CELEBRITY INC, 10-K405, 1996-09-30

CELEBRITY INC
10-K405, 1996-09-30
MISCELLANEOUS NONDURABLE GOODS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------------

FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

FOR THE FISCAL YEAR ENDED JUNE 30, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ___________ to ______________

COMMISSION FILE NUMBER 0-20802

--------------------

CELEBRITY, INC.
(Exact name of registrant as specified in its charter)

TEXAS 75-1289223
(State or other jurisdiction (IRS employer
of incorporation or organization) Identification Number)

PHYSICAL DELIVERY ADDRESS: MAILING ADDRESS:
4520 OLD TROUP ROAD P.O. BOX 6666
TYLER, TEXAS 75707 TYLER, TEXAS 75711
(Address of principal executive offices)

Registrant's telephone number including area code: (903)561-3981
Securities Registered Pursuant to Section 12(b) of the Act:

NONE

Securities Registered Pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]

The aggregate market value of voting stock held by nonaffiliates of the
registrant as of September 11, 1996, was approximately $23,661,008, based on the
closing price of the registrant's common stock on such date as reported by the
Nasdaq National Market. For the purposes of this disclosure only, the
registrant has assumed that its directors, executive officers and beneficial
owners of 5% or more of the registrant's common stock are the affiliates of the
registrant. As of September 11, 1996, the registrant had outstanding 6,309,602
shares of its common stock, par value $.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive proxy statement for the annual meeting of
the Company to be held December 2, 1996, are incorporated by reference into
Part III of this Report.

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CELEBRITY, INC.

INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1996

PART I
Page
----
<S> <C> <C>
ITEM 1. Business 1

ITEM 2. Properties 8

ITEM 3. Legal Proceedings 9

ITEM 4. Submission of Matters to a Vote of Security Holders 9

PART II

ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters 9

ITEM 6. Selected Consolidated Financial Data 10

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11

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 22

Index to Consolidated Financial Statements F-1
</TABLE>
<PAGE> 3
PART I

ITEM 1. BUSINESS.

GENERAL

Celebrity, Inc. (the "Company" or "Celebrity") is one of the largest suppliers
of high quality artificial flowers, foliage and flowering bushes and other
decorative accessories, selling primarily to craft store chains and other
retailers and to wholesale florists. Artificial floral products is one of the
largest product categories for craft store chains. The Company serves these
and other customers by offering a line of over 9,000 competitively priced
products and performing accurate and on-time delivery. Celebrity meets the
just-in-time inventory requirements of its customers for artificial floral
products from its distribution centers. The Company also arranges bulk
shipment of private label merchandise direct from manufacturers to customers.
Celebrity works closely with individual customers to devise marketing
strategies, planograms and merchandising concepts and advises them on
advertising, product promotion and store displays. The Company contributes to
the design of its products, and its Hong Kong staff contracts and oversees
their manufacture, exercises quality control and arranges the consolidation and
shipment of merchandise.

In February 1995 the Company acquired certain assets of India Exotics, Inc.
("India Exotics"), an importer and distributor of decorative brass and textile
products. Management believes the acquisition benefits the Company because it
further diversifies its product offerings. Additionally, the Company believes
the complementary product lines of India Exotics provide the Company a greater
presence in the decorative accessories marketplace, thereby affording it the
opportunity to increase its share in a more broadly defined market. In November
1993 the Company consummated a business combination with The Cluett Corporation
("Cluett") of Winston-Salem, North Carolina, an assembler of artificial trees,
floor planters and floral arrangements, and Centre Court Group, a related
partnership ("Centre Court"). The combination expanded the Company in parts of
the U.S. market where Celebrity had not had a strong presence. Management
believes the combination has benefited the Company because of the compatibility
among product lines and because the Company acquired additional distribution
capabilities and customer accounts. In June 1992 the Company acquired certain
assets of Magicsilk, Inc. ("Magicsilk"), which had one of the best recognized
trade names in the artificial floral industry. The Company believes the
acquisition broadened Celebrity's product line into premium quality artificial
floral products, diversified its customer base and strengthened its leadership
position in the industry. In 1984 Robert H. Patterson, Jr. and Richard Yuen
established Celebrity Exports International Limited, a Hong Kong corporation
("Celebrity Hong Kong"), to serve as the Company's exclusive purchasing agent in
southeastern Asia. Contemporaneously with the consummation of the Company's
initial public offering in December 1992, Celebrity Hong Kong became a
wholly-owned subsidiary of the Company.

MARKET OVERVIEW

In enhancing the warmth and style of their homes, many consumers purchase
artificial flowers as interior accent pieces and accessories. Commercial
consumers such as hotels, stores and malls also purchase artificial floral
products for interior decoration. The use of fabrics and advances in
manufacturing techniques have made the products more natural looking and more
aesthetically appealing than ever before. Consumers are also attracted to the
products' other characteristics. Artificial floral products are relatively
inexpensive as furnishing items, can last for years, require no maintenance and
can be fashioned to complement any decor. Home consumers purchase artificial
floral products, either as completed arrangements that are convenient
decorative accessories, or as individual components that they arrange
themselves for display at home, for gifts, or for resale at craft shows or
through small in-home businesses.

Craft store chains and other specialty retailers have capitalized on the demand
of home consumers, specifically women aged 25 to 55 with above average income,
by devoting a substantial portion of their shelf space to a wide range of
artificial floral products, including completed arrangements, flowering bushes
and foliage and individual stems. In addition to artificial floral products,
craft store chains specialize in picture framing, creative craft materials, art
supplies and hobby items. Among major craft store chains, artificial floral
products is typically the
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largest single product category by sales, and the Company believes this
category contributes significantly to the profitability and sales growth of the
craft store chains.

In addition to craft store chains, artificial floral products are sold through
other distribution channels. Pottery stores are high volume, lower price
retail stores with substantial square footage devoted to pottery, glass,
artificial floral and other products. These stores sell artificial floral
products in a manner and to customers similar to those of craft store chains.
Full line discount store chains with floral or craft departments sell small
arrangements and offer a reduced range of individual stems. Warehouse clubs
sell primarily artificial trees, floor planters and completed floral
arrangements. Retail florists often sell artificial as well as natural floral
products. These retailers are supplied broad ranges of individual artificial
floral products, as well as natural cut flowers, by wholesale florists.
Wholesale florists are a highly fragmented distribution channel consisting of a
few large multiple site distributors and numerous smaller single site
operations.

PRODUCTS

Celebrity's product line of approximately 9,000 items offers a full range of
artificial floral products, including artificial flowers, flowering bushes and
foliage, pre-made floral arrangements, trees and floor planters that the
Company assembles, decorative brass containers, candlesticks and accessories
and a broad line of decorative textile products including tassels, rugs and
door mats. Celebrity's Christmas line consists of artificial Christmas trees,
wreaths, garlands and other ornamental products. Celebrity continually updates
its product mix, monitoring style and color trends that affect artificial
floral product sales and identifying product categories with growth potential.
This requires adding, deleting or modifying hundreds of the Company's stock
keeping units ("SKUs") each year.

The Company brand names most of its products. These brand names designate high
quality artificial floral products to retailers and consumers. Product lines,
such as "CELEBRITY SILK" flowers and foliage and "SILK ACCENTS" and "ARTISTIC
SILK" stem flowers, are marketed primarily through craft store chains and
certain other retailers. The Company's Magicsilk brands, consisting of
"MAGICSILK" and "KARISMA" flowers and "BOTANIX" foliage and flowering bushes,
are sold primarily by retail florists. Artificial trees, floor planters and
pre-made floral arrangements assembled by Cluett are sold under the brand names
"THE GOLD LEAF COLLECTION" and "INDOOR GARDEN COLLECTION," primarily by discount
retailers and warehouse clubs. The Company has introduced its Magicsilk and
Cluett product lines to its craft store chain customers.

The Company believes that its brand names give its customers assurance of
product quality and availability and distinguish its products from unbranded
artificial floral products sold by its competitors.

SERVICES

The Company serves its customers with accurate and on-time delivery of its
products. Craft store chain customers, in particular, demand this high level
of service because they typically stock hundreds of these products as everyday

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items and seek to minimize inventory cost while assuring full product
availability. The Company offers a variety of distribution services depending
on the customers' needs and the product:

o Assured Rapid Delivery. Celebrity reduces delivery times and customers'
inventory costs and meets their just-in-time delivery requirements by
quickly filling orders for artificial floral products from the extensive
inventory in its two regional distribution centers. Celebrity's goal is
to fill within 48 hours all orders placed for immediate shipment with at
least 90% of the ordered merchandise. Shipments are made from Celebrity's
distribution centers in Tyler, Texas, serving the Southwest, Midwest and
West, and in Charlotte, North Carolina, serving the East. The Company
plans to consolidate its Charlotte, North Carolina distribution center
into its Tyler, Texas distribution center in conjunction with its
inventory and cost reduction strategy adopted during fiscal 1996.
Artificial trees, floor planters and pre-made floral arrangements are
assembled and shipped from the Company's manufacturing facilities in
Winston-Salem, North Carolina; Tyler, Texas; and Vista, California.
Shipments of decorative brass and textile products are made from the India
Exotics distribution center in St. Louis, Missouri.

o Direct Shipment. Celebrity can provide substantial unit cost savings by
planning with customers for delivery of large orders. Celebrity's Hong
Kong staff arranges these shipments direct from manufacturers in
southeastern Asia to the customer's location. In addition to assuring the
high quality of the products shipped, Celebrity's Hong Kong staff can also
arrange private labeling, customs documentation and financing for its
customers. Similar services can be provided for shipment of decorative
brass products direct from manufacturers in India. Even if a customer's
order is not large enough to meet minimum manufacturing lot sizes for
direct shipment, Celebrity can still offer cost savings to the customer by
arranging to combine the customer's order with its own orders or orders of
other customers. These combined shipments are delivered to the Company's
distribution centers, separated and shipped to the customers.

Customers who place direct shipment orders sometimes reorder the same product
from the distribution centers to replenish their inventory of that product.
Even large customers order low turnover products through the distribution
centers.

Celebrity provides customers a range of other services that it believes make
the Company an attractive source for artificial floral products and other
decorative accessories. Celebrity's sales force assists customers in
identifying products from the Company's lines that are most likely to fit the
customer's primary consumer market. Celebrity works closely with individual
customers to devise marketing strategies, planograms and merchandising concepts
and to furnish advice on advertising, product promotion and store displays. A
store's planogram indicates product display and establishes minimum inventory
levels of the Company's products. The Company's sales force provides thorough
in-store service, frequently checking stock levels and placing reorders.

The Company was one of the first in its industry to have all of its products
bar coded under the universal product code system at the factory. Most of the
Company's major customers require bar codes to track inventory turnover and
generate reorders. To speed order placement, customers use Celebrity's
toll-free ordering lines and the Company's sales force, equipped with portable
fax machines, quickly transmits written purchase orders. The Company can
directly monitor the rate of sale of its products sold by larger retailers and
warehouse clubs that provide on-line access to their point-of-sale information
systems. Celebrity also offers electronic data interchange, which allows
customers to electronically place orders for the Company's products.

PRODUCT SUPPLY ARRANGEMENTS

The manufacture of high quality artificial flowers and foliage requires
semi-skilled labor that is attentive to detail. Southeastern Asia offers an
abundant low cost supply of this labor and dominates the manufacture of
artificial floral products. Factories are located primarily in the Guangdong
Province of the People's Republic of China (the "PRC") and also in Thailand,
Malaysia, the Philippines, Taiwan and South Korea. Nearly all the
manufacturers are

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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 are limited to sales offices in Hong Kong, which are
easily accessible to Celebrity's Hong Kong staff.

Celebrity Hong Kong contracts and oversees product manufacture, exercises
quality control and arranges the consolidation and shipment of merchandise to
the Company's distribution centers or direct to customers. The Company,
through Celebrity Hong Kong, works closely with manufacturers to modify product
design, color and other features and to produce the Company's original designs.
The Company believes that it is one of the few U.S. importers of artificial
floral products that does not rely on third party agents to obtain these
services. Through Celebrity Hong Kong, the Company has more control over the
quality, production and shipment of products than most of its competitors. Its
Hong Kong presence also enables the Company to build strong relationships with
manufacturers and to judge better their capabilities and financial stability.

There are numerous manufacturers of artificial floral products, providing
alternative sources of supply for each of the Company's products. The Company
works with approximately 60 manufacturers and purchases most of its products
from ten of them. Celebrity believes that it is the dominant customer of these
major suppliers and through this status obtains superior pricing and service.
Additionally, the Company purchases decorative brass and textile products from
approximately 20 suppliers located primarily in India. The Company has entered
into an agreement with its primary supplier of decorative brass products
pursuant to which the supplier agreed to supply these products to the Company
for a three-year period ending in 1998. See Note 11 to the Consolidated
Financial Statements.

QUALITY ASSURANCE

To assure delivery of high quality products, Celebrity carefully selects its
suppliers and performs periodic product inspections, both prior to shipment and
after receipt in the U.S. The Company has experienced negligible returns of
defective or damaged products.

SALES AND MARKETING

Celebrity's sales force is organized by geographic area and product line. The
Company employs 31 salespeople and contracts with 20 independent sales
representatives. Sales of artificial floral products outside the U.S.,
aggregating approximately $9.4 million in fiscal 1996, are made primarily to
customers in Europe. Most sales outside the U.S. are made by the staff of
Celebrity Hong Kong. See Note 12 to the Consolidated Financial Statements for
financial information by geographic area. Large corporate accounts are served
by the national sales managers. Company salespeople receive base salaries,
monthly commissions and year-end bonuses based on sales volume. Independent
sales representatives receive commissions based on a percentage of their net
sales.

Celebrity participates in the major artificial floral trade shows held annually
in Las Vegas, Atlanta, New Orleans, New York, Hong Kong and Frankfurt, Germany.
Additionally, the Company attends several smaller trade shows on a limited
scale. Through these shows Celebrity promotes its name and brands and
introduces its products to potential customers. Products sold through
wholesale florists are promoted by the Company through advertisements in
florist trade publications.

The Company's existing distribution centers in Tyler, Texas; Charlotte, North
Carolina; and St. Louis, Missouri, and floral arrangement production facilities
in Winston-Salem, North Carolina; Tyler, Texas; and Vista, California, assure
rapid delivery to customers over a broad geographic area.

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CUSTOMERS

During fiscal 1996 the Company sold products to approximately 3,000 customers,
primarily in the South, Midwest and East. The majority of those sales were to
craft store chains and pottery stores, including Michaels Stores, MJDesigns,
Hobby Lobby, Frank's Nursery and Crafts and Garden Ridge Pottery, and discount
retailers and warehouse clubs, including Kmart and Sam's. Approximately 8% of
consolidated net sales were made by Celebrity Hong Kong to European customers.

A single customer, Michaels Stores, accounted for $26.5 million of the Company's
net sales in fiscal 1996. The loss of the largest customer or a significant
portion of its business, or the ability of such customer to cause the Company to
reduce its profit margins, could have a material adverse effect on the Company.

COMPETITION

The artificial floral industry is highly competitive. The Company's primary
competitors are other importers and distributors. The Company believes that
some of its competitors may have greater financial, distribution and marketing
resources than the Company.

The Company believes that there are a variety of ways to compete in its
industry. For example, some competitors focus solely on price and others
specialize in a particular product segment. The Company competes primarily on
the basis of customer service, product quality, supply dependability, product
line breadth, price and brand name recognition.

The barriers to entry to the Company's industry are relatively low. The Company
believes, however, that attaining success in the industry is difficult. The
Company also believes that it has competitive advantages, including its ability
to fill orders quickly and completely from its distribution centers and
generally provide a high level of customer service, its Hong Kong presence, high
quality products, competitive prices and brand names. There is no assurance
that the Company will maintain these advantages or that they will not be
overcome by other factors that may develop.

TRADEMARKS

The Company has registered the "ARTISTIC SILK," "BOTANIX," "CELEBRITY DESIGNS,"
"CELEBRITY SILK," "FLORA LACE COLLECTION," "CLUETT CANE COLLECTION," "GOLD LEAF
COLLECTION," "COLOR CONCEPTS," "COLOR UNION," "INDOOR GARDEN COLLECTION,"
"KARISMA," "MAGICSILK," "MR. SILK SHINE," "OLIVER'S GREENHOUSE COLLECTION,"
"SEND A SILK," "SILK ACCENTS," "TROPICAL PALM" and "THE SILK GARDENER"
trademarks with the U.S. Patent and Trademark Office in conjunction with its
products and services. In addition, the Company 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 intends to protect its trademarks vigorously against infringement. All
rights with respect to the Company's trademarks are fully reserved.

TRADE REGULATION

The Company currently imports products manufactured in the People's Republic of
China 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 either by 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 30% of the Company's net sales in fiscal 1996.

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Artificial floral products sold by Celebrity Hong Kong to customers outside the
U.S., accounting for approximately 8% of the Company's consolidated net sales
in fiscal 1996, may be subject to tariffs imposed by the destination countries
but would not be subject to U.S. tariffs. Although U.S. customs duties paid by
the Company, ranging from approximately 8% to 17% of the cost of imported
merchandise, have been relatively constant for several years, changes in
customs rates could adversely affect the Company's ability to import quality
products at favorable prices. Likewise, import quotas or embargoes could limit
the amount of merchandise the Company could import from time to time, affecting
the Company's ability to meet its customers' demands.

Most Favored Nation Treatment for the PRC. The PRC's exports to the U.S.,
which include toys, discount apparel and footwear, have, since 1980, received
the same preferential tariff treatment accorded goods from countries granted
"most favored nation" status. However, preferential tariff treatment for
countries with nonmarket economies, including the PRC, is granted one year at a
time, and such treatment is renewed only upon the President's recommendation to
Congress that the objectives of U.S. trade law will be served by extending
preferential treatment for another year. Under U.S. trade law, Congress may
override the President's recommendation with a joint resolution to bar the
extension of preferential treatment. If such a joint resolution is passed by
Congress, the President may veto the resolution. If Congress cannot override
such a veto, preferential treatment continues.

Because of concerns regarding the labor and human rights practices of the PRC
and its trade policies that potentially deprive U.S. firms and products of
market access, the renewal of the PRC's most favored nation treatment has been a
contentious political issue for several years. President Clinton has reversed
his position that renewal of most favored nation status be based on progress on
human rights issues and has extended most favored nation status for the PRC
through June 1997 without placing significant conditions on future renewal.
In June 1996 the U.S. House of Representatives voted against a resolution
to rescind the most favored nation status of the PRC by a 286 to 141 vote,
thereby continuing the U.S. trade relationship with the PRC under most favored
nation status. However, the linkage between most favored nation status and the
limitation of the proliferation of nuclear weapons technology and provision of
greater access to markets, as well as progress on human rights issues in the
PRC, may continue in the future, and therefore prospects for continued
preferential treatment are difficult to determine.

Were the PRC to lose most favored nation treatment, the import duty on goods
manufactured in the PRC and imported into the U.S. would increase from
approximately 9% to 71.5%. According to U.S. Commerce Department statistics,
currently about one-third of the artificial floral products imported into the
U.S. come from the PRC. The Company believes this significant market share is
primarily attributable to the low cost of labor in the PRC. Although increased
duties on the Company's products would increase the cost of goods from the PRC,
all of the Company's competitors who import artificial floral products from the
PRC would be subject to the same increase in costs. In addition, because labor
costs in the PRC are significantly lower than those in other countries, the
Company believes the PRC would continue to be the lowest cost source for
artificial floral products even if the PRC lost most favored nation treatment.
If the Company were to face a substantial increase in tariff rates on products
imported into the U.S., the Company would (i) attempt to increase the prices
charged to its customers, (ii) ask its suppliers to reduce the prices charged to
the Company and (iii) seek to identify more favorable sources for its products
to assure the highest quality at the lowest price; however, there is no
assurance that these efforts will allow the Company to prevent its results of
operations from being affected adversely.

Additionally, even if most favored nation status is maintained for the PRC,
significant forces in the Congress and elsewhere are pressing for other
sanctions in response to the PRC's human rights, arms and intellectual rights
policies, and there is no assurance that these possible sanctions will not
affect the Company.

Section 301. Section 301 of the Trade Act of 1974, as amended ("Section 301"),
directs the U.S. Trade Representative ("USTR") to designate those countries
that deny adequate and effective intellectual property rights or fair and
equitable market access to U.S. firms that rely on intellectual property.
From the countries designated, the USTR is to identify as "priority"
foreign countries those countries where the lack of intellectual property
rights protection is most egregious and has the greatest adverse impact on
U.S. firms. The USTR is authorized to take retaliatory action, including
the imposition of retaliatory tariffs and import restraints

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on goods from priority foreign countries, if such countries do not respond to
USTR investigations by entering into good faith negotiations or by evidencing
significant progress in protecting intellectual property rights.

In October 1992 the PRC and the U.S. entered into a memorandum of understanding
("MOU") concerning access to PRC markets. In the MOU the PRC agreed to adjust
its trade practices to international standards by reducing barriers to U.S.
goods, including the elimination of a variety of licensing requirements, quotas,
controls and restrictions, between December 1992 and December 1997. As a result
of concerns regarding the PRC's compliance with the MOU, the USTR reopened
negotiations with the PRC in late 1994. These negotiations concluded with the
re-signing of the MOU in February 1995. In April 1996, however, the USTR again
became concerned regarding the PRC's trading policies and enforcement efforts
and designated the PRC as a priority foreign country. The USTR subsequently
published a preliminary retaliation list on $3 billion of PRC exports to the
U.S., which did not include artificial floral products. The USTR announced in
June 1996 that no sanctions would be imposed, however, as a result of the
PRC's improved enforcement efforts with respect to its trade agreements with the
U.S.

The Company cannot predict the likelihood or effect of potential trade
retaliation against the PRC that may occur in the future. Trade retaliation in
the form of increased tariffs or quotas, or both, against products that are
manufactured on behalf of the Company now or in the future could increase the
cost of such products to the Company.

EXECUTIVE OFFICERS

Set forth below is certain information regarding the executive officers of the
Company:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Robert H. Patterson, Jr. 45 Chairman of the Board and Chief Executive Officer

Richard Yuen 52 Managing Director of Celebrity Hong Kong

David J. Huffman 45 President

Clifford C. Condict 49 Vice President - Merchandise

Roger D. Craft 49 Vice President - Operations

James R. Thompson 38 Vice President - Finance, Treasurer and Secretary
</TABLE>

Robert H. Patterson, Jr. has served as Chairman of the Board of Directors of
Celebrity since 1989, as President from 1978 to July 1995 and as a director
since 1974.

Richard Yuen has managed Celebrity Hong Kong since 1984 and has been a director
of Celebrity since December 1992.

David J. Huffman has served as President of Celebrity since July 1995. From
February 1991 to July 1995, he was Vice President - Sales of Celebrity. From
February 1990 to February 1991, he was the Sales Manager of the Celebrity
Designs Division.

Clifford C. Condict has served as Vice President - Merchandise of Celebrity
since March 1994. Mr. Condict served as President of Magicsilk, Inc., a
subsidiary of the Company, from June 1992 to December 1993, and as Vice
President - Operations of Celebrity from 1988 to June 1992.

Roger D. Craft has served as Vice President - Operations of Celebrity since
September 1993. Mr. Craft served as General Manager of Star Wholesale Florist,
Inc., a subsidiary of the Company, from 1986 to August 1993.

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James R. Thompson has served as Vice President - Finance, Treasurer and
Secretary of Celebrity since August 1992. He served as Controller of Celebrity
from 1987 to August 1992.

Officers are elected annually by the Board of Directors and serve at its
discretion.

EMPLOYEES

At August 31, 1996, the Company had 608 full-time and part-time employees,
including 41 employed by Celebrity Hong Kong. The Company has not entered into
any collective bargaining agreements with its employees. The Company believes
that its relations with its employees are good.

ITEM 2. PROPERTIES.

The Company owns certain facilities for offices, distribution centers and
floral arrangement production as follows:

<TABLE>
<CAPTION>
Approximate
Location Type of Facility Square Footage
-------- ---------------- --------------
<S> <C> <C>
Tyler, Texas Office/Distribution Center 137,500

Winston-Salem, North Carolina Floral Arrangement 110,000
Production Facility

Tyler, Texas Floral Arrangement 100,000
Production Facility
</TABLE>

The Company also leases the space occupied by certain offices, warehouses,
distribution centers, showrooms, floral arrangement production facilities and
other facilities. The following table summarizes these leases.

<TABLE>
<CAPTION>
Approximate
Location Type of Facility Square Footage
-------- ---------------- --------------
<S> <C> <C>
Tyler, Texas Warehouse 60,000

Tyler, Texas Warehouse 56,000

Tyler, Texas Warehouse 47,000

Tyler, Texas Wholesale Supply House 23,000

Dallas, Texas Wholesale Supply House 36,000

Dallas, Texas Showroom 19,000

Atlanta, Georgia Showrooms (2) 10,000

Miami, Florida Showroom 3,000

Charlotte, North Carolina Distribution Center 107,000

St. Louis, Missouri Office/Distribution Center 100,000

St. Louis, Missouri Warehouse 46,000

Winston-Salem, North Carolina Warehouse 69,000

Vista, California Floral Arrangement 35,000
Production Facility
</TABLE>

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<PAGE> 11
<TABLE>
<S> <C> <C>
Hong Kong Office/Showroom 20,000
</TABLE>

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 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.

The Common Stock, par value $.01 per share, of the Company ("Common Stock")
is traded in the Nasdaq National Market under the symbol "FLWR."

The following table sets forth, for the periods indicated, the high and low
closing sale prices of the Common Stock, as reported by the Nasdaq National
Market.

<TABLE>
<CAPTION>
Fiscal Year High Low
----------- ---- ---
<S> <C> <C>
1995
First Quarter $ 5 3/4 $ 3 1/4
Second Quarter $ 5 7/8 $ 3 1/2
Third Quarter $ 7 1/4 $ 4 1/4
Fourth Quarter $ 7 1/8 $ 5 1/2

1996
First Quarter $ 7 7/8 $ 6 5/8
Second Quarter $ 7 1/4 $ 5
Third Quarter $ 5 7/8 $ 3 1/4
Fourth Quarter $ 5 $ 3 7/8

1997
First Quarter (through September 11, 1996) $ 4 5/8 $ 3 1/2
</TABLE>

On September 11, 1996, the closing sale price of the Common Stock as reported
by the Nasdaq National Market was $3 3/4 per share. As of September 11, 1996,
there were 112 record holders of the Common Stock.

The Company has not paid cash dividends in the last four fiscal years.
Management presently intends to retain any earnings for the operation and
expansion of the Company's business and does not anticipate paying cash
dividends in the foreseeable future. The terms of the Company's revolving
line of credit with its principal lender currently restrict the payment of
dividends.

-9-
<PAGE> 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The following selected consolidated balance sheet data as of June 30, 1996,
1995 and 1994, and selected consolidated statement of operations data for each
of the years in the three year period ended June 30, 1996, are derived from
audited consolidated financial statements of Celebrity. The selected
consolidated balance sheet data as of June 30, 1993, and selected statement of
operations data for the year ended June 30, 1993, are derived from audited
consolidated financial statements of Celebrity and audited combined financial
statements of Cluett and Centre Court. The selected consolidated balance sheet
data as of June 30, 1992, and selected consolidated statement of operations data
for the year ended June 30, 1992, are derived from audited combined financial
statements of Celebrity and Celebrity Hong Kong, and audited financial
statements of Cluett. Certain events, such as the acquisitions of India Exotics
in February 1995 and Magicsilk in June 1992 and the initial public offering of
Common Stock in December 1992, affect the comparability of the data between
years. See Note 3 to the Consolidated Financial Statements for discussion of
certain of these events.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . $ 115,048 $ 118,810 $ 90,884 $ 73,183 $ 60,935
Net income (loss) . . . . . . . . . . . $ (5,422) $ 3,782 $ 1,130 $ 2,893 $ 3,353
Earnings (loss) per share . . . . . . . $ (.86) $ .60 $ .18 $ .54 $ .75
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
----------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (1)
Total assets . . . . . . . . . . . . . . $ 73,363 $ 74,641 $ 47,105 $ 42,045 $ 26,564
Long-term debt . . . . . . . . . . . . . $ 31,081 $ 27,941 $ 11,701 $ 7,286 $ 6,277
Warrants to purchase common stock (2) . $ 1,750
Redeemable common stock (2) . . . . . . $ 350 $ 525 $ 700 $ 875

</TABLE>

- ---------------------
(1) Celebrity Hong Kong, which was consolidated with Celebrity
contemporaneously with the initial public offering, paid cash dividends
of $711,000 and $906,000 for fiscal 1993 and 1992, respectively.
Celebrity has never declared cash dividends and does not anticipate
declaring cash dividends in the foreseeable future.

(2) At June 30, 1992, the Company had outstanding 48,193.29 Series A,
36,358.52 Series B and 84,551.70 Series C warrants, each representing
the right to purchase one share of Common Stock at a nominal exercise
price (the "Series A Warrants," "Series B Warrants" and "Series C
Warrants," or, collectively, the "Warrants"), all of which were issued
in connection with the acquisition of Magicsilk.

The Warrants were converted/redeemed in December 1992 in conjunction
with the Company's initial public offering. The Series A and B
Warrants were converted into an aggregate of 67,308 shares of Common
Stock at the initial public offering price of $13 per share. The
Series C Warrants were redeemed for $1,099,000, an amount obtained
by multiplying the number of Series C Warrants by the initial public
offering price of $13 per share.

-10-
<PAGE> 13
The holders of the Common Stock obtained upon the exercise of the
Series A and B Warrants ("Redeemable Common Stock") have the right on
September 30 of 1993, 1994, 1995, 1996 and 1997, to "put" to the
Company, and the Company has the obligation to purchase, shares of
Redeemable Common Stock from such holders at a price per share equal
to the greater of the initial public offering price or the fair market
value per share at the time of the put (as determined pursuant to the
terms of the warrant agreement). The Company's purchase obligations
with respect to the Redeemable Common Stock are limited to $100,000 and
$75,000 on each put date, and $500,000 and $375,000 in the aggregate
over all put dates, for the Redeemable Common Stock relating to the
Series A Warrants and Series B Warrants, respectively. On September 30
in each of 1993, 1994 and 1995, 13,461 shares of Redeemable Common
Stock were put back to the Company at $13 per share. See Note 8 to the
Consolidated Financial Statements. The Company has received notice
that 13,461 shares of Redeemable Common Stock will be put back to the
Company on September 30, 1996 at $13 per share.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS

This Annual Report on Form 10-K contains forward-looking statements about the
business, financial condition and prospects of Celebrity. The actual results
of Celebrity could differ materially from those indicated by the forward
looking statements because of various risks and uncertainties, including
without limitation (i) changes in customer demand for our 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 our products from
overseas suppliers and our strategy of maintaining a high merchandise in stock
percentage, (iv) the effects of economic conditions, (v) supply and/or shipment
constraints or difficulties, (vi) the impact of competitors' pricing, (vii) the
effects of our 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 and (ix)
other risks detailed in our Securities and Exchange Commission filings. These
risks and uncertainties are beyond the ability of the Company to control, and
in many cases, the Company cannot predict the risks and uncertainties that
could cause its actual results to differ materially from those indicated by the
forward-looking statements. When used in this Annual Report on Form 10-K, the
words "believes", "expects", "plans" and similar expressions as they relate to
the Company or its management generally are intended to identify forward-looking
statements.

GENERAL

Celebrity's net sales increased at an average compounded annual rate of 23%
from $33.6 million in fiscal 1990 to $115 million in fiscal 1996 due to
increases in sales to existing and new customers, expanded marketing efforts
primarily in the northeastern U.S., the acquisition of Magicsilk in June 1992,
the combination with Cluett in November 1993 and the acquisition of India
Exotics in February 1995.

The Company imports premium quality artificial floral products under the
Magicsilk trademarks and distributes them through wholesale florists.
Celebrity believes the acquisition broadened its product line into premium
quality artificial flowers, diversified its customer base, and strengthened its
leadership position in the industry.

Cluett is one of the leading providers of high quality artificial trees and
floor planters, selling primarily to warehouse clubs and discount retailers.
Celebrity believes the Cluett merger expanded the Company in parts of the U.S.
where Celebrity had not had a strong presence.

India Exotics imports and distributes decorative brass and textile products to
craft store chains and other specialty retailers and to wholesale florists.
Celebrity believes the acquisition benefits the Company because it further
diversifies its product offerings. Additionally, the Company believes the
complementary product lines provide the

-11-
<PAGE> 14
Company a greater presence in the decorative accessories marketplace, thereby
affording it the opportunity to increase its share in a more broadly defined
market.

The Company reported a 3% decline in sales, an operating loss of $5.3 million
and a net loss of $5.4 million for fiscal 1996. Included in the results are
charges amounting to approximately $4.4 million related to inventory adjustments
resulting from the discontinuance of certain product lines and the planned
closing of a distribution center and several of the Company's satellite
warehouse facilities.

The Company's operating philosophy is changing to a more streamlined inventory
strategy that is more focused on a core group of profitable products.
Additionally, the Company intends to reduce sales-to-delivery cycle times by
cutting production and shipment times and expanding direct producer-to-customer
shipments. In order to accomplish these objectives the Company has decided to
(i) discontinue certain underperforming product lines, (ii) reduce inventory
further from year ago levels and (iii) close a distribution center and several
satellite warehouse facilities to enable the Company to consolidate warehousing
and shipment operations and reduce costs.

RESULTS OF OPERATIONS

The following table sets forth certain items in the Company's consolidated
statements of income expressed as a percentage of net sales for the years
indicated.

<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 % 100% 100%
Costs and operating expenses:
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . 79 % 76% 76%
Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 % 4% 5%
General and administrative . . . . . . . . . . . . . . . . . . . . 19 % 14% 14%
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . 1%
Depreciation and amortization . . . . . . . . . . . . . . . . . . 2 % 1% 1%
--- --- ---
105 % 95% 97%
--- --- ---
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . (5)% 5% 3%
Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . (3)% (1)% (1)%
--- --- ---
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . (8)% 4% 2%
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . (3)% 1% 1%
--- --- ---
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . (5)% 3% 1%
=== === ===
</TABLE>

FISCAL 1996 COMPARED WITH FISCAL 1995

Net sales decreased 3% from $118.8 million in fiscal 1995 to $115.0 million in
fiscal 1996. The decrease was attributable to a decrease in sales to existing
customers, primarily as a result of a slower than expected retail environment
beginning in the last quarter of calendar 1995 and continuing through the first
half of calendar 1996. Many of the Company's retailer customers reduced their
purchases from the Company during this period to lower their inventories to
desirable levels.

Cost of goods sold increased from $89.8 million, or 76% of net sales, in fiscal
1995 to $91.2 million, or 79% of net sales, in fiscal 1996. Included in cost of
goods sold are charges amounting to $3.8 million, or 3% of net sales, related to
inventory adjustments resulting from the discontinuance of certain product
lines. The Company expects gross profit margins to be somewhat lower than those
historically reported as the Company sells the discontinued products. However,
the decrease in gross margins is expected to be offset to some degree by a
corresponding increase

-12-
<PAGE> 15
in sales volume. The Company expects its inventory reduction program to be
substantially complete by the end of the third quarter of fiscal 1997.

Selling expenses increased from $4.7 million, or 4% of net sales, in fiscal 1995
to $5.8 million, or 5% of net sales, in fiscal 1996. The increase in selling
expenses is primarily attributable to expenses incurred by India Exotics,
acquired in February 1995, increases in salaries and commissions, and increases
in trade show expenses. Selling expenses increased as a percentage of net sales
primarily as a result of the lower sales volume in fiscal 1996.

General and administrative expenses increased from $16.2 million, or 14% of net
sales, in fiscal 1995 to $21.3 million, or 19% of net sales, in fiscal 1996. The
increase in general and administrative expenses was attributable to (i) general
and administrative expenses incurred by India Exotics, (ii) floral arrangement
production facilities in Tyler, Texas and Vista, California, which were expanded
in fiscal 1995, being operational for a full year in fiscal 1996, resulting in
increases in compensation, facility costs and other expenses, (iii) increases in
rent for satellite warehouse space to accommodate the higher inventory levels
carried by the Company during fiscal 1996 and (iv) special charges of
approximately $600,000 relating to the planned closure of a distribution center
and several satellite warehouse facilities in conjunction with the inventory
reduction resulting from the Company's plan to discontinue certain product
lines. General and administrative expenses increased as a percentage of net
sales primarily as a result of (i) the lower sales volume in fiscal 1996, (ii)
the special charges relating to the planned closure of a distribution center and
several of the Company's satellite warehouse facilities and (iii) the fact that
direct shipment sales represented a lower percentage of net sales in fiscal 1996
than in fiscal 1995. Direct shipment sales are those for which products are
shipped directly from Celebrity Hong Kong to the customers and generally consist
of large orders with lower gross margins but also lower associated selling,
general and administrative costs. The Company expects general and
administrative expenses to decrease as a percentage of net sales as a result of
the cost reductions associated with the Company's decision to discontinue
certain product lines, reduce inventory further and close a distribution center
and several satellite warehouse facilities.

Depreciation and amortization increased from $1.6 million in fiscal 1995 to $2.1
million in fiscal 1996, primarily as a result of (i) depreciation and
amortization incurred by India Exotics and (ii) additional building and
equipment depreciation associated with the expansion in fiscal 1995 of floral
arrangement production facilities in Tyler, Texas and Vista, California.

As a result of the foregoing factors, the Company reported an operating loss of
$5.3 million, or 5% of net sales, in fiscal 1996, compared with operating income
of $6.6 million, or 5% of net sales, in fiscal 1995.

Net interest expenses increased from $2.0 million in fiscal 1995 to $3.7 million
in fiscal 1996. The increase was attributable to increased borrowings under the
Company's revolving line of credit and debt issued in the third quarter of
fiscal 1995 in conjunction with the India Exotics acquisition.

As a result of the foregoing factors, the Company reported a loss before income
taxes of $9.0 million, or 8% of net sales, in fiscal 1996, compared with income
before income taxes of $4.6 million, or 4% of net sales, in fiscal 1995.

FISCAL 1995 COMPARED WITH FISCAL 1994

Net sales increased 31% from $90.9 million in fiscal 1994 to $118.8 million in
fiscal 1995. The increase in net sales was attributable to sales by India
Exotics ($2.2 million), an increase in sales to existing customers, a number of
whom adopted planograms (which establish minimum inventory levels of the
Company's products in the customer's stores), and the addition of several new
customers.

Cost of goods sold increased from $69.5 million in fiscal 1994 to $89.8 million
in fiscal 1995. A larger percentage of net sales was associated with direct
shipments from Celebrity Hong Kong. These shipments generally consist of larger
orders with lower gross profit margins but lower associated selling, general and
administrative costs. The lower gross

-13-
<PAGE> 16
profit margin on direct shipment sales was partially offset by higher gross
margins on sales associated with shipments from U.S. distribution centers and
Cluett as a result of cancellation of the promotional strategy in place during
fiscal 1994.

Selling expenses increased from $4.4 million, or 5% of net sales, in fiscal 1994
to $4.7 million, or 4% of net sales, in fiscal 1995. The increase was
attributable to selling expenses incurred by India Exotics ($270,000) and
increased salaries for the salesforce, travel, catalog and trade show expenses.
Selling expenses decreased as a percentage of net sales as a result of the
higher sales volume in fiscal 1995 and a higher percentage of net sales being
associated with shipments from Celebrity Hong Kong, which generally have lower
associated selling, general and administrative costs.

General and administrative expenses increased from $12.4 million in fiscal 1994
to $16.2 million in fiscal 1995. The increase was due primarily to general and
administrative expenses associated with India Exotics ($734,000) and expansion
of the Company's facilities during fiscal 1995, which resulted in increases in
compensation, distribution center rent and other expenses. General and
administrative expenses as a percentage of net sales remained unchanged at 14%
in fiscal 1994 and fiscal 1995 despite the fact that direct shipment sales,
which generally have lower associated selling, general and administrative costs,
accounted for a higher percentage of net sales in fiscal 1995. General and
administrative expenses as a percentage of net sales were higher than expected
due primarily to the expansion of the Company's facilities in fiscal 1995 in
anticipation of future growth.

Depreciation and amortization expense increased from $1.2 million in fiscal 1994
to $1.6 million in fiscal 1995. The increase was primarily attributable to
depreciation and amortization incurred by India Exotics ($98,000), and
additional building and equipment depreciation associated with the completion of
a new floral arrangement production facility in Tyler, Texas. Depreciation and
amortization expense remained at 1% of net sales in fiscal 1994 and fiscal 1995.

The Company incurred nonrecurring acquisition costs of approximately $1.0
million in fiscal 1994 associated with the Cluett merger, which was accounted
for as a pooling of interests, and the potential acquisition of an artificial
floral products distribution company located on the west coast of the U.S. Those
discussions were terminated in December 1993.

As a result of the foregoing factors, operating income increased from $2.3
million, or 3% of net sales, in fiscal 1994 to $6.6 million, or 5% of net sales,
in fiscal 1995.

Net interest expense increased from $858,000 in fiscal 1994 to $2.0 million in
fiscal 1995. The increase was attributable to higher interest rates in fiscal
1995, increased borrowings under the Company's revolving line of credit, debt
issued and assumed in conjunction with the India Exotics acquisition, and
increases in notes payable associated with the expansion of the Company's
facilities in fiscal 1994 and fiscal 1995.

As a result of the foregoing factors, income before income taxes increased from
$1.5 million, or 2% of net sales, in fiscal 1994 to $4.6 million, or 4% of net
sales, in fiscal 1995.

INFLATION

The effect of inflation on operating costs has been minimal in recent years.
Most of the Company's operating expenses are inflation sensitive, with increases
in inflation generally resulting in increased costs of operation. The effect of
inflation-driven cost increases on the Company's overall operating costs is not
expected to be greater for the Company than its competitors.

SEASONALITY

Celebrity markets and distributes products for all seasons. The shipping period
for each season is relatively long. When combined with shipments of basic
merchandise that is sold all year, there is no material seasonal fluctuation in
net sales or operating income.

-14-
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES

Celebrity's sales and marketing strategy and the growth of its business have
required significantly increased investment in inventory. Additionally, the
Company follows the industry practice of offering extended terms to qualified
customers for sales of Christmas merchandise. These sales generally take place
between the months of June and October on terms not requiring payment until
December 1. The Company has traditionally relied on borrowings under its
revolving line of credit and cash flows from operations to fund these and
other working capital needs.

Cash used by operating activities in fiscal 1996 amounted to $42,000, which
was primarily attributable to the net loss, net of noncash items, and changes
in operating assets and liabilities. Inventory decreased $3.7 million during
fiscal 1996. The decrease was a result of the Company's inventory reduction
strategy. Accounts payable and accrued expenses decreased $2.4 million,
primarily as a result of the decreases in inventory and the timing of payment
for merchandise purchased.

Cash provided by financing activities amounted to $1.9 million, which was
primarily from borrowings under its revolving line of credit and notes payable
to finance expenditures for equipment and land.

The Company has a revolving line of credit for its Celebrity, Magicsilk, Cluett
and India Exotics operations in a maximum amount of $35.0 million. At August
31, 1996, the outstanding balance on this line of credit was approximately $27.5
million. Borrowing limits are based on specified percentages of eligible
accounts receivable and inventories and, as a result of such limits, the maximum
amount the Company would have been eligible to borrow at August 31, 1996, was
$27.8 million. Interest is charged monthly on the daily outstanding balance at
the bank's prime rate of interest plus 1/2%. Amounts borrowed under the line of
credit are secured by accounts receivable and inventory. 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 within ten days after
the manufacturers deliver products in Hong Kong for export. The Company
believes that its practice of making prompt payments has enhanced its
relationships with manufacturers. Celebrity Hong Kong finances these cash
payments through a credit facility with a Hong Kong bank. Generally, under the
terms of this facility the bank finances, with recourse, export bills for
specific shipments by Celebrity Hong Kong. The bank is reimbursed when payment
for these shipments is received. Under the terms of the facility, the maximum
aggregate amount of Celebrity Hong Kong export bills the bank is obligated to
finance at any time is $5.8 million. At August 31, 1996, export bills of
Celebrity Hong Kong aggregating $6.6 million were being financed by the bank.
All of these bills were related to direct shipments to customers and Celebrity
Hong Kong's related potential recourse liability was accounted for as a
contingent obligation.

The Company utilizes its existing management information systems to monitor the
turnover and rate of sale of inventory. Additionally, its credit department
carefully monitors the credit status of each customer.

The Company plans approximately $500,000 in capital expenditures in fiscal
1996, primarily in connection with the Company's continuing program to upgrade
its management information systems.

The Company's business is subject to U.S. law relating to imports, including
those imposing import duties. If the U.S. government were to terminate most
favored nation treatment for the PRC or impose punitive tariff rates on
products imported by the Company in retaliation for market access barriers in
the PRC, the duty on products imported by the Company from the PRC would
increase significantly. See "Business - Trade Regulation." If the Company
were to face an increase in tariff rates on the products it imports into the
U.S., it would (i) attempt to

-15-
<PAGE> 18
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 and
expansion plans or that any necessary additional financing will be available,
if at all, in amounts required or on terms satisfactory to the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Consolidated Financial Statements, together with the report of independent
accountants and financial statement schedule, are included on pages F-1
through F-23 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

-16-
<PAGE> 19
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information concerning the directors of the Company is set forth in the
Proxy Statement to be delivered to shareholders in connection with the
Company's Annual Meeting of Shareholders to be held December 2, 1996 (the
"Proxy Statement"), under the headings "Election of Directors," "Board of
Directors and Committees" and "Section 16 Requirements," which information is
incorporated herein by reference. The name, age and position 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 is 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 is 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 is
set forth in the Proxy Statement under the headings "Management Compensation"
and "Certain Transactions," which information is incorporated herein by
reference.

-17-
<PAGE> 20
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.

(a) (1) Financial statements:

The financial statements filed as a part of this report are
listed in the Index to Consolidated Financial Statements on
page F-1.

(2) Financial statement schedules:

The financial statement schedule filed as a part of this
report is listed in the Index to Consolidated Financial
Statements on page F-1.

(3) Exhibits:

The exhibits filed as a part of this report are listed under
"Exhibits" at subsection (c) of this Item 14.

(b) Reports on Form 8-K:

None.

<TABLE>
<S> <C>
2.1 Asset Purchase Agreement dated as of June 16, 1992, among Registrant, Holdingflower, Inc., a Delaware
corporation, Magicsilk, Inc., a Delaware corporation, and Magicsilk, Inc., a Texas corporation. (1)

2.2 Amended Form of Share Contribution Agreement dated as of
November 25, 1992, among the Registrant, Celebrity Exports International Limited,
Robert H. Patterson, Jr., Golden Pool Limited and Richard Yuen.(1)

2.3 Amended Form of Share Repurchase Agreement dated as of November 25, 1992, among Registrant, Celebrity Exports
International Limited, Nina Ruth Patterson Harris and the trust under the will of the late R. Harold
Patterson, Sr.(1)

2.4 Agreement and Plan of Merger dated November 16, 1993, among The Cluett Corporation, Celebrity, Inc., Cluett
Acquisition Corporation, Robert C. Welles, Jr., Raymond J. Trottier, James N. Gammill, III, The Robert C. Welles,
Jr. Revocable Living Trust U/A/D May 27, 1992, Robert C. Welles, Jr., trustee, The Trottier Family Revocable
Living Trust U/A/D May 14, 1992, Raymond J. Trottier and Joan Trottier, trustees, and The James N. Gammill, III
Revocable Living Trust U/A/D May 14, 1992, James N. Gammill, III, trustee.(2)

2.5 Exchange Agreement dated November 16, 1993, among Celebrity, Centre Court Group, a North Carolina general
partnership, Robert C. Welles, Jr., Raymond J. Trottier, James N. Gammill, III, The Robert C. Welles, Jr.
Revocable Living Trust U/A/D May 27, 1992, Robert C. Welles, Jr., trustee, The Trottier Family Revocable Living
Trust U/A/D May 14, 1992, Raymond J. Trottier and Joan Trottier, trustees, and The James N. Gammill, III
Revocable Living Trust U/A/D May 14, 1992, James N. Gammill, III, trustee.(2)

2.6 Asset Purchase Agreement dated February 7, 1995, among India Exotics, Inc., a Texas corporation,
Registrant, India Exotics, Inc., a Missouri corporation, Surendra Khokha, Rajneesh Khokha, Asheesh
Khokha and the Surendra K. Khokha Revocable Trust, dated July 18, 1985. (7)

3.1 Restated Articles of Incorporation of the Registrant. (1)

3.2 Bylaws of the Registrant. (1)

4.1 Specimen Common Stock Certificate. (1)

4.2 Warrant Agreement dated as of June 16, 1992, between the Registrant and Magicsilk, Inc. (1)

10.1 Loan Agreement dated March 21, 1994, among Registrant and NationsBank of Texas, N.A. (3)

10.2 Amendment to Loan Agreement dated December 21, 1994, between Registrant and NationsBank of Texas, N.A.
(7)

10.3 Second Amendment to Loan Agreement dated March 20, 1995, between Registrant and NationsBank of Texas,
N.A. (8)

10.4 Third Amendment to Loan Agreement dated February 9, 1996, between Registrant and NationsBank of Texas,
N.A. (12)
</TABLE>

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<PAGE> 21
<TABLE>
<S> <C>
10.5 Modification of Note and Deed of Trust dated December 21, 1994, between Registrant and NationsBank of
Texas, N.A. (7)

10.6 Modification of Promissory Note and Deed of Trust dated March 20, 1995, between Registrant and
NationsBank of Texas, N.A. (8)

10.7 Guaranty dated March 21, 1994, executed by The Cluett Corporation in favor of NationsBank of Texas,
N.A. (3)

10.8 Guaranty dated March 21, 1994, executed by Magicsilk, Inc. in favor of NationsBank of Texas, N.A. (3)

10.9 Guaranty dated March 21, 1994, executed by Star Wholesale Florist, Inc. in favor of NationsBank of
Texas, N.A. (3)

10.10 Guaranty dated February 7, 1995, executed by India Exotics, Inc. in favor of NationsBank of Texas, N.A.
(8)

10.11 Modification and Amendment of Note and Restatement of Deed of Trust (Tract A) dated March 21, 1994,
executed by Registrant and NationsBank of Texas, N.A. (3)

10.12 Transfer of Lien dated March 21, 1994, executed by Tyler Bank and Trust, N.A. in favor of NationsBank
of Texas, N.A. (3)

10.13 $2,290,409.98 Promissory Note dated March 21, 1994, signed by Registrant and payable to the order of
NationsBank of Texas, N.A. (3)

10.14 Commercial Loans Deed of Trust, Assignment, Security Agreement and Financing Statement (Future
Advances) dated March 21, 1994, executed by Registrant in favor of Michael F. Hord, Trustee for the
benefit of NationsBank of Texas, N.A. (3)

10.15 $1,800,000 Promissory Note (Winston-Salem, N.C.) dated March 21, 1994, signed by Registrant and payable
to NationsBank of Texas, N.A. (3)

10.16 Commercial Loans Deed of Trust, Assignment, Security Agreement and Financing Statement (Future
Advances) dated March 20, 1994, executed by Registrant in favor of NationsBank of Texas, N.A. (3)

10.17 Loan Agreement dated May 10, 1993, among Registrant, Magicsilk, Inc. and National Canada Finance Corp.
(4)

10.18 First Amendment to Loan Agreement dated July 27, 1993, among Registrant, Magicsilk, Inc. and National
Canada Finance Corp. (5)

10.19 Second Amendment to Loan Agreement dated effective as of November 17, 1993, among Registrant,
Magicsilk, Inc., The Cluett Corporation and National Canada Finance Corp. (6)

10.20 Third Amendment to Loan Agreement dated effective as of March 18, 1994, among Registrant, Magicsilk,
Inc., The Cluett Corporation and National Canada Finance Corp. (3)

10.21 Fourth Amendment to Loan Agreement dated effective as of November 4, 1994, among Registrant, Magicsilk,
Inc., The Cluett Corporation and National Canada Finance Corp. (7)
</TABLE>

-19-
<PAGE> 22
<TABLE>
<S> <C>
10.22 Fifth Amendment to Loan Agreement dated effective as of February 3, 1995, among Registrant, Magicsilk,
Inc., The Cluett Corporation, India Exotics, Inc. and National Canada Finance Corp. (7)

10.23 Sixth Amendment to Loan Agreement dated effective as of March 14, 1995, among Registrant, Magicsilk,
Inc., The Cluett Corporation, India Exotics, Inc. and National Canada Finance Corp. (8)

10.24 Seventh Amendment to Loan Agreement dated effective as of August 4, 1995, among Registrant, Magicsilk,
Inc., The Cluett Corporation, India Exotics, Inc. and National Canada Finance Corp. (10)

10.25 Promissory Note dated August 4, 1995, executed by Registrant, Magicsilk, Inc., The Cluett Corporation
and India Exotics, Inc. in the principal amount of $35,000,000 payable to the order of National Canada
Finance Corp. (10)

10.26 Security Agreement dated May 10, 1993, among Registrant, Magicsilk, Inc. and National Canada Finance
Corp. (5)

10.27 Security Agreement dated November 17, 1993, between The Cluett Corporation and National Canada Finance
Corp. (6)

10.28 Security Agreement dated February 3, 1995, between India Exotics, Inc. and National Canada Finance
Corp. (7)

10.29 Subordination Agreement dated July 14, 1992, among National Canada Finance Corp., TBK Partners, L.P.,
ML-Lee Acquisition Fund, L.P., The Bank of New York Commercial Corporation, Registrant and Magicsilk,
Inc. (1)

10.30 Letter agreement dated August 16, 1995, setting forth the terms of a banking facility between
Celebrity Exports International Limited and The Hongkong and Shanghai Banking Corporation Limited. (11)

10.31 General Security Agreement Relating to Goods between Celebrity Exports International Limited and The
Hongkong and Shanghai Banking Corporation Limited dated April 30, 1984. (1)

10.32 Form of Guarantee by Limited Company executed by Registrant in favor of The Hongkong and Shanghai
Banking Corporation Limited. (11)

10.33 Commitment of Celebrity Exports International Limited to maintain a combined net worth of
HK$30,000,000. (11)

10.34 Employment Agreement dated November 17, 1993, between The Cluett Corporation and James N. Gammill, III.
(2)

10.35 Employment Agreement dated February 7, 1995, between India Exotics, Inc. and Surendra Khokha. (7)

10.36 Letter Agreement dated June 20, 1996, amending the Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Surendra Khokha. (13)

10.37 Employment Agreement dated February 7, 1995, between India Exotics, Inc. and Meena Khokha. (7)

10.38 Letter Agreement dated June 20, 1996, amending the Employment Agreement dated February 7, 1995, between India
Exotics, Inc. and Meena Khokha. (13)

</TABLE>

-20-
<PAGE> 23
<TABLE>
<S> <C>
10.39 Noncompetition Agreement dated November 17, 1993, between Registrant and James N. Gammill, III. (2)

10.40 Noncompetition Agreement dated February 7, 1995, among India Exotics, Inc., Surendra Khokha, Rajneesh
Khokha, Asheesh Khokha and Meena Khokha. (7)

10.41 Promissory Note of India Exotics, Inc., a Texas corporation, guaranteed by Registrant, dated February
7, 1995, payable to the order of India Exotics, Inc., a Missouri corporation. (7)

10.42 First Amendment to Promissory Note dated June 20, 1996, amending the Promissory Note of India Exotics, Inc., a
Texas corporation, guaranteed by Registrant, dated February 7, 1995, payable to the order of India Exotics, Inc.,
a Missouri corporation. (13)

10.43 Form of Indemnity Agreement. (1)

10.44 Amended and Restated 1992 Stock Option Plan. (3)

10.45 Amended and Restated 1993 Employee Stock Purchase Plan. (7)

10.46 1997 Employee Bonus Plan. (13)

10.47 Promissory Note of India Exotics, Inc., a Missouri corporation, guaranteed by Registrant, dated February 7, 1995,
in the principal amount of $1,800,000 payable to the order of Surendra Khokha and his successors, trustees of the
Surendra K. Khokha Revocable Trust, dated July 18, 1985. (7)

21.1 Subsidiaries of Registrant. (10)

23.1 Consent of Price Waterhouse LLP. (13)

27.1 Financial Data Schedule (13)
</TABLE>

- ---------------------
<TABLE>
<S> <C>
(1) Previously filed as an exhibit to Registration Statement No. 33-51820 on Form S-1 and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated November 17, 1993, as amended,
and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1993, as amended, and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1993, as amended, and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1993, and incorporated herein by reference.
(7) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994, and incorporated herein by reference.
(8) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995, and incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1994, and incorporated herein by reference.
(10) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference.
(11) 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.
(12) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, and incorporated herein by reference.
(13) Filed herewith.

</TABLE>

-21-
<PAGE> 24
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company 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 and
Chief Executive Officer

Dated: September 27, 1996

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and in
the capacities indicated and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C>
/s/ Robert H. Patterson, Jr. Chairman of the Board and Chief September 27, 1996
- --------------------------------- Executive Officer (Principal Executive
Robert H. Patterson, Jr. Officer)

Director
- ---------------------------------
B. D. Hunter

/s/ C. A. Langner Director September 27, 1996
- ---------------------------------
C. A. Langner

/s/ Valerie Anne Mars Director September 27, 1996
- ---------------------------------
Valerie Anne Mars

/s/ Richard Yuen Managing Director of Celebrity Exports September 27, 1996
- --------------------------------- International Limited and Director
Richard Yuen
</TABLE>

-22-
<PAGE> 25
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C>
/s/ James R. Thompson Vice President - Finance, Secretary, September 27, 1996
- --------------------------------- Treasurer and Chief Financial Officer
James R. Thompson (Principal Financial and Accounting
Officer)

</TABLE>

-23-
<PAGE> 26
CELEBRITY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 3

Consolidated Balance Sheets as of June 30, 1996 and 1995 . . . . . . . . . . . . . . . . F - 4

Consolidated Statements of Operations for the
Years Ended June 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . F - 6

Consolidated Statements of Cash Flows for the
Years Ended June 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . F - 7

Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended June 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . F - 8

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F - 9

Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . F - 23

Other financial statement schedules are omitted because they are not applicable or the required information
is shown in the Consolidated Financial Statements or notes thereto.
</TABLE>

F - 1
<PAGE> 27

(This page intentionally left bank.)

F - 2
<PAGE> 28
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, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As discussed in Note 2 of the Notes to the Consolidated Financial Statements,
the Company changed its method of accounting for income taxes in fiscal 1994.

Price Waterhouse LLP

Dallas, Texas
September 3, 1996, except as to Note 7, which is as of September 27, 1996

F - 3
<PAGE> 29
CELEBRITY, INC.

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 1,166 $ 1,921
Accounts receivable, net of $1,119 and
$1,539 allowance for doubtful accounts,
respectively 14,919 16,247
Inventories 33,279 37,026
Deferred tax asset 2,859 1,122
Other assets 2,332 1,485
-------------- --------------
Total current assets 54,555 57,801
-------------- --------------

Property, plant and equipment, net 11,774 10,943
Deferred tax asset 1,622 178
Intangible assets, net 5,048 5,345
Other assets 364 374
-------------- --------------
Total assets $ 73,363 $ 74,641
============== ==============
</TABLE>

The accompanying notes are an integral part
of these Consolidated Financial Statements.

F - 4
<PAGE> 30
CELEBRITY, INC.

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 8,662 $ 7,388
Accrued expenses 4,134 3,030
Income taxes payable 936 1,022
Current portion of notes payable 1,484 2,682
-------------- --------------
Total current liabilities 15,216 14,122

Notes payable, net of current portion 31,081 27,941
-------------- --------------
Total liabilities 46,297 42,063
-------------- --------------

Redeemable common stock (26,924 and 40,385 shares
at June 30, 1996 and 1995, respectively) 350 525

Shareholders' equity:
Preferred stock (10,000,000 shares of par value $.01 per
share authorized; none issued and outstanding in
1996 or 1995)
Common stock (25,000,000 shares of par value $.01 per
share authorized; 6,280,677 and 6,267,216 shares
issued and outstanding at June 30, 1996 and
1995, respectively) 63 63
Paid-in capital 22,178 22,003
Subscriptions receivable (461) (554)
Retained earnings 5,292 10,714
Cumulative translation adjustment (6) 2
Treasury stock, at cost (350) (175)
-------------- --------------
Total shareholders' equity 26,716 32,053
-------------- --------------

Commitments and contingencies

Total liabilities, redeemable common stock
and shareholders' equity $ 73,363 $ 74,641
============== ==============
</TABLE>

The accompanying notes are an integral
part of these Consolidated Financial Statements.

F - 5
<PAGE> 31
CELEBRITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
Net sales $ 115,048 $ 118,810 $ 90,884

Costs and operating expenses:
Cost of goods sold 91,169 89,774 69,510
Selling 5,842 4,715 4,386
General and administrative 21,323 16,186 12,446
Acquisition costs 1,042
Depreciation and amortization 2,054 1,566 1,200
--------------- -------------- --------------

120,388 112,241 88,584
--------------- -------------- --------------

Operating income (loss) (5,340) 6,569 2,300

Interest income 193 205 106
Interest expense (3,882) (2,238) (964)
Other, net 60 87 62
--------------- -------------- --------------

Income (loss) before income taxes and
cumulative effect of accounting change (8,969) 4,623 1,504

Provision (benefit) for income taxes (3,547) 841 478
--------------- -------------- --------------

Income (loss) before cumulative effect of
accounting change (5,422) 3,782 1,026
--------------- -------------- --------------
Cumulative effect of change in
accounting principle 104
--------------- -------------- --------------

Net income (loss) $ (5,422) $ 3,782 $ 1,130
=============== ============== ==============

Earnings (loss) per common and common
equivalent share:
Before cumulative effect of
accounting change $ (.86) $ .60 $ .16
Cumulative effect of accounting change .02
--------------- -------------- --------------

$ (.86) $ .60 $ .18
=============== ============== ==============

Average common and common
equivalent shares outstanding 6,325,673 6,338,702 6,240,827
=============== ============== ==============
</TABLE>

The accompanying notes are an integral
part of these Consolidated Financial Statements.

F - 6
<PAGE> 32
CELEBRITY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
-------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (5,422) $ 3,782 $ 1,130
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operations:
Depreciation 1,364 1,082 867
Amortization 690 484 333
Cumulative effect of accounting change (104)
Deferred income taxes (3,181) (617) (222)
Changes in operating assets and liabilities:
Accounts receivable 1,328 (239) (4,171)
Inventories 3,747 (16,322) 2,555
Other assets, net (852) (447) (60)
Accounts payable and accrued expenses 2,370 3,819 1,132
Income taxes payable (86) 157 478
-------------- --------------- ---------------

Net cash provided by (used in)
operating activities (42) (8,301) 1,938
-------------- --------------- ---------------

Investing activities:
Purchases of equipment (1,704) (1,537) (1,116)
Purchase of land (491)
Expenditures for building construction (1,230) (2,169)
Acquisition of India Exotics, net of cash acquired (2,396)
Other (379) 46
-------------- --------------- ---------------

Net cash used in investing activities (2,574) (5,163) (3,239)
-------------- --------------- ---------------

Financing activities:
Proceeds from lines of credit 39,501 52,962 29,755
Payments on lines of credit (35,708) (40,686) (25,976)
Proceeds from notes payable 899 1,927 4,387
Payments on notes payable (2,749) (1,187) (5,566)
Proceeds (costs) from issuance of common stock 24 (38)
Redemption of common stock (175) (175) (175)
Payments on subscriptions receivable 93 114
Other (29) (94)
-------------- --------------- ---------------

Net cash provided by financing activities 1,861 12,950 2,293
-------------- --------------- ---------------

Increase (decrease) in cash and cash equivalents (755) (514) 992
Cash and cash equivalents, beginning of period 1,921 2,435 1,443
-------------- --------------- ---------------

Cash and cash equivalents, end of period $ 1,166 $ 1,921 $ 2,435
============== =============== ===============
</TABLE>

See Notes 2, 6, and 7 for supplementary disclosures.

The accompanying notes are an integral part of these
Consolidated Financial Statements.

F - 7
<PAGE> 33
CELEBRITY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(dollars in thousands)
- --------------------------------------------------------------------------------

Common Stock
---------------------------------- Paid-in
Shares Par Value Capital
------------ ------------ ----------
<S> <C> <C> <C>
Balance at June 30, 1993 6,109,555 $61 $21,176

Purchase of redeemable common stock 13,461 175

Sale of common stock 128,739 2 453

Payment on stock subscriptions

Net income

Currency translation
--------- --- -------
Balance at June 30, 1994 6,251,755 63 21,804

Purchase of redeemable common stock 13,461 175

Sale of common stock 2,000 24

Payment on stock subscriptions

Net income

Currency translation
--------- --- -------
Balance at June 30, 1995 6,267,216 63 22,003

Purchase of redeemable common stock 13,461 175

Payment on stock subscriptions

Net loss

Currency translation
--------- --- -------
Balance at June 30, 1996 6,280,677 $63 $22,178
========= === =======
</TABLE>

<TABLE>
<CAPTION>
Cumulative
Subscriptions Retained Translation Treasury Stock,
Receivable Earnings Adjustment at Cost
--------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance at June 30, 1993 $ 5,802 $ (4)

Purchase of redeemable common stock $(175)

Sale of common stock $(690) 175

Payment on stock subscriptions 22

Net income 1,130

Currency translation 16
----- ------- ---- -----
Balance at June 30, 1994 (668) 6,932 12

Purchase of redeemable common stock (175)

Sale of common stock

Payment on stock subscriptions 114

Net income
3,782
Currency translation (10)
----- ------- ---- -----
Balance at June 30, 1995 (554) 10,714 2 (175)

Purchase of redeemable common stock (175)

Payment on stock subscriptions 93

Net loss (5,422)

Currency translation (8)
----- ------- ---- -----
Balance at June 30, 1996 $(461) $ 5,292 $ (6) $(350)
===== ======= ==== =====
</TABLE>

The accompanying notes are an integral
part of these Consolidated Financial Statements.

F - 8
<PAGE> 34
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"),
Magicsilk, Inc. ("Magicsilk"), and Star Wholesale Florist, Inc. ("Star"),
are suppliers of high quality artificial flowers, foliage and flowering
bushes, selling primarily to craft store chains and other retailers and
to wholesale florists. India Exotics, Inc. ("India Exotics"), a
wholly-owned subsidiary acquired in February 1995 (Note 3), is a
supplier of decorative brass products and other decorative accessories,
selling primarily to craft store chains and other specialty retailers and
to wholesale florists. The Cluett Corporation ("Cluett"), a wholly-owned
subsidiary acquired in November 1993 (Note 3), assembles artificial
trees, floor planters and floral arrangements and markets them primarily
to discount retailers and warehouse clubs. Celebrity, Celebrity Hong
Kong, Magicsilk, Star, India Exotics and Cluett are referred to herein
collectively as "Celebrity" or the "Company."

2. SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

All majority-owned subsidiaries are consolidated and all material
intercompany accounts and transactions are eliminated.

REVENUE RECOGNITION

The Company recognizes revenue from merchandise sales at the time of
shipment. Title to merchandise transfers at point of shipment.

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.

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:

<TABLE>
<CAPTION>
Estimated Useful Life
---------------------
<S> <C>
Furniture, fixtures and equipment 5 to 10 years
Transportation equipment 3 to 5 years
Buildings 20 to 31.5 years
</TABLE>

F - 9
<PAGE> 35
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

Maintenance and repairs are charged to expense as incurred. Renewals and
betterments are capitalized.

INTANGIBLE ASSETS

Intangible assets consist primarily of goodwill, a customer list and trade
names related to purchase acquisitions, which are being amortized using
the straight-line method over 20, 10 and 20 years, respectively. The
carrying value of intangible assets is periodically reviewed by the
Company and impairments are recognized when the estimated undiscounted
future cash flows derived from such intangible assets is less than their
carrying value.

INCOME TAXES

As of July 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. The
adoption of SFAS 109 changed Celebrity's method of accounting for income
taxes from the deferred method to an asset and liability method. The
asset and liability method 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 adoption of SFAS 109
resulted in a benefit of $104,000 in fiscal 1994.

FOREIGN CURRENCY TRANSLATION

All balance sheet asset and liability accounts of Celebrity Hong Kong are
translated to U.S. dollars using rates of exchange in effect at the
balance sheet date. Celebrity Hong Kong statements of operations are
translated at exchange rates approximating the actual rates on the dates
of the transactions. Cumulative translation adjustments are included as
a separate component of shareholders' equity.

EARNINGS (LOSS) PER SHARE

Earnings (loss) per share are computed by dividing net earnings or loss by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents consist
of the dilutive effect of common shares that may be issued upon exercise
of stock options. Earnings (loss) per share for all years presented
include the 655,000 shares used to consummate the Cluett merger (Note 3).
Fully diluted earnings (loss) per share were not presented, as the
resulting per share amounts did not substantially differ from primary
earnings (loss) per share.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses

F - 10
<PAGE> 36
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

during the reporting period. Actual results could differ from those
estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121")
and Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). The Company must adopt the
provisions of SFAS 121 and SFAS 123 beginning in fiscal 1997.

SFAS 121 will require the review of long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The impact of adopting this
standard is not expected to have a materially adverse effect on the
Company's financial position or results of operations. SFAS 123 will
require companies to record or disclose the fair value of stock-based
compensation to employees. The Company currently intends to disclose the
fair value of stock-based compensation to employees.

3. ACQUISITIONS

INDIA EXOTICS

In February 1995 the Company acquired, in a transaction accounted for as a
purchase, the business and certain assets of India Exotics, Inc. of St.
Louis, Missouri (the "Seller"). As consideration, the Company, through a
wholly-owned subsidiary, India Exotics, paid $2,500,000 in cash, issued a
$2,000,000 note payable to the Seller (subsequently reduced to $1,830,000
and assigned to the shareholders of the Seller), repaid approximately
$2,100,000 of bank debt of the Seller, assumed a $1,800,000 note from the
Seller to one of its shareholders and assumed certain trade payables of
the Seller. Additionally, India Exotics entered into a noncompetition
agreement (Note 15), employment agreements and certain building lease
agreements (Note 11) with certain former shareholders and officers of the
Seller.

The purchase price was allocated to net assets acquired as follows:
current assets of $5,146,000, including inventories of $3,576,000, and
current liabilities of $2,728,000 (net of the $2,100,000 repayment of
bank indebtedness). The excess of purchase price over the fair value of
net assets acquired was approximately $3,987,000. The results of
operations and cash flows for India Exotics are included in the
Consolidated Financial Statements from the date of acquisition.

F - 11
<PAGE> 37
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

The results of operations for the years ended June 30, 1995 and 1994, on
an unaudited pro forma basis, as if the Seller's assets had been acquired
at the beginning of each period (with appropriate adjustments for
amortization of intangible assets, interest expense, elimination of
certain general and administrative expenses and the related income tax
effects), would have been as follows (in thousands except per share
amounts):

<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Net sales $ 125,484 $ 98,531
============== ===============
Income before cumulative effect of
accounting change $ 4,166 $ 1,080
============== ===============
Net income $ 4,166 $ 1,184
============== ===============
Earnings per share before cumulative
effect of accounting change $ .66 $ .17
============== ===============
Earnings per share $ .66 $ .19
============== ===============
</TABLE>

CLUETT

In November 1993 Celebrity consummated an agreement to merge a
wholly-owned subsidiary with Cluett whereby Celebrity acquired all the
outstanding common stock of Cluett in exchange for 600,000 shares of
common stock, par value $.01 per share ("Common Stock"), of Celebrity.
Additionally, as part of the same transaction, Celebrity acquired all the
outstanding partnership interests in Centre Court Group ("Centre Court")
in exchange for 55,000 shares of Common Stock. The owners of all the
outstanding common stock of Cluett also owned all the partnership
interests in Centre Court. The Cluett merger and the acquisition of
Centre Court are collectively referred to herein as the "Transaction." At
the closing of the Transaction, all outstanding bank indebtedness of
Cluett was repaid, Cluett's former shareholders were released from all
guarantees made on behalf of Cluett, all subordinated loans owed to
Cluett's former shareholders were repaid and all outstanding indebtedness
of Centre Court was assumed by Celebrity. The Transaction was accounted
for as a pooling of interests. The Consolidated Financial Statements
reflect the financial position, results of operations and cash flows of
Cluett and Centre Court as if the Transaction had been consummated on July
1, 1993.

F - 12
<PAGE> 38
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

4. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS

The composition of certain balance sheet accounts as of June 30 is as
follows (in thousands):

<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Inventories:
-----------
Raw materials $ 6,165 $ 8,145
Finished goods 27,114 28,881
-------------- --------------
$ 33,279 $ 37,026
============== ==============

Property, plant and equipment: 1996 1995
------------------------------ -------------- --------------

Buildings $ 7,625 $ 7,614
Land 811 320
Furniture, fixtures and equipment 5,259 4,306
Transportation equipment 624 525
Leasehold improvements 1,415 905
-------------- --------------
15,734 13,670
Less: accumulated depreciation (3,960) (2,727)
-------------- --------------
$ 11,774 $ 10,943
============== ==============

Intangible assets: 1996 1995
------------------ -------------- --------------
Excess of cost over fair value of net assets acquired $ 4,224 $ 4,224
Customer list 1,327 1,327
Trade names 397 397
-------------- --------------
5,948 5,948
Less: accumulated amortization (900) (603)
-------------- --------------
$ 5,048 $ 5,345
============== ==============
</TABLE>

5. SPECIAL CHARGES

The Company incurred special charges of approximately $4,400,000 for
fiscal 1996 related to inventory adjustments ($3,800,000) resulting from
the discontinuance of certain product lines and a lease obligation reserve
($600,000) resulting from the planned closure of a distribution center and
several of the Company's satellite warehouse facilities. The charges were
the result of actions taken by the Company in the fourth quarter of fiscal
1996 to (i) discontinue certain underperforming product lines and (ii)
close a distribution center and several satellite warehouse facilities
pursuant to a plan to consolidate warehousing and shipment operations and
reduce costs, with completion expected by March 1997.

F - 13
<PAGE> 39
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------

6. INCOME TAXES

The components of income (loss) before income taxes are summarized below
(in thousands):

<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
Domestic $ (12,172) $ (703) $ (1,574)
Foreign 3,203 5,326 3,078
--------------- -------------- --------------

$ (8,969) $ 4,623 $ 1,504
=============== ============== ==============
</TABLE>

The components of the provision (benefit) for income taxes are as
follows (in thousands):

<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
Current:
State $ 75 $ 71 $ 74
Federal (924) 434 114
Foreign 483 953 512
--------------- -------------- --------------

(366) 1,458 700
Deferred:
Federal (3,181) (617) (222)
--------------- -------------- --------------

$ (3,547) $ 841 $ 478
--------------- -------------- --------------
</TABLE>

The components of the net deferred tax asset are as follows
(in thousands):

<TABLE>
<CAPTION>
June 30,
---------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Special charges $ 1,496
Net operating loss and other carryforwards 1,255
Capitalized inventory costs 1,119 $ 705
Provision for losses on accounts receivable 216 374
Intangible assets 157 92
Accelerated depreciation 130 67
Capitalized interest 43 43
Deferred rent 22 27
Other 43 (8)
-------------- --------------
$ 4,481 $ 1,300
============== ==============
</TABLE>

F - 14
<PAGE> 40
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):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------ ---------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) at statutory rate $ (3,049) (34%) $ 1,572 34% $ 511 34%
Meals, entertainment and
other disallowed expenses 58 13 1 30 2
Acquisition costs 139 9
Imputed interest 166 12
Other 55 1 91 6
State tax expense 50 59 1 75 5
Foreign tax rate differentials (606) (6) (858) (19) (534) (36)
--------- ------- --------- ------- -------- -------
$ (3,547) (40%) $ 841 18% $ 478 32%
========= ======= ========= ======= ======== =======
</TABLE>

Since the Company plans to continue financing Celebrity Hong Kong's
expansion through reinvestment of undistributed Celebrity Hong Kong
earnings, no provision is made for U.S. taxes on such earnings. If the
Celebrity Hong Kong earnings were distributed, the U.S. tax on the
distribution would be approximately $1,825,000.

Income taxes paid during fiscal 1996, 1995 and 1994 were $527,000,
$1,186,000 and $480,000, respectively. Included in other current
assets at June 30, 1996 and 1995 were U.S. federal income tax
receivables of $1,027,000 and $339,000, respectively.

As of June 30, 1996, the Company had a net operating loss carryforward
of $2,683,000, foreign tax credit carryforwards aggregating $255,000
and a minimum tax credit carryforward of $88,000. The net operating loss
carryforward expires in 2011. The foreign tax credit carryforwards
expire between 1998 and 2000.

7. NOTES PAYABLE

Notes payable consist of the following (in thousands):

<TABLE>
<CAPTION>
June 30,
-----------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Revolving line of credit; interest at prime plus .5%
(8.25% at June 30, 1996); due March 1998; secured
by substantially all accounts receivable and inventory $ 25,914 $ 22,121

Notes payable to bank; interest at prime plus 1%
(8.25% at June 30, 1996); payable in monthly
installments aggregating $65; due January 1998;
secured by real estate 5,255 5,525
</TABLE>

F - 15
<PAGE> 41
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Note payable to related party; interest at prime
plus .5%; due August 1995 1,350

Note payable to related party; interest at prime
plus .5% (8.25% at June 30, 1996); payable in
quarterly installments of $125; due February 1998 875 1,375

Installment notes payable monthly through
June 1997; interest rates vary from 7%
to 13%; secured by automobiles 177 134

Note payable to related party; interest at 8%; payable in
annual installments through May 1999 93 118

Other 251
------------ ------------
32,565 30,623
Less: current portion (1,484) (2,682)
------------ ------------
$ 31,081 $ 27,941
============ ============
</TABLE>

Aggregate maturities of notes payable are as follows (in thousands):

<TABLE>
<S> <C>
1997 $ 1,484
1998 30,940
1999 96
2000 38
2001 7
--------------

Total $ 32,565
==============
</TABLE>

The revolving line of credit provides for borrowings up to a maximum
amount of $35,000,000. Borrowing limits are based on specified percentages
of eligible accounts receivable and inventories and, as a result of such
limits, the maximum amount the Company would have been eligible to borrow
at June 30, 1996 was $26,783,000. The commitment fee for the unused
portion of the revolving line of credit is 1/2% of the average daily
unused portion of the line of credit during each quarter. At June 30,
1996, $542,000 of the revolving line of credit had been reserved as a
result of the issuance of letters of credit.

The $875,000 note payable to related party was issued in conjunction with
the acquisition of the business and assets of India Exotics (Note 3) and
has been assigned to the shareholders of the Seller.

The $93,000 note payable to related party represents an amount due a
former Celebrity officer and director and is unsecured.

F - 16
<PAGE> 42
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

The revolving line of credit, notes payable to bank and the $875,000 note
payable to related party contain certain covenants limiting the incurrence
of indebtedness, restricting the payment of dividends and requiring the
Company to maintain certain financial ratios. The Company was not in
compliance with certain of these financial covenants at June 30, 1996.
The Company received waivers as of June 30, 1996 relative to the revolving
line of credit and the $875,000 note payable to related party. The
covenants for the revolving line of credit and the $875,000 note payable
to related party reset each July 1. The Company also received a waiver as
of June 30, 1996 and through January 31, 1997 relative to the notes
payable to bank. In conjunction with this waiver the Company agreed to
amend the maturity dates of these notes from March 2004 to January 1998.
The Company is attempting to refinance the notes payable to bank and
expects to do so by January 1997. There is no assurance, however, that
such refinancing will be obtained. With the waivers described above, the
Company is presently in compliance with all of its covenants with its
lenders.

Interest paid during fiscal 1996, 1995 and 1994 was $3,645,000, $2,158,000
and $964,000, respectively.

8. REDEEMABLE COMMON STOCK

In conjunction with Celebrity's initial public offering in December 1992,
certain warrants were converted into an aggregate of 67,308 shares of
Common Stock at the initial public offering price of $13 per share. The
Common Stock obtained upon the exercise of these warrants may be put back
to the Company at a price per share equal to the greater of the initial
public offering price per share or the fair market value per share (as
determined pursuant to the terms of the warrant agreement). The Common
Stock may be put back to the Company annually at September 30, 1993
through 1997. Celebrity's maximum obligation to purchase Common Stock on
each put date is limited to an aggregate of $175,000. At June 30, 1996,
Celebrity's obligation to purchase Common Stock over all remaining put
dates was $350,000.

9. EMPLOYEE BENEFIT PLANS

The Celebrity, Inc. Employee 401(k) Plan is available to substantially all
of the Company's employees. Eligible employees may contribute up to 15%
of their compensation to this plan. Celebrity has contributed an amount
equal to 50% of each employee's contribution up to 6% of the employee's
compensation. Employee contributions in excess of 6% of the employee's
compensation are not matched by Celebrity. The Company contributed
$79,000, $41,000 and $41,000 for fiscal 1996, 1995 and 1994, respectively.

The Celebrity, Inc. 1993 Employee Stock Purchase Plan was adopted in
fiscal 1994. Under this plan, the Company may periodically offer to its
employees, at its sole discretion, the right to purchase shares of Common
Stock at the market value as of the date of the offer. Employee payment
for plan shares may be made either with cash or a promissory note. The
participants' shares are fully vested upon purchase. The Company has
reserved 300,000 shares of Common Stock for issuance under this plan.
Subscriptions receivable at June 30, 1996 for purchases of Common Stock
under this plan amounted to approximately $461,000 and will be paid over
periods of one to ten years. The Company made no offers during fiscal 1996
to sell Common Stock under this plan.

10. STOCK OPTION PLAN

The Celebrity, Inc. 1992 Stock Option Plan (the "Plan") was adopted
effective with the completion of the Company's initial public offering.
An aggregate of 500,000 shares of

F - 17
<PAGE> 43
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

Common Stock has been reserved for issuance under the Plan. The Plan
permits the granting of incentive stock options to Celebrity's employees
and nonqualified stock options to employees, nonemployee members of the
board of directors and advisors. Options are exercisable during the
period specified in each option agreement and are generally exercisable in
installments pursuant to a vesting schedule designated by the Compensation
Committee of the board of directors. The exercise price determined by the
Compensation Committee may not be less than the fair market value of the
Common Stock on the date of grant. No option will remain exercisable
later than ten years after the date of grant. Additional information with
respect to stock options issued under the Plan is as follows:

<TABLE>
<CAPTION>
Number Exercise Price
Stock Option Activity of Shares per Share
----------------------------- --------------- -----------------
<S> <C> <C>
June 30, 1993 150,400 $12.00-13.00
Granted 14,000 $3.25-6.50
Canceled or surrendered (16,500) $13.00
---------------

June 30, 1994 147,900 $3.25 - 13.00
Granted 122,500 $4.88 - 5.88
Canceled or surrendered (2,000) $5.38
---------------

June 30, 1995 268,400 $3.25 - 12.50
Granted 6,000 $5.75
Canceled or surrendered (10,000) $5.88
---------------

June 30, 1996 264,400 $3.25 - 12.50
===============

Exercisable at:
June 30, 1995 86,940
June 30, 1996 164,520
</TABLE>

Included in the table above are 14,000 fully vested nonqualified stock
options for three outside directors with exercise prices ranging from
$5.38 to $12.50 per share.

On May 18, 1995 the Compensation Committee of the board of directors
approved the amendment of the exercise price for options covering 130,900
shares of Common Stock granted under the Plan in fiscal 1993 from $13.00
to the fair market value on the amendment date ($5.88).

11. RELATED PARTIES

Celebrity leases certain office and distribution facilities in Tyler,
Texas from a shareholder. Amounts paid under this lease were
approximately $120,000, $120,000 and $140,000 for fiscal 1996, 1995 and
1994, respectively.

The Company leases, from partnerships controlled by an officer of India
Exotics, two

F - 18
<PAGE> 44
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

buildings in St. Louis, Missouri comprised of office and warehouse space.
The aggregate rentals paid on these leases during fiscal 1996 and 1995
were approximately $575,000 and $81,300, respectively. One lease
provides for minimum annual rental payments of $100,400 and expires in
February 1998. The other lease provides for minimum annual rental
payments of $443,840 and expires in April 2003. In addition to the
minimum rentals, the Company pays for taxes, insurance, utility services
and certain maintenance items related to the leased property.

Long-term debt at June 30, 1996 includes two notes payable to related
parties (Note 7).

The Company purchases decorative brass products from an entity controlled
by a relative of an officer of India Exotics. Purchases from this
supplier during fiscal 1996 and 1995 totaled approximately $5,910,000 and
$1,517,000, respectively. The amounts due this supplier at June 30, 1996
and 1995 were approximately $2,024,000 and $266,000, respectively, which
amounts are included in accounts payable. As part of the India Exotics
acquisition, the Company entered into an agreement with the related party
whereby the related party agreed to supply decorative brass products for a
three-year period ending in February 1998.

12. GEOGRAPHIC INFORMATION

The Company operates exclusively in a single industry. Celebrity exports
artificial flowers, foliage and flowering bushes from Asia to the U.S. and
Europe and distributes and markets these products in the U.S. using a
direct sales force and distribution centers, primarily to craft store
chains and other specialty retailers and to wholesale florists. Cluett
assembles artificial trees, floor planters and floral arrangements and
markets them primarily to discount retailers and warehouse clubs,
primarily in the U.S. India Exotics distributes and markets decorative
brass products and other decorative accessories, primarily to craft store
chains and other speciality retailers and to wholesale florists, primarily
in the U.S., using a direct sales force and a distribution center.

Financial information by geographic area for fiscal 1996, 1995 and 1994 is
summarized in the tables below. Intergeographic area sales are accounted
for at prices approximating arm's length market prices. Operating income
by geographic area is comprised of net sales less operating expenses that
are related to the operating revenue derived from the area. Identifiable
assets by geographic area are those assets that are used in the operations
of the Company in that area.

<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Net sales to unaffiliated customers:
Hong Kong $ 54,662 $ 79,248 $ 48,608
United States 80,947 75,015 61,327
Intercompany sales (20,561) (35,453) (19,051)
--------------- -------------- --------------

Total $ 115,048 $ 118,810 $ 90,884
=============== ============== ==============

Operating income (loss):
Hong Kong $ 3,395 $ 5,947 $ 3,160
United States (8,910) 962 (935)
Intercompany sales 175 (340) 75
--------------- -------------- --------------

Total $ (5,340) $ 6,569 $ 2,300
=============== ============== ==============
</TABLE>

F - 19
<PAGE> 45
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Identifiable assets at year-end:
Hong Kong $ 15,693 $ 14,628 $ 8,400
United States 71,598 72,794 44,352
Eliminations (13,928) (12,781) (5,647)
--------------- -------------- --------------

Total $ 73,363 $ 74,641 $ 47,105
=============== ============== ==============
</TABLE>

13. FINANCIAL INSTRUMENTS

The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The carrying
amounts of cash and cash equivalents, accounts receivable and accounts
payable approximate fair value because of their immediate or short
maturities. The carrying amounts of the revolving line of credit and
other variable-rate notes payable approximate their fair value because
the interest rates on these instruments change with market interest
rates. The fair value, based on market interest rates, of the Company's
fixed-rate notes payable at June 30, 1996 and June 30, 1995 did not
significantly differ from their carrying amount.

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents and trade receivables. The Company limits its exposure to
credit risk on its cash and cash equivalents by placing these instruments
with high quality financial institutions. With respect to accounts
receivable, the Company is exposed to group concentrations of credit risk
as its customer base consists primarily of craft store chains and other
specialty retailers, discount retailers and warehouse clubs. In addition,
in fiscal 1996, the Company had one customer that accounted for sales of
$26.5 million. The June 30, 1996 accounts receivable balance for this
customer was $4.3 million. The Company had two significant customers in
fiscal 1995 that accounted for sales of $33.3 million and $12.5 million,
respectively. The Company had one significant customer in fiscal 1994
that accounted for sales of $21.0 million. The Company performs ongoing
evaluations of the financial condition of its customers, but does not
require collateral to secure customer receivables. The Company
establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and
other information.

14. CERTAIN FACTORS THAT COULD AFFECT FUTURE OPERATIONS

The Company derives a substantial amount of its consolidated net sales
from products manufactured and exported from the People's Republic of
China (the "PRC") and other locations throughout Asia. Risks inherent in
international operations include trade protection measures; risks of
increases in taxes and governmental royalties and loss of revenue,
property and equipment from such hazards as expropriation,
nationalization, war, insurrection and other political risks. Other
risks inherent in international operations are the possibility of
realizing economic currency exchange losses when transactions

F - 20
<PAGE> 46
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

are completed in currencies other than U.S. dollars and the Company's
ability to freely repatriate its earnings under existing exchange control
laws. To date, the Company's international operations have not been
materially affected by these risks.

A significant amount of the Company's international purchasing and
exporting activities are controlled in Hong Kong. Accordingly,
Celebrity's success depends to some degree on the economic and social
conditions in Hong Kong. In 1997, the PRC will resume control over Hong
Kong in accordance with the Sino-British Declaration of 1984 (the "Joint
Declaration"). Although the Joint Declaration establishes a framework for
the continuation of existing economic and social systems in Hong Kong
after 1997, there can be no assurances as to the manner in which this
framework will be implemented or whether it will be respected by the PRC
authorities. Although the Company believes that it could move its
purchasing and exporting activities to another location, the disruption of
the Company's operations in Hong Kong could have a material adverse
effect on the Company's business.

15. COMMITMENTS AND CONTINGENCIES

RECEIVABLES SOLD WITH RECOURSE

During fiscal 1996, 1995 and 1994, proceeds of approximately $27,183,000,
$31,475,000 and $7,000,000, respectively, were received from a Hong Kong
bank in connection with the financing, with recourse, of Celebrity Hong
Kong accounts receivable related to shipments directly to customers. As
of June 30, 1996 and 1995, Celebrity was contingently liable to the Hong
Kong bank in respect of such financing activities for $6,649,000 and
$3,856,000, respectively. The Company has retained substantially the same
risk of credit loss as if the receivables had not been sold (Note 13).
Under a facility with the bank, a maximum aggregate of $5,800,000 in
accounts receivable may be financed by the bank at any time, with
recourse.

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):

<TABLE>
<S> <C>
1997 $2,263
1998 1,363
1999 803
2000 724
2001 444
Thereafter 814
------

Total minimum lease payments $6,411
======
</TABLE>

F - 21
<PAGE> 47
CELEBRITY, INC.

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

Rent expense for operating leases was $3,792,000, $2,464,000 and
$1,896,000 for fiscal 1996, 1995 and 1994, 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.

As part of the Cluett merger and the India Exotics acquisition, the
Company executed noncompetition agreements with three former Cluett
shareholders and two former officers of India Exotics, respectively. The
agreements call for annual payments of $200,000, $267,000 and $333,000 in
fiscal 1997, 1998 and 1999, respectively. Amortization expense is
recognized over the terms of the agreements.

F - 22
<PAGE> 48
SCHEDULE II

CELEBRITY, INC.

VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1996
(dollars in thousands)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Allowance
for Balance at Charged to Balance
Doubtful beginning cost and Corporate at end
Accounts of period expenses acquisition Deductions of period
------------ ------------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1996 $ 1,539 $ 795 $ (1,215) $ 1,119

1995 886 574 $ 425 (346) 1,539

1994 230 1,154 (498) 886
</TABLE>

F - 23
<PAGE> 49
EXHIBIT INDEX

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
2.1 Asset Purchase Agreement dated as of June 16, 1992, among Registrant, Holdingflower, Inc., a Delaware
corporation, Magicsilk, Inc., a Delaware corporation, and Magicsilk, Inc., a Texas corporation. (1)

2.3 Amended Form of Share Repurchase Agreement dated as of November 25, 1992, among Registrant, Celebrity
Exports International Limited, Nina Ruth Patterson Harris and the trust under the will of the late
R. Harold Patterson, Sr.(1)

2.4 Agreement and Plan of Merger dated November 16, 1993, among The Cluett Corporation, Celebrity, Inc.,
Cluett Acquisition Corporation, Robert C. Welles, Jr., Raymond J. Trottier, James N. Gammill, III,
The Robert C. Welles, Jr. Revocable Living Trust U/A/D May 27, 1992, Robert C. Welles, Jr., trustee,
The Trottier Family Revocable Living Trust U/A/D May 14, 1992, Raymond J. Trottier and Joan Trottier,
trustees, and The James N. Gammill, III Revocable Living Trust U/A/D May 14, 1992, James N. Gammill, III,
trustee.(2)

2.5 Exchange Agreement dated November 16, 1993, among Celebrity, Centre Court Group, a North Carolina general
partnership, Robert C. Welles, Jr., Raymond J. Trottier, James N. Gammill, III, The Robert C. Welles, Jr.
Revocable Living Trust U/A/D May 27, 1992, Robert C. Welles, Jr., trustee, The Trottier Family Revocable
Living Trust U/A/D May 14, 1992, Raymond J. Trottier and Joan Trottier, trustees, and The James N.
Gammill, III Revocable Living Trust U/A/D May 14, 1992, James N. Gammill, III, trustee.(2)

3.1 Restated Articles of Incorporation of the Registrant. (1)

3.2 Bylaws of the Registrant. (1)

4.1 Specimen Common Stock Certificate. (1)

4.2 Warrant Agreement dated as of June 16, 1992, between the Registrant and Magicsilk, Inc. (1)

10.1 Loan Agreement dated March 21, 1994, among Registrant and NationsBank of Texas, N.A. (3)

10.2 Amendment to Loan Agreement dated December 21, 1994, between Registrant and NationsBank of Texas, N.A.(7)

10.3 Second Amendment to Loan Agreement dated March 20, 1995, between Registrant and NationsBank of Texas, N.A.(8)

10.4 Third Amendment to Loan Agreement dated February 9, 1996, between Registrant and NationsBank of Texas, N.A. (12)

</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
10.5 Modification of Note and Deed of Trust dated December 21, 1994, between Registrant and NationsBank of
Texas, N.A. (7)