration statement on Form S-4 in connection
with a pending exchange offer in which the Company would exchange new Notes for
the Company's currently outstanding Notes due 2008. The terms of the new Notes
are the same as the terms of the currently outstanding Notes.
F-13
<PAGE> 116
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Current maturities of long-term debt as of September 30, 1998 (unaudited)
are as follows (in thousands):
<TABLE>
<CAPTION>
TRANCHE A TRANCHE B
LOAN LOAN NOTES TOTAL
--------- --------- -------- --------
<S> <C> <C> <C> <C>
1998.......................................... $ 6,250 $ 250 $ -- $ 6,500
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
Thereafter.................................... 65,000 95,500 200,000 360,500
-------- ------- -------- --------
$193,750 $99,750 $200,000 $493,500
======== ======= ======== ========
</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, consolidations or amalgamations 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 will
be required to comply with specified financial ratios and tests, including
minimum interest coverage and maximum leverage ratios. Subject to these leverage
ratios, the Company will be required to make certain mandatory prepayments of
the term loans.
Interest Rate Swap Agreement
On July 1, 1998, the Company entered into an interest rate swap agreement
to limit the effect of increases in interest rates on the Senior Credit
Facility. The swap agreement provides the Company with a fixed interest rate
until December 31, 2001, on $75,000,000. Pursuant to the swap agreement and
subject to certain exceptions and limitations, the Company is guaranteed a fixed
3 month LIBOR rate of 5.50% until June 9, 1999.
13. INCOME TAXES
The components of income tax expense for the years ended December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $31,621 $30,354 $33,144
State............................................... 3,697 3,236 5,352
------- ------- -------
35,318 33,590 38,496
Deferred, net......................................... (3) 367 (577)
------- ------- -------
$35,315 $33,957 $37,919
======= ======= =======
</TABLE>
F-14
<PAGE> 117
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>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate applied to earnings before
income taxes........................................ $29,701 $30,941 $35,039
State income taxes, net of federal benefit............ 2,403 2,103 3,479
Other................................................. 3,211 913 (599)
------- ------- -------
$35,315 $33,957 $37,919
======= ======= =======
</TABLE>
The components of the net deferred tax balances as of December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Tax effect of temporary differences relating to:
Inventories............................................... $ 565 $ 799
Allowance for doubtful accounts........................... 76 83
Accrued employee benefits and displayer incentives........ 1,708 2,148
Other..................................................... 26 1
------ ------
Gross deferred tax assets.............................. 2,375 3,031
Investments............................................... -- (381)
Property, plant and equipment............................. (224) (298)
------ ------
Net deferred tax asset................................. 2,151 2,352
Less current deferred tax asset........................... 2,375 3,031
------ ------
Noncurrent deferred income tax liability............... $ 224 $ 679
====== ======
</TABLE>
14. BENEFIT PLANS
Employee Stock Ownership Plan.
In January 1993 the Company established an Employee Stock Ownership Plan
(the "ESOP") for all full-time employees of the Company who have at least one
year of service and are age 18 or older (see Note 3). The Company makes annual
contributions to the ESOP at the discretion of the Board. Cash contributions,
which are paid in the following year, totaled $1,904,000, $1,961,000 and
$2,159,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Shares owned by the ESOP attributable to employees of the Company totaled
2,106,556 and 2,386,741 as of December 31, 1996 and 1997, respectively.
The Company loaned the ESOP funds to purchase shares of the Company's stock
from an existing shareholder in 1993, and the loan was repaid in full during
1995. Loans to the ESOP and the related Home Interiors common stock shares
pledged as collateral are reported as a deduction from shareholders' equity in
the consolidated balance sheets in accordance with Statement of Position 93-6.
As shares are committed-to-be-released from collateral, the Company reports
contribution expense equal to the current estimated market value of the
committed-to-be-released shares, as determined by an independent appraiser, and
records any appreciation in market value over the original purchase price of the
shares as additional paid-in capital. Upon repayment of the loan in 1995, all
shares were released from collateral. The amount credited to additional paid-in
capital in 1995 related to the appreciation in the market price of the released
shares totaled approximately $1,576,000 and is included in total contribution
expense of $3,480,000 for the year ended December 31, 1995.
In connection with the Recapitalization, the ESOP was converted into a
401(k) plan.
F-15
<PAGE> 118
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation Plans
In connection with the Recapitalization, the Company adopted stock option
plans for key employees (the "Stock Option Plan") and for unit directors, branch
directors and certain other independent contractors (the "Independent Contractor
Stock Option Plan "). A trust (the "Stock Option Trust") will hold and under
certain circumstances may distribute stock options granted pursuant to the
Independent Contractor Stock Option Plan.
Options under both plans are to be issued at an exercise price equal to the
estimated fair market value of Company Common Stock on the date of grant. The
option exercise period is specified at the time an option is granted, though not
to exceed 10 years. 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 options exercisable under either plan as of
September 30, 1998.
Key assumptions utilized in the valuation of options issued under each plan are
summarized below:
<TABLE>
<CAPTION>
STOCK OPTION INDEPENDENT CONTRACTOR
PLAN STOCK OPTION PLAN
------------ ----------------------
<S> <C> <C>
Expected term........................................ 8 years 8 years
Expected dividend yield.............................. 0.00% 0.00%
Expected volatility.................................. -- 40.06%
Risk-free interest rate.............................. 5.63% 5.71%
</TABLE>
Stock Option Plan
Options for a total of 1,353,924 shares of Company Common Stock are
available for grant under the Stock Option Plan to key executives and key
employees. Options of 676,962 and 288,080 shares were granted under the plan in
June and July 1998, respectively. As the Company Common Stock is not publicly
traded, the fair value of options granted to executives and employees was
estimated on the date of grant using the Minimum Value method of option pricing
and the assumptions set forth above. The fair value approximated $6.50 per
option. The Company accounts for options issued under the Stock Option Plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25.
Accordingly, no compensation cost has been recognized for options issued under
the Stock Option Plan. Had compensation cost been determined in accordance with
the provisions of SFAS No. 123. "Accounting for Stock-Based Compensation,"
("SFAS No. 123") the Company's net income for the nine months ended September
30, 1998 would have been $35,314,000.
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. There were
233,788 and 14,681 options granted in June and July 1998, respectively. The fair
value of each stock option granted was estimated on the date of the grant using
the Black-Scholes method of option pricing based on the assumptions set forth
above. As the Company Common Stock is not publicly traded, a volatility factor
for a peer group of public companies was utilized in the Black-Scholes model.
The fair value approximated $10.00 per option. The Company accounts for options
issued under the Independent Contractor Stock Option Plan in accordance with the
provisions of SFAS No. 123. The Company recorded expense of $329,000 related to
options issued under the Independent Contractor Stock Option Plan during the
nine months ended September 30, 1998.
F-16
<PAGE> 119
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. 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,
it is management's opinion 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.
Worker's Compensation Requirement
The Company has designated a $1,300,000 certificate of deposit as a
guarantee on a letter of credit in meeting the requirements of the insurance
carrier covering the Company's worker's compensation insurance as of December
31, 1996 and 1997. These amounts are included in short-term marketable
securities in the consolidated balance sheets.
Chemical Recycling, Inc.
In 1989, DWC was named as a 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 1995, 1996 and 1997 or in the nine months
ended September 30, 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.
Materials Recovery Enterprises, Inc.
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 during the nine months ended September 30, 1998 and
has not established any accrual for such costs as no determination of the
cleanup costs for the site has been made.
Management Fees
In conjunction with the Recapitalization, the Company entered into an
agreement that requires that the Company to pay a minimum annual management fee
to Hicks Muse in an initial amount of $1,000,000, payable quarterly. The
management fee will be adjusted annually, but in no event will the fee be less
than $1,000,000 or exceed $1,500,000. Management fees incurred during the nine
months ended September 30, 1998 totaled $324,000. In addition, if the Board
requests Hicks Muse to perform additional financial advisory services in the
future, Hicks Muse will be entitled to receive a financial advisory fee.
F-17
<PAGE> 120
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The management agreements with Hicks Muse will terminate on June 4, 2008 or
earlier under certain circumstances.
Employment and Consulting Agreements
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, pursuant to which he will
be paid $200,000 for his consulting services. The agreement also contains a
three-year covenant not to compete.
16. 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 $546,000, $395,000 and $269,000 for legal services during 1995,
1996 and 1997, respectively. The Company paid the firm approximately $263,000
and $739,000 during the nine months ended September 30, 1997 and 1998,
respectively. Amounts due to the law firm totaled $285,000, $134,000 and
$197,000 as of December 31, 1996 and 1997 and September 30, 1998, respectively.
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 $50,756,000, $46,920,000
and $45,601,000 during 1995, 1996 and 1997, respectively. The Company paid the
supplier approximately $29,397,000 and $25,927,000 during the nine months ended
September 30, 1997 and 1998, respectively. Amounts due to this supplier totaled
$107,000, $2,327,000 and $496,000 as of December 31, 1996 and 1997 and September
30, 1998, respectively.
The Company owns 21% of the common stock of one of its suppliers whose
primary customer is the Company. The investment was purchased on December 31,
1996 from CCP for $1,281,000 and had a balance of $1,461,000 as of December 31,
1997 and September 30, 1998. The Company paid the supplier approximately
$13,253,000, $10,589,000 and $10,455,000 during 1995, 1996 and 1997,
respectively. The Company paid the supplier approximately $7,090,000 and
$7,336,000 during the nine months ended September 30, 1997 and 1998,
respectively. Amounts due to this supplier totaled $40,000, $0 and $283,000 as
of December 31, 1996 and 1997 and September 30, 1998, respectively.
In connection with the Recapitalization (see Note 3), CCP acted as a
consultant to the Company from July 1997 pursuant to a written consulting
agreement, which was cancellable upon 30 days notice, 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.
Additionally, the Dallas Mavericks, an NBA franchise that was controlled by CCP,
leased an athletic facility owned by the Company pursuant to which it paid
approximately $37,000 and $40,000 during 1995 and 1996, respectively. The
Company also purchased an airplane hangar in Addison, Texas from CCP on December
31, 1996 for approximately $565,000.
F-18
<PAGE> 121
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Spin-Off, the Company and CCP executed a Joint and
Mutual Release pursuant to which CCP agreed to indemnify the Company for CCP's
share of any deficiencies in consolidated federal income taxes when and to the
extent that CCP actually realizes a tax benefit as a result of the adjustment
giving rise to such deficiency. In 1995, the Company paid to CCP approximately
$900,000 in satisfaction of its obligations under a tax sharing agreement
between the Company and CCP related to periods prior to the Spin-Off.
The Company leased improved real estate from a former officer and director
of the Company for $52,000 per year plus reimbursement of expenses during 1995,
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 purchased the real estate
valued at $1,925,000 in exchange for two airplane hangers with a net book value
of $858,000 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 and the cash paid.
During 1995, 1996, 1997 and in the nine months ended September 30, 1998,
the Company leased a condominium from a related party for approximately $24,000
per year. The Company also paid a company controlled by former directors of the
Company $43,000, $139,000 and $96,000 during 1995, 1996 and 1997, respectively,
for its services as a common carrier. The Company paid this common carrier
$63,000 and $65,000 during the nine months ended September 30, 1997 and 1998,
respectively.
17. CONCENTRATION OF CREDIT RISK
The Company maintains cash and cash equivalents at financial institutions
in excess of federally insured limits.
18. ISSUANCE OF COMMON STOCK
In October 1997, a former employee of the Company purchased 237,600 shares
of Company Common Stock for approximately $430,000 pursuant to 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.
19. 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 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.
20. YEAR 2000 ISSUES
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 is in the process of implementing a new and significantly more
sophisticated Computer System, which will replace a significant portion of the
Company's existing infrastructure. Substantially all of the hardware and
software currently in use at the Company will be eliminated with the
implementation of the Computer System. 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 first quarter of 1999. The Company is also
assessing
F-19
<PAGE> 122
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
whether its material non-information technology systems, third party suppliers
and service providers, and the technology systems of its subsidiaries are year
2000 compliant. Any delay beyond 1999 in the implementation of the Computer
System, or any difficulties in the transition to or effectiveness of the
Computer System, could have a material adverse effect on the Company's business,
financial condition, results of operations and liquidity. In addition, while the
Company believes that remediation of its infrastructure and its subsidiaries
will be complete in all material respects by the end of the first quarter of
1999, 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.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
For the quarters ended:
1996
Net sales...................... $85,799 $104,221 $105,911 $138,368
Gross profit................... 42,221 51,472 50,416 65,053
Net income..................... 9,287 12,260 14,556 18,343
1997
Net sales...................... $85,784 $122,736 $113,579 $146,746
Gross profit................... 41,779 60,216 53,841 73,345
Net income..................... 9,634 17,575 13,216 21,767
</TABLE>
F-20
<PAGE> 123
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. GUARANTOR FINANCIAL DATA
DWC, GIA, Homco, SVS and PR (the "Guarantors") unconditionally, on a joint
and several basis, guarantee the Notes. The Company's other subsidiary, Homco de
Mexico, S.A. de C.V., has not guaranteed the Notes. Financial statements for the
nonguarantor subsidiary have been omitted because the assets, equity, income and
cash flows of the nonguarantor subsidiary 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
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $27,189 $22,734 $ --
Inventories............................................... 10,132 9,185 11,254
Intercompany receivable, net.............................. 1,130 1,377 17,195
Other current assets...................................... 463 553 529
------- ------- -------
Total current assets.............................. 38,914 33,849 28,978
Property, plant and equipment, net.......................... 7,406 7,600 8,525
Other assets................................................ 1,204 1,525 1,120
------- ------- -------
Total assets...................................... $47,524 $42,974 $38,623
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,086 $ 1,131 $ 2,020
Income taxes payable...................................... 902 1,448 3,383
Other current liabilities................................. 2,472 2,916 4,343
------- ------- -------
Total current liabilities......................... 4,460 5,495 9,746
Deferred income tax liability............................... 269 254 266
------- ------- -------
Total liabilities................................. 4,729 5,749 10,012
------- ------- -------
Commitments and contingencies
Shareholder's equity:
Common stock.............................................. 1,010 1,010 1,010
Additional paid-in capital 9,391 9,592 10,292
Retained earnings......................................... 32,394 26,623 17,309
------- ------- -------
Total shareholder's equity........................ 42,795 37,225 28,611
------- ------- -------
Total liabilities and shareholder's equity........ $47,524 $42,974 $38,623
======= ======= =======
</TABLE>
F-21
<PAGE> 124
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined Statements of Operations
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................................ $75,161 $66,741 $77,363 $58,792 $64,297
Cost of goods sold............................... 55,359 49,226 55,931 42,221 46,855
------- ------- ------- ------- -------
Gross profit..................................... 19,802 17,515 21,432 16,571 17,442
Selling, general and administrative.............. 4,542 4,000 4,038 2,940 3,164
------- ------- ------- ------- -------
Operating income................................. 15,260 13,515 17,394 13,631 14,278
Other income, net................................ 583 697 1,120 686 665
------- ------- ------- ------- -------
Income before income taxes....................... 15,843 14,212 18,514 14,317 14,943
Income taxes..................................... 6,029 5,329 6,686 5,463 5,585
------- ------- ------- ------- -------
Net income....................................... $ 9,814 $ 8,883 $11,828 $ 8,854 $ 9,358
======= ======= ======= ======= =======
</TABLE>
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1995 1996 1997 1997 1998
-------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 9,814 $ 8,883 $ 11,828 $ 8,854 $ 9,358
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 1,922 1,592 1,619 1,120 1,320
(Gains) losses on the sale of assets....... (12) (1) (190) (1) 58
Deferred tax expense (benefit)............. (63) 28 (135) -- (26)
Appreciation in common stock released to
ESOP.................................... 883 -- -- -- --
Changes in assets and liabilities:
Inventories............................. (1,064) 681 947 618 (2,069)
Intercompany receivable, net............ (693) 519 (245) (3,010) (15,441)
Other current and non-current assets.... (17) (38) (341) (284) 52
Income taxes payable.................... (330) (509) 545 (410) 1,935
Other current liabilities............... (177) 390 489 1,404 2,097
-------- ------- -------- -------- --------
Total adjustments.................. 449 2,662 2,689 (563) (12,074)
-------- ------- -------- -------- --------
Net cash provided by (used in)
operating activities............. 10,263 11,545 14,517 8,291 (2,716)
-------- ------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment,
net..................................... (1,201) (685) (1,573) (1,248) (2,048)
-------- ------- -------- -------- --------
Net cash used in investing
activities....................... (1,201) (685) (1,573) (1,248) (2,048)
-------- ------- -------- -------- --------
Cash flows from financing activities:
Dividends paid to parent................... (14,800) -- (17,600) (17,600) (18,670)
Capital contributions from parent.......... -- -- 201 -- 700
-------- ------- -------- -------- --------
Net cash used in financing
activities....................... (14,800) -- (17,399) (17,600) (17,970)
-------- ------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................ (5,738) 10,860 (4,455) (10,557) (22,734)
Cash and cash equivalents at beginning of
period..................................... 22,067 16,329 27,189 27,189 22,734
-------- ------- -------- -------- --------
Cash and cash equivalents at end of period... $ 16,329 $27,189 $ 22,734 $ 16,632 $ --
======== ======= ======== ======== ========
</TABLE>
F-22
<PAGE> 125
------------------------------------------------------------
------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
SECURITIES TO WHICH IT RELATES, OR ANY OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................... i
Prospectus Summary......................... 1
Risk Factors............................... 14
The Recapitalization....................... 24
Use of Proceeds............................ 25
Capitalization............................. 26
Selected Historical Consolidated Financial 27
Data.....................................
Unaudited Pro Forma Consolidated Financial 29
Data.....................................
Management's Discussion and Analysis of 34
Financial Condition and Results of
Operations...............................
Business................................... 43
Management................................. 50
Certain Relationships and Related 55
Transactions.............................
Securities Ownership of Certain Beneficial 58
Owners and Management....................
Description of Senior Credit Facility...... 59
The Exchange Offer......................... 61
Description of New Notes................... 68
Certain Federal Income Tax 93
Considerations...........................
Plan of Distribution....................... 97
Legal Matters.............................. 98
Experts.................................... 98
Index to Consolidated Financial F-1
Statements...............................
</TABLE>
------------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
OFFER TO EXCHANGE ALL OUTSTANDING
10 1/8% SENIOR SUBORDINATED
NOTES DUE 2008
FOR
10 1/8% SENIOR SUBORDINATED
NOTES DUE 2008
---------------------
PROSPECTUS
---------------------
, 1998
------------------------------------------------------------
------------------------------------------------------------
<PAGE> 126
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation and the Bylaws of the Company and Dallas
Woodcraft, Inc., a Texas corporation, Homco, Inc., a Texas corporation, and
Spring Valley Scents, Inc., a Texas corporation (collectively, the "Texas
Guarantors"), and GIA, Inc., a Nebraska corporation ("GIA"), and the Certificate
of Incorporation and Bylaws of Homco Puerto Rico, Inc., a Delaware corporation
("Homco PR"), provide for the indemnification of directors and officers to the
fullest extent permitted by the Texas Business Corporation Act ("TBCA"), the
Nebraska Business Corporation Act ("NBCA") and the General Corporation Law of
the State of Delaware ("DGCL"), respectively. Pursuant to the provisions of
Article 2.02-1 of the TBCA, the Company and the Texas Guarantors have the power
to indemnify a person who was, is, or is threatened to be named a defendant in a
proceeding because the person is or was a director only if it is determined that
the director conducted himself in good faith, reasonably believed that his
conduct was in the Company's or the Texas Guarantors' best interests (in the
case of conduct in his official capacity) or not opposed to the Company's or the
Texas Guarantors' best interests (in all other cases) and in the case of a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Officers may be indemnified to the same extent as directors pursuant
to certain sections of Article 2.02-1. The provisions of Sections 21-20,102 and
21-20,108 of the NBCA provide GIA the authority for substantially similar
indemnification of directors and officers as does the TBCA. Pursuant to the
provisions of Section 145 of the DGCL, Homco PR has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was a director, officer, employee, or agent of Homco PR
against any and all expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding. The power to indemnify only applies if such person acted in good
faith and in a manner he reasonably believed to be in the best interest, or not
opposed to the best interest, of Homco PR and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Indemnification is not available if such person has been adjudged to have
been liable to the Company, the Texas Guarantors, GIA or Homco PR, unless and
only to the extent that the court in which such action determines that, despite
the adjudication of liability, but in view of all of the circumstances, the
person is reasonably and fairly entitled to indemnification for such expenses as
the court shall deem proper. The Company, the Texas Guarantors, GIA and Homco PR
have the power to purchase and maintain insurance for directors and officers.
The statutes also expressly provide that the power to indemnify authorized
thereby is not exclusive of any rights granted under any bylaw, agreement, vote
of shareholders or disinterested directors, or otherwise.
The above discussion of the Articles of Incorporation and Bylaws of the
Company, the Texas Guarantors and GIA, the Certificate of Incorporation and
Bylaws of Homco PR, Article 2.02-1 of the TBCA, Sections 20-21,102 and 20-21,108
of the NBCA and Section 145 of the DGCL is not intended to be exhaustive and is
qualified in its entirety by reference thereto.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company,
the Texas Guarantors, GIA and Homco PR pursuant to the foregoing provisions, or
otherwise, the Company, the Texas Guarantors, GIA and Homco PR have been advised
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment of
expenses incurred or paid by a director, officer or controlling person thereof
in the successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, the Company, the Texas Guarantors, GIA and Homco PR will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-1
<PAGE> 127
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated April 13, 1998,
merging Crowley Investments, Inc. into the Company.*
2.2 -- Articles of Merger, dated June 4, 1998.*
3.1 -- Articles of Incorporation of the Company, as amended.*
3.2 -- Bylaws of the Company.*
3.3 -- Articles of Incorporation of Dallas Woodcraft, Inc.
(f/k/a Bo-Mar Manufacturing Co., Inc.)*
3.4 -- Bylaws of Dallas Woodcraft, Inc. (f/k/a Bo-Mar
Manufacturing Co., Inc.)*
3.5 -- Articles of Incorporation of Homco, Inc. (f/k/a Syroco of
Texas, Inc.)*
3.6 -- Bylaws of Homco, Inc. (f/k/a Syroco of Texas, Inc.)*
3.7 -- Articles of Incorporation of Spring Valley Scents, Inc.*
3.8 -- Bylaws of Spring Valley Scents, Inc.*
3.9 -- Articles of Incorporation of GIA, Inc.*
3.10 -- Bylaws of GIA, Inc.*
3.11 -- Certificate of Incorporation of Homco Puerto Rico, Inc.*
3.12 -- Bylaws of Homco Puerto Rico, Inc.*
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, as trustee.*
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.*
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.*
5.1 -- Opinion of Weil, Gotshal & Manges LLP as to the validity
of the securities registered hereby.+
8.1 -- Opinion of Weil, Gotshal & Manges LLP regarding certain
tax matters.+
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.*
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.*
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.*
10.4 -- Consulting Agreement, dated June 4, 1998, between Company
and Ronald L. Carter.*
</TABLE>
II-2
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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.*
10.7 -- Executive Employment Agreement, dated June 4, 1998,
between Company and Donald J. Carter Jr.*
10.8 -- Executive Employment Agreement, dated June 4, 1998,
between Company and Barbara J. Hammond.*
10.9 -- Executive Employment Agreement, dated June 4, 1998,
between Company and Christina L. Carter Urschel.*
10.10 -- Home Interiors & Gifts, Inc., 1998 Stock Option Plan for
Unit Directors, Branch Directors and Certain Other
Independent Contractors.*
10.11 -- Home Interiors & Gifts, Inc. 1998 Stock Option Trust,
dated June 4, 1998.*
10.12 -- Agreement, dated February 26, 1997, by and between the
Company and Distribution Architects International, Inc.*
10.13 -- ISDA Master Agreement, dated as of June 25, 1998, by and
between NationsBank, N.A. and the Company.*
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.*
12.1 -- Computation of Ratio of Earnings to Fixed Charges.+
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinions filed as Exhibit 5.1 and Exhibit 8.1 to the
Registration Statement).+
23.2 -- Consent of PricewaterhouseCoopers LLP, independent
auditors.+
24.1 -- Powers of Attorney of directors and executive officers of
the Co-Registrants.*
25.1 -- Statement of Eligibility and Qualification of the United
States Trust Company of New York, as trustee, under the
Indenture listed as Exhibit 4.1 hereto on Form T-1.*
27.1 -- Financial Data Schedule for the Nine Months Ended
September 30, 1998.+
27.2 -- Financial Data Schedule for the Year Ended December 31,
1997.*
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
99.3 -- Form of Exchange Agent Agreement.*
</TABLE>
- ---------------
* Previously filed.
+ Filed herewith.
(b) Financial Statement Schedules:
All schedules have been omitted since the required information is
either not present or not in amounts sufficient to require submission of
the schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
II-3
<PAGE> 129
ITEM 22. UNDERTAKINGS.
(a) The undersigned Co-Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) The undersigned Co-Registrants hereby undertake to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(5) The undersigned Co-Registrants hereby undertake to supply by means
of a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
II-4
<PAGE> 130
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Co-Registrant certifies that it has reasonable grounds to believe that it meets
all requirements for filing on Form S-4 and has duly caused this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on November
13, 1998.
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 Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD J. CARTER, JR. Director, Chairman of the November 13, 1998
- --------------------------------------------------- Board and Chief Executive
Donald J. Carter, Jr. Officer (principal
executive officer of the
Company)
* Chief Financial Officer November 13, 1998
- --------------------------------------------------- (principal financial and
Leonard A. Robertson accounting officer of the
Company)
* Director and President November 13, 1998
- ---------------------------------------------------
Barbara J. Hammond
* Director and Executive Vice November 13, 1998
- --------------------------------------------------- President
Christina L. Carter Urschel
* Director November 13, 1998
- ---------------------------------------------------
Thomas O. Hicks
* Director November 13, 1998
- ---------------------------------------------------
Jack D. Furst
* Director November 13, 1998
- ---------------------------------------------------
Lawrence D. Stuart, Jr.
* Director November 13, 1998
- ---------------------------------------------------
Daniel S. Dross
* Director November 13, 1998
- ---------------------------------------------------
Sheldon I. Stein
* By: /s/ DONALD J. CARTER, JR.
--------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>
II-5
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Co-Registrant certifies that it has reasonable grounds to believe that it meets
all requirements for filing on Form S-4 and has duly caused this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on November
13, 1998.
HOMCO, INC.
By: /s/ DONALD J. CARTER, JR.
----------------------------------
Donald J. Carter, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD J. CARTER, JR. Sole Director and President November 13, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)
* Secretary (principal November 13, 1998
- --------------------------------------------------- financial and accounting
Leonard A. Robertson officer)
*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>
II-6
<PAGE> 132
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Co-Registrant certifies that it has reasonable grounds to believe that it meets
all requirements for filing on Form S-4 and has duly caused this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on November
13, 1998.
DALLAS WOODCRAFT, INC.
By: /s/ DONALD J. CARTER, JR.
----------------------------------
Donald J. Carter, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD J. CARTER, JR. Sole Director and President November 13, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)
* Secretary (principal November 13, 1998
- --------------------------------------------------- financial and accounting
Leonard A. Robertson officer)
*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in fact
</TABLE>
II-7
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Co-Registrant certifies that it has reasonable grounds to believe that it meets
all requirements for filing on Form S-4 and has duly caused this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on November
13, 1998.
SPRING VALLEY SCENTS, INC.
By: /s/ DONALD J. CARTER, JR.
----------------------------------
Donald J. Carter, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD J. CARTER, JR. Sole Director and President November 13, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)
* Secretary (principal November 13, 1998
- --------------------------------------------------- financial and accounting
Leonard A. Robertson officer)
*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>
II-8
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Co-Registrant certifies that it has reasonable grounds to believe that it meets
all requirements for filing on Form S-4 and has duly caused this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on November
13, 1998.
GIA, INC.
By: /s/ DONALD J. CARTER, JR.
----------------------------------
Donald J. Carter, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD J. CARTER, JR. Sole Director and President November 13, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)
* Secretary (principal November 13, 1998
- --------------------------------------------------- financial and accounting
Leonard A. Robertson officer)
*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>
II-9
<PAGE> 135
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Co-Registrant certifies that it has reasonable grounds to believe that it meets
all requirements for filing on Form S-4 and has duly caused this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on November
13, 1998.
HOMCO PUERTO RICO, INC.
By: /s/ DONALD J. CARTER, JR.
----------------------------------
Donald J. Carter, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD J. CARTER, JR. Sole Director, and President November 13, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)
* Secretary (principal November 13, 1998
- --------------------------------------------------- financial and accounting
Leonard A. Robertson officer)
*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>
II-10
<PAGE> 136
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated April 13, 1998,
merging Crowley Investments, Inc. into the Company.*
2.2 -- Articles of Merger, dated June 4, 1998.*
3.1 -- Articles of Incorporation of the Company, as amended.*
3.2 -- Bylaws of the Company.*
3.3 -- Articles of Incorporation of Dallas Woodcraft, Inc.
(f/k/a Bo-Mar Manufacturing Co., Inc.)*
3.4 -- Bylaws of Dallas Woodcraft, Inc. (f/k/a Bo-Mar
Manufacturing Co., Inc.)*
3.5 -- Articles of Incorporation of Homco, Inc. (f/k/a Syroco of
Texas, Inc.)*
3.6 -- Bylaws of Homco, Inc. (f/k/a Syroco of Texas, Inc.)*
3.7 -- Articles of Incorporation of Spring Valley Scents, Inc.*
3.8 -- Bylaws of Spring Valley Scents, Inc.*
3.9 -- Articles of Incorporation of GIA, Inc.*
3.10 -- Bylaws of GIA, Inc.*
3.11 -- Certificate of Incorporation of Homco Puerto Rico, Inc.*
3.12 -- Bylaws of Homco Puerto Rico, Inc.*
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, as trustee.*
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.*
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.*
5.1 -- Opinion of Weil, Gotshal & Manges LLP as to the validity
of the securities registered hereby.+
8.1 -- Opinion of Weil, Gotshal & Manges LLP as to certain tax
matters.+
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
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.*
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.*
10.4 -- Consulting Agreement, dated June 4, 1998, between Company
and Ronald L. Carter.*
10.5 -- Home Interiors & Gifts, Inc. 1998 Stock Option Plan for
Key Employees, dated June 4, 1998.*
</TABLE>
<PAGE> 137
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.6 -- Executive Employment Agreement, dated June 4, 1998,
between Company and Donald J. Carter.*
10.7 -- Executive Employment Agreement, dated June 4, 1998,
between Company and Donald J. Carter Jr.*
10.8 -- Executive Employment Agreement, dated June 4, 1998,
between Company and Barbara J. Hammond.*
10.9 -- Executive Employment Agreement, dated June 4, 1998,
between Company and Christina L. Carter Urschel.*
10.10 -- Home Interiors & Gifts, Inc., 1998 Stock Option Plan for
Unit Directors, Branch Directors and Certain Other
Independent Contractors.*
10.11 -- Home Interiors & Gifts, Inc. 1998 Stock Option Trust,
dated June 4, 1998.*
10.12 -- Agreement, dated February 26, 1997, by and between the
Company and Distribution Architects International, Inc.*
10.13 -- ISDA Master Agreement, dated as of June 25, 1998, by and
between NationsBank, N.A. and the Company.*
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.*
12.1 -- Computation of Ratio of Earnings to Fixed Charges.+
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinions to be filed as Exhibit 5.1 and Exhibit 8.1 to
the Registration Statement).+
23.2 -- Consent of PricewaterhouseCoopers LLP, independent
auditors.+
24.1 -- Powers of Attorney of directors and executive officers of
the Co-Registrants.*
25.1 -- Statement of Eligibility and Qualification of the United
States Trust Company of New York, as trustee, under the
Indenture listed as Exhibit 4.1 hereto on Form T-1.*
27.1 -- Financial Data Schedule for the Nine Months Ended
September 30, 1998.+
27.2 -- Financial Data Schedule for the Year Ended December 31,
1997.*
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
99.3 -- Form of Exchange Agent Agreement.*
</TABLE>
- ---------------
* Previously filed.
+ Filed herewith.
<PAGE> 1
EXHIBIT 5.1
November 12, 1998
Home Interiors & Gifts, Inc.
Dallas Woodcraft, Inc.
GIA, Inc.
Homco, Inc.
Homco Puerto Rico, Inc.
Spring Valley Scents, Inc.
4550 Spring Valley Road
Dallas, Texas 75244-3705
Ladies and Gentlemen:
We have acted as counsel to Home Interiors & Gifts, Inc., a Texas
corporation (the "Company"), in connection with the preparation and filing by
the Company and by Dallas Woodcraft, Inc., a Texas corporation, GIA, Inc., a
Nebraska corporation ("GIA"), Homco, Inc., a Texas corporation, Homco Puerto
Rico, Inc., a Delaware corporation and Spring Valley Scents, Inc., a Texas
corporation (collectively, the "Subsidiary Guarantors"), of a Registration
Statement on Form S-4 (Registration No. 333-62021) (the "Registration
Statement"), filed with the Securities and Exchange Commission on August 21,
1998 under the Securities Act of 1933, as amended, relating to $200,000,000
aggregate principal amount of 10 1/8% Senior Subordinated Notes due 2008 (the
"New Notes") of the Company and the related guarantees thereof by the Subsidiary
Guarantors (the "Guarantees"). The Company and the Subsidiary Guarantors propose
to offer (the "Exchange Offer"), upon the terms set forth in the Prospectus
contained in the Registration Statement, to exchange $1,000 principal amount of
New Notes and the related Guarantees for each $1,000 principal amount of issued
and outstanding 10 1/8% Senior Subordinated Notes due 2008 of the Company (the
"Old Notes") and the related guarantees thereof by the Subsidiary Guarantors.
The New Notes and the related Guarantees will be issued under the Indenture,
dated June 4, 1998, by and among the Company, the Subsidiary Guarantors and
United States Trust Company of New York (the "Trustee") (as amended or
supplemented to the date hereof, the "Indenture").
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Indenture, the form of New
Notes set forth in the Indenture and such corporate records, agreements,
documents and other instruments, and such certificates or comparable documents
of public officers and of officers and representatives of the Company and the
Subsidiary Guarantors (such companies herein referred to collectively as the
"Home Interiors Companies"), and have made such
<PAGE> 2
Home Interiors & Gifts, Inc.
November 12, 1998
Page 2
inquiries of such officers and representatives as we have deemed relevant and
necessary as a basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as originals, the conformity to original documents of
the authenticity of the originals of such latter documents. As to all
questions of fact material to this opinion that have not been independently
established, we have relied upon certificates or comparable documents of
officers and representatives of the Home Interiors Companies.
Based on the foregoing, and subject to the qualifications stated herein,
we are of the opinion that:
1. Assuming that the Indenture has been duly authorized, executed and
delivered by the Trustee, when (i) the New Notes issuable upon consummation of
the Exchange Offer have been duly executed by the Company and authenticated by
the Trustee in accordance with the terms of the Indenture and (ii) the New
Notes issuable upon consummation of the Exchange Offer have been duly delivered
against receipt of Old Notes surrendered in exchange therefor, the New Notes
issuable upon consummation of the Exchange Offer will constitute the legal,
valid and binding obligations of the Company, enforceable against it in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial
reasonableness, good faith and fair dealing (regardless of whether enforcement
is sought in a proceeding at law or in equity).
2. Assuming that the Indenture has been duly authorized, executed and
delivered by the Trustee, when (i) the New Notes issuable upon consummation of
the Exchange Offer have been duly executed by the Company and authenticated by
the Trustee in accordance with the terms of the Indenture and (ii) the New
Notes issuable upon consummation of the Exchange Offer have been duly delivered
against receipt of Old Notes surrendered in exchange therefor, the Guarantees
issuable upon consummation of the Exchange Offer will constitute the legal,
valid and binding obligations of the Subsidiary Guarantors, enforceable against
them in accordance with their terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
The opinions expressed herein are limited to the laws of the State of New
York, the corporate laws of the State of Delaware and the State of Texas and
the federal laws of
2
<PAGE> 3
Home Interiors & Gifts, Inc.
November 12, 1998
Page 3
the United States, and we express no opinion as to the effect on the matters
covered by this letter of the laws of any other jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ Weil, Gotshal & Manges LLP
3
<PAGE> 1
EXHIBIT 8.1
[Weil, Gotshal & Manges LLP Letterhead]
November 13, 1998
Home Interiors & Gifts, Inc.
4550 Spring Valley Road
Dallas, Texas 75244-3705
Ladies and Gentlemen:
We have acted as counsel to Home Interiors & Gifts, Inc., a Texas
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission of the Company's Registration Statement
(Registration No. 333-62021) on Form S-4 originally filed on August 21, 1998, as
amended to the date hereof (together with the exhibits thereto, the
"Registration Statement"), relating to the registration by the Company of its
10 1/8% Senior Subordinated Senior Notes due 2008.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Registration Statement,
including the Prospectus which is a part thereof (the "Prospectus"), and such
corporate records, agreements, documents and other instruments (the
aforementioned documents together, the "Documents"), and have made such
inquiries of such officers and representatives, as we have deemed relevant and
necessary as a basis for the opinion hereinafter set forth. In such examination,
we have assumed the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies, the authenticity of the originals of such
latter documents, the genuineness of all signatures, and the correctness of all
representations made therein. (The terms of the Documents are incorporated
herein by reference.) We have further assumed that the final executed Documents
will be substantially the same as those which we have reviewed and that there
are no agreements or understandings between or among the parties to the
Documents with respect to the transactions contemplated therein other than those
contained in the Documents.
<PAGE> 2
November 13, 1998
Page 2
Based on the foregoing and, subject to the next succeeding paragraph
and to the extent relating to legal conclusions and matters of law, the
discussion appearing under the caption "Certain Federal Income Tax
Considerations" in the Registration Statement is the opinion of Weil, Gotshal &
Manges LLP as to the material United States federal income tax consequences of
the Exchange Offer.
The foregoing opinion is based on current provisions of the Internal
Revenue Code of 1986, as amended, the Treasury Regulations promulgated
thereunder, published pronouncements of the Internal Revenue Service, and case
law, any of which may be changed at the time with retroactive effect. No opinion
is expressed on any matters other than those specifically covered by the
foregoing opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference in this firm under the caption "Legal
Matters" and "Certain Federal Income Tax Considerations" in the Prospectus
forming part of the Registration Statement.
Very truly yours,
/s/ WEIL, GOTSHAL & MANGES LLP
2
<PAGE> 1
EXHIBIT 12.1
HOME INTERIORS & GIFTS, INC.
Ratio of Earnings to Fixed Charges
Actual for all periods presented
(Dollars in thousands)
<TABLE>
<CAPTION> Year ended December 31, Nine months ended September 30,
----------------------- -------------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income
taxes 104,891 113,710 84,859 88,403 100,111 65,757 58,822
Less undistributed
equity in earnings -- -- -- -- (180) -- --
of an affiliate
Plus fixed charges 287 92 2 503 362 14 15,913
------- ------- ------ ------ ------- ------ ------
Total 105,178 113,802 84,861 88,906 100,293 65,771 74,735
======= ======= ====== ====== ======= ====== ======
Fixed charges (interest
expense) 287 92 2 503 362 14 15,913
======= ======= ======= ======= ======= ======= =======
Ratio of earnings
to fixed charges N/A N/A N/A N/A N/A N/A 4.7x
======= ======= ======= ======= ======= ======= =======
</TABLE>
Note: The ratio of earnings to fixed charges has been omitted for the years
ended December 31, 1993 through 1997 and the nine months ended September
30, 1997 because fixed charges were de minimis during these periods.
Ratio of Earnings to Fixed Charges
Pro forma for all periods presented
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended Nine months Latest twelve
December 31, ended months ended
1997 September 30, September 30, 1998
------------- ------------- ------------------
1997 1998
---- ----
<S> <C> <C> <C> <C>
Income before income
taxes 45,227 25,145 35,930 56,012
Less undistributed equity
in earnings of an
affiliate (180) -- -- (180)
Plus fixed charges 47,261 35,401 33,964 45,824
------ ------ ------ -------
Total 92,308 60,546 69,894 101,656
====== ====== ====== =======
Fixed charges (interest
expense) 47,261 35,401 33,964 45,824
====== ====== ====== =======
Ratio of earnings to fixed
charges 2.0x 1.7x 2.1x 2.2x
===== ===== ==== =======
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form S-4 (File
No. 333-62021) of our report dated February 20, 1998, on our audits of the
consolidated financial statements of Home Interiors & Gifts, Inc. and
Subsidiaries. We also consent to the references to our firm under the captions
"Summary Historical Consolidated Financial Data", "Selected Historical
Consolidated Financial Data" and "Experts."
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001067541
<NAME> Home Interiors & Gifts, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 42,859
<SECURITIES> 0
<RECEIVABLES> 11,882
<ALLOWANCES> 351
<INVENTORY> 42,137
<CURRENT-ASSETS> 99,402
<PP&E> 56,630
<DEPRECIATION> 36,379
<TOTAL-ASSETS> 148,883
<CURRENT-LIABILITIES> 108,258
<BONDS> 0
0
0
<COMMON> 1,523
<OTHER-SE> (425,509)
<TOTAL-LIABILITY-AND-EQUITY> 148,883
<SALES> 347,205
<TOTAL-REVENUES> 347,205
<CGS> 170,658
<TOTAL-COSTS> 278,338
<OTHER-EXPENSES> (5,868)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,913
<INCOME-PRETAX> 58,822
<INCOME-TAX> 23,346
<INCOME-CONTINUING> 35,476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,476
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
