<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 December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File 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 6,176,655 shares of Common Stock, par value $.01 per share,
outstanding as of February 12, 1999.
<PAGE> 2
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
----
<S> <C>
Condensed Consolidated Balance Sheets at
December 31, 1998 and June 30, 1998
(Unaudited) ............................................... 2
Condensed Consolidated Statements of Operations
for the three months ended
December 31, 1998 and 1997 (Unaudited) .................... 3
Condensed Consolidated Statements of Operations
for the six months ended
December 31, 1998 and 1997 (Unaudited) .................... 4
Condensed Consolidated Statements of Cash
Flows for the six months ended
December 31, 1998 and 1997 (Unaudited) .................... 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) .................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................................... 11
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................. 19
SIGNATURES ................................................... 20
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
CELEBRITY, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1998 1998
------------ --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 127
Accounts receivable, net 11,472 14,121
Inventories 22,375 22,766
Other current assets 3,091 3,607
-------- --------
Total current assets 36,938 40,621
Property, plant and equipment, net 9,650 9,788
Other assets 1,218 1,310
-------- --------
Total assets $ 47,806 $ 51,719
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,698 $ 9,466
Accrued expenses and income taxes payable 4,178 3,849
Current portion of notes payable 3,818 3,479
-------- --------
Total current liabilities 15,694 16,794
Notes payable, net of current portion 23,976 26,588
-------- --------
Total liabilities 39,670 43,382
-------- --------
Shareholders' equity:
Common stock 62 63
Paid-in capital 21,494 22,751
Subscriptions receivable -- (570)
Accumulated deficit (13,410) (13,198)
Treasury stock, at cost -- (700)
Cumulative translation adjustment (10) (9)
-------- --------
Total shareholders' equity 8,136 8,337
-------- --------
Commitments and contingencies
Total liabilities and shareholders' equity $ 47,806 $ 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 December 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net Sales $ 25,986 $ 29,854
-------- --------
Costs and operating expenses:
Cost of goods sold 18,903 22,904
Selling expenses 1,384 1,245
General and administrative expenses 4,010 5,370
Depreciation and amortization 416 540
-------- --------
Total expenses 24,713 30,059
-------- --------
Operating income (loss) 1,273 (205)
Interest expense, net (1,021) (910)
Other, net 25 8
-------- --------
Income (loss) before income taxes 277 (1,107)
Provision for income taxes 168 120
-------- --------
Net income (loss) $ 109 $ (1,227)
======== ========
Basic and diluted earnings (loss) per share $ .02 $ (.19)
======== ========
Basic and diluted weighted average
common shares outstanding 6,294 6,310
======== ========
</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>
Six Months
Ended December 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales $ 53,112 $ 60,062
-------- --------
Costs and operating expenses:
Cost of goods sold 39,263 45,573
Selling expenses 2,546 2,592
General and administrative 8,484 10,509
Depreciation and amortization 869 1,057
-------- --------
Total expenses 51,162 59,731
-------- --------
Operating income 1,950 331
Interest expense, net (1,969) (1,715)
Other, net 54 (1)
--------
Income (loss) before income taxes 35 (1,385)
Provision for income taxes 247 285
-------- --------
Net loss $ (212) $ (1,670)
======== ========
Basic and diluted loss per share $ (.03) $ (.26)
======== ========
Basic and dilutive weighted average
common shares outstanding 6,294 6,310
======== ========
</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>
Six Months
Ended December 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Operating activities:
Net loss $ (212) $(1,670)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 869 1,057
Changes in operating assets and liabilities:
Accounts receivable 2,649 (753)
Inventories 391 (300)
Other assets, net 523 1,001
Accounts payable and accrued expenses (1,439) 135
------- -------
Net cash provided by (used in) operating activities 2,781 (800)
------- -------
Investing activities:
Additions to property and equipment (646) (211)
------- -------
Net cash used in investing activities (646) (211)
------- -------
Financing activities:
Net proceeds from (payments on) credit facility (1,000) 559
Proceeds from long-term debt 500 182
Payments on long-term debt (1,773) 0
Other 11 19
------- -------
Net cash provided by (used in) financing activities (2,262) 760
------- -------
Decrease in cash (127) (251)
Cash and cash equivalents at beginning of period 127 530
------- -------
Cash and cash equivalents at end of period $ 0 $ 279
======= =======
</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 good will 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 ("SFAS 109"), Accounting for Income Taxes, which
prescribes an asset and liability method that requires the recognition of
deferred tax assets and liabilities for the anticipated future tax consequences
of temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities. The Company periodically reviews the
realizability of its deferred tax assets and records valuation allowances, as
appropriate, when realization of the deferred tax asset is not likely.
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.
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<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 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 December 31, 1998 was $735,000. The composition of
inventories is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
<S> <C> <C>
Raw materials $ 8,294 $ 8,460
Finished goods 14,081 14,306
------- -------
$22,375 $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
December 31, 1998, $823,000 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
========== ========== ========== =======
</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. CREDIT FACILITY
During the quarter ended December 31, 1998, certain provisions of the
Company's revolving credit facility were amended, including a reduction in the
maximum amount of the facility from $31.5 million to $26.5 million, and a
rescheduling of the maturity date of a $1.0 million seasonal overadvance. The
maturity date of the seasonal overadvance originally provided by the lender in
July 1998 was extended to March 1, 1999, with an amortization period beginning
February 8, 1999. The facility reduction from $31.5 million to $26.5 million was
proposed by the Company to reduce commitment fees and other financing costs. Due
to lower levels of inventory carried by the Company, management concluded it was
unlikely that the higher credit line would be utilized in the near future.
7. CANCELLATION OF CERTAIN COMMON STOCK AND SUBSCRIPTIONS RECEIVABLE
During the quarter ended December 31, 1998, the Board of Directors of
the Company approved the cancellation of (i) certain common stock, par value
$.01 per share, of the Company ("Common Stock") sold to Company employees in
prior years, as well as the related subscriptions receivable, and (ii) all
Common Stock held in treasury.
8. REVERSE STOCK SPLIT
Subsequent to the end of the first quarter of fiscal 1999, on January
29, 1999, the Company filed a definitive proxy statement with the Securities and
Exchange Commission related to a special meeting of its shareholders that is
scheduled to be held February 26, 1999. The record date for the special meeting
was January 25, 1999. The purpose of the special meeting is to request the
shareholders' approval of certain
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<PAGE> 11
amendments to the Company's Articles of Incorporation, the primary one of which
will effect a four-to-one reverse stock split of the Common Stock. The reverse
stock split is being proposed in order to ensure that the minimum $1.00 per
share continued listing requirement for the Common Stock on the Nasdaq SmallCap
Market will be satisfied. On February 8, 1999, the closing price of the Common
Stock on the Nasdaq SmallCap Market was $.75 per share.
-10-
<PAGE> 12
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.
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<PAGE> 13
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 SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------- ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
---- ---- ---- ----
Costs and operating expenses:
Cost of goods sold 73% 77% 74% 76%
Selling expenses 5% 4% 5% 4%
General and administrative expenses 15% 18% 16% 18%
Depreciation and amortization 2% 2% 1% 2%
---- ---- ---- ----
Total expenses 95% 101% 96% 100%
---- ---- ---- ----
Operating income (loss) 5% (1)% 4% 0%
Interest expense, net (4)% (3)% (4)% (3)%
---- ---- ---- ----
Income (loss) before income taxes 1% (4)% 0% (3)%
Provision (benefit) for income taxes 1% 0 % 0% 0%
---- ---- ---- ----
Net income (loss) 0% (4)% 0% (3)%
==== ==== ==== ====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998, COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1997
Net sales decreased 13.0% from $29.9 million in the second quarter of
fiscal 1998 to $26.0 million in the second quarter of fiscal 1999. The sales
decrease was attributable to lower sales in domestic distribution divisions in
the quarter, including lower revenues resulting from the Company's decision in
June 1998 to exit the India Exotics business. Operations in Hong Kong generated
sales increases for the quarter, as the shortage of shipping containers in the
Far East that affected first quarter fiscal 1999 sales was remedied in the
second quarter of fiscal 1999.
Cost of goods sold decreased 17.5% from $22.9 million in the second
quarter of fiscal 1998 to $18.9 million in the second quarter of fiscal 1999.
The decrease was primarily attributable to the lower sales volume in the second
quarter of fiscal 1999. Cost of goods sold as a percentage of net sales was 73%
in the second quarter of fiscal 1999, compared with 77% in the prior year. The
lower cost of goods sold 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.
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<PAGE> 14
Selling expenses increased from $1.2 million in the second quarter of
fiscal 1998 to $1.4 million in the second quarter of fiscal 1999. Selling
expenses as a percentage of net sales were 5% in the second quarter of fiscal
1999, compared with 4% in the prior year. This increase in selling expenses was
primarily attributable to the opening of a new showroom in Dallas, Texas.
General and administrative expenses of $4.0 million in the second
quarter of fiscal 1999 decreased $1.4 million, or 25%, from $5.4 million in the
second quarter of fiscal 1998. The decrease is attributable to expense
reductions implemented in the fourth quarter of fiscal 1998. A substantial
component of the decrease resulted from the closing of the St. Louis, Missouri
facility associated with the exit from the India Exotics business. As a
percentage of net sales, general and administrative expenses declined to 15% of
net sales in the second quarter of fiscal 1999, compared with 18% in the second
quarter of fiscal 1998.
Depreciation and amortization expenses of $416,000 in the second
quarter of fiscal 1999 decreased from $540,000 in the second 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.
SIX MONTHS ENDED DECEMBER 31, 1998, COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 1997
Net sales decreased 11.6% from $60.1 million in fiscal 1998 to $53.1
million in fiscal 1999. The decrease was attributable to lower sales in domestic
distribution divisions, including lower revenues resulting from the Company's
decision in June 1998 to exit the India Exotics business.
Cost of goods sold decreased from $45.6 million in fiscal 1998 to $39.3
million in fiscal 1999. The decrease was primarily attributable to the lower
sales volume in fiscal 1999. Cost of goods sold as a percentage of net sales
decreased from 76% in fiscal 1998 to 74% in fiscal 1999. The lower cost of goods
sold percentage in fiscal 1999 was attributable to expense reductions
implemented in June 1998 and a mix of higher margin products sold in fiscal
1999, primarily resulting from the Company's decision to exit the India Exotics
business in June 1998. A substantial component of the decrease resulted from the
closing of the St. Louis, Missouri facility associated with the exit from the
India Exotics business.
Selling expenses of $2.5 million in fiscal 1999 decreased from $2.6
million in fiscal 1998. Selling expenses as a percentage of net sales increased
from 4% in fiscal 1998 to 5% in fiscal 1999.
General and administrative expenses decreased from $10.5 million, or
18% of net sales, in fiscal 1998, to $8.5 million, or 16% of net sales, in
fiscal 1999. The decrease is attributable to expense reductions implemented in
the fourth quarter of fiscal 1998. A substantial component of the decrease
resulted from the closing of the St. Louis, Missouri facility associated with
the exit from the India Exotics business.
Depreciation and amortization expenses decreased from $1.1 million in
fiscal 1998 to $869,000 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 borrowings under its revolving credit facility and
cash flows from operations to fund these and other working capital needs.
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<PAGE> 15
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 December 31,
1998, was $21.0 million, and the amount outstanding under the revolving credit
facility was $19.6 million. On July 7, 1998 the Company received a $1.0 million
seasonal overadvance under its revolving credit facility. The seasonal
overadvance is scheduled to begin amortization on February 8, 1999, with the
overadvance period scheduled to expire on March 1, 1999. 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 December 31, 1998.
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 December 31, 1998, an aggregate of $3.8 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 December 31, 1998, the
outstanding balance under the facility was approximately $4.5 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
has 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
-14-
<PAGE> 16
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 and is expected to be repaid after March 1, 1999.
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 People's Republic of China ("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 December 31, 1998, it had completed approximately 90% of the
initiatives that it believes will be necessary to fully address potential Year
2000 issues related to its computer equipment and software.
-15-
<PAGE> 17
The projects comprising the remaining 10% of the initiatives are in process and
are expected to be completed by December 31, 1999.
<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 December 31, 1998, 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
-16-
<PAGE> 18
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.
-17-
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of shareholders on November 16,
1998. The following are the results of the matters voted upon at the meeting:
(a) With respect to the election of directors whose terms will expire
in 1999, shares were voted as follows:
<TABLE>
<CAPTION>
Robert H. Richard B.D. C.A. Valerie Anne
Patterson, Jr. Yuen Hunter Langner Mars
<S> <C> <C> <C> <C> <C>
For 3,583,658 3,583,858 3,583,858 3,583,858 3,583,858
Withheld 72,310 72,110 72,110 72,110 72,110
--------- --------- --------- --------- ---------
Total 3,655,968 3,655,968 3,655,968 3,655,968 3,655,968
========= ========= ========= ========= =========
</TABLE>
(b) With respect to the approval of the amendment of the Company's
Amended and Restated 1992 Stock Option Plan to increase the number of shares of
Common Stock authorized for issuance thereunder from 500,000 to 1,000,000,
shares were voted as follows:
<TABLE>
<S> <C>
For .................. 3,456,742
Against .............. 193,026
Abstentions .......... 6,200
---------
Total .............. 3,655,968
=========
</TABLE>
(c) With respect to the ratification of the selection of
PricewaterhouseCoopers LLP as the Company's independent auditors for the 1999
fiscal year, shares were voted as follows:
<TABLE>
<S> <C>
For .................. 3,642,268
Against .............. 8,400
Abstentions .......... 5,300
---------
Total .............. 3,655,968
=========
</TABLE>
-18-
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Amendment Number Three to Loan and Security Agreement dated
effective as of December 31, 1998 by and among Foothill
Capital Corporation and Registrant and certain of its
subsidiaries (1).
27 Financial Data Schedule (2).
(b) Reports on Form 8-K:
None.
- -------------------
(1) Filed herewith.
(2) Included with EDGAR version only.
-19-
<PAGE> 21
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.
CELEBRITY, INC.
Dated: February 12, 1999 By: /s/ ROBERT H. PATTERSON, JR.
-----------------------------------------------
Robert H. Patterson, Jr., Chairman of the Board,
President and Chief Executive Officer
(Authorized Officer)
Dated: February 12, 1999 By: /s/ LYNN SKILLEN
-----------------------------------------------
Lynn Skillen
Vice President - Finance
(Principal Financial and Accounting Officer)
-20-
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.1 Amendment Number Three to Loan and Security Agreement dated
effective as of December 31, 1998 by and among Foothill
Capital Corporation and Registrant and certain of its
subsidiaries (1).
27 Financial Data Schedule (2).
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NUMBER THREE TO LOAN AND SECURITY AGREEMENT
This Amendment Number Three to Loan and Security Agreement
("Amendment") is entered into as of December 31, 1998, by and between FOOT
CAPITAL CORPORATION, a California corporation ("Foothill"), and CELEBRITY, INC.,
a Texas corporation, and certain of its subsidiaries (collectively, the
"Borrowers"), in light of the following:
FACT ONE: Borrowers and Foothill have previously entered into that
certain Loan and Security Agreement, dated as of January 30, 1998, as amended by
Amendment Number One to Loan and Security Agreement, dated as of June 5, 1998,
Amendment Number Two to Loan and Security Agreement, dated as of July 7, 1998,
and an amendment waiver letter, dated as of November 9, 1998 (the "Agreement").
FACT TWO: Borrowers and Foothill desire to amend the Agreement provided
for and on the conditions herein.
NOW, THEREFORE, Borrowers and Foothill hereby amend and supplement the
Agreement as follows:
1. DEFINITIONS. All initially capitalized terms used in this
Amendment shall have the meanings given to them in the Agreement unless
specifically defined herein.
2. AMENDMENTS.
2.1 Section 1.1 of the Agreement is hereby amended by adding
following new definitions thereto:
"Bridge Limit" means the following amounts during the following
periods:
<TABLE>
<CAPTION>
Period Bridge Limit
------ ------------
<S> <C>
July 7, 1998 through
February 7, 1999 $ 1,000,000
February 8, 1999 through
February 14, 1999 $ 750,000
February 15, 1999 through
February 21, 1999 $ 500,000
February 22, 1999 through
February 28, 1999 $ 250,000
March 1, 1999 and thereafter $ -0-
</TABLE>
<PAGE> 2
provided, however, that on the consummation of the Permitted
Sale/Leaseback, irrespective of whether that occurs prior to March 1,
1999 the Bridge Limit shall be $0.
"Bridge Period" means the period of time commencing on June 15,
1998 and ending on the earlier to occur of (a) February 28, 1999, and
(b) the consummation of the Permitted Sale/Leaseback.
2.2 Section 1.1 of the Agreement is hereby amended by
deleting definition of "Maximum Amount" therefrom.
2.3 Section 1.1 of the Agreement is hereby amended by
amending the definition of "Maximum Revolving Amount" to read as follows:
"Maximum Revolving Amount" means $26,500,000.
2.4 Section 1.1 of the Agreement is hereby amended by
amending the definition of "OLV Multiplier" to read as follows:
"OLV Multiplier" means the following numbers for
following periods:
<TABLE>
<CAPTION>
Period Multiplier
------ ----------
<S> <C>
01/30/98 - 08/31/98 1.00
09/01/98 - 11/30/98 0.98
12/01/98 - 02/28/99 0.96
03/01/99 - 03/31/99 0.95
04/01/99 - 04/30/99 0.935
05/01/99 - 05/31/99 0.92
06/01/99 - 06/30/99 0.905
07/01/99 - 01/31/99 0.89
08/01/99 - 08/31/99 0.875
09/01/99 - 09/30/99 0.86
10/01/99 - 10/31/99 0.845
11/01/99 - 11/30/99 0.83
12/01/99 - 12/31/99 0.815
01/01/00 and thereafter 0.80
</TABLE>
2.5 Section 7.20 (d) of the Agreement is hereby amended by
changing the Minimum EBITDA for December 31, 1998 from, $1,100,000 to $800,000
3. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby affirms to
Foothill that all of such Borrower's representations and warranties set forth in
the Agreement are true, complete and accurate in all respects as of the date
hereof.
-2-
<PAGE> 3
4. NO DEFAULTS. Each Borrower hereby affirms to Foothill that no
Event of Default has occurred and is continuing as of the date hereof.
5. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the receipt by Foothill of:
(a) executed copy of this Amendment;
(b) a restructuring fee of $50,000.
6. COSTS AND EXPENSES. Borrowers shall pay to Foothill all of
Foothill's out-of-pocket costs and expenses (including, without limitation, the
fees and expenses of its counsel, which counsel may include any local counsel
deemed necessary, search fees, filing and recording fees, documentation fees,
appraisal fees, travel expenses, and other fees) arising in connection with the
preparation, execution, and delivery of this Amendment and related documents.
7. LIMITED EFFECT. In the event of a conflict between the terms
provisions of this Amendment and the terms and provisions of the Agreement, the
terms and provisions of this Amendment shall govern. In all other respects, the
Agreement as amended and supplemented hereby, shall remain in full force and
effect.
8. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in
any number of counterparts and by different parties on separate counterparts,
each of which when so executed and delivered shall be deemed to be an original.
All counterparts, taken together, shall constitute but one and the same
Amendment. This Amendment shall become effective upon, the execution of a
counterpart of this Amendment by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
FOOTHILL CAMAL CORPORATION,
a California corporation
By: /s/ KEVIN M. COYLE
-------------------------------------------
Title: Vice President
----------------------------------------
CELEBRITY, INC.,
a Texas corporation
By: /s/ LYNN SKILLEN
-------------------------------------------
Title: Vice President & Chief Financial Officer
----------------------------------------
-3-
<PAGE> 4
THE CLUETT CORPORATION,
a California corporation
By: /s/ LYNN SKILLEN
-------------------------------------------
Title: Vice President
----------------------------------------
STAR WHOLESALE FLORIST, INC.,
a Texas corporation
By: /s/ LYNN SKILLEN
-------------------------------------------
Title: Vice President
----------------------------------------
INDIA EXOTICS, INC.,
a Texas corporation
By: /s/ LYNN SKILLEN
-------------------------------------------
Title: Vice President
----------------------------------------
VALUE FLORIST SUPPLIES, INC.,
a Texas corporation
By: /s/ LYNN SKILLEN
-------------------------------------------
Title: Vice President
----------------------------------------
-4-
<PAGE> 5
The undersigned has executed a Continuing Guaranty in favor of Foothill
Capital Corporation ("Foothill") respecting the obligations of the
above-referenced Borrower owing to Foothill. The undersigned acknowledges the
terms of the above Amendment reaffirms and agrees that: its Continuing Guaranty
remain in full force and effect; nothing, such Continuing Guaranty obligates
Foothill to notify the undersigned of any changes in financial accommodations
made available to the Borrowers or to seek reaffirmations of Continuing
Guaranty; and no requirement to so notify the undersigned or to, seek
reaffirmations in the future shall be implied by the execution of this
reaffirmation.
MAGICSILK, INC.,
a Texas corporation
By: /s/ LYNN SKILLEN
-------------------------------------------
Name: Lynn Skillen
-----------------------------------------
Title: Vice President
----------------------------------------
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 11,472
<ALLOWANCES> 0
<INVENTORY> 22,375
<CURRENT-ASSETS> 36,938
<PP&E> 9,650
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,806
<CURRENT-LIABILITIES> 15,694
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 8,074
<TOTAL-LIABILITY-AND-EQUITY> 47,806
<SALES> 53,112
<TOTAL-REVENUES> 53,112
<CGS> 39,263
<TOTAL-COSTS> 39,263
<OTHER-EXPENSES> (54)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,969
<INCOME-PRETAX> 35
<INCOME-TAX> 247
<INCOME-CONTINUING> (212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (212)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
