<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 0-20802
CELEBRITY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1289223
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Physical Delivery Address:
4520 Old Troup Road
Tyler, Texas 75707
Mailing Address:
P.O. Box 6666
Tyler, Texas 75711
(903) 561-3981
(Address, including zip code, of principal executive
offices and registrant's telephone number, including area
code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
The registrant had 1,544,166 shares of Common Stock, par value $.01 per share,
outstanding as of May 3, 1999.
<PAGE> 2
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS Page
----
<S> <C>
Condensed Consolidated Balance Sheets at
March 31, 1999 and June 30, 1998
(Unaudited)...................................................................2
Condensed Consolidated Statements of Operations
for the three months ended
March 31, 1999 and 1998 (Unaudited)..........................................3
Condensed Consolidated Statements of Operations
for the nine months ended
March 31, 1999 and 1998 (Unaudited)..........................................4
Condensed Consolidated Statements of Cash
Flows for the nine months ended
March 31, 1999 and 1998 (Unaudited)...........................................5
Notes to Condensed Consolidated Financial
Statements (Unaudited)........................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................................10
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................17
SIGNATURES......................................................................18
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
CELEBRITY, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, June 30,
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 127
Accounts receivable, net 15,300 14,121
Inventories 19,329 22,766
Other current assets 3,439 3,607
-------- --------
Total current assets 38,068 40,621
Property, plant and equipment, net 9,276 9,788
Other assets 1,162 1,310
-------- --------
Total assets $ 48,506 $ 51,719
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,170 $ 9,466
Accrued expenses 3,252 3,849
Current portion of notes payable 3,245 3,479
-------- --------
Total current liabilities 15,667 16,794
Notes payable, net of current portion 24,840 26,588
-------- --------
Total liabilities 40,507 43,382
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock 15 16
Paid-in capital 21,541 22,798
Subscriptions receivable -- (570)
Accumulated deficit (13,543) (13,198)
Treasury stock, at cost -- (700)
Cumulative translation adjustment (14) (9)
-------- --------
Total shareholders' equity 7,999 8,337
-------- --------
Total liabilities and shareholders' equity $ 48,506 $ 51,719
======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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<PAGE> 4
CELEBRITY, INC.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Net Sales $ 25,760 $ 31,519
-------- --------
Costs and operating expenses:
Cost of goods sold 18,703 25,426
Selling expenses 1,138 1,209
General and administrative expenses 4,652 4,846
Depreciation and amortization 463 482
-------- --------
Total expenses 24,956 31,963
-------- --------
Operating income (loss) 804 (444)
Interest expense, net (956) (852)
Other, net 73 9
-------- --------
Loss before income taxes (79) (1,287)
Provision for income taxes 54 130
-------- --------
Net loss $ (133) $ (1,417)
======== ========
Basic and diluted loss per share $ (.09) $ (.90)
======== ========
Basic and diluted weighted average
common shares outstanding 1,544 1,577
======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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<PAGE> 5
CELEBRITY, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 78,872 $ 91,581
-------- --------
Costs and operating expenses:
Cost of goods sold 57,966 70,999
Selling expenses 3,684 3,801
General and administrative 13,136 15,355
Depreciation and amortization 1,332 1,539
-------- --------
Total expenses 76,118 91,694
-------- --------
Operating income (loss) 2,754 (113)
Interest expense, net (2,925) (2,567)
Other, net 127 8
-------- --------
Loss before income taxes (44) (2,672)
Provision for income taxes 301 415
-------- --------
Net loss $ (345) $ (3,087)
======== ========
Basic and diluted loss per share $ (.22) $ (1.96)
======== ========
Basic and dilutive weighted average
common shares outstanding 1,564 1,577
======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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<PAGE> 6
CELEBRITY, INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Operating activities:
Net loss $ (345) $(3,087)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,332 1,539
Loss on sale of assets -- 7
Changes in operating assets and liabilities:
Accounts receivable (1,179) (4,841)
Inventories 3,437 4,439
Other assets, net 188 753
Accounts payable and accrued expenses (893) (131)
------- -------
Net cash provided by (used in) operating activities 2,540 (1,321)
------- -------
Investing activities:
Proceeds from sales of assets -- 55
Additions to property and equipment (692) (412)
------- -------
Net cash used in investing activities (692) (357)
------- -------
Financing activities:
Net proceeds from credit facility 143 3,220
Proceeds from (payments on) long-term debt (2,125) 119
Other 7 23
------- -------
Net cash provided by (used in) financing activities (1,975) 3,362
------- -------
Increase (Decrease) in cash (127) 1,684
Cash and cash equivalents at beginning of period 127 530
------- -------
Cash and cash equivalents at end of period $ -- $ 2,214
======= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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<PAGE> 7
CELEBRITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE BUSINESS AND BASIS OF PRESENTATION
Description of Business
Celebrity, Inc. ("Celebrity" or the "Company") is a supplier of high-quality
artificial flowers, ficus trees and plants, and other decorative accessories to
mass-market retailers, craft store chains, wholesale florists and other
retailers throughout North America and Europe. Celebrity imports and/or
produces approximately 14,000 home accent, decorative accessory and giftware
items, including artificial floral arrangements, floor planters and trees, and
a broad line of seasonal items such as Christmas trees, wreaths, garlands and
other ornamental products. The Company also supplies decorative metal products
through its Color Concepts division.
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of
Celebrity and its wholly-owned subsidiaries, Celebrity Exports International
Limited ("Celebrity Hong Kong"), The Cluett Corporation ("Cluett"), India
Exotics, Inc. ("India Exotics"), Magicsilk, Inc. ("Magicsilk"), Star Wholesale
Florist, Inc. ("Star Wholesale") and Value Florist Supplies, Inc. ("Value
Florist"). All intercompany accounts and transactions have been eliminated.
The accompanying Condensed Consolidated Financial Statements are unaudited and,
in the opinion of management, reflect all adjustments that are necessary for a
fair presentation of the financial position and results of operations for the
periods presented. All of such adjustments are of a normal and recurring
nature. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the entire year. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statement disclosures contained in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue from merchandise sales at the time of shipment.
Title to merchandise transfers at point of shipment. Damaged or defective
products may be returned to the Company for replacement or credit. The effects
of returns and discounts are estimated and recorded at time 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. Costs include
material, labor and overhead.
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<PAGE> 8
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 3 to 10 years
Transportation equipment 3 to 5 years
Buildings 20 to 31.5 years
</TABLE>
Maintenance and repairs are charged to expense as incurred. Renewals and
betterments are capitalized and amortized over the lesser of the estimated
useful life or the term of the lease.
Intangible Assets
Intangible assets consist primarily of goodwill and a customer list related to
purchase acquisitions, which are being amortized using the straight-line method
over 20 and 10 years, respectively.
Long-lived Assets
The Company periodically reviews long-lived assets, including goodwill and
customer lists, for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Assets
are grouped at the lowest level for which there are identifiable cash flows
that are largely independent of the cash flows of other groups of assets. In
such cases, if the future undiscounted cash flows of the underlying assets are
less than the carrying amount, then the carrying amount of the long-lived asset
will be adjusted for impairment to a level commensurate with a discounted cash
flow analysis of the underlying assets.
During the fourth quarter of fiscal 1998, the Company decided to exit the India
Exotics business that was acquired in fiscal 1995. As a result of this
decision, certain long-lived assets were written down to their estimated fair
value less cost to sell.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which prescribes an
asset and liability method that requires the recognition of deferred tax assets
and liabilities for the anticipated future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. The Company periodically reviews the realizability
of its deferred tax assets and records valuation allowances, as appropriate,
when realization of the deferred tax asset is not likely.
Foreign Currency Translation
All balance sheet asset and liability accounts of Celebrity Hong Kong are
translated to U.S. dollars using the rates of exchange in effect at the
respective balance sheet dates. 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.
-7-
<PAGE> 9
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ significantly from those estimates.
Recent Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards No.130, Reporting
Comprehensive Income ("FAS 130"), was issued and is effective for fiscal years
beginning after December 15, 1997. FAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company believes that the adoption of
this standard will not have a material effect on the Company's consolidated
results of operations or financial position.
In June 1997, Statement of Financial Accounting Standards No. 131, Disclosures
About Segments of an Enterprise and Related Information ("FAS 131"), was issued
and is effective for fiscal years beginning after December 15, 1997. FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements. The
Company believes the adoption of this standard will not affect its reportable
segments.
3. INVENTORY
Inventories are valued at the lower of average cost or market. The Company
establishes valuation reserves for slow moving, discontinued or obsolete
products. The amounts of the valuation reserves are determined by estimating
the amount of mark down required to value those products at fair market value.
The balance of inventory reserves at March 31, 1999 was $526,000. The
composition of inventories is as follows (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------- -------
<S> <C> <C>
Raw materials $ 7,767 $ 8,460
Finished goods 11,562 14,306
------- -------
$19,329 $22,766
======= =======
</TABLE>
4. 1998 SPECIAL CHARGES
The 1998 special charges included the accrual of the remaining payments due
pursuant to a settlement agreement and a noncompetition agreement related to
the India Exotics acquisition ($614,000), and the accrual of a contractual
lease termination obligation ($206,000), both of which were included as
components of a restructuring charge recorded in the fourth quarter of fiscal
1998. Additionally, a $1,128,000 inventory lower of cost or market reserve was
established as a result of the decision to exit the India Exotics business and
certain other underperforming product lines, which reserve was included as a
component of cost of goods sold in the fourth quarter of fiscal 1998. At March
31, 1999, $500,000 of the reserve remained unutilized. There were no amounts
reclassified from the reserve or released from the reserve. The chart below
summarizes reserve activities.
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<PAGE> 10
<TABLE>
<CAPTION>
SETTLEMENT LEASE INVENTORY TOTAL
AGREEMENT TERMINATION WRITE-DOWN RESERVE
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Expense Recorded $614 $206 $1,128 $1,948
---- ---- ------ ------
Balance at June 30,
1998 614 206 1,128 1,948
Charges against reserve -- 206 428 634
---- ---- ------ ------
Balance at September
30, 1998 614 -- 700 1,314
Charges against reserve -- -- 491 491
---- ---- ------ ------
Balance at December
31, 1998 614 -- 209 823
Charges against reserve 114 -- 209 323
---- ---- ------ ------
Balance at March
31, 1999 $500 $ -- $ -- $ 500
==== ==== ====== ======
</TABLE>
5. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share, effective December 31, 1997. For all periods presented there
were no differences between basic and diluted earnings per share.
6. REVERSE STOCK SPLIT
On February 26, 1999, the Company held a special shareholders' meeting, the
purpose of which was to request the shareholders' approval of certain amendments
to the Company's Amended and Restated Articles of Incorporation, the primary one
of which effected a four-to-one reverse stock split of the common stock, par
value $.01 per share (the "Common Stock"), of the Company. The reverse stock
split was proposed in order to adjust the per share price of the Common Stock so
that it would be in excess of the minimum $1.00 per share continued listing
requirement on the Nasdaq SmallCap Market. The amendments were approved by a
vote of the holders of approximately 90% of all shares of Common Stock
outstanding and entitled to vote, and effective at the end of business on
February 26, 1999, the number of outstanding shares of Common Stock was reduced
from 6,176,655 to 1,544,166, reflecting the four-to-one reverse stock split.
Share and per share data for prior periods have been restated to reflect the
reverse stock split.
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<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, financial condition and prospects of Celebrity. The actual
results of operations of Celebrity could differ materially from those indicated
by the forward-looking statements because of various risks and uncertainties,
including without limitation (i) changes in customer demand for the Company's
products at the retail level, (ii) trends in the retail and wholesale
decorative accessories industries, (iii) inventory risks attributable to
possible changes in customer demand, compounded by extended lead times in
ordering the Company's products from overseas suppliers and the Company's
strategy of maintaining a high merchandise in stock percentage, (iv) the
effects of economic conditions, including the economic instability in the Far
East, (v) supply and/or shipment constraints or difficulties, (vi) the impact
of competitors' pricing, (vii) the effects of the Company's accounting
policies, (viii) changes in foreign trade regulations, including changes in
duty rates, possible trade sanctions, import quotas and other restrictions
imposed by U.S. and foreign governments, (ix) the effects of the assumption of
control over Hong Kong by the People's Republic of China (the "PRC") on July 1,
1997, (x) risks associated with a heavy reliance on products coming from
manufacturers in the PRC, (xi) currency risks, including changes in the
relationship between the U.S. dollar and the Hong Kong dollar, and (xii) other
risks detailed in the Company's Securities and Exchange Commission filings.
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 herein, the words "believes," "expects,"
"plans," "intends" and similar expressions as they relate to the Company or its
management generally are intended to identify forward-looking statements.
-10-
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth certain items in the condensed
consolidated statements of operations of Celebrity expressed as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
---- ---- ---- ----
Costs and operating expenses:
Cost of goods sold 73% 80% 73% 77%
Selling expenses 4% 4% 5% 4%
General and administrative
expenses 18% 15% 17% 17%
Depreciation and amortization 2% 2% 2% 2%
---- ---- ---- ----
Total expenses 97% 101% 97% 100%
---- ---- ---- ----
Operating income (loss) 3% (1)% 3% --
Interest expense, net (4)% (3)% (3)% (3)%
---- ---- ---- ----
Income (loss) before income taxes -- (4)% -- (3)%
Provision (benefit) for income taxes -- -- -- --
---- ---- ---- ----
Net income (loss) (1)% (4)% -- (3)%
==== ==== ==== ====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999, COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998
Net sales decreased 18.3% from $31.5 million in the third quarter of
fiscal 1998 to $25.8 million in the third quarter of fiscal 1999. The sales
decrease was attributable to (i) lower sales in the Company's Cluett
subsidiary, which had a sales decline in the quarter to customers in the
discount/mass-market retail segment, (ii) lower spring seasonal sales in the
Company's domestic floral division, due in part to the bankruptcy of a major
customer, and (iii) lower sales of decorative metal products resulting from the
Company's June 1998 decision to exit the India Exotics business.
Cost of goods sold decreased 26.4% from $25.4 million in the third
quarter of fiscal 1998 to $18.7 million in the third quarter of fiscal 1999.
The decrease was primarily attributable to the lower sales volume in the third
quarter of fiscal 1999. Cost of goods sold as a percentage of net sales was 73%
in the third quarter of fiscal 1999, compared with 80% in the prior year. The
lower cost of goods percentage in the third quarter fiscal 1999 as compared to
the same period in the prior year is attributable to an improved mix of product
sales in the third quarter of fiscal 1999 and expense reductions implemented in
the fourth quarter of fiscal 1998.
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<PAGE> 13
Selling expenses decreased from $1.2 million in the third quarter of
fiscal 1998 to $1.1 million in the third quarter of fiscal 1999. Selling
expenses as a percentage of net sales remained at 4% in the third quarter of
fiscal 1999 when compared to the same period in the prior year.
General and administrative expenses decreased from $4.8 million in the
third quarter of fiscal 1998 to $4.7 million in the third quarter of fiscal
1999. General and administrative sales as a percentage of net sales were 18% in
the third quarter of fiscal 1999, compared with 15% in the third quarter of
fiscal 1998. The increased percentage in the third fiscal quarter fiscal 1999 is
attributable to lower sales volumes.
Depreciation and amortization expense of $463,000, in the third
quarter of fiscal 1999 decreased from $482,000 in the third quarter of fiscal
1998. The decrease was primarily attributable to the write-off of goodwill and
other intangibles in the fourth quarter of fiscal 1998, related to exiting the
India Exotics business.
NINE MONTHS ENDED MARCH 31, 1999, COMPARED WITH NINE MONTHS ENDED MARCH 31, 1998
Net sales decreased 13.9% from $91.6 million in fiscal 1998 to $78.9
million in fiscal 1999. The sales decease was attributable to (i) lower sales in
the Company's Cluett subsidiary, which had a sales decline to customers in the
discount/mass-market retail segment, (ii) lower sales in the Company's domestic
floral division, due in part to the bankruptcy of a major customer and (iii)
lower sales of decorative metal products resulting from the Company's June 1998
decision to exit the India Exotics business.
Cost of goods sold decreased 18.4% from $71.0 million in fiscal 1998 to
$58.0 million in fiscal 1999. The decrease was primarily attributable to the
lower sales volume in fiscal 1999. Cost of goods sold as a percentage of net
sales was 73% in fiscal 1999, compared with 77% in the prior year. The lower
cost of goods percentage in fiscal 1999 is attributable to an improved mix of
product sales in fiscal 1999 and expense reductions implemented in the fourth
quarter of fiscal 1998. Gross profits of $20.9 million in fiscal 1999 increased
from $20.6 million in fiscal 1998, despite lower revenues in fiscal 1999
compared with fiscal 1998.
Selling expenses decreased from $3.8 million in fiscal 1998 to $3.7
million in fiscal 1999. Selling expenses as a percentage of net sales were 5%
in fiscal 1999 compared to 4% in the prior year.
General and administrative expenses decreased 14.5% from $15.4 million
in fiscal 1998 to $13.1 million in fiscal 1999. The decrease in expenses is
attributable to expense reductions implemented in the fourth quarter of fiscal
1998, including the closure of the St. Louis, Missouri facility associated with
the exit of the India Exotics business. General and administrative expenses as
a percentage of net sales were 17% in fiscal 1999, compared to 17% in the prior
year.
Depreciation and amortization expenses decreased from $1.5 million in
fiscal 1998 to $1.3 million in fiscal 1999. The decrease was primarily
attributable to the write-off of goodwill and other intangibles in the fourth
quarter of fiscal 1998, related to exiting the India Exotics business.
LIQUIDITY AND CAPITAL RESOURCES
Celebrity's sales and marketing strategy has required significant
investment in inventory and receivables. The Company follows the industry
practice of offering extended terms to qualified customers for sales of
Christmas merchandise. These sales generally take place between the months of
June and October on terms not requiring payment until December 1. The Company
has traditionally relied on borrowing under its revolving credit facility and
cash flows from operations to fund these and other working capital needs.
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<PAGE> 14
The Company maintains a revolving credit facility for its Celebrity,
Cluett, Color Concepts, Star Wholesale and Value Florist operations in a
maximum amount of $26.5 million. The revolving credit facility matures January
30, 2001. Borrowing limits under the revolving credit facility are based on
specified percentages of eligible accounts receivable and inventories. As a
result of such limits, the maximum amount the Company was eligible to borrow at
March 31, 1999, was $22.5 million, and the amount outstanding under the
revolving credit facility was $21.9 million. In addition to the revolving
credit facility, the lender has made a term loan to the Company in the original
principal amount of $3.5 million. The term loan is payable in monthly
installments of principal of $200,000 that began May 1, 1998, and the remaining
outstanding principal balance under the term loan is due and payable upon the
earlier of (i) September 1, 1999, or (ii) the termination of the revolving
credit facility. Interest on the outstanding balance under the revolving credit
facility bears interest at a reference bank's prime rate of interest plus 1.5%
per annum, and interest on the outstanding balance of the term loan bears
interest at a rate of 12.5% per annum. Interest is payable monthly. Amounts
borrowed under the revolving credit facility and the term loan are secured by
accounts receivable, inventory, equipment, certain interests in real property,
and general intangibles (including intellectual property) of Celebrity and its
subsidiary borrowers. In addition, substantially all stock of the Company's
subsidiaries has been pledged to the lender. The revolving credit facility and
the term loan are subject to certain covenants limiting the incurrence of
indebtedness, prohibiting the payment of dividends and requiring the Company to
maintain certain financial ratios. The Company was in compliance with all
covenants at March 31, 1999.
Celebrity Hong Kong generally makes full cash payments for products
ordered for Celebrity's account or for direct shipment to customers after the
manufacturers deliver products in Hong Kong for export. Celebrity Hong Kong
finances cash payments to its vendors through export credit facilities
established with three Hong Kong banks, each of which is guaranteed by the
Company. Generally, under the terms of these facilities each bank finances,
with recourse, export bills for specific shipments by Celebrity Hong Kong to
its customers. Each bank is reimbursed when payment is received for shipments
it has financed. At March 31, 1999, an aggregate of $2.5 million of export
bills was financed by the three banks. All of these export bills were related
to direct shipments to customers and Celebrity Hong Kong's related potential
recourse liability was accounted for as a contingent obligation. Covenants
under the Company's revolving credit facility restrict the aggregate amount of
export bills that may be financed under the export credit facilities to $7.0
million.
In June 1997, the Company entered into a revolving credit facility
with an additional lender, which matures in June 2004. At March 31, 1999, the
outstanding balance under the facility was approximately $4.4 million. Interest
accrues on the principal amount outstanding under the facility at the rate of
LIBOR plus 2.65% per annum. Amounts borrowed under the facility are secured by
certain real estate owned by the Company, and the facility contains covenants
requiring the Company to maintain certain financial ratios; however, the lender
waived these financial ratio covenants through June 30, 1999.
In September 1997, the Company borrowed $500,000 from a related party,
RHP Management, LLC ("RHP"), an entity controlled by Robert H. Patterson, Jr.,
Chairman of the Board, President and Chief Executive Officer of the Company. In
February 1998, the parties amended the promissory note to extend the repayment
date to September 30, 1999, subject to repayment restrictions under the
revolving credit facility. The principal amount outstanding accrues interest at
a fluctuating rate per annum equal to RHP's cost of borrowing, which is
currently the prime rate of a reference bank plus 1.5% per annum. The proceeds
from this loan were used to pay certain intercompany accounts payable to
Celebrity Hong Kong. In July 1998, the Company borrowed an additional $500,000
from RHP for seasonal working capital needs, which accrues interest at 10% per
annum. The note was scheduled to mature November 1, 1998, but repayment is
subject to certain restrictions under the revolving credit facility, which
required the extension of repayment beyond March 31, 1999.
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<PAGE> 15
The Company does not plan to make any significant capital expenditures
in fiscal 1999 other than those incurred in the normal course of business for
facilities and equipment, and those in connection with the Company's continuing
program to upgrade its management information systems.
The Company's products are primarily sourced in the Far East, with a
majority produced in the PRC. The Company's source or cost of supply could be
affected by a variety of factors, including general economic conditions in the
Far East, changes in currency valuations, export credit availability, freight
carrier availability and cost, and U.S. trade policy and law related to
imports. If the U.S. government were to terminate most favored nation status
for the PRC or impose punitive tariff rates on products imported by the Company
in retaliation for market access barriers in the PRC, the duty on products
imported by the Company from the PRC would increase significantly. If the
Company were to face an increase in product cost from any of these factors, it
would (i) attempt to increase the prices charged to its customers, (ii) ask its
suppliers to reduce the prices charged to the Company and (iii) seek to
identify more favorable sources; however, unless and until these efforts were
successful, the Company's results of operations could be affected adversely.
The Company believes that its current financial position, credit
facilities and cash flows from operations will be adequate to fund its
operations and expansion plans for the foreseeable future. There is no
assurance, however, that these sources will be sufficient to fund its
operations or that any necessary additional financing will be available, if at
all, in amounts required or on terms satisfactory to the Company.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Computer equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations, causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
The Company has undertaken various initiatives intended to ensure that
the computer equipment and software used by the Company will function properly
with respect to dates in the Year 2000 and thereafter. For this purpose, the
term "computer equipment and software" includes systems thought of as
information technology ("IT") systems, including accounting, data processing
and telephone/PBX systems and other miscellaneous systems that may contain
embedded technology, as well as systems that are not commonly thought of as IT
systems, such as materials handling systems, alarm systems, fax machines or
other miscellaneous systems that may contain embedded technology. Based upon
its identification and assessment efforts to date, the Company believes that
certain of the computer equipment and software systems it currently uses will
require replacement or modification. In addition, in the ordinary course of
replacing computer equipment and software, the Company attempts to obtain
replacements that are Year 2000 compliant. Utilizing both internal and external
resources to identify and assess needed Year 2000 remediation, the Company
currently anticipates that its Year 2000 identification, assessment,
remediation and testing efforts, which began in April 1997, will be completed
by December 31, 1999, and that such efforts will be completed prior to any
currently anticipated impact on its computer equipment and software systems.
The Company estimates that as of March 31, 1999, it had completed approximately
90% of the initiatives that it believes will be necessary to fully address
potential Year 2000 issues related to its computer equipment and software. The
projects comprising the remaining 10% of the initiatives are in process and are
expected to be completed by December 31, 1999.
-14-
<PAGE> 16
<TABLE>
<CAPTION>
Percent
Year 2000 Initiative Time Period Complete
-------------------- ----------- --------
<S> <C> <C>
Initial IT system identification and assessment April 1997 to December 1998 100
Remediation and testing of central system June 1997 to December 1998 100
Remediation and testing of manufacturing and June 1998 to September 1999 50
distribution systems
Identification and assessment of non-IT systems June 1998 to September 1999 30
Remediation and testing of non-IT systems January 1999 to December 1999 0
</TABLE>
Substantially all of the Company's products are manufactured in
southeastern Asia. The Company currently has relationships with approximately
70 manufacturers and purchases most of its products from 12 of them. Celebrity
has made its own assessment of the manufacturing operations of its significant
suppliers and their relative dependence on computer equipment and software. As
a result of this independent assessment, the Company has concluded that because
the manufacturing processes of the Company's suppliers utilize very little
technology, the risks associated with the Year 2000 readiness of its
significant suppliers are not significant. The Company is beginning the
assessment of the Year 2000 readiness of its customers. The Company plans to
contact its significant customers to determine their state of Year 2000
readiness, and expects to complete its assessment of such customers' Year 2000
readiness by September 1999.
The Company believes that the costs to modify its computer equipment
and software systems to be Year 2000 compliant, as well as the currently
anticipated costs with respect to Year 2000 issues of third parties, will not
exceed $250,000, which expenditures will be funded from operating cash flows.
All of the $250,000 relates to analysis, repair or replacement of existing
software, upgrades of existing software or evaluation of information received
from significant suppliers or customers. Such amount represents approximately
50% of the Company's total actual and anticipated IT expenditures for fiscal
1998 and 1999. As of March 31, 1999, the Company had incurred costs of
approximately $100,000 related to its Year 2000 identification, assessment,
remediation and testing efforts. Other non-Year 2000 IT efforts have not been
materially delayed or impacted by Year 2000 initiatives. However, if all Year
2000 issues are not properly identified, or assessment, remediation and testing
are not effected timely, there can be no assurance that the Year 2000 issue
will not have a material adverse effect on the Company's results of operations,
or adversely affect the Company's relationships with customers, suppliers or
others. Additionally, there can be no assurance that the Year 2000 issues of
other entities will not have a material adverse effect on the Company's systems
or results of operations.
The Company has begun, but not yet completed, a comprehensive analysis
of the operational problems and costs (including loss of revenues) that would
be reasonably likely to result from the failure by the Company and certain
third parties to complete efforts necessary to achieve Year 2000 compliance on
a timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company plans to complete such analysis and contingency
planning by December 31, 1999.
The costs of the Company's Year 2000 identification, assessment,
remediation and testing efforts and the date by which the Company believes it
will complete such efforts are based upon management's best estimates, which
are derived utilizing numerous assumptions regarding future events, including
the continued availability of certain resources, third-party remediation plans,
and other factors. However, there can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that might cause such material
differences include but are not limited to the availability and cost of
personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, and
similar uncertainties.
-15-
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a special meeting of shareholders on February 26,
1999. The following are the results of the matter voted upon at the meeting:
With respect to the approval of the amendment of the Company's Amended
and Restated Articles of Incorporation to effect (i) a four-to-one reverse
stock split of the Common Stock in order to maintain the listing of the Common
Stock on the Nasdaq SmallCap Market, and (ii) certain other technical changes,
shares were voted as follows:
<TABLE>
<S> <C>
For.............................................................. 5,571,744
Against.......................................................... 203,496
Abstentions...................................................... 3,700
----------
Total...................................................... 5,778,940
==========
</TABLE>
-16-
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule (1).
(b) Reports on Form 8-K:
None
- -------------------
(1) Included with EDGAR version only.
-17-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
CELEBRITY, INC.
Dated: May 7, 1999 By: /s/ ROBERT H. PATTERSON, JR.
------------------------------------------------
Robert H. Patterson, Jr., Chairman of the Board,
President and Chief Executive Officer
(Authorized Officer)
Dated: May 7, 1999 By: /s/ LYNN SKILLEN
------------------------------------------------
Lynn Skillen, Vice President - Finance
(Principal Financial and Accounting Officer)
</TABLE>
-18-
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule (1)
</TABLE>
- -----------------
(1) Included with EDGAR version only.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 16,672
<ALLOWANCES> (1,372)
<INVENTORY> 19,329
<CURRENT-ASSETS> 38,068
<PP&E> 17,149
<DEPRECIATION> (7,873)
<TOTAL-ASSETS> 48,506
<CURRENT-LIABILITIES> 15,667
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 7,984
<TOTAL-LIABILITY-AND-EQUITY> 48,506
<SALES> 78,872
<TOTAL-REVENUES> 78,872
<CGS> 57,966
<TOTAL-COSTS> 57,966
<OTHER-EXPENSES> (127)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,925
<INCOME-PRETAX> (44)
<INCOME-TAX> 301
<INCOME-CONTINUING> (345)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345)
<EPS-PRIMARY> (.22)<F1>
<EPS-DILUTED> (.22)<F1>
<FN>
<F1>ON FEBRUARY 26, 1999, THE SHAREHOLDERS OF THE COMPANY APPROVED CERTAIN
AMENDMENTS TO THE COMPANY'S AMENDED AND RESTATED ARTICLES OF INCORPORATION
THAT EFFECTED A FOUR-TO-ONE REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK.
THE EFFECTIVE TIME OF THE REVERSE STOCK SPLIT WAS THE END OF BUSINESS ON
FEBRUARY 26, 1999. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED
TO REFLECT THE REVERSE STOCK SPLIT.
</FN>
</TABLE>
