GIA INC, S-4/A, 1998-10-21

GIA INC
S-4/A, 1998-10-21

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1998

REGISTRATION NO. 333-62021

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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------

AMENDMENT NO. 1

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. [ ]
- ---------

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. [ ]
- ---------

------------------------------

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 OCTOBER 21, 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.
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 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

(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)

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
51,500 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 June 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 June 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, 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. Approximately $11.6 million
consisting of the underwriting discount to the Initial Purchasers and
certain other fees and expenses is included in debt issuance costs as of
June 30, 1998, and will be amortized over the term of the related debt. The
other fees and expenses of $12.7 million consist of a financial advisory
fee of approximately $11.2 million paid to Hicks Muse and other legal and
accounting costs of approximately $1.5 million. The $12.7 million of fees
and expenses have been treated as a treasury stock transaction cost, and
accordingly upon retirement of all treasury stock, existing additional
paid-in capital of $1.1 million was eliminated and the remaining costs of
$11.6 million were charged to retained earnings. 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 six months ended June 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 sold by the Company on May 28,
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 November 24, 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. 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 six months ended June 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 six-month periods ended June
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
six-months ended June 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 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 $208,520 $ 236,073
Cost of goods sold.............................. 258,137 262,623 261,806 225,137 239,664 106,524 116,087
-------- -------- -------- -------- -------- -------- ---------
Gross profit.................................... 232,840 252,718 221,144 209,162 229,181 101,996 119,986
Selling, general and administrative:
Selling....................................... 71,815 73,276 72,857 68,489 72,172 30,943 40,456
Freight, warehouse and distribution........... 44,020 43,116 41,041 37,167 41,284 18,672 20,916
General and administrative.................... 18,518 28,841 25,398 22,246 26,319 11,569 11,999
(Gains) losses on the sale of assets.......... (919) 209 (14) (2,077) (198) -- (5,179)
Recapitalization expenses(1).................. -- -- -- -- -- -- 6,198
-------- -------- -------- -------- -------- -------- ---------
Total selling, general and administrative... 133,434 145,442 139,282 125,825 139,577 61,184 74,390
-------- -------- -------- -------- -------- -------- ---------
Operating income................................ 99,406 107,276 81,862 83,337 89,604 40,812 45,596
Other income, net............................... 5,485 6,434 2,997 5,066 10,507 3,770 1,163
-------- -------- -------- -------- -------- -------- ---------
Income before income taxes...................... 104,891 113,710 84,859 88,403 100,111 44,582 46,759
Income taxes.................................... 38,313 42,737 35,315 33,957 37,919 17,373 18,570
-------- -------- -------- -------- -------- -------- ---------
Income from continuing operations before
cumulative effect of accounting change........ $ 66,578 $ 70,973 $ 49,544 $ 54,446 $ 62,192 $ 27,209 $ 28,189
======== ======== ======== ======== ======== ======== =========
Net income(2)................................... $ 68,889 $ 70,522 $ 49,544 $ 54,446 $ 62,192 $ 27,209 $ 28,189
======== ======== ======== ======== ======== ======== =========
OTHER FINANCIAL DATA:
Gross profit percentage......................... 47.4% 49.0% 45.8% 48.2% 48.9% 48.9% 50.8%
EBITDA(3)....................................... $104,046 $112,171 $ 85,944 $ 84,610 $ 92,019 $ 41,981 $ 48,112
EBITDA margin(4)................................ 21.2% 21.8% 17.8% 19.5% 19.6% 20.1% 20.4%
Cash flows provided by (used in):
Operating activities.......................... $ 77,027 $ 66,850 $ 64,746 $ 57,507 $ 60,285 $ 12,929 $ 31,230
Investing activities.......................... (64,148) (152,376) (1,394) (8,808) (67,023) (66,604) 67,367
Financing activities.......................... (47,234) (11,242) (16,760) (6,086) (21,760) (15,850) (178,887)
Depreciation and amortization................... 5,559 4,686 4,096 3,350 2,613 1,169 1,497
Capital expenditures(5)......................... 26,751 3,135 1,408 2,126 4,617 1,036 4,778
Ratio of earnings to fixed charges(6)........... -- -- -- -- -- -- 14.4x
DOMESTIC DISPLAYER DATA:
Number of orders................................ 716,081 754,439 782,996 710,008 732,202 341,938 376,095
Average order size(7)........................... $ 686 $ 683 $ 617 $ 610 $ 635 $ 607 $ 620
Number of Displayers at end of period(8)........ 37,500 38,300 45,200 37,800 44,200 43,700 50,200
Average number of Displayers during period(8)... 33,800 38,300 41,200 39,900 42,400 39,700 47,500
</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 that resulted from the
Company's adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," and the effects of discontinued operations.
Net income differs from income from continuing operations before cumulative
effect of accounting change for the year ended December 31, 1994 due to the
effects of discontinued operations.

(3) EBITDA represents operating income plus depreciation and amortization and
Recapitalization expenses, 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 six months ended June 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 deferred financing 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 $1,098,000 and $2,907,000 for the six months ended June 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 to encourage inactive Displayers
to reinitiate their sales activities. At December 31, 1997 and June 30,
1998, the Company had included in the Displayer count approximately 1,400
and 5,100 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 six
months ended June 30, 1997 and 1998. The historical consolidated financial data
as of June 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>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1997 1997 1998
------------ -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT DISPLAYER DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $468,845 $208,520 $236,073
Cost of goods sold.......................................... 239,664 106,524 116,087
-------- -------- --------
Gross profit................................................ 229,181 101,996 119,986
Selling, general and administrative:
Selling................................................... 72,172 30,943 40,456
Freight, warehouse and distribution....................... 41,284 18,672 20,916
General and administrative................................ 26,319 11,569 11,999
Gains on the sale of assets............................... (198) -- (5,179)
-------- -------- --------
Total selling, general and administrative............... 139,577 61,184 68,192
-------- -------- --------
Operating income............................................ 89,604 40,812 51,794
Other income (expense):
Interest expense.......................................... (45,231) (22,700) (25,168)
Other income.............................................. 2,884 406 378
-------- -------- --------
Total other expense, net................................ (42,347) (22,294) (24,790)
-------- -------- --------
Income before income taxes(1)............................... 47,257 18,518 27,004
Income taxes................................................ 17,570 7,338 10,964
-------- -------- --------
Net income(1)............................................... $ 29,687 $ 11,180 $ 16,040
======== ======== ========
OTHER FINANCIAL DATA:
Gross profit percentage..................................... 48.9% 48.9% 50.8%
EBITDA(2)................................................... $ 92,019 $ 41,981 $ 48,112
EBITDA margin(3)............................................ 19.6% 20.1% 20.4%
Depreciation and amortization............................... $ 2,613 $ 1,169 $ 1,497
Capital expenditures........................................ 4,617 1,036 4,778
Ratio of EBITDA to cash interest expense.................... 2.1x 1.9x 2.2x
Ratio of earnings to fixed charges(4)....................... 2.0x 1.8x 2.1x
DOMESTIC DISPLAYER DATA:
Number of orders............................................ 732,202 341,938 376,095
Average order size(5)....................................... $ 635 $ 607 $ 620
Number of Displayers at end of period(6).................... 44,200 43,700 50,200
Average number of Displayers during period(6)............... 42,400 39,700 47,500
</TABLE>

<TABLE>
<CAPTION>
ACTUAL AS OF
JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 23,938
Property, plant and equipment, net.......................... 20,378
Total assets................................................ 116,463
Total debt (including current maturities)................... 500,000
Shareholders' deficit....................................... (444,157)
</TABLE>

12
<PAGE> 17

- ---------------

(1) Fees and expenses paid to the Company's financial advisor and attorneys of
$6,198,000 in connection with the Recapitalization, which were expensed as
incurred in June 1998, have been excluded from the unaudited pro forma
consolidated statements of operations.

(2) EBITDA represents operating income plus depreciation and amortization, 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 deferred financing 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, $1,098,000 and $2,907,000 for the six
months ended June 30, 1997 and 1998, respectively, and $5,902,548 for the
twelve months ended June 30, 1998 have been excluded from net sales.

(6) Prior to July 1997, the Company had a policy of removing from its Displayer
count Displayers who failed to place an order within the 14 prior weeks.
The Company revised this policy in mid-1997 to encourage inactive
Displayers to reinitiate their sales activities. At December 31, 1997 and
June 30, 1998, the Company had included in its Displayer count
approximately 1,400 and 5,100 Displayers, respectively, who had not placed
an order within the 14-week period ended as of such dates.

13
<PAGE> 18

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 June 30, 1998 the Company had (i) $500.0 million ($493.5
million as of September 30, 1998) of consolidated indebtedness, of which $300.0
million ($293.5 million as of September 30, 1998) 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 $444.2 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 June 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 11 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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<PAGE> 19

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 June 30, 1998, the Company had approximately 51,500 Displayers, 50,200 of
whom were located in the United States and 1,200 and 100 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

16
<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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<PAGE> 22

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 Company
anticipates that, in the absence of a request by the IRS for an extension, 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 will expire 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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<PAGE> 23

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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<PAGE> 24

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; YEAR 2000

The Company is in the process of implementing a new and significantly more
sophisticated management information system (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 special business requirements and to assist with the
implementation process. As of June 30, 1998, the Company had spent approximately
$3.7 million on the Computer System. The Company expects that it will incur an
additional $1.1 million to implement the balance of the Computer System, which
the Company expects to rollout in late 1998 and early 1999. Any delay beyond
1999 in the implementation of the Computer System, or any unexpected
difficulties in the transition to or effectiveness of the Computer System, 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.

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 expects that the Computer
System will function properly beyond 1999. There can be no assurance, however,
that the Computer System will be Year 2000 compliant. The Company is also in the
process of determining whether its material non-information technology systems
such as manufacturing and physical facilities are Year 2000 compliant. Moreover,
the Company is in the process of determining, but has not yet fully ascertained,
whether its third party suppliers, service providers and its subsidiaries have
adequately addressed their Year 2000 compliance issues. The Company has
commenced an assessment of whether these parties will be Year 2000 compliant by
the year 2000, however, the ability of third parties with whom the Company
transacts business to adequately address their Year 2000 issues is outside of
the Company's control. The Company intends to commence contingency planning to
address potential problem areas with its internal non-information technology
systems and with its suppliers, service providers and subsidiaries once the
assessment is complete. It is expected that assessment, remediation and testing
activities will be on-going through 1998 and 1999 with the goal of appropriately
resolving all material internal and third party issues. There can be no
assurance, however, that the failure of the Company or such third parties to
adequately address their respective Year 2000 issues will 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."

21
<PAGE> 26

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 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

22
<PAGE> 27

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
and $100.0 million aggregate principal amount of the Tranche B Loan. As of
June 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 on June 30, 1998 the Company had $40.0 million of Revolving Loans
under the Senior Credit Facility 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, expenses in connection with
the 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. Approximately $11.6 million
consisting of the underwriting discount to the Initial Purchasers and
certain other fees and expenses is included in debt issuance costs as of
June 30, 1998, and will be amortized over the term of the related debt. The
other fees and expenses of $12.7 million consist of a financial advisory
fee of approximately $11.2 million paid to Hicks Muse and other legal and
accounting costs of approximately $1.5 million. The $12.7 million of fees
and expenses have been treated as a treasury stock transaction cost, and
accordingly upon retirement of all treasury stock, existing additional
paid-in capital of $1.1 million was eliminated and the remaining costs of
$11.6 million were charged to retained earnings. 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 six months ended June 30,
1998.

25
<PAGE> 30

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
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
JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 23,938
=========
Long-term debt (including current maturities):
Senior Credit Facility(1)
Tranche A Loan due 2004.............................. $ 200,000
Tranche B Loan due 2006.............................. 100,000
10 1/8% Senior Subordinated Notes due 2008................ 200,000
---------
Total long-term debt.............................. 500,000
Shareholders' deficit:
Common stock.............................................. 1,523
Additional paid-in capital................................ 181,546
Accumulated deficit....................................... (627,104)
Other..................................................... (122)
---------
Total shareholders' deficit....................... (444,157)
---------
Total capitalization......................... $ 55,843
=========
</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 six months ended June 30, 1997 and 1998. The historical consolidated
financial data as of December 31, 1996 and 1997 and 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 as of December 31, 1993, 1994 and 1995 and 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 June 30, 1997 and 1998 and for the six-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
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the full year. 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" appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 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 $208,520 $ 236,073
Cost of goods sold....................... 258,137 262,623 261,806 225,137 239,664 106,524 116,087
-------- --------- -------- -------- -------- -------- ---------
Gross profit............................. 232,840 252,718 221,144 209,162 229,181 101,996 119,986
Selling, general and administrative:
Selling................................ 71,815 73,276 72,857 68,489 72,172 30,943 40,456
Freight, warehouse and distribution.... 44,020 43,116 41,041 37,167 41,284 18,672 20,916
General and administrative............. 18,518 28,841 25,398 22,246 26,319 11,569 11,999
(Gains) losses on the sale of assets... (919) 209 (14) (2,077) (198) -- (5,179)
Recapitalization expenses(1)........... -- -- -- -- -- -- 6,198
-------- --------- -------- -------- -------- -------- ---------
Total selling, general and
administrative..................... 133,434 145,442 139,282 125,825 139,577 61,184 74,390
-------- --------- -------- -------- -------- -------- ---------
Operating income......................... 99,406 107,276 81,862 83,337 89,604 40,812 45,596
Other income, net........................ 5,485 6,434 2,997 5,066 10,507 3,770 1,163
-------- --------- -------- -------- -------- -------- ---------
Income before income taxes............... 104,891 113,710 84,859 88,403 100,111 44,582 46,759
Income taxes............................. 38,313 42,737 35,315 33,957 37,919 17,373 18,570
-------- --------- -------- -------- -------- -------- ---------
Income from continuing operations before
cumulative effect of accounting
change................................. $ 66,578 $ 70,973 $ 49,544 $ 54,446 $ 62,192 $ 27,209 $ 28,189
======== ========= ======== ======== ======== ======== =========
Net income(2)............................ $ 68,889 $ 70,522 $ 49,544 $ 54,446 $ 62,192 $ 27,209 $ 28,189
======== ========= ======== ======== ======== ======== =========
OTHER FINANCIAL DATA:
Gross profit percentage.................. 47.4% 49.0% 45.8% 48.2% 48.9% 48.9% 50.8%
EBITDA(3)................................ $104,046 $ 112,171 $ 85,944 $ 84,610 $ 92,019 $ 41,981 $ 48,112
EBITDA margin(4)......................... 21.2% 21.8% 17.8% 19.5% 19.6% 20.1% 20.4%
Cash flows provided by (used in):
Operating activities................... $ 77,027 $ 66,850 $ 64,746 $ 57,507 $ 60,285 $ 12,929 $ 31,230
Investing activities................... (64,148) (152,376) (1,394) (8,808) (67,023) (66,604) 67,367
Financing activities................... (47,234) (11,242) (16,760) (6,086) (21,760) (15,850) (178,887)
Depreciation and amortization............ 5,559 4,686 4,096 3,350 2,613 1,169 1,497
Capital expenditures(5).................. 26,751 3,135 1,408 2,126 4,617 1,036 4,778
Ratio of earnings to fixed charges(6).... -- -- -- -- -- -- 14.4x

DOMESTIC DISPLAYER DATA:
Number of orders......................... 716,081 754,439 782,996 710,008 732,202 341,938 376,095
Average order size(7).................... $ 686 $ 683 $ 617 $ 610 $ 635 $ 607 $ 620
Number of Displayers at end of
period(8).............................. 37,500 38,300 45,200 37,800 44,200 43,700 50,200
Average number of Displayers during
period(8).............................. 33,800 38,300 41,200 39,900 42,400 39,700 47,500
</TABLE>

27
<PAGE> 32

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 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 $ 63,279 $ 23,938
Marketable securities and investments..... 26,947 3,251 3,251 4,643 69,684 68,460 1,509
Property, plant and equipment, net........ 32,543 20,116 17,478 15,481 17,353 15,373 20,378
Total assets(9)........................... 471,177 252,458 147,110 195,774 244,190 204,094 116,463
Total debt (including current
maturities)............................. -- -- -- -- -- -- 500,000
Shareholders' equity (deficit)............ 416,294 62,373 99,461 141,227 189,931 162,196 (444,157)
</TABLE>

- ---------------

(1) Recapitalization expenses consist of amounts paid to the Company's financial
advisor and attorneys in connection with the Recapitalization.

(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 six months ended June 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 deferred financing costs.

(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 to encourage inactive Displayers
to reinitiate their sales activities. At December 31, 1997 and June 30,
1998, the Company had included in its Displayer count approximately 1,400
and 5,100 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 six months ended June 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 debt issuance costs of approximately $11.6
million and other fees and expenses of approximately $12.7 million. The other
fees and expenses of $12.7 million consist of a financial advisory fee of
approximately $11.2 million paid to Hicks Muse and other legal and accounting
costs of approximately $1.5 million.

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 six months ended June 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) (44,869)(2) (45,231)
Other income.......................................... 2,884 2,884
-------- -------- --------
Total other income (expense), net............. 10,507 (52,854) (42,347)
-------- -------- --------
Income before income taxes(4)........................... 100,111 (52,854) 47,257
Income taxes............................................ 37,919 (20,349)(3) 17,570
-------- -------- --------
Net income(4)........................................... $ 62,192 $(32,505) $ 29,687
======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges(5)................. 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 SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR THE
ACTUAL ADJUSTMENTS RECAPITALIZATION
-------- ----------- ----------------
<S> <C> <C> <C>
Net sales............................................... $208,520 $208,520
Cost of goods sold...................................... 106,524 106,524
-------- --------
Gross profit............................................ 101,996 101,996
Selling, general and administrative:
Selling............................................... 30,943 30,943
Freight, warehouse and distribution................... 18,672 18,672
General and administrative............................ 11,569 11,569
-------- --------
Total selling, general and administrative..... 61,184 61,184
-------- --------
Operating income........................................ 40,812 40,812
Other income (expense):
Interest income....................................... 3,377 (3,377)(1) --
Interest expense...................................... (13) (22,687)(2) (22,700)
Other income.......................................... 406 406
-------- -------- --------
Total other income (expense), net............. 3,770 (26,064) (22,294)
-------- -------- --------
Income before income taxes(4)........................... 44,582 (26,064) 18,518
Income taxes............................................ 17,373 (10,035)(3) 7,338
-------- -------- --------
Net income(4)........................................... $ 27,209 $(16,029) $ 11,180
======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges(5)................. 1.8x
</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 SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR THE
ACTUAL ADJUSTMENTS RECAPITALIZATION
-------- ----------- ----------------
<S> <C> <C> <C>
Net sales............................................... $236,073 $236,073
Cost of goods sold...................................... 116,087 116,087
-------- --------
Gross profit............................................ 119,986 119,986
Selling, general and administrative:
Selling............................................... 40,456 40,456
Freight, warehouse and distribution................... 20,916 20,916
General and administrative............................ 11,999 11,999
Gains on the sale of assets........................... (5,179) (5,179)
Recapitalization expenses............................. 6,198 (6,198)(6) --
-------- -------- --------
Total selling, general and administrative..... 74,390 (6,198) 68,192
-------- -------- --------
Operating income........................................ 45,596 6,198 51,794
Other income (expense):
Interest income....................................... 4,276 (4,276)(1) --
Interest expense...................................... (3,491) (21,677)(2) (25,168)
Other income.......................................... 378 378
-------- -------- --------
Total other income (expense), net............. 1,163 (25,953) (24,790)
-------- -------- --------
Income before income taxes.............................. 46,759 (19,755) 27,004
Income taxes............................................ 18,570 (7,606)(3) 10,964
-------- -------- --------
Net income.............................................. $ 28,189 $(12,149) $ 16,040
======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges(5)................. 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 deferred financing costs. Pro forma
interest expense consists of the following:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1997 1997 1998
------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest Expense:
Revolving Loans (commitment fee)......... $ (200) $ (100) $ (100)
Senior Credit Facility Tranche A Loan due
2004 $200,000 @ 7 3/4%................ (14,773) (7,629) (6,660)
Senior Credit Facility Tranche B Loan due
2006 $100,000 @ 8 1/4%................ (8,220) (4,120) (4,079)
Senior Subordinated Notes due 2008 @
10 1/8%............................... (20,250) (10,125) (10,125)
Historical interest expense.............. (362) (13) (3,491)
-------- -------- --------
Cash interest expense................. (43,805) (21,987) (24,455)
Amortization of deferred financing
costs................................. (1,426) (713) (713)
-------- -------- --------
Pro forma interest expense................. $(45,231) $(22,700) $(25,168)
======== ======== ========
</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% with scheduled quarterly principal
payments of $6,250,000 commencing March 31, 1997

- Tranche B Loan -- interest at 8 1/4% with scheduled quarterly principal
payments of $250,000 commencing March 31, 1997

- Amortization of deferred financing costs -- $11,609,000 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) Fees and expenses paid to the Company's financial advisor and attorneys of
$6.2 million in connection with the Recapitalization, which were expensed
as incurred in June 1998, have been excluded from the unaudited pro forma
consolidated statements of operations for the year ended December 31, 1997
and for the six months ended June 30, 1997.

(5) 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 and amortization of deferred
financing costs.

(6) The adjustment represents 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, based on sales. As of June 30, 1998, the
Company sold its Products to approximately 51,500 Displayers, including 50,200
located in the United States and 1,200 and 100 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 a
$340.0 million 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 debt issuance costs of approximately $11.6
million which are included in debt issuance costs in the accompanying balance
sheet and are being amortized using the effective interest method over the term
of the related indebtedness. The remaining fees and expenses of approximately
$12.7 million consist of a financial advisory fee of approximately $11.2 million
paid to Hicks Muse and other legal and accounting costs of approximately $1.5
million. These fees and expenses have been treated as a treasury stock
transaction cost, and accordingly upon retirement of all treasury stock,
existing additional paid-in capital of $1,120,000 was eliminated and the
remaining costs of $11,604,000 were charged to retained earnings.

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 were expensed as incurred and are reflected as Recapitalization expenses
in the Company's consolidated statement of operations for the six months ended
June 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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 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% 51.1% 49.2%
------ ------ ------ ------ ------
Gross profit........................ 45.8% 48.2% 48.9% 48.9% 50.8%
Selling, general and administrative:
Selling........................... 15.1% 15.8% 15.4% 14.8% 17.1%
Freight, warehouse and
distribution................... 8.5% 8.6% 8.8% 9.0% 8.9%
General and administrative........ 5.3% 5.1% 5.6% 5.5% 5.1%
Gains on the sale of assets....... -- (0.5)% -- -- (2.2)%
Recapitalization expenses......... -- -- -- -- 2.6%
------ ------ ------ ------ ------
Total selling, general and
administrative............ 28.9% 29.0% 29.8% 29.3% 31.5%
------ ------ ------ ------ ------
Operating income.................... 16.9% 19.2% 19.1% 19.6% 19.3%
Other income, net................... 0.6% 1.2% 2.2% 1.8% 0.5%
------ ------ ------ ------ ------
Income before income taxes.......... 17.5% 20.4% 21.3% 21.4% 19.8%
Income taxes........................ 7.3% 7.8% 8.1% 8.3% 7.9%
------ ------ ------ ------ ------
Net income.......................... 10.2% 12.6% 13.2% 13.1% 11.9%
====== ====== ====== ====== ======
</TABLE>

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

Net sales. Net sales increased $27.6 million, or 13.2%, to $236.1 million
in the six months ended June 30, 1998 from $208.5 million in the comparable
period in 1997. This increase was primarily attributable to an increase in the
number of orders placed, largely as a result of an increase in the number of
domestic Displayers. In addition, an increase in average order size, primarily
resulting from the introduction of several new incentive programs and discounts
in the 1998 period, contributed to the net sales increase.

Gross profit. Gross profit increased $18.0 million, or 17.6%, to $120.0
million in the six months ended June 30, 1998 from $102.0 million in the
comparable period in 1997. As a percentage of net sales, gross profit increased
to 50.8% in the 1998 period from 48.9% in the 1997 period. This increase was
primarily attributable to the introduction of new Products with greater profit
margins, and to a lesser extent, increased manufacturing efficiencies at the
Company's manufacturing subsidiaries.

Selling. Selling expense increased $9.6 million, or 30.7%, to $40.5 million
in the six months ended June 30, 1998 from $30.9 million in the comparable
period in 1997. As a percentage of net sales, selling expense increased to 17.1%
in the 1998 period from 14.8% 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. Freight, warehouse and distribution
expense increased $2.2 million, or 12.0%, to $20.9 million in the six months
ended June 30, 1998 from $18.7 million in the comparable period in 1997. As a
percentage of net sales, freight, warehouse and distribution expense decreased
to 8.9% in the 1998 period from 9.0% in the 1997 period. This decrease was
primarily attributable to freight efficiencies achieved on the higher sales
volumes.

General and administrative. General and administrative expense increased
$0.4 million, or 3.7%, to $12.0 million in the six months ended June 30, 1998
from $11.6 million in the comparable period in 1997 largely due to increased
training and other costs associated with the implementation of the Company's new

36
<PAGE> 41

Computer System. As a percentage of net sales, general and administrative
expenses decreased to 5.1% in the 1998 period from 5.5% in the 1997 period.

Gains on the sale of assets. The Company recorded gains on the sale of
assets of $5.2 million during the six months ended June 30, 1998 principally
from the sale of two aircraft.

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.

Other income, net. Other income, net of other expense, decreased $2.6
million, or 69.2%, to $1.2 million in the six months ended June 30, 1998 from
$3.8 million in the comparable period in 1997. The decrease was primarily due to
approximately $3.5 million of interest expense incurred in June 1998 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.

Other income, net. Other income, net of other expense, increased $5.4
million, or 107.4%, to $10.5 million in 1997 from $5.1 million in 1996. This
increase was attributable to higher average investment balances and the gain on
the sale of a single investment.

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.
37
<PAGE> 42

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.

Other income, net. Other income, net of other expense, increased $2.1
million, or 69.0%, to $5.1 million in 1996 from $3.0 million in 1995. This
increase was attributable 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 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.

38
<PAGE> 43

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 six months ended June
30, 1998 than in the comparable period in 1997. Net cash provided by operating
activities in the six months ended June 30, 1998 increased $18.3 million to
$31.2 million from $12.9 million in the comparable period in 1997. The increase
was primarily attributable to increases in accounts payable, income taxes
payable and other current liabilities in the six months ended June 30, 1998 as
compared to the same period in 1997, partially offset by a decline in net income
as adjusted for noncash items in the six months ended June 30, 1998 as compared
to in the same period in 1997. The increases in the Company's payable and
liability balances are primarily a result of the timing of payments.

The Company also generated significantly higher cash flow from investing
activities during the six months ended June 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 six months ended June 30, 1998 totaled $152.8 million, or $83.7 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,
consisting primarily of tax exempt and fixed income mutual funds, tax exempt and
corporate bonds and preferred stock totaling $132.8 million during the six
months ended June 30, 1997. The proceeds from the sale of those investments
totaled $69.1 million. Purchases of investments totaled $86.6 million during the
six months ended June 30, 1998, or $46.2 million less than the comparable period
in 1997. In addition to its other investing activities, the Company sold two
aircraft in the six months ended June 30, 1998 for proceeds of $5.6 million.

The Company's use of cash for financing activities increased to $178.9
million during the six months ended June 30, 1998 from $15.9 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 the Hicks Muse Shareholders, $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 in the preceding paragraph, 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. These fees and expenses consisted of debt
issuance costs of $11.6 million and other fees and expenses of $12.7 million.
Prior to the Recapitalization, the Company's primary financing activity was the
payment of dividends. Dividends paid during the six months ended June 30, 1998
decreased to $9.6 million from $15.9 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 payments commencing in
June 1998 and quarterly principal payments commencing in September 1998. 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 June
30, 1998, and the Company does not expect to utilize the Revolving Loans during
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."

39
<PAGE> 44

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. As
of June 30, 1998, the 3-month LIBOR rate was 5.72%.

The Company increased its capital expenditures to $4.8 million during the
six months ended June 30, 1998 from $1.0 million in the 1997 period primarily as
a result of several nonrecurring expenditures. These nonrecurring expenditures
included approximately $1.1 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. 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.
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 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
repayment of 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. In the future,
DWC and the other PRPs will incur 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 during the six months ended June 30, 1998.

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 will incur costs related to the cleanup of hazardous
substances at the facility. Homco did not incur any cleanup related costs during
1997 or during the six months ended June 30, 1998.

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.

40
<PAGE> 45

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

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 Company's infrastructure consists of hardware and software used for
mainframes, file servers and personal computers, machinery and equipment and
other non-IT items. With the anticipated rollout of the Computer System in early
1999, infrastructure remediation should be complete. Remediation for all other
aspects of the infrastructure is substantially complete. Testing is ongoing.
Infrastructure contingency planning will commence in the second quarter of 1999.

The Company has identified and surveyed its critical third party suppliers,
service providers and subsidiaries, 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 those suppliers, service
providers and subsidiaries to remediate their own Year 2000 issues. Remediation
for the subsidiaries is expected to be completed in the first quarter of 1999.
Remediation for the Company's critical third party suppliers and service
providers is partially complete and on schedule. Testing is ongoing. Progress is
being monitored and contingency planning will commence by the fourth quarter of
1998.

The Company is in the process of implementing its new and significantly
more sophisticated Computer System. The Computer System is a critical aspect of
the Project. The Computer System will replace a significant portion of the
Company's business systems and includes a mainframe computer, certain business
applications and upgraded or replacement peripheral equipment associated with
the core business systems. The Company purchased certain software products from
DAI, who has also been engaged to modify the software to meet the Company's
special business requirements and assist with the implementation process. As of
June 30, 1998, the Company had spent approximately $3.7 million on the Computer
System. The Company expects that it will incur an additional $2.1 million to
implement the first phase of the Computer System, which the Company expects to
rollout in early 1999. The Company expects that the Computer System will
function properly beyond 1999. There can be no assurance, however, that the
Computer System will be 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, and results of operations.

As the Company expects that the DAI software will be Year 2000 compliant,
the total costs associated with becoming Year 2000 compliant, which will be
funded through income from operations, are estimated to

41
<PAGE> 46

be less than $1.0 million and thus are not expected to have a material impact on
the Company's financial condition or results of operations.

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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<PAGE> 47

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 June 30,
1998, the Company sold Products to approximately 51,500 Displayers, 50,200 of
whom were located in the United States and 1,200 and 100 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'

43
<PAGE> 48

review, Home Interiors introduces approximately 150 to 225 new Products
each year to replace other less popular items.

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

44
<PAGE> 49

(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 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

45
<PAGE> 50

decorating interests or needs and to taking orders for Products. Typically,
Products are paid for at the time they are ordered and are delivered to the
Hostess within two weeks after the Show. The Company believes that Shows create
group enthusiasm for the Products, enable Displayers to increase sales, offer
the opportunity for Displayers to develop new customers and provide Displayers
the opportunity to recruit new Hostesses and Displayers. At each Show, in
addition to selling Products, Displayers promote to the guests the benefits of
being a Hostess or Displayer.

Hostesses are critical to a Displayer's success. A Hostess is responsible
for inviting the guests, or prospective customers, to a Show and later for
distributing the purchased Products to each customer. To reward the Hostess for
her efforts, the Displayer purchases redeemable coupons ("Hostess merits") from
the Company and provides her Hostess 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 June 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.

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<PAGE> 51

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 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.
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<PAGE> 52

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
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 June 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 August 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.......... 68 Director and President
Christina L. Carter 35 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."

51
<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.

52
<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.

53
<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.

54
<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

55
<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.

57
<PAGE> 62

SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of August 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) 10,056,048 shares of Company Common Stock owned of record by
HI Equity Partners, L.P. ("HIEP"), a limited partnership whose sole general
partner is TOH Ranger LLC ("Ranger LLC") and (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 Ranger LLC. Thomas O.
Hicks is the sole member and director of Ranger LLC and, accordingly, may be
deemed to be the beneficial owner of Company Common Stock held by HIEP and
HMIP. In addition, Mr. Hicks is a minority limited partner in HM Partners,
the sole limited partner of HIEP. Mr. Hicks disclaims beneficial ownership
of Company Common Stock owned of record by HIEP and HMIP.

(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 minority limited partnership interests
in HM Partners, the sole limited partner of 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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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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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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THE EXCHANGE OFFER

PURPOSE AND EFFECT

The Old Notes were sold by the Company on May 28, 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 November 24, 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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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 August 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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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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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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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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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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<PAGE> 72

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. 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 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

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<PAGE> 76

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 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
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<PAGE> 77

substantially to the same extent as the Notes are subordinated to all existing
and future Senior Indebtedness of the Company. 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

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

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<PAGE> 78

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,
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
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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 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

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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.

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

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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 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

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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 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

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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 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.
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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 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
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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.

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,

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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 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.

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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).

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

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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.

"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
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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 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

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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).

"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

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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 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.

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"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 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
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<PAGE> 93

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; (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

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<PAGE> 94

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.

"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

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<PAGE> 95

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 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
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<PAGE> 96

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 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.

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"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.

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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following is a discussion of the material federal income tax
considerations relevant to the exchange of Old Notes for New Notes. The
discussion is based upon the Internal Revenue Code of 1986, as amended, Treasury
regulations, Internal Revenue Service rulings and pronouncements, and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of the New Notes.
The description does not consider the effect of any applicable foreign, state,
local or other tax laws or estate or gift tax considerations.

EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.

EXCHANGE OF OLD NOTES FOR NEW NOTES

It is the opinion of Weil, Gotshal & Manges LLP, special tax counsel to the
Company, that the exchange of Old Notes for New Notes pursuant to the Exchange
Offer will not constitute a sale or an exchange for 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, such exchange will have no
federal income tax consequences to holders of Old Notes.

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 Notes) other than commissions or
concessions of any broker-dealers and will indemnify holders of the Old

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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 will be 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 June 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 six months ended June 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 six months ended June 30, 1998 (unaudited)........ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1997 and 1998 (unaudited).................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
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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> 102

HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997 AND AS OF JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $132,848 $104,262 $ 23,938
Marketable securities.................................. 2,203 2,003 --
Accounts receivable, net............................... 9,097 11,577 9,432
Inventories............................................ 23,134 30,531 38,786
Deferred income tax benefit............................ 2,375 3,031 2,520
Other current assets................................... 408 440 716
-------- -------- --------
Total current assets........................... 170,065 151,844 75,392
Property, plant and equipment, net....................... 15,481 17,353 20,378
Investments.............................................. 2,440 67,681 1,509
Debt issuance costs, net................................. -- -- 11,512
Other assets............................................. 7,788 7,312 7,672
-------- -------- --------
Total assets................................... $195,774 $244,190 $116,463
======== ======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable....................................... $ 7,473 $ 8,702 $ 13,178
Accrued seminars and incentive awards.................. 11,349 12,398 12,715
Royalties payable...................................... 3,496 6,770 7,989
Hostess prepayments.................................... 6,332 7,812 8,555
Income taxes payable................................... 4,810 3,107 4,984
Dividends payable...................................... 12,680 5,733 --
Current maturities of long-term debt................... -- -- 26,000
Other current liabilities.............................. 8,183 9,058 12,798
-------- -------- --------
Total current liabilities...................... 54,323 53,580 86,219
Long-term debt, net of current portion................... -- -- 474,000
Deferred income tax liability............................ 224 679 401
-------- -------- --------
Total liabilities.............................. 54,547 54,259 560,620
-------- -------- --------
Commitments and contingencies (see Note 14)
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............................. -- 1,120 181,546
Retained earnings (accumulated deficit)................ 209,171 256,121 (627,104)
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 (444,157)
-------- -------- --------
Total liabilities and shareholders' equity
(deficit).................................... $195,774 $244,190 $116,463
======== ======== ========
</TABLE>

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

F-3
<PAGE> 103

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 SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $482,950 $434,299 $468,845 $208,520 $236,073
Cost of goods sold..................... 261,806 225,137 239,664 106,524 116,087
-------- -------- -------- -------- --------
Gross profit........................... 221,144 209,162 229,181 101,996 119,986
Selling, general and administrative:
Selling.............................. 72,857 68,489 72,172 30,943 40,456
Freight, warehouse and
distribution...................... 41,041 37,167 41,284 18,672 20,916
General and administrative........... 25,398 22,246 26,319 11,569 11,999
Gains on the sale of assets.......... (14) (2,077) (198) -- (5,179)
Recapitalization expenses............ -- -- -- -- 6,198
-------- -------- -------- -------- --------
Total selling, general and
administrative............. 139,282 125,825 139,577 61,184 74,390
-------- -------- -------- -------- --------
Operating income....................... 81,862 83,337 89,604 40,812 45,596
Other income, net...................... 2,997 5,066 10,507 3,770 1,163
-------- -------- -------- -------- --------
Income before income taxes............. 84,859 88,403 100,111 44,582 46,759
Income taxes........................... 35,315 33,957 37,919 17,373 18,570
-------- -------- -------- -------- --------
Net income............................. $ 49,544 $ 54,446 $ 62,192 $ 27,209 $ 28,189
Other comprehensive income (loss),
before tax:
Cumulative translation adjustment.... -- -- (88) (44) (34)
Unrealized gains (losses) on
investments....................... -- -- 1,074 144 (1,074)
-------- -------- -------- -------- --------
Other comprehensive income (loss),
before tax...................... -- -- 986 100 (1,108)
Income tax (expense) benefit related to
items of other comprehensive
income............................... -- -- (376) -- 376
-------- -------- -------- -------- --------
Other comprehensive income (loss),
net of tax...................... -- -- 610 100 (732)
-------- -------- -------- -------- --------
Comprehensive income................... $ 49,544 $ 54,446 $ 62,802 $ 27,309 $ 27,457
======== ======== ======== ======== ========
</TABLE>

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

F-4
<PAGE> 104

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 SIX MONTHS ENDED JUNE 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 common stock held
by ESOP............................. 2,270 2,270
Appreciation in common stock released
to 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 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)................ 28,189 28,189
Recapitalization adjustments (see Note
3):
Issuance of common stock to Hicks
Muse (Unaudited).................. 10,111,436 1,011 181,546 182,557
Purchase and retirement of common
stock (Unaudited)................. (45,836,584) (4,584) (822,973) (827,557)
Retirement of treasury stock
(Unaudited)....................... (7,985,700) (798) (73,016) 73,814 --
Hicks Muse financial advisory fee
(Unaudited)....................... (1,120) (10,130) (11,250)
Other transaction fees
(Unaudited)....................... (1,474) (1,474)
Cumulative translation adjustment
(Unaudited)......................... (34) (34)
Unrealized losses on investments
(Unaudited)......................... (698) (698)
Dividends, $0.075 per share
(Unaudited)......................... (3,821) (3,821)
----------- -------- -------- --------- -------- ------- ---------
Balance, June 30, 1998 (Unaudited)...... 15,231,652 $ 1,523 $181,546 $(627,104) $ -- $ (122) $(444,157)
=========== ======== ======== ========= ======== ======= =========
</TABLE>

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

F-5
<PAGE> 105

HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 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 $ 27,209 $ 28,189
-------- -------- --------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 4,096 3,350 2,613 1,169 1,497
Amortization of debt issuance costs and other............ -- -- 146 45 97
Provision for doubtful accounts.......................... 656 461 753 411 306
Gains on the sale of assets.............................. (14) (2,077) (198) -- (5,179)
Realized gains on investments............................ -- -- (1,859) -- (203)
Equity in earnings of affiliate.......................... -- -- (180) -- --
Deferred tax expense (benefit)........................... (3) 367 (577) -- 233
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) (82) (130)
Inventories............................................ 5,945 2,385 (8,958) (9,660) (8,255)
Other current assets................................... 188 (91) (32) (124) (276)
Other assets........................................... 18 (59) (491) (2,900) (384)
Accounts payable....................................... (783) 767 1,229 (2,067) 4,476
Income taxes payable................................... (873) 4,810 (989) (3,807) 1,877
Other accrued liabilities.............................. (1,161) (5,205) 6,829 2,735 8,982
-------- -------- --------- --------- ---------
Total adjustments................................. 15,202 3,061 (1,907) (14,280) 3,041
-------- -------- --------- --------- ---------
Net cash provided by operating activities......... 64,746 57,507 60,285 12,929 31,230
-------- -------- --------- --------- ---------
Cash flows from investing activities:
Purchases of investments and other assets................ -- (2,392) (204,315) (132,770) (86,591)
Proceeds from the sale of investments.................... -- 1,000 142,388 69,097 152,765
Purchases of property, plant and equipment............... (1,408) (2,126) (4,617) (1,036) (4,778)
Purchases of notes receivable............................ -- (5,691) -- -- (962)
Issuance of notes receivable............................. -- -- (2,520) (2,521) --
Payments received on notes receivable.................... -- -- 1,812 626 1,361
Proceeds from the sale of property, plant and
equipment.............................................. 14 401 229 -- 5,572
-------- -------- --------- --------- ---------
Net cash (used in) provided by investing
activities...................................... (1,394) (8,808) (67,023) (66,604) 67,367
-------- -------- --------- --------- ---------
Cash flows from financing activities:
Dividends paid........................................... (8,814) (6,086) (22,190) (15,850) (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
Debt issuance costs...................................... -- -- -- -- (11,609)
Recapitalization fees and expenses....................... -- -- -- -- (12,724)
-------- -------- --------- --------- ---------
Net cash used in financing activities............. (16,760) (6,086) (21,760) (15,850) (178,887)
-------- -------- --------- --------- ---------
Effect of cumulative translation adjustment................ -- -- (88) (44) (34)
-------- -------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... 46,592 42,613 (28,586) (69,569) (80,324)
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 $ 63,279 $ 23,938
======== ======== ========= ========= =========
Income taxes paid.......................................... $ 40,921 $ 29,396 $ 38,723 $ 16,344 $ 15,787
======== ======== ========= ========= =========
Interest paid.............................................. $ 2 $ -- $ 19 $ 1 $ 495
======== ======== ========= ========= =========
</TABLE>

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

F-6
<PAGE> 106

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, 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 June 30, 1998 and for the six
months ended June 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 June 30, 1998 and the operating results and cash flows for the six months
ended June 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.

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.

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.

F-7
<PAGE> 107
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

F-8
<PAGE> 108
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Those fees and expenses included debt
issuance costs of $11,609,000, which are included in debt issuance costs in the
accompanying balance sheet and are amortized using the effective interest method
over the term of the related indebtedness. The remaining fees and expenses of
$12,724,000 consist of a financial advisory fee of $11,250,000 paid to Hicks
Muse and other legal and accounting costs $1,474,000. These remaining fees and
expenses of $12,724,000 have been treated as a treasury stock transaction cost,
and accordingly upon retirement of all treasury stock, existing additional
paid-in capital of $1,120,000 was eliminated and the remaining costs of
$11,604,000 were charged to retained earnings.

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. These costs were expensed as
incurred and are included in the Company's statement of operations for the six
months ended June 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 30, 1998, all
treasury stock was retired and Hicks Muse acquired a controlling interest in the
Company.

F-9
<PAGE> 109
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 Company's Board of Directors (the
"Board") shall consist of eleven members, 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. This is subject to adjustment based upon the ownership of Company
Common Stock by the Hicks Muse shareholders and the Committed Shareholders.

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 in certain circumstances and subject to certain
restrictions, they may require the Company to register their shares of Company
Common Stock and they have the right to include their shares of Company Common
Stock in any registration of securities proposed by the Company.

Additionally, the Committed Shareholders have the right to be included, on
a proportionate basis, in any proposed sale of Company Common Stock by the Hicks
Muse shareholders if (i) such sale individually represents more than 20% of the
shares then held by the Hicks Muse shareholders or (ii) in the aggregate, such
sale results in the Hicks Muse shareholders having sold more than 50% of the
shares held by them 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> 110
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
June 30, 1998 (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials...................................... $ 5,230 $ 5,036 $ 6,882
Work in process.................................... 1,219 1,152 1,508
Finished goods..................................... 16,685 24,343 30,396
------- ------- -------
$23,134 $30,531 $38,786
======= ======= =======
</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> 111
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. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following as of December 31 (in
thousands):

<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Accrued compensation........................................ $2,527 $3,394
Employee retirement plan contribution....................... 1,961 2,159
Sales taxes payable......................................... 2,312 2,122
Other current liabilities................................... 1,383 1,383
------ ------
$8,183 $9,058
====== ======
</TABLE>

11. 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 June 30, 1998. Prior to the Recapitalization, the
Company had no indebtedness.

Long-term debt consists of the following as of June 30, 1998 (in
thousands):

<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
Tranche A Loan @ 7 3/4% due 2004............................ $200,000
Tranche B Loan @ 8 1/4% due 2006............................ 100,000
Notes @ 10 1/8% due 2008.................................... 200,000
--------
500,000
Less current maturities..................................... (26,000)
--------
$474,000
========
</TABLE>

F-12
<PAGE> 112
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. As of June 30, 1998, no letters of
credit were issued under the Revolving Loans. 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 5.72% and 6 month rate of
5.78% in each case as of June 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. (8.50% as of June
30, 1998) or the federal funds effective rate (5.69% as of June 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 June 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, 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.

Current maturities of long-term debt as of June 30, 1998 (unaudited) are as
follows (in thousands):

<TABLE>
<CAPTION>
TRANCHE A TRANCHE B
LOAN LOAN NOTES TOTAL
--------- --------- -------- --------
<S> <C> <C> <C> <C>
1998.......................................... $ 12,500 $ 500 $ -- $ 13,000
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
-------- -------- -------- --------
$200,000 $100,000 $200,000 $500,000
======== ======== ======== ========
</TABLE>

The terms of the Notes and the Senior Credit Facility contain a number of
covenants which will, among other things, limit or restrict the ability of the
Company and its subsidiaries to make investments, incur additional indebtedness,
create liens on assets, enter into mergers, consolidations or amalgamations or

F-13
<PAGE> 113
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. As of June 30, 1998, the 3 month
LIBOR rate was 5.72%.

12. 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>

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>

F-14
<PAGE> 114
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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>

13. 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.

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
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 when 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

F-15
<PAGE> 115
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of $18.05451, the price per share paid in connection with the Recapitalization.
There were no options exercisable under either plan as of June 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.................................. 0.00% 39.74%
Risk-free interest rate.............................. 5.71% 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. The fair value of each option granted 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. Although the Company will account for options issued under the Stock
Option Plan in accordance with the provisions of Accounting Principles Board
Opinion No. 25, it will be required to include pro forma disclosure of the
impact of these options on results of operations had compensation cost been
determined in accordance with the provisions of SFAS No. 123. The pro forma
impact for the six months ended June 30, 1998 is immaterial as options under the
Stock Option Plan were first issued in June 1998.

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. The fair value approximated $10.00 per option. The Company will account
for options issued under the Independent Contractor Stock Option Plan in
accordance with the provisions of SFAS No. 123. No expense related to such
options was recorded during the six months ended June 30, 1998 as the amount was
immaterial as options under this plan were first issued in June 1998.

14. COMMITMENTS AND CONTINGENCIES

The Company is engaged in various legal proceedings incidental to its
normal business activities. Considering the fact that 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.

F-16
<PAGE> 116
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 Potentially Responsible Party ("PRP") based on
allegedly having sent 2,640 gallons of waste to the Chemical Recycling, Inc.
facility in Wylie, Texas. In the future, DWC and the other PRPs, who are jointly
and severally liable, may incur additional costs for the cleanup of hazardous
substances at the facility. DWC has not incurred any cleanup related costs
during 1995, 1996 and 1997 and has not established any accrual for such costs as
it is not probable that any additional costs will be incurred.

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 joint and severally
liable, will incur costs related to the cleanup of hazardous substances at the
facility. Homco has not incurred any cleanup related costs during 1997 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 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 below $1,000,000
or exceed $1,500,000. Management fees paid during the period ended June 30, 1998
totaled $324,000, of which $250,000 represents prepaid fees and are included in
other current assets in the accompanying consolidated balance sheet as of June
30, 1998. 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.

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.

15. RELATED PARTY TRANSACTIONS

A majority of the Company's inventory purchases are from suppliers whose
primary customer is the Company.

F-17
<PAGE> 117
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $709,000 during the six months ended June 30, 1997 and 1998, respectively.
Amounts due to the law firm totaled $285,000, $134,000 and $163,000 as of
December 31, 1996 and 1997 and June 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 $18,446,000 and $18,415,000 during the six months ended
June 30, 1997 and 1998, respectively. Amounts due to this supplier totaled
$107,000, $2,327,000 and $817,000 as of December 31, 1996 and 1997 and June 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 June 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 $4,580,000 and $5,186,000 during the six
months ended June 30, 1997 and 1998, respectively. Amounts due to this supplier
totaled $40,000, $0 and $300,000 as of December 31, 1996 and 1997 and June 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.

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 the six-month period ended June 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
$41,000 and $44,000 during the six months ended June 30, 1997 and 1998,
respectively.

F-18
<PAGE> 118
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. CONCENTRATION OF CREDIT RISK

The Company maintains cash and cash equivalents at financial institutions
in excess of federally insured limits.

17. OTHER INCOME AND EXPENSE

Other income, net for the years ended December 31, 1995, 1996 and 1997 and
for the six months ended June 30, 1997 and 1998 consists of the following (in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------
1995 1996 1997 1997 1998
------ ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Other income:
Interest income...................... $2,470 $5,113 $ 7,985 $3,377 $4,276
Capital gains........................ -- -- 1,859 -- 203
Other................................ 689 695 1,275 452 380
------ ------ ------- ------ ------
3,159 5,808 11,119 3,829 4,859
------ ------ ------- ------ ------
Other expense:
Interest expense..................... 2 503 362 13 3,491
Other................................ 160 239 250 46 205
------ ------ ------- ------ ------
162 742 612 59 3,696
------ ------ ------- ------ ------
Other income, net...................... $2,997 $5,066 $10,507 $3,770 $1,163
====== ====== ======= ====== ======
</TABLE>

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

The Company is in the process of implementing a new and significantly more
sophisticated computer system with the expectation that it will function
properly beyond 1999. The new computer system will replace a significant portion
of the Company's existing systems. The Company is also assessing whether its
material non-information technology systems, third party suppliers and service
providers and subsidiaries are year 2000 complaint. Any delay beyond 1999 in the
implementation of the computer system, or any difficulties in the

F-19
<PAGE> 119
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transition to or effectiveness of the computer system, could have a material
adverse effect on the Company's business, financial condition and results of
operations.

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> 120
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, JUNE 30,
----------------- -----------
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current Assets:
Cash and cash equivalents................................. $27,189 $22,734 $ 466
Inventories............................................... 10,132 9,185 11,053
Intercompany receivable, net.............................. 1,130 1,377 13,897
Other current assets...................................... 463 553 594
------- ------- -------
Total current assets.............................. 38,914 33,849 26,010
Property, plant and equipment, net.......................... 7,406 7,600 8,569
Other assets................................................ 1,204 1,525 1,325
------- ------- -------
Total assets...................................... $47,524 $42,974 $35,904
======= ======= =======

LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,086 $ 1,131 $ 2,490
Income taxes payable...................................... 902 1,448 3,611
Other current liabilities................................. 2,472 2,916 3,483
------- ------- -------
Total current liabilities......................... 4,460 5,495 9,584
Deferred income tax liability............................... 269 254 266
------- ------- -------
Total liabilities................................. 4,729 5,749 9,850
------- ------- -------
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 14,752
------- ------- -------
Total shareholder's equity........................ 42,795 37,225 26,054
------- ------- -------
Total liabilities and shareholder's equity........ $47,524 $42,974 $35,904
======= ======= =======
</TABLE>

F-21
<PAGE> 121
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Combined Statements of Operations

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................................ $75,161 $66,741 $77,363 $39,768 $43,876
Cost of goods sold............................... 55,359 49,226 55,931 28,530 31,376
------- ------- ------- ------- -------
Gross profit..................................... 19,802 17,515 21,432 11,238 12,500
Selling, general and administrative.............. 4,542 4,000 4,038 1,993 2,071
------- ------- ------- ------- -------
Operating income................................. 15,260 13,515 17,394 9,245 10,429
Other income, net................................ 583 697 1,120 524 451
------- ------- ------- ------- -------
Income before income taxes....................... 15,843 14,212 18,514 9,769 10,880
Income taxes..................................... 6,029 5,329 6,686 3,816 4,079
------- ------- ------- ------- -------
Net income....................................... $ 9,814 $ 8,883 $11,828 $ 5,953 $ 6,801
======= ======= ======= ======= =======
</TABLE>

Combined Statements of Cash Flows

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 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 $ 5,953 $ 6,801
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 1,922 1,592 1,619 723 829
Gains on the sale of assets................ (12) (1) (190) -- 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) 681 947 584 (1,868)
Intercompany receivable, net............ (693) 519 (245) (2,977) (12,143)
Other current and non-current assets.... (17) (38) (341) 45 (207)
Income taxes payable.................... (330) (509) 545 142 2,163
Other current liabilities............... (177) 390 489 966 1,700
-------- ------- -------- -------- --------
Total adjustments.................. 449 2,662 2,689 (517) (9,494)
-------- ------- -------- -------- --------
Net cash provided by (used in)
operating activities............. 10,263 11,545 14,517 5,436 (2,693)
-------- ------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment,
net..................................... (1,201) (685) (1,573) (414) (1,605)
-------- ------- -------- -------- --------
Net cash used in investing
activities....................... (1,201) (685) (1,573) (414) (1,605)
-------- ------- -------- -------- --------
Cash flows from financing activities:
Dividends paid to Home Interiors........... (14,800) -- (17,600) (17,600) (18,670)
Capital contributions from Home
Interiors............................... -- -- 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) (12,578) (22,268)
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 $ 14,611 $ 466
======== ======= ======== ======== ========
</TABLE>

F-22
<PAGE> 122

------------------------------------------------------------
------------------------------------------------------------

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 94
Considerations...........................
Plan of Distribution....................... 94
Legal Matters.............................. 95
Experts.................................... 95
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> 123

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> 124

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> 125

<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
opinion to be filed as Exhibit 5.1 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 Six Months Ended June 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> 126

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> 127

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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on October 21, 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
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 October 21, 1998
- --------------------------------------------------- Board and Chief Executive
Donald J. Carter, Jr. Officer (principal executive
officer of the Company)

* Chief Financial Officer October 21, 1998
- --------------------------------------------------- (principal financial and
Leonard A. Robertson accounting officer of the
Company)

* Director and President October 21, 1998
- ---------------------------------------------------
Barbara J. Hammond

* Director and Executive Vice October 21, 1998
- --------------------------------------------------- President
Christina L. Carter Urschel

* Director October 21, 1998
- ---------------------------------------------------
Thomas O. Hicks

* Director October 21, 1998
- ---------------------------------------------------
Jack D. Furst

* Director October 21, 1998
- ---------------------------------------------------
Lawrence D. Stuart, Jr.

* Director October 21, 1998
- ---------------------------------------------------
Daniel S. Dross

* Director October 21, 1998
- ---------------------------------------------------
Sheldon I. Stein

* By: /s/ DONALD J. CARTER, JR.
--------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>

II-5
<PAGE> 128

SIGNATURES

HOMCO, INC.

By: /s/ DONALD J. CARTER, JR.

----------------------------------
Donald J. Carter, Jr.
President

Pursuant to the requirements of the Securities Act of 1933, this
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 October 21, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)

* Secretary (principal financial October 21, 1998
- --------------------------------------------------- and accounting officer)
Leonard A. Robertson

*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>

II-6
<PAGE> 129

SIGNATURES

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
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 October 21, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)

* Secretary (principal financial October 21, 1998
- --------------------------------------------------- and accounting officer)
Leonard A. Robertson

*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in fact
</TABLE>

II-7
<PAGE> 130

SIGNATURES

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
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 October 21, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)

* Secretary (principal financial October 21, 1998
- --------------------------------------------------- and accounting officer)
Leonard A. Robertson

*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>

II-8
<PAGE> 131

SIGNATURES

GIA, INC.

By: /s/ DONALD J. CARTER, JR.

----------------------------------
Donald J. Carter, Jr.
President

Pursuant to the requirements of the Securities Act of 1933, this
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 October 21, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)

* Secretary (principal financial October 21, 1998
- --------------------------------------------------- and accounting officer)
Leonard A. Robertson

*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>

II-9
<PAGE> 132

SIGNATURES

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
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 October 21, 1998
- --------------------------------------------------- (principal executive
Donald J. Carter, Jr. officer)

* Secretary (principal financial October 21, 1998
- --------------------------------------------------- and accounting officer)
Leonard A. Robertson

*By: /s/ DONALD J. CARTER, JR.
---------------------------------------------
Donald J. Carter, Jr.
Attorney-in-fact
</TABLE>

II-10
<PAGE> 133

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> 134

<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
opinion to be filed as Exhibit 5.1 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 Six Months Ended June 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

October 20, 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").
<PAGE> 2

Home Interiors & Gifts, Inc.
October 20, 1998
Page 2

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 officials 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 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 certified, conformed or photostatic copies and
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. We have also
assumed (i) the due incorporation or formation and valid existence of the Home
Interiors Companies, (ii) that GIA has the requisite corporate power and
authority to enter into and perform the Indenture, (iii) the due authorization,
execution and delivery of the Indenture by GIA and (iv) that the issuance of
its Guarantee upon consummation of the Exchange Offer has been duly authorized
by GIA.

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

<PAGE> 3

Home Interiors & Gifts, Inc.
October 20, 1998
Page 3

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 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. Those opinions
may not be used or relied upon by any other person, nor may this letter or any
copies thereof be furnished to a third party, filed with a governmental agency,
quoted, cited or otherwise referred to without our prior written consent.

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

<PAGE> 1
EXHIBIT 8.1

October 20, 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

Home Interiors & Gifts, Inc.
October 20, 1998
Page 2

Based on the foregoing, subject to the next succeeding paragraph, and
assuming full compliance with all the terms of the Documents, it is our opinion
that the discussion included in the Prospectus under the caption "Certain
Federal Income Tax Considerations," insofar as it constitutes statements of law
or legal conclusions and except to the extent qualified therein, is accurate in
all material respects.

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 any 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.

Very truly yours,

/s/ WEIL, GOTSHAL, & MANGES LLP

<PAGE> 1
EXHIBIT 10.1
================================================================================

CREDIT AGREEMENT

AMONG

HOME INTERIORS & GIFTS, INC.

CERTAIN LENDERS

NATIONSBANK, N.A., AS ADMINISTRATIVE AGENT

THE CHASE MANHATTAN BANK, AS SYNDICATION AGENT

NATIONAL WESTMINSTER BANK, PLC, AS DOCUMENTATION AGENT

AND

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
SOCIETE GENERALE
CITICORP USA, INC.

AS CO-AGENTS

June 4, 1998

================================================================================

NATIONSBANC MONTGOMERY SECURITIES LLC, AS ARRANGER
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Amendments and Renewals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 1.3 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

ARTICLE 2 Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Section 2.1 The Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2.2 Manner of Borrowing and Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 2.5 Prepayment and Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 2.6 Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 2.7 Non-Receipt of Funds by the Administrative Agent . . . . . . . . . . . . . . . . . . . . . . 37
Section 2.8 Payment of Principal of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 2.9 Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 2.10 Manner of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 2.11 LIBOR Lending Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 2.12 Sharing of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 2.13 Calculation of LIBOR Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 2.14 Booking Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 2.15 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 2.16 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
</TABLE>

<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 3 Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Section 3.1 Conditions Precedent to the Initial Advances and the Initial Letters of Credit . . . . . . . 52
Section 3.2 Conditions Precedent to All Advances and Letters of Credit . . . . . . . . . . . . . . . . . 54
Section 3.3 Conditions Precedent to Conversions and Continuations . . . . . . . . . . . . . . . . . . . 55

ARTICLE 4 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Section 4.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 4.2 Survival of Representations and Warranties, etc . . . . . . . . . . . . . . . . . . . . . . 62

ARTICLE 5 General Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Section 5.1 Preservation of Existence and Similar Matters . . . . . . . . . . . . . . . . . . . . . . . 62
Section 5.2 Business; Compliance with Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 5.3 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 5.4 Accounting Methods and Financial Records . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 5.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 5.6 Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 5.7 Visits and Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 5.8 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 5.9 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 5.10 Environmental Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 5.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 5.12 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

ARTICLE 6 Information Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Section 6.1 Quarterly Financial Statements and Information . . . . . . . . . . . . . . . . . . . . . . . 67
Section 6.2 Annual Financial Statements and Information; Certificate of No Default . . . . . . . . . . . 67
Section 6.3 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
</TABLE>

-ii-
<PAGE> 4

<TABLE>
<S> <C>
Section 6.4 Copies of Other Reports and Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 6.5 Notice of Litigation, Default and Other Matters . . . . . . . . . . . . . . . . . . . . . . 69
Section 6.6 ERISA Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 6.7 Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

ARTICLE 7 Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Section 7.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 7.2 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 7.3 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 7.4 Liquidation, Merger, New Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 7.5 Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 7.6 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 7.7 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 7.8 Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 7.9 Interest Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 7.10 Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 7.11 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 7.12 Amendments and Waivers of Senior Subordinated Notes . . . . . . . . . . . . . . . . . . . . 77
Section 7.13 Amendment of Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

ARTICLE 8 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Section 8.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Section 8.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
</TABLE>

-iii-
<PAGE> 5

<TABLE>
<S> <C>
ARTICLE 9 Changes in Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Section 9.1 LIBOR Basis Determination Inadequate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 9.2 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 9.3 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Section 9.4 Effect On Base Rate Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Section 9.5 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Section 9.6 Replacement of Lenders under Certain Circumstances . . . . . . . . . . . . . . . . . . . . . 83

ARTICLE 10 Agreement Among Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Section 10.1 Agreement Among Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Section 10.2 Lender Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 10.3 Benefits of Article . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

ARTICLE 11 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Section 11.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Section 11.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 11.3 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 11.4 Determination by the Lenders Conclusive and Binding . . . . . . . . . . . . . . . . . . . . 90
Section 11.5 Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Section 11.6 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Section 11.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 11.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 11.9 Interest and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 11.10 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 11.11 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
</TABLE>

-iv-
<PAGE> 6

<TABLE>
<S> <C> <C>
Section 11.12 No Liability of Issuing Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Section 11.13 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Section 11.14 No Duties of Syndication Agent, Documentation Agent or Co-Agents . . . . . . . . . . . . . . 95
SECTION 11.15 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
SECTION 11.16 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
SECTION 11.17 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
</TABLE>

-v-
<PAGE> 7

Schedules and Exhibits

Schedule 1: Commitments and Specified Percentages
Schedule 2: LIBOR Lending Offices
Schedule 3: Existing Liens
Schedule 4: Existing Litigation and Material Liabilities
Schedule 5: Subsidiaries
Schedule 6: Existing Investments
Schedule 7: Existing Indebtedness
Schedule 8: Authorization, Qualification and Good Standing
Schedule 9: Labor Matters
Schedule 10: Environmental Reports
Schedule 11: Taxes

Exhibit A: Revolving Credit Note
Exhibit B: Facility A Term Loan Note
Exhibit C: Facility B Term Loan Note
Exhibit D: Security Agreement
Exhibit E: Compliance Certificate
Exhibit F: Assignment Agreement
Exhibit G: Subsidiary Guaranty
Exhibit H: Swing Line Note
Exhibit I: Deed of Trust
Exhibit J: Intellectual Property Security Agreement and Assignment
Exhibit K: Notice of Borrowing
Exhibit L: Notice of Continuation/Conversion
<PAGE> 8

CREDIT AGREEMENT

CREDIT AGREEMENT, dated as of June 4, 1998, among HOME INTERIORS &
GIFTS, INC., a Texas corporation (the "Borrower"), the Lenders from time to
time party hereto, 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.

BACKGROUND

The Lenders have been requested to provide the Borrower the funds to
(a) consummate the Home Interiors Recapitalization (as hereinafter defined),
(b) pay certain fees and expenses related to the Home Interiors
Recapitalization, and (c) finance the ongoing working capital and general
corporate requirements of the Borrower and its Subsidiaries. The Lenders have
agreed to provide a portion of such financing, subject to the terms and
conditions set forth below.

In consideration of the mutual covenants and agreements contained
herein, and other good and valuable consideration hereby acknowledged, the
parties hereto agree as follows:

ARTICLE 1

Definitions

Section 1.1 Defined Terms. For purposes of this Agreement:

"Acquisition" means any transaction pursuant to which the Borrower or
any of its Subsidiaries, (a) whether by means of a capital contribution or
purchase or other acquisition of stock or other securities or other equity
participation or interest, (i) acquires more than 50% of the equity interest in
any Person pursuant to a solicitation by the Borrower or such Subsidiary of
tenders of equity securities of such Person, or through one or more negotiated
block, market, private or other transactions, or a combination of any of the
foregoing, (ii) except as permitted by Section 7.3(d) hereof with respect to a
newly-formed corporation and Section 7.4(b) hereof with respect to an existing
Subsidiary of the Borrower, makes any corporation a Subsidiary of the Borrower
or such Subsidiary, or causes any corporation, other than a Subsidiary of the
Borrower or such Subsidiary, to be merged into the Borrower or such Subsidiary
(or agrees to be merged into any other corporation other than a wholly-owned
Subsidiary of the Borrower or such Subsidiary), or (iii) agrees to purchase all
or more than 50% of the assets of any Person, pursuant to a merger, purchase of
assets or other reorganization providing for the delivery or issuance to the
holders of such Person's then outstanding securities or other equity interests,
in exchange for such securities, of cash or securities of the Borrower or such
Subsidiary, or any combination thereof, or (b) purchases in one
<PAGE> 9

transaction or a series of related transactions all or more than 50% of the
business or assets of any Person or of any operating division of any Person.

"Acquisition Consideration" means the consideration given by the
Borrower or any of its Subsidiaries for an Acquisition, including but not
limited to the sum of (without duplication) (a) the fair market value of any
cash, property or services given (other than Capital Stock issued in respect of
the Acquisition), plus (b) the amount of any indebtedness for borrowed money
and Capitalized Lease Obligations assumed, incurred or guaranteed in connection
with such Acquisition by the Borrower or any of its Subsidiaries that is a
Subsidiary immediately prior to such Acquisition.

"Adjusted LIBOR Rate" means, for any LIBOR Advance for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100th of 1%) determined by the Administrative Agent to be equal to
the quotient obtained by dividing (a) the LIBOR Rate for such LIBOR Advance for
such Interest Period by (b) 1 minus the Reserve Requirement for such LIBOR
Advance for such Interest Period.

"Adjustment Date" means, for purposes of the Applicable Base Rate
Margin, the Applicable LIBOR Rate Margin, the Commitment Fee payable pursuant
to Section 2.4(a) hereof and the Letter of Credit fees payable pursuant to
Section 2.16(f)(i) hereof, the date of receipt by the Administrative Agent of
the financial statements required to be delivered pursuant to Section 6.1 or
6.2 hereof, as applicable, and the Compliance Certificate required pursuant to
Section 6.3 hereof.

"Administrative Agent" means NationsBank, N.A., a national banking
association, as administrative agent for Lenders, or such successor
administrative agent appointed pursuant to Section 10.1(b) hereof.

"Advance" means any amount advanced or deemed advanced by a Lender to
the Borrower pursuant to Article 2 hereof on the occasion of any borrowing.

"Affected LIBOR Advances" has the meaning specified in Section 2.5(h)
hereof.

"Affiliate" means any Person that, directly or indirectly, through one
or more Persons, Controls or is Controlled By or Under Common Control with such
Person, or a Person who Controls or is Controlled By, such Person, or in the
case of any Lender which is an investment fund, the investment advisor thereof
and any investment fund having the same investment advisor.

"Agreement" means this Credit Agreement, as amended, modified,
supplemented or restated from time to time.

"Agreement Date" means the date of this Agreement.

"Applicable Base Rate Margin" means the following per annum
percentages, applicable in the following situations:

-2-
<PAGE> 10

<TABLE>
<CAPTION>
Facility A Term Loan
Advances and Facility B Term
Revolving Loan
Applicability Advances Advances
------------- -------------------- ---------------
<S> <C> <C> <C>
(a) The Leverage Ratio is greater than or equal to
4.75 to 1 0.75 1.25

(b) The Leverage Ratio is greater than or equal to
4.25 to 1 but less than 4.75 to 1 0.50 1.00

(d) The Leverage Ratio is greater than or equal to
3.25 to 1 but less than 3.75 to 1 0.00 0.75

(e) The Leverage Ratio is less than 3.25 to 1 0.00 0.75
</TABLE>

The Applicable Base Rate Margin payable by the Borrower on the Base Rate
Advances outstanding hereunder shall be adjusted on each Adjustment Date as
tested by using the Leverage Ratio for the most recent four fiscal quarters.
If the financial statements required pursuant to Section 6.1 or 6.2 hereof, as
applicable, and the related Compliance Certificate are not received by the
Administrative Agent by the date required, the Applicable Base Rate Margin
shall be determined as if the Leverage Ratio is greater than or equal to 4.75
to 1 until such time as such financial statements and Compliance Certificate
are received. Notwithstanding the foregoing, the Applicable Base Rate Margin
from and after the Agreement Date until and including the Adjustment Date
determined following the date of receipt of the audited financial statements
for the fiscal year ending December 31, 1998 and related Compliance Certificate
shall be determined as if the Leverage Ratio is greater than or equal to 4.75
to 1.

"Applicable Environmental Laws" means applicable laws pertaining to
health or the environment, including without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 (as amended from time
to time, "CERCLA"), the Resource Conservation and Recovery Act of 1976, as
amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act
amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as
amended from time to time, "RCRA"), the Texas Water Code, and the Texas Solid
Waste Disposal Act.

"Applicable Law" means (a) in respect of any Person, all provisions of
constitutions, statutes, rules, regulations and orders of governmental bodies
or regulatory agencies applicable to such Person and its properties, including,
without limiting the foregoing, all orders and decrees of all courts and
arbitrators in proceedings or actions to which the Person in question is a
party, and (b) in respect of contracts relating to interest or finance charges
that are made or performed in the State of Texas,

-3-
<PAGE> 11

"Applicable Law" shall mean the laws of the United States of America, including
without limitation 12 USC Sections 85 and 86(a), as amended from time to time,
and any other statute of the United States of America now or at any time
hereafter prescribing the maximum rates of interest on loans and extensions of
credit, and the laws of the State of Texas, including, without limitation,
Article 5069-IH, Title 79, Revised Civil Statutes of Texas, 1925, as amended
("Art. IH"), if applicable, and if Art. IH is not applicable, Article 5069-ID,
Title 79, Revised Civil Statutes, 1925, as amended ("Art. ID"), and any other
statute of the State of Texas now or at any time hereafter prescribing maximum
rates of interest on loans and extensions of credit; provided that the parties
hereto agree that the provisions of Chapter 346 of the Texas Finance Code, as
amended, shall not apply to Advances, this Agreement, the Notes or any other
Loan Documents.

"Applicable LIBOR Rate Margin" means the following per annum
percentages, applicable in the following situations:

<TABLE>
<CAPTION>
Facility A Term Loan
Advances and Facility B
Revolving Term Loan
Applicability Advances Advances
------------- ------------------- ----------
<S> <C> <C> <C>
(a) The Leverage Ratio is greater than or equal to
4.75 to 1 2.00 2.50

(b) The Leverage Ratio is greater than or equal to
4.25 to 1 but less than 4.75 to 1 1.75 2.25

(d) The Leverage Ratio is greater than or equal to
3.25 to 1 but less than 3.75 to 1 1.25 2.00

(e) The Leverage Ratio is less than 3.25 to 1 1.00 2.00
</TABLE>

The Applicable LIBOR Rate Margin payable by the Borrower on the LIBOR Advances
outstanding hereunder shall be adjusted on each Adjustment Date as tested by
using the Leverage Ratio for the most recent four fiscal quarters. If the
financial statements required pursuant to Section 6.1 or 6.2 hereof, as
applicable, and the related Compliance Certificate are not received by the
Administrative Agent by the date required, the Applicable LIBOR Rate Margin
shall be determined as if the Leverage Ratio is greater than or equal to 4.75
to 1 until such time as such financial statements and Compliance Certificate
are received. Notwithstanding the foregoing, the Applicable LIBOR Rate Margin
from and after the Agreement Date until and including the Adjustment Date
determined following the date of receipt of the audited financial statements
for the fiscal quarter ending December 31, 1998 and the

-4-
<PAGE> 12

related Compliance Certificates shall be determined as if the Leverage Ratio is
greater than or equal to 4.75 to 1.

"Applicable Specified Percentages" means the Revolving Credit
Specified Percentage, the Facility A Term Loan Specified Percentage, the
Facility B Term Loan Specified Percentage, or the Total Specified Percentage,
as applicable in the context used.

"Assignee" has the meaning specified in Section 11.6(d) hereof.

"Assignment Agreement" shall have the meaning ascribed thereto in
Section 11.6 hereof and substantially in the form of Exhibit F hereto.

"Authorized Signatory" means the chief executive officer, the
president, any vice president, the treasurer, the chief financial officer, any
assistant treasurer, the secretary, or any assistant secretary or controller as
may be or is designated in writing by the Borrower, or any of its Subsidiaries
to execute documents, agreements and instruments on behalf of the Borrower or
any Subsidiary, and to request Advances hereunder.

"Base Rate Advance" means any Advance bearing interest at the Base
Rate Basis.

"Base Rate Basis" means, for any day, a per annum interest rate equal
to the higher of (a) the sum of (i) 0.50% plus (ii) the Federal Funds Rate on
such day plus (iii) the Applicable Base Rate Margin, or (b) the sum of (i) the
Prime Rate on such day plus (ii) the Applicable Base Rate Margin. The Base
Rate Basis shall be adjusted automatically as of the opening of business on the
effective date of each change in the Prime Rate or Federal Funds Rate, as
applicable, to account for such change.

"Borrower" has the meaning assigned to such term in the preamble.

"Business Day" means a day on which commercial banks are open (a) for
the transaction of business in Dallas, Texas and (b) with respect to any LIBOR
Advance, for the transaction of international business (including dealings in
Dollar deposits) in London, England.

"Candle Making Joint Venture" means that certain joint venture of the
Borrower to be engaged in the making of candles in which the Borrower will
initially contribute real estate and equipment having a fair market value not
to exceed $2,500,000 in aggregate amount.

"Capital Expenditures" means, for any period, expenditures made by the
Borrower and its Subsidiaries to acquire or construct fixed assets, plant and
equipment (including renewals, improvements and replacements during such period
and the aggregate amount of items leased or acquired under Capital Leases at
the cost of the item) computed in accordance with GAAP, consistently applied
(excluding any such asset acquired (x) in connection with normal replacement
and maintenance programs properly expensed in accordance with GAAP, (y) with
the proceeds of

-5-
<PAGE> 13

any casualty insurance or any condemnation award (with such expenditures to be
made in accordance with and as permitted by Section 2.5(c) hereof) and (z) with
the cash proceeds of any asset sale made pursuant to Section 7.5 hereof).

"Capital Leases" means capital leases and subleases, as defined in the
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 13, dated November 1976, as amended.

"Capital Stock" means, as to any Person, the equity interests in such
Person, including, without limitation, the shares of each class of capital
stock in any Person that is a corporation, each class of partnership interest
in any Person that is a partnership, and each class of membership interest in
any Person that is a limited liability company.

"Capitalized Lease Obligations" means that portion of any obligation
of the Borrower or any of its Subsidiaries as lessee under a lease which at the
time would be required to be capitalized on a balance sheet prepared in
accordance with GAAP.

"Cash and Cash Equivalents" means with respect to the Borrower and
each of its Subsidiaries (a) cash, (b) securities issued or directly and fully
guaranteed or insured by the United States Government or any agency or
instrumentality thereof having maturities of not more than six months from the
date of acquisition, (c) certificates of deposit and eurodollar time deposits
with maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any Lender or with any domestic commercial bank
having capital and surplus in excess of $500,000,000, (d) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (b) and (c) entered into with any financial
institution meeting the qualifications specified in clause (c) above, and (e)
commercial paper issued by any Lender or the Borrower corporation of any
Lender, and commercial paper rated A-1 or the equivalent thereof by Standard &
Poor's Ratings Group, a Division of McGraw-Hill, Inc., a New York corporation
or P-1 or the equivalent thereof by Moody's Investors Service, Inc. and in each
case maturing within six months after the date of acquisition.

"Change of Control" means the earlier to occur of (a) Hicks Muse, its
principals and their Affiliates and the management of the Borrower and its
Subsidiaries ("HMTF") shall cease to have the power, directly or indirectly, to
vote or direct the voting of securities having a majority of the ordinary
voting power for the election of directors of the Borrower, provided that the
occurrence of the foregoing event shall not be deemed a Change of Control if
(i) at any time prior to the consummation of an Initial Public Offering, and
for any reason whatsoever, (A) HMTF otherwise has the right to designate (and
does so designate) a majority of the board of directors of the Borrower or (B)
HMTF and their employees, directors and officers (the "HMTF Group") own of
record and beneficially an amount of common stock of the Borrower equal to at
least 50% of the amount of common stock of the Borrower owned by the HMTF Group
of record and beneficially as of the Closing Date and such ownership by the
HMTF Group represents the largest single block of voting securities of the
Borrower held by any Person or related group for purposes of section 13(d) of
the

-6-
<PAGE> 14

Securities Exchange Act of 1934, as amended or (ii) at any time after the
consummation of an Initial Public Offering, and for any reason whatsoever, (A)
no "Person" or "group" (as such terms are used in sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), excluding the HMTF Group,
shall become the "beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5
under such Act), directly or indirectly, of more than the greater of (x) 15% of
the shares outstanding or (y) the percentage of the then outstanding voting
stock of the Borrower owned beneficially by the HMTF Group and (B) the board of
directors of the Borrower shall consist of a majority of the Continuing
Directors and (b) any Change of Control as defined in any document pertaining
to the Senior Subordinated Notes.

"Co-Agents" means The Prudential Insurance Company of America, Societe
Generale, and Citicorp USA, Inc.

"Code" means the Internal Revenue Code of 1986, as amended.

"Collateral" means any collateral granted by any Person to the
Administrative Agent to secure the Obligations.

"Collateral Document" means any document under which Collateral is
granted and any document related thereto.

"Commitment Fee" has the meaning specified in Section 2.4(a) hereof.

"Commitments" means, collectively, the Revolving Credit Commitment,
the Facility A Term Loan Commitment and the Facility B Term Loan Commitment.

"Compliance Certificate" means a certificate, signed by an Authorized
Signatory, in substantially the form of Exhibit E, appropriately completed.

"Consulting Agreements" means, collectively, that certain (a)
Financial Advisory Agreement, dated as of June 4, 1998, among the Borrower,
each Guarantor and Hicks, Muse & Co. Partners, L.P. and (b) Monitoring and
Oversight Agreement, dated as of June 4, 1998, among the Borrower, each
Guarantor and Hicks, Muse & Co. Partners, L.P., each as in effect as of the
Agreement Date, and with only such amendments or modifications thereto after
the Agreement Date which do not materially affect the interest of the Lenders
or otherwise reasonably acceptable to the Administrative Agent.

"Continuing Directors" means the directors of the Borrower on the
Closing Date, after giving effect to the Home Interiors Merger and the other
transactions contemplated hereby, and each other director, if, in each case,
such other directors' nominations for election to the board of directors of the
Borrowers are recommended by a majority of the then Continuing Directors or
such other director receives the vote of HMTF in his or her election by the
stockholders of the Borrower.

-7-
<PAGE> 15

"Control" or "Controlled By" or "Under Common Control" means
possession, directly or indirectly, of power to direct or cause the direction
of management or policies (whether through ownership of voting securities, by
contract or otherwise); provided, however, that in any event any Person which
beneficially owns, directly or indirectly, 25% or more (in number of votes) of
the securities having ordinary voting power for the election of directors of a
corporation shall be conclusively presumed to control such corporation.

"Controlled Group" means as of the applicable date, as to any Person
not an individual, all members of a controlled group of corporations and all
trades or businesses (whether or not incorporated) which are under common
control with such Person and which, together with such Person, are treated as a
single employer under Section 414(b), (c), (m) or (o) of the Code; provided,
however, that the Subsidiaries of the Borrower shall be deemed to be members of
the Borrower's Controlled Group.

"Crowley Investments" means Crowley Investments, Inc., a Texas
corporation.

"Current Assets" means at any date, the amount which, in conformity
with GAAP, would be set forth opposite the caption "Total Current Assets" (or
any like caption) on a consolidated balance sheet of the Borrower and its
Subsidiaries at such date, except that there shall be excluded therefrom Cash
and Cash Equivalents.

"Current Liabilities" means at any date, the amount which, in
conformity with GAAP, would be set forth opposite the caption "Total Current
Liabilities" (or any like caption) on a consolidated balance sheet of the
Borrower and its Subsidiaries at such date, except that there shall be excluded
therefrom the current portion of (a) all Advances, and (b) all long-term
Indebtedness for borrowed money (including Capitalized Lease Obligations) in
each case, to the extent included therein.

"Debtor Relief Laws" means any applicable liquidation,
conservatorship, bankruptcy, moratorium, rearrangement, insolvency,
reorganization or similar debtor relief Laws affecting the rights of creditors
generally from time to time in effect.

"Deed of Trust" means any fee simple deed of trust or mortgage, as
applicable, relating to the real fee owned property of the Borrower and each of
its Subsidiaries required to be pledged to the Administrative Agent, in
substantially the form set forth in Exhibit I hereto, as amended, modified,
renewed, supplemented or restated from time to time.

"Default" means an Event of Default and/or any of the events specified
in Section 8.1, regardless of whether there shall have occurred any passage of
time or giving of notice that would be necessary in order to constitute such
event an Event of Default.

"Default Rate" means a simple per annum interest rate equal to (a)
with respect to Base Rate Advances the lesser of (i) the Highest Lawful Rate or
(ii) the Base Rate Basis plus two percent or (b) with respect to LIBOR
Advances, the lesser of (i) the Highest Lawful Rate or (ii) the LIBOR Basis
plus two percent.

-8-
<PAGE> 16
"Determining Lenders" means, on any date of determination, any
combination of Lenders whose Total Specified Percentages aggregate more than
50%; provided, however, in the event that all of the Commitments have been
terminated, "Determining Lenders" means, on any date of determination, any
combination of Lenders having more than 50% of the Advances (other than Swing
Line Advances) then outstanding.

"Dividend" means, as to any Person, (a) any declaration or payment of
any dividend (other than a stock dividend) on, and (b) any purchase, redemption
or other acquisition or retirement for value by such Person of any shares of
Capital Stock of such Person.

"Documentation Agent" means National Westminster Bank, PLC.

"Dollar" or "$" means the lawful currency of the United States of
America.

"Domestic Subsidiary" means any Subsidiary of the Borrower other than
a Foreign Subsidiary.

"EBITDA" means, for any period, determined in accordance with GAAP on
a consolidated basis for the Borrower and its Subsidiaries, the sum of (without
duplication) (a) Pretax Net Income (excluding therefrom, to the extent included
in determining Pretax Net Income, any items of extraordinary gain, including
net gains on the sale of assets other than asset sales in the ordinary course
of business, and adding thereto, to the extent included in determining Pretax
Net Income, any items of extraordinary loss, including net losses on the sale
of assets other than asset sales in the ordinary course of business), plus (b)
to the extent included in determining Pretax Net Income, interest expense
(including the amortization or write-off of debt discount and issuance costs
and commissions and discounts and other fees and charges associated with
Indebtedness), plus (c) to the extent included in determining Pretax Net
Income, depreciation and amortization, plus (d) to the extent included in
determining Pretax Net Income, other non-cash charges, minus (e) for any period
prior to the Agreement Date included in the calculation of EBITDA, interest and
investment income, minus (f) to the extent included in determining Pretax Net
Income, other non-cash credits, minus (g) cash payments made with respect to
non-cash charges added back in determining EBITDA in any prior period which
would otherwise be excluded in determining EBITDA, plus (h) to the extent
included in determining Pretax Net Income, one-time transaction expenses
incurred in connection with the Home Interiors Recapitalization which are not
capitalized or amortized pursuant to GAAP.

"Environmental Reports" has the meaning specified in Section 4.1(q)
hereof.

"Equity Offering" means any offering, sale or issuance of Capital
Stock of the Borrower other than in respect of the exercise of stock options of
such stock.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any regulation promulgated thereunder.

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<PAGE> 17
"ERISA Event" means, with respect to the Borrower and its
Subsidiaries, (a) a Reportable Event (other than a Reportable Event not subject
to the provision for 30-day notice to the PBGC under regulations issued under
Section 4043 of ERISA) with respect to a Plan, (b) the withdrawal of any such
Person or any member of its Controlled Group from a Plan subject to Section
4063 of ERISA during a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to
terminate under Section 4041(c) of ERISA, (d) the institution of proceedings to
terminate a Plan by the PBGC, (e) the failure to make required contributions
which would result in the imposition of a Lien under Section 412 of the Code or
Section 302 of ERISA, (f) a withdrawal from a Multiemployer Plan, or (g) any
other event or condition which would reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan or Multiemployer Plan or the imposition of
any liability under Title IV of ERISA other than PBGC premiums due but not
delinquent under Section 4007 of ERISA.

"Event of Default" means any of the events specified in Section 8.1,
provided that any requirement for notice or lapse of time has been satisfied.

"Excess Cash Flow" means, for the Borrower and its Subsidiaries on a
consolidated basis for any period, an amount equal to (without duplication) (a)
Net Income for such period, plus (b) depreciation and amortization for such
period, plus (c) any decreases in Working Capital for such period, minus (d)
for any period prior to the Agreement Date included in the calculation of
Excess Cash Flow, interest and investment income for such period, plus or minus
as the case may be, (e) any items of extraordinary loss, including net losses
on the sale of assets other than asset sales in the ordinary course of
business, and any items of extraordinary gain, including net gains on the sale
of assets other than asset sales in the ordinary course of business (in each
case to the extent such extraordinary gain or loss is included in Net Income),
minus (f) scheduled payments of Indebtedness for such period, minus (g) actual
Capital Expenditures during such period (excluding, however, the portion of
such Capital Expenditures, if any, financed by purchase money debt (other than
the Advances) or Capitalized Lease Obligations), minus (h) any increases in
Working Capital for such period, minus (i) the cash portion of any Acquisition
Consideration paid during such period.

"Facility A Term Loan Advance" means an Advance made pursuant to
Section 2.1(b) hereof.

"Facility A Term Loan Commitment" means the commitments of the
Lenders, subject to the terms and conditions hereof, to make Facility A Term
Loan Advances up to an aggregate principal amount of $200,000,000, as
terminated pursuant to Section 2.1(b) hereof.

"Facility A Term Loan Maturity Date" means June 30, 2004, or the
earlier date of acceleration of the Facility A Term Loan Advances pursuant to
Section 8.2 hereof.

"Facility A Term Loan Note" means any promissory note of the Borrower
evidencing Facility A Term Loan Advances hereunder, substantially in the form
of Exhibit B hereto, together with any extension, renewal or amendment thereof,
or substitution therefor.

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<PAGE> 18
"Facility A Term Loan Specified Percentage" means, as to any Lender,
the percentage indicated beside its name on Schedule 1 hereto as its Facility A
Term Loan Specified Percentage, or as adjusted or specified in any amendment to
this Agreement or in any Assignment Agreement.

"Facility B Term Loan Advance" means an Advance made pursuant to
Section 2.1(c) hereof.

"Facility B Term Loan Commitment" means the commitments of the
Lenders, subject to the terms and conditions hereof, to make Facility B Term
Loan Advances up to an aggregate principal amount of $100,000,000, as
terminated pursuant to Section 2.1(c) hereof.

"Facility B Term Loan Maturity Date" means June 30, 2006, or the
earlier date of acceleration of the Facility B Term Loan Advances pursuant to
Section 8.2 hereof.

"Facility B Term Loan Note" means any promissory note of the Borrower
evidencing Facility B Term Loan Advances hereunder, substantially in the form
of Exhibit C hereto, together with any extension, renewal or amendment thereof,
or substitution therefor.

"Facility B Term Loan Specified Percentage" means, as to any Lender,
the percentage indicated beside its name on Schedule 1 hereto as its Facility B
Term Loan Specified Percentage, or as adjusted or specified in any amendment to
this Agreement or in any Assignment Agreement.

"Federal Funds Rate" means, for any day, the rate per annum (rounded
upwards if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of Dallas on the Business Day next
succeeding such day, provided that (a) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Business Day as so published on the next succeeding Business
Day, and (b) if no such rate is so published on such next succeeding Business
Day, the Federal Funds Rate for such day shall be the average rate quoted to
the Administrative Agent by three federal funds brokers of recognized standing
selected by it.

"Fee Letter" has the meaning specified in Section 2.4(b) hereof.

"Financial Statements" has the meaning specified in Section 4.1(j)(i)
hereof.

"Foreign Subsidiary" means any Subsidiary of the Borrower which is not
organized under the Laws of any state of the United States of America or the
District of Columbia.

"Form 4224" has the meaning specified in Section 2.15(e) hereof.

"Form 1001" has the meaning specified in Section 2.15(e) hereof.

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<PAGE> 19
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the rules and regulations of the Securities
and Exchange Commission, or their successors which are applicable in the
circumstances as of the date of determination, except that for purposes of
Sections 7.8 and 7.9 hereof, GAAP shall be determined on the basis of such
principles in effect on the date hereof and consistent with those used in the
preparation of the Financial Statements. In the event that any "Accounting
Change" (as defined below) shall occur and such change results in a change in
the method of calculation of financial covenants, standards or terms in this
Agreement, then the Borrower and the Administrative Agent agree to enter into
negotiations in order to amend such provisions of this Agreement so as to
equitably reflect such Accounting Changes with the desired result that the
criteria for evaluating the Borrower's financial condition shall be the same
after such Accounting Changes as if such Accounting Changes had not been made.
Until such time as such an amendment shall have been executed and delivered by
the Borrower, the Administrative Agent and the Determining Lenders, all
financial covenants, standards and terms in this Agreement shall continue to be
calculated or construed as if such Accounting Changes had not occurred. The
term "Accounting Changes" refers to changes in accounting principles required
by the promulgation of any rule, regulation, pronouncement or opinion by the
Financial Accounting Standards Board or the American Institute of Certified
Public Accountants or, if applicable, the Securities and Exchange Commission
(or successors thereto or agencies with similar functions).

"Guarantor" means each direct and indirect Domestic Subsidiary of the
Borrower which executes a Subsidiary Guaranty.

"Guaranty" or "Guaranteed", means (a) as applied to an obligation of
another Person, (i) a guaranty, direct or indirect, in any manner, of any part
or all of such obligation, and (ii) an agreement, direct or indirect,
contingent or otherwise, the practical effect of which is to assure in any way
the payment or performance (or payment of damages in the event of
nonperformance) of any part or all of such obligation, including, without
limiting the foregoing, any reimbursement obligations with respect to amounts
which may be drawn by beneficiaries of outstanding letters of credit and (b) an
agreement, direct or indirect, contingent or otherwise, to maintain net worth,
working capital, earnings or other financial performance of another Person.

"Hicks Muse" means HMTF Operating, Inc., a Texas corporation.

"Highest Lawful Rate" means at the particular time in question the
maximum rate of interest which, under Applicable Law, the Lenders are then
permitted to charge on the Obligations. If the maximum rate of interest which,
under Applicable Law, the Lenders are permitted to charge on the Obligations
shall change after the date hereof, the Highest Lawful Rate shall be
automatically increased or decreased, as the case may be, from time to time as
of the effective time of each change in the Highest Lawful Rate without notice
to the Borrower. For purposes of determining the Highest Lawful Rate under the
Applicable Law of the State of Texas, the applicable rate ceiling shall be (a)
the weekly rate ceiling described in and computed in accordance with the
provisions of

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<PAGE> 20

Art. ID.003, or (b) if the parties subsequently contract as allowed by
Applicable Law, the quarterly ceiling or the annualized ceiling computed
pursuant to Art. ID.008; provided, however, that at any time the weekly rate
ceiling, the quarterly ceiling or the annualized ceiling shall be less than 18%
per annum or more than 24% per annum, the provisions of Art. ID.009(a) and (b)
shall control for purposes of such determination, as applicable.

"HM/RB Partners, L.P. Cash Contribution" means the contribution of
cash by HM/RB Partners, L.P. to the Borrower in an amount equal to the
remainder of $195,000,000 minus the amount, if any, that the Home Interiors
Rollover Equity exceeds $80,000,000.

"HMTF" has the meaning specified in the definition of "Change of
Control".

"HMTF Group" has the meaning specified in the definition of "Change of
Control".

"Home Interiors Merger" means the merger of Crowley Investments with
and into the Borrower, with the Borrower as the surviving corporation.

"Home Interiors Merger Agreement" means that certain Agreement and
Plan of Merger, dated as of April 13, 1998, by and among the Borrower and
Crowley Investments, as amended, modified and supplemented.

"Home Interiors Merger Documents" means the Home Interiors Merger
Agreement and all other contracts, agreements or documents executed or
delivered in connection with the Home Interiors Merger, as amended, modified or
supplemented.

"Home Interiors Recapitalization" means, collectively, (a) the HM/RB
Partners, L.P. Cash Contribution, (b) the Home Interiors Stock Redemption, and
(c) the issuance by the Borrower of the Senior Subordinated Notes.

"Home Interiors Rollover Equity" means the outstanding Capital Stock
of the Borrower retained by existing shareholders of the Borrower and not
redeemed pursuant to the Home Interiors Stock Redemption, which amount shall
not be less than $80,000,000.

"Home Interiors Stock Redemption" means the redemption by the Borrower
of up to $845,000,000 of its outstanding Capital Stock from existing
shareholders of the Borrower.

"Increased Costs" has the meaning specified in Section 9.3(a) hereof.

"Indebtedness" means, with respect to any Person, without duplication,
(a) all obligations for borrowed money, (b) all obligations evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations under conditional
sale or other title retention agreements relating to property or assets
purchased by such Person, (d) all obligations issued or assumed as the deferred
purchase price of property or services (other than current trade payables and
accrued expenses incurred in the

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<PAGE> 21

ordinary course of such Person's business), (e) all obligations secured by any
Lien on any property or asset owned by such Person, whether or not the
obligation secured thereby shall have been assumed, (f) to the extent not
otherwise included, all Capitalized Lease Obligations of such Person, all
obligations in respect of letters of credit, bankers' acceptances and similar
instruments, and all obligations under Interest Hedge Agreements, (g) the
principal portion of all obligations of such Person under any Synthetic Lease,
and (h) any Guaranty of such Person of any obligation of another Person
constituting obligations of a type set forth above. The amount of any such
indebtedness of any Person described in clause (e) shall be deemed to be the
lesser of such (i) indebtedness and (ii) the fair market value of such asset or
property encumbered, as determined by such Person in good faith.

"Indemnified Matters" has the meaning specified in Section 5.9(a)
hereof.

"Indemnitees" has the meaning specified in Section 5.9(a) hereof.

"Initial Public Offering" means an underwritten public offering by the
Borrower of Capital Stock of the Borrower or any Subsidiary thereof pursuant to
a registration statement filed with the Securities and Exchange Commission in
accordance with the Securities Act of 1933, as amended.

"Intellectual Property Security Agreement" means the Intellectual
Property Security Agreement and Assignment executed by the Borrower and each of
its Subsidiaries, substantially in the form of Exhibit J hereto, as amended,
modified, renewed, supplemented or restated from time to time.

"Interest Coverage Ratio" means for any date of determination, the
ratio of (a) EBITDA to (b) cash interest expense of the Borrower and its
Subsidiaries (including cash interest expense pursuant to Capitalized Lease
Obligations, but excluding amortization or write-off of debt discount, issuance
costs and commissions and discounts and other fees and charges associated with
Indebtedness), in each case for the immediately preceding four consecutive
fiscal quarters. Notwithstanding the immediately preceding sentence, for
purposes of the calculation of the Interest Coverage Ratio prior to June 30,
1999, cash interest expense shall be determined by annualizing the amount of
cash interest paid from June 30, 1998 until such date of determination.

"Interest Hedge Agreements" means any and all agreements, devices or
arrangements designed to protect at least one of the parties thereto from the
fluctuations of interest rates, exchange rates or forward rates applicable to
such party's assets, liabilities or exchange transactions, including, but not
limited to, dollar-denominated or cross- currency interest rate exchange
agreements, forward currency exchange agreements, interest rate cap or collar
protection agreements, forward rate currency or interest rate options, puts and
warrants, as the same may be amended or modified and in effect from time to
time, and any and all cancellations, buy backs, reversals, terminations or
assignments of any of the foregoing.

"Interest Period" means the period beginning on the day any LIBOR
Advance is made and ending one, two, three or six months thereafter, and if
available to all Lenders, nine or twelve months

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<PAGE> 22

thereafter (as the Borrower shall select); provided, however, that all of the
foregoing provisions are subject to the following:

(a) if any Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall be extended to
the next succeeding Business Day, unless the result of such extension
would be to extend such Interest Period into another calendar month,
in which event such Interest Period shall end on the immediately
preceding Business Day;

(b) any Interest Period that begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month;

(c) the Borrower may not select any Interest Period in
respect of Advances having an aggregate principal amount less than
$2,000,000; and

(d) there shall be outstanding at any one time no more
than ten Interest Periods in the aggregate.

"Investment" means any (a) Acquisition or (b) any other direct or
indirect acquisition of assets of any Person which is not an Acquisition, or
any other direct or indirect purchase or other acquisition of, or beneficial
interest in, Capital Stock or other securities of any other Person, or any
direct or indirect loan, advance (other than advances to employees for moving
and travel expenses, drawing accounts and similar expenditures in the ordinary
course of business), capital contribution to, or investment in any other
Person, including without limitation the occurrence or sufferance of
Indebtedness or the purchase of accounts receivable of any other Person that
are not current assets or do not arise in the ordinary course of business. The
amount of any equity Investment shall be the original cost of such Investment
plus the cost of all additions thereto and the amount of any debt Investment
shall be the outstanding principal amount thereof, in each case without any
adjustments for increases or decreases in value, or write-ups, write- downs or
write-offs with respect to such Investment.

"Issuing Bank" means NationsBank, N.A. in its capacity as issuer of
the Letters of Credit.

"Law" means any statute, law, ordinance, regulation, rule, order,
writ, injunction or decree of any Tribunal.

"Lender" means each financial institution shown on the signature pages
hereof so long as such financial institution maintains a portion of any of the
Commitments or is owed any part of the Obligations (including the
Administrative Agent in its individual capacity), and each Assignee that
hereafter becomes party hereto pursuant to Section 11.6 hereof, subject to the
limitations set forth therein.

"L/C Cash Collateral Account" has the meaning specified in Section
2.16(g) hereof.

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<PAGE> 23
"L/C Related Documents" has the meaning specified in Section 2.16(e)
hereof.

"Letter of Credit" has the meaning specified in Section 2.16(a)
hereof, provided that letters of credit which have been cash collateralized
(excluding, however, pursuant to the L/C Cash Collateral Account) or for which
back-up letters of credit have been obtained, in each case in a manner
reasonably acceptable to the Administrative Agent, shall no longer be
considered Letters of Credit.

"Letter of Credit Agreement" has the meaning specified in Section
2.16(b) hereof.

"Letter of Credit Facility" means the amount of Letters of Credit the
Issuing Bank may issue pursuant to Section 2.16(a) hereof.

"Leverage Ratio" means, for any date of determination, the ratio of
(a) Total Debt as of the date of determination to (b) EBITDA for the
immediately preceding four consecutive fiscal quarters. For purpose of
calculation of the Leverage Ratio only, with respect to assets not owned at all
times during the four fiscal quarters immediately preceding the date of
calculation of EBITDA, there shall be (i) included in EBITDA the pro forma
EBITDA of any assets acquired during any such four fiscal quarters as if
acquired at the beginning of the four fiscal quarters preceding the date of
calculation and (ii) excluded from EBITDA the EBITDA of any assets disposed of
during any of such fiscal quarters as if disposed of at the beginning of the
four fiscal quarters preceding the date of calculation.

"LIBOR Advance" means an Advance bearing interest at the LIBOR Basis.

"LIBOR Basis" means with respect to any LIBOR Advance, a per annum
interest rate equal to the lesser of (a) the Highest Lawful Rate, or (b) the
sum of the Adjusted LIBOR Rate plus the Applicable LIBOR Rate Margin.

"LIBOR Lending Office" means, with respect to a Lender, the office
designated as its LIBOR Lending Office on Schedule 2 attached hereto, and such
other office of the Lender or any of its affiliates hereafter designated by
notice to the Borrower and the Administrative Agent.

"LIBOR Rate" means, for any Interest Period the rate per annum
(rounded upwards, if necessary, to the nearest 1/100th of 1%) appearing on
Telerate Page 3750 (or any successor page) as the London interbank offered rate
for deposits in Dollars at approximately 11:00 a.m. (London time) two Business
Days prior to the first day of such Interest Period for a term comparable to
such Interest Period. If for any reason such rate is not available, the term
"LIBOR Rate" shall mean, for any LIBOR Advance for any Interest Period
therefor, the rate per annum (rounded upwards, if necessary, to the nearest
1/100th of 1%) appearing on Reuters Screen LIBO Page as the London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m. (London time)
two Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period; provided, however, if more than one rate is
specified on Reuters Screen LIBO Page, the

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<PAGE> 24

applicable rate shall be the arithmetic mean of all such rates (rounded
upwards, if necessary, to the nearest 1/100th of 1%).

"Lien" means, with respect to any property, any mortgage, lien,
pledge, collateral assignment, hypothecation, charge, security interest, title
retention agreement or other encumbrance of any kind in respect of such
property.

"Litigation" means any proceeding, claim, lawsuit, arbitration, and/or
investigation by or before any Tribunal, including, without limitation,
proceedings, claims, lawsuits, and/or investigations under or pursuant to any
environmental, occupational, safety and health, antitrust, unfair competition,
securities, Tax or other Law, or under or pursuant to any contract, agreement
or other instrument.

"Loan Documents" means this Agreement, the Notes, if any, the Security
Agreement, the Fee Letter, any Interest Hedge Agreements entered into with any
Lender or any Affiliate of any Lender, each Subsidiary Guaranty, the
Intellectual Property Security Agreement, the Deeds of Trust, and any other
agreement executed, delivered or performable by any Obligor in connection
herewith or as security for the Obligations.

"Material Adverse Effect" means any act or circumstance or event that
has a material adverse effect in or on (a) the business, assets, financial
condition, results of operations, or prospects of the Borrower and its
Subsidiaries taken as a whole, (b) the validity or enforceability of any Loan
Documents or (c) the rights or remedies of the Lenders or the Administrative
Agent under any of the Loan Documents.

"Maximum Amount" means the maximum amount of interest which, under
Applicable Law, the Lenders are permitted to charge on the Obligations.

"Multiemployer Plan" means, as to any Person, at any time, a
"multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to
which such Person or any member of its Controlled Group has any obligation or
liability (contingent or otherwise) under Title IV of ERISA.

"NationsBank" means NationsBank, N.A., a national banking association,
in its capacity as a Lender.

"Necessary Authorization" means any right, franchise, license, permit,
consent, approval or authorization from, or any filing or registration with,
any governmental or other regulatory authority or any Person necessary or
appropriate to enable the Borrower or any of its Subsidiaries to maintain and
operate its business and properties, provided a failure to have such license,
permit, consent, approval or authorization could reasonably be expected to
result on a Material Adverse Effect.

"Negative Pledge" means any agreement, contract or other arrangement
whereby the Borrower or any of its Subsidiaries is prohibited from, or would
otherwise be in default as a result

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<PAGE> 25

of, creating, assuming, incurring or suffering to exist, directly or
indirectly, any Lien on any of its assets.

"Net Cash Proceeds" means, with respect to any sale, lease, transfer
or other disposition of any asset by or of, or the issuance of Capital Stock
to, any Person or any Recovery Event, the amount of cash received by such
Person in connection with such transaction after deducting therefrom the
aggregate, without duplication, of the following amounts to the extent properly
attributable to such transaction or to any asset that may be the subject
thereof: (i) reasonable brokerage commissions, legal fees, finder's fees,
financial advisory fees, fees for solvency opinions, accounting fees,
underwriting fees, investment banking fees, survey, title insurance,
appraisals, notaries and other similar commissions and fees, and expenses, in
each case, to the extent paid, payable or reimbursed by such Person; (ii)
filing, recording or registration fees or charges or similar fees or charges
paid by such Person; (iii) taxes paid or payable by such Person or any
shareholder, partner or member of such Person to governmental taxing
authorities as a result of such sale or other disposition (after taking into
account any available tax credits or deductions or any tax sharing
arrangements); (iv) payment of the outstanding principal amount of, premium or
penalty, if any, and interest on any Indebtedness (other than the Obligations)
that is secured by a Lien on the asset in question; and (v) any reserve for
adjustment in respect of the price of any such sale, lease, transfer or other
disposition of such asset or assets.

"Net Income" means net profit (or loss) after taxes of the Borrower
and its Subsidiaries, on a consolidated basis, determined in accordance with
GAAP.

"Non-Consenting Lender" has the meaning specified in Section 9.6
hereof.

"Non-Funding Lender" has the meaning specified in Section 9.6 hereof.

"Notes" means, collectively, the Revolving Credit Notes, the Facility
A Term Loan Notes, the Facility B Term Loan Notes and the Swing Line Notes.

"Notice of Borrowing" has the meaning specified in Section 2.2(a)
hereof.

"Notice of Continuation/Conversion" has the meaning specified in
Section 2.2(d) hereof.

"Notice of Issuance" has the meaning specified in Section 2.16(b)
hereof.

"Obligations" means all obligations of any nature (whether matured or
unmatured, fixed or contingent, including the Reimbursement Obligations) of the
Borrower or any of its Subsidiaries to any Lender or any Affiliate of any
Lender under any of the Loan Documents as they may be amended from time to
time.

"Obligor" means the Borrower and each Guarantor.

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<PAGE> 26
"Operating Lease" means any operating lease, as defined in the
Financial Accounting Standard Board Statement of Financial Accounting Standards
No. 13, dated November, 1976 or otherwise in accordance with GAAP.

"Other Taxes" has the meaning specified in Section 2.15(b) hereof.

"Ownership Information" has the meaning specified in Section 11.6(j)
hereof.

"Participant" has the meaning specified in Section 11.6(c) hereof.

"Participation" has the meaning specified in Section 11.6(c) hereof.

"Payment Date" means the last day of the Interest Period for any LIBOR
Advance; provided, however, if the Interest Period for any LIBOR Advance
exceeds three months, "Payment Date" shall also mean each day which is three
months, or a whole multiple thereof after the first day of such Interest
Period.

"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

"Permitted Issuance" means (a) the issuance by the Borrower of shares
of Capital Stock as dividends on issued and outstanding Capital Stock of the
same class of the Borrower or pursuant to any dividend reinvestment plan, (b)
the issuance by the Borrower of options or other equity securities of the
Borrower to outside directors, members of management or employees of the
Borrower or any Subsidiary of the Borrower, (c) the issuance of securities as
interest or dividends on pay-in-kind debt or preferred equity securities in
accordance with the terms permitted hereunder and under the other Loan
Documents, (d) the issuance to the Borrower or any Subsidiary (or any director,
with respect to such director's qualifying shares) by any of its Subsidiaries
of any of their respective Capital Stock, in each case with respect to this
clause (d) to the extent such Capital Stock issued to the Borrower or any
Domestic Subsidiary is pledged to the Administrative Agent pursuant to the
applicable Loan Document, (e) the issuance by the Borrower of shares of its
Capital Stock in connection with an Acquisition, (f) cash payments made in lieu
of fractional shares of the Borrower's Capital Stock in an aggregate amount not
to exceed $200,000 in aggregate amount during the term of this Agreement, and
(g) the issuance by the Borrower of additional shares of Capital Stock of the
Borrower to infuse additional capital into the Borrower in an aggregate amount
not to exceed $25,000,000 during the term of this Agreement.

"Permitted Liens" means, as applied to any Person:

(a) Any Lien in favor of the Lenders or the
Administrative Agent to secure the Obligations hereunder;

(b) (i) Liens on real estate for ad valorem taxes not yet
delinquent, (ii) Liens on leasehold interests created by the lessor in
favor of any mortgagee of the leased premises, and

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<PAGE> 27

(iii) Liens for taxes, assessments, governmental charges, levies or
claims not yet delinquent, or in each case for clauses (i) and (iii)
that are being diligently contested in good faith by appropriate
proceedings and for which adequate reserves shall have been set aside
on such Person's books in accordance with GAAP, but only so long as no
foreclosure, restraint, sale or similar proceedings have been
commenced with respect thereto that has not been stayed;

(c) Liens of carriers, landlords, warehousemen,
mechanics, laborers and materialmen and other similar Liens incurred
in the ordinary course of business for sums not overdue for a period
of more than 60 days or being contested in good faith, if such reserve
or appropriate provision, if any, as shall be required by GAAP shall
have been made therefor;

(d) (i) Liens incurred in the ordinary course of business
in connection with worker's compensation, unemployment insurance or
similar legislation and (ii) deposits to secure the performance of
bids, trade contracts (other than for borrowed money), leases,
statutory obligations, insurance contracts, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in
the ordinary course of business;

(e) Easements, right-of-way, restrictions and other
similar encumbrances on the use of real property which do not
materially interfere with the ordinary conduct of the business of such
Person or which are set forth in any title policy or "marked up"
commitment thereof delivered pursuant hereto and reasonably acceptable
to the Administrative Agent;

(f) Liens created to secure the purchase price of assets
acquired by such Person or created to secure Indebtedness permitted by
Section 7.1(c) hereof, which is incurred solely for the purpose of
financing the acquisition of such assets and incurred at the time of
acquisition or within 90 days thereafter, so long as each such Lien
shall at all times be confined solely to the asset or assets so
acquired (and proceeds thereof), and refinancings thereof so long as
any such Lien remains solely on the asset or assets acquired and the
amount of Indebtedness related thereto is not increased;

(g) Liens in respect of judgments or awards for which
appeals or proceedings for review are being prosecuted and in respect
of which a stay of execution upon any such appeal or proceeding for
review shall have been secured not constituting an Event of Default
under Section 8.1(h) hereof, provided that (i) such Person shall have
established adequate reserves for such judgments or awards, (ii) such
judgments or awards shall be fully insured and the insurer shall not
have denied coverage, or (iii) such judgments or awards shall have
been bonded to the satisfaction of the Determining Lenders;

(h) Any Liens which are described on Schedule 3 hereto,
and Liens resulting from the refinancing, renewal, or extension of the
related Indebtedness, provided that the Indebtedness secured thereby
shall not be increased and the Liens shall not cover additional assets
of the Borrower (other than after-acquired title in or on such
property and proceeds of the existing collateral in accordance with
the document creating such Lien);

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<PAGE> 28
(i) Liens arising from precautionary Uniform Commercial
Code financing statements with respect to operating leases or
consignment arrangements in the ordinary course of business;

(j) Liens in favor of banking institutions arising by
operation of law encumbering deposits (including the right of setoff)
held by such banking institution incurred in the ordinary course of
business and which are within the general parameters customary in the
banking industry;

(k) Liens existing on any property or asset at the time
of acquisition thereof by the Borrower and its Subsidiaries or
existing on the property or assets of any Person that becomes a
Subsidiary after the Agreement Date at the time such Person becomes a
Subsidiary (provided, that (x) such Lien is not created in
contemplation of or in connection with such acquisition or such Person
becoming a Subsidiary, as the case may be, (y) such Lien shall not
apply to any other property or assets of the Borrower or its
Subsidiaries and (z) such Lien shall secure only those obligations
which it secures on the date of such acquisition or the date such
Person becomes a Subsidiary, as the case may be);

(l) Any obligations or duties affecting any of the
property of the Borrower or its Subsidiaries to any municipality or
public authority with respect to any franchise, grant, license or
permit which do not materially impair the use of such property for the
purposes for which it is held and do not materially impair the value
of the Collateral;

(m) Liens on property of the Borrower and its
Subsidiaries in favor of landlords securing licenses, subleases and
leases permitted hereunder and not interfering with the business of
the Borrower or any of its Subsidiaries;

(n) Licenses, leases or subleases permitted hereunder
granted to others but not interfering in any material respect with any
rights to the Collateral or with the business of the Borrower or any
of its Subsidiaries; and

(o) Liens not otherwise permitted hereunder which secure
obligations not to exceed $3,000,000 in aggregate amount outstanding
at any time.

"Person" means an individual, corporation, partnership, limited
liability company, trust or unincorporated organization, or a government or any
agency or political subdivision thereof.

"Plan" means an employee benefit plan as defined in Section 3(3) of
ERISA subject to Title IV of ERISA or Section 412 of the Code (other than a
Multiemployer Plan) pursuant to which any employees of the Borrower, its
Subsidiaries or any member of their Controlled Group participate.

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<PAGE> 29
"Pretax Net Income" means net profit (or loss) before taxes of the
Borrower and its Subsidiaries, on a consolidated basis, determined in
accordance with GAAP.

"Prime Rate" means, at any time, the prime interest rate announced or
published by the Reference Lender from time to time as its reference rate for
the determination of interest rates for loans of varying maturities in Dollars
to United States residents of varying degrees of creditworthiness and being
quoted at such time by the Reference Lender as its "prime rate;" it being
understood that such rate may not be the lowest rate of interest charged by the
Reference Lender.

"Quarterly Date" means the last day of each March, June, September and
December, beginning June 30, 1998.

"Recovery Event" means any settlement of or payment in respect of any
property insurance or casualty insurance claim or any condemnation proceeding
in or deed in lieu thereof relating to any Collateral, excluding any such
settlement or payment which, together with any related settlement or payment,
yields gross proceeds to the Borrower or any of its Subsidiaries of less than
$5,000,000.00.

"Reference Lender" means NationsBank; provided that if NationsBank's
portion of the Commitments shall terminate and it shall have no Advances
outstanding hereunder, NationsBank shall cease to be the Reference Lender, and
the Administrative Agent (after consultation with Borrower) shall, with notice
to the Borrower and the Lenders, designate another Lender as the Reference
Lender.

"Register" has the meaning specified in Section 11.6(j) hereof.

"Reimbursement Obligations" means, in respect of any Letter of Credit
as at any date of determination, the sum of (a) the maximum aggregate amount
which is then available to be drawn under such Letter of Credit plus (b) the
aggregate amount of all drawings under such Letter of Credit and not
theretofore reimbursed by the Borrower.

"Reinvestment Deferred Amount" means with respect to any Reinvestment
Event, the aggregate Net Cash Proceeds received by the Borrower or any of its
Subsidiaries in connection therewith which are not applied to prepay the
Advances.

"Reinvestment Event" means any Recovery Event in respect of which the
Borrower has delivered a Reinvestment Notice.

"Reinvestment Notice" means a written notice by an Authorized
Signatory stating that no Event of Default has occurred and is continuing and
that the Borrower (directly or indirectly through a Subsidiary) intends to use
all or a specified portion of the Net Cash Proceeds of a Recovery Event to
acquire assets useful in its business.

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<PAGE> 30
"Reinvestment Prepayment Amount" means with respect to any
Reinvestment Event, the Reinvestment Deferred Amount relating thereto less any
amount expended prior to the relevant Reinvestment Prepayment Date to acquire
assets useful in the Borrower's business.

"Reinvestment Prepayment Date" means with respect to any Reinvestment
Event, the earlier of (a) the date occurring 365 days after such Reinvestment
Event and (b) the date on which the Borrower shall have determined not to, or
shall have otherwise ceased to, acquire assets useful in the Borrower's
business with all or any portion of the relevant Reinvestment Deferred Amount.

"Related Fund" means, with respect to any Lender which is a fund that
invests in loans, any other fund that invests in loans and is managed by the
same investment advisor as such Lender or by an Affiliate of such investment
advisor.

"Release Date" means the date on which the Notes have been paid, all
other Obligations due and owing have been paid and performed in full, and the
Commitments have been terminated.

"Reportable Event" shall have the meaning set forth in Section 4043(b)
of ERISA.

"Required Facility A Term Loan Lenders" means, on any date of
determination, any combination of Lenders having more than 50% of the Facility
A Term Loan Advances then outstanding.

"Required Facility B Term Loan Lenders" means, on any date of
determination, and combination of Lenders having more than 50% of the Facility
B Term Loan Advances then outstanding.

"Required Revolving Credit Lenders" means, on any date of
determination, any combination of Lenders whose Revolving Credit Specified
Percentages aggregate more than 50%, provided, however, in the event that the
Revolving Credit Commitment has terminated, "Required Revolving Credit Lenders"
means, on any date of determination, any combination of Lenders having more
than 50% of the Revolving Credit Advances then outstanding.

"Reserve Requirement" means, at any time, the maximum rate at which
reserves (including, without limitation, any marginal, special, supplemental or
emergency reserves) are required to be maintained under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) by member banks of the Federal Reserve System against "Eurocurrency
liabilities" (as such term is used in Regulation D). Without limiting the
effect of the foregoing, the Reserve Requirement shall reflect any other
reserves required to be maintained by such member banks with respect to (i) any
category of liabilities which includes deposits by reference to which the
Adjusted LIBOR Rate (as the case may be) is to be determined, or (ii) any
category of extensions of credit or other assets which include LIBOR Advances.
The Adjusted LIBOR Rate shall be adjusted automatically on and as of the
effective date of any change in the Reserve Requirement.

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"Restricted Payments" means, collectively, (a) Dividends, (b) any
payment or prepayment of principal, interest, premium or penalty on any of the
Senior Subordinated Notes of the Borrower or any of its Subsidiaries or any
defeasance, redemption, purchase, repurchase or other acquisition or retirement
for value, in whole or in part, of any of the Senior Subordinated Notes
(including, without limitation, the setting aside of assets or the deposit of
funds therefor) of the Borrower or any of its Subsidiaries, and (c) any payment
of any management, advisory, consulting or similar fees to any Affiliate of the
Borrower or any of its Subsidiaries other than an (i) Obligor and (ii) pursuant
to the Consulting Agreements.

"Revolving Commitment Fee" has the meaning specified in Section 2.4(a)
hereof.

"Revolving Commitment Maturity Date" means June 30, 2004, or the
earlier date of termination in whole of the Revolving Credit Commitment
pursuant to Section 2.6 or 8.2 hereof.

"Revolving Credit Advance" means an Advance made pursuant to Section
2.1(a) hereof.

"Revolving Credit Commitment" means $40,000,000.00, as reduced or
terminated pursuant to Sections 2.6 or 8.2 hereof.

"Revolving Credit Note" means any Promissory Note of the Borrower
evidencing Revolving Credit Advances hereunder, substantially in the form of
Exhibit A hereto, together with any extension, renewal, or amendment thereof,
or substitution therefor.

"Revolving Credit Specified Percentage" means, as to any Lender, the
percentage indicated beside its name on Schedule 1 hereto as its Revolving
Credit Specified Percentage, or as adjusted or specified in any amendment to
this Agreement or in any Assignment Agreement.

"Rights" means rights, remedies, powers and privileges.

"Security Agreement" means that certain security agreement executed by
the Borrower and each of its Subsidiaries, substantially in the form of Exhibit
D hereto, as amended, modified, renewed, supplemented or restated from time to
time.

"Senior Subordinated Notes" means (a) those certain senior
subordinated notes of the Borrower due 2008 to be issued by the Borrower in
connection with the Home Interiors Recapitalization which shall be subordinated
to the Obligations on the terms set forth in the Senior Subordinated Notes
Indenture and (b) all senior subordinated notes of the Borrower issued in
exchange for the Senior Subordinated Notes on terms substantially identical to
the terms of the Senior Subordinated Notes.

"Senior Subordinated Notes Indenture" means that certain Indenture,
dated as of June 4, 1998, by and among the Borrower, certain of its
Subsidiaries as guarantors, and United States Trust Company of New York, as
Trustee.

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"Solvent" means, with respect to any Person, that the fair value of
the assets of such Person (both at fair valuation and at present fair saleable
value) is, on the date of determination, greater than the total amount of
liabilities (including contingent and unliquidated liabilities) of such Person
as of such date and that, as of such date, such Person is able to pay all
liabilities of such Person as such liabilities mature and such Person does not
have unreasonably small capital with which to carry on its business. In
computing the amount of contingent or unliquidated liabilities at any time,
such liabilities will be computed at the amount which, in light of all the
facts and circumstances existing at such time, represents the amount that can
reasonably be expected to become an actual or matured liability discounted to
present value at rates believed to be reasonable by such Person.

"Special Counsel" means the law firm of Donohoe, Jameson & Carroll,
P.C., or such other legal counsel as the Administrative Agent may select.

"Specified Percentage" means, as applicable or as the context
requires, the Revolving Credit Specified Percentage, the Facility A Term Loan
Specified Percentage or the Facility B Term Loan Specified Percentage.

"Subsidiary" of any Person means any corporation, partnership, limited
liability company, joint venture, trust or estate or other Person of which (or
in which) more than 50% of:

(a) the outstanding Capital Stock having voting power to
elect a majority of the Board of Directors of such corporation
(irrespective of whether at the time Capital Stock of any other class
or classes of such corporation shall or might have voting power upon
the occurrence of any contingency),

(b) the interest in the capital or profits of such
partnership or joint venture,

(d) the equity interest of such other Person,

is at the time directly or indirectly owned by such Person, by such Person and
one or more of its Subsidiaries or by one or more of such Person's
Subsidiaries.

"Subsidiary Guaranty" means that certain Subsidiary Guaranty executed
by each Domestic Subsidiary of the Borrower, substantially in the form of
Exhibit G hereto, as amended, modified, renewed, supplemented or restated from
time to time.

"Swing Line Advance" means an Advance made pursuant to Section 2.1(d)
hereof.

"Swing Line Bank" means NationsBank, N.A. and any successor thereto
appointed in accordance with Section 10.1(b) hereof.

"Swing Line Facility" has the meaning specified in Section 2.1(d)
hereof.

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<PAGE> 33
"Swing Line Note" means the Swing Line Note of the Borrower payable to
the order of the Swing Line Bank, evidencing Swing Line Advances hereunder,
substantially in the form of Exhibit H hereto, together with any extension,
renewal or amendment thereof or substitution therefor.

"Syndication Agent" means The Chase Manhattan Bank.

"Synthetic Lease" means any synthetic lease, tax retention generating
lease, or off-balance sheet financing product where such transaction is
considered borrowed money indebtedness for tax purposes but which is classified
as an Operating Lease pursuant to GAAP.

"Taxes" has the meaning specified in Section 2.15 hereof.

"Term Loan Advance" means a Facility A Term Loan Advance or a Facility
B Term Loan Advance.

"Total Debt" means, as of any date of determination, determined for
the Borrower and its Subsidiaries on a consolidated basis, without duplication,
(a) indebtedness for borrowed money, (b) obligations evidenced by bonds,
debentures, notes or other similar instruments, (c) obligations to pay the
deferred purchase price of property or services other than trade payables
incurred in the ordinary course of business, and (d) Capitalized Lease
Obligations.

"Total Specified Percentage" means, as to any Lender, the percentage
indicated beside its name on Schedule 1 hereto as its Total Specified
Percentage, or as adjusted or specified in any amendment to this Agreement or
in any Assignment Agreement, as adjusted to account for any permanent
reductions in the Revolving Credit Commitment and any payments of Facility A
Term Loan Advances or Facility B Term Loan Advances which result in a reduction
of the outstanding Facility A Term Loan Advances or outstanding Facility B Term
Loan Advances.

"Tribunal" means any (a) state, commonwealth, federal, foreign,
territorial, or other court or government body, subdivision, agency,
department, commission, board, bureau, or instrumentality of a governmental or
other regulatory or public body or authority or (b) private arbitration board
or panel.

"UCC" means the Uniform Commercial Code of Texas, as amended from time
to time.

"Unused Portion" means an amount equal to the result of (a) the
Revolving Credit Commitment minus (b) the sum of (i) the outstanding Revolving
Credit Advances plus (ii) outstanding Reimbursement Obligations in respect of
the Letters of Credit.

"Working Capital" means Current Assets minus Current Liabilities.

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<PAGE> 34
Section 1.2 Amendments and Renewals. Each definition of an
agreement in this Article 1 shall include such agreement as amended to date,
and as amended or renewed from time to time in accordance with its terms.

Section 1.3 Construction. The terms defined in this Article 1
(except as otherwise expressly provided in this Agreement) for all purposes
shall have the meanings set forth in Section 1.1 hereof, and the singular shall
include the plural, and vice versa, unless otherwise specifically required by
the context. All accounting terms used in this Agreement which are not
otherwise defined herein shall be construed in accordance with GAAP on a
consolidated basis for the Borrower and its Subsidiaries, unless otherwise
expressly stated herein.

ARTICLE 2

Advances

Section 2.1 The Advances.

(a) Revolving Credit Advances. Each Lender severally agrees, upon
the terms and subject to the conditions of this Agreement, to make Revolving
Credit Advances to the Borrower from time to time in an aggregate amount not to
exceed its Revolving Credit Specified Percentage of the Revolving Credit
Commitment less its Revolving Credit Specified Percentage of the aggregate
amount of all (i) Reimbursement Obligations then outstanding (assuming
compliance with all conditions to drawing) and (ii) Swing Line Advances then
outstanding for the purposes set forth in Section 5.8 hereof. Subject to
Section 2.9 hereof, Revolving Credit Advances may be repaid and then
reborrowed. Notwithstanding any provision in any Loan Document to the
contrary, in no event shall the principal amount of all outstanding Revolving
Credit Advances, Reimbursement Obligations and Swing Line Advances exceed the
Revolving Credit Commitment.

(b) Facility A Term Loan Advances. Each Lender severally agrees,
upon the terms and subject to the conditions of this Agreement, to make
Facility A Term Loan Advances to the Borrower on the Agreement Date in an
aggregate amount not to exceed its Facility A Term Loan Specified Percentage of
the Facility A Term Loan Commitment for the purposes set forth in Section 5.8
hereof. Notwithstanding any provision in any Loan Document to the contrary, in
no event shall the principal amount of all outstanding Facility A Term Loan
Advances exceed the Facility A Term Loan Commitment. Immediately upon the
making of the Facility A Term Loan Advance, the Facility A Term Loan Commitment
shall be automatically terminated. Facility A Term Loan Advances may not be
repaid and then reborrowed.

(c) Facility B Term Loan Advances. Each Lender severally agrees,
upon the terms and subject to the conditions of this Agreement, to make
Facility B Term Loan Advances to the Borrower on the Agreement Date in an
aggregate amount not to exceed its Facility B Term Loan Specified Percentage of
the Facility B Term Loan Commitment for the purposes set forth in Section 5.8
hereof.

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Notwithstanding any provision in any Loan Document to the contrary, in no event
shall the principal amount of all outstanding Facility B Term Loan Advances
exceed the Facility B Term Loan Commitment. Immediately upon the making of the
Facility B Term Loan Advance, the Facility B Term Loan Commitment shall be
automatically terminated. Facility B Term Loan Advances may not be repaid and
then reborrowed.

(d) Swing Line Advances. The Borrower may request the Swing Line
Bank to make, and the Swing Line Bank shall make, on the terms and conditions
hereinafter set forth, advances ("Swing Line Advances") to the Borrower from
time to time on any Business Day during the period from the Agreement Date to
the Revolving Commitment Maturity Date in an aggregate principal amount not to
exceed at any time outstanding the lesser of (a) $10,000,000 or (b) an amount
equal to the Revolving Credit Commitment minus (i) the aggregate principal
amount of Revolving Credit Advances then outstanding and (ii) the aggregate
amount of all Reimbursement Obligations then outstanding (the "Swing Line
Facility"). Each Swing Line Advance shall be in an amount not less than
$100,000. Within the limits of the Swing Line Facility and subject to the
terms hereof, Swing Line Advances may be repaid and then reborrowed.

(e) Type and Number of Advances. Any Advance, other than a Swing
Line Advance, shall, at the option of the Borrower as provided in Section 2.2
hereof (and, in the case of LIBOR Advances, subject to availability and to the
provisions of Article 9 hereof), be made as a Base Rate Advance or a LIBOR
Advance; provided that there shall not be outstanding to any Lender, at any one
time, more than ten LIBOR Advances.

Section 2.2 Manner of Borrowing and Disbursement.

(a) Base Rate Advances. In the case of Base Rate Advances (other
than Swing Line Advances), the Borrower, through an Authorized Signatory, shall
give the Administrative Agent prior to 11:00 a.m., Dallas, Texas time, on the
date of any proposed Base Rate Advance irrevocable written notice, or
irrevocable telephonic notice followed immediately by written notice, in
substantially the form of Exhibit K hereto (a "Notice of Borrowing") (provided,
however, that the Borrower's failure to confirm any telephonic notice in
writing shall not invalidate any notice so given), of its intention to borrow
or reborrow a Base Rate Advance hereunder. Such Notice of Borrowing shall
specify the requested funding date, which shall be a Business Day, the amount
of the proposed aggregate Base Rate Advances to be made by the Lenders, and
whether such Advance is a Revolving Credit Advance, Facility A Term Loan
Advance or Facility B Term Loan Advance.

(b) LIBOR Advances. In the case of LIBOR Advances, the Borrower,
through an Authorized Signatory, shall give the Administrative Agent at least
three Business Days' irrevocable written notice, or irrevocable telephonic
notice followed immediately by written notice (provided, however, that the
Borrower's failure to confirm any telephonic notice in writing shall not
invalidate any notice so given) pursuant to a Notice of Borrowing, of its
intention to borrow or reborrow a LIBOR Advance hereunder. Notice shall be
given to the Administrative Agent prior to 11:00 a.m., Dallas, Texas time, in
order for such Business Day to count toward the minimum number of Business

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<PAGE> 36

Days required. LIBOR Advances shall in all cases be subject to availability
and to Article 9 hereof. For LIBOR Advances, the Notice of Borrowing shall
specify the requested funding date, which shall be a Business Day, the amount
of the proposed aggregate LIBOR Advances to be made by Lenders, whether such
Advance is a Revolving Credit Advance, Facility A Term Loan Advance or Facility
B Term Loan Advance, and the Interest Period selected by the Borrower, provided
that no such Interest Period shall extend past the Revolving Commitment
Maturity Date, the Facility A Term Loan Maturity Date or the Facility B Term
Loan Maturity Date, as appropriate, or prohibit or impair the Borrower's
ability to comply with Section 2.5 or 2.8 hereof.

(c) Swing Line Advances. In the case of Swing Line Advances, the
Borrower, through an Authorized Signatory, shall give the Swing Line Bank and
the Administrative Agent prior to 1:00 p.m., Dallas, Texas time, on the date of
any proposed Swing Line Advance irrevocable telephonic notice (provided,
however, (i) the Borrower shall deliver written notice at least once a week
confirming the telephonic notices given by the Borrower with respect to Swing
Line Advances during the immediately preceding week and (ii) that the
Borrower's failure to confirm any telephonic notice in writing shall not
invalidate any notice so given), of its intention to borrow or reborrow a Swing
Line Advance. Such notice of borrowing shall specify (i) the requested funding
date, which shall be a Business Day and (ii) the amount of the proposed Swing
Line Advance.

(d) Continuation/Conversion. Subject to Sections 2.1 and 2.9
hereof, the Borrower shall have the option (i) to convert at any time all or
any part of the outstanding Base Rate Advances to LIBOR Advances and all or any
part of the outstanding LIBOR Advances to Base Rate Advances or (ii) upon
expiration of any Interest Period applicable to a LIBOR Advance, to continue
all or any portion of such LIBOR Advance equal to $2,000,000 and integral
multiples of $500,000 in excess of that amount as a LIBOR Advance and the
succeeding Interest Period(s) of such continued LIBOR Advance shall commence on
the last day of the Interest Period of the LIBOR Advance to be continued;
provided, however, (A) LIBOR Advances may be converted into Base Rate Advances
at any time only if the Borrower concurrently reimburses the Lenders in
accordance with Section 2.9 hereof and (B) notwithstanding anything in this
Agreement to the contrary, no outstanding Advance may be continued as, or
converted into, a LIBOR Advance when any Event of Default has occurred and is
continuing. Not later than 11:00 a.m., Dallas, Texas time on the date of any
proposed continuation of or a conversion to a Base Rate Advance and not later
than 11:00 a.m., Dallas, Texas time at least three Business Days prior to any
proposed continuation of or conversion to a LIBOR Advance, the Borrower,
through an Authorized Signatory, shall give the Administrative Agent
irrevocable written notice, or irrevocable telephonic notice followed
immediately by written notice, in substantially the form of Exhibit L hereto (a
"Notice of Continuation/Conversion") (provided, however, that the Borrower's
failure to confirm any telephonic notice in writing shall not invalidate any
notice so given), stating (i) the proposed conversion/continuation date (which
shall be a Business Day), (ii) the amount of the Advance to be
converted/continued, (iii) in the case of a conversion to, or a continuation
of, a LIBOR Advance, the requested Interest Period, and (iv) in the case of a
conversion of a Base Rate Advance to a LIBOR Advance or continuation of a LIBOR
Advance, stating that no Event of Default has occurred and is continuing. If
the Borrower shall fail to give any notice in accordance with this Section
2.2(d) prior to the expiration of any then-relevant Interest

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<PAGE> 37

Period with respect to any LIBOR Advance, the Borrower shall be deemed
irrevocably to have requested that such LIBOR Advance be converted to a Base
Rate Advance in the same principal amount.

(e) Minimum Amounts. The aggregate amount of Base Rate Advances
(other than Swing Line Advances) to be made by the Lenders on any day shall be
in a principal amount which is at least $1,000,000 and which is an integral
multiple of $500,000; provided, however, that such amount may equal the unused
amount of the applicable Commitment. The aggregate amount of LIBOR Advances
having the same Interest Period and to be made by the Lenders on any day shall
be in a principal amount which is at least $2,000,000 and which is an integral
multiple of $500,000.

(f) Notice and Disbursement. The Administrative Agent shall
promptly notify the Lenders of each notice (other than with respect to a Swing
Line Advance) received from the Borrower pursuant to this Section. Each Lender
shall, not later than noon, Dallas, Texas time, on the date of any Advance,
deliver to the Administrative Agent, at its address set forth herein, such
Lender's Revolving Credit Specified Percentage, Facility A Term Loan Specified
Percentage and Facility B Term Loan Specified Percentage, as the case may be,
of such Advance in immediately available funds in accordance with the
Administrative Agent's instructions. Prior to 2:00 p.m., Dallas, Texas time,
on the date of any Advance hereunder, the Administrative Agent shall, subject
to satisfaction of the conditions set forth in Article 3, disburse the amounts
made available to the Administrative Agent by the Lenders by (i) transferring
such amounts by wire transfer pursuant to the Borrower's instructions, or (ii)
in the absence of such instructions, crediting such amounts to the account of
the Borrower maintained with the Administrative Agent. All Revolving Credit
Advances shall be made by each Lender according to its Revolving Credit
Specified Percentage. All Facility A Term Loan Advances shall be made by each
Lender according to its Facility A Term Loan Specified Percentage. All
Facility B Term Loan Advances shall be made by each Lender in accordance with
its Facility B Term Loan Specified Percentage.

(g) Swing Line Advances. The Swing Line Bank shall, not later
than 2:00 p.m., Dallas, Texas time, on the date of any Swing Line Advance,
deliver to the Administrative Agent at its address set forth herein, the amount
of such Swing Line Advance in immediately available funds in accordance with
the Administrative Agent's instructions. Prior to 2:30 p.m., Dallas, Texas
time, on the date of any Swing Line Advance, the Administrative Agent shall,
subject to the conditions set forth in Article 3, disburse the amount made
available to the Administrative Agent by the Swing Line Bank by (i)
transferring such amounts by wire transfer pursuant to the Borrower's
instruction or (ii) in the absence of such instructions, crediting such amounts
to the account of the Borrower maintained with the Administrative Agent.
Forthwith upon demand by the Swing Line Bank at any time, including after a
Default or Event of Default, and in any event upon the making of the direction
specified by Section 8.2 to authorize the Administrative Agent to declare the
Advances due and payable pursuant to the provisions of Section 8.2, each
Lender, including the Swing Line Bank, notwithstanding the failure of the
Borrower at such time to satisfy each condition specified in Article 3, shall
make by 12:00 noon (Dallas, Texas time) on the first Business Day following
receipt by such Lender of notice from the Swing Line Bank, a Revolving Credit
Advance which is a Base Rate Advance in an amount

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<PAGE> 38

equal to the product of (i) the Revolving Credit Specified Percentage of such
Lender times (ii) the aggregate outstanding principal amount of the Swing Line
Advances. The proceeds of such Revolving Credit Advances shall be applied by
the Administrative Agent to repay the outstanding Swing Line Advances.

Section 2.3 Interest.

(a) On Base Rate Advances.

(i) The Borrower shall pay interest on the outstanding
unpaid principal amount of the Base Rate Advances outstanding from
time to time, until such Base Rate Advances are due (whether at
maturity, by reason of acceleration, by scheduled reduction, or
otherwise) and repaid at a simple interest rate per annum equal to the
Base Rate Basis for the Base Rate Advances as in effect from time to
time, provided that interest on the Base Rate Advances shall not
exceed the Maximum Amount. If at any time the Base Rate Basis would
exceed the Highest Lawful Rate, interest payable on the Base Rate
Advances shall be limited to the Highest Lawful Rate, but the Base
Rate Basis shall not thereafter be reduced below the Highest Lawful
Rate until the total amount of interest accrued on the Base Rate
Advances equals the amount of interest that would have accrued if the
Base Rate Basis had been in effect at all times.

(ii) Interest on the Base Rate Advances shall be computed
on the basis of a year of 365 or 366 days, as applicable, for the
number of days actually elapsed, and shall be payable in arrears on
each Quarterly Date and on the Revolving Commitment Maturity Date, the
Facility A Term Loan Maturity Date or the Facility B Term Loan
Maturity Date, as appropriate.

(b) On LIBOR Advances.

(i) The Borrower shall pay interest on the unpaid
principal amount of each LIBOR Advance, from the date such Advance is
made until it is due (whether at maturity, by reason of acceleration,
by scheduled reduction, or otherwise) and repaid, at a rate per annum
equal to the LIBOR Basis for such Advance. The Administrative Agent,
whose determination shall be controlling in the absence of manifest
error, shall determine the LIBOR Basis on the second Business Day
prior to the applicable funding date and shall notify the Borrower and
the Lenders of such LIBOR Basis.

(ii) Subject to Section 11.9 hereof, interest on each
LIBOR Advance shall be computed on the basis of a 360-day year for the
actual number of days elapsed, and shall be payable in arrears on the
applicable Payment Date and on the Revolving Commitment Maturity Date,
the Facility A Term Loan Maturity Date and the Facility B Term Loan
Maturity Date, as appropriate.

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<PAGE> 39
(c) On Swing Line Advances.

(i) The Borrower shall pay interest on the outstanding
principal amount of such Swing Line Advance, from the date such Swing
Line Advance is made until it is due (whether at maturity, by reason
of acceleration or otherwise) and repaid, at an interest rate per
annum equal to the sum of (A) the Base Rate Basis in effect from time
to time minus (B) the Commitment Fee (specified as a percentage) then
in effect, but in no event higher than the Highest Lawful Rate.

(ii) Subject to Section 11.9 hereof, interest on Swing
Line Advances shall be computed on the basis of a 365 or 366-day year,
as applicable, for the actual number of days elapsed, and shall be
payable in arrears on each Quarterly Date and on the Revolving
Commitment Maturity Date.

(d) Interest if No Notice of Selection of Interest Rate Basis. If
the Borrower fails to give the Administrative Agent timely notice of its
selection of a LIBOR Advance or an Interest Period for a LIBOR Advance, or if
for any reason a determination of a LIBOR Basis for any Advance is not timely
concluded due to the fault of the Borrower, the Base Rate Basis shall apply to
the applicable Advance.

(e) Interest After an Event of Default. (i) After an Event of
Default specified in Section 8.1(b) hereof and during any continuance thereof,
automatically and without any action by the Administrative Agent or any Lender,
the Obligations shall bear interest at a rate per annum equal to the Default
Rate. Such interest shall be payable on the earlier of demand or the Revolving
Commitment Maturity Date, the Facility A Term Loan Maturity Date or the
Facility B Term Loan Maturity Date, as appropriate, and shall accrue until the
earlier of (i) waiver or cure (to the satisfaction of the Determining Lenders)
of the applicable Event of Default, (ii) agreement by the Lenders affected
thereby to rescind the charging of interest at the Default Rate, or (iii)
payment in full of the Obligations. The Lenders shall not be required to
accelerate the maturity of the Advances, to exercise any other rights or
remedies under the Loan Documents, or to give notice to the Borrower of the
decision to charge interest at the Default Rate.

Section 2.4 Fees.

(a) Revolving Commitment Fee. Subject to Section 11.9 hereof, the
Borrower agrees to pay to the Administrative Agent, for the ratable account of
the Lenders, a commitment fee on the daily average Unused Portion (the
"Commitment Fee") at the following per annum percentages, applicable in the
following situations:

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<TABLE>
<CAPTION>
Applicability Percentage
------------- ----------
<S> <C> <C>
(i) The Leverage Ratio is greater than or equal to 4.25 to 1 0.500%

(ii) The Leverage Ratio is less than 4.25 to 1 0.375%
</TABLE>

The Commitment Fee shall be payable in arrears on each Quarterly Date and on
the Revolving Commitment Maturity Date. The Commitment Fee shall be adjusted
on each Adjustment Date. If the financial statements required pursuant to
Section 6.1 or 6.2 hereof, as applicable, and the Compliance Certificate
required pursuant to Section 6.3 hereof are not received by the Administrative
Agent by the date required, the Commitment Fee shall be determined as if the
Leverage Ratio is greater than or equal or 4.25 to 1 until such time as such
financial statements and Compliance Certificate are received. Notwithstanding
the foregoing, from and including the Agreement Date to and including the
Adjustment Date following the date of receipt by the Administrative Agent of
the audited financial statements for December 31, 1998 and related Compliance
Certificate, the Commitment Fee shall be determined as if the Leverage Ratio is
greater than or equal to 4.25 to 1. Subject to Section 11.9 hereof, the
Commitment Fee shall be calculated on the basis of a 360-day year for the
actual number of days elapsed.

(b) Other Fees. Subject to Section 11.9 hereof, the Borrower
agrees to pay to the Administrative Agent, for the account of the
Administrative Agent and one of its Affiliates, the fees provided for in the
letter agreement (the "Fee Letter"), dated as of the Agreement Date, between
the Borrower and the Administrative Agent on the dates and in the amounts
specified therein.

Section 2.5 Prepayment and Payments.

(a) Voluntary LIBOR Advance Prepayments. Upon three Business
Days' prior telephonic notice (to be promptly followed by written notice) by an
Authorized Signatory to the Administrative Agent, LIBOR Advances may be
voluntarily prepaid but only so long as the Borrower concurrently reimburses
the Lenders in accordance with Section 2.9 hereof. Any notice of prepayment
shall be irrevocable unless such notice is given in connection with a refunding
of Advances under this Agreement in full and a termination of this Agreement,
in which case the parties hereto acknowledge that such refunding may occur on a
date after the date given in such notice as a result of normal delay with
respect to such refunding; provided, however, the Borrower shall reimburse each
Lender (to the extent required) in accordance with Section 2.9 hereof.

(b) Mandatory Prepayment. On or before the date of any reduction
of the Revolving Credit Commitment, the Borrower shall first, prepay applicable
outstanding Revolving Credit Advances and second, prepay Swing Line Advances in
an amount necessary to reduce the sum of outstanding Revolving Credit Advances,
Swing Line Advances and Reimbursement Obligations to an amount less than or
equal to the Revolving Credit Commitment as so reduced. To the extent required
by the preceding sentence, the Borrower shall first prepay all Base Rate
Advances and shall thereafter prepay LIBOR Advances. To the extent that any
prepayment requires that a LIBOR Advance be repaid on a date other than the
last day of its Interest Period, the Borrower shall

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<PAGE> 41

reimburse each Lender in accordance with Section 2.9 hereof. To the extent
that aggregate outstanding Revolving Credit Advances, Reimbursement
Obligations, and Swing Line Advances exceed the Revolving Credit Commitment
after any reduction thereof, the Borrower shall repay any such excess amount
and all accrued interest attributable to such excess Revolving Credit Advances
on the date of such reduction.

(c) Prepayments from Sales of Assets. Within 10 Business Days of
the receipt of Net Cash Proceeds from the sale or disposition by the Borrower
or any of its Subsidiaries of any assets (including the Capital Stock of any
Subsidiary) (other than any such sales or dispositions permitted under Sections
7.5(a) through (j) hereof), the Borrower shall prepay Facility A Term Loan
Advances and Facility B Term Loan Advances in an aggregate principal amount
equal to the lesser of (A) 100% of such Net Cash Proceeds received or (B) an
amount, if any, which would result in the Leverage Ratio being less than 3.50
to 1 after such prepayment. Each such prepayment shall be applied as provided
in Section 2.5(g) hereof.

(d) Prepayments from Excess Cash Flow. Commencing on March 31,
1999 and on each March 31 thereafter, the Borrower shall prepay Facility A Term
Loan Advances and Facility B Term Loan Advances in an aggregate principal
amount equal to the lesser of (i) 70% of Excess Cash Flow, if any, for the
fiscal year ending immediately preceding each such March 31 (or in the case of
the fiscal year ending December 31, 1998, for the period from July 1, 1998
through December 31, 1998) or (ii) an amount, if any, which would result in the
Leverage Ratio being less than 3.50 to 1 after such prepayment. Each such
prepayment shall be applied as provided in Section 2.5(g) hereof.

(e) Prepayment from Recovery Events. Within 10 Business Days
after receipt of Net Cash Proceeds by the Borrower or any of its Subsidiaries
from any Recovery Event, unless a Reinvestment Notice shall have been delivered
in respect thereof, the Borrower shall prepay Facility A Term Loan Advances and
Facility B Term Loan Advances in an aggregate principal amount of 100% of such
Net Cash Proceeds received, provided that if a Reinvestment Notice shall be
delivered in respect thereof, an amount equal to the Reinvestment Prepayment
Amount with respect to the relevant Reinvestment Event shall be applied to
payment of the Advances on the Reinvestment Prepayment Date. Each such
prepayment shall be applied as provided in Section 2.5(g) hereof.

(f) Prepayment from Sales of Capital Stock. Concurrently with the
receipt of Net Cash Proceeds from the sale or disposition by the Borrower or
any of its Subsidiaries to any Person (other than to the Borrower or any of its
Subsidiaries) of any Capital Stock of the Borrower other than a Permitted
Issuance, the Borrower shall prepay the Facility A Term Loan Advances and the
Facility B Term Loan Advances in an aggregate principal amount equal to the
lesser of (A) 50% of such Net Cash Proceeds or (B) an amount, if any, which
would result in the Leverage Ratio being less than 3.50 to 1 after such
prepayment. Each such prepayment shall be applied as provided in Section
2.5(g) hereof.

(g) Payments, Generally. Any partial payment of a (i) Base Rate
Advance shall be in a principal amount which is at least $100,000 and which is
an integral multiple of $100,000 and (ii) a

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<PAGE> 42

LIBOR Rate Advance shall be in a principal amount which is at least $1,000,000
and which is an integral multiple of $500,000, and to the extent that any
payment of a LIBOR Advance is made on a date other than the last day of its
Interest Period, the Borrower shall reimburse each Lender (to the extent
required) in accordance with Section 2.9 hereof. Any voluntary prepayment of
any Term Loan Advance shall be allocated among the Facility A Term Loan
Advances and the Facility B Term Loan Advances pro rata based on the
outstanding principal amount of the Facility A Term Loan Advances and the
Facility B Term Loan Advances and applied to the then remaining installments of
the Facility A Term Loan Advances and the Facility B Term Loan Advances pro
rata based on the number of then remaining installments in respect of the
Facility A Term Loan Advances and the Facility B Term Loan Advances (i.e. each
then remaining installment of the applicable Term Loan Advance shall be reduced
by an amount equal to the aggregate amount to be applied to such Term Loan
Advances divided by the number of the then remaining installments for such Term
Loan Advances), provided that if the amount to be applied to any installment
required by this Agreement would exceed the then remaining amount of such
installment, then an amount equal to such excess shall be applied to the
remaining installments in the order of maturity after giving effect to all
prior reductions thereto (including the amount of prepayments theretofore
allocated pursuant to the preceding portion of this sentence); provided,
further, however, notwithstanding the foregoing, until the aggregate amount of
voluntary prepayments of Term Loan Advances exceed $20,000,000, voluntary
prepayment of Term Loan Advances may be applied to any scheduled installment
payments of Facility A Term Loan Advances or Facility B Term Loan Advances, at
the Borrower's discretion. Any prepayments required to be made pursuant to
Sections 2.5(c), (d), (e) or (f) hereof shall (i) include and be applied to
accrued interest to the date of such prepayment on the principal amount
prepaid, (ii) be allocated among the Facility A Term Loan Advances and the
Facility B Term Loan Advances, pro rata based on the outstanding principal
amount of the Facility A Term Loan Advances and the Facility B Term Loan
Advances and applied to the then remaining installments of the Facility A Term
Loan Advances and the Facility B Term Loan Advances pro rata based on the
number of then remaining installments in respect of the Facility A Term Loan
Advances and the Facility B Term Loan Advances (i.e. each then remaining
installment of the applicable Term Loan Advance shall be reduced by an amount
equal to the aggregate amount to be applied to such Term Loan Advances divided
by the number of the then remaining installments for such Term Loan Advance),
provided that if the amount to be applied to any installment required by this
Agreement would exceed the then remaining amount of such installment, then an
amount equal to such excess shall be applied to the remaining installments in
the order of maturity after giving effect to all prior reductions thereto
(including the amount of prepayments theretofore allocated pursuant to the
preceding portion of this sentence), (iii) not be subject to the notice and
minimum payment provisions of this Section 2.5; provided, however, the Borrower
shall be required to reimburse each Lender for any loss, cost or expense
incurred by each Lender in connection with any such prepayment as set forth in
Section 2.9 hereof if any prepayment results in a LIBOR Advance being paid on a
day other than the last day of an Interest Period for such LIBOR Advance, and
(iv) be applied first to Base Rate Advances, if any, and then to LIBOR
Advances. With respect to any voluntary payment of Term Loan Advances made by
the Borrower within fifteen days of any Quarterly Date on which amortization of
any Term Loan Advance is required, the Borrower shall have the right to
designate

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<PAGE> 43

such payment as a prepayment or as payment of the Term Loan Advances required
to be made on such Quarterly Date.

(h) Notwithstanding the foregoing provisions of this Section 2.5,
if at any time the mandatory prepayment of any Advances pursuant to this
Agreement would result, after giving effect to the procedures set forth in this
Agreement, in the Borrower incurring costs under Section 2.9 hereof as a result
of LIBOR Advances ("Affected LIBOR Advances") being prepaid other than on the
last day of an Interest Period applicable thereto, which costs are required to
be paid pursuant to Section 2.9 hereof, then, the Borrower may, in its sole
discretion, initially deposit a portion (up to 100%) of the amounts that
otherwise would have been paid in respect of the Affected LIBOR Advances with
the Administrative Agent (which deposit must be equal in amount to the amount
of the Affected LIBOR Advances not immediately prepaid) to be held as security
for the obligations of the Borrower to make such mandatory prepayment pursuant
to a cash collateral agreement to be entered into in form and substance
reasonably satisfactory to the Administrative Agent, with such cash collateral
to be directly applied upon the first occurrence (or occurrences) thereafter of
the last day of an Interest Period applicable to the relevant Advance that is a
LIBOR Advance (or such earlier date or dates as shall be requested by the
Borrower), to repay an aggregate principal amount of such Advance equal to the
Affected LIBOR Advances not initially repaid pursuant to this sentence.

Section 2.6 Reduction of Commitments.

(a) Voluntary Reduction. The Borrower shall have the right, upon
not less than 2 Business Days' notice by an Authorized Signatory to the
Administrative Agent (if telephonic, to be confirmed by telex or in writing on
or before the date of reduction or termination), which shall promptly notify
the Lenders, to terminate or reduce the Revolving Credit Commitment, in whole
or in part. Each partial termination shall be in an aggregate amount which is
at least $5,000,000 and which is an integral multiple of $100,000, and no
voluntary reduction in the Revolving Credit Commitment shall cause any LIBOR
Advance to be repaid prior to the last day of its Interest Period, unless the
Borrower shall reimburse each Lender (to the extent required) in accordance
with Section 2.9 hereof.

(b) Mandatory Reduction. On the Revolving Commitment Maturity
Date, the Revolving Credit Commitment shall automatically reduce to zero.

(c) General Requirements. Upon any reduction of the Revolving
Credit Commitment pursuant to this Section, the Borrower shall immediately make
a repayment of applicable Advances in accordance with Section 2.5(b) hereof.
The Borrower shall reimburse each Lender for any loss or out-of-pocket expense
incurred by each Lender in connection with any such payment, as set forth in
Section 2.9 hereof to the extent applicable. The Borrower shall not have any
right to rescind any termination or reduction, except as otherwise provided in
the last sentence of Section 2.5(a) hereof. Once reduced, the Revolving Credit
Commitment may not be increased or reinstated.

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<PAGE> 44
Section 2.7 Non-Receipt of Funds by the Administrative Agent.
Unless the Administrative Agent shall have been notified by a Lender prior to
the date of any proposed Advance (which notice shall be effective upon receipt)
that such Lender does not intend to make the proceeds of such Advance available
to the Administrative Agent, the Administrative Agent may assume that such
Lender has made such proceeds available to the Administrative Agent on such
date, and the Administrative Agent may in reliance upon such assumption (but
shall not be required to) make available to the Borrower a corresponding
amount. If such corresponding amount is not in fact made available to the
Administrative Agent by such Lender, the Administrative Agent shall be entitled
to recover such amount on demand from such Lender (or, if such Lender fails to
pay such amount forthwith upon such demand, from the Borrower) together with
interest thereon in respect of each day during the period commencing on the
date such amount was available to the Borrower and ending on (but excluding)
the date the Administrative Agent receives such amount from the Lender, with
interest thereon at a per annum rate equal to the lesser of (i) the Highest
Lawful Rate or (ii) the Federal Funds Rate. No Lender shall be liable for any
other Lender's failure to fund an Advance hereunder.

Section 2.8 Payment of Principal of Advances.

(a) Revolving Credit Advances. To the extent not otherwise
required to be paid earlier as provided herein, the principal amount of the
Revolving Credit Advances shall be due and payable on the Revolving Commitment
Maturity Date.

(b) Facility A Term Loan Advances. To the extent not otherwise
required to be paid earlier as provided herein, the principal amount of the
Facility A Term Loan Advances shall be repaid on each Quarterly Date (except as
provided in the last sentence of Section 2.5(g) hereof) and on the Facility A
Term Loan Maturity Date in such amounts as set forth next to each such date
below:

<TABLE>
<CAPTION>
Amount of Reduction of Facility A
Quarterly Date Term Loan Advances as of each Date
-------------- ----------------------------------
<S> <C>
September 30, 1998 $6,250,000

December 31, 1998 $6,250,000

March 31, 1999 $6,250,000

June 30, 1999 $6,250,000

September 30, 1999 $6,250,000

December 31, 1999 $6,250,000

March 31, 2000 $6,250,000

June 30, 2000 $6,250,000

September 30, 2000 $7,500,000
</TABLE>

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<PAGE> 45

<TABLE>
<S> <C>
December 31, 2000 $7,500,000

March 31, 2001 $7,500,000

June 30, 2001 $7,500,000

September 30, 2001 $8,750,000

December 31, 2001 $8,750,000

March 31, 2002 $8,750,000

June 30, 2002 $8,750,000

September 30, 2002 $10,000,000

December 31, 2002 $10,000,000

March 31, 2003 $10,000,000

June 30, 2003 $10,000,000

September 30, 2003 $11,250,000

December 31, 2003 $11,250,000

March 31, 2004 $11,250,000

June 30, 2004 $11,250,000
or such other amount of Facility A Term Loan
Advances then outstanding
</TABLE>

(c) Facility B Term Loan Advances. To the extent not otherwise
required to be paid earlier as provided herein, the principal amount of the
Facility B Term Loan Advances shall be repaid on each Quarterly Date (except as
provided in the last sentence of Section 2.5(g) hereof) and on the Facility B
Term Loan Maturity Date in such amounts as set forth next to each such date
below:

<TABLE>
<CAPTION>
Amount of Reduction of Facility B
Quarterly Date Term Loan Advances as of each Date
-------------- ----------------------------------
<S> <C>
September 30, 1998 $250,000

December 31, 1998 $250,000

March 31, 1999 $250,000

June 30, 1999 $250,000

September 30, 1999 $250,000
</TABLE>

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<PAGE> 46

<TABLE>
<S> <C>
December 31, 1999 $250,000

March 30, 2000 $250,000

June 30, 2000 $250,000

September 30, 2000 $250,000

December 31, 2000 $250,000

March 31, 2001 $250,000

June 30, 2001 $250,000

September 30, 2001 $250,000

December 31, 2001 $250,000

March 31, 2002 $250,000

June 30, 2002 $250,000

September 30, 2002 $250,000

December 31, 2002 $250,000

March 31, 2003 $250,000

June 30, 2003 $250,000

September 30, 2003 $250,000

December 31, 2003 $250,000

March 31, 2004 $250,000

June 30, 2004 $250,000

September 30, 2004 $11,250,000

December 31, 2004 $11,250,000

March 31, 2005 $11,250,000

June 30, 2005 $11,250,000

September 30, 2005 $12,250,000

December 31, 2005 $12,250,000

March 31, 2006 $12,250,000

June 30, 2006 $12,250,000
or such other amount of Facility B Term Loan
Advances then outstanding
</TABLE>

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<PAGE> 47

(d) Swing Line Advances. To the extent not otherwise required to
be paid earlier as provided herein, the outstanding principal amount of each
Swing Line Advance shall be due and payable on the Revolving Commitment
Maturity Date.

Section 2.9 Reimbursement. Whenever any Lender shall sustain or
incur any losses or reasonable out-of- pocket expenses in connection with (a)
failure by the Borrower to borrow any LIBOR Advance after having given notice
of its intention to borrow in accordance with Section 2.2 hereof (whether by
reason of the Borrower's election not to proceed or the non-fulfillment of any
of the conditions set forth in Article 3 hereof), (b) any prepayment for any
reason of any LIBOR Advance in whole or in part (including a prepayment
pursuant to Section 9.3(b) hereof) on other than the last day of an Interest
Period applicable to such LIBOR Advance, (c) any prepayment of any of its LIBOR
Advances that is not made on any date specified in a notice of prepayment given
by the Borrower, or (d) the selling by NationsBank of its rights and
obligations under this Agreement to an Assignee within 180 days after the
Agreement Date, the Borrower agrees to pay to any such Lender, upon its demand,
an amount sufficient to compensate such Lender for all such losses and
out-of-pocket expenses (provided that with respect to sales pursuant to clause
(d) above, NationsBank shall only be reimbursed for the lost profits and
reasonable expenses incurred by it in connection with the re- employment of
funds prepaid as a result of such a sale), subject to Section 11.9 hereof.
Such Lender's good faith determination of the amount of such losses or
out-of-pocket expenses, calculated in its usual fashion, absent manifest error,
shall be controlling. Such losses shall include, without limiting the
generality of the foregoing, lost profits and reasonable expenses incurred by
such Lender in connection with the re-employment of funds prepaid, repaid,
converted or not borrowed, converted or paid, as the case may be. Upon request
of the Borrower, such Lender shall provide a certificate setting forth the
amount to be paid to it by the Borrower hereunder and calculations therefor.
The covenants set forth in this Section 2.9 shall survive termination of this
Agreement and the repayment of Advances in full and other amounts payable
hereunder for a period of nine months thereafter.

Section 2.10 Manner of Payment.

(a) Payment Timing and Type. Each payment (including prepayments)
by the Borrower of the principal of or interest on the Advances, fees, and any
other amount owed under this Agreement or any other Loan Document shall be made
not later than 12:00 noon (Dallas, Texas time) on the date specified for
payment under this Agreement to the Administrative Agent at the Administrative
Agent's office, in Dollars constituting immediately available funds.

(b) Non-Business Day Payments. If any payment under this
Agreement or any other Loan Document shall be specified to be made upon a day
which is not a Business Day, it shall be made on the next succeeding day which
is a Business Day, unless, with respect to a payment due in respect of a LIBOR
Advance, such Business Day falls in another calendar month, in which case
payment shall

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<PAGE> 48

be made on the preceding Business Day. Any extension of time shall in such
case be included in computing interest and fees, if any, in connection with
such payment.

(c) Payments without Deduction. The Borrower agrees to pay
principal, interest, fees and all other amounts due under the Loan Documents
without deduction for set-off or counterclaim or any deduction whatsoever.

(d) Apportionment of Payments.

(i) Prior to (A) the occurrence of an Event of Default
and (B) delivery by the Determining Lenders of the notice to the
Administrative Agent referred to in Section 2.10(d)(ii)(B) below, all
payments in respect of the Obligations shall be applied in the
following order:

(1) first, to pay the Administrative Agent's fees and
expenses incurred on behalf of the Lenders then due
and payable;

(2) second, to pay all other fees then due and payable in
respect of the Advances and the Reimbursement
Obligations under the Loan Documents;

(3) third, to pay all other amounts other than principal
and interest (including, without limitation, expense
reimbursements and indemnities) not otherwise
referred in clauses (1) and (2) immediately preceding
then due and payable in respect of the Advances and
the Reimbursement Obligations under the Loan
Documents;

(4) fourth, to pay interest then due and payable on the
Advances and the Reimbursement Obligations, to be
applied in accordance with the Applicable Specified
Percentages (except that (A) prior to the Lenders
making a Revolving Credit Advance pursuant to Section
2.2(g) hereof, all interest due and payable on the
Swing Line Advances shall be payable to the Swing
Line Bank and (B) at such time, if any, that the
Lenders make a Revolving Credit Advance pursuant to
Section 2.2(g) hereof, the Administrative Agent shall
distribute all interest payments in respect of Swing
Line Advances to the Lenders in accordance with their
respective Revolving Credit Specified Percentages).

(5) fifth, to pay principal then due and payable on the
Advances and Reimbursement Obligations, to be applied
in accordance with Applicable Specified Percentages
(except that (A) prior to the Lenders making a
Revolving Credit Advance pursuant to Section 2.2(g)
hereof, all principal due and payable on the Swing
Line Advances shall be payable to the Swing Line Bank
and (B) at such time, if any, that the Lenders make a
Revolving Credit

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<PAGE> 49

Advance pursuant to Section 2.2(g) hereof, the
Administrative Agent shall distribute all principal
payments in respect of Swing Line Advances to the
Lenders in accordance with their respective Revolving
Credit Specified Percentages).

(ii) After (A) the occurrence of an Event of Default and
(B) the Determining Lenders shall have delivered the notice to the
Administrative Agent to apply payments in respect of the Obligations
as provided in this Section 2.10(d)(ii), all payments in respect of
the Obligations and (proceeds of Collateral and payments under any
Subsidiary Guaranty) shall be applied in the following order:

(1) first, to pay the Administrative Agent's fees and
expenses incurred on behalf of the Lenders then due
and payable;

(2) second, to pay all other fees then due and payable in
respect of the Advances and the Reimbursement
Obligations under the Loan Documents;

(3) third, to pay all other amounts other than principal
and interest (including; without limitation, expense
reimbursements and indemnities) not otherwise
referred to in clauses (1) and (2) immediately
preceding then due and payable in respect of the
Advances and the Reimbursement Obligations under the
Loan Documents;

(4) fourth, to pay interest then due and payable on the
Advances and the Reimbursement Obligations, to be
applied in accordance with each Lenders' Total
Specified Percentage; and

(5) fifth, to pay principal then due and payable on the
Advances and Reimbursement Obligations, and in the
case of proceeds of Collateral and payments under any
Subsidiary Guaranty, to pay any other obligations to
any Secured Party (as defined in the Security
Agreement) not covered in first through four above,
ratably among the Secured Parties in accordance with
the aggregate principal amount of Advances and the
Reimbursement Obligations and, in the case of
proceeds of Collateral or payments under any
Subsidiary Guaranty, the obligations secured or
guaranteed thereby, owed to each Secured Party.

Section 2.11 LIBOR Lending Offices. Each Lender's initial LIBOR
Lending Office is set forth opposite its name in Schedule 2 attached hereto.
Each Lender shall have the right at any time and from time to time to designate
a different office of itself or of any Affiliate as such Lender's LIBOR Lending
Office, and to transfer any outstanding LIBOR Advance to such LIBOR Lending
Office. No such designation or transfer shall result in any liability on the
part of the Borrower for increased costs or expenses resulting solely from such
designation or transfer (except any such

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<PAGE> 50

transfer which is made by a Lender pursuant to Section 9.2 or 9.3 hereof, or
otherwise for the purpose of complying with Applicable Law).

Section 2.12 Sharing of Payments. Any Lender obtaining a payment
(whether voluntary or involuntary, due to the exercise of any right of set-off,
or otherwise) on account of its Advances (other than pursuant to Section
2.4(b), 2.15, 2.16(d), 9.3 or 9.5) in excess of its share of payments made by
the Borrower according to (a) before the Determining Lenders have delivered the
notice to the Administrative Agent referred to in Section 2.10(d)(ii)(B) above,
its Applicable Specified Percentage, and (b) after the Determining Lenders have
delivered the notice to the Administrative Agent referred to in Section
2.10(d)(ii)(B) above, its Total Specified Percentage, then in each case, such
Lender shall purchase from each other Lender such participation in the Advances
made by such other Lender as shall be necessary to cause such purchasing Lender
to share a ratable portion of the excess payment with each other Lender (based
on its Applicable Specified Percentage if the Determining Lenders have not
delivered notice to the Administrative Agent referred to in Section
2.10(d)(ii)(B) above, and based on its Total Specified Percentage if the
Determining Lenders have delivered notice to the Administrative Agent referred
to in Section 2.10(d)(ii)(B) above); provided, however, that if all or any
portion of such excess payment is thereafter recovered from such purchasing
Lender, the purchase shall be rescinded and the purchase price restored to the
extent of such recovery, but without interest. The Borrower agrees that any
Lender so purchasing a participation from another Lender pursuant to this
Section, to the fullest extent permitted by law, may exercise all its rights of
payment (including the right of set-off) with respect to such participation as
fully as if such Lender were the direct creditor of the Borrower in the amount
of such participation.

Section 2.13 Calculation of LIBOR Rate. The provisions of this
Agreement relating to calculation of the LIBOR Rate are included only for the
purpose of determining the rate of interest or other amounts to be paid
hereunder that are based upon such rate, it being understood that each Lender
shall be entitled to fund and maintain its funding of all or any part of a
LIBOR Advance as it sees fit.

Section 2.14 Booking Loans. Any Lender may make, carry or
transfer Advances at, to or for the account of any of its branch offices or the
office of any Affiliate. No such action shall result in any liability on the
part of the Borrower from such action (except any such action which is made by
a Lender pursuant to Section 9.2 or 9.3 hereof, or otherwise for the purpose of
complying with Applicable Law).

Section 2.15 Taxes.

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<PAGE> 51

(a) Any and all payments by the Borrower and each other Obligor
hereunder and under the other Loan Documents (including, without limitation,
payments pursuant to Sections 2.9, 5.9, 9.3, 9.5, 11.2 hereof and this Section
2.15) shall be made, in accordance with Section 2.10, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges and withholdings, and all liabilities with respect thereto,
excluding, in the case of each Lender and the Administrative Agent, taxes
imposed on, based upon or measured by its overall net income, net worth or
capital, and franchise taxes, doing business taxes or minimum taxes imposed on
it, (i) by the jurisdiction under the laws of which such Lender or the
Administrative Agent (as the case may be) is organized and in which it has its
applicable lending office or any political subdivision thereof; (ii) by any
other jurisdiction, or any political subdivision thereof, other than those
imposed solely by reason of (A) an asserted relation of such jurisdiction to
the transactions contemplated by this Agreement, (B) the activities of the
Borrower in such jurisdiction, or (C) the activities in connection with the
transactions contemplated by this Agreement or any other Loan Document of a
Lender or the Administrative Agent; (iii) by reason of failure by the Lender or
the Administrative Agent to comply with the requirements of paragraph (e) of
this Section 2.15; and (iv) in the case of any Lender, any Taxes in the nature
of transfer, stamp, recording or documentary taxes resulting from a transfer
(other than as a result of foreclosure) by such Lender of all or any portion of
its interest in this Agreement, the Notes or any other Loan Documents (all such
non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall
be required by law to deduct any Taxes from or in respect of any sum payable
hereunder to any Lender or the Administrative Agent, (x) the sum payable shall
be increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
2.15) such Lender or the Administrative Agent (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been
made, (y) the Borrower shall make such deductions and (z) the Borrower shall
pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law.

(b) In addition, the Borrower agrees to pay any and all stamp and
documentary taxes and any and all other excise and property taxes, charges and
similar levies (other than Taxes described in clause (iv) of the first sentence
of Section 2.15(a)) that arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Document (hereinafter referred to as "Other
Taxes").

(c) The Borrower will indemnify each Lender and the Administrative
Agent for the full amount of Taxes and Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section 2.15) paid by such Lender or the Administrative
Agent (as the case may be) and all liabilities (including penalties, additions
to tax, interest and reasonable expenses) arising therefrom or with respect
thereto whether or not such Taxes or Other Taxes were correctly or legally
asserted, other than penalties, additions to tax, interest and expenses arising
as a result of gross negligence on the part of such Lender or the
Administrative Agent, provided, however, that the Borrower shall have no
obligation to indemnify such Lender or the Administrative Agent unless and
until such Lender or the Administrative Agent shall have delivered to the
Borrower a certificate setting forth in reasonable detail the basis of the
Borrower's obligation to indemnify such Lender or the Administrative Agent
pursuant to this Section 2.15. This

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<PAGE> 52

indemnification shall be made within 30 days from the date such Lender or the
Administrative Agent (as the case may be) makes written demand therefor.

(d) Within 30 days after the date of any payment of Taxes, the
Borrower will furnish to the Administrative Agent the original or a certified
copy of a receipt evidencing payment thereof. If no Taxes are payable in
respect of any payment hereunder, the Borrower will furnish to the
Administrative Agent a certificate from each appropriate taxing authority if
available, stating that such payment is exempt from or not subject to Taxes,
provided, however, that such certificate need only be given if: (i) the
Borrower makes any payment from any account located outside the United States,
or (ii) the payment is made by a payor that is not a United States Person. For
purposes of this Section 2.15 the terms "United States" and "United States
Person" shall have the meanings set forth in Section 7701 of the Code.

(e) Each Lender which is not a United States Person hereby agrees
that:

(i) it shall (except as provided in Section 2.15(e)(vi)
hereof), no later than the Agreement Date (or, in the case of a Lender
which becomes a party hereto pursuant to Section 11.6 after the
Agreement Date, the date upon which such Lender becomes a party
hereto) deliver to the Borrower through the Administrative Agent, with
a copy to the Administrative Agent:

(A) if any lending office is located in the
United States of America, two (2) accurate and complete signed
originals of Internal Revenue Service Form 4224 or any
successor thereto ("Form 4224"),

(B) if any lending office is located outside the
United States of America, two (2) accurate and complete signed
originals of Internal Revenue Service Form 1001 or any
successor thereto ("Form 1001").

in each case indicating that such Lender is on the date of delivery
thereof entitled to receive payments of principal, interest and fees
for the account of such lending office or lending offices under this
Agreement free from withholding of United States Federal income tax;

(ii) if at any time such Lender changes its lending office
or lending offices or selects an additional lending office it shall,
at the same time or reasonably promptly thereafter but only to the
extent the forms previously delivered by it hereunder are no longer
effective, deliver to the Borrower through the Administrative Agent,
with a copy to the Administrative Agent, in replacement for the forms
previously delivered by it hereunder:

(A) if such changed or additional lending office
is located in the United States of America, two (2) accurate
and complete signed originals of Form 4224; or

(B) otherwise, two (2) accurate and complete
signed originals of Form 1001, in each case indicating that
such Lender is on the date of delivery thereof

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entitled to receive payments of principal, interest and fees
for the account of such changed or additional lending office
under this Agreement free from withholding of United States
Federal income tax;

(iii) it shall, before or promptly after the occurrence of
any event (including the passing of time but excluding any event
mentioned in clause (ii) above) requiring a change in the most recent
Form 4224 or Form 1001 previously delivered by such Lender and if the
delivery of the same be lawful, deliver to the Borrower through the
Administrative Agent with a copy to the Administrative Agent, two (2)
accurate and complete original signed copies of Form 4224 or Form 1001
in replacement for the forms previously delivered by such Lender;

(iv) it shall, promptly upon the request of the Borrower
to that effect, deliver to the Borrower such other forms or similar
documentation as may be required from time to time by any applicable
law, treaty, rule or regulation in order to establish such Lender's
tax status for withholding purposes;

(v) it shall notify the Borrower within 30 days after any
event (including an amendment to, or a change in any applicable law or
regulation or in the written interpretation thereof by any regulatory
authority or any judicial authority, or by ruling applicable to such
Lender of any governmental authority charged with the interpretation
or administration of any law) shall occur that results in such Lender
no longer being capable of receiving payments without any deduction or
withholding of United States federal income tax; and

(vi) if such Lender is not a "bank" or other person
described in Section 881(c)(3) of the Code and cannot deliver either
Form 4224 or Form 1001, a statement that such Lender is not a "bank"
under Section 881(c)(3)(A) of the Code and two original copies of
Internal Revenue Service Form W-8 (or any successor form), properly
completed and duly executed by such Lender.

(f) Without prejudice to the survival of any other agreement of
the Borrower hereunder, the agreements and obligations of the Borrower
contained in this Section 2.15 shall survive termination of this Agreement and
the payment in full of the Advances and all other amounts payable hereunder for
a period of one year thereafter.

(g) Any Lender claiming any additional amounts payable pursuant to
this Section 2.15 shall use its reasonable best efforts (consistent with its
internal policy and legal and regulatory restrictions) to change the
jurisdiction of its lending office, if the making of such a change would avoid
the need for, or reduce the amount of, any such additional amounts which may
thereafter accrue and would not, in the reasonable judgment of such Lender, be
materially disadvantageous to such Lender.

(h) Each Lender (and the Administrative Agent with respect to
payments to the Administrative Agent for its own account) agrees that (i) it
will take all reasonable actions by all usual

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<PAGE> 54

means to maintain all exemptions, if any, available to it from United States
withholding taxes (whether available by treaty, existing administrative waiver,
by virtue of the location of any Lender's lending office) and (ii) otherwise
cooperate with the Borrower to minimize amounts payable by the Borrower under
this Section 2.15; provided, however, the Lenders and the Administrative Agent
shall not be obligated by reason of this Section 2.15(h) to contest the payment
of any Taxes or Other Taxes or to disclose any information regarding its tax
affairs or tax computations or reorder its tax or other affairs or tax or other
planning. Subject to the foregoing, to the extent the Borrower pays sums
pursuant to this Section 2.15 and the Lender or the Administrative Agent
receives a refund of any or all of such sums, such refund shall be applied to
reduce any amounts then due and owing under this Agreement or, to the extent
that no amounts are due and owing under this Agreement at the time such refunds
are received, the party receiving such refund shall promptly pay over all such
refunded sums to the Borrower, provided that no Default or Event of Default is
in existence at such time.

Section 2.16 Letters of Credit.

(a) The Letter of Credit Facility. The Borrower may request the
Issuing Bank, on the terms and conditions hereinafter set forth, to issue, and
the Issuing Bank shall, if so requested, issue, letters of credit to be
denominated in Dollars (the "Letters of Credit") for the account of the
Borrower or for the joint account of the Borrower and any of its Subsidiaries
from time to time on any Business Day from the date of the initial Advance
until the Revolving Commitment Maturity Date in an aggregate maximum amount
(assuming compliance with all conditions to drawing) not to exceed, at any time
outstanding, the lesser of (i) $15,000,000 (the "Letter of Credit Facility")
and (ii) the sum of (A) the Revolving Credit Commitment, minus (B) the
aggregate principal amount of Revolving Credit Advances and Swing Line Advances
then outstanding. No Letter of Credit shall have an expiration date (including
all rights of renewal) later than the earlier of (i) 5 Business Days before the
Revolving Commitment Maturity Date or (ii) one year after the date of issuance
thereof (provided that any Letter of Credit with a one-year term may provide
for the renewal thereof for additional one-year periods, which in no event
extend beyond the date referred to in clause (i) of this sentence).
Immediately upon the issuance of each Letter of Credit, the Issuing Bank shall
be deemed to have sold and transferred to each Lender, and each Lender shall be
deemed to have purchased and received from the Issuing Bank, in each case
irrevocably and without any further action by any party, an undivided interest
and participation in such Letter of Credit, each drawing thereunder and the
obligations of the Borrower under this Agreement in respect thereof in an
amount equal to the product of (x) such Lender's Revolving Credit Specified
Percentage times (y) the maximum amount available to be drawn under such Letter
of Credit (assuming compliance with all conditions to drawing). Within the
limits of the Letter of Credit Facility, and subject to the limits referred to
above, the Borrower may request the issuance of Letters of Credit under this
Section 2.16(a), repay any Revolving Credit Advances resulting from drawings
thereunder pursuant to Section 2.16(c) and request the issuance of additional
Letters of Credit under this Section 2.16(a).

(b) Request for Issuance. Each Letter of Credit shall be issued
upon notice, given not later than 11:00 a.m. (Dallas, Texas time) on the third
Business Day prior to the date of the proposed issuance of such Letter of
Credit, by the Borrower to the Issuing Bank. Each Letter of Credit shall

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be issued upon notice given in accordance with the terms of any separate
agreement between the Borrower and the Issuing Bank in form and substance
reasonably satisfactory to the Borrower and the Issuing Bank providing for the
issuance of Letters of Credit pursuant to this Agreement and containing terms
and conditions not inconsistent with this Agreement (a "Letter of Credit
Agreement"), provided that if any such terms and conditions are inconsistent
with this Agreement, this Agreement shall control. Each such notice of
issuance of a Letter of Credit by the Borrower (a "Notice of Issuance") shall
be by telex, telecopier or cable, specifying therein, in the case of a Letter
of Credit, the requested (A) date of such issuance (which shall be a Business
Day), (B) maximum amount of such Letter of Credit, (C) expiration date of such
Letter of Credit, (D) name and address of the beneficiary of such Letter of
Credit, (E) form of such Letter of Credit and (F) such other information as
shall be required pursuant to the relevant Letter of Credit Agreement. If the
requested terms of such Letter of Credit are acceptable to the Issuing Bank in
its reasonable discretion, the Issuing Bank will, upon fulfillment of the
applicable conditions set forth in Article 3 hereof, make such Letter of Credit
available to the Borrower at its office referred to in Section 11.1 or as
otherwise agreed with the Borrower in connection with such issuance. At the
request of any Lender, but no more than once each calendar month, the
Administrative Agent shall obtain from the Issuing Bank and deliver to such
requesting Lender a summary report of the issued and outstanding Letters of
Credit.

(c) Drawing and Reimbursement. The payment by the Issuing Bank of
a draft drawn under any Letter of Credit shall constitute for all purposes of
this Agreement the making by the Issuing Bank of an Revolving Credit Advance,
which shall bear interest at the Base Rate Basis, in the amount of such draft
(but without any requirement for compliance with the conditions set forth in
Article 3 hereof). In the event that a drawing under any Letter of Credit is
not reimbursed by the Borrower by 11:00 a.m. (Dallas, Texas time) on the first
Business Day after such drawing, the Issuing Bank shall promptly notify
Administrative Agent and each other Lender. Each such Lender shall, on the
first Business Day following such notification, make a Revolving Credit Advance
(or, if as a result of any Debtor Relief Law, the Lenders are prohibited from
making a Revolving Credit Advance, each Lender shall fund its participation
purchased pursuant to Section 2.16(a) hereof by making such amount available to
the Administrative Agent), which shall bear interest at the Base Rate Basis,
and shall be used to repay the applicable portion of the Issuing Bank's Advance
with respect to such Letter of Credit, in an amount equal to the amount of its
participation in such drawing for application to reimburse the Issuing Bank
(but without any requirement for compliance with the applicable conditions set
forth in Article 3 hereof) and shall make available to the Administrative Agent
for the account of the Issuing Bank, by deposit at the Administrative Agent's
office, in same day funds, the amount of such Advance. In the event that any
Lender fails to make available to the Administrative Agent for the account of
the Issuing Bank the amount of such Advance, the Issuing Bank shall be entitled
to recover such amount on demand from such Lender together with interest
thereon at a rate per annum equal to the lesser of (i) the Highest Lawful Rate
or (ii) the Federal Funds Rate.

(d) Increased Costs. If the adoption, effectiveness, phase-in or
applicability after the Agreement of any Law (or any provision thereof) or if
any change in any Law or in the interpretation thereof by any court or
administrative or governmental authority charged with the administration

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<PAGE> 56

thereof shall either (i) impose, modify or deem applicable any reserve, special
deposit or similar requirement against letters of credit or guarantees issued
by, or assets held by, or deposits in or for the account of, the Issuing Bank
or any Lender or (ii) impose on the Issuing Bank or any Lender any other
condition regarding this Agreement or such Lender or any Letter of Credit, and
the result of any event referred to in the preceding clause (i) or (ii) shall
be to increase the cost to the Issuing Bank of issuing or maintaining any
Letter of Credit or to any Lender of purchasing any participation therein or
making any Advance pursuant to Section 2.16(c) hereof, then, upon demand by the
Issuing Bank or such Lender, the Borrower shall, subject to Section 11.9
hereof, pay to the Issuing Bank or such Lender, from time to time as specified
by the Issuing Bank or such Lender, additional amounts that shall be sufficient
to compensate the Issuing Bank or such Lender for such increased cost. A
certificate as to the amount of such increased cost, submitted to the Borrower
by the Issuing Bank or such Lender, shall include in reasonable detail the
basis for the demand for additional compensation and shall be controlling for
all purposes, absent manifest error. The obligations of the Borrower under
this Section 2.16(d) shall survive termination of this Agreement. The Issuing
Bank or any Lender claiming any additional compensation under this Section
2.16(d) shall use reasonable efforts (consistent with legal and regulatory
restrictions) to reduce or eliminate any such additional compensation which may
thereafter accrue and which efforts would not, in the sole discretion of the
Issuing Bank or such Lender, be otherwise disadvantageous.

(e) Obligations Absolute. The obligations of the Borrower under
this Agreement with respect to any Letter of Credit, any Letter of Credit
Agreement and any other agreement or instrument relating to any Letter of
Credit or any Revolving Credit Advance pursuant to Section 2.16(c) hereof shall
be unconditional and irrevocable, and shall be paid strictly in accordance with
the terms of this Agreement, such Letter of Credit Agreement and such other
agreement or instrument under all circumstances, including, without limitation,
the following circumstances unless such circumstance is caused by the gross
negligence or willful misconduct of the Issuing Bank:

(i) any lack of validity or enforceability of this
Agreement, any other Loan Document, any Letter of Credit Agreement,
any Letter of Credit or any other agreement or instrument relating
thereto (collectively, the "L/C Related Documents");

(ii) (A) any change in the time, manner or place of
payment of, or in any other term of, all or any of the Obligations of
the Borrower in respect of the Letters of Credit or any Revolving
Credit Advance pursuant to Section 2.16(c) hereof or (B) any other
amendment or waiver of or any consent to departure from all or any of
the L/C Related Documents;

(iii) the existence of any claim, set-off, defense or other
right that the Borrower may have at any time against any beneficiary
or any transferee of a Letter of Credit (or any Persons for whom any
such beneficiary or any such transferee may be acting), the Issuing
Bank, any Lender or any other Person, whether in connection with this
Agreement, the transactions contemplated hereby or by the L/C Related
Documents or any unrelated transaction;

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(iv) any statement or any other document presented under a
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;

(v) payment by the Issuing Bank under a Letter of Credit
against presentation of a draft or certificate that does not comply
with the terms of the Letter of Credit, except for any payment made
upon the Issuing Bank's gross negligence or willful misconduct;

(vi) any exchange, release or non-perfection of any
collateral, or any release or amendment or waiver of or consent to
departure from any guarantee, for all or any of the Obligations of the
Borrower in respect of the Letters of Credit or any Revolving Credit
Advance pursuant to Section 2.16(c) hereof; or

(vii) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing, including, without
limitation, any other circumstance that might otherwise constitute a
defense available to, or a discharge of, the Borrower or a guarantor,
other than the Issuing's Bank gross negligence or wilful misconduct.

(f) Compensation for Letters of Credit.

(i) Credit Fee. Subject to Section 11.9 hereof, the
Borrower shall pay to the Administrative Agent for the account of each
Lender a fee (which shall be payable quarterly in arrears on each
Quarterly Date and on the Revolving Commitment Maturity Date) equal to
the product of (A) an amount equal to the remainder of (y) 100% of the
applicable LIBOR Rate Margin for Revolving Credit Advances in effect
from time to time minus (z) 0.250% multiplied by (B) the average daily
amount available for drawing under all Letters of Credit. Subject to
Section 11.9 hereof, such fee shall be computed on the basis of a
360-day year for the actual number of days elapsed.

(ii) Fronting Fee. Subject to Section 11.9 hereof, the
Borrower shall pay to the Administrative Agent for the account of the
Issuing Bank a per annum fronting fee (which shall be payable
quarterly in arrears on each Quarterly Date and on the Revolving
Commitment Maturity Date) in an amount equal to the product of (A)
0.250% multiplied by (B) the average daily amount available for
drawing under all outstanding Letters of Credit. Subject to Section
11.9 hereof, such fee shall be computed on the basis of a 360-day year
for the actual number of days elapsed.

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(g) L/C Cash Collateral Account.

(i) Upon the occurrence of an Event of Default and within
thirty days of demand by the Administrative Agent pursuant to Section
8.2(c) (but in the case of an Event of Default specified in Section
8.1(f) or (g) hereof immediately and without any demand or taking of
any other action by the Administrative Agent or any Lender), the
Borrower will (A) pay to the Administrative Agent in immediately
available funds an amount equal to the maximum amount then available
to be drawn under the Letters of Credit then outstanding or (B)
deliver to the Issuing Bank back-up letters of credit acceptable to
the Issuing Bank which, together with any funds deposited in the L/C
Cash Collateral Account, are in an amount equal to the maximum amount
then available to be drawn under the Letters of Credit then
outstanding. Any amounts so received by the Administrative Agent
shall be deposited by the Administrative Agent in a deposit account
maintained by the Administrative Agent (the "L/C Cash Collateral
Account").

(ii) As security for the payment of all Reimbursement
Obligations and for any other Obligations, the Borrower hereby grants,
conveys, assigns, pledges, sets over and transfers to the
Administrative Agent (for the benefit of the Issuing Bank and
Lenders), and creates in the Administrative Agent's favor (for the
benefit of the Issuing Bank and Lenders) a Lien in, all money,
instruments and securities at any time held in or acquired in
connection with the L/C Cash Collateral Account, together with all
proceeds thereof. The L/C Cash Collateral Account shall be under the
sole dominion and control of the Administrative Agent and the Borrower
shall have no right to withdraw or to cause the Administrative Agent
to withdraw any funds deposited in the L/C Cash Collateral Account.
At any time and from time to time, upon the Administrative Agent's
request, the Borrower promptly shall execute and deliver any and all
such further instruments and documents, including UCC financing
statements, as may be necessary, appropriate or desirable in the
Administrative Agent's judgment to obtain the full benefits (including
perfection and priority) of the security interest created or intended
to be created by this paragraph (ii) and of the rights and powers
herein granted. The Borrower shall not create or suffer to exist any
Lien on any amounts or investments held in the L/C Cash Collateral
Account other than the Lien granted under this paragraph (ii).

(iii) The Administrative Agent shall (A) apply any funds in
the L/C Cash Collateral Account on account of Reimbursement
Obligations when the same become due and payable if and to the extent
that the Borrower shall fail directly to pay such Reimbursement
Obligations and (B) after the Revolving Commitment Maturity Date,
apply any proceeds remaining in the L/C Cash Collateral Account first
to pay any unpaid Obligations then outstanding hereunder and then to
refund any remaining amount to the Borrower.

(iv) The Borrower, no more than once in any calendar
month, may direct the Administrative Agent to invest the funds held in
the L/C Cash Collateral Account (so long as the aggregate amount of
such funds exceeds any relevant minimum investment requirement) in (A)
direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency thereof and
(B) one or more other types of investments

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permitted by the Administrative Agent, in each case with such
maturities as the Borrower, with the consent of the Administrative
Agent, may specify, pending application of such funds on account of
Reimbursement Obligations or on account of other Obligations, as the
case may be. In the absence of any such direction from the Borrower,
the Administrative Agent shall invest the funds held in the L/C Cash
Collateral Account (so long as the aggregate amount of such funds
exceeds any relevant minimum investment requirement) in one or more
types of investments with such maturities as the Administrative Agent
may specify, pending application of such funds on account of
Reimbursement Obligations or on account of other Obligations, as the
case may be. All such investments shall be made in the Administrative
Agent's name for the account of the Lenders, subject to the ownership
interest therein of the Borrower. The Borrower recognizes that any
losses or taxes with respect to such investments shall be borne solely
by the Borrower, and the Borrower agrees to hold the Administrative
Agent and the Lenders harmless from any and all such losses and taxes.
Administrative Agent may liquidate any investment held in the L/C Cash
Collateral Account in order to apply the proceeds of such investment
on account of the Reimbursement Obligations (or on account of any
other Obligation then due and payable, as the case may be) without
regard to whether such investment has matured and without liability
for any penalty or other fee incurred (with respect to which the
Borrower hereby agrees to reimburse the Administrative Agent) as a
result of such application.

ARTICLE 3

Conditions Precedent

Section 3.1 Conditions Precedent to the Initial Advances and the
Initial Letters of Credit. The obligation of each Lender to make the initial
Advance and the obligations of the Issuing Bank to issue any Letter of Credit
issued on the Agreement Date, is subject to (i) receipt by the Administrative
Agent of each of the following, in form and substance reasonably satisfactory
to each Lender, with a copy (except for the Notes) for each Lender, and (ii)
satisfaction of the following conditions:

(a) a loan certificate of each Obligor certifying as to the
accuracy of its representations and warranties in the Loan Documents,
certifying that no Default has occurred and is continuing, and including a
certificate of incumbency with respect to each officer executing any Loan
Document, and including (i) a copy of the articles or certificate of
incorporation (or other similar organizational documents) of such Obligor
certified to be true, complete and correct by the secretary of state of its
state of incorporation or organization, (ii) a copy of the by-laws, partnership
agreement or other similar governance document of such Obligor, as in effect on
the Agreement Date, (iii) a copy of the resolutions of such Obligor authorizing
it to execute, deliver and perform the Loan Documents to which it is a party
and all other transactions contemplated thereby, and (iv) a copy of a
certificate of good standing and a certificate of existence for its state of
incorporation and each state in which it is qualified to do business;

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(B) a duly executed Revolving Credit Note, Facility A Term Loan
Note and Facility B Term Loan Note payable to the order of each Lender with a
related Commitment and in an amount for each Lender equal to its Specified
Percentage of each such Commitment, respectively, and which has specifically
requested such Note;

(c) the duly executed Swing Line Note, payable to the order of the
Swing Line Bank in the amount of the Swing Line Facility;

(d) UCC-11 searches in appropriate jurisdictions where Collateral
is located;

(e) opinion of counsel to the Borrower and each Subsidiary
(including foreign counsel with respect to any Capital Stock of a Foreign
Subsidiary as Collateral) addressed to the Lenders;

(f) reimbursement to the Administrative Agent for Special
Counsel's reasonable and customary fees (on an hourly basis) and expenses
incurred through the date hereof;

(g) any fees required to be paid pursuant to the Fee Letter;

(h) duly executed and completed Security Agreements and
Intellectual Property Security Agreements executed by the Borrower and each of
its Domestic Subsidiaries, granting a first priority perfected Lien in all
Collateral covered thereby, together with related financing statements, stock
powers, stock certificates evidencing ownership of (i) 100% of the issued and
outstanding Capital Stock of each Domestic Subsidiary and (ii) 65% of the
issued and outstanding Capital Stock of each Foreign Subsidiary, and insurance
certificates listing the Administrative Agent as loss payee and additional
insured and otherwise in a form required by the Collateral Documents;

(i) a duly executed and completed Subsidiary Guaranty by each
Domestic Subsidiary;

(j) duly executed and completed Deeds of Trusts, together with
such environmental reports and title insurance policies or commitments as shall
be required by the Administrative Agent, in form or substance reasonably
satisfactory to the Administrative Agent and Special Counsel;

(k) simultaneously with the making of the initial Advance,
executed UCC-3 Termination Statements to be filed in appropriate jurisdictions
to terminate all Liens against assets of the Borrower and its subsidiaries
other than Permitted Liens;

(l) all Home Interiors Merger Documents, which shall be on terms
and conditions acceptable to the Administrative Agent;

(m) the Home Interiors Recapitalization shall have occurred
contemporaneously pursuant to terms and conditions of the Home Interiors Merger
Documents;

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(n) evidence reasonably satisfactory to the Administrative Agent,
that contemporaneously with the Home Interiors Recapitalization (i) the
Borrower shall receive contemporaneously (A) at least $200,000,000 in gross
proceeds from the sale of the Senior Subordinated Notes and (B) the HM/RB
Partners, L.P. Cash Contribution; (iii) the aggregate amount of Total Debt does
not exceed $505,000,000; and (iv) the Unused Portion shall be equal to or
greater than $35,000,000;

(o) a pro forma balance sheet of the Borrower and its Subsidiaries
as of the Agreement Date, taking into account the Home Interiors
Recapitalization, and such other information relating to the Home Interiors
Recapitalization as the Administrative Agent shall reasonably request;

(p) all requisite approvals or consents of all Tribunals or third
parties with respect to the Home Interiors Recapitalization and the other
transactions contemplated hereby to the extent required shall have been
obtained (but excluding any approvals or consents that could not reasonably be
expected to have a Material Adverse Effect);

(q) after giving effect to the Home Interiors Recapitalization,
there shall have occurred no material adverse change in the business, assets,
operations, prospects or condition (financial or otherwise) of the Borrower and
its Subsidiaries, taken as a whole, since December 31, 1997; and

(r) such other documents, instruments and certificates as the
Administrative Agent or any Lender may reasonably require in connection with
the transactions contemplated hereby.

Section 3.2 Conditions Precedent to All Advances and Letters of
Credit. The obligation of each Lender to make each Advance hereunder
(including the initial Advance) and the obligation of the Issuing Bank to issue
or extend each Letter of Credit (including the initial Letter of Credit) is
subject to fulfillment of the following conditions immediately prior to or
contemporaneously with each such Advance or issuance or extension:

(a) With respect to each Advance and each issuance of a Letter of
Credit, all of the representations and warranties of the Borrower under this
Agreement, which, pursuant to Section 4.2 hereof, are made at and as of the
time of such Advance or Letter of Credit, shall be true and correct at such
time in all material respects, both before and after giving effect to the
application of the proceeds of such Advance or Letter of Credit;

(b) There shall not exist a Default or Event of Default hereunder;

(c) The aggregate Advances and Letters of Credit, after giving
effect to such proposed Advance or Letter of Credit, shall not exceed the
maximum principal amount then permitted to be outstanding hereunder;

(d) No order, judgment, injunction or decree of any Tribunal shall
purport to enjoin or restrain any Lender or the Issuing Bank from making any
Advance or issuing any Letter of Credit;

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(e) There shall be no Litigation pending against, or, to the
Borrower's current actual knowledge, threatened against the Borrower or any of
its Subsidiaries, or in any of their respective properties, which could
reasonably be expected to have a Material Adverse Effect; and

(f) There shall have occurred no material adverse change in the
business, assets, condition (financial or otherwise) or results of operations
of the Borrower and its Subsidiaries, taken as a whole since the date of the
last financial statements delivered pursuant to Section 6.2(a) hereof.

Notwithstanding the above, the obligation of each Lender to make a
Revolving Credit Advance pursuant to Sections 2.2(g) and 2.16(c) hereof (or
fund its participation in respect of Letters of Credit pursuant to Section
2.16(c) hereof) shall be absolute and unconditional and shall not be affected
by any circumstances, including, without limitation, (i) the occurrence of any
Default or Event of Default, (ii) the failure of the Borrower to satisfy any
condition set forth in this Section 3.2, or (iii) any other circumstance,
happening or event whatsoever, except that the conditions precedent set forth
in Section 3.1 and 3.2 hereof with respect to the Swing Line Advance or the
Letter of Credit for which such Revolving Credit Advance is made pursuant to
Section 2.2(g) or 2.16(c) hereof (or participation funded) shall have been
satisfied in full at the time of the making of such Swing Line Advance or the
issuance or extension of such Letter of Credit.

Section 3.3 Conditions Precedent to Conversions and
Continuations. The obligation of the Lenders to convert any existing Base Rate
Advance into a LIBOR Advance or to continue any existing LIBOR Advance is
subject to the condition precedent that on the date of such conversion or
continuation no Event of Default shall have occurred and be continuing or would
result from the making of such conversion or continuation. The acceptance of
the benefits of each such conversion and continuation shall constitute a
representation and warranty by the Borrower to each of the Lenders that no
Event of Default shall have occurred and be continuing or would result from the
making of such conversion or continuation.

ARTICLE 4

Representations and Warranties

Section 4.1 Representations and Warranties. The Borrower hereby
represents and warrants to each Lender as follows:

(a) Organization; Power; Qualification. As of the Agreement Date,
the respective jurisdiction of incorporation or organization and percentage
ownership by the Borrower or another Subsidiary of the Subsidiaries listed on
Schedule 5 are true and correct. All of the outstanding Capital Stock of the
Borrower and its Subsidiaries is validly issued, fully paid and non-assessable.
Each of the Borrower and its Subsidiaries is a corporation, partnership or
limited liability company duly organized, validly existing and in good standing
under the laws of its state of organization. Each of the Borrower and its
Subsidiaries has the corporate or other legal power and authority to own its

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properties and to carry on its business as now being and hereafter proposed to
be conducted. Each of the Borrower and its Subsidiaries is authorized to do
business, duly qualified and in good standing in the jurisdictions set forth in
Schedule 8 and no qualification or authorization is necessary in any other
jurisdictions in which the character of its properties or the nature of its
business requires such qualification or authorization except where the failure
to be so qualified or authorized would not have a Material Adverse Effect.

(b) Authorization. The Borrower has the corporate power and has
taken all necessary corporate action to authorize it to borrow hereunder and
enter into the Home Interiors Recapitalization. Each Obligor has corporate or
other legal power and has taken all necessary corporate or other legal action
to execute, deliver and perform the Loan Documents to which it is party in
accordance with the terms thereof, and to consummate the transactions
contemplated thereby. Each Loan Document has been duly executed and delivered
by the Obligor executing it. Each of the Loan Documents to which an Obligor is
a party is a legal, valid and binding respective obligation of such Obligor,
enforceable in accordance with its terms, subject, to enforcement of remedies,
to the following qualifications: (i) equitable principles generally, and (ii)
Debtor Relief Laws (insofar as any such law relates to the bankruptcy,
insolvency or similar event of such Obligor).

(c) Compliance with Other Loan Documents and Contemplated
Transactions. The execution, delivery and performance by each Obligor of the
Loan Documents to which it is a party, and the consummation of the transactions
contemplated thereby, do not and will not (i) require any consent or approval
other than (x) those already obtained, (y) consents under immaterial
contractual obligations, the failure to obtain which could not reasonably be
expected to have a Material Adverse Effect, and (z) UCC and mortgage filings in
connection with the Loan Documents, (ii) violate any material Applicable Law,
the result of which could not reasonably be expected to have a Material Adverse
Effect, (iii) conflict with, result in a breach of, or constitute a default
under the certificate of incorporation, by-laws, partnership agreement,
operating agreement or other similar governing document or agreement of such
Obligor, (iv) conflict with, result in a breach of, or constitute a default
under any Necessary Authorization, indenture, agreement or other instrument, to
which such Obligor is a party or by which they or their respective properties
may be bound, or (v) result in or require the creation or imposition of any
Lien upon or with respect to any property now owned or hereafter acquired by
such Obligor other than the Liens created pursuant to the Loan Documents.

(d) Business. The Borrower and its Subsidiaries are engaged
primarily in the business of the manufacture, direct selling, direct marketing
or home furnishings business and activities reasonably related, ancillary or
complimentary thereto.

(e) Licenses, etc. All Necessary Authorizations have been duly
obtained, and are in full force and effect without any known conflict with the
rights of others and free from any unduly burdensome restrictions.

(f) Compliance with Law. The Borrower and its Subsidiaries are in
compliance in all respects with all Applicable Laws, except where the failure
to so comply could not reasonably be expected to have a Material Adverse
Effect.

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(g) Title to Properties. The Borrower and its Subsidiaries have
good and indefeasible title to, or a valid leasehold interest in, all of their
material assets. None of their assets are subject to any Liens, except
Permitted Liens. No financing statement or other Lien filing (except relating
to Permitted Liens and other Liens for which releases and UCC-3 Termination
Statements have been obtained pursuant to Section 3.1(l) hereof) is on file in
any state or jurisdiction that names the Borrower or any of its Subsidiaries as
debtor or covers (or purports to cover) any assets of the Borrower or any of
its Subsidiaries, except for Indebtedness permitted hereunder or with respect
to which the requirements of Section 3.1(l) hereof have been satisfied. The
Borrower and its Subsidiaries have not signed any such financing statement or
filing, nor any security agreement authorizing any Person to file any such
financing statement or filing (except relating to Permitted Liens).

(h) Litigation. Except as reflected on Schedule 4 hereto, as of
the Agreement Date, there is no Litigation pending against, or, to the
Borrower's current actual knowledge, threatened against the Borrower, or in any
other manner relating directly and adversely to the Borrower or any of its
Subsidiaries, or any of their properties, in, before, or by any Tribunal which
if adversely determined could reasonably be expected to have a Material Adverse
Effect.

(i) Taxes. Except as set forth in Schedule 11 hereto, all federal
and other material tax returns of the Borrower and its Subsidiaries required by
law to be filed have been duly filed or extensions have been timely filed, and
all federal and other material taxes, assessments and other governmental
charges or levies upon the Borrower, its Subsidiaries or any of their
respective properties, income, profits and assets, which are due and payable,
have been paid, unless the same are being contested in good faith by
appropriate proceedings, with adequate reserves established therefor, and no
Lien (other than a Permitted Lien) has attached and no foreclosure, distraint,
sale or similar proceedings have been commenced that have not been vacated,
discharged, bonded or stayed. The charges, accruals and reserves on the books
of the Borrower and its Subsidiaries in respect of their taxes are, in the
judgment of the Borrower, adequate.

(j) Financial Statements; Material Liabilities.

(i) The Borrower has heretofore delivered to Lenders the
audited consolidated balance sheets of the Borrower as at December 31,
1997, and the related statements of earnings and changes in
shareholders' equity and statement of cash flows for the twelve-month
period then ended (the "Financial Statements"). The Financial
Statements were prepared in conformity with GAAP and fairly present,
in all material respects, the financial position of the Borrower and
its Subsidiaries as at the date thereof and the combined results of
operations and cash flows for the period covered thereby.

(ii) The projected consolidated financial statements of
the Borrower, delivered to the Lenders prior to or on the Agreement
Date are based on good faith estimates and assumptions made by the
management of the Borrower and believed to be reasonable at the

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time made, it being recognized by the Lenders that such projections as
to future events are not to be viewed as facts and that actual results
during the period or periods covered by any such projections may
differ from the projected results.

(iii) The financial statements of the Borrower and its
Subsidiaries delivered to the Lenders pursuant to Section 6.1 and 6.2
hereof fairly present in all material respects their respective
financial condition and their respective results of operations as of
the dates and for the periods shown, all in accordance with GAAP,
subject to normal year-end adjustments. The latest of such financial
statements reflects all material liabilities, direct and contingent,
of the Borrower and each Subsidiary of the Borrower that are required
to be disclosed in accordance with GAAP.

(k) No Adverse Change. Since the date of the Financial Statements
and thereafter any financial statements delivered pursuant to Section 6.2(a)
hereof, no event or circumstance has occurred or arisen which could reasonably
be expected to have as a Material Adverse Effect.

(l) ERISA. None of the Borrower or any of its Subsidiaries
maintains or contributes to any Plan or Multiemployer Plan pursuant to which
employees of the Borrower or any of its Subsidiaries participate other than
those disclosed to the Administrative Agent in writing. Each such Plan (other
than any Multiemployer Plan) is in compliance in all material respects with the
applicable provisions of ERISA, the Code and any other Applicable Law, except
where the failure to comply could not reasonably be expected to have a Material
Adverse Effect. No accumulated funding deficiency (as defined in Section
412(a) of the Code) with respect to a Plan has occurred (without regard to any
waiver granted under Section 412 of the Code), the result of which could
reasonably be expected to have Material Adverse Effect. None of the Borrower
or any member of its Controlled Group has failed to make any contribution or
pay any amount due or owing as required under the terms of any Plan or
Multiemployer Plan, the result of which could reasonably be expected to have
Material Adverse Effect. There has been no ERISA Event, the result of which
could reasonably be expected to have a Material Adverse Effect. The present
value of the benefit liabilities, as defined in Title IV of ERISA, of each Plan
subject to Title IV of ERISA (other than a Multiemployer Plan) of the Borrower
and each member of its Controlled Group does not exceed by more than $500,000
the present value of the assets of each such Plan as of the most recent
valuation date using each such Plan's actuarial assumptions at such date.
There are no pending, or to the Borrower's knowledge threatened, claims,
lawsuits or actions (other than routine claims for benefits in the ordinary
course) asserted or instituted against, and neither the Borrower nor any member
of its Controlled Group has knowledge of any threatened litigation or claims
against, the assets of any Plan or its related trust or against any fiduciary
of a Plan with respect to the operation of such Plan the result of which could
reasonably be expected to have a Material Adverse Effect. None of the
Borrower, any member of its Controlled Group, or any organization to which the
Borrower or any member of its Controlled Group is a successor or parent
corporation within the meaning of ERISA Section 4069(b), has engaged in a
transaction within the meaning of ERISA Section 4069 the result of which could
reasonably be expected to have Material Adverse Effect.

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(m) Compliance with Regulations T, U and X. The Borrower is not
engaged principally or as one of its important activities in the business of
extending credit for the purpose of purchasing or carrying any margin stock
within the meaning of Regulations T, U and X of the Board of Governors of the
Federal Reserve System, and no proceeds of any Advances or Letters of Credit
will be used, directly or indirectly, to purchase or carry any such margin
stock. No more than 25% of the assets of the Borrower and its Subsidiaries
will be margin stock. Neither the making of any Advances, the issuance of any
Letters of Credit nor the application of any proceeds thereof will violate, or
be inconsistent with, the provisions of Regulations T, U and X of the Board of
Governors of the Federal Reserve System.

(n) Necessary Authorization. The Borrower and its Subsidiaries
are not required to obtain any Necessary Authorization that has not already
been obtained from, or effect any material filing or registration that has not
already been effected with, any federal, state or local regulatory authority in
connection with the execution and delivery of this Agreement or any other Loan
Document, or the performance thereof, in accordance with their respective
terms, including any borrowing hereunder.

(o) Absence of Default. No event has occurred or failed to occur,
which has not been remedied or waived, the occurrence or non-occurrence of
which constitutes, or which with the passage of time or giving of notice or
both would constitute, (i) an Event of Default or (ii) a default by the
Borrower or any of its Subsidiaries under any indenture, agreement or other
instrument, or any judgment, decree or order to which the Borrower or any of
its Subsidiaries or by which they or any of their respective properties is
bound, the result of which with respect to any default set forth in clause (ii)
immediately preceding could reasonably be expected to have a Material Adverse
Effect.

(p) Governmental Regulation. Neither the Borrower nor any of its
Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, or a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" of a "holding company" or of
a "subsidiary company" of a "holding company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended. Neither the entering into or
performance by the Borrower of this Agreement nor the issuance of the Notes
violates any provision of such act or requires any consent, approval, or
authorization of, or registration with, the Securities and Exchange Commission
or any other Tribunal pursuant to any provisions of such act.

(q) Environmental Matters. Except as disclosed in Borrower's
Environmental Reports, (i) neither the Borrower nor any of its Subsidiaries has
any current actual knowledge that any substance deemed hazardous by any
Applicable Environmental Law, has been installed (A) on any real property fee
title to which is now owned by the Borrower or any of its Subsidiaries or (B)
by Borrower or any of its Subsidiaries on any real property leased by the
Borrower or any of its Subsidiaries, in either case in a manner which could
give rise to a violation of Applicable Environmental Laws which could
reasonably be expected to have a Material Adverse Effect; (ii) the Borrower and
its Subsidiaries are not in material violation of or subject to any existing,
pending or, to the Borrower's knowledge, threatened investigation or inquiry by
any governmental authority or

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to any material remedial obligations under any Applicable Environmental Laws
which could reasonably be expected to have a Material Adverse Effect; and (iii)
the Borrower and its Subsidiaries have obtained all permits, licenses, and
authorizations required by Applicable Environmental Laws except where failure
to obtain such permits would not have a Material Adverse Effect. The Borrower
and its Subsidiaries have taken reasonable steps to determine, and the Borrower
and its Subsidiaries have no current actual knowledge, that any hazardous
substances or solid wastes have been disposed of or otherwise released (y) on
or to the real property fee title to which is owned by the Borrower or any of
its Subsidiaries or (z) by Borrower or any of its Subsidiaries on or to any
real property leased by Borrower or any of its Subsidiaries, all within the
meaning of the Applicable Environmental Laws, which could reasonably be
expected to have a Material Adverse Effect. For purposes of this Section
4.1(q), the Borrower's Environmental Reports means those Environmental
Assessments prepared by Law Engineering in anticipation of the transaction
hereunder and listed on Schedule 10 hereto.

(r) Certain Fees. No broker's, finder's or other fee or
commission will be payable by the Borrower (other than to the Lenders hereunder
and HMTF and its Affiliates) with respect to the making of the Commitments or
the Advances hereunder. The Borrower agrees to indemnify and hold harmless the
Administrative Agent and each Lender from and against any claims, demand,
liability, proceedings, costs or expenses asserted with respect to or arising
in connection with any such fees or commissions.

(s) Intellectual Property. The Borrower and its Subsidiaries have
collectively obtained or applied for or licensed or otherwise obtained the
right to use all patents, trademarks, service marks, trade names, copyrights,
and other rights, free from Liens (except Permitted Liens), that are necessary
for the operation of their business as presently conducted and as proposed to
be conducted other than those of which the failure to obtain or to apply for
could not reasonably be expected to have a Material Adverse Effect. Nothing
has come to the current actual knowledge of the Borrower or any of its
Subsidiaries to the effect that (i) any process, method, part or other material
presently contemplated to be employed by the Borrower or any of its
Subsidiaries infringes any valid and enforceable patent, trademark, service
mark, trade name, copyright, license or other right owned by any other Person,
or (ii) there is pending or overtly threatened any claim or litigation against
or affecting the Borrower or any of its Subsidiaries contesting its right to
sell or use any such process, method, part or other material, in each case
which could reasonably be expected to result in a Material Adverse Effect.

(t) Disclosure. All factual information, reports, financial
statements, exhibits and schedules furnished in writing by the Borrower or any
of its Subsidiaries to the Administrative Agent or any Lender in connection
with this Agreement or the other Loan Documents prior to or on the Agreement
Date is, and all other such factual written information furnished by or on
behalf of the Borrower or any of its Subsidiaries to the Administrative Agent
or any Lender after the Agreement Date will be, true and accurate in all
material respects (or, in the case of projections based on reasonable estimates
and assumptions) on the date as of which such information is dated or certified
and not incomplete by omitting to state any material fact necessary to make
such information not

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materially misleading at such time in light of the circumstances under which
such information was provided. There is no fact known to the Borrower and not
known to the public generally that could reasonably be expected to have a
Material Adverse Effect, which has not been set forth in this Agreement or in
the documents, certificates and statements furnished to the Lenders by or on
behalf of the Borrower hereof in connection with the transactions contemplated
hereby or thereby.

(u) Solvency. The Borrower is, and Borrower and its Subsidiaries
on a consolidated basis are, Solvent.

(v) Labor Relations. Except as set forth on Schedule 9 hereto, as
of the Agreement Date neither the Borrower nor any of its Subsidiaries is a
party to a collective bargaining agreement or similar agreement, and the
Borrower and each of its Subsidiaries is in compliance in all material respects
with all Laws respecting employment and employment practices, terms and
conditions of employment, wages and hours and other laws related to the
employment of its employees, and there are no arrears in the payment of wages,
withholding or social security taxes, unemployment insurance premiums or other
similar obligations of the Borrower or any of its Subsidiaries or for which the
Borrower or any such Subsidiary may be responsible other than in the ordinary
course of business. There is no strike, work stoppage or labor dispute with
any union or group of employees pending or overtly threatened involving
Borrower or any of its Subsidiaries which could reasonably be expected to have
a Material Adverse Effect.

(w) Common Enterprise. The Borrower and its Subsidiaries are
engaged in the businesses set forth in Section 4.1(d) hereof. These operations
require financing on a basis such that the credit supplied can be made
available from time to time to the Borrower and various of its Subsidiaries, as
required for the continued successful operation of the Borrower and its
Subsidiaries as a whole. The Borrower and its Subsidiaries expect to derive
benefit (and the boards of directors of the Borrower and its Subsidiaries have
determined that the Borrower and its Subsidiaries may reasonably be expected to
derive benefit), directly or indirectly, from the credit extended by the
Lenders hereunder, both in their separate capacities and as members of the
group of companies, since the successful operation and condition of the
Borrower and its Subsidiaries is dependent on the continued successful
performance of the functions of the group as a whole.

(x) Year 2000 Compliance. To the extent that such problem could
reasonably be expected to cause a Material Adverse Effect, the Borrower is (i)
developing a review and assessment of all areas within its and each of its
Subsidiaries' business and operations that could be adversely affected by the
"Year 2000 Problem" (that is, the risk that computer applications used by the
Borrower or any of its Subsidiaries may be unable to recognize and perform
properly date-sensitive involving certain dates prior to and any date after
December 31, 1999), (ii) developing a plan and timeline for addressing the Year
2000 Problem on a timely basis, and (iii) to date, implementing that plan in
accordance with that timetable. The Borrower reasonably believes that all
computer applications that are material to its or any of its Subsidiaries'
business and operations will on a timely basis be able to perform properly
date- sensitive functions for all dates before and after January 1, 2000

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(that is, be "Year 2000 Compliant"), except to the extent that a failure to do
so could not reasonably be expected to have a Material Adverse Effect.

Section 4.2 Survival of Representations and Warranties, etc. All
representations and warranties made under this Agreement and the other Loan
Documents shall be deemed to be made at and as of the Agreement Date and at and
as of the date of each Advance, and each shall be true and correct when made,
except to the extent (a) previously fulfilled in accordance with the terms
hereof, (b) applicable to a specific date or otherwise subsequently
inapplicable, or (c) previously waived in writing by the Determining Lenders
with respect to any particular factual circumstance. All such representations
and warranties shall survive, and not be waived by, the execution hereof by any
Lender, any investigation or inquiry by any Lender, or by the making of any
Advance under this Agreement.

ARTICLE 5

General Covenants

So long as any of the Obligations are outstanding and unpaid or any
Commitment is outstanding (whether or not the conditions to borrowing have been
or can be fulfilled):

Section 5.1 Preservation of Existence and Similar Matters . The
Borrower shall, and shall cause each Subsidiary to:

(a) except as otherwise permitted pursuant to Section 7.4 hereof,
preserve and maintain, or timely obtain and thereafter preserve and maintain,
(a) its existence, and (b) all rights, franchises, licenses, authorizations,
consents, privileges and all other Necessary Authorizations from federal, state
and local governmental bodies and any tribunal (regulatory or otherwise), the
loss of which could reasonably be expected to have a Material Adverse Effect;
and

(b) except as otherwise permitted pursuant to Section 7.4 hereof,
qualify and remain qualified and authorized to do business in each jurisdiction
in which the character of its properties or the nature of its business requires
such qualification or authorization, unless the failure to do so could not
reasonably be expected to have a Material Adverse Effect.

Section 5.2 Business; Compliance with Applicable Law. The
Borrower and its Subsidiaries shall (a) engage primarily in the businesses set
forth in Section 4.1(d) hereof, and (b) comply in all material respects with
the requirements of all material Applicable Law.

Section 5.3 Maintenance of Properties. The Borrower shall, and
shall cause each Subsidiary to, maintain or cause to be maintained all its
material properties (whether owned or held under lease) in reasonably good
repair, working order and condition, taken as a whole, and from time

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to time make or cause to be made all appropriate repairs, renewals and
replacements as Borrower shall in good faith deem necessary.

Section 5.4 Accounting Methods and Financial Records. The
Borrower shall, and shall cause each Subsidiary to, maintain a system of
accounting established and administered in accordance with GAAP, keep adequate
records and books of account in which complete entries will be made and all
transactions reflected in accordance with sound business practices, and keep
accurate and complete records of its respective assets. The Borrower and each
of its Subsidiaries shall maintain a fiscal year ending on the last day of
December.

Section 5.5 Insurance.

(a) The Borrower shall, and shall cause each Subsidiary to,
maintain insurance from responsible companies in such amounts and against such
risks (but including in any event public liability, business interruption and
flood as to any portion of the real estate Collateral which shall at any time
be located in an identified "flood prone" area in which flood insurance has
been made available pursuant to the Federal Flood Protection Act of 1973 as
amended) as shall be customary and usual in the industry for companies of
similar size and capability. Each insurance policy shall provide for at least
30 days' prior notice to the Administrative Agent of any proposed termination
or cancellation of such policy, whether on account of default or otherwise and
name the Administrative Agent as loss payee or additional insured, as the case
may be.

(b) The Borrower shall furnish, upon request of the Administrative
Agent, evidence of the insurance required to be maintained in accordance with
Section 5.5(a) hereof in form and content reasonably satisfactory to the
Administrative Agent. If the Borrower or any of its Subsidiaries fails to
maintain the insurance required to be maintained in accordance with Section
5.5(a) hereof, the Administrative Agent may at its option obtain insurance on
the Collateral, and any premium thereby paid by the Administrative Agent shall
become part of the Obligation and shall bear interest at the lesser of the (i)
Base Rate Basis and (ii) Highest Lawful Rate. In the event that the
Administrative Agent maintains such substitute insurance, the additional
premium for such insurance shall be due on demand and payable by the Borrower
to the Administrative Agent in accordance with any notice delivered to the
Borrower by the Administrative Agent.

Section 5.6 Payment of Taxes and Claims. The Borrower shall, and
shall cause each Subsidiary to, pay and discharge all material taxes,
assessments and governmental charges or levies imposed upon it or its income or
properties prior to the date of delinquency, and to pay all lawful material
claims for labor, materials and supplies which, if unpaid, might become a Lien
upon any of its properties; in each case unless such tax, assessment, charge,
levy or claim is being diligently contested in good faith by appropriate
proceedings and for which adequate reserves shall have been set aside on the
appropriate books in accordance with GAAP, but only so long as no Lien (other
than a Permitted Lien) shall attach with respect thereto and no foreclosure,
distraint, sale or similar proceedings shall have been commenced which has not
been vacated, discharged, bonded or stayed.

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Section 5.7 Visits and Inspections. The Borrower shall, and
shall cause each of its Subsidiaries to, permit representatives of the
Administrative Agent or any Lender from time to time after reasonable notice by
the Administrative Agent or any Lender to (a) visit and inspect the properties
of the Borrower and its Subsidiaries (i) as often as the Administrative Agent
or any Lender shall reasonably deem advisable, and (ii) at reasonable times,
(b) audit, inspect and make extracts from and copies of the Borrower's and each
such Subsidiary's books and records, and (c) discuss with the Borrower's and
each such Subsidiary's directors, officers, employees and auditors its
business, assets, liabilities, financial positions, results of operations and
business prospects. After the occurrence and during the continuance of an
Event of Default, the Borrower shall pay the reasonable expenses related to
inspections and audits performed by the Administrative Agent. Prior to the
occurrence of an Event of Default, all such visits and inspections shall be
conducted during normal business hours and shall not be conducted more often
than once per fiscal quarter. Following the occurrence and during the
continuance of an Event of Default, such visits and inspections shall be
conducted at any time requested by the Administrative Agent or any Lender
without any requirement for advance notice.

Section 5.8 Use of Proceeds. The Borrower shall use the proceeds
of Advances and the Letters of Credit to (a) consummate the Home Interiors
Recapitalization, (b) pay certain fees and expenses related to the Home
Interiors Recapitalization, and (c) finance the ongoing working capital and
general corporate requirements of the Borrower and its Subsidiaries, including
Acquisitions permitted hereunder.

SECTION 5.9 INDEMNITY.

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(a) THE BORROWER AGREES TO DEFEND, PROTECT, INDEMNIFY AND HOLD
HARMLESS THE ADMINISTRATIVE AGENT, EACH LENDER, THE ISSUING BANK, EACH OF THEIR
RESPECTIVE AFFILIATES, AND EACH OF THEIR RESPECTIVE (INCLUDING SUCH
AFFILIATES') OFFICERS, DIRECTORS, TRUSTEES, EMPLOYEES, AGENTS, ATTORNEYS,
SHAREHOLDERS AND CONSULTANTS (INCLUDING, WITHOUT LIMITATION, THOSE RETAINED IN
CONNECTION WITH THE SATISFACTION OR ATTEMPTED SATISFACTION OF ANY OF THE
CONDITIONS SET FORTH HEREIN) OF EACH OF THE FOREGOING (COLLECTIVELY,
"INDEMNITEES") FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, REASONABLE COSTS,
REASONABLE EXPENSES AND REASONABLE DISBURSEMENTS OF ANY KIND OR NATURE
WHATSOEVER (INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND
DISBURSEMENTS OF COUNSEL FOR SUCH INDEMNITEES IN CONNECTION WITH ANY
INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING, WHETHER OR NOT SUCH
INDEMNITEES SHALL BE DESIGNATED A PARTY THERETO), IMPOSED ON, INCURRED BY, OR
ASSERTED AGAINST SUCH INDEMNITEES (WHETHER DIRECT, INDIRECT OR CONSEQUENTIAL
AND WHETHER BASED ON ANY FEDERAL, STATE, OR LOCAL LAWS AND REGULATIONS, UNDER
COMMON LAW OR AT EQUITABLE CAUSE, OR ON CONTRACT, TORT OR OTHERWISE, ARISING
FROM OR CONNECTED WITH THE PAST, PRESENT OR FUTURE OPERATIONS OF THE BORROWER,
OR ANY OF ITS SUBSIDIARIES OR THEIR RESPECTIVE PREDECESSORS IN INTEREST, OR THE
PAST, PRESENT OR FUTURE ENVIRONMENTAL CONDITION OF PROPERTY OF THE BORROWER OR
ANY OF ITS SUBSIDIARIES), IN ANY MANNER RELATING TO OR ARISING OUT OF THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY ACT, EVENT OR TRANSACTION OR
ALLEGED ACT, EVENT OR TRANSACTION RELATING OR ATTENDANT HERETO OR THERETO,
INCLUDING IN CONNECTION WITH, OR AS A RESULT, IN WHOLE OR IN PART, OF ANY
NEGLIGENCE OF ADMINISTRATIVE AGENT OR ANY LENDER (OTHER THAN THOSE MATTERS
RAISED EXCLUSIVELY BY A PARTICIPANT AGAINST THE ADMINISTRATIVE AGENT OR ANY
LENDER AND NOT THE BORROWER), OR THE USE OR INTENDED USE OF THE PROCEEDS OF THE
ADVANCES OR LETTERS OF CREDIT HEREUNDER, OR IN CONNECTION WITH ANY
INVESTIGATION OF ANY POTENTIAL MATTER COVERED HEREBY, BUT EXCLUDING (I) ANY
CLAIM OR LIABILITY THAT ARISES AS THE RESULT OF THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF ANY INDEMNITEE, AS FINALLY JUDICIALLY DETERMINED BY A COURT OF
COMPETENT JURISDICTION, AND (II) MATTERS RAISED BY ONE LENDER AGAINST ANOTHER
LENDER OR BY ANY SHAREHOLDERS OF A LENDER AGAINST A LENDER OR ITS MANAGEMENT
AND (III) LEGAL FEES OF ANY LENDER EXCEPT AS OTHERWISE PROVIDED IN SECTION 11.2
HEREOF (COLLECTIVELY, "INDEMNIFIED MATTERS").

(b) IN ADDITION, THE BORROWER SHALL PERIODICALLY, UPON REQUEST,
REIMBURSE EACH INDEMNITEE FOR ITS REASONABLE LEGAL AND

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OTHER ACTUAL REASONABLE EXPENSES (INCLUDING THE REASONABLE COST OF ANY
INVESTIGATION AND PREPARATION) INCURRED IN CONNECTION WITH ANY INDEMNIFIED
MATTER. THE REIMBURSEMENT, INDEMNITY AND CONTRIBUTION OBLIGATIONS UNDER THIS
SECTION SHALL BE IN ADDITION TO ANY LIABILITY WHICH THE BORROWER MAY OTHERWISE
HAVE, SHALL EXTEND UPON THE SAME TERMS AND CONDITIONS TO EACH INDEMNITEE, AND
SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF ANY SUCCESSORS, ASSIGNS,
HEIRS AND PERSONAL REPRESENTATIVES OF THE BORROWER, THE ADMINISTRATIVE AGENT,
THE LENDERS AND ALL OTHER INDEMNITEES. THIS SECTION SHALL SURVIVE ANY
TERMINATION OF THIS AGREEMENT AND PAYMENT OF THE OBLIGATIONS.

Section 5.10 Environmental Law Compliance. The Borrower and its
Subsidiaries shall comply with all Applicable Environmental Laws, except for
non-compliance the result of which could not reasonably be expected to have a
Material Adverse Effect.

Section 5.11 Further Assurances. At any time or from time to time
upon reasonable request by the Administrative Agent, the Borrower or any of its
Subsidiaries shall execute and deliver such further documents and do such other
acts and things as the Administrative Agent may reasonably request in order to
effect fully the purposes of this Agreement and the other Loan Documents and to
provide for payment of the Obligations in accordance with the terms of this
Agreement and the other Loan Documents. At the time of delivery of the
financial statements set forth in Sections 6.1 and 6.2 hereof, if the
information provided therein has changed since the last delivery thereof, the
Borrower agrees to update and deliver to the Administrative Agent Schedule 5
hereto(with respect to the identities, jurisdictions of organization and
ownership of the Borrower's Subsidiaries). The Borrower agrees to update the
information on Schedule 2 to the Security Agreements promptly upon discovery
that the information provided therein is not complete and correct. The
Borrower agrees to execute and deliver, or cause its Subsidiaries to execute
and deliver, to the Administrative Agent Deeds of Trust, in substantially the
form of Exhibit I hereto with respect to any fee owned real property hereafter
acquired by the Borrower or any Subsidiary, as applicable, with a fair market
value in excess of $500,000 at the time of acquisition thereof, together with
any existing surveys and environmental reports in form reasonably satisfactory
to the Administrative Agent and title insurance thereon in form and amount (not
to exceed the fair market value thereof) reasonably satisfactory to the
Administrative Agent, and such board resolutions, officer's certificates,
corporate and other documents and opinions of counsel as the Administrative
Agent shall reasonably request with respect thereto.

Section 5.12 Subsidiaries. At any time that any Person becomes a
Domestic Subsidiary, (a) such Subsidiary shall execute a Subsidiary Guaranty of
the Obligations and Collateral Documents granting a first priority Lien in all
unencumbered assets of such Subsidiary required by the Determining Lenders to
be pledged, except, to the extent applicable, for Permitted Liens, to secure
the Obligations, (b) 100% of such Subsidiary's Capital Stock shall be pledged
to secure the Obligations and (c) the Lenders shall receive such board
resolutions, officer's certificates, corporate

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and other documents and opinions of counsel as the Administrative Agent shall
reasonably request in connection with the actions described in clauses (a) and
(b) above. At any time that any Person becomes a direct Foreign Subsidiary,
(a) 65% of such Subsidiary's Capital Stock shall be pledged to secure the
Obligations and (b) the Lenders shall receive such board resolutions, officers'
certificates, corporate and other documents and opinions of counsel as the
Administrative Agent shall reasonably request in connection with the action
described in the immediately preceding clause (a) above.

ARTICLE 6

Information Covenants

So long as any of the Obligations are outstanding and unpaid or any
Commitment is outstanding (whether or not the conditions to borrowing have been
or can be fulfilled), the Borrower shall furnish or cause to be furnished to
each Lender:

Section 6.1 Quarterly Financial Statements and Information.
Within 45 days after the end of each of the first three fiscal quarters of each
fiscal year, an unaudited consolidated balance sheet of the Borrower and its
Subsidiaries as at the end of such fiscal quarter and the related unaudited
consolidated statement of operations for such fiscal quarter and for the
elapsed portion of the year ended with the last day of such fiscal quarter, and
an unaudited consolidated statement of cash flow of the Borrower and its
Subsidiaries for the elapsed portion of the year ended with the last day of
such fiscal quarter; all of which shall be certified by the chief executive
officer or chief financial officer or other officer of the Borrower reasonably
acceptable to the Administrative Agent, to be, in his or her opinion acting
solely in his or her capacity as an officer of the Borrower, complete and
correct in all material respects and to present fairly, in accordance with
GAAP, the financial position and results of operations of the Borrower and its
Subsidiaries as at the end of and for such fiscal quarter, and for the elapsed
portion of the year ended with the last day of such fiscal quarter, subject
only to normal year-end adjustments.

Section 6.2 Annual Financial Statements and Information;
Certificate of No Default.

(a) Within 90 days after the end of each fiscal year, (i) a copy
of the consolidated balance sheets of the Borrower and its Subsidiaries, as of
the end of the current and prior fiscal year and (ii) the consolidated
statements of operations of the Borrower and its Subsidiaries and consolidated
statements of changes in shareholders' equity of the Borrower and its
Subsidiaries, and consolidated statements of cash flow of the Borrower and its
Subsidiaries for such fiscal year, all of which are prepared in accordance with
GAAP, and certified by independent certified public accounts reasonably
acceptable to the Lenders (provided, however, any "big five" public accounting
firm shall be acceptable to the Lenders), whose opinion shall be in scope and
substance in accordance with generally accepted auditing standards and shall be
unqualified.

(b) Simultaneously with the delivery of the statements required by
this Section 6.2, a letter from the Borrower's public accountants certifying
that no Default or Event of Default under

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Sections 7.1, 7.2, 7.3, 7.5, 7.6, 7.8, 7.9 and 7.11 was detected during the
examination of the books and records of the Borrower and its Subsidiaries.

(c) As soon as available, but in any event within 90 days
following the end of each fiscal year, a copy of the annual consolidated
operating budget of the Borrower for such current fiscal year.

Section 6.3 Compliance Certificate. At the time financial
statements are furnished pursuant to Sections 6.1 and 6.2 hereof, the
Compliance Certificate, completed as provided therein.

Section 6.4 Copies of Other Reports and Notices.

(a) Promptly upon their becoming available, a copy of (i) all
material final management letters submitted to any Obligor by accountants in
connection with any annual, interim or special audit, (ii) each financial
statement, report, notice or proxy statement sent by any Obligor to
stockholders generally, and (iii) each regular, periodic or other report and
any registration statement (other than statements on Form S-8) or prospectus
(or material written communication in respect of any thereof) filed by any
Obligor with any securities exchange, with the Securities and Exchange
Commission or any successor agency;

(b) Promptly upon becoming aware that (i) the holder(s) of any
note(s) or other evidence of indebtedness or other security of the Borrower or
any of its Subsidiaries in excess of $5,000,000 in the aggregate has given
notice or taken any action with respect to a breach, failure to perform,
claimed default or event of default thereunder, (ii) any occurrence or
non-occurrence of any event which constitutes or which with the passage of time
or giving of notice or both could constitute a material breach by the Borrower
or any of its Subsidiaries under any material agreement or instrument other
than this Agreement to which the Borrower or any of its Subsidiaries is a party
or by which any of their properties may be bound, or (iii) any event,
circumstance or condition which could reasonably be expected to be classified
as a Material Adverse Effect, a written notice specifying the details thereof
(or the nature of any claimed default or event of default) and what action is
being taken or is proposed to be taken with respect thereto;

(c) Promptly upon becoming aware that any party to any Capitalized
Lease Obligations or any other lease obligations of the Borrower or any of its
Subsidiaries, in each case, in excess of $5,000,000, has given notice or taken
any action with respect to a breach, failure to perform, claimed default or
event of default thereunder, a written notice specifying the details thereof
(or the nature of any claimed default or event of default) and what action is
being taken or is proposed to be taken with respect thereto;

(d) Promptly upon receipt thereof, information with respect to and
copies of any notices received from any federal, state or local regulatory
agencies or any tribunal relating to any order, ruling, law, information or
policy that relates to a breach of or noncompliance with any Law by the
Borrower or any of its Subsidiaries, or might result in the payment of money by
any Obligor in an

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amount of $5,000,000 or more in the aggregate, or otherwise have a Material
Adverse Effect, or result in the loss or suspension of any Necessary
Authorization; and

(e) From time to time and promptly upon each request, such data,
certificates, reports, statements, documents or further information regarding
the assets, business, liabilities, financial position, projections, results of
operations or business prospects of the Borrower or any of its Subsidiaries, as
the Administrative Agent or any Lender may reasonably request.

Section 6.5 Notice of Litigation, Default and Other Matters;
Deliveries.

(a) Prompt notice of the following events after the Borrower has
knowledge or notice thereof:

(i) The commencement of all proceedings and
investigations by or before any governmental body, and all actions and
proceedings in any court or before any arbitrator involving claims for
damages (including punitive damages) in excess of $5,000,000 (after
deducting the amount with respect to which creditworthy insurance
companies have not denied coverage), against or in any other way
relating directly to the Borrower or any of its Subsidiaries, or any
of their respective properties or businesses and which if adversely
determined could reasonably be expected to have a Material Adverse
Effect;

(ii) Promptly upon the happening of any condition or event
of which the Borrower has knowledge which constitutes a Default, a
written notice specifying the nature and period of existence thereof
and what action is being taken or is proposed to be taken with respect
thereto; and

(iii) Any change with respect to the business, assets,
liabilities, financial position, results of operations or prospective
business of the Borrower or any of its Subsidiaries that could
reasonably be expected to have a Material Adverse Effect.

(b) Promptly deliver to the Administrative Agent, together with
the delivery of each Compliance Certificate, Instruments (as defined in the
Security Agreement), duly endorsed as required by the Security Agreement, such
that the aggregate principal amount of all Instruments owned by the Borrower
and its Subsidiaries and not delivered to the Administrative Agent shall not
exceed $5,000,000.

Section 6.6 ERISA Reporting Requirements.

(a) Promptly and in any event within 30 days after the Borrower or
any member of its Controlled Group has knowledge that any ERISA Event has
occurred, a written notice describing such event and describing what action is
being taken or is proposed to be taken with respect thereto, together with a
copy of any notice of event that is given to the PBGC;

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(b) Promptly and in any event within three Business Days after
receipt thereof by the Borrower or any member of its Controlled Group, copies
of each notice received by the Borrower or any member of its Controlled Group
of the PBGC's intention to terminate any Plan or to have a trustee appointed to
administer any Plan;

(c) Promptly upon the request of the Administrative Agent, copies
of each annual report (including Schedule B thereto, if applicable) with
respect to each Plan covering employees of the Borrower or any of its
Subsidiaries;

(d) Promptly, and in any event within 10 Business Days after
receipt thereof, a copy of any correspondence the Borrower or any member of its
Controlled Group receives from the Plan Sponsor (as defined by Section
4001(a)(10) of ERISA) of any Multiemployer Plan or Plan subject to Section 4064
of ERISA concerning potential withdrawal liability pursuant to Section 4064,
4219 or 4202 of ERISA;

(e) Notification within three Business Days after the Borrower or
any member of its Controlled Group knows that the Borrower or any such member
of its Controlled Group has filed or intends to file a notice of intent to
terminate any Plan under a distress termination within the meaning of Section
4041(c) of ERISA and a copy of such notice; and

(f) Within three Business Days after receipt of written notice of
commencement thereof, notice of all actions, suits and proceedings before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, affecting the Borrower or any member of
its Controlled Group with respect to any Plan, which, in the aggregate, if
adversely determined could reasonably be expected to have a Material Adverse
Effect.

Section 6.7 Year 2000 Compliance. The Borrower will promptly
notify the Administrative Agent in the event the Borrower discovers or
determines that any computer application that is material to its or any of its
Subsidiaries' business and operations will not be Year 2000 Compliant on a
timely basis, except to the extent that such failure could not reasonably be
expected to have a Material Adverse Effect.

ARTICLE 7

Negative Covenants

So long as any of the Obligations are outstanding and unpaid or any
Commitment is outstanding (whether or not the conditions to borrowing have been
or can be fulfilled):

Section 7.1 Indebtedness. The Borrower shall not, and shall not
permit any of its Subsidiaries to, create, assume, incur or otherwise become or
remain obligated in respect of, or permit to be outstanding, or suffer to exist
any Indebtedness, except:

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(a) Indebtedness under the Loan Documents;

(b) Accounts payable, accrued liabilities and deferred taxes
incurred in the ordinary course of business;

(c) Indebtedness, including in respect of Capitalized Lease
Obligations, incurred to purchase, or to finance the purchase of, assets which
constitute property, plant and equipment, not to exceed $10,000,000 in
aggregate principal amount outstanding at any time;

(d) Interest hedging obligations under Interest Hedge Agreements,
provided that such Interest Hedge Agreements were entered into in the ordinary
course of business for the purpose of limiting risks that arise in the ordinary
course of business;

(e) Indebtedness (including as the result of intercompany
transfers made in the ordinary course of business) owing (i) among the
Obligors, (ii) from any direct Foreign Subsidiary to the Borrower or any
Domestic Subsidiary, (iii) from any indirect Foreign Subsidiary to the
Borrower, any Domestic Subsidiary or any Foreign Subsidiary in an aggregate
principal amount not to exceed, together with Investments (excluding
Indebtedness) in indirect Foreign Subsidiaries pursuant to Section 7.3(d)(iii)
hereof, $15,000,000; provided, that (A) all such intercompany Indebtedness
shall be noted in the books and records and (B) all such intercompany
Indebtedness owed by the Borrower, any Obligor or any direct Foreign Subsidiary
shall be subordinated to the Obligations pursuant to terms reasonably
acceptable to the Determining Lenders;

(f) (i) Indemnities and guaranties (including guaranties of
Indebtedness if such Indebtedness is permitted hereunder) made in the ordinary
course of business provided such indemnities and guaranties could not
individually or in the aggregate have a Material Adverse Effect, (ii)
guaranties of (A) real property leases and (B) personal property leases, (iii)
indemnities in favor of the Persons issuing title insurance policies, (iv)
indemnities made in the Home Interiors Merger Documents, the Loan Documents,
the Consulting Agreements or in any agreements contemplated thereunder or
thereby and (v) in the corporate charter and/or bylaws or other constituent
documents of the Borrower and its Subsidiaries;

(g) Indebtedness existing on the Agreement Date which is described
on Schedule 7 hereto, including renewals, refinancings or extensions (but no
increases in the principal amount thereof other than pursuant to the instrument
creating such Indebtedness) thereof;

(h) Indebtedness in respect of endorsement of negotiable
instruments in the ordinary course of business;

(i) Indebtedness, including guaranties thereof, in respect of the
Senior Subordinated Notes;

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(j) Indebtedness (i) of the Borrower or any of its Subsidiaries to
the seller in any Acquisition or (ii) assumed in connection with any
Acquisition;

(k) At any time following the termination of the Revolving Credit
Commitment and following payment in full of principal of and interest on the
Revolving Credit Advances, the Swing Line Advances, the Reimbursement
Obligations and all other fees and other amounts payable herewith in respect of
the Revolving Credit Advances, the Swing Line Advances and the Letters of
Credit, Indebtedness of the Borrower or its Subsidiaries in respect of
unsecured revolving lines of credit in aggregate amount outstanding not to
exceed $40,000,000 at any one time;

(l) Indebtedness of all Foreign Subsidiaries of the Borrower for
working capital purposes and overdraft facilities in an aggregate amount not to
exceed $15,000,000 at any one time outstanding; and

(m) Other Indebtedness not to exceed $20,000,000 in aggregate
amount outstanding at any time;

provided, however, that no Indebtedness otherwise permitted pursuant to clauses
(c), (j) or (m) above may be incurred if, immediately before or after giving
effect to the incurrence thereof, any Default or Event of Default shall have
occurred and be continuing.

Section 7.2 Liens. The Borrower shall not, and shall not permit
any of its Subsidiaries to, create, assume, incur, permit or suffer to exist,
directly or indirectly, any Lien on any of its assets, whether now owned or
hereafter acquired, except Permitted Liens. Except with respect to the Senior
Subordinated Notes, the Senior Subordinated Notes Indenture, and Indebtedness
permitted by Sections 7.1(c), (g), (j)(ii), (k), (l), or (m) hereof (provided
that such agreement relates only to any assets purchased or acquired with the
proceeds of such Indebtedness), the Borrower shall not, and shall not permit
any of its Subsidiaries to enter into a Negative Pledge with another Person.

Section 7.3 Investments. The Borrower shall not, and shall not
permit any of its Subsidiaries to, make any Investment, except that the
Borrower may make, purchase or otherwise acquire and own:

(a) Cash and Cash Equivalents;

(b) Accounts receivable and trade credit that arise in the
ordinary course of business;

(c) Investments in existence on the Agreement Date which are
described on Schedule 6 hereto and including any extensions and renewals
thereof;

(d) Investments in (i) Domestic Subsidiaries (A) which have
executed a Subsidiary Guaranty and Collateral Documents granting a first
priority Lien in all unencumbered assets of such Subsidiary required by the
Determining Lenders to be pledged, to secure the Obligations, (B) 100%

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of whose Capital Stock shall be pledged to secure the Obligations and (C) which
have delivered to the Lenders such board resolutions, officer's certificates,
corporate and other documents and opinions of counsel as the Administrative
Agent shall reasonably request, (ii) direct Foreign Subsidiaries 65% of whose
Capital Stock shall be pledged to secure the Obligations, (iii) indirect
Foreign Subsidiaries not to exceed $15,000,000 in aggregate amount outstanding
at any time, and (iv) the Borrower (including, in each of clauses (i), (ii) and
(iii) any new Subsidiary);

(e) Investments permitted under Sections 7.1, 7.4, 7.7 and 7.11
hereof;

(f) The Home Interiors Merger and the Home Interiors
Recapitalization and the transactions contemplated thereby;

(g) Loans and advances by the Borrower and any of its Subsidiaries
to their respective displayers and independent contractors in an aggregate
principal amount not to exceed $5,000,000 at any one time outstanding;

(h) Investments in Interest Hedge Agreements;

(i) Investments (including debt obligations and Capital Stock)
received in connection with the bankruptcy or reorganization of suppliers and
customers and in settlement of delinquent obligations of and other disputes
with, customers and suppliers arising in the ordinary course of business;

(j) Loans and advances by the Borrower and any of its Subsidiaries
to its suppliers in an aggregate principal amount not exceeding $9,000,000 at
any one time outstanding;

(k) Investments in respect of the Candle Making Joint Venture not
to exceed $5,000,000 in aggregate amount;

(l) Other Investments not to exceed in aggregate amount
outstanding at any time 3% of annual net sales of the Borrower and its
Subsidiaries for the most recent fiscal year, without regard to any write down
or write up thereof; and

(m) Acquisitions, if (i) immediately after giving effect to the
proposed transaction the Unused Portion shall be no less than $10,000,000, (ii)
such Acquisition shall not be opposed by the board of directors of the Person
being acquired, (iii) the Lenders shall have received written notice thereof at
least 15 Business Days prior to the date of such Acquisition, (iv) the
Administrative Agent shall have received at least 10 Business Days prior to the
date of such Acquisition a Compliance Certificate setting forth the covenant
calculations both immediately prior to and after giving effect to the proposed
Acquisition, (v) the assets, property or business acquired shall be in the
business described in Section 4.1(d) hereof and the Administrative Agent for
the benefit of the Lenders shall have a first priority Lien in substantially
all of such assets (or, if less than substantially all of such assets, such
assets required by the Determining Lenders to be pledged), except for Permitted
Liens,

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(vi) if such Acquisition results in a Domestic Subsidiary, (A) such Subsidiary
shall execute a Subsidiary Guaranty of the Obligations and Collateral Documents
granting a first priority Lien in substantially all of such assets (or, if less
than substantially all of such assets, all assets required by the Determining
Lenders to be pledged), except for Permitted Liens to secure the Obligations,
(B) 100% of such Subsidiary's Capital Stock shall be pledged to secure the
Obligations and (C) the Administrative Agent on behalf of the Lenders shall
have received such board resolutions, officer's certificates and opinions of
counsel as the Administrative Agent shall reasonably request in connection with
the actions described in clauses (A) and (B) above, (vii) if such Acquisition
results in a Foreign Subsidiary, (A) 65% of such Subsidiary's Capital Stock
shall be pledged to secure the Obligations and (B) the Administrative Agent on
behalf of the Lenders shall have received such board resolutions, officer's
certificates and opinions of counsel as the Administrative Agent shall
reasonably request in connection with clause (A) immediately preceding and
(viii) the aggregate Acquisition Consideration expended during any period of
four consecutive fiscal quarters (commencing July 1, 1998) shall not exceed
$25,000,000.

provided, however, (A) that no Investment otherwise permitted by clauses (e)
and (m) above shall be permitted if, immediately before or after giving effect
thereto, any Default or Event of Default shall have occurred and be continuing,
and (B) notwithstanding anything in this Section 7.4 to the contrary,
Investments in indirect Foreign Subsidiaries shall not exceed $15,000,000 in
aggregate amount outstanding at any time.

Section 7.4 Liquidation, Merger, New Subsidiaries. The Borrower
shall not, and shall not permit any of its Subsidiaries to, at any time:

(a) liquidate or dissolve itself (or suffer any liquidation or
dissolution) or otherwise wind up, except that (i) a Subsidiary of the Borrower
may liquidate or dissolve into the Borrower or a Subsidiary of the Borrower
which is an Obligor, (ii) a Subsidiary of the Borrower which is not an Obligor
may liquidate or dissolve into the Borrower or a Subsidiary of the Borrower,
and (iii) a Subsidiary of the Borrower may dissolve if substantially all of its
assets have been conveyed pursuant to Section 7.5(e) hereof; or

(b) enter into any merger or consolidation unless (i) with respect
to a merger or consolidation involving the Borrower, the Borrower shall be the
surviving corporation, (ii) with respect to a merger or consolidation involving
a Subsidiary of the Borrower which is an Obligor and not the Borrower, such
Subsidiary shall be the surviving corporation, or such merger or consolidation
shall be a part of an Acquisition permitted by Section 7.3 hereof or part of a
disposition permitted by Section 7.5 hereof, and (iii) no Default or Event of
Default shall then be in existence or occur as a result of such transaction.

Section 7.5 Sale of Assets. The Borrower shall not, and shall
not permit any of its Subsidiaries to, sell (including for discount or
otherwise), lease, transfer or otherwise dispose of assets, except (a) sales of
inventory and other assets sold in the ordinary course of business, (b) sales
or other dispositions of worn-out or obsolete assets or assets no longer useful
in the conduct of the

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Borrower's business in the ordinary course of business, (c) sales of Cash and
Cash Equivalents in the ordinary course of business, (d) sales of assets in
which the Net Cash Proceeds thereof are used within 365 days of such sale to
purchase assets of similar value and quality and business utility to those
assets sold, provided that the aggregate amount of Net Cash Proceeds
outstanding and pending reinvestment pursuant to this clause (d) shall not
exceed $5,000,000 at any time, (e) sales and dispositions (i) from any Domestic
Subsidiary to the Borrower or any other Domestic Subsidiary and (ii) from any
Foreign Subsidiary to the Borrower or any of its Subsidiaries, (f) transfers
resulting from any casualty or condemnation of property or assets, (g) the sale
or discount of overdue accounts receivable in the ordinary course of business,
in connection with the compromise or collection thereof, (h) licenses or
sublicenses of intellectual property and general intangibles and licenses,
leases or subleases of other property in each case in the ordinary course of
business and which do not materially interfere with the business of the
Borrower and its Subsidiaries, (i) the sale of assets in respect of the Candle
Making Joint Venture not to exceed $2,500,000 in aggregate amount, (j) sales of
assets during any fiscal year the aggregate Net Cash Proceeds of which do not
exceed $1,000,000 and (k) asset sales, the Net Cash Proceeds of which are
applied in accordance with Section 2.5(c) hereof.

Section 7.6 Restricted Payments. The Borrower shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly declare,
pay or make any Restricted Payments, except (a) Dividends payable by a
Subsidiary to the Borrower or another Subsidiary, (b) Dividends payable in
stock and not cash, (c) regularly scheduled payments of interest on the Senior
Subordinated Notes, (d) Restricted Payments as the result of the repurchase of
the Capital Stock of the Borrower or other securities of the Borrower from
outside directors, employees or members of management of the Borrower or any
Subsidiary of the Borrower, in an aggregate amount not to exceed $20,000,000
during the term of this Agreement, net of the proceeds received by the Borrower
and its Subsidiaries as a result of any resales of any such Capital Stock or
other securities, (e) Restricted Payments as a result of a purchase of Capital
Stock made in order to fulfill the obligations of the Borrower or its
Subsidiaries under an employee stock purchase plan or similar plan covering
employees of the Borrower or any Subsidiary as from time to time in effect in
an aggregate net amount not to exceed $10,000,000 during the term of this
Agreement, (f) Permitted Issuances, (g) Restricted Payments made pursuant to
the Home Interiors Recapitalization and the Home Interiors Merger and (h)
management, advisory, consulting and similar fees to any Affiliate of the
Borrower or any of its Subsidiaries other than (i) an Obligor and (ii) pursuant
to the Consulting Agreements, subject to Section 7.7 hereof; provided, further,
however, the Borrower shall not pay or make any Restricted Payments permitted
by this Section 7.6 unless there shall exist no Default prior to or after
giving effect to any such proposed Restricted Payment.

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Section 7.7 Affiliate Transactions.

(a) The Borrower shall not, and shall not permit any of its
Subsidiaries to, at any time engage in any transaction with an Affiliate (other
than the Borrower or any of its Subsidiaries), nor make an assignment or other
transfer of any of its assets or properties to any Affiliate (other than the
Borrower or any of its Subsidiaries), unless such transaction is (i) otherwise
permitted under this Agreement, (ii) in the ordinary course of business of the
Borrower and the relevant Subsidiary of the Borrower, as the case may be, and
(iii) upon fair and reasonable terms no less favorable to the Borrower or such
Subsidiary, as the case may be, than it would obtain in a comparable arm's
length transaction with a Person which is not an Affiliate.

(b) In addition, notwithstanding the foregoing, the Borrower and
its Subsidiaries shall be entitled to make the following payments and/or enter
into the following: (i) the payment of reasonable and customary fees and
reimbursement of expenses payable to the directors of the Borrower; (ii) the
payment of fees and expenses pursuant to the Consulting Agreements; and (iii)
the employment arrangements with respect to the procurement of services of
directors, officers and employees in the ordinary course of business and the
payment of reasonable fees in connection therewith.

Section 7.8 Leverage Ratio. The Borrower shall not permit the
Leverage Ratio to be greater than (a) 5.60 to 1 at the end of any fiscal
quarter occurring during the period from the Agreement Date through September
30, 1999, (b) 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, (c)
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 (d) 3.90 to 1 at
December 31, 2001 and at the end of any fiscal quarter thereafter.

Section 7.9 Interest Coverage Ratio. The Borrower shall not
permit the Interest Coverage Ratio to be 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.

Section 7.10 Sale and Leaseback. The Borrower shall not, and
shall not permit any of its Subsidiaries to, enter into any arrangement whereby
it sells or transfers any of its assets, and thereafter rents or leases such
assets, provided that this Section 7.10 hereof does not prohibit any sale and
leaseback resulting from the incurrence of any lease or purchase money
financing in respect of any capital assets entered into within 90 days of the
acquisition of such capital asset for the purpose of providing permanent
financing of such capital asset permitted under Section 7.1 hereof.

Section 7.11 Capital Expenditures. The Borrower shall not permit
the Capital Expenditures to be paid or incurred by it and its Subsidiaries to
exceed (a) $5,000,000 in aggregate amount during the period from the Agreement
Date to and including December 31, 1998 and (b) 1.50% of cumulative net
revenues of the Borrower and its Subsidiaries from and after January 1, 1999;

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provided however, notwithstanding the immediately preceding, the Borrower and
its Subsidiaries may also make additional Capital Expenditures during the term
of this Agreement not to exceed $12,500,000 in aggregate amount.

Section 7.12 Amendments and Waivers of Senior Subordinated Notes.
The Borrower shall not, and shall not permit any Subsidiary to, change or amend
(or take any action or fail to take any action the result of which is an
effective amendment or change) or accept any waiver or consent with respect to,
any document, instrument or agreement relating to the Senior Subordinated Notes
that would result in (a) an increase in the principal, interest, overdue
interest, fees or other amounts payable under the Senior Subordinated Notes,
(b) an acceleration in any date fixed for payment or prepayment of principal,
interest, fees or other amounts payable under the Senior Subordinated Notes
(including, without limitation, as a result of any redemption), (c) a change in
the definition of "Change of Control" or "Change in Control" or similar event
or circumstance, however defined or designated, as provided in the Senior
Subordinated Notes which would result in such definition being more restrictive
than such definition in this Agreement, (d) a change in any of the
subordination provisions of the Senior Subordinated Notes, (e) a change in any
covenant, term or provision in the Senior Subordinated Notes which would result
in such term or provision being more restrictive than the terms of this
Agreement and the other Loan Documents or (f) a change in any term or provision
of the Senior Subordinated Notes that could have, in any material respect, an
adverse effect on the interest of the Lenders.

Section 7.13 Amendment of Organizational Documents. The Borrower
shall not, and shall not permit any of its Subsidiaries to, amend its articles
of incorporation, bylaws or other applicable organizational documents in any
manner that could reasonably be expected to have a Material Adverse Effect.

ARTICLE 8

Default

Section 8.1 Events of Default. Each of the following shall
constitute an Event of Default, whatever the reason for such event, and whether
voluntary, involuntary, or effected by operation of law or pursuant to any
judgment or order of any court or any order, rule or regulation of any
governmental or non-governmental body:

(a) Any representation or warranty made under any Loan Document
shall prove to have been incorrect or misleading in any material respect when
made;

(b) The Borrower shall fail to pay (i) principal of any Advance
when due and (ii) interest under any Advance or under any Loan Document or any
fees payable hereunder or any other costs, fees, expenses or other amounts
payable hereunder or under the other Loan Documents, when due,

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which failure to pay with respect to clause (ii) above is not cured within five
days after such amounts become due in accordance with the terms hereof;

(c) The Borrower or any of its Subsidiaries shall default in the
performance or observance of any agreement or covenant contained in Section
5.1(a) or Article 7 hereof;

(d) The Borrower or any of its Subsidiaries shall default in the
performance or observance of any other agreement or covenant contained in this
Agreement not specifically referred to elsewhere in this Section 8.1, and such
default shall not be cured within a period of 30 days after written notice
thereof from the Administrative Agent;

(e) The Borrower or any of its Subsidiaries shall default or
breach in the performance or observance of any agreement or covenant not
specifically referred to elsewhere in this Section 8.1 (after the expiration of
any applicable notice and cure or grace period) in any of the Loan Documents
(other than this Agreement) and such default or breach shall not be cured
within a period of 30 days after written notice thereof from the Administrative
Agent;

(f) There shall be commenced an involuntary proceeding or an
involuntary petition shall be filed in a court having competent jurisdiction
seeking (i) relief in respect of the Borrower or any of its Subsidiaries or a
substantial part of the property or assets of the Borrower or any of its
Subsidiaries under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other applicable Federal or state bankruptcy law or
other similar law, (ii) the appointment of a receiver, liquidator, assignee,
trustee, custodian, sequestrator or similar official of the Borrower or any of
its Subsidiaries, or of any substantial part of any of their respective
property or assets, or (iii) the winding-up or liquidation of the affairs of
the Borrower or any of its Subsidiaries, and any such proceeding or petition
shall continue unstayed and in effect for a period of 60 consecutive days;

(g) The Borrower or any of its Subsidiaries shall (i) file a
petition, answer or consent seeking relief under Title 11 of the United States
Code, as now constituted or hereafter amended, or any other applicable Federal
or state bankruptcy law or other similar law, (ii) consent to the institution
of proceedings thereunder or to the filing of any such petition or to the
appointment or taking of possession of a receiver, liquidator, assignee,
trustee, custodian, sequestrator or other similar official of the Borrower or
any of its Subsidiaries or of any substantial part of their respective
properties, (iii) file an answer admitting the material allegations filed
against it in any such proceeding, (iv) make a general assignment for the
benefit of creditors, (v) fail generally to pay its debts as they become due,
or (vi) take any action in furtherance of any such action;

(h) A final judgment or judgments shall be entered by any court
against the Borrower or any of its Subsidiaries for the payment of money which
exceeds $5,000,000 in the aggregate, or a warrant of attachment or execution or
similar process shall be issued or levied against property of the Borrower or
any of its Subsidiaries which, together with all other such property of the
Borrower and its Subsidiaries subject to other such process, exceeds in value
$5,000,000 in the aggregate, and if such judgment or award is not insured or,
within 45 days after the entry, issue or levy thereof, such

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judgment, warrant or process shall not have been paid or discharged or stayed
pending appeal, or if, after the expiration of any such stay, such judgment,
warrant or process shall not have been paid or discharged;

(i) (i) the Borrower or any member of its Controlled Group shall
incur any accumulated funding deficiency, as defined in Section 412 of the
Code; (ii) the Borrower or any member of its Controlled Group shall incur any
withdrawal liability as a result of a complete or partial withdrawal within the
meaning of Section 4063, 4203 or 4205 of ERISA; (iii) the Borrower or any
member of its Controlled Group shall fail to make a required contribution by
the due date under Section 412 of the Code or Section 302 of ERISA which would
result in the imposition of a Lien under Section 412 of the Code or Section 302
of ERISA; (iv) the Borrower or any member of its Controlled Group shall notify
the PBGC of an intent to terminate a Plan under Section 4201(c) of ERISA, or
the PBGC shall institute proceedings to terminate, any Plan; (v) a trustee
shall be appointed by a court of competent jurisdiction to administer any Plan
or the assets thereof; (vi) the benefits of any Plan shall be increased, or the
Borrower or any member of its Controlled Group shall begin to maintain, or
begin to contribute to, any Plan; or (vii) any ERISA Event with respect to a
Plan shall have occurred; provided, however, that the events listed in
subsections (i) through (vii) above shall constitute Events of Default only if,
as of the date thereof or any subsequent date, the amount of liability that the
Borrower is likely to incur in the aggregate under ERISA or any other provision
of law with respect to all such Plans, computed by the actuary of the Plan
taking into account any applicable rules and regulations of the PBGC at such
time, and based on the actuarial assumptions used by the Plan, resulting from
or otherwise associated with such event could reasonably be expected to have a
Material Adverse Effect;

(j) Any Obligor shall challenge in any manner whatsoever the
validity or enforceability of all or any portion of the Loan Documents or the
Collateral;

(k) The Borrower or any of its Subsidiaries shall default in any
payment in respect of Indebtedness beyond any grace period provided with
respect thereto, or shall default in the performance of any agreement or
instrument under which such Indebtedness is created or evidenced beyond any
applicable grace period, or any other event or condition shall occur in respect
of such Indebtedness, if the effect of such default, event or condition is to
permit or cause the holder of such Indebtedness (or a trustee on behalf of any
such holder) to cause such Indebtedness to become due, repurchased or redeemed
prior to its date of maturity, provided that a default, event or condition of
the type described above in this Section 8.1(k) shall not constitute an Event
of Default under this Agreement unless, at such time, one or more defaults,
events or conditions of the type described above in this Section 8.1(k) shall
have occurred and be continuing with respect to Indebtedness the outstanding
amount of which exceeds in the aggregate $10,000,000;

(l) Any provision of any Loan Document shall for any reason cease
to be valid and binding on or enforceable against any party to it (other than
the Administrative Agent or any Lender) in all material respects unless
released by the Administrative Agent at the direction of the Determining

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Lenders or all Lenders or as otherwise permitted by the terms of this Agreement
or the other Loan Documents;

(m) Any Collateral Document shall for any reason (other than as
expressly provided or permitted pursuant to the terms thereof) cease to create
a valid and perfected first priority Lien in any Collateral, and if such
invalidity is amenable to cure, the relevant Obligor shall have failed to cure
such invalidity within 30 days after notice from the Administrative Agent; or

(n) A Change of Control shall have occurred.

Section 8.2 Remedies. If an Event of Default shall have occurred
and shall be continuing:

(a) With the exception of an Event of Default specified in Section
8.1(f) or (g) hereof, the Administrative Agent shall, (i) upon the direction of
the Required Revolving Credit Lenders, terminate the Revolving Credit
Commitment, and/or (ii) upon the direction of the Determining Lenders,
terminate the Commitments and/or declare the principal of and interest on the
Advances and all Obligations and other amounts owed under the Loan Documents to
be forthwith due and payable without presentment, demand, protest or notice of
any kind, all of which are hereby expressly waived, anything in the Loan
Documents to the contrary notwithstanding.

(b) Upon the occurrence of an Event of Default specified in
Section 8.1(f) or (g) hereof, such principal, interest and other amounts shall
thereupon and concurrently therewith become due and payable and the Commitments
shall forthwith terminate, all without any action by the Administrative Agent,
any Lender or any holders of the Notes and without presentment, demand, protest
or other notice of any kind, all of which are expressly waived, anything in the
Loan Documents to the contrary notwithstanding.

(c) If any Letter of Credit shall be then outstanding, the
Administrative Agent may demand upon the Borrower to, and within 30 days of
such demand (but in the case of an Event of Default specified in Section 8.1(f)
or (g) hereof, immediately and without any demand or taking of any other action
by the Administrative Agent or any Lender), the Borrower shall, pay to the
Administrative Agent in same day funds at the office of the Administrative
Agent in such demand for deposit in the L/C Cash Collateral Account, an amount
equal to the maximum amount available to be drawn under the Letters of Credit
then outstanding and/or provide back-up letters of credit satisfactory to the
Issuing Bank in an amount, together with any funds deposited in the L/C Cash
Collateral Account, equal to the maximum amount available to be drawn under the
Letters of Credit then outstanding.

(d) The Administrative Agent, and the Lenders may exercise all of
the post-default rights granted to them under the Loan Documents or under
Applicable Law.

(e) The rights and remedies of the Administrative Agent and the
Lenders hereunder shall be cumulative, and not exclusive.

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ARTICLE 9

Changes in Circumstances

Section 9.1 LIBOR Basis Determination Inadequate. If with
respect to any proposed LIBOR Advance for any Interest Period, any Lender
reasonably determines that (i) deposits in Dollars (in the applicable amount)
are not being offered to that Lender in the relevant market for such Interest
Period or (ii) the LIBOR Rate for such proposed LIBOR Advance does not
adequately cover the cost to such Lender of making and maintaining such
proposed LIBOR Advance for such Interest Period, such Lender shall forthwith
give notice thereof to the Borrower, whereupon until such Lender notifies the
Borrower that the circumstances giving rise to such situation no longer exist
(which such Lender agrees to promptly when the circumstances giving rise to
such determination no longer exist), the obligation of such Lender to make
LIBOR Advances shall be suspended.

Section 9.2 Illegality. If any applicable law, rule or
regulation, or any change therein or adoption thereof, or interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by any Lender (or its LIBOR Lending Office) with any request or
directive (whether or not having the force of law) of any such authority,
central bank or comparable agency, shall make it unlawful or impossible for
such Lender (or its LIBOR Lending Office) to make, maintain or fund its LIBOR
Advances, such Lender shall so notify the Borrower and the Administrative
Agent. Before giving any notice to the Borrower pursuant to this Section, the
notifying Lender shall designate a different LIBOR Lending Office or other
lending office if such designation will avoid the need for giving such notice
and will not, in the reasonable judgment of the Lender, be disadvantageous to
the Lender. Upon receipt of such notice, notwithstanding anything contained in
Article 2 hereof, the Borrower shall repay in full the then outstanding
principal amount of each LIBOR Advance owing to the notifying Lender, together
with accrued interest thereon, on either (a) the last day of the Interest
Period applicable to such Advance, if the Lender may lawfully continue to
maintain and fund such Advance to such day, or (b) immediately, if the Lender
may not lawfully continue to fund and maintain such Advance to such day.
Concurrently with repaying each affected LIBOR Advance owing to such Lender if
the Borrower does not terminate this Agreement, notwithstanding anything
contained in Article 2 hereof, the Borrower shall borrow a Base Rate Advance
from such Lender, and such Lender shall make such Base Rate Advance, in an
amount such that the outstanding principal amount of the Advances owing to such
Lender shall equal the outstanding principal amount of the Advances owing
immediately prior to such repayment.

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Section 9.3 Increased Costs.

(a) If the adoption, effectiveness, phase-in or applicability
after the Agreement Date of any Law (or any provision thereof) or any change in
the interpretation or administration thereof after the Agreement Date by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof or compliance by any Lender (or its
LIBOR Lending Office) with any request or directive (whether or not having the
force of law) of any such authority, central bank or compatible agency:

(i) shall subject a Lender (or its LIBOR Lending Office)
to any Tax (net of any tax benefit engendered thereby and excluding
any taxes referred to in clauses (i) through (iv) of Section 2.15(a)
hereof) with respect to its LIBOR Advances or its obligation to make
such Advances, or shall change the basis of taxation of payments to a
Lender (or to its LIBOR Lending Office) of the principal of or
interest on its LIBOR Advances or in respect of any other amounts due
under this Agreement, as the case may be, or its obligation to make
such Advances (except for changes in the rate of tax on the overall
net income, net worth or capital of the Lender and franchise taxes,
doing business taxes or minimum taxes imposed upon such Lender); or

(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of Governors
of the Federal Reserve System), special deposit or similar requirement
against assets of, deposits with or for the account of, or credit
extended by, a Lender's LIBOR Lending Office or shall impose on the
Lender (or its LIBOR Lending Office) or on the United States market
for certificates of deposit or the London interbank market any other
condition affecting its LIBOR Advances or its obligation to make such
Advances;

and the result of any of the foregoing is to increase the cost to a Lender (or
its LIBOR Lending Office) of making or maintaining any LIBOR Advances, or to
reduce the amount of any sum received or receivable by a Lender (or its LIBOR
Lending Office) with respect thereto, in each case by an amount deemed by a
Lender to be material ("Increased Costs"), then, within 15 days after demand by
a Lender, the Borrower agrees to pay to such Lender such additional amount as
will compensate such Lender for such Increased Costs, subject to Section 11.9
hereof. The affected Lender will as soon as practicable notify the Borrower of
any event of which it has knowledge, occurring after the date hereof, which
will entitle such Lender to compensation pursuant to this Section and will
designate a different LIBOR Lending Office or other lending office if such
designation will avoid the need for, or reduce the amount of, such compensation
and will not, in the reasonable judgment of the affected Lender made in good
faith, be disadvantageous to such Lender. Notwithstanding the foregoing, any
Lender's demand for Increased Costs shall not include any Increased Costs with
respect to any period more than 90 days prior to the date that such Lender has
knowledge or should have knowledge of such Increased Costs.

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(b) A certificate of any Lender claiming compensation under this
Section and setting forth the additional amounts to be paid to it hereunder and
calculations therefor (and certifying that such Lenders generally charging such
costs to similarly situated borrowers) shall be controlling in the absence of
manifest error. In determining such amount, a Lender may use any reasonable
averaging and attribution methods. If a Lender demands compensation under this
Section, the Borrower may at any time, upon at least five Business Days' prior
notice to the Lender, after reimbursement to the Lender by the Borrower in
accordance with this Section of all costs incurred, prepay in full the then
outstanding LIBOR Advances of the Lender, together with accrued interest
thereon to the date of prepayment, along with any reimbursement required under
Section 2.9 hereof. Concurrently with prepaying such LIBOR Advances, the
Borrower shall borrow a Base Rate Advance from the Lender, and the Lender shall
make such Base Rate Advance, in an amount such that the outstanding principal
amount of the Advances owing to such Lender shall equal the outstanding
principal amount of the Advances owing immediately prior to such prepayment.
The obligation of the Borrower pursuant to this Section 9.3 shall survive
termination of this Agreement in full and all other amounts payable hereunder
and repayment of the Advances in full for a period of nine months thereafter.

Section 9.4 Effect On Base Rate Advances. If notice has been
given pursuant to Section 9.1, 9.2 or 9.3 hereof suspending the obligation of a
Lender to make LIBOR Advances, or requiring LIBOR Advances of a Lender to be
repaid or prepaid, then, unless and until the Lender notifies the Borrower that
the circumstances giving rise to such repayment no longer apply which such
Lender agrees to do when the circumstances giving rise to such suspension no
longer exist, all Advances which would otherwise be made by such Lender as
LIBOR Advances shall be made instead as Base Rate Advances.

Section 9.5 Capital Adequacy. If either (a) the adoption or
applicability after the Agreement Date of any Law (or any provision thereof) or
the introduction of or any change in or in the interpretation of any Law after
the Agreement Date or (b) compliance by a Lender with any Law or any guideline
or request from any central bank or other governmental authority (whether or
not having the force of law) adopted, phased-in or made applicable after the
Agreement Date affects or would affect the amount of capital required or
expected to be maintained by a Lender or any corporation controlling such
Lender, and such Lender determines that the amount of such capital is increased
by or based upon the existence of such Lender's commitment or Advances
hereunder and other commitments or advances of such Lender of this type, then,
within 30 days after written notice and demand by such Lender, subject to
Section 11.9, the Borrower shall pay to such Lender, from time to time as
specified by such Lender, additional amounts sufficient to compensate such
Lender with respect to such circumstances, to the extent that such Lender
reasonably determines in good faith such increase in capital to be allocable to
the existence of such Lender's portion of the Commitments hereunder. A
certificate as to such amounts submitted to the Borrower by a Lender hereunder,
shall, in the absence of manifest error, be conclusive and binding for all
purposes.

Section 9.6 Replacement of Lenders under Certain Circumstances.
If at any time (a) the Borrower becomes obligated to pay additional amounts
described in Sections 2.15, 9.2, 9.3, or 9.5 hereof, or any Lender ceases to
make LIBOR Advances pursuant to such sections, (b) any Lender

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becomes insolvent and its assets become subject to a receiver, liquidator,
trustee, custodian or other Person having similar powers, (c) any Lender
becomes a "Non-Consenting Lender" (as defined below in this Section 9.6) or (d)
any Lender becomes a "Non-Funding Lender" (as defined below in this Section
9.6), then the Borrower may replace such Lender by causing such Lender to (and
such Lender shall be obligated to) assign pursuant to Section 11.6 all of its
rights and obligations under this Agreement to a Lender or other entity
selected by the Borrower and reasonably acceptable to the Administrative Agent
for a purchase price equal to the outstanding principal amount of such Lender's
Advances and all accrued interest and fees and other amounts payable hereunder
(including amounts payable under Sections 9.2, 9.3 or 9.5 hereof as though such
Advances were being paid instead of being purchased). In the event that (x)
the Borrower or the Administrative Agent has requested the Lenders to consent
to a departure or waiver of any provisions of the Loan Documents or to agree to
any amendment thereto, (y) the consent, waiver or amendment in question
requires the agreement of all Lenders in accordance with the terms of Section
11.10 hereof or all the Lenders with respect to a certain class of the Advances
and (z) Determining Lenders or more than 50% of the class of such Lenders have
agreed to such consent, waiver or amendment then any lender who does not agree
to such consent, waiver or amendment shall be deemed a "Non- Consenting
Lender". In the event that any Lender has (y) failed to make any Advance
required to be made by it hereunder or (z) given notice to the Administrative
Agent that it will not make, or that it has disaffirmed or repudiated any
obligation to make, any Advance required to be made by it hereunder such Lender
shall be deemed a "Non-Funding Lender". The Borrower's right to replace a
Non-Funding Lender pursuant to this Section 9.6 is, and shall be, in addition
to, and not in lieu of, all other rights and remedies available to the Borrower
against such Non-Funding Lender under this Agreement, at law, in equity, or by
statute.

ARTICLE 10

Agreement Among Lenders

Section 10.1 Agreement Among Lenders. The Lenders agree among
themselves that:

(a) Administrative Agent. Each Lender hereby appoints the
Administrative Agent as its nominee in its name and on its behalf, to receive
all documents and items to be furnished hereunder; to act as nominee for and on
behalf of all Lenders under the Loan Documents; to, except as otherwise
expressly set forth herein, take such action as may be requested by the
Determining Lenders, provided that, unless and until the Administrative Agent
shall have received such requests, the Administrative Agent may take such
administrative action, or refrain from taking such administrative action, as it
may deem advisable and in the best interests of the Lenders; to arrange the
means whereby the proceeds of the Advances of the Lenders are to be made
available to the Borrower; to distribute promptly to each Lender information,
requests and documents received from the Borrower, and each payment (in like
funds received) with respect to any of such Lender's Advances, fee or other
amount; and to deliver to the Borrower requests, demands, approvals and
consents received from the Lenders. Administrative Agent agrees to promptly
distribute to each Lender, at such Lender's address set forth below
information, requests, documents and payments received from the Borrower. The

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Administrative Agent agrees to promptly notify the Lenders of any receipt of
cash collateral or back-up letter of credit which would cause any Letter of
Credit to no longer be considered a Letter of Credit hereunder. The
Administrative Agent shall have no fiduciary relationship in respect of any
Lender by reason of this Agreement or any other Loan Document. The
Administrative Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement. The duties of the Administrative Agent
are mechanical and administrative in nature.

(b) Replacement of Administrative Agent. Should the
Administrative Agent or any successor Administrative Agent ever cease to be a
Lender hereunder, or should the Administrative Agent or any successor
Administrative Agent ever resign as Administrative Agent, or should the
Administrative Agent or any successor Administrative Agent ever be removed with
cause or without cause by the action of the Determining Lenders (other than the
Administrative Agent), then the Lender appointed by the other Lenders (with the
consent of the Borrower, which consent shall not be unreasonably withheld)
shall forthwith become the Administrative Agent, and the Borrower and the
Lenders shall execute such documents as such successors to the Administrative
Agent may reasonably request to reflect such change. If the Administrative
Agent also then serves in the capacity of the Swing Line Bank or the Issuing
Bank, such resignation or removal shall constitute resignation or removal of
the Swing Line Bank and the Issuing Bank and the successor Administrative Agent
shall serve in the capacity of the Swing Line Bank and the Issuing Bank. Any
resignation or removal of the Administrative Agent or any successor
Administrative Agent shall become effective upon the appointment by the Lenders
of a successor Administrative Agent; provided, however, if no successor
Administrative Agent shall have been so appointed and shall have accepted such
appointment within 30 days after the retiring Administrative Agent's giving of
notice of resignation or the Lenders' removal of the retiring Administrative
Agent, then the retiring Administrative Agent may, on behalf of the Lenders,
appoint a successor Administrative Agent, which shall be a commercial bank
organized under the Laws of the United States of America or of any State
thereof and having a combined capital and surplus of at least $500,000,000 with
the consent of the Borrower, which consent will not be unreasonably withheld.
Upon the acceptance of any appointment as the Administrative Agent hereunder by
a successor Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all the rights and duties of the
retiring Administrative Agent, and the retiring Administrative Agent shall be
discharged from its duties and obligations under the Loan Documents.
Notwithstanding any Administrative Agent's resignation or removal hereunder,
the provisions of this Article shall continue to inure to its benefit as to any
actions taken or omitted to be taken by it while it was the Administrative
Agent under this Agreement.

(c) Expenses. Each Lender shall pay its pro rata share, based on
its Total Specified Percentage, of any expenses paid by the Administrative
Agent directly and solely in connection with any of the Loan Documents if
Administrative Agent does not receive reimbursement therefor from other sources
within 60 days after the date incurred, unless payment of such fees is being
diligently disputed by such Lender or the Borrower in good faith. Any amount
so paid by the Lenders to the Administrative Agent shall be returned by the
Administrative Agent pro rata to each paying Lender to the extent later paid by
the Borrower or any other Person on the Borrower's behalf to the Administrative
Agent.

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(d) Delegation of Duties. The Administrative Agent may execute
any of its duties hereunder by or through officers, directors, employees,
attorneys or agents, and shall be entitled to (and shall be protected in
relying upon) advice of counsel concerning all matters pertaining to its duties
hereunder.

(e) Reliance by Administrative Agent. The Administrative Agent
and its officers, directors, employees, attorneys and agents shall be entitled
to rely and shall be fully protected in relying on any writing, resolution,
notice, consent, certificate, affidavit, letter, cablegram, telegram, telex or
teletype message, statement, order, or other document or conversation
reasonably believed by it or them in good faith to be genuine and correct and
to have been signed or made by the proper Person and, with respect to legal
matters, upon opinions of counsel selected the Administrative Agent. The
Administrative Agent may, in its reasonable judgment, deem and treat the payee
of any Note as the owner thereof for all purposes hereof unless a written
notice of assignment, negotiation or transfer thereof shall have been filed
with the Administrative Agent.

(f) Limitation of Administrative Agent's Liability. Neither the
Administrative Agent nor any of its officers, directors, employees, attorneys
or agents shall be liable for any action taken or omitted to be taken by it or
them hereunder in good faith and believed by it or them to be within the
discretion or power conferred to it or them by the Loan Documents or be
responsible for the consequences of any error of judgment, except for its or
their own gross negligence or wilful misconduct. Except as aforesaid, the
Administrative Agent shall be under no duty to enforce any rights with respect
to any of the Advances, or any security therefor. The Administrative Agent
shall not be compelled to do any act hereunder or to take any action towards
the execution or enforcement of the powers hereby created or to prosecute or
defend any suit in respect hereof, unless indemnified to its satisfaction
against loss, cost, liability and expense. The Administrative Agent shall not
be responsible in any manner to any Lender for the effectiveness,
enforceability, genuineness, validity or due execution of any of the Loan
Documents, or for any representation, warranty, document, certificate, report
or statement made herein or furnished in connection with any Loan Documents, or
be under any obligation to any Lender to ascertain or to inquire as to the
performance or observation of any of the terms, covenants or conditions of any
Loan Documents on the part of the Borrower. TO THE EXTENT NOT REIMBURSED BY
THE BORROWER, EACH LENDER HEREBY SEVERALLY INDEMNIFIES AND HOLDS HARMLESS THE
ADMINISTRATIVE AGENT, PRO RATA ACCORDING TO ITS TOTAL SPECIFIED PERCENTAGE,
FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND/OR DISBURSEMENTS OF
ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, ASSERTED AGAINST, OR
INCURRED BY THE ADMINISTRATIVE AGENT IN ANY WAY WITH RESPECT TO ANY LOAN
DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER THE
LOAN DOCUMENTS (INCLUDING ANY NEGLIGENT ACTION OF THE ADMINISTRATIVE AGENT),
EXCEPT TO THE EXTENT THE SAME ARE FINALLY DETERMINED BY A COURT OF COMPETENT
JURISDICTION TO RESULT FROM GROSS NEGLIGENCE

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OR WILFUL MISCONDUCT BY THE ADMINISTRATIVE AGENT. THE INDEMNITY PROVIDED IN
THIS SECTION 10.1(F) SHALL SURVIVE TERMINATION OF THIS AGREEMENT.

(g) Liability Among Lenders. No Lender shall incur any liability
(other than the sharing of expenses and other matters specifically set forth
herein and in the other Loan Documents) to any other Lender, except for acts or
omissions in bad faith.

(h) Rights as Lender. With respect to its commitment hereunder,
the Advances made by it and the Notes issued to it, the Administrative Agent
shall have the same rights as a Lender and may exercise the same as though it
were not the Administrative Agent, and the term "Lender" or "Lenders" shall,
unless the context otherwise indicates, include the Administrative Agent in its
individual capacity. The Administrative Agent or any Lender may accept
deposits from, act as trustee under indentures of, and generally engage in any
kind of business with, the Borrower and any of its Affiliates, and any Person
who may do business with or own securities of the Borrower or any of its
Affiliates, all as if the Administrative Agent were not the Administrative
Agent hereunder and without any duty to account therefor to the Lenders.

Section 10.2 Lender Credit Decision. Each Lender acknowledges
that it has, independently and without reliance upon the Administrative Agent
or any other Lender and based upon the financial statements referred to in
Sections 4.1(j), 6.1 and 6.2 hereof, and such other documents and information
as it has deemed appropriate, made its own credit analysis and decision to
enter into this Agreement. Each Lender also acknowledges that it will,
independently and without reliance upon the Administrative Agent or any other
Lender and based upon such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement and the other Loan Documents.

Section 10.3 Benefits of Article. None of the provisions of this
Article shall inure to the benefit of any Person other than Lenders (and where
the Borrowers's consent is required, the Borrower); consequently, no Person
shall be entitled to rely upon, or to raise as a defense, in any manner
whatsoever, the failure of the Administrative Agent or any Lender to comply
with such provisions.

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ARTICLE 11

Miscellaneous

Section 11.1 Notices.

(a) All notices and other communications under this Agreement
shall be in writing (except in those cases where giving notice by telephone is
expressly permitted) and shall be deemed to have been given on the date
personally delivered or sent by telecopy (answerback received), or three days
after deposit in the mail, designated as certified mail, return receipt
requested, postage-prepaid, or one day after being entrusted to a reputable
commercial overnight delivery service, or one day after being delivered to the
telegraph office or sent out by telex addressed to the party to which such
notice is directed at its address determined as provided in this Section. All
notices and other communications under this Agreement shall be given to the
parties hereto at the following addresses:

(i) If to the Borrower, at:

Home Interiors & Gifts, Inc.
4550 Spring Valley Road
Dallas, Texas 75244
Facsimile: (972) 490-7573

Attention: Chief Financial Officer

With a copy to:

Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Facsimile: (214) 720-7888

Attention: Lawrence D. Stuart, Jr.

(ii) If to the Administrative Agent, at:

NationsBank, N.A.
901 Main Street, 67th Floor
Dallas, Texas 75202
Facsimile: (214) 508-0980

Attention: Thomas Blake

with a copy to:

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NationsBank, N.A.
901 Main Street, 14th Floor
Dallas, Texas 75202
Facsimile: (214) 508-2515

Attention: Molly Oxford

(iii) If to a Lender, at its address or facsimile number
shown below its name on the signature pages hereof,
or if applicable, set forth in its Assignment
Agreement.

(b) Any party hereto may change the address to which notices shall
be directed by giving 10 days' written notice of such change to the other
parties.

Section 11.2 Expenses. The Borrower shall promptly pay:

(a) all reasonable out-of-pocket expenses of the Administrative
Agent in connection with the preparation, negotiation, execution and delivery
of this Agreement and the other Loan Documents, the transactions contemplated
hereunder and thereunder, and the making of Advances hereunder, including
without limitation the reasonable fees and disbursements of Special Counsel;

(b) all reasonable out-of-pocket expenses and reasonable
attorneys' fees of the Administrative Agent in connection with the
administration of the transactions contemplated in this Agreement and the other
Loan Documents and the preparation, negotiation, execution and delivery of any
waiver, amendment or consent by the Administrative Agent relating to this
Agreement or the other Loan Documents; and

(c) all (i) costs and out-of-pocket expenses and attorneys' fees
of the Administrative Agent incurred for enforcement, collection,
restructuring, refinancing and "work-out", or otherwise incurred in obtaining
performance under the Loan Documents, which in each case shall include without
limitation fees and expenses of consultants, legal counsel for the
Administrative Agent, and administrative fees for the Administrative Agent; and
(ii) from and after the occurrence and during the continuance of an Event of
Default, all costs and out-of-pocket expenses of each Lender, including legal
fees of one counsel for all the Lenders.

Section 11.3 Waivers. The rights and remedies of the Lenders
under this Agreement and the other Loan Documents shall be cumulative and not
exclusive of any rights or remedies which they would otherwise have. No
failure or delay by the Administrative Agent or any Lender in exercising any
right shall operate as a waiver of such right. The Lenders expressly reserve
the right to require strict compliance with the terms of this Agreement in
connection with any funding of a request for an Advance or issuance of a Letter
of Credit. In the event that any Lender decides to fund an Advance at a time
when the Borrower is not in strict compliance with the terms of this Agreement,
such decision by such Lender shall not be deemed to constitute an undertaking
by the Lender to fund any further requests for Advances or preclude the Lenders
from exercising any rights available under

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the Loan Documents or at law or equity. Any waiver or indulgence granted by
the Lenders shall not constitute a modification of this Agreement, except to
the extent expressly provided in such waiver or indulgence, or constitute a
course of dealing by the Lenders at variance with the terms of the Agreement
such as to require further notice by the Lenders of the Lenders' intent to
require strict adherence to the terms of the Agreement in the future. Any such
actions shall not in any way affect the ability of the Administrative Agent or
the Lenders, in their discretion, to exercise any rights available to them
under this Agreement or under any other agreement, whether or not the
Administrative Agent or any of the Lenders are a party thereto, relating to the
Borrower.

Section 11.4 Determination by the Lenders Conclusive and Binding.
Any calculation required or expressly permitted to be made by the
Administrative Agent or any Lender under this Agreement shall when made, absent
manifest error, be controlling.

Section 11.5 Set-Off. In addition to any rights now or hereafter
granted under Applicable Law and not by way of limitation of any such rights,
upon the occurrence and during the continuation of an Event of Default, each
Lender and any subsequent holder of any Note, and any assignee or participant
in any Note is hereby authorized by the Borrower at any time or from time to
time, without notice to the Borrower or any other Person, any such notice being
hereby expressly waived, to set-off, appropriate and apply any deposits
(general or special (except trust and escrow accounts), time or demand,
including without limitation Indebtedness evidenced by certificates of deposit,
in each case whether matured or unmatured) and any other Indebtedness at any
time held or owing by such Lender or holder to or for the credit or the account
of the Borrower, against and on account of the Obligations and other
liabilities of the Borrower to such Lender or holder, irrespective of whether
or not (a) the Lender or holder shall have made any demand hereunder, or (b)
the Lender or holder shall have declared the principal of and interest on the
Advances and other amounts due hereunder to be due and payable as permitted by
Section 8.2, provided, however, such Lender shall promptly notify the Borrower
and the Administrative Agent after any such set-off and the application made by
such Lender. Any sums obtained by any Lender or by any assignee, participant
or subsequent holder of any Note shall be subject to pro rata treatment and
shared as provided in Section 2.12 hereof.

Section 11.6 Assignment.

(a) The Borrower may not assign or transfer any of its rights or
obligations hereunder or under the other Loan Documents without the prior
written consent of all of the Lenders.

(b) No Lender shall be entitled to assign its interest in this
Agreement, its Notes (if any) or its Advances, except as hereinafter set forth.

(c) Each Lender may sell participations to one or more banks or
other entities (the "Participants") in or to all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of the Advances or Reimbursement Obligations owing to it and any Note
or Notes held by it) (the "Participations"); provided, however, that (i) such
Lender's obligations under this Agreement (including, without limitation, its
Specified Percentage of the

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Commitments) shall remain unchanged, (ii) such Lender shall remain solely
responsible to the other parties hereto for the performance of such
obligations, (iii) such Lender shall remain the holder of any such Note for all
purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the
other Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement, and
(v) no Participant under any such Participation shall have any right to approve
any amendment or waiver of any provision of any Loan Document, or any consent
to any departure by the Borrower therefrom, except to the extent that such
amendment, waiver or consent would (A) reduce the amount or postpone any date
fixed for payment of principal of, or interest on, the Notes or any fees or
other amounts payable hereunder or (B) increase the commitment of any
Participant. The Lenders may, subject to Section 11.13 hereof, provide copies
of all financial information received from the Borrower to such Participants.

(d) Each Lender may assign to one or more banks, financial
institutions or entities other than the Borrower or an Affiliate of the
Borrower (an "Assignee") its rights and obligations under this Agreement and
the other Loan Documents; provided, however, that (i) each such assignment
shall be subject to the prior written consent of the Administrative Agent and
Borrower, which consent shall not be unreasonably withheld (provided, however,
notwithstanding anything herein to the contrary, no consent of the Borrower or
the Administrative Agent is required for any assignment (A) during any time
that an Event of Default specified in Section 8.1(f) or (g) hereof shall have
occurred, (B) during any time that any other Event of Default has occurred and
is continuing for a period of 30 consecutive days, (C) to an Affiliate of a
Lender, (D) to an existing Lender hereunder or (E) to a Related Fund), (ii) the
applicable Lender, the Administrative Agent and Assignee shall execute and
deliver to the Administrative Agent an Assignment and Acceptance Agreement (an
"Assignment Agreement") in substantially the form of Exhibit F hereto, together
with any Notes subject to such assignment, (iii) the Assignee or the assigning
Lender, as the case may be, shall deliver to the Administrative Agent a
processing fee of $3,500; and (iv) no such Assignment shall be in an amount of
less than $5,000,000, unless the portion of the Commitments or Advances of a
Lender is less than $5,000,000, in which case such assignment may be in the
total amount of such Lender's portion of the Commitments or Advances. Upon
such execution, delivery and acceptance from and after the effective date
specified in each Assignment Agreement, which effective date shall be at least
three Business Days after the execution thereof and the recordation of the
information therein in the Register pursuant to Section 11.6(j) hereof, (A) the
Assignee thereunder shall be party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment
Agreement, have the rights and obligations of a Lender hereunder and (B) the
applicable Lender shall, to the extent that rights and obligations hereunder
have been assigned by it pursuant to such Assignment Agreement, relinquish such
rights and be released from such obligations under this Agreement.

(e) Notwithstanding anything in clause (d) above to the contrary,
(i) any Lender may assign and pledge all or any portion of its Advances to any
Federal Reserve Bank as collateral security pursuant to Regulation A of F.R.S.
Board and any Operating Circular issued by such Federal Reserve Bank and (ii)
any Lender that is a fund may at any time assign or pledge all or any portion
of its rights

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under this Agreement to secure such Lender's Indebtedness; provided, however,
that no such assignment under this clause (e) shall release the assignor Lender
from its obligations hereunder.

(f) Upon its receipt of an Assignment Agreement executed by a
Lender and an Assignee, and any Note or Notes subject to such assignment, the
Borrower shall, within five Business Days after its receipt of such Assignment
Agreement, at no expense to the Borrower, execute and deliver to the
Administrative Agent in exchange for any such surrendered Notes new Notes to
the order of such Assignee in an amount equal to the portion of the Advances
and Commitments assigned to it pursuant to such Assignment Agreement and new
Notes to the order of the Administrative Agent in an amount equal to the
portion of the Advances and Commitments retained by it hereunder. Such new
Notes shall be in an aggregate principal amount equal to the aggregate
principal amount of such surrendered Notes, shall be dated the effective date
of such Assignment Agreement and shall otherwise be in substantially the form
of Exhibit A, B or C hereto, as applicable. The Administrative Agent agrees to
promptly return the surrendered Notes marked "exchanged" to the Borrower.

(g) Any Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
11.6, disclose to the Assignee or Participant or proposed assignee or
Participant, any information relating to the Borrower furnished to such Lender
by or on behalf of the Borrower, provided such Person agrees in writing to be
bound by the standards set forth in Section 11.14 hereof.

(h) Except as specifically set forth in this Section 11.6, nothing
in this Agreement or any other Loan Documents, expressed or implied, is
intended to or shall confer on any Person other than the respective parties
hereto and thereto and their successors and assignees permitted hereunder and
thereunder any benefit or any legal or equitable right, remedy or other claim
under this Agreement or any other Loan Documents.

(i) Notwithstanding anything in this Section 11.6 to the contrary,
no Assignee or Participant shall be entitled to receive any greater payment
under Section 2.15 or Section 9.3 than such assigning or participating Lender
or any other Lender would have been entitled to receive with respect to the
interest assigned or participated to such Assignee or Participant.

(j) The Administrative Agent shall maintain at its address
referred to in Section 11.1 a copy of each Assignment Agreement delivered to
and accepted by it and a register (the "Register") for the recordation of the
names and addresses of the Lenders, any U.S. taxpayer identification number,
the applicable Specified Percentages of the Lenders (the "Ownership
Information"), whether such Lender is an original Lender or the assignee of
another Lender pursuant to an Assignment Agreement and the effective date and
amount of each Assignment Agreement delivered to and accepted by it and the
parties thereto. Any transfer of an ownership interest in any Advance (whether
or not evidenced by a Note), including any right to principal or interest
payable with respect to such Advance, shall be subject to and conditioned upon
the due recordation of such transfer and Ownership Information with respect to
the transferee in the Register and such transfer shall be effective only upon
such recordation (and not prior thereto). The entries in the Register shall be

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conclusive and binding for all purposes, absent manifest error, and the
Borrower, the Administrative Agent and the Lenders may treat each Person whose
name is recorded in the Register as a Lender hereunder for all purposes hereof.
The Register shall be available for inspection by the Borrower or any Lender at
any reasonable time and from time to time upon reasonable prior notice.

Section 11.7 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but
all such separate counterparts shall together constitute but one and the same
instrument.

Section 11.8 Severability. Any provision of this Agreement which
is for any reason prohibited or found or held invalid or unenforceable by any
court or governmental agency shall be ineffective to the extent of such
prohibition or invalidity or unenforceability without invalidating the
remaining provisions hereof in such jurisdiction or affecting the validity or
enforceability of such provision in any other jurisdiction.

Section 11.9 Interest and Charges. It is not the intention of any
parties to this Agreement to make an agreement in violation of the laws of any
applicable jurisdiction relating to usury. Regardless of any provision in any
Loan Documents, no Lender shall ever be entitled to receive, collect or apply,
as interest on the Obligations, any amount in excess of the Maximum Amount. If
any Lender or participant ever receives, collects or applies, as interest, any
such excess, such amount which would be excessive interest shall be deemed a
partial repayment of principal and treated hereunder as such; and if principal
is paid in full, any remaining excess shall be paid to the Borrower. In
determining whether or not the interest paid or payable, under any specific
contingency, exceeds the Maximum Amount, the Borrower and the Lenders shall, to
the maximum extent permitted under Applicable Law, (a) characterize any
nonprincipal payment as an expense, fee or premium rather than as interest, (b)
exclude voluntary prepayments and the effect thereof, and (c) amortize,
prorate, allocate and spread in equal parts, the total amount of interest
throughout the entire contemplated term of the Obligations so that the interest
rate is uniform throughout the entire term of the Obligations; provided,
however, that if the Obligations are paid and performed in full prior to the
end of the full contemplated term thereof, and if the interest received for the
actual period of existence thereof exceeds the Maximum Amount, the Lenders
shall refund to the Borrower the amount of such excess or credit the amount of
such excess against the total principal amount of the Obligations owing, and,
in such event, the Lenders shall not be subject to any penalties provided by
any laws for contracting for, charging or receiving interest in excess of the
Maximum Amount. This Section shall control every other provision of all
agreements pertaining to the transactions contemplated by or contained in the
Loan Documents.

Section 11.10 Headings. Headings used in this Agreement are for
convenience only and shall not be used in connection with the interpretation of
any provision hereof.

Section 11.11 Amendment and Waiver. The provisions of this
Agreement may not be amended, modified or waived except by the written
agreement of the Borrower and the Determining Lenders; provided, however, that
no such amendment, modification or waiver shall be made

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(a) without the consent of each Lender affected thereby, if it would (i)
increase any Specified Percentage or commitment of any Lender, or (ii) extend
or postpone the date of maturity of, extend or postpone the due date for any
payment of principal or interest on, reduce the amount of any installment of
principal or interest on, or reduce the rate of interest on, any Advance, the
Reimbursement Obligations or other amount owing under any Loan Documents, or
(iii) reduce the fees payable hereunder to which such Lender is entitled, or
(iv) waive or extend the date for payment of any of the Obligations, (b)
without the consent of all Lenders, if it would (i) release all or
substantially all of the Guarantors or all or substantially all of the
Collateral, (ii) revise this Section 11.11 or (iii) amend the definition of
"Determining Lenders," "Revolving Credit Percentage", "Facility A Term Loan
Specified Percentage", "Facility B Term Loan Specified Percentage", "Total
Specified Percentage", "Required Revolving Credit Lender", "Required Facility A
Term Loan Lender", or "Required Facility B Term Loan Lender"; (c) without the
consent of the Required Revolving Credit Lenders, amend, modify or waive any
condition precedent to an extension of a Revolving Credit Advance under Section
3.2 hereof; (d) without the consent of the Administrative Agent, if it would
alter the rights, duties or obligations of the Administrative Agent; (e)
without the consent of the Issuing Bank, if it would alter the rights, duties
or obligations of the Issuing Bank; or (f) without the consent of the Swing
Line Bank, if it would alter rights, duties or obligations of the Swing Line
Bank. Notwithstanding anything in this Agreement to the contrary, no amendment,
waiver or consent that changes the application of payments or prepayments to,
or allocations of payments or prepayments between, the Facility A Term Loan
Advances and the Facility B Term Loan Advances and no waiver of any mandatory
prepayments pursuant to Sections 2.5(c) (d), (e) or (f) hereof may be made
without the express written consent of the Required Facility A Term Loan
Lenders and Required Facility B Term Loan Lenders. Neither this Agreement nor
any term hereof may be amended orally, nor may any provision hereof be waived
orally but only by an instrument in writing signed by the Administrative Agent
and, in the case of an amendment, by the Borrower.

Section 11.12 No Liability of Issuing Bank. The Borrower assumes
all risks of the acts or omissions of any beneficiary or transferee of any
Letter of Credit with respect to its use of such Letter of Credit. Neither the
Issuing Bank nor any Lender nor any of their respective officers or directors
shall be liable or responsible for: (a) the use that may be made of any Letter
of Credit or any acts or omissions of any beneficiary or transferee in
connection therewith; (b) the validity, sufficiency or genuineness of
documents, or of any endorsement thereon, even if such documents should prove
to be in any or all respects invalid, insufficient, fraudulent or forged; (c)
payment by the Issuing Bank against presentation of documents that do not
comply with the terms of a Letter of Credit, including failure of any documents
to bear any reference or adequate reference to the Letter of Credit, except for
any payment made upon the Issuing Bank's gross negligence or willful
misconduct; or (d) any other circumstances whatsoever in making or failing to
make payment under any Letter of Credit, except that the Borrower shall have a
claim against the Issuing Bank, and the Issuing Bank shall be liable to the
Borrower, to the extent of any direct, but not consequential, damages suffered
by the Borrower that the Borrower proves were caused by (i) the Issuing Bank's
willful misconduct or gross negligence in determining whether documents
presented under any Letter of Credit comply with the terms of the Letter of
Credit or (ii) the Issuing Bank's willful failure to make lawful payment under
a Letter of Credit after the presentation to it of a draft and certificates
strictly complying with the

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terms and conditions of the Letter of Credit. In furtherance and not in
limitation of the foregoing, the Issuing Bank may accept documents that appear
on their face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary.

Section 11.13 Confidentiality. Each Lender and the Administrative
Agent agrees (on behalf of itself and each of its Affiliates, directors,
officers and employees) to use reasonable efforts to keep confidential, in
accordance with customary procedures for handling confidential information of
this nature and in accordance with safe and sound banking or investment
practices, any non-public information supplied to it by the Borrower or any of
its Affiliates pursuant to this Agreement, provided that nothing herein shall
limit the disclosure of any such information (a) to the extent required by
statute, rule, regulation or judicial process, (b) to counsel for any Lender or
the Administrative Agent, (c) to bank or other examiners, regulatory bodies
(including the National Association of Insurance Commissioners or any similar
organization, or any nationally recognized rating agency that requires access
to information about any Lender's investment portfolio), auditors or
accountants of any Lender, (d) to the Administrative Agent or any other Lender
or any Affiliate thereof, (e) in connection with any Litigation relating to the
transactions contemplated by the Loan Documents to which any one or more of
Lenders is a party, (f) to the extent necessary in connection with the exercise
of any Right under this Agreement or any other Loan Document, or (g) to any
Assignee or Participant (or prospective Assignee or Participant) or to any
direct or indirect contractual counterparties in swap agreements or to the
professional advisors of such swap counterparties so long as such Assignee or
Participant (or prospective Assignee or Participant) or direct or indirect
contractual counterparties in swap agreements or such swap counterparties'
professional advisors agrees in writing to be bound by the provisions of this
Section 11.13. Non-public information does not include information that (a)
was publicly known prior to the time of disclosure by the Borrower or any of
its Subsidiaries, (b) after disclosure by the Borrower to any Lender or the
Administrative Agent becomes publicly known through no act or omission by any
Lender or the Administrative Agent or by any Person acting on behalf of any
Lender or the Administrative Agent or (c) otherwise becomes known to any Lender
or the Administrative Agent other than through disclosure by the Borrower or
any of its Subsidiaries or Affiliates or any of their respective
representatives or consultants.

Section 11.14 No Duties of Syndication Agent, Documentation Agent
or Co-Agents. The Borrower and the Lenders acknowledge that the Syndication
Agent, the Documentation Agent and the Co-Agents shall have no duties,
responsibilities or liabilities in their capacities as Syndication Agent,
Documentation Agent and Co-Agents.

SECTION 11.15 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF TEXAS WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS AND THE
APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA. THE LOAN DOCUMENTS
ARE PERFORMABLE IN DALLAS, DALLAS COUNTY, TEXAS, AND BORROWER AND EACH SURETY,
GUARANTOR, ENDORSER AND ANY OTHER PARTY EVER LIABLE FOR PAYMENT

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OF ANY MONEY PAYABLE WITH RESPECT TO THE LOAN DOCUMENTS, JOINTLY AND SEVERALLY
WAIVE THE RIGHT TO BE SUED ELSEWHERE. WITHOUT EXCLUDING ANY OTHER
JURISDICTION, THE BORROWER AND EACH LENDER AGREE THAT THE STATE AND FEDERAL
COURTS OF TEXAS LOCATED IN DALLAS, TEXAS SHALL HAVE JURISDICTION OVER
PROCEEDINGS IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND
HEREBY SUBMITS WITH RESPECT TO ITSELF AND ITS PROPERTY TO THE JURISDICTION OF
ANY SUCH COURT FOR THE PURPOSE OF ANY SUIT, ACTION OR PROCEEDING OR JUDGMENT
RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.

SECTION 11.16 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE
ADMINISTRATIVE AGENT AND THE LENDERS HEREBY KNOWINGLY VOLUNTARILY, IRREVOCABLY
AND INTENTIONALLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM ARISING OUT OF OR RELATED TO
ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. THIS
PROVISION IS A MATERIAL INDUCEMENT TO EACH LENDER ENTERING INTO THIS AGREEMENT
AND MAKING ANY ADVANCES HEREUNDER.

SECTION 11.17 ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT, TOGETHER
WITH THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.

REMAINDER OF PAGE LEFT INTENTIONALLY BLANK

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IN WITNESS WHEREOF, this Credit Agreement is executed as of the date
first set forth above.

BORROWER: HOME INTERIORS & GIFTS, INC.

By:
-------------------------------
Donald J. Carter, Jr.
Chief Executive Officer

<PAGE> 105

ADMINISTRATIVE AGENT: NATIONSBANK, N.A., as Administrative
Agent

By:
-------------------------------
Harold R. Beattie, Jr.
Senior Vice President

<PAGE> 106

SYNDICATION AGENT: THE CHASE MANHATTAN BANK, as
Syndication Agent

By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------

<PAGE> 107

DOCUMENTATION AGENT: NATIONAL WESTMINSTER BANK, PLC, as
Documentation Agent

By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 108

CO-AGENTS: THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, as Co-Agent

By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 109

SOCIETE GENERALE, as Co-Agent

By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 110

CITICORP USA, INC., as Co-Agent

By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 111

LENDERS: NATIONSBANK, N.A., as a Lender

By:
------------------------------------
Harold R. Beattie, Jr.
Senior Vice President

901 Main Street, 67th Floor
Dallas, Texas 75202
Attn: Thomas Blake
Senior Vice President

<PAGE> 112

THE CHASE MANHATTAN BANK, as a Lender

By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------

270 Park Avenue, 4th Floor
New York, New York 10017
Attn:
----------------------------------
----------------------------------
<PAGE> 113

NATIONAL WESTMINSTER BANK Plc, as a
Lender

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

660 Madison Avenue, 14th Floor
New York, New York 10021
Attn:
---------------------------------
---------------------------------

<PAGE> 114

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
as a Lender

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

Chase Tower, Suite 4200E
2200 Ross Avenue
Dallas, Texas 75201-2763
Attention:
---------------------------
---------------------------

<PAGE> 115

SOCIETE GENERALE, as a Lender

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

1221 Avenue of the Americas
New York, New York 10020
Attention:
----------------------------
----------------------------

<PAGE> 116

CITICORP USA, INC., as a Lender

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

399 Park Avenue, 5th Floor, Zone 8
New York, New York 10043
Attention:
----------------------------
----------------------------

<PAGE> 117

BANK ONE, TEXAS, N.A.

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

1717 Main Street, 3rd Floor
Dallas, Texas 75201
Attention:
----------------------------
----------------------------

<PAGE> 118

BANKERS TRUST COMPANY

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

One Bankers Trust Plaza, 34th Floor
130 Liberty Street
New York, New York 10006
Attention:
----------------------------
----------------------------
<PAGE> 119

BHF-BANK AKTIENGESELLSCHAFT

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

590 Madison Avenue
New York, New York 10022-2540
Attention:
----------------------------
----------------------------

<PAGE> 120

CREDITANSTALT CORPORATE FINANCE, INC.

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

Two Ravinia Drive, Suite 1680
Atlanta, Georgia 30346
Attention:
----------------------------
----------------------------

<PAGE> 121

GENERAL ELECTRIC CAPITAL CORPORATION

By:
-----------------------------------
Roger M. Burns
Duly Authorized Signatory

201 High Ridge Road
Stamford, Connecticut 06927-5100
Attention: Roger M. Burns
Duly Authorized Signatory

<PAGE> 122

HELLER FINANCIAL, INC.

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

500 West Monroe
CF6 - 12th Floor
Chicago, Illinois 60661
Attention:
----------------------------
----------------------------

<PAGE> 123

NATIONAL CITY BANK OF KENTUCKY

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

101 South Fifth Street, Locator #T08J
Louisville, Kentucky 40202
Attention:
----------------------------
----------------------------

<PAGE> 124

BALANCED HIGH-YIELD FUND I LTD.

By: BHF-BANK Aktiengesellschaft,
acting through its New York Branch,
as attorney-in-fact

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

c/o BHF-Bank Aktiengesellschaft, New
York Branch
590 Madison Avenue
New York, New York 10022-2540
Attention:
----------------------------
----------------------------
<PAGE> 125

KZH-ING-2 CORPORATION

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

333 South Grand Avenue, Suite 4250
Los Angeles California 90071
Attention:
----------------------------
----------------------------

with a copy to:

Ruth Shackelford
Gibson, Dunn & Crutcher
200 Park Avenue
New York, New York 10166-0193

<PAGE> 126

DELANO COMPANY

By: Pacific Investment Management
Company, as its Investment
Advisor

By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------

840 Newport Center Drive
Newport Beach, California 92658
Attention: Jason Rosiak

--------------------------

with a copy to:

Marianne Caulfield
Rogers & Wells
607 Fourteenth Street, N.W.
Washington, D.C. 20005

<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
October 20, 1998

<PAGE> 1
EXHIBIT 25.1

FORM T-1
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------------

STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE

----------------------

CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2) _____

----------------------

UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)

New York 13-3818954
(Jurisdiction of incorporation (I.R.S. employer
if not a U.S. national bank) identification No.)

114 West 47th Street 10036-1532
New York, NY (Zip Code)
(Address of principal
executive offices)

----------------------

Home Interiors and Gifts, Inc.
(Exact name of obligor as specified in its charter)

Texas 75-0981828
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

----------------------
Dallas Woodcraft, Inc.
(Co-Registrant)

Texas 75-1248263
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

<PAGE> 2

- 2 -

----------------------
GIA, Inc.
(Co-Registrant)

Nebraska 76-2819682
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

----------------------
Homco, Inc.
(Co-Registrant)

Texas 75-1725861
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

----------------------
Homco Puerto Rico, Inc.
(Co-Registrant)

Delaware 75-2695262
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

----------------------
Spring Valley Scents, Inc.
(Co-Registrant)

Texas 75-2729831
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

4550 Spring Valley Road
Dallas, Texas 75244-3705
(Address of principal executive offices) (Zip Code)

----------------------
10-1/8% Series A Senior Notes due 6/1/2008
(Title of the indenture securities)

================================================================================

<PAGE> 3

- 3 -

GENERAL

1. GENERAL INFORMATION

Furnish the following information as to the trustee:

(a) Name and address of each examining or supervising authority to
which it is subject.

Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Washington, D.C.
New York State Banking Department, Albany, New York

(b) Whether it is authorized to exercise corporate trust powers.

The trustee is authorized to exercise corporate trust powers.

2. AFFILIATIONS WITH THE OBLIGOR

If the obligor is an affiliate of the trustee, describe each such
affiliation.

None

3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15:

Home Interiors and Gifts, Inc., Dallas Woodcraft, Inc., GIA, Inc., Homco,
Inc., Homco Puerto Rico, Inc. and Spring Valley Scents, Inc. currently are
not in default under any of these outstanding securities for which United
States Trust Company of New York is Trustee. Accordingly, responses to
Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of Form T-1 are not
required under General Instruction B.

16. LIST OF EXHIBITS

T-1.1 -- Organization Certificate, as amended, issued by the State of
New York Banking Department to transact business as a Trust
Company, is incorporated by reference to Exhibit T-1.1 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No.
33-97056).

T-1.2 -- Included in Exhibit T-1.1.

T-1.3 -- Included in Exhibit T-1.1.

<PAGE> 4

- 4 -

16. LIST OF EXHIBITS
(cont'd)

T-1.4 -- The By-Laws of United States Trust Company of New York, as
amended, is incorporated by reference to Exhibit T-1.4 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No.
33-97056).

T-1.6 -- The consent of the trustee required by Section 321(b) of
the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990.

T-1.7 -- A copy of the latest report of condition of the trustee
pursuant to law or the requirements of its supervising or
examining authority.

NOTE

As of August 18, 1998 the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U.S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States Trust
Company of New York and its parent company, U.S. Trust Corporation.

In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.

--------------------

Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
United States Trust Company of New York, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York and State of New York, on the 18th day
of August, 1998.

UNITED STATES TRUST COMPANY
OF NEW YORK, Trustee

By:
------------------------
Assistant Vice President

CCC/pg

<PAGE> 5

EXHIBIT T-1.6

The consent of the trustee required by Section 321(b) of the Act.

United States Trust Company of New York
114 West 47th Street
New York, NY 10036

September 1, 1995

Securities and Exchange Commission
450 5th Street. N.W.
Washington, DC 20549

Gentlemen:

Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.

Very truly yours,

UNITED STATES TRUST COMPANY
OF NEW YORK

By: /s/ Gerard F. Ganey
---------------------
Gerard F. Ganey
Senior Vice President

<PAGE> 6

EXHIBIT T-1.7

UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION

JUNE 30, 1998
($ IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and Due from Banks $ 99,322

Short-Term Investments 171,315

Securities, Available for Sale 626,426

Loans 1,857,795
Less: Allowance for Credit Losses 16,708
------------
Net Loans 1,841,087
Premises and Equipment 59,304
Other Assets 122,476
------------
TOTAL ASSETS $ 2,919,930
============
LIABILITIES
Deposits:
Non-Interest Bearing $ 648,072
Interest Bearing 1,646,049
------------
Total Deposits 2,294,121

Short-Term Credit Facilities 306,807
Accounts Payable and Accrued Liabilities 144,419
------------
TOTAL LIABILITIES $ 2,745,847
============
STOCKHOLDER'S EQUITY
Common Stock 14,995
Capital Surplus 49,541
Retained Earnings 107,703
Unrealized Gains on Securities
Available for Sale (Net of Taxes) 2,344
------------

TOTAL STOCKHOLDER'S EQUITY 174,583
------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 2,919,930
============
</TABLE>

I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank
do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.

Richard E. Brinkmann, SVP & Controller

July 31, 1998

<PAGE> 1
EXHIBIT 99.3

HOME INTERIORS & GIFTS, INC.
4550 Spring Valley Road
Dallas, Texas 75244-3705

October ___, 1998

United States Trust Company of New York
114 West 47th Street
New York, New York 10036

Ladies and Gentlemen:

Home Interiors & Gifts, Inc., a Texas corporation (the "Company"), is
making an offer to exchange $1,000 principal amount of its 10 1/8% Senior
Subordinated Notes due 2008 (the "Exchange Notes"), upon the terms and subject
to the conditions set forth in the Prospectus, dated October __, 1998 (the
"Prospectus"), and in the related Letter of Transmittal (the "LT"), for each
$1,000 principal amount of its outstanding 10 1/8% Senior Subordinated Notes
due 2008 (the "Old Notes") issued pursuant to an Indenture, dated as of June 4,
1998 (the "Indenture"), among the Company, the Guarantors (as defined therein)
and United States Trust Company of New York, as trustee (the "Trustee"). The
offer to exchange Exchange Notes for Old Notes pursuant to the Prospectus and
the LT are referred to collectively herein as the "Exchange Offer." Attached
hereto and incorporated herein by reference as Exhibits A through D,
respectively, are the following:

A. The Prospectus;

B. A form of the LT;

C. A form of the Notice of Guaranteed Delivery; and

D. The Exchange Agent's Fee and Expense Schedule.

The Exchange Offer will commence on October___, 1998 (the
"Commencement Date"), and will expire at 5:00 p.m., New York City time, on
November ___, 1998, unless extended by the Company as provided in the Exchange
Offer (the last date to which the Offer is extended and on which the Exchange
Offer expires is herein referred to as the "Expiration Date"). The Company
will notify you in writing on the day of any extension of the Exchange Offer.
<PAGE> 2

The Company hereby appoints you, and you hereby agree, to act as the
exchange agent (the "Exchange Agent") in connection with the Exchange Offer.
In such capacity, you will, on behalf of the Company, receive and deliver
Exchange Notes for Old Notes tendered pursuant to the terms of the Exchange
Offer. The parties hereto acknowledge that the Old Notes and the Exchange
Notes are held in book-entry form, and that all references to the tendering,
delivery or exchange of Old Notes or Exchange Notes shall be deemed to include
book entry procedures. In carrying out your duties as the Exchange Agent in
connection with the Exchange Offer, you and the Company agree as follows:

1. You will make a request to establish an account with respect
to the Old Notes at The Depository Trust Company ("DTC") within two business
days after the date of this Agreement. You agree that any financial
institution that is a participant in DTC's systems may make book-entry delivery
of Old Notes in accordance with DTC's Automated Tender Offer Program ("ATOP").

2. On the Commencement Date you will send by first class mail to
each holder of Old Notes, at the addresses shown on the register maintained by
you as Registrar under the Indenture, for use by such holder in forwarding and
tendering the Old Notes to you as Exchange Agent, one copy of each of the
Prospectus, the LT and the Notice of Guaranteed Delivery, along with a
self-addressed envelope prepared by you as Exchange Agent. Upon request of any
holder of Old Notes, you are hereby authorized to issue additional documents to
such holder of Old Notes.

3. You will examine the LTs, the certificates evidencing Old
Notes, the Notices of Guaranteed Delivery and the other documents mailed or
otherwise delivered to you in connection with tenders of Old Notes to ascertain
whether each such LT or Notice of Guaranteed Delivery has been properly
completed and duly executed and whether the certificates evidencing Old Notes
accompanying such LT or received pursuant to a Notice of Guaranteed Delivery
are in proper form for transfer, in each case in accordance with the
instructions set forth in the Exchange Offer. Final determination of all
questions as to the validity, form, eligibility and acceptance for exchange of
any tender of Old Notes shall be made by the Company in its sole discretion and
such determination shall be final and binding. The Company has reserved in the
Exchange Offer the absolute right to reject any or all tenders of Old Notes
determined by it not to be timely or in proper form or the acceptance of or
exchange for which may, in the opinion of the Company's counsel, be unlawful
and to waive any of the conditions of the Exchange Offer or any defect or
irregularity in the tender of the Old Notes, and the Company's interpretation
of the terms and conditions of the Exchange Offer will be final. The Company
promptly shall notify you, in writing, of any such rejection or waiver.

2
<PAGE> 3

4. Subject to the provisions of Paragraph 3 concerning the
Company's ability to waive defects in the tender, Old Notes must be tendered
only in accordance with the terms and conditions set forth in the Exchange
Offer.

(a) Exchange of Exchange Notes for Old Notes tendered and
accepted for exchange pursuant to the Exchange Offer shall be made
only if:

(i) you receive prior to the Expiration Date (A)
certificates for such Old Notes and (B) a properly completed
and duly executed LT (or facsimile thereof) relating thereto;
or

(ii) you receive on or prior to the Expiration
Date electronic instructions tendering the Old Notes through
the ATOP system that contain the character by which the
participant at DTC acknowledges its receipt of and agrees to
be bound by the LT; or

(iii) you receive (A) a Notice of Guaranteed
Delivery relating to such Old Notes from an Eligible
Institution (as defined in the Exchange Offer) prior to the
Expiration Date and (B) certificates for such Old Notes and a
properly completed and duly executed LT (or facsimile thereof)
relating thereto at or prior to 5:00 p.m., New York City time,
on or before the third New York Stock Exchange (the "NYSE")
trading day after the date of execution of such Notice of
Guaranteed Delivery;

(b) Exchange of Exchange Notes for Old Notes shall be
made only if a final determination of the adequacy of the items
received, as provided in Paragraph 3 hereof, has been made by the
Company and you receive written notice from the Company that the
conditions of the Exchange Offer have been satisfied or waived.

(c) You are authorized to take such actions as may be
necessary and appropriate to correct any irregularities or
deficiencies associated with any tender not in proper order and to
follow the instructions of the Company with respect to the waiver of
any irregularities or deficiencies associated with any tender.

5. A tendering holder of Old Notes may withdraw Old Notes
tendered prior to the Expiration Date as set forth in the Exchange Offer, in
which event you shall, as promptly as possible after notification of such
withdrawal, return such Old Notes to, or in accordance with the instructions
of, such holder of Old Notes, and such Old Notes shall thereafter be deemed not
to have been validly tendered. All questions as to the form and validity
(excluding time of receipt) of notices of withdrawal shall be determined by the
Company, in its sole discretion, such determination to be final and binding.

3
<PAGE> 4

6. On each day there is activity while the Exchange Offer remains
open, and once each day on the Expiration Date and the four business days
immediately preceding the Expiration Date, you shall advise in writing via
facsimile to Leonard A. Robertson of the Company, 4550 Spring Valley Road,
Dallas, Texas 75244-3705 (telephone: (972) 386-1000, facsimile: (972)
490-7582) and to Kyle C. Krpata of Weil, Gotshal & Manges LLP, at 100 Crescent
Court, Suite 1300, Dallas, Texas 75201-6950 (telephone: (214) 746-7819;
facsimile: (214) 746-7777) as to the aggregate principal amount of Old Notes
which have been validly tendered since the last advice, stating separately (i)
the aggregate principal amount of Old Notes tendered and represented by
certificates physically held by you since the last advice, (ii) the aggregate
principal amount of Old Notes tendered by Notices of Guaranteed Delivery since
the last advice, (iii) the aggregate principal amount of Old Notes tendered
since the last advice about which you have questions concerning the validity of
their tender, (iv) the aggregate principal amount of Old Notes delivered which
have been tendered previously by Notices of Guaranteed Delivery, (v) the
aggregate principal amount of Old Notes that have been withdrawn since the last
advice and which had been previously tendered, and (vi) the cumulative
aggregate principal amount of Old Notes tendered (and not withdrawn or revoked)
through the time of such advice. You shall also provide the aforementioned
persons (or any other persons identified to you by such aforementioned
persons), with such other information as any of them may reasonably request.

7. LTs, Notices of Guaranteed Delivery and withdrawn tenders of
Old Notes and facsimile transmissions submitted in lieu thereof pursuant to the
Exchange Offer shall be recorded by you as to the date and time of receipt
thereof and preserved by you as permanent records until you are otherwise
instructed in writing by the Company. You shall match submitted Notices of
Guaranteed Delivery with Old Notes tendered pursuant thereto, although you
shall have no duty to enforce any such Notices of Guaranteed Delivery.

8. You shall follow and act upon any written amendments,
modifications or supplements to these instructions to which you agree in
writing, and upon any further instructions in connection with the Exchange
Offer, any of which may be given to you by the Company or such other persons as
it may authorize in writing.

9. The Company shall notify you in writing of the tendered Old
Notes, if any, which have been accepted for exchange, and such written
notification shall be irrevocable. Upon completion of the issuance of Exchange
Notes, you will promptly provide to the Company (i) a list, certified by an
authorized officer, of the Old Notes that have been canceled in accordance
herewith, (ii) a list, certified by an authorized officer, of the Exchange
Notes that have been issued and (iii) a list, certified by an authorized
officer, of the Old Notes not tendered for exchange or tendered and withdrawn,
each such list to include the name and address of the former or current holder,
as applicable, and the principal amount of each Old Note or Exchange Note, as
applicable.

4
<PAGE> 5

10. If, pursuant to the provisions of the instructions to the LTs,
less than the entire principal amount evidenced by any certificate delivered to
you is to be tendered, you shall, promptly after the Expiration Date, and after
receipt of the acceptance notice provided in Paragraph 9 with respect to the
tendered portion, return or cause to be returned a new certificate evidencing
the untendered remainder of the principal amount of the Old Note that was
evidenced by such certificate to, or in accordance with the instructions of,
the tendering holder of such Old Note.

11. If, pursuant to the terms of the Exchange Offer, the Company
does not accept for exchange all or any part of the tendered Old Notes, or Old
Notes are tendered but withdrawn in the manner provided in the Exchange Offer,
you shall promptly return to, or in accordance with the instructions of, each
tendering holder of such Old Notes the certificates evidencing the principal
amount of Old Notes not exchanged or, to the extent required, submit to the
Company for reissuance to, or in accordance with the instructions of, each
tendering holder of Old Notes certificates evidencing the principal amount of
Old Notes not tendered or exchanged, which certificates shall be returned to
you for disposition, together with a letter of notice provided by the Company,
explaining why the tendered Old Notes are being returned.

12. Certificates evidencing the Exchange Notes as well as
certificates evidencing principal amounts of Old Notes not exchanged shall be
forwarded in accordance with Paragraphs 9, 10 or 11 hereof, as the case may be,
by (a) first-class mail under an existing insurance policy protecting you and
the Company from loss or liability arising out of the non-receipt or
non-delivery of such certificates or (b) by registered mail insured separately
for the replacement value of such certificates.

13. Upon request of any person, you shall furnish to such person
copies of the Prospectus, and supplements thereto, the LTs, Notices of
Guaranteed Delivery and the other materials referred to in the Prospectus as
being available to holders of Old Notes. The Company will supply you promptly
with copies of such documents upon your request.

14. As Exchange Agent you:

(a) shall have no duties or obligations other than those
specifically set forth herein or as subsequently may be requested by
the Company in writing and agreed to in writing by you, and no implied
duties or obligations shall be read into this Agreement against you;

(b) will be regarded as making no representations and
having no responsibilities as to the validity, sufficiency, value or
genuineness of any certificates evidencing Old Notes deposited with
you pursuant to the Exchange Offer and will not

5
<PAGE> 6

be required to and will make no representations as to the validity,
sufficiency, value or genuineness of the Exchange Offer or the
Exchange Notes;

(c) shall not be required to initiate any legal action
hereunder that might in your judgment involve any expense or liability
to you except upon written instructions of the Company and then only
if you have been furnished by the Company with such indemnity as shall
be satisfactory to you in your sole discretion;

(d) may rely on and shall be protected in acting upon any
certificate, instrument, opinion, notice, letter, telegram, facsimile
transmission or other document delivered to you and reasonably
believed by you to be genuine and to have been signed by the proper
party or parties;

(e) may rely on and shall be protected in acting upon
written or oral instructions from Donald J. Carter, Jr., Leonard A.
Robertson or Bettina S. Simon, who are each officers of the Company,
or such other person or persons as may be designated by the Company in
writing, with respect to any matter relating to your actions as
Exchange Agent specifically covered by this Agreement or supplementing
or qualifying any such actions;

(f) may consult with counsel satisfactory to you
(including counsel for the Company) and the advice or opinion of such
counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by you hereunder in
good faith and in accordance with such advice or opinion of such
counsel;

(g) shall not at any time advise or be called upon to
advise any person as to the wisdom of making any tender pursuant to
the Exchange Offer, the market value or decline or appreciation in
market value of the Old Notes or the Exchange Notes, or any other
financial or legal aspect of the Exchange Offer or any transaction
related thereto; and

(h) shall be entitled, in the event that conflicting
claims are made, or threatened, against you with respect to the
Exchange Offer, to institute an interpleader action in any court of
competent jurisdiction requesting such court to resolve such
conflicting claims.

15. You hereby agree that all securities, money, assets and
property (collectively, the "Property") deposited with or received by you as
Exchange Agent constitute a special, segregated account, held solely for the
benefit of the Company and holders of Old Notes tendering Old Notes, as their
interests may appear, and the Property shall not be commingled with the
securities, money, assets or property of you or any other person or entity.

6
<PAGE> 7

16. You hereby expressly waive any lien, encumbrance or right of
set-off whatsoever that you may have with respect to funds deposited with you
for the payment of transfer taxes.

17. In performing and carrying out your duties and
responsibilities under this Agreement, you may employ and utilize such agents
and employees as you in your sole discretion deem necessary, advisable or
desirable to carry out the purpose of this Agreement. For services rendered as
Exchange Agent hereunder, you shall be entitled to the fees specified in
Exhibit D hereto. The Company shall also reimburse you for reasonable
out-of-pocket expenses (including, but not limited to, reasonable fees and
expenses of your legal counsel) in connection with your services. The failure
of the Exchange Offer in its entirety or in part or as to any particular holder
of Old Notes shall in no event affect your entitlement to your fees and
expenses.

18. The Company covenants and agrees to indemnify and to hold you
harmless against any costs, expenses (including reasonable fees and expenses of
your legal counsel), losses or damages which may be paid, incurred or suffered
by you or to which you may become subject, arising from or out of, directly or
indirectly, any claim or liability resulting from your actions or inactions as
Exchange Agent pursuant hereto; provided that such covenant and agreement does
not extend to, and you shall not be indemnified and held harmless with respect
to, such costs, expenses, losses and damages incurred or suffered by you as a
result of, or arising out of, your gross negligence, bad faith, or willful
failure to perform your obligations hereunder.

19. All reports, notices and other communications required or
permitted hereunder (other than the telephonic advice required by Paragraph 6)
shall be in writing (unless otherwise provided herein) and shall be deemed
given when delivered by hand, facsimile transmission or first-class mail,
postage prepaid, as follows:

To the Exchange Agent:

United States Trust Company of New York
114 West 47th Street
New York, New York 10036
Attention: Corporate Trust Department
Telephone No. (212) 852-1676
Facsimile No. (212) 852-1626

7
<PAGE> 8

To the Company:

Home Interiors & Gifts, Inc.
4550 Spring Valley Road
Dallas, Texas 75244-3705
Attention: Bettina S. Simon
Telephone No. (972) 386-1000
Facsimile No. (972) 386-1106

With copy to:

Weil, Gotshal & Manges LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201-6950
Attention: Glenn D. West
Telephone No. (214) 746-7780
Facsimile No. (214) 746-7777

20. This Agreement and your appointment as Exchange Agent
hereunder shall be construed and enforced in accordance with the laws of the
State of New York, and shall inure to the benefit of, and the obligation
created hereby shall be binding upon, the successors and assigns of each of the
parties hereto; provided, however, that no assignment by the Company shall
affect the Exchange Agent's rights under Paragraphs 14, 18 and 19 hereof. This
Agreement may not be assigned by you without prior written consent of the
Company.

21. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original but which together shall
constitute one and the same agreement. This Agreement may only be amended,
modified or supplemented in writing signed by all parties hereto.

22. Upon the first to occur of (a) the completion of your duties
hereunder or (b) 90 days following the Expiration Date, your designation as
Exchange Agent and your obligations hereunder will terminate at the close of
business on said date. The provisions of Paragraphs 18 and 19 shall survive
the termination of this Agreement and shall continue in full force and effect.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

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<PAGE> 9

Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy.

HOME INTERIORS & GIFTS, INC.

By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------

Accepted as of the date first above written.

UNITED STATES TRUST COMPANY OF NEW YORK,
as Exchange Agent

By:
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Name:
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Title:
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