- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
<Table>
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
</Table>
COMMISSION FILE NUMBER 333-62021
HOME INTERIORS & GIFTS, INC.
(Exact name of registrant as specified in its charter)
<Table>
TEXAS 75-0981828
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1649 FRANKFORD ROAD, W
CARROLLTON, TEXAS 75007
(Address of principal executive offices) (Zip Code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 386-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The common stock of the registrant is not publicly registered or traded
and, therefore, no market value, whether held by affiliates or non-affiliates,
can readily be ascertained.
As of March 26, 2002, 15,240,218 shares of the Company's common stock, par
value $0.10 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXPLANATORY NOTE
The quarterly results for the first quarter ended March 31, 2001 and for
the fourth quarter ended December 31, 2001, each as set forth in Note 17 in the
Notes to Consolidated Financial Statements of the Company included in the Form
10-K for the year ended December 31, 2001, are being amended and restated in
their entirety to correct a mathematical error. Except as amended as described
above, the Consolidated Financial Statements of the Company being filed herewith
(and included in the Company's 10-K for the year ended December 31, 2001 as
previously filed with the Securities and Exchange Commission) remain unchanged.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOME INTERIORS & GIFTS, INC.
By: /s/ DONALD J. CARTER, JR.
------------------------------------
Donald J. Carter, Jr.
Chairman of the Board and
Chief Executive Officer
Date: April 30, 2002
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 2000 and
2001...................................................... F-3
Consolidated Statements of Operations and Comprehensive
Income for the years ended December 31, 1999, 2000 and
2001...................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1999, 2000 and 2001...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II Valuation and Qualifying Accounts............... F-29
</Table>
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Home Interiors & Gifts, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income,
shareholders' equity (deficit) and cash flows present fairly, in all material
respects, the consolidated financial position of Home Interiors & Gifts, Inc.
and Subsidiaries at December 31, 2000 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 11, 2002
F-2
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 2001
<Table>
<Caption>
2000 2001
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 41,720 $ 13,712
Accounts receivable, net.................................. 9,608 11,703
Inventories, net.......................................... 27,493 40,452
Deferred income tax benefit............................... 4,353 6,540
Other current assets...................................... 2,262 1,096
--------- ---------
Total current assets.............................. 85,436 73,503
Restricted cash............................................. 900 --
Property, plant and equipment, net.......................... 60,600 65,164
Debt issuance costs, net.................................... 13,385 10,048
Other assets................................................ 5,077 5,833
--------- ---------
Total assets...................................... $ 165,398 $ 154,548
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 17,693 $ 25,672
Accrued seminars and incentive awards..................... 15,108 19,126
Royalties payable......................................... 4,527 7,790
Accrued compensation...................................... 2,726 6,598
Income taxes payable...................................... 1,260 2,770
Current maturities of long-term debt and capital lease
obligations............................................ 58,503 15,031
Other current liabilities................................. 12,226 15,292
--------- ---------
Total current liabilities......................... 112,043 92,279
Long-term debt and capital lease obligations, net of current
maturities................................................ 406,830 302,811
Other liabilities........................................... 8,636 22,471
--------- ---------
Total liabilities................................. 527,509 417,561
--------- ---------
Commitments and contingencies (see Note 14)
Shareholders' deficit:
Preferred stock, par value $0.01 per share 10,000,000
shares authorized 96,058.98 shares designated as
cumulative 12.5% Senior Convertible Preferred Stock at
a liquidation value of $1,000 per share, 96,058.98
shares issued and outstanding at December 31, 2001..... -- 95,637
Common stock, par value $0.10 per share, 75,000,000 shares
authorized, 15,240,218 shares issued and outstanding... 1,524 1,524
Additional paid-in capital................................ 179,624 179,562
Accumulated deficit....................................... (542,939) (539,379)
Other..................................................... (320) (357)
--------- ---------
Total shareholders' deficit....................... (362,111) (263,013)
--------- ---------
Total liabilities and shareholders' deficit....... $ 165,398 $ 154,548
========= =========
</Table>
The accompanying notes are an integral part of these financial statements.
F-3
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
(IN THOUSANDS)
Net sales................................................... $503,344 $460,440 $461,693
Cost of goods sold.......................................... 240,390 223,514 200,893
-------- -------- --------
Gross profit................................................ 262,954 236,926 260,800
Selling, general and administrative:
Selling................................................... 89,514 82,285 86,477
Freight, warehouse and distribution....................... 48,144 44,896 49,552
General and administrative................................ 29,193 48,867 57,176
Loss (gain) on disposition of assets...................... (10,650) (2,738) 495
Stock option expense (credit)............................. 912 (351) (62)
Homco restructuring....................................... -- 1,027 --
Redundant warehouse and distribution...................... -- 6,089 1,197
-------- -------- --------
Total selling, general and administrative.............. 157,113 180,075 194,835
-------- -------- --------
Operating income............................................ 105,841 56,851 65,965
Other income (expense):
Interest income........................................... 2,978 2,208 1,017
Interest expense.......................................... (44,081) (45,496) (37,982)
Other income (expense).................................... (183) 2,116 431
-------- -------- --------
Other income (expense), net............................ (41,286) (41,172) (36,534)
-------- -------- --------
Income before income taxes and extraordinary loss........... 64,555 15,679 29,431
Income taxes................................................ 22,967 5,892 10,671
-------- -------- --------
Income before extraordinary loss............................ 41,588 9,787 18,760
Extraordinary loss (see Note 10)............................ -- -- 15,200
-------- -------- --------
Net income.................................................. 41,588 9,787 3,560
Other comprehensive income (loss):
Cumulative translation adjustment......................... 268 (361) (37)
-------- -------- --------
Other comprehensive income (loss)...................... 268 (361) (37)
-------- -------- --------
Comprehensive income (loss)................................. $ 41,856 $ 9,426 $ 3,523
======== ======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
F-4
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK SHARES STOCK CAPITAL DEFICIT OTHER TOTAL
--------- --------- ---------- ------ ---------- ----------- ----- ---------
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Balance, December 31,
1998..................... -- -- 15,234,422 $1,523 $178,944 $(594,314) $(227) $(414,074)
Net income............... 41,588 41,588
Issuance of common
stock.................. 5,796 1 119 120
Cumulative translation
adjustment............. 268 268
Stock option expense..... 912 912
--------- ------- ---------- ------ -------- --------- ----- ---------
Balance, December 31,
1999..................... -- -- 15,240,218 1,524 179,975 (552,726) 41 (371,186)
Net income............... 9,787 9,787
Cumulative translation
adjustment............. (361) (361)
Stock option credit...... (351) (351)
--------- ------- ---------- ------ -------- --------- ----- ---------
Balance, December 31,
2000..................... -- -- 15,240,218 1,524 179,624 (542,939) (320) (362,111)
Net Income............... 3,560 3,560
Issuance of preferred
stock.................. 96,058.98 95,637 95,637
Cumulative translation
adjustment............. (37) (37)
Unrealized gains on
derivative swaps at
adoption of SFAS No.
133.................... 456 456
Amortization to earnings
of unrealized gain on
derivative swap........ (456) (456)
Stock option credit...... (62) (62)
--------- ------- ---------- ------ -------- --------- ----- ---------
Balance, December 31,
2001..................... 96,058.98 $95,637 15,240,218 $1,524 $179,562 $(539,379) $(357) $(263,013)
========= ======= ========== ====== ======== ========= ===== =========
</Table>
The accompanying notes are an integral part of these financial statements.
F-5
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income.................................................. $ 41,588 $ 9,787 $ 3,560
-------- -------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary loss........................................ -- -- 15,200
Depreciation and amortization............................. 4,032 8,837 9,762
Amortization of debt issuance costs and other............. 3,251 2,942 2,473
Provision for doubtful accounts........................... 1,662 2,801 2,254
Provision for losses on inventories....................... 1,342 5,256 2,803
Loss (gain) on disposition of assets...................... (10,650) (2,738) 495
Stock option expense (credit)............................. 912 (351) (62)
Realized gains on investments............................. -- (345) --
Equity in earnings of an affiliate........................ (1) (35) --
Deferred tax expense (benefit)............................ 1,591 (2,102) (569)
Minority interest......................................... 163 92 --
Changes in assets and liabilities:
Accounts receivable..................................... (8,867) 1,465 (4,349)
Inventories............................................. (13,048) 9,965 (15,762)
Other current assets.................................... (2,946) 2,474 1,166
Other assets............................................ 179 (60) (205)
Accounts payable........................................ 6,948 (3,293) 7,979
Income taxes payable.................................... (1,243) (1,598) 1,510
Other accrued liabilities............................... 3,160 (5,096) 14,040
-------- -------- --------
Total adjustments..................................... (13,515) 18,214 36,735
-------- -------- --------
Net cash provided by operating activities............. 28,073 28,001 40,295
-------- -------- --------
Cash flows from investing activities:
Proceeds from the sale of investments..................... -- 2,000 --
Deposit on new warehouse and distribution facility........ (750) -- --
Purchases of property, plant and equipment................ (12,703) (34,135) (15,088)
Purchase of minority ownership of interest of
subsidiary.............................................. -- (7,800) --
Payments received on notes receivable..................... 6,464 211 --
Proceeds from the sale of property, plant and equipment... -- 5,409 250
Decrease in restricted cash............................... -- 13,690 --
Other..................................................... 304 -- --
-------- -------- --------
Net cash used in investing activities................. (6,685) (20,625) (14,838)
-------- -------- --------
Cash flows from financing activities:
Capital contribution from minority owner of subsidiary.... 2,301 642 --
Proceeds from borrowings under revolving loan facility.... -- 50,000 14,000
Payments under revolving loan facility.................... -- (20,000) (44,000)
Payments under capital lease obligations.................. -- (719) (1,324)
Proceeds from issuance of preferred stock................. 120 -- 231
Payments under the Senior Credit Facility................. (32,695) (27,178) (20,339)
Debt issuance costs....................................... -- (446) (1,574)
Preferred stock issuance costs............................ -- -- (422)
-------- -------- --------
Net cash (used in) provided by financing activities... (30,274) 2,299 (53,428)
-------- -------- --------
Effect of cumulative translation adjustment................. 268 (361) (37)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (8,618) 9,314 (28,008)
Cash and cash equivalents at beginning of year.............. 41,024 32,406 41,720
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 32,406 $ 41,720 $ 13,712
======== ======== ========
Supplemental disclosures:
Cash payments during the period for:
Income taxes paid....................................... $ 24,210 $ 9,666 $ 10,692
Interest paid........................................... 40,692 42,322 36,495
Non-cash investing and financing activities:
Execution of capital leases for the purchase of
furniture and equipment................................ 1,248 7,684 --
Debt converted into preferred stock..................... -- -- 95,828
</Table>
The accompanying notes are an integral part of these financial statements.
F-6
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND
Home Interiors & Gifts, Inc. ("HI"), and its subsidiaries (the "Company"),
is a direct seller of home decorative accessories using the "party plan" method
whereby members of its non-employee, independent sales representatives
("Displayers") conduct shows in the homes of potential customers. The Company
believes that in-home shows provide a comfortable environment where the unique
benefits and attributes of the Company's products can be demonstrated in a more
effective manner than the typical retail setting.
The Company has been located in Dallas, Texas since its inception in 1957.
Currently, a majority of the Company's outstanding capital stock is owned of
record by affiliates of Hicks, Muse, Tate & Furst Incorporated, a Dallas based
Texas corporation ("Hicks Muse"). Approximately 41% of the dollar volume of
products purchased by the Company in 2001 were purchased from, and manufactured
by, the Company's subsidiaries. The Company's subsidiaries sell substantially
all of their products to the Company.
The following is a brief description of the Company's subsidiaries, each of
which is wholly owned:
- Dallas Woodcraft Company, LP (formerly Dallas Woodcraft, Inc.) ("DWC")
manufactures framed artwork and mirrors using custom-designed equipment.
- GIA, Inc. ("GIA") manufactures various types of molded plastic products
using custom-designed equipment. In April, 2000, the Company consolidated
its Homco, Inc. ("Homco") operations into its GIA facilities in Grand
Island, Nebraska and sold the Homco facility in McKinney, Texas. Prior to
April 2000, Homco manufactured molded plastic products similar to those
manufactured by GIA.
- Laredo Candle Company, L.P. ("Laredo Candle") manufactures candles using
custom-designed equipment. Spring Valley Scents, Inc. ("SVS") is the
general partner of Laredo Candle.
- Subsidiaries of the Company in Mexico and Puerto Rico provide sales
support services to the international Displayers.
- Business operations were initiated in Canada in September 2001 and
consisted primarily of start-up activities. The Company has not yet
formed a separate legal entity to conduct its Canadian operations.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of the Company.
All significant inter-company balances and transactions have been eliminated in
the consolidation.
The financial statements, having been prepared in conformity with generally
accepted accounting principles, require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenue and expenses during reporting periods. Actual results could differ from
those estimates.
FINANCIAL INSTRUMENTS
The Company considers all liquid interest-bearing instruments with a
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash and cash equivalents at financial institutions in excess
of federally insured limits.
The Company has historically used interest rate swap agreements to limit
the effect of changes in interest rates on its variable rate long-term
borrowings. Periodic amounts paid or received under the swap agreements are
recorded as part of interest expense. The swaps have historically contained
option provisions, which are separately valued and adjusted to market quarterly.
Any resulting gain or loss is included in other income (expense). There were no
outstanding interest rate swaps at December 31, 2001.
F-7
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of adopting SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133"), effective January 1,
2001, the Company transferred a liability balance of approximately $456,000
related to the deferred gain on the terminated swap portion of an interest rate
swap to Other Comprehensive Income. This balance was fully amortized into
earnings as an adjustment to interest expense during 2001.
INVENTORIES
Inventories are stated at the lower of cost or current market price. Cost
is determined using 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 costs of developing software, including
programming and enhancements, are capitalized and amortized over the estimated
useful lives once the software is placed in service. Software training costs,
maintenance and repairs are expensed as incurred. When assets are sold or
otherwise disposed of, costs and related accumulated depreciation are removed
from the financial statements and any resulting gains or losses are included in
operating income.
SELF INSURANCE
The Company is primarily self-insured for workers' compensation.
Self-insurance liabilities are based on claims filed and estimates for claims
incurred but not reported. These liabilities are not discounted.
INCOME TAXES
The Company files its federal income tax return on a consolidated basis.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes, based upon enacted tax rates in effect for the
periods the tax differences are expected to be settled or realized.
SALES RECOGNITION
As a result of adopting Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101), effective January 1, 2000,
revenue from product sales is recognized upon receipt of shipment by the
Displayers. Prior to the adoption of SAB 101, revenue was recognized when
products were shipped. Provisions for discounts, returns, and other adjustments
are provided for in the same period the related sales are recorded.
There was no cumulative effect adjustment upon adoption of SAB 101 as the
Company had historically ceased shipping product to Displayers during the latter
part of December.
SHIPPING AND HANDLING
The costs associated with shipping and handling are separately disclosed as
part of operating expenses in the consolidated statement of operations and
comprehensive income.
F-8
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The balance sheet accounts of the Company's foreign operations are
translated into U.S. dollars at the year-end exchange rate. Revenues and
expenses are translated at the weighted average exchange rate for each period.
Translation gains and losses are included in shareholders' deficit.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances to
conform with current year presentation.
MARKETABLE SECURITIES
In November 2000, the Company sold marketable securities classified as
available for sale. At that time, these securities had a book value of $1.7
million. Cash in the amount of $2.0 million was received in exchange for the
stock resulting in a realized gain of $0.3 million.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and other current liabilities approximate fair market value due
to their short maturities. The carrying amounts of variable rate long-term debt
also approximate fair market value as their interest rates are based on current
interest rates. The Notes had a carrying value of $200.0 million as of December
31, 2000 and $149.1 million as of December 31, 2001. The Notes had a fair value
of approximately $71.0 million as of December 31, 2000 and $113.6 million as of
December 31, 2001 based upon quoted market prices. The interest rate swap had a
negative carrying value and a negative fair market value of $38,000 as of
December 31, 2000. As of December 31, 2001 the interest rate swap had expired.
3. ACQUISITION OF LAREDO CANDLE COMPANY
Prior to July 2000, the Company owned a 60% majority interest in Laredo
Candle. In July 2000, the Company purchased the remaining 40% minority interest
in Laredo Candle for cash of $8.7 million. Of the total purchase price, $900,000
was held in escrow and was subject to offset if certain performance standards
were not satisfied by Laredo Candle during the twelve months ended June 30,
2001. In July 2001, the entire $900,000 held in escrow was released and paid to
the seller. The Company accounted for the acquisition using the purchase method
of accounting. Goodwill of $4.2 million, representing the excess of cost over
the fair value of net assets acquired, is being amortized over 15 years. See
Note 18.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of December 31 (in
thousands):
<Table>
<Caption>
2000 2001
------- -------
Trade receivables........................................... $11,374 $12,368
Other....................................................... 201 1,349
------- -------
11,575 13,717
Allowance for doubtful accounts............................. (1,967) (2,014)
------- -------
$ 9,608 $11,703
======= =======
</Table>
F-9
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories, net consisted of the following as of December 31 (in
thousands):
<Table>
<Caption>
2000 2001
------- -------
Raw materials............................................... $ 5,697 $ 4,406
Work in process............................................. 1,563 2,169
Finished goods.............................................. 25,089 38,399
------- -------
$32,349 $44,974
Inventory allowance......................................... (4,856) (4,522)
------- -------
$27,493 $40,452
======= =======
</Table>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of December 31
(in thousands):
<Table>
<Caption>
ESTIMATED
USEFUL LIFE 2000 2001
----------- -------- --------
Land................................................ $ 4,104 $ 3,716
Buildings and improvements.......................... 5-40 years 35,761 37,602
Computer hardware and software...................... 5 years 12,555 18,527
Equipment, furniture and fixtures................... 3-10 years 39,366 46,517
-------- --------
$ 91,786 $106,362
Accumulated depreciation and amortization........... (35,111) (44,290)
-------- --------
56,675 62,072
Equipment, software and hardware implementations in
process........................................... 2,731 3,092
Distribution automation in process.................. 1,194 --
-------- --------
$ 60,600 $ 65,164
======== ========
</Table>
Depreciation expense was $4.0 million, $7.9 million, and $9.4 million for
1999, 2000, and 2001, respectively. Equipment, furniture and fixtures
include assets held under capital lease obligations, with a cost of $8.8
million and accumulated amortization of $0.7 million and $2.3 million as of
December 31, 2000 and 2001, respectively.
7. INCOME TAXES
The components of earnings before income tax expense and extraordinary gain
for the years ended December 31 are as follows:
<Table>
<Caption>
1999 2000 2001
------- ------- -------
Domestic................................................ 64,955 15,114 27,043
Foreign................................................. (400) 565 2,388
------- ------- -------
$64,555 $15,679 $29,431
======= ======= =======
</Table>
F-10
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of income tax expense for the years ended December 31 are as
follows (in thousands):
<Table>
<Caption>
1999 2000 2001
------- ------- -------
Current:
Federal................................................. $19,143 $ 7,032 $10,946
Foreign................................................. -- -- 69
State................................................... 2,233 962 225
------- ------- -------
21,376 7,994 11,240
Deferred, net........................................... 1,591 (2,102) (569)
------- ------- -------
$22,967 $ 5,892 $10,671
======= ======= =======
</Table>
A reconciliation of income tax expense computed at the federal statutory
rate applied to income before income taxes and extraordinary loss to income tax
expense at the Company's effective tax rate for the years ended December 31 is
as follows (in thousands):
<Table>
<Caption>
1999 2000 2001
------- ------ -------
Federal statutory rate applied to income before income
taxes and extraordinary loss........................... $22,594 $5,337 $10,301
State income taxes, net of federal benefit............... 1,783 612 501
Other.................................................... (1,410) (57) (131)
------- ------ -------
$22,967 $5,892 $10,671
======= ====== =======
</Table>
The components of the net deferred tax balances as of December 31 are as
follows (in thousands):
<Table>
<Caption>
2000 2001
------- -------
Inventories................................................. $ 2,021 $ 2,077
Allowance for doubtful accounts............................. 703 648
Debt issuance costs and stock options....................... 1,035 710
Investments................................................. 198 169
Accrued employee benefits and Displayer incentives.......... 2,922 4,067
Other....................................................... 2,758 3,500
------- -------
Gross deferred tax assets................................... 9,637 11,171
Deferred gain on sale of facilities......................... (5,318) (5,318)
Property, plant and equipment............................... (465) (219)
Investments................................................. (18) --
Other....................................................... (1,337) (1,671)
------- -------
Net deferred tax asset...................................... 2,499 3,963
Less current deferred tax asset............................. 4,353 6,540
------- -------
Noncurrent deferred income tax liability.................... $ 1,854 $ 2,577
======= =======
</Table>
A valuation allowance is required against deferred tax assets if, based on
the weighted of available evidence, it is more likely than not that some of or
all of the deferred tax assets will not be realized. As of December 31, 2000 and
2001, no valuation reserve was required.
F-11
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CORPORATE HEADQUARTERS FACILITY
On January 3, 2000, the Company entered into a ten-year lease for a new
corporate headquarters location in Dallas, Texas. The Company's offices occupied
approximately 75,000 square feet of office space at an annual rent of
approximately $1.6 million. Tenant improvements to customize the space totaled
approximately $2.9 million, of which approximately $2.0 million was borne by the
landlord as improvement allowances. In December 2000, the Company moved the
corporate headquarters from these facilities into the new warehouse and
distribution facility.
In 2001, the Company and a subtenant signed an agreement to sublease
approximately 44,000 square feet of the corporate headquarters leased space
commencing on February 2001 through January 2010. The rental rate begins at
$67,000 per month and increases over the life of the lease to $80,000 per month.
The Company has also agreed to provide the subtenant with an allowance for
tenant improvements of $150,000.
Included in general and administrative expenses for 2000 is $6.4 million
primarily related to an accrual for the net present value of estimated future
abandoned lease commitments, as adjusted for estimated future sublease rental
income and deferred lease incentives of $3.8 million, and accelerated
amortization on related leasehold improvements of $2.6 million.
Included in other long term liabilities is the net present value of the
abandoned lease commitments of approximately $4.4 million and $3.6 million as of
December 31, 2000 and 2001, respectively.
9. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following as of December 31,
2000 and 2001 (in thousands):
<Table>
<Caption>
2000 2001
------- -------
Interest payable............................................ $ 2,300 $ 1,294
Employee benefit plan contributions......................... 1,030 1,665
Sales taxes payable......................................... 2,354 3,408
Other taxes payable......................................... 1,427 1,335
Deferred revenue............................................ -- 3,626
Other current liabilities................................... 5,115 3,964
------- -------
$12,226 $15,292
======= =======
</Table>
F-12
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS
A summary of long-term debt and capital lease obligations as of December
31, is as follows (in thousands):
<Table>
<Caption>
2000 2001
-------- --------
Notes, interest at 10.125% with semi-annual interest
payments due on June 1 and December 1..................... $200,000 $149,100
Tranche A Loan, interest at LIBOR plus an applicable margin
(8.76% and 4.66% as of December 31, 2000 and 2001)........ 65,844 55,000
Tranche A Loan, interest at LIBOR plus an applicable margin
(8.21% as of December 31, 2000)........................... 65,843 --
Tranche B Loan, interest at LIBOR plus an applicable margin
(9.14% and 5.16% as of December 31, 2000 and 2001)........ 47,720 106,859
Tranche B Loan, interest at LIBOR plus an applicable margin
(9.33% as of December 31, 2000)........................... 47,719 --
Revolving Loans, interest at Swing Line (9.25% as of
December 31, 2000)........................................ 10,000 --
Revolving Loans, interest at Base Rate (9.75% as of December
31, 2000)................................................. 20,000 --
Capitalized lease obligations, collateralized by certain
equipment furniture and fixtures, rates ranging from 5.21%
to 7.80%.................................................. 8,207 6,883
-------- --------
465,333 317,842
Less current maturities..................................... (58,503) (15,031)
-------- --------
$406,830 $302,811
======== ========
</Table>
In June of 1998 the Company issued $200.0 million of Notes and entered into
a $340.0 million Senior Credit Facility, which includes $40.0 million of
revolving loans (the "Revolving Loans"). The Senior Credit Facility provides for
a $200.0 million term loan (the "Tranche A Loan"), a $100.0 million term loan
(the "Tranche B Loan"), and $40.0 million of Revolving Loans. The Company may
use the Revolving Loans for letters of credit of up to $15.0 million. Letters of
credit of $1.5 million were outstanding as of December 31, 2001 and 2000.
Borrowings under the Senior Credit Facility required quarterly principal
and interest payments. The Tranche A Loan and Revolving Loans mature on June 30,
2004. The Tranche B Loan matures on June 30, 2006. The Company may, at its
option, prepay the term loans without premium or penalty. Additionally, the
Company may reduce or eliminate its revolving loan commitment prior to maturity.
The Senior Credit Facility is guaranteed unconditionally on a senior basis by
the Company's wholly-owned domestic subsidiaries and is collateralized by a lien
on substantially all assets of the Company and its wholly-owned subsidiaries.
There are no material restrictions on the Company's ability to obtain funds from
its wholly owned subsidiaries by dividend or otherwise.
The loans under the Senior Credit Facility bear interest, at the Company's
election, at either the LIBOR Rate plus an applicable margin, the Base Rate
Basis plus an applicable margin or at a Swing Line Rate that is equal to the
Base Rate less a 0.5% commitment fee. The Base Rate Basis is the higher of the
prime rate of Bank of America or the federal funds effective rate plus 0.5%. The
applicable LIBOR margin is 2.0% for the Tranche A Loan and the Revolving Loans
and 2.5% for the Tranche B Loan. The applicable Base Rate Basis margin is 0.75%
for the Tranche A Loan and the Revolving Loans, and 1.25% for the Tranche B
Loan. The interest rates on all borrowings outstanding under the Senior Credit
Facility as of December 31, 2000 and 2001 were based on LIBOR. The
weighted-average interest rate on the Tranche A and Tranche B borrowings
F-13
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding at December 31, 2000 and 2001 was 8.80% and 4.99%, respectively. The
applicable margin with respect to the loans will be eligible for certain
performance pricing step-downs.
As of December 31, 2000, $30.0 million was outstanding under the Revolving
Loans. The Company borrowed $10.0 million of the revolver under a Swing Line
advance and the remaining $20.0 million was drawn under a Base Rate advance. The
weighted-average interest rate on the Revolving Loans outstanding at December
31, 2000 was 10.08%. The Revolving Loans are subject to a commitment fee based
on the undrawn portion of the Revolving Loans. The commitment fee is eligible
for certain performance pricing step-downs and was 0.5% per annum as of December
31, 2000 and 2001. Commitment fees of approximately $173,000 and $107,600 are
included in interest expense in 2000 and 2001, respectively.
The Notes bear interest at 10.125% per year, payable semi-annually in
arrears on June 1 and December 1 of each year. The Notes mature on June 1, 2008
and are guaranteed, unconditionally, jointly and severally, on an unsecured
senior subordinated basis by all of the Company's wholly owned domestic
subsidiaries. Except as set forth below, the Notes are not redeemable by the
Company prior to June 1, 2003. Thereafter, the Notes are subject to redemption
by the Company, in whole or in part, at specified redemption prices.
The terms of the Notes and Senior Credit Facility include significant
operating and financial restrictions, such as limits on the Company's ability to
incur indebtedness, create liens, sell assets, engage in mergers or
consolidations, make investments and pay dividends. In addition, under the
Senior Credit Facility, the Company is required to comply with specified
financial ratios and tests, including fixed charge coverage ratios, maximum
leverage ratios, capital expenditure measurements, and EBITDA measurements.
Subject to the financial ratios and tests, the Company will be required to make
certain mandatory prepayments of the term loans on an annual basis beginning in
March 2003.
In January 2001, a limited partnership that includes an affiliate of Hicks
Muse, certain members of the Donald J. Carter Jr. family (the "Carter Family"),
and their respective affiliates (the "Note Limited Partnership") acquired, in
the open market, $50.9 million aggregate principal amount of the Company's
10 1/8% Series B Senior Subordinated Notes due 2008 ("Notes") for approximately
$23.0 million plus accrued interest. In March 2001, another limited partnership
that includes an affiliate of Hicks Muse, certain members of the Carter Family,
and their respective affiliates (the "Debt Limited Partnership") purchased $44.9
million of the Company's senior bank debt for approximately $35.6 million. This
transaction is discussed further below and in Note 13.
Effective March 30, 2001, the Company entered into an amendment to the
Senior Credit Facility which, among other things: (i) reduced the Revolving
Loans available to the Company from $40.0 million to $30.0 million; (ii)
increased pricing by 75 basis points above previous levels; (iii) provided for
an amendment fee of 25 basis points immediately payable to the Lenders who
executed the amendment prior to March 31, 2001; (iv) provided for a fee of $3.0
million payable to the Lenders, with the payment of such fee deferred until
September 30, 2001, and which such fee was forgiven in the event that certain
existing equity holders or their affiliates contribute $40.0 million in equity
to the Borrower prior to September 30, 2001; (v) reset the leverage and interest
coverage ratios applicable through the fiscal quarter ended December 31, 2001;
and (vi) added additional financial covenants with respect to minimum liquidity
and EBITDA. Further limitations related to capital lease obligations, liens,
acquisitions, payment of management fees to affiliates, letters of credit, loans
and advances to suppliers, and asset sales were also added to the Senior Credit
Facility. Payment terms of interest changed from quarterly payments to monthly
payments. Additionally, the amendment to the Senior Credit Facility waived
compliance with the minimum interest coverage and maximum leverage ratios of the
Senior Credit Facility for the quarter ended December 31, 2000.
As a result of the new financial covenant to measure liquidity, the Company
classified $25.0 million of the balance outstanding under the Revolving Loans as
a current liability at December 31, 2000. This represents the amount that could
potentially be required to be repaid pursuant to this covenant in 2001.
F-14
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, in connection with the amendment to the Senior Credit
Facility, the Company incurred debt issuance costs of $200,000 that have been
deferred, and the Company has incurred $1.5 million in costs related to legal
and consulting fees as of December 31, 2001, which are included in general and
administrative expense.
Additionally, in connection with the Debt Restructuring and Senior
Preferred Stock issuances, the Company incurred additional debt issuance costs
of $1.3 million which have been deferred and $422,000 in costs related to the
Senior Preferred Stock issuance which has been recorded as a reduction to Senior
Preferred Stock.
The Company completed its Debt Restructuring on July 16, 2001 through the
following transactions:
- Transfer of $50.9 million aggregate principal amount of Notes from the
Note Limited Partnership to the Company in exchange for 50,900.00 shares
of 12.5% Senior Convertible Preferred Stock, par value $.01 per share,
issued by the Company ("Senior Preferred Stock").
- Transfer of $44.9 million of the Company's senior bank debt from the Debt
Limited Partnership to the Company in exchange for 44,927.98 shares of
Senior Preferred Stock.
- The Debt Limited Partnership purchased an additional 231 shares of Senior
Preferred Stock for $231,000 cash.
- The Company converted $44.9 million of the Tranche A Loan of the Senior
Credit Facility into the Tranche B Loan of the Senior Credit Facility.
- The Company's Senior Credit Facility was amended and restated to provide
for, among other things, an increase of $10 million in the revolving
credit line and the extension of the maturity dates of the Tranche A Loan
and the Tranche B Loan for an additional six month period.
As a result of the foregoing transactions, for financial reporting
purposes, the Company wrote off $2.4 million in unamortized debt issuance costs
(with a related income tax benefit of $902,000) and recorded $13.7 million of
income taxes. These transactions are reflected in the Statement of Operations as
an extraordinary loss.
The Company will not report significant net taxable income in respect of
the Debt purchase transactions and the issuance of the Preferred Stock. However,
if tax is found to be due and payable by the Company with respect to such
transactions prior to the termination of the Senior Credit Facility, the Note
Limited Partnership and the Debt Limited Partnership are required, at their
option: (i) to make a cash contribution to the capital of the Company; (ii) to
purchase shares of common stock of the Company at the then-current market value;
or (iii) to purchase additional shares of Preferred Stock, in each case in an
aggregate amount equal to the net amount of tax paid by the Company.
Included in general and administrative expenses as of December 31, 2001 are
approximately $1.9 million in costs related to legal and consulting fees
associated with the Company's Debt Restructuring.
In conjunction with the Debt Restructuring, the Company designated
96,058.98 shares of Senior Preferred Stock. The shares of Senior Preferred stock
shares have a par value of $0.01 per share and a liquidation preference of
$1,000 per share, together with all declared or accrued and unpaid dividends
thereon. In the event of any liquidation of the Company, holders of shares of
Senior Preferred Stock shares shall be paid the liquidation preference plus all
accrued dividends to the date of liquidation before any payments are made to the
Common Stock holders. Dividends, as and if declared by the Company's Board of
Directors, are cumulative and payable quarterly beginning October 1, 2001 at the
rate of 12.5% of the liquidation preference per annum. Each share of Senior
Preferred Stock is convertible at any time at the option of the holder for
51.49330587 shares of the Company's Common Stock.
F-15
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holders of Senior Preferred Stock are entitled to the number of votes equal
to the number of shares of the Company's Common Stock into which such shares of
Senior Preferred Stock are convertible on the record date for such vote. Each
holder has a preemptive right to purchase a pro rata share of future securities
issuances, excluding public securities issued under applicable securities laws,
securities issued to employees and Displayers for incentive compensation and
securities issued in exchange for assets in the normal course of business.
The table below presents the net loss applicable to common shareholders for
the year ended December 31, 2001 (in thousands):
<Table>
Net income.................................................. $ 3,560
Less: 12.5% cumulative preferred stock dividends............ 5,527
-------
Net loss applicable to common shareholders.................. $(1,967)
=======
</Table>
No dividends have been paid or declared as of December 31, 2001.
CAPITAL LEASES
In December 1999, the Company entered into capital leases with Bank One
Leasing for certain equipment associated with the automated order fulfillment
system being used in the new warehouse and distribution facility. The lessor
funded the equipment purchase when construction of the automated order
fulfillment system was completed in April 2000. The initial term of each of the
leases is seven years. Interest is imputed at approximately 6.1% per annum.
Total cost of the equipment funded under this lease was approximately $6.2
million. The Company also leases certain office furniture and equipment under
capital lease obligations. Future minimum lease payments for the Company's
assets held under capital lease obligations as of December 31, 2001 are as
follows (in thousands):
<Table>
Years ending December 31:
2002........................................................ $ 1,951
2003........................................................ 1,556
2004........................................................ 1,366
2005........................................................ 1,355
2006........................................................ 1,344
Thereafter.................................................. 479
-------
Total minimum lease obligations............................. $ 8,051
Less: amounts representing interest......................... (1,168)
-------
Present value of minimum lease obligations.................. $ 6,883
Less: current maturities.................................... (1,531)
-------
Long-term capital lease obligations......................... $ 5,352
=======
</Table>
F-16
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents a summary of the current maturities of
long-term debt and capital leases as of December 31 (in thousands):
<Table>
<Caption>
TOTAL
--------
2002........................................................ $ 15,031
2003........................................................ 19,760
2004........................................................ 27,142
2005........................................................ 48,205
2006........................................................ 58,132
Thereafter.................................................. 149,572
--------
$317,842
========
</Table>
11. BENEFIT PLANS
EMPLOYEE BENEFIT PLANS
The Company's 401(k) plan covers all full-time employees who have at least
six months of service and are age 18 or older. Beginning in 1999, the 401(k)
plan generally allows employees to contribute up to 16% of their base salary in
various investment alternatives and provides for Company matching contributions
of up to 4%. The Company's matching contributions totaled $752,000 and $803,000
in 2000 and 2001, respectively. Additionally, the Board may make discretionary
contributions to the 401(k) plan at any time. The Board approved discretionary
contributions of $1.0 million and $1.5 million to the 401(k) for 2000 and 2001.
STOCK-BASED COMPENSATION PLANS
The Company has adopted stock option plans for key employees (the "Key
Employee Stock Option Plan") and for Displayers and other independent
contractors (the "Independent Contractor Stock Option Plan"). A trust (the
"Stock Option Trust") holds and distributes stock options granted under the
Independent Contractor Stock Option Plan.
Options under both plans are issued at an exercise price equal to the
estimated fair market value of common stock on the date of grant. Options
granted under both plans 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.
KEY EMPLOYEE STOCK OPTION PLAN
Options for a total of 1,353,924 shares of common stock were available for
grant upon the adoption of the Key Employee Stock Option Plan. As the Company's
common stock is not publicly traded, the fair value of options granted to key
employees was estimated on the date of grant using the minimum value method of
option pricing and the assumptions set forth below in order to determine
compensation expense for disclosure purposes only in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The Company
accounts for options issued under the Key Employee Stock Option Plan in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25").
INDEPENDENT CONTRACTOR STOCK OPTION PLAN
Options for a total of 338,481 shares were available for grant to the Stock
Option Trust for the benefit of certain Displayers and other independent
contractors upon the adoption of the Independent Contractor Stock Option Plan.
The fair value of each stock option grant is estimated on the date of the grant
using the Black-Scholes method of option pricing based on the assumptions set
forth below in order to determine
F-17
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation expense for the period. As the Company's common stock is not
publicly traded, a volatility factor for a peer group of public companies is
utilized in the Black-Scholes model. The Company accounts for options issued
under the Independent Contractor Stock Option Plan in accordance with SFAS No.
123. Compensation expense (credit) totaled $912,000, ($351,000), and ($62,000)
for 1999, 2000 and 2001.
Key information related to the Company's stock-based compensation plans is
summarized below:
<Table>
<Caption>
INDEPENDENT
WEIGHTED CONTRACTOR WEIGHTED
KEY EMPLOYEE AVERAGE STOCK AVERAGE
STOCK OPTION EXERCISE OPTION EXERCISE
PLAN PRICE PLAN PRICE
------------ -------- ----------- --------
Options outstanding as of December 31,
1998.................................... 984,432 $18.05 272,291 $18.05
Granted................................. 42,192 $21.33 22,230 $21.33
Exercised............................... (1,108) $18.05 -- $ --
Forfeited............................... (14,404) $18.05 (7,202) $18.05
--------- ---------
Options outstanding as of December 31,
1999.................................... 1,011,112 $18.19 287,319 $18.17
Granted................................. 76,391 $18.05 30,554 $21.26
Exercised............................... -- -- -- --
Forfeited............................... (103,556) $18.34 (4,771) $18.63
Expired................................. -- -- (1,705) $18.14
--------- ---------
Options outstanding as of December 31,
2000.................................... 983,947 $18.16 311,397 $18.47
Granted................................. 25,000 $18.05 8,290 $21.33
Exercised............................... -- --
Forfeited............................... (25,484) $18.05 (11,363) $18.72
Expired................................. (24,376) $18.05 (8,853) $18.31
--------- ---------
Options outstanding as of December 31,
2001.................................... 959,087 $18.17 299,471 $18.68
Options exercisable as of December 31,
2001.................................... 523,667 158,832
Weighted average remaining contractual
life.................................... 6.7 years 6.8 years
Valuation assumptions:
Expected term........................... 6.0 years 5.3 years
Expected dividend yield................. 0.00% 0.00%
Expected volatility..................... -- 35.26%
Risk-free interest rate................. 4.46% 4.57%
</Table>
The weighted average fair value of options granted in 1999, 2000, and 2001
under the Key Employee Stock Option Plan and Independent Stock Option Plan was
$5.97, $4.66 and $2.62, and $9.92, $9.27 and $5.43, respectively.
COMPENSATION CHARGE
SFAS No. 123 establishes a fair value basis of accounting for stock-based
compensation plans. The effects of applying SFAS No. 123 as shown below are not
indicative of future amounts. Had the compensation cost for the Company's Key
Employee Stock Option Plan been determined consistent with SFAS No. 123,
F-18
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's compensation cost and net income for 1999, 2000, and 2001 would
approximate (in thousands):
<Table>
<Caption>
KEY EMPLOYEE STOCK OPTION PLAN
-------------------------------
1999 2000 2001
--------- -------- --------
SFAS No. 123 Compensation Cost:
As reported............................................. -- -- --
Pro forma............................................... $ 998 $ 815 $ 914
Net Income:
As reported............................................. $41,588 $9,787 $3,560
Pro forma............................................... $40,959 $9,273 $2,984
</Table>
12. RESTRUCTURING, REDUNDANCY AND REORGANIZATION
HOMCO RESTRUCTURING
On April 1, 2000, the Company discontinued operations at Homco's
manufacturing and warehouse facility in McKinney, Texas and transferred
operations to GIA's facility in Grand Island, Nebraska. The Company incurred
approximately $1.0 million of non-recurring costs related to the combination of
Homco's operations into GIA and recorded a non-recurring charge amount in the
statement of operations for the year ended December 31, 2000.
On May 15, 2000, the Company sold Homco's manufacturing and warehouse
facility to Donald J. Carter, Jr., the Company's Chairman of the Board and Chief
Executive Officer, for approximately $3.7 million. The Company used the proceeds
from the sale, together with approximately $1.7 million in proceeds from the
sale of another property, to purchase an undivided interest in the Company's new
warehouse and distribution facility. This exchange qualified as a Section 1031
like-kind exchange under the Internal Revenue Code.
REDUNDANT WAREHOUSE AND DISTRIBUTION COST
The Company's previously announced plan to consolidate its several
distribution centers into a single facility was contingent upon timely
integration and implementation of its automated order fulfillment system. This
plan anticipated a significant warehouse and distribution headcount reduction in
connection with the consolidation process. The Company encountered delays and
problems associated with the design and implementation of the automated order
fulfillment system and the overall productivity of the consolidated distribution
facility. These delays forced the Company to hire additional temporary laborers
and retain existing warehouse employees longer than originally anticipated.
In addition, the Company continued to operate two of its older manual order
fulfillment distribution facilities longer then was anticipated. In October
2000, one of the two manual operations was moved into the consolidated
distribution facility. The Company has extended the lease term on the other
manual distribution facility for a period of five years.
Redundant warehouse and distribution costs resulting from the issues
discussed above were approximately $6.1 million and $1.2 million for the year
ended December 31, 2000 and 2001, respectively. These costs consist primarily of
incremental labor associated with productivity issues at the new consolidated
distribution facility, costs of operating certain manual distribution centers
longer than anticipated and consolidation of the manual distribution centers
into the new distribution facility.
F-19
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REORGANIZATION COST
During 2000, the Company implemented a corporate reorganization plan that
included among other things, staff reductions and the elimination of excess
facility costs. As part of the reorganization, the Company has downsized various
departments. In December 2000, the Company relocated its corporate headquarters
to the new warehouse and distribution facility. As a result of the move, the
Company was able to sublet 44,000 square feet to a subtenant and has accelerated
amortization of the related leasehold improvements.
During 2001 in addition to redundant headquarter facility costs associated
with the Company's reorganization plan, the Company incurred non-capitalizable
legal fees related to obtaining a waiver for the Senior Credit Facility and Debt
Restructuring.
Included in selling and general and administrative expenses in the
consolidated statements of operations and comprehensive income are the following
amounts associated with the Company's reorganization plan as of December 31:
<Table>
<Caption>
2000 2001
------ ------
Staff reductions, excess facilities cost and other.......... $1,723 $3,177
Debt restructuring.......................................... -- 3,419
Lease abandonment costs and accelerated amortization of
leasehold improvements.................................... 6,474 --
------ ------
$8,197 $6,596
====== ======
</Table>
13. RELATED PARTY TRANSACTIONS
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 $385,000, $236,000 and $67,000 for legal services during 1999,
2000 and 2001. Amounts due to the law firm totaled $27,000, as of December 31,
2000. There were no amounts due as of December 31, 2001.
Another shareholder and former Director of the Company owns a company that
supplies inventory items to the Company and whose primary customer is the
Company. The Company paid the supplier approximately $30.9 million, $13.2
million, and $12.0 million during 1999, 2000 and 2001. Amounts due to this
supplier totaled approximately $1.1 million and $225,000 as of December 31, 2000
and 2001.
The Company owned 21% of the common stock of Charles W. Weaver
Manufacturing Company, a supplier whose primary customer is the Company. The
investment was sold on November 30, 2000 for $2.0 million resulting in a gain of
$0.3 million. The Company paid the supplier $10.7 million and $12.4 million
during 1999 and 2000, respectively. There were no amounts due this supplier as
of December 31, 2000.
The Company engages the services of a freight company controlled by former
Directors of the Company to handle a small portion of its freight. The Company
paid this freight company $108,000, $110,000 and $25,000 during 1999, 2000 and
2001 for its services. There were no amounts due this supplier as of December
31, 2000 and 2001.
In conjunction with the June 1998 Recapitalization, the Company entered
into an agreement requiring payment of a quarterly management fee to Hicks Muse
and reimbursement of general expenses. The management fee will be adjusted
annually, but in no event will the annual fee be less than $1.0 million or
exceed $1.5 million. Management fees and reimbursements of general expenses
totaled $1.2 million, $1.1 million and $1.0 million during 1999, 2000, and 2001,
respectively. In addition, if the Board requests Hicks Muse to perform
additional financial advisory services in the future, Hicks Muse will receive a
financial
F-20
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
advisory fee. The management agreement with Hicks Muse terminates on June 4,
2008 or earlier under certain circumstances.
On June 4, 1998, the Company entered into a five-year executive 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. In 1999, 2000, and 2001 the Company
paid the former chief executive officer approximately $201,000, $200,000 and
$266,000 pursuant to the terms and conditions of his executive employment
agreement.
The Company purchased inventory from a supplier who was also the minority
owner of Laredo Candle through July of 2000. The Company paid the supplier $12.7
million during 2000. As of December 31, 2000 there were no amounts due to the
minority owner.
During 1999, 2000 and 2001, Board fees were paid to certain outside
Directors which totaled $32,500, $33,000 and $24,000 respectively.
In January 2001, Hicks Muse acquired in the open market, $50.9 million
aggregate principal amount of the Company's 10 1/8% Series B Senior Subordinated
Notes due 2008 ("Notes") for approximately $23.0 million plus accrued interest.
In March 2001, the Debt Limited Partnership purchased $44.9 million of the
Company's senior bank debt for approximately $35.6 million.
During 2001, the Company contributed approximately $784,000 to a
not-for-profit charity organization that was established in September 2001. The
Company and the charity share some of the same officers. Amounts due to this
charitable organization totaled approximately $120,000 as of December 31, 2001.
During 2001, the Company paid a related party approximately $10,000 for
marketing related expenses.
14. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal proceedings incidental to its
normal business activities. Because most of the claims are covered by insurance,
management believes that the amounts, if any, which ultimately may be due in
connection with such lawsuits and claims would not have a material effect upon
the Company.
15. SEGMENT REPORTING
The Company's reportable segments are based upon functional lines of
business as follows:
- Home Interiors "HI" -- direct seller of home decorative accessories in
the United States;
- Manufacturing -- manufactures framed artwork and mirrors, as well as
various types of molded plastic products and candles for Home Interiors;
and
- International -- direct seller of home decorative accessories in Mexico
and Puerto Rico.
The Company evaluates the performance of its segments and allocates
resources to them based on earnings before interest, taxes, the effects of SAB
101, depreciation and amortization, reorganization costs, redundant warehouse
and distribution expenses, Homco restructuring, non-cash (expenses) credit for
stock options and gains on sale of assets, Senior Credit Facility restructure
and amendment fees and other income (expense) ("EBITDA"). The accounting
principles of the segments are the same as those described in Note 2. Segment
data includes intersegment sales. Eliminations consist primarily of intersegment
sales between Manufacturing and HI, as well as the elimination of the investment
in each subsidiary for
F-21
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated purposes. The table below presents information about reportable
segments used by the chief operation decision-maker of the Company as of and for
the years ended December 31 (in thousands):
<Table>
<Caption>
HI MANUFACTURING INTERNATIONAL ELIMINATIONS CONSOLIDATED
-------- ------------- ------------- ------------ ------------
1999
Net sales................ $499,515 $ 88,083 $ 9,098 $ (93,352) $503,344
EBITDA................... 83,426 17,993 (338) (946) 100,135
Total assets............. 145,222 42,577 825 (27,083) 161,541
Capital expenditures..... 5,449 7,101 245 (92) 12,703
2000
Net sales................ $452,792 $ 87,596 $15,148 $ (95,096) $460,440
EBITDA................... 56,461 17,670 695 433 75,259
Total assets............. 144,815 62,324 700 (42,441) 165,398
Capital expenditures..... 28,501 5,512 122 -- 34,135
2001
Net sales................ $448,819 $118,513 $22,896 $(128,535) $461,693
EBITDA................... 49,311 33,856 2,543 (768) 84,942
Total assets............. 115,330 117,250 2,944 (80,976) 154,548
Capital expenditures..... 11,452 3,553 83 -- 15,088
</Table>
The following table represents a reconciliation of consolidated EBITDA to
income before income taxes and extraordinary loss for the years ended December
31 (in thousands):
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
EBITDA............................................... $100,135 $ 75,259 $ 84,942
Effect of SAB 101.................................... -- -- (989)
Depreciation and amortization........................ (4,032) (8,837) (9,762)
Gain (loss) on disposition of assets................. 10,650 2,738 (495)
Stock option (expense) credit........................ (912) 351 62
Homco Restructuring.................................. -- (1,027) --
Redundant warehouse & distribution................... -- (6,089) (1,197)
Reorganization costs................................. -- (5,544) (3,177)
Debt Restructuring and waiver fees................... -- -- (3,419)
Interest income...................................... 2,978 2,208 1,017
Interest expense..................................... (44,081) (45,496) (37,982)
Other income (expense), net.......................... (183) 2,116 431
-------- -------- --------
Income before income taxes and extraordinary loss.... $ 64,555 $ 15,679 $ 29,431
======== ======== ========
</Table>
16. GUARANTOR FINANCIAL DATA
DWC, GIA, Homco, SVS, Laredo Candle and Homco Puerto Rico (collectively,
the "Guarantors") unconditionally, on a joint and several basis, guarantee the
Notes. Laredo Candle became a guarantor in connection with the purchase of the
40% ownership of Laredo Candle Company L.L.P. from the minority owner on July 3,
2000. Prior to the purchase, Laredo Candle was not a guarantor. The Company's
other subsidiaries, Home Interiors de Mexico and Home Interiors de Mexico
Services(the "Non-Guarantors") have not guaranteed the Notes. Guarantor and
Non-Guarantor financial statements on an individual basis are
F-22
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not significant and have been omitted. Accordingly, the following presents
financial information of the Guarantors and Non-Guarantors on a consolidating
basis (in thousands):
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<Table>
<Caption>
HI GUARANTORS NON GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
Net sales......................... $499,515 $84,590 $12,591 $(93,352) $503,344
Cost of good sold................. 259,266 63,950 8,891 (91,717) 240,390
-------- ------- ------- -------- --------
Gross profit.................... 240,249 20,640 3,700 (1,635) 262,954
Total selling, general and
administrative.................. 149,124 4,771 3,964 (746) 157,113
-------- ------- ------- -------- --------
Operating income (loss)......... 91,125 15,869 (264) (889) 105,841
Other income (expense), net....... (41,821) 1,107 (29) (543) (41,286)
-------- ------- ------- -------- --------
Income (loss) before income
taxes........................ 49,304 16,976 (293) (1,432) 64,555
Income taxes...................... 16,313 6,654 -- -- 22,967
-------- ------- ------- -------- --------
Net income (loss)............... $ 32,991 $10,322 $ (293) $ (1,432) $ 41,588
======== ======= ======= ======== ========
</Table>
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
HI GUARANTORS NON GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
Net sales......................... $452,792 $88,793 $13,951 $(95,096) $460,440
Cost of good sold................. 241,475 68,119 7,148 (93,228) 223,514
-------- ------- ------- -------- --------
Gross profit.................... 211,317 20,674 6,803 (1,868) 236,926
Total selling, general and
administrative.................. 173,427 2,633 6,399 (2,384) 180,075
-------- ------- ------- -------- --------
Operating income................ 37,890 18,041 404 516 56,851
Other income (expense), net....... (42,337) 1,512 (66) (281) (41,172)
-------- ------- ------- -------- --------
Income (loss) before income
taxes........................ (4,447) 19,553 338 235 15,679
Income taxes...................... (564) 6,456 -- -- 5,892
-------- ------- ------- -------- --------
Net income (loss)............... $ (3,883) $13,097 $ 338 $ 235 $ 9,787
======== ======= ======= ======== ========
</Table>
F-23
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
HI GUARANTORS NON GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
Net sales......................... $448,819 $119,996 $21,413 $(128,535) $461,693
Cost of good sold................. 235,010 81,885 10,314 (126,316) 200,893
-------- -------- ------- --------- --------
Gross profit.................... 213,809 38,111 11,099 (2,219) 260,800
Total selling, general and
administrative.................. 180,484 6,919 8,883 (1,451) 194,835
-------- -------- ------- --------- --------
Operating income................ 33,325 31,192 2,216 (768) 65,965
Other income (expense), net....... (37,604) 1,139 (69) -- (36,534)
-------- -------- ------- --------- --------
Income (loss) before income
taxes and extraordinary
loss......................... (4,279) 32,331 2,147 (768) 29,431
Income taxes...................... (1,606) 11,805 472 -- 10,671
-------- -------- ------- --------- --------
Income (loss) before extraordinary
loss............................ (2,673) 20,526 1,675 (768) 18,760
Extraordinary loss................ 15,200 -- -- -- 15,200
-------- -------- ------- --------- --------
Net income (loss)................. $(17,873) $ 20,526 $ 1,675 $ (768) $ 3,560
======== ======== ======= ========= ========
</Table>
F-24
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2000
<Table>
<Caption>
HI GUARANTORS NON GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- -------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents...... $ 40,823 $ 432 $ 465 $ -- $ 41,720
Accounts receivable, net....... 9,008 227 373 -- 9,608
Inventories, net............... 22,587 5,903 1,106 (2,103) 27,493
Other current assets........... 5,194 1,265 156 -- 6,615
Intercompany................... (21,648) 28,403 (2,124) (4,631) --
--------- ------- ------- -------- ---------
Total current assets...... 55,964 36,230 (24) (6,734) 85,436
Property, plant and equipment,
net............................ 43,393 16,844 363 -- 60,600
Investment in subsidiaries....... 31,993 3,714 -- (35,707) --
Debt issuance costs and other
assets......................... 13,465 5,897 -- -- 19,362
--------- ------- ------- -------- ---------
Total assets.............. $ 144,815 $62,685 $ 339 $(42,441) $ 165,398
========= ======= ======= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............... $ 19,937 $ 1,669 $ 85 $ (3,998) $ 17,693
Current maturities of long-term
debt and capital lease
obligations................. 58,503 -- -- -- 58,503
Other current liabilities...... 25,946 9,350 551 -- 35,847
--------- ------- ------- -------- ---------
Total current
liabilities............ 104,386 11,019 636 (3,998) 112,043
Long-term debt and capital lease
obligations, net of current
maturities..................... 406,830 -- -- -- 406,830
Other liabilities................ 7,638 998 -- -- 8,636
--------- ------- ------- -------- ---------
Total liabilities......... 518,854 12,017 636 (3,998) 527,509
--------- ------- ------- -------- ---------
Commitments and contingencies
(Note 14)
Shareholders' equity (deficit):
Common stock................... 1,524 1,010 14 (1,024) 1,524
Additional paid-in capital..... 179,624 15,470 1,014 (16,484) 179,624
Retained earnings (accumulated
deficit).................... (555,187) 34,188 (1,005) (20,935) (542,939)
Other.......................... -- -- (320) -- (320)
--------- ------- ------- -------- ---------
Total shareholders' equity
(deficit).............. (374,039) 50,668 (297) (38,443) (362,111)
--------- ------- ------- -------- ---------
Total liabilities and
shareholders' equity
(deficit).............. $ 144,815 $62,685 $ 339 $(42,441) $ 165,398
========= ======= ======= ======== =========
</Table>
F-25
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
<Table>
<Caption>
HI GUARANTORS NON GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- -------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents....... $ 13,757 $ (542) $ 497 $ -- $ 13,712
Accounts receivable, net........ 9,879 1,022 802 -- 11,703
Inventories..................... 36,238 5,141 1,944 (2,871) 40,452
Other current assets............ 5,743 1,707 186 -- 7,636
Intercompany.................... (42,484) 43,503 (1,019) -- --
--------- -------- ------- -------- ---------
Total current assets....... 23,133 50,831 2,410 (2,871) 73,503
Property, plant and equipment,
net............................. 47,213 17,591 360 -- 65,164
Investment in subsidiaries........ 34,247 43,858 -- (78,105) --
Debt issuance costs and other
assets.......................... 10,736 5,554 (409) -- 15,881
--------- -------- ------- -------- ---------
Total assets............... $ 115,329 $117,834 $ 2,361 $(80,976) $ 154,548
========= ======== ======= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................ $ 22,697 $ 2,210 $ 133 $ 632 $ 25,672
Current maturities of long-term
debt......................... 15,031 -- -- -- 15,031
Other current liabilities....... 35,167 15,522 887 -- 51,576
--------- -------- ------- -------- ---------
Total current
liabilities............. 72,895 17,732 1,020 632 92,279
Long-term debt, net of current
maturities...................... 302,811 -- -- -- 302,811
Deferred income taxes............. 20,973 1,498 -- -- 22,471
--------- -------- ------- -------- ---------
Total liabilities.......... 396,679 19,230 1,020 632 417,561
--------- -------- ------- -------- ---------
Commitments and contingencies (see
Note 14)
Shareholders' equity (deficit):
Preferred stock.............. 95,637 -- -- -- 95,637
Common stock.................... 1,524 1,000 14 (1,014) 1,524
Additional paid-in capital...... 179,562 48,471 1,014 (49,485) 179,562
Retained earnings (accumulated
deficit)..................... (558,073) 49,133 670 (31,109) (539,379)
Other........................... -- -- (357) -- (357)
--------- -------- ------- -------- ---------
Total shareholders' equity
(deficit)............... (281,350) 98,604 1,341 (81,608) (263,013)
--------- -------- ------- -------- ---------
Total liabilities and
shareholders' equity
(deficit)............... $ 115,329 $117,834 $ 2,361 $(80,976) $ 154,548
========= ======== ======= ======== =========
</Table>
F-26
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CASH FLOW INFORMATION
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
HI GUARANTORS NON GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
Net cash provided by (used in)
operating activities............ $ 41,281 $ 1,684 $ (138) $(14,754) $ 28,073
Net cash provided by (used in)
investing activities............ (17,284) (1,974) (2,436) 15,009 (6,685)
Net cash provided by (used in)
financing activities............ (32,738) -- 2,301 163 (30,274)
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------
HI GUARANTORS NON GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
Net cash provided by (used in)
operating activities............ $ 17,478 $ 10,563 $ 378 $(418) $ 28,001
Net cash used in investing
activities...................... (9,999) (10,504) (122) -- (20,625)
Net cash provided by financing
activities...................... 1,657 642 -- -- 2,299
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------------
HI GUARANTORS NON GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- -------------- ------------ ------------
Net cash provided by operating
activities...................... $ 37,815 $ 2,328 $152 $-- $ 40,295
Net cash used in investing
activities...................... (11,449) (3,306) (83) -- (14,838)
Net cash used in financing
activities...................... (53,428) -- -- -- (53,428)
</Table>
17. QUARTERLY RESULTS (UNAUDITED)
The following table summarizes (in thousands) the effect of SAB 101 on the
quarters ended for the year 2000:
<Table>
<Caption>
TOTAL
MARCH 31, 2000 JUNE 20, 2000 SEPTEMBER 20, 2000 DECEMBER 31, 2000 --------------------
-------------------- -------------------- -------------------- -------------------- TOTAL
REVISED REVISED REVISED REVISED REVISED
PREVIOUSLY FOR PREVIOUSLY FOR PREVIOUSLY FOR PREVIOUSLY FOR PREVIOUSLY FOR
REPORTED SAB 101 REPORTED SAB 101 REPORTED SAB 101 REPORTED SAB 101 REPORTED SAB 101
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Net sales......... 121,121 112,090 104,932 107,008 96,970 94,975 137,417 146,367 460,440 460,440
Gross profit...... 60,477 55,957 55,936 57,231 53,298 51,927 67,215 71,811 236,926 236,926
Operating income.. 15,950 12,578 19,359 20,391 16,315 15,195 5,227 8,687 56,851 56,851
Net income
(loss).......... 3,005 897 6,326 6,971 2,591 1,891 (2,135) 28 9,787 9,787
</Table>
The following table presents quarterly results (in thousands) during 2001.
<Table>
<Caption>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001 TOTAL
--------- -------- ------------- ------------ --------
Net sales........................... $ 94,443 $106,088 $100,117 $161,045 $461,693
Gross profit........................ 52,722 60,101 56,204 91,773 260,800
Operating income.................... 6,714 17,209 11,536 30,506 65,965
Income before extraordinary loss.... (2,615) 3,887 2,160 15,328 18,760
Extraordinary loss.................. -- -- 15,200 -- 15,200
Net income (loss)................... (2,615) 3,887 (13,040) 15,328 3,560
</Table>
F-27
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 141, "Business Combinations" ("SFAS No. 141") was issued on July
20, 2001. SFAS No. 141 addresses financial accounting and reporting for business
combinations. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001, and to all business combinations accounted for
using the purchase method for which the date of acquisition is July 1, 2001, or
later. The Company adopted the provisions of this statement as of July 1, 2001,
and there was no financial accounting impact associated with its adoption.
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") was
issued on July 20, 2001. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. The provisions of
SFAS No. 142 are required to be applied starting with fiscal years beginning
after December 15, 2001, and must be applied at the beginning of a fiscal year
and to all goodwill and other intangible assets recognized in the financial
statements at that date. Under the provisions of SFAS No. 142, there will be no
amortization of goodwill or intangible assets with indefinite lives. Impairment
of these assets will need to be assessed annually and in special circumstances.
Application of the non-amortization provisions of SFAS No. 142 is expected to
result in an increase in pretax income of approximately $391,000 per year.
SFAS No. 144, "Accounting for Impairment of Disposal of Long-Lived Assets,"
was issued in October 2001. SFAS No. 144 provides new guidance on the
recognition of impairment losses on long-lived assets to be held and used or to
be disposed of and also broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and must be applied at the beginning of the fiscal year. The Company will adopt
the provisions of this statement on January 1, 2002 and does not anticipate any
material financial accounting impact associated with its adoption.
In September 2001, the EITF issued EITF 01-09, "Accounting for
Consideration Given by a Vendor to a Customer or Reseller of the Vendor's
Products", which addresses the income statement characterization of stock option
awards, royalties, and other cash consideration the Company pays its District
Directors, Branch Directors, Group Directors, Unit Directors and Trainers. The
provisions of EITF 01-09 are required to be adopted starting with fiscal years
beginning after December 15, 2001. The Company is currently evaluating the
impact of this new guidance.
F-28
HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
COLUMN A COLUMN B COLUMN C ADDITIONS COLUMN D COLUMN E
- -------- ------------ ------------------------------ ------------- -------------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO OTHER BALANCE AT
PERIOD EXPENSES(1) ACCOUNTS(2) DEDUCTIONS(3) END OF PERIOD
------------ ----------- ---------------- ------------- -------------
(AMOUNTS IN THOUSANDS)
Allowance for doubtful
accounts:
Year ended December 31,
1999................... 348 1,662 108 (805) 1,313
Year ended December 31,
2000................... 1,313 2,801 93 (2,240) 1,967
Year ended December 31,
2001................... 1,967 2,254 -- (2,207) 2,014
</Table>
- ---------------
(1) Represents provision for losses on accounts receivable.
(2) Represents collection of accounts previously written off.
(3) Represents write-off of uncollectible accounts receivable.
<Table>
<Caption>
COLUMN A COLUMN B COLUMN C ADDITIONS COLUMN D COLUMN E
- -------- ------------ ------------------------------ ------------- -------------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO OTHER BALANCE AT
PERIOD EXPENSES(A) ACCOUNTS DEDUCTIONS(B) END OF PERIOD
------------ ----------- ---------------- ------------- -------------
(AMOUNTS IN THOUSANDS)
Inventory Reserves:
Year ended December 31,
1999................... -- 1,342 -- -- 1,342
Year ended December 31,
2000................... 1,342 5,256 -- (1,742) 4,856
Year ended December 31,
2001................... 4,856 2,803 -- (3,137) 4,522
</Table>
- ---------------
(A) Provisions for losses.
(B) Write-offs or reserve utilization as a result of inventory sales.
F-29