SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
X Securities Exchange Act of 1934
- ---
For the quarter ended March 31, 2000
Transition Report Pursuant to Section 13 or 15(d) of the
- --- Securities Exchange Act of 1934
For the transition period from ______________ to _____________
Commission File Number 1-5893
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MOVIE STAR, INC.
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(Exact name of Registrant as specified in its charter)
New York 13-5651322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Madison Avenue, New York, N.Y. 10016
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(Address of principal executive offices) (Zip Code)
(212) 684-3400
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(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No |_|
The number of common shares outstanding on April 28, 2000 was 14,896,977.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
March 31, June 30,
2000 1999*
------------- --------
(Unaudited)
Assets
Current Assets
Cash $ 2,491 $ 4,597
Receivables, net 9,489 6,864
Inventory 11,661 16,460
Prepaid expenses and other current assets 2,218 2,585
------- -------
Total current assets 25,859 30,506
Property, plant and equipment, net 3,256 3,495
Other assets 2,730 2,758
------- -------
Total assets $31,845 $36,759
======= =======
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of capital lease
obligations $ 53 $ 45
Accounts payable and accrued expenses 5,488 7,845
------- -------
Total current liabilities 5,541 7,890
------- -------
Long-term debt and capital lease obligations 15,052 20,703
------- -------
Commitments and Contingencies - -
Stockholders' equity
Common stock, $.01 par value - authorized
30,000,000 shares; issued 16,914,000 shares 169 169
Additional paid-in capital 4,078 4,072
Retained earnings 10,623 7,543
------- -------
14,870 11,784
Less: Treasury stock, at cost - 2,017,000 shares 3,618 3,618
------- --------
Total stockholders' equity 11,252 8,166
------- -------
Total liabilities and stockholders' equity $31,845 $36,759
======= =======
* Derived from audited financial statements.
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- ---------------------
2000 1999 2000 1999
-------- -------- ----- -----
<S> <C> <C> <C> <C>
Net sales $14,487 $14,715 $57,060 $59,462
Cost of sales 9,882 10,334 40,269 42,038
------- ------- ------- -------
Gross profit 4,605 4,381 16,791 17,424
Selling, general and administrative
expenses 4,006 3,637 12,534 11,588
------- ------- ------- -------
Income from operations 599 744 4,257 5,836
Gain on purchases of subordinated debentures - - (164) -
Interest income (33) (56) (53) (59)
Interest expense 384 594 1,481 2,104
------- ------- ------- -------
Income before provision for income taxes
and extraordinary gain 248 206 2,993 3,791
Provision for income taxes 8 4 63 76
------- ------- ------- -------
Income before extraordinary gain 240 202 2,930 3,715
Extraordinary gain on purchases of
subordinated debentures - - (150) -
------- ------- ------- -------
Net income $ 240 $ 202 $ 3,080 $ 3,715
======= ======= ======= =======
BASIC
Income before extraordinary gain per share $.02 $.01 $.20 $.26
Extraordinary gain per share - - .01 -
---- ----- ---- ----
Net income per share $.02 $.01 $.21 $.26
==== ==== ==== ====
DILUTED
Income before extraordinary gain per share $.02 $.01 $.18 $.24
Extraordinary gain per share - - .01 -
---- ---- --- ----
Net income per share $.02 $.01 $.19 $.24
==== ==== ==== ====
Basic weighted average number of shares
outstanding 14,892 14,131 14,884 14,122
======= ====== ------ ======
Diluted weighted average number of shares
outstanding 15,804 16,326 16,041 15,639
====== ====== ====== ======
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
-----------------
2000 1999
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,080 $3,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain on purchases of subordinated
debentures (150) -
Depreciation and amortization 462 428
Gain on purchases of subordinated debentures (164) -
Loss on sale of property, plant and equipment 5 2
(Increase) decrease in operating assets:
Receivables (2,625) (2,781)
Inventory 4,799 7,369
Prepaid expenses and other current assets 367 101
Other assets (95) (28)
Decrease in operating liabilities:
Accounts payable and accrued expenses (2,360) (2,388)
--------- -------
Net cash provided by operating activities 3,319 6,418
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (141) (458)
Proceeds from sale of property, plant and equipment 32 200
--------- -------
Net cash used in investing activities (109) (258)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on and purchases of long-term debt and
capital lease obligations (5,316) (39)
Repayment of revolving line of credit, net - (328)
Issuance of common stock under stock option plan - 7
--------- -------
Net cash used in financing activities (5,316) (360)
--------- -------
NET (DECREASE) INCREASE IN CASH (2,106) 5,800
CASH, beginning of period 4,597 546
--------- -------
CASH, end of period $ 2,491 $ 6,346
========= =======
(Cont'd)
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
-----------------
2000 1999
------- ------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $1,241 $1,495
====== ======
Income taxes (net of refunds received) $ 26 $ 16
====== ======
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Acquisition of equipment through assumption of capital
lease obligation $ 18 $ 56
====== ======
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Conversion of long-term debt for common stock $ (6) $ (278)
Issuance of common stock 6 278
------ ------
$ - $ -
====== ======
(Concluded)
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial
position as of March 31, 2000 and the results of operations for the interim
periods presented and cash flows for the nine months ended March 31, 2000
and 1999, respectively.
The condensed consolidated financial statements and notes are presented as
required by Form 10-Q and do not contain certain information included in
the Company's year-end consolidated financial statements. The year-end
condensed consolidated balance sheet was derived from the Company's audited
financial statements. The results of operations for the three and nine
months ended March 31, 2000 are not necessarily indicative of the results
to be expected for the full year. This Form 10-Q should be read in
conjunction with the Company's consolidated financial statements and notes
included in the 1999 Annual Report on Form 10-K.
2. Certain items included in these statements are based upon estimates. The
cost of sales is determined utilizing estimated gross profit rates. The
calculation of the actual cost of sales is predicated upon a physical
inventory taken at the end of each fiscal year.
An approximate breakdown of the inventory in thousands is as follows:
March 31, June 30,
2000 1999
------- --------
Raw materials $ 2,403 $ 5,513
Work-in process 448 2,121
Finished goods 8,810 8,826
-------- -------
$11,661 $16,460
======= =======
3. During the second quarter ending December 31, 1999, the Company purchased
an aggregate of $2,786,000 in principal amount of its 12.875% subordinated
debentures. With $903,000 of these debentures and in conjunction with
previously acquired debentures, the Company will satisfy its sinking fund
requirement due October 1, 2000. As a result of the purchase of these
$903,000 of debentures, the Company recorded a pre-tax gain of $50,000, net
of related costs. The remaining $1,883,000 of repurchased debentures will
be applied to the final payment due on October 1, 2001. As a result of the
purchase of these $1,883,000 of debentures, the Company recorded an
extraordinary gain of $150,000, net of related costs and income taxes.
4. In the first quarter of fiscal 2000, the Company purchased an aggregate of
$2,834,000 in principal amount of its 12.875% subordinated debentures and
recorded a pre-tax gain of $114,000, net of related costs. The Company will
use these debentures to reduce its mandatory sinking fund requirement due
on October 1, 2000.
<PAGE>
5. Net Income Per Share - The Company's calculation of Basic and Diluted Net
Income Per Share are as follows (in thousands, except per share amounts):
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- ---------------------
2000 1999 2000 1999
---- ----- ---- ----
<S> <C> <C> <C> <C>
Basic Income Before Extraordinary Gain Per Share:
------------------------------------------------
Income Before Extraordinary Gain
to Common Stockholders $ 240 $ 202 $ 2,930 $ 3,715
Basic Weighted Average Shares Outstanding 14,892 14,131 14,884 14,122
Basic Income Before Extraordinary Gain Per Share $.02 $.01 $.20 $.26
==== ==== ==== ====
Diluted Income Before Extraordinary Gain Per Share:
--------------------------------------------------
Income Before Extraordinary Gain
to Common Stockholders $240 $202 $2,930 $ 3,715
Plus: Interest Expense on 8% Convertible Senior Notes 2 - 5 21
---- ---- ------ -------
Adjusted Income Before Extraordinary Gain $242 $202 $2,935 $ 3,736
==== ==== ====== =======
Weighted Average Shares Outstanding 14,892 14,131 14,884 14,122
Plus: Shares Issuable Upon Conversion of
8% Convertible Senior Notes 196 943 204 948
Shares Issuable Upon Conversion of
Stock Options 689 1,252 922 569
Shares Issuable Upon Conversion of Warrants 27 - 31 -
------- ------- ------- ------
Diluted Weighted Average Shares Outstanding 15,804 16,326 16,041 15,639
======= ======= ======= ======
Diluted Income Before Extraordinary Gain Per Share $.02 $.01 $.18 $.24
==== ==== ==== ====
Nine Months Ended
March 31, 2000
------------------
Basic Extraordinary Gain Per Share:
----------------------------------
Extraordinary Gain to Common Stockholders $ 150
Basic Weighted Average Shares Outstanding 14,884
Basic Extraordinary Gain Per Share $.01
====
Diluted Extraordinary Gain Per Share:
------------------------------------
Extraordinary Gain to Common Stockholders $ 150
Plus: Interest Expense on 8% Convertible Senior Notes
-
------
Adjusted Extraordinary Gain $ 150
=====
Weighted Average Shares Outstanding 14,884
Plus: Shares Issuable Upon Conversion of
8% Convertible Senior Notes 204
Shares Issuable Upon Conversion of
Stock Options 922
Shares Issuable Upon Conversion of Warrants 31
-------
Diluted Weighted Average Shares Outstanding 16,041
=======
Diluted Extraordinary Gain Per Share $.01
====
</TABLE>
<PAGE>
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- ---------------------
2000 1999 2000 1999
---- ----- ---- ----
<S> <C> <C> <C> <C>
Basic Net Income Per Share:
--------------------------
Net Income to Common Stockholders $ 240 $ 202 $3,080 $3,715
Basic Weighted Average Shares Outstanding 14,892 14,131 14,884 14,122
Basic Net Income Per Share $.02 $.01 $.21 $.26
==== ==== ==== ====
Diluted Net Income Per Share:
----------------------------
Net Income to Common Stockholders $ 240 $ 202 $3,080 $3,715
Plus: Interest Expense on 8% Convertible Senior Notes 2 - 5 21
------ ----- ------ ------
Adjusted Net Income $ 242 $ 202 $3,085 $3,736
===== ===== ====== ======
Weighted Average Shares Outstanding 14,892 14,131 14,884 14,122
Plus: Shares Issuable Upon Conversion of
8% Convertible Senior Notes 196 943 204 948
Shares Issuable Upon Conversion of
Stock Options 689 1,252 922 569
Shares Issuable Upon Conversion of Warrants 27 - 31 -
------- ------- ------- -------
Diluted Weighted Average Shares Outstanding 15,804 16,326 16,041 15,639
====== ====== ====== ======
Diluted Net Income Per Share $.02 $.01 $.19 $.24
==== ==== ==== ====
</TABLE>
Options to purchase 290,000 shares of common stock at prices ranging from
$1.0625 to $1.75 per share were outstanding as of March 31, 2000, but were
not included in the computation of diluted net income per share since they
would be considered antidilutive.
<PAGE>
6. SEGMENT-RELATED INFORMATION
The Company has two reportable business segments: intimate apparel and
retail. The Company's reportable segments are individual business units
that offer different products and services. They are managed separately
because each segment requires different strategic initiatives, marketing,
and advertising based on its own positioning in the market. Additionally,
these segments reflect the reporting basis used internally by senior
management to evaluate performance and the allocation of resources.
The Company's intimate apparel segment designs, sources, manufactures,
markets and sells an extensive line of ladies' intimate apparel. This
segment primarily sells to discount, specialty, national and regional
chain, mass merchandise and department stores and direct mail catalog
marketers throughout the United States, as well as its Company-owned retail
stores.
The retail segment sells apparel products purchased primarily from external
suppliers, as well as from the Company's intimate apparel segment.
Intersegment sales and transfers are recorded at cost and treated as a
transfer of inventory. Senior management does not consider these sales when
evaluating segment performance. The Company's senior management evaluates
each segment's performance based upon income or loss from operations before
interest, nonrecurring gains and losses and income taxes. The operational
results for the retail division are based on direct operating expenses and
do not include any indirect corporate overhead.
The Company's net sales and income from operations for each segment for the
three and nine months ended March 31, 2000 and 1999 and total assets for
each segment as of March 31, 2000 and June 30, 1999 were as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
2000 1999 2000 1999
----- ------ ------- -----
Net Sales:
Intimate Apparel $12,898 $13,024 $50,618 $52,021
Retail 1,589 1,691 6,442 7,441
------- ------- ------- -------
$14,487 $14,715 $57,060 $59,462
======= ======= ======= =======
Income (Loss) From Operations:
Intimate Apparel $ 599 $ 789 $ 4,036 $ 5,485
Retail - (46) 221 351
------- ------- ------- -------
$ 599 $ 743 $ 4,257 $ 5,836
======= ======= ======= =======
March 31, June 30,
2000 1999
-------- --------
Segment Assets:
Intimate Apparel $29,675 $34,061
Retail 2,170 2,698
------- ------
$31,845 $36,759
======= =======
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements with
respect to anticipated results, which are subject to a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are: business conditions and growth in the Registrant's industry;
general economic conditions; the addition or loss of significant customers; the
loss of key personnel; product development; competition; foreign government
regulations; fluctuations in foreign currency exchange rates; rising costs of
raw materials and the unavailability of sources of supply; the timing of orders
placed by the Registrant's customers; and the risk factors listed from time to
time in the Company's SEC reports.
Results of Operations
Net sales for the three months ended March 31, 2000 decreased by 1.5% to
$14,487,000 from $14,715,000 in the comparable period in 1999. The decrease in
sales resulted from lower sales in both the intimate apparel division and the
retail division of approximately $126,000 and $102,000, respectively. Net sales
in the intimate apparel division decreased to $12,898,000 and net sales in the
Company's retail division decreased to $1,589,000.
Net sales for the nine months ended March 31, 2000 decreased by 4% to
$57,060,000 from $59,462,000 in the comparable period in 1999. The decrease in
sales resulted from lower sales in both the intimate apparel division and the
retail division of approximately $1,403,000 and $999,000, respectively. Net
sales in the intimate apparel division decreased to $50,618,000 due to programs
with certain customers being discontinued or reduced which were partially offset
by new programs. Net sales in the Company's retail division decreased to
$6,442,000 due to a reduction in the number of customers that visited our
stores.
At the end of March 2000, the Company closed two of its retail stores that
specialized in plus sized clothing for women. The plus sized lines that were
sold in these stores have been consolidated into existing stores in the same
area.
At the end of January 2000, the Company completed the elimination of the sewing
operation at its manufacturing facility in Virginia. This action was taken to
eliminate the operational inefficiencies the Company experienced in the six
months ended December 31, 1999 at its Virginia manufacturing facility and to
lower overall manufacturing costs. The Company now operates three domestic
distribution facilities and has a minimal amount of domestic production to
accommodate small customer orders or orders with short lead times.
The gross profit percentage increased to 31.8% for the three months ended March
31, 2000 from 29.8% in the similar period in 1999. The gross margin in the
Company's intimate apparel division increased to 30.9% for the three months
ended March 31, 2000 from 29.1% in the similar period in 1999. The higher
margins in the Company's intimate apparel division resulted from an improved
<PAGE>
product mix and cost efficiencies due to the continued shift of production to
offshore locations and the elimination of the sewing operation at its
manufacturing facility in Virginia. The gross margin for the retail division
increased to 39.3% for the three months ended March 31, 2000 as compared to
34.9% in the similar period in 1999. The higher margins in the retail division
resulted from lower markdowns taken in the current three-month period as
compared to the same period in the prior year.
The gross profit percentage increased to 29.4% for the nine months ended March
31, 2000 from 29.3% in the similar period in 1999. The gross margin in the
Company's intimate apparel division decreased to 28.6% for the nine months ended
March 31, 2000 from 28.8% in the similar period in 1999. The lower margins in
the intimate apparel division resulted primarily from the sale of excess
inventory at discounted prices, additional duties on the Company's finished
products and operational inefficiencies at the Company's Virginia manufacturing
facility during the first six months partially offset by an improved product mix
and operational efficiencies in the third quarter. The additional duties were
imposed on finished goods manufactured in Mexico as a result of the Tariff
Preference Levels ("TPL") on certain of the raw materials used in the Company's
products expiring nearly four months earlier in calendar year 1999 as compared
to 1998. Operational inefficiencies were due to the Company's increased reliance
on offshore production which caused an uneven flow of production at the
Company's remaining domestic manufacturing facility during the first two
quarters.
The gross profit percentage for the retail division increased to 35.6% for the
nine months ended March 31, 2000 as compared to 32.8% in the similar period in
1999. The higher margins in the retail division resulted from lower markdowns
taken in the current nine-month period as compared to the same period in the
prior year.
Selling, general and administrative expenses increased to $4,006,000, or 27.7%
of sales, for the three months ended March 31, 2000 as compared to $3,637,000,
or 24.7% of sales, for the similar period in 1999.
Selling, general and administrative expenses attributable to the Company's
intimate apparel division were $3,382,000, or 26.2% of net sales for the three
months ended March 31, 2000, as compared to $3,000,000, or 23.0% of net sales
for the similar period in 1999. This increase of $382,000 resulted primarily
from start-up costs associated with the development of the Company's new Meant
To Be line, salaries and salary related costs and a net increase in other
general overhead expenses. The increase in percentage was due to higher expenses
for the period.
The Company's retail division had selling, general and administrative expenses
of $624,000 or 39.3% of net sales for the three months ended March 31, 2000, as
compared to $637,000, or 37.7% of net sales for the similar period in 1999. This
increase in percentage was primarily due to lower sales for the division.
<PAGE>
Selling, general and administrative expenses increased to $12,534,000 or 22.0%
of sales, for the nine months ended March 31, 2000 as compared to $11,588,000,
or 19.5% of sales, for the similar period in 1999.
Selling, general and administrative expenses attributable to the Company's
intimate apparel division were $10,461,000 or 20.7% of net sales for the nine
months ended March 31, 2000, as compared to $ 9,501,000 or 18.3% of net sales
for the similar period in 1999. This increase of $960,000 resulted primarily
from start-up costs associated with the development of the Company's new Meant
To Be line and the now-discontinued Flora Nikrooz Intimates line, increases in
salaries and salary related costs, utilities and a net increase in other general
overhead expenses. The increase in percentage was due to lower sales for the
division and higher expenses.
The Company's retail division had selling, general and administrative expenses
of $2,073,000, or 32.2% of net sales for the nine months ended March 31, 2000,
as compared to $2,086,000, or 28.0% of net sales for the similar period in 1999.
This increase in percentage was due to lower sales for the division.
Income from operations decreased to $599,000 and $4,257,000 for the three and
nine months ended March 31, 2000 from $744,000 and $5,836,000 for the similar
periods in 1999. The decrease for the three months was due to lower sales and an
increase in selling, general and administrative expenses partially offset by an
increase in gross margins. The decrease for the nine months was due to lower
sales and gross margins and an increase in selling, general and administrative
expenses.
The Company's intimate apparel division had income from operations of $599,000
and $4,036,000 for the three and nine months ended March 31, 2000 as compared to
income from operations of $789,000 and $5,485,000 for the similar periods in
1999. The decrease for the three months was due to lower sales and an increase
in selling, general and administrative expenses partially offset by an increase
in gross margins. The decrease for the nine months was due to lower sales and
gross margins and an increase in selling, general and administrative expenses.
The Company's retail division had no income from operations for the three months
ended March 31, 2000 and had income from operations of $221,000 for the nine
months ended March 31, 2000 as compared to a loss from operations of $46,000 and
income from operations of $351,000 for the similar periods in 1999. The
improvement for the three months was due to an increase in gross margins offset
by a decrease in sales. The decrease for the nine months was due to lower sales
partially offset by an increase in gross margins. The operational results for
the retail division are based on direct operating expenses and do not include
any indirect corporate overhead.
During the second quarter ended December 31, 2000, the Company purchased an
aggregate of $2,786,000 in principal amount of its 12.875% subordinated
debentures. With $903,000 of these debentures and in conjunction with previously
acquired debentures, the Company will satisfy its sinking fund requirement due
October 1, 2000. As a result of the purchase of $903,000 of these debentures,
<PAGE>
the Company recorded a pre-tax gain of $50,000, net of related costs. The
remaining $1,883,000 will be applied to the final payment due on October 1,
2001. As a result of the purchase of $1,883,000 of these debentures, the Company
recorded an extraordinary gain of $150,000, net of related costs and income
taxes.
During the first quarter ended September 30, 1999, the Company purchased an
aggregate of $2,834,000 in principal amount of its 12.875% subordinated
debentures. As a result, the Company recorded a pre-tax gain of $114,000, net of
related costs. The Company will reduce its mandatory sinking fund requirement
due on October 1, 2000 with these debentures.
Interest income for the three and nine months ended March 31, 2000 was $33,000
and $53,000, respectively, as compared to $56,000 and $59,000 for the similar
periods in 1999.
Interest expense for the three and nine months ended March 31, 2000 was $384,000
and $1,481,000, respectively, as compared to $594,000 and $2,104,000 for the
similar periods in 1999. These reductions were due to reduced overall borrowing
needs, a lower interest rate on the Company's revolving line of credit and the
purchases of its 12.875% subordinated debentures.
The Company provided for an alternative minimum tax of $5,000 and $63,000 for
the three and nine months ended March 31, 2000, respectively, as compared to
$4,000 and $76,000 for the similar periods in 1999.
The Company had net income of $240,000 and $3,080,000 for the three and nine
months ended March 31, 2000, respectively, as compared to $202,000 and
$3,715,000 for the similar periods in 1999. The increase for the three months
was due to an increase in gross margins and lower net interest costs offset
partially by lower sales and an increase in selling, general and administrative
expenses and a higher provision for income taxes. The reduction for the nine
months was due to lower sales and an increase in selling, general and
administrative expenses offset partially by an increase in gross margins, a gain
on the purchase of the Company's 12.875% subordinated debentures, lower net
interest costs and a lower provision for income taxes.
Liquidity and Capital Resources
For the nine months ended March 31, 2000, the Company's working capital
decreased by $2,298,000 to $20,318,000, principally from the purchases of
long-term debt, partially offset by operating profits.
During the nine months ended March 31, 2000, cash decreased by $2,106,000. The
Company used cash of $141,000 for the purchase of fixed assets, and $5,316,000
for the repayments on and purchases of long-term debt. These activities were
funded with cash generated from profitable operations of $3,319,000 and the sale
of fixed assets of $32,000.
<PAGE>
Receivables at March 31, 2000 increased by $2,625,000 to $9,489,000 from
$6,864,000 at June 30, 1999. This increase is due to normal seasonal shipping
fluctuations within the period in the Company's intimate apparel division.
Inventory at March 31, 2000 decreased by $4,799,000 to $11,661,000 from
$16,460,000 at June 30, 1999. This decrease, was reflected in both the intimate
apparel and retail division inventories. The decrease in the intimate apparel
division was the result of normal fluctuations in sales and the Company's
decision to purchase more finished good packages in fiscal 2000, thereby
reducing the Company's need to purchase and maintain an inventory of the raw
materials associated with those finished goods. Also, the Company has continued
to reduce the level of excess and closeout finished goods on hand. The inventory
for the retail division decreased due to normal fluctuations in sales during the
July through December period and the decision to carry a lower inventory in an
effort to minimize markdowns.
In January 2000, holders of $6,500 in principal amount of the Company's 8%
Convertible Senior Notes converted their Notes into 17,333 shares of the
Company's common stock, par value $.01.
During the second quarter ended December 31, 2000, the Company purchased an
aggregate of $2,786,000 in principal amount of its 12.875% subordinated
debentures. With $903,000 of these debentures and in conjunction with previously
acquired debentures, the Company will satisfy its sinking fund requirement due
October 1, 2000. As a result of the purchase of $903,000 of these debentures,
the Company recorded a pre-tax gain of $50,000, net of related costs. The
remaining $1,883,000 will be applied to the final payment due on October 1,
2001. As a result of the purchase of $1,883,000 of these debentures, the Company
recorded an extraordinary gain of $150,000, net of related costs and income
taxes.
During the first quarter ended September 30, 1999, the Company purchased an
aggregate of $2,834,000 in principal amount of its 12.875% subordinated
debentures. As a result, the Company recorded a pre-tax gain of $114,000, net of
related costs. The Company will reduce its mandatory sinking fund requirement
due on October 1, 2000 with these debentures.
The Company does not anticipate making any purchases of its stock and
anticipates that capital expenditures for fiscal 2000 will be less than
$400,000.
Following the first and second quarter purchases of the Company's 12.875%
subordinated debentures, the Company has $14,988,500 in long-term debt and a
secured revolving line of credit of up to $13,500,000. The long-term debt
consists of $4,367,000 of 12.875% Subordinated Debentures, $10,550,000 8% Senior
Notes, and $71,500 8% Convertible Senior Notes. The remaining balance of
$4,367,000 of the 12.875% Subordinated Debentures is due on October 1, 2001. The
8% Senior Notes and the 8% Convertible Senior Notes do not require any
amortization and mature on September 1, 2001. The $71,500 8% Convertible Senior
<PAGE>
Notes are convertible into the Company's common stock, at any time prior to
maturity, at a price of $0.375 per share.
The Company's secured revolving line of credit does not expire until July 1,
2001 and is sufficient for 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 prime rate of Chase Manhattan Bank.
Availability under the line of credit is subject to certain agreed upon
formulas. Under the terms of this financing, the Company has agreed to pledge
substantially all of its assets, except the Company's domestic inventory and
real property.
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. Management is also currently exploring
alternatives for refinancing the long-term debt.
Recently Issued Accounting Standard
Recently Issued Accounting Standard - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires the
recognition of all derivatives as either assets or liabilities in the statement
of financial position and measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative is dependent upon the
intended use of the derivative. SFAS No. 133 will be effective in the Company's
first quarter of the fiscal year ending June 30, 2001 and retroactive
application is not permitted. The Company has not yet determined whether the
application of SFAS No. 133 will have a material impact on its financial
position or results of operations.
Imports
The Company's transactions with its foreign manufacturers and suppliers are
subject to the risks of doing business abroad. The Company's import and offshore
operations are subject to constraints imposed by agreements between the United
States and a number of foreign countries in which the Company does business.
These agreements impose quotas on the amount and type of goods that can be
imported into the United States from these countries. Such agreements also allow
the United States to impose, at any time, restraints on the importation of
categories of merchandise that, under the terms of the agreements, are not
subject to specified limits. The Company's imported products are also subject to
United States customs duties and, in the ordinary course of business, the
Company is from time to time subject to claims by the United States Customs
Service for duties and other charges. The United States and other countries in
which the Company's products are manufactured may, from time to time, impose new
quotas, duties, tariffs or other restrictions, or adversely adjust presently
prevailing quotas, duty or tariff levels, which could adversely affect the
Company's operations and its ability to continue to import products at current
or increased levels. The Company cannot predict the likelihood or frequency of
any such events occurring.
<PAGE>
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 needed to accept four digit entries to distinguish 21st
century dates from 20th century dates.
Internal Systems and Equipment
The Company completed its comprehensive program of identifying, assessing and,
when necessary, upgrading and/or replacing its systems and equipment that were
vulnerable to Year 2000 problems. The Company has also successfully tested,
implemented and installed all new systems and equipment that were required to
make the Company's systems and equipment Year 2000 compliant.
Third Party Relationships
The Company formally communicated with its significant suppliers and customers
to determine if those parties had appropriate plans to remedy Year 2000 issues
when their systems interface with the Company's systems or may otherwise impact
the operations of the Company. The Company substantially completed its review
and believes that its major customers and suppliers have addressed their Year
2000 issues. The Company has been successfully interfacing with its customers
and suppliers and has not encountered any Year 2000 issues to date. However,
there can be no assurance, that the Company has interfaced with all of its
significant suppliers and customers or that the systems of other companies on
which the Company's processes rely have been 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
in the future.
Costs
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, less than $150,000 for fiscal 1999 and less than $50,000 for fiscal 2000.
<PAGE>
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Report on Form 10-Q
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which involve certain risks and uncertainties.
The Company's actual results or outcomes may differ materially from those
anticipated. Important factors that the Company believes might cause differences
are discussed in the cautionary statement under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-Q. In assessing forward-looking statements contained herein,
readers are urged to carefully read those statements.
<PAGE>
PART II Other Information
Item 1 - Legal proceedings - Not Applicable
Item 2 - Changes in Securities - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders - None
Item 5 - Other Information - None
Item 6 - (a) Exhibits
Number Exhibit
------ -------
10.13 Employment Agreement dated as of February 22, 2000
Between Saul Pomerantz and the Company *
10.14 Employment Agreement dated as of February 22, 2000
Between Melvyn Knigin and the Company *
(b) Form 8-K Report - None
- ---------------------
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MOVIE STAR, INC.
By: /s/ MELVYN KNIGIN
------------------------
MELVYN KNIGIN
Chief Executive Officer;
President
By: /s/ THOMAS RENDE
------------------------
THOMAS RENDE
Principal Financial &
Accounting Officer
May 15, 2000
EMPLOYMENT AGREEMENT
AGREEMENT dated as of February 22, 2000 between SAUL POMERANTZ, residing at
515 East 79th Street, New York, New York 10021 ("Executive"), and MOVIE STAR,
INC., a New York corporation having its principal office at 136 Madison Avenue,
New York, New York 10016 ("Company").
WHEREAS, Executive has been an employee of the Company since 1979; and
WHEREAS, the Company and Executive desire to evidence the terms and
conditions of Executive's continued employment in writing and to provide for the
employment of Executive by the Company on the terms set forth herein;
IT IS AGREED:
1. Employment, Duties and Acceptance.
1.1 The Company hereby employs Executive as its Executive Vice
President and Chief Operating Officer ("COO"). All of Executive's powers and
authority in any capacity shall at all times be subject to the direction and
control of the Company's Board of Directors. Executive shall report directly to
the Board of Directors of the Company.
1.2 The Board may assign to Executive such general management and
supervisory responsibilities and executive duties for the Company or any
subsidiary of the Company, including serving as a director, as are consistent
with Executive's status as Executive Vice President and COO. The Company and
Executive acknowledge that Executive's primary functions and duties as Executive
Vice President and COO shall be to manage and supervise the day to day
administration of the Company's business.
1.3 Executive accepts such employment and agrees to devote
substantially all of his business time, energies and attention to the
performance of his duties hereunder. Nothing herein shall be construed as
preventing Executive from making and supervising personal investments, provided
they will not interfere with the performance of Executive's duties hereunder or
violate the provisions of paragraph 5.1(F) hereof.
2. Compensation and Benefits.
2.1 The Company shall pay to Executive a base salary at the annual
rate of $250,000 during the term hereof. Executive's compensation shall be paid
in equal, periodic installments in accordance with the Company's normal payroll
procedures.
<PAGE>
2.2 The Company shall also pay to Executive such bonuses as may be
determined from time to time by the Board of Directors. In connection therewith,
the Executive shall be entitled to participate in the senior executive incentive
compensation pool as adopted by the Board of Directors on February 22, 2000, and
thereafter as in effect from time to time during the term hereof; provided that,
notwithstanding any action hereafter taken by the Board of Directors, throughout
the initial term and any renewal terms of this Agreement, Executive shall
receive incentive compensation as more fully set forth in Schedule A annexed
hereto and made a part hereof and on terms no less favorable than the terms of
Schedule A and the Senior Executive Incentive Compensation Plan as they exist on
March 1, 2000.
2.3 As additional compensation for services to be rendered by
Executive hereunder:
(A) (i) The Company hereby issues to Executive options to
purchase 65,000 shares of Common Stock at a price of $1.0625 per share ("Signing
Options"), as evidenced by a Stock Option Agreement of even date herewith
between the Company and Executive.
(ii) The Company shall also issue to Executive options to
purchase an additional 65,000 shares of Common Stock at a price per share equal
to the closing market price of the Company's shares on the American Stock
Exchange on June 30, 2000 (the "Additional Options" and, together with the
"Signing Options," the "Agreement Options"), as evidenced by a second Stock
Option Agreement of even date herewith between the Company and Executive.
(iii) It is the express intention of the parties that the
Agreement Options be granted under the Company's qualified Incentive Stock
Option Plan ("ISOP"). The Executive acknowledges that the effectiveness of the
2000 ISOP adopted by the Company's Board of Directors on February 22, 2000 ( a
copy of which is annexed hereto as Schedule B) is subject to approval by the
Company's shareholders at the next annual meeting of shareholders. The Company
agrees to submit the 2000 ISOP for approval by the Company's shareholders at the
next annual meeting of the Company's shareholders. In the event the shareholders
of the Company fail to approve the 2000 ISOP, the Agreement Options will be
issued pursuant to the Company's 1988 Stock Option Plan and will not constitute
"qualified" options.
(iv) The Company agrees to include the Agreement Options in a
registration statement on Form S-8 to be filed with the Securities and Exchange
Commission as soon as practicable following the next annual meeting of
shareholders of the Company.
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<PAGE>
(B) In consideration for the services to be rendered by Executive
hereunder, the Company and Executive shall, simultaneously with the execution of
this Agreement, execute and deliver an amendment, in the form annexed hereto as
Exhibit I, to those certain Option Agreements dated January 29, 1997 and
November 5, 1998 (the "Pre-existing Options").
(C) Notwithstanding the foregoing, (i) in the event of
termination of Executive's employment for "Good Reason" (as hereinafter defined
in Section 3.6 prior to the time the Pre-existing Options or the Agreement
Options are fully vested); or (ii) upon the occurrence of an "Acceleration
Event" (as hereinafter defined in Section 2.3(E)), then the portion of the
Pre-existing Options and Agreement Options which have not then vested shall
become vested as of the date of the termination for "Good Reason" or the
"Acceleration Event", as the case may be.
(D) Notwithstanding the foregoing, in the event of termination of
Executive's employment without "Cause" (as defined in Section 3.4) prior to the
time the Pre-existing Options or the Agreement Options are fully vested and an
"Acceleration Event" shall occur within six months following the date of such
termination without "Cause", then the portion of the Pre-existing Options and
Agreement Options which have not then vested shall become vested as of the date
of the "Acceleration Event".
(E) For the purposes of this Agreement, "an Acceleration Event"
shall mean a change in control of the Company of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934, as amended (the "Act"), whether or not the
Company is then subject to such reporting requirement; provided, however, that,
without limitation, such a Change in Control shall be deemed to have occurred
if, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Act), directly or indirectly, of securities of the Company representing 28% or
more of the combined voting power of the Company's then outstanding securities
without the prior approval of at least two thirds of the members of the
Company's Board of Directors (the "Board") in office immediately prior to such
person attaining such percentage interest; (ii) the Company is a party to a
merger, consolidation, sale of assets or other transaction, or a proxy contest,
as a consequence of which members of the Board in office immediately prior to
such transaction or event constitute less than a majority of the Board
thereafter; or (iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board (including for this
purpose any new director whose election or nomination for election by the
Company's stockholders was approved by a vote of at least two- thirds of the
directors then still in office, other than Executive, who were directors
3
<PAGE>
at the beginning of such period) cease, for any reason, to constitute a majority
of the Board.
2.4 The Company shall, at its own cost and expense, maintain (i) a
policy of life insurance on the life of the Executive which will provide a death
benefit to the Executive's beneficiary in the amount of $1,200,000 and which
will be owned by Executive; and (iii) such group medical insurance covering
Executive and Executive's dependent family members and such other benefits as
are generally afforded to other senior executives of the Company, subject to
applicable waiting periods and other conditions. Provided that Executive is
still employed by the Company on the date he attains age 62 and Executive
thereafter retires from such employment, Executive shall be entitled to
participate in the Company's Retired Senior Executive Medical Plan in accordance
with all of the terms and conditions thereof and contained in the letter from
David M. Hogan to Thomas Rende dated August 2, 1999 (copies of which are annexed
hereto as Exhibit II), except that (i) no further approval of the Compensation
Committee of the Board of Directors shall be necessary for such participation
and (ii) the Retired Senior Executive Medical Plan shall at all times provide
benefits to Executive and Executive's dependent family members no less favorable
than are provided to senior executives and retired senior executives of the
Company on March 1, 2000.
2.5 Executive shall be entitled to four weeks of vacation in each
calendar year and to a reasonable number of other days off for religious and
personal reasons.
2.6 The Company shall provide Executive with a suitable leased
automobile for business use and shall pay for all other costs associated with
the use of the vehicle, including insurance costs, repairs and maintenance. The
Company shall not be required to expend more than $800 per month for the costs
of leasing such automobile. The costs associated with Executive's automobile
shall be considered taxable income to Executive, except to the extent that it is
documented to have been used by him for business purposes.
2.7 The Company will pay or reimburse Executive for all
transportation, hotel and other expenses reasonably incurred by Executive on
business trips and for all other ordinary and reasonable out-of-pocket expenses
actually incurred by him in the conduct of the business of the Company against
itemized vouchers submitted with respect to any such expenses and approved in
accordance with customary procedures.
2.8 Executive acknowledges that he will be obligated to render
services hereunder wherever such services are reasonably required by the
Company, which may necessitate substantial travel by Executive.
4
<PAGE>
2.9 The provisions of this paragraph 2 shall survive the termination
of this Agreement for any reason.
3. Term and Termination.
3.1 The term of this Agreement commences as of July 1, 1999 and shall
continue until June 30, 2001, unless sooner terminated as herein provided.
3.2 If Executive dies during the term of this Agreement, this
Agreement shall thereupon terminate, except that the Company shall pay to the
legal representative of Executive's estate (i) the base salary due Executive
pursuant to paragraph 2.1 hereof through the date of Executive's death, (ii) if
death occurs between July 1 and December 31, one-half of the bonus payments
calculated in accordance with paragraph 2.2 for the year in which Executive
dies, and the entire amount of the bonus payments, if death occurs between
January 1 and June 30, (iii) all earned and previously approved but unpaid
bonuses, (iv) all valid expense reimbursements through the date of the
termination of this Agreement, (v) all accrued but unused vacation pay, (vi) all
costs, if any, associated with terminating the lease for Executive's automobile,
and (vii) Executive shall retain his rights under paragraph 2.3 hereof and under
the Stock Option Agreements executed simultaneously herewith.
3.3 The Company, by notice to Executive, may terminate this Agreement
if Executive shall fail because of illness or incapacity to render, for one
hundred and eighty consecutive (180) calendar days in any consecutive twelve
calendar month period, services of the character contemplated by this Agreement.
Notwithstanding such termination, the Company shall pay to Executive (i) the
base salary due Executive pursuant to paragraph 2.1 hereof through the date of
such notice, less any amount Executive receives for such period from any
Company- sponsored or Company-paid source of insurance, disability compensation
or government program, (ii) if the disability commences between July 1 and
December 31, one-half of the bonus payments calculated in accordance with
paragraph 2.2 for the year in which the disability commenced, and the entire
amount of the bonus payments, if the disability commences between January 1 and
June 30, (iii) all earned and previously approved but unpaid bonuses, (iv) all
valid expense reimbursements through the date of the termination of this
Agreement and all costs, if any, associated with terminating or transferring the
lease for Executive's automobile, (v) all accrued but unused vacation pay, and
(vi) Executive shall retain his rights under paragraph 2.3 hereof and under the
Stock Option Agreements executed simultaneously herewith, in accordance with
their terms.
3.4 The Company, by notice to Executive, may terminate this Agreement
for cause. As used herein, "Cause" shall mean: (a) the refusal, or failure
5
<PAGE>
resulting from the lack of good faith efforts, by Executive to carry out
specific directions of the Board which are of a material nature and consistent
with his status as Executive Vice President and COO, or the refusal, or failure
resulting from the lack of good faith efforts, by Executive to perform a
material part of Executive's duties hereunder; (b) the commission by Executive
of a material breach of any of the provisions of this Agreement; (c) fraud or
dishonest action by Executive in his relations with the Company or any of its
subsidiaries or affiliates, or with any customer or business contact of the
Company or any of its subsidiaries or affiliates ("dishonest" for these purposes
shall mean Executive's knowingly making a material misstatement or omission, or
knowingly committing a material improper act, for his personal benefit); or (d)
the conviction of Executive of any crime involving an act of moral turpitude.
Notwithstanding the foregoing, no "Cause" for termination shall be deemed to
exist with respect to Executive's acts described in clauses (a) or (b) above,
unless the Company shall have given written notice to Executive specifying the
"Cause" with reasonable particularity and, within thirty (30) calendar days
after such notice, Executive shall not have cured or eliminated the problem or
thing giving rise to such "Cause;" provided, however, that a repeated breach
after notice and cure of any provision of clauses (a) or (b) above involving the
same or substantially similar actions or conduct, shall be grounds for
termination for "Cause" without any additional notice from the Company.
3.5 If Executive's employment hereunder is terminated for any reason,
then Executive shall, at the Company's request, resign as a director of the
Company and all of its subsidiaries, effective upon the occurrence of such
termination.
3.6 The Executive, by notice to the Company, may terminate this
Agreement if a "Good Reason" exists. For purposes of this Agreement, "Good
Reason" shall mean the occurrence of any of the following circumstances without
the Executive's prior express written consent: (a) a substantial and material
adverse change in the nature of Executive's title, duties or responsibilities
with the Company that represents a demotion from his title, duties or
responsibilities as in effect immediately prior to such change; (b) Executive is
not nominated to serve as a director by the Company or is removed from service
as a director of the Company; (c) a substantial and material breach of this
Agreement by the Company; (d) a failure by the Company to make any payment to
Executive when due, unless the payment is not material and is being contested by
the Company, in good faith; or (e) a material and adverse change in the
compensation or benefits described in Section 2 of this Agreement with which
Executive disagrees; provided that the failure or refusal by the Company to
offer continued employment to Executive at least six months prior to the
expiration of the initial term or any renewal term of this Agreement; and
further provided that, if the Company fails or refuses to offer continued
employment to the Executive at least six months prior to the expiration of the
initial term or any renewal term of this Agreement, (i) "Good Reason" shall not
6
<PAGE>
exist by reason of a substantial and material adverse change in the nature of
Executive's title, duties or responsibilities with the Company which represents
a demotion from his title, duties or responsibilities as in effect immediately
prior to such change within six months prior to the expiration of the initial
term or any renewal term of this Agreement; and (ii) "Good Reason" shall not
exist by reason of Executive's not being nominated by the Company to serve as a
director or being removed as a director within six months prior to the
expiration of the initial term or any renewal term of this Agreement.
Notwithstanding the foregoing, Good Reason shall not be deemed to exist with
respect to the Company's acts described in clauses (a), (b), (c), (d) or (e)
above, unless the Executive shall have given written notice to the Company
specifying the Good Reason with reasonable particularity and, within thirty (30)
calendar days after such notice, the Company shall not have cured or eliminated
the problem or thing giving rise to such Good Reason; provided, however, that a
repeated breach after notice and cure of any provision of clauses (a), (b), (c),
(d) or (e) above involving the same or substantially similar actions or conduct,
shall be grounds for termination for Good Reason without any additional notice
from the Executive.
3.7 In the event that Executive terminates this Agreement for Good
Reason, pursuant to the provisions of paragraph 3.6, or the Company terminates
this Agreement without "Cause," as defined in paragraph 3.4, the Company shall
continue to pay to Executive (or in the case of his death, the legal
representative of Executive's estate or such other person or persons as
Executive shall have designated by written notice to the Company), all payments,
compensation and benefits required under paragraph 2 hereof through the term of
this Agreement; including, without limitation, incentive compensation as
determined in accordance with paragraph 2.2, plus an amount equal to one year's
base salary and Executive shall not be subject to the obligations of Section
5.1(F); provided, however Executive's health insurance coverage shall terminate
upon the Executive becoming covered under a similar program by reason of
employment elsewhere.
3.8 In the event that, not less than six months prior to the
expiration of the initial term or any renewal term (if the parties agree to a
renewal term) hereof, the Company does not offer continued employment to
Executive or offers such continued employment on terms and conditions less
favorable to Executive than those in effect upon the expiration of the
then-current term hereof, in addition to all amounts payable to Executive
hereunder through the expiration of the then current term, commencing not more
than thirty (30) days after the expiration of this Agreement, the Company shall
pay to Executive an amount equal to one-half of the annual base salary paid to
Executive for the twelve months immediately preceding the expiration of this
Agreement. Such amounts shall be paid in six equal monthly installments whether
or not Executive is otherwise employed and regardless of any other income
Executive may earn and Executive shall not be subject to the obligations of
Section 5.1(F).
7
<PAGE>
4. Executive Indemnity
4.1 The Company agrees to indemnify Executive and hold Executive
harmless against all costs, expenses (including, without limitation, reasonable
attorneys' fees) and liabilities (other than settlements to which the Company
does not consent, which consent shall not be unreasonably withheld)
(collectively, "Losses") reasonably incurred by Executive in connection with any
claim, action, proceeding or investigation brought against or involving
Executive with respect to, arising out of or in any way relating to Executive's
employment with the Company or Executive's service as a director of the Company;
provided, however, that the Company shall not be required to indemnify Executive
for Losses incurred as a result of Executive's intentional misconduct or gross
negligence (other than matters where Executive acted in good faith and in a
manner he reasonably believed to be in and not opposed to the Company's best
interests). Executive shall promptly notify the Company of any claim, action,
proceeding or investigation under this paragraph and the Company shall be
entitled to participate in the defense of any such claim, action, proceeding or
investigation and, if it so chooses, to assume the defense with counsel selected
by the Company; provided that Executive shall have the right to employ counsel
to represent him (at the Company's expense) if Company counsel would have a
"conflict of interest" in representing both the Company and Executive. The
Company shall not settle or compromise any claim, action, proceeding or
investigation without Executive's consent, which consent shall not be
unreasonably withheld; provided, however, that such consent shall not be
required if the settlement entails only the payment of money and the Company
fully indemnifies Executive in connection therewith. The Company further agrees
to advance any and all expenses (including, without limitation, the fees and
expenses of counsel) reasonably incurred by the Executive in connection with any
such claim, action, proceeding or investigation, provided Executive first enters
into an appropriate agreement for repayment of such advances if indemnification
is found not to have been available.
5. Protection of Confidential Information; Non-Competition.
5.1 Executive acknowledges that:
(A) As a result of his current employment with, and prior
retention as an employee of, the Company, Executive has obtained and will obtain
secret and confidential information concerning the business of the Company and
its subsidiaries and affiliates (referred to collectively in this paragraph 5 as
the "Company"), including, without limitation, financial information, designs
and other proprietary rights, trade secrets and "know-how," customers and
sources ("Confidential Information").
8
<PAGE>
(B) The Company will suffer substantial damage which will be
difficult to compute if, during the period of his employment with the Company or
thereafter, Executive should enter a business competitive with the Company or
divulge Confidential Information.
(C) The provisions of this Agreement are reasonable and
necessary for the protection of the business of the Company.
(D) Executive agrees that he will not at any time, either
during the term of this Agreement or thereafter, divulge to any person or entity
any Confidential Information obtained or learned by him as a result of his
employment with, or prior retention by, the Company, except (i) in the course of
performing his duties hereunder, (ii) with the Company's express written
consent; (iii) to the extent that any such information is in the public domain
other than as a result of Executive's breach of any of his obligations
hereunder; or (iv) where required to be disclosed by court order, subpoena or
other government process. If Executive shall be required to make disclosure
pursuant to the provisions of clause (iv) of the preceding sentence, Executive
promptly, but in no event more than 72 hours after learning of such subpoena,
court order, or other government process, shall notify, by personal delivery or
by electronic means, confirmed by mail, the Company and, at the Company's
expense, Executive shall: (a) take all reasonably necessary and lawful steps
required by the Company to defend against the enforcement of such subpoena,
court order or other government process, and (b) permit the Company to intervene
and participate with counsel of its choice in any proceeding relating to the
enforcement thereof.
(E) Upon termination of his employment with the Company,
Executive will promptly deliver to the Company all memoranda, notes, records,
reports, manuals, drawings, blueprints and other documents (and all copies
thereof) relating to the business of the Company and all property associated
therewith, which he may then possess or have under his control; provided,
however, that Executive shall be entitled to retain copies of such documents
reasonably necessary to document his financial relationship (both past and
future) with the Company.
(F) During the period commencing on the date hereof and
ending on the date Executive's employment hereunder is terminated (and, if
Executive is terminated with "Cause" or Executive terminates this Agreement
without "Good Reason," until the date which is one year after any such
termination), Executive, without the prior written permission of the Company,
shall not, anywhere in the world, (i) be employed by, or render any services to,
any person, firm or corporation engaged in any business which is directly or
indirectly in competition with the Company ("Competitive Business"); (ii) engage
in any Competitive Business for his or its own account; (iii) be associated with
9
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or interested in any Competitive Business as an individual, partner,
shareholder, creditor, director, officer, principal, agent, employee, trustee,
consultant, advisor or in any other relationship or capacity; (iv) employ or
retain, or have or cause any other person or entity to employ or retain, any
person who was employed or retained by the Company while Executive was employed
by the Company; or (v) solicit, interfere with, or endeavor to entice away from
the Company, for the benefit of a Competitive Business, any of its customers or
other persons with whom the Company has a contractual relationship.
Notwithstanding the foregoing, nothing in this Agreement shall preclude
Executive from investing his personal assets in the securities of any
corporation or other business entity which is engaged in a Competitive Business
if such securities are traded on a national stock exchange or in the
over-the-counter market and if such investment does not result in his
beneficially owning, at any time, more than 4.9% of the publicly-traded equity
securities of such Competitive Business.
(G) If Executive commits a breach, or threatens to commit a
breach, of any of the provisions of Sections 5.1(D) or 5.1(F), the Company shall
have the right and remedy:
(i) to have the provisions of this Agreement
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed by Executive that the services being rendered hereunder
to the Company are of a special, unique and extraordinary character and that any
such breach or threatened breach will cause irreparable injury to the Company
and that money damages will not provide an adequate remedy to the Company; and
(ii) require Executive to account for and pay over to
the Company all monetary damages suffered by the Company as the result of any
transactions constituting a breach of any of the provisions of Sections 5.1(D)
or 5.1(F), and Executive hereby agrees to account for and pay over such damages
to the Company.
5.2 Each of the rights and remedies enumerated in this Section 5 shall
be independent of the other, and shall be severally enforceable, and such rights
and remedies shall be in addition to, and not in lieu of, any other rights and
remedies available to the Company under law or equity.
5.3 In connection with any legal action or proceeding arising out of
or relating to this Agreement, the prevailing party in such action or proceeding
shall be entitled to be reimbursed by the other party for the reasonable
attorneys' fees and costs incurred by the prevailing party.
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5.4 If Executive shall violate any covenant contained in Section
5.1(F), the duration of such covenant so violated shall be automatically
extended for a period of time equal to the period of such violation.
5.5 If any provision of Sections 5.1(D) or 5.1(F) is held to be
unenforceable because of the scope, duration or area of its applicability, the
tribunal making such determination shall have the power to modify such scope,
duration, or area, or all of them, and such provision or provisions shall then
be applicable in such modified form.
5.6 The provisions of this paragraph 5 shall survive the termination
of this Agreement for any reason.
6. MISCELLANEOUS PROVISIONS
6.1 All notices provided for in this Agreement shall be in writing,
and shall be deemed to have been duly given when (i) delivered personally to the
party to receive the same, or (ii) when mailed first class postage prepaid, by
certified mail, return receipt requested, addressed to the party to receive the
same at his or its address set forth below, or such other address as the party
to receive the same shall have specified by written notice given in the manner
provided for in this Section 6.1:
If to Executive:
Mr. Saul Pomerantz
515 East 79th Street
New York, New York 10021
With a copy to:
James W. Wimberly, Esq.
Wimberly & Lawson, P.C.
Lenox Towers
Suite 400
3400 Peachtree Road, N.E.
Atlanta, Georgia 30326
Fax No.: (404) 261-3707
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If to the Company:
Movie Star, Inc.
136 Madison Avenue
New York, New York 10016
Attn: Chairman of the Board
With a copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attn: Michael A. Salberg, Esq.
Fax No.: (212) 818-8881
All notices shall be deemed to have been given as of the date of personal
delivery or mailing thereof.
6.2 This Agreement, the Stock Option Agreements and the amended Stock
Option Agreements with respect to the Pre-existing Options executed
simultaneously herewith set forth the entire agreement of the parties relating
to the employment of Executive and are intended to supersede all prior
negotiations, understandings and agreements. No provisions of this Agreement or
the Stock Option Agreements may be waived or changed except by a writing by the
party against whom such waiver or change is sought to be enforced. The failure
of any party to require performance of any provision hereof or thereof shall in
no manner affect the right at a later time to enforce such provision.
6.3 All questions with respect to the construction of this Agreement,
and the rights and obligations of the parties hereunder, shall be determined in
accordance with the law of the State of New York applicable to agreements made
and to be performed entirely in New York.
6.4 This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the Company. This Agreement shall not be
assignable by Executive, but shall inure to the benefit of and be binding upon
Executive's heirs and legal representatives.
6.5 Should any provision of this Agreement become legally
unenforceable, no other provision of this Agreement shall be affected, and this
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Agreement shall continue as if the Agreement had been executed absent the
unenforceable provision.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
/s/ Saul Pomerantz
-----------------------------------
SAUL POMERANTZ
MOVIE STAR, INC.
/s/ Mark M. David
-----------------------------------
By: Mark M. David
Chairman of the Board
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SCHEDULE A TO EMPLOYMENT AGREEMENT
DATED AS OF FEBRUARY 22, 2000
BETWEEN
MOVIE STAR, INC. ("COMPANY")
AND
SAUL POMERANTZ ("SP")
Pursuant to the Company's Senior Executive Incentive Compensation Plan (the
"Plan"), in each fiscal year during the initial term and any renewal term of the
Employment Agreement SP shall be entitled to an award in an amount of not less
than two percent (2%) of pretax income on pretax income from $1,200,000 to
$3,200,000 and an additional award in an amount of not less than two and one
quarter percent (2.25%) of pretax income in excess of $3,200,000.
14
EMPLOYMENT AGREEMENT
AGREEMENT dated as of February 22, 2000 between MELVYN KNIGIN, residing at
400 17th Street, Norwood, New Jersey 07648 ("Executive"), and MOVIE STAR, INC.,
a New York corporation having its principal office at 136 Madison Avenue, New
York, New York 10016 ("Company").
WHEREAS, Executive has been an employee of the Company since 1987; and
WHEREAS, the Company and Executive desire to evidence the terms and
conditions of Executive's continued employment in writing and to provide for the
employment of Executive by the Company on the terms set forth herein;
IT IS AGREED:
1. Employment, Duties and Acceptance.
1.1 The Company hereby employs Executive as its President and Chief
Executive Officer ("CEO"). All of Executive's powers and authority in any
capacity shall at all times be subject to the direction and control of the
Company's Board of Directors. Executive shall report directly to the Board of
Directors of the Company.
1.2 The Board may assign to Executive such general management and
supervisory responsibilities and executive duties for the Company or any
subsidiary of the Company, including serving as a director, as are consistent
with Executive's status as President and CEO. The Company and Executive
acknowledge that Executive's primary functions and duties as President and CEO
shall be to manage and supervise the overall operations of the Company's
business.
1.3 Executive accepts such employment and agrees to devote
substantially all of his business time, energies and attention to the
performance of his duties hereunder. Nothing herein shall be construed as
preventing Executive from making and supervising personal investments, provided
they will not interfere with the performance of Executive's duties hereunder or
violate the provisions of paragraph 5.1(F) hereof.
2. Compensation and Benefits.
2.1 The Company shall pay to Executive a base salary at the annual
rate of $400,000 during the term hereof. Executive's compensation shall be paid
in equal, periodic installments in accordance with the Company's normal payroll
procedures.
<PAGE>
2.2 The Company shall also pay to Executive such bonuses as may be
determined from time to time by the Board of Directors. In connection therewith,
the Executive shall be entitled to participate in the senior executive incentive
compensation pool as adopted by the Board of Directors on February 22, 2000, and
thereafter as in effect from time to time during the term hereof; provided that,
notwithstanding any action hereafter taken by the Board of Directors, throughout
the initial term and any renewal terms of this Agreement, Executive shall
receive incentive compensation as more fully set forth in Schedule A annexed
hereto and made a part hereof and on terms no less favorable than the terms of
Schedule A and the Senior Executive Incentive Compensation Plan as they exist on
March 1, 2000.
2.3 As additional compensation for services to be rendered by
Executive hereunder:
(A) (i) The Company hereby issues to Executive options to
purchase 100,000 shares of Common Stock at a price of $1.0625 per share
("Signing Options"), as evidenced by a Stock Option Agreement of even date
herewith between the Company and Executive.
(ii) The Company shall also issue to Executive options to
purchase an additional 100,000 shares of Common Stock at a price per share equal
to the closing market price of the Company's shares on the American Stock
Exchange on June 30, 2000 (the "Additional Options" and, together with the
"Signing Options," the "Agreement Options"), as evidenced by a second Stock
Option Agreement of even date herewith between the Company and Executive.
(iii) It is the express intention of the parties that the
Agreement Options be granted under the Company's qualified Incentive Stock
Option Plan ("ISOP"). The Executive acknowledges that the effectiveness of the
2000 ISOP adopted by the Company's Board of Directors on February 22, 2000 ( a
copy of which is annexed hereto as Schedule B) is subject to approval by the
Company's shareholders at the next annual meeting of shareholders. The Company
agrees to submit the 2000 ISOP for approval by the Company's shareholders at the
next annual meeting of the Company's shareholders. In the event the shareholders
of the Company fail to approve the 2000 ISOP, the Agreement Options will be
issued pursuant to the Company's 1988 Stock Option Plan and will not constitute
"qualified" options.
(iv) The Company agrees to include the Agreement Options in a
registration statement on Form S-8 to be filed with the Securities and Exchange
Commission as soon as practicable following the next annual meeting of
shareholders of the Company.
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(B) In consideration for the services to be rendered by Executive
hereunder, the Company and Executive shall, simultaneously with the execution of
this Agreement, execute and deliver an amendment, in the form annexed hereto as
Exhibit I, to those certain Option Agreements dated January 29, 1997 and
November 5, 1998 (the "Pre-existing Options").
(C) Notwithstanding the foregoing, (i) in the event of
termination of Executive's employment for "Good Reason" (as hereinafter defined
in Section 3.6 prior to the time the Pre-existing Options or the Agreement
Options are fully vested); or (ii) upon the occurrence of an "Acceleration
Event" (as hereinafter defined in Section 2.3(E)), then the portion of the
Pre-existing Options and Agreement Options which have not then vested shall
become vested as of the date of the termination for "Good Reason" or the
"Acceleration Event", as the case may be.
(D) Notwithstanding the foregoing, in the event of termination of
Executive's employment without "Cause" (as defined in Section 3.4) prior to the
time the Pre-existing Options or the Agreement Options are fully vested and an
"Acceleration Event" shall occur within six months following the date of such
termination without "Cause", then the portion of the Pre-existing Options and
Agreement Options which have not then vested shall become vested as of the date
of the "Acceleration Event".
(E) For the purposes of this Agreement, "an Acceleration Event"
shall mean a change in control of the Company of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934, as amended (the "Act"), whether or not the
Company is then subject to such reporting requirement; provided, however, that,
without limitation, such a Change in Control shall be deemed to have occurred
if, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Act), directly or indirectly, of securities of the Company representing 28% or
more of the combined voting power of the Company's then outstanding securities
without the prior approval of at least two thirds of the members of the
Company's Board of Directors (the "Board") in office immediately prior to such
person attaining such percentage interest; (ii) the Company is a party to a
merger, consolidation, sale of assets or other transaction, or a proxy contest,
as a consequence of which members of the Board in office immediately prior to
such transaction or event constitute less than a majority of the Board
thereafter; or (iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board (including for this
purpose any new director whose election or nomination for election by the
Company's stockholders was approved by a vote of at least two- thirds of the
directors then still in office, other than Executive, who were directors
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<PAGE>
at the beginning of such period) cease, for any reason, to constitute a majority
of the Board.
2.4 The Company shall, at its own cost and expense, maintain (i)
a policy of life insurance on the life of the Executive which will provide a
death benefit to the Executive's beneficiary in the amount of $1,500,000 and
which will be owned by Executive; (ii) a policy of disability insurance which
will provide a benefit of $10,000 per month payable to Executive until Executive
attains the age of sixty- two and which will be owned by Executive; and (iii)
such group medical insurance covering Executive and Executive's dependent family
members and such other benefits as are generally afforded to other senior
executives of the Company, subject to applicable waiting periods and other
conditions. Provided that Executive is still employed by the Company on the date
he attains age 62 and Executive thereafter retires from such employment,
Executive shall be entitled to participate in the Company's Retired Senior
Executive Medical Plan in accordance with all of the terms and conditions
thereof and contained in the letter from David M. Hogan to Thomas Rende dated
August 2, 1999 (copies of which are annexed hereto as Exhibit II), except that
(i) no further approval of the Compensation Committee of the Board of Directors
shall be necessary for such participation and (ii) the Retired Senior Executive
Medical Plan shall at all times provide benefits to Executive and Executive's
dependent family members no less favorable than are provided to senior
executives and retired senior executives of the Company on March 1, 2000.
2.5 Executive shall be entitled to four weeks of vacation in each
calendar year and to a reasonable number of other days off for religious and
personal reasons.
2.6 The Company shall provide Executive with a suitable leased
automobile for business use and shall pay for all other costs associated with
the use of the vehicle, including insurance costs, repairs and maintenance. The
Company shall not be required to expend more than $1,200 per month for the costs
of leasing such automobile. The costs associated with Executive's automobile
shall be considered taxable income to Executive, except to the extent that it is
documented to have been used by him for business purposes.
2.7 The Company will pay or reimburse Executive for all
transportation, hotel and other expenses reasonably incurred by Executive on
business trips and for all other ordinary and reasonable out-of-pocket expenses
actually incurred by him in the conduct of the business of the Company against
itemized vouchers submitted with respect to any such expenses and approved in
accordance with customary procedures.
4
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2.8 Executive acknowledges that he will be obligated to render
services hereunder wherever such services are reasonably required by the
Company, which may necessitate substantial travel by Executive.
2.9 The provisions of this paragraph 2 shall survive the termination
of this Agreement for any reason.
3. Term and Termination.
3.1 The term of this Agreement commences as of July 1, 1999 and shall
continue until June 30, 2001, unless sooner terminated as herein provided.
3.2 If Executive dies during the term of this Agreement, this
Agreement shall thereupon terminate, except that the Company shall pay to the
legal representative of Executive's estate (i) the base salary due Executive
pursuant to paragraph 2.1 hereof through the date of Executive's death, (ii) if
death occurs between July 1 and December 31, one-half of the bonus payments
calculated in accordance with paragraph 2.2 for the year in which Executive
dies, and the entire amount of the bonus payments, if death occurs between
January 1 and June 30, (iii) all earned and previously approved but unpaid
bonuses, (iv) all valid expense reimbursements through the date of the
termination of this Agreement, (v) all accrued but unused vacation pay, (vi) all
costs, if any, associated with terminating the lease for Executive's automobile,
and (vii) Executive shall retain his rights under paragraph 2.3 hereof and under
the Stock Option Agreements executed simultaneously herewith.
3.3 The Company, by notice to Executive, may terminate this Agreement
if Executive shall fail because of illness or incapacity to render, for one
hundred and eighty consecutive (180) calendar days in any consecutive twelve
calendar month period, services of the character contemplated by this Agreement.
Notwithstanding such termination, the Company shall pay to Executive (i) the
base salary due Executive pursuant to paragraph 2.1 hereof through the date of
such notice, less any amount Executive receives for such period from any
Company- sponsored or Company-paid source of insurance, disability compensation
or government program, (ii) if the disability commences between July 1 and
December 31, one-half of the bonus payments calculated in accordance with
paragraph 2.2 for the year in which the disability commenced, and the entire
amount of the bonus payments, if the disability commences between January 1 and
June 30, (iii) all earned and previously approved but unpaid bonuses, (iv) all
valid expense reimbursements through the date of the termination of this
Agreement and all costs, if any, associated with terminating or transferring the
lease for Executive's automobile, (v) all accrued but unused vacation pay, and
(vi) Executive shall retain his rights under paragraph 2.3 hereof and under the
Stock Option Agreements executed simultaneously herewith, in accordance with
their terms.
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3.4 The Company, by notice to Executive, may terminate this Agreement
for cause. As used herein, "Cause" shall mean: (a) the refusal, or failure
resulting from the lack of good faith efforts, by Executive to carry out
specific directions of the Board which are of a material nature and consistent
with his status as President and CEO, or the refusal, or failure resulting from
the lack of good faith efforts, by Executive to perform a material part of
Executive's duties hereunder; (b) the commission by Executive of a material
breach of any of the provisions of this Agreement; (c) fraud or dishonest action
by Executive in his relations with the Company or any of its subsidiaries or
affiliates, or with any customer or business contact of the Company or any of
its subsidiaries or affiliates ("dishonest" for these purposes shall mean
Executive's knowingly making a material misstatement or omission, or knowingly
committing a material improper act, for his personal benefit); or (d) the
conviction of Executive of any crime involving an act of moral turpitude.
Notwithstanding the foregoing, no "Cause" for termination shall be deemed to
exist with respect to Executive's acts described in clauses (a) or (b) above,
unless the Company shall have given written notice to Executive specifying the
"Cause" with reasonable particularity and, within thirty (30) calendar days
after such notice, Executive shall not have cured or eliminated the problem or
thing giving rise to such "Cause;" provided, however, that a repeated breach
after notice and cure of any provision of clauses (a) or (b) above involving the
same or substantially similar actions or conduct, shall be grounds for
termination for "Cause" without any additional notice from the Company.
3.5 If Executive's employment hereunder is terminated for any reason,
then Executive shall, at the Company's request, resign as a director of the
Company and all of its subsidiaries, effective upon the occurrence of such
termination.
3.6 The Executive, by notice to the Company, may terminate this
Agreement if a "Good Reason" exists. For purposes of this Agreement, "Good
Reason" shall mean the occurrence of any of the following circumstances without
the Executive's prior express written consent: (a) a substantial and material
adverse change in the nature of Executive's title, duties or responsibilities
with the Company that represents a demotion from his title, duties or
responsibilities as in effect immediately prior to such change; (b) Executive is
not nominated to serve as a director by the Company or is removed from service
as a director of the Company; (c) a substantial and material breach of this
Agreement by the Company; (d) a failure by the Company to make any payment to
Executive when due, unless the payment is not material and is being contested by
the Company, in good faith; or (e) a material and adverse change in the
compensation or benefits described in Section 2 of this Agreement with which
Executive disagrees; provided that the failure or refusal by the Company to
offer continued employment to Executive at least six months prior to the
expiration of the initial term or any renewal term of this Agreement; and
further provided that, if the Company fails or refuses to offer continued
6
<PAGE>
employment to the Executive at least six months prior to the expiration of the
initial term or any renewal term of this Agreement, (i) "Good Reason" shall not
exist by reason of a substantial and material adverse change in the nature of
Executive's title, duties or responsibilities with the Company which represents
a demotion from his title, duties or responsibilities as in effect immediately
prior to such change within six months prior to the expiration of the initial
term or any renewal term of this Agreement; and (ii) "Good Reason" shall not
exist by reason of Executive's not being nominated by the Company to serve as a
director or being removed as a director within six months prior to the
expiration of the initial term or any renewal term of this Agreement.
Notwithstanding the foregoing, Good Reason shall not be deemed to exist with
respect to the Company's acts described in clauses (a), (b), (c), (d) or (e)
above, unless the Executive shall have given written notice to the Company
specifying the Good Reason with reasonable particularity and, within thirty (30)
calendar days after such notice, the Company shall not have cured or eliminated
the problem or thing giving rise to such Good Reason; provided, however, that a
repeated breach after notice and cure of any provision of clauses (a), (b), (c),
(d) or (e) above involving the same or substantially similar actions or conduct,
shall be grounds for termination for Good Reason without any additional notice
from the Executive.
3.7 In the event that Executive terminates this Agreement for Good
Reason, pursuant to the provisions of paragraph 3.6, or the Company terminates
this Agreement without "Cause," as defined in paragraph 3.4, the Company shall
continue to pay to Executive (or in the case of his death, the legal
representative of Executive's estate or such other person or persons as
Executive shall have designated by written notice to the Company), all payments,
compensation and benefits required under paragraph 2 hereof through the term of
this Agreement; including, without limitation, incentive compensation as
determined in accordance with paragraph 2.2, plus an amount equal to one year's
base salary and Executive shall not be subject to the obligations of Section
5.1(F); provided, however Executive's health insurance coverage shall terminate
upon the Executive becoming covered under a similar program by reason of
employment elsewhere.
3.8 In the event that, not less than six months prior to the
expiration of the initial term or any renewal term (if the parties agree to a
renewal term) hereof, the Company does not offer continued employment to
Executive or offers such continued employment on terms and conditions less
favorable to Executive than those in effect upon the expiration of the
then-current term hereof, in addition to all amounts payable to Executive
hereunder through the expiration of the then current term, commencing not more
than thirty (30) days after the expiration of this Agreement, the Company shall
pay to Executive an amount equal to one-half of the annual base salary paid to
Executive for the twelve months immediately preceding the expiration of this
Agreement. Such amounts shall be paid in six equal monthly installments whether
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or not Executive is otherwise employed and regardless of any other income
Executive may earn and Executive shall not be subject to the obligations of
Section 5.1(F).
4. Executive Indemnity
4.1 The Company agrees to indemnify Executive and hold Executive
harmless against all costs, expenses (including, without limitation, reasonable
attorneys' fees) and liabilities (other than settlements to which the Company
does not consent, which consent shall not be unreasonably withheld)
(collectively, "Losses") reasonably incurred by Executive in connection with any
claim, action, proceeding or investigation brought against or involving
Executive with respect to, arising out of or in any way relating to Executive's
employment with the Company or Executive's service as a director of the Company;
provided, however, that the Company shall not be required to indemnify Executive
for Losses incurred as a result of Executive's intentional misconduct or gross
negligence (other than matters where Executive acted in good faith and in a
manner he reasonably believed to be in and not opposed to the Company's best
interests). Executive shall promptly notify the Company of any claim, action,
proceeding or investigation under this paragraph and the Company shall be
entitled to participate in the defense of any such claim, action, proceeding or
investigation and, if it so chooses, to assume the defense with counsel selected
by the Company; provided that Executive shall have the right to employ counsel
to represent him (at the Company's expense) if Company counsel would have a
"conflict of interest" in representing both the Company and Executive. The
Company shall not settle or compromise any claim, action, proceeding or
investigation without Executive's consent, which consent shall not be
unreasonably withheld; provided, however, that such consent shall not be
required if the settlement entails only the payment of money and the Company
fully indemnifies Executive in connection therewith. The Company further agrees
to advance any and all expenses (including, without limitation, the fees and
expenses of counsel) reasonably incurred by the Executive in connection with any
such claim, action, proceeding or investigation, provided Executive first enters
into an appropriate agreement for repayment of such advances if indemnification
is found not to have been available.
5. Protection of Confidential Information; Non-Competition.
5.1 Executive acknowledges that:
(A) As a result of his current employment with, and prior
retention as an employee of, the Company, Executive has obtained and will obtain
secret and confidential information concerning the business of the Company and
its subsidiaries and affiliates (referred to collectively in this paragraph 5 as
the "Company"), including, without limitation, financial information, designs
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and other proprietary rights, trade secrets and "know-how," customers and
sources ("Confidential Information").
(B) The Company will suffer substantial damage which will be
difficult to compute if, during the period of his employment with the Company or
thereafter, Executive should enter a business competitive with the Company or
divulge Confidential Information.
(C) The provisions of this Agreement are reasonable and necessary
for the protection of the business of the Company.
(D) Executive agrees that he will not at any time, either during
the term of this Agreement or thereafter, divulge to any person or entity any
Confidential Information obtained or learned by him as a result of his
employment with, or prior retention by, the Company, except (i) in the course of
performing his duties hereunder, (ii) with the Company's express written
consent; (iii) to the extent that any such information is in the public domain
other than as a result of Executive's breach of any of his obligations
hereunder; or (iv) where required to be disclosed by court order, subpoena or
other government process. If Executive shall be required to make disclosure
pursuant to the provisions of clause (iv) of the preceding sentence, Executive
promptly, but in no event more than 72 hours after learning of such subpoena,
court order, or other government process, shall notify, by personal delivery or
by electronic means, confirmed by mail, the Company and, at the Company's
expense, Executive shall: (a) take all reasonably necessary and lawful steps
required by the Company to defend against the enforcement of such subpoena,
court order or other government process, and (b) permit the Company to intervene
and participate with counsel of its choice in any proceeding relating to the
enforcement thereof.
(E) Upon termination of his employment with the Company,
Executive will promptly deliver to the Company all memoranda, notes, records,
reports, manuals, drawings, blueprints and other documents (and all copies
thereof) relating to the business of the Company and all property associated
therewith, which he may then possess or have under his control; provided,
however, that Executive shall be entitled to retain copies of such documents
reasonably necessary to document his financial relationship (both past and
future) with the Company.
(F) During the period commencing on the date hereof and ending on
the date Executive's employment hereunder is terminated (and, if Executive is
terminated with "Cause" or Executive terminates this Agreement without "Good
Reason," until the date which is one year after any such termination),
Executive, without the prior written permission of the Company, shall not,
anywhere in the world, (i) be employed by, or render any services to, any
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person, firm or corporation engaged in any business which is directly or
indirectly in competition with the Company ("Competitive Business"); (ii) engage
in any Competitive Business for his or its own account; (iii) be associated with
or interested in any Competitive Business as an individual, partner,
shareholder, creditor, director, officer, principal, agent, employee, trustee,
consultant, advisor or in any other relationship or capacity; (iv) employ or
retain, or have or cause any other person or entity to employ or retain, any
person who was employed or retained by the Company while Executive was employed
by the Company; or (v) solicit, interfere with, or endeavor to entice away from
the Company, for the benefit of a Competitive Business, any of its customers or
other persons with whom the Company has a contractual relationship.
Notwithstanding the foregoing, nothing in this Agreement shall preclude
Executive from investing his personal assets in the securities of any
corporation or other business entity which is engaged in a Competitive Business
if such securities are traded on a national stock exchange or in the
over-the-counter market and if such investment does not result in his
beneficially owning, at any time, more than 4.9% of the publicly-traded equity
securities of such Competitive Business.
(G) If Executive commits a breach, or threatens to commit a
breach, of any of the provisions of Sections 5.1(D) or 5.1(F), the Company shall
have the right and remedy:
(i) to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction, it being acknowledged and
agreed by Executive that the services being rendered hereunder to the Company
are of a special, unique and extraordinary character and that any such breach or
threatened breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company; and
(ii) require Executive to account for and pay over to the
Company all monetary damages suffered by the Company as the result of any
transactions constituting a breach of any of the provisions of Sections 5.1(D)
or 5.1(F), and Executive hereby agrees to account for and pay over such damages
to the Company.
5.2 Each of the rights and remedies enumerated in this Section 5 shall
be independent of the other, and shall be severally enforceable, and such rights
and remedies shall be in addition to, and not in lieu of, any other rights and
remedies available to the Company under law or equity.
5.3 In connection with any legal action or proceeding arising out of
or relating to this Agreement, the prevailing party in such action or proceeding
shall be entitled to be reimbursed by the other party for the reasonable
attorneys' fees and costs incurred by the prevailing party.
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5.4 If Executive shall violate any covenant contained in Section
5.1(F), the duration of such covenant so violated shall be automatically
extended for a period of time equal to the period of such violation.
5.5 If any provision of Sections 5.1(D) or 5.1(F) is held to be
unenforceable because of the scope, duration or area of its applicability, the
tribunal making such determination shall have the power to modify such scope,
duration, or area, or all of them, and such provision or provisions shall then
be applicable in such modified form.
5.6 The provisions of this paragraph 5 shall survive the termination
of this Agreement for any reason.
6. MISCELLANEOUS PROVISIONS
6.1 All notices provided for in this Agreement shall be in writing,
and shall be deemed to have been duly given when (i) delivered personally to the
party to receive the same, or (ii) when mailed first class postage prepaid, by
certified mail, return receipt requested, addressed to the party to receive the
same at his or its address set forth below, or such other address as the party
to receive the same shall have specified by written notice given in the manner
provided for in this Section 6.1:
If to Executive:
Mr. Melvyn Knigin
400 17th Street
Norwood, New Jersey 07648
With a copy to:
James W. Wimberly, Esq.
Wimberly & Lawson, P.C.
Lenox Towers
Suite 400
3400 Peachtree Road, N.E.
Atlanta, Georgia 30326
Fax No.: (404) 261-3707
11
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If to the Company:
Movie Star, Inc.
136 Madison Avenue
New York, New York 10016
Attn: Chairman of the Board
With a copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attn: Michael A. Salberg, Esq.
Fax No.: (212) 818-8881
All notices shall be deemed to have been given as of the date of personal
delivery or mailing thereof.
6.2 This Agreement, the Stock Option Agreements and the amended Stock
Option Agreements with respect to the Pre-existing Options executed
simultaneously herewith set forth the entire agreement of the parties relating
to the employment of Executive and are intended to supersede all prior
negotiations, understandings and agreements. No provisions of this Agreement or
the Stock Option Agreements may be waived or changed except by a writing by the
party against whom such waiver or change is sought to be enforced. The failure
of any party to require performance of any provision hereof or thereof shall in
no manner affect the right at a later time to enforce such provision.
6.3 All questions with respect to the construction of this Agreement,
and the rights and obligations of the parties hereunder, shall be determined in
accordance with the law of the State of New York applicable to agreements made
and to be performed entirely in New York.
6.4 This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the Company. This Agreement shall not be
assignable by Executive, but shall inure to the benefit of and be binding upon
Executive's heirs and legal representatives.
6.5 Should any provision of this Agreement become legally
unenforceable, no other provision of this Agreement shall be affected, and this
12
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Agreement shall continue as if the Agreement had been executed absent the
unenforceable provision.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
/s/ Melvyn Knigin
-----------------------------------
MELVYN KNIGIN
MOVIE STAR, INC.
/s/ Mark M. David
-----------------------------------
By: Mark M. David
Chairman of the Board
13
<PAGE>
SCHEDULE A TO EMPLOYMENT AGREEMENT
DATED AS OF FEBRUARY 22, 2000
BETWEEN
MOVIE STAR, INC. ("COMPANY")
AND
MELVYN KNIGIN ("MK")
Pursuant to the Company's Senior Executive Incentive Compensation Plan (the
"Plan"), in each fiscal year during the initial term and any renewal term of the
Employment Agreement MK shall be entitled to an award in an amount of not less
than three percent (3%) of pretax income on pretax income from $1,200,000 to
$3,200,000 and an additional award in an amount of not less than three and three
quarters percent (3.75%) of pretax income in excess of $3,200,000.
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,491
<SECURITIES> 0
<RECEIVABLES> 10,617
<ALLOWANCES> 1,128
<INVENTORY> 11,661
<CURRENT-ASSETS> 25,859
<PP&E> 8,155
<DEPRECIATION> 4,899
<TOTAL-ASSETS> 31,845
<CURRENT-LIABILITIES> 5,541
<BONDS> 15,052
<COMMON> 169
0
0
<OTHER-SE> 11,083
<TOTAL-LIABILITY-AND-EQUITY> 31,845
<SALES> 57,060
<TOTAL-REVENUES> 57,060
<CGS> 40,269
<TOTAL-COSTS> 40,269
<OTHER-EXPENSES> 12,317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,481
<INCOME-PRETAX> 2,993
<INCOME-TAX> 63
<INCOME-CONTINUING> 2,930
<DISCONTINUED> 0
<EXTRAORDINARY> 150
<CHANGES> 0
<NET-INCOME> 3,080
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.19
</TABLE>
