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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended June 30, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of Securities Exchange Act
of 1934 [Fee Required]
For the transition period from ___________ to _________
Commission File Number 1-5893
MOVIE STAR, INC.
(Exact name of Registrant as specified in its Charter)
New York 13-5651322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
136 Madison Avenue, New York, NY 10016
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number including area code (212) 684-3400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value American Stock Exchange
$25,000,000 12.875% Debenture American Stock Exchange
due October 1, 2001
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
Yes X No
The aggregate market value of voting stock held by nonaffiliates of the
Registrant totalled $4,780,754 on August 30, 1997, based upon the closing price
of $0.50 at the close of trading on August 30, 1997.
As of August 30, 1997, there were 13,959,650 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
SEE Item 14 with respect to exhibits to this Form 10-K which are incorporated
herein by reference to documents previously filed or to be filed by the
Registrant with the Commission.
MOVIE STAR, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page No.
Item 1 Business.........................................................................I-1
Item 2 Properties.......................................................................I-6
Item 3 Legal Proceedings................................................................I-8
Item 4 Submission of Matters to a
Vote of Security Holders........................................................ I-8
PART II
Item 5 Market for Company's Common Stock and
Related Stockholder Matters.....................................................II-1
Item 6 Selected Financial Data.........................................................II-2
Item 7 Management's Discussion and Analysis
of Financial Condition and
. Results of Operations...........................................................II-3
Item 8 Financial Statements and
Supplementary Data...............................................................F-1
Item 9 Disagreements on Accounting and
Financial Disclosure............................................................II-8
PART III
Item 10 Executive Officers and Directors
of the Company.................................................................III-1
Item 11 Executive Compensation.........................................................III-2
Item 12 Security Ownership of Certain Beneficial
Owners and Management..........................................................III-6
Item 13 Certain Relationships and
Related Transactions...........................................................III-7
PART IV
Item 14 Exhibits, Financial Statement
Schedule and Reports on Form 8-K................................................IV-1
PART I
ITEM 1. BUSINESS
(a) The Company, a New York corporation organized in 1935, designs,
manufactures, markets and sells an extensive line of ladies' sleepwear, robes,
leisurewear, loungewear, panties and daywear; men's, women's and children's
screen printed tee shirts; and also operates retail outlet stores under the name
Movie Star Factory Stores ("Factory Stores"). At December 31, 1995, the Company
had substantially completed the previously reported divestiture of its Schwabe
men's work and leisure shirt division.
The Company's products consist of ladies' pajamas, nightgowns, baby dolls,
nightshirts, dusters, shifts, sundresses, rompers, short sets, beachwear,
peignoir ensembles, robes, leisurewear, panties, and daywear consisting of
bodysuits, soft bras, slips, half-slips, teddies and camisoles. These products
are manufactured in various fabrics, designs, colors and styles depending upon
seasonal requirements, changes in fashion and customer demand. The Company also
sells screen printed men's, women's and children's tee shirts under the
trademark Sunworks(R). The designs for these tee shirt products are printed with
photo-sensitive inks that appear in black and white until exposed to direct
sunlight, which causes the designs to then appear in colors; the designs return
to black and white when the tee shirts are no longer exposed to sunlight.
In the past, the Company has benefited from its long-standing relationships with
its customers based on providing them with competitively priced products and
efficient service. As a result of consolidations in the retail industry, the
high cost of domestic manufacturing and difficulties the Company has encountered
in engaging reliable offshore contractors and obtaining sufficient quantities of
acceptable quality finished products from overseas, the Company has experienced
a loss of sales to certain of its customers. The Company maintains an in-house
design staff which affords it the flexibility to work with merchandise buyers on
fashion design and price points and its domestic manufacturing facilities allow
shorter "lead times" in producing certain of its products.
(b) Intentionally omitted.
(c) (i) The Company's products are sold to discount, specialty, national and
regional chain, mass merchandise and department stores and direct mail catalog
marketers throughout the United States. The prices to consumers for the
Company's products range from approximately $3.00 for certain of its panty
products to approximately $90.00 for certain other products, such as peignoir
sets. The Company's products are sold by in-house sales personnel and outside
manufacturer's representatives. Approximately 47% of the Company's sales are
made to national chains and mass merchandisers; the balance of the Company's
sales are unevenly distributed among discount, specialty, department and
regional chain stores, direct mail catalog marketers and to consumers through
the Company's Factory Stores. The Company's gross profit on its sales for each
of the fiscal years ended June 30, 1997, 1996 and 1995 was approximately 27%,
20% and 22%, respectively.
The Factory Stores sell apparel products manufactured by the Company and other
manufacturers at discounted retail prices. Historically, approximately 30% of
the sales by these stores have been derived from products supplied by the
Company. In fiscal 1996, approximately 44% of the products sold by these stores
were supplied by the Company. This increase resulted from the sale by these
stores of a substantial amount of the finished goods inventory of the
discontinued Schwabe division. In fiscal 1997 less than 20% of the products sold
by these stores were supplied by the Company. This decrease resulted primarily
from the phase out of the popular-priced trade business, the divestiture of the
Schwabe division and the expansion of the factory stores product line. The
Factory Stores accounted for approximately 11.5% of total sales of the Company
in fiscal 1996 and 16.7% of total sales in fiscal 1997. This increase in
percentage of total sales was due to the reduction in overall sales of the
Company in fiscal 1997 caused primarily by the divestiture of the Schwabe
Division. These stores operate at a gross profit above 30%. The Factory Stores
division advertises directly to consumers through print, radio and television in
the localities in which it operates.
I-1
The Company limits the promotion of its products to cooperative advertising in
conjunction with its retail customers directed to the ultimate retail consumer
of its products. In addition to its in-house sales force, the Company has, since
1976, retained Harold Shatz and Jeffrey Hymowitz and their organization, as a
manufacturer's representative. Working closely with the Company, Messrs. Shatz
and Hymowitz sell to selected accounts under the overall supervision of the
Company's Chairman, Mark M. David, and Mel Knigin, the Company's President and
its most senior executive in charge of sales and merchandising. Their
organization is paid commissions based on the net sales of all intimate apparel
products it sells. Messrs. Shatz and Hymowitz are not employees of the Company
and their current contract with the Company expires in December 1998. In fiscal
year 1996 approximately 12% and in fiscal year 1997 approximately 30% of the
Company's net sales were attributed to sales by this organization. This increase
was a result of an overall decrease in the Company's sales caused primarily by
the divestiture of the Schwabe Division and the Company's recent consolidation
and restructuring which has allowed senior management to refocus their sales and
design efforts on the Company's intimate apparel business. Management believes
that the increase in sales to Mr. Shatz's and Mr. Hymowitz's accounts were
directly attributable to its refocused sales and design efforts. The Company
believes that the loss of its relationship with Messrs. Shatz and Hymowitz and
their organization would not materially adversely affect the Company because
retailers' purchasing decisions are primarily based upon the Company's products.
In 1988, Mr. Shatz and Mr. Hymowitz were granted non-qualified options to
purchase an aggregate of 133,333 shares of the Company's Common Stock at a price
of $2.36 per share.
Messrs. Shatz and Hymowitz and their organization have also devoted a portion of
their time to the development, marketing and sale of the Company's screen
printed tee shirts under the Sunworks(R) trademark and in the development of
other products utilizing the same sun-activated print technology in which the
Company is a participant. The Company has entered into a separate agreement with
the Shatz/Hymowitz organization providing for formula based compensation to be
paid to it based on the net profits (as defined in the agreement) derived by the
Company from the sale of Sunworks(R) imprinted tee shirts and other products.
(ii) Not applicable.
(iii) The Company utilizes a large variety of fabrics made from natural and
man-made fibers including, among others, polyester, cotton, broadcloth, stretch
terry, flannel, brush, nylon, spun polyester, velour, satins, tricot, jersey,
fleece, jacquards, lace, stretch lace, charmeuse, chambray, and various knit
fabrics.
These materials are available from a variety of both domestic and foreign
sources. The sources are highly competitive in a world market. The Company
expects these competitive conditions to continue in the foreseeable future.
Generally, the Company has long-standing relationships with its domestic and
foreign suppliers and purchases its raw materials in anticipation of orders or
as a result of need based on orders received. Purchase of raw materials in high
volume provides the Company with the opportunity to buy at relatively low
prices. In turn, the Company is able to take advantage of these lower prices in
the pricing of its finished goods.
The Company increased the amount of finished goods assembled for it by
contractors in the Caribbean, Central America and Mexico from approximately 9%
in fiscal 1996 to approximately 25% in fiscal 1997. This increase was due to the
Company's strategic decision to assemble more of its finished goods in Mexico in
order to take advantage of lower labor costs and lower duty rates resulting from
the North American Free Trade Agreement. In fiscal 1997, approximately 33% of
the Company's raw materials were imported as compared to approximately 9% in
fiscal 1996. This increase resulted from the increase in offshore production,
the availability of raw materials in Mexico and purchasing decisions designed to
take advantage of lower costs associated with certain imported raw materials.
Approximately 20% of the Company's finished goods were purchased from foreign
sources in fiscal 1997 as compared to 19% in fiscal 1996.
I-2
As of June 30, 1996, the Company eliminated the separate structure of its
International Division and has absorbed the functions of purchasing finished
products and raw materials from offshore sources, into its single unified
operating organization. Currently, the Company has two employees based in
Bangladesh to supervise the production of finished products purchased by the
Company from manufacturers in that country. The Company may hire additional
supervisory personnel to be based in other countries as new sources of supply
are identified or it may retain the services of independent agents in those
countries.
Centralization of the functions of the former International Division has given
the Company greater control over its offshore sourcing through closer oversight
of these functions by senior management and greater accountability from foreign
based personnel employed by and reporting directly to the Company. Management
personnel travel to the Far East, the Caribbean, Mexico and Central America
throughout the year to monitor the performance of the Company's offshore
manufacturers and contractors. The General Agreement on Tariffs and Trade has
not had any impact on the operations of the Company.
The Company believes it maintains adequate inventories to cover the needs of its
customers.
(iv) The Company has several registered trademarks, of which "Movie Star",
"Movie Star Loungewear", "Cinema Etoile", "Cine Jour", "Cine Star", "Night
Magic" and "Sunworks" are material to the marketing by the Company of its
products. There is no litigation with respect to patents, licenses and
trademarks.
(v) The Company manufactures a wide variety of intimate apparel in many
different styles and sizes and for use in all seasons and climates in the United
States. Because of its product mix, it is subject to certain seasonal variations
in sales and in the utilization of its manufacturing facilities. More than 50%
of the Company's sales are made in the first six months of its fiscal year.
(vi) All sales are outright sales. Terms are generally net 10 days E.O.M. or net
30 days from the date the goods are shipped which, depending on date of
shipment, can be due from as short a period as twenty-one days or as long as
fifty days. It has become industry practice to extend payment terms up to an
additional thirty days for certain customers. Although sales are made without
the right of return, in certain instances the Company may accept returns or
agree to allowances. The Company maintains sufficient inventories of raw
materials and finished goods to meet its production requirements and the
delivery demands of its customers. As a result, the Company relies on its
short-term line of credit to supplement internally generated funds to fulfill
its working capital needs.
(vii) Sears Roebuck and Company accounted for 12% of fiscal year 1997 sales and
25% of sales for fiscal year 1996. Approximately 15% of the Company's sales for
fiscal 1996 were comprised of men's work and leisure shirts which were
manufactured by the Schwabe Division and sold to Sears Roebuck and Company. The
Schwabe Division had no sales for fiscal 1997. Walmart accounted for 17% of
sales for fiscal 1997 and 5% of sales for fiscal 1996. J.C. Penney accounted for
11% of sales for fiscal 1997 and 8% of sales for fiscal 1996.
Purchasing decisions by the Company's customers with respect to each group of
the Company's products and, in some instances, products within a group,
generally are made by different buyers and purchasing departments. The Company
believes that the loss of orders from any one buyer or purchasing department
would not necessarily result in the loss of sales to other buyers or purchasing
departments of those customers.
(viii) The backlog of orders as of June 30, 1997 was approximately $21,300,000
and as of June 30, 1996 was approximately $21,200,000. Orders are booked upon
receipt. The Company believes that the current backlog is firm and will be
filled by the end of the current fiscal year.
(ix) There is no material portion of the business which may be subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the Government.
I-3
(x) The intimate apparel business is fragmented and highly competitive. The
industry is characterized by a large number of small companies manufacturing and
selling unbranded merchandise, and by several large companies which have
developed widespread consumer recognition of the brand names associated with
merchandise manufactured and sold by these companies. In addition, certain of
the larger retailers to whom the Company has historically sold its products
have, in recent years, sought to expand the development and marketing of their
own brands and to obtain intimate apparel products directly from similar sources
as the Company.
While the Company believes that owning manufacturing facilities can be
advantageous, owning plants has required the investment of substantial capital
and subjected the Company to the costs of maintaining excess capacity.
Competitive conditions in the industry have required the Company to place
greater reliance on obtaining raw materials and finished products from sources
outside the United States.
The Company has consolidated production in its domestic plants by closing
underutilized and inefficient facilities. Between August 1990 and June 1996, the
Company has closed sixteen manufacturing plants in an effort to lower costs by
reducing excess manufacturing capacity and in response to the need to produce
and purchase products at a lower cost from sources outside the United States.
The intimate apparel industry is further characterized by competition on the
basis of price, quality, efficient service and prompt delivery. Because of this
competitive pressure, it has become increasingly difficult for the Company to
rely principally on domestic manufacturing. Further shifts in competitive
conditions may require the Company to increase its reliance on offshore
manufacturers and contractors in the future. Accordingly, changes in import
quotas, currency valuations and political conditions in the countries from which
the Company imports products could adversely affect the Company's business. Such
shifts could result in the underutilization of the Company's remaining domestic
plants and decrease profitability.
The Company believes that the consolidation in the retail industry has
contributed to increased competition among manufacturers of products of the type
sold by the Company. As part of its response to this competitive pressure, the
Company has sought to maximize its domestic manufacturing efficiency through
strategic consolidation of underutilized facilities. The Company has continued
to take advantage of opportunities in the Caribbean Basin and Central America to
contract for the cutting and assembly of its products which enables the Company
to benefit from lower offshore labor costs coupled with transportation times
that are faster than deliveries from the Far East. In fiscal 1996, the Company
resumed contracting in Mexico and in fiscal 1997 increased its production there.
In the past, the Company has been unable to maximize the benefits of these
opportunities due to a reduction in the volume of orders it received for goods
that were suitable for assembly offshore; shorter than anticipated lead times
between placement of orders and customers' required delivery dates; and, its
inability to establish or maintain relationships with reliable contractors. The
Company believes it has addressed and corrected the problems associated with the
unreliability of certain contractors it used in the past.
(xi) No material research activities relating to the development of new products
or services or the improvement of existing products or services were undertaken
during the last fiscal year, except for the normal continuing development of new
styles and marketing methods.
(xii) There are no costs relating to complying with environmental regulations in
the fiscal year just completed or over future periods of which the Company is
aware.
(xiii) Of the approximately 732 employees of the Company, approximately 22 are
executive, design and sales personnel, 89 are administrative personnel, and the
balance are in manufacturing and warehousing and retail sales for the Movie Star
Factory Stores division. In addition, the Company employs approximately 60
part-time sales and stockroom assistants in its Movie Star Factory Stores
division.
The Company has never experienced an interruption of its operations because of a
work stoppage. Even though the Company is subject to certain seasonal variations
in sales, significant seasonal layoffs are rare.
I-4
Most employees have an interest in the Company's Common Stock through the
Company's ESOP. The Company deems its relationship with its employees to be
good. The Company is not a party to any collective bargaining agreement with any
union.
Restriction on Dividends
Pursuant to a public offering of $25,000,000 of Debentures in 1986, and the
exchange in October 1996 of certain of those Debentures for New Senior Notes,
the Company may not declare or pay any dividend or make any distribution on any
class of its capital stock except dividends or distributions payable in capital
stock of the Company or to the holders of any class of its capital stock, or
purchase, redeem or otherwise acquire or retire for value any capital stock of
the Company if (i) at the time of such action an event of default, or an event
which with notice or lapse of time or both would constitute an event of default,
shall have occurred and be continuing, or (ii) if, upon after giving effect to
such dividend, distribution, purchase, redemption, other acquisition or
retirement, the aggregate amount expended for all such purposes subsequent to
June 30, 1986, shall exceed the sum of (a) 75% of the aggregate consolidated net
income of the Company earned subsequent to June 30, 1986, (b) the aggregate net
proceeds, including the fair market value of property other than cash received
by the Company from the issue or sale after September 30, 1986 of capital stock
of the Company, including capital stock issued upon the conversion of, or in
exchange for, indebtedness for borrowed money and (c) $4,000,000; provided,
however, that the provisions of this limitation shall not prevent the retirement
of any shares of the Company's capital stock by exchange for, or out of proceeds
of the substantially concurrent sale of, other shares of its capital stock, and
neither such retirement nor the proceeds of any such sale or exchange shall be
included in any computation made under this limitation. At June 30, 1997, the
Company is prohibited from paying any cash dividends.
I-5
ITEM 2. PROPERTIES
The following table sets forth all of the facilities owned or leased by the
Company as of June 30, 1997.
Owned or Bldg. Area Expiration Productive Extent of
Location Use Leased (sq. ft.) Annual Rent of Lease Capacity(6) Utilization(6)
- -------- ------- ------ --------- ----------- -------- ----------- --------------
Executive Portions Sub- 23,000 $422,118 4/01 N/A N/A
136 Madison Ave., offices; leased; (1)
New York, NY divisional sales Portions
(includes one floor office and Leased
at 148 Madison showroom Directly from
Ave., NY, NY) Landlord
1333 Broadway Division sales 750 $ 5,023 2/98 N/A N/A
New York, NY office and
showroom
Petersburg, PA Warehousing Owned (2) 140,000 _____ _____ N/A N/A
for finished
goods; dis-
tribution center
Hazlehurst, GA Leased to a Owned (3) 180,000 _____ _____ N/A N/A
Third Party;
Lebanon, VA Manufacturing; Owned 170,000 _____ _____ 210 82%
warehousing for
piece goods and
finished goods;
distribution
center
Honaker, VA Manufacturing Owned 40,000 _____ _____ 150 82%
Claxton, GA Vacant Owned 72,000 _____ _____ N/A N/A
(8)(9)
South Mississippi 1 Mfg./Dist./ Leased (4) 239,000 _____ _____ 200 70%
Warehouse; 1
Distribution
Center
North Mississippi 3 Mfg. Owned/Leased 145,000 N/A N/A
(4)(7)
Retail Stores 28 retail stores Leased 102,631 (5) (5) N/A N/A
located
throughout
Mississippi and
Georgia
- ----------
(1) Includes escalation for 1997.
(2) This property is encumbered by purchase money mortgages.
(3) Approximately 140,000 square feet was transferred to a third party in
fiscal year 1994 pursuant to a lease-purchase agreement. An additional
40,000 square feet was leased to another third party in July 1997 for a
period of three months.
I-6
(4) Leased from municipalities pursuant to local Development Authority bond
issues.
(5) Store leases generally are for one to three-year periods with options to
renew. Rents generally range from $2-$8 per square foot.
(6) "Productive Capacity" is based on the total number of employees that can be
employed at a facility providing direct labor for the manufacture of the
Company's products based on existing machinery and equipment and plant
design. Extent of utilization is the percentage obtained by dividing the
average number of employees actually employed at a facility during the
fiscal year providing direct labor for the manufacture of the Company's
products by Productive Capacity.
(7) Three manufacturing facilities are currently vacant.
(8) This Building was leased to a third party in August 1997 for a period of
six months.
(9) On September 23, 1997 the Company entered into a written agreement to sell
the Building.
I-7
The following table sets forth the amount of space allocated to
different functions in shared facilities set forth in the preceding table.
AMOUNT
OF SPACE
LOCATION FUNCTION (Sq. ft.)
136 and 148 Madison Avenue Corporate Offices; 7,000
1333 Broadway Divisional Sales Offices and Showrooms; 8,750
New York, New York Production Staff and Design 8,000
Petersburg, Pennsylvania Warehousing and Distribution; 137,000
Offices 3,000
Lebanon, Virginia Manufacturing; 49,000
Warehousing and Distribution; 111,000
Offices 10,000
Honaker, Virginia Manufacturing; 31,000
Warehousing; 5,000
Offices 4,000
Mississippi Manufacturing; 61,000
Warehousing and Distribution; 163,000
Offices 15,000
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending which are material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
I-8
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the American Stock Exchange. The following table
sets forth for the indicated periods the reported high and low prices per share.
High Low
Year Ended June 30, 1997
First Quarter 1 9/16
Second Quarter 7/8 7/16
Third Quarter 15/16 9/16
Fourth Quarter 11/16 7/16
Year Ended June 30, 1996
First Quarter 7/8 1/2
Second Quarter 5/8 3/16
Third Quarter 9/16 1/4
Fourth Quarter 1 7/16
As of August 30, 1997, there were approximately 1,035 holders of record of the
Common Stock. For restrictions on dividends, see Item 1 at page I-7.
MARKET FOR COMPANY'S DEBENTURE
High Low
Year Ended June 30, 1997
First Quarter.................................. 650.00 501.25
Second Quarter................................. 640.00 570.00
Third Quarter.................................. 771.25 570.00
Fourth Quarter................................. 760.00 671.25
Year Ended June 30, 1996
First Quarter.................................. 750.00 650.00
Second Quarter................................. 740.00 430.00
Third Quarter.................................. 550.00 285.00
Fourth Quarter................................. 500.00 270.00
II-1
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Statement of Operations Data: Fiscal Year Ended June 30,
1997 1996 1995 1994 1993
NET SALES $ 61,470 $84,115 $101,946 $103,105 $120,251
-------- ------- -------- -------- --------
COST OF SALES 44,947 66,993 81,261 86,158 92,106
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 13,718 17,527 20,541 20,874 22,596
LOSS ON ABANDONMENT OF LEASED PREMISES - 1,070 - - -
SPECIAL CHARGE - - 750 - -
-------- ------- -------- -------- --------
58,665 85,590 102,552 107,032 114,702
-------- ------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 2,805 (1,475) (606) (3,927) 5,549
GAIN ON PURCHASE OF SUBORDINATED DEBENTURES (560) - - - -
INTEREST EXPENSE - Net 2,781 3,893 4,669 4,014 3,955
GAIN ON SALE OF PROPERTY,
PLANT AND EQUIPMENT - - - (984) (908)
-------- ------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 584 (5,368) (5,275) (6,957) 2,502
PROVISION FOR INCOME TAXES 65 (90) (246) (2,772) 217
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE FOR INCOME TAXES - - - 861 -
-------- ------- -------- -------- --------
NET INCOME (LOSS) $ 519 $ (5,278) $ (5,029) $ (3,324) $ 2,285
======== ======= ======== ======== ========
INCOME (LOSS) PER SHARE (1) $.04 $(.38) $(.36) $(.24) $.16
==== ===== ===== ===== ====
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (1) 13,960 13,960 14,960 14,031 14,185
======== ======= ======== ======== ========
Balance Sheet Data: At June 30,
1997 1996 1995 1994 1993
WORKING CAPITAL $18,636 $19,546 $22,648 $25,178 $30,984
======== ======= ======== ======== ========
TOTAL ASSETS $33,957 $34,610 $57,204 $69,806 $72,731
======== ======= ======== ======== ========
SHORT-TERM DEBT - Including current
maturities of long-term debt $ 73 $ 45 $15,832 $19,627 $16,783
======== ======= ======== ======== ========
LONG-TERM DEBT $22,336 $23,533 $22,496 $22,529 $22,733
======== ======= ======== ======== ========
STOCKHOLDERS' EQUITY $ 3,941 $ 3,422 $ 8,700 $13,729 $17,412
======== ======= ======== ======== ========
(1) Income (loss) per share is based on net income (loss) for the year divided
by the weighted average number of shares of common stock outstanding.
Common share equivalents (stock options) were not dilutive in each of the
years presented.
(2) For each of the five years ended June 30, 1997, no cash dividends were
declared.
II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements with
respect to anticipated results which are subject to a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are: business conditions and growth in the Registrant's industry;
general economic conditions; the addition or loss of significant customers;
the loss of key personnel; product development; competition; foreign
government regulations; fluctuations in foreign currency exchange rates;
rising costs of raw materials and the unavailability of sources of supply;
the timing of orders placed by the Registrant's customers; and such other
risk factors listed from time to time in the Company's SEC reports .
Results of Operations
1997 vs. 1996
Net sales for the year ended June 30, 1997 decreased to $61,470,000 from
$84,115,000 in the comparable period in 1996, a decrease of 26.9%. The
decrease in sales resulted primarily from the elimination of the men's work
and leisure shirt division and lower sales in the intimate apparel division
of approximately $17,498,000 and $4,746,000, respectively. The lower sales
in the intimate apparel division resulted primarily from the weak retail
demand for certain of the Company's products and the Company's efforts to
eliminate low margin business. The Company does not intend to directly
replace the reduction in sales resulting from the elimination of the men's
work and leisure shirt division. Net sales for the Company's retail
division, Movie Star Factory Stores, increased $458,000 to $10,229,000 for
the year ended June 30, 1997 as compared to the comparable period in 1996.
The gross profit percentage increased to 26.9% for the year ended June 30,
1997 from 20.4% in the similar period in 1996. The increase was due
primarily to the elimination of the low margin men's work and leisure shirt
division, which had an 11.2% gross margin in 1996. The gross margin in the
Company's intimate apparel product lines increased to 24.9% in 1997 from
20.6% in the similar period in 1996. The higher margins resulted primarily
from the Company's refocused efforts to increase margins and to address all
components of its finished goods costs, including the countries in which
goods are manufactured, the sources of its piece goods and the overall
management of its costs. The Movie Star Factory Stores gross margin
increased to 35.7% for 1997 as compared to 34.4% in the similar period in
1996. The higher margins in the Movie Star Factory Stores resulted from
changes in buying practices, an expanded product line and lower markdowns.
During fiscal 1997, the Company shifted a portion of its production from the
Caribbean, Central America and the Far East to manufacturers located in
close proximity to Mexico City, Mexico. This shift allows the Company to
take advantage of lower duty rates that result from the North American Free
Trade Agreement and the availability of piece goods in Mexico. The proximity
of the Mexican based contractors also enables the Company's senior
management to more easily monitor the production of these products. The
Company has one full-time employee located in Mexico and is relocating
another full-time employee to Mexico to monitor the production of its
products. The Company intends to increase its production in Mexico and to
hire additional personnel, located in Mexico, to monitor its production.
At the end of fiscal 1996 and into the second quarter of fiscal 1997, the
Company continued to encounter problems with its imported finished goods. In
certain instances, after taking delivery of the goods, the Company was
required to correct manufacturing defects before shipping the merchandise to
one of the Company's customers. Although no loss of sales was attributable
to the poor quality
II-3
merchandise, the Company incurred costs of approximately $400,000 associated
with correcting the quality problems, which had a negative impact on the
financial results for fiscal 1997. In fiscal 1997, the Company replaced the
senior personnel responsible for its import department and hired two
employees located in the Far East to supervise the production of its
products. In addition, the Company is now purchasing its products from
different manufacturers than it has in the past.
Selling, general and administrative expenses decreased by $3,809,000 to
$13,718,000 for the year ended June 30, 1997 as compared to 1996. This
decrease was primarily due to the Company's consolidation and realignment of
its operations and lower sales volume. Specifically, the decrease resulted
from reductions in salary expense and salary related costs of approximately
$1,518,000, sales related expenses of approximately $226,000 and rent
expense of approximately $1,322,000, along with decreases in other general
overhead expenses. The Company also had a more favorable than expected
recovery of bad debts of approximately $447,000. This allowance recovery
resulted primarily from one customer that resolved its bankruptcy much
faster and much more favorably than the Company had anticipated.
In fiscal 1996, the Company abandoned two floors of its New York City
offices in connection with the Company's consolidation and realignment of
its operations. The Company provided a reserve of $900,000 for estimated
costs in connection with the abandonment of the two floors, and wrote-off
the net remaining book value of related leasehold improvements of $270,000.
In August of 1996, the Company terminated and settled its remaining
leasehold obligations with respect to the aforementioned abandoned floors
for $800,000.
The Company had income from operations for fiscal year 1997 of $2,805,000
as compared to a loss from operations of $1,475,000 for fiscal year 1996.
This improvement in income from operations was due to higher margins, lower
selling, general and administrative expenses and one time charges taken in
the prior fiscal year. The Movie Star Factory Stores had a positive impact
on the Company's results from operations for both fiscal year 1997 and 1996.
In September 1996, the Company purchased $1,320,000 in principal amount of
its 12.875% subordinated debentures to meet a sinking fund payment due in
October 1996. As a result of the transaction, the Company recorded a gain of
$560,000, net of related costs, in the first quarter of fiscal 1997.
Interest expense for the year ended June 30, 1997 decreased by $1,112,000
from the comparable period in 1996 due to lower borrowings coupled with the
effect of the negotiated lower rate of interest on a portion of the
Company's long-term debt.
An income tax provision of $65,000 was provided for by the Company for the
year ended June 30, 1997 as compared to an income tax benefit of $90,000 for
the year ended June 30, 1996.
The Company had net income of $519,000 for the year ended June 30, 1997 as
compared to a net loss of $5,278,000 for the same period in 1996. This
improvement was due to higher margins, lower selling, general and
administrative expenses, lower interest costs, a gain on the Company's
purchase of its subordinated debentures and one time charges taken in the
prior year.
1996 vs. 1995
Net sales decreased by $17,831,000 (17.5 %) to $84,115,000 for the year
ended June 30, 1996 compared to the prior year. The decrease in sales
resulted primarily from lower sales in the popular-priced intimate apparel
product line. The lower sales resulted from the elimination of trade
business from that product line, the weak retail climate for the Company's
products and the inability of the Company to source effectively. The Company
anticipated lower sales in fiscal 1997 due to the discontinuance of its low
margin men's work and leisure shirt division in fiscal 1996.
In September 1995, the Company announced its decision to eliminate its low
margin men's work and leisure shirt division to focus on its core intimate
apparel business. This action was designed to alleviate certain pressures
associated with that division's operations namely, high inventory and
capital requirements and poor return on capital. The liquidation of the
assets of this division was substantially completed as of December 31,
1995. The Company recorded an additional charge of $2,250,000, against cost
of sales, to write-down to its net realizable value the inventory of the
men's work and leisure shirt division.
II-4
The gross profit percentage was 20.4% in fiscal 1996 as compared to 20.3% in
the prior year. The above-mentioned additional charge of $2,250,00 decreased
the Company's fiscal 1995 gross profit percentage by 2.2%, from 22.5%,
before the additional charge to 20.3% after the additional charge. The lower
margins in fiscal 1996 were primarily due to the Company's popular-priced
intimate apparel product line. The lower margins resulted from a more
competitive market, the weak retail climate for the Company's products,
the inability of the Company to source effectively and the Company's effort
to sell off discontinued inventory and reduce inventory levels. The Company
anticipated higher margins in fiscal 1997 due to the discontinuance of its
low margin's men's work and leisure shirt division in fiscal 1996 and the
other continuing efforts to eliminate low margin business.
In order to compete more effectively, the Company reduced excess plant
capacity and, accordingly, closed 7 plants in fiscal 1996. The Company now
operates 3 domestic manufacturing facilities.
The Company continued to encounter significant problems with the finished
goods it imports. These problems resulted in the receipt of lesser quality
goods, unscheduled and costly air shipments and the inability, in certain
instances, to make timely delivery of quality finished product to our
customers. As a result, certain customers either canceled orders, returned
goods or took deductions. The Company has not fully resolved its sourcing
problems, which were expected to have a further negative effect on financial
results in fiscal 1997. However, due to the steps taken in fiscal 1996
described above, the Company anticipated that operating results would
improve in fiscal 1997.
Selling, general and administrative expenses decreased by $3,014,000 to
$17,527,000 for the year ended June 30, 1996, as compared to 1995. This
decrease was due to reduced overhead costs as a result of the Company's
consolidation and realignment and lower sales volume. Specifically, this
decrease resulted from reductions in salary expense and related payroll
taxes of approximately $1,342,000, sales related expenses of approximately
$1,368,000, which included reductions in shipping costs and sample making of
approximately $615,000 and $473,000, respectively, rent expense of
approximately $384,000 and a net increase in other general overhead
expenses.
In order to reduce overhead expenses and improve operating efficiencies, the
Company vacated two floors in its New York City offices, separately leased
to the Company, and combined its operation into another floor leased by the
Company in the same building. The Company terminated and settled these lease
obligations for $800,000 and wrote-off the remaining net book value of
related leasehold improvements of $270,000.
In fiscal 1995, the Company recorded a special charge of $750,000 to
write-down to its estimated realizable value the men's work and leisure
shirt division's property, plant and equipment.
Interest expense for the year ended June 30, 1996 decreased by $776,000 from
the comparable period in 1995 due to lower borrowing levels in fiscal 1996.
An income tax benefit of $90,000 was provided by the Company for the year
ended June 30, 1996 as compared to $246,000 for the year ended June 30,
1995.
As a result of the above factors, the financial results reflect a net loss
from operations of $5,278,000 for the year ended June 30, 1996, compared to
a net loss of $5,029,000 for the comparable period in 1995.
Liquidity and Capital Resources
For the year ended June 30, 1997, the Company's working capital decreased by
$770,000 to $18,636,000, principally from the payment of long-term debt and
the purchase of fixed assets, offset partially by operating profits.
During the fiscal year ended June 30, 1997, cash increased by $752,000. The
Company used cash for the purchase of fixed assets of $133,000 and the
repayment of long-term debt of $815,000. These activities were principally
funded by cash generated by operating activities.
II-5
Inventory at June 30, 1997 increased by $2,391,000 to $16,638,000 from
$14,247,000 at June 30, 1996 due primarily to an increase in the inventory
of the lingerie division from the prior year's levels.
In October 1996, the Company consummated an agreement with holders of
$10,187,000 of the Company's outstanding 12.875% unsecured subordinated
debentures ("Restructured Bonds"). The holders of the Restructured Bonds
exchanged such bonds for the issuance of an equivalent principal amount of a
new series of notes bearing interest at a rate of 8% per annum, payable
semi-annually (April 1 and October 1) which are senior to the 12.875%
debentures ("New Senior Notes"). Additionally, the holders of the
Restructured Bonds deferred the receipt of interest due April 1, 1996
(approximately $656,000) and October 1, 1996 (approximately $434,000). The
Company paid the interest due on the remaining 12.875% debentures. The
holders of the Restructured Bonds have also accepted New Senior Notes in
exchange for the April 1, 1996 and October 1, 1996 deferred interest related
to the Restructured Bonds. The aggregate principal amount of the New Senior
Notes approximate $11,276,500. The New Senior Notes do not provide for any
amortization of principal and mature on September 1, 2001. As a result of
the exchange, the Company will apply the entire principal amount of the
Restructured Bonds acquired by the Company of $10,187,000 to its mandatory
annual sinking fund payments through October 1999. The Company's obligation
to make mandatory sinking fund payments on the 12.875% debentures will
resume in October 1999. The aggregate principal indebtedness of the New
Senior Notes and the 12.875% subordinated debentures after the exchange is
approximately $22,209,000.
The New Senior Notes carry the right to convert up to approximately $716,000
of the notes into 1,908,000 shares of the Company's common stock at a price
of $0.375 per share. In addition, the holders of the New Senior Notes have
the right to designate a representative to attend all meetings of the
Company's Board of Directors and Compensation Committee.
During September 1996, the Company purchased $1,320,000 in principal amount
of its 12.875% subordinated debentures. As a result of the transaction, the
Company recorded a pre-tax gain of approximately $560,000, net of related
costs, in the first quarter of fiscal 1997. The Company reduced its
mandatory sinking fund requirements with these debentures.
In September 1996, the Company delivered $3,750,000 of its 12.875%
debentures, that it had previously acquired, to the Indenture Trustee, in
lieu of making the mandatory sinking fund payment due October 1, 1996 in
cash.
The Company does not anticipate making any additional purchases of its stock
and anticipates that capital expenditures for fiscal 1998 will be less than
$500,000. Depending on price and availability the Company may seek to
purchase a portion of its outstanding 12.875% debentures to further reduce
its sinking fund obligation and reduce interest expense.
The Company has a secured revolving line of credit of up to $13,500,000,
through June 1998, to cover the Company's projected needs for operating
capital and letters of credit to fund the purchase of imported goods. Direct
borrowings under this line bear interest at the annual rate of 2.5% above
the prime rate of Chase Manhattan Bank. Availability under the line of
credit is subject to certain agreed upon formulas. Under the terms of this
financing, the Company has agreed to pledge substantially all of its assets,
except the Company's domestic inventory and real property. This credit
facility replaced the financing agreements which the Company had with two
banks.
Management believes its available borrowing under its secured revolving line
of credit, along with anticipated internally generated funds, will be
sufficient to cover its working capital requirements.
Continued Stock Exchange Listing
The Company has been notified in writing by the American Stock Exchange that
the Exchange has determined to defer further consideration of the Company's
eligibility for continued listing on the Exchange, subject to periodic
reviews of the Company's filings with the Commission.
II-6
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Report on Form 10-K
contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 which involve certain risks and
uncertainties. The Company's actual results or outcomes may differ
materially from those anticipated. Important factors that the Company
believes might cause differences are discussed in the cautionary statement
under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Form 10-K. In assessing
forward-looking statements contained herein, readers are urged to carefully
read those statements.
II-7
ITEM 8 INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Movie Star, Inc.:
We have audited the accompanying consolidated balance sheets of Movie Star, Inc.
and subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1997. Our audits also included the
financial statement schedule listed in the index at Item 14(a)(2). 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Movie Star, Inc. and subsidiaries
as of June 30, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
September 4, 1997
New York, New York
F-1
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(In Thousands, Except Number of Shares)
ASSETS 1997 1996
CURRENT ASSETS:
Cash (Note 6) $ 3,035 $ 2,283
Receivables (Note 3) 4,147 7,415
Inventory (Note 2) 16,638 14,247
Deferred income tax benefits (Note 9) 2,291 3,158
Prepaid expenses and other current assets 205 108
--------- ---------
Total current assets 26,316 27,211
PROPERTY, PLANT AND EQUIPMENT - Net (Note 4) 4,262 4,569
OTHER ASSETS 1,661 1,979
DEFERRED INCOME TAXES (Note 9) 1,718 851
--------- ---------
TOTAL ASSETS $33,957 $ 34,610
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 7) $ 73 $ 45
Accounts payable 4,987 5,477
Accrued expenses and other current liabilities (Note 5) 2,620 2,283
--------- ---------
Total current liabilities 7,680 7,805
--------- ---------
LONG-TERM DEBT - Less current maturities included above (Note 7) 22,336 23,383
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 6 and 10)
STOCKHOLDERS' EQUITY (Notes 7 and 12):
Common stock, $.01 par value - authorized, 30,000,000 shares;
issued, 15,977,000 shares 160 160
Additional paid-in capital 3,731 3,731
Retained earnings 3,668 3,149
--------- ---------
7,559 7,040
Less treasury stock, at cost - 2,017,000 shares 3,618 3,618
--------- ---------
Total stockholders' equity 3,941 3,422
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,957 $ 34,610
========= =========
See notes to consolidated financial statements.
F-2
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(In Thousands, Except Per Share Amounts)
1997 1996 1995
NET SALES (Note 11) $61,470 $ 84,115 $ 101,946
COST OF SALES (Note 13) 44,947 66,993 81,261
-------- -------- ----------
GROSS PROFIT 16,523 17,122 20,685
OPERATING EXPENSES:
Selling, general and administrative expenses 13,718 17,527 20,541
Loss on abandonment of leased premises (Note 10) - 1,070 -
Special charge (Note 13) - - 750
-------- -------- ----------
INCOME (LOSS) FROM OPERATIONS 2,805 (1,475) (606)
GAIN ON PURCHASE OF SUBORDINATED DEBENTURES (Note 7) (560) - -
INTEREST EXPENSE (Notes 6 and 7) 2,781 3,893 4,669
-------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 584 (5,368) (5,275)
PROVISION FOR INCOME TAXES (Note 9) 65 (90) (246)
-------- -------- --------
NET INCOME (LOSS) $ 519 $(5,278) $(5,029)
======== ======== ========
NET INCOME (LOSS) PER SHARE $.04 $(.38) $(.36)
==== ===== =====
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 13,960 13,960 13,960
====== ====== ======
See notes to consolidated financial statements.
F-3
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(In Thousands)
Additional
Common Stock Paid-in Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount Total
BALANCE, JULY 1, 1994 15,977 $ 160 $ 3,731 $ 13,456 2,017 $ (3,618) $ 13,729
Net loss - - - (5,029) - - (5,029)
------- ----- ------- --------- ------- -------- ----------
BALANCE, JUNE 30, 1995 15,977 160 3,731 8,427 2,017 (3,618) 8,700
Net loss - - - (5,278) - - (5,278)
------- ----- ------- --------- ------- -------- ----------
BALANCE, JUNE 30, 1996 15,977 160 3,731 3,149 2,017 (3,618) 3,422
Net income - - - 519 - - 519
------- ----- ------- --------- ------- -------- ----------
BALANCE, JUNE 30, 1997 15,977 $ 160 $ 3,731 $ 3,668 2,017 $ (3,618) $ 3,941
======= ===== ======= ========= ======= ======== ==========
See notes to consolidated financial statements.
F-4
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996, AND 1995
(In Thousands)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 519 $(5,278) $(5,029)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 698 952 1,319
Gain on purchase of subordinated debentures (560) - -
Loss on disposal of property, plant and equipment 35 309 750
(Increase) decrease in operating assets:
Receivables 3,268 1,374 1,302
Inventory (2,391) 21,838 8,727
Prepaid expenses and other current assets (97) 273 (55)
Other assets 215 152 51
(Decrease) Increase in operating liabilities:
Accounts payable (490) (1,462) (2,433)
Accrued expenses and other current liabilities 503 (81) (1,312)
---------- ---------- ----------
Net cash provided by operating activities 1,700 18,077 3,320
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (133) (233) (311)
Proceeds from sale of property and equipment - 771 -
---------- ---------- ----------
Net cash (used in) provided by investing activities (133) 538 (311)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt and capital lease obligations (815) (52) (122)
Payment of deferred financing cost - (580) -
Repayment of revolving line of credit - (15,803) (3,706)
---------- ---------- ----------
Net cash used in financing activities (815) (16,435) (3,828)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH 752 2,180 (819)
CASH, BEGINNING OF YEAR 2,283 103 922
---------- ---------- ----------
CASH, END OF YEAR $ 3,035 $ 2,283 $ 103
========== ========== ==========
(Continued)
F-5
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996, AND 1995
(In Thousands)
1997 1996 1995
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during year for:
Interest $ 2,256 $ 4,025 $ 4,074
======= ========= =======
Income taxes, net of refunds $ 61 $ (364) $ 14
======= ========= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES:
Acquisition of equipment through assumption of capital
lease obligation $ 139 $ 82 $ -
======= ========= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Exchange of long-term debt $ - $ 10,187 $ -
Exchange of long-term debt - (10,187) -
------- --------- -------
$ - $ - $ -
======= ========= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
ACTIVITIES:
Increase in long-term debt for interest paid in kind $ 217 $ 873 $ -
Decrease in accrued liabilities for interest paid in kind (217) (873) -
-------- --------- -------
$ - $ - $ -
======== ========= =======
(Concluded)
See notes to consolidated financial statements.
F-6
MOVIE STAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Movie Star, Inc. and its subsidiaries (the "Company") is a
New York corporation organized in 1935, which designs, manufactures,
markets and sells an extensive line of ladies' sleepwear, robes,
leisurewear, loungewear, panties and daywear; and also operates 28
retail outlet stores.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company. All significant intercompany
accounts and transactions have been eliminated.
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, and the reported amounts of
revenues and expenses during the reporting period. The preparation of
financial statements in conformity with generally accepted accounting
principles also requires management to make estimates and assumptions
that affect the disclosures of contingent assets and liabilities at
the date of the financial statements. Actual results could differ from
those estimates.
Inventory - Inventory is valued at lower of cost (first-in, first-out)
or market.
Property, Plant and Equipment - Property, plant and equipment are
stated at cost. Depreciation and amortization are provided by the
straight-line method over the following estimated useful lives:
Buildings and improvements 15-30 years
Machinery & Equipment 5 years
Office furniture and equipment 5 years
Leasehold improvements Lesser of life of
the asset or life of lease
Revenue Recognition - Revenue is recognized upon shipment. Although
sales are made without the right of return, in certain instances, the
Company may accept returns or agree to allowances. Allowances for
sales returns are recorded as a component of net sales in the period
in which the related sales are recognized.
Income Taxes - The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" (see Note
9).
Net Income (Loss) Per Share - Net income (loss) per share is based on
the net income (loss) for each year divided by the weighted average
number of shares outstanding. Common share equivalents (stock options)
were not dilutive in each of the three years ended June 30, 1997.
Deferred Costs - Deferred financing costs are amortized over the life
of the debt using the straight-line method.
Accounting Pronouncements - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," which is effective for the
Company for the year ended June 30, 1998. SFAS No. 128 simplifies the
standards for computing earnings per share previously found in
Accounting Principles Board Opinion ("APB") No. 15 and
F-7
establishing new standards for computing and presenting earnings per
share. Application of SFAS No. 128 is not expected to has a
significant affect on the Company's earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure About Segments of an Enterprise and Related
Information, " which is effective for the Company for the year ended
June 30, 1999. SFAS No. 131 requires disclosure about operating
segments in complete sets of financial statements and in condensed
financial statements of interim periods issued to shareholders. The
new standard also requires that the Company report certain information
about their products and services, the geographic areas in which they
operate, and major customers. The Company has not yet determined the
impact of the adoption of SFAS No. 131.
Reclassification - Certain items in prior years in specific captions
of the accompanying consolidated financial statements and notes to
consolidated financial statements have been reclassified for
comparative purposes.
2. INVENTORY
Inventory consists of the following:
June 30,
1997 1996
(In Thousands)
Raw materials $ 5,503 $ 3,816
Work-in-process 2,806 1,950
Finished goods 8,329 8,481
--------- ---------
$16,638 $ 14,247
========= =========
3. RECEIVABLES
Receivables are comprised of the following:
June 30,
1997 1996
(In Thousands)
Trade $ 5,171 $ 9,780
Other 214 251
--------- ---------
5,385 10,031
Less allowance for doubtful accounts (1,238) (2,616)
--------- ---------
$ 4,147 $ 7,415
========= =========
F-8
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
June 30,
1997 1996
(In Thousands)
Land, buildings and improvements $ 7,875 $ 7,858
Machinery and equipment 591 663
Office furniture and equipment 1,534 1,821
Leasehold improvements 861 846
--------- ---------
10,861 11,188
Less accumulated depreciation and amortization (6,599) (6,619)
--------- ---------
$ 4,262 $ 4,569
========= =========
At June 30, 1997, the Company held property, plant and equipment with a
net book value of approximately $ 587,000 for sale or lease.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
June 30,
1997 1996
(In Thousands)
Interest $ 578 $ 392
Insurance 1,002 449
Salary, wages and benefits 399 494
Other 641 948
------- ----------
$ 2,620 $ 2,283
======= ==========
6. NOTES PAYABLE
At June 30, 1995, the Company had notes payable aggregating
$15,803,000 under line of credit agreements from two banks. Pursuant
to the agreements, all borrowings were collateralized by accounts
receivable and finished goods inventory imported pursuant to letters
of credit. Interest on the outstanding notes was payable monthly at up
to 1 percent above the prime rate.
On October 13, 1995, the Company entered into new agreements under
similar terms with the same banks, which was to expire on June 30,
1996, with interest on outstanding borrowings being payable monthly at
1.25 percent above the prime rate.
On April 24, 1996, the Company terminated these line of credit
agreements and entered into a line of credit agreement with an
unrelated lender. Under the new credit agreement, the Company may
borrow for either
F-9
revolving loans or letters of credit up to the lesser of $13,500,000
or the sum of 80 percent of the net amount of eligible receivables, 50
percent of the eligible inventory and 50 percent of the eligible
letters of credit. Pursuant to the terms of the agreement, the Company
has pledged substantially all of its assets, except the Company's
domestic inventory and real property. Interest on outstanding
borrowings is payable at 2.5 percent above the prime rate. The Company
is obligated to pay a facility fee of $270,000 over the term of the
agreement which expires on June 30, 1998.
Under the terms of the agreement, the Company is required to meet
certain financial covenants, of which the Company is in compliance at
June 30, 1997. Furthermore, the Company is prohibited from paying
dividends or incurring additional indebtedness, as defined, outside
the normal course of business.
At June 30, 1997, the Company had no borrowing outstanding under this
line of credit and had approximately $2,948,000 outstanding letters of
credit. Additionally, the Company had a cash balance of approximately
$2,683,000 deposited with the lender which earned interest at 5.25
percent at June 30, 1997.
7. LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
1997 1996
(In Thousands)
12.875% Subordinated Debentures $10,943 $12,263
8% Senior Notes 10,550 10,344
8% Senior Convertible Notes 716 716
Other 200 105
------- -------
22,409 23,428
Less current portion 73 45
------- -------
Long-term debt $22,336 $23,383
======= =======
12.875% Subordinated Debentures - On October 10, 1986, the Company
sold $25,000,000 of 12.875% Subordinated Debentures due October 1,
2001 (the "Debentures"). Interest payments on the outstanding
Debentures are due semi-annually on October 1 and April 1. The
Debentures are redeemable, in whole or in part, at the option of the
Company, at any time, and are subordinated to all senior debt (as
defined). The Debentures contain covenants with respect to limitations
on dividends and stock purchases. At June 30, 1997, the Company is
prohibited from paying dividends and making stock purchases.
Annual sinking fund payments of $3,750,000 are required commencing
October 1, 1996. However, required payments in any year may be reduced
by Debentures previously purchased by the Company. The total purchases
of Debentures at June 30, 1996 were $2,550,000. On September 13, 1996,
the Company purchased an additional $1,320,000 of Debentures for
approximately $824,000 including related costs. Furthermore in 1996,
the Company acquired $10,187,000 of 12.875% Debentures in an exchange
(discussed below). The Company reduced the October 1, 1996 sinking
fund requirement and intends to reduce sinking fund payments through
1998 and part of 1999 by these purchased Debentures.
8% Senior Notes - In April 1996, the Company reached an agreement with
holders of $10,187,000 of the Company's outstanding 12.875%
Debentures. The holders of these Debentures agreed to exchange such
Debentures for the equivalent principal amount of a new series of
notes ("Senior Notes") bearing interest at
F-10
a rate of 8 percent per annum, payable semi-annually (April 1 and
October 1) which will be senior to the remaining outstanding
Debentures. Additionally, these Debenture holders agreed to defer the
receipt of interest due April 1, 1996 (approximately $656,000) and due
October 1, 1996 (approximately $434,000) and to accept Senior Notes in
exchange for such deferred interest. The Senior Notes will carry the
right to convert up to approximately $716,000 of the notes into
1,908,000 shares of the Company's common stock. On October 1, 1996,
the aggregate principal amount of the Senior Notes approximated
$11,276,000 and will not provide for any amortization of principal and
will mature on September 1, 2001.
The debt exchange closed on October 15, 1996, but became effective
retroactively as of April 1, 1996, the date of the deferral of
interest on the 12.875% Debentures. In connection with the debt
exchange, the Company incurred certain costs which have been
capitalized and will be amortized over the life of the Senior Notes
using the straight-line method. The Senior Notes contain covenants
with respect to limitations on dividends and stock purposes. At June
30, 1997, the Company is prohibited from paying dividends and making
stock purchases.
The maturities of long-term debt at June 30, 1997, including current
maturities, are as follows (in thousands):
Year Amount
1998 $ 73
1999 41
2000 971
2001 3,779
2002 (9/1/01) 11,276
2002 (10/1/01) 6,269
---------
$22,409
=========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments." The estimated fair value amounts have
been determined by the Company, using available market information and
appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated
fair value amounts.
F-11
June 30,
1997 1996
-------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Long-Term Debt $22,409 $17,079 $23,428 $15,027
Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and
Other Noncurrent Assets - The carrying value of these items
approximates fair value, based on the short-term maturities of these
instruments.
Long-Term Debt - The fair value of these securities are estimated
based on quoted market prices. If no market quotes are available,
interest rates that are currently available to the Company for
issuance of the debt with similar terms and remaining maturities are
used to estimate fair value of debt issues.
The fair value estimates presented herein are based on pertinent
information available to management as of June 30, 1997 and 1996.
Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since those respective dates, and current estimates of fair
value may differ significantly from the amounts presented herein.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current
market exchange.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) operating losses. The tax effects of significant
items, comprising the Company's net deferred tax asset, are as
follows:
June 30,
1997 1996
(In Thousands)
Deferred tax liabilities:
Differences between book and tax basis of property,
plant and equipment $ 346 $ 526
Difference between book and tax basis of gain on sale
of property, plant and equipment 336 322
-------- -------
682 848
-------- -------
Deferred tax assets:
Difference between book and tax basis of inventory 368 223
Reserves not currently deductible 1,756 2,534
Operating loss carryforwards 4,548 5,572
Other 167 103
Difference between book and tax basis of subordinated debentures 2,003 349
-------- -------
8,842 8,781
-------- -------
Valuation allowance 4,151 3,924
-------- -------
Net deferred tax asset $4,009 $4,009
======== =======
F-12
The provision for income taxes is comprised as follows:
Year Ended June 30,
1997 1996 1995
(In Thousands)
Current:
Federal $ 65 $ - $ (270)
State and local - (90) 24
Deferred - - -
--------- -------- --------
$ 65 $ (90) $ (246)
========= ======== ========
Reconciliation of the U.S. statutory rate with the Company's effective
tax rate is summarized as follows:
Year Ended June 30,
1997 1996 1995
(In Thousands)
Federal statutory rate 34.0% (34.0)% (34.0)%
Increase (decrease) in tax resulting from:
Valuation allowance (41.5) 38.9 34.8
State income taxes (net of Federal tax benefits) 6.0 (6.0) (6.0)
Other 1.5 (.6) .5
Alternative minimum tax 11.1 - -
----- ------ -------
Effective rate 11.1% ( 1.7)% ( 4.7)%
===== ====== =======
As of June 30, 1997, the Company has net operating loss carryforwards
of approximately $11,369,000 for income tax purposes that expire
between the years 2002 and 2010.
10. LEASES
The Company has operating leases expiring through 2001, which include,
in addition to fixed rentals, escalation clauses that require the
Company to pay a percentage of increases in occupancy expenses.
Future minimum payments under these leases at June 30, 1997 are as
follows (in thousands):
Year Amount
1998 $ 571
1999 471
2000 451
2001 338
--------
Total $ 1,831
========
F-13
Loss on Abandonment of Leased Premises - During 1996, the Company
vacated two floors, separately leased to the Company, and combined its
operation into an existing floor leased by the Company in the same
building. The Company terminated and settled its lease obligations for
the vacated floors for $800,000 and wrote-off the remaining net book
value of related leasehold improvements of $270,000.
Rental expense for 1997, 1996 and 1995 was approximately $787,000,
$1,471,000 and $1,863,000, respectively. Rental expense for 1996
excludes the $800,000 lease settlement.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company's customers are not concentrated in any
specific geographic region but are concentrated in the retail
industry. One customer accounted for 12, 25, and 22 percent of the
Company's net sales in fiscal 1997, 1996 and 1995, respectively. In
fiscal 1997, another two customers accounted for 17 and 11 percent of
the Company's net sales, respectively. The Company performs ongoing
credit evaluations of its customers' financial condition. The Company
establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends
and other information.
12. STOCK PLANS, OPTIONS AND WARRANT
Employee Stock Ownership Plan - The Company has an Employee Stock
Ownership and Capital Accumulation Plan and Trust covering
substantially all of its employees, pursuant to which it can elect to
make contributions to the Trust in such amounts as may be determined
by the Board of Directors. The Company contributed $91,000 for the
year ended June 30, 1996 in order to allow the plan to meet required
distributions in connection with plant closings. No contributions were
made for the years ended June 30, 1997 and 1995.
Stock Options - The Company has an Incentive Stock Option Plan ("1983
ISOP"), pursuant to which the Company has reserved 5,000 shares at
June 30, 1997. This plan expired by its terms on June 30, 1993, but
5,000 previous grants remained outstanding at June 30, 1997, of which
3,300 are presently exercisable. The 1983 ISOP provided for the
issuance of options to employees to purchase common stock of the
Company at a price not less than fair market value on the date of
grant.
On December 8, 1994, the Company's stockholders' approved a new
Incentive Stock Option Plan ("1994 ISOP") to replace the 1983 ISOP
discussed above. Options granted, pursuant to the plan, are not
subject to a uniform vesting schedule. The plan permits the issuance
of options to employees to purchase common stock of the Company at a
price not less than fair market value on the date of the option grant.
The plan reserves 2,000,000 shares of common stocks for grant and
provides that the term of each award be determined by the Compensation
Committee with all awards made within the ten-year period following
the effective date. During fiscal 1997, 1,495,000 options were granted
under this plan and 1,160,000 were canceled, 452,000 of which were
replaced with options to purchase 700,000 shares at an exercise price
of $.625 per share.
The Company also has a Key Employee Stock Option Plan covering the
issuance of up to 1,667,000 shares of the Company's common stock.
During fiscal 1997, 333,000 options under this plan were canceled and
replaced with options to purchase 350,000 shares at an exercise price
of $.625 per share which are outstanding at June 30, 1997. All options
granted are presently exercisable.
F-14
The Company has also granted, in fiscal 1989, nonqualified options to
certain nonemployee sales representatives to purchase an aggregate of
133,000 shares at an exercise price of $2.36.
Statement of Financial Accounting Standards No. 123, "Accounting
Stock-Based Compensation" was effective for the Company for fiscal
1997. SFAS No. 123 encourages (but does not require) compensation
expense to be measured based on the fair value of the equity
instrument awarded. In accordance with APB No. 25, no compensation
cost has been recognized in the Consolidated Statements of Operations
for the Company's stock option plans. If compensation cost for the
Company's stock option plans had been determined in accordance with
the fair value method prescribed by SFAS No.123, the Company's net
income (loss) would have been $183,000, $(5,461,000) and $(5,212,000)
for 1997, 1996 and 1995, respectively, and the earnings (loss) per
share would have been $.02, $(.39), and $(.37) for 1997, 1996 and
1995, respectively. This pro forma information may not be
representative of the amounts to be expected in future years as the
fair value method of accounting prescribed by SFAS No. 123 has not
been applied to options granted prior to 1995.
Information with respect to stock options is as follows (shares in
thousands):
1997 1996 1995
------------------------- ------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
FIXED OPTIONS Shares Price Shares Price Shares Price
Outstanding - beginning of year 1,701 $1.43 2,026 $1.43 1,868 $1.96
Granted 1,845 .63 - - 1,382 1.13
Exercised - - - - - -
Canceled (1,493) 1.36 (325) 1.42 (1,224) 1.90
------ ------ ------- ------ ------ ------
Outstanding - end of year 2,053 $ .76 1,701 $1.43 2,026 $1.43
====== ====== ======= ====== ====== ======
Exercisable - end of year 708 $ .94 850 $1.69 991 $1.69
====== ====== ======= ====== ====== ======
Weighted-average fair value of
options granted during the year $ .58 $ - $ .93
====== ====== ======
The following table summarizes information about stock options
outstanding at June 30, 1997 (options in thousands):
Options Outstanding Options Exercisable
Weighted-Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding at Contractual Average Exercisable at Average
Exercise Prices June 30, 1997 Life (Yrs) Exercise Price June 30, 1997 Exercise Price
--------------- ----------------- ---------------- -------------- -------------- --------------
$.625 - $2.363 2,053 8.2 $.76 708 $.94
The fair value of each option-pricing model with the following
weighted average assumptions used for grants in 1997, 1996 and 1995,
respectively; risk-free interest rate 6.38%, 0% and 6.85%; expected
life 7 years, 0 years and 7 years; expected volatility of 126.28%, 0%
and 92.20%. The fair values generated by the Black-Scholes model may
not be indicative of the future benefit, if any, that may be received
by the option holder.
F-15
Warrant - In August 1993, in connection with an agreement with a
financial consulting firm, the Company granted a warrant to purchase
30,000 shares of its common stock at $1.69 per share to the
consultants. The warrant is exercisable at anytime through August
2000. No expense related to such warrant was recorded since it was not
material.
13. SPECIAL CHARGE
During fiscal 1995, the Company recorded a charge of $3,000,000 for
costs associated with the divestiture of its men's work and leisure
shirt division. This charge consisted of the write-down, to its
estimated realizable value, of this division's inventory of
$2,250,000, classified as cost of sales, and property, plant and
equipment of $750,000, classified separately as a special charge.
Prior to fiscal 1997, the inventory write-down of $2,250,000 was
previously classified separately as a special charge.
14. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
Quarter
First Second Third Fourth
(In Thousands, Except Per Share)
Year Ended June 30, 1997
Net sales $12,894 $22,133 $13,089 $13,354
Gross profit 3,285 5,745 3,535 3,958
Net income (loss) (63) 1,280 (329) (369)
Income (loss) per share - .09 (.02) (.03)
Quarter
First Second Third Fourth
(In Thousands, Except Per Share)
Year Ended June 30, 1996
Net sales $24,927 $32,721 $12,408 $14,059
Gross profit 4,770 6,215 2,775 3,362
Net loss (1,103) (1,217)(a) (1,938) (1,020)
Loss per share (.08) (.09) (.14) (.07)
Quarter
First Second Third Fourth
(In Thousands, Except Per Share)
Year Ended June 30, 1995
Net sales $32,440 $35,997 $17,327 $16,182
Gross profit 7,052 8,365 3,998 1,270 (b)
Net income (loss) 607 944 (1,316) (5,264)(b)
Income (loss) per share .04 .07 (.09) (.38)
(a) Amount includes an estimated loss of $1,170,000 associated with the
abandonment of leased premises.
(b) Gross profit includes a special charge of $2,250,000 associated with the
divestiture of the Company's men's work and leisure shirt division's
inventory; and net income (loss) includes an additional $750,000 for the
write-down of this division's property, plant and equipment.
* * * * * *
F-16
Schedule II
MOVIE STAR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
FISCAL YEAR ENDED JUNE 30, 1997:
Allowance for doubtful accounts $ 1,956 $ 192 $(1,370)(a) $ 778
Allowance for sales allowances 660 1,315 (1,515) 460
-------- -------- ---------- ---------
$ 2,616 $ 1,507 $(2,885) $ 1,238
======== ======== ========== =========
FISCAL YEAR ENDED JUNE 30, 1996:
Allowance for doubtful accounts $ 1,208 $ 769 $ (21)(a) $ 1,956
Allowance for sales allowances 660 2,237 (2,237) 660
-------- -------- ---------- ---------
$ 1,868 $ 3,006 $(2,258) $ 2,616
======== ======= ========== =========
FISCAL YEAR ENDED JUNE 30, 1995:
Allowance for doubtful accounts $ 965 $ 676 $ (433)(a) $ 1,208
Allowance for sales allowances 660 2,792 (2,792) 660
-------- -------- ---------- ---------
$ 1,625 $ 3,468 $(3,225) $ 1,868
======== ======== ========== =========
(a) Uncollectible accounts written off.
S-1
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
II-8
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Director Since Name Age Position
1981 Mark M. David 50 Chairman of the Board,
Chief Executive Officer and
Director
1997 Melvyn Knigin 54 President, Chief Operating
Officer and
Director
1983 Saul Pomerantz 48 Executive Vice President,
Chief Financial
Officer, Secretary
and Director
1996 Gary W. Krat 49 Director
1996 Joel M. Simon 52 Director
Mark M. David was re-elected Chairman of the Board and Chief Executive
Officer on November 20, 1996. On August 14, 1995, Mr. David relinquished
the position of Chief Executive Officer, but remained as Chairman of the
Board. He had been Chairman of the Board and Chief Executive Officer since
December 1985, President from April 1983 to December 1987 and Chief
Operating Officer of the Company since the merger with Stardust Inc. in
1981 until December 1987. Prior to the merger, he was founder, Executive
Vice President and Chief Operating Officer of Sanmark Industries Inc. In
April 1996, Mr. David resumed his duties as Chief Executive Officer.
Melvyn Knigin was appointed to fill a vacancy on the Board of Directors and
promoted to Senior Vice President and Chief Operating Officer on February
5, 1997 and was promoted to President on September 4, 1997. Since joining
the Company in 1987, he was the President of Cinema Etoile, the Company's
upscale intimate apparel division. Prior to joining the Company, he had
spent most of his career in the intimate apparel industry.
Saul Pomerantz, CPA, was elected Senior Vice President on December 3, 1987
and was re-elected on November 20, 1996 and was promoted to Executive Vice
President on September 4, 1997. Previously, he was Vice President-Finance
since 1981. He has been Chief Financial Officer since 1982 and Secretary of
the Company since 1983.
Gary W. Krat was elected to the Board of Directors on November 20, 1996.
Mr. Krat has been Senior Vice President of SunAmerica Inc. since 1990. He
is also Chairman and Chief Executive Officer of SunAmerica's subsidiaries,
Royal Alliance Associates, Inc. and SunAmerica Securities, Inc., both of
which are NASD broker dealer companies with more than three thousand
registered representatives. From 1977 until 1990, Mr. Krat was a senior
executive with Integrated Resources, Inc. Prior to joining Integrated
Resources, Mr. Krat was a practicing attorney. He has a law degree from
Fordham University and a Bachelor of Arts degree from the University of
Pittsburgh.
Joel M. Simon was elected to the Board of Directors on November 20, 1996.
Mr. Simon is currently self-employed as a private investor. From 1990 until
the end of 1996, Mr. Simon was the Executive Vice President and Chief
Operating Officer and, (until July 1993), was a director of a group of
affiliated companies known as Olympia & York Companies (USA)("O&Y-USA"),
subsidiaries of a Canadian multinational real estate concern. Prior to
becoming Chief Operating Officer of O&Y-USA, from 1985 until the end of
1989, Mr. Simon was the Executive Vice President-Administration and a
director of O&Y-USA. Mr. Simon is a Certified Public Accountant and was a
senior partner in
III-1
an accounting firm prior to joining O&Y-USA. In 1992, O&Y-USA experienced a
liquidity crisis. The O&Y-USA crisis was caused and exacerbated by its
inability to obtain financial support from its Canadian parent, as it had
in the past, because of the parent company's own financial crises. Since
then, O&Y-USA has been in the process of restructuring its business and
financial obligations. Many of the O&Y-USA companies filed voluntary
petitions for protection under Chapter 11 of the U.S. Bankruptcy Code.
Substantially all of these companies have had their plans of reorganization
confirmed and consummated. The balance of the companies are expected to
have their plans confirmed.
ITEM 11. EXECUTIVE COMPENSATION
Report of the Compensation Committee on Executive Compensation
Joel M. Simon, Gary W. Krat and Mark M. David were appointed by the Board
of Directors, and each of them agreed to serve as members of the
Compensation Committee (the "Committee").
The salaries of certain officers, other than Mr. David, were increased for
fiscal years 1997 and 1998.
Compensation Policies
In determining the appropriate levels of executive compensation for fiscal
year 1997, the Committee did not apply the policies previously established
by the Committee for determining compensation; rather, the Committee based
its decisions solely on the Company's financial condition.
Prior to fiscal year 1995, the Committee had based its recommendations to
the Board of Directors on (1) the Company's ability to attract and retain
experienced individuals with proven leadership and managerial skills, (2)
the executives' motivation to enhance the Company's performance for the
benefit of its shareholders and customers and (3) the executives'
contributions to the accomplishment of the Company's annual and long-term
business objectives.
Salaries generally had been determined based on the Committee's evaluation
of the value of each executive's contribution to the Company, results of the
past fiscal year in light of prevailing business conditions, the Company's
goals for the ensuing fiscal year and prevailing levels at companies
considered to be comparable to and competitors of the Company.
In addition to base salary compensation, the Committee had also, from time
to time, recommended that stock options be granted to the executive officers
of the Company in order to reward the officers' commitment to maximizing
shareholder return and long-term results.
Base Salary Compensation
Based on recommendations from the Company's Chairman of the Board and the
other Committee members' collective business experience, base salaries are
determined from year to year. The Committee does not utilize outside
consultants to obtain comparative salary information, but believes that the
salaries paid by the Company are competitive, by industry standards, with
those paid by companies with similar sales volume to the Company. The
Committee places considerably more weight on each executive's contribution
to the Company's development and maintenance of its sources of supply,
manufacturing capabilities, marketing strategies and customer relationships
than on the compensation policies of the Company's competitors; however, the
Committee does not establish or rely on target levels of performance in any
of these areas to arrive at its recommendations.
The current senior executives of the Company have been associated with the
Company in senior
III-2
management positions for periods ranging from thirteen to more than
twenty-five years. They have been primarily responsible for the formulation
and implementation of the Company's recent financial and operational
restructuring and provide the Company with a broad range of management
skills which are considered by the Committee to be an essential source of
stability and a base for the Company's future growth.
Stock Option Grants
In 1983, the Company adopted an Incentive Stock Option Plan (the "ISOP") to
provide a vehicle to supplement the base salary compensation paid to key
employees. All of the Company's senior executives were eligible to receive
grants under the ISOP. Options under the ISOP were granted at fair market
value at the date of grant. In the past, the Committee has recommended and
the Board of Directors has granted options under the ISOP to each of the
senior executives, except the Chairman of the Board. Mark M. David has not
received options under the ISOP because his ownership of shares of the
Company exceeds 10% of the outstanding shares of the Company. The options
granted under the ISOP were exercisable at a rate of 11% per year for the
first eight years of service after grant and 12% for the ninth year after
grant. No options have been granted to the Company's senior executives under
the ISOP since 1986 and no further options may be granted under the ISOP.
The 1983 ISOP has expired.
On July 15, 1994, the Committee adopted a new Incentive Stock Option Plan
(the "1994 ISOP") to replace the expired 1983 ISOP. All of the Company's
management and administrative employees are eligible to receive grants under
the 1994 ISOP. The 1994 ISOP was approved by the Company's shareholders at
the Company's annual meeting on December 8, 1994. Subject to shareholder
approval, options under the 1994 ISOP were granted to each of the Company's
senior executives (except Mark M. David) on July 15, 1994 at fair market
value at that date. As a condition to the grant of options to the Company's
senior executives, the Committee required each of the recipients to
surrender for cancellation any interest in options granted prior to July 15,
1994.
In addition to the ISOP, in 1988, the Committee recommended and the Board of
Directors adopted a non-qualified Management Option Plan (the "1988
Non-qualified Plan") to provide an additional continuing form of long-term
incentive to selected officers of the Company. The 1988 Nonqualified Plan
was approved by the Company's shareholders at the Company's annual meeting
on December 13, 1988. Generally, options under the 1988 Non-qualified Plan
are issued with a 10-year exercise period in order to encourage the
executive officers to take a long-term approach to the formulation and
accomplishment of the Company's goals. In 1988, the Committee recommended
and the Board of Directors approved the grant of options under the
non-qualified option plan to all of the Company's then executive officers.
Mark David is the only current executive officer of the Company who retains
any options granted under the 1988 Non-qualified Plan.
In January 1997, Messrs. Simon and Krat, the independent Directors serving
on the Committee, recommended that the Company grant new options to Mark
David under the 1988 Non-qualified Plan at a price equal to the market price
for the Company's shares on the date of the grant. As a condition to the
grant of new options to Mr. David under the 1988 Non-qualified Plan, the
Committee required Mr. David to surrender for cancellation any interest in
options granted to him prior to January 29, 1997.
Also in January 1997, the independent directors serving on the Committee
recommended that the Company grant new options under the 1994 ISOP to Saul
Pomerantz and Melvyn Knigin at a price equal to the market price for the
Company's shares on the date of the grant. The grant of new options to
Messrs. Pomerantz and Knigin was also subject to the condition that they
surrender for cancellation any interest in options granted to them prior to
January 29, 1997.
III-3
Compensation of the Chief Executive Officer
For fiscal year 1997, the annual base salary paid to Mark M. David, the
Company's Chairman of the Board and Chief Executive Officer, was not
increased. The Committee believed that it would be more appropriate to
recognize Mr. David's contribution to the Company's improved performance in
fiscal year 1997 through the grant of new options under the 1988
Non-qualified Plan rather than by increasing Mr. David's base salary.
Compensation Committee Interlocks and Insider Participation
Other than the Company's Chairman of the Board, there are no Compensation
Committee interlocks or insider participation. Mr. David did not participate
in the Committee's determinations of compensation for fiscal year 1997 or
fiscal year 1998.
Mark M. David
Gary W. Krat
Joel M. Simon
III-4
Summary Compensation Table
ANNUAL
COMPENSATION LONG TERM COMPENSATION
RESTRICTED
NAME AND FISCAL STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) AWARDS($) (# SHARES) COMPENSATION
------------------- ---- --------- --------- ---------- --------------
Mark M. David 1997 275,000 - 350,000(1) 8,145(3)
Chairman of the Board 1996 275,000 - 333,333(2) 8,145(3)
and Chief Executive 1995 275,000 - 333,333(2) 8,145(3)
Officer of the Company
Melvyn Knigin 1997 296,660 - 350,000(4) -
President and Chief 1996 291,076 - 139,844(5) -
Operating Officer of 1995 297,408 - 139,844(5) -
the Company; Director
Saul Pomerantz 1997 164,480 - 350,000(4) -
Executive Vice President 1996 145,000 - 312,467(5) -
and Chief Financial 1995 161,663 - 312,467(5) -
Officer of the
Company; Director
(1) Represents options to purchase 350,000 shares of Common Stock granted under
the Company's Non-Qualified Stock Option Plan ("1988 Plan").
(2) As a condition to the grant of new options, Mr. David was required to
surrender all outstanding options previously granted to him.
(3) Represents annual premiums paid by the Company for a split dollar form of
life insurance policy on the life of Mark M. David.
(4) Represents options to purchase 350,000 shares of Common Stock under the
1994 Incentive Stock Option Plan (the "1994 Plan").
(5) As a condition to the grant of new options under the 1994 Plan, each
recipient was required to surrender all of outstanding options previously
granted to him or her. The exercise prices of the surrendered options were
higher than the exercise price of options granted under the 1994 Plan.
III-5
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AS OF AUGUST 30, 1997
The following table sets forth certain information as of August 30,
1997 with respect to the stock ownership of (i) those persons or groups (as
that term is used in Section 13(d)(3) of the Securities Exchange Act of
1934) who beneficially own more than 5% of the Company's Common Stock, (ii)
each director of the Company and (iii) all directors and officers of the
Company as a group.
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNERSHIP CLASS(1)
Mark M. David 3,032,440(2)(6) 21.1916%
136 Madison Avenue
New York, NY 10016
Republic National 1,287,664; Direct 9.2242%
Bank as Trustee for
the Movie Star, Inc.
Employee Stock
Ownership Plan
452 Fifth Avenue
New York, NY 10018
Mrs. Abraham David 1,622,959(3)(7) 11.6261%
8710 Banyan Court
Tamarac, FL 33321
Melvyn Knigin 64,844(4) .4624%
136 Madison Avenue
New York, NY 10016
Saul Pomerantz 170,026(5) 1.2055%
136 Madison Avenue
New York, NY 10016
Joel M. Simon 47,500 0.3403%
237 Park Avenue
New York, NY 10017
Gary W. Krat 20,000 0.1433%
733 Third Avenue
New York, NY 10017
Abraham David 25,000; Direct(9) 0.1791%
8710 Banyan Court
Tamarac, FL 33321
All directors and officers as a group 4,957,769(2)(4)(5)(8) 34.1461%
(4 persons)
-----------------
(1) Based upon 13,959,650 shares (excluding 2,016,802 treasury shares)
outstanding and options, where applicable, to purchase shares of Common
Stock, exercisable within 60 days.
III-6
(2) Includes 58,674 shares owned as custodian for his children, 30,000 shares
owned as custodian for his sisters' children and 26,560 shares owned by his
spouse. Also includes the options granted to him for 350,000 shares, under
the 1988 Non-Qualified Stock Option Plan, exercisable within 60 days.
(3) Includes 506,695 shares owned by Annie David as a trustee for the benefit
of her daughters, Marcia Sussman and Elaine Greenberg.
(4) Represents options granted to Melvyn Knigin pursuant to the 1994 Plan,
exercisable within 60 days.
(5) Includes options granted to Saul Pomerantz for 144,782 shares pursuant to
the 1994 Plan, exercisable within 60 days; and 244 shares owned by his
spouse and 8,000 shares held jointly with his spouse.
(6) Does not include Mrs. Abraham David's shares for which he holds the proxy.
(7) Mark M. David holds a proxy for these shares.
(8) Includes the shares held by Mrs. Abraham David.
(9) Abraham David is the husband of Annie David and the father of Mark M.
David.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE.
III-7
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
(a) 1. Financial Statements and Supplementary Data
Included in Part II, Item 8 of this report:
Independent Auditors' Report F-1
Consolidated Balance Sheets at June 30, 1997 and 1996 F-2
Consolidated Statements of Operations for the fiscal
years ended June 30, 1997, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity for
the fiscal years ended June 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the
fiscal years ended June 30, 1997, 1996 and 1995 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-16
2. Schedule
For the fiscal years ended June 30, 1997, 1996 and 1995:
II - Valuation and Qualifying Accounts S-1
Schedules other than those listed above are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
financial statements or notes thereto. Columns omitted from schedules filed have
been omitted because the information is not applicable.
IV-1
(a) 3. EXHIBITS
Exhibit
Number Exhibit Method of Filing
3.1 Certificate of Incorporation Incorporated by reference
to Form 10-K for fiscal
year ended June 30, 1988
and filed on October 13,
1988.
3.1.1 Amended Certificate of Incorporated by reference
Incorporation to Form 10-K for fiscal
year ended June 30, 1992
and filed on September 25,
1992.
3.1.2 Amended Certificate of Incorporated by reference
Incorporation to Form 8 Amendment to
Form 10-K for fiscal
year ended June 30, 1992 and
filed on January 19, 1993.
3.2 By-Laws Incorporated by reference
to Form 10-K for fiscal
year ended June 30, 1988
and filed on October 13,
1988.
4.1 Instruments defining the Incorporated by reference
rights of security holders to Exhibits to
including indentures Registration Statement on
Form S-2 (No. 33-7837)
filed October 10, 1986.
4.1.1 Indenture dated as of October Incorporated by reference
1, 1996 between the to Exhibits to Application
Company, as Issuer and for Qualification of
American Stock Transfer & Indenture under the Trust
Trust Company, as Trustee Indenture Act of 1939 on
Form T-3 (Commission File
No. 22-22243) filed on
September 13, 1996.
4.2 Plan of Merger dated November Incorporated by reference
18, 1980, between Stardust to Exhibits to
Inc. and Sanmark Industries Registration Statement on
Inc. whereby Sanmark Form S-14 (Registration
Industries Inc. was merged No. 2-70365) filed by
into Stardust Inc. Company's predecessor
corporation, Stardust Inc.
on February 12, 1981.
IV-2
Exhibit
Number Exhibit Method of Filing
10.1 Agreement of Sale dated Incorporated by reference
December 12, 1983, as amended to Exhibits to
January 31, 1984, among Registration Statement
Industrial Development Form S-2 (No. 33-7837)
Authority of Russell County filed October 10, 1986.
(Virginia), the Company and the
Bankers Trust Company, with attendant
Deed and Bill of Sale, Deed of Trust,
Assignment, and Promissory Note in
the sum of $3,000,000.
10.2 Employee Stock Ownership and Incorporated by reference
Capital Accumulation Plan to Exhibits to
dated April 17, 1984 as Registration Statement
amended on July 1, 1984 Form S-2 (No. 33-7837)
between Republic National filed October 10, 1986.
Bank of New York, as trustee, and
the Company.
10.3 Incentive Stock Option Plan Incorporated by reference
Agreement dated June 28, to Exhibits to
1983, as amended on January Registration Statement
13, 1986. Form S-2 (No. 33-7837)
filed October 10, 1986.
10.3.1 1994 Incentive Stock Option Incorporated by reference
Plan. to Form 10-K for fiscal
year ended June 30, 1994
and filed on October 12,
1994.
10.4 Form of Non-Qualified Stock Incorporated by reference
Option granted to several to Exhibits to
persons who are Registration Statement
manufacturer's Form S-2 (No. 33-7837)
representatives for the filed October 10, 1986.
Company.
10.5 Financing Agreement dated as Incorporated by reference
of April 24, 1996 between to Form 10-Q for the
Rosenthal & Rosenthal, Inc. quarter ended March 30,
and the Company. 1996 and filed on May 15, 1996.
10.5.1 Side Letter re Covenants Incorporated by reference
dated as of April 24, 1996 to Form 10-Q for the
with Rosenthal & Rosenthal, quarter ended March 30,
Inc. 1996 and filed on
May 15, 1996.
IV-3
Exhibit
Number Exhibit Method of Filing
10.5.2 Security Agreement dated as Incorporated by reference
of April 24, 1996 between to Form 10-Q for the
Rosenthal & Rosenthal, Inc. quarter ended March 30,
and the Company. 1996 and filed on
May 15, 1996.
10.5.3 Security Agreement - Incorporated by reference
Inventory dated as of April to Form 10-Q for the
24, 1996 between Rosenthal & quarter ended March 30,
Rosenthal, Inc. and the 1996 and filed on
Company. May 15, 1996.
10.5.4 Security Agreement and Incorporated by reference
Mortgage - Trademarks dated to Form 10-Q for the
as of April 24, 1996 between quarter ended March 30,
Rosenthal & Rosenthal, inc. 1996 and filed on
and the Company. May 15, 1996.
10.5.5 Negative Pledge - Real Incorporated by reference
property dated as of April to Form 10-Q for the
24, 1996 between Rosenthal & quarter ended March 30,
Rosenthal, Inc. and the 1996 and filed on
Company. May 15, 1996.
10.5.6 Assignment of Leases, Rents Incorporated by reference
and Security Deposits dated to Form 10-Q for the
as of April 24, 1996 between quarter ended March 30,
Rosenthal & Rosenthal, Inc. 1996 and filed on
and the Company. May 15, 1996.
10.7 1988 Non-Qualified Stock Incorporated by reference
Option Plan. to Form 10-K for fiscal
year ended June 30, 1989
and filed on September 27,
1989.
10.8 License Agreement dated Incorporated by reference
July 26, 1990 between PGH to Form 8 Amendment to
Company, Licensor and Form 10-K for fiscal year
Sanmark-Stardust Inc. ended June 30, 1992 and
Licensee. filed on January 19, 1993.
10.9 License Agreement dated Incorporated by reference
November 14, 1991 between to Form 8 Amendment to
BonJour Group, Ltd., Licensor Form 10-K for fiscal year
and Sanmark-Stardust Inc., ended June 30, 1992 and
Licensee. Filed on January 19, 1993.
IV-4
Exhibit
Number Exhibit Method of Filing
10.10 Prototype of Contract of Incorporated by reference
Purchase periodically entered to Form 10-K for fiscal
into between the Company year ended June 30, 1993
and Sears Roebuck and and filed on September 18,
Company. 1993.
21 Subsidiaries of the Company. Filed herewith.
27 Financial Data Schedule Filed herewith.
28.1 Tender Offer Statement and Incorporated by reference
Rule 13E-3 Transaction to Schedule 14D-1 and Rule
Statement with respect to 13E-3 Transaction
Movie Star, Inc. Acquisition. Statement (No. 1-4585)
filed December 18, 1987.
(a) 4. Report on Form 8-K
None.
IV-5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this document to be signed on
its behalf by the undersigned, thereunto duly authorized.
September 29, 1997
MOVIE STAR, INC.
By: /s/ MARK M. DAVID
--------------------------
MARK M. DAVID, Chairman
of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and as of the date indicated.
/s/ MARK M. DAVID Chairman of the Board; Chief September 29 , 1997
- ----------------------- Executive Officer; Director
MARK M. DAVID
/s/ MELVYN KNIGIN President; Chief Operating Officer; September 29 , 1997
- ----------------------- Director
MELVYN KNIGIN
/s/ SAUL POMERANTZ Executive Vice President; September 29 , 1997
- ----------------------- Secretary & Director;
SAUL POMERANTZ Principal Financial &
Accounting Officer
/s/ GARY W. KRAT Director September 29, 1997
- -----------------------
GARY W. KRAT
/s/ JOEL M. SIMON Director September 29 , 1997
- -----------------------
JOEL M. SIMON
IV-6
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
21 SUBSIDIARIES OF THE COMPANY
27 FINANCIAL DATA SCHEDULE