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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20802
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CELEBRITY, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1289223
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4520 OLD TROUP ROAD P.O. BOX 6666
TYLER, TEXAS 75707 TYLER, TEXAS 75711
(Physical Delivery Address) (Mailing Address)
(Address of principal executive offices)
Registrant's telephone number, including area code: (903) 561-3981
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of September 12, 2000 was approximately $822,633 based on the
closing price of the registrant's common stock on such date as reported by the
Nasdaq SmallCap Market. For the purposes of this disclosure only, the registrant
has assumed that its directors, executive officers and beneficial owners of 5%
or more of the registrant's common stock are affiliates of the registrant. The
registrant had 1,544,166 shares of common stock outstanding at September 12,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the annual
meeting of the Company's shareholders to be held December 1, 2000, are
incorporated by reference into Part III of this Report.
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CELEBRITY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PART I
PAGE
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<S> <C> <C>
ITEM 1. BUSINESS................................................................................... 1
ITEM 2. PROPERTIES................................................................................. 7
ITEM 3. LEGAL PROCEEDINGS.......................................................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS...................... 8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA....................................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................................. 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 15
ITEM 11. EXECUTIVE COMPENSATION..................................................................... 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................ 16
SIGNATURES................................................................................. 19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................. F-1
</TABLE>
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PART I
ITEM 1. BUSINESS.
GENERAL
Celebrity, Inc. (the "Company" or "Celebrity") is one of the largest
suppliers of high quality artificial flowers, ficus trees and plants, and other
decorative accessories. The Company distributes its products to mass market
retailers, craft store chains, wholesale florists and other retailers under
several names, primarily Celebrity, Celebrity Exports International, Cluett,
Color Concepts and Importer's Outlet. The Company offers a broad line of over
14,000 competitively priced products through the offices of its wholly-owned
subsidiary Celebrity Exports International Limited ("Celebrity Hong Kong") and
its domestic distribution centers, coordinating the just-in-time delivery
requirements of many of its customers. Celebrity works closely with individual
customers to devise marketing strategies, planograms and merchandising concepts
and advises them on advertising, product promotion and store displays. The
Company contributes to the design of its products and Celebrity Hong Kong's
staff contracts and oversees their manufacture, exercises quality control and
arranges the consolidation and shipment of merchandise. Celebrity is a Texas
corporation organized in 1968.
MARKET OVERVIEW
In enhancing the warmth and style of their homes, many consumers
purchase artificial flowers as interior accent pieces and accessories.
Commercial consumers such as hotels, stores and malls also purchase artificial
floral products for interior decoration. The use of improved fabrics and
advances in manufacturing techniques have made the products more natural looking
and more aesthetically appealing than ever before. Consumers are also attracted
to the products' other characteristics. Artificial floral products are
relatively inexpensive home furnishing items, can last for years, require no
maintenance and can be fashioned to complement any decor. Home consumers
purchase artificial floral products, either as completed arrangements that are
convenient decorative accessories or as individual components that they arrange
themselves for display at home, for gifts or for resale.
Artificial floral products are sold through many distribution channels.
Craft stores devote significant shelf space to artificial flowers and related
products. Full line discount store chains with floral or craft departments sell
small arrangements and offer a reduced range of individual stems. Warehouse
clubs sell primarily artificial trees, floor planters and completed floral
arrangements. Pottery stores are high volume, lower price retail stores with
substantial square footage devoted to pottery, glass, artificial floral and
other products. Retail florists often sell artificial as well as natural floral
products and are supplied broad ranges of individual artificial floral products,
as well as natural cut flowers, by wholesale florists. Wholesale florists are a
highly fragmented distribution channel consisting of a few large multiple site
distributors and numerous smaller single site operations.
PRODUCTS
Celebrity's product line of approximately 14,000 items is comprised of
a full range of artificial floral products, including artificial flowers,
flowering bushes and foliage, pre-made floral arrangements, trees and floor
planters that the Company assembles and other decorative accessories.
Celebrity's Christmas line consists of artificial Christmas trees, wreaths,
garlands and other ornamental floral products. Celebrity continually updates its
product mix, monitoring style and color trends that affect artificial floral
product sales and identifying product categories with growth potential. This
requires adding, deleting or modifying hundreds of the Company's stock keeping
units (SKUs) each year.
SERVICES
The Company serves its customers with accurate and on-time delivery of
its products. Mass market chain customers demand this high level of service
because they typically stock hundreds of these products as everyday items and
seek to minimize inventory costs while assuring full product availability. The
Company offers a variety of distribution services depending on the customers'
needs and the product:
o Assured Rapid Delivery. Celebrity reduces delivery times and
customers' inventory costs and meets their just-in-time
delivery requirements by quickly filling orders from the
extensive inventory in its Tyler, Texas distribution center.
Celebrity's goal is to fill within 48 hours all orders
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placed for immediate shipment with at least 90% of the ordered
merchandise. Artificial trees, floor planters and pre-made
floral arrangements are assembled and shipped from the
Company's floral arrangement production facilities in
Winston-Salem, North Carolina and Tyler, Texas.
o Direct Shipment. Celebrity provides substantial unit cost
savings by planning with customers for delivery of large
orders. Celebrity Hong Kong's staff arranges these shipments
direct from manufacturers in southeastern Asia to the
customer's location. In addition to assuring the high quality
of the products shipped, Celebrity Hong Kong's staff also
arranges private labeling, customs documentation and financing
for its customers. If a customer's order is not large enough
to meet minimum manufacturing lot sizes for direct shipment,
Celebrity can still offer cost savings to the customer by
arranging to combine the customer's order with its own orders
or orders of other customers. These combined shipments are
delivered to the Company's distribution center, separated and
shipped to the customers.
Customers who place direct shipment orders sometimes reorder the same
product from the distribution center to replenish their inventory of that
product. Large customers also order smaller volume, nonseasonal products through
Celebrity's distribution center.
Celebrity provides its customers with a range of other services that it
believes make the Company an attractive source for artificial floral products
and other decorative accessories. Celebrity's sales force assists customers in
identifying products from the Company's lines that are most likely to fit the
customer's primary consumer market. Celebrity works closely with individual
customers to devise marketing strategies, planograms and merchandising concepts
and to furnish advice on advertising, product promotion and store displays. A
store's planogram indicates product display and establishes minimum inventory
levels of the Company's products.
The Company directly monitors the rate of sale of its products sold by
larger retailers and warehouse clubs that provide on-line access to their
point-of-sale information systems. Celebrity also offers electronic data
interchange, which allows customers to electronically place orders for the
Company's products.
PRODUCT SUPPLY ARRANGEMENTS
The manufacture of high quality artificial flowers and foliage requires
semi-skilled labor that is attentive to detail. Southeastern Asia offers an
abundant, low cost supply of this labor and dominates the manufacture of
artificial floral products. Factories are located primarily in the Guangdong
Province of the People's Republic of China (the "PRC") and also in Thailand and
the Philippines. Nearly all the manufacturers are privately owned, including
those with factories in the PRC. Most manufacturers produce only a limited
product line and few have a distribution network. The marketing efforts of most
of these manufacturers are limited to sales offices in Hong Kong, which are
easily accessible to Celebrity Hong Kong's staff.
Celebrity Hong Kong contracts and oversees product manufacture,
exercises quality control and arranges the consolidation and shipment of
merchandise to the Company's distribution center or direct to customers. The
Company, through Celebrity Hong Kong, works closely with manufacturers to modify
product design, color and other features and to produce the Company's original
designs. Through Celebrity Hong Kong, the Company has improved control over the
quality, production and shipment of products and developed strong business
relationships with many manufacturers.
There are numerous manufacturers of artificial floral products,
providing alternative sources of supply for each of the Company's products. The
Company works with approximately 70 manufacturers and purchases most of its
products from 12 of them. Celebrity believes that it is the dominant customer of
these major suppliers and through this status obtains superior pricing and
service.
QUALITY ASSURANCE
To assure delivery of high quality products, Celebrity carefully
selects its suppliers and performs periodic product inspections, both prior to
shipment and after receipt in the U.S. The Company has experienced negligible
returns of defective or damaged products.
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SALES AND MARKETING
Celebrity's sales force is organized by geographic area and product
line. The Company employs 16 salespeople and contracts with 14 independent sales
representatives. The Company's sales of artificial floral products outside the
U.S., aggregating approximately $7.4 million in fiscal 2000, are made primarily
to customers in Europe. Most sales outside the U.S. are made by the staff of
Celebrity Hong Kong. See Note 12 to the Consolidated Financial Statements for
financial information by geographic area. Large corporate accounts are served by
the Company's national account managers. Company salespeople receive base
salaries and monthly commissions based on sales volume. Independent sales
representatives receive commissions based on a percentage of their net sales.
Celebrity participates in the major artificial floral trade shows held
annually in Dallas, Hong Kong and Frankfurt, Germany. Through these shows,
Celebrity promotes its name and brands and introduces its products to potential
customers.
The Company's distribution center in Tyler, Texas and floral
arrangement production facilities in Winston-Salem, North Carolina and Tyler,
Texas, assure rapid delivery to customers over a broad geographic area.
CUSTOMERS
During fiscal 2000 the Company sold products to approximately 2,000
customers, primarily in the United States. The majority of those sales were to
mass market chains, including Michaels Stores, Wal-Mart Stores and Jo-Ann
Stores. Approximately 7% of consolidated net sales were made by Celebrity Hong
Kong to European customers.
In fiscal 2000, Michaels Stores accounted for $31.8 million, or 33.5%,
of consolidated net sales. The loss of this customer or a significant portion of
its business, or the ability of such customer to cause the Company to reduce its
profit margins, could have a material adverse effect on the Company.
COMPETITION
The artificial floral industry is highly competitive. The Company's
primary competitors are other importers and distributors, some of which may have
greater financial, distribution and marketing resources than the Company.
The Company believes that there are a variety of ways to compete in its
industry. For example, some competitors focus solely on price and others
specialize in a particular product segment. The Company competes primarily on
the basis of customer service, product quality, supply dependability, product
line breadth, price and brand name recognition.
The barriers to entry to the Company's industry are relatively low. The
Company believes, however, that attaining success in the industry is difficult.
The Company also believes that it has competitive advantages, including its
ability to fill orders quickly and completely from its distribution center,
providing a high level of customer service, its Hong Kong presence, high quality
products, competitive prices and brand names. There is no assurance that the
Company will maintain these advantages or that they will not be overcome by
other factors that may develop.
TRADEMARKS
The Company has registered the "Botanix," "Celebrity Designs,"
"Celebrity, Inc.," "Celebrity Silk," "Color Concepts," "Color Union," "Garden
Magic," "Gold Leaf Collection and Design," "Indoor Garden Collection,"
"Karisma," "Magicsilk," "Mr. Silk Shine," "Oliver's Greenhouse Collection,"
"Send a Silk," "Silk Accents," "The Greenhouse Collection," "Greenhouse
Collection and Design," "India Exotics Inc. & Design," "The Silk Gardener" and
"Versailles Trimming" trademarks with the U.S. Patent and Trademark Office in
conjunction with its products. The Company has an application pending in the
United States Patent and Trademark Office for registration of an additional
mark. The Company also has registered certain of its trademarks in a number of
foreign countries. The Company believes that its trademarks have significant
value in the marketing of its products and services and protects its trademarks
vigorously against infringement.
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CERTAIN RISK FACTORS
TRADE REGULATION RISKS. The Company currently imports products
manufactured in the PRC and other locations throughout southeastern Asia.
Products imported by the Company into the U.S. are subject to U.S. customs
duties on the price paid for the products, which are payable when the products
are brought over the U.S. border. The duty is paid by either the Company or its
customers, depending on which party assumes responsibility for importation.
Customer purchases of artificial floral products directly from Celebrity Hong
Kong, with customers responsible for importation and paying their own import
duties, accounted for approximately 35% of consolidated net sales in fiscal
2000.
Artificial floral products sold by Celebrity Hong Kong to customers
outside the U.S., accounting for approximately 8% of consolidated net sales in
fiscal 2000, may be subject to tariffs imposed by the destination countries but
would not be subject to U.S. tariffs. Although U.S. customs duties paid by the
Company, ranging from approximately 8% to 17% of the cost of imported
merchandise, have been relatively constant for several years, changes in customs
rates could adversely affect the Company's ability to import quality products at
favorable prices. Likewise, import quotas or embargoes could limit the amount of
merchandise the Company could import from time to time, affecting the Company's
ability to meet its customers' demands.
Normal Trade Relations Treatment for the PRC. The PRC's exports to the
U.S., which include among other things toys, discount apparel and footwear,
have, since 1980, received the same preferential tariff treatment accorded goods
from countries granted "most favored nation" or "normal trading relations"
("NTR") status. However, preferential tariff treatment for countries with
non-market economies, including the PRC, is currently granted on a year-to-year
basis, and such treatment is currently renewed only upon the President's
recommendation to Congress that the objectives of U.S. trade will be served by
extending preferential treatment for another year. Under U.S. trade law,
Congress may override the President's recommendation with a joint resolution to
bar the extension of preferential treatment. If such a joint resolution is
passed by Congress, the President may veto the resolution. If Congress cannot
override such a veto, preferential treatment continues. The renewal of the PRC's
NTR status has been a contentious political issue over the past several years.
President Clinton has extended NTR status for the PRC through June 2001.
The Congress of the United States has approved legislation granting
permanent NTR status to the PRC (the "NTR Legislation"). The President now has
an opportunity to approve or veto the NTR Legislation submitted to him by the
Congress.
Were the PRC to lose NTR status, the import duty on goods manufactured
in the PRC and imported into the U.S. would increase from approximately 9% to
71.5%. According to U.S. Commerce Department statistics, currently approximately
90% of the artificial floral products imported into the U.S. come from the PRC.
The Company believes this significant market share is primarily attributable to
the low cost of labor in the PRC. Although increased duties on the Company's
products would increase the cost of goods from the PRC, all of the Company's
competitors who import artificial floral products from the PRC would be subject
to the same increase in costs. In addition, because labor costs in the PRC are
significantly lower than those in other countries, the Company believes the PRC
would continue to be the lowest cost source for artificial floral products even
if the PRC lost NTR status. If the Company were to face a substantial increase
in tariff rates on products imported into the U.S., the Company would (i)
attempt to increase the prices charged to its customers, (ii) ask its suppliers
to reduce the prices charged to the Company and (iii) seek to identify more
favorable sources for its products to assure the highest quality at the lowest
price; however, there is no assurance that these efforts will allow the Company
to prevent its results of operations from being affected adversely.
Additionally, even if NTR status is maintained for the PRC, significant
forces in Congress and elsewhere are pressing for other sanctions in response to
the PRC's labor and human rights practices, nuclear nonproliferation, market
access and intellectual property rights policies, and there is no assurance that
these possible sanctions would not affect the Company.
Section 301. Section 301 of the Trade Act of 1974, as amended ("Section
301"), directs the U.S. Trade Representative ("USTR") to designate those
countries that deny adequate and effective intellectual property rights or fair
and equitable market access to U.S. firms that rely on intellectual property.
From the countries designated, the USTR is to identify as "priority" foreign
countries those countries where the lack of intellectual property rights
protection has the greatest adverse impact on U.S. firms. The USTR is authorized
to take retaliatory action,
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including the imposition of retaliatory tariffs and import restraints on goods
from priority foreign countries, if such countries do not respond to USTR
investigations by entering into good faith negotiations or by evidencing
significant progress in protecting intellectual property rights.
Admission of China to the World Trade Organization. The PRC has applied
to join the World Trade Organization (the "WTO"), which is the successor
organization to the General Agreement of Tariffs and Trade (GATT). Because all
members of the WTO must grant one another permanent NTR status, if the PRC is
admitted to the WTO, the U.S. would have to grant the PRC permanent NTR status.
To gain admission to the WTO, the PRC must come to terms with and gain the
approval of every current member of the WTO. In addition, since China would
necessarily need to be granted permanent NTR status by the U.S. if it is
admitted to the WTO, Congress and the President must approve China's admission
to the WTO. There can be no assurance that China will be admitted to the WTO,
particularly since certain countries have expressed dissatisfaction with China's
progress in opening its domestic market in a number of areas.
The Company cannot predict the likelihood or effect of potential trade
retaliation against the PRC that may occur in the future. Trade retaliation in
the form of increased tariffs or quotas, or both, against products that are
manufactured on behalf of the Company now or in the future could increase the
cost of such products to the Company.
ECONOMIC INSTABILITY IN THE FAR EAST. Although the situation has
recently improved, most economies in the Far East are suffering from high levels
of debt and declining corporate earnings and economic growth, and some have
experienced significant currency devaluation. All of these factors have affected
the import/export trade in the region. For example, Asian currency devaluations
from time to time resulted in an increased level of exportation from the PRC,
which resulted in a shortage of shipping containers in that region. If a
container shortage affected the delivery schedule of the Company over a longer
period, causing a long-term disruption in the delivery of the Company's
products, it could have a material adverse effect on the Company's business,
financial condition or results of operations.
The region has been affected by tightening credit markets from time to
time as well. Celebrity Hong Kong currently maintains export credit facilities
with three alternative financial institutions, providing export credit financing
to fund its export requirements. Should Celebrity Hong Kong's export credit
facilities be affected by changes in the credit markets, it could have an
adverse affect on the Company's export activities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RISKS RELATING TO CURRENCY FLUCTUATIONS. While the Company transacts
business predominantly in U.S. dollars and most of its revenues are collected in
U.S. dollars, the Company's Hong Kong subsidiary and its manufacturing suppliers
use the Hong Kong dollar as the functional currency. The Hong Kong dollar has
historically been "pegged" to a fixed exchange rate vis-a-vis the U.S. dollar,
and while there has been pressure from time to time on Far East currencies, both
the Hong Kong Special Administrative Region ("SAR") and the PRC continue to make
statements in favor of continuing the current link between the Hong Kong dollar
and the U.S. dollar. If the Hong Kong dollar were to be devalued relative to the
U.S. dollar, values of on hand inventory could be affected and future short term
exchange gains could be realized by the Company. However, the Company believes
that over the longer term, costs and margins would stabilize at historical
levels.
RISKS RELATING TO HONG KONG. The Company's business, financial
condition and results of operations may be influenced by the political situation
in Hong Kong and by the general state of the Hong Kong economy. On July 1, 1997,
sovereignty over Hong Kong was transferred from the United Kingdom to the PRC,
and Hong Kong became an SAR of the PRC. As provided in the Sino-British Joint
Declaration on the Question of Hong Kong and the Basic Law of the Hong Kong SAR
of the PRC (the "Basic Law"), the Hong Kong SAR has a high degree of autonomy
except in foreign affairs and defense. Under the Basic Law, the Hong Kong SAR
has its own legislature, legal and judicial system and economic autonomy for 50
years. Based on the current political conditions and the Company's understanding
of the Basic Law, the Company does not believe that the transfer of sovereignty
over Hong Kong has had or will have a material adverse effect on the Company's
business, financial condition or results of operations. There can be no
assurance, however, that changes in political, legal or other conditions will
not result in such an adverse effect.
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RISKS RELATING TO THE PRC. The Company's operations and assets are
subject to significant political, economic, legal and other uncertainties in the
PRC, where the Company maintains relationships with a substantial number of its
manufacturing suppliers. Under its current leadership, the PRC has been pursuing
economic reform policies, including the encouragement of foreign trade and
investment and greater economic decentralization. No assurance can be given,
however, that the PRC will continue to pursue such policies, that such policies
will be successful if pursued, or that such policies will not be significantly
altered from time to time.
EXECUTIVE OFFICERS
Set forth below is certain information as of September 14, 2000
regarding the executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE TITLE
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Robert H. Patterson, Jr. 49 Chairman of the Board, President and Chief
Executive Officer
Richard Yuen 56 Managing Director of Celebrity Hong Kong
David J. Huffman 49 Executive Vice President -- Sales and Marketing
Clifford C. Condict 53 Vice President -- Merchandise
Roger D. Craft 53 Vice President -- Manufacturing
Lynn Skillen 44 Vice President -- Finance, Chief Financial
Officer, Treasurer and Secretary
Laura Lockhart 41 Vice President -- Operations
Lisa L. Hill 42 Vice President -- Marketing
</TABLE>
Robert H. Patterson, Jr. has served as Chairman of the Board of
Directors of Celebrity since 1989, as Chief Executive Officer since July 1995,
as President from 1978 to July 1995 and since September 1997, and as a director
since 1974.
Richard Yuen has managed Celebrity Hong Kong since 1984 and has been a
director of Celebrity since 1992.
David J. Huffman has served as Executive Vice President of Celebrity
since September 1997. He served as President of Celebrity from July 1995 to
September 1997. From 1991 to July 1995, he was Vice President -- Sales of
Celebrity. From February 1990 to February 1991, he was the Sales Manager of the
Celebrity Designs Division.
Clifford C. Condict has served as Vice President -- Merchandise of
Celebrity since 1994. From June 1992 to December 1993 Mr. Condict served as
President of Magicsilk, Inc., a subsidiary of the Company until June 2000, when
it was merged into the Company. He has also served as Vice President --
Operations of Celebrity from 1988 to 1992.
Roger D. Craft has served as Vice President -- Manufacturing of
Celebrity since February 1999. From February 1998 to February 1999, he served as
Vice President -- Star Operations. From 1993 to January 1998, Mr. Craft served
as Vice President -- Celebrity Operations. Mr. Craft served as General Manager
of Celebrity Holdings, Inc., a subsidiary of the Company formerly known as Star
Wholesale Florist, Inc. ("Star Wholesale"), from 1986 to 1993.
Lynn Skillen has served as Vice President -- Finance, Chief Financial
Officer, Treasurer and Secretary of Celebrity since March 1998. From October
1997 to March 1998, Mr. Skillen served as Vice President -- Finance of Dollar
Rental Car Systems, Inc., and from 1994 to October 1997, he was Vice President
and Chief Financial Officer of Snappy Car Rental, Inc. Prior to 1994, Mr.
Skillen was employed for 16 years at Safelite Auto Glass Corp., serving in
several finance management positions.
Laura Lockhart has served as Vice President -- Operations of Celebrity
since March 1998. Ms. Lockhart served as Operations Manager of the Company from
1992 to March 1998. From 1979 to 1992, Ms. Lockhart served in a variety of
operating and management positions at the Company.
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Lisa L. Hill has served as Vice President -- Marketing of Celebrity
since March 1999. From 1993 to February 1999, Ms. Hill was Vice President --
Marketing and Vice President International Division for C.M. Offrey & Son Inc.
and from 1991 to 1993 she was Vice President -- Sales and Marketing for Horizon
Fabrics, Inc.
Officers are elected annually by the Board of Directors and serve at
its discretion.
EMPLOYEES
At August 18, 2000, the Company had 411 full-time and part-time
employees, including 42 employed by Celebrity Hong Kong. The Company has not
entered into any collective bargaining agreements with its employees. The
Company believes that its relations with its employees are good.
ITEM 2. PROPERTIES.
The Company leases the space occupied by the facilities listed in the
following table:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION TYPE OF FACILITY SQUARE FOOTAGE
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<S> <C> <C>
Tyler, Texas* Office/Distribution Center 137,700
Winston-Salem, North Carolina* Floral Arrangement Production Facility 105,522
Tyler, Texas* Floral Arrangement Production Facility 100,000
Winston-Salem, North Carolina Floral Arrangement Production Facility 145,200
Tyler, Texas Warehouse 60,000
Tyler, Texas Retail Outlet Store 27,000
Dallas, Texas Showroom 19,000
Atlanta, Georgia Showroom 8,606
Winston-Salem, North Carolina Warehouse 91,000
Hong Kong Office/Showroom 24,599
</TABLE>
*Subject to sale-leaseback transaction effected in April 1999. See Note 8 to the
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings that arise in the
ordinary course of its business. The Company believes that none of its current
litigation is likely to have a material adverse effect on its financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of fiscal 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock, par value $.01 per share, of the Company ("Common
Stock") is listed on the NASDAQ SmallCap Market (the "SmallCap Market") under
the symbol "FLWR". The Company has received a letter from the SmallCap Market
informing the Company that the Common Stock is no longer eligible to be listed
on the SmallCap Market. Certain market makers that currently make a market in
the Common Stock in the SmallCap Market have indicated to the Company they will
continue to do so in the Pinksheets' Electronic Quotation Service after the
Common Stock is delisted from the SmallCap Market. However, the Company can make
no assurances that any market makers will do so.
The following table sets forth, for the periods indicated, the high and
low sale prices of the Common Stock, as reported by the Nasdaq SmallCap Market.
All prices have been adjusted to reflect a four-to-one reverse stock split that
occurred on February 26, 1999.
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
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<S> <C> <C>
1999
First Quarter....................................................... $ 8 1/4 $ 3 1/4
Second Quarter...................................................... $ 4 1/2 $ 2
Third Quarter....................................................... $ 4 1/2 $ 1 7/16
Fourth Quarter...................................................... $ 3 $ 15/16
2000
First Quarter....................................................... $ 4 1/8 $ 2 3/4
Second Quarter...................................................... $ 4 1/2 $ 1 1/2
Third Quarter....................................................... $ 3 5/8 $ 2 1/4
Fourth Quarter...................................................... $ 3 1/4 $ 1 7/8
2001
First Quarter (through September 12, 2000).......................... $ 1 31/32 $ 1
</TABLE>
On September 12, 2000, the closing sale price of the Common Stock as
reported by the Nasdaq SmallCap Market was $1.25 per share. As of September 12,
2000, there were 90 record holders of the Common Stock.
The Company has not paid cash dividends in the last five fiscal years.
Management presently intends to retain any earnings for the operation and
expansion of the Company's business and does not anticipate paying cash
dividends in the foreseeable future. In addition, the terms of the Company's
primary credit facility prohibit the payment of dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated balance sheet data as of June 30,
2000, 1999, 1998, 1997 and 1996, and selected consolidated statement of
operations data for each of the years in the five-year period ended June 30,
2000, are derived from audited consolidated financial statements of Celebrity.
Certain events, such as the Company's June 1998 decision to exit the business
conducted by India Exotics, Inc., a wholly-owned subsidiary of the Company, and
the sale of the Company's Star Wholesale business in May 2000, affect the
comparability of the data between years. See Notes 4 and 6 to the Consolidated
Financial Statements for discussion of certain of these events.
-8-
<PAGE> 11
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 94,850 $ 110,662 $ 122,262 $ 125,170 $ 115,048
Net income (loss)........................... $ (852) $ 558 $ (12,729) $ (5,761) $ (5,422)
Earnings (loss) per common share (basic).... $ (.55) $ .36 $ (8.09) $ (3.67) $ (3.44)
Earnings (loss) per common share and
common equivalent share (diluted)........ $ (.55) $ .36 $ (8.09) $ (3.67) $ (3.44)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $ 41,837 $ 46,271 $ 51,719 $ 67,453 $ 73,363
Current liabilities....................... $ 8,875 $ 10,270 $ 16,794 $ 41,424 $ 15,216
Notes payable, net of current portion..... $ 25,006 $ 27,083 $ 26,588 $ 4,877 $ 31,081
Redeemable common stock................... $ -- $ -- $ -- $ 175 $ 350
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
This Annual Report on Form 10-K contains forward-looking statements
about the business, financial condition and prospects of Celebrity. The actual
results of Celebrity could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties, including
without limitation (i) changes in customer demand for the Company's products at
the retail level, (ii) trends in the retail and wholesale decorative accessories
industries, (iii) inventory risks attributable to possible changes in customer
demand, compounded by extended lead times in ordering the Company's products
from overseas suppliers and the Company's strategy of maintaining a high
merchandise in stock percentage, (iv) the effects of economic conditions,
including the economic instability in the Far East, (v) supply and/or shipment
constraints or difficulties, (vi) the impact of competitors' pricing, (vii) the
effects of the Company's accounting policies, (viii) changes in foreign trade
regulations, including changes in duty rates, possible trade sanctions, import
quotas and other restrictions imposed by U.S. and foreign governments, (ix) the
effects of the assumption of control over Hong Kong by the PRC on July 1, 1997,
(x) risks associated with a heavy reliance on products coming from manufacturers
in the PRC, (xi) currency risks, including changes in the relationship between
the U.S. dollar and the Hong Kong dollar and (xii) other risks detailed in the
Company's other Securities and Exchange Commission filings. See "Business --
Certain Risk Factors." These risks and uncertainties are beyond the ability of
the Company to control, and in many cases, the Company cannot predict the risks
and uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements. When used in this Annual
Report on Form 10-K, the words "believes," "expects," "plans," "intends" and
similar expressions as they relate to the Company or its management generally
are intended to identify forward-looking statements.
-9-
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's
consolidated statements of operations expressed as a percentage of net sales for
the years indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30,
--------------------------------
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Net sales.............................................. 100% 100% 100%
Costs and operating expenses:
Cost of goods sold................................... 74% 75% 80%
Selling.............................................. 4% 4% 4%
General and administrative........................... 18% 16% 18%
Depreciation and amortization........................ 1% 1% 2%
Restructuring charges................................ --% --% 3%
------ ----- ------
97% 96% 107%
------ ----- ------
Operating income (loss)................................ 3% 4% (7)%
Interest, net.......................................... (4)% (3)% (3)%
Other income, net...................................... 1% --% --%
------ ----- ------
Income (loss) before income taxes...................... --% 1% (10)%
Provision for income taxes............................. 1% --% --%
------ ----- ------
Income (loss) before extraordinary charge.............. (1)% 1% (10)%
Extraordinary charge .................................. --% --% --%
------ ----- ------
Net income (loss) ..................................... (1)% 1% (10)%
====== ===== ======
</TABLE>
FISCAL 2000 COMPARED WITH FISCAL 1999
Net sales decreased 14% from $110.7 million in fiscal 1999 to $94.9
million in fiscal 2000. The sales decrease was attributable to (i) lower sales
of decorative metal products resulting from the Company's June 1998 decision to
exit the India Exotics decorative metal products business, (ii) lower shipments
from the Company's Hong Kong subsidiary, and (iii) lower sales in the Company's
domestic floral businesses, due in part to customer bankruptcies.
Cost of goods sold decreased 15% from $82.3 million in fiscal 1999 to
$69.9 million in fiscal 2000. The decrease was primarily attributable to the
lower sales volume in fiscal 2000. Cost of goods sold as a percentage of net
sales was 74% in fiscal 2000, compared with 75% in fiscal 1999. The lower cost
of goods sold percentage in fiscal 2000 was primarily attributable to an
improved mix of product sales in fiscal 2000.
Selling expenses decreased from $4.6 million in fiscal 1999 to $3.9
million in fiscal 2000. The decrease was attributable to restructuring of the
sales and marketing departments and expense reductions implemented in the second
half of fiscal 1999. Selling expenses as a percentage of net sales were 4% in
fiscal 1999 and fiscal 2000.
General and administrative expenses decreased from $17.6 million in
fiscal 1999 to $17.2 million in fiscal 2000. The decrease was due to expense
reductions implemented by the Company. General and administrative expenses as a
percentage of net sales were 18% in fiscal 2000, compared with 16% in fiscal
1999.
Depreciation and amortization expenses of $1.4 million, or 1% of net
sales, in fiscal 1999 was comparable to $1.4 million, or 1% of net sales, in
fiscal 2000.
Operating income decreased from $4.8 million, or 4% of net sales, in
fiscal 1999 to $2.4 million, or 3% of net sales, in fiscal 2000. The $2.4
million decrease in operating income was primarily attributable to lower net
sales volume in fiscal 2000.
Net interest expense decreased from $3.8 million in fiscal 1999, or 3%
of net sales, to $3.5 million, or 4% of net sales, in fiscal 2000. The reduction
in interest expense was primarily attributable to a July 1999 amendment
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<PAGE> 13
to the Company's credit facility, which included provisions that lowered
applicable interest rates and other financing costs. See "--Liquidity and
Capital Resources" and Note 8 to the Consolidated Financial Statements.
Other income, net increased from $60,000 in fiscal 1999 to $682,000 in
fiscal 2000. Other income in fiscal 2000 included (i) $331,000 of income from
the settlement of an insurance claim, (ii) a $200,000 expense related to the
settlement of a lawsuit, and (iii) a $465,000 gain resulting from the sale of
the Company's Star Wholesale Florist business in Dallas, Texas in May 2000.
Other income as a percentage of net sales was 1% in fiscal 2000, compared with
0% in the prior year. See Note 4 to the Consolidated Financial Statements.
Provision for income taxes of $451,000 in fiscal 2000 was comparable to
$440,000 in fiscal 1999. The tax provision recognized in fiscal 2000 and fiscal
1999 was principally related to foreign operations. At June 30, 2000, a
valuation allowance of the Company's deferred tax asset totaled $10.4 million. A
deferred tax asset of $2.2 million, net of the valuation allowance, was
reflected on the Company's balance sheets at June 30, 2000 and June 30, 1999.
The valuation allowance reflects the amount of deferred tax assets that, at this
time, are uncertain to be realized in the future. These uncertainties relate
primarily to whether the Company will be able to utilize net operating loss
carryforwards and certain tax credit carryforwards prior to expiration. If the
Company's U.S. operations are sufficiently profitable in the future, this
reserve will be released and the net operating loss and tax credit carryforwards
will be available to shelter future U.S. taxable income of the Company.
Conversely, if the Company's U.S. operations are not sufficiently profitable in
the future, or if the composition of the deferred tax assets changes adversely,
then the valuation allowance may be increased in future periods. See Note 7 to
the Consolidated Financial Statements.
An extraordinary charge of $68,000 was recorded in fiscal 1999, related
to the extinguishment of debt. There was no extraordinary charge recorded in
fiscal 2000.
As a result of the foregoing factors, the Company recorded a net loss
of $0.9 million in fiscal 2000, compared with net income of $0.6 million in
fiscal 1999.
FISCAL 1999 COMPARED WITH FISCAL 1998
Net sales decreased 10% from $122.3 million in fiscal 1998 to $110.7
million in fiscal 1999. The sales decrease was attributable to (i) lower sales
of The Cluett Corporation, a wholly owned subsidiary of the Company until June
2000 when it was merged with the Company ("Cluett"), which had a sales decline
to customers in the discount/mass-market retail segment, (ii) lower sales in the
Company's domestic floral division, due in part to a bankruptcy of a major
customer and (iii) lower sales of decorative metal products resulting from the
Company's June 1998 decision to exit the India Exotics decorative metal products
business.
Cost of goods sold decreased 16% from $97.7 million in fiscal 1998 to
$82.3 million in fiscal 1999. The decrease was primarily attributable to the
lower sales volume in fiscal 1999. Cost of goods sold as a percentage of net
sales was 75% in fiscal 1999, compared with 80% in fiscal 1998. Gross profits
increased from $24.6 million in fiscal 1998 to $28.3 million in fiscal 1999,
despite lower net sales in fiscal 1999. The lower cost of goods sold percentage
in fiscal 1999 is primarily attributable to an improved mix of product sales in
fiscal 1999, but also reflects the effects of inventory reduction strategies in
fiscal 1998, including a special charge of $1.1 million recorded in fiscal 1998
related to discontinued products.
Selling expenses decreased from $4.8 million in fiscal 1998 to $4.6
million in fiscal 1999. The decrease was attributable to expense reductions
resulting from reorganization of sales and marketing activities in fiscal 1999.
Selling expenses as a percentage of net sales were 4% in fiscal 1998 and fiscal
1999.
General and administrative expenses decreased from $22.1 million, or
18% of net sales, in fiscal 1998 to $17.6 million, or 16% of net sales, in
fiscal 1999. The decrease in expenses is attributable to expense reductions
implemented in the fourth quarter of fiscal 1998 and during fiscal 1999,
including the closure of the St. Louis, Missouri facility associated with the
exit of the India Exotics business and expense savings from the consolidation of
administrative offices.
Depreciation and amortization expenses decreased from $2.2 million, or
2% of net sales, in fiscal 1998 to $1.4 million, or 1% of net sales, in fiscal
1999. The decrease was attributable to the write-off of goodwill and other
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<PAGE> 14
intangibles in the fourth quarter of fiscal 1998 related to the exit of the
India Exotics business, the retirement of certain assets, and the full
depreciation of assets in late fiscal 1998 or early fiscal 1999.
Restructuring charges of $4.5 million, or 3.6% of net sales, were
recorded in fiscal 1998, compared with no such charges in fiscal 1999. These
charges resulted from the Company's decision to exit the India Exotics
operations in St. Louis, Missouri in June 1998. See Note 6 to the Consolidated
Financial Statements.
Operating income (loss) increased from a loss of $8.9 million in fiscal
1998 to income of $4.8 million in fiscal 1999. The $13.7 million improvement in
operating income (loss) was primarily attributable to expense reductions
implemented in the fourth quarter of fiscal 1998 and in fiscal 1999. The
comparison of operating income (loss) between years is also affected by fiscal
1998 restructuring charges ($4.5 million) resulting from the closure of the
India Exotics facility in St. Louis, and special charges related to discontinued
inventory ($1.1 million).
Net interest expense increased from $3.5 million in fiscal 1998 to $3.8
million in fiscal 1999. The increase was primarily attributable to higher
financing costs of the Company's revolving credit facility and term loan
financing in fiscal 1999 compared with fiscal 1998.
As a result of the foregoing factors, income (loss) before income taxes
increased from a loss of $12.4 million in fiscal 1998 to income of $1.1 million
in fiscal 1999.
Provision for income taxes of $0.4 million was comparable in fiscal
1998 and fiscal 1999. The tax provision recognized in fiscal 1999 was
principally related to foreign operations. At June 30, 1999, a valuation
allowance on the Company's deferred tax asset totaled $9.2 million. The
valuation allowance reflects the amount of deferred tax assets that, at this
time, are uncertain to be realized in the future. These uncertainties relate
primarily to whether the Company will be able to utilize net operating loss
carryforwards and certain tax credit carryforwards prior to their expiration. If
the Company's U.S. operations are sufficiently profitable in the future, this
reserve will be released and the net operating loss and tax credit carryforwards
will be available to shelter future U.S. taxable income of the Company.
The extraordinary charge related to extinguishment of debt of $68,000,
which was recorded in fiscal 1999, resulted from the write-off of past deferred
financing fees related to real estate included in the sale-leaseback transaction
that occurred in April 1999. See Note 8 to the Consolidated Financial
Statements.
As a result of the foregoing factors net income (loss) increased from a
loss of $12.7 million in fiscal 1998 to net income of $0.6 million in fiscal
1999.
INFLATION
The effect of inflation on operating costs has been minimal in recent
years. Most of the Company's operating expenses are inflation sensitive, with
increases in inflation generally resulting in increased costs of operation. The
effect of inflation-driven cost increases on the Company's overall operating
costs is not expected to be greater for the Company than its competitors.
SEASONALITY
Celebrity markets and distributes products for all seasons. The
shipping period for each season is relatively long. When combined with shipments
of basic merchandise that is sold all year, there is no material seasonal
fluctuation in net sales or operating income.
LIQUIDITY AND CAPITAL RESOURCES
Celebrity's sales and marketing strategy has required significant
investment in inventory and receivables. The Company follows the industry
practice of offering extended terms to qualified customers for sales of
Christmas merchandise. These sales generally take place between June and October
on terms not requiring payment until December 1. The Company has traditionally
relied on borrowings under its revolving credit facility and cash flows from
operations to fund these and other working capital needs.
-12-
<PAGE> 15
Cash provided by operating activities in fiscal 2000 amounted to
approximately $613,000, which was primarily attributable to changes in operating
assets and liabilities. Cash provided by investing activities in fiscal 2000 was
$1.8 million, which was primarily related to the sale of substantially all of
the assets of the wholesale florist supply business in Dallas, Texas. Cash used
in financing activities amounted to $2.7 million, resulting primarily from
payments on the Company's term loan and credit facility.
The Company has a revolving credit facility for $26,500,000. The
facility originally included a term loan with an initial amount of $3,500,000.
The term loan was payable in monthly installments of principal of $200,000
beginning in May 1998 and the remaining outstanding principal balance under the
term loan was paid on October 1, 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 specific EBITDA requirements (the per annum rates were 9.75% and
9.25% at June 30, 2000 and 1999, respectively), (iii) the financial ratio
covenants were reset, and (iv) the monthly fees were reduced from $15,000 to
$2,000. In October 1999, the Company amended the facility whereby the advances
limit was modified to include a 90-day bridge advance of $1,500,000, bearing
interest at 12.5% per annum. The purpose of the advance was to fund seasonal
inventory increases. The advance was guaranteed by an entity controlled by
Robert H. Patterson, Jr. ("RP"), the Company's Chairman of the Board, President
and Chief Executive Officer, which also provided a letter of credit to the
lender in the amount of $375,000 as additional security. In January 2000, the
Company amended the facility to extend the bridge advance until June 15, 2000,
with monthly reductions of $300,000 beginning February 15, 2000. This amendment
also contained provisions permitting the Company to borrow and repay, from time
to time, up to $1,000,000 from RP. Borrowing limits under the revolving credit
facility are based on specified percentages of eligible accounts receivable and
inventories. As a result of such limits, the maximum amount the Company was
eligible to borrow at June 30, 2000 was $17,928,000. The amount outstanding
under the revolving credit facility at June 30, 2000 was $17,671,000. As a
condition to establishing the credit facility, the Company issued to the lender
a five-year warrant to purchase 25,000 shares of Common Stock at $4.00 per
share. The fair value of the warrant was estimated to be $70,000. Accordingly,
the proceeds from the new credit facility were allocated between debt and
paid-in capital, resulting in a debt discount that will be accreted to the
redemption amount over the term of the new credit facility. Amounts borrowed
under the revolving credit facility and the term loan are secured by accounts
receivable, inventory, equipment, and general intangibles (including
intellectual property) of the Company. In addition, substantially all stock of
the Company's subsidiaries has been pledged to the lender. The revolving credit
facility and the term loan contain certain covenants limiting the incurrence of
indebtedness, prohibiting the payment of dividends and requiring the Company to
maintain certain financial ratios. The Company was in compliance with all
covenants at June 30, 2000. The commitment fee for the unused portion of the
revolving credit facility is .25% of the average unused portion of the credit
facility during the year. Unused borrowing availability under the credit
facility was approximately $257,000 at June 30, 2000.
Celebrity Hong Kong generally makes full cash payments for products
ordered for Celebrity's account or for direct shipment to customers after the
manufacturers deliver products in Hong Kong for export. Celebrity Hong Kong
finances cash payments to its vendors through export credit facilities
established with three Hong Kong banks, each of which is guaranteed by the
Company. Generally, under the terms of these facilities each bank finances, with
recourse, export bills for specific shipments by Celebrity Hong Kong to its
customers. Each bank is reimbursed when payment is received for shipments it has
financed. At June 30, 2000, an aggregate of $1.7 million of export bills was
financed by the three banks. All of these export bills were related to direct
shipments to customers and Celebrity Hong Kong's related potential recourse
liability was accounted for as a contingent obligation. The Company's revolving
credit facility restricts the aggregate amount of export bills that may be
financed under the export credit facilities at any time to $7.0 million.
Celebrity Hong Kong has borrowed working capital from RP for short-term working
capital needs from time to time. At June 30, 2000, $500,000 of such borrowings
were outstanding, bearing an interest rate at a reference bank's prime rate of
interest plus 2.0%.
In June 1997, the Company entered into a revolving credit facility with
an additional lender, which was scheduled to mature in June 2004. Amounts
borrowed under the facility were secured by certain real estate owned by the
Company, with interest accruing at the rate of LIBOR plus 2.65% per annum. In
April 1999 the Company executed the necessary documents to sell to Crest
Properties, Ltd., a Texas limited partnership ("Crest") (an entity controlled by
RP), for $7,500,000, the real estate that secured the revolving credit facility.
As part of the same transaction the properties were leased back to the Company.
The same lender provided similar financing for Crest, requiring the guarantee of
the Company and RP. 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
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<PAGE> 16
recording the sales proceeds as a liability and recording future rental
payments, exclusive of an interest portion, as a reduction of the liability. See
Note 8 to the Consolidated Financial Statements.
In September 1997, Celebrity borrowed $500,000 from a related party,
RHP Management, LLC ("RHP"), an entity controlled by RP. The principal amount
outstanding accrued interest at a fluctuating rate per annum equal to RHP's cost
of borrowing, which was the prime rate of a reference bank plus 1.5% per annum.
In July 1998, the Company borrowed an additional $500,000 from RHP for seasonal
working capital needs, which accrued interest at 10% per annum. In April 1999, a
portion of the proceeds from the sale-leaseback transaction (see Note 8 to the
Consolidated Financial Statements) was utilized to pay the principal and accrued
interest due RHP on the borrowings described above.
The Company does not plan to make any significant capital expenditures
in fiscal 2001 other than those incurred in the normal course of business for
replacement of transportation and warehouse equipment and those in connection
with the Company's continuing program to upgrade its management information
systems.
The Company's products are primarily sourced in the Far East, with a
majority produced in the PRC. The Company's source or cost of supply could be
affected by a variety of factors, including general economic conditions in the
Far East, changes in currency valuations, export credit availability, freight
carrier availability and cost, and U.S. trade policy and law related to imports.
If the U.S. government were to 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company's revolving credit facility provides for borrowings that
bear interest at variable rates based on a prime rate. During fiscal 2000, the
applicable rate was prime plus 0.25%. At June 30, 2000, the amount outstanding
under the revolving credit facility was $17.7 million. A hypothetical 10% change
in the effective interest rate for these borrowings, assuming debt remained at
June 30, 2000 levels, would change annual interest expense by approximately
$173,000. The Company believes that the effect, if any, of reasonably possible
near-term changes in interest rates on the Company's financial position, results
of operations and cash flows should not be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements, together with the report of
independent accountants and financial statement schedule, are included on pages
F-1 through F-26 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the directors of the Company will be set
forth in the proxy statement to be delivered to shareholders in connection with
the Company's Annual Meeting of Shareholders to be held on December 1, 2000 (the
"Proxy Statement"), under the headings "Election of Directors," "Board of
Directors and Committees" and "Section 16(a) Beneficial Ownership Reporting
Compliance," which information is incorporated herein by reference. The name,
age, position and business experience of each executive officer of the Company
is set forth under "Executive Officers" in Item 1 of this report, which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information concerning management compensation and transactions
with management will be set forth in the Proxy Statement under the headings
"Management Compensation" and "Certain Transactions," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information concerning security ownership of certain beneficial
owners and management will be set forth in the Proxy Statement under the heading
"Principal Shareholders and Management Ownership," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related
transactions will be set forth in the Proxy Statement under the headings
"Management Compensation" and "Certain Transactions," which information is
incorporated herein by reference.
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<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual
Report on Form 10-K:
(1) Financial statements:
The financial statements filed as a part of this Annual Report on Form
10-K are listed in the Index to Consolidated Financial Statements on page F-1.
(2) Financial statement schedules:
The financial statement schedule filed as a part of this Annual Report
on Form 10-K is listed in the Index to Consolidated Financial Statements on page
F-1.
(3) Exhibits:
The exhibits filed as a part of this report are listed under "Exhibits"
at subsection (c) of this Item 14.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
3.1 -- Amended and Restated Articles of Incorporation of the
Registrant.(9)
3.2 -- Articles of Correction of the Registrant.(9)
3.3 -- Bylaws of the Registrant.(1)
4.1 -- Specimen Common Stock Certificate.(1)
4.2 -- Warrant, dated February 3, 1998, issued by Registrant to
Foothill Capital Corporation.(5)
4.3 -- Warrant, dated April 22, 1999, issued by Registrant to RHP
Management, LLC.(8)
10.1 -- Letter agreement dated May 19, 1997, setting forth the
terms of a banking facility between Celebrity Exports
International Limited and The Hongkong and Shanghai Banking
Corporation Limited.(4)
10.2 -- General Security Agreement Relating to Goods between
Celebrity Exports International Limited and The Hongkong and
Shanghai Banking Corporation Limited dated April 30, 1984.(1)
10.3 -- Form of Guarantee by Limited Company executed by Registrant
in favor of The Hongkong and Shanghai Banking Corporation
Limited.(4)
10.4 -- Commitment of Celebrity Exports International Limited to
maintain a combined net worth of HK$50,000,000.(4)
10.5 -- Loan Agreement dated July 27, 1998 by and between The China
State Bank Limited and Celebrity Exports International
Limited.(7)
10.6 -- Deed of Guarantee dated August 31, 1998 by and between
Celebrity, Inc., as Guarantor, and The China State Bank
Limited, as Lender.(7)
10.7 -- Loan Agreement dated September 29, 1998 by and between
State Street Bank and Trust Company and Celebrity Exports
International Limited.(7)
10.8 -- Continuing Guarantee dated September 29, 1998 granted by
Celebrity, Inc. for the benefit of State Street Bank and Trust
Company.(7)
10.9 -- 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. (10)
10.10 -- Amendment Number Two to Amended and Restated Loan and
Security Agreement dated effective as of January 31, 2000, by
and among Foothill Capital Corporation and the Registrant and
certain of its subsidiaries.(11)
10.11 -- Amended and Restated Loan and Security Agreement dated
effective as of July 15, 1999 by and among Foothill Capital
Corporation and the Registrant and certain of its
subsidiaries.(10)
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<PAGE> 19
10.12 -- Lease Agreement, dated April 22, 1999, between the
Registrant, as lessee, and Crest Properties, Ltd., as lessor,
relating to property at 4520 Old Troup Highway, Tyler,
Texas.(8)
10.13 -- Lease Agreement, dated April 22, 1999, between The Cluett
Corporation, as lessee, and Crest Properties, Ltd., as lessor,
relating to property at 3200 Centre-Park Boulevard,
Winston-Salem, North Carolina.(8)
10.14 -- Agreement for Purchase and Sale of Promissory Note, dated
May 28, 1999, by and among the Registrant, RHP Real Estate,
Ltd. and The Residuary Trust Created Under the Last Will and
Testament of Robert H. Patterson, Sr., Deceased.(8)
10.15 -- Form of Guarantee of the Term Loan and Security Agreement
dated April 16, 1999 between Merrill Lynch Business Financial
Services, Inc. and Crest Properties, Ltd. by each of
Celebrity, Inc., India Exotics, Inc., Star Wholesale Florist,
Inc., MagicSilk, Inc. and The Cluett Corporation.(9)
10.16 -- Promissory Note of Registrant, amended and restated as of
February 16, 1998 payable to the order of RHP Management,
LLC.(5)
10.17 -- Promissory Note of Registrant, dated July 7, 1998 payable
to the order of RHP Management, LLC.(6)
10.18 -- Form of Indemnity Agreement.(1)
10.19* -- Amended and Restated Stock Option Plan.(9)
10.20* -- Amended and Restated 1993 Employee Stock Purchase Plan.(3)
10.21* -- Fiscal 2000 Management Bonus Plan.(9)
21.1 -- Subsidiaries of Registrant.(12)
23.1 -- Consent of PricewaterhouseCoopers LLP.(12)
27.1 -- Financial Data Schedule as of and for the Year Ended June
30, 2000.(13)
----------
* Exhibits 10.19 through 10.21 constitute management compensatory plans
or contracts.
(1) Previously filed as an exhibit to Registration Statement No.
33-51820 on Form S-1 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995,
and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1994,
and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997
and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997
and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998
and incorporated herein by reference.
(7) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
and incorporated herein by reference.
(8) Previously filed as an exhibit to the Registrant's Report on
Form 8-K filed on June 4, 1999, and incorporated herein by
reference.
(9) Previously filed as an Exhibit A to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1999
and incorporated herein by reference.
(10) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
-17-
<PAGE> 20
(11) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999.
(12) Filed herewith.
(13) Included with EDGAR version only.
-18-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Celebrity, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CELEBRITY, INC.
By: /s/ ROBERT H. PATTERSON, JR.
-----------------------------
Robert H. Patterson, Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: September 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
-------------------------------------- -------------------------------------- ------------------
<S> <C> <C>
/s/ ROBERT H. PATTERSON, JR. Chairman of the Board, President and September 26, 2000
-------------------------------------- Chief Executive Officer (Principal
Robert H. Patterson, Jr. Executive Officer)
/s/ LYNN SKILLEN Vice President -- Finance, Treasurer September 26, 2000
-------------------------------------- and Chief Financial Officer (Principal
Lynn Skillen Financial Officer and Principal
Accounting Officer)
/s/ B. D. HUNTER Director September 26, 2000
--------------------------------------
B. D. Hunter
/s/ C. A. LANGNER Director September 26, 2000
--------------------------------------
C. A. Langner
/s/ VALERIE ANNE MARS Director September 26, 2000
--------------------------------------
Valerie Anne Mars
/s/ RICHARD YUEN Managing Director of Celebrity Exports September 26, 2000
-------------------------------------- International Limited and Director
Richard Yuen
</TABLE>
-19-
<PAGE> 22
CELEBRITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999.................. F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Years Ended June 30, 2000, 1999 and 1998.......... F-5
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended June 30, 2000, 1999 and 1998................. F-6
Consolidated Statements of Cash Flows for the Years Ended June 30,
2000, 1999 and 1998..................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................... F-26
</TABLE>
Other financial statement schedules are omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
F-1
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Celebrity, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Celebrity, Inc. and its subsidiaries at June 30, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2000 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
August 31, 2000
F-2
<PAGE> 24
CELEBRITY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
----------------------
2000 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 137 $ 558
Accounts receivable, net 11,843 13,157
Inventories, net 17,977 18,847
Deferred tax asset 2,173 2,173
Other assets 480 579
------- -------
Total current assets 32,610 35,314
------- -------
Property, plant and equipment, net 8,129 9,479
Intangible assets, net 717 888
Other assets 381 590
------- -------
Total assets $41,837 $46,271
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 25
CELEBRITY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,087 $ 6,800
Accrued expenses 1,668 1,774
Income taxes payable 533 496
Current maturities of long-term obligations (includes $500
payable to related party) 587 1,200
-------- --------
Total current liabilities 8,875 10,270
-------- --------
Long-term obligations, net of current portion 25,006 27,083
-------- --------
Total liabilities 33,881 37,353
-------- --------
Shareholders' equity:
Common stock (25,000,000 shares of $.01 par value
authorized; 1,544,166 shares issued and outstanding) 15 15
Paid-in capital 21,577 21,577
Accumulated deficit (13,492) (12,640)
Accumulated other comprehensive loss (144) (34)
-------- --------
Total shareholders' equity 7,956 8,918
-------- --------
Commitments and contingencies (Note 15)
Total liabilities and shareholders' equity $ 41,837 $ 46,271
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 26
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 94,850 $ 110,662 $ 122,262
Costs and operating expenses:
Cost of goods sold 69,929 82,335 97,660
Selling 3,883 4,570 4,750
General and administrative 17,210 17,571 22,095
Depreciation and amortization 1,413 1,410 2,176
Restructuring charges -- -- 4,454
--------- --------- ---------
92,435 105,886 131,135
--------- --------- ---------
Operating income (loss) 2,415 4,776 (8,873)
Interest income 75 133 202
Interest expense (3,573) (3,903) (3,699)
Other income, net 682 60 13
--------- --------- ---------
Income (loss) before income taxes (401) 1,066 (12,357)
Provision for income taxes 451 440 372
--------- --------- ---------
Income (loss) before extraordinary charge (852) 626 (12,729)
Extraordinary charge related to extinguishment of
debt, net of tax -- 68 --
--------- --------- ---------
Net income (loss) $ (852) $ 558 $ (12,729)
--------- --------- ---------
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (110) (25) (6)
--------- --------- ---------
Other comprehensive loss, net of tax (110) (25) (6)
--------- --------- ---------
Comprehensive income (loss) $ (962) $ 533 $ (12,735)
========= ========= =========
Basic and diluted income (loss) per share:
Income (loss) before extraordinary charge $ (.55) $ .40 $ (8.09)
Extraordinary charge -- (.04) --
--------- --------- ---------
Income (loss) per common share $ (.55) $ .36 $ (8.09)
========= ========= =========
Basic weighted average common shares outstanding 1,544 1,559 1,573
Diluted weighted average common shares outstanding 1,544 1,561 1,573
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 27
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- PAID-IN SUBSCRIPTIONS
SHARES PAR VALUE CAPITAL RECEIVABLE
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 1,574,035 16 $ 22,400 $ (442)
Purchase of redeemable common stock 3,366 -- 175 --
Employee stock purchase plan 9,550 -- 153 (153)
Payments on stock subscriptions
receivable -- -- -- 25
Issuance of warrants -- -- 70 --
Net loss -- -- -- --
Other comprehensive loss, net of tax -- -- -- --
---------- ---------- ---------- ----------
Balance at June 30, 1998 1,586,951 16 22,798 (570)
Payments on stock subscriptions
receivable -- -- -- 12
Cancellation of employee stock
subscriptions receivable (26,525) (1) (557) 558
Retirement of treasury stock (16,260) -- (700) --
Issuance of warrants -- -- 36 --
Net income -- -- -- --
Other comprehensive loss, net of tax -- -- -- --
---------- ---------- ---------- ----------
Balance at June 30, 1999 1,544,166 15 21,577 --
Net loss -- -- -- --
Other comprehensive loss, net of tax -- -- -- --
---------- ---------- ---------- ----------
Balance at June 30, 2000 1,544,166 $ 15 $ 21,577 $ --
========== ========== ======== ==========
<CAPTION>
RETAINED ACCUMULATED
EARNINGS OTHER TREASURY
(ACCUMULATED COMPREHENSIVE STOCK,
DEFICIT) LOSS AT COST TOTAL
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ (469) $ (3) $ (525) $ 20,977
Purchase of redeemable common stock -- -- (175) --
Employee stock purchase plan -- -- -- --
Payments on stock subscriptions
receivable -- -- -- 25
Issuance of warrants -- -- -- 70
Net loss (12,729) -- -- (12,729)
Other comprehensive loss, net of tax -- (6) -- (6)
---------- ---------- ---------- ----------
Balance at June 30, 1998 (13,198) (9) (700) 8,337
Payments on stock subscriptions
receivable -- -- -- 12
Cancellation of employee stock
subscriptions receivable -- -- -- --
Retirement of treasury stock -- -- 700 --
Issuance of warrants -- -- -- 36
Net income 558 -- -- 558
Other comprehensive loss, net of tax -- (25) -- (25)
---------- ---------- ---------- ----------
Balance at June 30, 1999 (12,640) (34) -- 8,918
Net loss (852) -- -- (852)
Other comprehensive loss, net of tax -- (110) -- (110)
---------- ---------- ---------- ----------
Balance at June 30, 2000 $ (13,492) $ (144) $ -- $ 7,956
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 28
CELEBRITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (852) $ 558 $(12,729)
Adjustments to reconcile net income (loss) to net
cash provided by operations:
Depreciation 1,242 1,239 1,693
Amortization 171 171 483
(Gain) loss on sale of assets (477) 46 49
Noncash interest expense 131 194 87
Extraordinary charge related to extinguishment of debt -- 68 --
Restructuring charges -- -- 4,454
Changes in operating assets and liabilities:
Accounts receivable 1,314 964 1,499
Inventories (251) 3,919 7,853
Other assets, net 157 829 789
Accounts payable and accrued expenses (777) (4,143) (1,179)
Income taxes payable (45) (102) (69)
-------- -------- --------
Net cash provided by operating activities 613 3,743 2,930
-------- -------- --------
Investing activities:
Additions to property and equipment (437) (1,043) (447)
Proceeds from sale of equipment 44 67 --
Proceeds from sale of assets (see Note 4) 2,184 -- --
-------- -------- --------
Net cash provided by (used in) investing activities 1,791 (976) (447)
-------- -------- --------
Financing activities:
Net proceeds from (payments on) new credit facility (2,067) (911) 23,724
Payments on old credit facility -- -- (26,162)
Proceeds from other long-term obligations 901 500 500
Payments on other long-term obligations (1,549) (8,770) (581)
Proceeds from sale-leaseback of facilities -- 7,500 --
Payments for debt issuance cost -- (554) (299)
Redemption of common stock -- (88) (87)
Payments on subscriptions receivable -- 12 25
-------- -------- --------
Net cash used in financing activities (2,715) (2,311) (2,880)
-------- -------- --------
Effect of exchange rate changes on cash (110) (25) (6)
Increase (decrease) in cash and cash equivalents (421) 431 (403)
Cash and cash equivalents, beginning of period 558 127 530
-------- -------- --------
Cash and cash equivalents, end of period $ 137 $ 558 $ 127
======== ======== ========
</TABLE>
See Notes 7, 8 and 9 for supplementary disclosures.
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE> 29
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Celebrity, Inc. ("Celebrity") and its wholly-owned subsidiaries,
Celebrity Exports International Limited ("Celebrity Hong Kong"), and
Celebrity Holdings, Inc., ("Holdings") are suppliers of high quality
artificial floral products, including artificial flowers, flowering
bushes and foliage, pre-made floral arrangements, trees and floor
planters that the Company assembles, and other decorative accessories,
selling primarily to mass market retailers, craft store chains and other
retailers and to wholesale florists. Celebrity, Celebrity Hong Kong, and
Holdings are referred to herein collectively as the "Company." The Cluett
Corporation ("Cluett") and India Exotics, Inc. ("India Exotics"),
wholly-owned subsidiaries of the Company, were merged into Celebrity as
of June 30, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
All majority-owned subsidiaries are consolidated and all material
intercompany accounts and transactions are eliminated. Certain prior
period amounts have been reclassified for comparative purposes.
REVENUE RECOGNITION
The Company recognizes revenue from merchandise sales at the time of
shipment. Title to merchandise transfers at point of shipment. Damaged or
defective products may be returned to the Company for replacement or
credit. The Company offers sales volume rebates to customers based on the
level of their sales activity. The effects of returns and discounts are
estimated and recorded at time of shipment. Volume rebates are estimated
and recorded based on sales activity.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with original
maturities of three months or less.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using standard costs which approximates average costs. Costs include
material, labor and overhead. The Company establishes valuation reserves
for discontinued or obsolete products.
F-8
<PAGE> 30
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, software 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. The carrying
value of intangible assets is periodically reviewed by the Company and
impairments are recognized when the estimated undiscounted future cash
flows derived from such intangible assets are less than their carrying
value.
CAPITALIZED SOFTWARE
In March 1998, Statement of Position ("SOP") 98-1, Accounting for Costs
of Computer Software Developed or Obtained for Internal Use, was issued.
This SOP requires that certain costs related to the development or
purchase of internal-use software be capitalized and amortized over the
estimated useful life of the software. The Company adopted the provisions
of this SOP in fiscal 1999.
LONG-LIVED ASSETS
The Company periodically reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. Assets are grouped at the
lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. In such cases,
if the future undiscounted cash flows of the underlying assets are less
than the carrying amount, then the carrying amount of the long-lived
asset will be adjusted for impairment to a level commensurate with a
discounted cash flow analysis of the underlying assets.
During the fourth quarter of fiscal 1998, the Company decided to exit the
operations of India Exotics, a supplier of decorative metal products and
other decorative accessories to craft store chains and other specialty
retailers, which was acquired in fiscal 1995. As a result of this
decision, certain long-lived assets were written down to their estimated
fair value less cost to sell (Note 6).
F-9
<PAGE> 31
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
ACCOUNTS PAYABLE
The Company records book overdrafts in its cash accounts as accounts
payable. Accounts payable includes book overdrafts representing
outstanding checks in excess of funds on deposit of approximately
$252,000 at June 30, 2000.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("FAS 109"), Accounting for Income
Taxes, which prescribes an asset and liability method that requires the
recognition of deferred tax assets and liabilities for the anticipated
future tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
The Company periodically reviews the realizability of its deferred tax
assets and records valuation allowances, as appropriate, when realization
of the deferred tax asset is not likely.
ADVERTISING COSTS
Advertising costs are expensed in the period incurred. Advertising
expense for fiscal 2000, 1999, and 1998 was $467,000, $718,000 and
$447,000, respectively.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("FAS 130"). FAS 130 establishes
standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all
changes in equity during a period from non-owner sources. Accumulated
other comprehensive loss, as presented on the accompanying consolidated
balance sheets, consists of cumulative translation adjustments.
EARNINGS (LOSS) PER SHARE
The Company calculates earnings per share pursuant to Statement of
Financial Accounting Standards No. 128, Earnings per Share ("FAS 128").
Basic earnings per share are computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted
earnings per share are computed by dividing net income (loss) by the
weighted average number of common shares and dilutive potential common
shares outstanding.
Options to purchase 160,975 shares of Common Stock and warrants to
purchase 100,000 shares of Common Stock were excluded from the diluted
earnings per share calculations for fiscal 2000 because their inclusion
would be antidilutive due to the net loss incurred during the year. For
fiscal 1999, common share equivalents related to shares issuable upon the
exercise of stock options approximated 2,000 shares. Options to purchase
149,725 shares of Common Stock and a warrant to purchase 25,000 shares of
Common Stock were excluded from the diluted earnings per share
calculation because their exercise prices were greater than the average
market price of the Common Stock. Options to purchase 177,475 shares of
Common Stock and a warrant to purchase
F-10
<PAGE> 32
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
25,000 shares of Common Stock were excluded from the diluted earnings per
share calculations for fiscal 1998 because their inclusion would be
antidilutive due to the net loss incurred during the year.
FOREIGN CURRENCY TRANSLATION
All balance sheet asset and liability accounts of Celebrity Hong Kong are
translated to U.S. dollars using the rate of exchange in effect at the
balance sheet date. Celebrity Hong Kong statements of operations are
translated at exchange rates approximating the actual rates on the dates
of the transactions. Cumulative translation adjustments are not included
in determining net income but are included as a separate component of
shareholders' equity in accumulated other comprehensive income (loss).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ significantly from
those estimates.
3. REVERSE STOCK SPLIT
A four-to-one reverse split of the Company's Common Stock occurred in
February 1999. All references to shares, share prices, per share amounts
and stock plans have been adjusted retroactively to reflect the
four-to-one reverse Common Stock split.
4. SALE OF ASSETS
On May 1, 2000, substantially all the assets of the wholesale florist
supply business in Dallas, Texas, was sold for approximately $2.2 million
and the assumption of specified liabilities. The assets sold consisted
primarily of inventory and other assets used in connection with the
operations. The Company recognized a gain of approximately $465,000 on
the transaction.
F-11
<PAGE> 33
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts as of June 30 is as
follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Accounts receivable:
Accounts receivable $ 12,818 $ 14,850
Less: allowance for doubtful accounts and customer
deductions, returns and allowances (975) (1,693)
-------- --------
$ 11,843 $ 13,157
======== ========
Inventories:
Raw materials $ 8,617 $ 6,663
Finished goods 9,660 13,026
Less: inventory reserves (300) (842)
-------- --------
$ 17,977 $ 18,847
======== ========
Property, plant and equipment:
Assets under capital lease $ 9,738 $ 9,738
Furniture, fixtures, software and equipment 5,178 5,606
Transportation equipment 320 387
Leasehold improvements 1,164 1,753
-------- --------
16,400 17,484
Less: accumulated depreciation (8,271) (8,005)
-------- --------
$ 8,129 $ 9,479
======== ========
</TABLE>
At June 30, 2000 and 1999, accumulated amortization of assets under
capital lease was $3,208,000 and $2,812,000, respectively.
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Intangible:
Excess of cost over fair value of net assets acquired $ 765 $ 765
Customer list 1,327 1,327
------- -------
2,092 2,092
Less: accumulated amortization (1,375) (1,204)
------- -------
$ 717 $ 888
======= =======
</TABLE>
F-12
<PAGE> 34
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. SPECIAL CHARGES
In the fourth quarter of fiscal 1998, the Company recorded restructuring
charges of approximately $4,454,000. These charges resulted from the
Company's June 1998 decision to exit the India Exotics operations. The
Company wrote down the carrying value of certain assets ($3,634,000),
primarily goodwill, other intangible assets and property and equipment,
to their estimated fair value, less cost to sell, and recorded as a fixed
obligation the remaining payments ($614,000) due pursuant to a
noncompetition agreement related to the India Exotics acquisition (Note
8). The charge also included a contractual lease termination obligation
($206,000) resulting from the closure of the India Exotics
office/distribution center in St. Louis, Missouri. Substantially all
activities of India Exotics had ceased by June 30, 1998. The following
table presents unaudited operating results for India Exotics (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Net sales $ 12,398
Operating loss $ (6,326)
</TABLE>
The Company also recorded special charges of approximately $1,128,000 in
the fourth quarter of fiscal 1998 related to inventory adjustments
resulting from the Company's decision to exit the India Exotics
operations and actions taken by the Company to discontinue and liquidate
certain underperforming product lines, primarily at Cluett. These charges
are included in cost of goods sold in the accompanying statements of
operations.
There were no amounts reclassified from the reserve or released from the
reserve. The assets that were written down during fiscal 1998 were
completely disposed of in fiscal 1999 with no adjustment to the estimated
fair value. The following table summarizes activities in these reserves
during fiscal 1999 and fiscal 2000 (in thousands):
<TABLE>
<CAPTION>
SETTLEMENT LEASE INVENTORY TOTAL
AGREEMENT TERMINATION WRITE-DOWN RESERVE
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1998 $ 614 $ 206 $ 1,128 $ 1,948
Charges against reserve (239) (206) (1,128) (1,573)
------- ------- ------- -------
Balance at June 30, 1999 $ 375 $ -- $ -- $ 375
======= ======= ======= =======
Charges against reserve (375) -- -- (375)
------- ------- ------- -------
Balance of June 30, 2000 $ -- $ -- $ -- $ --
======= ======= ======= =======
</TABLE>
F-13
<PAGE> 35
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. INCOME TAXES
The components of income (loss) before income taxes are summarized below
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Domestic $ (3,707) $ (1,935) $(14,547)
Foreign 3,306 3,001 2,190
-------- -------- --------
$ (401) 1,066 (12,357)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Current:
State $ -- $ -- $ --
Federal -- -- --
Foreign 451 440 372
Deferred -- -- --
-------- -------- --------
$ 451 $ 440 $ 372
======== ======== ========
</TABLE>
The components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
Net operating loss and other carryforwards $ 9,961 $ 8,665
Inventory related items 687 710
Accounts receivable allowance 291 466
Intangible assets 1,305 1,278
Property and equipment basis differences 286 325
Other 34 (79)
-------- --------
12,564 11,365
Less: valuation allowance (10,391) (9,192)
-------- --------
$ 2,173 $ 2,173
======== ========
</TABLE>
F-14
<PAGE> 36
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The provision (benefit) for income taxes differs from those computed
using the statutory U.S. federal income tax rate as a result of the
following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------
2000 1999 1998
------------------ ----------------- -----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------ -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) at statutory rate $ (136) 34 % $ 362 34 % $(4,201) 34 %
Meals and entertainment and
other disallowed expenses 69 (17) 12 1 92 (1)
Valuation allowance 1,191 (297) 693 65 4,867 (39)
Other -- -- -- -- (14) --
Foreign tax rate differentials (673) 168 (627) (59) (372) 3
------- ---- ------- --- ------- ---
$ 451 (112)% $ 440 41 % $ 372 (3)%
======= ==== ======= === ======= ===
</TABLE>
Because the Company plans to continue financing Celebrity Hong Kong's
expansion through reinvestment of undistributed Celebrity Hong Kong
earnings, no provision is made for U.S. taxes on such earnings. If the
Celebrity Hong Kong earnings were distributed, the U.S. tax on the
distribution would be approximately $8,055,000 before consideration of
any available tax loss carryforwards.
Income tax paid during fiscal 2000, 1999 and 1998 was $383,000, $540,000
and $488,000, respectively.
At June 30, 2000, the Company had net operating loss carryforwards of
approximately $29,042,000 and minimum tax credit carryforwards of
$87,000. The net operating loss carryforwards expire between 2011 and
2015. If certain substantial changes in the Company's ownership should
occur, there would be an annual limitation on the amount of the
carryforwards that could be utilized.
At June 30, 2000, the Company has recorded a valuation allowance of
$10,391,000 to reflect the estimated amount of deferred tax assets that,
at this time, are uncertain to be realized in the future. These
uncertainties relate primarily to whether the Company will be able to
utilize net operating loss carryforwards and certain tax credit
carryforwards prior to their expiration. The valuation allowance was
$9,192,000 at June 30, 1999.
F-15
<PAGE> 37
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
Revolving credit facility; secured by substantially
all accounts receivable and inventory, balance due July 2002 $ 17,671 $ 19,713
Term loan secured by substantially all accounts
receivable and inventory -- 700
Noninterest bearing obligation -- 375
Financing lease obligations to related party; payable in
monthly installments of $75 with balance due April 2024 7,433 7,491
Note payable to related party; interest at prime plus 2%;
(11.5% at June 30, 2000) 500 --
Installment notes; payable monthly through February 2003,
interest rates vary from 7% to 13%; secured by automobiles 26 17
Other 13 62
-------- --------
25,643 28,358
Less: current maturities (587) (1,200)
Less: unamortized debt discounts (50) (75)
-------- --------
$ 25,006 $ 27,083
======== ========
</TABLE>
On June 15, 2000, the Company entered into a $500,000 short-term note
agreement with an officer and principal shareholder of the Company. The
note bears interest at prime plus 2% and is due on December 31, 2000. The
proceeds were primarily used to fund the working capital needs of
Celebrity Hong Kong.
In April 1999, the Company completed the sale and leaseback of its
office, production and distribution facilities to a partnership, which is
controlled by an officer and principal shareholder of the Company, for
$7,500,000. The partnership assumed the Company's obligations under a
promissory note of $4,444,000 secured by the property; however, the
Company has guaranteed the debt to the lender. The partnership's
assumption of the Company's debt resulted in an extraordinary loss of
$68,000, or $.04 per share, related to the write-off of unamortized
financing costs. A promissory note for $1,036,000 was issued to the
Company by the partnership as part of the consideration. This note was
subsequently purchased from the Company by a partnership controlled by
the officer and principal shareholder and a relative of the officer and
principal shareholder. Including the sale of the promissory note, the
Company received proceeds from the transaction of approximately
$2,846,000, net of fees of approximately $210,000. Notes payable to
F-16
<PAGE> 38
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
the officer in the amount of $1,077,000, which includes accrued interest,
were repaid with a portion of the proceeds. The remaining proceeds were
utilized for working capital purposes. Due to the continuing involvement
of the Company, the transaction was accounted for as a financing lease by
recording the sales proceeds as a liability and recording lease payments,
exclusive of an interest portion, as a reduction of the liability in
accordance with Statement of Financial Accounting Standards No. 98,
Accounting for Leases. In connection with the sale transaction and the
subsequent leaseback, and in consideration for the officer and principal
shareholder's personal guarantee of the partnership's debt, the Company
issued to the partnership a five-year warrant to purchase 75,000 shares
of Common Stock at $3.00 per share. The fair value of the warrant was
estimated to be $36,000. Accordingly, the proceeds from the sales
transactions were allocated between long-term obligations and paid-in
capital, resulting in a debt discount that will be accreted to the
redemption amount over the term of the lease.
The Company has a revolving credit facility for $26,500,000. The facility
originally included a term loan with an initial amount of $3,500,000. The
term loan was payable in monthly installments of principal of $200,000
beginning in May 1998 and the remaining outstanding principal balance
under the term loan was paid on October 1, 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 specific
EBITDA requirements (per annum rates were 9.75% and 9.25% at June 30,
2000 and 1999, respectively), (iii) the financial ratio covenants were
reset, and (iv) the monthly fees were reduced from $15,000 to $2,000. In
October 1999, the Company amended the facility whereby the advances limit
was modified to include a 90- day bridge advance of $1,500,000, bearing
interest at 12.5% per annum. The purpose of the advance was to fund
seasonal inventory increases. The advance was guaranteed by an entity
controlled by the Company's Chairman of the Board, President and Chief
Executive Officer, which also provided a letter of credit to the lender
in the amount of $375,000 as additional security. In January 2000, the
Company amended the facility to extend the bridge advance until June 15,
2000, with monthly reductions of $300,000 beginning February 15, 2000.
This amendment also contained provisions permitting the Company to borrow
and repay, from time to time, up to $1,000,000 from the Company's
Chairman of the Board, President and Chief Executive Officer. Borrowing
limits under the revolving credit facility are based on specified
percentages of eligible accounts receivable and inventories. As a result
of such limits, the maximum amount the Company was eligible to borrow at
June 30, 2000 was $17,928,000. The amount outstanding under the revolving
credit facility at June 30, 2000 was $17,671,000. As a condition to
establishing the credit facility, the Company issued to the lender a
five-year warrant to purchase 25,000 shares of Common Stock at $4.00 per
share. The fair value of the warrant was estimated to be $70,000.
Accordingly, the proceeds from the new credit facility were allocated
between debt and paid-in capital, resulting in a debt discount that will
be accreted to the redemption amount over the term of the new credit
facility. Amounts borrowed under the revolving credit facility and the
term loan are secured by accounts receivable, inventory, equipment, and
general intangibles (including intellectual property) of the Company. In
addition, substantially all stock of the Company's subsidiaries has been
pledged to the lender. The revolving credit facility and the term loan
contain certain covenants limiting the incurrence of indebtedness,
prohibiting the payment of dividends and requiring the Company to
maintain certain financial ratios. The Company was in compliance
F-17
<PAGE> 39
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
with all covenants at June 30, 2000. The commitment fee for the unused
portion of the revolving credit facility is .25% of the average unused
portion of the credit facility during the year. Unused borrowing
availability under the credit facility was approximately $257,000 at June
30, 2000.
In the third quarter of fiscal 1998, the Company renegotiated the payment
terms of all of its remaining obligations to the former owners of India
Exotics related to the 1995 acquisition of the business. The obligations
renegotiated included those remaining under a note, a noncompetition
agreement and employment agreements with the former owners, and certain
other obligations. The note was canceled and all payment obligations
under the note and all other agreements with the former owners were
consolidated into one agreement obligating the Company to make payments
of approximately $42,000 per month from April 1, 1998 through March 1,
2000.
Interest paid during fiscal 2000, 1999 and 1998 was $3,352,000,
$3,634,000, $3,507,000, respectively.
The principal reductions on notes payable are $522,000, $10,000 and
$17,678,000 for the years ended June 30, 2001, 2002 and 2003,
respectively. Future minimum lease payments under the financing lease are
as follows (in thousands):
<TABLE>
<S> <C>
2001 $ 900
2002 900
2003 900
2004 900
2005 900
Thereafter 16,950
--------
Total 21,450
Less: amounts representing interest (14,017)
--------
Present value of capital lease obligations 7,433
Less: current maturities (65)
--------
Long-term maturities $ 7,368
========
</TABLE>
9. EMPLOYEE BENEFIT PLANS
The Celebrity, Inc. 401(k) Plan is available to substantially all of the
Company's employees. Eligible employees may contribute up to 15% of their
annual compensation to this plan. The Company's matching contributions
are determined each year by the Company. The Company made matching
contributions equal to 100% of the first 3% of the employees'
contributions for fiscal 2000, 1999 and 1998, contributing $119,000,
$113,000 and $129,000, respectively.
The Celebrity, Inc. 1993 Employee Stock Purchase Plan was adopted in
fiscal 1994. Under this plan, the Company periodically offered to its
employees the right to purchase shares of Common Stock at the market
value as of the date of the offer. Employee payment for plan shares was
made either with cash or a promissory note, which are classified as
subscriptions receivable on the balance sheet. The participants' shares
were fully vested upon purchase. In fiscal 1999, the Company cancelled
all subscriptions receivable from employees that were outstanding under
this plan and the related Common Stock.
F-18
<PAGE> 40
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. STOCK OPTION PLAN
The Celebrity, Inc. Amended and Restated Stock Option Plan (the "Plan")
was adopted effective with the completion of the Company's initial public
offering. An aggregate of 250,000 shares of Common Stock has been
reserved for issuance under the Plan. The Plan permits the granting of
incentive stock options to Celebrity's employees and nonqualified stock
options to employees, nonemployee members of the Board of Directors and
advisors. Options are exercisable during the period specified in each
option agreement and are generally exercisable in installments pursuant
to a vesting schedule as designated by the Compensation Committee of the
Board of Directors. The exercise price determined by the Compensation
Committee may not be less than the fair market value of the Common Stock
on the date of grant. No option will remain exercisable later than ten
years after the date of grant. A summary of options granted and
outstanding under the plan is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PER SHARE
NUMBER EXERCISE
STOCK OPTION ACTIVITY OF SHARES PRICE
--------------------------- --------- ---------
<S> <C> <C>
June 30, 1997 109,100 $ 17.96
Granted 91,500 $ 5.72
Canceled or surrendered (23,125) $ 17.44
-------
June 30, 1998 177,475 $ 11.72
Granted 12,750 $ 2.28
Canceled or surrendered (29,000) $ 10.74
-------
June 30, 1999 161,225 $ 10.89
Granted 1,500 $ 3.25
Canceled or surrendered (1,750) $ 9.05
-------
June 30, 2000 160,975 $ 11.00
=======
</TABLE>
F-19
<PAGE> 41
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following information is presented for stock options outstanding at
June 30, 2000. At June 30, 2000, options to purchase an aggregate of
94,075 shares of Common Stock were exercisable at a weighted average
exercise price of $13.88 per share.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
PER SHARE AVERAGE PER SHARE PER SHARE
EXERCISE PRICE REMAINING EXERCISE EXERCISE
RANGE SHARES LIFE PRICE SHARES PRICE
--------------- ------ --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$ 2.00 - 3.25 13,000 8.8 years $ 2.20 5,000 $ 2.53
$ 4.25 - 5.52 50,250 8.0 years $ 4.77 20,750 $ 4.81
$ 7.75 25,000 7.7 years $ 7.75 10,000 $ 7.75
$ 12.75 - 16.00 37,500 6.8 years $ 13.41 23,100 $ 13.41
$ 19.52 - 26.00 33,975 3.3 years $ 21.89 33,975 $ 21.89
$ 50.00 1,250 2.5 years $ 50.00 1,250 $ 50.00
</TABLE>
Included in the table above are fully vested nonqualified options to
purchase an aggregate of 9,750 shares of Common Stock. These are held by
three outside directors and have exercise prices ranging from $2.50 to
$50.00 per share.
The Company adopted the disclosure-only option under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"). On a pro forma basis, if the Company had
recorded compensation expense in accordance with FAS 123 for fiscal 2000,
the net loss would have been $902,000 and the basic and diluted loss per
share would have been $0.58; for fiscal 1999, the net income would have
been $510,000 and the basic and diluted income per share would have been
$0.33; and for fiscal 1998, the net loss would have been $12,766,000 and
the basic and diluted loss per share would have been $8.12.
The weighted average fair value at date of grant for options granted
during fiscal 2000, 1999 and 1998, was $2.37, $1.54 and $3.90 per option,
respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model, with the
following weighted average assumptions used for grants during fiscal
2000, 1999 and 1998:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Dividend yield -- -- --
Expected volatility 54.7% 49.1% 50.1%
Risk free interest rate 6.5% 5.7% 5.7%
Option term 10 years 10 years 10 years
</TABLE>
F-20
<PAGE> 42
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. RELATED PARTIES
Celebrity leased a warehouse in Tyler, Texas from a shareholder in the
prior year. This lease was terminated in April 1999. Amounts paid under
this lease were approximately $96,000 and $120,000 in fiscal 1999 and
1998, respectively.
Long-term obligations at June 30, 2000 include a note payable and a
financing lease obligation to a related party (Note 8).
12. SEGMENT REPORTING
In June 1997, Statement of Financial Accounting Standards No. 131,
Disclosure About Segments of an Enterprise and Related Information ("FAS
131") was issued. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. FAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company
adopted FAS 131 in fiscal 1999.
The Company operates and management monitors the results in a single
operating segment. Celebrity Hong Kong exports artificial flowers,
foliage and flowering bushes from southeastern Asia to the U.S. and
Europe and Celebrity distributes and markets its products in the U.S.
using a direct sales force and a distribution center, primarily to mass
market retailers, craft store chains and other specialty retailers and to
wholesale florists.
Financial information by geographic area for fiscal 2000, 1999 and 1998
is summarized in the tables below:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net sales to external customers:
Hong Kong $ 33,207 $ 38,505 $ 38,607
United States 61,643 72,157 83,655
-------- -------- --------
Total $ 94,850 $110,662 $122,262
======== ======== ========
</TABLE>
Sales are attributed to countries in which the sales originated (i.e.,
where the subsidiary is domiciled).
F-21
<PAGE> 43
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------
2000 1999 1998
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Long-lived assets (net of depreciation and amortization):
Hong Kong $ 295 $ 387 $ 141
United States 8,551 9,980 10,706
------- ------- -------
Total $ 8,846 $10,367 $10,847
======= ======= =======
</TABLE>
13. FINANCIAL INSTRUMENTS AND CONCENTRATIONS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The carrying
amounts of cash and cash equivalents, accounts receivable and accounts
payable approximate fair value because of their immediate or short
maturities. The carrying amounts of the revolving credit facility and
other variable-rate notes payable approximate their fair value because
the interest rates on these instruments change with market interest
rates. The fair value, based on market interest rates, of the Company's
fixed-rate notes payable at June 30, 2000 and 1999, respectively, did not
significantly differ from their carrying amounts.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents and trade receivables. The Company limits its exposure to
credit risk on its cash and cash equivalents by placing these instruments
with high quality financial institutions. With respect to accounts
receivable, the Company is exposed to group concentrations of credit risk
as its customer base consists primarily of craft store chains, discount
retailers, specialty retailers and warehouse clubs. In fiscal 2000, the
Company had one customer that accounted for net sales of $31.8 million.
The June 30, 2000 accounts receivable balance for this customer was $2.9
million. The Company had one other customer whose accounts receivable
balance at June 30, 2000 was $1.7 million. In fiscal 1999, the Company
had one customer that accounted for net sales of $36.3 million. The June
30, 1999 accounts receivable balance for this customer was $3.4 million.
The Company had one other customer whose accounts receivable balance at
June 30, 1999 was $2.1 million. In fiscal 1998, two customers accounted
for net sales of $35.8 million and $13.9 million, respectively. The June
30, 1998 accounts receivable balance for one of these customers was $4.4
million. The Company performs ongoing evaluations of the financial
condition of its customers, but does not require collateral to secure
customer receivables. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
14. CERTAIN FACTORS THAT COULD AFFECT FUTURE OPERATIONS
A substantial portion of the Company's consolidated net sales is derived
from products manufactured in and exported from the Far East, primarily
from the People's Republic of China (the "PRC"). Risks inherent in such
international operations include loss of revenue, property and equipment
from such hazards as expropriation, nationalization, war, insurrection
and other political risks, and include other factors that could affect
the Company's source of supply or cost of supply, including: general
economic conditions in the Far East, changes in currency valuations,
export credit availability, freight carrier availability and cost and
U.S. trade policy and laws related
F-22
<PAGE> 44
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
to imports. If the U.S. government were to terminate normal trading
relations status for the PRC or impose higher tariff rates on products
imported by the Company from the PRC, the duty on products imported by
the Company from the PRC could increase substantially. To date, the
Company's international operations have not been materially affected by
these risks. However, if the Company's supply or cost of products were to
be significantly affected, it could have a material adverse effect on the
Company's results of operations.
F-23
<PAGE> 45
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENCIES
RECEIVABLES SOLD WITH RECOURSE
During fiscal 2000, 1999 and 1998, proceeds of approximately $27,642,000,
$34,277,000, and $33,539,000, respectively, were received from Hong Kong
banks in connection with the financing, with recourse, of Celebrity Hong
Kong accounts receivable related to shipments directly to customers. As
of June 30, 2000 and 1999, the Company was contingently liable to the
Hong Kong banks with respect to such financing activities for $1,691,000
and $2,672,000, respectively. The Company has retained substantially the
same risk of credit loss as if the receivables had not been sold (Note
13). The Company's revolving credit facility restricts the aggregate
amount that may be financed under the export credit facilities at any
time to $7,000,000.
LEASES
The Company leases certain buildings and equipment under noncancelable
operating leases. Future minimum lease payments for the next five fiscal
years and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
2001 $ 1,815
2002 1,520
2003 876
2004 858
2005 866
Thereafter 1,055
--------
Total minimum lease payments $ 6,990
========
</TABLE>
Rent expense for operating leases was $1,920,000, $1,854,000 and
$3,223,000 for fiscal 2000, 1999 and 1998, respectively.
F-24
<PAGE> 46
CELEBRITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
16. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The Company's historical unaudited quarterly results of operations for
fiscal 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
FISCAL 2000
-----------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2000 2000 1999 1999
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 23,041 $ 23,532 $ 21,454 $ 26,823
Net income (loss) (709) (587) 59 385
Basic and diluted income (loss) per share $ (.46) $ (.38) $ .04 $ .25
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999
-----------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1998 1998
-------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 31,790 $ 25,760 $ 25,986 $ 27,126
Net income (loss) before extraordinary item 715 (79) 230 (240)
Net income (loss) 647 (79) 230 (240)
Basic and diluted income (loss) per share
before extraordinary item $ .46 $ (.05) $ .15 $ (.15)
Basic and diluted income (loss) per share $ .42 $ (.05) $ .15 $ (.15)
</TABLE>
17. SUBSEQUENT EVENT
On August 31, 2000, the Company received notice from NASDAQ that it had
failed to maintain a minimum market value of public float that is
required for continued listing of the Common Stock on the NASDAQ SmallCap
Market. The Company has until November 29, 2000 to comply with this rule
or the Common Stock will be delisted.
F-25
<PAGE> 47
CELEBRITY, INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 2000
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE
FOR BALANCE AT CHARGED TO BALANCE AT
DOUBTFUL BEGINNING COST AND END
ACCOUNTS OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
2000 $ 1,693 $ 536 $ (1,254) $ 975
1999 1,949 773 (1,029) 1,693
1998 2,017 2,869 (2,937) 1,949
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
INVENTORY BEGINNING COST AND END
RESERVES OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
2000 $ 842 $ 515 $ (1,057) $ 300
1999 1,652 316 (1,126) 842
1998 433 1,332 (113) 1,652
</TABLE>
F-26
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 -- Amended and Restated Articles of Incorporation of the Registrant.(9)
3.2 -- Articles of Correction of the Registrant.(9)
3.3 -- Bylaws of the Registrant.(1)
4.1 -- Specimen Common Stock Certificate.(1)
4.2 -- Warrant, dated February 3, 1998, issued by Registrant to Foothill Capital Corporation.(5)
4.3 -- Warrant, dated April 22, 1999, issued by Registrant to RHP Management, LLC.(8)
10.1 -- Letter agreement dated May 19, 1997, setting forth the terms of a banking facility between
Celebrity Exports International Limited and The Hongkong and Shanghai Banking Corporation
Limited.(4)
10.2 -- General Security Agreement Relating to Goods between Celebrity Exports International
Limited and The Hongkong and Shanghai Banking Corporation Limited dated April 30, 1984.(1)
10.3 -- Form of Guarantee by Limited Company executed by Registrant in favor of The Hongkong and
Shanghai Banking Corporation Limited.(4)
10.4 -- Commitment of Celebrity Exports International Limited to maintain a combined net worth of
HK$50,000,000.(4)
10.5 -- Loan Agreement dated July 27, 1998 by and between The China State Bank Limited and
Celebrity Exports International Limited.(7)
10.6 -- Deed of Guarantee dated August 31, 1998 by and between Celebrity, Inc., as Guarantor, and
The China State Bank Limited, as Lender.(7)
10.7 -- Loan Agreement dated September 29, 1998 by and between State Street Bank and Trust Company
and Celebrity Exports International Limited.(7)
10.8 -- Continuing Guarantee dated September 29, 1998 granted by Celebrity, Inc. for the benefit of
State Street Bank and Trust Company.(7)
10.9 -- 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. (10)
10.10 -- Amendment Number Two to Amended and Restated Loan and Security Agreement dated effective as
of January 31, 2000, by and among Foothill Capital Corporation and the Registrant and certain
of its subsidiaries.(11)
10.11 -- Amended and Restated Loan and Security Agreement dated effective as of July 15, 1999 by and
among Foothill Capital Corporation and the Registrant and certain of its subsidiaries.(10)
</TABLE>
<PAGE> 49
<TABLE>
<S> <C>
10.12 -- Lease Agreement, dated April 22, 1999, between the Registrant, as lessee, and Crest
Properties, Ltd., as lessor, relating to property at 4520 Old Troup Highway, Tyler, Texas.(8)
10.13 -- Lease Agreement, dated April 22, 1999, between The Cluett Corporation, as lessee, and Crest
Properties, Ltd., as lessor, relating to property at 3200 Centre-Park Boulevard,
Winston-Salem, North Carolina.(8)
10.14 -- Agreement for Purchase and Sale of Promissory Note, dated May 28, 1999, by and among the
Registrant, RHP Real Estate, Ltd. and The Residuary Trust Created Under the Last Will and
Testament of Robert H. Patterson, Sr., Deceased.(8)
10.15 -- Form of Guarantee of the Term Loan and Security Agreement dated April 16, 1999 between
Merrill Lynch Business Financial Services, Inc. and Crest Properties, Ltd. by each of
Celebrity, Inc., India Exotics, Inc., Star Wholesale Florist, Inc., MagicSilk, Inc. and The
Cluett Corporation.(9)
10.16 -- Promissory Note of Registrant, amended and restated as of February 16, 1998 payable to the
order of RHP Management, LLC.(5)
10.17 -- Promissory Note of Registrant, dated July 7, 1998 payable to the order of RHP Management,
LLC.(6)
10.18 -- Form of Indemnity Agreement.(1)
10.19* -- Amended and Restated Stock Option Plan.(9)
10.20* -- Amended and Restated 1993 Employee Stock Purchase Plan.(3)
10.21* -- Fiscal 2000 Management Bonus Plan.(9)
21.1 -- Subsidiaries of Registrant.(12)
23.1 -- Consent of PricewaterhouseCoopers LLP.(12)
27.1 -- Financial Data Schedule as of and for the Year Ended June 30, 2000.(13)
</TABLE>
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* Exhibits 10.19 through 10.21 constitute management compensatory plans
or contracts.
(1) Previously filed as an exhibit to Registration Statement No.
33-51820 on Form S-1 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995,
and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1994,
and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997
and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997
and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998
and incorporated herein by reference.
(7) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
and incorporated herein by reference.
(8) Previously filed as an exhibit to the Registrant's Report on
Form 8-K filed on June 4, 1999, and incorporated herein by
reference.
(9) Previously filed as an Exhibit A to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1999
and incorporated herein by reference.
(10) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
(11) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999.
(12) Filed herewith.
(13) Included with EDGAR version only.
