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, 1998 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 ______
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes X No __________
The aggregate market value of voting stock held by nonaffiliates of the
Registrant totalled $4,010,421 on August 31, 1998, based upon the closing price
of $0.4375 at the close of trading on August 31, 1998.
As of August 31, 1998, there were 14,116,982 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.
<PAGE>
MOVIE STAR, INC.
1998 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-12
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
<PAGE>
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 outlet
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. At December 31, 1995, the Company
had substantially completed the previously reported divestiture of its Schwabe
men's work and leisure shirt division.
The Company's products consist of ladies' pajamas, nightgowns, baby dolls,
nightshirts, dusters, shifts, sundresses, rompers, short sets, beachwear,
peignoir ensembles, robes, leisurewear, panties, and daywear consisting of
bodysuits, soft bras, slips, half-slips, teddies and camisoles. These products
are manufactured in various fabrics, designs, colors and styles depending upon
seasonal requirements, changes in fashion and customer demand.
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 for its
customers. The Company has also shifted a large portion of its production to
Mexico based contractors and has developed an infrastructure in Mexico 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 domestic manufacturing facilities allow shorter "lead times" in
producing certain of its products.
(b) Intentionally omitted.
(c) (i) The Company's products are sold to discount, specialty, national and
regional chain, mass merchandise and department stores and direct mail catalog
marketers throughout the United States. The prices to consumers for the
Company's products range from approximately $3.00 for certain of its panty
products to approximately $90.00 for certain other products, such as peignoir
sets. The Company's products are sold by in-house sales personnel and outside
manufacturer's representatives. Approximately 44% of the Company's sales are
made to national chains and mass merchandisers; the balance of the Company's
sales are unevenly distributed among discount, specialty, department and
regional chain stores, direct mail catalog marketers and to consumers through
the Company's Factory Stores. The Company's gross profit on its sales for each
of the fiscal years ended June 30, 1998, 1997 and 1996 was approximately 29%,
27% and 20%, respectively.
The Retail Stores sell apparel products manufactured by the Company and other
manufacturers at discounted retail prices. Historically, approximately 30% of
the sales by these stores have been derived from products supplied by the
Company. In fiscal 1996, approximately 44% of the products sold by these stores
were supplied by the Company. This increase resulted from the sale by these
stores of a substantial amount of the finished goods inventory of the
discontinued Schwabe division. In fiscal 1998 and 1997 less than 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, the divestiture of the Schwabe division and the
Company's decision to broaden the Retail Stores product line. The Retail Stores
accounted for approximately 16.6%, 16.7% and 11.5% of total sales of the
I-1
<PAGE>
Company in fiscal 1998, 1997 and 1996, respectively. This increase in percentage
of total sales was due to the reduction in overall sales of the Company's
manufactured products in fiscal 1998 and 1997, as compared to 1996, caused
primarily by the divestiture of the Schwabe Division. 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.
The Company limits the promotion of its products to cooperative advertising in
conjunction with its retail customers directed to the ultimate retail consumer
of its products.
In addition to its in-house sales force, the Company has, pursuant to various
written agreements, since 1976, 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. The Company and Mr. Hymowitz have agreed that Mr. Hymowitz
will become an employee of the Company upon the expiration of the agreement.
Working closely with the Company, Mr. Hymowitz will continue 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 1998 and
1997 approximately 30% of the Company's net sales were attributed to 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. In 1988,
Mr. Shatz and Mr. Hymowitz were granted non-qualified options to purchase an
aggregate of 133,333 shares of the Company's Common Stock at an exercise price
of $2.36 per share. The options granted to Messrs. Shatz and Hymowitz expire on
December 12, 1998.
(ii) Not applicable.
(iii) The Company utilizes a large variety of fabrics made from natural and
man-made fibers including, among others, polyester, cotton, broadcloth, stretch
terry, flannel, brush, nylon, spun polyester, velour, satins, tricot, jersey,
fleece, jacquards, lace, stretch lace, charmeuse, chambray, and various knit
fabrics.
These materials are available from a variety of both domestic and foreign
sources. The sources are highly competitive in a world market. The Company
expects these competitive conditions to continue in the foreseeable future.
Generally, the Company has long-standing relationships with its domestic and
foreign suppliers and purchases its raw materials in anticipation of orders or
as a result of need based on orders received. Purchase of raw materials in high
volume provides the Company with the opportunity to buy at relatively low
prices. In turn, the Company is able to take advantage of these lower prices in
the pricing of its finished goods.
The Company increased the amount of finished goods assembled for it by
contractors in the Caribbean, Central America and Mexico from approximately 9%
in fiscal 1996 to approximately 9% and 34% in Mexico for 1997 and 1998,
respectively and to approximately 16% and 13% in the Caribbean and central
America for 1997 and 1998, respectively. 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, for the first time since 1996, when the Company
began its efforts to increase production in Mexico, certain of the raw textile
materials used in the Company's products reached the maximum annual TPL. As a
result, the rate of duty on the Company's products from Mexico shipped to the
United States in the last four months of calendar year 1998 will increase from
2.8% of the
I-2
<PAGE>
value of the finished products to 16.6% of that value. The Company is
investigating various alternatives to minimize the impact of this increase,
including the possibility of deferring the shipment of finished products until
the beginning of calendar year 1999 when the full amount of TPL for that year
will be available. Although the actual cost to the Company of the increased duty
cannot be precisely quantified at this time, the Company believes it will not
have a material adverse impact on the Company's financial results for the 1999
fiscal year. In fiscal 1998, approximately 37% of the Company's raw materials
were imported as compared to approximately 33% in fiscal 1997 and 9% in fiscal
1996. These increases resulted from the increase in offshore production, the
availability of raw materials in Mexico and purchasing decisions designed to
take advantage of lower costs associated with certain imported raw materials.
Approximately 10% of the Company's finished goods were imported from foreign
sources in fiscal 1998 as compared to 20% in fiscal 1997 and 19% in fiscal 1996.
This decrease in imported finished goods resulted from the Company's decision to
increase the amount of finished goods assembled for it by contractors in Mexico.
As of June 30, 1996, the Company eliminated the separate structure of its
international division and has absorbed the functions of purchasing finished
products and raw materials from offshore sources into its single unified
operating organization. Centralization of these functions has given 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 and reporting directly to the Company. Currently, the
Company has two employees in Bangladesh supervising the production of finished
products purchased by the Company from manufacturers in that country. The
Company does not believe that the current political situation in Bangladesh will
have a material adverse affect on its ability to fill customer orders in a
timely manner.
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
seven employees in Mexico to assure greater control over its operations and
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 General Agreement on Tariffs and Trade has not had any impact
on the operations of the Company.
The Company believes it maintains adequate inventories to cover the needs of its
customers.
(iv) The Company has several registered trademarks, of which "Movie Star",
"Movie Star Loungewear", "Cinema Etoile", "Cine Jour", "Cine Star", 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.
(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) Walmart accounted for 20% of sales for fiscal 1998 and 17% of sales for
fiscal 1997. Sears Roebuck and Company accounted for 11% of sales for fiscal
1998 and 12% of sales for fiscal 1997. J.C. Penney accounted for 8% of sales for
fiscal 1998 and 11% of sales for fiscal 1997.
I-3
<PAGE>
Purchasing decisions by the Company's customers with respect to each group of
the Company's products and, in some instances, products within a group,
generally are made by different buyers and purchasing departments. The Company
believes that the loss of orders from any one buyer or purchasing department
would not necessarily result in the loss of sales to other buyers or purchasing
departments of those customers.
(viii) The backlog of orders as of June 30, 1998 was approximately $33,000,000
and as of June 30, 1997 was approximately $21,300,000. This increase is due to
an expected increase in business for fiscal year 1999 and orders being booked
earlier than they were in the prior year. 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, in recent years, sought to expand the development and marketing of their
own brands and to obtain intimate apparel products directly from similar sources
as the Company.
While the Company believes that owning manufacturing facilities can be
advantageous, owning plants has required the investment of substantial capital
and subjected the Company to the costs of maintaining excess capacity.
Competitive conditions in the industry have required the Company to place
greater reliance on obtaining raw materials and finished products from sources
outside the United States.
The Company has consolidated production in its domestic plants by closing
underutilized and inefficient facilities. Between August 1990 and June 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. In
June 1998, the Company completed the transfer of its operations from its
manufacturing facility located in Honaker, Virginia into its larger facility
located in Lebanon, Virginia. This consolidation was done to reduce expenses
associated with the additional indirect costs of manufacturing in two
facilities. All direct labor and all but three indirect labor personnel were
offered transfers to the Lebanon facility.
The intimate apparel industry is further characterized by competition on the
basis of price, quality, efficient service and prompt delivery. Because of this
competitive pressure, it has become increasingly difficult for the Company to
rely principally on domestic manufacturing. Further shifts in competitive
conditions may require the Company to increase its reliance on offshore
manufacturers and contractors in the future. Accordingly, changes in import
quotas, currency valuations and political conditions in the countries from which
the Company imports products could adversely affect the Company's business. Such
shifts could result in the underutilization of the Company's remaining domestic
plants and decrease profitability.
The Company believes that the consolidation in the retail industry has
contributed to increased competition among manufacturers of products of the type
sold by the Company. As part of its response to this competitive pressure, the
Company has sought to maximize its domestic manufacturing efficiency through
strategic consolidation of underutilized facilities. The Company has also
continued to take advantage of opportunities in Mexico, the Caribbean Basin and
Central America to contract for the cutting and assembly of its products which
enables the Company to benefit from lower offshore labor costs coupled with
transportation times that are faster than deliveries from the Far East. In the
past, the Company had been unable to maximize the benefits of these
opportunities due to a reduction in the volume of orders it received for goods
that were suitable for assembly offshore; shorter than anticipated lead times
between placement of orders and customers' required delivery dates; and, its
inability to establish or maintain relationships with reliable contractors.
I-4
<PAGE>
(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 667 employees of the Company, approximately 19 are
executive, design and sales personnel, 98 are administrative personnel, and the
balance are in manufacturing, and warehousing and retail sales for the Movie
Star Factory Stores division. In addition, the Company employs approximately 76
part-time sales and stockroom assistants in its Movie Star Factory Stores
division.
The Company has never experienced an interruption of its operations because of a
work stoppage. Even though the Company is subject to certain seasonal variations
in sales, significant seasonal layoffs are rare.
Most employees have an interest in the Company's Common Stock through the
Company's ESOP. The Company deems its relationship with its employees to be
good. The Company is not a party to any collective bargaining agreement with any
union.
Restriction on Dividends
Pursuant to a public offering of $25,000,000 of Debentures in 1986, and the
exchange in October 1996 of certain of those Debentures for New Senior Notes,
the Company may not declare or pay any dividend or make any distribution on any
class of its capital stock except dividends or distributions payable in capital
stock of the Company or to the holders of any class of its capital stock, or
purchase, redeem or otherwise acquire or retire for value any capital stock of
the Company if (i) at the time of such action an event of default, or an event
which with notice or lapse of time or both would constitute an event of default,
shall have occurred and be continuing, or (ii) if, upon after giving effect to
such dividend, distribution, purchase, redemption, other acquisition or
retirement, the aggregate amount expended for all such purposes subsequent to
June 30, 1986, shall exceed the sum of (a) 75% of the aggregate consolidated net
income of the Company earned subsequent to June 30, 1986, (b) the aggregate net
proceeds, including the fair market value of property other than cash received
by the Company from the issue or sale after September 30, 1986 of capital stock
of the Company, including capital stock issued upon the conversion of, or in
exchange for, indebtedness for borrowed money and (c) $4,000,000; provided,
however, that the provisions of this limitation shall not prevent the retirement
of any shares of the Company's capital stock by exchange for, or out of proceeds
of the substantially concurrent sale of, other shares of its capital stock, and
neither such retirement nor the proceeds of any such sale or exchange shall be
included in any computation made under this limitation. At June 30, 1998, the
Company is prohibited from paying any cash dividends.
I-5
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth all of the facilities owned or leased by the
Company as of June 30, 1998.
<TABLE>
<CAPTION>
Owned or Bldg. Area Expiration Productive Extent of
Location Use Leased (sq. ft.) Annual Rent of Lease Capacity(5) Utilization(5)
- -------- --------- ------ --------- ----------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 divisional sales Leased
148 Madison office and Directly from
Ave., NY, NY) showroom Landlord
Petersburg, PA Warehousing Owned 140,000 _____ _____ N/A N/A
for finished
goods; dis-
tribution center
Lebanon, VA Manufacturing; Owned 170,000 _____ _____ 250 93%(6)
warehousing for
piece goods and
finished goods;
distribution
center
Honaker, VA Vacant Owned 40,000 _____ _____ N/A N/A(6)
Claxton, GA Undeveloped Owned 3.0 Acres _____ _____ N/A N/A
Land(2)
South Mississippi 1 Mfg./Dist./ Owned/Leased 239,000 _____ _____ 200 51%(7)
Warehouse; 1 (3)
Distribution
Center
North Mississippi 3 Mfg./Vacant Owned/Leased 145,000 _____ _____ N/A N/A
(3)
Retail Stores 28 retail stores Leased(4) 103,000 $360,000(4) (4) N/A N/A
located
throughout
Mississippi and
Georgia
</TABLE>
- ----------
(1) Includes escalation for 1998.
(2) On August 27, 1998, the Company entered into a written agreement to sell
the land.
(3) Leased from municipalities pursuant to local Development Authority bond
issues.
(4) Store leases generally are for one to three-year periods with options to
renew. Rents generally range from $2-$8 per square foot.
I-6
<PAGE>
(5) "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.
(6) Prior to the consolidation of the Virginia operations, the Lebanon facility
had productive capacity of 210 employees and was operating at a utilization
rate of 89% and the Honaker facility had capacity for 150 employees and was
operating at a utilization rate of 58%.
(7) 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 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.
<TABLE>
<CAPTION>
AMOUNT
OF SPACE
LOCATION FUNCTION (Sq. ft.)
- -------------------------- ------------------------------------ ----------
<S> <C> <C>
136 and 148 Madison Avenue Corporate Offices; 7,000
New York, New York Divisional Sales Offices and Showrooms; 8,000
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; 61,000
Warehousing and Distribution; 163,000
Offices 15,000
</TABLE>
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
<PAGE>
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, 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
Year Ended June 30, 1997
First Quarter 1 9/16
Second Quarter 7/8 7/16
Third Quarter 15/16 9/16
Fourth Quarter 11/16 7/16
As of August 31, 1998, there were approximately 908 holders of record of the
Common Stock. For restrictions on dividends, see Item 1 at page I-5.
MARKET FOR COMPANY'S DEBENTURE
High Low
------ ---------
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
Year Ended June 30, 1997
First Quarter 650.00 501.25
Second Quarter 640.00 570.00
Third Quarter 771.25 570.00
Fourth Quarter 760.00 671.25
II-1
<PAGE>
MOVIE STAR, INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Statement of Operations Data: Fiscal Year Ended June 30,
1998 1997 1996 1995 1994
--------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
NET SALES $ 64,537 $61,470 $84,115 $101,946 $103,105
-------- --------- -------- -------- --------
COST OF SALES 45,777 44,947 66,993 81,261 86,158
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 15,076 13,718 17,527 20,541 20,874
LOSS ON ABANDONMENT OF LEASED PREMISES - - 1,070 - -
SPECIAL CHARGE - - -
750 -
-------- ------- ------- -------- --------
60,853 58,665 85,590 102,552 107,032
-------- ------- ------- -------- --------
INCOME (LOSS) FROM OPERATIONS 3,684 2,805 (1,475) (606) (3,927)
GAIN ON PURCHASES OF SUBORDINATED DEBENTURES
AND SENIOR NOTES (157) (560) - - -
INTEREST EXPENSE 2,623 2,781 3,893 4,669 4,014
GAIN ON SALE OF PROPERTY,
PLANT AND EQUIPMENT - - - - (984)
-------- ------- ------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 1,218 584 (5,368) (5,275) (6,957)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 16 65 (90) (246) (2,772)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE FOR INCOME TAXES - - - - (861)
-------- ------- ------- ------- -------
NET INCOME (LOSS) $ 1,202 $ 519 $(5,278) $ (5,029) $(3,324)
======== ======= ======= ======== =======
BASIC INCOME (LOSS) PER SHARE $.09 $.04 $(.38) $(.36) $(.24)
==== ==== ===== ===== =====
DILUTED INCOME (LOSS) PER SHARE $.08 $.04 $(.38) $(.36) $(.24)
==== ==== ===== ===== =====
BASIC WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 14,049 13,960 13,960 13,960 14,031
====== ====== ====== ====== ======
DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 15,161 15,868 13,960 13,960 14,031
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: At June 30,
1998 1997 1996 1995 1994
------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
WORKING CAPITAL $19,916 $18,636 $19,546 $22,648 $ 25,178
======= ======= ======= ====== =========
TOTAL ASSETS $36,743 $33,957 $34,610 $57,204 $ 69,806
======= ======= ======= ====== =========
SHORT-TERM DEBT - Including current maturites
of long-term debt and capital lease obligations $ 40 $ 73 $ 45 $15,832 $ 19,627
======= ======= ======= ====== =========
LONG-TERM DEBT $20,980 $22,336 $23,533 $22,496 $ 22,529
======= ======= ======= ====== =========
STOCKHOLDERS' EQUITY $ 5,202 $ 3,941 $ 3,422 $ 8,700 $ 13,729
======= ======= ======= ====== =========
</TABLE>
II-2
<PAGE>
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
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 partially by a
decrease in other business. Net sales in the intimate apparel division increased
to $53,847,000 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 primarily due to an expanded product line, which
includes higher priced brand name products.
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. 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, for the first time since
1996, when the Company began its efforts to increase production in Mexico,
certain of the raw textile materials used in the Company's products reached the
maximum annual TPL. As a result, the rate of duty on the Company's products from
Mexico shipped to the United States in the last four months of calendar year
1998 will increase from 2.8% of the value of the finished products to 16.6% of
that value. The Company is investigating various alternatives to minimize the
impact of this increase, including the possibility of deferring the shipment of
finished products until the beginning of calendar year 1999 when the full amount
of TPL for that year will be available. Although the actual cost to the Company
of the increased duty cannot be precisely quantified at this time, the Company
believes it will not have a material adverse impact on the Company's financial
results for the 1999 fiscal year. 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.
II-3
<PAGE>
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 $1,358,000 to
$15,076,000 for the year ended June 30, 1998 as compared to 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. Salary expense and
salary related expenses increased approximately $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 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.
II-4
<PAGE>
Income from operations increased to $3,684,000 for the year ended June 30, 1998,
from $2,805,000 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 $1,223,000 and income from operations of $1,221,000 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 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.
In February 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.
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 $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.
1997 vs. 1996
Net sales for the year ended June 30, 1997 decreased to $61,470,000 from
$84,115,000 in the comparable period in 1996, a decrease of 26.9%. The decrease
in sales resulted primarily from the elimination of the men's work and leisure
shirt division and lower sales in the intimate apparel division of approximately
$17,498,000 and $4,746,000, respectively. The lower sales in the intimate
apparel division resulted primarily from the weak retail demand for certain of
the Company's products and the Company's efforts to eliminate low margin
business. The Company does not intend to directly replace the reduction in sales
resulting from the elimination of the men's work and leisure shirt division. Net
sales for the Company's retail division, Movie Star Factory Stores, increased
$458,000 to $10,229,000 for the year ended June 30, 1997 as compared to the
comparable period in 1996.
II-5
<PAGE>
The gross profit percentage increased to 26.9% for the year ended June 30, 1997
from 20.4% in the similar period in 1996. The increase was due primarily to the
elimination of the low margin men's work and leisure shirt division, which had
an 11.2% gross margin in 1996. The gross margin in the Company's intimate
apparel product lines increased to 24.9% in 1997 from 20.6% in the similar
period in 1996. The higher margins resulted primarily from the Company's
refocused efforts to increase margins and to address all components of its
finished goods costs, including the countries in which goods are manufactured,
the sources of its piece goods and the overall management of its costs. The
Movie Star Factory Stores gross margin increased to 35.7% for 1997 as compared
to 34.4% in the similar period in 1996. The higher margins in the Movie Star
Factory Stores resulted from changes in buying practices, an expanded product
line and lower markdowns.
During fiscal 1997, the Company shifted a portion of its production from the
Caribbean, Central America and the Far East to manufacturers located in close
proximity to Mexico City, Mexico. This shift allows the Company to take
advantage of lower duty rates that result from the North American Free Trade
Agreement and the availability of piece goods in Mexico. The proximity of the
Mexican based contractors also enables the Company's senior management to more
easily monitor the production of these products. The Company has one full-time
employee located in Mexico and is relocating another full-time employee to
Mexico to monitor the production of its products. The Company intends to
increase its production in Mexico and to hire additional personnel, located in
Mexico, to monitor its production.
At the end of fiscal 1996 and into the second quarter of fiscal 1997, the
Company continued to encounter problems with its imported finished goods. In
certain instances, after taking delivery of the goods, the Company was required
to correct manufacturing defects before shipping the merchandise to one of the
Company's customers. Although no loss of sales was attributable to the poor
quality merchandise, the Company incurred costs of approximately $400,000
associated with correcting the quality problems which had a negative impact on
the financial results for fiscal 1997. In fiscal 1997, the Company replaced the
senior personnel responsible for its import department and hired two employees
located in the Far East to supervise the production of its products. In
addition, the Company is now purchasing its products from different
manufacturers than it has in the past.
Selling, general and administrative expenses decreased by $3,809,000 to
$13,718,000 for the year ended June 30, 1997 as compared to 1996. This decrease
was primarily due to the Company's consolidation and realignment of its
operations and lower sales volume. Specifically, the decrease resulted from
reductions in salary expense and salary related costs of approximately
$1,518,000, sales related expenses of approximately $226,000 and rent expense of
approximately $1,322,000, along with decreases in other general overhead
expenses. The Company also had a more favorable than expected recovery of bad
debts of approximately $447,000. This allowance recovery of bad debt resulted
primarily from one customer that resolved its bankruptcy much faster and much
more favorably than the Company had anticipated.
In September 1996, the Company purchased $1,320,000 in principal amount of its
12.875% subordinated debentures to meet a sinking fund payment due in October
1996. As a result of the transaction, the Company recorded a gain of $560,000,
net of related costs, in the first quarter of fiscal 1997.
In fiscal 1996, the Company abandoned two floors of its New York City offices in
connection with the Company's consolidation and realignment of its operations.
The Company provided a reserve of $900,000 for estimated costs in connection
with the abandonment of the two floors, and wrote-off the net remaining book
value of related leasehold improvements of $270,000. In August of 1996, the
Company terminated and settled its remaining leasehold obligations with respect
to the aforementioned abandoned floors for $800,000.
II-6
<PAGE>
Interest expense for the year ended June 30, 1997 decreased by $1,112,000 from
the comparable period in 1996 due to lower borrowings coupled with the effect of
the negotiated lower rate of interest on a portion of the Company's long-term
debt.
An income tax provision of $65,000 was provided for by the Company for the year
ended June 30, 1997 as compared to an income tax benefit of $90,000 for the year
ended June 30, 1996.
The Company had net income of $519,000 for the year ended June 30, 1997 as
compared to a net loss of $5,278,000 for the same period in 1996. This
improvement was due to higher margins, lower selling, general and administrative
expenses, lower interest costs, a gain on the Company's purchase of its
subordinated debentures and one time charges taken in the prior year.
Liquidity and Capital Resources
For the year ended June 30, 1998, the Company's working capital increased by
$1,280,000 to $19,916,000, 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, 1998, cash decreased by $2,489,000. The
Company used $2,590,000 in its operations, $191,000 for the purchase of fixed
assets and $1,155,000 for the repayment and purchases of long-term debt. These
activities were principally funded by cash generated by profitable operations,
an increase in short-term borrowings of $328,000 and from the proceeds of the
sale of certain non-operating assets aggregating $1,119,000.
Receivables at June 30, 1998 increased by $2,183,000 to $6,330,000 from
$4,147,000 at June 30, 1997. This increase is primarily due to orders, for the
Company's intimate apparel division, being shipped later in fiscal 1998 as
compared to the prior year.
Inventory at June 30, 1998 increased by $4,307,000 to $20,945,000 from
$16,638,000 at June 30, 1997. This increase is primarily the result of the
Company's lingerie division increasing the level of its raw material inventory
due to the increase in orders the Company has received for the upcoming fall
season and the Company's retail division buying goods earlier than they have in
the past in order to take advantage of buying opportunities that existed.
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.
In October 1996, the Company consummated an agreement with holders of
$10,187,000 of the Company's outstanding 12.875% unsecured subordinated
debentures ("Restructured Bonds"). The holders of the Restructured Bonds
exchanged such bonds for the issuance of an equivalent principal amount of a new
series of notes bearing interest at a rate of 8% per annum, payable
semi-annually (April 1 and October 1) which are senior to the 12.875% debentures
("New Senior Notes"). Additionally, the holders of the Restructured Bonds
deferred the receipt of interest due April 1, 1996 (approximately $656,000) and
October 1, 1996 (approximately $434,000). The Company paid the interest due on
the remaining 12.875% debentures. The holders of the Restructured Bonds have
also accepted New Senior Notes in payment of the April 1,1996 and October 1,
1996 deferred interest related to the Restructured Bonds. The aggregate
principal amount of the New Senior Notes approximated $11,276,500. The New
Senior Notes do not provide for any amortization of principal and mature on
September 1, 2001. The aggregate principal indebtedness of the New Senior Notes
and the 12.875% subordinated debentures after the exchange was approximately
$22,209,000.
II-7
<PAGE>
The New Senior Notes carried the right to convert $715,500 of the notes into
1,908,000 shares of the Company's common stock at a price of $0.375 per share.
In addition, the holders of the New Senior Notes have the right to designate a
representative to attend all meetings of the Company's Board of Directors and
Compensation Committee.
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. 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 Notes or 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 the Company's 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.
In February 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.
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.
As a result of the above exchange in which the Company acquired $10,187,000 in
principal amount of its 12.875% subordinated debentures and its purchases of an
additional $4,826,000 in principal amount of these debentures, the Company has
satisfied or will be able to satisfy its sinking fund requirement through
October 1999.
II-8
<PAGE>
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% abaove the prime rate
of Chase Manhattan Bank in fiscal 1998 and 2.0% above the prime rate in fiscal
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. This credit facility
replaced the financing agreements that the Company had with two banks.
Management believes its available borrowing under its secured revolving line of
credit, along with anticipated internally generated funds, will be sufficient to
cover its working capital requirements.
The Company does not anticipate making any additional purchases of its stock and
anticipates that capital expenditures for fiscal 1999 will be less than
$700,000.
Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
The statement requires that public enterprises report certain information about
operating segments in complete sets of financial statements of an enterprise and
in condensed financial statements of interim periods issued to stockholders. It
also requires that public enterprises report certain information about their
products and services, geographic areas in which they operate, and major
customers.
The Company is required to adopt SFAS No. 131 in fiscal 1999 and the Company's
consolidated financial statements will reflect the appropriate disclosures.
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 commenced a comprehensive program consisting of identifying,
assessing and, if necessary, upgrading and/or replacing its systems and
equipment that may be vulnerable to year 2000 problems. The first stage of this
program, identifying the systems and equipment, has been substantially
completed. The Company has prioritized the identified items as either critical
or non-critical to the operations of the Company. The Company has made
substantial progress through the second and third stages of this program,
assessing and upgrading and/or replacing the equipment it has deemed to be
non-compliant. The Company is also in the beginning stage of developing a plan
to test its entire system for year 2000 compliance. The Company believes that it
will have completed all of its necessary upgrades and/or replacements and the
testing of its systems by April 1999.
II-9
<PAGE>
Third party relationships
The Company is in the beginning stages of developing a plan to formally
communicate 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. There can be no assurance, however, 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. The Company believes that by February 1999 it will
complete its assessment of the status of its customers' and suppliers'
compliance with year 2000 issues.
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 in the early stages of developing these plans and
believes that it will be able to fully determine its worst case scenarios by
April 1999. 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 does not expect the additional cost to exceed $250,000. Although the Company
is not aware of any 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 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-10
<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-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-11
<PAGE>
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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1998 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 15, 1998
New York, New York
F-1
<PAGE>
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
ASSETS 1998 1997
---------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 546 $ 3,035
Receivables 6,330 4,147
Inventory 20,945 16,638
Deferred income taxes 2,200 2,291
Prepaid expenses and other current assets 456 205
--------- ---------
Total current assets 30,477 26,316
PROPERTY, PLANT AND EQUIPMENT - Net 3,551 4,262
OTHER ASSETS 906 1,661
DEFERRED INCOME TAXES 1,809 1,718
--------- ---------
TOTAL ASSETS $36,743 $ 33,957
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 328 $ -
Current maturities of long-term debt and capital lease obligations 40 73
Accounts payable 7,234 4,987
Accrued expenses and other current liabilities 2,959 2,620
--------- ---------
Total current liabilities 10,561 7,680
--------- ---------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 20,980 22,336
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES - -
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - authorized, 30,000,000 shares;
issued 16,134,000 shares in 1998 and 15,977,000 shares in 1997 161 160
Additional paid-in capital 3,789 3,731
Retained earnings 4,870 3,668
--------- ---------
8,820 7,559
Less treasury stock, at cost - 2,017,000 shares 3,618 3,618
--------- ---------
Total stockholders' equity 5,202 3,941
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,743 $ 33,957
========= =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES $64,537 $61,470 $84,115
COST OF SALES 45,777 44,947 66,993
-------- ------- -------
GROSS PROFIT 18,760 16,523 17,122
OPERATING EXPENSES:
Selling, general and administrative expenses 15,076 13,718 17,527
Loss on abandonment of leased premises - - 1,070
-------- ------- --------
INCOME (LOSS) FROM OPERATIONS 3,684 2,805 (1,475)
GAIN ON PURCHASES OF SUBORDINATED DEBENTURES
AND SENIOR NOTES (157) (560) -
INTEREST EXPENSE 2,623 2,781 3,893
-------- ------- --------
INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES 1,218 584 (5,368)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 16 65 (90)
-------- ------- ---------
NET INCOME (LOSS) $ 1,202 $ 519 $(5,278)
======== ======= =========
BASIC NET INCOME (LOSS) PER SHARE $.09 $.04 $(.38)
==== ==== ====
DILUTED NET INCOME (LOSS) PER SHARE $.08 $.04 $(.38)
==== ==== =====
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 14,049 13,960 13,960
====== ====== ======
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 15,161 15,868 13,960
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(In Thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount Total
------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 15,977 $160 $3,731 $8,427 2,017 $(3,618) $8,700
Net loss - - - (5,278) - - (5,278)
-------- ------- -------- -------- ------- --------- -------
BALANCE, JUNE 30, 1996 15,977 160 3,731 3,149 2,017 (3,618) $3,422
Net income - - - 519 - - 519
-------- ------- -------- -------- ------- --------- -------
BALANCE, JUNE 30, 1997 15,977 160 3,731 3,668 2,017 (3,618) 3,941
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
====== ===== ======= ====== ======== ======= ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,202 $ 519 $(5,278)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 582 698 952
Gain on purchases of subordinated debentures and senior notes (157) (560) -
Loss on disposal of property, plant and equipment 4 35 309
(Increase) decrease in operating assets:
Receivables (2,183) 3,268 1,374
Inventory (4,307) (2,391) 21,838
Prepaid expenses and other current assets (251) (97) 273
Other assets (66) 215 152
Increase (decrease) in operating liabilities:
Accounts payable 2,247 (490) (1,462)
Accrued expenses and other current liabilities 339 503 (81)
---------- ------ -------
Net cash (used in) provided by operating activities (2,590) 1,700 18,077
---------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (191) (133) (233)
Proceeds from sale of property and equipment 500 - 771
Proceeds from sale of other assets (interest in building) 619 - -
---------- ------ ------
Net cash provided by (used in) investing activities 928 (133) 538
---------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on and purchases of long-term debt and
capital lease obligations (1,155) (815) (52)
Payment of deferred financing cost - - (580)
Net proceeds (repayment) of revolving line of credit 328 - (15,803)
-------- ----- -------
Net cash used in financing activities (827) (815) (16,435)
-------- ----- -------
NET (DECREASE) INCREASE IN CASH (2,489) 752 2,180
CASH, BEGINNING OF YEAR 3,035 2,283 103
-------- ------ --------
CASH, END OF YEAR $ 546 $ 3,035 $ 2,283
======== ======= ========
</TABLE>
(Continued)
F-5
<PAGE>
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during year for:
Interest $ 2,544 $ 2,256 $ 4,025
======= ======== ========
Income taxes, net of refunds $ 13 $ 61 $ (364)
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES:
Acquisition of equipment through assumption of capital
lease obligation $ - $ 139 $ 82
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Conversion of long-term debt for common stock $ (59) $ - $ -
Issuance of common stock 59 - -
Exchange of long-term debt - - 10,187
Exchange of long-term debt - - (10,187)
---------- -------- --------
$ - $ - $ -
========== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH
ACTIVITIES:
Increase in long-term debt for interest paid in kind $ - $ 217 $ 873
Decrease in accrued liabilities for interest paid in kind - (217) (873)
---------- --------- ---------
$ - $ - $ -
========== ========= =========
</TABLE>
(Concluded)
See notes to consolidated financial statements.
F-6
<PAGE>
MOVIE STAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Movie Star, Inc. and its subsidiaries (the "Company") is a
New York corporation organized in 1935, which designs, manufactures,
markets and sells an extensive line of ladies' sleepwear, robes,
leisurewear, loungewear, panties and daywear; and also operates 28
retail outlet stores.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, and the reported amounts of revenues and
expenses during the reporting period. The preparation of financial
statements in conformity with generally accepted accounting principles
also requires management to make estimates and assumptions that affect
the disclosures of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
Inventory - Inventory is valued at lower of cost (first-in, first-out)
or market.
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Depreciation and amortization are provided by the straight-line
method over the following estimated useful lives:
Buildings and improvements 15 - 30 years
Machinery & Equipment 5 years
Office furniture and equipment 5 years
Leasehold improvements Lesser of life of the
asset or life of lease
Revenue Recognition - Revenue is recognized upon shipment. Although
sales are made without the right of return, in certain instances, the
Company may accept returns or agree to allowances. Allowances for sales
returns are recorded as a component of net sales in the period in which
the related sales are recognized.
Income Taxes - The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" (see Note 9).
Net Income (Loss) Per Share - During the second quarter of fiscal 1998,
the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share," as required. The Company has restated all
previously recorded net income (loss) per share for all periods
presented.
Deferred Costs - Deferred financing costs are amortized over the life of
the debt using the straight-line method.
Recently Issued Accounting Standard - 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 stockholders. 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.
F-7
<PAGE>
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,
1998 1997
---------------------
(In Thousands)
Raw materials $ 8,762 $ 5,503
Work-in-process 2,431 2,806
Finished goods 9,752 8,329
--------- --------
$ 20,945 $ 16,638
========= ========
3. RECEIVABLES
Receivables are comprised of the
following:
June 30,
1998 1997
-------------------
(In Thousands)
Trade $ 7,666 $ 5,171
Other - 214
-------- ---------
7,666 5,385
Less allowance for doubtful
accounts (1,336) (1,238)
-------- ---------
$ 6,330 $ 4,147
========= =========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
June 30,
1998 1997
--------------------
(In Thousands)
Land, buildings and improvements $ 6,233 $ 7,875
Machinery and equipment 478 591
Office furniture and equipment 907 1,534
Leasehold improvements 187 861
--------- ---------
7,805 10,861
Less accumulated depreciation and
amortization (4,254) (6,599)
--------- --------
$ 3,551 $ 4,262
========= =========
F-8
<PAGE>
The Company held for sale or lease certain property, plant and equipment
with a net book value of approximately $518,000 and $587,000 at June 30,
1998 and 1997, respectively.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities
are comprised of the following:
June 30,
1998 1997
--------------------
(In Thousands)
Interest $ 540 $ 578
Insurance 910 1,002
Salary, commissions and employee
benefits 964 399
Other 545 641
------- -------
$ 2,959 $ 2,620
======= =======
6. NOTES PAYABLE
On April 24, 1996, the Company entered into a line of credit agreement
with a financial institution expiring on June 30, 1999. 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 2.5 percent above the
prime rate through June 30, 1998 and 2 percent above the prime rate
commencing in fiscal 1999. The Company paid a facility fee of
approximately $77,000 in fiscal 1998 and is obligated to pay up to a
maximum of $67,500 in fiscal 1999.
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, 1998. Furthermore, the Company is prohibited from paying
dividends or incurring additional indebtedness, as defined, outside the
normal course of business.
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.
At June 30, 1997, the Company had no borrowings outstanding under this
line of credit and had approximately $2,948,000 of outstanding letters
of credit. Additionally, the Company had a cash balance of approximately
$2,683,000 deposited with the lender, which earned interest at 5.25
percent at June 30, 1997.
F-9
<PAGE>
7. LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
1998 1997
--------------------
(In Thousands)
12.875% Subordinated Debentures $ 9,987 $10,943
8% Senior Notes 10,550 10,550
8% Senior Convertible Notes 356 716
Capital Lease Obligations 127 200
-------- -------
21,020 22,409
Less current portion 40 73
-------- -------
Long-term debt $ 20,980 $22,336
======== =======
12.875% Subordinated Debentures - On October 10, 1986, the Company sold
$25,000,000 of 12.875% Subordinated Debentures due October 1, 2001 (the
"Debentures"). Interest payments on the outstanding Debentures are due
semi-annually on October 1 and April 1. The Debentures are redeemable,
in whole or in part, at the option of the Company, at any time, and are
subordinated to all senior debt (as defined). The Debentures contain
covenants with respect to limitations on dividends and stock purchases.
At June 30, 1998, the Company is prohibited from paying dividends and
making stock purchases.
Annual sinking fund payments of $3,750,000 are required commencing
October 1, 1996. However, required payments in any year may be reduced
by Debentures previously purchased by the Company. At June 30, 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 by
these Debentures.
8% Senior Notes - In April 1996, the Company reached an agreement with
holders of $10,187,000 of the Company's outstanding 12.875% Debentures.
The holders of these Debentures agreed to exchange such Debentures for
the equivalent principal amount of a new series of notes ("Senior
Notes") bearing interest at a rate of 8 percent per annum, payable
semi-annually (April 1 and October 1) which will be senior to the
remaining outstanding Debentures. Additionally, these Debenture holders
agreed to defer the receipt of interest due April 1, 1996 (approximately
$656,000) and due October 1, 1996 (approximately $434,000) and to accept
Senior Notes in exchange for such deferred interest. The Senior Notes
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.
The debt exchange closed on October 15, 1996, but became effective
retroactively as of April 1, 1996, the date of the deferral of interest
on the 12.875% Debentures. In connection with the debt exchange, the
Company incurred certain costs, which have been capitalized and will be
amortized over the life of the Senior Notes using the straight-line
method. The Senior Notes contain covenants with respect to limitations
on dividends and stock purposes. At June 30, 1998, the Company is
prohibited from paying dividends and making stock purchases.
F-10
<PAGE>
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 Notes purchased by the affiliates entitle the holders to
convert the principal amount into approximately 743,000 shares of the
Company's common stock. The purchasing affiliates have agreed to
convert the Notes no later than March 31, 1999 and 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 right 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, 1998, including current
maturities, are as follows (in thousands):
Year Amount
1999 $ 40
2000 28
2001 3,767
2002 (9/1/01) 10,906
2002 (10/1/01) 6,279
---------
$21,020
=========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and
appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated
fair value amounts.
F-11
<PAGE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------
1998 1997
------------------------------- --------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
Long-Term Debt and Capital
Lease Obligations $21,020 $17,389 $22,409 $17,079
</TABLE>
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, 1998 and 1997.
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:
<TABLE>
<CAPTION>
June 30,
1998 1997
--------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property,
plant and equipment $ 529 $ 346
Difference between book and tax basis of gain on sale
of property, plant and equipment - 336
------- ------
529 682
------- ------
Deferred tax assets:
Difference between book and tax basis of inventory 293 368
Reserves not currently deductible 1,812 1,756
Operating loss carryforwards 4,571 4,548
Difference between book and tax basis of senior notes 1,556 2,003
Other 81 167
------- ------
8,313 8,842
------- ------
Valuation allowance 3,775 4,151
------- ------
Net deferred tax asset $4,009 $4,009
======== ======
</TABLE>
F-12
<PAGE>
The provision for income taxes is comprised as follows:
Year Ended June 30,
1998 1997 1996
-------------------------
(In Thousands)
Current:
Federal $(2) $ 65 $ -
State and local 18 - (90)
Deferred - - -
---- ------ -------
$16 $ 65 $ (90)
==== ====== =======
Reconciliation of the U.S. statutory rate with the Company's effective
tax rate is summarized as follows:
Year Ended June 30,
1998 1997 1996
-------------------------
(In Thousands)
Federal statutory rate 34.0% 34.0% (34.0)%
Increase (decrease) in
tax resulting from:
Valuation allowance (42.1) (41.5) 38.9
State income taxes (net of
Federal tax benefits) 6.0 6.0 (6.0)
Other 1.4 1.5 (.6)
Alternative minimum tax 2.0 11.1 -
------ ----- -------
Effective rate 1.3% 11.1% (1.7)%
====== ===== =======
As of June 30, 1998, the Company has net operating loss carryforwards of
approximately $11,429,000 for income tax purposes that expire between
the years 2002 and 2010.
10. LEASES
The Company has operating leases expiring in various years through the
year 2001, which include, in addition to fixed rentals, escalation
clauses that require the Company to pay a percentage of increases in
occupancy expenses.
Future minimum payments under these leases at June 30, 1998 are as
follows (in thousands):
Year Amount
---- -------
1999 $ 499
2000 459
2001 338
-------
Total $ 1,296
=========
F-13
<PAGE>
Loss on Abandonment of Leased Premises - During 1996, the Company
vacated two floors, separately leased to the Company, and combined its
operation into an existing floor leased by the Company in the same
building. The Company terminated and settled its lease obligations for
the vacated floors for $800,000 and wrote-off the remaining net book
value of related leasehold improvements of $270,000.
Rental expense for 1998, 1997 and 1996 was approximately $764,000,
$787,000 and $1,471,000, respectively. Rental expense for 1996
excludes the $800,000 lease settlement.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company's customers are not concentrated in any specific
geographic region but are concentrated in the retail industry. One
customer accounted for 20, 17, and 5 percent of the Company's net sales
in fiscal 1998, 1997 and 1996, respectively. Another customer accounted
for 11, 12, and 25 percent of the Company's net sales in fiscal 1998,
1997 and 1996, respectively. Additionally, another customer accounted
for 8, 11, and 8 percent of the Company's net sales in fiscal 1998, 1997
and 1996, respectively. The Company performs ongoing credit evaluations
of its customers' financial condition. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends and other
information.
12. STOCK PLANS, OPTIONS AND WARRANT
Employee Stock Ownership Plan - The Company has an Employee Stock
Ownership and Capital Accumulation Plan and Trust covering substantially
all of its employees, pursuant to which it can elect to make
contributions to the Trust in such amounts as may be determined by the
Board of Directors. No contributions were made for the years ended June
30, 1998 and 1997.
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, 1998. This plan expired by its terms on June 30, 1993, but 5,000
previous grants remained outstanding at June 30, 1998, of which 3,850
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 350,000 shares at an exercise price of $.625 per
share are outstanding and exercisable at June 30, 1998. All options
granted are presently exercisable.
The Company has also granted, in fiscal 1989, nonqualified options to
certain nonemployee sales representatives to purchase an aggregate of
133,000 shares at an exercise price of $2.36. These options expire on
December 12, 1998.
F-14
<PAGE>
Statement of Financial Accounting Standards No. 123, "Accounting
Stock-Based Compensation" was effective for the Company for fiscal 1997.
SFAS No. 123 encourages (but does not require) compensation expense to
be measured based on the fair value of the equity instrument awarded. In
accordance with APB No. 25, no compensation cost has been recognized in
the Consolidated Statements of Operations for the Company's stock option
plans. If compensation cost for the Company's stock option plans had
been determined in accordance with the fair value method prescribed by
SFAS No. 123, the Company's net income (loss) would have been $858,000,
$183,000 and $(5,461,000) for 1998, 1997 and 1996, respectively. Basic
net income (loss) per share would have been $.06, $.02, and $(.39) for
1998, 1997 and 1996, respectively and diluted net income (loss) per
share would have been $.06, $.01 and $(.39) for 1998, 1997 and 1996,
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):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
FIXED OPTIONS Shares Price Shares Price Shares Price
-------------------------------- -------- --------- -------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 2,053 $ .76 1,701 $1.43 2,026 $ 1.43
Granted 200 .72 1,845 .63 - -
Exercised - - - - - -
Canceled - - (1,493) 1.36 ( 325) 1.42
--------- --------- ------ ----- -------- --------
Outstanding - end of year 2,253 $ .75 2,053 $ .76 1,701 $1.43
======== ====== ====== ===== ======== =======
Exercisable - end of year 996 $ .88 708 $ .94 850 $1.69
======== ====== ====== ===== ======= =======
Weighted-average fair value of
options granted during the year $ .64 $ .58 $ .-
====== ====== ======
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1998 (options in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------- ---------------------------------
Weighted-Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding at Contractual Average Exercisable at Average
Exercise Prices June 30, 1998 Life (Yrs) Exercise Price June 30, 1998 Exercise Price
--------------- ----------------- ------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$.625 - $2.363 2,253 8.1 $.75 996 $.88
</TABLE>
The fair value of each option-pricing model with the following
weighted average assumptions used for grants in 1998 and 1997,
respectively; risk-free interest rate 5.7% and 6.4%; expected life 7
years and 7 years; expected volatility of 115.9% and 126.3%. 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
<PAGE>
Warrant - In August 1993, in connection with an agreement with a
financial consulting firm, the Company granted a warrant to purchase
30,000 shares of its common stock at $1.69 per share to the
consultants. The warrant is exercisable at anytime 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 or S-8, under
the Securities Act of 1933, as amended. No expense related to such
warrant was recorded since it was not material.
13. 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>
Year Ended June 30,
1998 1997 1996
------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Basic Net Income (Loss) Per Share:
Net Income (Loss) to Common Stockholders $ 1,202 $ 519 $(5,278)
Basic Weighted Average Shares Outstanding 14,049 13,960 13,960
Basic Net Income (Loss) Per Share $.09 $.04 $(.38)
======== ========= =======
Diluted Net Income (Loss) Per Share:
Net Income (Loss) to Common Stockholders $ 1,202 $ 519 $(5,278)
Plus: Interest Expense on 8% Convertible Senior Notes 40 57 (a)
--------- --------- ----------
Adjusted Net Income (Loss) $ 1,242 $ 576 $(5,278)
======== ========= ==========
Basic Weighted Average Shares Outstanding 14,049 13,960 13,960
Plus: Shares Issuable Upon Conversion of
8% Convertible Senior Notes 1,112 1,908 (a)
======== ========= ==========
Diluted Weighted Average Shares Outstanding 15,161 15,868 13,960
======== ========= ==========
Diluted Net Income (Loss) Per Share $.08 $.04 $(.38)
======== ========= ==========
</TABLE>
(a) These dilutive securities have been excluded because their effect,
if included, would have been antidilutive.
All shares of potential exercisable stock options are not included in
the Diluted Net Income Per Share calculation because they are
considered antidilutive.
F-16
<PAGE>
14. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Quarter
First Second Third Fourth
------------------------------------------
(In Thousands, Except Per Share)
<S> <C> <C> <C> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
Quarter
First Second Third Fourth
------------------------------------------
(In Thousands, Except Per Share)
<S> <C> <C> <C> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
Quarter
First Second Third Fourth
------------------------------------------
(In Thousands, Except Per Share)
<S> <C> <C> <C> <C>
Year Ended June 30, 1996
Net sales $24,927 $32,721 $12,408 $14,059
Gross profit 4,770 6,215 2,775 3,362
Net loss (1,103) (1,217)(a) (1,938) (1,020)
Basic net income (loss) per share (.08) (.09) (.14) (.07)
Dilutive net income (loss) per share (.08) (.09) (.14) (.07)
</TABLE>
(a) Amount includes an estimated loss of $1,170,000 associated
with the abandonment of leased premises.
* * * * * *
F-17
<PAGE>
Schedule II
MOVIE STAR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
------------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
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
======= ======= ======== =======
FISCAL YEAR ENDED JUNE 30, 1996:
Allowance for doubtful accounts $ 1,208 $ 769 $ (21) (a) $ 1,956
Allowance for sales allowances 660 2,237 (2,237) 660
------- ------ -------- -------
$ 1,868 $3,006 $(2,258) $ 2,616
======== ====== ======= =======
</TABLE>
(a) Uncollectible accounts written off.
S-1
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
II-12
<PAGE>
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
Director Since Name Age Position
- --------------- --------------- --- -------------
<S> <C> <C> <C>
1981 Mark M. David 51 Chairman of the Board,
Chief Executive Officer and Director
1997 Melvyn Knigin 55 President, Chief Operating Officer
and Director
1983 Saul Pomerantz 49 Executive Vice President, Chief
Financial Officer, Secretary
and Director
1996 Gary W. Krat 50 Director
1996 Joel M. Simon 53 Director
</TABLE>
Mark M. David was re-elected Chairman of the Board and Chief Executive Officer
on November 20, 1997. On August 14, 1995, Mr. David relinquished the position of
Chief Executive Officer, but remained as Chairman of the Board. He had been
Chairman of the Board and Chief Executive Officer since December 1985, President
from April 1983 to December 1987 and Chief Operating Officer of the Company
since the merger with Stardust Inc. in 1981 until December 1987. Prior to the
merger, he was founder, Executive Vice President and Chief Operating Officer of
Sanmark Industries Inc. In April 1996, Mr. David resumed his duties as Chief
Executive Officer.
Melvyn Knigin was elected to the Board of Directors on November 20, 1997. 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 November 20, 1997.
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 has been Chief Financial Officer since
1982 and Secretary of the Company since 1983.
Gary W. Krat was re-elected to the Board of Directors on November 20, 1997. 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
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 November 20, 1997. Mr.
Simon is the President and Chief Executive Officer of Starret Corporation, a
real estate construction, development and management company. From 1996 to 1998,
Mr. Simon was 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
III-1
<PAGE>
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").
The salaries of Mark M. David, the Chairman and Chief Executive Officer; Melvyn
Knigin, the President and Chief Operating Officer; and, Saul Pomerantz, the
Executive Vice President and Chief Financial Officer, were increased for fiscal
year 1998. The salaries of Messrs. Knigin and Pomerantz were also increased for
fiscal year 1999. Mr. David's salary was not increased for fiscal year 1999.
Compensation Policies
In determining the appropriate levels of executive compensation for fiscal year
1998, the Committee based its decisions on (1) the Company's improved financial
condition, (2) the Company's ability 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.
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 does 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.
III-2
<PAGE>
The current senior executives of the Company have been associated with the
Company in senior management positions for periods ranging from fourteen to more
than twenty-five years. They have been primarily responsible for the formulation
and implementation of the Company's recent financial and operational
restructuring and provide the Company with a broad range of management skills
which are considered by the Committee to be an essential source of stability and
a base for the Company's future growth.
Stock Option Grants
In 1983, the Company adopted an Incentive Stock Option Plan (the "ISOP") to
provide a vehicle to supplement the base salary compensation paid to key
employees. All of the Company's senior executives were eligible to receive
grants under the ISOP. Options under the ISOP were granted at fair market value
at the date of grant. In the past, the Committee has recommended and the Board
of Directors has granted options under the ISOP to each of the senior
executives, except the Chairman of the Board. Mark M. David has not received
options under the ISOP because his ownership of shares of the Company exceeds
10% of the outstanding shares of the Company. The options granted under the ISOP
were exercisable at a rate of 11% per year for the first eight years of service
after grant and 12% for the ninth year after grant. No options have been granted
to the Company's senior executives under the ISOP since 1986 and no further
options may be granted under the ISOP. The 1983 ISOP has expired.
On July 15, 1994, the Committee adopted a new Incentive Stock Option Plan (the
"1994 ISOP") to replace the expired 1983 ISOP. All of the Company's management
and administrative employees are eligible to receive grants under the 1994 ISOP.
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 1988, the Committee recommended and the Board of
Directors approved the grant of options under the non-qualified option plan to
all of the Company's then executive officers. Mark David is the only current
executive officer of the Company who retains any options granted under the 1988
Nonqualified Plan.
In January 1997, Messrs. Simon and Krat, the independent Directors serving on
the Committee, recommended that the Company grant new options to Mark David
under the 1988 Non-qualified Plan at a price equal to the market price for the
Company's shares on the date of the grant. As a condition to the grant of new
options to Mr. David under the 1988 Non-qualified Plan, the Committee required
Mr. David to surrender for cancellation any interest in options granted to him
prior to January 29, 1997.
Also in January 1997, the independent directors serving on the Committee
recommended that the Company grant new options under the 1994 ISOP to Saul
Pomerantz and Melvyn Knigin at a price equal to the market price for the
Company's shares on the date of the grant. The grant of new options to Messrs.
Pomerantz and Knigin was also subject to the condition that they surrender for
cancellation any interest in options granted to them prior to January 29, 1997.
III-3
<PAGE>
Compensation of the Chief Executive Officer
For fiscal year 1998, the annual base salary paid to Mark M. David, the
Company's Chairman of the Board and Chief Executive Officer, was increased from
$275,000 to $335,000. The Committee believed it was appropriate to recognize Mr.
David's contribution to the Company's improved performance in fiscal year 1997
and the anticipated continuation of that improvement in fiscal 1998 by
increasing Mr. David's base salary by approximately the same percentage as the
increases granted to other senior executives.
Compensation Committee Interlocks and Insider Participation
Other than the Company's Chairman of the Board, there are no Compensation
Committee interlocks or insider participation. Mr. David did not participate in
the Committee's determinations of compensation for fiscal year 1998 or fiscal
year 1999.
Mark M. David
Gary W. Krat
Joel M. Simon
III-4
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG TERM COMPENSATION
---------------- ------------------------
NAME AND PRINCIPAL RESTRICTED ALL OTHER
POSITION FISCAL STOCK OPTIONS COMPENSATION
YEAR SALARY ($) AWARDS($) (# SHARES)
---- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Mark M. David 1998 335,000 _ 350,000(1) 8,145(3)
Chairman of the Board and 1997 275,000 _ 350,000(1) 8,145(3)
Chief Executive 1996 275,000 _ 333,333(2) 8,145(3)
Officer of the Company
Melvyn Knigin 1998 350,000 _ 350,000(4) _
President and Chief Operating 1997 296,660 _ 350,000(4) _
Officer of 1996 291,076 _ 139,844(5) _
the Company; Director
Saul Pomerantz 1998 200,000 _ 350,000(4) _
Executive Vice President and 1997 164,480 _ 350,000(4) _
Chief Financial 1996 145,000 _ 312,467(5) _
Officer of the
Company; Director
</TABLE>
(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").
(2) As a condition to the grant of new options, Mr. David was required to
surrender all outstanding options previously granted to him on October 17,
1988.
(3) Represents annual premiums paid by the Company for a split dollar form of
life insurance policy on the life of Mark M. David.
(4) Represents options to purchase 350,000 shares of Common Stock granted
January 29, 1997 under the 1994 Incentive Stock Option Plan (the "1994
Plan").
(5) As a condition to the grant of new options under the 1994 Plan, each
recipient was required to surrender all of outstanding options previously
granted to him on July 15, 1994. The exercise prices of the surrendered
options were higher than the exercise price of options granted under the
1994 Plan.
III-5
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AS OF AUGUST 31, 1998
The following table sets forth certain information as of August 31, 1998
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.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNERSHIP CLASS(1)
- ---------------------------------------- ---------------------- ------------
<S> <C> <C>
Mark M. David 3,559,102(2)(6) 24.6016%
136 Madison Avenue
New York, NY 10016
Republic National 1,110,230 ;Direct 7.8645%
Bank as Trustee for
the Movie Star, Inc.
Employee Stock
Ownership Plan
452 Fifth Avenue
New York, NY 10018
Mrs. Abraham David 1,622,959(3)(7) 11.4965%
8710 Banyan Court
Tamarac, FL 33321
Melvyn Knigin 242,375(4) 1.6880%
136 Madison Avenue
New York, NY 10016
Saul Pomerantz 277,738(5) 1.9328%
136 Madison Avenue
New York, NY 10016
Joel M. Simon 74,166(10) 0.5244%
237 Park Avenue
New York, NY 10017
Gary W. Krat 233,333(11) 1.6282%
733 Third Avenue
New York, NY 10017
Abraham David 25,000 ;Direct(9) 0.1771%
8710 Banyan Court
Tamarac, FL 33321
All directors and officers as a group 6,009,673(2)(4)(5)(8)(10)(11) 39.5338%
(4 persons)
</TABLE>
-----------------
(1) Based upon 14,116,982 shares (excluding 2,016,802 treasury shares)
outstanding and options, where applicable, to purchase shares of Common
Stock, exercisable within 60 days.
III-6
<PAGE>
(2) Includes 58,674 shares owned as custodian for his children, 30,000 shares
owned as custodian for his sisters' children and 26,560 shares owned by his
spouse. Also includes the options granted to him for 350,000 shares, under
the 1988 Non-Qualified Stock Option Plan, exercisable within 60 days.
(3) Includes 606,695 shares owned by Annie David as a trustee for the benefit
of her daughters, Marcia Sussman and Elaine Greenberg and her
grandchildren, Adam David, Evan David, Michael Sussman and David Greenberg.
(4) Represents options granted to Melvyn Knigin for 121,875 shares pursuant to
the 1994 Plan, exercisable within 60 days and 120,000 shares underlying
$45,000 in 8% Senior Convertible Notes.
(5) Includes options granted to Saul Pomerantz for 185,828 shares pursuant to
the 1994 Plan, exercisable within 60 days, 66,666 shares underlying
$25,000 in 8% Senior Convertible Notes; and 244 shares owned by his spouse
and 8,000 shares held jointly with his spouse.
(6) Does not include Mrs. Abraham David's shares for which he holds the proxy.
(7) Mark M. David holds a proxy for these shares.
(8) Includes the shares held by Mrs. Abraham David.
(9) Abraham David is the husband of Annie David and the father of Mark M.
David.
(10) Includes 26,666 shares underlying $10,000 in 8% Senior Convertible Notes.
(11) Includes 213,333 shares underlying $80,000 in 8% Senior Convertible Notes.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE.
III-7
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
Page
<S> <C> <C>
(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, 1998 and 1997 F-2
Consolidated Statements of Operations for the fiscal
years ended June 30, 1998, 1997 and 1996 F-3
Consolidated Statements of Stockholders' Equity for
the fiscal years ended June 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the
fiscal years ended June 30, 1998, 1997 and 1996 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-17
2. Schedule
For the fiscal years ended June 30, 1998, 1997 and 1996:
II - Valuation and Qualifying Accounts S-1
</TABLE>
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
<PAGE>
(a) 3. EXHIBITS
<TABLE>
Exhibit
Number Exhibit Method of Filing
-------- ---------------------- ------------------------
<S> <C> <C>
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.
</TABLE>
IV-2
<PAGE>
<TABLE>
Exhibit
Number Exhibit Method of Filing
-------- ---------------------- ------------------------
<S> <C> <C>
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.
</TABLE>
IV-3
<PAGE>
<TABLE>
Exhibit
Number Exhibit Method of Filing
-------- ---------------------- ------------------------
<S> <C> <C>
10.5.2 Security Agreement dated as Incorporated by reference
of April 24, 1996 between to Form 10-Q for the
Rosenthal & Rosenthal, Inc. quarter ended March 30,
and the Company. 1996 and filed on
May 15, 1996.
10.5.3 Security Agreement - Incorporated by reference
Inventory dated as of April to Form 10-Q for the
24, 1996 between Rosenthal & quarter ended March 30,
Rosenthal, Inc. and the 1996 and filed on
Company. May 15, 1996.
10.5.4 Security Agreement and Incorporated by reference
Mortgage - Trademarks dated to Form 10-Q for the
as of April 24, 1996 between quarter ended March 30,
Rosenthal & Rosenthal, inc. 1996 and filed on
and the Company. May 15, 1996.
10.5.5 Negative Pledge - Real Incorporated by reference
property dated as of April to Form 10-Q for the
24, 1996 between Rosenthal & quarter ended March 30,
Rosenthal, Inc. and the 1996 and filed on
Company. May 15, 1996.
10.5.6 Assignment of Leases, Rents Incorporated by reference
and Security Deposits dated to Form 10-Q for the
as of April 24, 1996 between quarter ended March 30,
Rosenthal & Rosenthal, Inc. 1996 and filed on
and the Company. May 15, 1996.
10.7 1988 Non-Qualified Stock Incorporated by reference
Option Plan. to Form 10-K for fiscal
year ended June 30, 1989
and filed on September 27,
1989.
10.8 License Agreement dated Incorporated by reference
July 26, 1990 between PGH to Form 8 Amendment to
Company, Licensor and Form 10-K for fiscal year
Sanmark-Stardust Inc. ended June 30, 1992 and
Licensee. filed on January 19, 1993.
10.9 License Agreement dated Incorporated by reference
November 14, 1991 between to Form 8 Amendment to
BonJour Group, Ltd., Licensor Form 10-K for fiscal year
and Sanmark-Stardust Inc., ended June 30, 1992 and
Licensee. Filed on January 19, 1993.
</TABLE>
IV-4
<PAGE>
<TABLE>
Exhibit
Number Exhibit Method of Filing
-------- ---------------------- ------------------------
<S> <C> <C>
10.10 Prototype of Contract of Incorporated by reference
Purchase periodically entered to Form 10-K for fiscal
into between the Company year ended June 30, 1993
and Sears Roebuck and and filed on September 18,
Company. 1993.
21 Subsidiaries of the Company. Filed herewith.
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.
</TABLE>
(a) 4. Report on Form 8-K
None.
IV-5
<PAGE>
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, 1998
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.
<TABLE>
<S> <C> <C>
/s/ MARK M. DAVID Chairman of the Board; Chief September 28 , 1998
- ------------------------------- Executive Officer; Director
MARK M. DAVID
/s/ MELVYN KNIGIN President; Chief Operating Officer; September 28 , 1998
- ---------------------- Director
MELVYN KNIGIN
/s/ SAUL POMERANTZ Executive Vice President; September 28 , 1998
- ------------------------------- Secretary & Director;
SAUL POMERANTZ Principal Financial &
Accounting Officer
/s/ GARY W. KRAT Director September 28, 1998
- -------------------------------
GARY W. KRAT
/s JOEL M. SIMON Director September 28 , 1998
- -------------------------------
JOEL M. SIMON
</TABLE>
IV-6
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
21 SUBSIDIARIES OF THE COMPANY
23 INDEPENDENT AUDITORS' CONSENT
27 FINANCIAL DATA SCHEDULE
<PAGE>
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
<PAGE>
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 15, 1998, appearing in the
Annual Report on Form 10-K of Movie Star, Inc. and subsidiaries for the year
ended June 30, 1998.
DELOITTE & TOUCHE LLP
New York, New York
September 24, 1998
<PAGE>
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