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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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COMMISSION FILE NO. 333-62021
HOME INTERIORS & GIFTS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-0981828
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4550 SPRING VALLEY ROAD
DALLAS, TEXAS 75244
(Address of principal executive offices) (Zip Code)
(972) 386-1000
(Registrant's telephone number, including area code)
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 requirement for the past 90 days. Yes [X] No [ ]
As of August 12, 1999, the registrant had outstanding 15,239,110 shares of
its common stock, $0.10 par value per share.
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HOME INTERIORS & GIFTS, INC.
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
June 30, 1999.................................................................... 3
Consolidated Statements of Operations and Comprehensive Income
For the three months and six months ended June 30, 1998 and 1999................. 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1999........................................................... 5
Notes to Unaudited Interim Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 10
PART II - OTHER INFORMATION
Item 1. Legal proceedings............................................................ 19
Item 6. Exhibits and Reports on Form 8-K............................................. 19
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HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31, JUNE 30,
1998 1999
------------- ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents........................................... $ 41,024 $ 17,740
Accounts receivable, net............................................ 7,975 11,463
Inventories......................................................... 31,010 41,328
Deferred income tax benefit......................................... 2,164 2,044
Other current assets................................................ 1,040 2,285
--------- ---------
Total current assets........................................ 83,213 74,860
Property, plant and equipment, net.................................... 21,774 26,222
Investments........................................................... 1,667 1,729
Debt issuance costs, net.............................................. 19,132 17,536
Other assets.......................................................... 6,662 4,301
--------- ---------
Total assets................................................ $ 132,448 $ 124,648
=========== =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................................... $ 13,119 $ 8,791
Accrued seminars and incentive awards............................... 12,422 12,922
Royalties payable................................................... 6,922 6,535
Hostess prepayments................................................. 8,719 9,556
Income taxes payable................................................ 4,101 2,824
Accrued compensation................................................ 3,606 4,797
Current maturities and prepayment of long-term debt................. 33,723 24,679
Other current liabilities........................................... 9,949 8,019
--------- ---------
Total current liabilities................................... 92,561 78,123
Long-term debt, net of current maturities............................. 453,277 441,966
Deferred income tax liability and other............................... 176 801
--------- ---------
Total liabilities........................................... 546,014 520,890
--------- ---------
Minority interest..................................................... 508 1,806
Commitments and contingencies
Shareholders' deficit:
Common stock, par value $0.10 per share, 75,000,000 shares
authorized, 15,234,422 and 15,239,110 shares
issued and outstanding............................................ 1,523 1,524
Additional paid-in capital.......................................... 178,944 179,791
Accumulated deficit................................................. (594,314) (579,354)
Cumulative translation adjustment................................... (227) (9)
--------- ---------
Total shareholders' deficit................................. (414,074) (398,048)
--------- ---------
Total liabilities and shareholders' deficit................. $ 132,448 $ 124,648
========= =========
The accompanying notes are an integral part of these financial statements.
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HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
Net sales .............................................. $ 127,752 $ 126,234 $ 236,073 $ 242,982
Cost of goods sold ..................................... 61,763 60,279 116,087 116,991
--------- --------- --------- ---------
Gross profit ........................................... 65,989 65,955 119,986 125,991
Selling, general and administrative:
Selling .............................................. 22,289 20,642 41,332 42,361
Freight, warehouse and distribution .................. 11,551 12,501 21,225 23,634
General and administrative ........................... 5,897 6,398 10,814 12,612
Gains on the sale of assets .......................... (1,107) -- (5,179) --
Stock option expense ................................. -- 267 -- 748
Recapitalization expenses ............................ 6,198 -- 6,198 --
--------- --------- --------- ---------
Total selling, general and administrative ....... 44,828 39,808 74,390 79,355
--------- --------- --------- ---------
Operating income ....................................... 21,161 26,147 45,596 46,636
Other income (expense):
Interest income ...................................... 1,998 595 4,276 1,369
Interest expense ..................................... (3,481) (11,063) (3,491) (22,324)
Other income (expense), net .......................... 182 (176) 378 (106)
--------- --------- --------- ---------
Other income (expense), net ..................... (1,301) (10,644) 1,163 (21,061)
--------- --------- --------- ---------
Income before income taxes ............................. 19,860 15,503 46,759 25,575
Income taxes ........................................... 7,681 6,485 18,570 10,615
--------- --------- --------- ---------
Net income ............................................. 12,179 9,018 28,189 14,960
Other comprehensive income (loss) before tax:
Cumulative translation adjustment .................... (73) (54) (34) 218
Unrealized losses on investments ..................... (655) -- (698) --
--------- --------- --------- ---------
Other comprehensive income (loss) before tax ... (728) (54) (732) 218
Income tax benefit related to items of other
comprehensive income ................................. 229 -- 244 --
--------- --------- --------- ---------
Other comprehensive income, net of tax ............... (499) (54) (488) 218
--------- --------- --------- ---------
Comprehensive income ................................... $ 11,680 $ 8,964 $ 27,701 $ 15,178
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
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HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1998 1999
--------- --------
Cash flows from operating activities:
Net income .......................................................... $ 28,189 $ 14,960
--------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 1,497 1,815
Amortization of debt issuance costs ............................... 97 1,596
Provision for doubtful accounts ................................... 306 278
Gains on the sale of assets ....................................... (5,179) --
Stock option expense .............................................. -- 748
Realized gains on investments ..................................... (203) --
Equity in earnings of an affiliate ................................ -- (62)
Deferred tax expense .............................................. 233 176
Changes in assets and liabilities:
Accounts receivable ............................................... (130) (4,572)
Inventories ....................................................... (8,255) (10,318)
Other current assets .............................................. (276) (1,245)
Other assets ...................................................... (384) 53
Accounts payable .................................................. 4,476 (4,328)
Income taxes payable .............................................. 1,877 (1,277)
Other current liabilities ......................................... 8,982 780
--------- --------
Total adjustments ............................................ 3,041 (16,356)
--------- --------
Net cash provided by (used in) operating activities .......... 31,230 (1,396)
--------- --------
Cash flows from investing activities:
Purchases of investments ............................................ (86,591) --
Proceeds from the sale of investments ............................... 152,765 --
Purchases of property, plant and equipment .......................... (4,778) (5,009)
Purchases of property, plant and equipment by minority
owner of Laredo Candle .......................................... -- (1,229)
Purchases of notes receivable ....................................... (962) --
Payments received on notes receivable ............................... 1,361 3,089
Proceeds from the sale of property, plant and equipment ............. 5,572 --
--------- --------
Net cash provided by (used in) investing activities .......... 67,367 (3,149)
--------- --------
Cash flows from financing activities:
Dividends paid ...................................................... (9,554) --
Proceeds from the issuance of Company common stock .................. 182,557 100
Purchase of treasury stock .......................................... (827,557) --
Proceeds from the 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) --
Capital contribution from Laredo Candle minority owner .............. -- 1,298
Payments under the Senior Credit Facility ........................... -- (20,355)
--------- --------
Net cash used in financing activities ........................ (178,887) (18,957)
--------- --------
Effect of cumulative translation adjustment ........................... (34) 218
--------- --------
Net decrease in cash and cash equivalents ............................. (80,324) (23,284)
Cash and cash equivalents at beginning of year ........................ 104,262 41,024
--------- --------
Cash and cash equivalents at end of period ............................ $ 23,938 $ 17,740
========= ========
The accompanying notes are an integral part of these financial statements.
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HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND
Home Interiors & Gifts, Inc., together with its subsidiaries (the
"Company"), is a direct seller of home decorative accessories using the "party
plan" method whereby its non-employee, independent sales representatives
("Displayers") conduct shows in the homes of potential customers. The Company
believes that the party plan method provides 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. The Company manufactures approximately one-third of its products and
purchases the remainder of its product line from a select number of independent
suppliers, most of who sell their products exclusively to the Company. The
Company expanded its operations internationally in 1995. Revenue from
international operations is not significant.
The following is a brief description of the Company's subsidiaries, each of
which is wholly-owned except as indicated:
o Dallas Woodcraft, Inc. ("DWC") manufactures framed art work and mirrors
using custom-designed equipment
o GIA, Inc. ("GIA") and Homco, Inc. ("Homco") manufacture various types of
molded plastic products using custom-designed equipment
o Laredo Candle Company, L.L.P. ("Laredo Candle"), which is owned 60% by the
Company, was established in 1998 and is anticipated to begin manufacturing
candles in the third quarter of 1999
o Subsidiaries in Mexico and Puerto Rico provide sales support services to
the international Displayers
2. SIGNIFICANT ACCOUNTING POLICIES
The Company maintains its accounting records and prepares financial
statements on the accrual basis of accounting, which conforms with generally
accepted accounting principles. Following these principles, management makes
estimates and assumptions that affect the amounts reported in the financial
statements and notes. Actual results may differ from these estimates.
These consolidated financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have been
eliminated. The Company records sales and related expenses on a weekly basis
ending on each Saturday and every quarter consists of thirteen weeks. The last
days of the quarter ended June 30, 1998 and 1999 in the accompanying unaudited
consolidated financial information were July 4, 1998 and July 3, 1999,
respectively.
The consolidated financial information as of June 30, 1999 and for the
three months and six months ended June 30, 1998 and 1999 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 Company's
consolidated financial position as of June 30, 1999, operating results and
comprehensive income for the three months and six months ended June 30, 1998
and 1999, and cash flows for the six months ended June 30, 1998 and 1999.
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.
Certain reclassifications have been made to prior years' balances to
conform with current year presentation.
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HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. THE RECAPITALIZATION
The Company completed a recapitalization (the "Recapitalization") on
June 4, 1998 through the following simultaneous transactions:
o contribution of $182.6 million by Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse") in exchange for 10,111,436 shares of the common stock, or
approximately 66% of all outstanding shares upon completion of the
Recapitalization
o issuance of $200.0 million of senior subordinated notes (the "Notes")
o borrowing of $300.0 million under a $340.0 million senior credit facility
(the "Senior Credit Facility")
o use of the above proceeds, together with available cash of $169.3 million,
to:
o redeem 45,836,584 shares of common stock for $827.6 million
o pay fees and expenses of $24.3 million associated with the
Recapitalization consisting of:
--> $11.2 million financial advisory fee paid to Hicks Muse for its
role in obtaining financing for the Recapitalization
--> $11.6 million of debt issuance costs paid primarily to the bank
syndicate group for the Senior Credit Facility and the initial
purchasers of the Notes
--> $1.5 million of legal and accounting fees
The Company allocated the Hicks Muse financial advisory fee and the
legal and accounting fees on a proportionate basis to the debt and equity
financing for the Recapitalization. Accordingly, the Company allocated $9.5
million to debt issuance costs and $3.2 million to additional paid-in capital.
The total debt issuance costs of $21.1 million are being amortized using the
effective interest method over the term of the related indebtedness.
In addition to the $24.3 million of fees and expenses related to the
Recapitalization, the Company paid additional financial advisory and legal fees
of approximately $6.2 million in connection with the Recapitalization. The
Company paid its financial advisor approximately $5.7 million to assist with
the development of strategic alternatives, identify potential buyers, evaluate
proposals and assist in the negotiation of the Hicks Muse offer. These
financial advisory and legal fees were expensed as incurred in the three months
ended June 30, 1998.
As a result of the Recapitalization, the issued and outstanding shares of
common stock decreased to 15,231,652 shares as of June 4, 1998, all treasury
stock was retired and Hicks Muse acquired a controlling interest in the
Company.
4. NEW WAREHOUSE AND DISTRIBUTION FACILITY
The Company is currently operating in and from several separate
warehouse and distribution facilities. On July 19, 1999 the Company entered
into a contract with Argent Frankford L.P. ("Argent") to construct a new
630,000 square-foot warehouse and distribution facility in Carrollton, Texas
for approximately $19.4 million. The Company expects to incur an additional
$2.0 million to $3.0 million in customized improvements to prepare the facility
for occupancy, which should occur prior to the end of the second quarter of
2000. In the event the Argent transaction described in the next paragraph is
not consummated and the Company is unable to purchase the facility, the Company
is obligated to enter into a long-term lease agreement with Argent upon
completion of construction.
The new warehouse and distribution facility will allow the Company to
consolidate its current warehouse and distribution operation from several
smaller facilities into a single larger facility. Among other things, the
Company anticipates that it will benefit from reduced labor and inventory costs
and property tax savings. Additionally, the new facility will allow the Company
to utilize an automated order fulfillment system, which the Company expects
will result in additional labor savings.
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HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concurrently with the transaction described above, the Company entered
into an exchange transaction with Parker Equities Inc. ("Parker") to sell to
Parker for $15.7 million, net of commissions and closing costs, substantially
all of the Company's owned properties and facilities in the Dallas area,
including all of its warehouse and distribution facilities and its corporate
headquarters. The Company plans to close the transaction on December 1, 1999
subject to certain customary terms and conditions. At closing, the Company
intends to enter into several separate lease agreements to lease back all of
its properties and facilities until the Company's new facilities are ready for
occupancy. The lease terms will vary in length based on a predetermined
schedule of facility closings between April 2000 and August 2000.
The Company expects that the process of selling its current facilities
and properties in exchange for purchasing a new facility and property will
qualify as a Section 1031 Tax-Free Exchange under the United States Internal
Revenue Code of 1986, as amended. The Company anticipates there will be a
pre-tax gain of approximately $10.7 million on the sale of its properties and
facilities for financial reporting purposes.
The transactions described above require approval from the Company's
lenders. The Company is currently meeting with its lenders and expects to gain
approval of these transactions.
5. CORPORATE HEADQUARTERS FACILITY
The Company is in the process of negotiating a ten year lease for a new
corporate headquarters location in the Dallas area. The Company anticipates
that this facility will consist of approximately 75,000 square feet of office
space for annual rent of approximately $1.7 million. Tenant improvements to
customize the space are expected to be approximately $3.0 million after
improvement allowances. The Company expects to move into its new headquarters
facility in late 1999 or early 2000.
6. INVENTORIES
Inventories consist of the following as of December 31, 1998 and June
30, 1999 (in thousands):
DECEMBER 31, JUNE 30,
1998 1999
------------- -----------
(UNAUDITED)
Raw materials....................................................... $ 6,134 $ 6,952
Work in process..................................................... 1,742 1,802
Finished goods...................................................... 23,134 32,574
--------- ---------
$ 31,010 $ 41,328
========= =========
7. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following as of December 31,
1998 and June 30, 1999 (in thousands):
DECEMBER 31, JUNE 30,
1998 1999
------------- ----------
(UNAUDITED)
Interest payable.................................................... $ 2,959 $ 2,248
Employee benefit plan contributions................................. 2,264 807
Sales taxes payable................................................. 1,871 1,884
Other current liabilities........................................... 2,855 3,080
--------- ---------
$ 9,949 $ 8,019
========= =========
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HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard is effective for quarters
and fiscal years beginning after June 15, 2000. The Company has not yet
determined the effect the new standard will have on its financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and accompanying notes as
of and for the year ended December 31, 1998, included in its Form 10-K. Unless
otherwise mentioned, all references to the number of Displayers, number of
orders shipped, and average order size relate to domestic sales activity only.
COMPANY BACKGROUND
The Company believes it is the largest direct seller of home
decorative accessories in the United States, as measured by sales. The
Company's sales are dependent upon the number of Displayers selling the
Company's products and Displayer productivity. Displayer productivity is
measured in terms of orders shipped and average order size, both of which
fluctuate from time to time based on the implementation and timing of discounts
and new incentive programs, seasonality and recruiting activity.
To stimulate sales, the Company offers a variety of discounts and
incentives to Displayers. The amount and type of discounts and incentives vary
from year to year and throughout each year, but are generally consistent over
any given quarterly period. The cost of discounts is reflected in the Company's
net sales while the cost of incentives is reflected in selling expense.
Primarily because of the nature of the direct selling industry, and as
a result of numerous general and economic factors, the Company experienced
average annual Displayer turnover of approximately 40% during the last three
years. The Company believes that new Displayers are generally among the least
productive Displayers and that the majority of Displayers who terminate their
status as Displayers in any particular year are Displayers recruited in that
year or in the immediately preceding year. The Company's ability to maintain
its sales volume and to achieve growth depends upon its ability to attract,
train and retain a significant number of new Displayers each year.
The Company revised its recruiting and training criteria in early
1999. Among other things, the Company increased opportunities for new
Displayers by reducing start-up costs and lowering certain other barriers to
entry. These changes resulted in a significant increase in the number of new
Displayers. The Company recruited approximately 31,400 new Displayers during
the six months ended June 30, 1999, which was more than the number recruited
during the entire year in 1998. Although the Displayer base grew from 52,800 as
of December 31, 1998 to 83,700 as of June 30, 1999, many of the new Displayers
were not considered active because they had not yet placed their first order.
To be considered an active Displayer, the Displayer must have placed an order
within the 14 prior weeks. Active Displayers totaled 61,400 as of June 30,
1999, up 22.6% from 50,100 as of December 31, 1998, and up 36.1% from 45,100 as
of June 30, 1998.
In connection with the recent growth in recruiting, the
Company lowered its minimum order requirement in June 1999, and as a result,
experienced a significant decline in average order sizes. The Company is
continuing to evaluate the impact the lower minimum order requirement is having
on its business; however, the Company expects that the higher operating costs
experienced during the second quarter will continue through the remainder of
the year.
Historically, the Company has benefited from relatively stable gross
profit and operating profit margins. Once a product is introduced into the
Company's product line, the price at which the Company purchases the product
from its suppliers and the price at which the Company sells the product to
Displayers seldom changes. The Company has steadily improved its gross profit
margin since mid-1997, when the markup on all new products was increased. Prior
to that time, the Company seldom changed product markups. The Company believes
that further improvement in gross margin will occur during the remainder of
1999 until the new pricing structure is incorporated throughout its entire
product line. The Company expects that its operating profit margins will
decline slightly through the end of 1999 primarily as a result of the increased
costs associated with processing and shipping more orders.
The Company delivers its products to Displayers via common carrier and
a regional network of locally-based freight distributors ("Local
Distributors"). Unlike many other direct sales companies that the Company
believes charge their customers shipping costs, the Company delivers its
products to Displayers free of charge if
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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 their 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 errors or product damage.
THE RECAPITALIZATION
The Company completed the Recapitalization on June 4, 1998 through the
following simultaneous transactions:
o contribution of $182.6 million by Hicks Muse, in exchange for 10,111,436
shares of the common stock, or approximately 66% of all outstanding shares
upon completion of the Recapitalization
o issuance of $200.0 million of the Notes
o borrowing of $300.0 million under the Senior Credit Facility
o use of the above proceeds, together with available cash of $169.3 million,
to:
o redeem 45,836,584 shares of common stock for $827.6 million
o pay fees and expenses of $24.3 million associated with the
Recapitalization consisting of:
--> $11.2 million financial advisory fee paid to Hicks Muse for its
role in obtaining financing for the Recapitalization
--> $11.6 million of debt issuance costs paid primarily to the bank
syndicate group for the Senior Credit Facility and the initial
purchasers of the Notes
--> $1.5 million of legal and accounting fees
In addition to the $24.3 million of fees and expenses related to the
Recapitalization, the Company paid additional financial advisory and legal fees
of approximately $6.2 million in connection with the Recapitalization. The
Company paid its financial advisor approximately $5.7 million to assist with
the development of strategic alternatives, identify potential buyers, evaluate
proposals and assist in the negotiation of the Hicks Muse offer. These
financial advisory and legal fees were expensed as incurred during the three
months ended June 30, 1998.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1998
Net Sales. Net sales decreased $1.6 million, or 1.2%, to $126.2
million in the three months ended June 30, 1999 from $127.8 million in the
comparable period in 1998. This decrease was primarily due to a 19.2% decline
in the average order size, which more than offset a 22.0% increase in the
number of orders shipped. The decline in the average order size was primarily
as a result of a lower minimum order requirement implemented in June 1999 and
growth in the Displayer base that increased the percentage of less experienced,
and therefore, less productive Displayers. Additionally, sales in the 1998
period were impacted positively by a six-month sales incentive that ended in
June 1998. For 1999, the same incentive is earned over a nine-month period
ending in September 1999. Growth in the Displayer base contributed to the
increase in the number of orders shipped in the 1999 period. The average number
of active Displayers increased to 56,500 in the three months ended June 30,
1999 from 44,700 in the comparable period in 1998. Orders shipped per active
Displayer decreased slightly. The Company expects that the trend of more orders
shipped and lower order sizes will continue throughout 1999 as a result of the
factors discussed above.
Gross Profit. Gross profit remained flat at $66.0 million in the three
months ended June 30, 1998 and 1999. As a percentage of net sales, gross profit
increased to 52.2% in the 1999 period from 51.7% in the 1998 period largely due
to the introduction of new products with higher profit margins.
Selling expense. Selling expense decreased $1.7 million, or 7.4%, to
$20.6 million in the three months ended June 30, 1999 from $22.3 million in the
comparable period in 1998. As a percentage of net sales, selling expense
decreased to 16.4% in 1999 from 17.4% in the 1998 period. This decrease was
primarily attributable to lower bonus accruals for Displayers in the 1999
period as a result of lower sales and higher incentive costs in the 1998
period. The accrual of annual sales production bonuses for Displayers in the
1999 period was lower as a result of lower sales volume compared to the 1998
period.
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Freight, warehouse and distribution expense. Freight, warehouse and
distribution expense increased $0.9 million, or 8.2%, to $12.5 million in the
three months ended June 30, 1999 from $11.6 million in the comparable period in
1998. As a percentage of net sales, freight, warehouse and distribution expense
increased to 9.9% in the 1999 period from 9.0% in the 1998 period. This
increase resulted from the 22.0% increase in the number of orders shipped, and
in particular the use of temporary labor necessary to fill orders.
Additionally, the Company incurred higher wage costs for its distribution
employees as a result of a wage rate increase in May 1999. The Company expects
the trend of higher labor costs will continue throughout the remainder of 1999.
General and administrative expense. General and administrative expense
increased $0.5 million, or 8.5%, to $6.4 million in the three months ended June
30, 1999 from $5.9 million in the comparable period in 1998. The increase was
largely due to increased personnel costs, the full period impact of a
monitoring and oversight fee payable to Hicks Muse, and increased depreciation
expense as a result of a higher level of capital expenditures throughout 1998.
The higher personnel costs were in response to the growth in the sales force
coupled with modernization of new computer systems requiring specialized labor.
Gains on the sale of assets. The Company recorded a gain of $1.1
million on the sale of an aircraft in 1998. No gains have been recorded in the
three months ended June 30, 1999.
Recapitalization expenses. Recapitalization expenses of $6.2 million
in 1998 consisted of fees and expenses paid to the Company's financial advisor
and attorneys in connection with the Recapitalization.
Interest Income. Interest income decreased to $0.6 million in the
three months ended June 30, 1999 from $2.0 million in the comparable period in
1998 due to lower average investment balances as a result of the
Recapitalization.
Interest Expense. Interest expense increased to $11.1 million in the
three months ended June 30, 1999 from $3.5 million in the comparable period in
1998. Interest expense was incurred over the entire period in 1999 in
connection with the Senior Credit Facility and the Notes as compared to one
month in the 1998 period.
Income Taxes. Income taxes decreased to $6.5 million in the three
months ended June 30, 1999 from $7.7 million in the comparable period in 1998.
Income taxes as a percentage of income before income taxes increased to 41.8%
in the 1999 period from 38.7% in the 1998 period. This increase was primarily
due to a higher effective state income tax rate in the 1999 period as a result
of the Company's filing income or franchise tax returns in substantially all
states.
THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1998
Net Sales. Net sales increased $6.9 million, or 2.9%, to $243.0
million in the six months ended June 30, 1999 from $236.1 million in the
comparable period in 1998. This increase was primarily attributable to a 19.1%
increase in the number of orders shipped, which more than offset a 13.7%
decrease in the average order size. The increase in orders shipped was due to
growth in the Displayer base. The average number of active Displayers increased
to 54,400 in the six months ended June 30, 1999 from 44,100 in the comparable
period in 1998. Orders shipped per active Displayer dropped slightly. The
decline in the average order size was primarily as a result of a lower minimum
order requirement implemented in June 1999 and growth in the Displayer base
that increased the percentage of less experienced and, therefore, less
productive Displayers.
Gross Profit. Gross profit increased $6.0 million, or 5.0%, to $126.0
million in the six months ended June 30, 1999 from $120.0 million in the
comparable period in 1998. As a percentage of net sales, gross profit increased
to 51.9% in 1999 from 50.8% in the 1998 period. This increase was primarily
attributable to the introduction of new products with higher profit margins,
and to a lesser extent, manufacturing efficiencies.
Selling expense. Selling expense increased $1.1 million, or 2.5%, to
$42.4 million in the six months ended June 30, 1999 from $41.3 million in the
comparable period in 1998. As a percentage of net sales, selling expense of
17.4% in 1999 was in line with 17.5% in the 1998 period. Increased commissions
earned by Displayers in the 1999 period were offset by higher incentive costs
in the 1998 period.
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Freight, warehouse and distribution expense. Freight, warehouse and
distribution expense increased $2.4 million, or 11.3%, to $23.6 million in the
six months ended June 30, 1999 from $21.2 million in the comparable period in
1998. As a percentage of net sales, freight, warehouse and distribution expense
increased to 9.7% in the 1999 period from 9.0% in the 1998 period. This
increase resulted from the increase in the number of orders shipped, and in
particular the use of temporary labor necessary to fill orders. Additionally,
the Company incurred higher wage costs for its distribution employees as a
result of a wage rate increase in May 1999. The Company expects that the trend
of higher labor costs will continue throughout the remainder of 1999.
General and administrative expense. General and administrative expense
increased $1.8 million, or 16.6%, to $12.6 million in the six months ended June
30, 1999 from $10.8 million in the comparable period in 1998. The increase was
largely due to increased personnel costs, the full period impact of a
monitoring and oversight fee payable to Hicks Muse, and increased depreciation
expense as a result of a higher level of capital expenditures throughout 1998.
The higher personnel costs are in response to the growth in the sales force
coupled with modernization of new computer systems requiring specialized labor.
Gains on the sale of assets. The Company recorded gains of $5.2
million primarily on the sale of two aircraft in 1998. No gains have been
reported in the six months ended June 30, 1999.
Interest Income. Interest income decreased to $1.4 million in the six
months ended June 30, 1999 from $4.3 million in the comparable period in 1998
due to lower average investment balances as a result of the Recapitalization.
Interest Expense. Interest expense increased $18.8 million to $22.3
million from $3.5 million in the comparable period in 1998 due to interest
expense incurred in connection with the Senior Credit Facility and the Notes.
Income Taxes. Income taxes decreased to $10.6 million in the six
months ended June 30, 1999 from $18.6 million in the comparable period in 1998.
Income taxes as a percentage of income before income taxes increased to 41.5%
in the 1999 period from 39.7% in the 1998 period. This increase was primarily
due to a higher effective state income tax rate in the 1999 period as a result
of the Company's filing income or franchise tax returns in substantially all
states.
SEASONALITY
The Company's business is influenced by the Christmas holiday season
and promotional events. Historically, a higher portion of the Company's sales
and net income has been realized during the fourth quarter, and net sales and
net income have generally been slightly lower during the first quarter as
compared to the second and third quarters. Working capital requirements also
fluctuate during the year and reach their highest levels during the third and
fourth quarters as the Company increases its inventory for the peak season. In
addition to the Company's peak season fluctuations, quarterly results of
operations may fluctuate depending on the timing of, and amount of sales from
discounts, incentive promotions and/or the introduction of new products. As a
result, the Company's business activity and results of operations in any
quarter are not necessarily indicative of any future trends in the Company's
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has satisfied its historical requirements for capital
through cash flow from operations. As a result of borrowings under the Senior
Credit Facility and the issuance of the Notes, the Company is subject to cash
requirements, which are significantly greater than its historical requirements.
Net cash used by operating activities in the six months ended June 30, 1999
totaled $1.4 million, a $32.6 million decline from the $31.2 million in cash
provided by operations in the comparable period in 1998. The decrease was
largely attributable to reduced net income in the six months ended June 30,
1999 primarily as a result of the full period impact of interest expense on the
Senior Credit Facility and the Notes and an increase in accounts receivable
combined with a decrease in accounts payable and other current liabilities.
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 through
June 30, 1998 totaled $152.8 million. Purchases of investments totaled $86.6
million through June 30, 1998. In addition to its other investing activities,
the Company sold two aircraft for proceeds of $5.2 million.
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The Company used $3.1 million cash in investing activities during the
six months ended June 30, 1999 and generated $67.4 million in the comparable
period in 1998. The Company's capital expenditures totaled $6.2 million during
the six months ended June 30, 1999 and $4.8 million in the comparable period in
1998. Capital expenditures in the 1999 period include $1.2 million attributable
to the minority owner of Laredo Candle. Payments received on notes receivable
increased to $3.1 million during the six months ended June 30, 1999 from $1.4
million in the comparable period in 1998 primarily due to the early payoff of a
note. In addition to its other investing activities, the Company sold two
aircraft in 1998 for proceeds of $5.6 million.
The Company is currently operating in and from several separate
warehouse and distribution facilities. On July 19, 1999 the Company entered
into a contract with Argent to construct a new 630,000 square-foot warehouse
and distribution facility in Carrollton, Texas for approximately $19.4 million.
The Company expects to incur an additional $2.0 million to $3.0 million in
customized improvements to prepare the facility for occupancy, which should
occur prior to the end of the second quarter of 2000. In the event the Company
is unable to purchase the facility, the Company is obligated to enter into a
long-term lease agreement with Argent upon completion of construction.
The new warehouse and distribution facility will allow the Company to
consolidate its current warehouse and distribution operation from several
smaller facilities into a single larger facility. Among other things, the
Company anticipates that it will benefit from reduced labor and inventory costs
and property tax savings. Additionally, the new facility will allow the Company
to utilize an automated order fulfillment system, which the Company expects
will result in additional labor savings.
Concurrently with the transaction described above, the Company entered
into an exchange transaction with Parker Equities Inc. to sell to Parker for
$15.7 million, net of commissions and closing costs, substantially all of the
Company's owned properties and facilities in the Dallas area, including all of
its warehouse and distribution facilities and its corporate headquarters. The
Company plans to close the transaction on December 1, 1999 subject to certain
customary terms and conditions. At closing, the Company intends to enter into
several separate lease agreements to lease back all of its properties and
facilities. The lease terms will vary in length based on a predetermined
schedule of facility closings between April 2000 and August 2000.
The Company expects that the process of selling its current facilities
and properties in exchange for purchasing a new facility and property will
qualify as a Section 1031 Tax-Free Exchange under the United States Internal
Revenue Code of 1986, as amended. The Company anticipates there will be a
pre-tax gain of approximately $10.7 million on the sale of its properties and
facilities for financial reporting purposes.
The transactions described above require approval from the Company's
lenders. The Company is currently meeting with its lenders and expects to gain
approval of these transactions.
The Company is in the process of negotiating a ten year lease for a
new corporate headquarters location in the Dallas area. The Company anticipates
that this facility will consist of approximately 75,000 square feet of office
space for annual rent of approximately $1.7 million. Tenant improvements to
customize the space are expected to be approximately $3.0 million after
improvement allowances. The Company expects to move into its new headquarters
facility in late 1999 or early 2000.
In connection with the construction of the new warehouse and
distribution facility, the Company is working with a consultant to assist in
the specific design layout of the facility and implementation of an automated
order fulfillment system. The Company expects that its automation related costs
will be approximately $5.0 million to $10.0 million. These costs will be
incurred in late 1999 and throughout 2000 as the Company transitions from its
current warehouse and distribution facilities to its new facility over a period
of several months. The Company expects to continue to use its current
distribution system until the automated system is fully operational.
The Company estimates that its remaining capital expenditures will
increase to approximately $13.2 million during the year ended December 31, 1999
from $8.4 million in the comparable period of 1998. The anticipated increase is
principally as a result of continued enhancements to the Company's new computer
system, including Internet capabilities, and construction of the building and
purchase of equipment for Laredo Candle. The Company's capital expenditures
include expenditures attributable to the minority owner of Laredo Candle. The
minority owner of Laredo Candle spent $0.5 million in capital expenditures in
the 1998 period and expects to spend approximately $2.0 million in the 1999
period for its portion of the new candle manufacturing operation.
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The Company's use of cash for financing activities decreased to $19.0
million during the six months ended June 30, 1999 from $178.9 million in the
comparable period in 1998. The higher use of cash in the 1998 period was due to
the Recapitalization. The Company used proceeds of $182.6 million from the
contribution of equity by Hicks Muse, $200.0 million from the issuance of the
Notes and $300.0 million of borrowings under the Senior Credit Facility,
together with proceeds from the sale of investments as described above, to pay
$827.6 million for the redemption of common stock, and to pay $24.3 million of
fees and expenses associated with the Recapitalization. Prior to the
Recapitalization, the Company's primary financing activity was the payment of
dividends. Dividends paid during the 1998 period totaled $9.6 million. 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, and no dividends were paid during the 1999
period. The Company's primary financing activity in the 1999 consisted of
principal payments under the Senior Credit Facility of $20.4 million.
Payments on the Notes and Senior Credit Facility represent significant
cash requirements for the Company. Interest payments on the Notes commenced in
December 1998 and will continue semi-annually until the Notes mature in 2008.
Borrowings under the Senior Credit Facility require quarterly interest and
principal payments. In addition, the Senior Credit Facility includes $40.0
million of Revolving Loans, which mature on June 30, 2004. The Revolving Loans
remained undrawn as of June 30, 1999.
The Company paid a total of $36.5 million in debt service in the six
months ended June 30, 1999. The debt service payments consisted of scheduled
principal payments under the Senior Credit Facility of $12.7 million, a
mandatory prepayment of $7.7 million under the Senior Credit Facility, and
interest under the Senior Credit Facility and the Notes of approximately $16.1
million.
The Company anticipates that its debt service requirements will total
$72.4 million in 1999. These debt service requirements are expected to consist
of scheduled principal payments due under the Senior Credit Facility of $24.6
million, the mandatory prepayment of $7.7 million under the Senior Credit
Facility, interest due under the Senior Credit Facility of $19.9 million and
interest of $20.2 million due on the Notes. A majority of the Company's
variable-rate debt as of June 30, 1999 consisted of thirty day borrowings
entered into on June 30, 1999.
The terms of the Notes and Senior Credit Facility include significant
operating and financial restrictions, such as limits on the Company's ability
to incur indebtedness, create liens, sell assets, engage in mergers or
consolidations, make investments and pay dividends. In addition, under the
Senior Credit Facility, the Company is required to comply with specified
financial ratios and tests, including minimum interest coverage and maximum
leverage ratios. Subject to the financial ratios and tests, the Company will be
required to make certain mandatory prepayments of the term loans on an annual
basis. The Company prepaid $7.7 million on the term loans on March 31, 1999. As
a result of the timing and magnitude of the prepayment amount, the Company may
have to utilize the Revolving Loans at varying times subsequent to June 30,
1999 primarily to meet working capital needs and to fund capital expenditures,
including costs associated with an automated order fulfillment system, and the
transitions to its new warehouse and distribution facility and corporate
headquarters facility.
The Company believes that net cash flow from operations and borrowings
under the Revolving Loans, if any, will be sufficient to fund its cash
requirements over the next twelve months, which will consist primarily of
payment of principal and interest on outstanding indebtedness, working capital
requirements and capital expenditures. The Company's future operating
performance and ability to service or refinance its current indebtedness will
be subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To mitigate risks on
changes in interest rates, the Company utilizes derivative financial
instruments. The Company does not use derivative financial instruments for
speculative or trading purposes. The Company's international operations are not
significant, and as a result, changes in foreign currency exchange rates do not
have a material effect on the Company.
In July 1998, the Company entered into an interest rate swap agreement
to limit the effect of changes in interest rates on long-term borrowings. Under
the swap, the Company pays interest at 5.50% on a notional amount of $75.0
million and receives interest thereon at three-month LIBOR on a quarterly
basis. Beginning June 9, 1999, if LIBOR is greater than 6.44% at the
commencement of any quarterly reset period, a knockout provision provides for
15
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no payment under the swap during such period. The knockout provision is
separately adjusted to market on a quarterly basis. The Company recorded a
$546,000 loss on the derivative in the six months ended June 30, 1999 as a
result of an increase in interest rates.
There are no material quantitative changes in market risk exposures at
June 30, 1999 when compared to December 31, 1998.
ENVIRONMENTAL ISSUES
In 1989, DWC was named as a potentially responsible party ("PRP")
based on allegedly having sent 2,640 gallons of waste to the Chemical
Recycling, Inc. facility in Wylie, Texas. The Company believes that DWC's share
of the total cleanup costs based on a volumetric allocation would be less than
one percent. In the future, DWC and the other PRPs, who are jointly and
severally liable, may incur additional costs related to the cleanup of
hazardous substances at the facility. DWC did not incur any cleanup related
costs in 1996, 1997 and 1998 or in the six months ended June 30, 1999. Because
the site has been dormant for several years, the Company does not believe it is
probable that any additional costs will be incurred and, accordingly, has not
established any accruals for future cleanup costs at the site.
In 1997, Homco was named as a PRP based on allegedly having
transported hazardous substances to the Materials Recovery Enterprises, Inc.
facility near Ovalo, Texas in Taylor County, Texas. In 1998, Homco paid an
assessment of approximately $1,000 for liability at the facility. By agreement,
Kraft Foods, Inc., a partial indemnitor to Homco, paid Homco 96.5% of this past
assessment; assumed the future administration of the matter, including payment
of future costs; and may, upon demand, request reimbursement from Homco for
3.5% of future costs. Although Homco remains jointly and severally liable for
the remediation of the site, the probability that Homco will be required to pay
more than a de minimis amount is remote.
In 1996, the United States Environmental Protection Agency issued a
Notice of Violation claiming that 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. This permit
has been issued and GIA did not incur penalties for the activities covered by
the Notice of Violation.
On February 9, 1999, the EPA conducted an inspection at GIA to
determine compliance with the toxic chemical release reporting requirements for
1997 pursuant to the Emergency Planning and Community Right To Know Act of
1986, Section 313. A final determination has not been issued, but several
possible calculation errors in GIA's Form R Report were noted during the
inspection. The EPA will make its final determination upon receipt and
verification of GIA's revised 1997 Form R calculation. It is possible that the
EPA could seek administrative penalties for these errors.
The ultimate outcome and aggregate cost of resolving all of the above
contingencies will be based on a number of factors and will be determined over
a number of years. Accordingly, the total cost to the Company cannot currently
be determined with certainty. It is management's opinion, however, the total
cost of resolving such contingencies should not have a material adverse effect
on the Company's business, financial condition or results of operations.
YEAR 2000 ISSUES; MANAGEMENT INFORMATION SYSTEM
As a result of certain computer programs being written using two
digits rather than four digits to define the applicable year, any of the
Company's computer programs that have date sensitive software may recognize a
date using "00" as the Year 1900 rather than the Year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.
The Company has established a Year 2000 compliance team to address the
issue of computer programs and systems that are unable to distinguish between
the year 1900 and the year 2000 (the "Project"). The Project is divided into
three categories: infrastructure, subsidiaries and third party suppliers and
service providers. The Company has completed the assessment phase which
consisted of identifying and inventorying items, prioritizing, determining
critical items and establishing a timetable for Year 2000 compliance and is
actively engaged in the remediation and testing phases of the Project. The
computer system is a critical aspect of the Project.
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The Company implemented its new and significantly more sophisticated
computer system (the "Computer System") in January 1999, which replaced
substantially all of the hardware and software previously in use at the
Company. A limited amount of peripheral equipment was retained and testing for
Year 2000 compliance is substantially complete. Additional testing will
continue throughout the third quarter of 1999. The Computer System includes a
mainframe computer, certain business applications and upgraded or replacement
peripheral equipment associated with the Company's core business systems. The
Company upgraded the software for the Computer System through the purchase of
certain software products developed by Distribution Architects International
("DAI"). DAI has been engaged to assist with the implementation and enhancement
process. Each supplier (including DAI) of the hardware and software
incorporated or to be incorporated into the Computer System has provided to the
Company a compliance statement or other documentation certifying that its
products will function properly in all material respects beyond 1999.
The DAI software was installed in January 1999, and the Computer
System is presently operational. In addition, Year 2000 remediation of other
aspects of the Company's infrastructure is substantially complete. Remediation
of the Company's subsidiaries was substantially completed in the first quarter
of 1999 and testing is ongoing throughout the third quarter. The Company
believes that Year 2000 remediation of its infrastructure and its subsidiaries
is complete in all material respects. Additional costs associated with
remediating the Company's remaining infrastructure is expected to be less than
$1.0 million.
The Company is currently enhancing the effectiveness of the DAI
software and the Computer System in general. The Company's core business
functions, including inventory, purchasing and accounting are dependent on a
properly functioning management information system. Because the Computer System
replaced a significant portion of such system, the failure of the DAI software
to function as anticipated would require the Company to reassess its Year 2000
compliance and its Computer System in general. On-site systems testing will
continue throughout the remainder of 1999. Specific testing of the DAI software
for Year 2000 compliance took place in the second quarter of 1999. No
substantial weaknesses were found during the testing. There can be no assurance
that such software could be obtained and installed in a timely fashion or that
such software would be year 2000 compliant. Non-compliance could potentially
result in a disruption of operations, including, among other things, a
temporary inability to process transactions, ship products or engage in normal
business activities, which could have a material adverse effect on the
Company's business, financial condition, results of operations and liquidity of
a magnitude which the Company is presently unable to predict. However, if some
or all of the Company's remediated or replaced internal computer systems fail
to correctly distinguish between years before and after Year 2000, or if any
software applications critical to the Company's operations are overlooked in
the Company's assessment of its Year 2000 compliance, there could be a material
adverse effect on the Company's business, financial condition, results of
operations and liquidity of a magnitude which the Company presently is not able
to predict.
In addition to the foregoing, the Company has identified and surveyed
its critical third party suppliers and service providers, and continues to
monitor and assess their progress toward Year 2000 compliance to determine the
extent to which the Company is vulnerable to the failure of such suppliers and
service providers to remediate their own Year 2000 issues. The failure of such
third parties to adequately address their respective Year 2000 issues, could
have a material adverse effect on the Company's business, financial condition,
results of operations and liquidity of a magnitude which the Company is
presently not able to predict.
The Company spent approximately $5.3 million on the Computer System as
of March 31, 1999, which represented substantially all of the costs to
implement the first phase of the rollout of the Computer System. Now that the
installation process is complete, the Company is responding to increased
information demands and overall growth by enhancing the operational performance
and capabilities of the Computer System. The Company spent approximately $1.0
million on the Computer System in the three months ended June 30, 1999.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard is effective for quarters
and fiscal years beginning after June 15, 2000. The Company has not yet
determined the effect the new standard will have on its financial statements.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause the Company's actual results to be materially
different from any future results expressed or implied by such forward-looking
statements.
In some cases, forward-looking statements are identified by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms or other comparable terminology.
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 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: (i) loss of Displayers; (ii) loss or
retirement of key members of management; (iii) imposition of state taxes; (iv)
change in status of independent contractors; (v) increased competition; (vi)
unexpected delays or problems associated with the completion of the Company's
new warehouse and distribution facility; (vii) unexpected delays or problems
associated with the sale of substantially all of the Company's existing
properties and facilities; (viii) unexpected delays or problems associated with
integration and implementation of an automated order fulfillment system; (ix)
unexpected delays or problems associated with the Company's Year 2000 Project;
and (x) the ability of third party suppliers and service providers to remediate
any Year 2000 issues applicable to their respective businesses. Many of these
factors will be beyond the control of the Company.
Moreover, neither the Company nor any other person assumes
responsibility for the accuracy and completeness of such statements. The
Company is under no duty to update any of the forward-looking statements after
the date of this Form 10-Q to conform such statements to actual results.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Environmental Issues" for information regarding legal
proceedings which is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.1 Consulting Services Agreement dated as of June 3, 1999, between Home Interiors & Gifts, Inc.
and Tompkins Associated Incorporated.
10.2 Real Estate Purchase Contract dated July 19, 1999, between Home Interiors & Gifts, Inc. and
Parker Equities, Inc.
10.3 First Amendment to Real Estate Purchase Contract dated August 9, 1999, between Home Interiors
& Gifts, Inc. and Parker Equities, Inc.
10.4 Purchase and Sale Agreement dated July 19, 1999, between Argent Frankford, L.P. and Home
Interiors & Gifts, Inc.
10.5 First Amendment to Purchase and Sale Agreement dated July 23, 1999, between Argent Frankford,
L.P. and Home Interiors & Gifts, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, 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/ LEONARD A. ROBERTSON
-------------------------
Leonard A. Robertson
Chief Financial Officer
(principal financial and accounting officer)
Date: August 12, 1999
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EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1 Consulting Services Agreement dated as of June 3, 1999, between Home Interiors & Gifts, Inc.
and Tompkins Associated Incorporated.
10.2 Real Estate Purchase Contract dated July 19, 1999, between Home Interiors & Gifts, Inc. and
Parker Equities, Inc.
10.3 First Amendment to Real Estate Purchase Contract dated August 9, 1999, between Home Interiors
& Gifts, Inc. and Parker Equities, Inc.
10.4 Purchase and Sale Agreement dated July 19, 1999, between Argent Frankford, L.P. and Home
Interiors & Gifts, Inc.
10.5 First Amendment to Purchase and Sale Agreement dated July 23, 1999, between Argent Frankford,
L.P. and Home Interiors & Gifts, Inc.
27 Financial Data Schedule