SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
X Securities Exchange Act of 1934
For the quarter ended March 31, 1998
Transition Report Pursuant to Section 13 or 15(d) of the
|_| Securities Exchange Act of 1934
For the transition period from _________________ to _________________
Commission File Number 1-5893
---------------------------------------------
MOVIE STAR, INC.
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(Exact name of Registrant as specified in its charter)
New York 13-5651322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Madison Avenue, New York, N.Y. 10016
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(Address of principal executive offices) (Zip Code)
(212) 684-3400
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(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
The number of common shares outstanding on April 30, 1998 was 14,116,982.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
March 31, June 30,
1998 1997*
----------- --------
(Unaudited)
Assets
Current assets
Cash $ 5,425 $ 3,035
Receivables, net of allowances 6,978 4,147
Inventory (note 3) 14,079 16,638
Deferred income taxes 2,291 2,291
Prepaid expenses and other
current assets 403 205
------- -------
Total current assets 29,176 26,316
Property, plant and equipment (net) (note 5) 3,554 4,262
Other assets (note 6) 935 1,661
Deferred income taxes 1,718 1,718
------- -------
Total assets $35,383 $33,957
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ 52 $ 73
Accounts payable and accrued expenses 8,644 7,607
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Total current liabilities 8,696 7,680
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Long-term debt 20,985 22,336
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Commitments and Contingencies - -
Stockholders' equity
Common stock 161 160
Additional paid-in capital 3,789 3,731
Retained earnings 5,370 3,668
------- -------
9,320 7,559
Less: Treasury stock, at cost 3,618 3,618
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Total stockholders' equity 5,702 3,941
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Total liabilities and stockholders' equity $35,383 $33,957
======= =======
* Derived from audited financial statements.
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net sales $12,918 $13,089 $50,857 $48,116
Cost of sales (note 3) 9,134 9,554 36,300 35,551
------- ------- ------- -------
Gross profit 3,784 3,535 14,557 12,565
Selling, general and administrative expenses 3,400 3,212 10,967 10,075
------- ------- ------- -------
Income from operations 384 323 3,590 2,490
Gain on purchases of subordinated debentures
and senior notes (note 4) (59) - (157) (560)
Interest expense 566 652 2,045 2,161
------- ------- ------- -------
Net income (loss) $ (123) $ (329) $ 1,702 $ 889
======= ======== ======== =======
Basic net income (loss) per share (note 7) $(.01) $(.02) $.12 $.06
====== ===== ==== ====
Dilutive net income (loss) per share (note 7) $(.01) $(.02) $.11 $.06
====== ===== ==== ====
Basic weighted average number of shares
outstanding (note 7) 14,117 13,960 14,029 13,960
====== ====== ====== ======
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,702 $ 889
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 467 546
Gain on purchases of subordinated debentures and
senior notes (157) (560)
(Increase) decrease in operating assets:
Receivables (2,831) (266)
Inventory 2,559 1,094
Prepaid expenses and other current assets (198) (36)
Other assets (63) 78
Increase (decrease)in operating liabilities:
Accounts payable and accrued expenses 1,037 (494)
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Net cash provided by operating activities 2,516 1,251
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (107) (113)
Proceeds from sale of property, plant and equipment 500 -
Proceeds from sale of other assets (interest in building) 619 -
------- -------
Net cash provided by (used in)
investing activities 1,012 (113)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on and purchases of long-term debt
and capital lease obligations (1,138) (588)
------- -------
Net cash used in financing activities (1,138) (588)
------- -------
NET INCREASE IN CASH 2,390 550
CASH, beginning of period 3,035 2,283
------- -------
CASH, end of period $ 5,425 $ 2,833
======= =======
</TABLE>
(Cont'd)
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1998 1997
------ --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during period for:
Interest $1,478 $1,072
====== ======
Income taxes (net of refunds received) $ 13 $ 42
====== ======
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Conversion of long-term debt for common stock $ (59) $ -
Issuance of common stock 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)
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying consolidated condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of March 31, 1998 and the results of operations for the interim periods
presented and cash flows for the nine months ended March 31, 1998 and 1997,
respectively.
The condensed consolidated financial statements and notes are presented as
required by Form 10-Q and do not contain certain information included in
the Company's year-end consolidated financial statements. The year-end
condensed consolidated balance sheet was derived from the Company's audited
financial statements. This Form 10-Q should be read in conjunction with the
Company's consolidated financial statements and notes included in the 1997
Annual Report on Form 10-K.
2. The results of operations for the three and nine months ended March 31,
1998 are not necessarily indicative of the results to be expected for the
full year.
3. Certain items included in these statements are based upon estimates. The
cost of sales is determined utilizing estimated gross profit rates. The
calculation of the actual cost of sales is predicated upon a physical
inventory taken at the end of each fiscal year.
An approximate breakdown of the inventory is as follows (in thousands):
March 31, June 30,
1998 1997
-------- --------
Raw materials $ 4,450 $ 5,503
Work-in-process 1,479 2,806
Finished goods 8,150 8,329
-------- -------
$14,079 $16,638
======== =======
4. In October 1997, 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.
In November 1997, the Company purchased $300,000 in principal amount of its
8% convertible senior notes. These notes entitled the previous holders to
convert the principal amount into 800,000 shares of the Company's common
stock. As a result of the transaction, the Company recorded a pre-tax gain
of $4,000, net of related costs, in the second quarter of fiscal 1998.
In February 1998 and March 1998, the Company purchased $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 $59,000, net of related costs, in the third quarter of
fiscal 1998. These debentures, along with previously acquired debentures,
will be applied to the mandatory sinking fund requirement through October
1999 and will reduce the October 2000 requirement by $13,000.
In December 1997, holders of $59,000 in principal amount of the 8%
convertible senior notes converted their notes into approximately 157,000
shares of common stock.
During September 1996, the Company purchased $1,320,000 in principal amount
of its 12.875% subordinated debentures. As a result of the transaction, the
Company recorded a pre-tax gain of $560,000, net of related costs, in the
first quarter of fiscal 1997. The Company reduced its mandatory sinking
fund requirement due in October 1996 with these debentures.
<PAGE>
5. During the second quarter of fiscal 1998, the Company sold two
non-operating manufacturing facilities located in Georgia for an aggregate
of $500,000. The Company did not recognize a gain or loss on these
transactions.
6. In March 1998, the Company sold its interest in a building located in
Georgia for approximately $619,000. The Company did not recognize a gain or
loss on this transaction.
7. Net Income (Loss) Per Share - Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." As required by SFAS No. 128, all net income (loss)
per share have been restated to present Basic and Diluted Net Income (Loss)
Per Share. The Company's calculation of Basic and Diluted Net Income (Loss)
Per Share are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic Net Income (Loss) Per Share:
Net Income (Loss) to Common Stockholders $ (123) $ (329) $ 1,702 $ 889
Basic Weighted Average Shares Outstanding 14,117 13,960 14,029 13,960
Basic Net Income (Loss) Per Share $ (.01) $(.02) $.12 $.06
======= ======== ======= =======
Diluted Net Income (Loss) Per Share:
Net Income (Loss) to Common Stockholders $ (123) $ (329) $ 1,702 $ 889
Plus: Interest Expense on 8% Convertible Senior Notes (a) (a) 31 43
-------- --------- ------- -------
Adjusted Net Income (Loss) $ (123) $ (329) $ 1,733 $ 932
======= ======== ======= =======
Basic Weighted Average Shares Outstanding 14,117 13,960 14,029 13,960
Plus: Shares Issuable Upon Conversion of
8% Convertible Senior Notes (a) (a) 1,483 1,908
------- ------- ------ ------
Diluted Weighted Average Shares Outstanding 14,117 13,960 15,512 15,868
======= ======== ======= =======
Diluted Net Income (Loss) Per Share $(.01) $(.02) $.11 $.06
======== ======== ======= =======
</TABLE>
(a) These dilutive securities have been excluded because their effect, if
included, would have been antidilutive.
Shares of potential exercisable stock options are not included in the
Diluted Net Income Per Share calculation because they are considered
antidilutive.
8. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
is effective for the Company for the year ended June 30, 1999. SFAS No. 131
requires disclosure about operating segments in complete sets of financial
statements and in condensed financial statements of interim periods issued
to shareholders. The new standard also requires that the Company report
certain information about their products and services, the geographic areas
in which they operate, and major customers. The Company has not yet
determined the impact of the adoption of SFAS No. 131.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements with
respect to anticipated results, which are subject to a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are: business conditions and growth in the Registrant's industry;
general economic conditions; the addition or loss of significant customers; the
loss of key personnel; product development; competition; foreign government
regulations; fluctuations in foreign currency exchange rates; rising costs of
raw materials and the unavailability of sources of supply; the timing of orders
placed by the Registrant's customers; and the risk factors listed from time to
time in the Company's SEC reports.
Results of Operations
- ----------------------
Net sales for the three months ended March 31, 1998 decreased by 1.3% to
$12,918,000 from $13,089,000 in the comparable period in 1997. The decrease in
sales resulted from lower sales in the intimate apparel division and the retail
division of approximately $47,000 and $15,000, respectively, and a decrease in
other business. Net sales in the intimate apparel division and the retail
division decreased to $11,015,000 and $1,902,000, respectively.
Net sales for the nine months ended March 31, 1998 increased by 5.7% to
$50,857,000 from $48,116,000 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 $2,648,000 and $583,000, respectively, offset
partially by a decrease in other business. Net sales in the intimate apparel
division increased to $42,546,000 due to greater demand for the Company's new
designs and competitive products. Net sales in the Company's retail division
increased to $8,302,000 primarily due to an expanded product line, which
includes higher priced brand name products.
The gross profit percentage increased to 29.3% for the three months ended March
31, 1998 from 27.0% in the similar period in 1997. The gross margin in the
Company's intimate apparel division increased to 28.9% for the three months
ended March 31, 1998 from 26.6% 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. The shift in
production to Mexico-based contractors enables the Company to take advantage of
lower duty rates that result from the North American Free Trade Agreement and
shorter lead times associated with the raw materials that are available in
Mexico. The 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 gross margin for the retail division increased to 31.4% for the
three months ended March 31, 1998 as compared to 29.0% in the similar period in
1997. The higher margins in the retail division resulted primarily from lower
markdowns taken in the current three-month period as compared to the same period
in the prior year.
The gross profit percentage increased to 28.6% for the nine months ended March
31, 1998 from 26.1% in the similar period in 1997. The gross margin in the
Company's intimate apparel division increased to 27.8% for the nine months ended
March 31, 1998 from 24.8% in the similar period in 1997. The higher margins in
the intimate apparel division resulted from the above-mentioned shift in
production to Mexico, an improved product mix, better control of product costs
and, to a lesser extent, the elimination of certain problems with the quality of
specific items of the Company's imported finished goods (discussed below) in the
prior year. The gross margin for the retail division increased to 32.9% for the
nine months ended March 31, 1998 from 32.2% for the similar period in 1997. The
higher margins in the retail division resulted primarily from lower markdowns
taken in the current nine-month period as compared to the same period in the
prior year.
<PAGE>
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 Far East manufacturers.
Selling, general and administrative expenses increased by $188,000 to $3,400,000
for the three months ended March 31, 1998 as compared to the similar period in
1997. This increase resulted from a more favorable recovery of bad debts in the
prior year, which reduced the prior year's expense.
Selling, general and administrative expenses increased by $892,000 to
$10,967,000 for the nine months ended March 31, 1998 as compared to the similar
period in 1997. This increase resulted from increases in salary expenses and
salary related costs of $436,000, commissions of $192,000, advertising costs of
$143,000 and a more favorable recovery of bad debts in the prior year, which
reduced the prior year's expense by approximately $201,000, partially offset by
a net decrease in other general overhead expenses.
Income from operations increased to $384,000 and $3,590,000 for the three and
nine months ended March 31, 1998, from $323,000 and $2,490,000 for the similar
periods in 1997. The increase for the three months was due to higher gross
margins partially offset by an increase in selling, general and administrative
expenses. The increase for the nine months 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 a loss from operations of $38,000
and income from operations of $621,000 for the three and nine months ended March
31, 1998 as compared to a loss from operations of $61,000 and income from
operations of $603,000 for the similar periods 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 October 1997, 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.
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, par value $.01. As a result of the transaction, the
Company recorded a pre-tax gain of $4,000, net of related costs, in the second
quarter of fiscal 1998.
In February 1998 and March 1998, the Company purchased $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 $59,000,
net of related costs in the third quarter of fiscal 1998.
<PAGE>
In September 1996, the Company purchased $1,320,000 in principal amount of its
12.875% subordinated debentures to meet a sinking fund payment due in October
1996. As a result of the transaction, the Company recorded a pre-tax gain of
$560,000, net of related costs, in the first quarter of fiscal 1997.
Interest expense decreased by $86,000 and $116,000 for the three and nine-month
period ended March 31, 1998, respectively, from the comparable periods 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 did not provide for an income tax provision or benefit for the three
and nine months ended March 31, 1998 and 1997.
The Company recorded a net loss for the three months ended March 31, 1998 of
$123,000 as compared to a net loss of $329,000 for the same period in 1997. Net
income was $1,702,000 for the nine months ended March 31, 1998 as compared to
net income of $889,000 for the same period in 1997. The three-month improvement
was due to higher gross margins, lower interest costs and a gain on the purchase
of subordinated debentures offset partially by an increase in selling, general
and administrative expenses. The increase for the nine months 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 nine months ended March 31, 1998, the Company's working capital
increased by $1,844,000 to $20,480,000, principally from profitable operations
and the sale of non-operating assets offset by the purchases of property, plant
and equipment and payments on and purchases of long-term debt.
During the nine months ended March 31, 1998, cash increased by $2,390,000. Net
cash provided by operations was $2,516,000. The Company used cash of $107,000
for the purchases of property, plant and equipment and $1,138,000 for the
payments on and purchases of long-term debt. These activities were funded by
profitable operations and from the proceeds of the sale of certain non-operating
assets in the amount of $1,119,000.
Receivables at March 31, 1998 increased by $2,831,000 to $6,978,000 from
$4,147,000 at June 30, 1997. This increase is due to normal seasonal shipping
fluctuations within the period for the Company's intimate apparel division.
Inventory at March 31, 1998 decreased by $2,559,000 to $14,079,000 from
$16,638,000 at June 30, 1997. This decrease reflects normal reductions in both
the intimate apparel and the retail inventory, which results from historically
higher sales during the July through December period as compared to the January
through June period.
During the second quarter of fiscal 1998, the Company sold two non-operating
manufacturing facilities located in Georgia for an aggregate of $500,000. The
Company did not recognize a gain or loss on these transactions.
In March 1998, the Company sold its interest in a building located in Georgia
for approximately $619,000. The Company did not recognize a gain or loss on this
transaction.
<PAGE>
In October 1996, the Company consummated an agreement with holders of
$10,187,000 in principal amount of the Company's outstanding 12.875% unsecured
subordinated debentures ("Restructured Bonds"). The holders of the Restructured
Bonds exchanged such bonds for the issuance of an equivalent principal amount of
a new series of notes bearing interest at a rate of 8% per annum, payable
semi-annually (April 1 and October 1) which are senior to the 12.875% debentures
("New Senior Notes"). Additionally, the holders of the Restructured Bonds
deferred the receipt of interest due April 1, 1996 (approximately $656,000) and
October 1, 1996 (approximately $434,000). The Company paid the interest due on
the remaining 12.875% debentures. The holders of the Restructured Bonds accepted
New Senior Notes in exchange for the April 1, 1996 and October 1, 1996 deferred
interest related to the Restructured Bonds. Upon completion of the
restructuring, the aggregate principal amount of the New Senior Notes
approximated $11,265,500. The New Senior Notes do not provide for any
amortization of principal and mature on September 1, 2001. As a result of the
exchange, the Company applied the entire principal amount of $10,187,000
acquired by the Company to its mandatory annual sinking fund payments through
October 1999. The Company's obligation to make mandatory sinking fund payments
on the 12.875% debentures will resume in October 1999. The aggregate principal
indebtedness of the New Senior Notes and the 12.875% subordinated debentures
remaining after the exchange and subsequent purchases by the Company is
approximately $20,894,000.
The New Senior Notes carried the right to convert up to approximately $716,000
of the Notes into 1,908,000 shares of the Company's common stock at a price of
$0.375 per share (see below). In addition, the holders of the New Senior Notes
have the right to designate a representative to attend all meetings of the
Company's Board of Directors and Compensation Committee.
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, par value $.01. As a result of the transaction, the
Company recorded a pre-tax gain of $4,000, net of related costs, in the second
quarter of fiscal 1998. 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 Notes purchased by
the affiliates entitle the holders to convert the principal amount into
approximately 742,667 shares of the Company's common stock, par value $.01. The
purchasing affiliates have agreed to convert the Notes no later than March 31,
1999 and to certain restrictions on the circumstances under which they will be
permitted to sell the shares underlying the Notes. The purchasers have also
granted the Company the right to purchase the underlying shares at a price equal
to 90% 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 common stock.
In October 1997, 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 will further reduce its mandatory sinking fund
requirements due in October 1999 by the principal amount of these debentures.
In February 1998 and March 1998, the Company purchased $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
approximately $59,000, net of related costs, in the third quarter of fiscal
1998. These debentures along with the previously acquired debentures will be
applied to the mandatory sinking fund requirements through October 1999 and the
balance of $13,000 will be applied to reduce the October 2000 requirement.
Depending on price and availability, the Company may seek to purchase an
additional portion of its outstanding 12.875% debentures to further reduce its
sinking fund obligation and reduce interest expense.
During September 1996, the Company purchased $1,320,000 in principal amount of
its 12.875% subordinated debentures. As a result of the transaction, the Company
recorded a pre-tax gain of approximately $560,000, net of related costs, in the
first quarter of fiscal 1997. The Company reduced its mandatory sinking fund
requirements with these debentures.
<PAGE>
In September 1996, the Company delivered $3,750,000 of its 12.875% subordinated
debentures that it had previously acquired to the Indenture Trustee, in lieu of
making the mandatory sinking fund payment due October 1, 1996 in cash.
The Company has a secured revolving line of credit of up to $13,500,000, through
June 1999, to cover the Company's projected needs for operating capital and
letters of credit to fund the purchase of imported goods. Direct borrowings
under this line bear interest at the annual rate of 2.5% above the prime rate of
Chase Manhattan Bank through June 1998 and 2.0% above the prime rate of Chase
Manhattan Bank through June 1999. Availability under the line of credit is
subject to certain agreed upon formulas. Under the terms of this financing, the
Company has agreed to pledge substantially all of its assets, except the
Company's domestic inventory and real property. In April 1996, this credit
facility replaced the financing agreements the Company had with two other banks.
Management believes the Company's 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 does not anticipate making any additional purchases of its stock and
anticipates that capital expenditures for fiscal 1998 will be less than
$500,000.
Year 2000
- ---------
The Company is assessing and updating its computer hardware and software and the
programs and procedures that will require modification to become year 2000
compliant. The Company currently anticipates that it will substantially complete
the necessary modifications by October 1, 1998. The cost of updating the current
computer system to be year 2000 compliant is not expected to be material to the
ongoing operations of the Company. The Company has received or is in the process
of receiving representations from its software vendors that the software they
support for the Company will also be year 2000 compliant.
<PAGE>
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-Q
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-Q. In assessing forward-looking statements contained herein,
readers are urged to carefully read those statements.
<PAGE>
PART II Other Information
Item 1 - Legal proceedings - Not Applicable
Item 2 - Changes in Securities - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders - None
Item 5 - Other Information - None
Item 6 - (a) Exhibits
Exhibit
Number Exhibit Method of Filing
- -------- ------------------------ ----------------
10.11 Agreement dated Filed herewith.
as of December 9,
1997 (executed and
delivered on March
24, 1998) among
Melvyn Knigin, Saul
Pomerantz, Thomas Rende,
Gary W. Krat, Joel M.
Simon, Jill Salberg (the
"Affiliates") and the
Company governing the
rights of the Affiliates
with respect to the
Company's 8% Convertible
Senior Notes owned by
the Affiliates.
(b) Form 8-K Report - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MOVIE STAR, INC.
By: /s/ MARK M. DAVID
---------------------
MARK M. DAVID
Chairman of the Board;
Chief Executive Officer
By: /s/ SAUL POMERANTZ
------------------------
SAUL POMERANTZ
Executive Vice President;
Chief Financial Officer
May 14, 1998
AGREEMENT dated as of December 9, 1997 by and among Melvyn Knigin, an
individual residing at 400 17th Street, Norwood, New Jersey 07648 ("Knigin"),
Saul Pomerantz, an individual residing at 515 East 79th Street, Apt. 21F, New
York, New York 10021 ("Pomerantz"), Thomas Rende, an individual residing at 432
China Road, Sayville, New York 11782 ("Rende"), Gary W. Krat, an individual
residing at 985 Fifth Avenue, Apt. 2A, New York, New York 10021 ("Krat"), Joel
M. Simon, an individual residing at 35 Midwood Cross, Roslyn, New York 11576
("Simon") on behalf of himself and the individuals listed in Schedule 1 annexed
hereto and made a part hereof, Jill Salberg, an individual residing at 7
McClellan Place, Chappaqua, New York 10514 ("Salberg") and Movie Star, Inc., a
New York corporation having an office at 136 Madison Avenue, New York, New York
10016 (the "Company") (Knigin, Pomerantz, Rende, Krat, Simon, the individuals
listed in Schedule 1 and Salberg are hereinafter sometimes referred to
individually as an "Affiliate" and collectively as the "Affiliates").
RECITALS
A. Knigin and Pomerantz are officers, directors and employees of the
Company, Rende is an employee of the Company, Krat and Simon are directors of
the Company, the individuals listed in Schedule 1 are relatives of Simon and
Salberg is the wife of Michael A. Salberg who is a member of the law firm which
acts as general counsel to the Company. The Affiliates have acquired an
aggregate of $278,500 in principal amount (the "Affiliates' Aggregate Amount")
of the Company's 8% Convertible Senior Notes, which are convertible into an
aggregate of 742,667 shares of the Company's common stock , par value $.01 (the
"Notes").
B. The Affiliates have agreed to certain limitations on their rights to (i)
sell the Notes; (ii) convert the Notes to common stock; and (iii) sell the
common stock after conversion of the Notes, all as hereinafter more fully set
forth.
NOW, THEREFORE, in consideration of the premises and the mutual promises
made herein, the parties hereto agree as follows:
<PAGE>
1. The Affiliates, jointly and severally, agree that
(a) they (i) will not sell all or any portion of the Notes or the
underlying shares of common stock in any manner other than as provided in
this Agreement; and (ii) will convert all of the Notes into shares of
common stock on or before midnight Eastern Time on March 31, 1999 (the
"Mandatory Conversion Date"). Nothing herein shall, in any way, restrict or
prohibit an Affiliate from converting all or any portion of the Notes into
shares of common stock at any time prior to the Mandatory Conversion Date.
The shares of common stock into which the Notes are convertible are
hereinafter called, the "Underlying Shares";
(b) If an Affiliate desires to sell all or any portion of the Notes,
such Affiliate shall first offer to sell such Notes to the other
Affiliates, in the first instance, and any Notes not purchased by the other
Affiliates shall be offered to the Company. The offer by a selling
Affiliate to the other Affiliates and the Company shall be made in writing
setting forth the aggregate principal amount of the Notes being offered and
the price at which the selling Affiliate wishes to sell the Notes (a
"Transfer Notice"). Upon receipt of a Transfer Notice, the other Affiliates
shall have the right to purchase the offered Notes for the price set forth
in the Transfer Notice in proportion to their respective ownership of the
Affiliates' Aggregate Amount. Any offered Notes not purchased by one or
more of the other Affiliates may be purchased by the remaining Affiliates
and any offered Notes not purchased by the remaining Affiliates may be
purchased by the Company. If the other Affiliates and the Company do not
purchase all of the offered Notes, the selling Affiliate shall continue to
hold the Notes subject to and in accordance with this Agreement. Any
purchase of the offered Notes by the other Affiliates or the Company shall
be completed within ten business days after the receipt of the Transfer
Notice.
2. (a) During the period commencing on the date upon which any Affiliate
converts all or any portion of the Notes into shares of common stock and ending
at midnight on December 31, 1998, Underlying Shares may not be sold unless the
closing sale price of the Company's common stock in consolidated trading on the
American Stock Exchange is at least $1.00 per share for each of the twenty
consecutive trading days ending not more than three days prior to giving the
"Sale Notice" (as hereinafter defined) (a "1998 Trigger Event"). If a 1998
Trigger Event occurs, an Affiliate may during calendar year 1998, subject to
2
<PAGE>
Rule 144 if applicable, sell up to an aggregate of 35% of the Underlying Shares
held by such Affiliate (the "1998 Maximum"), from time to time in accordance
with the procedures set forth in Section 2(c) of this Agreement.
(b) Commencing on January 1, 1999, an Affiliate may from time to time
during calendar year 1999, subject to Rule 144 if applicable, sell all or
any portion of the Underlying Shares held by such Affiliate, provided the
closing sale price of the Company's common stock in consolidated trading on
the American Stock Exchange is at least $1.00 per share for each of the
twenty consecutive trading days ending not more than three days prior to
giving the "Sale Notice" (as hereinafter defined) (a "1999 Trigger Event")
and such Affiliate has complied with the procedures set forth in Section
2(c) of this Agreement.
(c) Provided a 1998 Trigger Event or 1999 Trigger Event has occurred,
an Affiliate shall, in each instance prior to selling any Underlying Shares
on the open market, give the Company written notice of an intention to sell
setting forth the aggregate number of Underlying Shares intended to be sold
(a "Sale Notice") and the Company shall have three business days following
receipt of a Sale Notice to purchase not less than all of the Underlying
Shares specified in the Sale Notice (the "Company Purchase Period") at a
price equal to 90% of the closing sale price of the Company's common stock
in consolidated trading on the American Stock Exchange on the date the Sale
Notice is received (the "Company Purchase Price"). If the Company
determines to purchase the Underlying Shares from a selling Affiliate, the
Company shall, on or before the expiration of the Company Purchase Period,
deliver to the selling Affiliate a check for the full amount of the Company
Purchase Price against receipt of the share certificates for the Underlying
Shares to be sold duly endorsed in blank for transfer with signature
medallion guaranteed. If the Company does not exercise its right to
purchase the Underlying Shares or fails to deliver the Company Purchase
Price before the expiration of the Company Purchase Period, the Affiliate
shall be free to sell the Underlying Shares on the open market; provided
that any such sales shall be made within ten business days after the end of
the Company Purchase Period.
3. Any Underlying Shares remaining unsold at the close of business in
December 31, 1999 may not be sold thereafter until the earlier to occur of the
date upon which (i) the selling Affiliate has obtained the express prior written
consent of the Company's Chairman of the Board:
3
<PAGE>
(ii) the Company has completed a refinancing of its 12.875% Subordinated
Debentures and its 8% Senior Notes and 8% Senior Convertible Notes; and (iii)
January 2, 2001. In addition to the foregoing, if any underwriter engaged by the
Company requires the Affiliates to agree to any other or further restrictions on
the sale of the Underlying Shares than those set forth in this Agreement, the
Affiliates shall, promptly following the request from an underwriter, enter into
written agreements containing such other or further restrictions.
4. Upon the expiration of ninety days after the date upon which an
Affiliate is no longer (i) employed by the Company; or (ii) deemed to be an
"affiliate" of the Company as defined in Rule 144(a)(1) promulgated under the
Securities Act of 1933, as amended, the terms and conditions of this Agreement
shall not apply to any such Affiliate, the Notes or the Underlying Shares.
5. To the extent the provisions of Section 16 of the Securities Exchange
Act of 1934 are applicable to an Affiliate, all such Affiliates shall be
required to comply with those provisions.
6. All of the Affiliates acknowledge that they are familiar with the
Company's written policies and procedures with respect to purchases and sales of
the Company's securities, all of the provisions of which are incorporated herein
by reference. Each of the Affiliates agrees to be bound by and comply with the
Company's policies and procedures in connection with the sale or other
disposition of the Notes and Underlying Shares. Notwithstanding anything to the
contrary herein, no Affiliate may sell the Notes or Underlying Shares at any
time when such Affiliate has knowledge of material non-public information
regarding the Company.
7. This Agreement has been entered into in, and shall be governed by and
construed in accordance with the internal laws of the State of New York.
8. All of the terms and provisions of this Agreement shall be binding upon
and inure to the benefit of the parties hereto and to their respective
successors and permitted assigns. This Agreement contains the entire agreement
among the parties with respect to the subject matter hereof and shall supersede
4
<PAGE>
all previous and contemporaneous negotiations, commitments and understandings,
whether written or oral. No waiver of or amendment to this Agreement will be
effective unless it is signed by the party or parties sought to be bound
thereby.
IN WITNESS WHEREOF, each of the parties hereto has executed, or caused to
be executed, this Agreement, as of the day and year first above written.
MOVIE STAR, INC.
By:----------------------------- --------------------------
Mark M. David, Chairman Melvyn Knigin
- -------------------------------- --------------------------
Saul Pomerantz Thomas Rende
- -------------------------------- --------------------------
Gary W. Krat Joel M. Simon
- --------------------------------
Jill Salberg
5
<PAGE>
SCHEDULE 1
ERIC R. SIMON
BETH J. SIMON
DAVID S. SIMON
BARRIE BERMAN
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Mar-31-1998
<CASH> 5,425
<SECURITIES> 0
<RECEIVABLES> 8,076
<ALLOWANCES> 1,098
<INVENTORY> 14,079
<CURRENT-ASSETS> 29,176
<PP&E> 7,837
<DEPRECIATION> 4,283
<TOTAL-ASSETS> 35,383
<CURRENT-LIABILITIES> 8,696
<BONDS> 20,985
<COMMON> 161
0
0
<OTHER-SE> 5,541
<TOTAL-LIABILITY-AND-EQUITY> 35,383
<SALES> 50,857
<TOTAL-REVENUES> 50,857
<CGS> 36,300
<TOTAL-COSTS> 36,300
<OTHER-EXPENSES> 10,810
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,045
<INCOME-PRETAX> 1,702
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,702
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
</TABLE>
