ITEM 1. BUSINESS
(a) The Company, a New York corporation organized in 1935, designs, manufactures, markets and sells an extensive line of ladies' sleepwear, robes, leisurewear, loungewear, panties and daywear; men's, women's and children's screen printed tee shirts; and also operates retail outlet stores under the name Movie Star Factory Stores ("Factory Stores"). At December 31, 1995, the Company had substantially completed the previously reported divestiture of its Schwabe men's work and leisure shirt division.
The Company's products consist of ladies' pajamas, nightgowns, baby dolls, nightshirts, dusters, shifts, sundresses, rompers, short sets, beachwear, peignoir ensembles, robes, leisurewear, panties, and daywear consisting of bodysuits, soft bras, slips, half-slips, teddies and camisoles. These products are manufactured in various fabrics, designs, colors and styles depending upon seasonal requirements, changes in fashion and customer demand. The Company also sells screen printed men's, women's and children's tee shirts under the trademark Sunworks(R). The designs for these tee shirt products are printed with photo-sensitive inks that appear in black and white until exposed to direct sunlight, which causes the designs to then appear in colors; the designs return to black and white when the tee shirts are no longer exposed to sunlight.
In the past, the Company has benefited from its long-standing relationships with its customers based on providing them with competitively priced products and efficient service. As a result of consolidations in the retail industry, the high cost of domestic manufacturing and difficulties the Company has encountered in engaging reliable offshore contractors and obtaining sufficient quantities of acceptable quality finished products from overseas, the Company has experienced a loss of sales to certain of its customers. The Company maintains an in-house design staff which affords it the flexibility to work with merchandise buyers on fashion design and price points and its domestic manufacturing facilities allow shorter "lead times" in producing certain of its products.
(b) Intentionally omitted.
(c) (i) The Company's products are sold to discount, specialty, national and regional chain, mass merchandise and department stores and direct mail catalog marketers throughout the United States. The prices to consumers for the Company's products range from approximately $3.00 for certain of its panty products to approximately $90.00 for certain other products, such as peignoir sets. The Company's products are sold by in-house sales personnel and outside manufacturer's representatives. Approximately 47% of the Company's sales are made to national chains and mass merchandisers; the balance of the Company's sales are unevenly distributed among discount, specialty, department and regional chain stores, direct mail catalog marketers and to consumers through the Company's Factory Stores. The Company's gross profit on its sales for each of the fiscal years ended June 30, 1997, 1996 and 1995 was approximately 27%, 20% and 22%, respectively.
The Factory Stores sell apparel products manufactured by the Company and other manufacturers at discounted retail prices. Historically, approximately 30% of the sales by these stores have been derived from products supplied by the Company. In fiscal 1996, approximately 44% of the products sold by these stores were supplied by the Company. This increase resulted from the sale by these stores of a substantial amount of the finished goods inventory of the discontinued Schwabe division. In fiscal 1997 less than 20% of the products sold by these stores were supplied by the Company. This decrease resulted primarily from the phase out of the popular-priced trade business, the divestiture of the Schwabe division and the expansion of the factory stores product line. The Factory Stores accounted for approximately 11.5% of total sales of the Company in fiscal 1996 and 16.7% of total sales in fiscal 1997. This increase in percentage of total sales was due to the reduction in overall sales of the Company in fiscal 1997 caused primarily by the divestiture of the Schwabe Division. These stores operate at a gross profit above 30%. The Factory Stores division advertises directly to consumers through print, radio and television in the localities in which it operates. I-1
The Company limits the promotion of its products to cooperative advertising in conjunction with its retail customers directed to the ultimate retail consumer of its products. In addition to its in-house sales force, the Company has, since 1976, retained Harold Shatz and Jeffrey Hymowitz and their organization, as a manufacturer's representative. Working closely with the Company, Messrs. Shatz and Hymowitz sell to selected accounts under the overall supervision of the Company's Chairman, Mark M. David, and Mel Knigin, the Company's President and its most senior executive in charge of sales and merchandising. Their organization is paid commissions based on the net sales of all intimate apparel products it sells. Messrs. Shatz and Hymowitz are not employees of the Company and their current contract with the Company expires in December 1998. In fiscal year 1996 approximately 12% and in fiscal year 1997 approximately 30% of the Company's net sales were attributed to sales by this organization. This increase was a result of an overall decrease in the Company's sales caused primarily by the divestiture of the Schwabe Division and the Company's recent consolidation and restructuring which has allowed senior management to refocus their sales and design efforts on the Company's intimate apparel business. Management believes that the increase in sales to Mr. Shatz's and Mr. Hymowitz's accounts were directly attributable to its refocused sales and design efforts. The Company believes that the loss of its relationship with Messrs. Shatz and Hymowitz and their organization would not materially adversely affect the Company because retailers' purchasing decisions are primarily based upon the Company's products. In 1988, Mr. Shatz and Mr. Hymowitz were granted non-qualified options to purchase an aggregate of 133,333 shares of the Company's Common Stock at a price of $2.36 per share.
Messrs. Shatz and Hymowitz and their organization have also devoted a portion of their time to the development, marketing and sale of the Company's screen printed tee shirts under the Sunworks(R) trademark and in the development of other products utilizing the same sun-activated print technology in which the Company is a participant. The Company has entered into a separate agreement with the Shatz/Hymowitz organization providing for formula based compensation to be paid to it based on the net profits (as defined in the agreement) derived by the Company from the sale of Sunworks(R) imprinted tee shirts and other products.
(ii) Not applicable.
(iii) The Company utilizes a large variety of fabrics made from natural and man-made fibers including, among others, polyester, cotton, broadcloth, stretch terry, flannel, brush, nylon, spun polyester, velour, satins, tricot, jersey, fleece, jacquards, lace, stretch lace, charmeuse, chambray, and various knit fabrics.
These materials are available from a variety of both domestic and foreign sources. The sources are highly competitive in a world market. The Company expects these competitive conditions to continue in the foreseeable future. Generally, the Company has long-standing relationships with its domestic and foreign suppliers and purchases its raw materials in anticipation of orders or as a result of need based on orders received. Purchase of raw materials in high volume provides the Company with the opportunity to buy at relatively low prices. In turn, the Company is able to take advantage of these lower prices in the pricing of its finished goods.
The Company increased the amount of finished goods assembled for it by contractors in the Caribbean, Central America and Mexico from approximately 9% in fiscal 1996 to approximately 25% in fiscal 1997. This increase was due to the Company's strategic decision to assemble more of its finished goods in Mexico in order to take advantage of lower labor costs and lower duty rates resulting from the North American Free Trade Agreement. In fiscal 1997, approximately 33% of the Company's raw materials were imported as compared to approximately 9% in fiscal 1996. This increase resulted from the increase in offshore production, the availability of raw materials in Mexico and purchasing decisions designed to take advantage of lower costs associated with certain imported raw materials. Approximately 20% of the Company's finished goods were purchased from foreign sources in fiscal 1997 as compared to 19% in fiscal 1996.
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As of June 30, 1996, the Company eliminated the separate structure of its International Division and has absorbed the functions of purchasing finished products and raw materials from offshore sources, into its single unified operating organization. Currently, the Company has two employees based in Bangladesh to supervise the production of finished products purchased by the Company from manufacturers in that country. The Company may hire additional supervisory personnel to be based in other countries as new sources of supply are identified or it may retain the services of independent agents in those countries.
Centralization of the functions of the former International Division has given the Company greater control over its offshore sourcing through closer oversight of these functions by senior management and greater accountability from foreign based personnel employed by and reporting directly to the Company. Management personnel travel to the Far East, the Caribbean, Mexico and Central America throughout the year to monitor the performance of the Company's offshore manufacturers and contractors. The General Agreement on Tariffs and Trade has not had any impact on the operations of the Company.
The Company believes it maintains adequate inventories to cover the needs of its customers.
(iv) The Company has several registered trademarks, of which "Movie Star", "Movie Star Loungewear", "Cinema Etoile", "Cine Jour", "Cine Star", "Night Magic" and "Sunworks" are material to the marketing by the Company of its products. There is no litigation with respect to patents, licenses and trademarks.
(v) The Company manufactures a wide variety of intimate apparel in many different styles and sizes and for use in all seasons and climates in the United States. Because of its product mix, it is subject to certain seasonal variations in sales and in the utilization of its manufacturing facilities. More than 50% of the Company's sales are made in the first six months of its fiscal year.
(vi) All sales are outright sales. Terms are generally net 10 days E.O.M. or net 30 days from the date the goods are shipped which, depending on date of shipment, can be due from as short a period as twenty-one days or as long as fifty days. It has become industry practice to extend payment terms up to an additional thirty days for certain customers. Although sales are made without the right of return, in certain instances the Company may accept returns or agree to allowances. The Company maintains sufficient inventories of raw materials and finished goods to meet its production requirements and the delivery demands of its customers. As a result, the Company relies on its short-term line of credit to supplement internally generated funds to fulfill its working capital needs.
(vii) Sears Roebuck and Company accounted for 12% of fiscal year 1997 sales and 25% of sales for fiscal year 1996. Approximately 15% of the Company's sales for fiscal 1996 were comprised of men's work and leisure shirts which were manufactured by the Schwabe Division and sold to Sears Roebuck and Company. The Schwabe Division had no sales for fiscal 1997. Walmart accounted for 17% of sales for fiscal 1997 and 5% of sales for fiscal 1996. J.C. Penney accounted for 11% of sales for fiscal 1997 and 8% of sales for fiscal 1996.
Purchasing decisions by the Company's customers with respect to each group of the Company's products and, in some instances, products within a group, generally are made by different buyers and purchasing departments. The Company believes that the loss of orders from any one buyer or purchasing department would not necessarily result in the loss of sales to other buyers or purchasing departments of those customers.
(viii) The backlog of orders as of June 30, 1997 was approximately $21,300,000 and as of June 30, 1996 was approximately $21,200,000. Orders are booked upon receipt. The Company believes that the current backlog is firm and will be filled by the end of the current fiscal year.
(ix) There is no material portion of the business which may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.
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(x) The intimate apparel business is fragmented and highly competitive. The industry is characterized by a large number of small companies manufacturing and selling unbranded merchandise, and by several large companies which have developed widespread consumer recognition of the brand names associated with merchandise manufactured and sold by these companies. In addition, certain of the larger retailers to whom the Company has historically sold its products have, in recent years, sought to expand the development and marketing of their own brands and to obtain intimate apparel products directly from similar sources as the Company.
While the Company believes that owning manufacturing facilities can be advantageous, owning plants has required the investment of substantial capital and subjected the Company to the costs of maintaining excess capacity. Competitive conditions in the industry have required the Company to place greater reliance on obtaining raw materials and finished products from sources outside the United States.
The Company has consolidated production in its domestic plants by closing underutilized and inefficient facilities. Between August 1990 and June 1996, the Company has closed sixteen manufacturing plants in an effort to lower costs by reducing excess manufacturing capacity and in response to the need to produce and purchase products at a lower cost from sources outside the United States.
The intimate apparel industry is further characterized by competition on the basis of price, quality, efficient service and prompt delivery. Because of this competitive pressure, it has become increasingly difficult for the Company to rely principally on domestic manufacturing. Further shifts in competitive conditions may require the Company to increase its reliance on offshore manufacturers and contractors in the future. Accordingly, changes in import quotas, currency valuations and political conditions in the countries from which the Company imports products could adversely affect the Company's business. Such shifts could result in the underutilization of the Company's remaining domestic plants and decrease profitability.
The Company believes that the consolidation in the retail industry has contributed to increased competition among manufacturers of products of the type sold by the Company. As part of its response to this competitive pressure, the Company has sought to maximize its domestic manufacturing efficiency through strategic consolidation of underutilized facilities. The Company has continued to take advantage of opportunities in the Caribbean Basin and Central America to contract for the cutting and assembly of its products which enables the Company to benefit from lower offshore labor costs coupled with transportation times that are faster than deliveries from the Far East. In fiscal 1996, the Company resumed contracting in Mexico and in fiscal 1997 increased its production there. In the past, the Company has been unable to maximize the benefits of these opportunities due to a reduction in the volume of orders it received for goods that were suitable for assembly offshore; shorter than anticipated lead times between placement of orders and customers' required delivery dates; and, its inability to establish or maintain relationships with reliable contractors. The Company believes it has addressed and corrected the problems associated with the unreliability of certain contractors it used in the past.
(xi) No material research activities relating to the development of new products or services or the improvement of existing products or services were undertaken during the last fiscal year, except for the normal continuing development of new styles and marketing methods.
(xii) There are no costs relating to complying with environmental regulations in the fiscal year just completed or over future periods of which the Company is aware.
(xiii) Of the approximately 732 employees of the Company, approximately 22 are executive, design and sales personnel, 89 are administrative personnel, and the balance are in manufacturing and warehousing and retail sales for the Movie Star Factory Stores division. In addition, the Company employs approximately 60 part-time sales and stockroom assistants in its Movie Star Factory Stores division.
The Company has never experienced an interruption of its operations because of a work stoppage. Even though the Company is subject to certain seasonal variations in sales, significant seasonal layoffs are rare.
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Most employees have an interest in the Company's Common Stock through the Company's ESOP. The Company deems its relationship with its employees to be good. The Company is not a party to any collective bargaining agreement with any union.
Restriction on Dividends
Pursuant to a public offering of $25,000,000 of Debentures in 1986, and the exchange in October 1996 of certain of those Debentures for New Senior Notes, the Company may not declare or pay any dividend or make any distribution on any class of its capital stock except dividends or distributions payable in capital stock of the Company or to the holders of any class of its capital stock, or purchase, redeem or otherwise acquire or retire for value any capital stock of the Company if (i) at the time of such action an event of default, or an event which with notice or lapse of time or both would constitute an event of default, shall have occurred and be continuing, or (ii) if, upon after giving effect to such dividend, distribution, purchase, redemption, other acquisition or retirement, the aggregate amount expended for all such purposes subsequent to June 30, 1986, shall exceed the sum of (a) 75% of the aggregate consolidated net income of the Company earned subsequent to June 30, 1986, (b) the aggregate net proceeds, including the fair market value of property other than cash received by the Company from the issue or sale after September 30, 1986 of capital stock of the Company, including capital stock issued upon the conversion of, or in exchange for, indebtedness for borrowed money and (c) $4,000,000; provided, however, that the provisions of this limitation shall not prevent the retirement of any shares of the Company's capital stock by exchange for, or out of proceeds of the substantially concurrent sale of, other shares of its capital stock, and neither such retirement nor the proceeds of any such sale or exchange shall be included in any computation made under this limitation. At June 30, 1997, the Company is prohibited from paying any cash dividends.
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ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth all of the facilities owned or leased by the Company as of June 30, 1997.
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The following table sets forth the amount of space allocated to different functions in shared facilities set forth in the preceding table.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending which are material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the American Stock Exchange. The following table sets forth for the indicated periods the reported high and low prices per share.
High Low Year Ended June 30, 1997 First Quarter 1 9/16 Second Quarter 7/8 7/16 Third Quarter 15/16 9/16 Fourth Quarter 11/16 7/16
Year Ended June 30, 1996 First Quarter 7/8 1/2 Second Quarter 5/8 3/16 Third Quarter 9/16 1/4 Fourth Quarter 1 7/16
As of August 30, 1997, there were approximately 1,035 holders of record of the Common Stock. For restrictions on dividends, see Item 1 at page I-7.
MARKET FOR COMPANY'S DEBENTURE
High Low Year Ended June 30, 1997 First Quarter.................................. 650.00 501.25 Second Quarter................................. 640.00 570.00 Third Quarter.................................. 771.25 570.00 Fourth Quarter................................. 760.00 671.25
Year Ended June 30, 1996 First Quarter.................................. 750.00 650.00 Second Quarter................................. 740.00 430.00 Third Quarter.................................. 550.00 285.00 Fourth Quarter................................. 500.00 270.00
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (In Thousands, Except Per Share Amounts)
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements with respect to anticipated results which are subject to a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are: business conditions and growth in the Registrant's industry; general economic conditions; the addition or loss of significant customers; the loss of key personnel; product development; competition; foreign government regulations; fluctuations in foreign currency exchange rates; rising costs of raw materials and the unavailability of sources of supply; the timing of orders placed by the Registrant's customers; and such other risk factors listed from time to time in the Company's SEC reports .
Results of Operations
1997 vs. 1996
Net sales for the year ended June 30, 1997 decreased to $61,470,000 from $84,115,000 in the comparable period in 1996, a decrease of 26.9%. The decrease in sales resulted primarily from the elimination of the men's work and leisure shirt division and lower sales in the intimate apparel division of approximately $17,498,000 and $4,746,000, respectively. The lower sales in the intimate apparel division resulted primarily from the weak retail demand for certain of the Company's products and the Company's efforts to eliminate low margin business. The Company does not intend to directly replace the reduction in sales resulting from the elimination of the men's work and leisure shirt division. Net sales for the Company's retail division, Movie Star Factory Stores, increased $458,000 to $10,229,000 for the year ended June 30, 1997 as compared to the comparable period in 1996.
The gross profit percentage increased to 26.9% for the year ended June 30, 1997 from 20.4% in the similar period in 1996. The increase was due primarily to the elimination of the low margin men's work and leisure shirt division, which had an 11.2% gross margin in 1996. The gross margin in the Company's intimate apparel product lines increased to 24.9% in 1997 from 20.6% in the similar period in 1996. The higher margins resulted primarily from the Company's refocused efforts to increase margins and to address all components of its finished goods costs, including the countries in which goods are manufactured, the sources of its piece goods and the overall management of its costs. The Movie Star Factory Stores gross margin increased to 35.7% for 1997 as compared to 34.4% in the similar period in 1996. The higher margins in the Movie Star Factory Stores resulted from changes in buying practices, an expanded product line and lower markdowns.
During fiscal 1997, the Company shifted a portion of its production from the Caribbean, Central America and the Far East to manufacturers located in close proximity to Mexico City, Mexico. This shift allows the Company to take advantage of lower duty rates that result from the North American Free Trade Agreement and the availability of piece goods in Mexico. The proximity of the Mexican based contractors also enables the Company's senior management to more easily monitor the production of these products. The Company has one full-time employee located in Mexico and is relocating another full-time employee to Mexico to monitor the production of its products. The Company intends to increase its production in Mexico and to hire additional personnel, located in Mexico, to monitor its production.
At the end of fiscal 1996 and into the second quarter of fiscal 1997, the Company continued to encounter problems with its imported finished goods. In certain instances, after taking delivery of the goods, the Company was required to correct manufacturing defects before shipping the merchandise to one of the Company's customers. Although no loss of sales was attributable to the poor quality
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merchandise, the Company incurred costs of approximately $400,000 associated with correcting the quality problems, which had a negative impact on the financial results for fiscal 1997. In fiscal 1997, the Company replaced the senior personnel responsible for its import department and hired two employees located in the Far East to supervise the production of its products. In addition, the Company is now purchasing its products from different manufacturers than it has in the past.
Selling, general and administrative expenses decreased by $3,809,000 to $13,718,000 for the year ended June 30, 1997 as compared to 1996. This decrease was primarily due to the Company's consolidation and realignment of its operations and lower sales volume. Specifically, the decrease resulted from reductions in salary expense and salary related costs of approximately $1,518,000, sales related expenses of approximately $226,000 and rent expense of approximately $1,322,000, along with decreases in other general overhead expenses. The Company also had a more favorable than expected recovery of bad debts of approximately $447,000. This allowance recovery resulted primarily from one customer that resolved its bankruptcy much faster and much more favorably than the Company had anticipated.
In fiscal 1996, the Company abandoned two floors of its New York City offices in connection with the Company's consolidation and realignment of its operations. The Company provided a reserve of $900,000 for estimated costs in connection with the abandonment of the two floors, and wrote-off the net remaining book value of related leasehold improvements of $270,000. In August of 1996, the Company terminated and settled its remaining leasehold obligations with respect to the aforementioned abandoned floors for $800,000.
The Company had income from operations for fiscal year 1997 of $2,805,000 as compared to a loss from operations of $1,475,000 for fiscal year 1996. This improvement in income from operations was due to higher margins, lower selling, general and administrative expenses and one time charges taken in the prior fiscal year. The Movie Star Factory Stores had a positive impact on the Company's results from operations for both fiscal year 1997 and 1996.
In September 1996, the Company purchased $1,320,000 in principal amount of its 12.875% subordinated debentures to meet a sinking fund payment due in October 1996. As a result of the transaction, the Company recorded a gain of $560,000, net of related costs, in the first quarter of fiscal 1997.
Interest expense for the year ended June 30, 1997 decreased by $1,112,000 from the comparable period in 1996 due to lower borrowings coupled with the effect of the negotiated lower rate of interest on a portion of the Company's long-term debt.
An income tax provision of $65,000 was provided for by the Company for the year ended June 30, 1997 as compared to an income tax benefit of $90,000 for the year ended June 30, 1996.
The Company had net income of $519,000 for the year ended June 30, 1997 as compared to a net loss of $5,278,000 for the same period in 1996. This improvement was due to higher margins, lower selling, general and administrative expenses, lower interest costs, a gain on the Company's purchase of its subordinated debentures and one time charges taken in the prior year.
1996 vs. 1995
Net sales decreased by $17,831,000 (17.5 %) to $84,115,000 for the year ended June 30, 1996 compared to the prior year. The decrease in sales resulted primarily from lower sales in the popular-priced intimate apparel product line. The lower sales resulted from the elimination of trade business from that product line, the weak retail climate for the Company's products and the inability of the Company to source effectively. The Company anticipated lower sales in fiscal 1997 due to the discontinuance of its low margin men's work and leisure shirt division in fiscal 1996.
In September 1995, the Company announced its decision to eliminate its low margin men's work and leisure shirt division to focus on its core intimate apparel business. This action was designed to alleviate certain pressures associated with that division's operations namely, high inventory and capital requirements and poor return on capital. The liquidation of the assets of this division was substantially completed as of December 31, 1995. The Company recorded an additional charge of $2,250,000, against cost of sales, to write-down to its net realizable value the inventory of the men's work and leisure shirt division.
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The gross profit percentage was 20.4% in fiscal 1996 as compared to 20.3% in the prior year. The above-mentioned additional charge of $2,250,00 decreased the Company's fiscal 1995 gross profit percentage by 2.2%, from 22.5%, before the additional charge to 20.3% after the additional charge. The lower margins in fiscal 1996 were primarily due to the Company's popular-priced intimate apparel product line. The lower margins resulted from a more competitive market, the weak retail climate for the Company's products, the inability of the Company to source effectively and the Company's effort to sell off discontinued inventory and reduce inventory levels. The Company anticipated higher margins in fiscal 1997 due to the discontinuance of its low margin's men's work and leisure shirt division in fiscal 1996 and the other continuing efforts to eliminate low margin business.
In order to compete more effectively, the Company reduced excess plant capacity and, accordingly, closed 7 plants in fiscal 1996. The Company now operates 3 domestic manufacturing facilities.
The Company continued to encounter significant problems with the finished goods it imports. These problems resulted in the receipt of lesser quality goods, unscheduled and costly air shipments and the inability, in certain instances, to make timely delivery of quality finished product to our customers. As a result, certain customers either canceled orders, returned goods or took deductions. The Company has not fully resolved its sourcing problems, which were expected to have a further negative effect on financial results in fiscal 1997. However, due to the steps taken in fiscal 1996 described above, the Company anticipated that operating results would improve in fiscal 1997.
Selling, general and administrative expenses decreased by $3,014,000 to $17,527,000 for the year ended June 30, 1996, as compared to 1995. This decrease was due to reduced overhead costs as a result of the Company's consolidation and realignment and lower sales volume. Specifically, this decrease resulted from reductions in salary expense and related payroll taxes of approximately $1,342,000, sales related expenses of approximately $1,368,000, which included reductions in shipping costs and sample making of approximately $615,000 and $473,000, respectively, rent expense of approximately $384,000 and a net increase in other general overhead expenses.
In order to reduce overhead expenses and improve operating efficiencies, the Company vacated two floors in its New York City offices, separately leased to the Company, and combined its operation into another floor leased by the Company in the same building. The Company terminated and settled these lease obligations for $800,000 and wrote-off the remaining net book value of related leasehold improvements of $270,000.
In fiscal 1995, the Company recorded a special charge of $750,000 to write-down to its estimated realizable value the men's work and leisure shirt division's property, plant and equipment.
Interest expense for the year ended June 30, 1996 decreased by $776,000 from the comparable period in 1995 due to lower borrowing levels in fiscal 1996.
An income tax benefit of $90,000 was provided by the Company for the year ended June 30, 1996 as compared to $246,000 for the year ended June 30, 1995.
As a result of the above factors, the financial results reflect a net loss from operations of $5,278,000 for the year ended June 30, 1996, compared to a net loss of $5,029,000 for the comparable period in 1995.
Liquidity and Capital Resources
For the year ended June 30, 1997, the Company's working capital decreased by $770,000 to $18,636,000, principally from the payment of long-term debt and the purchase of fixed assets, offset partially by operating profits.
During the fiscal year ended June 30, 1997, cash increased by $752,000. The Company used cash for the purchase of fixed assets of $133,000 and the repayment of long-term debt of $815,000. These activities were principally funded by cash generated by operating activities.
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Inventory at June 30, 1997 increased by $2,391,000 to $16,638,000 from $14,247,000 at June 30, 1996 due primarily to an increase in the inventory of the lingerie division from the prior year's levels.
In October 1996, the Company consummated an agreement with holders of $10,187,000 of the Company's outstanding 12.875% unsecured subordinated debentures ("Restructured Bonds"). The holders of the Restructured Bonds exchanged such bonds for the issuance of an equivalent principal amount of a new series of notes bearing interest at a rate of 8% per annum, payable semi-annually (April 1 and October 1) which are senior to the 12.875% debentures ("New Senior Notes"). Additionally, the holders of the Restructured Bonds deferred the receipt of interest due April 1, 1996 (approximately $656,000) and October 1, 1996 (approximately $434,000). The Company paid the interest due on the remaining 12.875% debentures. The holders of the Restructured Bonds have also accepted New Senior Notes in exchange for the April 1, 1996 and October 1, 1996 deferred interest related to the Restructured Bonds. The aggregate principal amount of the New Senior Notes approximate $11,276,500. The New Senior Notes do not provide for any amortization of principal and mature on September 1, 2001. As a result of the exchange, the Company will apply the entire principal amount of the Restructured Bonds acquired by the Company of $10,187,000 to its mandatory annual sinking fund payments through October 1999. The Company's obligation to make mandatory sinking fund payments on the 12.875% debentures will resume in October 1999. The aggregate principal indebtedness of the New Senior Notes and the 12.875% subordinated debentures after the exchange is approximately $22,209,000.
The New Senior Notes carry the right to convert up to approximately $716,000 of the notes into 1,908,000 shares of the Company's common stock at a price of $0.375 per share. In addition, the holders of the New Senior Notes have the right to designate a representative to attend all meetings of the Company's Board of Directors and Compensation Committee.
During September 1996, the Company purchased $1,320,000 in principal amount of its 12.875% subordinated debentures. As a result of the transaction, the Company recorded a pre-tax gain of approximately $560,000, net of related costs, in the first quarter of fiscal 1997. The Company reduced its mandatory sinking fund requirements with these debentures.
In September 1996, the Company delivered $3,750,000 of its 12.875% debentures, that it had previously acquired, to the Indenture Trustee, in lieu of making the mandatory sinking fund payment due October 1, 1996 in cash.
The Company does not anticipate making any additional purchases of its stock and anticipates that capital expenditures for fiscal 1998 will be less than $500,000. Depending on price and availability the Company may seek to purchase a portion of its outstanding 12.875% debentures to further reduce its sinking fund obligation and reduce interest expense.
The Company has a secured revolving line of credit of up to $13,500,000, through June 1998, to cover the Company's projected needs for operating capital and letters of credit to fund the purchase of imported goods. Direct borrowings under this line bear interest at the annual rate of 2.5% above the prime rate of Chase Manhattan Bank. Availability under the line of credit is subject to certain agreed upon formulas. Under the terms of this financing, the Company has agreed to pledge substantially all of its assets, except the Company's domestic inventory and real property. This credit facility replaced the financing agreements which the Company had with two banks.
Management believes its available borrowing under its secured revolving line of credit, along with anticipated internally generated funds, will be sufficient to cover its working capital requirements.
Continued Stock Exchange Listing
The Company has been notified in writing by the American Stock Exchange that the Exchange has determined to defer further consideration of the Company's eligibility for continued listing on the Exchange, subject to periodic reviews of the Company's filings with the Commission.
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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve certain risks and uncertainties. The Company's actual results or outcomes may differ materially from those anticipated. Important factors that the Company believes might cause differences are discussed in the cautionary statement under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K. In assessing forward-looking statements contained herein, readers are urged to carefully read those statements.
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ITEM 8
ITEM 8 INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Movie Star, Inc.:
We have audited the accompanying consolidated balance sheets of Movie Star, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the financial statement schedule listed in the index at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Movie Star, Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP September 4, 1997 New York, New York
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND 1996 (In Thousands, Except Number of Shares)
See notes to consolidated financial statements.
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (In Thousands, Except Per Share Amounts)
See notes to consolidated financial statements.
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (In Thousands)
See notes to consolidated financial statements.
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996, AND 1995 (In Thousands)
MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996, AND 1995 (In Thousands)
See notes to consolidated financial statements.
MOVIE STAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Movie Star, Inc. and its subsidiaries (the "Company") is a New York corporation organized in 1935, which designs, manufactures, markets and sells an extensive line of ladies' sleepwear, robes, leisurewear, loungewear, panties and daywear; and also operates 28 retail outlet stores.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. The preparation of financial statements in conformity with generally accepted accounting principles also requires management to make estimates and assumptions that affect the disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Inventory - Inventory is valued at lower of cost (first-in, first-out) or market.
Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation and amortization are provided by the straight-line method over the following estimated useful lives:
Buildings and improvements 15-30 years Machinery & Equipment 5 years Office furniture and equipment 5 years Leasehold improvements Lesser of life of the asset or life of lease
Revenue Recognition - Revenue is recognized upon shipment. Although sales are made without the right of return, in certain instances, the Company may accept returns or agree to allowances. Allowances for sales returns are recorded as a component of net sales in the period in which the related sales are recognized.
Income Taxes - The Company follows Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" (see Note 9).
Net Income (Loss) Per Share - Net income (loss) per share is based on the net income (loss) for each year divided by the weighted average number of shares outstanding. Common share equivalents (stock options) were not dilutive in each of the three years ended June 30, 1997.
Deferred Costs - Deferred financing costs are amortized over the life of the debt using the straight-line method.
Accounting Pronouncements - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which is effective for the Company for the year ended June 30, 1998. SFAS No. 128 simplifies the standards for computing earnings per share previously found in Accounting Principles Board Opinion ("APB") No. 15 and
establishing new standards for computing and presenting earnings per share. Application of SFAS No. 128 is not expected to has a significant affect on the Company's earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information, " which is effective for the Company for the year ended June 30, 1999. SFAS No. 131 requires disclosure about operating segments in complete sets of financial statements and in condensed financial statements of interim periods issued to shareholders. The new standard also requires that the Company report certain information about their products and services, the geographic areas in which they operate, and major customers. The Company has not yet determined the impact of the adoption of SFAS No. 131.
Reclassification - Certain items in prior years in specific captions of the accompanying consolidated financial statements and notes to consolidated financial statements have been reclassified for comparative purposes.
2. INVENTORY
Inventory consists of the following:
June 30, 1997 1996 (In Thousands)
Raw materials $ 5,503 $ 3,816 Work-in-process 2,806 1,950 Finished goods 8,329 8,481 --------- ---------
$16,638 $ 14,247 ========= =========
3. RECEIVABLES
Receivables are comprised of the following:
June 30, 1997 1996 (In Thousands)
Trade $ 5,171 $ 9,780 Other 214 251 --------- --------- 5,385 10,031 Less allowance for doubtful accounts (1,238) (2,616) --------- ---------
$ 4,147 $ 7,415 ========= =========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
At June 30, 1997, the Company held property, plant and equipment with a net book value of approximately $ 587,000 for sale or lease.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the following:
6. NOTES PAYABLE
At June 30, 1995, the Company had notes payable aggregating $15,803,000 under line of credit agreements from two banks. Pursuant to the agreements, all borrowings were collateralized by accounts receivable and finished goods inventory imported pursuant to letters of credit. Interest on the outstanding notes was payable monthly at up to 1 percent above the prime rate.
On October 13, 1995, the Company entered into new agreements under similar terms with the same banks, which was to expire on June 30, 1996, with interest on outstanding borrowings being payable monthly at 1.25 percent above the prime rate.
On April 24, 1996, the Company terminated these line of credit agreements and entered into a line of credit agreement with an unrelated lender. Under the new credit agreement, the Company may borrow for either
revolving loans or letters of credit up to the lesser of $13,500,000 or the sum of 80 percent of the net amount of eligible receivables, 50 percent of the eligible inventory and 50 percent of the eligible letters of credit. Pursuant to the terms of the agreement, the Company has pledged substantially all of its assets, except the Company's domestic inventory and real property. Interest on outstanding borrowings is payable at 2.5 percent above the prime rate. The Company is obligated to pay a facility fee of $270,000 over the term of the agreement which expires on June 30, 1998.
Under the terms of the agreement, the Company is required to meet certain financial covenants, of which the Company is in compliance at June 30, 1997. Furthermore, the Company is prohibited from paying dividends or incurring additional indebtedness, as defined, outside the normal course of business.
At June 30, 1997, the Company had no borrowing outstanding under this line of credit and had approximately $2,948,000 outstanding letters of credit. Additionally, the Company had a cash balance of approximately $2,683,000 deposited with the lender which earned interest at 5.25 percent at June 30, 1997.
7. LONG-TERM DEBT
Long-term debt consists of the following:
12.875% Subordinated Debentures - On October 10, 1986, the Company sold $25,000,000 of 12.875% Subordinated Debentures due October 1, 2001 (the "Debentures"). Interest payments on the outstanding Debentures are due semi-annually on October 1 and April 1. The Debentures are redeemable, in whole or in part, at the option of the Company, at any time, and are subordinated to all senior debt (as defined). The Debentures contain covenants with respect to limitations on dividends and stock purchases. At June 30, 1997, the Company is prohibited from paying dividends and making stock purchases.
Annual sinking fund payments of $3,750,000 are required commencing October 1, 1996. However, required payments in any year may be reduced by Debentures previously purchased by the Company. The total purchases of Debentures at June 30, 1996 were $2,550,000. On September 13, 1996, the Company purchased an additional $1,320,000 of Debentures for approximately $824,000 including related costs. Furthermore in 1996, the Company acquired $10,187,000 of 12.875% Debentures in an exchange (discussed below). The Company reduced the October 1, 1996 sinking fund requirement and intends to reduce sinking fund payments through 1998 and part of 1999 by these purchased Debentures.
8% Senior Notes - In April 1996, the Company reached an agreement with holders of $10,187,000 of the Company's outstanding 12.875% Debentures. The holders of these Debentures agreed to exchange such Debentures for the equivalent principal amount of a new series of notes ("Senior Notes") bearing interest at
a rate of 8 percent per annum, payable semi-annually (April 1 and October 1) which will be senior to the remaining outstanding Debentures. Additionally, these Debenture holders agreed to defer the receipt of interest due April 1, 1996 (approximately $656,000) and due October 1, 1996 (approximately $434,000) and to accept Senior Notes in exchange for such deferred interest. The Senior Notes will carry the right to convert up to approximately $716,000 of the notes into 1,908,000 shares of the Company's common stock. On October 1, 1996, the aggregate principal amount of the Senior Notes approximated $11,276,000 and will not provide for any amortization of principal and will mature on September 1, 2001.
The debt exchange closed on October 15, 1996, but became effective retroactively as of April 1, 1996, the date of the deferral of interest on the 12.875% Debentures. In connection with the debt exchange, the Company incurred certain costs which have been capitalized and will be amortized over the life of the Senior Notes using the straight-line method. The Senior Notes contain covenants with respect to limitations on dividends and stock purposes. At June 30, 1997, the Company is prohibited from paying dividends and making stock purchases.
The maturities of long-term debt at June 30, 1997, including current maturities, are as follows (in thousands):
Year Amount
1998 $ 73 1999 41 2000 971 2001 3,779 2002 (9/1/01) 11,276 2002 (10/1/01) 6,269 --------- $22,409 =========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
June 30, 1997 1996 ------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In Thousands)
Long-Term Debt $22,409 $17,079 $23,428 $15,027
Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and Other Noncurrent Assets - The carrying value of these items approximates fair value, based on the short-term maturities of these instruments.
Long-Term Debt - The fair value of these securities are estimated based on quoted market prices. If no market quotes are available, interest rates that are currently available to the Company for issuance of the debt with similar terms and remaining maturities are used to estimate fair value of debt issues.
The fair value estimates presented herein are based on pertinent information available to management as of June 30, 1997 and 1996. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those respective dates, and current estimates of fair value may differ significantly from the amounts presented herein. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses. The tax effects of significant items, comprising the Company's net deferred tax asset, are as follows:
The provision for income taxes is comprised as follows:
Year Ended June 30, 1997 1996 1995 (In Thousands)
Current: Federal $ 65 $ - $ (270) State and local - (90) 24 Deferred - - - --------- -------- -------- $ 65 $ (90) $ (246) ========= ======== ========
Reconciliation of the U.S. statutory rate with the Company's effective tax rate is summarized as follows:
As of June 30, 1997, the Company has net operating loss carryforwards of approximately $11,369,000 for income tax purposes that expire between the years 2002 and 2010.
10. LEASES
The Company has operating leases expiring through 2001, which include, in addition to fixed rentals, escalation clauses that require the Company to pay a percentage of increases in occupancy expenses.
Future minimum payments under these leases at June 30, 1997 are as follows (in thousands):
Year Amount
1998 $ 571 1999 471 2000 451 2001 338 -------- Total $ 1,831 ========
Loss on Abandonment of Leased Premises - During 1996, the Company vacated two floors, separately leased to the Company, and combined its operation into an existing floor leased by the Company in the same building. The Company terminated and settled its lease obligations for the vacated floors for $800,000 and wrote-off the remaining net book value of related leasehold improvements of $270,000.
Rental expense for 1997, 1996 and 1995 was approximately $787,000, $1,471,000 and $1,863,000, respectively. Rental expense for 1996 excludes the $800,000 lease settlement.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company's customers are not concentrated in any specific geographic region but are concentrated in the retail industry. One customer accounted for 12, 25, and 22 percent of the Company's net sales in fiscal 1997, 1996 and 1995, respectively. In fiscal 1997, another two customers accounted for 17 and 11 percent of the Company's net sales, respectively. The Company performs ongoing credit evaluations of its customers' financial condition. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
12. STOCK PLANS, OPTIONS AND WARRANT
Employee Stock Ownership Plan - The Company has an Employee Stock Ownership and Capital Accumulation Plan and Trust covering substantially all of its employees, pursuant to which it can elect to make contributions to the Trust in such amounts as may be determined by the Board of Directors. The Company contributed $91,000 for the year ended June 30, 1996 in order to allow the plan to meet required distributions in connection with plant closings. No contributions were made for the years ended June 30, 1997 and 1995.
Stock Options - The Company has an Incentive Stock Option Plan ("1983 ISOP"), pursuant to which the Company has reserved 5,000 shares at June 30, 1997. This plan expired by its terms on June 30, 1993, but 5,000 previous grants remained outstanding at June 30, 1997, of which 3,300 are presently exercisable. The 1983 ISOP provided for the issuance of options to employees to purchase common stock of the Company at a price not less than fair market value on the date of grant.
On December 8, 1994, the Company's stockholders' approved a new Incentive Stock Option Plan ("1994 ISOP") to replace the 1983 ISOP discussed above. Options granted, pursuant to the plan, are not subject to a uniform vesting schedule. The plan permits the issuance of options to employees to purchase common stock of the Company at a price not less than fair market value on the date of the option grant. The plan reserves 2,000,000 shares of common stocks for grant and provides that the term of each award be determined by the Compensation Committee with all awards made within the ten-year period following the effective date. During fiscal 1997, 1,495,000 options were granted under this plan and 1,160,000 were canceled, 452,000 of which were replaced with options to purchase 700,000 shares at an exercise price of $.625 per share.
The Company also has a Key Employee Stock Option Plan covering the issuance of up to 1,667,000 shares of the Company's common stock. During fiscal 1997, 333,000 options under this plan were canceled and replaced with options to purchase 350,000 shares at an exercise price of $.625 per share which are outstanding at June 30, 1997. All options granted are presently exercisable.
The Company has also granted, in fiscal 1989, nonqualified options to certain nonemployee sales representatives to purchase an aggregate of 133,000 shares at an exercise price of $2.36.
Statement of Financial Accounting Standards No. 123, "Accounting Stock-Based Compensation" was effective for the Company for fiscal 1997. SFAS No. 123 encourages (but does not require) compensation expense to be measured based on the fair value of the equity instrument awarded. In accordance with APB No. 25, no compensation cost has been recognized in the Consolidated Statements of Operations for the Company's stock option plans. If compensation cost for the Company's stock option plans had been determined in accordance with the fair value method prescribed by SFAS No.123, the Company's net income (loss) would have been $183,000, $(5,461,000) and $(5,212,000) for 1997, 1996 and 1995, respectively, and the earnings (loss) per share would have been $.02, $(.39), and $(.37) for 1997, 1996 and 1995, respectively. This pro forma information may not be representative of the amounts to be expected in future years as the fair value method of accounting prescribed by SFAS No. 123 has not been applied to options granted prior to 1995.
Information with respect to stock options is as follows (shares in thousands):
The following table summarizes information about stock options outstanding at June 30, 1997 (options in thousands):
The fair value of each option-pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively; risk-free interest rate 6.38%, 0% and 6.85%; expected life 7 years, 0 years and 7 years; expected volatility of 126.28%, 0% and 92.20%. The fair values generated by the Black-Scholes model may not be indicative of the future benefit, if any, that may be received by the option holder.
Warrant - In August 1993, in connection with an agreement with a financial consulting firm, the Company granted a warrant to purchase 30,000 shares of its common stock at $1.69 per share to the consultants. The warrant is exercisable at anytime through August 2000. No expense related to such warrant was recorded since it was not material.
13. SPECIAL CHARGE
During fiscal 1995, the Company recorded a charge of $3,000,000 for costs associated with the divestiture of its men's work and leisure shirt division. This charge consisted of the write-down, to its estimated realizable value, of this division's inventory of $2,250,000, classified as cost of sales, and property, plant and equipment of $750,000, classified separately as a special charge. Prior to fiscal 1997, the inventory write-down of $2,250,000 was previously classified separately as a special charge.
14. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
* * * * * *
Schedule II MOVIE STAR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
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ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10.
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Mark M. David was re-elected Chairman of the Board and Chief Executive Officer on November 20, 1996. On August 14, 1995, Mr. David relinquished the position of Chief Executive Officer, but remained as Chairman of the Board. He had been Chairman of the Board and Chief Executive Officer since December 1985, President from April 1983 to December 1987 and Chief Operating Officer of the Company since the merger with Stardust Inc. in 1981 until December 1987. Prior to the merger, he was founder, Executive Vice President and Chief Operating Officer of Sanmark Industries Inc. In April 1996, Mr. David resumed his duties as Chief Executive Officer.
Melvyn Knigin was appointed to fill a vacancy on the Board of Directors and promoted to Senior Vice President and Chief Operating Officer on February 5, 1997 and was promoted to President on September 4, 1997. Since joining the Company in 1987, he was the President of Cinema Etoile, the Company's upscale intimate apparel division. Prior to joining the Company, he had spent most of his career in the intimate apparel industry.
Saul Pomerantz, CPA, was elected Senior Vice President on December 3, 1987 and was re-elected on November 20, 1996 and was promoted to Executive Vice President on September 4, 1997. Previously, he was Vice President-Finance since 1981. He has been Chief Financial Officer since 1982 and Secretary of the Company since 1983.
Gary W. Krat was elected to the Board of Directors on November 20, 1996. Mr. Krat has been Senior Vice President of SunAmerica Inc. since 1990. He is also Chairman and Chief Executive Officer of SunAmerica's subsidiaries, Royal Alliance Associates, Inc. and SunAmerica Securities, Inc., both of which are NASD broker dealer companies with more than three thousand registered representatives. From 1977 until 1990, Mr. Krat was a senior executive with Integrated Resources, Inc. Prior to joining Integrated Resources, Mr. Krat was a practicing attorney. He has a law degree from Fordham University and a Bachelor of Arts degree from the University of Pittsburgh.
Joel M. Simon was elected to the Board of Directors on November 20, 1996. Mr. Simon is currently self-employed as a private investor. From 1990 until the end of 1996, Mr. Simon was the Executive Vice President and Chief Operating Officer and, (until July 1993), was a director of a group of affiliated companies known as Olympia & York Companies (USA)("O&Y-USA"), subsidiaries of a Canadian multinational real estate concern. Prior to becoming Chief Operating Officer of O&Y-USA, from 1985 until the end of 1989, Mr. Simon was the Executive Vice President-Administration and a director of O&Y-USA. Mr. Simon is a Certified Public Accountant and was a senior partner in
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an accounting firm prior to joining O&Y-USA. In 1992, O&Y-USA experienced a liquidity crisis. The O&Y-USA crisis was caused and exacerbated by its inability to obtain financial support from its Canadian parent, as it had in the past, because of the parent company's own financial crises. Since then, O&Y-USA has been in the process of restructuring its business and financial obligations. Many of the O&Y-USA companies filed voluntary petitions for protection under Chapter 11 of the U.S. Bankruptcy Code. Substantially all of these companies have had their plans of reorganization confirmed and consummated. The balance of the companies are expected to have their plans confirmed.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Report of the Compensation Committee on Executive Compensation
Joel M. Simon, Gary W. Krat and Mark M. David were appointed by the Board of Directors, and each of them agreed to serve as members of the Compensation Committee (the "Committee").
The salaries of certain officers, other than Mr. David, were increased for fiscal years 1997 and 1998.
Compensation Policies
In determining the appropriate levels of executive compensation for fiscal year 1997, the Committee did not apply the policies previously established by the Committee for determining compensation; rather, the Committee based its decisions solely on the Company's financial condition.
Prior to fiscal year 1995, the Committee had based its recommendations to the Board of Directors on (1) the Company's ability to attract and retain experienced individuals with proven leadership and managerial skills, (2) the executives' motivation to enhance the Company's performance for the benefit of its shareholders and customers and (3) the executives' contributions to the accomplishment of the Company's annual and long-term business objectives.
Salaries generally had been determined based on the Committee's evaluation of the value of each executive's contribution to the Company, results of the past fiscal year in light of prevailing business conditions, the Company's goals for the ensuing fiscal year and prevailing levels at companies considered to be comparable to and competitors of the Company.
In addition to base salary compensation, the Committee had also, from time to time, recommended that stock options be granted to the executive officers of the Company in order to reward the officers' commitment to maximizing shareholder return and long-term results.
Base Salary Compensation
Based on recommendations from the Company's Chairman of the Board and the other Committee members' collective business experience, base salaries are determined from year to year. The Committee does not utilize outside consultants to obtain comparative salary information, but believes that the salaries paid by the Company are competitive, by industry standards, with those paid by companies with similar sales volume to the Company. The Committee places considerably more weight on each executive's contribution to the Company's development and maintenance of its sources of supply, manufacturing capabilities, marketing strategies and customer relationships than on the compensation policies of the Company's competitors; however, the Committee does not establish or rely on target levels of performance in any of these areas to arrive at its recommendations.
The current senior executives of the Company have been associated with the Company in senior
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management positions for periods ranging from thirteen to more than twenty-five years. They have been primarily responsible for the formulation and implementation of the Company's recent financial and operational restructuring and provide the Company with a broad range of management skills which are considered by the Committee to be an essential source of stability and a base for the Company's future growth.
Stock Option Grants
In 1983, the Company adopted an Incentive Stock Option Plan (the "ISOP") to provide a vehicle to supplement the base salary compensation paid to key employees. All of the Company's senior executives were eligible to receive grants under the ISOP. Options under the ISOP were granted at fair market value at the date of grant. In the past, the Committee has recommended and the Board of Directors has granted options under the ISOP to each of the senior executives, except the Chairman of the Board. Mark M. David has not received options under the ISOP because his ownership of shares of the Company exceeds 10% of the outstanding shares of the Company. The options granted under the ISOP were exercisable at a rate of 11% per year for the first eight years of service after grant and 12% for the ninth year after grant. No options have been granted to the Company's senior executives under the ISOP since 1986 and no further options may be granted under the ISOP. The 1983 ISOP has expired.
On July 15, 1994, the Committee adopted a new Incentive Stock Option Plan (the "1994 ISOP") to replace the expired 1983 ISOP. All of the Company's management and administrative employees are eligible to receive grants under the 1994 ISOP. The 1994 ISOP was approved by the Company's shareholders at the Company's annual meeting on December 8, 1994. Subject to shareholder approval, options under the 1994 ISOP were granted to each of the Company's senior executives (except Mark M. David) on July 15, 1994 at fair market value at that date. As a condition to the grant of options to the Company's senior executives, the Committee required each of the recipients to surrender for cancellation any interest in options granted prior to July 15, 1994.
In addition to the ISOP, in 1988, the Committee recommended and the Board of Directors adopted a non-qualified Management Option Plan (the "1988 Non-qualified Plan") to provide an additional continuing form of long-term incentive to selected officers of the Company. The 1988 Nonqualified Plan was approved by the Company's shareholders at the Company's annual meeting on December 13, 1988. Generally, options under the 1988 Non-qualified Plan are issued with a 10-year exercise period in order to encourage the executive officers to take a long-term approach to the formulation and accomplishment of the Company's goals. In 1988, the Committee recommended and the Board of Directors approved the grant of options under the non-qualified option plan to all of the Company's then executive officers. Mark David is the only current executive officer of the Company who retains any options granted under the 1988 Non-qualified Plan.
In January 1997, Messrs. Simon and Krat, the independent Directors serving on the Committee, recommended that the Company grant new options to Mark David under the 1988 Non-qualified Plan at a price equal to the market price for the Company's shares on the date of the grant. As a condition to the grant of new options to Mr. David under the 1988 Non-qualified Plan, the Committee required Mr. David to surrender for cancellation any interest in options granted to him prior to January 29, 1997.
Also in January 1997, the independent directors serving on the Committee recommended that the Company grant new options under the 1994 ISOP to Saul Pomerantz and Melvyn Knigin at a price equal to the market price for the Company's shares on the date of the grant. The grant of new options to Messrs. Pomerantz and Knigin was also subject to the condition that they surrender for cancellation any interest in options granted to them prior to January 29, 1997.
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Compensation of the Chief Executive Officer
For fiscal year 1997, the annual base salary paid to Mark M. David, the Company's Chairman of the Board and Chief Executive Officer, was not increased. The Committee believed that it would be more appropriate to recognize Mr. David's contribution to the Company's improved performance in fiscal year 1997 through the grant of new options under the 1988 Non-qualified Plan rather than by increasing Mr. David's base salary.
Compensation Committee Interlocks and Insider Participation
Other than the Company's Chairman of the Board, there are no Compensation Committee interlocks or insider participation. Mr. David did not participate in the Committee's determinations of compensation for fiscal year 1997 or fiscal year 1998.
Mark M. David Gary W. Krat Joel M. Simon
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Summary Compensation Table
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF AUGUST 30, 1997
The following table sets forth certain information as of August 30, 1997 with respect to the stock ownership of (i) those persons or groups (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who beneficially own more than 5% of the Company's Common Stock, (ii) each director of the Company and (iii) all directors and officers of the Company as a group.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE.
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PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable.
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(a) 3. EXHIBITS
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IV-3
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(a) 4. Report on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Company has duly caused this document to be signed on its behalf by the undersigned, thereunto duly authorized.
September 29, 1997
MOVIE STAR, INC.
By: /s/ MARK M. DAVID -------------------------- MARK M. DAVID, Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and as of the date indicated.
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
21 SUBSIDIARIES OF THE COMPANY
27 FINANCIAL DATA SCHEDULE