-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HvISycA3jQFjgE9YAqRKaeiKpLQQX0f3v2IllFKCN9k8/VErd+OIc0W4o/ItQobr j4Yg22CCBJAfgBJc3+NeGw== 0001094891-99-000019.txt : 19991227 0001094891-99-000019.hdr.sgml : 19991227 ACCESSION NUMBER: 0001094891-99-000019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOVIE STAR INC /NY/ CENTRAL INDEX KEY: 0000093631 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', CHILDREN'S & INFANTS' UNDERGARMENTS [2340] IRS NUMBER: 135651322 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05893 FILM NUMBER: 99718341 BUSINESS ADDRESS: STREET 1: 136 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126797260 MAIL ADDRESS: STREET 1: 136 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10016 FORMER COMPANY: FORMER CONFORMED NAME: SANMARK STARDUST INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STARDUST INC /NY/ DATE OF NAME CHANGE: 19810526 10-K 1 ANNUAL REPORT ON FORM 10-K 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, 1999 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 $12,818,264 on August 31, 1999, based upon the closing price of $1.375 at the close of trading on August 31, 1999. As of August 31, 1999, there were 14,879,644 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. 1999 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-7 Item 4 Submission of Matters to a Vote of Security Holders..................... I-7 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-14 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; and also operates retail stores under the names Movie Star Factory Stores, Bargain Box Factory Stores, Bobby's Place, Bobby's Menswear and A Little Xtra from Movie Star ("Retail Stores"). During fiscal 1998, the Company exited the men's, women's and children's screen printed tee shirt division. The Company's products consist of ladies' pajamas, nightgowns, baby dolls, nightshirts, dusters, shifts, caftans, 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 products sold in the Company's retail stores consist of lingerie, loungewear, sportswear, outerwear and hosiery for regular and plus size women, select menswear, jewelry and accessories. The specific products offered depend on the buying opportunities that are available each season. Between 1992 and 1997, as a result of consolidations in the retail industry, the high cost of domestic manufacturing and difficulties the Company had encountered in engaging reliable offshore contractors and obtaining sufficient quantities of acceptable quality finished products from overseas, the Company experienced a loss of sales to certain of its customers. In fiscal 1998, the Company began to regain a portion of the sales it had lost by creating new designs at competitive prices and by improving on-time delivery and the quality of its products. The Company has shifted a large portion of its production to Mexico and other offshore based contractors and has developed infrastructures in these locations that has given the Company greater control over its operations, quality and on-time delivery. 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 remaining 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 $110.00 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 54% 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 Retail Stores. The Company's gross profit on its sales for each of the fiscal years ended June 30, 1999, 1998 and 1997 was approximately 29%, 29% and 27%, respectively. The Retail Stores primarily sell apparel products manufactured by the Company and other manufacturers at discounted retail prices. The prices to consumers for the products sold in the Retail Stores range from approximately $.49 for hosiery to $79.00 for outerwear. During the early to mid 90's, the Retail Stores began to shift the mix of products sold from primarily non-branded first quality closeouts and irregular merchandise at discounted prices to selling branded merchandise, first quality non-branded merchandise and to a much lesser extent, irregular merchandise at discounted prices. In fiscal 1999, 1998 and 1997 less than 5%, 15% and 20%, respectively, of the products sold by these stores were supplied by the Company. This decrease resulted primarily from the phase out of the Company's popular-priced trade business and the Company's decision to diversify and broaden the Retail Stores product line. The Retail Stores accounted for approximately 13.1%, 16.6% and 16.7% of the Company's total sales in fiscal 1999, 1998 and 1997, respectively. These stores operate at a gross profit above 33%. The Retail 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 manufactured products to cooperative advertising in conjunction with its retail customers directed to the ultimate retail consumer of its products. From 1976 until 1998, the Company had, pursuant to various written agreements, retained Harold Shatz and Jeffrey Hymowitz and their organization, Domino Industries, Inc. ("Domino"), as a manufacturer's representative. In fiscal 1998, Mr. Shatz effectively discontinued providing his services as a sales executive to the Domino organization and did not wish to resume providing those services. In view of this fact, the Company and Domino agreed to modify their agreement. Under the modification, Domino accepted significantly lower commissions on the net sales attributable to its sales efforts in consideration for the Company's payment of a negotiated fixed fee payable in monthly installments until the expiration of the agreement on December 31, 1998. Mr. Hymowitz became an employee of the Company upon the expiration of the agreement. Working closely with the Company, Mr. Hymowitz has continued to sell to certain accounts under the supervision of Mel Knigin, the Company's President and most senior executive in charge of sales and merchandising. In fiscal year 1999 and 1998, approximately 36% and 30%, respectively, of the Company's net sales were attributed to Mr. Hymowitz and the Domino organization. The Company believes that the loss of its relationship with Mr. Hymowitz would not materially adversely affect the Company because retailers' purchasing decisions are primarily based upon the Company's 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, brushed terry, flannel, brushed flannel, 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 amount of finished goods assembled for the Company in the Caribbean and Central America has increased from 13% in fiscal 1997 and 1998 to 16% in fiscal 1999. The Company has also increased the amount of finished goods assembled in Mexico from 9% in fiscal 1997 and 34% in fiscal 1998 to 48% in fiscal 1999. The increases in Mexico were due to the Company's strategic decision to assemble more of its finished goods in that country in order to take advantage of lower labor costs and lower duty rates resulting from the North American Free Trade Agreement ("NAFTA"). Certain of the raw materials used in the production of the Company's products in Mexico are subject to export limitations under NAFTA, called Tariff Protection Levels ("TPL"), that are similar to quotas. TPL is assigned annually to various categories of textiles and is available on a "first-come first-served" basis to U.S. companies exporting products from Mexico containing the textiles subject to the TPL. In September 1998 and June 1999, the maximum annual TPL for certain of the raw materials used in the Company's products was exhausted. As a result, the rate of duty on the affected products from Mexico shipped to the United States in the last four months of calendar year 1998 and the last six months of calendar year 1999 increased from 2.8% in 1998 and no duty in 1999 to 16.6% of the value of the finished product. The Company has investigated various alternatives to minimize the impact of this increase, including the shift of a portion of its production to other locations, such as the Philippines. Approximately 15% of the Company's finished goods were imported from foreign sources in fiscal 1999 as compared to 10% in fiscal 1998 and 20% in fiscal 1997. In fiscal 1999, approximately 33% of the Company's raw materials were imported as compared to approximately 37% in fiscal 1998 and 33% in fiscal 1997. The functions of purchasing finished products and raw materials from offshore sources have been centralized to give the Company greater control over its offshore purchases through closer oversight of these functions by senior management and greater accountability from foreign based personnel employed by I-2 and reporting directly to the Company. Currently, the Company has two employees in Bangladesh and two employees in the Philippines supervising the production of finished products purchased by the Company from manufacturers in those countries. As a result of the Company's decision to shift a large portion of its production to Mexico-based contractors, the Company has developed an infrastructure with nine employees in Mexico to assure greater control over its operations and assist in maintaining quality and on-time delivery. The Company also has two employees in Honduras who assist in maintaining quality and on-time delivery. Management personnel travel to Mexico, the Far East, the Caribbean and Central America throughout the year to monitor the performance of the Company's offshore manufacturers and contractors. The Company's transactions with its foreign manufacturers and suppliers are subject to the risks of doing business abroad. The Company's import and offshore operations are subject to constraints imposed by agreements between the United States and a number of foreign countries in which the Company does business. These agreements impose quotas on the amount and type of goods that can be imported into the United States from these countries. Such agreements also allow the United States to impose, at any time, restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specified limits. The Company's imported products are also subject to United States customs duties and, in the ordinary course of business, the Company is from time to time subject to claims by the United States Customs Service for duties and other charges. The United States and other countries in which the Company's products are manufactured may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust presently prevailing quotas, duty or tariff levels, which could adversely affect the Company's operations and its ability to continue to import products at current or increased levels. The Company cannot predict the likelihood or frequency of any such events occurring. 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", "Private Property", and "Night Magic" are material to the marketing by the Company of its products. There is no litigation with respect to patents, licenses and trademarks. The Company has entered into an exclusive licensing agreement to produce and sell sleepwear and intimate apparel designed by Flora Nikrooz. The Company has introduced a designer collection at affordable prices that have been designed by Ms. Nikrooz under the Flora Nikrooz intimates name. These products are being offered to department and better specialty stores. The Company plans to ship the first orders in November 1999. (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) Wal-Mart accounted for 22% of sales for fiscal 1999 and 20% of sales for fiscal 1998. Sears, Roebuck and Company accounted for 14% of sales for fiscal 1999 and 11% of sales for fiscal 1998. Target accounted for 11% of sales for fiscal 1999 and 3% of sales for fiscal 1998. 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 I-3 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, 1999 was approximately $32,300,000 and as of June 30, 1998 was approximately $33,000,000. 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. (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 sought to expand the development and marketing of their own brands and to obtain intimate apparel products directly from similar sources as the Company. Owning manufacturing facilities 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. As a result, the Company has consolidated production in its domestic plants by closing underutilized and inefficient facilities. Between August 1990 and June 1998, the Company has closed seventeen 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, the Company no longer relies principally on domestic manufacturing and has increased its reliance on offshore manufacturers and contractors. 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 also result in the underutilization of the Company's remaining domestic plants and decrease profitability. (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 588 employees of the Company, approximately 22 are executive, design and sales personnel, 115 are administrative personnel, and the balance are in manufacturing, warehousing and retail sales for the Retail Stores division. In addition, the Company employs approximately 55 part-time sales and stockroom assistants in its Retail 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. 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. I-4 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. I-5 ITEM 2. PROPERTIES The following table sets forth all of the facilities owned or leased by the Company as of June 30, 1999. Owned or Bldg. Area Expiration Productive Extent of Location Use Leased (sq. ft.) Annual Rent of Lease Capacity(4) Utilization(4) - -------- ------ --------- ----------- -------- ----------- -------------- 136 Madison Ave., Executive and Portions Sub- 23,000 $393,000 4/01 N/A N/A New York, NY Administrative leased; (1) (includes one offices; Portions floor at 148 divisional sales Leased Madison Ave., office and Directly from NY, NY) showroom Landlord 180 Madison Ave., Sales Office Leased 3,000 $ 65,000 7/00 N/A N/A New York, NY and Showroom Petersburg, PA Warehousing Owned 140,000 _____ _____ N/A N/A for finished goods; dis- tribution center Lebanon, VA Manufacturing; Owned 170,000 _____ _____ 250 91% warehousing for piece goods and finished goods; distribution center Honaker, VA Vacant Owned 40,000 _____ _____ N/A N/A South Mississippi 1 Mfg./Dist./ Owned/Leased 239,000 _____ _____ 200 28%(5) Warehouse; 1 (2) Distribution Center North Mississippi 1 Mfg./Vacant Owned 103,000 _____ _____ N/A N/A Retail Stores 28 retail Leased(3) 103,000 $360,000(3) (3) N/A N/A stores located throughout Mississippi and Georgia
- ---------- (1) Includes escalation for 1999. (2) Leased from municipalities pursuant to local Development Authority bond issues. (3) Store leases generally are for one to three-year periods with options to renew. Rents generally range from $2-$8 per square foot. (4) "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. I-6 (5) Subsequent to June 30, 1998, the Company has minimized the amount of production it does at this facility in order to maximize its overall efficiency, lower manufacturing costs and to allow for more warehousing and distribution space. 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, 148 and 180 Corporate Offices; 7,000 Madison Avenue Divisional Sales Offices New York, New York and Showrooms; 11,000 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 Mississippi Manufacturing; 29,000 Manufacturing and Distribution; 195,000 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-7 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, 1999 First Quarter . . . . . . . . . . . . . . . . . . . . . 11/16 7/16 Second Quarter. . . . . . . . . . . . . . . . . . . . . 1 3/4 3/8 Third Quarter . . . . . . . . . . . . . . . . . . . . . 2 1/4 1 1/8 Fourth Quarter. . . . . . . . . . . . . . . . . . . . . 2 13/16 1 5/16 Year Ended June 30, 1998 First Quarter . . . . . . . . . . . . . . . . . . . . . 13/16 3/8 Second Quarter. . . . . . . . . . . . . . . . . . . . . 7/8 9/16 Third Quarter . . . . . . . . . . . . . . . . . . . . . 7/8 9/16 Fourth Quarter. . . . . . . . . . . . . . . . . . . . . 7/8 11/16 As of August 31, 1999, there were approximately 891 holders of record of the Common Stock. For restrictions on dividends, see Item 1 at page I-5. MARKET FOR COMPANY'S 12.875% SUBORDINATED DEBENTURE (per $1,000 par value) High Low ------ ---- Year Ended June 30, 1999 First Quarter . . . . . . . . . . . . . . . . . . . . 940.00 860.00 Second Quarter. . . . . . . . . . . . . . . . . . . . 950.00 820.00 Third Quarter . . . . . . . . . . . . . . . . . . . . 950.00 861.25 Fourth Quarter. . . . . . . . . . . . . . . . . . . . 955.00 900.00 Year Ended June 30, 1998 First Quarter . . . . . . . . . . . . . . . . . . . . 837.50 750.00 Second Quarter. . . . . . . . . . . . . . . . . . . . 910.00 810.00 Third Quarter . . . . . . . . . . . . . . . . . . . . 980.00 900.00 Fourth Quarter. . . . . . . . . . . . . . . . . . . . 947.50 915.00 II-1 ITEM 6. SELECTED FINANCIAL DATA MOVIE STAR, INC. AND SUBSIDIARIES ITEM 6. Selected Financial Data (In Thousands, Except Per Share Amounts) ________________________________________________________________________________ Statement of Operations Data: Fiscal Year Ended June 30, 1999 1998 1997 1996 1995 NET SALES $ 72,506 $ 64,537 $ 61,470 $ 84,115 $ 101,946 --------- --------- --------- --------- --------- COST OF SALES 51,363 45,777 44,947 66,993 81,261 SELLING, GENERAL AND ADMINISTRATIVE EXPENES 15,859 15,206 13,875 17,637 20,645 LOSS ON ABANDONMENT OF LEASED PREMISES -- -- -- 1,070 -- SPECIAL CHARGE -- -- -- -- 750 -------- --------- ------- --------- -------- 67,222 60,983 58,822 85,700 102,656 -------- --------- ------- --------- -------- INCOME (LOSS) FROM OPERATIONS 5,284 3,554 2,648 (1,585) (710) GAIN ON PURCHASES OF SUBORDINATED DEBENTURES AND SENIOR NOTES -- (157) (560) -- -- INTEREST INCOME (118) (130) (157) (110) (104) INTEREST EXPENSE 2,694 2,623 2,781 3,893 4,669 -------- --------- ------- --------- -------- INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES 2,708 1,218 584 (5,368) (5,275) PROVISION FOR (BENEFIT FROM) INCOME TAXES 35 16 65 (90) (246) -------- --------- ------- --------- -------- NET INCOME (LOSS) $ 2,673 $ 1,202 $ 519 $(5,278) $ (5,029) ======== ======== ======= ========= ======== BASIC INCOME (LOSS) PER SHARE $ .19 $ .09 $ .04 $ (.38) $ (.36) ======== ======== ======= ========= ======== DILUTED INCOME (LOSS) PER SHARE $ .17 $ .08 $ .04 $ (.38) $ (.36) ======== ======== ======= ========= ======== BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 14,309 14,049 13,960 13,960 13,960 ======== ======== ======= ========= ======== DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 15,869 15,161 15,868 13,960 13,960 ======== ======== ======= ========= ======== Balance Sheet Data: At June 30, 1999 1998 1997 1996 1995 WORKING CAPITAL $ 22,616 $ 19,916 $ 18,636 $ 19,546 $ 22,648 ======== ======== ======= ========= ======== TOTAL ASSETS $ 36,759 $ 36,743 $ 33,957 $ 34,610 $ 57,204 ======== ======== ======= ========= ======== SHORT-TERM DEBT - Including current maturities of long-term debt and capital lease obligations $ 45 $ 40 $ 73 $ 45 $ 15,832 ======== ======== ======= ========= ======== LONG-TERM DEBT $ 20,703 $ 20,980 $ 22,336 $ 23,533 $ 22,496 ======== ======== ======= ========= ======== STOCKHOLDERS' EQUITY $ 8,166 $ 5,202 $ 3,941 $ 3,422 $ 8,700 ======== ======== ======= ========= ========
II-2 ITEM 7. 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 Company'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 Company's customers; and the risk factors listed from time to time in the Company's SEC reports. Results of Operations 1999 vs. 1998 Net sales for the year ended June 30, 1999 increased by 12.3% to $72,506,000 from $64,537,000 in the comparable period in 1998. The increase in sales resulted from higher sales in the intimate apparel division of approximately $9,159,000, offset partially by a decrease in sales for the retail division of approximately $1,182,000. Net sales in the intimate apparel division increased to $63,006,000 as compared to $53,847,000 in the comparable period in 1998. This increase was primarily due to the retailers' positive acceptance of the Company's moderately priced fashion forward products. At June 30, 1999, the Company's backlog of open orders was $32,300,000 as compared to $33,000,000 at June 30, 1998. Net sales in the Company's retail division decreased to $9,500,000 as compared to $10,682,000 in the comparable period in 1998. This decrease was primarily due to poor weather patterns and hurricanes in the geographic areas in which the stores are located, resulting in lower sales due to fewer customers. The gross profit percentage was 29.2% for the year ended June 30, 1999 as compared to 29.1% for the year ended June 30, 1998. The gross margin in the Company's intimate apparel division increased to 28.0% for the year ended June 30, 1999 from 27.5% for the year ended June 30, 1998. The higher margins in the intimate apparel division resulted primarily from an improved product mix, better control of product costs and the continued shift of production to offshore contractors offset partially by additional duty (see discussion on Tariff Protection Levels below). The gross margin for the retail division decreased to 37.0% for the year ended June 30, 1999 as compared to 38.2% for the year ended June 30, 1998. The lower margins in the retail division resulted primarily from higher markdowns taken in the current year as compared to the prior year, due to the closeout of excess seasonal merchandise that resulted from an unseasonably warm fall and winter. Certain of the raw materials used in the production of the Company's products in Mexico are subject to export limitations under the North American Free Trade Agreement, called Tariff Protection Levels ("TPL"), that are similar to quotas. TPL is assigned annually to various categories of textiles and is available on a II-3 "first-come first-served" basis to U.S. companies exporting products from Mexico containing the textiles subject to the TPL. In September 1998 and June 1999, certain of the raw materials used in the Company's products reached the maximum annual TPL. As a result, the rate of duty for this category of products shipped from Mexico to the United States, after the annual TPL has been reached, increased from 2.8% in 1998 and no duty in 1999 to 16.6% of the value of the finished product. The Company has investigated various strategies to minimize the impact of this increase. These strategies include purchasing more raw materials that originate in Mexico that will not be subject to TPL limitations and investigating other locations for manufacturing, such as the Philippines. Selling, general and administrative expenses were $15,859,000, or 21.9% of net sales, for the year ended June 30, 1999 as compared to $15,206,000, or 23.6% of net sales, for the similar period in 1998. This increase of $653,000 resulted primarily from increases in salary expense and salary related costs of $678,000 due to the hiring of additional personnel and salary increases for existing personnel, a one-time charge of $625,000 in connection with the retirement of the Company's Chief Executive Officer, Mark M. David, an increase in shipping costs of $171,000 and a net increase in other general overhead expenses, partially offset by a decrease in commissions of $891,000 and bad debts of $291,000. The decrease in commissions was primarily due to the restructuring of an agreement the Company had with its outside manufacturer's representative, who became an employee of the Company on January 1, 1999 and the overall product mix of the Company's sales. The Company's intimate apparel division had selling, general and administrative expenses of $13,065,00, or 20.7% of net sales, for the year ended June 30, 1999 as compared to $12,367,000, or 23.0% of net sales, for the similar period in 1998. This increase in dollars was primarily due to the same reasons described above. The Company's retail division had selling, general and administrative expenses of $2,794,00, or 29.4% of net sales, for the year ended June 30, 1999 as compared to $2,839,000, or 26.6% of net sales, for the similar period in 1998. This increase in percentage was primarily due to the reduction in sales for the division. Income from operations increased to $5,284,000 for the year ended June 30, 1999, from $3,554,000 for the similar period in 1998. This increase was due to higher sales and gross margins partially offset by an increase in selling, general and administrative expenses. The Company's intimate apparel division had income from operations of $4,564,000 for the year ended June 30, 1999 as compared to $2,316,000 for the similar period in 1998. This increase was due to higher sales and gross margins partially offset by an increase in selling, general and administrative expenses. The Company's retail division had income from operations of $720,000 for the year ended June 30, 1999 as compared to income from operations of $1,238,000 for II-4 the similar period in the prior year. This decrease was due to lower sales and gross margins offset partially by lower selling, general and administrative expenses. The operational results for the retail division are based on direct operating expenses and do not include any indirect corporate overhead. In the second quarter of fiscal 1998, the Company purchased $500,000 in principal amount of its 12.875% subordinated debentures. As a result of the transaction, the Company recorded a pre-tax gain of $94,000, net of related costs. In the third quarter of fiscal 1998, the Company purchased $156,000 and $300,000 in principal amount of its 12.875% subordinated debentures. As a result of these transactions, the Company recorded a pre-tax gain of $59,000, net of related costs. Interest income for the year ended June 30, 1999 was $118,000 as compared to $130,000 for 1998. Interest expense for the year ended June 30, 1999 was $2,694,000 as compared to $2,623,000 for 1998. The Company provided for an income tax provision of $35,000 for the year ended June 30, 1999 as compared to $16,000 for 1998. The Company recorded net income for the year ended June 30, 1999 of $2,673,000 as compared to net income of $1,202,000 for the same period in 1998. This increase of $1,471,000 was due to higher sales and gross margins offset partially by an increase in selling general and administrative expenses, a gain on the purchase of subordinated debentures in the prior year, a net increase in interest costs and a larger provision for income taxes in the current year. 1998 vs. 1997 Net sales for the year ended June 30, 1998 increased by 5.0% to $64,537,000 from $61,470,000 in the comparable period in 1997. The increase in sales resulted from higher sales in the intimate apparel division and the retail division of approximately $3,311,000 and $453,000, respectively, offset by a decrease in other business of $697,000. Net sales in the intimate apparel division increased to $53,847,000 from $50,536,000 in the comparable period in 1997. This increase was due to the creation of new designs and competitive products for its customers. At June 30, 1998 the Company's backlog of open orders was $33,000,000 as compared to $21,300,000 at June 30, 1997. This increase is due to an expected increase in business for fiscal 1999 and orders being booked earlier than they were in the prior year. Net sales in the Company's retail division increased to $10,682,000 from $10,229,000 in the comparable period in 1997. This increase was primarily due to an expanded product line, which includes higher priced brand II-5 name products. The decrease in other business was the result of the Company's decision to exit the men's, women's and children's screen printed tee shirt division. The gross profit percentage increased to 29.1% for the year ended June 30, 1998 from 26.9% in the similar period in 1997. The gross margin in the Company's intimate apparel division increased to 27.5% for the year ended June 30, 1998 from 24.9% in the similar period in 1997. The higher margins in the intimate apparel division resulted primarily from an improved product mix, better control of product costs and the continued shift of a significant portion of production to Mexico-based contractors and, to a lesser extent, the elimination of certain problems it had in the prior year with the quality of specific items of the Company's imported finished goods (discussed below). The shift in production to Mexico-based contractors has enabled the Company to take advantage of lower duty rates that result from the North American Free Trade Agreement ("NAFTA") and shorter lead times associated with the raw materials that are available in Mexico. The geographic proximity of the Mexico-based contractors also affords the Company's senior management the opportunity to more easily monitor the production of these products. The Company has seven employees in Mexico to support this significant shift in production. The gross margin for the retail division increased to 38.2% for the year ended June 30, 1998 as compared to 35.7% in the similar period in 1997. The higher margins in the retail division resulted primarily from lower markdowns taken in the current year as compared to the prior year. At the end of fiscal 1996 and extending into the second quarter of fiscal 1997, the Company encountered problems with certain of its imported finished goods. After taking delivery of these goods, the Company was required to correct manufacturing defects before shipping the merchandise to one of the Company's customers. Although there was no loss of sales attributable to this merchandise, the Company incurred additional 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 new 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 had in fiscal 1996 and the first half of fiscal 1997. Selling, general and administrative expenses increased by $1,331,000 to $15,206,000 for the year ended June 30, 1998 from $13,875,000 in the similar period in 1997. This increase resulted primarily from increases in salary expense and salary related costs, commission expense, a more favorable recovery of bad debts in the prior year and an increase in expenses for the retail division partially offset by a net decrease in other general overhead expenses. The Company's intimate apparel division had selling, general and administrative expenses of $12,367,000 for the year ended June 30, 1998 as compared to $11,325,000 in the similar period in 1997. This increase was primarily the result of salary expense and salary related expenses increasing approximately II-6 $481,000 due to the hiring of additional personnel, increases for executive and sales personnel as well as increases for administrative personnel. Commission expense increased by $400,000 primarily due to an increase in sales and a restructured agreement with the Company's outside manufacturer's representative, which included guaranteed commissions in exchange for a significantly reduced commission rate on future sales through the expiration of the agreement, December 31, 1998. The additional expense incurred in the current fiscal year due to this restructuring was approximately $285,000. The Company also had a more favorable recovery of bad debts in the prior year of approximately $447,000 primarily from one customer that resolved its bankruptcy on a more favorable basis than the Company had anticipated. The retail division had selling, general and administrative expenses of $2,839,000 for the year ended June 30, 1998 as compared to $2,550,000 in the similar period in 1997. This increase was primarily the result of increases in salary expense and salary related costs, advertising expense and store related expenses totaling approximately $310,000 due to its effort to expand its product line with more brand name merchandise and increase sales. Income from operations increased to $3,554,000 for the year ended June 30, 1998, from $2,648,000 for the similar period in 1997. This increase was due to higher sales and gross margins partially offset by an increase in selling, general and administrative expenses. The Company's retail division had income from operations of $1,238,000 and income from operations of $1,106,000 for the similar period in the prior year. The operational results for the retail division are based on direct operating expenses and do not include any indirect corporate overhead. In the second quarter of fiscal 1998, the Company purchased $500,000 in principal amount of its 12.875% subordinated debentures. As a result of the transaction, the Company recorded a pre-tax gain of $94,000, net of related costs. In the second quarter of fiscal 1998, the Company purchased $300,000 in principal amount of its 8% Convertible Senior Notes due September 1, 2001. These Notes entitled the previous holders to convert the principal amount into 800,000 shares of the Company's common stock, par value $.01. In the third quarter of fiscal 1998, the Company purchased $156,000 and $300,000 in principal amount of its 12.875% subordinated debentures. As a result of these transactions, the Company recorded a pre-tax gain of $59,000, net of related costs. In the first quarter of fiscal 1997, 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 pre-tax gain of $560,000, net of related costs. II-7 Interest income for the year ended June 30, 1998 was $130,000 as compared to $157,000 for 1997. Interest expense decreased by $158,000 for the year ended June 30, 1998, from the comparable period in the prior year primarily due to the purchases of a portion of the Company's 12.875% subordinated debentures and lower short-term borrowing charges. The Company provided for an income tax provision of $16,000 for the year ended June 30, 1998 as compared to $65,000 for 1997. The Company recorded net income for the year ended June 30, 1998 of $1,202,000 as compared to net income of $519,000 for the same period in 1997. This increase of $683,000 was due to higher sales and gross margins and lower interest costs offset partially by an increase in selling general and administrative expenses and a larger gain on the purchase of subordinated debentures in the prior year. Liquidity and Capital Resources For the year ended June 30, 1999, the Company's working capital increased by $2,700,000 to $22,616,000, principally from profitable operations and the sale of non-operating assets offset partially by the payment and purchases of long-term debt and the purchase of fixed assets. During the fiscal year ended June 30, 1999, cash increased by $4,051,000. The Company used cash of $528,000 for the purchase of fixed assets, $328,000 for the repayment of short-term borrowings and $50,000 for the payment of capital lease obligations. Cash generated from profitable operations, the sale of certain non-operating assets aggregating $200,000 and the exercise of stock options of $13,000 principally funded these activities. Receivables at June 30, 1999 increased by $534,000 to $6,864,000 from $6,330,000 at June 30, 1998. This increase is due to orders for the Company's intimate apparel division, being shipped later in fiscal 1999 as compared to the prior year. Inventory at June 30, 1999 decreased by $4,485,000 to $16,460,000 from $20,945,000 at June 30, 1998. This decrease resulted in both the intimate apparel division of approximately $3,941,000 and the retail division of approximately $544,000. The decrease in the intimate apparel division was primarily the result of an increase in the amount of finished goods being purchased by the Company in fiscal 2000 which did not require the Company to purchase and maintain an inventory of the raw materials associated with those finished goods and a reduction in the level of excess and closeout finished goods on hand. The decrease in the retail division resulted from the Company's decision to reduce the level of inventory in this division. II-8 During the second quarter of fiscal 1999, the Company sold a non-operating manufacturing facility located in Mississippi, a vacant parcel of land located in Georgia and other non-operating assets for an aggregate of $200,000. During the third quarter of fiscal 1998, the Company sold its interest in a building located in Georgia for approximately $619,000. During the second quarter of fiscal 1998, the Company sold two non-operating manufacturing facilities located in Georgia for an aggregate of $500,000. In the second quarter of fiscal 1998, the Company purchased $300,000 in principal amount of its 8% Convertible Senior Notes due September 1, 2001. These Notes entitled the previous holders to convert the principal amount into 800,000 shares of the Company's common stock, par value $.01. Also in the second quarter of fiscal 1998, certain individuals affiliated with the Company purchased $278,500 in principal amount of the 8% Convertible Senior Notes due September 1, 2001. The purchasing affiliates converted the Notes on March 31, 1999 into 742,662 shares of the Company's common stock, par value $.01. The affiliates have agreed to certain restrictions on the circumstances under which they will be permitted to sell the shares into which the Notes were converted. The purchasers have also granted the Company the option to purchase the shares at a price equal to 90% of the market price at the time any purchaser is permitted under the agreement to sell the shares in the open market and wishes to do so. Non-affiliated holders of $59,000 in principal amount of the Company's 8% Convertible Senior Notes converted their Notes into approximately 157,000 shares of the Company's common stock in the second quarter of fiscal 1998. During the second quarter of fiscal 1998, the Company purchased $500,000 in principal amount of its 12.875% subordinated debentures. As a result of the transaction, the Company recorded a pre-tax gain of $94,000, net of related costs. In the third quarter of fiscal 1998, the Company purchased $156,000 and $300,000 in principal amount of its 12.875% subordinated debentures. As a result of these transactions, the Company recorded a pre-tax gain of approximately $59,000, net of related costs. During August and September 1999, the Company purchased $2,721,000 in principal amount of its 12.875% subordinated debentures. As a result of the transaction, the Company will record a pre-tax gain of approximately $105,000, net of related costs, in the first quarter of fiscal 2000. The Company will reduce its mandatory sinking fund requirement with these debentures. The Company has, after the above purchases, $17,894,000 remaining in long-term debt and a secured revolving line of credit of up to $13,500,000. The long-term debt consists of $7,266,000 of 12.875% Subordinated Debentures, $10,550,000 of II-9 8% Senior Notes, and $78,000 of 8% Convertible Senior Notes. The remaining sinking fund requirement for the 12.875% Subordinated Debentures is $1,016,000 due on October 1, 2000 and the balance of the principal in the amount of $6,250,000 is due on October 1, 2001. The 8% Senior Notes and the 8% Convertible Senior Notes do not require any amortization and mature on September 1, 2001. The $78,000 of 8% Convertible Senior Notes are convertible into the Company's common stock, at any time prior to maturity, at a price of $0.375 per share. The Company has a secured revolving line of credit of up to $13,500,000, through June 2001, 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 2.0% above the prime rate of Chase Manhattan Bank in fiscal 1999 and the prime rate commencing July 1, 1999. Availability under the line of credit is subject to the Company's compliance with certain agreed upon financial 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. 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. The Company has been authorized by the board of directors to make additional purchases of its 12.875% Subordinated Debentures to satisfy its October 1, 2000 sinking fund requirement. The Company does not anticipate making any purchases of its stock and anticipates that capital expenditures for fiscal 2000 will be less than $700,000. Recently Issued Accounting Standard Recently Issued Accounting Standard - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative is dependent upon the intended use of the derivative. SFAS No. 133 will be effective in the Company's first quarter of the fiscal year ending June 30, 2001 and retroactive application is not permitted. The Company has not yet determined whether the application of SFAS No. 133 will have a material impact on its financial position or results of operations. II-10 Imports The Company's transactions with its foreign manufacturers and suppliers are subject to the risks of doing business abroad. The Company's import and offshore operations are subject to constraints imposed by agreements between the United States and a number of foreign countries in which the Company does business. These agreements impose quotas on the amount and type of goods that can be imported into the United States from these countries. Such agreements also allow the United States to impose, at any time, restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specified limits. The Company's imported products are also subject to United States customs duties and, in the ordinary course of business, the Company is from time to time subject to claims by the United States Customs Service for duties and other charges. The United States and other countries in which the Company's products are manufactured may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust presently prevailing quotas, duty or tariff levels, which could adversely affect the Company's operations and its ability to continue to import products at current or increased levels. The Company cannot predict the likelihood or frequency of any such events occurring. Year 2000 Overview The Year 2000 issue is primarily the result of computer programs only accepting a two-digit date code, as opposed to four digits, to indicate the year. Beginning in the Year 2000, and in certain instances prior to the Year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, the Company's date critical functions may be adversely affected unless these computer systems and software products are, or become, able to accept four-digit entries. Internal Systems and Equipment The Company has completed its comprehensive program consisting of identifying, assessing and, when necessary, upgrading and/or replacing its systems and equipment that were vulnerable to Year 2000 problems. The Company has also successfully completed the testing of its entire system for Year 2000 compliance. Third Party Relationships The Company has been formally communicating with its significant suppliers and customers to determine if those parties have appropriate plans to remedy Year 2000 issues when their systems interface with the Company's systems or may otherwise impact the operations of the Company. The Company has substantially completed its review and believes that its major customers and suppliers have II-11 addressed their Year 2000 issues. However, there can be no assurance, that the systems of other companies on which the Company's processes rely will be timely converted, or that a failure to successfully convert by another company, or a conversion that is incompatible with the Company's systems, would not have an impact on the Company's operations. Contingency Plans Based on the assessment efforts to date, the Company has focused on three separate contingency plans (1) if the Company's systems are non-compliant (2) if the Company's customers are non-compliant and (3) if the Company's suppliers are non-compliant. The Company is continuously developing these plans to minimize the impact of a potential failure. However, there can be no assurance that the Company will be able to have a contingency plan in place for a significant supplier and/or customer that does not become Year 2000 compliant. Costs/Risks Management currently estimates that the cost, in connection with bringing its own systems and equipment into compliance, was less than $50,000 for fiscal 1998 and less than $150,000 for fiscal 1999. Although the Company is not aware of any additional material operational issues or costs associated with preparing its internal systems for the Year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the Year 2000. Potential sources of risk include but are not limited to (a) the inability of principal suppliers or the countries in which those suppliers operate to be Year 2000 compliant, which could result in delays in product deliveries from such suppliers, (b) the inability of our customers to become compliant, which could result in them not accepting our product in a timely manner causing the Company to be in an over inventoried position resulting in a disruption of its cash flow, and (c) disruption of the distribution channel, including ports and transportation vendors as a result of general failure of systems and necessary infrastructure such as electrical supply. II-12 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-13 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, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 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 22, 1999 New York, New York F-1 MOVIE STAR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND 1998 (In Thousands, Except Number of Shares) _______________________________________________________________________________ ASSETS 1999 1998 CURRENT ASSETS: Cash $ 4,597 $ 546 Receivables 6,864 6,330 Inventory 16,460 20,945 Deferred income taxes 1,983 2,200 Prepaid expenses and other current assets 602 456 -------- ------ Total current assets 30,506 30,477 PROPERTY, PLANT AND EQUIPMENT - Net 3,495 3,551 OTHER ASSETS 732 906 DEFFERED INCOME TAXES 2,026 1,809 -------- ------ TOTAL ASSETS $ 36,759 $ 36,743 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ -- $ 328 Current maturities of long-term debt and capital lease obligations 45 40 Accounts payable 4,529 7,234 Accrued expenses and other current liabilities 3,316 2,959 ------- ------ Total current liabilities 7,890 10,561 ------- ------ LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 20,703 20,980 ------- ------ COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Common stock, $.01 par value - authorized, 30,000,000 shares; issued 16,897,000 shares in 1999 and 16,134,000 shares in 1998 169 161 Additional paid-in capital 4,072 3,789 Retained earnings 7,543 4,870 ------- ------ 11,784 8,820 Less treasury stock, at cost - 2,017,000 shares 3,618 3,618 ------- ------ Total stockholders' equity 8,166 5,202 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,759 $36,743 ======= ======= See notes to consolidated financial statements. F-2 MOVIE STAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (In Thousands, Except Per Share Amounts) _____________________________________________________________________________ 1999 1998 1997 NET SALES $72,506 $64,537 $61,470 COST OF SALES 51,363 45,777 44,947 ------- ------- -------- GROSS PROFIT 21,143 18,760 16,523 OPERATING EXPENSES: Selling, general and administrative expenses 15,859 15,206 13,875 ------- ------- -------- INCOME FROM OPERATIONS 5,284 3,554 2,648 GAIN ON PURCHASES OF SUBORDINATED DEBENTURES AND SENIOR NOTES - (157) (560) INTEREST INCOME (118) (130) (157) INTEREST EXPENSE 2,694 2,623 2,781 ------- ------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 2,708 1,218 584 PROVISION FOR INCOME TAXES 35 16 65 ------- ------- -------- NET INCOME $ 2,673 $ 1,202 $ 519 ======= ======= ===== BASIC NET INCOME PER SHARE $.19 $.09 $.04 ==== ==== ==== DILUTED NET INCOME PER SHARE $.17 $.08 $.04 ==== ==== ==== BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 14,309 14,049 13,960 ====== ====== ====== DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 15,869 15,161 15,868 ====== ====== ====== See notes to consolidated financial statements. F-3 MOVIE STAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (In Thousands) _______________________________________________________________________________
Additional Common Stock Paid-in Retained Treasury Stock Shares Amount Capital Earnings Shares Amount Total 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 Net income - - - 1,202 - - 1,202 Conversion of long-term debt for common stock 157 1 58 - - - 59 ------ ----- ------ ------ ----- ------- ------ BALANCE, JUNE 30, 1998 16,134 161 3,789 4,870 2,017 (3,618) 5,202 Net income - - - 2,673 - - 2,673 Conversion of long-term debt for common stock 743 8 278 - - - 286 Exercise of stock options 20 - 5 - - - 5 ------ ----- ------ ------ ----- ------- ------ BALANCE, JUNE 30, 1999 16,897 $ 169 $4,072 $7,543 2,017 $(3,618) $8,166 ====== ===== ====== ====== ===== ======= ======
See notes to consolidated financial statements. F-4 MOVIE STAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1999, 1998, AND 1997 (In Thousands) _______________________________________________________________________________ 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,673 $ 1,202 $ 519 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 566 582 698 Provision for sales allowances and doubtful accounts (191) 98 (1,378) Gain on purchases of subordinated debentures and senior notes - (157) (560) Loss on disposal of property, plant and equipment 16 4 35 (Increase) decrease in operating assets: Receivables (343) (2,281) 4,646 Inventory 4,485 (4,307) (2,391) Prepaid expenses and other current assets (146) (251) (97) Other assets 32 (66) 215 Increase (decrease) in operating liabilities: Accounts payable (2,705) 2,247 (490) Accrued expenses and other current liabilities 357 339 503 ------ ----- ----- Net cash provided by (used in) operating activities 4,744 (2,590) 1,700 ------ ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (528) (191) (133) Proceeds from sale of property and equipment 200 500 - Proceeds from sale of other assets (interest in building) - 619 - ------ ----- ----- Net cash (used in) provided by investing activities (328) 928 (133) ------ ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment on and purchases of long-term debt and capital lease obligations (50) (1,155) (815) Net (repayment) proceeds of revolving line of credit (328) 328 - Exercise of stock options 13 - - ------ ----- ----- Net cash used in financing activities (365) (827) (815) ------ ----- ----- NET INCREASE (DECREASE) IN CASH 4,051 (2,489) 752 CASH, BEGINNING OF YEAR 546 3,035 2,283 ------ ----- ----- CASH, END OF YEAR $ 4,597 $ 546 $ 3,035 ======= ====== =======
(Continued) F-5 MOVIE STAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1999, 1998, AND 1997 (In Thousands) _______________________________________________________________________________ 1999 1998 1997 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during period for: Interest $ 2,584 $2,544 $2,256 ======= ====== ====== Income taxes (net of refunds received) $ 25 $ 13 $ 16 ======= ====== ====== SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES: Acquisition of equipment through assumption of capital lease obligation $ 56 $ - $ 139 ====== ====== ===== SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES: Conversion of long-term debt for common stock $(278) $ (59) $ - Issuance of common stock 278 59 - ----- ------ ----- $ - $ - $ - ===== ====== ===== SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES: Increase in long-term debt for interest paid in kind $ - $ - $ 217 Decrease in accrued liabilities for interest paid in kind - - (217) ----- ------ ----- $ - $ - $ - ===== ====== =====
(Concluded) See notes to consolidated financial statements. F-6 MOVIE STAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 _______________________________________________________________________________ 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 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." Net Income Per Share - During the second quarter of fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share," as required. The Company has restated all previously recorded net income per share amounts for all periods presented. Deferred Costs - Deferred financing costs are amortized over the life of the debt using the straight-line method. Comprehensive Income - Effective July 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting of comprehensive income and its components in the financial statements. For the years ended June 1999, 1998 and 1997, comprehensive income approximated net income. F-7 Recently Issued Accounting Standard - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative is dependent upon the intended use of the derivative. SFAS No. 133 will be effective in the Company's first quarter of the fiscal year ending June 30, 2001 and retroactive application is not permitted. The Company has not yet determined whether the application of SFAS No. 133 will have a material impact on its financial position or results of operations. 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, 1999 1998 (In Thousands) Raw materials $ 5,513 $ 8,762 Work-in process 2,121 2,431 Finished goods 8,826 9,752 ------- ------- $16,460 $20,945 ======= ======= 3. RECEIVABLES Receivables are comprised of the following: June 30, 1999 1998 (In Thousands) Trade $ 7,986 $ 7,666 Other 23 - ------- -------- 8,009 7,666 Less allowance for doubtful accounts (1,145) (1,336) ------- ------- $ 6,864 $ 6,330 ======= ======= F-8 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: June 30, 1999 1998 (In Thousands) Land, buildings and improvements $ 6,023 $ 6,233 Machinery and equipment 578 478 Office furniture and equipment 1,229 907 Leasehold improvements 203 187 ------ ------ 8,033 7,805 Less accumulated depreciation and amortization (4,538) (4,254) ------ ------ $ 3,495 $ 3,551 ======= ======= The Company held for sale or lease certain property, plant and equipment with a net book value of approximately $324,000 and $518,000 at June 30, 1999 and 1998, respectively. 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities are comprised of the following: June 30, 1999 1998 (In Thousands) Interest $ 534 $ 540 Insurance 1,030 910 Salary, commissions and employee benefits 1,274 964 Other 478 545 ------ ----- $3,316 $2,959 ====== ====== 6. NOTES PAYABLE The Company has a line of credit agreement with a financial institution expiring on July 1, 2001. Under the agreement, the Company may borrow for either 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 percent above the prime rate through June 30, 1999 and at the prime rate commencing July 1, 1999. The Company paid a facility fee of approximately $61,000 in fiscal 1999. F-9 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, 1999. Furthermore, the Company is prohibited from paying dividends or incurring additional indebtedness, as defined, outside the normal course of business. At June 30, 1999, the Company had no borrowings outstanding under this line of credit and had approximately $4,930,000 of outstanding letters of credit. Additionally, the Company had a cash balance of approximately $4,179,000 deposited with the lender, which earned interest at 3 percent less than the prime rate at June 30, 1999. At June 30, 1998, the Company had borrowings of $328,000 outstanding under this line of credit at an interest rate of 10.5 percent and also had approximately $3,503,000 of outstanding letters of credit. 7. LONG-TERM DEBT Long-term debt consists of the following: June 30, 1999 1998 (In Thousands) 12.875% Subordinated Debentures $ 9,987 $ 9,987 8% Senior Notes 10,550 10,550 8% Senior Convertible Notes 78 356 Capital Lease Obligations 133 127 ------- ------- 20,748 21,020 Less current portion 45 40 -------- ------- Long-term debt $20,703 $20,980 ======== ======= 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. 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. During fiscal 1996, the Company purchased Debentures totaling $2,550,000. In fiscal 1997, the Company purchased $1,320,000 of Debentures for approximately $824,000 including related costs and recorded a pre-tax gain of $560,000. Furthermore in fiscal 1997, the Company acquired $10,187,000 of 12.875% Debentures in an exchange (discussed below). In October 1997, February 1998 and March 1998, the Company purchased $500,000, $156,000 and $300,000 in principal amount of its 12.875% subordinated debentures, respectively. As a result of these transactions, the Company recorded a pre-tax gain of $153,000, net of related costs, in fiscal 1998. The Company satisfied the October 1, 1996 and 1997 sinking fund requirements and intends to satisfy its sinking fund requirements through 1999 and reduce part of the 2000 requirement with these purchased Debentures. F-10 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 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 October 1, 1996 (approximately $434,000) and to accept Senior Notes in exchange for such deferred interest. The Senior Notes carried the right to convert up to $715,500 of the Notes into 1,908,000 shares of the Company's common stock. The Senior Notes will mature on September 1, 2001. As of June 30, 1999, $78,000 of the 8% Convertible Senior Notes remain outstanding and are convertible into 208,000 shares of the Company's common stock. The debt exchange closed on October 15, 1996, but became effective retroactively to 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 purchases. In November 1997, the Company purchased $300,000 in principal amount of its 8% Convertible Senior Notes due September 1, 2001. These Notes entitled the previous holders to convert the principal amount into 800,000 shares of the Company's common stock. In fiscal 1998, certain individuals affiliated with the Company purchased $278,500 in principal amount of the 8% Convertible Senior Notes due September 1, 2001. The purchasing affiliates converted the Notes on March 31, 1999 into approximately 743,000 shares of the Company's common stock, par value $.01. The affiliates have agreed to certain restrictions on the circumstances under which they will be permitted to sell the shares underlying the Notes. The affiliated purchasers have also granted the Company the option to purchase the underlying shares at a price equal to 90 percent of the market price at the time any purchaser is permitted under the agreement to sell the underlying shares in the open market and wishes to do so. In December 1997, non-affiliated holders of $59,000 in principal amount of the 8% Convertible Senior Notes converted their Notes into approximately 157,000 shares of the Company's common stock. The maturities of long-term debt at June 30, 1999, including current maturities, are as follows (in thousands): Fiscal Year Amount 2000 $ 45 2001 3,787 2002 (9/1/01) 10,628 2002 (10/1/01) 6,288 ------- $20,748 ======= F-11 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. June 30, ------------------------------------------- 1999 1998 -------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In Thousands) Long-Term Debt and Capital Lease Obligations $20,748 $18,917 $21,020 $17,389 Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and Other Current Liabilities - The carrying value of these items approximates fair value, based on the short-term maturities of these instruments. Long-Term Debt and Capital Lease Obligations- 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, 1999 and 1998. 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 income tax effects of significant items, comprising the Company's net deferred tax assets and liabilities, are as follows: F-12 June 30, 1999 1998 (In Thousands) Deferred tax liabilities: Differences between book and tax basis of property, plant and equipment $ 345 $ 529 ----- ----- Deferred tax assets: Difference between book and tax basis of inventory 360 293 Reserves not currently deductible 1,521 1,812 Operating loss carryforwards 4,047 4,571 Difference between book and tax basis of senior notes 1,111 1,556 Other 93 81 ----- ------ 7,132 8,313 ----- ------ Valuation allowance 2,778 3,775 ----- ------ Net deferred tax asset $4,009 $4,009 ====== ====== The provision for income taxes is comprised as follows: Year Ended June 30, 1999 1998 1997 (In Thousands) Current: Federal $25 $(2) $65 State and local 10 18 - Deferred - - - --- --- --- $35 $16 $65 === === === Reconciliation of the U.S. statutory rate with the Company's effective tax rate is summarized as follows: Year Ended June 30, 1999 1998 1997 (In Thousands) Federal statutory rate 34.0% 34.0% 34.0% Increase (decrease) in tax resulting from: Valuation allowance (42.2) (42.1) (41.5) State income taxes (net of federal tax benefits) 6.6 6.0 6.0 Other 2.9 1.4 1.5 Alternative minimum tax - 2.0 11.1 ---- ---- ---- Effective rate 1.3% 1.3% 11.1% ==== ==== ==== F-13 As of June 30, 1999, the Company has net operating loss carryforwards of approximately $10,118,000 for income tax purposes that expire between the years 2009 and 2012. 10. LEASES The Company has operating leases expiring in various years through fiscal 2002, 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, 1999 are as follows (in thousands): Fiscal Year Amount 2000 $ 634 2001 504 2002 6 ------ $1,144 ====== Rental expense for 1999, 1998 and 1997 was approximately $771,000, $764,000 and $787,000, respectively. 11. CONSULTING AGREEMENT Commencing July 1, 1999, the Company entered into a five-year consulting agreement with a majority shareholder, pursuant to which annual compensation payments of approximately $200,000 are required. 12. 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 22, 20, and 17 percent of the Company's net sales in fiscal 1999, 1998 and 1997, respectively. Another customer accounted for 14, 11, and 12 percent of the Company's net sales in fiscal 1999, 1998 and 1997, respectively. Additionally, another customer accounted for 11 and 3 percent of the Company's net sales in fiscal 1999 and 1998, respectively, and less than 1 percent in 1997 while another customer accounted for 5, 8, and 11 percent of the Company's net sales in fiscal 1999, 1998 and 1997, 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. 13. 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. No contributions were made for the years ended June 30, 1999, 1998 and 1997. F-14 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, 1999. This plan expired by its terms on June 30, 1993, but 5,000 previous grants remained outstanding at June 30, 1999, of which 4,400 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 stock 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. 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. Options to purchase 200,000 shares at an exercise price of $.625 per share are outstanding at June 30, 1999. None of the options granted are presently exercisable. 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 Income 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 would have been $2,333,000, $858,000 and $183,000 for 1999, 1998 and 1997, respectively. Basic net income per share would have been $.16, $.06, and $.02 for 1999, 1998 and 1997, respectively and diluted net income per share would have been $.15, $.06 and $.01 for 1999, 1998 and 1997, 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):
1999 1998 1997 ---------------------- ---------------------- ----------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise FIXED OPTIONS Shares Price Shares Price Shares Price Outstanding - beginning of year 2,253 $ .75 2,053 $ .76 1,701 $1.43 Granted 435 .63 200 .72 1,845 .63 Exercised (20) (.63) - - - - Canceled (593) (1.05) - - (1,493) 1.36 ---------- ----------- -------- --------- ------- ------- Outstanding - end of year 2,075 $ .64 2,253 $ .75 2,053 $ .76 ========== ===== ======= ===== ====== ===== Exercisable - end of year 780 $ .67 996 $ .88 708 $ .94 ========== ===== ======= ===== ====== ===== Weighted-average fair value of options granted during the year $ .69 $ .64 $ .58 ====== ===== =====
The fair value of each option-pricing model with the following weighted-average assumptions used for grants in 1999 and 1998, respectively; risk-free interest rate 5.5 % and 5.7%; expected life 7 years and 7 years; expected volatility of 95.3% and 115.9%. 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 The following table summarizes information about stock options outstanding at June 30, 1999 (options in thousands): Options Outstanding Options Exercisable -------------------------------------------------------------------------------- ------------------------------------ Weighted-Average Number Remaining Weighted- Weighted- Range of Outstanding at Contractual Average Exercisable at Average Exercise Prices June 30, 1999 Life (Yrs) Exercise Price June 30, 1999 Exercise Price --------------- ------------------ ------------- -------------- --------------- -------------- $.625 - $1.375 2,075 7.9 $.64 780 $.67
Warrant - In October 1998, in connection with an agreement with a financial consulting firm, the Company granted a warrant to purchase 50,000 shares of its common stock at $.4375 per share to the consultants. The warrant is exercisable at anytime within ninety days following written notice from the Company of the Company's intention to file a Registration Statement other than on Form S-4 and S-8, under the Securities Act of 1933, as amended. No expense related to such warrant was recorded since it was not material. 14. Net Income Per Share The Company's calculation of Basic and Diluted Net Income Per Share are as follows (in thousands, except per share amounts): Year Ended June 30, 1999 1998 1997 Basic Net Income Per Share (In Thousands, Except Per Share) Net Income to Common Stockholders $ 2,673 $ 1,202 $ 519 ======= ======= ====== Basic Weighted Average Shares Outstanding 14,309 14,049 13,960 ======= ======= ====== Basic Net Income Per Share $.19 $.09 $.04 ==== ==== ==== Diluted Net Income Per Share: Net Income to Common Stockholders $ 2,673 $ 1,202 $ 519 Plus: Interest Expense on 8% Convertible Senior Notes 6 40 57 ------- ------- ------ Adjusted Net Income $ 2,679 $ 1,242 $ 576 ======== ======= ====== Weighted Average Shares Outstanding 14,309 14,049 13,960 Plus: Shares Issuable Upon Conversion of 8% Convertible Senior Notes 765 1,112 1,908 Shares Issuable Upon Conversion of Stock Options 771 - - Shares Issuable Upon Conversion of Warrants 24 - - ------ ------- ------- Diluted Weighted Average Shares Outstanding 15,869 15,161 15,868 ======= ======= ====== Diluted Net Income Per Share $.17 $.08 $.04 ==== ==== ==== F-16 15. SEGMENT-RELATED INFORMATION The Company has implemented SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." This Statement requires the Company to use a management approach in identifying segments of its business. Prior year's comparative financial information has been restated to conform with the current year's presentation of segment-related information. The Company has two reportable business segments: intimate apparel and retail. The Company's reportable segments are individual business units that offer different products and services. They are managed separately because each segment requires different strategic initiatives, marketing, and advertising based on its own individual positioning in the market. Additionally, these segments reflect the reporting basis used internally by senior management to evaluate performance and the allocation of resources. The Company's intimate apparel segment designs, sources, manufactures, markets and sells an extensive line of ladies' intimate apparel. This segment primarily sells to discount, specialty, national and regional chain, mass merchandise and department stores and direct mail catalog marketers throughout the United States, as well as its Company-owned retail stores. The retail segment sells apparel products purchased primarily from external suppliers, as well as from the Company's intimate apparel segment. The accounting policies of the segments are consistent with those described in Note 1, Significant Accounting Policies. Intersegment sales and transfers are recorded at cost and treated as a transfer of inventory. Senior management does not review these sales when evaluating segment performance. The Company's senior management evaluates each segment's performance based upon income or loss from operations before interest, nonrecurring gains and losses and income taxes. The Company's net sales, income from operations, depreciation and amortization, total assets and capital expenditures for each segment for the years ended June 30, 1999, 1998 and 1997 were as follows: Year Ended June 30, 1999 1998 1997 (In Thousands) Net Sales: Intimate Apparel (a) $63,006 $53,855 $51,241 Retail 9,500 10,682 10,229 ------- ------- ------- $72,506 $64,537 $61,470 ======= ======= ====== Income From Operations: Intimate Apparel (a) $ 4,564 $ 2,316 $1,542 Retail 720 1,238 1,106 ------- ------- ------ $ 5,824 $ 3,554 $2,468 ======= ======= ====== Depreciation and Amortization: Intimate Apparel (a) $ 526 $ 549 $ 664 Retail 40 33 34 ------- ------- ------ $ 566 $ 582 $ 698 ======= ======= ====== F-17 Year Ended June 30, 1999 1998 1997 (In Thousands) Segment Assets: Intimate Apparel (a) $33,547 $33,147 $30,858 Retail 3,212 3,596 3,099 ------- ------- ------- $36,759 $36,743 $33,957 ======= ======= ======= Capital Expenditures: Intimate Apparel (a) $ 379 $ 186 $ 238 Retail 205 5 34 ------- ------- ------ $ 584 $ 191 $ 272 ======= ======= ======= (a) Includes discontinued apparel segment of men's, women's and children's screen printed tee shirts in 1998 and 1997 of less than 10%. 16. SUBSEQUENT EVENT During August and September 1999, the Company purchased $2,721,000 in principal amount of its 12.875% subordinated debentures. As a result of the transaction, the Company will record a pre-tax gain of approximately $105,000, net of related costs, in the first quarter of fiscal 2000. The Company will reduce its mandatory sinking fund requirement with these debentures. 17. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA Quarter First Second Third Fourth (In Thousands, Except Per Share) Fiscal Year Ended June 30, 1999 Net sales $18,958 $25,789 $14,715 $13,044 Gross profit 5,657 7,386 4,381 3,719 Net income (loss) 1,183 2,330 202 (1,042) Basic net income (loss) per share .08 .17 .01 (.07) Dilutive net income (loss) per share .08 .15 .01 (.07) F-18 Quarter First Second Third Fourth (In Thousands, Except Per Share) Fiscal Year Ended June 30, 1998 Net sales $15,202 $22,737 $12,918 $13,680 Gross profit 4,284 6,489 3,784 4,203 Net income (loss) 165 1,660 (123) (500) Basic net income (loss) per share .01 .12 (.01) (.03) Dilutive net income (loss) per share .01 .11 (.01) (.03) Quarter First Second Third Fourth (In Thousands, Except Per Share) Fiscal 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) Basic net income (loss) per share - .09 (.02) (.03) Dilutive net income (loss) per share - .08 (.02) (.03) * * * * * * F-19 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 Balance at Charged to at Beginning Costs and End of Description of Period Expenses Deductions Period FISCAL YEAR ENDED JUNE 30, 1999: Allowance for doubtful accounts $1,076 $ 40 $ (40)(a) $ 885 (191)(b) Allowance for sales allowances 260 1,720 (1,720) 260 ------ ------ ------ ---- $1,336 $1,760 $(1,951) $1,145 ====== ====== ======= ====== FISCAL YEAR ENDED JUNE 30, 1998: Allowance for doubtful accounts $ 778 $ 305 $ (7)(a) $1,076 Allowance for sales allowances 460 1,562 (1,762) 260 ------ ------ ------ ---- $1,238 $1,867 $(1,769) $1,336 ====== ====== ======= ====== 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 ====== ====== ======= ====== (a) Uncollectible accounts written off. (b) Reduction in allowance. S-1 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None II-14 PART III ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY Director Since Name Age Position - -------------- ---- --- -------- 1981 Mark M. David 52 Chairman of the Board 1997 Melvyn Knigin 56 President, Chief Executive Officer and Director 1983 Saul Pomerantz 50 Executive Vice President, Chief Operating Officer, Secretary and Director 1996 Gary W. Krat 51 Director 1996 Joel M. Simon 54 Director Officer Since - ------------- 1999 Thomas Rende 38 Chief Financial Officer Mark M. David was re-elected Chairman of the Board and Chief Executive Officer on December 11, 1998. Effective as of July 1, 1999 Mr. David retired as a full-time executive employee of the Company. Mr. David relinquished the position of Chief Executive Officer in February 1999, but remained as Chairman of the Board. He had been Chairman of the Board and Chief Executive Officer from December 1985 to August 1995 and from April 1996 until February 1999, 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. Melvyn Knigin was elected to the Board of Directors on December 11, 1998. Mr. Knigin was appointed Chief Executive Officer in February 1999. Mr. 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 re-elected to Board of Directors on December 11, 1998. Mr. Pomerantz was appointed Chief Operating Officer in February 1999. Mr. Pomerantz was elected Senior Vice President on December 3, 1987 and was promoted to Executive Vice President on September 4, 1997. Previously, he was Vice President-Finance since 1981. He was Chief Financial Officer from 1982 to February 1999 and has been Secretary of the Company since 1983. Thomas Rende was appointed Chief Financial officer in February 1999. Since joining Movie Star in 1989, Mr. Rende has held various positions within the finance department. Gary W. Krat was re-elected to the Board of Directors on December 11, 1998. Mr. Krat has been Senior Vice President of SunAmerica Inc. since 1990. He is also Chairman and Chief Executive Officer of SunAmerica Financial Network, Inc. and its six NASD broker dealer companies with nearly ten thousand registered representatives. From 1977 until 1990, Mr. Krat was a senior executive with III-1 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 re-elected to the Board of Directors on December 11, 1998. Mr. Simon was the President and Chief Executive Officer of Starrett Corporation, a real estate construction, development and management company from March to December 1998. Since then and from 1996 to 1998, Mr. Simon has been 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 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, most 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. 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"). Mark M. David relinquished the position of Chief Executive Officer in February 1999 and as a result, the Company's President, Melvyn Knigin, was appointed to the additional position of Chief Executive Officer, the Company's Executive Vice President, Saul Pomerantz, was assigned the additional duties of Chief Operating Officer and Thomas Rende was promoted to the position of Chief Financial Officer. Also, effective June 30, 1999, Mr. David retired as a full-time executive employee of the Company. Pursuant to a retirement program negotiated with Mr. David, he received a lump sum retirement payment and entered into a written agreement with the Company to provide consulting services for a term of five years for which he will receive a fixed annual fee. Pursuant to the terms of the agreements with Mr. David, he will remain as the non-executive Chairman of the Board of Directors and he is prohibited from participating in any business which competes with the business of the Company. The salaries of Messrs. Knigin, Pomerantz and Rende were increased for fiscal year 1999. In light of Mr. David's retirement and the new duties assumed by the Company's remaining senior executives, the Compensation Committee is in the process of determining whether to make any adjustments to the salaries of Messrs. Knigin, Pomerantz and Rende for fiscal year 2000. Compensation Policies In determining the appropriate levels of executive compensation for fiscal year 1999, the Committee based its decisions on (1) the Company's continued improved financial condition, (2) the need to retain experienced individuals with proven leadership and managerial skills, (3) the executives' motivation to enhance the Company's performance for the benefit of its shareholders and customers and (4) the executives' contributions to the accomplishment of the Company's annual and long-term business objectives. Salaries generally are 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, to a lesser extent, prevailing levels at companies considered to be comparable to and competitors of the Company. In addition to base salary compensation, the Committee has 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. III-2 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. Mr. David did not make recommendations with respect to his own salary and does not participate in the Committee's determination of the salary and other compensation to be paid to the Company's senior executives. The current senior executives of the Company have been associated with the Company in senior management positions for periods ranging from ten to twenty 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 are 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 Mr. David. 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. 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. The 1994 ISOP was approved by the Company's shareholders at the Company's annual meeting on December 8, 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 Non-qualified 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 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. On November 4, 1998, Mr. David voluntarily surrendered his interest in the options granted under the 1988 Non-qualified Plan. 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 III-3 for cancellation any interest in options granted to them prior to January 29, 1997. In November 1998, the independent Directors serving on the Committee recommended that the Company grant new options to Messrs. Knigin and Pomerantz under the 1994 ISOP and the 1988 Non-qualified Plan and to Mr. Rende under the 1994 ISOP. Incentive Compensation In September 1998, the Compensation Committee adopted an incentive compensation plan for senior executives, other than Mr. David (the "1998 Incentive Plan"). Under the 1998 Incentive Plan, the Compensation Committee has the discretion to award bonus compensation to senior executives in an amount not to exceed five (5%) percent of any increases in income before taxes and any extraordinary charges, as determined by the Compensation Committee, over the base amount of $1,200,000. Based on the collective efforts of Messrs. Knigin and Pomerantz, the Compensation Committee determined to award bonuses to them under the 1998 Incentive Plan for fiscal year 1999. Mr. Knigin was eligible to receive incentive compensation equal to three (3%) percent and Mr. Pomerantz was eligible to receive two (2%) of the available bonus compensation for fiscal 1999. Compensation of the Chief Executive Officer For fiscal year 1999, the annual base salary paid to Mark M. David, the Company's Chairman of the Board and former Chief Executive Officer, remained at the same $335,000 as he received in fiscal year 1998. Mr. Knigin became Chief Executive Officer in February 1999. His annual base salary for 1999 was $405,406. Compensation Committee Interlocks and Insider Participation Other than the Company's Chairman of the Board, there are no Compensation Committee interlocks or insider participation. Mr. David did not participate in the Committee's determinations of his compensation. Mark M. David Gary W. Krat Joel M. Simon III-4 Summary Compensation Table
ANNUAL LONG TERM COMPENSATION COMPENSATION RESTRICTED NAMED PRINCIPAL FISCAL ------------ STOCK OPTIONS ALL OTHER POSITION YEAR SALARY ($) AWARDS($) (# SHARES) COMPENSATION - --------------- ---- ---------- --------- --------- ------------ Mark M. David 1999 340,355 - -(1) 508,145 (2) Chairman of the Board 1998 335,000 - 350,000(1) 8,145 (2) 1997 275,000 - 350,000(1) 8,145 (2) Melvyn Knigin 1999 405,406 - 600,000(3) 67,495 President and Chief 1998 350,000 - 350,000(5) - Executive Officer of 1997 296,660 - 350,000(5) - the Company; Director Saul Pomerantz 1999 228,342 - 500,000(4) 44,996 Executive Vice President 1998 200,000 - 350,000(5) - and Chief Operating 1997 164,480 - 350,000(5) - Officer of the Company; Director Thomas Rende 1999 126,300 - 105,000(6) - Chief Financial Officer
(1) Represents options to purchase 350,000 shares of Common Stock granted On January 29, 1997 under the Company's Non-Qualified Stock Option Plan ("1988 Plan"). Mr. David surrendered these options on November 4, 1998. (2) Represents annual premiums of $8,145 paid by the Company for a split dollar form of life insurance policy on the life of Mark M. David and an accrual for the retirement payment made to Mr. David in connection with his retirement as a full-time employee of the Company. (3) Represents options to purchase shares of Common Stock under the 1994 Incentive Stock Option Plan (the "1994 Plan") of which 350,000 shares were granted on January 29, 1997 and 125,000 were granted on November 4, 1998 and 125,000 shares granted on November 4, 1998 under the Company's Non-Qualified Stock Option Plan (the "1988 Plan"). (4) Represents options to purchase shares of Common Stock under the 1994 Incentive Stock Option Plan (the "1994 Plan") of which 350,000 shares were granted on January 29, 1997 and 75,000 were granted on November 4, 1998 and 75,000 shares granted on November 4, 1998 under the Company's Non-Qualified Stock Option Plan (the "1988 Plan"). (5) Represents options to purchase 350,000 shares of Commo Stock granted on January 29, 1997 under the 1994 Incentive Stock Option Plan (the "1994 Plan"). (6) Represents options to purchase shares of Common Stock under the 1994 Incentive Stock Option Plan (the "1994 Plan") of which 20,000 shares were granted on July 15, 1994, 50,000 were granted on January 29, 1997 and 35,000 were granted on November 4, 1998. III-5 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF AUGUST 31, 1999 The following table sets forth certain information as of August 31, 1999 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 OFWNER PERRCENT OF BENEFICIAL OWNERSHIP CLASS(1) ------------------------ ------------------------ ------------- Mark M. David 3,180,428(2)(6) 21.3744% 136 Madison Avenue New York, NY 10016 Republic National 962,489; Direct 6.4685% 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) 10.9072% 8710 Banyan Court Tamarac, FL 33321 Melvyn Knigin 294,406(4) 1.9551% 136 Madison Avenue New York, NY 10016 Saul Pomerantz 348,781(5) 2.3042% 136 Madison Avenue New York, NY 10016 Thomas Rende 205,300(12) 1.3760% 136 Madison Avenue New York, NY 10016 Joel M. Simon 74,166(10) 0.4984% 136 Madison Avenue New York, NY 10016 Gary W. Krat 253,333(11) 1.7025% 733 Third Avenue New York, NY 10017 Abraham David 25,000; Direct(9) 0.1680% 8710 Banyan Court Tamarac, FL 33321 All directors and officers as a group 5,979,373(2)(4)(5)(8)(10) 39.0127% (6 persons) (11)(12) III-6 - ----------------- (1) Based upon 14,879,644 shares (excluding 2,016,802 treasury shares) outstanding and options, where applicable, to purchase shares of Common Stock, exercisable within 60 days. (2) Includes 30,000 shares owned as trustee for his children 30,000 shares owned as trustee for his sisters' children and 26,560 shares owned by his spouse. (3) Includes 606,695 shares owned by Annie David as a truste for the benefit of her daughters, Marcia Sussman and Elaine Greenberg and her grandchildren, Adam David, Evan David, Michael Sussman and David Greenberg. (4) Includes options granted to Melvyn Knigin for 178,906 shares pursuant to the 1994 Plan, exercisable within 60 days and 100,000 shares subject to the Affiliates Agreement (see Item 13(a)) (5) Includes options granted to Saul Pomerantz for 226,871 shares and Shelley Pomerantz for 30,000 shares (his wife who also is employed by the Company) pursuant to the 1994 Plan, exercisable within 60 days, 66,666 shares subject to the Affiliates Agreement (see Item 13(a)); 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 h 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. (10) Includes 26,666 shares subject to the Affiliates Agreement (see Item 13(a)). (11) Includes 233,333 shares subject to the Affiliates Agreement (see Item 13(a)). (12) Represents options granted to Thomas Rende for 40,000 shares, pursuant to the 1994 Plan, exercisable within 60 days, 46,000 shares held jointly with his spouse, 3,300 shares owned by his spouse and 116,000 shares subject to the Affiliates Agreement (see Item 13(a)). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) In December 1997, certain of the officers and directors of the Company (other than Mr. David), the Company's counsel and/or members of their families (collectively, the "Affiliates"), purchased from unrelated third parties 8% Convertible Senior Notes of the Company in the aggregate face amount of $278,500 (the "Notes"). The Affiliates entered into a written Agreement with the Company dated December 7, 1997 (the "Affiliates Agreement") pursuant to which they agreed to (i) certain restrictions on the circumstances under which the Notes and the shares of Common Stock underlying the Notes could be sold or transferred, and (ii) granted the Company the right to purchase the shares of Common Stock underlying the Notes at a price equal to ninety (90%) of the market price at the time any of the Affiliates is permitted under the Affiliates Agreement to sell the shares of Common Stock in the open market and wishes to do so. As required by the Affiliates Agreement, all of the Affiliates converted the Notes into shares of Common Stock on March 31, 1999. (b) Effective as of July 1, 1999, Mr. David retired as a full-time executive employee of the Company. The Company and Mr. David have entered into a series of written agreements which provide for the payment to Mr. David of a lump sum retirement benefit of $500,000, the continuation of health insurance benefits and a split dollar life insurance policy on Mr. David's life and the retention of Mr. David's services as a consultant to the Company for a term of five years. Pursuant to the consulting agreement, Mr. David is prohibited from disclosing any confidential information of the Company and from engaging in any business which is competitive with the business of the Company. 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, 1999 and 1998 F-2 Consolidated Statements of Income for the fiscal years ended June 30, 1999, 1998 and 1997 F-3 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1999, 1998 and 1997 F-4 Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1999, 1998 and 1997 F-5 - F-6 Notes to Consolidated Financial Statements F-7 - F-19 2. Schedule For the fiscal years ended June 30, 1999, 1998 and 1997: 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. 10.5.7 Letter Agreement dated as of Filed herewith. June 28, 1999 between Rosenthal & Rosenthal, Inc. and the Company Modifying and extending the Financing Agreement dated April 26, 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. 10.11 Agreement dated as of July 1, 1999 Filed herewith between Mark M. David and the Company providing for retirement benefits Mr. David. 10.12 Agreement dated as of July 1, 1999 Filed herewith between Mark M. David and the Company for Mr. David's consulting services. 21 Subsidiaries of the Company. Filed herewith. 23 Independent Auditors' Consent 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 28, 1999 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 September 28, 1999 - ------------------------------- MARK M. DAVID /s/ MELVYN KNIGIN President; Executive Officer; September 28, 1999 - ------------------------------- Director MELVYN KNIGIN /s/ SAUL POMERANTZ Executive Vice President; September 28, 1999 - ------------------------------- Chief Operating Officer; SAUL POMERANTZ Secretary & Director /s/ THOMAS RENDE Principal Financial & September 28, 1999 - ------------------------------- Accounting Officer THOMAS RENDE /s/ GARY W. KRAT Director September 28, 1999 - ------------------------------- GARY W. KRAT /s/ JOEL M. SIMON Director September 28, 1999 - ------------------------------- JOEL M. SIMON
IV-6 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 21 SUBSIDIARIES OF THE COMPANY 23 INDEPENDENT AUDITORS' CONSENT 27 FINANCIAL DATA SCHEDULE EX-10.5.7 2 LETTER AGREEMENT June 28, 1999 MOVIE STAR, INC. 136 Madison Avenue New York, NY 10016 It is mutually agreed that the Financing Agreement entered into between us dated April 24, 1996 as amended or supplemented (the "Financing Agreement") is amended effective July 1, 1999 as follows: 1. Section 3.1 is deleted in its entirety and the following is substituted in its place and stead: 3.1 Borrower agrees to pay to lender each month interest in arrears (computed on the basis of the actual number of days elapsed over a year of 360 days) on the average daily balances in the Loan Account during the preceding month at a rate to equal to the Prime Rate; provided however, that no decrease shall reduce the Prime Rate below 6% per annum. Any change in the effective interest rate due to a change in the Prime Rate shall take effecting the date of such change in the Prime Rate. 2. Section 3.2 is deleted in its entirety and the following is substituted in its place and stead: 3.2 Borrower shall pay to Lender a facility fee for each contract year of this Agreement equal to one quarter of one percent (1/4 of 1%) of the Maximum Amount payable on the first day of each contract year commencing on July 1, 1999. Upon any renewal of this Agreement, Borrower shall pay to Lender an annual facility fee equal to one quarter of one percent (1/4 of 1%) of the Maximum Amount provided, however, that commencing with the calendar quarter beginning July 1, 1999, we shall rebate to you quarterly twenty-five percent (25%) of an amount equal to one eighth of one percent (1/8 of 1%) of the Maximum Amount. 3. Section 3.3 is deleted in its entirety and the following is substituted in its place and stead: Should Lender arrange to open Letters of Credit or issue guarantees for Borrower's account, Borrower agrees to pay Lender and amount equal to one quarter of one percent (1/4 of 1%) percent of the face amount of such Letters of Credit or guaranties, plus one eighth of one percent for each 60 days or portion thereof that the letter of credit (or any resulting acceptance) or guaranty remains open and unpaid, plus bank charges. In addition to the above we shall rebate to you on a monthly basis one eighth of one percent (1/8 of 1%) of the face amount of any letters of credit opened during such month. In no event, however, shall the rebates in Paragraph 3.2 and 3.3 exceed $25,000 in any contract year. 4. The Renewal Date specified in Section 9.1 is hereby amended to read June 30, 2001. 5. Notwithstanding the provisions as set forth in Paragraph 9.1, the early termination fee is herewith waived for the period from July 1, 2000 to June 30, 2001. 6. The notification charge of $2,000.00 per month as set forth in your letter to us dated April 24, 1996 is herewith terminated. In all other respects the terms and conditions of the aforesaid agreement, as the same may have heretofore been amended, shall remain unchanged. ROSENTHAL & ROSENTHAL, INC. BY: /S/ Jerry Sandak, Sr. V.P. ---------------------------- THE FOREGOING IS ACKNOWLEDGED AND AGREED TO: MOVIE STAR, INC. BY: /S/ Thomas Rende -------------------- THOMAS RENDE, CFO EX-10.11 3 RETIREMENT AGREEMENT AGREEMENT dated as of June 30, 1999 between MARK M. DAVID, residing at 16870 Colchester Court, Delray Beach, Florida 33484 ("Executive"), and MOVIE STAR, INC., a New York corporation having its principal office at 136 Madison Avenue, New York, New York, 10016 (the "Company"). RECITALS: A. The Executive has relinquished his position as Chief Executive Officer, and has retired as an employee, of the Company; and B. The Company desires to provide certain benefits to Executive in recognition of Executive's long years of distinguished service to the Company as its Chief Executive Officer; and C. Executive desires to obtain such benefits in full satisfaction of any and all claims Executive has or may have against the Company in connection with the discontinuation of his employment with the Company. IT IS AGREED: 1. Retirement Benefit Payment. 1.1 Simultaneously with the execution and delivery of this Agreement, the Company shall pay to Executive and Executive shall accept the sum of $500,000.00 representing the entire amount to be paid to Executive in connection with Executive's retirement as an employee of the Company effective as of June 30, 1999. 2. Medical Benefits. 2.1 From and after the date of this Agreement through and including the date upon which Executive shall become eligible for coverage under the provisions of Medicare or any similar governmental medical benefits program, or in the event of the elimination or substantial curtailment of benefits under Medicare or any such similar governmental medical benefits program, the Company shall, at all times, at its sole cost and expense and for the benefit of Executive and Executive's spouse, provide medical benefits to Executive and his family which are (i) substantially similar to the medical benefits provided to senior executives of the Company on the date hereof and, (ii) in no event less favorable than the the medical benefits provided to senior executives of the Company, from time to time. 3. Split Dollar Life Insurance. 3.1 That certain Split Dollar Life Insurance Agreement, dated as of July 7, 1983, between the Company and Executive shall remain in full force and effect until terminated in accordance with its terms. 4. Release of Claims. 4.1 In consideration for the Company's agreement to provide Executive with the sums and benefits set forth herein Executive, on behalf of himself and his heirs, representatives and assigns, hereby release and discharge the Company, its parent companies, and all of its and their subsidiaries, divisions, and affiliated or related companies and all of the respective current and former directors, officers, shareholders, successors, agents, representatives and employees of each, of and from any and all claims Executive ever had, now has, or may in the future assert regarding any matter arising on or before the effective date of this Agreement, including, without limitation, all claims regarding Executive's employment with or resignation as an employee of the Company, any claim for equitable relief or recovery of monies or damages, any contract (express or implied), any tort, any claim for wages, any claim for breach of a fair employment practice law, including Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, as amended, the Older Workers Benefit Protection Act, the Civil Rights Act of 1991, the Employee Retirement Income Security Act of 1974, the Americans with Disabilities Act, the Family and Medical Leave Act, the New York State Human Rights Law, the New York City Humans Rights Law, and any violation of any other local, state or federal law, ordinance or regulation. 4.2 Pursuant to and as a part of the complete and total release and discharge of the Company, Executive agrees, to the fullest extent permitted by law, not to sue, file a charge, claim, complaint, grievance or demand for arbitration in any forum or, assist or otherwise participate willingly or voluntarily in any claim, arbitration, suit, action, charge, complaint, investigation or other proceeding of any kind which relates to any matter that involves the Company, its parent companies, or any of its or their subsidiaries, divisions or affiliated or related companies and all of the respective current and former directors, officers, shareholders, successors, agents, representatives and employees of each and that occurred on or before the effective date of this Agreement. Executive represents that Executive has not filed or initiated any such proceedings against the Company, its parent companies, or any of its or their subsidiaries, divisions or affiliated or related companies. 4.3 Executive recognizes and agrees that the complete and total release and discharge of the Company as provided herein is an indispensable part of the Company's agreement to pay the amounts and benefits set forth in this Agreement, and it is understood and agreed that Executive's failure to comply with the terms and conditions set forth in this Agreement would, to the fullest extent permitted by law, constitute a breach of this Agreement. In the event Executive breaches this Agreement or contests the enforceability of this Agreement, the Company, in addition to any other rights, 2 defenses or remedies which it may have, may require Executive to return any amounts paid under this Agreement, and to pay the Company's reasonable costs and attorneys' fees incurred as a result thereof. 4.4 Executive acknowledges that he has been given an adequate period of time within which to consider this Agreement. During that period, Executive has had the opportunity to review this Agreement with counsel of his own choosing, has read this Agreement carefully and/or had it read by your counsel, and is fully aware of and understands the contents and legal effects of this Agreement. Executive acknowledges that he has been represented by Leonard Tarr, Esq. in connection with this Agreement. 4.5 Executive further understands and agrees that this Agreement is revocable by either party for seven (7) days following the signing of this Agreement by both parties, and that this Agreement shall not become effective or enforceable until that revocation period has expired. This Agreement automatically becomes enforceable and effective on the eighth day after the date this Agreement is signed by the last party ("effective date"). This Agreement may be revoked by a writing sent certified mail by either party postmarked on or before the seventh day after the Agreement is signed by the last party (unless that day is a Sunday or legal holiday (i.e., no mail service), in which event the period is extended to the next day there is mail service. 4.6 Executive agrees that no fact, evidence, event or transaction currently unknown to Executive but which may hereafter become known to Executive shall affect in any manner the final and unconditional nature of the release stated above. 4.7 Executive warrants and represents that no promise or inducement has been offered to Executive except as stated in this Agreement; that this Agreement is executed without reliance upon any statement or representation by the Company or any of its representatives concerning the nature and extent of the claims herein released and any damages or legal liability therefor; Executive is competent to execute this Agreement and accept full responsibility therefor; and Executive acknowledges that this Agreement evidences a full, final and complete settlement of any and all past, present and future claims against the parties herein released. 5. Miscellaneous Provisions. 5.1 All notices provided for in this Agreement shall be in writing, and shall be deemed to have been duly given when delivered personally to the party to receive the same, when given by electronic means, or when mailed first class postage prepaid, by registered or certified mail, return receipt requested, addressed to the party to receive the same at her or its 3 address set forth below, or such other address as the party to receive the same shall have specified by written notice given in the manner provided for in this Section 5.1. All notices shall be deemed to have been given as of the date of personal delivery, transmittal or mailing thereof. To Executive: Mr. Mark M. David Marked "Personal and Confidential" with a copy given in the aforesaid manner to: Leonard Tarr,Esq. To Company: Movie Star, Inc. 136 Madison Avenue New York, NY 10016 Attn.: Mr. Melvyn Knigin with a copy given in the aforesaid manner to: Graubard Mollen & Miller 600 Third Avenue New York, NY 10016 Attn.: Michael A. Salberg, Esq. 5.2 This Agreement sets forth the entire agreement of the parties relating to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. No provisions of this Agreement may be waived or changed except by a writing by the party against whom such waiver or change is sought to be enforced. The failure of any party to require performance of any provision hereof shall in no manner affect the right at a later time to enforce such provision. 5.3 All questions with respect to the construction of this Agreement, and the rights and obligations of the parties hereunder, shall be determined in accordance with the law of the State of New York applicable to agreements made and to be performed entirely in New York. 5.4 The article headings are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of intent of any provision of this Agreement. 4 5.5 This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company. This Agreement shall not be assignable by Executive and shall inure to the benefit of and be binding upon Executive and his legal representatives. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. /s/ MARK M. DAVID ------------------------------ MARK M. DAVID MOVIE STAR, INC. /s/ MELVYN KNIGIN By: ------------------------- Title: President 5 EX-10.12 4 CONSULTING AGREEMENT CONSULTING AGREEMENT This Agreement is made and entered into as of the 1st day of July, 1999 between MARK M. DAVID ("David" or the "Consultant") and MOVIE STAR, INC. (the "Company"). In consideration of the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The Company hereby engages the Consultant to render consulting services and advice to the Company upon the terms and conditions set forth herein. The term of this Agreement shall be for five (5) years commencing on July 1, 1999. 2. During the term of this Agreement, Consultant shall provide the Company with such consulting advice as is reasonably requested by the Company. It is understood and acknowledged by the parties that the value of Consultant's advice is not readily quantifiable, and that although Consultant shall be obligated to render the services contemplated by this Agreement upon the reasonable request of the Company, Consultant shall not be obligated to spend any specific amount of time in so doing. Consultant's duties may include, but will not necessarily be limited to: (a) Rendering advice and assistance in connection with the Company's operations, including without limitation, sourcing, manufacturing, merchandising, marketing and sales; (b) Disseminating information about the Company to the investment community at large; (c) Rendering advice and assistance in connection with the preparation of annual and interim reports and press releases; (d) Assisting in the Company's financial public relations; (e) Arranging and attending, on behalf of the Company, at appropriate times, meetings with investment bankers and financial advisors retained by the Company; (f) Rendering advice with regard to internal operations, including: (i) the formation of corporate goals and their implementation; (ii) the Company's financial structure and its divisions or subsidiaries; (iii) when and if necessary and possible, additional financing through banks and/or insurance companies; and (iv) corporate organization and personnel. (g) Rendering advice with regard to any of the following corporate finance matters: (i) changes in the capitalization of the Company; (ii) changes in the Company's corporate structure; (iii) redistribution of shareholdings of the Company's stock; (iv) offerings of securities in public and private transactions; (v) alternative uses of corporate assets; and (vi) structure and use of debt; In addition to the foregoing, Consultant agrees to furnish advice to the Company in connection with (A) the acquisition of and/or merger with other companies, the sale of the Company itself, or any of its assets, subsidiaries or affiliates, or similar type of transaction, and (B) financings from financial institutions, including but not limited to lines of credit, performance bonds, letters of credit, loans or other financings . Consultant shall also render such other consulting services as may from time to time be agreed upon by Consultant and the Company. 3. The Company shall pay Consultant an annual fee of $200,000.00 in monthly installments of $16,666.67, the first payment due upon the execution of this Agreement; and 4. In addition to the annual fee payable hereunder, the Company shall promptly reimburse Consultant for all reasonable travel and out-of-pocket expenses ("Expenses") incurred in connection with the services performed by Consultant pursuant to this Agreement, against itemized vouchers or receipts submitted with respect to any such expenses and approved in accordance with the Company's customary procedures; provided that the amount of such reimbursement shall not exceed $12,000.00 per annum. 5. (a) Consultant acknowledges that: (i) As a result of his current retention by, and prior relationship (as an employee and director of), the Company, Consultant has obtained and will obtain secret and confidential information concerning the business of the Company and its subsidiaries and affiliates (referred to collectively in this paragraph 5 as the "Company"), including, without limitation, financial information, designs and other proprietary rights, trade secrets and "know-how," customers and sources ("Confidential Information"). (ii) The Company will suffer substantial damage which will be difficult to compute if, during the period of this Agreement or thereafter, Consultant should enter a business competitive with the Company or divulge Confidential Information. (iii) The provisions of this Agreement are reasonable and necessary for the protection of the business of the Company. (iv) Consultant agrees that he will not at any time, either during the term of this Agreement or thereafter, divulge to any person or entity any Confidential Information obtained or learned by him as a result of his rendering services under this Agreement, or his prior employment by, the Company, except (A) in the course of performing his duties hereunder, (B) with the Company's express written consent; (C) to the extent that any such information is in the public domain other than as a result of Consultant's breach of any of his obligations hereunder; or (D) where required to be disclosed by court order, subpoena or other government process. If Consultant shall be required to make disclosure pursuant to the provisions of clause (D) of the preceding sentence, Consultant promptly, but in no event more than 72 hours after learning of such subpoena, court order, or other government process, shall notify, by personal delivery or by electronic means, confirmed by mail, the Company and, at the Company's expense, Consultant shall: (1) take all reasonably necessary and lawful steps required by the Company to defend against the enforcement of such subpoena, court order or other government process, and (2) permit the Company to intervene and participate with counsel of its choice in any proceeding relating to the enforcement thereof. (v) Upon termination of this Agreement, Consultant will promptly deliver to the Company all memoranda, notes, records, reports, manuals, drawings, and other documents (and all copies thereof) relating to the business of the Company and all property associated therewith, which he may then 2 possess or have under his control; provided, however, that Consultant shall be entitled to retain copies of such documents reasonably necessary to document his financial relationship (both past and future) with the Company. (vi) During the period commencing on the date hereof and ending on the date Consultant's services hereunder are terminated (and, if Consultant is terminated with "Cause", as hereinafter defined, or Consultant terminates this Agreement without "Good Reason," as hereinafter defined, until June 30, 2005), Consultant, without the prior written permission of the Company, shall not, anywhere in the world, (A) be employed by, or render any services to, any person, firm or corporation engaged in any business which is directly or indirectly in competition with the Company ("Competitive Business"); (B) engage in any Competitive Business for his or its own account; (C) be associated with or interested in any Competitive Business as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, trustee, consultant, advisor or in any other relationship or capacity; (D) employ or retain, or have or cause any other person or entity to employ or retain, any person who was employed or retained by the Company while Consultant was rendering consulting services to the Company; or (E) solicit, interfere with, or endeavor to entice away from the Company, for the benefit of a Competitive Business, any of its customers or other persons with whom the Company has a contractual relationship. Notwithstanding the foregoing, nothing in this Agreement shall preclude Consultant from investing his personal assets in the securities of any corporation or other business entity which is engaged in a Competitive Business if such securities are traded on a national stock exchange or in the over-the-counter market and if such investment does not result in his beneficially owning, at any time, more than 4.9% of the publicly-traded equity securities of such Competitive Business. (b) If Consultant commits a breach, or threatens to commit a breach, of any of the provisions of Sections 5(a)(iv) or 5(a)(vi), the Company shall have the right and remedy: (i) to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed by Consultant that the services being rendered hereunder to the Company are of a special, unique and extraordinary character and that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company; and (ii) to require Consultant to account for and pay over to the Company all monetary damages suffered by the Company as the result of any transactions constituting a breach of any of the provisions of Sections 5(a)(iv) or 5(a)(vi), and Consultant hereby agrees to account for and pay over such damages to the Company. Each of the rights and remedies enumerated in this Section 5(b) shall be independent of the other, and shall be severally enforceable, and such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or equity. (c) In connection with any legal action or proceeding arising out of or relating to this Agreement, the prevailing party in such action or proceeding shall be entitled to be reimbursed by the other party for the reasonable attorneys' fees and costs incurred by the prevailing party. (d) If Consultant shall violate any covenant contained in Section 5(a), the duration of such covenant so violated shall be automatically extended for a period of time equal to the period of such violation. (e) If any provision of Sections 5(a)(iv) or 5(a)(vi) is held to be unenforceable because of the scope, duration or area of its applicability, the tribunal making such determination shall have the power to modify such 3 scope, duration, or area, or all of them, and such provision or provisions shall then be applicable in such modified form. (f) The provisions of this paragraph 5 shall survive the termination of this Agreement for any reason. 6. The Company acknowledges that Consultant or its affiliates are in the business of providing consulting services and advice to others. Except as expressly provided in Section of this Agreement, nothing herein contained shall be construed to limit or restrict Consultant in conducting such business with others, or in rendering such advice to others. 7. The Company recognizes and confirms that, in advising the Company hereunder, Consultant will use and rely on data, material and other information furnished to Consultant by the Company, without independently verifying the accuracy, completeness or veracity of same. 8. (a) If Consultant dies during the term of this Agreement, this Agreement shall thereupon terminate, except that the Company shall pay to the person or persons designated by Consultant in writing, from time time, (i) an amount equal to one half of the aggregate fees which would otherwise have been payable from the date of Consultant's death through the date fixed for the expiration of this Agreement, and (ii) all valid expense reimbursements through the date of the termination of this Agreement. Consultant hereby designates Norma David as the person to receive the payment referred to in this Section 8(a). (b) If, during the term of this Agreement, there is a "Change in Control" (as hereinafter defined) of the Company, the Company shall have the right to terminate this Agreement upon not less than thirty (30) days prior written notice to Consultant specifying in reasonable detail the events resulting in a Change in Control. (i) For the purposes of this Agreement, the term "Change in Control" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if, (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 40% or more of the combined voting power of the Company's then outstanding securities without the prior approval of at least two thirds of the members of the Company's Board of Directors (the "Board") in office immediately prior to such person attaining such percentage interest; (B) the Company is a party to a merger, consolidation, sale of assets or other transaction, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; or (C) during any period of two consecutive years, individuals, other than Consultant, who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease, for any reason, to constitute a majority of the Board. (ii) In the event of a termination of this Agreement in accordance with the provisions of this Section 8(b), the Company shall pay to Consultant (A) an amount equal to one half of the aggregate fees which would otherwise have been payable from the date of such termination through the date fixed for the expiration of this Agreement, and (B) all valid expense reimbursements through the date of the termination of this Agreement. 4 (c) The Company, by notice to Consultant, may terminate this Agreement if Consultant shall fail because of illness or incapacity to render, for six consecutive months, services of the character contemplated by this Agreement. Notwithstanding such termination, the Company shall pay to Consultant (i) an amount equal to one half of the aggregate fees which would otherwise have been payable from the date of such termination through the date fixed for the expiration of this Agreement, and (ii) all valid expense reimbursements through the date of the termination of this Agreement. 9. The Company agrees to indemnify Consultant and hold Consultant harmless against all costs, expenses (including, without limitation, reasonable attorneys' fees) and liabilities (other than settlements to which the Company does not consent, which consent shall not be unreasonably withheld) (collectively, "Losses") reasonably incurred by Consultant in connection with any claim, action, proceeding or investigation brought against or involving Consultant with respect to, arising out of or in any way relating to Consultant's services under this Agreement; provided, however, that the Company shall not be required to indemnify Consultant for Losses incurred as a result of Consultant's intentional misconduct or gross negligence (other than matters where Consultant acted in good faith and in a manner he reasonably believed to be in and not opposed to the Company's best interests). Consultant shall promptly notify the Company of any claim, action, proceeding or investigation under this paragraph and the Company shall be entitled to participate in the defense of any such claim, action, proceeding or investigation and, if it so chooses, to assume the defense with counsel selected by the Company; provided that Consultant shall have the right to employ counsel to represent him (at the Company's expense) if Company counsel would have a "conflict of interest" in representing both the Company and Consultant. The Company shall not settle or compromise any claim, action, proceeding or investigation without Consultant's consent, which consent shall not be unreasonably withheld; provided, however, that such consent shall not be required if the settlement entails only the payment of money and the Company fully indemnifies Consultant in connection therewith. The Company further agrees to advance any and all expenses (including, without limitation, the fees and expenses of counsel) reasonably incurred by the Consultant in connection with any such claim, action, proceeding or investigation, provided Consultant first enters into an appropriate agreement for repayment of such advances if indemnification is found not to have been available. 10. (a) The Company, by notice to Consultant, may terminate this Agreement for cause. As used herein, "Cause" shall mean: (i) the refusal or failure by Consultant to carry out specific directions of the Board which are of a material nature and consistent with his duties as a consultant hereunder, or the refusal or failure by Consultant to perform a material part of Consultant's duties hereunder; (ii) the commission by Consultant of a material breach of any of the provisions of this Agreement; (iii) fraud or dishonest action by Consultant in his relations with the Company or any of its subsidiaries or affiliates, or with any customer or business contact of the Company or any of its subsidiaries or affiliates ("dishonest" for these purposes shall mean Consultant's knowingly or recklessly making of a material misstatement or omission for his personal benefit); or (iv) the conviction of Consultant of any crime involving an act of moral turpitude. Notwithstanding the foregoing, no "Cause" for termination shall be deemed to exist with respect to Consultant's acts described in clauses (i) or (ii) above, unless the Company shall have given written notice to Consultant specifying the "Cause" with reasonable particularity and, within thirty calendar days after such notice, Consultant shall not have cured or eliminated the problem or thing giving rise to such "Cause;" provided, however, that a repeated breach after notice and cure of any provision of clauses (i) or (ii) above involving the same or substantially similar actions or conduct, shall be grounds for termination for "Cause" without any additional notice from the Company. In the event the Company terminates this Agreement for "Cause" pursuant to the provisions of this Section 10(a), the Company shall have no further obligation to Consultant under this Agreement. 5 (b) The Consultant, by notice to the Company, may terminate this Agreement if a "Good Reason" exists. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following circumstances without the Consultant's prior express written consent: (i) a substantial and material adverse change in the nature of Consultant's duties or responsibilities that are inconsistent with the duties or responsibilities set forth in this Agreement; (ii) a substantial and material breach of this Agreement by the Company; and (iii) a failure by the Company to make any payment to Consultant when due, unless the payment is not material and is being contested by the Company, in good faith. Notwithstanding the foregoing, no Good Reason shall be deemed to exist with respect to the Company's acts described in clauses (i), (ii) or (iii) above, unless the Consultant shall have given written notice to the Company specifying the Good Reason with reasonable particularity and, within thirty calendar days after such notice, the Company shall not have cured or eliminated the problem or thing giving rise to such Good Reason; provided, however, that a repeated breach after notice and cure of any provision of clauses (i), (ii) or (iii) above involving the same or substantially similar actions or conduct, shall be grounds for termination for Good Reason without any additional notice from the Consultant. In the event that Consultant terminates this Agreement for Good Reason, pursuant to the provisions of this Section 10(b), or the Company terminates this Agreement without "Cause," as defined in Section 10(a), the Company shall continue to pay to Consultant (or in the case of his death, the legal representative of Consultant's estate or such other person or persons as Consultant shall have designated by written notice to the Company), all payments, compensation and benefits required under this Agreement through the term of this Agreement. 11. Consultant shall perform the services hereunder as an independent contractor and not as an employee or agent of the Company or any affiliate thereof. Consultant shall have no authority to act for, represent or bind the Company or any affiliate thereof in any manner, except as may be expressly agreed to by the Company in writing from time to time. 12. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. No provision of this Agreement may be amended, modified or waived, except in a writing signed by both parties. This Agreement shall be binding upon and inure to the benefit of each of the parties and their respective successors, legal representatives and assigns. This Agreement may be executed in counterparts. In the event of any dispute under this Agreement, then and in such event, each party agrees that the same shall be submitted to the American Arbitration Association ("AAA") in the City of New York, for its decision and determination in accordance with its rules and regulations then in effect. Each of the parties agrees that the decision and/or award made by the AAA may be entered as judgment of the Courts or the State of New York, and shall be enforceable as such. This Agreement shall be construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year first above written. MOVIE STAR, INC. /s/ Melvin Knigin By:____________________ Name: Melvin Knigin Title: President /s/ Mark M. David ____________________ Mark M. David 6 EX-21 5 SUBSIDIARIES OF THE COMPANY Exhibit 21 MOVIE STAR, INC. AND SUBSIDIARIES Company owns 100% of the voting securities of all of its subsidiaries, which are included in the consolidated financial statements. Name of Subsidiary Ownership State of Incorporation - ------------------ --------- ---------------------- P.J. San Sebastian, Inc. 100% Delaware - ---------- THE COMPANY WILL FURNISH A COPY OF THE EXHIBITS TO THIS ANNUAL REPORT UPON THE WRITTEN REQUEST OF A PERSON REQUESTING COPIES THEREOF AND STATING THAT HE IS A BENEFICIAL HOLDER OF THE COMPANY'S COMMON STOCK AT A CHARGE OF $.35 PER PAGE, PAID IN ADVANCE. THE COMPANY WILL INDICATE THE NUMBER OF PAGES TO BE CHARGED FOR UPON SUCH PERSON'S INQUIRY. REQUESTS FOR COPIES AND INQUIRIES SHOULD BE ADDRESSED TO: MOVIE STAR, INC. 136 MADISON AVENUE NEW YORK, NEW YORK 10016 ATTENTION: CORPORATE SECRETARY EX-23 6 INDEPENDENT AUDITORS' CONSENT Exhibit No. 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-4489 on Form S-8 of our report dated September 22, 1999, appearing in the Annual Report on Form 10-K of Movie Star, Inc. and subsidiaries for the year ended June 30, 1999. DELOITTE & TOUCHE LLP New York, New York September 28, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 1000 12-MOS JUN-30-1999 JUL-01-1998 JUN-30-1999 4,597 0 8,009 1,145 16,460 30,506 8,033 4,538 36,759 7,890 20,703 0 0 169 7,997 36,759 72,506 72,506 51,363 51,363 11,411 0 2,694 2,708 35 2,673 0 0 0 2,673 0.19 0.17
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