<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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File 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 November 3, 1999.
<PAGE> 2
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
ITEM 1. FINANCIAL STATEMENTS ----
<S> <C> <C> <C>
Condensed Consolidated Balance Sheets at September 30, 1999 and June 30, 1999
(Unaudited)...............................................................................2
Condensed Consolidated Statements of Operations for the three months ended
September 30, 1999 and 1998 (Unaudited)...................................................3
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 1999 and 1998 (Unaudited)...................................................4
Notes to Condensed Consolidated Financial Statements (Unaudited).........................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................6
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................................................11
SIGNATURES..............................................................................................12
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
CELEBRITY, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------ --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 96 $ 558
Accounts receivable, net 12,998 13,157
Inventories 22,963 18,847
Other current assets 2,615 2,752
-------- --------
Total current assets 38,672 35,314
Property, plant and equipment, net 9,184 9,479
Other assets 1,590 1,478
-------- --------
Total assets $ 49,446 $ 46,271
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,491 $ 6,800
Accrued expenses 2,746 2,270
Current portion of long-term obligations 336 1,200
-------- --------
Total current liabilities 10,573 10,270
Long-term obligations, net of current portion 29,598 27,083
-------- --------
Total liabilities 40,171 37,353
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock 15 15
Paid-in capital 21,577 21,577
Accumulated deficit (12,255) (12,640)
Accumulated other comprehensive loss (62) (34)
-------- --------
Total shareholders' equity 9,275 8,918
-------- --------
Total liabilities and shareholders' equity $ 49,446 $ 46,271
======== ========
</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 September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Net Sales $ 26,823 $ 27,126
-------- --------
Costs and operating expenses:
Cost of goods sold 19,889 20,360
Selling expenses 974 1,162
General and administrative expenses 4,219 4,434
Depreciation and amortization 365 412
-------- --------
Total expenses 25,447 26,368
-------- --------
Operating income 1,376 758
Interest expense, net (813) (948)
Other, net 16 29
-------- --------
Income (loss) before income taxes 579 (161)
Provision for income taxes 194 79
-------- --------
Net income (loss) $ 385 $ (240)
-------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (28) (3)
-------- --------
Other comprehensive income (loss), net of tax 357 (243)
======== ========
Basic and diluted income (loss) per share $ .25 $ (.15)
======== ========
Basic weighted average common shares outstanding 1,544 1,573
======== ========
Diluted weighted average common shares outstanding 1,559 1,573
======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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<PAGE> 5
CELEBRITY, INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
1999 1998
------- -------
<S> <C> <C>
Operating activities:
Net income (loss) $ 385 $ (240)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 365 412
Changes in operating assets and liabilities:
Accounts receivable 159 (1,309)
Inventories (4,116) 1,505
Other assets, net (17) 691
Accounts payable and accrued expenses 1,167 (973)
------- -------
Net cash provided by (used in) operating activities (2,057) 86
------- -------
Investing activities:
Additions to property and equipment (28) (493)
------- -------
Net cash used in investing activities (28) (493)
------- -------
Financing activities:
Net proceeds from credit facility 2,514 679
Proceeds from long-term obligations -- 500
Payments on long-term obligations (863) (901)
Other (28) 2
------- -------
Net cash provided by financing activities 1,623 280
------- -------
Decrease in cash (462) (127)
Cash and cash equivalents at beginning of period 558 127
------- -------
Cash and cash equivalents at end of period $ 96 $ --
======= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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<PAGE> 6
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 over 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.
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"), and Star
Wholesale Florist, Inc. ("Star Wholesale"). 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, 1999.
2. 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 markdown required to value those products at fair market value. The
composition of inventories is as follows (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------ --------
<S> <C> <C>
Raw materials $ 7,856 $ 6,663
Finished goods 15,720 13,026
Less: Inventory reserves (613) (842)
-------- --------
$ 22,963 $ 18,847
======== ========
</TABLE>
3. EARNINGS (LOSS) PER SHARE
The Company calculates earnings (loss) per share pursuant to Statement
of Financial Accounting Standards No. 128, Earnings per Share. Basic earnings
(loss) per share are computed by dividing net income (loss) by the weighted
average number of common shares outstanding. Diluted earnings (loss) per share
are computed by dividing net income (loss) by the weighted average number of
common shares and dilutive potential common shares outstanding.
For the quarter ended September 30, 1999, common share equivalents
related to shares issuable upon the exercise of stock options approximated
14,607 shares. Options to purchase 149,725 shares of Common Stock and a warrant
to purchase 25,000 shares of Common Stock were excluded from the diluted
earnings per share calculation because their exercise prices were greater than
the average market price of the Common Stock. Outstanding options and warrants
were excluded from the diluted loss per share calculations for the quarter
ended September 30, 1998 because their inclusion would be antidilutive due to
the net losses incurred for the period.
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<PAGE> 7
4. CREDIT FACILITY
In July 1999, the Company entered into an amended and restated
agreement with its primary lender whereby the following changes, among others,
were made to the Company's credit facility: (i) the term of the revolving credit
facility was extended from January 2001 to July 2002, (ii) the interest rate
charged by the lender was reduced to prime plus applicable percentages, ranging
from 0% to 0.5%, based on specified EBITDA requirements, (iii) the financial
ratio covenants were reset, and (iv) the monthly fees were reduced from $15,000
to $2,000.
Subsequent to the quarter ended September 30, 1999, on October 28,
1999, the Company and its lender amended the Company's credit facility to
provide a $1.5 million seasonal bridge advance. The initial term of the bridge
advance is 90 days and the advance bears interest at 12.5% per annum. The
purpose of the advance was to fund seasonal inventory increases. The bridge
advance was guaranteed by RHP Management LLC (an entity controlled by Robert H.
Patterson, Jr., the Company's Chairman and Chief Executive Officer), and RHP
Management LLC also provided a letter of credit to the lender as additional
security in the amount of $375,000.
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 other 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> 8
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
ENDED
SEPTEMBER 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Net sales 100% 100%
---- ----
Costs and operating expenses:
Cost of goods sold 74% 75%
Selling expenses 4% 4%
General and administrative expenses 16% 16%
Depreciation and amortization 1% 2%
---- ----
Total expenses 95% 97%
---- ----
Operating income 5% 3%
Interest expense, net (3)% (4)%
---- ----
Income (loss) before income taxes 2% (1)%
Provision for income taxes 1% --
---- ----
Net income (loss) 1% (1)%
==== ====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales decreased 1.1% from $27.1 million in the first quarter of
fiscal 1999 to $26.8 million in the first quarter of fiscal 2000. Sales in the
Company's domestic distribution business were lower in the first quarter of
fiscal 2000, due in part to the bankruptcy in fiscal 1999 of a customer. The
lower domestic sales were partially offset by higher shipments and revenues in
the Company's Hong Kong subsidiary. Shipments last year were affected by a
shortage of shipping containers, which delayed revenues from the first quarter
to the second quarter in the prior year. This year the Company was able to
maintain a more orderly flow of shipments because of the increased availability
of shipping containers.
Cost of goods sold decreased 2.3% from $20.4 million in the first
quarter of fiscal 1999 to $19.9 million in the first quarter of fiscal 2000. The
decrease was attributable to the lower sales volume and an improved product mix
in the first quarter of fiscal 2000. Cost of goods sold as a percentage of net
sales was 74% in the first quarter of fiscal 2000, compared with 75% in the
prior year.
Selling expenses decreased from $1.2 million in the first quarter of
fiscal 1999 to $1.0 million in the first quarter of fiscal 2000. Selling
expenses as a percentage of net sales were 4% for both periods.
General and administrative expenses decreased from $4.4 million in the
first quarter of fiscal 1999 to $4.2 million in the first quarter of fiscal
2000. General and administrative expenses as a percentage of net sales were 16%
for both periods.
Depreciation and amortization expense of $365,000 in the first quarter
of fiscal 2000 decreased from $412,000 in the first quarter of fiscal 1999. The
decrease was primarily attributable to assets becoming fully depreciated during
the interim periods.
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<PAGE> 9
Interest expense of $813,000 in the first quarter of fiscal 2000
decreased from $948,000 in the first quarter of fiscal 1999. Interest expense as
a percentage of net sales was 3% in the first quarter of fiscal 2000, compared
with 4% in the prior year. The reduction in interest expense is primarily
attributable to new terms on the Company's primary credit facility, which were
effective July 15, 1999.
Provision for income taxes of $194,000 in the first quarter of fiscal
2000 increased from $79,000 in the first quarter of fiscal 1999. The tax
provision recognized in both periods was principally related to foreign
operations and the increase in the provision was related to increased income
from foreign operations.
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.
The Company maintains a revolving credit facility for its Celebrity,
Cluett, Color Concepts, Star Wholesale and Value Florist operations. Borrowing
limits under the revolving credit facility are based on specified percentages of
eligible accounts receivable and inventories. As a result of such limits, the
maximum amount the Company was eligible to borrow at September 30, 1999, was
$22.7 million, and the amount outstanding under the revolving credit facility
was $22.2 million. In addition to the revolving credit facility, the lender made
a term loan to the Company in the original principal amount of $3.5 million. The
term loan was payable in monthly installments of principal of $200,000 that
began May 1, 1998. Interest on the outstanding balance under the revolving
credit facility was at a reference bank's prime rate of interest plus .25% per
annum, and interest on the outstanding balance of the term loan was at a rate of
12.5% per annum. Amounts borrowed under the revolving credit facility and term
loan are secured by accounts receivable, inventory, equipment, and general
intangibles (including intellectual property) of Celebrity and its subsidiary
borrowers. In addition, substantially all stock of the Company's subsidiaries
has been pledged to the lender. The revolving credit facility and the term loan
contain covenants limiting the incurrence of indebtedness, prohibiting the
payment of dividends and requiring the Company to maintain certain financial
ratios. The Company was in compliance with all covenants of the revolving credit
facility and the term loan at September 30, 1999. In July 1999, the Company
entered into an amended and restated agreement with the lender whereby the
following changes, among others, were made: (i) the term of the revolving credit
facility was extended from January 2001 to July 2002, (ii) the interest rate
charged by the lender was reduced to prime plus applicable percentages, ranging
from 0% to 0.5%, based on specified EBITDA requirements, (iii) the financial
ratio covenants were reset and (iv) monthly fees were reduced from $15,000 to
$2,000.
Subsequent to the quarter ended September 30, 1999, on October 28,
1999, the Company and its lender amended the Company's credit facility to
provide a $1.5 million seasonal bridge advance. The initial term of the bridge
advance is 90 days and the advance bears interest at 12.5% per annum. The
purpose of the advance was to fund seasonal inventory increases. The bridge
advance was guaranteed by RHP Management LLC, an entity controlled by Robert H.
Patterson, Jr., the Company's Chairman and CEO ("RHP"), and RHP also provided a
letter of credit to the lender as additional security in the amount of $375,000.
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 September 30, 1999, an aggregate of $4.1 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 was scheduled to mature in June 2004. Amounts
borrowed under the facility were secured by certain real estate owned by the
Company, with interest accruing at the rate of LIBOR plus 2.65% per annum. In
April 1999 the Company executed the necessary documents to sell the real estate
that secured the revolving credit facility to Crest Properties, Ltd., a Texas
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<PAGE> 10
limited partnership ("Crest") (an entity controlled by Robert H. Patterson, Jr.,
Chairman of the Board, President and Chief Executive Officer of the Company),
for $7,500,000. As part of the same transaction, the properties were leased back
to the Company. The same lender provided similar financing for Crest, requiring
the guarantee of the Company and Mr. Patterson. Due to the continuing
involvement of the Company in the financing and the related party control of
Crest, the sale-leaseback was accounted for as a financing lease, by recording
the sales proceeds as a liability and recording future rental payments,
exclusive of an interest portion, as a reduction of the liability in accordance
with Statement of Financial Accounting Standard No. 98, Accounting for Leases.
In September 1997, the Company borrowed $500,000 from RHP. The
principal amount outstanding accrued interest at a fluctuating rate per annum
equal to RHP's cost of borrowing, which was the prime rate of a reference bank
plus 1.5% per annum. 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. In April 1999, a portion of the
proceeds from the sale-leaseback transaction was utilized to pay the principal
and accrued interest due RHP.
The Company does not plan to make any significant capital expenditures
in fiscal 2000 other than those incurred in the normal course of business for
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 normal trading relations status for the
PRC or impose punitive tariff rates on products imported by the Company in
retaliation for market access barriers in the PRC, the duty on products imported
by the Company from the PRC would increase significantly. If the Company were to
face an increase in product cost from any of these factors, it would (i) attempt
to increase the prices charged to its customers, (ii) ask its suppliers to
reduce the prices charged to the Company and (iii) seek to identify more
favorable sources; however, unless and until these efforts were successful, the
Company's results of operations could be affected adversely.
The Company believes that its current financial position, credit
facilities and cash flows from operations will be adequate to fund its
operations and expansion plans for the foreseeable future. There is no
assurance, however, that these sources will be sufficient to fund its operations
or that any necessary additional financing will be available, if at all, in
amounts required or on terms satisfactory to the Company.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. The
Company's computer equipment and software and devices with embedded technology
that are time-sensitive may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations,
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company has undertaken various initiatives intended to ensure that
the computer equipment and software used by the Company will function properly
with respect to dates in the Year 2000 and thereafter. For this purpose, the
term "computer equipment and software" includes systems thought of as
information technology ("IT") systems, including accounting, data processing and
telephone/PBX systems and other miscellaneous systems that may contain embedded
technology, as well as systems that are not commonly thought of as IT systems,
such as materials handling systems, alarm systems, fax machines or other
miscellaneous systems that may contain embedded technology. Based upon its
identification and assessment efforts to date, the Company believes that certain
of the computer equipment and software systems it currently uses will require
replacement or modification. In addition, in the ordinary course of replacing
computer equipment and software, the Company attempts to obtain replacements
that are Year 2000 compliant. Utilizing both internal and external resources to
identify and assess needed Year 2000 remediation, the Company currently
anticipates that its Year 2000 identification, assessment, remediation and
testing efforts, which began in April 1997, will be completed by December 31,
1999, and that such efforts will be completed prior to any currently anticipated
impact on its computer equipment and software systems. The Company estimates
that as of September 30, 1999, it had completed approximately 95% of the
initiatives it believes will be necessary to fully address potential Year
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<PAGE> 11
2000 issues related to its computer equipment and software. The projects
comprising the remaining 5% of the initiatives are in process and are expected
to be completed by December 31, 1999.
<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 distribution systems June 1998 to June 1999 100
Identification and assessment of non-IT systems June 1998 to December 1999 75
Remediation and testing of non-IT systems January 1998 to December 1999 75
Remediation and testing of Star Wholesale POS system June 1999 to December 1999 75
</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. With respect to the Company's customers, the
Company's customers are predominantly large sophisticated retailers. If any of
these customers were not Year 2000 compliant by the end of 1999 and could not
buy products from the Company, it could have a material adverse effect on the
Company's results of operations. However, based on the size and sophistication
of the Company's primary customers, the Company's management anticipates that
these companies will have adequately addressed Year 2000 issues by December
1999.
The Company believes that the costs to modify its computer equipment
and software systems to be Year 2000 compliant, as well as the currently
anticipated costs with respect to Year 2000 issues of third parties, will not
exceed $250,000, which expenditures will be funded from operating cash flows.
All of the $250,000 relates to analysis, repair or replacement of existing
software, upgrades of existing software or evaluation of information received
from significant suppliers or customers. Such amount represents approximately
50% of the Company's total actual and anticipated IT expenditures for fiscal
1998, 1999 and 2000. As of September 30, 1999, the Company had incurred costs of
approximately $149,000 related to its Year 2000 identification, assessment,
remediation and testing efforts. Other non-Year 2000 IT efforts have not been
materially delayed or affected by Year 2000 initiatives. However, if all Year
2000 issues are not properly identified, or assessment, remediation and testing
are not effected timely, there can be no assurance that the Year 2000 issue will
not have a material adverse effect on the Company's results of operations, or
adversely affect the Company's relationships with customers, suppliers or
others. Additionally, there can be no assurance that the Year 2000 issues of
other entities will not have a material adverse effect on the Company's systems
or results of operations.
The foregoing timetable and assessment of costs to become Year 2000
compliant reflect management's best estimates. These estimates are based on many
assumptions, including assumptions about the cost, availability and ability of
resources to locate, remediate and modify affected systems, equipment and
facilities. Based upon its activities to date, the Company does not believe that
these factors will cause results to differ significantly from those estimated.
However, the Company cannot reasonably estimate the potential impact on its
financial condition and results of operations if key third parties, including
among others suppliers, contractors, financial institutions, customers and
governments, do not become Year 2000 compliant on a timely basis. The Company is
currently identifying third parties whose business significantly affects the
Company, has contacted some significant third parties to determine the extent to
which interfaces with such entities are vulnerable to Year 2000 issues, and will
contact others as it completes the identification phase.
In the event the Company is unable to complete the remediation or
replacement of its critical systems, facilities and equipment, establish
alternative procedures in a timely manner, or if those with whom the Company
conducts business are unsuccessful in implementing timely Year 2000 solutions,
Year 2000 issues could have a material adverse effect on the Company's liquidity
and results of operations. At this time, the potential effects in the event the
Company and/or third parties are unable to timely resolve their Year 2000
problems is not determinable. A contingency plan has not been developed for
dealing with the most reasonably likely worst case scenario, and such scenario
has not yet been clearly identified. However, the Company currently believes
that it will be able to resolve its own Year 2000 issues in a timely manner.
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<PAGE> 12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<S> <C>
10.1 Amendment Number One to Amended and Restated Loan and Security
Agreement dated October 28, 1999, by and among Foothill
Capital Corporation and Registrant and certain of its
subsidiaries.
27 Financial Data Schedule (1).
</TABLE>
(b) Reports on Form 8-K:
None
- -------------------
(1) Included with EDGAR version only.
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<PAGE> 13
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: November 5, 1999 By: /s/ ROBERT H. PATTERSON, JR.
------------------------------------------------
Robert H. Patterson, Jr., Chairman of the Board,
President and Chief Executive Officer
(Authorized Officer)
Dated: November 5, 1999 By: /s/ LYNN SKILLEN
------------------------------------------------
Lynn Skillen, Vice President - Finance
(Principal Financial and Accounting Officer)
-12-
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 Amendment Number One to Amended and Restated Loan and Security
Agreement dated October 28, 1999, by and among Foothill
Capital Corporation and Registrant and certain of its
subsidiaries.
27 Financial Data Schedule (1).
</TABLE>
- --------------
(1) Included with EDGAR version only.
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NUMBER ONE TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Amendment Number One to Amended and Restated Loan and Security
Agreement ("Amendment") is entered into as of October 28, 1999, by and between
FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), and
CELEBRITY, INC., a Texas corporation, THE CLUETT CORPORATION, a California
corporation, INDIA EXOTICS, INC., a Texas corporation, VALUE FLORIST SUPPLIES,
INC., a Texas corporation and STAR WHOLESALE FLORIST, INC., a Texas corporation
(collectively "Borrowers"), in light of the following:
FACT ONE: Borrowers and Foothill have previously entered into that certain
Amended and Restated Loan and Security Agreement, dated as of July 15, 1999 (the
"Agreement").
FACT TWO: Borrowers and Foothill desire to amend the Agreement as 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.
(a) Section 1.1 of the Agreement is hereby amended by adding the
following definitions:
"Bridge Advances" means that part of the Borrowing Base set
forth in Section 2.1(a)(v).
"Bridge Limit" means $1,500,000.
"Bridge Period" means the period beginning on October 28, 1999
through and including January 28, 2000.
(b) The definition of "Guaranty" contained in Section 1.1 of the
Agreement is hereby amended in its entirety to read as follows:
"Guaranty" means both that certain Continuing Guaranty dated
as of January 30, 1998, by Magicsilk in favor of Foothill and that
certain Continuing Guaranty dated as of October 28, 1999, by RHP
Management, LLC, a Texas limited liability company in favor of
Foothill.
1
<PAGE> 2
(c) Section 2.1(a) of the Agreement is hereby amended by adding
the following subsection (v) before subsection (w):
"(v) up to the Bridge Limit; provided however, that
Advances will only be made under this clause (v) during the Bridge
Period, plus"
(d) Section 2.6(a) of the Agreement is hereby amended in its
entirety to read as follows:
"(a) Interest Rate. Except as provided in clause (c)
below, (i) all Obligations (except for undrawn Letters of Credit, the
Seasonal Borrowing Facility, and the Bridge Advances) shall bear
interest on the Daily Balance at a per annum rate equal to the
Applicable Margin plus the Reference Rate, (ii) the Seasonal Borrowing
Facility Advances shall bear interest at a per annum rate of 1.00%
above the Reference Rate, and (iii) the Bridge Advances shall bear
interest at a per annum rate of 12.5%."
(e) Section 2.6(c) of the Agreement is hereby amended in its
entirety to read as follows:
"(c) Default Rate. Upon the occurrence and during the
continuation of an Event of Default, (i) all Obligations (except for
undrawn Letters of Credit and Bridge Advances) shall bear interest on
the Daily Balance at a per annum rate equal to 4.5 percentage points
above the Reference Rate, (ii) the Letter of Credit fee provided in
Section 2.6(b) shall be increased to 4.5% per annum times the aggregate
undrawn amount of all Letters of Credit outstanding as of the end of
each day, and (iii) the Bridge Advances shall bear interest on the
Daily Balance at a per annum rate equal to 15.5%."
3. REPRESENTATIONS AND WARRANTIES. Borrowers hereby affirm to
Foothill that all of Borrowers' representations and warranties set forth in the
Agreement are true, complete and accurate in all respects as of the date hereof.
4. NO DEFAULTS. Borrowers hereby affirm 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 following:
(a) Payment by Borrowers to Foothill of an
amendment fee in the aggregate amount of $25,000, such fee to be charged to
Borrowers' loan account pursuant to Section 2.6(e) of the Agreement;
(b) Receipt by Foothill of an executed copy of
this Amendment;
2
<PAGE> 3
(c) Receipt by Foothill of a Continuing Guaranty (the "Guaranty"),
duly executed by RHP MANAGEMENT, LLC ("RHP") in favor of Foothill;
(d) Receipt by Foothill of a letter of credit in favor of Foothill
as beneficiary in the face amount of $375,000, in form acceptable to Foothill in
its sole discretion, issued by a financial institution acceptable to Foothill in
its sole discretion;
(e) Receipt by Foothill of (i) a duly executed Assistant
Secretary's Certificate of RHP and (ii) Certified Resolutions of RHP authorizing
the arrangement of the RHP Letter of Credit and the delivery of the Guaranty to
Foothill; and
(f) Receipt by foothill of an opinion letter, in form and
substance acceptable to Foothill, from Borrowers' counsel.
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 all related
documents.
7. LIMITED EFFECT. In the event of a conflict between the terms and
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.
3
<PAGE> 4
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 such 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 CAPITAL CORPORATION,
a California corporation
By: /s/ KEVIN M. COYLE
--------------------------------------
Title: Senior Vice President
--------------------------------
CELEBRITY, INC.,
a Texas corporation
By: /s/ LYNN SKILLEN
---------------------------------------
Title: VP
---------------------------------
THE CLUETT CORPORATION,
a California corporation
By: /s/ LYNN SKILLEN
---------------------------------------
Title: VP
--------------------------------
INDIA EXOTICS, INC.,
a Texas corporation
By /s/ LYNN SKILLEN
---------------------------------------
Title: VP
--------------------------------
VALUE FLORIST, INC.,
a Texas corporation
By: /s/ LYNN SKILLEN
-------------------------------------
Title: VP
-------------------------------------
STAR WHOLESALE FLORIST, INC.,
a Texas corporation
By: /s/ LYNN SKILLEN
------------------------------------
Title: VP
------------------------------
4
<PAGE> 5
REAFFIRMATION OF GUARANTY
The undersigned has executed a Continuing Guaranty (the "Guaranty") in
favor of Foothill Capital Corporation, a California corporation ("Foothill")
respecting the obligations of Celebrity, Inc., a Texas corporation
("Celebrity"), The Cluett Corporation, a California corporation ("Cluett"), Star
Wholesale Florist, Inc. a Texas corporation ("Star"), Value Florist Supplies,
Inc., a Texas corporation ("Value"), and India Exotics, Inc., a Texas
corporation ("India") (Celebrity, Cluett, Star, Value and India are each a
"Borrower" and collectively the "Borrowers") owing to Foothill. The undersigned
acknowledges the terms of the Amendment Number One to Amended and Restated Loan
and Security Agreement, dated as of October 28, 1999, and reaffirms and agrees
that (a) its Guaranty remains in full force and effect, (b) nothing in such
Guaranty obligates Foothill to notify the undersigned of any changes in the
financial accommodations made available to Borrowers or to seek reaffirmations
of the Guaranty, and (c) no requirement to so notify the undersigned or to seek
reaffirmations in the future shall be implied by the execution of the
reaffirmation.
Dated: October 28, 1999
MAGICSILK, INC.,
a Texas corporation
By: /s/ LYNN SKILLEN
---------------------------------
Name: Lynn Skillen
-------------------------------
Title: VP
------------------------------
5
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 96
<SECURITIES> 0
<RECEIVABLES> 14,804
<ALLOWANCES> 1,806
<INVENTORY> 22,963
<CURRENT-ASSETS> 38,672
<PP&E> 17,507
<DEPRECIATION> 8,323
<TOTAL-ASSETS> 49,446
<CURRENT-LIABILITIES> 10,573
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 9,260
<TOTAL-LIABILITY-AND-EQUITY> 49,446
<SALES> 26,238
<TOTAL-REVENUES> 26,238
<CGS> 19,889
<TOTAL-COSTS> 25,447
<OTHER-EXPENSES> 16
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 813
<INCOME-PRETAX> 579
<INCOME-TAX> 194
<INCOME-CONTINUING> 385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 385
<EPS-BASIC> 0.25<F1>
<EPS-DILUTED> 0.25<F1>
<FN>
<F1>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>
