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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20802
CELEBRITY, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1289223
(State or other jurisdiction (IRS employer
of incorporation or organization) Identification Number)
PHYSICAL DELIVERY ADDRESS: MAILING ADDRESS:
4520 OLD TROUP ROAD P.O. BOX 6666
TYLER, TEXAS 75707 TYLER, TEXAS 75711
(Address of principal executive offices)
Registrant's telephone number including area code: (903)561-3981
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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 statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of September 8, 1997, was approximately $6,489,027 based on the
closing price of the registrant's common stock on such date as reported by the
Nasdaq National Market. For the purposes of this disclosure only, the
registrant has assumed that its directors, executive officers and beneficial
owners of 5% or more of the registrant's common stock are affiliates of the
registrant. As of September 8, 1997, the registrant had outstanding 6,307,419
shares of its common stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the annual
meeting of the Company to be held December 10, 1997, are incorporated by
reference into Part III of this Report.
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CELEBRITY, INC.
INDEX TO FORM 10-K/A
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
PART I
PAGE
ITEM 1. Business 1
ITEM 2. Properties 9
ITEM 3. Legal Proceedings 9
ITEM 4. Submission of Matters to a Vote of Security Holders 9
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters 10
ITEM 6. Selected Consolidated Financial Data 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
ITEM 8. Financial Statements and Supplementary Data 17
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 17
PART III
ITEM 10. Directors and Executive Officers of the Registrant 18
ITEM 11. Executive Compensation 18
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 18
ITEM 13. Certain Relationships and Related Transactions 18
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Celebrity, Inc. (the "Company" or "Celebrity") is one of the largest
suppliers of high quality artificial flowers, foliage and flowering bushes and
other decorative accessories, selling primarily to craft store chains and other
retailers and to wholesale florists. Artificial floral products is one of the
largest product categories for craft store chains. The Company serves these
and other customers by offering a line of over 9,000 competitively priced
products and performing accurate and on-time delivery. Celebrity meets the
just-in-time inventory requirements of its customers for artificial floral
products from its distribution centers. The Company also arranges bulk
shipment of private label merchandise direct from manufacturers to customers.
Celebrity works closely with individual customers to devise marketing
strategies, planograms and merchandising concepts and advises them on
advertising, product promotion and store displays. The Company contributes to
the design of its products, and its Hong Kong staff contracts and oversees
their manufacture, exercises quality control and arranges the consolidation and
shipment of merchandise.
In February 1995 the Company acquired certain assets of India Exotics,
Inc. ("India Exotics"), an importer and distributor of decorative brass and
textile products. Management believes the acquisition has benefited the
Company by further diversifying its product offerings. Additionally, the
Company believes the complementary product lines of India Exotics provide the
Company a greater presence in the decorative accessories marketplace, thereby
affording it the opportunity to increase its share in a more broadly defined
market. In November 1993 the Company consummated a business combination with
The Cluett Corporation ("Cluett") of Winston-Salem, North Carolina, an
assembler of artificial trees, floor planters and floral arrangements, and
Centre Court Group, a related partnership ("Centre Court"). The combination
expanded the Company in parts of the U.S. market where Celebrity had not had a
strong presence. Management believes the combination has benefited the Company
because of the compatibility among product lines and because the Company
acquired additional distribution capabilities and customer accounts. In June
1992 the Company acquired certain assets of Magicsilk, Inc. ("Magicsilk"),
which had one of the best recognized trade names in the artificial floral
industry. The Company believes the acquisition broadened Celebrity's product
line into premium quality artificial floral products, diversified its customer
base and strengthened its leadership position in the industry. In 1984 Robert
H. Patterson, Jr. and Richard Yuen established Celebrity Exports International
Limited, a Hong Kong corporation ("Celebrity Hong Kong"), to serve as the
Company's exclusive purchasing agent in southeastern Asia. Contemporaneously
with the consummation of the Company's initial public offering in December
1992, Celebrity Hong Kong became a wholly- owned subsidiary of the Company.
MARKET OVERVIEW
In enhancing the warmth and style of their homes, many consumers
purchase artificial flowers as interior accent pieces and accessories.
Commercial consumers such as hotels, stores and malls also purchase artificial
floral products for interior decoration. The use of fabrics and advances in
manufacturing techniques have made the products more natural looking and more
aesthetically appealing than ever before. Consumers are also attracted to the
products' other characteristics. Artificial floral products are relatively
inexpensive as furnishing items, can last for years, require no maintenance and
can be fashioned to complement any decor. Home consumers purchase artificial
floral products, either as completed arrangements that are convenient
decorative accessories, or as individual components that they arrange
themselves for display at home, for gifts, or for resale at craft shows or
through small in-home businesses.
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Craft store chains and other specialty retailers have capitalized on the
demand of home consumers, specifically women aged 25 to 55 with above average
income, by devoting a substantial portion of their shelf space to a wide range
of artificial floral products, including completed arrangements, flowering
bushes and foliage and individual stems. In addition to artificial floral
products, craft store chains specialize in picture framing, creative craft
materials, art supplies and hobby items. Among major craft store chains,
artificial floral products is typically the largest single product category by
sales.
In addition to craft store chains, artificial floral products are sold
through other distribution channels. Pottery stores are high volume, lower
price retail stores with substantial square footage devoted to pottery, glass,
artificial floral and other products. These stores sell artificial floral
products in a manner and to customers similar to those of craft store chains.
Full line discount store chains with floral or craft departments sell small
arrangements and offer a reduced range of individual stems. Warehouse clubs
sell primarily artificial trees, floor planters and completed floral
arrangements. Retail florists often sell artificial as well as natural floral
products. These retailers are supplied broad ranges of individual artificial
floral products, as well as natural cut flowers, by wholesale florists.
Wholesale florists are a highly fragmented distribution channel consisting of a
few large multiple site distributors and numerous smaller single site
operations.
PRODUCTS
Celebrity's product line of approximately 9,000 items is comprised of a
full range of artificial floral products, including artificial flowers,
flowering bushes and foliage, pre-made floral arrangements, trees and floor
planters that the Company assembles, decorative brass containers, candlesticks
and accessories and a broad line of decorative textile products. Celebrity's
Christmas line consists of artificial Christmas trees, wreaths, garlands and
other ornamental products. Celebrity continually updates its product mix,
monitoring style and color trends that affect artificial floral product sales
and identifying product categories with growth potential. This requires
adding, deleting or modifying hundreds of the Company's stock keeping units
(SKUs) each year.
The Company uses identifiable brand names for most of its products.
These brand names identify the Company as the source of high quality artificial
floral products to retailers and consumers. Product lines, such as CELEBRITY
SILK(R) flowers and foliage and SILK ACCENTS(R) and ARTISTIC SILK(TM) stem
flowers, are marketed primarily through craft store chains and certain other
retailers. The Company's MAGICSILK(R) brands, consisting of MAGICSILK(R) and
KARISMA(R) flowers and BOTANIX(R) foliage and flowering bushes, are sold
primarily by retail florists. Artificial trees, floor planters and pre-made
floral arrangements assembled by Cluett are sold under the brand names GOLD
LEAF COLLECTION and Design(R) and INDOOR GARDEN COLLECTION(R), primarily by
discount retailers and warehouse clubs. The Company has introduced its
Magicsilk and Cluett product lines to its craft store chain customers.
The Company believes that its brand names give its customers assurance
of product quality and availability and distinguish its products from unbranded
artificial floral products sold by its competitors.
SERVICES
The Company serves its customers with accurate and on-time delivery of
its products. Craft store chain customers, in particular, demand this high
level of service because they typically stock hundreds of these products as
everyday items and seek to minimize inventory cost while assuring full product
availability. The Company offers a variety of distribution services depending
on the customers' needs and the product:
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o Assured Rapid Delivery. Celebrity reduces delivery times and
customers' inventory costs and meets their just-in-time delivery
requirements by quickly filling orders for artificial floral products
from the extensive inventory in its distribution center. Celebrity's
goal is to fill within 48 hours all orders placed for immediate shipment
with at least 90% of the ordered merchandise. Artificial trees, floor
planters and pre-made floral arrangements are assembled and shipped from
the Company's manufacturing facilities in Winston-Salem, North Carolina;
Tyler, Texas; and Vista, California. Shipments of decorative brass and
textile products are made from the India Exotics distribution center in
St. Louis, Missouri.
o Direct Shipment. Celebrity can provide substantial unit cost
savings by planning with customers for delivery of large orders.
Celebrity's Hong Kong staff arranges these shipments direct from
manufacturers in southeastern Asia to the customer's location. In
addition to assuring the high quality of the products shipped,
Celebrity's Hong Kong staff can also arrange private labeling, customs
documentation and financing for its customers. Similar services can be
provided for shipment of decorative brass products direct from
manufacturers in India. Even if a customer's order is not large enough
to meet minimum manufacturing lot sizes for direct shipment, Celebrity
can still offer cost savings to the customer by arranging to combine the
customer's order with its own orders or orders of other customers.
These combined shipments are delivered to the Company's distribution
centers, separated and shipped to the customers.
Customers who place direct shipment orders sometimes reorder the same
product from the distribution centers to replenish their inventory of that
product. Even large customers order low turnover products through the
distribution centers.
Celebrity provides customers a range of other services that it believes
make the Company an attractive source for artificial floral products and other
decorative accessories. Celebrity's sales force assists customers in
identifying products from the Company's lines that are most likely to fit the
customer's primary consumer market. Celebrity works closely with individual
customers to devise marketing strategies, planograms and merchandising concepts
and to furnish advice on advertising, product promotion and store displays. A
store's planogram indicates product display and establishes minimum inventory
levels of the Company's products. The Company's sales force provides thorough
in-store service, frequently checking stock levels and placing reorders.
The Company was one of the first in its industry to have all of its
products bar coded under the universal product code system at the factory.
Most of the Company's major customers require bar codes to track inventory
turnover and generate reorders. To speed order placement, customers use
Celebrity's toll-free ordering lines and the Company's sales force, equipped
with portable fax machines, quickly transmits written purchase orders. The
Company can directly monitor the rate of sale of its products sold by larger
retailers and warehouse clubs that provide on-line access to their point-of-
sale information systems. Celebrity also offers electronic data interchange,
which allows customers to electronically place orders for the Company's
products.
PRODUCT SUPPLY ARRANGEMENTS
The manufacture of high quality artificial flowers and foliage requires
semi-skilled labor that is attentive to detail. Southeastern Asia offers an
abundant, low-cost supply of this labor and dominates the manufacture of
artificial floral products. Factories are located primarily in the Guangdong
Province of the People's Republic of China (the "PRC") and also in Thailand,
Malaysia, the Philippines, Taiwan and South Korea. Nearly all the
manufacturers are privately owned, including those with factories in the PRC.
Most manufacturers produce only a limited product line and few have a
distribution network. The marketing
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efforts of most are limited to sales offices in Hong Kong, which are easily
accessible to Celebrity's Hong Kong staff.
Celebrity Hong Kong contracts and oversees product manufacture,
exercises quality control and arranges the consolidation and shipment of
merchandise to the Company's distribution centers or direct to customers. The
Company, through Celebrity Hong Kong, works closely with manufacturers to
modify product design, color and other features and to produce the Company's
original designs. The Company believes that it is one of the few U.S.
importers of artificial floral products that does not rely on third party
agents to obtain these services. Through Celebrity Hong Kong, the Company has
more control over the quality, production and shipment of products than most of
its competitors. Its Hong Kong presence also enables the Company to build
strong relationships with manufacturers and to judge better their capabilities
and financial stability.
There are numerous manufacturers of artificial floral products,
providing alternative sources of supply for each of the Company's products.
The Company works with approximately 60 manufacturers and purchases most of its
products from ten of them. Celebrity believes that it is the dominant customer
of these major suppliers and through this status obtains superior pricing and
service. Additionally, the Company purchases decorative brass and textile
products from approximately 20 suppliers located primarily in India. The
Company has entered into an agreement with its primary supplier of decorative
brass products pursuant to which the supplier agreed to supply these products
to the Company for a three-year period ending in 1998. See Note 11 to the
Consolidated Financial Statements.
QUALITY ASSURANCE
To assure delivery of high quality products, Celebrity carefully selects
its suppliers and performs periodic product inspections, both prior to shipment
and after receipt in the U.S. The Company has experienced negligible returns
of defective or damaged products.
SALES AND MARKETING
Celebrity's sales force is organized by geographic area and product
line. The Company employs 26 salespeople and contracts with 24 independent
sales representatives. Sales of artificial floral products outside the U.S.,
aggregating approximately $8.8 million in fiscal 1997, are made primarily to
customers in Europe. Most sales outside the U.S. are made by the staff of
Celebrity Hong Kong. See Note 12 to the Consolidated Financial Statements for
financial information by geographic area. Large corporate accounts are served
by the national sales managers. Company salespeople receive base salaries,
monthly commissions and year-end bonuses based on sales volume. Independent
sales representatives receive commissions based on a percentage of their net
sales.
Celebrity participates in the major artificial floral trade shows held
annually in Las Vegas, Dallas, Hong Kong and Frankfurt, Germany. Through these
shows Celebrity promotes its name and brands and introduces its products to
potential customers. Products sold through wholesale florists are promoted by
the Company through advertisements in florist trade publications.
The Company's distribution centers in Tyler, Texas and St. Louis,
Missouri, and floral arrangement production facilities in Winston-Salem, North
Carolina; Tyler, Texas; and Vista, California, assure rapid delivery to
customers over a broad geographic area.
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CUSTOMERS
During fiscal 1997 the Company sold products to approximately 3,000
customers, primarily in the South, Midwest and East. The majority of those
sales were to craft store chains and pottery stores, including Michaels Stores,
MJDesigns, Hobby Lobby, Frank's Nursery and Crafts and Garden Ridge Pottery,
and discount retailers and warehouse clubs, including Kmart and Sam's.
Approximately 7% of consolidated net sales were made by Celebrity Hong Kong to
European customers.
A single customer, Michaels Stores, accounted for $34.6 million, or
27.6%, of consolidated net sales in fiscal 1997. The loss of the largest
customer or a significant portion of its business, or the ability of such
customer to cause the Company to reduce its profit margins, could have a
material adverse effect on the Company.
COMPETITION
The artificial floral industry is highly competitive. The Company's
primary competitors are other importers and distributors. The Company believes
that some of its competitors may have greater financial, distribution and
marketing resources than the Company.
The Company believes that there are a variety of ways to compete in its
industry. For example, some competitors focus solely on price and others
specialize in a particular product segment. The Company competes primarily on
the basis of customer service, product quality, supply dependability, product
line breadth, price and brand name recognition.
The barriers to entry to the Company's industry are relatively low. The
Company believes, however, that attaining success in the industry is difficult.
The Company also believes that it has competitive advantages, including its
ability to fill orders quickly and completely from its distribution centers and
generally provide a high level of customer service, its Hong Kong presence,
high quality products, competitive prices and brand names. There is no
assurance that the Company will maintain these advantages or that they will not
be overcome by other factors that may develop.
TRADEMARKS
The Company has registered the BOTANIX(R), CELEBRITY DESIGNS(R),
CELEBRITY SILK(R), FLORA LACE COLLECTION and Design(R), CLUETT CANE
COLLECTION(R), GOLD LEAF COLLECTION(R), COLOR CONCEPTS(R), COLOR UNION(R), GOLD
LEAF COLLECTION and Design(R), INDIA EXOTICS and Design(R), INDOOR GARDEN
COLLECTION(R), KARISMA(R), MAGICSILK(R), MR. SILK SHINE(R) , OLIVER'S
GREENHOUSE COLLECTION(R), SEND A SILK(R), SILK ACCENTS(R), THE GREENHOUSE
COLLECTION(R), THE GREENHOUSE COLLECTION and Design(R), TROPICAL PALM(R) and
THE SILK GARDENER(R) trademarks with the U.S. Patent and Trademark Office in
conjunction with its products and services. The Company has applications
pending in the United States Patent and Trademark Office for registration of 12
additional marks. The Company also has registered certain of its trademarks in
a number of foreign countries. The Company believes that its trademarks have
significant value in the marketing of its products and services and protects
its trademarks vigorously against infringement.
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TRADE REGULATION
The Company currently imports products manufactured in the PRC and other
locations throughout southeastern Asia. Products imported by the Company into
the U.S. are subject to U.S. customs duties on the price paid for the products,
which are payable when the products are brought over the U.S. border. The duty
is paid by either the Company or its customers, depending on which party
assumes responsibility for importation. Customer purchases of artificial
floral products directly from Celebrity Hong Kong, with customers responsible
for importation and paying their own import duties, accounted for approximately
32% of consolidated net sales in fiscal 1997.
Artificial floral products sold by Celebrity Hong Kong to customers
outside the U.S., accounting for approximately 7% of consolidated net sales in
fiscal 1997, may be subject to tariffs imposed by the destination countries but
would not be subject to U.S. tariffs. Although U.S. customs duties paid by the
Company, ranging from approximately 8% to 17% of the cost of imported
merchandise, have been relatively constant for several years, changes in
customs rates could adversely affect the Company's ability to import quality
products at favorable prices. Likewise, import quotas or embargoes could limit
the amount of merchandise the Company could import from time to time, affecting
the Company's ability to meet its customers' demands.
Most Favored Nation Treatment for the PRC. The PRC's exports to the
U.S., which include toys, discount apparel and footwear, have, since 1980,
received the same preferential tariff treatment accorded goods from countries
granted "most favored nation" status. However, preferential tariff treatment
for countries with nonmarket economies, including the PRC, is granted one year
at a time, and such treatment is renewed only upon the President's
recommendation to Congress that the objectives of U.S. trade law will be served
by extending preferential treatment for another year. Under U.S. trade law,
Congress may override the President's recommendation with a joint resolution to
bar the extension of preferential treatment. If such a joint resolution is
passed by Congress, the President may veto the resolution. If Congress cannot
override such a veto, preferential treatment continues.
Because of concerns regarding the labor and human rights practices of
the PRC and its trade policies that potentially deprive U.S. firms and products
of market access, the renewal of the PRC's most favored nation treatment has
been a contentious political issue for several years. President Clinton has
reversed his position that renewal of most favored nation status be based on
progress on human rights issues and has extended most favored nation status for
the PRC through June 1998 without placing significant conditions on future
renewal. In June 1997 the U.S. House of Representatives voted against a
resolution to override the President's extension and rescind the most favored
nation status of the PRC by a 259 to 173 vote, thereby continuing the U.S.
trade relationship with the PRC under most favored nation status. However, the
linkage between most favored nation status and the limitation of the
proliferation of nuclear weapons technology and provision of greater access to
markets, as well as progress on human rights issues in the PRC, may continue in
the future, and therefore prospects for continued preferential treatment are
difficult to determine.
Were the PRC to lose most favored nation treatment, the import duty on
goods manufactured in the PRC and imported into the U.S. would increase from
approximately 9% to 71.5%. According to U.S. Commerce Department statistics,
currently about three-fourths of the artificial floral products imported into
the U.S. come from the PRC. The Company believes this significant market share
is primarily attributable to the low cost of labor in the PRC. Although
increased duties on the Company's products would increase the cost of goods
from the PRC, all of the Company's competitors who import artificial floral
products from the PRC would be subject to the same increase in costs. In
addition, because labor costs in the PRC are significantly lower than those in
other countries, the Company believes the PRC would continue to be the lowest
cost source for artificial floral products even if the PRC lost most favored
nation treatment. If the
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Company were to face a substantial increase in tariff rates on products
imported into the U.S., the Company would (i) attempt to increase the prices
charged to its customers, (ii) ask its suppliers to reduce the prices charged
to the Company and (iii) seek to identify more favorable sources for its
products to assure the highest quality at the lowest price; however, there is
no assurance that these efforts will allow the Company to prevent its results
of operations from being affected adversely.
Additionally, even if most favored nation status is maintained for the
PRC, significant forces in the Congress and elsewhere are pressing for other
sanctions in response to the PRC's human rights, arms and intellectual property
rights policies, and there is no assurance that these possible sanctions will
not affect the Company.
Section 301. Section 301 of the Trade Act of 1974, as amended ("Section
301"), directs the U.S. Trade Representative ("USTR") to designate those
countries that deny adequate and effective intellectual property rights or fair
and equitable market access to U.S. firms that rely on intellectual property.
From the countries designated, the USTR is to identify as "priority" foreign
countries those countries where the lack of intellectual property rights
protection is most egregious and has the greatest adverse impact on U.S. firms.
The USTR is authorized to take retaliatory action, including the imposition of
retaliatory tariffs and import restraints on goods from priority foreign
countries, if such countries do not respond to USTR investigations by entering
into good faith negotiations or by evidencing significant progress in
protecting intellectual property rights.
In October 1992 the PRC and the U.S. entered into a memorandum of
understanding ("MOU") concerning access to PRC markets. In the MOU the PRC
agreed to adjust its trade practices to international standards by reducing
barriers to U.S. goods, including the elimination of a variety of licensing
requirements, quotas, controls and restrictions, between December 1992 and
December 1997. As a result of concerns regarding the PRC's compliance with the
MOU, the USTR reopened negotiations with the PRC in late 1994. These
negotiations concluded with the re-signing of the MOU in February 1995. In
April 1996, however, the USTR again became concerned regarding the PRC's
trading policies and enforcement efforts and designated the PRC as a priority
foreign country. The USTR subsequently published a preliminary retaliation
list on $3 billion of PRC exports to the U.S., which did not include artificial
floral products. The USTR announced in June 1996 that no sanctions would be
imposed, however, as a result of the PRC's improved enforcement efforts with
respect to its trade agreements with the U.S.
The Company cannot predict the likelihood or effect of potential trade
retaliation against the PRC that may occur in the future. Trade retaliation in
the form of increased tariffs or quotas, or both, against products that are
manufactured on behalf of the Company now or in the future could increase the
cost of such products to the Company.
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EXECUTIVE OFFICERS
Set forth below is certain information as of September 25, 1997
regarding the executive officers of the Company:
NAME AGE TITLE
- -------------- --- -----------------------------------
Robert H. Patterson, Jr . . . . . . 46 Chairman of the Board, President, Chief Executive Officer and
Secretary
Richard Yuen . . . . . . . . . . . 53 Managing Director of Celebrity Hong Kong
David J. Huffman . . . . . . . . . 46 Executive Vice President of Celebrity and President of the
Distribution Division
Clifford C. Condict . . . . . . . . 50 Vice President -- Merchandise
Roger D. Craft . . . . . . . . . . 50 Vice President -- Operations
C. David Gingrich . . . . . . . . . 46 President of The Cluett Corporation
Robert H. Patterson, Jr. has served as Chairman of the Board of
Directors of Celebrity since 1989, as Chief Executive Officer since July 1995,
as President from 1978 to July 1995 and since September 1997, and as a director
since 1974.
Richard Yuen has managed Celebrity Hong Kong since 1984 and has been a
director of Celebrity since December 1992.
David J. Huffman has served as Executive Vice President of Celebrity and
President of the Distribution Division since September 1997. He served as
President of Celebrity from July 1995 to September 1997. From February 1991 to
July 1995, he was Vice President -- Sales of Celebrity. From February 1990 to
February 1991, he was the Sales Manager of the Celebrity Designs Division.
Clifford C. Condict has served as Vice President -- Merchandise of
Celebrity since March 1994. Mr. Condict served as President of Magicsilk,
Inc., a subsidiary of the Company, from June 1992 to December 1993, and as Vice
President -- Operations of Celebrity from 1988 to June 1992.
Roger D. Craft has served as Vice President -- Operations of Celebrity
since September 1993. Mr. Craft served as General Manager of Star Wholesale
Florist, Inc., a subsidiary of the Company, from 1986 to August 1993.
C. David Gingrich has served as the President of Cluett since February
1995. From August 1988 through February 1995, Mr. Gingrich served as Vice
President of Sales and Marketing of Seco, Inc., a manufacturer of window
fashions, including blinds and pleated shades, in Napierville, Illinois. He
served as Managing Director of Intercraft Industries, Inc., a manufacturer of
picture frames, from December 1980 through August
1988.
Officers are elected annually by the Board of Directors and serve at its
discretion.
EMPLOYEES
At August 31, 1997, the Company had 727 full-time and part-time
employees, including 41 employed by Celebrity Hong Kong. The Company has not
entered into any collective bargaining agreements with its employees. The
Company believes that its relations with its employees are good.
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ITEM 2. PROPERTIES.
The Company owns certain facilities for offices, distribution centers
and floral arrangement production as follows:
APPROXIMATE
SQUARE
LOCATION TYPE OF FACILITY FOOTAGE
- ------------------------------------------- -------------------------------------------- -----------------
Tyler, Texas . . . . . . . . . . . . . . Office/Distribution Center 137,500
Winston-Salem, North Carolina . . . . . . Floral Arrangement Production Facility 110,000
Tyler, Texas . . . . . . . . . . . . . . Floral Arrangement Production Facility 100,000
The Company also leases the space occupied by certain offices,
warehouses, distribution centers, showrooms, floral arrangement production
facilities and other facilities. The following table summarizes these leases.
APPROXIMATE
SQUARE
LOCATION TYPE OF FACILITY FOOTAGE
- ------------------------------------------- -------------------------------------------- -----------------
Tyler, Texas . . . . . . . . . . . . . . Warehouse 60,000
Tyler, Texas . . . . . . . . . . . . . . Warehouse 56,000
Tyler, Texas . . . . . . . . . . . . . . Wholesale Supply House 23,000
Dallas, Texas . . . . . . . . . . . . . . Wholesale Supply House 70,000
Dallas, Texas . . . . . . . . . . . . . . Showroom 19,000
Atlanta, Georgia . . . . . . . . . . . . Showroom 20,000
Miami, Florida . . . . . . . . . . . . . Showroom 3,000
St. Louis, Missouri . . . . . . . . . . . Office/Distribution Center 100,000
Winston-Salem, North Carolina . . . . . . Warehouse 69,000
Vista, California . . . . . . . . . . . . Floral Arrangement Production Facility 35,000
Hong Kong . . . . . . . . . . . . . . . . Office/Showroom 20,000
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings that arise in the
ordinary course of its business. The Company believes that none of its current
litigation is likely to have a material adverse effect on its financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of fiscal 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Common Stock, par value $.01 per share, of the Company ("Common
Stock") is traded on the Nasdaq Stock Market's National Market under the symbol
"FLWR."
The following table sets forth, for the periods indicated, the high and
low closing sale prices of the Common Stock, as reported by the Nasdaq National
Market.
FISCAL YEAR HIGH LOW
- ----------------------------------------------------- ----------- -----------
1996
First Quarter . . . . . . . . . . . . . . . . . . $7 7/8 $6 5/8
Second Quarter . . . . . . . . . . . . . . . . . . $7 1/4 $5
Third Quarter . . . . . . . . . . . . . . . . . . $5 7/8 $3 1/4
Fourth Quarter . . . . . . . . . . . . . . . . . . $5 $3 7/8
1997
First Quarter . . . . . . . . . . . . . . . . . . $4 1/4 $3 1/4
Second Quarter . . . . . . . . . . . . . . . . . . $3 3/4 $3 1/8
Third Quarter . . . . . . . . . . . . . . . . . . $4 $3 3/8
Fourth Quarter . . . . . . . . . . . . . . . . . . $3 1/2 $3 1/8
1998
First Quarter (through September 8, 1997) . . . . $3 $2 1/8
On September 8, 1997, the closing sale price of the Common Stock as
reported by the Nasdaq National Market was $2 3/8 per share. As of September
8, 1997, there were 121 record holders of the Common Stock.
The Company has not paid cash dividends in the last five fiscal years.
Management presently intends to retain any earnings for the operation and
expansion of the Company's business and does not anticipate paying cash
dividends in the foreseeable future. The terms of the Company's revolving line
of credit with its principal lender currently restrict the payment of
dividends.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated balance sheet data as of June 30,
1997, 1996, 1995 and 1994, and selected consolidated statement of operations
data for each of the years in the four year period ended June 30, 1997, are
derived from audited consolidated financial statements of Celebrity. The
selected consolidated balance sheet data as of June 30, 1993, and selected
statement of operations data for the year ended June 30, 1993, are derived from
audited consolidated financial statements of Celebrity and audited combined
financial statements of Cluett and Centre Court. Certain events, such as the
acquisitions of India Exotics in February 1995, affect the comparability of the
data between years. See Note 3 to the Consolidated Financial Statements for
discussion of certain of these events.
YEAR ENDED JUNE 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . $ 125,170 $ 115,048 $ 118,810 $ 90,884 $ 73,183
Net income (loss) . . . . . . . . . . $ (5,761) $ (5,422) $ 3,782 $ 1,130 $ 2,893
Earnings (loss) per common share and
common equivalent share . . . . . $ (.91) $ (.86) $ .60 $ .18 $ .54
JUNE 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:(1)
Total assets . . . . . . . . . . . . $ 67,453 $ 73,363 $ 74,641 $ 47,105 $ 42,045
Current liabilities . . . . . . . . . $ 41,424 $ 15,216 $ 14,122 $ 6,561 $ 6,849
Notes payable, net of current portion $ 4,877 $ 31,081 $ 27,941 $ 11,701 $ 7,286
Redeemable common stock(2) . . . . . $ 175 $ 350 $ 525 $ 700 $ 875
______________
(1) Celebrity Hong Kong, which was consolidated with Celebrity
contemporaneously with the initial public offering, paid cash dividends
of $711,000 for fiscal 1993. Celebrity has not paid cash dividends in
the last five fiscal years and does not anticipate declaring cash
dividends in the foreseeable future.
(2) At June 30, 1992, the Company had outstanding 48,193.29 Series A,
36,358.52 Series B and 84,551.70 Series C warrants, each representing
the right to purchase one share of Common Stock at a nominal exercise
price (the "Series A Warrants," "Series B Warrants" and "Series C
Warrants," respectively, or collectively, the "Warrants"), all of which
were issued in connection with the acquisition of Magicsilk.
The Warrants were exercised or redeemed in December 1992 in conjunction
with the Company's initial public offering. The Series A and B Warrants
were converted into an aggregate of 67,308 shares of Common Stock
("Redeemable Common Stock") at the initial public offering price of $13
per share. The Series C Warrants were redeemed for $1,099,000, an amount
obtained by multiplying the number of Series C Warrants by the initial
public offering price of $13 per share. The holders of the Redeemable
Common Stock have the right on September 30 of 1993, 1994, 1995, 1996 and
1997, to "put" to the Company, and the Company has the obligation to
purchase, shares of Redeemable Common Stock from such holders at a price
per share equal to the greater of the initial public offering price or
the fair market value per share at the time of the put (as determined
pursuant to the terms of the warrant agreement). The Company's purchase
obligations with respect to the Redeemable Common Stock are limited to
$100,000 and $75,000 on each put date, and $500,000 and $375,000 in the
aggregate over all put dates, for the Redeemable Common Stock relating to
the Series A Warrants and Series B Warrants, respectively. On September
30 in each of 1993, 1994, 1995 and 1996, 13,461 shares of Redeemable
Common Stock were put back to the Company at $13 per share. See Note 8
to the Consolidated Financial Statements. The Company
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has received notice that 13,461 shares of Redeemable Common Stock will
be put back to the Company on September 30, 1997 at $13 per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
This Annual Report on Form 10-K contains forward-looking statements
about the business, financial condition and prospects of Celebrity. The actual
results of Celebrity could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties,
including without limitation (i) changes in customer demand for the Company's
products at the retail level, (ii) trends in the retail and wholesale
decorative accessories industries, (iii) inventory risks attributable to
possible changes in customer demand, compounded by extended lead times in
ordering the Company's products from overseas suppliers and the Company's
strategy of maintaining a high merchandise in stock percentage, (iv) the
effects of economic conditions, (v) supply and/or shipment constraints or
difficulties, (vi) the impact of competitors' pricing, (vii) the effects of the
Company's accounting policies, (viii) changes in foreign trade regulations,
including changes in duty rates, possible trade sanctions, import quotas and
other restrictions imposed by U.S. and foreign governments, (ix) the effects of
the assumption of control over Hong Kong by the PRC on July 1, 1997 and (x)
other risks detailed in the Company's Securities and Exchange Commission
filings. These risks and uncertainties are beyond the ability of the Company
to control, and in many cases, the Company cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements. When used in this Annual
Report on Form 10-K, the words "believes," "expects," "plans," "intends" and
similar expressions as they relate to the Company or its management generally
are intended to identify forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's
consolidated statements of income expressed as a percentage of net sales for
the years indicated.
FISCAL YEAR ENDED JUNE 30,
------------------------------------
1997 1996 1995
----------- ----------- ----------
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
Costs and operating expenses:
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . 78% 79% 76%
Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4% 5% 4%
General and administrative . . . . . . . . . . . . . . . . . . . . 16% 19% 14%
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 2% 2% 1%
---- --- ---
100% 105% 95%
---- --- ---
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . % (5)% 5%
Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . (3)% (3)% (1)%
--- -- --
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . (3)% (8)% 4%
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . (2)% (3)% 1%
--- --- ---
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . (5)% (5)% 3%
=== === ===
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FISCAL 1997 COMPARED WITH FISCAL 1996
Net sales increased 9% from $115.0 million in fiscal 1996 to $125.2
million in fiscal 1997. The increase was attributable primarily to an increase
in sales to existing customers.
Cost of goods sold increased from $91.2 million, or 79% of net sales, in
fiscal 1996 to $97.5 million, or 78% of net sales, in fiscal 1997. The increase
was attributable to the higher sales volume in fiscal 1997. The increase in
overall gross margin was primarily attributable to the fact that the Company
discontinued certain product lines at the end of fiscal 1996 and recorded
special charges of approximately $3.8 million related to inventory adjustments
necessary to clear out the merchandise. The increase in gross margin resulting
from this fact was partially offset by several other factors. Gross margins
during fiscal 1997 were lower than expected due partially to the sale of the
closeout merchandise. The inventory reduction program was approximately 90%
complete as of June 30, 1997. Gross margins were also lower than expected due
to the sales mix being more heavily weighted toward lower margin products,
including artificial trees. In addition, the Company experienced unfavorable
labor rates and efficiency variances during the third and fourth quarters of
fiscal 1997, which also contributed to lower than expected gross margins.
Selling expenses decreased from $5.8 million, or 5% of net sales, in
fiscal 1996 to $5.5 million, or 4% of net sales, in fiscal 1997. The decrease
was attributable to lower salary and commission costs and trade show costs,
partially offset by higher travel expenses. Selling expenses decreased as a
percentage of net sales due to the higher sales volume in fiscal 1997.
General and administrative expenses decreased $1.8 million from $21.3
million, or 19% of net sales, in fiscal 1996 to $19.5 million, or 16% of net
sales, in fiscal 1997. The decrease was primarily attributable to cost saving
associated with lower inventory levels and the closure of one distribution
center and several satellite warehouse facilities. General and administrative
expenses decreased as a percentage of net sales due to the higher sales level
in fiscal 1997 and the cost savings associated with the inventory reductions
and closing of the distribution center and satellite warehouse facilities.
Depreciation and amortization increased from $2.1 million in fiscal 1996
to $2.2 million in fiscal 1997. The increase was primarily attributable to
higher depreciation associated with improvements to the Company's management
information systems and higher amortization expenses incurred by India Exotics.
As a result of the foregoing factors, operating income increased $5.8
million from a loss of $5.3 million in fiscal 1996 to income of $473,000 in
fiscal 1997.
Net interest expense decreased $473,000 from $3.7 million in fiscal 1996
to $3.2 million in fiscal 1997. The decrease was attributable to reductions in
notes payable and lower borrowings under the revolving line of credit.
As a result of the foregoing factors the net loss before income taxes
decreased from $9.0 million in fiscal 1996 to $2.7 million in fiscal 1997.
Provision for income taxes increased from a benefit of $3.5 million in
fiscal 1996 to a provision for income tax expense of $3.0 million in fiscal
1997. Included in the provision for income tax expense in fiscal 1997 is a
charge of $4.4 million to record a valuation allowance to reflect the estimated
amount of deferred tax assets that, at this time, are uncertain to be realized
in the future. These uncertainties relate primarily to the ability to utilize
net operating loss carryforwards and certain tax credit carryforwards prior to
their expiration. If the Company's U.S. operations are sufficiently profitable
in the future, this reserve will be released and the net operating loss
and tax credit carryforwards will be available to shelter future U.S. taxable
income.
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FISCAL 1996 COMPARED WITH FISCAL 1995
Net sales decreased 3% from $118.8 million in fiscal 1995 to $115.0
million in fiscal 1996. The decrease was attributable to a decrease in sales
to existing customers, primarily as a result of a slower than expected retail
environment beginning in the last quarter of calendar 1995 and continuing
through the first half of calendar 1996. Many of the Company's retailer
customers reduced their purchases from the Company during this period to lower
their inventories to desirable levels.
Cost of goods sold increased from $89.8 million, or 76% of net sales, in
fiscal 1995 to $91.2 million, or 79% of net sales, in fiscal 1996. Included in
cost of goods sold are charges amounting to $3.8 million, or 3% of net sales,
related to inventory adjustments resulting from the discontinuance of certain
product lines.
Selling expenses increased from $4.7 million, or 4% of net sales, in
fiscal 1995 to $5.8 million, or 5% of net sales, in fiscal 1996. The increase
in selling expenses is primarily attributable to expenses incurred by India
Exotics, acquired in February 1995, increases in salaries and commissions, and
increases in trade show expenses. Selling expenses increased as a percentage
of net sales primarily as a result of the lower sales volume in fiscal 1996.
General and administrative expenses increased from $16.2 million, or 14%
of net sales, in fiscal 1995 to $21.3 million, or 19% of net sales, in fiscal
1996. The increase in general and administrative expenses was attributable to
(i) general and administrative expenses incurred by India Exotics, (ii) floral
arrangement production facilities in Tyler, Texas and Vista, California, which
were expanded in fiscal 1995, being operational for a full year in fiscal 1996,
resulting in increases in compensation, facility costs and other expenses,
(iii) increases in rent for satellite warehouse space to accommodate the higher
inventory levels carried by the Company during fiscal 1996 and (iv) special
charges of approximately $600,000 relating to the planned closure of a
distribution center and several satellite warehouse facilities in conjunction
with the inventory reduction resulting from the Company's plan to discontinue
certain product lines. General and administrative expenses increased as a
percentage of net sales primarily as a result of (i) the lower sales volume in
fiscal 1996, (ii) the special charges relating to the planned closure of a
distribution center and several of the Company's satellite warehouse facilities
and (iii) the fact that direct shipment sales represented a lower percentage of
net sales in fiscal 1996 than in fiscal 1995. Direct shipment sales are those
for which products are shipped directly from Celebrity Hong Kong to the
customers and generally consist of large orders with lower gross margins but
also lower associated selling, general and administrative costs.
Depreciation and amortization increased from $1.6 million in fiscal 1995
to $2.1 million in fiscal 1996, primarily as a result of (i) depreciation and
amortization incurred by India Exotics and (ii) additional building and
equipment depreciation associated with the expansion in fiscal 1995 of floral
arrangement production facilities in Tyler, Texas and Vista, California.
As a result of the foregoing factors, the Company reported an operating
loss of $5.3 million, or 5% of net sales, in fiscal 1996, compared with
operating income of $6.6 million, or 5% of net sales, in fiscal 1995.
Net interest expenses increased from $2.0 million in fiscal 1995 to $3.7
million in fiscal 1996. The increase was attributable to increased borrowings
under the Company's revolving line of credit and debt issued in the third
quarter of fiscal 1995 in conjunction with the India Exotics acquisition.
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As a result of the foregoing factors, the Company reported a loss before
income taxes of $9.0 million, or 8% of net sales, in fiscal 1996, compared with
income before income taxes of $4.6 million, or 4% of net sales, in fiscal 1995.
INFLATION
The effect of inflation on operating costs has been minimal in recent
years. Most of the Company's operating expenses are inflation sensitive, with
increases in inflation generally resulting in increased costs of operation.
The effect of inflation-driven cost increases on the Company's overall
operating costs is not expected to be greater for the Company than its
competitors.
SEASONALITY
Celebrity markets and distributes products for all seasons. The
shipping period for each season is relatively long. When combined with
shipments of basic merchandise that is sold all year, there is no material
seasonal fluctuation in net sales or operating income.
LIQUIDITY AND CAPITAL RESOURCES
Celebrity's sales and marketing strategy and the growth of its business
have required a significantly increased investment in inventory. At the end of
fiscal 1996, however, the Company adopted a strategy to increase inventory
turnover by maintaining its sales growth while carrying reduced levels of
inventory. Inventory levels decreased approximately $2.7 million from
$33.3 million at June 30, 1996 to $30.6 million at June 30, 1997.
Additionally, the Company follows the industry practice of offering extended
terms to qualified customers for sales of Christmas merchandise. These sales
generally take place between the months of June and October on terms not
requiring payment until December 1. The Company has traditionally relied on
borrowings under its revolving line of credit and cash flows from operations to
fund these and other working capital needs.
Cash provided by operating activities in fiscal 1997 amounted to
approximately $2.0 million, which was primarily attributable to changes in
operating assets and liabilities. Inventory decreased $2.7 million during
fiscal 1997 (net of the reserve of $3.8 million established in fiscal 1996).
The decrease was primarily a result of the Company's inventory reduction
strategy. Accounts payable and accrued expenses increased $894,000, primarily
as a result of the timing of payment for merchandise purchased.
Cash used by financing activities amounted to $775,000, which was
primarily for reductions in notes payable.
The Company has a revolving line of credit for its Celebrity, Cluett,
India Exotics and Star Wholesale Florist, Inc. operations in a maximum
amount of $35.0 million. At August 31, 1997, the outstanding balance on this
line of credit was approximately $25.6 million. Borrowing limits are based on
specified percentages of eligible accounts receivable and inventories and, as a
result of such limits, the maximum amount the Company was eligible to borrow at
August 31, 1997, was $25.6 million. Interest is charged monthly on the daily
outstanding balance at the bank's prime rate of interest plus 3/4% per annum.
Amounts borrowed under the line of credit are secured by accounts receivable and
inventory of Celebrity and its Cluett, India Exotics and Star Wholesale Florist,
Inc. subsidiaries. The line of credit contains certain covenants limiting the
incurrence of indebtedness, restricting the payment of dividends and requiring
the Company to maintain certain financial ratios. The Company was not in
compliance with certain of these financial covenants at June 30, 1997,
specifically the minimum net worth, debt to equity ratio, EBITDA to interest
expense ratio and minimum net income requirements. Although the Company
received waivers for these violations at June 30, 1997, the waivers did not
extend to any subsequent periods. At September 29, 1997 it is uncertain whether
the Company will be in compliance with these covenants at the September 30 or
future quarterly measurement dates during fiscal 1998. Therefore, the debt has
been classified as a current liability at June 30, 1997, which resulted in the
violation of the current ratio covenant contained in the line of credit
agreement. The Company has not received a waiver for this violation. However,
the Company is presently negotiating a renewal and extension of the line of
credit agreement that would reset the covenants and extend the term beyond June
30, 1998. The lender has provided written assurance to the Company of its
intent to renew and extend the agreement. Management expects the revised line
of credit agreement to be finalized prior to December 31, 1997. There can be no
assurance, however, that negotiations with the lender will be successful. See
note 7 to the Consolidated Financial Statements.
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Celebrity Hong Kong generally makes full cash payments for products
ordered for Celebrity's account or for direct shipment to customers within ten
days after the manufacturers deliver products in Hong Kong for export. The
Company believes that its practice of making prompt payments has enhanced its
relationships with manufacturers. Celebrity Hong Kong finances these cash
payments through a credit facility with a Hong Kong bank. Generally, under the
terms of this facility the bank finances, with recourse, export bills for
specific shipments by Celebrity Hong Kong. The bank is reimbursed when payment
for these shipments is received. Under the terms of the facility, the maximum
aggregate amount of Celebrity Hong Kong export bills the bank is obligated to
finance at any time is $5.8 million. At August 31, 1997, export bills of
Celebrity Hong Kong aggregating $5.9 million were being financed by the bank.
All of these bills were related to direct shipments to customers and Celebrity
Hong Kong's related potential recourse liability was accounted for as a
contingent obligation.
In June 1997, the Company entered into a new revolving credit facility
with an additional bank, which matures in June 2004. Under the new credit
facility, the Company may borrow a maximum aggregate amount of $5.0 million. At
August 31, 1997, the outstanding balance under this facility was approximately
$5.0 million. Interest accrues on the principal amount outstanding under the
facility at the rate of LIBOR plus 2.65% per annum. Amounts borrowed under
the facility are secured by certain real estate owned by the Company, and the
facility contains covenants requiring the Company to maintain certain financial
ratios. While the Company was not in compliance with certain of these
financial covenants at June 30, 1997, it has obtained a waiver from the bank
with respect to such noncompliance through June 30, 1998. The Company used
proceeds from this new facility to repay the $4.6 million of indebtedness
outstanding under a $5.0 million loan with a different bank.
In September 1997, Celebrity borrowed $500,000 from RHP Management, LLC,
an entity controlled by Robert H. Patterson, Jr., President and Chief Executive
Officer of the Company. All amounts outstanding under the promissory note are
due and payable on December 9, 1997. The principal amount outstanding accrues
interest at a fluctuating rate per annum equal to the prime rate of a specified
bank plus 1.5%. The proceeds from this loan were used to pay certain
intercompany accounts payable to Celebrity Hong Kong.
The Company does not plan to make any significant capital expenditures
in fiscal 1998 other than those incurred in the normal course of business for
replacement of transportation and warehouse equipment and those in connection
with the Company's continuing program to upgrade its management information
systems.
The Company's business is subject to U.S. law relating to imports,
including those imposing import duties. If the U.S. government were to
terminate most favored nation treatment for the PRC or impose punitive tariff
rates on products imported by the Company in retaliation for market access
barriers in the PRC, the duty on products imported by the Company from the PRC
would increase significantly. See "Business -- Trade Regulation." If the
Company were to face an increase in tariff rates on the products it imports
into the U.S., it would (i) attempt to increase the prices charged to its
customers, (ii) ask its suppliers to reduce the prices charged to the Company
and (iii) seek to identify more favorable sources; however, unless and until
these efforts were successful, the Company's results of operations could be
affected adversely.
The Company believes that its current financial position and cash flows
from operations, plus its credit facilities once renegotiated as described
above, will be adequate to fund its operations and expansion plans for the
foreseeable future. There is no assurance, however, that these sources will be
sufficient to fund its operations and expansion plans or that any necessary
additional financing will be available, if at all, in amounts required or on
terms satisfactory to the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements, together with the report of
independent accountants and financial statement schedule, are included on pages
F-1 through F-23 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the directors of the Company will be set
forth in the Proxy Statement to be delivered to shareholders in connection with
the Company's Annual Meeting of Shareholders to be held December 10, 1997 (the
"Proxy Statement"), under the headings "Election of Directors," "Board of
Directors and Committees" and "Section 16 Beneficial Ownership Reporting
Compliance," which information is incorporated herein by reference. The name,
age, position and business experience of each executive officer of the Company
is set forth under "Executive Officers" in Item 1 of this report, which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information concerning management compensation and transactions with
management will be set forth in the Proxy Statement under the headings
"Management Compensation" and "Certain Transactions," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information concerning security ownership of certain beneficial
owners and management will be set forth in the Proxy Statement under the heading
"Principal Shareholders and Management Ownership," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related
transactions will be set forth in the Proxy Statement under the headings
"Management Compensation" and "Certain Transactions," which information is
incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial statements:
The financial statements filed as a part of this report
are listed in the Index to Consolidated Financial
Statements on page F-1.
(2) Financial statement schedules:
The financial statement schedule filed as a part of this
report is listed in the Index to Consolidated Financial
Statements on page F-1.
(3) Exhibits:
The exhibits filed as a part of this report are listed
under "Exhibits" at subsection (c) of this Item 14.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
2.1 -- Asset Purchase Agreement dated as of June 16, 1992,
among Registrant, Holdingflower, Inc., a Delaware
corporation, Magicsilk, Inc., a Delaware corporation, and
Magicsilk, Inc., a Texas corporation.(1)
2.2 -- Asset Purchase Agreement dated February 7, 1995, among India
Exotics, Inc., a Texas corporation, Registrant, India Exotics,
Inc., a Missouri corporation, Surendra Khokha, Rajneesh
Khokha, Asheesh Khokha and the Surendra K. Khokha Revocable
Trust, dated July 18, 1985.(7)
3.1 -- Restated Articles of Incorporation of the Registrant.(1)
3.2 -- Bylaws of the Registrant.(1)
4.1 -- Specimen Common Stock Certificate.(1)
4.2 -- Warrant Agreement dated as of June 16, 1992, between the
Registrant and Magicsilk, Inc.(1)
10.1 -- Loan Agreement dated May 10, 1993, among Registrant,
Magicsilk, Inc. and National Canada Finance Corp.(4)
10.2 -- First Amendment to Loan Agreement dated July 27, 1993,
among Registrant, Magicsilk, Inc. and National Canada Finance
Corp.(5)
10.3 -- Second Amendment to Loan Agreement dated effective as of
November 17, 1993, among Registrant, Magicsilk, Inc., The
Cluett Corporation and National Canada Finance Corp.(6)
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22
10.4 -- Third Amendment to Loan Agreement dated effective as of March
18, 1994, among Registrant, Magicsilk, Inc., The Cluett
Corporation and National Canada Finance Corp.(3)
10.5 -- Fourth Amendment to Loan Agreement dated effective as of
November 4, 1994, among Registrant, Magicsilk, Inc., The Cluett
Corporation and National Canada Finance Corp.(7)
10.6 -- Fifth Amendment to Loan Agreement dated effective as of
February 3, 1995, among Registrant, Magicsilk, Inc., The Cluett
Corporation, India Exotics, Inc. and National Canada Finance
Corp.(7)
10.7 -- Sixth Amendment to Loan Agreement dated effective as of March
14, 1995, among Registrant, Magicsilk, Inc., The Cluett
Corporation, India Exotics, Inc. and National Canada Finance
Corp.(8)
10.8 -- Seventh Amendment to Loan Agreement dated effective as of
August 4, 1995, among Registrant, Magicsilk, Inc., The Cluett
Corporation, India Exotics, Inc. and National Canada Finance
Corp.(9)
10.9 -- Eighth Amendment to Loan Agreement dated effective as of June
19, 1997 among Registrant, Magicsilk, Inc., The Cluett
Corporation, India Exotics, Inc. and National Canada Finance
Corp. (12)
10.10 -- Ninth Amendment to Loan Agreement dated effective as of
September 26, 1997 among Registrant, Magicsilk, Inc., The
Cluett Corporation, India Exotics, Inc., Star Wholesale
Florist, Inc. and National Canada Finance Corp. (12)
10.11 -- Promissory Note dated September 26, 1997, executed by
Registrant, Magicsilk, Inc., The Cluett Corporation, India
Exotics, Inc. and Star Wholesale Florist, Inc. in the principal
amount of $35,000,000, payable to the order of National Canada
Finance Corp.(12)
10.12 -- Amended and Restated Security Agreement dated September 26,
1997, among Registrant, Magicsilk, Inc., The Cluett Corporation,
India Exotics, Inc., Star Wholesale Florist, Inc. and National
Canada Finance Corp.(12)
10.13 -- Subordination Agreement dated July 14, 1992, among National
Canada Finance Corp., TBK Partners, L.P., ML-Lee Acquisition
Fund, L.P., The Bank of New York Commercial Corporation,
Registrant and Magicsilk, Inc.(1)
10.14 -- Letter agreement dated May 19, 1997, setting forth the terms
of a banking facility between Celebrity Exports International
Limited and The Hongkong and Shanghai Banking Corporation
Limited.(12)
10.15 -- General Security Agreement Relating to Goods between
Celebrity Exports International Limited and The Hongkong
and Shanghai Banking Corporation Limited dated April 30,
1984.(1)
10.16 -- Form of Guarantee by Limited Company executed by Registrant in
favor of The Hongkong and Shanghai Banking Corporation
Limited.(12)
10.17 -- Commitment of Celebrity Exports International Limited to
maintain a combined net worth of HK$50,000,000.(12)
10.18 -- Term WCMA Loan Agreement dated June 17, 1997 between
Registrant and Merrill Lynch Business Financial Services Inc.(12)
10.19 -- $5,000,000 Term WCMA Note dated June 17, 1997 signed by
Registrant and payable to Merrill Lynch Business Financial
Services Inc.(12)
20
23
10.20 -- Unconditional Guaranty dated June 17, 1997, executed by
Magicsilk, Inc. in favor of Merrill Lynch Business Financial
Services Inc. (12)
10.21 -- Unconditional Guaranty dated June 17, 1997, executed by The
Cluett Corporation in favor of Merrill Lynch Business Financial
Services Inc.(12)
10.22 -- Unconditional Guaranty dated June 17, 1997, executed by India
Exotics, Inc. in favor of Merrill Lynch Business Financial
Services Inc. (12)
10.23 -- Deed of Trust, Security Agreement, Financing Statement and
Assignment of Rents from Celebrity, Inc. to Trustee for the
Benefit of Merrill Lynch Business Financial Services Inc.
relating to Winston-Salem, North Carolina property. (12)
10.24 -- Deed of Trust, Security Agreement, Financing Statement and
Assignment of Rents from Celebrity, Inc. to Trustee for the
Benefit of Merrill Lynch Business Financial Services Inc.
relating to Tyler, Texas property.(12)
10.25 -- Employment Agreement dated November 17, 1993, between The
Cluett Corporation and James N. Gammill, III.(2)
10.26 -- Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Surendra Khokha.(7)
10.27 -- Letter Agreement dated June 20, 1996, amending the Employment
Agreement dated February 7, 1995, between India Exotics, Inc. and
Surendra Khokha.(11)
10.28 -- Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Meena Khokha.(7)
10.29 -- Letter Agreement dated June 20, 1996, amending the Employment
Agreement dated February 7, 1995, between India Exotics, Inc. and
Meena Khokha.(11)
10.30 -- Noncompetition Agreement dated November 17, 1993, between
Registrant and James N. Gammill, III.(2)
10.31 -- Noncompetition Agreement dated February 7, 1995, among India
Exotics, Inc., Surendra Khokha, Rajneesh Khokha, Asheesh Khokha
and Meena Khokha.(7)
10.32 -- Promissory Note of India Exotics, Inc., a Texas corporation,
guaranteed by Registrant, dated February 7, 1995, payable to
the order of India Exotics, Inc., a Missouri corporation.(7)
10.33 -- First Amendment to Promissory Note dated June 20, 1996,
amending the Promissory Note of India Exotics, Inc., a Texas
corporation, guaranteed by Registrant, dated February 7, 1995,
payable to the order of India Exotics, Inc., a Missouri
corporation.(11)
10.34 -- Promissory Note of India Exotics, Inc., a Missouri corporation,
guaranteed by Registrant, dated February 7, 1995, in the
principal amount of $1,800,000 payable to the order of Surendra
Khokha and his successors, trustees of the Surendra K. Khokha
Revocable Trust, dated July 18, 1985.(7)
10.35 -- Form of Indemnity Agreement.(1)
10.36 -- Amended and Restated 1992 Stock Option Plan.(3)
10.37 -- Amended and Restated 1993 Employee Stock Purchase Plan.(7)
10.38 -- 1998 Employee Bonus Plan.(12)
10.39 -- Promissory Note of Registrant, dated September 10, 1997, in
the principal amount of $500,000 payable to the order of RHP
Management, LLC. (12)
21
24
21.1 -- Subsidiaries of Registrant.(10)
23.1 -- Consent of Price Waterhouse LLP.(12)
23.2 -- Consent of Price Waterhouse LLP.(13)
27.1 -- Financial Data Schedule.(12)
_____________________
(1) Previously filed as an exhibit to Registration Statement No. 33-51820 on
Form S-1 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's Current Report on
Form 8-K dated November 17, 1993, as amended, and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994, and incorporated herein
by reference.
(4) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1993, as amended, and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1993, as amended, and
incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1993, and incorporated
herein by reference.
(7) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1994, and incorporated
herein by reference.
(8) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995, and incorporated herein
by reference.
(9) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1995, and incorporated herein by
reference.
(10) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995, and incorporated
herein by reference.
(11) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996 and incorporated herein by
reference.
(12) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1997 and incorporated herein by
reference.
(13) Filed herewith.
22
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Celebrity, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CELEBRITY, INC.
By /s/ ROBERT H. PATTERSON, JR.
-------------------------------
Robert H. Patterson, Jr.
Chairman of the Board, President
and Chief Executive Officer
Date: October 3, 1997
23
26
CELEBRITY, INC.
CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 1997 AND 1996
27
Page
Report of Independent Accountants.............................................................. F - 3
Consolidated Balance Sheets as of June 30, 1997 and 1996....................................... F - 4
Consolidated Statements of Operations for the
Years Ended June 30, 1997, 1996 and 1995...................................................... F - 6
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1997, 1996 and 1995...................................................... F - 7
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended June 30, 1997, 1996 and 1995....................................... F - 8
Notes to Consolidated Financial Statements..................................................... F - 9
Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts.............................................. F - 23
Other financial statement schedules are omitted because they are not applicable
or the required information is shown in the consolidated financial
statements or notes thereto.
F - 1
28
(This page intentionally left bank.)
F - 2
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Celebrity, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Celebrity, Inc. and its subsidiaries at June 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Dallas, Texas
September 4, 1997, except as to Note 7
which is as of September 29, 1997
F - 3
30
CELEBRITY, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
JUNE 30,
-----------------------
1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 530 $ 1,166
Accounts receivable, net of $2,017 and
$1,119 allowance for doubtful accounts, respectively ......... 15,620 14,919
Inventories ................................................... 30,619 33,279
Deferred tax asset ............................................ 1,711 2,859
Other assets .................................................. 1,782 2,332
---------- ----------
Total current assets ....................................... 50,262 54,555
---------- ----------
Property, plant and equipment, net ............................... 11,522 11,774
Deferred tax asset ............................................... 462 1,622
Intangible assets, net ........................................... 4,718 5,048
Other assets ..................................................... 489 364
---------- ----------
Total assets ............................................... $ 67,453 $ 73,363
========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F - 4
31
CELEBRITY, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
JUNE 30,
------------------------
1997 1996
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 10,405 $ 8,662
Accrued expenses .................................... 3,285 4,134
Income taxes payable ................................ 667 936
Current portion of notes payable .................... 27,067 1,484
---------- ----------
Total current liabilities ........................ 41,424 15,216
Notes payable, net of current portion .................. 4,877 31,081
---------- ----------
Total liabilities ................................ 46,301 46,297
---------- ----------
Redeemable common stock (13,462 and 26,924 shares
at June 30, 1997 and 1996, respectively) .............. 175 350
---------- ----------
Shareholders' equity:
Preferred stock (10,000,000 shares of par value $.01
per share authorized; none issued and outstanding in
1997 or 1996)
Common stock (25,000,000 shares of par value $.01
per share authorized; 6,296,140 and 6,282,678 shares
issued and outstanding at June 30, 1997 and
1996, respectively) ................................ 63 63
Paid-in capital ..................................... 22,353 22,178
Subscriptions receivable ............................ (442) (461)
Retained earnings (accumulated deficit) ............. (469) 5,292
Cumulative translation adjustment ................... (3) (6)
Treasury stock, at cost ............................. (525) (350)
---------- ----------
Total shareholders' equity ....................... 20,977 26,716
---------- ----------
Commitments and contingencies
Total liabilities, redeemable common stock
and shareholders' equity ...................... $ 67,453 $ 73,363
========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
F - 5
32
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
YEARS ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net sales ........................... $ 125,170 $ 115,048 $ 118,810
Costs and operating expenses:
Cost of goods sold ............... 97,479 91,169 89,774
Selling .......................... 5,508 5,842 4,715
General and administrative ....... 19,474 21,323 16,186
Depreciation and amortization .... 2,236 2,054 1,566
------------ ------------ ------------
124,697 120,388 112,241
------------ ------------ ------------
Operating income (loss) ............. 473 (5,340) 6,569
Interest income ..................... 192 193 205
Interest expense .................... (3,408) (3,882) (2,238)
Other, net .......................... (6) 60 87
------------ ------------ ------------
Income (loss) before income taxes ... (2,749) (8,969) 4,623
Provision (benefit) for
income taxes....................... 3,012 (3,547) 841
------------ ------------ ------------
Net income (loss) ................... $ (5,761) $ (5,422) $ 3,782
============ ============ ============
Earnings (loss) per common and common
equivalent share ................... $ (.91) $ (.86) $ .60
============ ============ ============
Average common and common
equivalent shares outstanding .... 6,309,602 6,309,602 6,338,702
============ ============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
F - 6
33
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
YEARS ENDED JUNE 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Operating activities:
Net income (loss) ....................................... $ (5,761) $ (5,422) $ 3,782
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operations:
Depreciation ........................................ 1,604 1,364 1,082
Amortization ........................................ 632 690 484
Deferred income taxes ............................... 2,308 (3,181) (617)
Changes in operating assets and liabilities:
Accounts receivable .............................. (701) 1,328 (239)
Inventories ...................................... 2,660 3,747 (16,322)
Other assets, net ................................ 593 (852) (447)
Accounts payable and accrued expenses ............ 894 2,370 3,819
Income taxes payable ............................. (269) (86) 157
---------- ---------- ----------
Net cash provided by (used in)
operating activities ........................... 1,960 (42) (8,301)
---------- ---------- ----------
Investing activities:
Purchases of equipment .................................. (1,351) (1,704) (1,537)
Purchase of land ........................................ (491)
Expenditures for building construction .................. (1,230)
Acquisition of India Exotics, net of cash acquired ...... (2,396)
Other ................................................... (470) (379)
---------- ---------- ----------
Net cash used in investing activities............. (1,821) (2,574) (5,163)
---------- ---------- ----------
Financing activities:
Proceeds from lines of credit ........................... 24,980 39,501 52,962
Payments on lines of credit ............................. (24,732) (35,708) (40,686)
Proceeds from notes payable ............................. 5,110 899 1,927
Payments on notes payable ............................... (5,979) (2,749) (1,187)
Proceeds from issuance of common stock .................. 24
Redemption of common stock .............................. (175) (175) (175)
Payments on subscriptions receivable .................... 19 93 114
Other ................................................... 2 (29)
---------- ---------- ----------
Net cash provided by (used in)
financing activities........................... (775) 1,861 12,950
---------- ---------- ----------
Decrease in cash and cash equivalents ....................... (636) (755) (514)
Cash and cash equivalents, beginning of period .............. 1,166 1,921 2,435
---------- ---------- ----------
Cash and cash equivalents, end of period .................... $ 530 $ 1,166 $ 1,921
========== ========== ==========
See Notes 2, 6, and 7 for supplementary disclosures.
The accompanying notes are an integral part of
these consolidated financial statements.
F - 7
34
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(dollars in thousands)
Retained
Common Stock Earnings Cumulative
----------------------- Paid-in Subscriptions (Accumulated Translation
Shares Par Value Capital Receivable Deficit) Adjustment
---------- ---------- ---------- ---------- ---------- -----------
Balance at June 30, 1994 .................... 6,253,757 $ 63 $ 21,804 $ (668) $ 6,932 $ 12
Purchase of redeemable common stock ......... 13,461 175
Sale of common stock ........................ 2,000 24
Payment on stock subscriptions .............. 114
Net income .................................. 3,782
Currency translation ........................ (10)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1995 .................... 6,269,218 63 22,003 (554) 10,714 2
Purchase of redeemable common stock ......... 13,461 175
Payment on stock subscriptions .............. 93
Net loss .................................... (5,422)
Currency translation ........................ (8)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 ................... 6,282,679 63 22,178 (461) 5,292 (6)
Purchase of redeemable common stock ......... 13,461 175
Payment on stock subscriptions .............. 19
Net loss .................................... (5,761)
Currency translation ........................ 3
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 .................... 6,296,140 $ 63 $ 22,353 $ (442) $ (469) $ (3)
========== ========== ========== ========== ========== ==========
Treasury
Stock,
At Cost
----------
Balance at June 30, 1994 ....................
Purchase of redeemable common stock ......... $ (175)
Sale of common stock ........................
Payment on stock subscriptions ..............
Net income ..................................
Currency translation ........................
----------
Balance at June 30, 1995 .................... (175)
Purchase of redeemable common stock ......... (175)
Payment on stock subscriptions ..............
Net loss ....................................
Currency translation ........................
----------
Balance at June 30, 1996 ................... (350)
Purchase of redeemable common stock ......... (175)
Payment on stock subscriptions ..............
Net loss ....................................
Currency translation ........................
----------
Balance at June 30, 1997 .................... $ (525)
==========
The accompanying notes are an integral
part of these consolidated financial statements.
F - 8
35
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Celebrity, Inc. ("Celebrity") and its wholly-owned subsidiaries, Celebrity
Exports International Limited ("Celebrity Hong Kong") and Star Wholesale
Florist, Inc. ("Star"), are suppliers of high quality artificial flowers,
foliage and flowering bushes, selling primarily to craft store chains and
other retailers and to wholesale florists. India Exotics, Inc. ("India
Exotics"), a wholly-owned subsidiary of Celebrity (Note 3), is a supplier
of decorative brass products and other decorative accessories, selling
primarily to craft store chains and other specialty retailers and to
wholesale florists. The Cluett Corporation ("Cluett"), a wholly-owned
subsidiary of Celebrity, assembles artificial trees, floor planters and
floral arrangements and markets them primarily to discount retailers and
warehouse clubs. Celebrity, Celebrity Hong Kong, Star, India Exotics and
Cluett are referred to herein collectively as "Celebrity" or the
"Company."
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
All majority-owned subsidiaries are consolidated and all material
intercompany accounts and transactions are eliminated.
REVENUE RECOGNITION
The Company recognizes revenue from merchandise sales at the time of
shipment. Title to merchandise transfers at point of shipment. Damaged or
defective products may be returned to the Company for replacement or
credit. The Company offers sales volume rebates to customers based on the
level of their sales activity. The effects of returns and discounts are
estimated and recorded at time of shipment. Volume rebates are estimated
and recorded based on sales activity.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with original
maturities of three months or less.
INVENTORIES
Inventories are valued at the lower of average cost or market. Costs
include material, labor and overhead.
F - 9
36
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of
the assets as follows:
Estimated Useful Life
---------------------
Furniture, fixtures and equipment............... 5 to 10 years
Transportation equipment........................ 3 to 5 years
Buildings....................................... 20 to 31.5 years
Maintenance and repairs are charged to expense as incurred. Renewals and
betterments are capitalized.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, a customer list and trade
names related to purchase acquisitions, which are being amortized using
the straight-line method over 20, 10 and 20 years, respectively. The
carrying value of intangible assets is periodically reviewed by the
Company and impairments are recognized when the estimated undiscounted
future cash flows derived from such intangible assets is less than their
carrying value.
LONG-LIVED ASSETS
The Company periodically reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. In such cases, if the future
undiscounted cash flows of the underlying assets are less than the
carrying amount, then the carrying amount of the long-lived asset will be
adjusted for impairment to a level commensurate with a discounted cash
flow analysis of the underlying assets. Based on its most recent analysis,
the Company believes no impairment of long-lived assets exists at June 30,
1997.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes", which prescribes an asset and liability method that
requires the recognition of deferred tax assets and liabilities for the
anticipated future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities. The Company periodically reviews the realizability of its
deferred tax assets and records valuation allowances, as appropriate, when
realization of the deferred tax asset is not likely.
F - 10
37
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY TRANSLATION
All balance sheet asset and liability accounts of Celebrity Hong Kong are
translated to U.S. dollars using rates of exchange in effect at the
balance sheet date. Celebrity Hong Kong statements of operations are
translated at exchange rates approximating the actual rates on the dates
of the transactions. Cumulative translation adjustments are included as a
separate component of shareholders' equity.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed by dividing net earnings or loss by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents consist
of the dilutive effect of common shares that may be issued upon exercise
of stock options. Fully diluted earnings (loss) per share were not
presented, as the resulting per share amounts did not substantially differ
from primary earnings (loss) per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") was issued effective for interim and
annual periods ending after December 15, 1997. SFAS 128 establishes new
standards for computing and presenting earnings per share. If the Company
had computed earnings per share in accordance with SFAS 128, basic and
diluted earnings (loss) per share would have been the same as the amounts
presented on the accompanying consolidated statements of operations.
3. ACQUISITIONS
INDIA EXOTICS
In February 1995, the Company acquired, in a transaction accounted for as
a purchase, the business and certain assets of India Exotics, Inc. of St.
Louis, Missouri (the "Seller"). As consideration, the Company, through a
wholly-owned subsidiary, India Exotics, paid $2,500,000 in cash, issued a
$2,000,000 note payable to the Seller (subsequently reduced to
$1,830,000), repaid approximately $2,100,000 of bank debt of the Seller,
assumed a $1,800,000 note from the Seller to one of its shareholders and
assumed certain trade payables of the Seller. Additionally, India Exotics
entered into a noncompetition agreement (Note 15), employment agreements,
and certain building lease agreements (Note 11) with certain former
shareholders and officers of the Seller and related partnerships.
The purchase price was allocated to net assets acquired as follows:
current assets of $5,146,000 including inventories of $3,576,000, and
current liabilities of $2,728,000 (net of the $2,100,000 repayment of bank
indebtedness). The excess of purchase price over the fair value of net
assets acquired
F - 11
38
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was approximately $3,987,000. The results of operations and cash flows for
India Exotics are included in the Consolidated Financial Statements from
the date of acquisition.
The results of operations for the year ended June 30, 1995, on an
unaudited pro forma basis, as if the Seller's assets had been acquired on
July 1, 1994 (with appropriate adjustments for amortization of intangible
assets, interest expense, elimination of certain general and
administrative expenses and the related income tax effects), would have
been as follows (in thousands except per share amounts):
Year ended
June 30, 1995
-------------
Net sales ................ $ 125,484
==========
Net income ............... $ 4,166
==========
Earnings per share ....... $ .66
==========
4. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts as of June 30 is as
follows (in thousands):
1997 1996
---------- ----------
Inventories:
Raw materials ................................................ $ 8,707 $ 6,165
Finished goods ............................................... 21,912 27,114
---------- ----------
$ 30,619 $ 33,279
========== ==========
Property, plant and equipment:
Buildings .................................................... $ 7,625 $ 7,625
Land ......................................................... 811 811
Furniture, fixtures and equipment ............................ 6,355 5,259
Transportation equipment ..................................... 697 624
Leasehold improvements ....................................... 1,318 1,415
---------- ----------
16,806 15,734
Less: accumulated depreciation .............................. (5,284) (3,960)
---------- ----------
$ 11,522 $ 11,774
========== ==========
1997 1996
---------- ----------
Intangible assets:
Excess of cost over fair value of net assets acquired ........ $ 4,224 $ 4,224
Customer list ................................................ 1,327 1,327
Trade names .................................................. 397 397
---------- ----------
5,948 5,948
F - 12
39
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Less: accumulated amortization .... (1,230) (900)
-------- --------
$ 4,718 $ 5,048
======== ========
5. SPECIAL CHARGES
The Company incurred special charges of approximately $4,400,000 for
fiscal year 1996 related to inventory adjustments ($3,800,000) resulting
from the discontinuance of certain product lines and a lease obligation
reserve ($600,000) resulting from the planned closure of a distribution
center and several of the Company's satellite warehouse facilities. The
charges were the result of actions taken by the Company in the fourth
quarter of 1996 to (i) discontinue and liquidate certain underperforming
product lines, and (ii) close a distribution center and several satellite
warehouse facilities pursuant to a plan to consolidate warehousing and
shipment operations and reduce costs. The charges related to inventory
adjustments and lease obligations are included in cost of goods sold and
general and administrative expenses, respectively, in the accompanying
statements of operations. At June 30, 1997, the remaining reserve related
to discontinued product lines was $433,000. The lease obligation reserve
was fully utilized during fiscal 1997.
6. INCOME TAXES
The components of income (loss) before income taxes are summarized below
(in thousands):
Years Ended June 30,
--------------------------------
1997 1996 1995
-------- -------- --------
Domestic ..................... $ (6,829) $(12,172) $ (703)
Foreign ...................... 4,080 3,203 5,326
-------- -------- --------
$ (2,749) $ (8,969) $ 4,623
======== ======== ========
F - 13
40
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the provisions (benefits) for income taxes are as
follows (in thousands):
Years Ended June 30,
--------------------------------
1997 1996 1995
-------- -------- --------
Current:
State ............................ $ 74 $ 75 $ 71
Federal .......................... -- (924) 434
Foreign .......................... 630 483 953
-------- -------- --------
704 (366) 1,458
Deferred provision (benefit) ....... 2,308 (3,181) (617)
-------- -------- --------
$ 3,012 $ (3,547) $ 841
======== ======== ========
The components of the net deferred tax asset are as follows:
June 30,
--------------------
1997 1996
-------- --------
Special charges .................................. $ 188 $ 1,496
Net operating loss and other carryforwards ....... 4,454 1,255
Capitalized inventory costs ...................... 915 1,119
Provision for losses on accounts receivable ...... 563 216
Intangible assets ................................ 113 157
Accelerated depreciation ......................... 220 130
Other ............................................ 174 108
-------- --------
6,627 4,481
Less: Valuation allowance ........................ (4,454) --
-------- --------
$ 2,173 $ 4,481
======== ========
During fiscal 1997, the Company recorded a valuation allowance of
$4,454,000 to reflect the amount of deferred tax assets that may not be
realized due to the expiration of net operating loss and tax credit
carryforwards.
The provision (benefit) for income taxes differs from those computed using
the statutory U.S. federal income tax rate as a result of the following
(in thousands):
YEARS ENDED JUNE 30,
-------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- -------- --------
Provision (benefit) at statutory rate ...... $ (935) (34%) $ (3,049) (34%) $ 1,572 34%
Meals and entertainment and
other disallowed expenses ................. 18 58 13 1
Valuation allowance ........................ 4,454 162
Other ...................................... 75 3 55 1
State tax expense .......................... 71 3 50 59 1
Foreign tax rate differentials ............. (671) (24) (606) (6) (858) (19)
-------- -------- -------- -------- -------- --------
$ 3,012 110% $ (3,547) (40%) $ 841 18%
======== ======== ======== ======== ======== ========
Since the Company plans to continue financing Celebrity Hong Kong's
expansion through reinvestment of undistributed Celebrity Hong Kong
earnings, no provision is made for U.S. taxes on such earnings. If the
Celebrity Hong Kong earnings were distributed, the U.S. tax on the
distribution would be approximately $3,277,000.
F - 14
41
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes paid during fiscal 1997, 1996 and 1995 were $901,000,
$527,000 and $1,186,000, respectively. Included in other current assets at
June 30, 1997 and 1996 were U.S. federal income tax receivables of
$1,008,000 and $1,027,000, respectively.
As of June 30, 1997, the Company had net operating loss carryforwards of
$12,078,000, foreign tax credit carryforwards aggregating $253,000 and
minimum tax credit carryforwards of $87,000. The net operating loss
carryforwards expire between 2011 and 2012. If certain substantial changes
in the Company's ownership should occur, there would be an annual
limitation on the amount of the carryforwards that could be utilized. The
foreign tax credit carryforwards expire between 1998 and 2000.
7. NOTES PAYABLE
Notes payable consist of the following (in thousands):
June 30,
------------------------
1997 1996
---------- ----------
Revolving line of credit; interest at prime plus .75%
(9.25% at June 30, 1997); due March 1998; secured
by substantially all accounts receivable and inventory ......... $ 26,162 $ 25,914
Note payable to bank repaid in June 1997 ........................ -- 5,255
Note payable to bank; interest at LIBOR plus 2.65%
(8.78% at June 30, 1997) payable in monthly install-
ments of $28; due June 2004; secured by real estate ............ 5,000 --
Note payable to related partys; interest at prime
plus .5% (9.00% at June 30, 1997) payable in
quarterly installments of $125; due February 1998 .............. 375 875
Installment notes payable monthly through January 1999;
interest rates vary from 7% to 13%; secured
by automobiles ................................................. 137 177
Note payable to related party; interest at 8%; payable in
annual installments through May 1999 ........................... 64 93
Other ........................................................... 206 251
---------- ----------
31,944 32,565
Less: current portion .......................................... (27,067) (1,484)
---------- ----------
$ 4,877 $ 31,081
========== ==========
F - 15
42
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate maturities of notes payable for the next five years and
thereafter are as follows (in thousands):
1998 ............... $ 27,067
1999 ............... 489
2000 ............... 374
2001 ............... 348
2002 ............... 333
Thereafter ......... 3,333
----------
Total ......... $ 31,944
==========
The revolving line of credit provides for borrowings up to a maximum
amount of $35,000,000. Borrowing limits are based on specified percentages
of eligible accounts receivable and inventories and, as a result of such
limits, the maximum amount the Company would have been eligible to borrow
at June 30, 1997 was $26,262,000. The commitment fee for the unused
portion of the revolving line of credit is 1/2% of the average daily
unused portion of the line of credit during each quarter. At June 30,
1997, $96,894 of the revolving line of credit had been reserved as a
result of the issuance of letters of credit.
The $375,000 note payable to a related party was issued in conjunction
with the acquisition of the business and assets of India Exotics (Note 3)
and has been assigned to the shareholders of the Seller.
The $64,000 note payable to related party represents an amount due a
former Celebrity officer and director and is unsecured.
The revolving line of credit contains certain covenants limiting the
incurrence of indebtedness, restricting the payment of dividends and
requiring the Company to maintain certain financial ratios. The Company
was not in compliance with certain of these financial covenants at June
30, 1997, specifically the minimum net worth, debt to equity ratio, EBITDA
to interest expense and minimum net income requirements. Although the
Company received waivers for these violations at June 30, 1997, the
waivers did not extend to any subsequent periods. At September 29, 1997,
it is uncertain whether the Company will be in compliance with these
covenants at the September 30 or future quarterly measurement dates during
fiscal 1998. Therefore, the debt has been classified as a current
liability at June 30, 1997, which resulted in the violation of the current
ratio covenant contained in the line of credit agreement. The Company has
not received a waiver for this violation. However, the Company is
presently negotiating a renewal and extension of the line of credit
agreement that would reset the covenants and extend the term beyond June
30, 1998. The lender has provided written assurance to the Company of its
intent to renew and extend the agreement. Management expects the revised
line of credit agreement to be finalized prior to December 31, 1997.
The note payable to bank contains certain covenants requiring the Company
to maintain certain financial ratios. While the Company was not in
compliance with certain of these financial covenants at June 30, 1997, it
has obtained a waiver from the bank with respect to such noncompliance
through June 30, 1998.
Interest paid during the years ended June 30, 1997, 1996 and 1995 was
$3,435,000, $3,645,000 and $2,158,000, respectively.
8. REDEEMABLE COMMON STOCK
In conjunction with Celebrity's initial public offering in December 1992,
certain warrants were converted into an aggregate of 67,308 shares of
common stock at the initial public offering price of $13 per share. The
common stock obtained upon the exercise of these warrants may be put back
to the Company at a price per share equal to the greater of the initial
public offering price per share or the fair market value per share (as
determined pursuant to the terms of the warrant agreement). Celebrity's
maximum obligation to purchase common stock on each put date is limited to
an aggregate of $175,000. The common stock was put back to the Company
annually at September 30, 1993, 1994, 1995 and 1996. At June 30, 1997,
Celebrity's obligation to purchase common stock for the last
F - 16
43
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remaining put date was $175,000. The Company has been advised that the
holders intend to put the remaining common stock back at September 30,
1997.
9. EMPLOYEE BENEFIT PLANS
The Celebrity, Inc. 401(k) Plan is available to substantially all of the
Company's employees. Eligible employees may contribute up to 15% of their
compensation to this plan. Celebrity has contributed an amount equal to
50% of each employee's contribution up to 6% of the employee's
compensation. Employee contributions in excess of 6% of the employee's
compensation are not matched by Celebrity. The Company contributed
$111,000, $79,000 and $41,000 for fiscal 1997, 1996 and 1995,
respectively.
The Celebrity, Inc. 1993 Employee Stock Purchase Plan was adopted in
fiscal 1994. Under this plan, the Company may periodically offer to its
employees, at its sole discretion, the right to purchase shares of Common
Stock at the market value as of the date of the offer. Employee payment
for plan shares may be made either with cash or a promissory note. The
participants' shares are fully vested upon purchase. The Company has
reserved 300,000 shares of Common Stock for issuance under this plan.
Subscriptions receivable at June 30, 1997 for purchases of Common Stock
under this plan amounted to approximately $442,000 and will be paid over
periods of one to ten years.
10. STOCK OPTION PLAN
The Celebrity, Inc. 1992 Stock Option Plan (the "Plan") was adopted
effective with the completion of the Company's initial public offering. An
aggregate of 500,000 shares of Common Stock has been reserved for issuance
under the Plan. The Plan permits the granting of incentive stock options
to Celebrity's employees and nonqualified stock options to employees,
nonemployee members of the board of directors and advisors. Options are
exercisable during the period specified in each option agreement and are
generally exercisable in installments pursuant to a vesting schedule as
designated by the Compensation Committee of the board of directors. The
exercise price determined by the Compensation Committee may not be less
than the fair market value of the Common Stock on the date of grant. No
option will remain exercisable later than ten years after the date of
grant. Additional information with respect to stock options issued under
the Plan is as follows:
F - 17
44
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted
Number Average
Stock Option Activity of Shares Exercise Price
--------------------- --------- --------------
June 30, 1994 ..................... 147,900 $ 5.81
Granted ......................... 122,500 $ 5.05
Canceled or surrendered ......... (2,000) $ 5.38
----------
June 30, 1995 ..................... 268,400 $ 5.46
Granted ......................... 6,000 $ 5.75
Canceled or surrendered ......... (10,000) $ 5.88
----------
June 30, 1996 ..................... 264,400 $ 5.46
Granted ......................... 205,000 $ 3.39
Canceled or surrendered ......... (33,000) $ 5.43
----------
June 30, 1997 ..................... 436,400 $ 4.49
==========
The following information is presented for stock options outstanding at
June 30, 1997. At June 30, 1997, 152,120 options are exercisable at a
weighted average exercise price of $5.55.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Price Remaining Exercise Exercise
Range Shares Life Price Shares Price
-------------- ------- --------- ------------ ------ -----------
$3.19 to $4.00 215,000 9.7 years $ 3.38 12,000 $ 3.31
$4.88 to $6.50 219,400 6.4 years $ 5.50 138,120 $ 5.64
$12.50 2,000 5.5 years $ 12.50 2,000 $ 12.50
Included in the table above are 20,000 fully vested nonqualified stock
options for three outside directors with exercise prices ranging from
$3.38 to $12.50 per share.
On May 18, 1995 the Compensation Committee of the board of directors
approved the amendment of the exercise price for options covering 130,900
shares of Common Stock granted under the Plan in fiscal 1993 from $13.00
to the fair market value on the amendment date ($5.88).
The Company adopted the disclosure-only option under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). On a pro forma basis, if the Company had
recorded compensation expense in accordance with SFAS 123, the pro forma
net loss and loss per share would have been ($6,058,000) and ($.96),
respectively, for fiscal 1997 and ($5,437,000) and ($.86), respectively,
for fiscal 1996.
The significant assumptions used to estimate the fair value of the stock
options granted in fiscal 1996 and 1997 include a risk-free rate of return
of 5.76% in fiscal 1996 and ranging from 6.13% to 6.54% in fiscal 1997, an
expected option life of 10 years, an expected volatility of 46.13% in
fiscal 1996 and ranging from 44.88% to 45.62% in fiscal 1997.
F - 18
45
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. RELATED PARTIES
Celebrity leases certain office and distribution facilities in Tyler,
Texas from a shareholder. Amounts paid under this lease were approximately
$120,000 in each year for fiscal 1997, 1996 and 1995.
The Company leases, from a partnership controlled by a former officer of
India Exotics, one building in St. Louis, Missouri comprised of office and
warehouse space. The aggregate rentals paid on this lease during fiscal
1997 and 1996 were approximately $690,000 and $575,000, respectively. The
lease provides for minimum annual rental payments of $443,840 and expires
in April 2003. In addition to the minimum rentals, the Company pays for
taxes, insurance, utility services and certain maintenance items related
to the leased property.
Notes payable at June 30, 1997 includes a note payable to related
party (see Note 7).
The Company purchases decorative brass products and cotton goods from two
entities controlled by relatives of a former officer of India Exotics.
Purchases from these suppliers during fiscal 1997 and 1996 totaled
approximately $5,966,000 and $5,910,000, respectively. The amount due
these suppliers at June 30, 1997 and 1996 was approximately $1,481,000 and
$2,024,000, respectively, which amounts are included in accounts payable.
As part of the India Exotics acquisition, the Company entered into an
agreement with one of the suppliers whereby the supplier agreed to supply
decorative brass products for a three-year period ending in February 1998.
12. GEOGRAPHIC INFORMATION
The Company operates exclusively in a single industry. Celebrity exports
artificial flowers, foliage and flowering bushes from Asia to the U.S. and
Europe and distributes and markets its products in the U.S. using a direct
sales force and distribution centers, primarily to craft store chains and
other speciality retailers and to wholesale florists. Cluett assembles
artificial trees, floor planters and floral arrangements and markets them
primarily to discount retailers and warehouse clubs. India Exotics
distributes and markets decorative brass products and other decorative
accessories primarily to craft store chains and other speciality retailers
and to wholesale florists, primarily in the U.S., using a direct sales
force and a distribution center.
Financial information by geographic area for fiscal 1997, 1996 and 1995 is
summarized in the tables below. Intergeographic area sales are accounted
for at prices approximating arm's length market prices. Operating income
by geographic area is comprised of net sales less operating expenses that
are related to the operating revenue derived from the area. Identifiable
assets by geographic area are those assets that are used in the operations
of the Company in that area.
F - 19
46
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(in thousands)
Net sales to unaffiliated customers:
Hong Kong ........................ $ 60,144 $ 54,662 $ 79,248
United States .................... 89,629 80,947 75,015
Intercompany sales ............... (24,603) (20,561) (35,453)
---------- ---------- ----------
Total ......................... $ 125,170 $ 115,048 $ 118,810
========== ========== ==========
Years ended June 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(in thousands)
Operating earnings (loss):
Hong Kong .................... $ 4,216 $ 3,395 $ 5,947
United States ................ (3,863) (8,910) 962
Intercompany sales ........... 120 175 (340)
---------- ---------- ----------
Total ..................... $ 473 $ (5,340) $ 6,569
========== ========== ==========
Identifiable assets at year-end:
Hong Kong .................... $ 20,586 $ 15,693 $ 14,628
United States ................ 67,430 71,598 72,794
Eliminations ................. (20,563) (13,928) (12,781)
---------- ---------- ----------
Total ..................... $ 67,453 $ 73,363 $ 74,641
========== ========== ==========
13. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The carrying
amounts of cash and cash equivalents, accounts receivable and accounts
payable approximate fair value because of their immediate or short
maturities. The carrying amounts of the revolving line of credit and other
variable-rate notes payable approximate their fair value because the
interest rates on these instruments change with market interest rates. The
fair value, based on market interest rates, of the Company's fixed-rate
notes payable at June 30, 1997 and 1996, respectively, did not
significantly differ from their carrying amount.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents and trade receivables. The Company limits its exposure to
credit risk on its cash and cash equivalents by placing these instruments
with high quality financial institutions. With respect to accounts
receivable, the Company is exposed to group concentrations of credit risk
as its customer base consists primarily of craft store chains, discount
retailers, specialty retailers and warehouse clubs. In addition, in fiscal
1997 and fiscal 1996, the Company had one customer that accounted for
sales of $34.6 million and $26.5 million, respectively. The June 30, 1997
accounts receivable balance for this customer was $4.2 million. The
Company had
F - 20
47
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
two significant customers in fiscal 1995 that accounted for sales of $33.3
million and $12.5 million, respectively. The Company performs ongoing
evaluations of the financial conditions of its customers, but does not
require collateral to secure customer receivables. The Company establishes
an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends and other
information.
14. CERTAIN FACTORS THAT COULD AFFECT FUTURE OPERATIONS
The Company derives a substantial amount of its consolidated net sales
from products manufactured in and exported from the People's Republic of
China (the "PRC") and other locations throughout Asia. Risks inherent in
international operations include loss of revenue, property and equipment
from such hazards as expropriation, nationalization, war, insurrection and
other political risks. Other risks inherent in international operations
are the possibility of realizing economic currency exchange losses when
transactions are completed in currencies other than U.S. dollars and the
Company's ability to freely repatriate its earnings under existing
exchange control laws. To date, the Company's international operations
have not been materially affected by these risks.
A significant amount of the Company's international purchasing and
exporting activities are controlled in Hong Kong. As such, Celebrity's
success depends to some degree on the economic and social conditions in
Hong Kong. The PRC resumed control over Hong Kong in July 1997 in
accordance with the Sino-British Declaration of 1984 (the "Joint
Declaration"). Although the Joint Declaration establishes a framework for
the continuation of existing economic and social systems in Hong Kong
after 1997, there can be no assurances as to the manner in which this
framework will be implemented or whether it will be respected by the PRC
authorities. Although the Company believes that it could move its
purchasing and exporting activities to another location, the disruption of
the Company's operations in Hong Kong could have a materially adverse
effect on the Company's business.
15. COMMITMENTS AND CONTINGENCIES
RECEIVABLES SOLD WITH RECOURSE
During fiscal 1997, 1996 and 1995, proceeds of approximately $37,487,000,
$27,183,000 and $31,475,000, respectively, were received from a Hong Kong
bank in connection with the financing, with recourse, of Celebrity Hong
Kong accounts receivable related to shipments directly to customers. As of
June 30, 1997 and 1996, Celebrity was contingently liable to the Hong Kong
bank in respect of such financing activities for $5,859,000 and
$6,649,000, respectively. The Company has retained substantially the same
risk of credit loss as if the receivables had not been sold (Note 13).
The bank is obligated to finance at any time a maximum aggregate of
$5,800,000 in accounts receivable, with recourse.
F - 21
48
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASES
The Company leases certain buildings and equipment under noncancelable
operating leases. Future minimum lease payments for the next five fiscal
years and thereafter are as follows (in thousands):
1998 ....................... $ 1,618
1999 ....................... 1,280
2000 ....................... 1,201
2001 ....................... 921
2002 ....................... 931
Thereafter ................. 5,752
----------
Total minimum lease payments $ 11,703
==========
Rent expense for operating leases was $3,601,000, $3,792,000 and
$2,464,000 for fiscal 1997, 1996 and 1995, respectively.
OTHER
The Company is involved in various legal proceedings that arise in the
ordinary course of its business. The Company believes that none of its
current litigation is likely to have a materially adverse effect on its
financial condition or results of operations.
As part of the India Exotics acquisition, the Company executed a
noncompetition agreement with two former officers of India Exotics. The
agreement calls for annual payments of $267,000 and $333,000 in fiscal
1998 and 1999, respectively. Amortization expense is recognized over the
terms of the agreement.
F - 22
49
CELEBRITY, INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1997
(dollars in thousands)
Allowance
for Balance at Charged to Balance
Doubtful beginning cost and Corporate at end
Accounts of period expenses acquisition Deductions of period
--------- ---------- ---------- ----------- ---------- ---------
1997 $ 1,119 $ 1,553 $ $ (655) $ 2,017
1996 1,539 795 (1,215) 1,119
1995 886 574 425 (346) 1,539
F - 23
50
EXHIBIT INDEX
Exhibits:
2.1 -- Asset Purchase Agreement dated as of June 16, 1992, among
Registrant, Holdingflower, Inc., a Delaware corporation, Magicsilk,
Inc., a Delaware corporation, and Magicsilk, Inc., a Texas
corporation.(1)
2.2 -- Asset Purchase Agreement dated February 7, 1995, among India
Exotics, Inc., a Texas corporation, Registrant, India Exotics, Inc., a
Missouri corporation, Surendra Khokha, Rajneesh Khokha, Asheesh Khokha
and the Surendra K. Khokha Revocable Trust, dated July 18, 1985.(7)
3.1 -- Restated Articles of Incorporation of the Registrant.(1)
3.2 -- Bylaws of the Registrant.(1)
4.1 -- Specimen Common Stock Certificate.(1)
4.2 -- Warrant Agreement dated as of June 16, 1992, between the Registrant
and Magicsilk, Inc.(1)
10.1 -- Loan Agreement dated May 10, 1993, among Registrant, Magicsilk,
Inc. and National Canada Finance Corp.(4)
10.2 -- First Amendment to Loan Agreement dated July 27, 1993, among
Registrant, Magicsilk, Inc. and National Canada Finance Corp.(5)
10.3 -- Second Amendment to Loan Agreement dated effective as of November
17, 1993, among Registrant, Magicsilk, Inc., The Cluett Corporation
and National Canada Finance Corp.(6)
51
10.4 -- Third Amendment to Loan Agreement dated effective as of March 18,
1994, among Registrant, Magicsilk, Inc., The Cluett Corporation and
National Canada Finance Corp.(3)
10.5 -- Fourth Amendment to Loan Agreement dated effective as of November
4, 1994, among Registrant, Magicsilk, Inc., The Cluett Corporation and
National Canada Finance Corp.(7)
10.6 -- Fifth Amendment to Loan Agreement dated effective as of February 3,
1995, among Registrant, Magicsilk, Inc., The Cluett Corporation, India
Exotics, Inc. and National Canada Finance Corp.(7)
10.7 -- Sixth Amendment to Loan Agreement dated effective as of March 14,
1995, among Registrant, Magicsilk, Inc., The Cluett Corporation, India
Exotics, Inc. and National Canada Finance Corp.(8)
10.8 -- Seventh Amendment to Loan Agreement dated effective as of August
4, 1995, among Registrant, Magicsilk, Inc., The Cluett Corporation,
India Exotics, Inc. and National Canada Finance Corp.(9)
10.9 -- Eighth Amendment to Loan Agreement dated effective as of June 19,
1997 among Registrant, Magicsilk, Inc., The Cluett Corporation, India
Exotics, Inc. and National Canada Finance Corp. (12)
10.10 -- Ninth Amendment to Loan Agreement dated effective as of
September 26, 1997 among Registrant, Magicsilk, Inc., The Cluett
Corporation, India Exotics, Inc., Star Wholesale Florist, Inc. and
National Canada Finance Corp. (12)
10.11 -- Promissory Note dated September 26, 1997, executed by Registrant,
Magicsilk, Inc., The Cluett Corporation, India Exotics, Inc. and Star
Wholesale Florist, Inc. in the principal amount of $35,000,000,
payable to the order of National Canada Finance Corp.(12)
10.12 -- Amended and Restated Security Agreement dated September 26, 1997,
among Registrant, Magicsilk, Inc., The Cluett Corporation, India
Exotics, Inc., Star Wholesale Florist, Inc. and National Canada
Finance Corp.(12)
10.13 -- Subordination Agreement dated July 14, 1992, among National
Canada Finance Corp., TBK Partners, L.P., ML-Lee Acquisition
Fund, L.P., The Bank of New York Commercial Corporation,
Registrant and Magicsilk, Inc.(1)
10.14 -- Letter agreement dated May 19, 1997, setting forth the terms of
a banking facility between Celebrity Exports International
Limited and The Hongkong and Shanghai Banking Corporation
Limited.(12)
10.15 -- General Security Agreement Relating to Goods between Celebrity
Exports International Limited and The Hongkong and Shanghai
Banking Corporation Limited dated April 30, 1984.(1)
10.16 -- Form of Guarantee by Limited Company executed by Registrant in
favor of The Hongkong and Shanghai Banking Corporation
Limited.(12)
10.17 -- Commitment of Celebrity Exports International Limited to maintain a
combined net worth of HK$50,000,000.(12)
10.18 -- Term WCMA Loan Agreement dated June 17, 1997 between Registrant
and Merrill Lynch Business Financial Services Inc.(12)
52
10.19 -- $5,000,000 Term WCMA Note dated June 17, 1997 signed by
Registrant and payable to Merrill Lynch Business Financial
Services Inc.(12)
10.20 -- Unconditional Guaranty dated June 17, 1997, executed by Magicsilk,
Inc. in favor of Merrill Lynch Business Financial Services Inc. (12)
10.21 -- Unconditional Guaranty dated June 17, 1997, executed by The Cluett
Corporation in favor of Merrill Lynch Business Financial Services
Inc.(12)
10.22 -- Unconditional Guaranty dated June 17, 1997, executed by India
Exotics, Inc. in favor of Merrill Lynch Business Financial Services
Inc.(12)
10.23 -- Deed of Trust, Security Agreement, Financing Statement and
Assignment of Rents from Celebrity, Inc. to Trustee for the Benefit of
Merrill Lynch Business Financial Services Inc. relating to Winston-
Salem, North Carolina property. (12)
10.24 -- Deed of Trust, Security Agreement, Financing Statement and
Assignment of Rents from Celebrity, Inc. to Trustee for the Benefit of
Merrill Lynch Business Financial Services Inc. relating to Tyler,
Texas property.(12)
10.25 -- Employment Agreement dated November 17, 1993, between The Cluett
Corporation and James N. Gammill, III.(2)
10.26 -- Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Surendra Khokha.(7)
10.27 -- Letter Agreement dated June 20, 1996, amending the Employment
Agreement dated February 7, 1995, between India Exotics, Inc. and
Surendra Khokha.(11)
10.28 -- Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Meena Khokha.(7)
10.29 -- Letter Agreement dated June 20, 1996, amending the Employment
Agreement dated February 7, 1995, between India Exotics, Inc. and
Meena Khokha.(11)
10.30 -- Noncompetition Agreement dated November 17, 1993, between
Registrant and James N. Gammill, III.(2)
10.31 -- Noncompetition Agreement dated February 7, 1995, among India
Exotics, Inc., Surendra Khokha, Rajneesh Khokha, Asheesh Khokha
and Meena Khokha.(7)
10.32 -- Promissory Note of India Exotics, Inc., a Texas corporation,
guaranteed by Registrant, dated February 7, 1995, payable to
the order of India Exotics, Inc., a Missouri corporation.(7)
53
10.33 -- First Amendment to Promissory Note dated June 20, 1996,
amending the Promissory Note of India Exotics, Inc., a Texas
corporation, guaranteed by Registrant, dated February 7, 1995,
payable to the order of India Exotics, Inc., a Missouri
corporation.(11)
10.34 -- Promissory Note of India Exotics, Inc., a Missouri corporation,
guaranteed by Registrant, dated February 7, 1995, in the principal
amount of $1,800,000 payable to the order of Surendra Khokha and his
successors, trustees of the Surendra K. Khokha Revocable Trust, dated
July 18, 1985.(7)
10.35 -- Form of Indemnity Agreement.(1)
10.36 -- Amended and Restated 1992 Stock Option Plan.(3)
10.37 -- Amended and Restated 1993 Employee Stock Purchase Plan.(7)
10.38 -- 1998 Employee Bonus Plan.(12)
10.39 -- Promissory Note of Registrant, dated September 10, 1997, in the
principal amount of $500,000 payable to the order of RHP
Management, LLC. (12)
21.1 -- Subsidiaries of Registrant.(10)
23.1 -- Consent of Price Waterhouse LLP.(12)
23.2 -- Consent of Price Waterhouse LLP.(13)
27.1 -- Financial Data Schedule.(12)
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(1) Previously filed as an exhibit to Registration Statement No. 33-51820
on Form S-1 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's Current Report on
Form 8-K dated November 17, 1993, as amended, and incorporated herein
by reference.
(3) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994, and incorporated
herein by reference.
(4) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1993, as amended,
and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993, as amended, and
incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1993, and incorporated
herein by reference.
(7) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1994, and incorporated
herein by reference.
(8) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995, and incorporated
herein by reference.
(9) Previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995, and incorporated
herein by reference.
(10) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995, and incorporated
herein by reference.
(11) Previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 and incorporated
herein by reference.
(12) Previously filed as an exhibit to the Registrant's Annual Report on
form 10-K for the fiscal year ended June 30, 1997 and incorporated
herein by reference.
(13) Filed herewith.