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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, 1999
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 21, 1999 was approximately $2,472,960 based on the
closing price of the registrant's common stock on such date as reported by the
Nasdaq SmallCap 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. The
registrant had 1,544,166 shares of common stock outstanding at September 21,
1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the annual meeting
of the Company's shareholders to be held November 9, 1999, are incorporated by
reference into Part III of this Report.
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CELEBRITY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
PART I
PAGE
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ITEM 1. BUSINESS.................................................................................... 1
ITEM 2. PROPERTIES.................................................................................. 7
ITEM 3. LEGAL PROCEEDINGS........................................................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS....................... 8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................................................ 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....... 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................. 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........ 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 17
ITEM 11. EXECUTIVE COMPENSATION...................................................................... 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................. 17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................. 18
SIGNATURES............................................................................................... 21
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 other
decorative accessories. The Company distributes its products to mass market
retailers, craft store chains, wholesale florists and other retailers under
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 organized in 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 home 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. 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. Pottery stores are high volume, lower price retail stores with
substantial square footage devoted to pottery, glass, artificial floral and
other products. 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 and other decorative accessories.
Celebrity's Christmas line consists of artificial 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 costs while assuring full product availability. The
Company offers a variety of distribution services depending on the customers'
needs and the product:
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o Assured Rapid Delivery. Celebrity reduces delivery times and
customers' inventory costs and meets their just-in-time
delivery requirements by quickly filling orders from the
extensive inventory in its Tyler distribution center.
Celebrity's goal is to fill within 48 hours all orders placed
for immediate shipment with at least 90% of the ordered
merchandise. Artificial trees, floor planters and pre-made
floral arrangements are assembled and shipped from the
Company's 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. 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 center,
separated and shipped to the customers.
Customers who place direct shipment orders sometimes reorder the same
product from the distribution center to replenish their inventory of that
product. Even large customers order smaller volume, nonseasonal products through
Celebrity's distribution center.
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.
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 center 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. The Company's principal suppliers by U.S. dollar value of goods
purchased are Good Ocean Manufacturing Co. and Tung Nam Artificial Flowers
Factory.
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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 19 salespeople and contracts with 20 independent sales
representatives. The Company's sales of artificial floral products outside the
U.S., aggregating approximately $6.8 million in fiscal 1999, 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 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 center 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 1999 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, Hobby Lobby, Wal-Mart Stores, Jo-
Ann Stores, Inc. and Kmart. Approximately 5% of consolidated net sales were made
by Celebrity Hong Kong to European customers.
In fiscal 1999, Michaels Stores accounted for $36.3 million, or 32.8%,
of consolidated net sales. The loss of this customer or a significant portion of
its business, or the ability of such customer to cause the Company to reduce its
profit margins, could have a material adverse effect on the Company.
COMPETITION
The artificial floral industry is highly competitive. The Company's
primary competitors are other importers and distributors, 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 center 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," "Indoor Garden Collection,"
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"Karisma," "Magicsilk," "Mr. Silk Shine," "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 an application pending in the United States Patent and Trademark
Office for registration of an additional mark. 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 35% of consolidated net sales in fiscal
1999.
Artificial floral products sold by Celebrity Hong Kong to customers
outside the U.S., accounting for approximately 5% of consolidated net sales in
fiscal 1999, 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.
Normal Trading Relations Treatment for the PRC. The PRC's exports to
the U.S., which include among other things toys, discount apparel and footwear,
have, since 1980, received the same preferential tariff treatment accorded goods
from countries granted "most favored nation"\ "normal trading relations" ("NTR")
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 NTR status has been a contentious political issue for several
years. In mid-1993, President Clinton announced that the 1994 renewal of the
PRC's NTR 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
NTR status be based on progress on nuclear non-proliferation and labor and human
rights issues and has extended NTR status for the PRC in subsequent years and
through June 2000, without placing significant conditions on future renewal.
However, the linkage between NTR status and providing 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 the likelihood of continued NTR
status for the PRC is therefore difficult to predict.
Were the PRC to lose NTR 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
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the lowest cost source for artificial floral products even if the PRC lost NTR
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 NTR status 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 would not affect the Company.
Section 301. Section 301 of the Trade Act of 1974, as amended ("Section
301"), directs the U.S. Trade Representative ("USTR") to designate those
countries that deny adequate and effective intellectual property rights or fair
and equitable market access to U.S. firms that rely on intellectual property.
From the countries designated, the USTR is to identify as "priority" foreign
countries those countries where the lack of intellectual property rights
protection 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.
Admission of China to the World Trade Organization. The PRC has applied
to join the World Trade Organization (the "WTO"), which is the successor
organization to the General Agreement of Tariffs and Trade (GATT). Because all
members of the WTO must grant one another permanent NTR status, if the PRC is
admitted to the WTO, the U.S. would have to grant the PRC permanent NTR status.
To gain admission to the WTO, the PRC must come to terms with and gain the
approval of every current member of the WTO. In addition, since China would
necessarily be granted permanent NTR status by the U.S. if it is admitted to the
WTO, Congress must approve China's admission to the WTO. There can be no
assurance that China will be admitted to the WTO, particularly since the U.S.
has expressed dissatisfaction with China's progress in opening its domestic
market in a number of areas.
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. Although the situation has
recently improved, 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, Asian currency devaluations
from time to time resulted in an increased level of exportation from the PRC,
which resulted in a shortage of shipping containers in that region. If a
container shortage affected the delivery schedule of the Company over a longer
period, 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 been affected by tightening credit markets from time to
time as well. Celebrity Hong Kong currently maintains export credit facilities
with three alternative financial institutions, providing sufficient export
credit financing to fund all of its export requirements. Should Celebrity Hong
Kong's export credit facilities be affected by changes in the credit markets, it
could have an adverse affect on the Company's export activities. 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.
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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.
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, 1999
regarding the executive officers of the Company:
NAME AGE TITLE
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Robert H. Patterson, Jr........ 48 Chairman of the Board, President and Chief
Executive Officer
Richard Yuen................... 55 Managing Director of Celebrity Hong Kong
David J. Huffman............... 48 Executive Vice President-- Sales and Marketing
Clifford C. Condict............ 52 Vice President-- Merchandise
Roger D. Craft................. 52 Vice President-- Manufacturing
Lynn Skillen................... 43 Vice President-- Finance, Chief Financial Officer,
Treasurer and Secretary
Laura Lockhart................. 40 Vice President-- Operations
Lisa L. Hill................... 41 Vice President-- Marketing
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 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 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 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 1992.
Roger D. Craft has served as Vice President -- Manufacturing of
Celebrity since February 1999. From February 1998 to February 1999, he served as
Vice President -- Star Operations. From 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 1993.
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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 Vice President -- Finance of Dollar
Rental Car Systems, Inc., and from 1994 to October 1997, he was Vice President
and Chief Financial Officer of Snappy Car Rental, Inc. Prior to 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
1992 to March 1998. From 1979 to 1992, Ms. Lockhart served in a variety of
operating and management positions at the Company.
Lisa L. Hill has served as Vice President -- Marketing of Celebrity
since March 1999. From 1993 to February 1999, Ms. Hill was Vice President --
Marketing and Vice President International Division for C.M. Offrey & Son Inc.
and from 1991 to 1993 she was Vice President -- Sales and Marketing for Horizon
Fabrics, Inc.
Officers are elected annually by the Board of Directors and serve at
its discretion.
EMPLOYEES
At August 31, 1999, the Company had 551 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.
ITEM 2. PROPERTIES.
The Company leases the space occupied by the facilities listed in the
following table:
APPROXIMATE
LOCATION TYPE OF FACILITY SQUARE FOOTAGE
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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
Tyler, Texas.......................... Warehouse 60,000
Tyler, Texas.......................... Retail Outlet Store 23,000
Dallas, Texas......................... Wholesale Supply House 70,000
Dallas, Texas......................... Showroom 19,000
Atlanta, Georgia...................... Showroom 8,606
Winston-Salem, North Carolina......... Warehouse 91,000
Vista, California..................... Floral Arrangement Production Facility 51,111
Hong Kong............................. Office/Showroom 24,599
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*Subject to sale-leaseback transaction effected in April 1999. See Note 7 to the
Consolidated Financial Statements.
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 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock, par value $.01 per share, of the Company ("Common
Stock") is listed on the NASDAQ SmallCap Market under the symbol "FLWR". On
February 26, 1999, the Company held a special shareholders meeting, the purpose
of which was to request the shareholders' approval of certain amendments to the
Company's Amended and Restated Articles of Incorporation, the primary one of
which effected a four-to-one reverse split of the Common Stock. The reverse
stock split was effected to adjust the price per share of the Common Stock so
that it would be in excess of the minimum $1.00 per share continued listing
requirement on the Nasdaq SmallCap Market. The amendments were approved by a
vote of the holders of approximately 90% of all shares of Common Stock
outstanding and entitled to vote, and effective at the end of business on
February 26, 1999, the number of outstanding shares of Common Stock was reduced
from 6,176,655 to 1,544,166, reflecting the four-to-one reverse stock split.
The following table sets forth, for the periods indicated, the high and
low closing sale prices of the Common Stock, as reported by the Nasdaq SmallCap
Market. All prices have been adjusted to reflect the reverse stock split.
FISCAL YEAR HIGH LOW
- ------------------------------------------------------------------------- --------- --------
1998
First Quarter.......................................................... $ 12 1/2 $ 8 1/4
Second Quarter......................................................... $ 12 $ 4 1/2
Third Quarter.......................................................... $ 9 $ 4
Fourth Quarter......................................................... $ 6 1/4 $ 4 1/2
1999
First Quarter.......................................................... $ 8 1/4 $ 3 3/4
Second Quarter......................................................... $ 4 1/2 $ 2
Third Quarter.......................................................... $ 4 1/2 $ 1 1/2
Fourth Quarter......................................................... $ 3 $ 1 1/16
2000
First Quarter (through September 21, 1999)............................. $ 4 1/8 $ 2 3/4
On September 21, 1999, the closing sale price of the Common Stock as
reported by the Nasdaq SmallCap Market was $3 3/4 per share. As of September 21,
1999, there were 95 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. In addition, the terms of the Company's
primary credit facility prohibit the payment of dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated balance sheet data as of June 30,
1999, 1998, 1997, 1996 and 1995, and selected consolidated statement of
operations data for each of the years in the five year period ended June 30,
1999, 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 5 to the Consolidated Financial Statements for
discussion of certain of these events.
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YEAR ENDED JUNE 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $ 110,662 $ 122,262 $ 125,170 $ 115,048 $ 118,810
Net income (loss)................................... $ 558 $ (12,729) $ (5,761) $ (5,422) $ 3,782
Earnings (loss) per common share (basic)............ $ .36 $ (8.09) $ (3.67) $ (3.44) $ 2.39
Earnings (loss) per common share and
common equivalent share (diluted)................ $ .36 $ (8.09) $ (3.67) $ (3.44) $ 2.39
JUNE 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets........................................ $ 46,271 $ 51,719 $ 67,453 $ 73,363 $ 74,641
Current liabilities................................. $ 10,270 $ 16,794 $ 41,424 $ 15,216 $ 14,122
Notes payable, net of current portion............... $ 27,083 $ 26,588 $ 4,877 $ 31,081 $ 27,941
Redeemable common stock............................. $ -- $ -- $ 175 $ 350 $ 525
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 other Securities and Exchange Commission filings. See "Business --
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.
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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,
----------------------
1999 1998 1997
---- ---- ----
Net sales ........................................ 100% 100% 100%
Costs and operating expenses:
Cost of goods sold ............................. 75% 80% 78%
Selling ........................................ 4% 4% 4%
General and administrative ..................... 16% 18% 16%
Depreciation and amortization .................. 1% 2% 2%
Restructuring charges .......................... -- % 3% -- %
---- ---- ----
96% 107% 100%
---- ---- ----
Operating income (loss) .......................... 4% (7)% -- %
Interest and other, net .......................... (3)% (3)% (3)%
---- ---- ----
Income (loss) before income taxes ................ 1% (10)% (3)%
Provision for income taxes ....................... -- % -- % (2)%
---- ---- ----
Income (loss) before extraordinary charge ........ 1% (10)% (5)%
Extraordinary charge ............................. -- % -- % -- %
---- ---- ----
Net income (loss) ................................ 1% (10)% (5)%
---- ---- ----
FISCAL 1999 COMPARED WITH FISCAL 1998
Net sales decreased 10% from $122.3 million in fiscal 1998 to $110.7
million in fiscal 1999. The sales decrease was attributable to (i) lower sales
of The Cluett Corporation, a wholly-owned subsidiary of the Company ("Cluett"),
which had a sales decline to customers in the discount/mass-market retail
segment, (ii) lower sales in the Company's domestic floral division, due in part
to a bankruptcy of a major customer and (iii) lower sales of decorative metal
products resulting from the Company's June 1998 decision to exit the India
Exotics decorative metal products business.
Cost of goods sold decreased 16% from $97.7 million in fiscal 1998 to
$82.3 million in fiscal 1999. The decrease was primarily attributable to the
lower sales volume in fiscal 1999. Cost of goods sold as a percentage of net
sales was 75% in fiscal 1999, compared with 80% in fiscal 1998. Gross profits
increased from $24.6 million in fiscal 1998 to $28.3 million in fiscal 1999,
despite lower net sales in fiscal 1999. The lower cost of goods sold percentage
in fiscal 1999 is primarily attributable to an improved mix of product sales in
fiscal 1999, but also reflects the effects of inventory reduction strategies in
fiscal 1998, including a special charge of $1.1 million recorded in fiscal 1998
related to discontinued products.
Selling expenses decreased from $4.8 million in fiscal 1998 to $4.6
million in fiscal 1999. The decrease was attributable to expense reductions
resulting from reorganization of sales and marketing activities in fiscal 1999.
Selling expenses as a percentage of net sales were 4% in fiscal 1998 and fiscal
1999.
General and administrative expenses decreased from $22.1 million, or
18% of net sales, in fiscal 1998 to $17.6 million, or 16% of net sales, in
fiscal 1999. The decrease in expenses is attributable to expense reductions
implemented in the fourth quarter of fiscal 1998 and during fiscal 1999,
including the closure of the St. Louis, Missouri facility associated with the
exit of the India Exotics business and expense savings from the consolidation of
administrative offices.
Depreciation and amortization expenses decreased from $2.2 million, or
2% of net sales, in fiscal 1998 to $1.4 million, or 1% of net sales, in fiscal
1999. The decrease was attributable to the write-off of goodwill and other
intangibles in the fourth quarter of fiscal 1998 related to the exit of the
India Exotics business, the retirement of certain assets, and the full
depreciation of assets in late fiscal 1998 or early fiscal 1999.
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Restructuring charges of $4.5 million, or 3.6% of net sales, were
recorded in fiscal 1998, compared with no such charges in fiscal 1999. These
charges resulted from the Company's decision to exit the India Exotics
operations in St. Louis, Missouri in June 1998. See Note 5 to the Consolidated
Financial Statements.
Operating income (loss) increased from a loss of $8.9 million in fiscal
1998 to income of $4.8 million in fiscal 1999. The $13.7 million improvement in
operating income (loss) was primarily attributable to expense reductions
implemented in the fourth quarter of fiscal 1998 and in fiscal 1999. The
comparison of operating income (loss) between years is also affected by fiscal
1998 restructuring charges ($4.5 million) resulting from the closure of the
India Exotics facility in St. Louis, and special charges related to discontinued
inventory ($1.1 million).
Net interest expense increased from $3.5 million in fiscal 1998 to $3.8
million in fiscal 1999. The increase was primarily attributable to higher
financing costs of the Company's revolving credit facility and term loan
financing in fiscal 1999 compared with fiscal 1998. In July 1999, the Company's
credit facility was extended and amended, including provisions that lowered
applicable interest rates and other financing costs. See "--Liquidity and
Capital Resources" and Note 7 to the Consolidated Financial Statements.
As a result of the foregoing factors, income (loss) before income taxes
increased from a loss of $12.4 million in fiscal 1998 to income of $1.1 million
in fiscal 1999.
Provision for income taxes of $0.4 million was comparable in fiscal
1998 and fiscal 1999. The tax provision recognized in fiscal 1999 was
principally related to foreign operations. At June 30, 1999, a valuation
allowance on the Company's deferred tax asset totaled $9.2 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 whether the Company will be able 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 of the Company.
The extraordinary charge related to extinguishment of debt of $68,000,
which was recorded in fiscal 1999, resulted from the write-off of past deferred
financing fees related to real estate included in the sale-leaseback transaction
that occurred in April 1999. See Note 7 to the Consolidated Financial
Statements.
As a result of the foregoing factors net income (loss) increased from a
loss of $12.7 million in fiscal 1998 to net income of $0.6 million in fiscal
1999.
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
of Cluett, resulting from a smaller presence of its products in the advertising
and promotional programs of one of its 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 had determined
to discontinue and liquidate. See Note 5 to the Consolidated Financial
Statements.
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
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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, or 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 with 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 5 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 credit facility and term loan
financing. In January 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 7 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 fiscal 1998 was
principally related to foreign operations. A valuation allowance of $4.8 million
was recorded in fiscal 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 whether the Company will be able 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 of the Company.
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.
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.
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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 credit facility and cash flows from
operations to fund these and other working capital needs.
Cash provided by operating activities in fiscal 1999 amounted to
approximately $3.7 million, which was primarily attributable to changes in
operating assets and liabilities. Most significantly, inventory decreased $3.9
million during fiscal 1999. Cash used in investing activities in fiscal 1999 was
$1.0 million, primarily related to purchases of equipment. Cash used by
financing activities amounted to $2.3 million, resulting primarily from payments
on the Company's term loan.
The Company maintains a revolving credit facility for its Celebrity,
Cluett, Color Concepts, Star Wholesale and Value Florist operations. 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, 1999, was $20.2
million, and the amount outstanding under the revolving credit facility was
$19.7 million. In addition to the revolving credit facility, the lender made a
term loan to the Company in January 1998 in the original principal amount of
$3.5 million. The term loan was payable in monthly installments of principal of
$200,000 that began in May 1998. In fiscal 1999, interest on the outstanding
balance under the revolving credit facility was at a reference bank's prime rate
of interest plus 1.5% per annum, and interest on the outstanding balance of the
term loan was 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, 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 contain 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 of the revolving credit facility and the term
loan at June 30, 1999. In July 1999, the Company entered into an amended and
restated agreement with the lender whereby the following changes, among others,
were made: (i) the term of the revolving credit facility was extended from
January 2001 to July 2002, (ii) the interest rate charged by the lender was
reduced to prime plus applicable percentages, ranging from 0% to 0.5%, based on
specified EBITDA requirements, (iii) the financial ratio covenants were reset,
and (iv) monthly fees were reduced from $15,000 to $2,000. See Note 7 to the
Consolidated Financial Statements.
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 export credit facilities
established with three Hong Kong banks, each of which is guaranteed by the
Company. Generally, under the terms of these facilities each bank finances, with
recourse, export bills for specific shipments by Celebrity Hong Kong to its
customers. Each bank is reimbursed when payment is received for shipments it has
financed. At June 30, 1999, an aggregate of $2.7 million of export bills was
financed by the three banks. All of these export bills were related to direct
shipments to customers and Celebrity Hong Kong's related potential recourse
liability was accounted for as a contingent obligation. The Company's revolving
credit facility restricts the aggregate amount of export bills that may be
financed under the export credit facilities at any time to $7.0 million.
In June 1997, the Company entered into a revolving credit facility with
an additional lender, which was scheduled to mature in June 2004. Amounts
borrowed under the facility were secured by certain real estate owned by the
Company, with interest accruing at the rate of LIBOR plus 2.65% per annum. In
April 1999 the Company executed the necessary documents to sell to Crest
Properties, Ltd., a Texas limited partnership ("Crest") (an entity controlled by
Robert H. Patterson, Jr., Chairman of the Board, President and Chief Executive
Officer of the Company), for $7,500,000 the real estate that secured the
revolving credit facility. As part of the same transaction the properties were
leased back to the Company. The same lender provided similar financing for
Crest, requiring the guarantee of the Company and Mr. Patterson. Due to the
continuing involvement of the Company in the financing and the related party
control of Crest, the sale-leaseback was accounted for as a financing lease, by
recording the sales proceeds as a liability and
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recording future rental payments, exclusive of an interest portion, as a
reduction of the liability. See Note 7 to the Consolidated Financial Statements.
In September 1997, Celebrity borrowed $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 accrued interest at a fluctuating rate per annum
equal to RHP's cost of borrowing, which was the prime rate of a reference bank
plus 1.5% per annum. In July 1998, the Company borrowed an additional $500,000
from RHP for seasonal working capital needs, which accrued interest at 10% per
annum. In April 1999, a portion of the proceeds from the sale-leaseback
transaction (see Note 7 to the Consolidated Financial Statements) was utilized
to pay the principal and accrued interest due RHP on the borrowings described
above.
The Company does not plan to make any significant capital expenditures
in fiscal 2000 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 NTR 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.
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 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 December 31,
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 21, 1999, it had completed approximately 95% of the
initiatives it believes will be necessary to fully address potential Year 2000
issues related to its computer equipment and software. The projects comprising
the remaining 5% of the initiatives are in process and are expected to be
completed by December 31, 1999.
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PERCENT
YEAR 2000 INITIATIVE TIME PERIOD COMPLETE
- ----------------------------------------------------------------- ----------------------------- --------
Initial IT system identification and assessment April 1997 to December 1998 100
Remediation and testing of central system June 1997 to December 1998 100
Remediation and testing of manufacturing and distribution systems June 1998 to June 1999 100
Identification and assessment of non-IT systems June 1998 to December 1999 75
Remediation and testing of non-IT systems January 1998 to December 1999 25
Remediation and testing of Star Wholesale POS system June 1999 to December 1999 25
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. With respect to the Company's customers, the
Company's customers are predominantly large sophisticated retailers. If any of
these customers were not Year 2000 compliant by the end of 1999 and could not
buy products from the Company, it could have a material adverse effect on the
Company's results of operations. However, based on the size and sophistication
of the Company's primary customers, the Company's management anticipates that
these companies will have adequately addressed Year 2000 issues by December
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 $250,000, which expenditures will be funded from operating cash flows.
All of the $250,000 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, 1999 and 2000. As of June 30, 1999, the Company had incurred costs of
approximately $100,000 related to its Year 2000 identification, assessment,
remediation and testing efforts. Other non-Year 2000 IT efforts have not been
materially delayed or affected 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 foregoing timetable and assessment of costs to become Year 2000
compliant reflect management's best estimates. These estimates are based on many
assumptions, including assumptions about the cost, availability and ability of
resources to locate, remediate and modify affected systems, equipment and
facilities. Based upon its activities to date, the Company does not believe that
these factors will cause results to differ significantly from those estimated.
However, the Company cannot reasonably estimate the potential impact on its
financial condition and results of operations if key third parties, including
among others suppliers, contractors, financial institutions, customers and
governments, do not become Year 2000 compliant on a timely basis. The Company is
currently identifying third parties whose business significantly affects the
Company, has contacted some significant third parties to determine the extent to
which interfaces with such entities are vulnerable to Year 2000 issues, and will
contact others as it completes the identification phase.
In the event the Company is unable to complete the remediation or
replacement of its critical systems, facilities and equipment, establish
alternative procedures in a timely manner, or if those with whom the Company
conducts business are unsuccessful in implementing timely Year 2000 solutions,
Year 2000 issues could have a material adverse effect on the Company's liquidity
and results of operations. At this time, the potential effects in the event the
Company and/or third parties are unable to timely resolve their Year 2000
problems is not determinable. 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. However, the Company currently believes
that it will be able to resolve its own Year 2000 issues in a timely manner.
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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. During fiscal 1999 the
applicable rate was prime plus 1.5%. At June 30, 1999, the amount outstanding
under the revolving credit facility was $19.7 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 Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
19
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 9, 1999 (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.
17
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
(1) Financial statements:
The financial statements filed as a part of this Annual Report on Form
10-K 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 Annual Report
on Form 10-K 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:
The Registrant filed a Report on Form 8-K on June 4, 1999, to report
the sale of certain real property to Crest Properties, Ltd, an entity controlled
by Robert H. Patterson, Jr., and the subsequent leaseback of the same real
property to the Registrant and one of its subsidiaries by Crest Properties, Ltd.
(c) Exhibits:
2.1 -- 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.(3)
3.1 -- Amended and Restated Articles of Incorporation of the
Registrant.(10)
3.2 -- Articles of Correction of the Registrant.(10)
3.3 -- Bylaws of the Registrant.(1)
4.1 -- Specimen Common Stock Certificate.(1)
4.2 -- Warrant, dated February 3, 1998, issued by Registrant to
Foothill Capital Corporation.(5)
4.3 -- Warrant, dated April 22, 1999, issued to RHP Management,
LLC.(9)
10.1 -- 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.(4)
10.2 -- General Security Agreement Relating to Goods between
Celebrity Exports International Limited and The Hongkong and
Shanghai Banking Corporation Limited dated April 30, 1984.(1)
10.3 -- Form of Guarantee by Limited Company executed by Registrant
in favor of The Hongkong and Shanghai Banking Corporation
Limited.(4)
10.4 -- Commitment of Celebrity Exports International Limited to
maintain a combined net worth of HK$50,000,000.(4)
10.5 -- Loan Agreement dated July 27, 1998 by and between The China
State Bank Limited and Celebrity Exports International
Limited.(7)
10.6 -- Deed of Guarantee dated August 31, 1998 by and between
Celebrity, Inc., as Guarantor, and The China State Bank
Limited, as Lender.(7)
10.7 -- Loan Agreement dated September 29, 1998 by and between
State Street Bank and Trust Company and Celebrity Exports
International Limited.(7)
18
21
10.8 -- Continuing Guarantee dated September 29, 1998 granted by
Celebrity, Inc. for the benefit of State Street Bank and Trust
Company.(7)
10.9 -- 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.(5)
10.10 -- Amendment Number One to Loan and Security Agreement dated
effective as of June 5, 1998 by and among Foothill Capital
Corporation and Registrant and certain of its
subsidiaries.(10)
10.11 -- Amendment Number Two to Loan and Security Agreement dated
effective as of July 7, 1998 by and among Foothill Capital
Corporation and Registrant and certain of its
subsidiaries.(10)
10.12 -- Amendment Number Three to Loan and Security Agreement dated
effective as of December 31, 1998 by and among Foothill
Capital Corporation and Registrant and certain of its
subsidiaries.(8)
10.13 -- Amended and Restated Loan and Security Agreement dated
effective as of July 15, 1999 by and among Foothill Capital
Corporation and Registrant and certain of its
subsidiaries.(10)
10.14 -- Lease Agreement, dated April 22, 1999, between the
Registrant, as lessee, and Crest Properties, Ltd., as lessor,
relating to property at 4520 Old Troup Highway, Tyler,
Texas.(9)
10.15 -- Lease Agreement, dated April 22, 1999, between The Cluett
Corporation, as lessee, and Crest Properties, Ltd., as lessor,
relating to property at 3200 Centre-Park Boulevard,
Winston-Salem, North Carolina.(9)
10.16 -- Agreement for Purchase and Sale of Promissory Note, dated
May 28, 1999, by and among the Registrant, RHP Real Estate,
Ltd. and The Residuary Trust Created Under the Last Will and
Testament of Robert H. Patterson, Sr., Deceased.(9)
10.17 -- Form of Guaranty of the Term Loan and Security Agreement
dated April 16, 1999 between Merrill Lynch Business Financial
Services, Inc. and Crest Properties, Ltd. by each of
Celebrity, Inc., India Exotics, Inc., Star Wholesale, Inc.,
MagicSilk, Inc. and The Cluett Corporation.(10)
10.18 -- Promissory Note of Registrant, amended and restated as of
February 16, 1998 payable to the order of RHP Management,
LLC.(5)
10.19 -- Promissory Note of Registrant, dated July 7, 1998 payable
to the order of RHP Management, LLC.(6)
10.20 -- 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.(6)
10.21 -- Form of Indemnity Agreement.(1)
10.22* -- Amended and Restated Stock Option Plan.(10)
10.23* -- Amended and Restated 1993 Employee Stock Purchase Plan.(3)
10.24* -- Fiscal 2000 Management Bonus Plan.(10)
21.1 -- Subsidiaries of Registrant.(2)
23.1 -- Consent of PricewaterhouseCoopers LLP.(10)
27.1 -- Financial Data Schedule as of and for the Year Ended June
30, 1999.(11)
- ----------
* Exhibits 10.22 through 10.24 constitute management compensatory plans
or contracts.
(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 Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995,
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 December 31, 1994,
and incorporated herein by reference.
19
22
(4) 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.
(5) 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.
(6) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998
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 September 30, 1998
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 December 31, 1998
and incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Report on
Form 8-K filed on June 4, 1999, and incorporated herein by
reference.
(10) Filed herewith.
(11) Included with EDGAR version only.
20
23
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 27, 1999
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 27, 1999
Robert H. Patterson, Jr. Chief Executive Officer (Principal
Executive Officer)
/s/ LYNN SKILLEN
- --------------------------------- Vice President -- Finance, Treasurer September 27, 1999
Lynn Skillen and Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/s/ B. D. HUNTER
- --------------------------------- Director September 27, 1999
B. D. Hunter
/s/ C. A. LANGNER
- --------------------------------- Director September 27, 1999
C. A. Langner
/s/ VALERIE ANNE MARS
- --------------------------------- Director September 27, 1999
Valerie Anne Mars
/s/ RICHARD YUEN
- --------------------------------- Managing Director of Celebrity Exports September 27, 1999
Richard Yuen International Limited and Director
21
24
CELEBRITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of June 30, 1999 and 1998.... F-3
Consolidated Statements of Operations and Comprehensive
Income for the Years Ended June 30, 1999, 1998 and 1997... F-5
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended June 30, 1999, 1998 and 1997.......... F-6
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997.............................. 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
25
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, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1999 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements 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 11, 1999
F-2
26
CELEBRITY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
JUNE 30,
-----------------
1999 1998
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 558 $ 127
Accounts receivable, net 13,157 14,121
Inventories, net 18,847 22,766
Deferred tax asset 2,173 2,173
Other assets 579 1,434
------- -------
Total current assets 35,314 40,621
------- -------
Property, plant and equipment, net 9,479 9,788
Intangible assets, net 888 1,059
Other assets 590 251
------- -------
Total assets $46,271 $51,719
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
27
CELEBRITY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
- --------------------------------------------------------------------------------
JUNE 30,
--------------------
1999 1998
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,800 $ 9,466
Accrued expenses 1,774 3,251
Income taxes payable 496 598
Current maturities of long-term obligations 1,200 3,479
-------- --------
Total current liabilities 10,270 16,794
-------- --------
Long-term obligations, net of current portion (Note 7) 27,083 26,588
-------- --------
Total liabilities 37,353 43,382
-------- --------
Shareholders' equity:
Preferred stock (10,000,000 shares of par value $.01
per share authorized; none issued and outstanding, respectively) -- --
Common stock (25,000,000 shares of par value $.01 per share
authorized; 1,544,166 and 1,586,951 shares issued, respectively) 15 16
Paid-in capital 21,577 22,798
Subscriptions receivable -- (570)
Accumulated deficit (12,640) (13,198)
Accumulated other comprehensive loss (34) (9)
Treasury stock, at cost (0 and 53,847 shares, respectively) -- (700)
-------- --------
Total shareholders' equity 8,918 8,337
-------- --------
Commitments and contingencies (Note 14)
Total liabilities and shareholders' equity $ 46,271 $ 51,719
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
28
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
YEARS ENDED JUNE 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Net sales $ 110,662 $ 122,262 $ 125,170
Costs and operating expenses:
Cost of goods sold 82,335 97,660 97,479
Selling 4,570 4,750 5,508
General and administrative 17,571 22,095 19,474
Depreciation and amortization 1,410 2,176 2,236
Restructuring charges -- 4,454 --
--------- --------- ---------
105,886 131,135 124,697
--------- --------- ---------
Operating income (loss) 4,776 (8,873) 473
Interest income 133 202 192
Interest expense (3,903) (3,699) (3,408)
Other, net 60 13 (6)
--------- --------- ---------
Income (loss) before income taxes 1,066 (12,357) (2,749)
Provision for income taxes 440 372 3,012
--------- --------- ---------
Income (loss) before extraordinary charge 626 (12,729) (5,761)
Extraordinary charge related to extinguishment of
debt, net of tax 68 -- --
--------- --------- ---------
Net income (loss) $ 558 $ (12,729) $ (5,761)
--------- --------- ---------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (25) (6) 3
--------- --------- ---------
Other comprehensive income (loss), net of tax (25) (6) 3
--------- --------- ---------
Comprehensive income (loss) $ 533 $ (12,735) $ (5,758)
========= ========= =========
Basic and diluted income (loss) per share:
Income (loss) before extraordinary charge $ .40 $ (8.09) $ (3.67)
Extraordinary charge (.04) -- --
--------- --------- ---------
Income (loss) per common share $ .36 $ (8.09) $ (3.67)
Basic weighted average common shares outstanding 1,559 1,573 1,568
Diluted weighted average common shares outstanding 1,561 1,573 1,568
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
29
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
RETAINED
COMMON STOCK EARNINGS
------------------------ PAID-IN SUBSCRIPTIONS (ACCUMULATED
SHARES PAR VALUE CAPITAL RECEIVABLE DEFICIT)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996, as previously
reported 6,282,679 $ 63 $ 22,178 $ (461) $ 5,292
Four-to-one reverse common stock split (4,712,009) (47) 47 -- --
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 as adjusted 1,570,760 16 22,225 (461) 5,292
Purchase of redeemable common stock 3,365 -- 175 -- --
Payments on stock subscriptions receivable -- -- -- 19 --
Net loss -- -- -- -- (5,761)
Other comprehensive income, net of tax -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 1,574,035 16 22,400 (442) (469)
Purchase of redeemable common stock 3,366 -- 175 -- --
Employee stock purchase plan 9,550 -- 153 (153) --
Payments on stock subscriptions receivable -- -- -- 25 --
Issuance of warrants -- -- 70 -- --
Net loss -- -- -- -- (12,729)
Other comprehensive loss, net of tax -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 1,586,951 16 22,798 (570) (13,198)
Payments on stock subscriptions receivable -- -- -- 12 --
Cancellation of employee stock subscriptions
receivable (26,525) (1) (557) 558 --
Retirement of treasury stock (16,260) -- (700) -- --
Issuance of warrants -- -- 36 -- --
Net income -- -- -- -- 558
Other comprehensive loss, net of tax -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1999 1,544,166 $ 15 $ 21,577 $ -- $ (12,640)
========== ========== ========== ========== ==========
ACCUMULATED
OTHER TREASURY
COMPREHENSIVE STOCK,
LOSS AT COST TOTAL
---------- ---------- ----------
Balance at June 30, 1996, as previously
reported $ (6) $ (350) $ 26,716
Four-to-one reverse common stock split -- -- --
---------- ---------- ----------
Balance at June 30, 1996 as adjusted (6) (350) 26,716
Purchase of redeemable common stock -- (175) --
Payments on stock subscriptions receivable -- -- 19
Net loss -- -- (5,761)
Other comprehensive income, net of tax 3 -- 3
---------- ---------- ----------
Balance at June 30, 1997 (3) (525) 20,977
Purchase of redeemable common stock -- (175) --
Employee stock purchase plan -- -- --
Payments on stock subscriptions receivable -- -- 25
Issuance of warrants -- -- 70
Net loss -- -- (12,729)
Other comprehensive loss, net of tax (6) -- (6)
---------- ---------- ----------
Balance at June 30, 1998 (9) (700) 8,337
Payments on stock subscriptions receivable -- -- 12
Cancellation of employee stock subscriptions
receivable -- -- --
Retirement of treasury stock -- 700 --
Issuance of warrants -- -- 36
Net income -- -- 558
Other comprehensive loss, net of tax (25) -- (25)
---------- ---------- ----------
Balance at June 30, 1999 $ (34) $ -- $ 8,918
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
30
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
YEARS ENDED JUNE 30,
--------------------------------
1999 1998 1997
-------- -------- --------
Operating activities:
Net income (loss) $ 558 $(12,729) $ (5,761)
Adjustments to reconcile net income (loss) to net
cash provided by operations:
Depreciation 1,239 1,693 1,604
Amortization 171 483 632
Noncash interest expense 194 87 --
Extraordinary charge related to extinguishment of debt 68 -- --
Restructuring charges -- 4,454 --
Deferred income taxes -- -- 2,308
Changes in operating assets and liabilities:
Accounts receivable 964 1,499 (701)
Inventories 3,919 7,853 2,660
Other assets, net 829 789 670
Accounts payable and accrued expenses (4,143) (1,179) 894
Income taxes payable (102) (69) (269)
-------- -------- --------
Net cash provided by operating activities 3,697 2,881 2,037
-------- -------- --------
Investing activities:
Purchases of equipment (1,043) (447) (1,351)
Other 88 43 (468)
-------- -------- --------
Net cash used in investing activities (955) (404) (1,819)
-------- -------- --------
Financing activities:
Net proceeds from (payments on) new credit facility (911) 23,724 --
Net proceeds from (payments on) old credit facility -- (26,162) 248
Proceeds from other long-term obligations 500 500 5,110
Payments on other long-term obligations (8,770) (581) (5,979)
Proceeds from sale-leaseback of facilities 7,500 -- --
Payments for debt issuance cost (554) (299) (77)
Redemption of common stock (88) (87) (175)
Payments on subscriptions receivable 12 25 19
-------- -------- --------
Net cash used in financing activities (2,311) (2,880) (854)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 431 (403) (636)
Cash and cash equivalents, beginning of period 127 530 1,166
-------- -------- --------
Cash and cash equivalents, end of period $ 558 $ 127 $ 530
======== ======== ========
See Notes 6, 7 and 8 for supplementary disclosures.
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
31
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"), The
Cluett Corporation ("Cluett") and Star Wholesale Florist, Inc. ("Star
Wholesale"), are suppliers of high quality artificial floral products,
including artificial flowers, flowering bushes and foliage, pre-made
floral arrangements, trees and floor planters that the Company
assembles, and other decorative accessories, selling primarily to mass
market retailers, craft store chains and other retailers and to
wholesale florists. Celebrity, Celebrity Hong Kong, Cluett and Star
Wholesale are referred to herein collectively as the "Company."
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
All majority-owned subsidiaries are consolidated and all material
intercompany accounts and transactions are eliminated. Certain prior
period amounts have been reclassified for comparative purposes.
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. The Company establishes valuation
reserves for discontinued or obsolete products.
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
F-8
32
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
CAPITALIZED SOFTWARE
In March 1998, Statement of Position ("SOP") 98-1, Accounting for Costs
of Computer Software Developed or Obtained for Internal Use, was
issued. This SOP requires that certain costs related to the development
or purchase of internal-use software be capitalized and amortized over
the estimated useful life of the software. The provisions of SOP 98-1
are effective for financial statements issued for fiscal years
beginning after December 15, 1998, although early adoption is allowed.
The Company adopted the provisions of this SOP in fiscal 1999.
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. Assets are grouped at the
lowest level for which there are identifiable cash flows that are
largely independent of the cash flows of other groups of assets. 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 operations of India Exotics, Inc. ("India Exotics"), a wholly-owned
subsidiary that supplied decorative metal products and other decorative
accessories to craft store chains and other specialty retailers, which
was 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 5).
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("FAS 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
33
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ADVERTISING COSTS
Advertising costs are expensed in the period incurred. Advertising
expense for fiscal 1999, 1998 and 1997 was $718,000, $447,000, and
$662,000, respectively.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("FAS 130"). FAS 130 establishes
standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all
changes in equity during a period from non-owner sources. Accumulated
other comprehensive loss, as presented on the accompanying consolidated
balance sheets, consists of cumulative translation adjustments.
EARNINGS (LOSS) PER SHARE
The Company calculates earnings per share pursuant to Statement of
Financial Accounting Standards No. 128, Earnings per Share. 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.
For fiscal 1999, common share equivalents related to shares issuable
upon the exercise of stock options approximated 2,000 shares. Options
to purchase 149,725 shares of Common Stock and a warrant to purchase
25,000 shares of Common Stock were excluded from the diluted earnings
per share calculation because their exercise prices were greater than
the average market price of the Common Stock. Outstanding options 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.
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 not
included in determining net income but are included as a separate
component of shareholders' equity in accumulated other comprehensive
income (loss).
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.
F-10
34
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. REVERSE STOCK SPLIT
A four-to-one reverse split of the Common Stock occurred in February
1999. All references in the financial statements to shares, share
prices, per share amounts and stock plans have been adjusted
retroactively to reflect the four-to-one reverse Common Stock split.
4. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts as of June 30 is as
follows (in thousands):
1999 1998
-------- --------
Accounts receivable:
Accounts receivable $ 14,850 $ 16,070
Less: allowance for doubtful accounts and customer
deductions, returns and allowances (1,693) (1,949)
-------- --------
$ 13,157 $ 14,121
======== ========
Inventories:
Raw materials $ 6,663 $ 8,460
Finished goods 13,026 15,958
Less: inventory reserves (842) (1,652)
-------- --------
$ 18,847 $ 22,766
======== ========
Property, plant and equipment:
Assets under capital lease $ 9,738 $ --
Buildings -- 7,625
Land -- 811
Furniture, fixtures and equipment 5,606 7,624
Transportation equipment 387 695
Leasehold improvements 1,753 310
-------- --------
17,484 17,065
Less: accumulated depreciation (8,005) (7,277)
-------- --------
$ 9,479 $ 9,788
======== ========
Intangible assets:
Excess of cost over fair value of net assets acquired $ 765 $ 765
Customer list 1,327 1,327
-------- --------
2,092 2,092
Less: accumulated amortization (1,204) (1,033)
-------- --------
$ 888 $ 1,059
======== ========
F-11
35
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. 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 7). 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
-------- --------
Net sales $ 12,398 $ 13,120
Operating loss $ (6,326) $ (2,272)
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.
There were no amounts reclassified from the reserve or released from
the reserve. The assets that were written down during fiscal 1998 were
completely disposed of in fiscal 1999 with no adjustment to the
estimated fair value. The following table summarizes activities in
these reserves during fiscal 1999 (in thousands):
SETTLEMENT LEASE INVENTORY TOTAL
AGREEMENT TERMINATION WRITE-DOWN RESERVE
--------- ----------- ---------- -------
Balance at June 30, 1998 $ 614 $ 206 $1,128 $1,948
Charges against reserve 239 206 1,128 1,573
------ ------ ------ ------
Balance at June 30, 1999 $ 375 $ -- $ -- $ 375
====== ====== ====== ======
F-12
36
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. INCOME TAXES
The components of income (loss) before income taxes are summarized
below (in thousands):
YEARS ENDED JUNE 30,
--------------------------------
1999 1998 1997
-------- -------- --------
Domestic $ (1,935) $(14,547) $ (6,829)
Foreign 3,001 2,190 4,080
-------- -------- --------
$ 1,066 $(12,357) $ (2,749)
======== ======== ========
The components of the provision for income taxes are as follows (in
thousands):
YEARS ENDED JUNE 30,
----------------------------
1999 1998 1997
------ ------ ------
Current:
State $ -- $ -- $ 74
Federal -- -- --
Foreign 440 372 630
------ ------ ------
440 372 704
Deferred provision -- -- 2,308
------ ------ ------
$ 440 $ 372 $3,012
====== ====== ======
The components of the net deferred tax asset are as follows (in
thousands):
JUNE 30,
----------------------
1999 1998
-------- --------
Special charges $ 1,367 $ 2,182
Net operating loss and other carryforwards 8,665 7,855
Capitalized inventory costs 531 619
Provision for losses on accounts receivable 466 482
Intangible assets 151 162
Accelerated depreciation 325 319
Other (140) (125)
-------- --------
11,365 11,494
Less: valuation allowance (9,192) (9,321)
-------- --------
$ 2,173 $ 2,173
======== ========
F-13
37
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,
------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ------- ------- ------- ------- -------
Provision (benefit) at statutory rate $ 362 34% $(4,201) (34)% $ (935) (34)%
Meals and entertainment and
other disallowed expenses 12 1 92 1 18 1
Valuation allowance 693 65 4,867 39 4,454 161
Other -- -- (14) -- 75 3
State tax expense -- -- -- -- 71 3
Foreign tax rate differentials (627) (59) (372) (3) (671) (24)
------- ------- ------- ------- ------- -------
$ 440 41% $ 372 3% $ 3,012 110%
======= ======= ======= ======= ======= =======
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 $7,065,000 before consideration of
any available tax loss carryforwards.
Income taxes paid during fiscal 1999, 1998 and 1997 were $540,000,
$488,000 and $901,000, respectively.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $24,700,000, foreign tax credit carryforwards aggregating
$167,000 and minimum tax credit carryforwards of $87,000. The net
operating loss carryforwards expire between 2011 and 2014. 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, 1999, a valuation allowance on the Company's deferred tax
asset totaled $9,192,000 to reflect the estimated amount of the
deferred tax asset that, at this time, is uncertain to be realized in
the future. These uncertainties relate primarily to whether the Company
will be able to utilize net operating loss carryforwards and certain
tax credit carryforwards prior to their expiration. The valuation
allowance was $9,321,000 at June 30, 1998.
F-14
38
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. LONG-TERM OBLIGATIONS
Notes payable consist of the following (in thousands):
JUNE 30,
----------------------
1999 1998
-------- --------
Revolving credit facility; interest at prime rate plus 1.5%
(9.25% at June 30, 1999); secured by substantially all accounts
receivable and inventory $ 19,713 $ 20,624
Term loan; interest at 12.5%; payable in monthly installments of
$200 with balance due October 1, 1999 secured by substantially all
accounts receivable and inventory 700 3,100
Note payable to a financial institution, secured by real estate -- 4,694
Noninterest bearing obligation; payable in
monthly installments of $42; through March 2000 375 875
Financing lease obligations to related party; payable in
monthly installments of $75 with balance due April 2024 7,491 --
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 17 49
Note payable to related party; interest at 8%; payable in
annual installments through May 1999 -- 33
Other 62 252
-------- --------
28,358 30,127
Less: current maturities (1,200) (3,479)
Less: unamortized debt discounts (75) (60)
-------- --------
$ 27,083 $ 26,588
======== ========
In April 1999, the Company completed the sale and leaseback of its
office, production and distribution facilities to a partnership, which
is controlled by an officer and principal shareholder of the Company,
for $7,500,000. The partnership assumed the Company's obligations under
a promissory note of $4,444,000 secured by the property; however, the
Company has guaranteed the debt to the lender. The partnership's
assumption of the Company's debt resulted in an extraordinary loss of
$68,000, or $.04 per share, related to the write-off of unamortized
financing
F-15
39
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
costs. A promissory note for $1,036,000 was issued to the Company by
the partnership as part of the consideration. This note was
subsequently purchased from the Company by a partnership controlled by
the officer and principal shareholder and a relative of the officer and
principal shareholder. Including the sale of the promissory note, the
Company received proceeds from the transaction of approximately
$2,846,000, net of fees of approximately $210,000. Notes payable to the
officer in the amount of $1,077,000, which includes accrued interest,
were repaid with a portion of the proceeds. The remaining proceeds were
utilized for working capital purposes. Due to the continuing
involvement of the Company, the transaction was accounted for as a
financing lease by recording the sales proceeds as a liability and
recording lease payments, exclusive of an interest portion, as a
reduction of the liability in accordance with Statement of Financial
Accounting Standards No. 98, Accounting for Leases. In connection with
the sale transaction and the subsequent leaseback, and in consideration
for the officer and principal shareholder's personal guarantee of the
partnership's debt, the Company issued to the partnership a five-year
warrant to purchase 75,000 shares of Common Stock at $3.00 per share.
The fair value of the warrant was estimated to be $36,000. Accordingly,
the proceeds from the sales transaction were allocated between
long-term obligations and paid-in capital, resulting in a debt discount
that will be accreted to the redemption amount over the term of the
lease.
In January 1998, the Company entered into a new three-year revolving
credit facility for its Celebrity, Cluett, and Star Wholesale
operations for borrowings up to $35,000,000. This credit facility
replaced the Company's prior line of credit with another bank. The new
credit facility included a revolving credit facility for borrowings of
up to $31,500,000 and a term loan with an initial principal amount of
$3,500,000. In December 1998, the maximum borrowing under the revolving
credit facility was reduced to $26,500,000. 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, 1999 was $20,219,000. The amount outstanding under the revolving
credit facility at June 30, 1999 was $19,713,000. The term loan was
payable in monthly installments of principal of $200,000 beginning in
May 1998, and the remaining outstanding principal balance under the
term loan was due and payable upon the earlier of (i) October 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 25,000 shares of Common
Stock at $4.00 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, and general intangibles (including intellectual
property) of the Company 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 contain
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, 1999. The commitment fee for the unused portion of the
revolving credit facility is .25% of the average unused portion of the
credit facility during the year. Unused borrowing availability under
the credit facility was approximately $506,000 at June 30, 1999.
F-16
40
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In July 1999, the Company entered into an amended and restated
agreement with the lender whereby the following changes, among others,
were made: (i) the term of the revolving credit facility was extended
from January 2001 to July 2002, (ii) the interest rate charged by the
lender was reduced to prime plus applicable percentages, ranging from
0% to 0.5%, based on specified EBITDA requirements, (iii) the financial
ratio covenants were reset, and (iv) the monthly fees were reduced from
$15,000 to $2,000.
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 canceled 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.
Interest paid during fiscal 1999, 1998 and 1997 was $3,634,000,
$3,507,000 and $3,435,000, respectively.
Aggregate maturities of notes payable for the next five years and
thereafter, as adjusted to reflect the July 1999 credit facility
amendment, are as follows (in thousands):
2000 $ 1,200
2001 77
2002 73
2003 19,796
2004 91
Thereafter 7,121
--------
Total $ 28,358
========
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 annual compensation to this plan. The Company's matching
contributions are determined each year by the Company. The Company made
matching contributions equal to 100% of the first 3% of the employees'
contributions for fiscal 1999, 1998 and 1997, contributing $113,000,
$129,000 and $111,000, respectively.
The Celebrity, Inc. 1993 Employee Stock Purchase Plan was adopted in
fiscal 1994. Under this plan, the Company periodically offered to its
employees the right to purchase shares of Common Stock at the market
value as of the date of the offer. Employee payment for plan shares was
made either with cash or a promissory note, which were classified as
subscriptions receivable on the balance sheet. The participants' shares
were fully vested upon purchase. In fiscal 1999, the Company cancelled
all subscriptions receivable from employees that were outstanding under
this plan and the related Common Stock.
F-17
41
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. STOCK OPTION PLAN
The Celebrity, Inc. Amended and Restated Stock Option Plan (the "Plan")
was adopted effective with the completion of the Company's initial
public offering. An aggregate of 250,000 shares of Common Stock has
been reserved for issuance under the Plan. The Plan permits the
granting of incentive stock options to Celebrity's employees and
nonqualified stock options to employees, nonemployee members of the
Board of Directors and advisors. Options are exercisable during the
period specified in each option agreement and are generally exercisable
in installments pursuant to a vesting schedule as designated by the
Compensation Committee of the Board of Directors. The exercise price
determined by the Compensation Committee may not be less than the fair
market value of the Common Stock on the date of grant. No option will
remain exercisable later than ten years after the date of grant. A
summary of options granted and outstanding under the plan is summarized
below:
WEIGHTED
AVERAGE
NUMBER EXERCISE
STOCK OPTION ACTIVITY OF SHARES PRICE
---------------------------- --------- ---------
June 30, 1996 66,100 $ 21.84
Granted 51,250 $ 13.56
Canceled or surrendered (8,250) $ 21.72
-------
June 30, 1997 109,100 $ 17.96
Granted 91,500 $ 5.72
Canceled or surrendered (23,125) $ 17.44
-------
June 30, 1998 177,475 $ 11.72
Granted 12,750 $ 2.28
Canceled or surrendered (29,000) $ 10.74
-------
June 30, 1999 161,225 $ 10.89
=======
F-18
42
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following information is presented for stock options outstanding at
June 30, 1999. At June 30, 1999, options to purchase an aggregate of
60,725 shares of Common Stock were exercisable at a weighted average
exercise price of $15.99 per share.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ---------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
PER SHARE AVERAGE PER SHARE AVERAGE
EXERCISE PRICE REMAINING EXERCISE EXERCISE
RANGE SHARES LIFE PRICE SHARES PRICE
------------------ ----------------- ------------------ ------------------- ---------------- --------------
$ 2.00 - 2.50 11,500 9.7 years $ 2.07 1,500 $ 2.50
$ 4.25 - 5.52 51,500 9.0 years $ 4.77 11,250 $ 4.86
$ 7.75 25,000 8.7 years $ 7.75 5,000 $ 7.75
$ 12.75 - 16.00 37,750 7.8 years $ 13.43 10,250 $ 13.81
$ 19.52 - 26.00 35,225 4.3 years $ 21.95 32,475 $ 22.16
$ 50.00 250 3.5 years $ 50.00 250 $ 50.00
Included in the table above are fully-vested nonqualified options to
purchase an aggregate of 8,250 shares of Common Stock. These are held
by three outside directors and have exercise prices ranging from $2.50
to $50.00 per share.
The Company adopted the disclosure-only option under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"). On a pro forma basis, if the Company had
recorded compensation expense in accordance with FAS 123, for fiscal
1999, the net income would have been $510,000 and the basic and diluted
income per share would have been $0.33, for fiscal 1998, the net loss
would have been $12,766,000 and the basic and diluted loss per share
would have been $8.12, and for fiscal 1997, the net loss would have
been $5,774,000 and the basic and diluted loss per share would have
been $3.68.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants during fiscal 1999, 1998
and 1997:
YEARS ENDED JUNE 30,
----------------------------
1999 1998 1997
-------- -------- --------
Dividend yield -- -- --
Expected volatility 49.1% 50.1% 43.7%
Risk free interest rate 5.7% 5.7% 6.5%
Option term 10 years 10 years 10 years
F-19
43
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. RELATED PARTIES
Celebrity leased a warehouse in Tyler, Texas from a shareholder. This
lease was terminated in April 1999. Amounts paid under this lease were
approximately $96,000 in fiscal 1999 and $120,000 in each of fiscal
1998 and 1997.
Long-term obligations at June 30, 1999 include a financing lease
obligation to a related party (Note 7).
11. SEGMENT REPORTING
In June 1997, Statement of Financial Accounting Standards No. 131,
Disclosure About Segments of an Enterprise and Related Information
("FAS 131") was issued. FAS 131 establishes standards for the way that
public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises
report selected information about operating segments in interim
financial reports issued to shareholders. FAS 131 is effective for
financial statements for periods beginning after December 15, 1997. The
Company has adopted FAS 131 for fiscal 1999.
The Company operates and management monitors the results in a single
operating segment. 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 a distribution center, primarily to mass
market retailers, craft store chains and other specialty retailers and
to wholesale florists.
Financial information by geographic area for fiscal 1999, 1998 and 1997
is summarized in the tables below:
YEARS ENDED JUNE 30,
----------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Net sales to external customers:
Hong Kong $ 38,505 $ 38,607 $ 35,541
United States 72,157 83,655 89,629
-------- -------- --------
Total $110,662 $122,262 $125,170
======== ======== ========
Sales are attributed to countries in which the sales originated (i.e.,
where the subsidiary is domiciled).
F-20
44
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
AT JUNE 30,
-------------------------------
1999 1998 1997
------- ------- -------
(in thousands)
Long-lived assets:
Hong Kong $ 387 $ 141 $ 164
United States 9,980 10,706 16,076
------- ------- -------
Total $10,367 $10,847 $16,240
======= ======= =======
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 credit facility 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, 1999 and 1998, respectively, did
not significantly differ from their carrying amounts.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents and trade receivables. The Company limits its exposure to
credit risk on its cash and cash equivalents by placing these
instruments with high quality financial institutions. With respect to
accounts receivable, the Company is exposed to group concentrations of
credit risk as its customer base consists primarily of craft store
chains, discount retailers, specialty retailers and warehouse clubs. In
addition, in fiscal 1999, the Company had one customer that accounted
for net sales of $36.3 million. The June 30, 1999 accounts receivable
balance for this customer was $3.4 million. Additionally, the Company
had one other customer whose accounts receivable balance at June 30,
1999 was $2.1 million. In fiscal 1998, two customers accounted for net
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, one customer accounted for net sales of $34.6
million. 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.
F-21
45
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 normal
trading relations 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 effect on the Company's results of operations.
14. COMMITMENTS AND CONTINGENCIES
RECEIVABLES SOLD WITH RECOURSE
During fiscal 1999, 1998 and 1997, proceeds of approximately
$34,277,000, $33,539,000, and $37,487,000, respectively, were received
from Hong Kong banks in connection with the financing, with recourse,
of Celebrity Hong Kong accounts receivable related to shipments
directly to customers. As of June 30, 1999 and 1998, the Company was
contingently liable to the Hong Kong banks with respect to such
financing activities for $2,672,000 and $4,085,000, respectively. The
Company has retained substantially the same risk of credit loss as if
the receivables had not been sold (Note 12). The Company's revolving
credit facility restricts the aggregate amount that may be financed
under the export credit facilities at any time to $7,000,000.
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):
2000 $ 1,671
2001 1,640
2002 804
2003 756
2004 756
Thereafter 4,494
---------
Total minimum lease payments $ 10,121
=========
F-22
46
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Rent expense for operating leases was $1,854,000, $3,223,000 and
$3,601,000 for fiscal 1999, 1998 and 1997, respectively.
OTHER
The Company is involved in various legal proceedings that arise in the
ordinary course of its business. The Company believes that none of its
current litigation is likely to have a material adverse effect on its
financial condition or results of operations.
15. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The Company's historical unaudited quarterly results of operations for
fiscal 1999 and 1998 are summarized as follows:
FISCAL 1999 (1)
-----------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1998 1998
-------- -------- ----------- -------------
Net sales $ 31,790 $ 25,760 $ 25,986 $ 27,126
Net income (loss) before extraordinary item 715 (79) 230 (240)
Net income (loss) 647 (79) 230 (240)
Basic and diluted income (loss) per share
before extraordinary item $ .46 $ (.05) $ .15 $ (.15)
Basic and diluted income (loss) per share $ .42 $ (.05) $ .15 $ (.15)
FISCAL 1998
------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1997 1997
-------- -------- ----------- -------------
Net sales $ 30,681 $ 31,519 $ 29,854 $ 30,208
Net income (loss) (9,642) (1,417) (1,227) (443)
Basic and diluted income (loss) per share $ (6.12) $ (.90) $ (.78) $ (.28)
(1) Quarterly data reflects restatement from data previously filed on Form
10-Q for the quarters ended March 31, 1999, December 31, 1998 and
September 30, 1998. The Company previously reported earnings (loss) per
share of $(.09), $.07, $(.20) per share for these quarters, respectively.
The results presented above reflect certain adjustments that should have
been reported in the results of operations for those quarters.
F-23
47
CELEBRITY, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1999
(dollars in thousands)
Allowance
for Balance at Charged to Balance
Doubtful beginning cost and at end
Accounts of period expenses Deductions of period
- ---------- ----------- ---------- ---------- ---------
1999 $ 1,949 $ 773 $ (1,029) $ 1,693
1998 2,017 2,869 (2,937) 1,949
1997 1,119 1,553 (655) 2,017
Balance at Charged to Balance
Inventory beginning cost and at end
Reserves of period expenses Deductions of period
- ---------- ----------- ---------- ---------- ---------
1999 $ 1,652 $ 316 $ (1,126) $ 842
1998 433 1,332 (113) 1,652
1997 3,800 -- (3,367) 433
F-24
48
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBITS
- ----------- --------
2.1 -- 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.(3)
3.1 -- Amended and Restated Articles of Incorporation of the
Registrant.(10)
3.2 -- Articles of Correction of the Registrant.(10)
3.3 -- Bylaws of the Registrant.(1)
4.1 -- Specimen Common Stock Certificate.(1)
4.2 -- Warrant, dated February 3, 1998, issued by Registrant to
Foothill Capital Corporation.(5)
4.3 -- Warrant, dated April 22, 1999, issued to RHP Management,
LLC.(9)
10.1 -- 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.(4)
10.2 -- General Security Agreement Relating to Goods between
Celebrity Exports International Limited and The Hongkong and
Shanghai Banking Corporation Limited dated April 30, 1984.(1)
10.3 -- Form of Guarantee by Limited Company executed by Registrant
in favor of The Hongkong and Shanghai Banking Corporation
Limited.(4)
10.4 -- Commitment of Celebrity Exports International Limited to
maintain a combined net worth of HK$50,000,000.(4)
10.5 -- Loan Agreement dated July 27, 1998 by and between The China
State Bank Limited and Celebrity Exports International
Limited.(7)
10.6 -- Deed of Guarantee dated August 31, 1998 by and between
Celebrity, Inc., as Guarantor, and The China State Bank
Limited, as Lender.(7)
10.7 -- Loan Agreement dated September 29, 1998 by and between
State Street Bank and Trust Company and Celebrity Exports
International Limited.(7)
10.8 -- Continuing Guarantee dated September 29, 1998 granted by
Celebrity, Inc. for the benefit of State Street Bank and Trust
Company.(7)
10.9 -- 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.(5)
10.10 -- Amendment Number One to Loan and Security Agreement dated
effective as of June 5, 1998 by and among Foothill Capital
Corporation and Registrant and certain of its
subsidiaries.(10)
10.11 -- Amendment Number Two to Loan and Security Agreement dated
effective as of July 7, 1998 by and among Foothill Capital
Corporation and Registrant and certain of its
subsidiaries.(10)
10.12 -- Amendment Number Three to Loan and Security Agreement dated
effective as of December 31, 1998 by and among Foothill
Capital Corporation and Registrant and certain of its
subsidiaries.(8)
10.13 -- Amended and Restated Loan and Security Agreement dated
effective as of July 15, 1999 by and among Foothill Capital
Corporation and Registrant and certain of its
subsidiaries.(10)
10.14 -- Lease Agreement, dated April 22, 1999, between the
Registrant, as lessee, and Crest Properties, Ltd., as lessor,
relating to property at 4520 Old Troup Highway, Tyler,
Texas.(9)
10.15 -- Lease Agreement, dated April 22, 1999, between The Cluett
Corporation, as lessee, and Crest Properties, Ltd., as lessor,
relating to property at 3200 Centre-Park Boulevard,
Winston-Salem, North Carolina.(9)
10.16 -- Agreement for Purchase and Sale of Promissory Note, dated
May 28, 1999, by and among the Registrant, RHP Real Estate,
Ltd. and The Residuary Trust Created Under the Last Will and
Testament of Robert H. Patterson, Sr., Deceased.(9)
49
10.17 -- Form of Guarantee of the Term Loan and Security Agreement
dated April 16, 1999 between Merrill Lynch Business Financial
Services, Inc. and Crest Properties, Ltd. by each of
Celebrity, Inc., India Exotics, Inc., Star Wholesale, Inc.,
MagicSilk, Inc. and The Cluett Corporation.(10)
10.18 -- Promissory Note of Registrant, amended and restated as of
February 16, 1998 payable to the order of RHP Management,
LLC.(5)
10.19 -- Promissory Note of Registrant, dated July 7, 1998 payable
to the order of RHP Management, LLC.(6)
10.20 -- 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.(6)
10.21 -- Form of Indemnity Agreement.(1)
10.22* -- Amended and Restated Stock Option Plan.(10)
10.23* -- Amended and Restated 1993 Employee Stock Purchase Plan.(3)
10.24* -- Fiscal 2000 Management Bonus Plan.(10)
21.1 -- Subsidiaries of Registrant.(2)
23.1 -- Consent of PricewaterhouseCoopers LLP.(10)
27.1 -- Financial Data Schedule as of and for the Year Ended June
30, 1999.(11)
- ----------
* Exhibits 10.22 through 10.24 constitute management compensatory plans
or contracts.
(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 Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995,
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 December 31, 1994,
and incorporated herein by reference.
(4) 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.
(5) 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.
(6) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998
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 September 30, 1998
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 December 31, 1998
and incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Report on
Form 8-K filed on June 4, 1999, and incorporated herein by
reference.
(10) Filed herewith.
(11) Included with EDGAR version only.