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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
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
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CELEBRITY, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1289223
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
4520 OLD TROUP ROAD P.O. BOX 6666
TYLER, TEXAS 75707 TYLER, TEXAS 75711
(Physical Delivery Address) (Mailing Address)
(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)
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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 15, 1998, was approximately $2,801,000 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 15, 1998, the registrant had outstanding 6,282,755 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 November 16, 1998, are incorporated by
reference into Part III of this Report.
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CELEBRITY, INC.
INDEX TO FORM 10-K
For the Fiscal Year Ended June 30, 1998
PART I
Page
ITEM 1. Business....................................................................... 1
ITEM 2. Properties..................................................................... 10
ITEM 3. Legal Proceedings.............................................................. 10
ITEM 4. Submission of Matters to a Vote of Security Holders............................ 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder
Matters..................................................................... 11
ITEM 6. Selected Consolidated Financial Data........................................... 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 12
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk...................... 20
ITEM 8. Financial Statements and Supplementary Data.................................... 20
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................... 20
PART III
ITEM 10. Directors and Executive Officers of the Registrant............................. 21
ITEM 11. Executive Compensation......................................................... 21
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................. 21
ITEM 13. Certain Relationships and Related Transactions................................. 21
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 22
Signatures...................................................................................... 27
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, ficus trees and plants, and
decorative metal products and other accessories. The Company distributes its
products to mass market retailers, craft store chains, wholesale florists and
other retailers through several brand names, primarily Celebrity, Celebrity
Exports International, Cluett, Color Concepts and Star Wholesale Florist. The
Company offers a broad line of over 14,000 competitively priced products through
the offices of its wholly-owned subsidiary Celebrity Exports International
Limited ("Celebrity Hong Kong") and its domestic distribution centers, each
coordinating the just-in-time delivery requirements of many of its 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 Celebrity Hong Kong's staff contracts and
oversees their manufacture, exercises quality control and arranges the
consolidation and shipment of merchandise. Celebrity is a Texas corporation and
was organized in October 1968.
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.
Artificial floral products are sold through many distribution channels.
Craft stores devote significant shelf space to artificial flowers and related
products. Pottery stores are high volume, lower price retail stores with
substantial square footage devoted to pottery, glass, artificial floral and
other products. 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 and 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 14,000 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 metal containers, candlestands
and other decorative accessories. Celebrity's Christmas line consists of
artificial
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Christmas trees, wreaths, garlands and other ornamental floral 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.
SERVICES
The Company serves its customers with accurate and on-time delivery of
its products. Mass market chain customers 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:
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
and decorative metal products from the extensive inventory in its Tyler
distribution centers. 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 floral
arrangement production facilities in Winston-Salem, North Carolina;
Tyler, Texas; and Vista, California.
o Direct Shipment. Celebrity provides substantial unit cost
savings by planning with customers for delivery of large orders.
Celebrity Hong Kong's 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 Hong Kong's staff also arranges private labeling, customs
documentation and financing for its customers. Similar services are
provided for shipment of decorative metal 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 smaller volume, nonseasonal products through
Celebrity's distribution centers.
Celebrity provides its customers with 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 service force provides thorough
in-store service, frequently checking stock levels and placing reorders.
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The Company directly monitors 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 and
the Philippines. 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 efforts of most
of these manufacturers are limited to sales offices in Hong Kong, which are
easily accessible to Celebrity Hong Kong's 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. Through Celebrity Hong Kong, the Company has improved control over the
quality, production and shipment of products and developed strong business
relationships with many manufacturers.
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 70 manufacturers and purchases most of its
products from 12 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 metal products from five
suppliers located primarily in India.
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 23 salespeople and contracts with 17 independent sales
representatives. The Company's sales of artificial floral products outside the
U.S., aggregating approximately $8.1 million in fiscal 1998, are made primarily
to customers in Europe. Most sales outside the U.S. are made by the staff of
Celebrity Hong Kong. See Note 11 to the Consolidated Financial Statements for
financial information by geographic area. Large corporate accounts are served by
the Company's national account managers. Company salespeople receive base
salaries, monthly commissions and year-end
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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 Dallas, Hong Kong and Frankfurt, Germany. Through these shows
Celebrity promotes its name and brands and introduces its products to potential
customers.
The Company's distribution centers in Tyler, Texas 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.
CUSTOMERS
During fiscal 1998 the Company sold products to approximately 2,000
customers, primarily in the United States. The majority of those sales were to
mass market chains, including Michaels Stores, Wal-Mart Stores, Kmart, Hobby
Lobby and Frank's Nursery and Crafts. Approximately 5% of consolidated net sales
were made by Celebrity Hong Kong to European customers.
In fiscal 1998, Michaels Stores accounted for $35.8 million, or 29.3%,
of consolidated net sales and Hobby Lobby accounted for $13.9 million, or 11.3%,
of consolidated net sales. The loss of either customer or a significant portion
of its business, or the ability of either of such customers 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, some of which 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," "Celebrity Designs,"
"Celebrity, Inc.," "Celebrity Silk," "Color Concepts," "Color Union," "Garden
Magic," "Gold Leaf Collection and Design," "India Exotics and Design," "Indoor
Garden Collection," "Karisma," "Magicsilk," "Mr. Silk Shine,"
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"Oliver's Greenhouse Collection," "Send a Silk," "Silk Accents," "The Greenhouse
Collection," "The Greenhouse Collection and Design," "Tropical Palm" and "The
Silk Gardener" trademarks with the U.S. Patent and Trademark Office in
conjunction with its products. The Company has applications pending in the
United States Patent and Trademark Office and certain states for registration of
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.
CERTAIN RISK FACTORS
TRADE REGULATION RISKS. 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
1998.
Artificial floral products sold by Celebrity Hong Kong to customers
outside the U.S., accounting for approximately 7% of consolidated net sales in
fiscal 1998, 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" ("MFN") 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 PRC's trade policies that
potentially deprive U.S. firms and products of market access, its failure to
support nuclear nonproliferation efforts and its labor and human rights
practices, the renewal of the PRC's MFN status has been a contentious
political issue for several years. In mid-1993, President Clinton announced
that the 1994 renewal of the PRC's MFN status would be conditioned upon
improvement in the PRC's trade policies as well as other factors, including
compliance with the Nuclear Non-Proliferation Treaty and an improved record on
labor and human rights practices. President Clinton subsequently reversed his
position that renewal of MFN status be based on progress on nuclear
non-proliferation and labor and human rights issues and has extended MFN status
for the PRC in subsequent years and through June 1999, without placing
significant conditions on future renewal. However, the linkage between MFN
status and provision of greater access to markets, nuclear nonproliferation
efforts and progress on labor and human rights issues in the PRC, may be
reasserted in the future, and therefore the likelihood of continued MFN status
for the PRC is difficult to predict.
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Were the PRC to lose MFN status, 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 approximately
90% 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 MFN status. If the 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 MFN states treatment is maintained for the PRC,
significant forces in Congress and elsewhere are pressing for other sanctions in
response to the PRC's labor and human rights, nuclear nonproliferation, market
access 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
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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. In April of each of 1997 and
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1998, the USTR reported that significant progress had occurred in the PRC in
late 1996 through early 1998. No further action has been taken by the USTR with
respect to the PRC to date.
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.
ECONOMIC INSTABILITY IN THE FAR EAST. Most economies in the Far East
are suffering from high levels of debt and declining corporate earnings and
economic growth, and some have experienced significant currency devaluation. All
of these factors have affected the import/export trade in the region. For
example, the speculation with regard to Asian currency devaluations has resulted
in an increased level of exportation from the PRC, which has resulted in a
shortage of shipping containers in that region. This container shortage has
affected the short-term delivery schedule of the Company and if the shortage
continues, causing a long-term disruption in the delivery of the Company's
products, it could have a material adverse effect on the Company's business,
financial condition or results of operations.
The region has also suffered from the effects of the resulting capital
flight from financial institutions, which has tightened credit. Celebrity Hong
Kong relies upon export credit financing to finance a portion of its product
purchases and its business growth. There can be no assurance, given the current
tight credit environment, that Celebrity Hong King will be able to maintain
sufficient export credit financing to fund all of its export requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RISKS RELATING TO CURRENCY FLUCTUATIONS. While the Company transacts
business predominantly in U.S. dollars and most of its revenues are collected in
U.S. dollars, the Company's manufacturing suppliers use the Hong Kong dollar as
functional currency. The Hong Kong dollar has historically been "pegged" to a
fixed exchange rate vis-a-vis the U.S. dollar, and while there has been
significant pressure recently on Far East currencies, both the Hong Kong Special
Administrative Region ("SAR") and the PRC continue to make statements in favor
of continuing the current link between the Hong Kong dollar and the U.S. dollar.
If the Hong Kong dollar were to be devalued relative to the U.S. dollar, short
term purchasing gains could be realized by the Company. However, the Company
believes that over the longer term, costs and margins would stabilize at
historical levels.
RISKS RELATING TO HONG KONG. The Company's business, financial
condition and results of operations may be influenced by the political situation
in Hong Kong and by the general state of the Hong Kong economy. On July 1, 1997,
sovereignty over Hong Kong was transferred from the United Kingdom to the PRC,
and Hong Kong became an SAR of the PRC. As provided in the Sino-British Joint
Declaration on the Question of Hong Kong and the Basic Law of the Hong Kong SAR
of the PRC (the "Basic Law"), the Hong Kong SAR has a high degree of autonomy
except in foreign affairs and defense. Under the Basic Law, the Hong Kong SAR
has its own legislature, legal and judicial system and economic autonomy for 50
years. Based on the current political conditions and the Company's understanding
of the Basic Law, the Company does not believe that the transfer of sovereignty
over Hong Kong has had or will have a material adverse effect on the Company's
business, financial condition or results of operations. There can be no
assurance, however, that changes in political, legal or other conditions will
not result in such an adverse effect.
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RISKS RELATING TO THE PRC. The Company's operations and assets are
subject to significant political, economic, legal and other uncertainties in the
PRC, where the Company maintains relationships with a substantial number of its
manufacturing suppliers. Under its current leadership, the PRC has been pursuing
economic reform policies, including the encouragement of foreign trade and
investment and greater economic decentralization. No assurance can be given,
however, that the PRC will continue to pursue such policies, that such policies
will be successful if pursued, or that such policies will not be significantly
altered from time to time.
EXECUTIVE OFFICERS
Set forth below is certain information as of September 21, 1998
regarding the executive officers of the Company:
NAME AGE TITLE
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Robert H. Patterson, Jr................ 47 Chairman of the Board, President and Chief Executive Officer
Richard Yuen........................... 54 Managing Director of Celebrity Hong Kong
David J. Huffman....................... 47 Executive Vice President-- Sales and Marketing
Clifford C. Condict.................... 51 Vice President-- Merchandise
Roger D. Craft......................... 51 Vice President-- Star Operations
Lynn Skillen........................... 42 Vice President-- Finance, Chief Financial Officer, Treasurer
and Secretary
Laura Lockhart......................... 39 Vice President-- Operations
Sherri L. Goodman...................... 36 Vice President-- Manufacturing
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
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 -- Star Operations of
Celebrity since January 1998. From September 1993 to January 1998, Mr. Craft
served as Vice President -- Celebrity Operations. Mr. Craft served as General
Manager of Star Wholesale Florist, Inc., a subsidiary of the Company ("Star
Wholesale"), from 1986 to August 1993.
Lynn Skillen has served as Vice President -- Finance, Chief Financial
Officer, Treasurer and Secretary of Celebrity since March 1998. From October
1997 to March 1998 Mr. Skillen served as
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Vice President--Finance of Dollar Rental Car Systems, Inc., and from October
1994 to October 1997 he was Vice President and Chief Financial Officer of Snappy
Car Rental, Inc. Prior to October 1994 Mr. Skillen was employed for 16 years at
Safelite Auto Glass Corp., serving in several finance management positions.
Laura Lockhart has served as Vice President -- Operations of Celebrity
since March 1998. Ms. Lockhart served as Operations Manager of the Company from
July 1992 to March 1998. From July 1979 to July 1992 Ms. Lockhart served in a
variety of operating and management positions at the Company.
Sherri L. Goodman has served as Vice President -- Manufacturing of
Celebrity since October 1997. From August 1990 through September 1997, Ms.
Goodman served in several plant management and production planning positions
with Sara Lee Corporation.
Officers are elected annually by the Board of Directors and serve at
its discretion.
EMPLOYEES
At August 31, 1998, the Company had 674 full-time and part-time
employees, including 46 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 137,700
Winston-Salem, North Carolina.................. Floral Arrangement Production Facility 105,522
Tyler, Texas................................... Floral Arrangement Production Facility 100,000
The Company also leases the space occupied by certain offices,
warehouses, a distribution center, 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................................... Distribution Center 56,000
Tyler, Texas................................... Wholesale Supply House 23,000
Dallas, Texas.................................. Wholesale Supply House 70,000
Dallas, Texas.................................. Showroom 9,910
Atlanta, Georgia............................... Showroom 8,500
St. Louis, Missouri*........................... Office/Distribution Center 100,000
Winston-Salem, North Carolina.................. Warehouse 91,000
Vista, California.............................. Floral Arrangement Production Facility 41,000
Hong Kong...................................... Office/Showroom 24,599
*Lease terminated July 31,1998
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 1998.
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13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.
Through September 28, 1998, the Common Stock, par value $.01 per share,
of the Company ("Common Stock") will be listed on the Nasdaq Stock Market's
National Market(R) (the "NNM"). On May 15, 1998, the Company received a letter
from the Nasdaq Stock Market (the "NASDAQ") advising the Company that the
Common Stock had not maintained the minimum market value of public float
("MVPF") necessary to meet the maintenance standards for continued listing on
the NNM. The Company was informed that it had 90 days to meet the minimum MVPF
requirement or face the prospect of the Common Stock being delisted from the
NNM. The Company, after reviewing the likelihood of meeting the MVPF
requirement within the designated period, petitioned to have the Common Stock
listed on the Nasdaq SmallCap Market(R) (the "SmallCap"), which listing was
approved by NASDAQ September 25, 1998. Effective September 29, 1998, the Common
Stock will be listed on the SmallCap 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 NNM.
FISCAL YEAR HIGH LOW
- ------------------------------------------------------------ -------- --------
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............................................ $3 1/8 $2 1/16
Second Quarter........................................... $3 $1 1/8
Third Quarter............................................ $2 1/4 $1
Fourth Quarter........................................... $1 9/16 $1 1/8
1999
First Quarter (through September 15, 1998)............... $2 1/16 $ 15/16
On September 15, 1998, the closing sale price of the Common Stock as
reported by the NNM was $1.00 per share. As of September 15,
1998, there were 109 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 prohibit the payment of dividends.
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14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated balance sheet data as of June 30,
1998, 1997, 1996, 1995 and 1994, and selected consolidated statement of
operations data for each of the years in the five year period ended June 30,
1998, are derived from audited consolidated financial statements of Celebrity.
Certain events, such as the acquisition of the India Exotics assets and
operations ("India Exotics") in February 1995 and the Company's June 1998
decision to exit the India Exotics operations, affect the comparability of the
data between years. See Note 4 to the Consolidated Financial Statements for
discussion of certain of these events.
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $ 122,262 $ 125,170 $ 115,048 $ 118,810 $ 90,884
Net income (loss).......................... $ (12,729) $ (5,761) $ (5,422) $ 3,782 $ 1,130
Earnings (loss) per common share and
common equivalent share (basic)........ $ (2.02) $ (.92) $ (.86) $ .60 $ .18
Earnings (loss) per common share and
common equivalent share (diluted)...... $ (2.02) $ (.92) $ (.86) $ .60 $ .18
JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets.............................. $ 51,719 $ 67,453 $ 73,363 $ 74,641 $ 47,105
Current liabilities....................... $ 16,794 $ 41,424 $ 15,216 $ 14,122 $ 6,561
Notes payable, net of current portion..... $ 26,588 $ 4,877 $ 31,081 $ 27,941 $ 11,701
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,
including the economic instability in the Far East, (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,
(x) risks associated with a heavy reliance on products coming from manufacturers
in the PRC, (xi) currency risks, including changes in the relationship between
the U.S. dollar and the Hong Kong dollar and (xii) other risks detailed in the
Company's Securities and Exchange Commission filings. See "Business --
- 12 -
15
Certain Risk Factors." 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 operations expressed as a percentage of net sales for
the years indicated.
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
Net sales....................................... 100% 100% 100%
Costs and operating expenses:
Cost of goods sold............................ 80% 78% 79%
Selling....................................... 4% 4% 5%
General and administrative.................... 18% 16% 19%
Depreciation and amortization................. 2% 2% 2%
Restructuring charges......................... 3% - % - %
----- ----- -----
107% 100% 105%
----- ----- -----
Operating (income) loss......................... (7)% - % (5)%
Interest and other, net......................... (3)% (3)% (3)%
----- ----- -----
Loss before income taxes........................ (10)% (3)% (8)%
Provision (benefit) for income taxes............ - % 2% (3)%
----- ----- -----
Net loss........................................ (10)% (5)% (5)%
===== ===== =====
FISCAL 1998 COMPARED WITH FISCAL 1997
Net sales decreased 2% from $125.2 million in fiscal 1997 to $122.3
million in fiscal 1998. The decrease was attributable primarily to lower sales
by The Cluett Corporation, a wholly-owned subsidiary of the Company ("Cluett"),
resulting from a smaller presence of the Company's products in the advertising
and promotional programs of one of Cluett's significant customers. As a result
of fewer promotions, the customer's sales of Cluett's products were lower,
with a similar reduction in product reorders from the customer.
Cost of goods sold increased from $97.5 million , or 78% of net sales,
in 1997 to $97.7 million, or 80% of net sales, in fiscal 1998. The increase in
the cost of goods sold percentage is attributable to inventory reduction plans
implemented in fiscal 1998. Inventory was reduced by $7.9 million, or 26%, from
$30.6 million at June 30, 1997 to $22.8 million at June 30, 1998. Price
incentives were offered on certain products and to certain customers to achieve
the inventory reduction. In addition a special charge of $1.1 million was
recorded to cost of goods sold in the fourth quarter of fiscal 1998, related to
inventory categories on hand at June 30, 1998, that the Company has determined
to discontinue and liquidate. See Note 4 to the Consolidated Financial
Statements.
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16
Selling expenses decreased from $5.5 million in fiscal 1997 to $4.8
million in fiscal 1998. The decrease was attributable to the lower sales volume
in fiscal 1998 and expense reductions resulting from consolidating certain sales
activities. Selling expenses as a percentage of net sales were 4% in fiscal 1997
and fiscal 1998.
General and administrative expenses increased from $19.5 million, or
16% of net sales, in fiscal 1997 to $22.1 million, or 18% of net sales, in
fiscal 1998. The increase was primarily attributable to higher bad-debt accruals
for certain accounts, higher facility and operating costs of the Dallas, Texas
facility of Star Wholesale, which opened in May 1997, and costs associated with
Cluett's additional inventory storage and handling requirements and other
expenses.
Depreciation and amortization expense of $2.2 million and 2% of net
sales in fiscal 1998 was approximately even with fiscal 1997 expenses.
Restructuring charges of $4.5 million, or 3.6% of net sales, were
recorded in fiscal 1998 compared to no such charges in fiscal 1997. These
charges resulted from the Company's decision to close the India Exotics
operations in St. Louis, Missouri in June 1998. The Company wrote down the
carrying value of certain assets ($3.6 million), primarily goodwill, other
intangibles and property and equipment, recorded as a fixed obligation ($0.6
million) the remaining payments due pursuant to a noncompetition agreement
related to the India Exotics acquisition, and recorded a charge ($0.2 million)
relating to the lease termination in St. Louis. See Note 4 to the Consolidated
Financial Statements.
Operating income (loss) decreased from income of $0.5 million in fiscal
1997 to a loss of $8.9 million in fiscal 1998. Of the factors described above
affecting operating income (loss), the most significant were the restructuring
charges resulting from the closure of the India Exotics facility in St. Louis
($4.5 million), special charges related to discontinued inventory ($1.1
million), as well as increased discounts in fiscal 1998 to certain customers on
certain products to effect a reduction of Company inventory levels.
Net interest expense increased from $3.2 million in fiscal 1997 to $3.5
million in fiscal 1998. The increase was primarily attributable to higher
financing costs of the Company's revolving line of credit and term loan
financing. In February 1998, the Company entered into a new three-year credit
agreement, replacing prior financing arrangements that were to mature in March
1998. See "--Liquidity and Capital Resources" and Note 6 to the Consolidated
Financial Statements.
As a result of the foregoing factors, the Company's loss before income
taxes increased from $2.7 million in fiscal 1997 to $12.4 million in fiscal
1998.
Provision for income taxes decreased from $3.0 million in fiscal 1997
to $0.4 million in fiscal 1998. The tax provision recognized in 1998 was
principally related to foreign operations. A valuation allowance of $4.8 million
was recorded in 1998, bringing the total deferred tax valuation allowance to
$9.3 million. The valuation allowance reflects the 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
- 14 -
17
will be released and the net operating loss and tax credit carryforwards will be
available to shelter future U.S. taxable income.
As a result of the foregoing factors the net loss increased from $5.8
million in fiscal 1997 to $12.7 million in fiscal 1998.
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 increases
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. 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 savings
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.
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18
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.
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 has required significant
investment in inventory and receivables. The Company follows the industry
practice of offering extended terms to qualified customers for sales of
Christmas merchandise. These sales generally take place between 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 1998 amounted to
approximately $2.6 million, which was primarily attributable to changes in
operating assets and liabilities. Most significantly, inventory decreased $7.9
million during fiscal 1998. The decrease was primarily a result of the
Company's fiscal 1998 inventory reduction strategy. Cash used in investing
activities in fiscal 1998 was $0.4 million, related solely to purchases of
equipment. Cash used by financing activities amounted to $2.5 million,
resulting primarily from refinancing the old credit facility in February 1998,
offset by borrowings under the new revolving credit facility discussed below.
In February 1998, the Company entered into a new three-year revolving
credit facility for its Celebrity, Cluett, Color Concepts and Star Wholesale
operations for borrowings up to $31.5 million. This revolving credit facility
replaces the Company's prior revolving line of credit with a bank. Borrowing
limits under the revolving credit facility are based on specified percentages of
eligible accounts receivable and inventories. As a result of such
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19
limits, the maximum amount the Company was eligible to borrow at June 30, 1998,
was $21.0 million, and the amount outstanding under the revolving credit
facility was $20.6 million. In addition to the revolving credit facility, the
lender has made a term loan to the Company in the original principal amount of
$3.5 million. The term loan is payable in monthly installments of principal of
$200,000 commencing May 1, 1998, and the remaining outstanding principal balance
under the term loan is due and payable upon the earlier of (a) September 1,
1999, or (b) the termination of the revolving credit facility. The outstanding
principal balance under the revolving credit facility bears interest at a
reference bank's prime rate of interest plus 1.5% per annum, and the outstanding
principal balance of the term loan bears interest at a rate of 12.5% per annum.
Interest is payable monthly. Amounts borrowed under the revolving credit
facility and the term loan are secured by accounts receivable, inventory,
equipment, certain interests in real property, and general intangibles
(including intellectual property) of Celebrity and its subsidiary borrowers. In
addition, substantially all stock of the Company's subsidiaries has been pledged
to the lender. The revolving credit facility and the term loan are subject to
certain covenants limiting the incurrence of indebtedness, prohibiting the
payment of dividends and requiring the Company to maintain certain financial
ratios. In connection with establishing the credit facility, the Company issued
to the lender a five-year warrant to purchase 100,000 shares of Common Stock at
$1.00 per share.
On July 7, 1998, subsequent to the fiscal 1998 year end, the Company
received a $1.0 million seasonal overadvance under its revolving credit
facility. The seasonal overadvance period expires November 1, 1998. On July 7,
1998, the Company also borrowed an additional $500,000 from a related party, RHP
Management, LLC ("RHP"), an entity controlled by Robert H. Patterson, Jr.,
Chairman of the Board, President and Chief Executive Officer of the Company. The
principal amount outstanding accrues interest at 10% per annum. The borrowing
from RHP was utilized for seasonal working capital needs and is expected to be
repaid by November 1, 1998.
The Company was not in compliance with certain covenants contained in
its previous credit facility at June 30, 1997, and it had not obtained waivers
for all such violations. Accordingly, the debt was classified as a current
liability at June 30, 1997. As this debt has now been refinanced on a long-term
basis, classification of the debt as a current liability is no longer required.
Celebrity Hong Kong generally makes full cash payments for products
ordered for Celebrity's account or for direct shipment to customers after the
manufacturers deliver products in Hong Kong for export. Celebrity Hong Kong
finances cash payments to its vendors 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 to its
customers. The bank is reimbursed when payment for these shipments is received.
At June 30, 1998, $4.1 million of export bills were financed by the bank, of a
$4.5 million maximum amount under the credit facility. 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.
Citing changing economic conditions in the Far East, the Hong Kong bank reduced
the maximum amount under the credit facility from $5.8 million to $4.5 million
in December 1997, and has indicated a further reduction to $3.8 million
effective October 1998. To address this credit reduction and support additional
export credit needs, the Company is developing export credit facilities with two
additional banks.
In June 1997, the Company entered into a new revolving credit facility
with an additional lender, which matures in June 2004. At June 30, 1998, the
outstanding balance under this facility was approximately $4.7 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
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certain real estate owned by the Company, and the facility contains covenants
requiring the Company to maintain certain financial ratios; however, the bank
has waived these financial ratios covenants through June 30, 1999.
In September 1997, Celebrity borrowed $500,000 from RHP. In February
1998, the parties amended the promissory note to extend the repayment date to
September 30, 1999, subject to repayment restrictions under the credit facility.
The principal amount outstanding accrues interest at a fluctuating rate per
annum equal to RHP's cost of borrowing, which is currently the prime rate of a
reference bank plus 1.5% per annum. 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 1999 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 products are primarily sourced in the Far East, with a
majority produced in the PRC. The Company's source or cost of supply could be
affected by a variety of factors, including general economic conditions in the
Far East, changes in currency valuations, export credit availability, freight
carrier availability and cost, and U.S. trade policy and law related to imports.
If the U.S. government were to terminate MFN status 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. If the Company were to face an
increase in product cost from any of these factors, 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, credit
facilities and cash flows from operations 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
or that any necessary additional financing will be available, if at all, in
amounts required or on terms satisfactory to the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("FAS 130"), was issued and is effective for
fiscal years beginning after December 15, 1997. FAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The Company believes that the
adoption of this standard will not have a material effect on the Company's
consolidated results of operations or financial position.
In June 1997, Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information ("FAS 131"),
was issued and is effective for fiscal years beginning after December 15, 1997.
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements. The
Company believes that the adoption of this standard will not affect its
reportable segments.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. The
Company's computer equipment and software and devices with embedded technology
that are time-sensitive may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations,
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company has undertaken various initiatives intended to ensure that
the computer equipment and software used by the Company will function properly
with respect to dates in the
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21
Year 2000 and thereafter. For this purpose, the term "computer equipment and
software" includes systems thought of as information technology ("IT") systems,
including accounting, data processing and telephone/PBX systems and other
miscellaneous systems that may contain embedded technology, as well as systems
that are not commonly thought of as IT systems, such as materials handling
systems, alarm systems, fax machines or other miscellaneous systems that may
contain embedded technology. Based upon its identification and assessment
efforts to date, the Company believes that certain of the computer equipment and
software systems it currently uses will require replacement or modification. In
addition, in the ordinary course of replacing computer equipment and software,
the Company attempts to obtain replacements that are Year 2000 compliant.
Utilizing both internal and external resources to identify and assess needed
Year 2000 remediation, the Company currently anticipates that its Year 2000
identification, assessment, remediation and testing efforts, which began in
April 1997, will be completed by June 30, 1999, and that such efforts will be
completed prior to any currently anticipated impact on its computer equipment
and software systems. The Company estimates that as of September 15, 1998, it
had completed approximately 90% of the initiatives that it believes will be
necessary to fully address potential Year 2000 issues related to its computer
equipment and software. The projects comprising the remaining 10% of the
initiatives are in process and are expected to be completed by June 30, 1999.
TIME PERCENT
YEAR 2000 INITIATIVE PERIOD COMPLETE
-------------------- ------ --------
Initial IT system identification and assessment April 1997 to December 1998 95
Remediation and testing of central system June 1997 to December 1998 90
Remediation and testing of manufacturing
and distribution systems June 1998 to June 1999 40
Identification and assessment of non-IT systems June 1998 to December 1998 20
Remediation and testing of non-IT systems January 1999 to June 1999 0
Substantially all of the Company's products are manufactured in
southeastern Asia. The Company currently has relationships with approximately 70
manufacturers and purchases most of its products from 12 of them. Celebrity has
made its own assessment of the manufacturing operations of its significant
suppliers and their relative dependence on computer equipment and software. As a
result of this independent assessment, the Company has concluded that because
the manufacturing processes of the Company's suppliers utilize very little
technology, the risks associated with the Year 2000 readiness of its significant
suppliers are not significant. The Company is beginning assessment of the Year
2000 readiness of its customers. Such assessment will include contacting
significant customers regarding their state of Year 2000 readiness. The Company
expects to complete its assessment of customers' Year 2000 readiness by March
1999.
The Company believes that the costs to modify its computer equipment
and software systems to be Year 2000 compliant, as well as the currently
anticipated costs with respect to Year 2000 issues of third parties, will not
exceed $200,000, which expenditures will be funded from operating cash flows.
All of the $200,000 relates to analysis, repair or replacement of existing
software, upgrades of existing software or evaluation of information received
from significant suppliers or customers. Such amount represents approximately
50% of the Company's total actual and anticipated IT expenditures for fiscal
1998 and 1999. As of June 30, 1998, the Company had
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22
incurred costs of approximately $50,000 related to its Year 2000 identification,
assessment, remediation and testing efforts. Other non-Year 2000 IT efforts have
not been materially delayed or impacted by Year 2000 initiatives. However, if
all Year 2000 issues are not properly identified, or assessment, remediation and
testing are not effected timely, there can be no assurance that the Year 2000
issue will not have a material adverse effect on the Company's results of
operations, or adversely affect the Company's relationships with customers,
suppliers or others. Additionally, there can be no assurance that the Year 2000
issues of other entities will not have a material adverse effect on the
Company's systems or results of operations.
The Company has begun, but not yet completed, a comprehensive analysis
of the operational problems and costs (including loss of revenues) that would
be reasonably likely to result from the failure by the Company and certain
third parties to complete efforts necessary to achieve Year 2000 compliance on
a timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company plans to complete such analysis and contingency
planning by December 31, 1999.
The costs of the Company's Year 2000 identification, assessment,
remediation and testing efforts and the date by which the Company believes it
will complete such efforts are based upon management's best estimates, which are
derived utilizing numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans, and
other factors. However, there can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that might cause such material
differences include but are not limited to the availability and cost of
personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, and
similar uncertainties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company's revolving credit facility provides for borrowings that
bear interest at variable rates based on a prime rate plus 1.5% per annum. At
June 30, 1998, the amount outstanding under the revolving credit facility was
$20.6 million. The Company believes that the effect, if any, of reasonably
possible near-term changes in interest rates on the Company's financial
position, results of operations and cash flows should not be material.
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-24 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 November 16, 1998 (the
"Proxy Statement"), under the headings "Election of Directors," "Board of
Directors and Committees" and "Section 16(a) 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.
- 21 -
24
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)
4.3 -- Warrant dated February 3, 1998, issued by Registrant to
Foothill Capital Corporation.(13)
10.1 -- Loan Agreement dated May 10, 1993, among Registrant,
Magicsilk, Inc. and National Canada Finance Corp.(4)
- 22 -
25
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)
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 -- 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)
10.14 -- General Security Agreement Relating to Goods between
Celebrity Exports International Limited and The Hongkong and
Shanghai Banking Corporation Limited dated April 30, 1984.(1)
10.15 -- Form of Guarantee by Limited Company executed by Registrant
in favor of The Hongkong and Shanghai Banking Corporation
Limited.(12)
- 23 -
26
10.16 -- Commitment of Celebrity Exports International Limited to
maintain a combined net worth of HK$50,000,000.(12)
10.17 -- Term WCMA Loan Agreement dated June 17, 1997 between
Registrant and Merrill Lynch Business Financial Services Inc.
(12)
10.18 -- $5,000,000 Term WCMA Note dated June 17, 1997 signed by
Registrant and payable to Merrill Lynch Business Financial
Services Inc.(12)
10.19 -- Unconditional Guaranty dated June 17, 1997, executed by
Magicsilk, Inc. in favor of Merrill Lynch Business Financial
Services Inc. (12)
10.20 -- Unconditional Guaranty dated June 17, 1997, executed by The
Cluett Corporation in favor of Merrill Lynch Business
Financial Services Inc.(12)
10.21 -- Unconditional Guaranty dated June 17, 1997, executed by India
Exotics, Inc. in favor of Merrill Lynch Business Financial
Services Inc. (12)
10.22 -- 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)
10.23 -- 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 Tyler, Texas property.(12)
10.24 -- Loan and Security Agreement dated as of January 30, 1998 among
Registrant, The Cluett Corporation, Star Wholesale Florist,
Inc. Value Florist, Inc. and India Exotics, Inc., as
borrowers, on the one hand, and Foothill Capital Corporation,
on the other (13)
10.25 -- Promissory Note of Registrant, amended and restated as of
February 16, 1998 payable to the order of RHP Management,
LLC(13)
10.26 -- Promissory Note of Registrant, dated July 7, 1998 payable to
the order of RHP Management, LLC(14)
10.27 -- Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Surendra Khokha.(7)
10.28 -- Letter Agreement dated June 20, 1996, amending the Employment
Agreement dated February 7, 1995, between India Exotics, Inc.
and Surendra Khokha.(11)
10.29 -- Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Meena Khokha.(7)
10.30 -- Letter Agreement dated June 20, 1996, amending the Employment
Agreement dated February 7, 1995, between India Exotics, Inc.
and Meena Khokha.(11)
10.31 -- Noncompetition Agreement dated February 7, 1995, among India
Exotics, Inc., Surendra Khokha, Rajneesh Khokha, Asheesh
Khokha and Meena Khokha.(7)
- 24 -
27
10.32 -- Settlement Agreement dated February 2, 1998, by and among
Registrant, India Exotics, Inc., a Texas corporation, Surendra
Khokha, Rajneesh Khokha, Asheesh Khokha and Meena Khokha.(14)
10.33 -- Lease Termination Agreement dated as of July 31, 1998 among
436 Investments, L.L.C., India Exotics, Inc., a Texas
corporation, Surendra Khokha, Rajneesh Khokha, Asheesh Khokha
and Meena Khokha and Registrant.(14)
10.34 -- Form of Indemnity Agreement.(1)
10.35 -- Amended and Restated 1992 Stock Option Plan.(3)
10.36 -- Amended and Restated 1993 Employee Stock Purchase Plan.(7)
10.37 -- 1999 Employee Bonus Plan.(14)
21 -- Subsidiaries of Registrant.(10)
23 -- Consent of PricewaterhouseCoopers LLP.(14)
27.1 -- Financial Data Schedule as of and for the Year Ended June
30, 1998.(15)
27.2 -- Restated Financial Data Schedule as of and for the Year Ended
June 30, 1997.(15)
- -------------
(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.
- 25 -
28
(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) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997 and incorporated
herein by reference.
(14) Filed herewith.
(15) Included with EDGAR version only.
- 26 -
29
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: September 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
------------------------------------- ---------------------------------------- ------------------
/s/ ROBERT H. PATTERSON, JR. Chairman of the Board, President and September 28, 1998
------------------------------------ Chief Executive Officer (Principal
Robert H. Patterson, Jr. Executive Officer)
Vice President -- Finance, Treasurer September 28, 1998
/s/ LYNN SKILLEN and Chief Financial Officer (Principal
------------------------------------ Financial Officer and Principal
Lynn Skillen Accounting Officer)
/s/ B.D. HUNTER Director September 28, 1998
------------------------------------
B. D. Hunter
/s/ C. A. LANGNER Director September 28, 1998
------------------------------------
C. A. Langner
/s/ VALERIE ANNE MARS Director September 28, 1998
------------------------------------
Valerie Anne Mars
/s/ RICHARD YUEN Managing Director of Celebrity September 28, 1998
------------------------------------ Exports International Limited and
Richard Yuen Director
-27-
30
CELEBRITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants.............................................................. F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997....................................... F-3
Consolidated Statements of Operations for the
Years Ended June 30, 1998, 1997 and 1996...................................................... F-5
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1998, 1997 and 1996...................................................... F-6
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended June 30, 1998, 1997 and 1996....................................... F-7
Notes to Consolidated Financial Statements..................................................... F-8
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts............................................... F-24
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
31
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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Dallas, Texas
August 27, 1998
F-2
32
CELEBRITY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30,
---------------------------
1998 1997
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 127 $ 530
Accounts receivable 14,121 15,620
Inventories 22,766 30,619
Deferred tax asset 2,173 1,711
Other assets 1,434 1,782
---------- -----------
Total current assets 40,621 50,262
---------- -----------
Property, plant and equipment, net 9,788 11,522
Deferred tax asset -- 462
Intangible assets, net 1,059 4,718
Other assets 251 489
---------- -----------
Total assets $ 51,719 $ 67,453
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
33
CELEBRITY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
JUNE 30,
----------------------------
1998 1997
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,466 $ 10,405
Accrued expenses 3,251 3,285
Income taxes payable 598 667
Current maturities of long-term obligations 3,479 27,067
------------ ------------
Total current liabilities 16,794 41,424
------------ ------------
Long-term obligations, net of current portion 26,588 4,877
------------ ------------
Total liabilities 43,382 46,301
------------ ------------
Redeemable common stock (0 and 13,462 shares
at June 30, 1998 and 1997, respectively) -- 175
------------ ------------
Shareholders' equity:
Preferred stock (10,000,000 shares of par value $.01
per share authorized; none issued and outstanding in
1998 or 1997) -- --
Common stock (25,000,000 shares of par value $.01
per share authorized; 6,347,802 and 6,296,140
shares issued at June 30, 1998 and 1997, respectively) 63 63
Paid-in capital 22,751 22,353
Subscriptions receivable (570) (442)
Accumulated deficit (13,198) (469)
Cumulative translation adjustment (9) (3)
Treasury stock, at cost (700) (525)
------------ ------------
Total shareholders' equity 8,337 20,977
------------ ------------
Commitments and contingencies
Total liabilities, redeemable common stock
and shareholders' equity $ 51,719 $ 67,453
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
34
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Net sales $ 122,262 $ 125,170 $ 115,048
Costs and operating expenses:
Cost of goods sold 97,660 97,479 91,169
Selling 4,750 5,508 5,842
General and administrative 22,095 19,474 21,323
Depreciation and amortization 2,176 2,236 2,054
Restructuring charges 4,454 -- --
---------- ---------- ----------
131,135 124,697 120,388
---------- ---------- ----------
Operating income (loss) (8,873) 473 (5,340)
Interest income 202 192 193
Interest expense (3,699) (3,408) (3,882)
Other, net 13 (6) 60
---------- ---------- ----------
Loss before income taxes (12,357) (2,749) (8,969)
Provision (benefit) for income taxes 372 3,012 (3,547)
---------- ---------- ----------
Net loss $ (12,729) $ (5,761) $ (5,422)
========== ========== ==========
Basic and diluted net loss per share $ (2.02) $ (.92) $ (.86)
========== ========== ==========
Basic and diluted weighted average common shares outstanding 6,291 6,273 6,286
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
35
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
Operating activities:
Net loss $(12,729) $ (5,761) $ (5,422)
Adjustments to reconcile net loss to net
cash provided by (used in) operations
Depreciation 1,693 1,604 1,364
Amortization 483 632 690
Restructuring charges 4,454 -- --
Deferred income taxes -- 2,308 (3,181)
Changes in operating assets and liabilities:
Accounts receivable 1,499 (701) 1,328
Inventories 7,853 2,660 3,747
Other assets, net 567 593 (852)
Accounts payable and accrued expenses (1,179) 894 2,370
Income taxes payable (69) (269) (86)
-------- -------- --------
Net cash provided by (used in)
operating activities 2,572 1,960 (42)
-------- -------- --------
Investing activities:
Purchases of equipment (447) (1,351) (1,704)
Purchase of land -- -- (491)
Other -- (470) (379)
-------- -------- --------
Net cash used in investing activities (447) (1,821) (2,574)
-------- -------- --------
Financing activities:
Net proceeds from (payments on) old credit facility (26,162) 248 3,793
Net proceeds from (payments on) new credit facility 23,724 -- --
Proceeds from other long-term obligations 500 5,110 899
Payments on other long-term obligations (581) (5,979) (2,749)
Redemption of common stock (87) (175) (175)
Payments on subscriptions receivable 25 19 93
Other 53 2 --
-------- -------- --------
Net cash provided by (used in) financing activities (2,528) (775) 1,861
-------- -------- --------
Decrease in cash and cash equivalents (403) (636) (755)
Cash and cash equivalents, beginning of period 530 1,166 1,921
-------- -------- --------
Cash and cash equivalents, end of period $ 127 $ 530 $ 1,166
======== ======== ========
See Notes 5, 6, 7 and 8 for supplementary disclosures.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
36
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
RETAINED
COMMON STOCK EARNINGS CUMULATIVE
--------------------- PAID-IN SUBSCRIPTIONS (ACCUMULATED TRANSLATION TREASURY STOCK,
SHARES PAR VALUE CAPITAL RECEIVABLE DEFICIT) ADJUSTMENT AT COST
--------- --------- ------- ------------- ------------ ----------- ---------------
Balance at June 30, 1995 6,269,218 $ 63 $22,003 $ (554) $ 10,714 $ 2 $ (175)
Purchase of redeemable common stock 13,461 175 (175)
Payments on subscriptions receivable 93
Net loss (5,422)
Currency translation (8)
--------- --------- ------- ------------- ------------ ----------- ---------------
Balance at June 30, 1996 6,282,679 63 22,178 (461) 5,292 (6) (350)
Purchase of redeemable common stock 13,461 175 (175)
Payments on subscriptions receivable 19
Net loss (5,761)
Currency translation 3
--------- --------- ------- ------------- ------------ ----------- ---------------
Balance at June 30, 1997 6,296,140 63 22,353 (442) (469) (3) (525)
Purchase of redeemable common stock 13,462 175 (175)
Employee stock purchase plan 38,200 153 (153)
Payments on subscriptions receivable 25
Issuance of warrants 70
Net loss (12,729)
Currency translation (6)
--------- --------- ------- ------------- ------------ ----------- ---------------
Balance at June 30, 1998 6,347,802 $ 63 $22,751 $ (570) $ (13,198) $ (9) $ (700)
========= ========= ======= ============= ============ =========== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
37
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 Wholesale"), are suppliers of high quality
artificial flowers, foliage and flowering bushes, selling primarily to
mass market retailers, craft store chains and other 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 Wholesale, and
Cluett are referred to herein collectively as "Celebrity" or the
"Company."
India Exotics, Inc. ("India Exotics"), a wholly-owned subsidiary of
Celebrity, supplied decorative metal products and other decorative
accessories to craft store chains and other specialty retailers and to
wholesale florists. In June 1998, the Company decided to exit the India
Exotics business (Note 4). The Company will continue to market decorative
metal products through its Color Concepts division with a more limited
product offering than that previously offered by India Exotics.
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-8
38
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 3 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 and amortized over the lesser of
the estimated useful life or the term of the lease.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and a customer list
related to purchase acquisitions, which are being amortized using the
straight-line method over 20 and 10 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 are 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.
During the fourth quarter of fiscal 1998, the Company decided to exit the
India Exotics operations that were acquired in fiscal 1995. As a result of
this decision, certain long-lived assets were written down to their
estimated fair value less cost to sell (Note 4).
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-9
39
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 the rate 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
The Company has adopted Statement of Financial Accounting Standards No.
128, Earnings per Share, ("FAS 128"), which is effective for interim and
annual periods subsequent to December 15, 1997. Basic earnings per share
are computed by dividing net income (loss) by the weighted average number
of common shares outstanding. Diluted earnings per share are computed by
dividing net income (loss) by the weighted average number of common
shares and dilutive potential common shares outstanding. FAS 128 requires
restatement of earnings per share for prior periods.
Outstanding options to purchase 709,900 and 436,400 shares of the
Company's common stock, par value $.01 per share ("Common Stock") were
excluded from the diluted earnings per share calculations for fiscal 1998
and 1997, respectively, because their inclusion would be antidilutive due
to the net losses incurred for those fiscal years.
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 significantly from
those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("FAS 130"), was issued and is effective
for fiscal years beginning after December 15, 1997. FAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The
Company believes that the adoption of this standard will not have a
material effect on the Company's consolidated results of operations or
financial position.
In June 1997, Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information ("FAS
131"), was issued and is effective for fiscal years beginning after
December 15, 1997. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements. The Company believes that the adoption of
this standard will not affect its reportable segments.
F-10
40
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts as of June 30 is as
follows (in thousands):
1998 1997
----------- -----------
Accounts receivable:
Accounts receivable $ 16,070 $ 17,637
Less: allowance for doubtful accounts and customer
deductions, returns and allowances (1,949) (2,017)
----------- -----------
$ 14,121 $ 15,620
=========== ===========
Inventories:
Raw materials $ 8,460 $ 8,707
Finished goods 15,958 22,345
Less: inventory reserves (1,652) (433)
----------- -----------
$ 22,766 $ 30,619
=========== ===========
Property, plant and equipment:
Buildings $ 7,625 $ 7,625
Land 811 811
Furniture, fixtures and equipment 7,624 6,789
Transportation equipment 695 697
Leasehold improvements 310 1,318
----------- -----------
17,065 17,240
Less: accumulated depreciation (7,277) (5,718)
----------- -----------
$ 9,788 $ 11,522
=========== ===========
Intangible assets:
Excess of cost over fair value of net assets acquired $ 765 $ 4,224
Customer list 1,327 1,327
Trade names -- 397
----------- -----------
2,092 5,948
Less: accumulated amortization (1,033) (1,230)
----------- -----------
$ 1,059 $ 4,718
=========== ===========
F-11
41
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SPECIAL CHARGES
In the fourth quarter of fiscal 1998, the Company recorded restructuring
charges of approximately $4,454,000. These charges resulted from the
Company's June 1998 decision to exit the India Exotics operations. The
Company wrote down the carrying value of certain assets ($3,634,000),
primarily goodwill, other intangible assets and property and equipment to
their estimated fair value, less cost to sell, and recorded as a fixed
obligation the remaining payments ($614,000) due pursuant to a
noncompetition agreement related to the India Exotics acquisition (Note
6). The charge also included a contractual lease termination obligation
($206,000) resulting from the closure of the India Exotics office/
distribution center in St. Louis, Missouri. Substantially all activities
of India Exotics had ceased by June 30, 1998. The following table presents
unaudited operating results for India Exotics (in thousands):
YEARS ENDED JUNE 30,
1998 1997 1996
------------ ------------ ------------
Net sales $ 12,398 $ 13,120 $ 10,322
Operating loss $ (6,326) $ (2,272) $ (4,332)
The Company also recorded special charges of approximately $1,128,000 in
the fourth quarter of fiscal 1998 related to inventory adjustments
resulting from the Company's decision to exit the India Exotics operations
and actions taken by the Company to discontinue and liquidate certain
underperforming product lines, primarily at Cluett. These charges are
included in cost of goods sold in the accompanying statements of
operations. At June 30, 1998, the entire reserve was unused.
The Company incurred special charges of approximately $4,400,000 for
fiscal 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 fiscal
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, 1998, the reserves had been fully
utilized.
F-12
42
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES
The components of income (loss) before income taxes are summarized below (in
thousands):
YEARS ENDED JUNE 30,
-------------------------------------
1998 1997 1996
--------- -------- ---------
Domestic $ (14,547) $ (6,829) $ (12,172)
Foreign 2,190 4,080 3,203
--------- -------- ---------
$ (12,357) $ (2,749) $ (8,969)
========= ======== =========
The components of the provision (benefit) for income taxes are as follows (in
thousands):
YEARS ENDED JUNE 30,
-------------------------------------
1998 1997 1996
--------- -------- ---------
Current:
State $ - $ 74 $ 75
Federal - - (924)
Foreign 372 630 483
--------- -------- ---------
372 704 (366)
Deferred provision (benefit) - 2,308 (3,181)
--------- -------- ---------
$ 372 $ 3,012 $ (3,547)
========= ======== =========
The components of the net deferred tax asset are as follows (in thousands):
JUNE 30,
-------------------
1998 1997
-------- --------
Special charges $ 2,182 $ 188
Net operating loss and other carryforwards 7,855 4,454
Capitalized inventory costs 619 915
Provision for losses on accounts receivable 482 563
Intangible assets 162 113
Accelerated depreciation 319 220
Other (125) 174
-------- --------
11,494 6,627
Less: valuation allowance (9,321) (4,454)
-------- --------
$ 2,173 $ 2,173
======== ========
F-13
43
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
----------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- -------- ---------- -------- --------- --------
Benefit at statutory rate $ (4,201) (34%) $ (935) (34%) $ (3,049) (34%)
Meals and entertainment and
other disallowed expenses 92 1 18 $ 1 58 1
Valuation allowance 4,867 39 4,454 161 -- --
Other (14) -- 75 3 -- --
State tax expense -- -- 71 3 50 --
Foreign tax rate differentials (372) (3) (671) (24) (606) (7)
---------- -------- --------- ------ -------- -------
$ 372 3% $ 3,012 110% $ (3,547) (40%)
========== ======== ========= ====== ======== =======
Because 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 $6,596,000 before consideration of
any available tax loss carryforwards.
Income taxes paid during fiscal 1998, 1997 and 1996 were $488,000,
$901,000 and $527,000, respectively. At June 30, 1997, other current
assets included a U.S. federal income tax receivable of $1,008,000, which
was received in fiscal 1998.
At June 30, 1998, the Company had net operating loss carryforwards of
$20,943,000, foreign tax credit carryforwards aggregating $167,000 and
minimum tax credit carryforwards of $87,000. The net operating loss
carryforwards expire between 2011 and 2013. 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 in 2000.
At June 30, 1998, the Company has recorded a valuation allowance of
$9,321,000 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 and tax credit carryforwards prior to their expiration. The
valuation allowance was $4,454,000 at June 30, 1997.
F-14
44
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
JUNE 30,
-------------------
1998 1997
-------- --------
Revolving line of credit; interest at reference bank rate plus
1.5% (10.00% at June 30, 1998); due January 2001; secured
by substantially all accounts receivable, inventory and
certain other assets $ 20,624 $ --
Term loan; interest at 12.5%; payable in monthly installments
of $200 with balance due September 1, 1999; secured by
substantially all accounts receivable, inventory and certain
other assets 3,100 --
Revolving credit facility; repaid in February 1998 -- 26,162
Note payable; interest at LIBOR plus 2.65% (8.31% at
June 30, 1998) payable in monthly installments of $28;
due June 2004; secured by real estate 4,694 5,000
Noninterest bearing obligation; payable in
monthly installments of $42 through March 2000 875 375
Note payable to related party; interest at 10%; due
September 1999 500 --
Installment notes payable monthly through January 1999;
interest rates vary from 7% to 13%; secured
by automobiles 49 137
Note payable to related party; interest at 8%; payable in
annual installments through May 1999 33 64
Other 252 206
-------- --------
30,127 31,944
Less: current maturities (3,479) (27,067)
Less: unamortized debt discount (60) --
-------- --------
$ 26,588 $ 4,877
======== ========
F-15
45
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate maturities of notes payable for the next five years and
thereafter are as follows (in thousands):
1999 $ 3,479
2000 1,995
2001 20,957
2002 333
2003 333
Thereafter 3,030
----------
Total $ 30,127
==========
In February 1998, the Company entered into a new three-year credit
facility for its Celebrity, Cluett, Color Concepts, and Star Wholesale
operations for borrowings up to $35,000,000. This credit facility
replaced the Company's prior line of credit with a bank. The new credit
facility includes a revolving line of credit for borrowings up to
$31,500,000 and a term loan with an initial principal amount of
$3,500,000. Borrowing limits under the revolving credit facility are
based on specified percentages of eligible accounts receivable and
inventories. As a result of such limits, the maximum amount the Company
was eligible to borrow at June 30, 1998 was $20,970,000. The amount
outstanding under the revolving credit facility at June 30, 1998 was
$20,624,000. On July 7, 1998, the Company received a $1,000,000 seasonal
overadvance under its revolving credit facility. The seasonal overadvance
period expires November 1, 1998. The term loan is payable in monthly
installments of principal of $200,000 beginning May 1, 1998, and the
remaining outstanding principal balance under the term loan is due and
payable upon the earlier of (i) September 1, 1999 or (ii) the termination
of the revolving credit facility. As a condition to establishing the
credit facility, the Company issued to the lender a five-year warrant to
purchase 100,000 shares of Common Stock at $1.00 per share. The fair
value of the warrant was estimated to be $70,000. Accordingly, the
proceeds from the new credit facility were allocated between debt and
paid-in capital, resulting in a debt discount that will be accreted to
the redemption amount over the term of the new credit facility. Amounts
borrowed under the revolving credit facility and the term loan are
secured by accounts receivable, inventory, equipment, certain interests
in real property, and general intangibles (including intellectual
property) of Celebrity and its subsidiary borrowers. In addition,
substantially all stock of the Company's subsidiaries has been pledged to
the lender. The revolving credit facility and the term loan are subject
to certain covenants limiting the incurrence of indebtedness, prohibiting
the payment of dividends and requiring the Company to maintain certain
financial ratios. The Company was in compliance with all covenants at
June 30, 1998. The commitment fee for the unused portion of the revolving
line of credit is .25% of the average unused portion of the revolving
line of credit during the year. Unused borrowing availability under the
revolving line of credit was approximately $346,000 at June 30, 1998.
The Company was not in compliance with certain covenants contained in its
previous revolving credit facility at June 30, 1997, and it had not
obtained waivers for all such violations. Accordingly, the debt was
classified as a current liability at June 30, 1997. As this debt has now
been refinanced on a long-term basis, classification of the debt as a
current liability is no longer required.
The note payable secured by real estate 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, 1998, it has obtained a waiver from the lender with respect
to such noncompliance through June 30, 1999.
F-16
46
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the third quarter of fiscal 1998, the Company renegotiated the payment
terms of all of its remaining obligations to the former owners of India
Exotics related to the 1995 acquisition of the business. The obligations
renegotiated included those remaining under a note, a noncompetition
agreement and employment agreements with the former owners, and certain
other obligations. The note was cancelled and all payment obligations
under the note and all other agreements with the former owners were
consolidated into one agreement obligating the Company to make payments
of approximately $42,000 per month from April 1, 1998 through March 1,
2000.
The $500,000 note payable to a related party represents an amount due a
current Celebrity officer and director and is unsecured. The Company
borrowed an additional $500,000 from this individual in July 1998.
The $33,000 note payable to related party represents an amount due a
former Celebrity officer and director and is unsecured.
Interest paid during fiscal 1998, 1997 and 1996 was $3,507,000,
$3,435,000 and $3,645,000, respectively.
7. 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 could 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).
The Common Stock was put back to the Company annually at September 30,
1993, 1994, 1995, 1996 and 1997. In fiscal 1998, the Company issued
notes payable for the purchase of the remaining shares of Common Stock
that could be put back to the Company. The Company owed $88,000 on these
notes at June 30, 1998.
8. 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 contributes an amount equal to 50%
of each employee's contribution up to 6% of the employee's compensation
plus 100% of the employee's contribution for the next 3% of the
employee's compensation. The Company contributed $129,000, $111,000 and
$79,000 for fiscal 1998, 1997 and 1996, 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, 1998 for purchases of Common Stock
under this plan amounted to approximately $570,000 and will be paid over
periods of one to ten years.
F-17
47
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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 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. During fiscal 1998, options to purchase
250,000 shares of Common Stock were granted contingent upon shareholder
approval of an increase in the number of shares reserved for issuance
under the Plan. These shares are included in the table below. Additional
information with respect to stock options granted under the Plan is as
follows:
WEIGHTED
AVERAGE
NUMBER PER SHARE
STOCK OPTION ACTIVITY OF SHARES EXERCISE PRICE
------------------------- --------- --------------
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
Granted 366,000 $1.43
Canceled or surrendered (92,500) $4.36
-------
June 30, 1998 709,900 $2.93
=======
F-18
48
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following information is presented for stock options outstanding
at June 30, 1998. At June 30, 1998, options to purchase an aggregate of
192,300 shares of Common Stock were exercisable at a weighted average
exercise price of $5.11 per share.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
PER SHARE AVERAGE PER SHARE PER SHARE
EXERCISE PRICE REMAINING EXERCISE EXERCISE
RANGE SHARES LIFE PRICE SHARES PRICE
-------------- -------- --------- ---------- -------- ----------
$ 1.19 - 1.38 256,000 10.0 years $ 1.19 6,000 $ 1.38
$ 1.94 - 2.38 110,000 9.7 years $ 1.98 -- $ --
$ 3.19 - 4.00 174,000 8.6 years $ 3.38 45,600 $ 3.36
$ 4.88 - 6.50 164,900 5.4 years $ 5.48 135,700 $ 5.59
$12.50 5,000 4.5 years $ 12.50 5,000 $ 12.50
Included in the table above are fully-vested, nonqualified options to
purchase an aggregate of 31,000 shares of Common Stock. These options
are held by three outside directors and have exercise prices ranging from
$1.38 to $12.50 per share.
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 would have been $12,766,000 and the basic and diluted loss per
share would have been $2.03 for fiscal 1998 and net loss would have been
$5,774,000 and the basic loss per share would have been $.92, for fiscal
1997.
The significant assumptions used to estimate the fair value of the stock
options granted in fiscal 1998 and 1997 include (i) a risk-free rate of
return ranging from 5.58% to 6.15% in fiscal 1998 and from 6.13% to 6.54%
in fiscal 1997, (ii) an expected option life of 10 years and (iii) an
expected volatility ranging from 44.2% to 51.1% in fiscal 1998 and from
44.88% to 45.62% in fiscal 1997.
10. RELATED PARTIES
Celebrity leases a warehouse in Tyler, Texas from a shareholder. Amounts
paid under this lease were approximately $120,000 in each year for
fiscal 1998, 1997 and 1996.
Long-term obligations at June 30, 1998 include two notes payable to
related parties (Note 6).
11. GEOGRAPHIC INFORMATION
The Company operates exclusively in a single industry. Celebrity Hong
Kong exports artificial flowers, foliage and flowering bushes from
southeastern Asia to the U.S. and Europe and Celebrity distributes and
markets its products in the U.S. using a direct sales force and
distribution centers, primarily to mass market retailers, craft store
chains and other specialty 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 distributed and marketed decorative metal products and other
decorative accessories primarily to craft store chains and other
specialty retailers and to wholesale florists, primarily in the U.S.,
using a direct sales force and a distribution center (Note 4).
F-19
49
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial information by geographic area for fiscal 1998, 1997 and 1996
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.
YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
(in thousands)
Net sales to unaffiliated customers:
Hong Kong $ 64,395 $ 60,144 $ 54,662
United States 83,655 89,629 80,947
Intercompany sales (25,788) (24,603) (20,561)
------------ ------------ ------------
Total $ 122,262 $ 125,170 $ 115,048
============ ============ ============
Operating earnings (loss):
Hong Kong $ 2,357 4,216 $ 3,395
United States (11,255) (3,863) (8,910)
Intercompany earnings 25 120 175
------------ ------------ ------------
Total $ (8,873) $ 473 $ (5,340)
============ ============ ============
AT JUNE 30,
1998 1997 1996
------------ ------------ ------------
(in thousands)
Identifiable assets at year-end:
Hong Kong $ 23,180 $ 20,586 $ 15,693
United States 48,525 67,430 71,598
Eliminations (19,986) (20,563) (13,928)
----------- ------------ ------------
Total $ 51,719 $ 67,453 $ 73,363
=========== ============ ============
12. FINANCIAL INSTRUMENTS AND CONCENTRATIONS
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, 1998 and 1997, 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
F-20
50
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998, the Company had two
customers that accounted for sales of $35.8 million and $13.9 million,
respectively. The June 30, 1998 accounts receivable balance for one of
these customers was $4.4 million. In fiscal 1997 and 1996, one customer
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 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.
13. CERTAIN FACTORS THAT COULD AFFECT FUTURE OPERATIONS
A substantial portion of the Company's consolidated net sales is derived
from products manufactured in and exported from the Far East, primarily
from the People's Republic of China (the "PRC"). Risks inherent in such
international operations include loss of revenue, property and equipment
from such hazards as expropriation, nationalization, war, insurrection
and other political risks, and include other factors that could affect
the Company's source of supply or cost of supply, including: general
economic conditions in the Far East, changes in currency valuations,
export credit availability, freight carrier availability and cost and
U.S. trade policy and laws related to imports. If the U.S. government
were to terminate most favored nation status for the PRC or impose higher
tariff rates on products imported by the Company from the PRC, the duty
on products imported by the Company from the PRC could increase
substantially. To date, the Company's international operations have not
been materially affected by these risks. However, if the Company's supply
or cost of products were to be significantly affected, it could have a
material adverse affect on the Company's business.
F-21
51
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENCIES
RECEIVABLES SOLD WITH RECOURSE
During fiscal 1998, 1997 and 1996, proceeds of approximately $33,539,000,
$37,487,000, and $27,183,000, 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, 1998 and 1997, Celebrity was contingently liable to the
Hong Kong bank with respect to such financing activities for $4,085,000
and $5,859,000, respectively. The Company has retained substantially the
same risk of credit loss as if the receivables had not been sold (Note
12). Under a facility with the bank, a maximum aggregate of $4,500,000 in
accounts receivable may be financed by the bank at any time, with
recourse. The bank has reduced the maximum amount that may be financed to
$3,800,000 effective October 1998.
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):
1999 $ 1,779
2000 1,715
2001 1,439
2002 1,191
2003 1,147
Thereafter 5,203
----------
Total minimum lease payments $ 12,474
==========
Rent expense for operating leases was $3,223,000, $3,601,000,
$3,792,000 for fiscal 1998, 1997 and 1996, respectively.
F-22
52
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 material adverse effect on its
financial condition or results of operations.
F-23
53
SCHEDULE II
CELEBRITY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
ALLOWANCE
FOR BALANCE AT CHARGED TO BALANCE
DOUBTFUL BEGINNING COST AND AT END
ACCOUNTS OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------- ---------- ---------- ---------- ---------
1998 $ 2,017 $ 2,869 $ (2,937) $ 1,949
1997 1,119 1,553 (655) 2,017
1996 1,539 795 (1,215) 1,119
BALANCE AT CHARGED TO BALANCE
INVENTORY BEGINNING COST AND AT END
RESERVES OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------- ---------- ---------- ---------- ---------
1998 $ 433 $ 1,332 $ 113 $ 1,652
1997 3,800 -- 3,367 433
1996 -- 3,800 -- 3,800
F-24
54
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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)
4.3 -- Warrant dated February 3, 1998, issued by Registrant to
Foothill Capital Corporation.(13)
10.1 -- Loan Agreement dated May 10, 1993, among Registrant,
Magicsilk, Inc. and National Canada Finance Corp.(4)
55
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)
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 -- 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)
10.14 -- General Security Agreement Relating to Goods between
Celebrity Exports International Limited and The Hongkong and
Shanghai Banking Corporation Limited dated April 30, 1984.(1)
10.15 -- Form of Guarantee by Limited Company executed by Registrant
in favor of The Hongkong and Shanghai Banking Corporation
Limited.(12)
56
10.16 -- Commitment of Celebrity Exports International Limited to
maintain a combined net worth of HK$50,000,000.(12)
10.17 -- Term WCMA Loan Agreement dated June 17, 1997 between
Registrant and Merrill Lynch Business Financial Services Inc.(12)
10.18 -- $5,000,000 Term WCMA Note dated June 17, 1997 signed by
Registrant and payable to Merrill Lynch Business Financial
Services Inc.(12)
10.19 -- Unconditional Guaranty dated June 17, 1997, executed by
Magicsilk, Inc. in favor of Merrill Lynch Business Financial
Services Inc. (12)
10.20 -- Unconditional Guaranty dated June 17, 1997, executed by The
Cluett Corporation in favor of Merrill Lynch Business Financial
Services Inc.(12)
10.21 -- Unconditional Guaranty dated June 17, 1997, executed by India
Exotics, Inc. in favor of Merrill Lynch Business Financial
Services Inc. (12)
10.22 -- 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)
10.23 -- 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 Tyler, Texas property.(12)
10.24 -- Loan and Security Agreement dated as of January 30, 1998
among Registrant, The Cluett Corporation, Star Wholesale Florist,
Inc. Value Florist, Inc. and India Exotics, Inc., as borrowers,
on the one hand, and Foothill Capital Corporation, on the other
(13)
10.25 -- Promissory Note of Registrant, amended and restated as of
February 16, 1998 payable to the order of RHP Management, LLC(13)
10.26 -- Promissory Note of Registrant, dated July 7, 1998 payable to
the order of RHP Management, LLC(14)
10.27 -- Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Surendra Khokha.(7)
10.28 -- Letter Agreement dated June 20, 1996, amending the Employment
Agreement dated February 7, 1995, between India Exotics, Inc. and
Surendra Khokha.(11)
10.29 -- Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Meena Khokha.(7)
10.30 -- Letter Agreement dated June 20, 1996, amending the Employment
Agreement dated February 7, 1995, between India Exotics, Inc. and
Meena Khokha.(11)
10.31 -- Noncompetition Agreement dated February 7, 1995, among India
Exotics, Inc., Surendra Khokha, Rajneesh Khokha, Asheesh Khokha
and Meena Khokha.(7)
57
10.32 -- Settlement Agreement dated February 2, 1998, by and among
Registrant, India Exotics, Inc., a Texas corporation, Surendra
Khokha, Rajneesh Khokha, Asheesh Khokha and Meena Khokha.(14)
10.33 -- Lease Termination Agreement dated as of July 31, 1998 among
436 Investments, L.L.C., India Exotics, Inc., a Texas
corporation, Surendra Khokha, Rajneesh Khokha, Asheesh Khokha and
Meena Khokha and Registrant.(14)
10.34 -- Form of Indemnity Agreement.(1)
10.35 -- Amended and Restated 1992 Stock Option Plan.(3)
10.36 -- Amended and Restated 1993 Employee Stock Purchase Plan.(7)
10.37 -- 1999 Employee Bonus Plan.(14)
21 -- Subsidiaries of Registrant.(10)
23 -- Consent of PricewaterhouseCoopers LLP.(14)
27.1 -- Financial Data Schedule as of and for the Year Ended June 30,
1998.(15)
27.2 -- Restated Financial Data Schedule as of and for the Year Ended
June 30, 1997.(15)
- ------------------------
(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.
58
(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) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997 and incorporated
herein by reference.
(14) Filed herewith.
(15) Included with EDGAR version only.