-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PvUKT1jBDzqtApZ1t63R04j8XmMncz5TfDRFo1SS8vtAWDzOckblqMUw1KV7QTeR kv/saUPve1DuLoO4GmSsPw== 0000950123-95-002910.txt : 19951016 0000950123-95-002910.hdr.sgml : 19951016 ACCESSION NUMBER: 0000950123-95-002910 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19951013 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOVIE STAR INC /NY/ CENTRAL INDEX KEY: 0000093631 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', CHILDREN'S & INFANTS' UNDERGARMENTS [2340] IRS NUMBER: 135651322 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05893 FILM NUMBER: 95580584 BUSINESS ADDRESS: STREET 1: 136 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126797260 MAIL ADDRESS: STREET 1: 136 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10016 FORMER COMPANY: FORMER CONFORMED NAME: SANMARK STARDUST INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STARDUST INC /NY/ DATE OF NAME CHANGE: 19810526 10-K405 1 FORM 10-K - MOVIE STAR, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------- FORM 10-K (Mark One) /X/ Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended June 30, 1995 or / / Transition report pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 [Fee Required] For the transition period from to ----------- ----------- Commission File Number 1-5893 MOVIE STAR, INC. (Exact name of Registrant as specified in its Charter) New York 13-5651322 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 136 Madison Avenue, New York, NY 10016 (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number including area code (212) 679-7260 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, $.01 par value American Stock Exchange $25,000,000 12-7/8% Debenture American Stock Exchange due October 1, 2001 Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K Yes X No ----- ----- The aggregate market value of voting stock held by nonaffiliates of EXHIBIT INDEX - PAGE 46 Page 1 of 50 Total Pages 2 the Registrant totalled $8,204,731 on August 31, 1995, based upon the closing price of $0.875 at the close of trading on August 31, 1995. As of August 31, 1995, there were 13,959,650 common shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE SEE Item 14 with respect to exhibits to this Form 10-K which are incorporated herein by reference to documents previously filed or to be filed by the Registrant with the Commission. 3 MOVIE STAR, INC. 1995 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I Page No. ------ -------- Item 1 Business...................................................... Item 2 Properties.................................................... Item 3 Legal Proceedings............................................. Item 4 Submission of Matters to a Vote of Security Holders...................................... PART II ------- Item 5 Market for Registrant's Common Stock and Related Stockholder Matters................................... Item 6 Selected Financial Data....................................... Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... Item 8 Financial Statements and Supplementary Data............................................ Item 9 Disagreements on Accounting and Financial Disclosure.......................................... PART III -------- Item 10 Executive Officers and Directors of the Registrant............................................. Item 11 Executive Compensation........................................ Item 12 Security Ownership of Certain Beneficial Owners and Management......................................... Item 13 Certain Relationships and Related Transactions.......................................... PART IV ------- Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K..............................
4 PART I ITEM 1 BUSINESS (a) The Registrant, 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 work and leisure shirts; and also operates retail outlet stores under the name Movie Star Factory Stores ("Factory Stores"). In the quarter ending September 30, 1995, the Registrant announced that it intended to divest itself of its men's work and leisure shirt division. On June 30, 1993, the Registrant sold its children's ready-to-wear business including substantially all of the inventory and certain trademarks, to a company formed by the former head of that division and others. During fiscal year 1992, the Registrant transferred the production of panties from its Claxton, Georgia plant to its Puerto Rico plant. The Claxton plant was engaged primarily in contracting for the manufacture of goods for third parties during fiscal year 1993. On July 30, 1993, the Registrant announced the closing of its Claxton, Georgia manufacturing plant. The Registrant'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. Men's work and leisure shirts will continue to be produced by the Registrant through the end of calendar year 1995. These products are manufactured in various fabrics, designs, colors and styles depending upon seasonal requirements, changes in fashion and customer demand. In the past, the Registrant 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 recent consolidations in the retail industry, the high cost of domestic manufacturing and difficulties the Registrant has encountered in sourcing raw materials, engaging reliable offshore contractors and obtaining finished products from overseas, the Registrant has experienced a loss of sales to certain of its customers. The Registrant 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. I-1 5 (c) (i) The Registrant'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 price to consumers for the Registrant's products ranges from $2.00 for certain of its panty products to approximately $70.00 for certain other products. The Registrant's products are sold by in-house sales personnel and outside manufacturer's representatives. Mark M. David, the Registrant's Chairman of the Board, is also involved in marketing and in maintaining good relations between the Registrant and its major customers. Approximately 45% of the Registrant's sales are made to national chains and mass merchandisers; the balance of the Registrant's sales are unevenly distributed among discount, specialty, department and regional chain stores, direct mail catalog marketers and to consumers through the Registrant's Factory Stores. The Registrant's gross profit on its sales for the fiscal year ended June 30, 1995 was approximately 22%. The gross profit for the fiscal year ended June 30, 1994 was approximately 20%; and, for the same period in 1993 and 1992, the Registrant achieved an average gross profit on its sales of approximately 23%. The Movie Star Factory Stores sell apparel products manufactured by the Registrant and other manufacturers at discounted retail prices. Approximately 30% of the sales from products sold by these stores are supplied by the Registrant. These stores account for less than 10% of total sales of the Registrant and operate at a gross profit above 30%. In the past, the Registrant promoted its products through advertisements in trade publications circulated to major retailers. In fiscal 1995, the Registrant limited 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 Registrant has retained Harold Shatz and Jeffrey Hymowitz and their organization, as a manufacturer's representative since 1976. Working closely with the Registrant, Messrs. Shatz and Hymowitz sell to selected accounts under the over-all supervision of Mark M. David and one of the Registrant's divisional Presidents. They are excluded from representing the Registrant in certain territories and in regard to certain accounts. Their organization is paid on a commission basis on all the products it sells. Messrs. Shatz and Hymowitz are not employees of the Company. In fiscal year 1995 less than 13% and in fiscal year 1994 less than 19% of the Registrant's net sales were attributed to sales by this organization. In 1986 and 1988, Mr. Shatz, Mr. Hymowitz and one former member of their organization were granted non-qualified options to purchase an aggregate of 225,648 shares of the Registrant's Common Stock at prices ranging from $1.67 to $2.36 per share. The Registrant believes that the loss of its relationship with Messrs. Shatz and Hymowitz and their organization would not materially adversely affect the Registrant I-2 6 because retailers' purchasing decisions are primarily based upon the Registrant's products. (ii) Not applicable. (iii) The Registrant utilizes a large variety of fabrics made from natural and man-made fibers including, among others, polyester, cotton, broadcloth, stretch terry, flannel, brush, nylon, Quintura, velour, satins, tricot, jersey, fleece, jacquards, lace, charmeuse, poplin, chambray, chamois 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 Registrant expects these conditions to continue in the foreseeable future. Generally, the Registrant has long-standing relationships with its domestic 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 Registrant with the opportunity to buy at relatively low prices. In turn, the Registrant is able to take advantage of these lower prices in the pricing of its finished goods. In fiscal 1995, approximately 4% of the Registrant's raw materials and approximately 14% of its finished goods were imported. Approximately 7% of its finished goods were assembled in the Caribbean and Central America during fiscal 1995. The Registrant formed its International Division in 1985 and established an office in Taiwan. During fiscal 1995, the Registrant closed its office in Taiwan and transferred the responsibility for monitoring the quality and progress of manufacturing of finished products purchased in the Far East to independent agents located in each of the countries in which goods are being manufactured for the Registrant. In addition, the Registrant no longer retains the services of an outside agent based in Hong Kong to assist in the purchase of raw materials and accessories for use in finished products. Raw materials are now sourced and purchased through independent agents located in those countries where the Registrant seeks to purchase raw materials. This division was created to give the Registrant the ability to increase its importing capabilities when the marketplace requires and to achieve better control over the pricing, quality and delivery of such imports through on-going direct contact with its suppliers and contractors. Presently, the International Division is engaged in the purchase of finished products and textiles used for the manufacture of goods in the Registrant's domestic plants and by offshore contractors. The International Division is administered from the Registrant's headquarters in New York and its management personnel travels to the Far East extensively throughout the year. The General Agreement on Tariffs and Trade has no impact on the operations of the Registrant. I-3 7 The Registrant had expected to expand its contracting for the assembly of its finished goods in the Caribbean and Central America during fiscal 1995. However, due to a reduction in the volume of orders it received for goods that were suitable for assembly offshore; shorter lead times between placement of orders and customers' required delivery dates; and, its inability to establish or maintain relationships with reliable contractors, the percentage of finished goods assembled in the Caribbean and Central America did not increase in fiscal 1995. The Registrant believes it maintains adequate inventories to cover the needs of its customers. (iv) In the past, the Registrant created an awareness of its products in the trade through the marketing of its own trademarks, which it promoted from time to time through advertisements in trade publications. In fiscal 1995, the Registrant did not advertise in trade publications. The Registrant was a licensee of various trademarks which it believed appealed to consumers in the same way its in-house brand names appeal to retailers. In fiscal 1995, the Registrant decided to permit its various licenses to expire without renewal. This decision was based on the Registrant's inability to obtain sufficient prices from its customers for products bearing the licensors' trademarks to justify the minimum guaranteed royalties and royalties based on a percentage of sales which were payable to the licensors. The Registrant has several registered trademarks, of which "Movie Star", "Movie Star Loungewear", "Cinema Etoile" and "Cine Star" are material to the marketing by Registrant of its products. There is no litigation with respect to patents, licenses and trademarks. (v) The Registrant 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 Registrant'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 receipt of goods 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 Registrant may accept returns or agree to allowances. The Registrant 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 Registrant relies on its short-term line of credit from its banks to supplement internally generated funds to fulfill I-4 8 its working capital needs. (vii) Sears Roebuck and Company accounted for 22% of fiscal year 1994 and 1995 sales. Approximately 12% of the Registrant's sales for fiscal 1995 were comprised of men's work and leisure shirts sold to Sears Roebuck and Company. No other customer accounted for more than 10% of sales in fiscal years 1994 and 1995. The Registrant's Schwabe Division received verbal orders from Sears Roebuck and Company which are confirmed by written contracts prior to the shipment of merchandise. Purchasing decisions by the Registrant's customers with respect to each group of the Registrant's products and, in some instances, products within a group, generally are made by different buyers and purchasing departments. The Registrant 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, 1994 was approximately $50,100,000 and as of June 30, 1995 was approximately $43,700,000. Orders are booked upon receipt. The reduction in the backlog of orders as of June 30,1995 resulted primarily from the elimination of the Registrant's "trade business" in its popular-priced intimate apparel division, the weak retail environment for the Registrant's products and its inability to effectively source offshore. The Registrant believes that the current backlog is firm and will be filled by the end of the current fiscal year. (ix) There is no material portion of the business which may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. (x) The intimate apparel business is fragmented and highly competitive. The industry is characterized by a large number of small companies. Many of these companies subcontract all or a significant portion of the manufacture of their garments. While the Registrant believes that owning manufacturing facilities can be advantageous, owning plants has required the investment of substantial capital and subjected the Registrant to the costs of maintaining excess capacity. Competitive conditions in the industry have required the Registrant to place greater reliance on obtaining raw materials and finished products from sources outside the United States. As a result, the Registrant has consolidated production in its domestic plants by closing underutilized and inefficient facilities. Between August 1990 and July 1995, the Registrant has closed nine manufacturing plants in an effort to lower costs by reducing excess manufacturing capacity and in response to the need I-5 9 to obtain more favorably priced finished products from sources outside the United States. On July 29, 1995, the Registrant closed its Purvis, Mississippi sewing facility. The intimate apparel industry is characterized by competition on the basis of price, quality, efficient service and prompt delivery. It has become increasingly difficult for the Registrant to rely principally on domestic manufacturing. Further shifts in competitive conditions may require the Registrant to increase its reliance on imports in the future. Accordingly, changes in import quotas, currency valuations and political conditions in the countries from which the Registrant imports products could adversely affect the Registrant's business. The Registrant's International Division could help mitigate the effect of any such shifts, but such shifts could result in the underutilization of the Registrant's domestic plants and decrease profitability. The Registrant believes that recent consolidations in the retail industry have contributed to increased competition among manufacturers of products of the type sold by it. As part of its response to this competitive pressure, the Registrant has sought to maximize its domestic manufacturing efficiency through strategic consolidation of underutilized facilities. For fiscal 1995, the Registrant sought to take advantage of emerging opportunities in the Caribbean Basin and Central America to contract for the cutting and assembly of its products which enables the Registrant to benefit from lower offshore labor costs coupled with transportation times that are faster than deliveries from the Far East. The Registrant has been unable to exploit the benefits of these emerging 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. On December 4, 1991, the Registrant formed a subsidiary, Sanmark de Mexico, S.A. in the Federal Republic of Mexico and subsequently applied to the Mexican Government to participate in that country's in-bond Maquila Program which permits companies to import raw materials into Mexico without duty. The subsidiary's status as a "Maquiladora" was intended to enable it to compete with other Mexican companies for an allocation from the Mexican government of a portion of the quota available for the manufacture in Mexico of finished products to be sold in the United States. The Mexican government allocates quota, in part, based on utilization by companies who have been granted quota allocations in the past, making it difficult for the Registrant's subsidiary, as a start-up enterprise, to obtain allocations. During fiscal year 1993, the Registrant's subsidiary applied to the Mexican government for quota allocations in five categories of products and was granted allocations in four of those categories. However, the request for allocation of quota in the category for which no quota I-6 10 was granted far exceeded all the other categories combined and was deemed by the Registrant to be the most important product category for the business of its subsidiary. Despite appeals to the Mexican authorities, the Registrant's subsidiary was unable to obtain meaningful allocations of quota for this product category. Due primarily to the Registrant's inability to obtain adequate allocation of quota from the Mexican government for the exportation of finished product, and the other difficulties the Registrant encountered in doing business in Mexico, the Registrant determined that it cannot operate profitably as a "Maquiladora" in Mexico. Accordingly, the Registrant terminated its operations as a "Maquiladora" as of December 31, 1993. (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 Registrant is aware. (xiii) Of the approximately 1,677 employees of the Registrant, approximately 43 are executive, design and sales personnel, 102 are administrative personnel, and the balance are in manufacturing. The Registrant has never experienced an interruption of its operations because of a work stoppage. Even though the Registrant is subject to certain seasonal variations in sales, significant seasonal layoffs are rare. However, as a result of the closing of the manufacturing facilities in Ellisville, Mississippi, Poplarville, Mississippi and Claxton, Georgia, approximately 122 employees were terminated in fiscal year 1993 and approximately 323 employees were terminated in fiscal year 1994. Approximately 21 employees were terminated in fiscal 1995 and an additional 52 were terminated in fiscal 1996 as a result of the completion of the closing of the Purvis facility. Most employees have an interest in the Registrant's Common Stock through the Registrant's ESOP. The Registrant deems its relationship with its employees to be good. The Registrant 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, the Registrant may not declare or pay any dividend or make any distribution on any class of its capital stock except I-7 11 dividends or distributions payable in capital stock of the Registrant 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 Registrant 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 Registrant earned subsequent to June 30, 1986, (b) the aggregate net proceeds, including the fair market value of property other than cash received by the Registrant from the issue or sale after September 30, 1986 of capital stock of the Registrant, 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 Registrant'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, 1995, the Company is prohibited from paying any cash dividends. I-8 12 ITEM 2 PROPERTIES The following table sets forth all of the facilities owned or leased by the Registrant as of June 30, 1995.
Owned or Bldg. Area Expiration Productive Extent of Location Use Leased (sq. ft.) Annual Rent of Lease Capacity(6) Utilization(6) -------- --- --------- ----------- ----------- ---------- ----------- -------------- 136 Madison Ave., Executive Portions 58,000 $1,391,000 4/29/99 N/A N/A New York, NY offices; Sub-leased; (1) 1/31/02 (includes one divisional Portions floor at 148 sales office Leased Madison Ave., NY, and showroom Directly NY) from Landlord Petersburg, PA Warehousing Owned 140,000 _____ _____ N/A N/A for finished (2) goods; distribution center Hazlehurst, GA Leased to a Owned 180,000 _____ _____ N/A N/A Third Party; (3) Vacant Lebanon, VA Manufacturing; Owned 170,000 _____ _____ 210 89% warehousing for piece goods and finished goods; distribution center Honaker, VA Manufacturing Owned 40,000 _____ _____ 150 89% Claxton, GA Vacant Owned 72,000 _____ _____ N/A N/A (7) Mississippi 8 Mfg.; Owned 571,500 _____ _____ 1,166 58% 5 Warehouses; Leased 1 Distribution (4)(8) Center Puerto Rico 1 Plant; Leased 58,000 58,000 1/31/98 200 81% Manufacturing
I-9 13
Owned or Bldg. Area Expiration Productive Extent of Location Use Leased (sq. ft.) Annual Rent of Lease Capacity(6) Utilization(6) -------- --- --------- ----------- ----------- ---------- ----------- -------------- Retail Stores 25 retail Leased 94,725 (5) (5) N/A N/A stores located throughout Mississippi and Georgia Evansville, IN Vacant Owned 68,000 _____ _____ N/A N/A
_____________ (1) Includes escalation for 1995. (2) This property is encumbered by purchase money mortgages which are described in the Notes to the Registrant's Consolidated Financial Statements included and incorporated by reference herein. (3) Approximately 140,000 square feet was leased to a third party in fiscal year 1994. An additional 40,000 square feet was leased to another third party during fiscal year 1996. (4) Leased from municipalities pursuant to local Development Authority bond issues. The Registrant leases certain temporary warehouse facilities in Mississippi on a month-to-month basis. (5) Store leases generally are for one to three-year periods with options to renew. Rents generally range from $2-$8 per square foot. (6) "Productive capacity" is based on the total number of employees that can be employed at a facility providing direct labor for the manufacture of the Registrant's products based on existing machinery and equipment and plant design. Extent of utilization is the percentage obtained by dividing the average number of employees actually employed at a facility during the fiscal year providing direct labor for the manufacture of the Registrant's products by Productive capacity. (7) Facility closed during fiscal year 1994. (8) One manufacturing facility was converted to warehouse use during fiscal year 1994. One additional manufacturing facility was closed during fiscal year 1996. I-10 14 The following table sets forth the amount of space allocated to different functions in shared facilities set forth in the preceding table.
AMOUNT OF SPACE LOCATION FUNCTION (Sq. ft.) - -------- -------- --------- 136 and 148 Madison Avenue Executive Offices 15,000 New York, New York Divisional Sales Offices and Showrooms 43,000 Petersburg, Pennsylvania Warehousing and Distribution 137,000 Offices 3,000 Lebanon, Virginia Manufacturing 49,000 Warehousing and Distribution 111,000 Offices 10,000 Honaker, Virginia Manufacturing 31,000 Warehousing 5,000 Offices 4,000 Mississippi Manufacturing 248,000 Warehousing and Distribution 295,800 Offices 27,700 Puerto Rico Manufacturing 40,500 Warehousing 16,500 Offices 1,000
ITEM 3 LEGAL PROCEEDINGS There are no legal proceedings pending which are material. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. I-11 15 PART II ITEM 5 MARKET FOR REGISTRANT'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, 1994 First Quarter.......... 2 1/4 1 1/2 Second Quarter......... 3 1/4 1 5/8 Third Quarter.......... 2 1 1/4 Fourth Quarter......... 1 5/8 1 1/8 Year Ended June 30, 1995 First Quarter........... 1 1/2 1 Second Quarter.......... 1 3/8 1 1/16 Third Quarter........... 1 1/4 15/16 Fourth Quarter.......... 1 1/8 7/16
As of August 31, 1995, there were approximately 1,046 holders of record of the Common Stock. For restrictions on dividends, see Item 1 at page I-7. MARKET FOR REGISTRANT'S DEBENTURE
High Low ---- --- Year Ended June 30, 1994 First Quarter........... 103 1/2 99 3/4 Second Quarter.......... 104 102 Third Quarter........... 103 99 1/2 Fourth Quarter.......... 103 96 Year Ended June 30, 1995 First Quarter........... 97 3/4 84 Second Quarter.......... 90 80 Third Quarter........... 91 84 Fourth Quarter.......... 92 7/8 74 1/2
16 MOVIE STAR, INC. AND SUBSIDIARIES ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA: FISCAL YEAR ENDED JUNE 30, 1995 1994 1993 1992 1991 NET SALES $ 101,946 $ 103,105 $ 120,251 $117,684 $ 120,644 --------- --------- --------- -------- --------- COST OF SALES 79,011 82,358 92,106 90,600 92,006 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 20,541 20,874 22,596 22,572 21,485 SPECIAL CHARGE 3,000 3,800 -- -- -- PROVISION FOR BAD DEBTS RELATED TO CERTAIN RETAIL CUSTOMER BANKRUPTCIES -- -- -- -- 742 INTEREST EXPENSE - Net 4,669 4,014 3,955 4,112 5,138 --------- --------- --------- -------- --------- 107,221 111,046 118,657 117,284 119,371 --------- --------- --------- -------- --------- (LOSS) INCOME FROM OPERATIONS (5,275) (7,941) 1,594 400 1,273 (GAIN) LOSS ON SALE OR DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT -- (984) (908) -- (335) --------- --------- --------- -------- --------- (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (5,275) (6,957) 2,502 400 l,608 PROVISION FOR INCOME TAXES (246) (2,772) 217 73 415 CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR INCOME TAXES -- 861 -- -- -- --------- --------- --------- -------- --------- NET (LOSS) INCOME $ (5,029) $ (3,324) $ 2,285 $ 327 $ 1,193 ========= ========= ========= ======== ========= (LOSS) INCOME PER SHARE (1) $ (.36) $ (.24) $ .16 $ .02 $ .08 ========= ========= ========= ======== ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (1) 13,960 14,031 14,185 14,470 14,993 ========= ========= ========= ======== =========
BALANCE SHEET DATA: AT JUNE 30, 1995 1994 1993 1992 1991 WORKING CAPITAL $22,648 $25,518 $30,984 $30,033 $31,500 ======= ======= ======= ======= ======= TOTAL ASSETS $57,204 $69,806 $72,731 $68,172 $70,292 ======= ======= ======= ======= ======= SHORT-TERM DEBT - Including current maturities of long-term debt $15,832 $19,627 $16,783 $12,964 $15,582 ======= ======= ======= ======= ======= LONG-TERM DEBT $22,496 $22,529 $22,733 $24,681 $26,347 ======= ======= ======= ======= ======= STOCKHOLDERS' EQUITY $ 8,700 $13,729 $17,412 $15,413 $15,837 ======= ======= ======= ======= =======
(1) (Loss) income per share is based on net (loss) income for the year divided by the weighted average number of shares of common stock outstanding, including common share equivalents, and has been restated to reflect all stock splits. (2) For each of the five years ended June 30, 1995, no cash dividends were declared. II-2 17 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1995 vs. 1994 Net sales for the year ended June 30, 1995 decreased to $101,946,000 from $103,105,000 in the comparable period in 1994, a decrease of 1%. The decrease in sales resulted primarily from lower sales in the popular-priced intimate apparel division of approximately $7,800,000, offset by increased sales in the higher-priced intimate apparel division of approximately $3,100,000 and the men's work and leisure shirt division of approximately $4,500,000. The gross profit percentage increased to 22.5% in fiscal 1995 from 20.1% in the prior year. The increase was due to increased margins in both of the Company's intimate apparel divisions and the men's work and leisure shirt division. The Company has been successful in increasing its sales in the higher-priced apparel division and has continued its efforts to eliminate low margin business. As anticipated, the gross profit percentage related to the Company's popular-priced intimate apparel division increased in the year ended June 30,1995 as a result of the Company's decision, during the third quarter of fiscal 1994, to phase-out the portion of that division's business which was least profitable. However, due to the lower sales in 1995 as compared to 1994, gross profit dollars in that division decreased in 1995. As a result of the phase-out, during the third quarter of fiscal 1994, the Company recorded a special charge of $3,800,000. In order to compete more effectively, the Company is continuing to reduce excess plant capacity. Management has closed 9 plants during the past five years including, the closing in July 1995 of its plant in Purvis, Mississippi. The Company has decided to focus its efforts and resources on its core intimate apparel business. In the quarter ending September 30,1995 the Company announced that it intended to divest itself of its men's work and leisure shirt division ("Schwabe"). The Company's decision was also based on Schwabe's inadequate return on capital. If the Schwabe operations cannot be sold, the Company intends to close its three shirt manufacturing facilities in Northern Mississippi by the end of the calendar year and liquidate Schwabe's assets. No prospective purchasers have expressed a significant interest in purchasing the Schwabe division with the intent of continuing its operations. As a result of this decision, the Company recorded a special charge of $3,000,000 consisting of a write-down, to its estimated realizable value, of the Schwabe inventory and property, plant and equipment. 18 In conjunction with the divestiture of the Schwabe division, the Company is in the process of realigning its core intimate apparel business. As such, the Company does not anticipate that the loss of the Schwabe sales will have a significant adverse effect on its business. In fiscal 1994 and throughout fiscal 1995, the Company had difficulties in sourcing its goods offshore. The Company's efforts to source more effectively were unsuccessful due to a number of factors including poor planning, the absence of controls to monitor the import process and the quality of the product, the purchase of raw materials from unreliable vendors and ineffective management and staffing. These problems resulted in the receipt and acceptance of poor quality goods, unanticipated and costly air shipments and the inability, in certain instances, to make timely delivery of our finished product to our customers. As a result, certain customers either canceled orders, returned goods or took deductions. These problems also resulted in lower than expected sales. The Company's inability to plan, administer and effectively source raw materials and finished products in a marketplace that is increasingly moving to lower cost imports and offshore manufacturing, as well as the Company's divestiture of its men's shirt division (see above) were the primary reasons that the Company did not return to profitability in fiscal 1995. Other contributing factors included a weak U.S. market for intimate apparel, the increasing purchasing power of the Company's consolidating customers, and the Company's inability to cut overhead sufficiently. The problems encountered in fiscal 1995 will also affect the Company's financial performance in fiscal 1996. Due to the negative impact of these problems on sales and gross margins and the inability of the Company to sufficiently cut expenses, the Company is anticipating a loss from operations in fiscal 1996. In its continuing efforts to return to profitability and improve the Company's overall operations, in August 1995 the Company retained Barbara Khouri as its new Chief Executive Officer. Ms. Khouri has extensive senior management experience in the intimate apparel industry. Under Ms. Khouri's recent leadership, management has devised a plan to consolidate and realign all of the operational areas of the Company. This consolidation and realignment is designed to reduce costs and create an organizational structure that is more productive, effective and efficient. The plan places an increased emphasis on controlling the Company's import operations and offshore manufacturing. Management also plans to formalize procedures for developing and implementing strategies to improve gross profit margins and create effective planning techniques to better respond to the changing needs of the Company's customers on a short and long-term basis. Selling, general and administrative expenses decreased by $333,000 to $20,541,000 for the year ended June 30, 1995 as compared to the 19 comparable period last year. This decrease was primarily attributable to a reduction in salary expense of $435,000 and sales related expenses, including royalties and licensing costs of $336,000 and commissions of $197,000, offset partially by an increase in bad debts of $350,000 and a net increase in other general overhead. Additionally, in connection with the reduction in inventory levels described below, associated costs have been reduced. Interest expense increased in 1995 by $424,000 to $4,669,000 due to higher short-term rates and increased borrowing in the first quarter of 1995. The Company had a loss from operations of $5,275,000 for the year ended June 30, 1995, compared to a loss of $7,941,000 for the year ended June 30, 1994 due primarily to higher gross margins and lower selling, general and administrative expenses, offset partially by increased interest expense in 1995. In addition, the special charge is significantly lower in 1995 as compared to 1994. The income tax benefit for the year ended June 30, 1995 was $246,000 as compared to $2,772,000 for the year ended June 30, 1994. The financial results reflect a net loss of $5,029,000 for the year ended June 30, 1995 as compared to a net loss of $3,324,000 for the year ended June 30, 1994. 1994 vs. 1993 Net sales for the year ended June 30, 1994 decreased to $103,105,000 from $120,251,000, a decrease of 14%, in the comparable period in 1993. The decrease in sales includes approximately $11,000,000 of reduced sales to existing customers (see discussion below relating to Sears) and approximately $6,000,000 of sales related to the Company's children's ready-to-wear line, for which no sales are reflected for the year ended June 30, 1994, and reductions in contract manufacturing for third parties. The decrease in sales to existing customers reflects large programs which had not been placed with us by our customers due primarily to difficulties the Company has incurred in sourcing its goods offshore. The Company refocused its efforts in this area and hired executive personnel with specific sourcing and quality control expertise to improve the Company's ability to source goods offshore and to develop new offshore manufacturing capabilities. The Company sought to recapture the sales lost to existing customers by improving its sourcing capabilities and from sales by certain of the Company's divisions that were not adversely affected by the sourcing difficulties. Toward that end, the Company expanded its manufacturing base in the Caribbean and Central America and planned to expand its imports from overseas. 20 During 1993, Sears announced the elimination of its catalogue sales division. As such, the Company's men's shirt division had sales of approximately $6,000,000 for the year ended June 30, 1994 related to the Sears' catalogue. The Company has replaced approximately $2,700,000 of these sales primarily with programs from new customers in fiscal 1994. Based on orders obtained and anticipated future orders, the Company expected that in fiscal 1995, the men's shirt division would replace all of the sales lost as a result of the elimination of the Sears' catalogue. The gross profit percentage decreased to 20.1% in 1994 from 23.4% in the prior year. The decrease was due to difficulties in sourcing our goods offshore, increased sales of close-outs and slow moving inventory at lower margins and to manufacturing inefficiencies, including excess plant capacity. The inability to source effectively resulted in the Company accepting orders at lower margins to maintain market share. In an effort to decrease excess plant capacity, management has closed certain plant facilities during the past three years including, in fiscal year 1994, one of its plants in Claxton, Georgia, and one of its plants in Poplarville, Mississippi. Due to the Company's decisions to close factories over the past three years, the determination to terminate its operations in Mexico as a "Maquiladora" as of December 31, 1993, intense price competition in the marketplace, the Company's effort to source more effectively, and its shipping needs, the Company has expanded its manufacturing base in the Caribbean and Central America and plans to expand its imports from overseas. During the third quarter of fiscal 1994, the Company decided, in an effort to increase margins and reduce inventory levels and related inventory carrying costs, to phase-out a portion of its popular-priced intimate apparel division's business which produces and purchases inventory without orders in-hand for smaller accounts ("trade business"), and to concentrate its efforts in the private label side of its business, where goods are manufactured against orders. Trade business has become a smaller and less profitable portion of that division's business and requires higher inventory levels. As a result of this decision, the Company recorded a special charge of $3,800,000, consisting of a write-down of inventory related to its trade business to its estimated realizable value. For the fiscal year ending June 30, 1994, trade business accounted for sales of approximately $10,000,000. The Company sought to mitigate the loss of such sales through a more concentrated effort on higher margin private label business, improving its sourcing capabilities, and through the elimination of low margin business, as well as other Company sales. As such, the Company did not anticipate that the loss of these sales would have a significant, adverse effect, except for the special charge discussed above, on its business. Selling, general and administrative expenses decreased by $1,722,000 to $20,874,000 for the year ended June 30, 1994 as compared to the comparable period last year. This decrease was 21 primarily attributable to a reduction in salary expense of approximately $666,000, of which $308,000 related to the sale of the children's ready-to-wear division, sales related expenses, including shipping costs of approximately $434,000, travel and entertainment of approximately $198,000, and commissions of approximately $184,000 and a net decrease in other general overhead. Interest expense increased in 1994 by $168,000 to $4,245,000 due primarily to higher short-term borrowing needs during the year. The Company had a loss from operations of $7,941,000 for the year ended June 30, 1994, compared to income of $1,594,000 for the year ended June 30, 1993 due primarily to lower sales volume, lower gross profit margins and a special charge in the fiscal 1994 period, partially offset by lower selling, general and administrative expenses. During the year ended June 30, 1994, the Company realized a gain of $984,000 from the sale of certain plant facilities compared to a $908,000 gain realized in the same period in fiscal 1993. The Company's effective income tax rate was 39.8% for the year ended June 30, 1994 compared to 8.7% for the same period in 1993. The Company adopted Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes," effective July 1, 1993, which resulted in a cumulative benefit from a change in accounting amounting to $861,000. The fiscal 1993 rate was lower than the federal statutory rate due to the utilization of prior period tax losses. Liquidity and Capital Resources For the year ended June 30, 1995, the Company's working capital decreased by $2,870,000 to $22,648,000, principally from operating losses. During the year ended June 30, 1995, cash decreased by $819,000. The Company used cash for the purchase of fixed assets of $311,000, the payment of notes payable of $3,706,000 and the payment of long-term obligations of $122,000. These activities were funded by cash generated by operating activities of $3,320,000. Inventory at June 30, 1995 decreased by $8,727,000 to $36,085,000 from $44,812,000 at June 30, 1994 due to lower inventory levels in each of the Company's divisions. Approximately 50% of the decrease is due to lower inventory in the Company's popular-priced intimate apparel division. The Company's divestiture of the Schwabe division and the liquidation of that division's remaining inventory will significantly reduce the Company's inventory levels in fiscal 1996. The Company intends to reduce the required sinking fund payment of $3,750,000 due in October 1996 on its outstanding subordinated 22 debentures by the $2,550,000 of debentures previously purchased by the Company. Based upon the Company's recent financial results and the anticipated loss in fiscal 1996, the Company does not presently anticipate that its earnings will be sufficient to pay the balance of the payment due in 1996. In addition, management believes it is unlikely that future sinking fund requirements in each year after 1996 can be made from earnings. The Company has retained the services of an investment banking firm to assist it in examining various alternative means of refinancing such debt through the issuance of new debt instruments or equity securities, the sale of certain assets or, a combination of these and other means. If the Company does not refinance its debentures prior to October 1996, it will have to rely on other sources of financing to make the balance of the payment due in October 1996. There can be no assurance that the Company will have sufficient availability under its short term line of credit for the purpose of making the required sinking fund payment in October 1996, or that if available, the Company's banks will allow it to utilize the short term line of credit for such purpose. The Company does not presently have any commitments from its banks or any other source to provide the funds necessary to pay the balance of the October 1996 sinking fund requirement. The Company does not anticipate any further significant purchases of its stock or debentures and anticipates that capital expenditures for fiscal 1996 will be less than $500,000. However, depending on price and the availability of funds, the Company may seek to take advantage of opportunities to purchase its debenture to further reduce its October 1996 sinking fund requirements. In August 1995, Moody's Investors Service lowered its rating on the Company's subordinated debentures to Ca from B3. The Company has negotiated an extension of its lines of credit with two banks subject to monthly borrowing limitations based on the Company's anticipated working capital requirements. The Company's borrowing needs are as high as approximately $24,000,000 in October 1995 to as low as approximately $2,000,000 in fiscal 1996. This reduction in borrowing needs is primarily due to the Company's decision to divest itself of its men's work and leisure shirt division and to liquidate its inventory (see below). The credit lines bear interest of up to 1.25% above the banks' prime rate. As collateral for such lines, the Company will continue to pledge all of its accounts receivable and its finished goods inventory imported pursuant to letters of credit issued under such lines. These lines of credit, which were previously to expire on December 31, 1995, have been extended until June 30, 1996. The extension is subject to the execution by the Company of definitive documents containing the terms and conditions of the loans. Even though the Company has suffered losses in fiscal 1994 and 1995 and expects a loss in fiscal 1996, anticipated working capital needs will be substantially lower in the second half of fiscal 1996 due to the Company's decision to divest itself of its men's work and leisure shirt division. That division has required significant amounts of capital to support it due to the seasonality of its shipping. Approximately 80% of the Schwabe division's finished products were historically shipped between July and December. In addition, the gross margins on that division's products have been lower than the Company's other divisions. The seasonality of Schwabe's shipping and the low gross margins resulted in a disproportionate use of and an inadequate return on capital. With the elimination of this division, the Company can focus the 23 attention of its personnel and financial resources on its core intimate apparel business. As a result, management believes its available borrowing under its lines of credit through June 30, 1996, along with anticipated internally generated funds, will be sufficient to cover its working capital requirements. ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 PART III ITEM 10 EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT See Item 13. ITEM 11 EXECUTIVE COMPENSATION See Item 13. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF AUGUST 31, 1995 See Item 13. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Items 10, 11 and 12 is incorporated by reference to the information included in the Company's definitive proxy statement in connection with the Annual Meeting of Stockholders to be held in December 1995. III-1 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE (a) 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Included in Part II, Item 8 of this report: Independent Auditors' Report F-1 Consolidated Balance Sheets at June 30, 1995 and 1994 F-2 Consolidated Statements of Operations for the fiscal years ended June 30, 1995, 1994 and 1993 F-3 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1995, 1994 and 1993 F-4 Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1995, 1994 and 1993 F-5 Notes to Consolidated Financial Statements F-6 - F-13 2. SCHEDULE For the fiscal years ended June 30, 1995, 1994 and 1993: II - Valuation and Qualifying Accounts S-1
Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable. IV-1 26 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, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995 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. As discussed in Note 7 to the consolidated financial statements, Movie Star, Inc. changed its method of accounting for income taxes as of July 1, 1993 to conform with Statement of Financial Accounting Standards No. 109. Deloitte & Touche LLP September 22, 1995 (except for Note 4 which is dated October 13, 1995) New York, New York F-1 27 MOVIE STAR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1995 AND 1994 (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
ASSETS 1995 1994 CURRENT ASSETS: Cash $ 103 $ 922 Receivables (net of allowance for doubtful accounts and sales allowances of $1,869 in 1995 and $1,625 in 1994) (Notes 1d and 4) 8,789 10,091 Inventory (Notes 1b, 2 and 4) 36,085 44,812 Deferred income tax benefits (Notes 1e and 7) 3,298 2,915 Prepaid expenses and other current assets 381 326 ------- ------- Total current assets 48,656 59,066 PROPERTY, PLANT AND EQUIPMENT - Net (Notes 1c, 3 and 5) 6,053 7,697 OTHER ASSETS (Note 1g) 1,784 1,949 DEFERRED INCOME TAXES (Notes 1e and 7) 711 1,094 ------- ------- TOTAL ASSETS $57,204 $69,806 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable (Notes 4 and 14) $15,803 $19,509 Current maturities of long-term debt (Note 5) 29 118 Accounts payable 6,939 9,372 Accrued expenses and other current liabilities 3,237 4,549 ------- ------- Total current liabilities 26,008 33,548 ------- ------- LONG-TERM DEBT - Less current maturities included above (Note 5) 46 79 ------- ------- SUBORDINATED DEBENTURES (Note 6) 22,450 22,450 ------- ------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 8) STOCKHOLDERS' EQUITY (Notes 6 and 10): Common stock, $.01 par value - authorized, 30,000,000 shares; issued, 15,977,000 shares 160 160 Additional paid-in capital 3,731 3,731 Retained earnings 8,427 13,456 ------- ------- 12,318 17,347 Less treasury stock, at cost - 2,017,000 shares 3,618 3,618 ------- ------- Total stockholders' equity 8,700 13,729 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $57,204 $69,806 ======= =======
See notes to consolidated financial statements. F-2 28 MOVIE STAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1995, 1994 AND 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 NET SALES (Notes 1d and 9) $ 101,946 $ 103,105 $ 120,251 COST OF SALES 79,011 82,358 92,106 --------- --------- --------- Gross profit 22,935 20,747 28,145 --------- --------- --------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 20,541 20,874 22,596 SPECIAL CHARGE (Note 12) 3,000 3,800 -- INTEREST INCOME -- (231) (122) INTEREST EXPENSE (Notes 4, 5 and 6) 4,669 4,245 4,077 --------- --------- --------- 28,210 28,688 26,551 --------- --------- --------- (LOSS) INCOME FROM OPERATIONS (5,275) (7,941) 1,594 GAIN ON SALE OF PLANT FACILITIES (Note 13) -- 984 908 --------- --------- --------- (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (5,275) (6,957) 2,502 --------- --------- --------- PROVISION FOR INCOME TAXES (Notes 1e and 7): Current (246) 11 203 Deferred -- (2,783) 14 --------- --------- --------- (246) (2,772) 217 --------- --------- --------- (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (5,029) (4,185) 2,285 CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR INCOME TAXES (Note 7) -- 861 -- --------- --------- --------- NET (LOSS) INCOME $ (5,029) $ (3,324) $ 2,285 ========= ========= ========= (LOSS) INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ (.36) $ (.30) $ .16 ========= ========= ========= CUMULATIVE EFFECT OF ACCOUNTING CHANGE PER SHARE $ .06 ========== NET (LOSS) INCOME PER SHARE $ (.36) $ (.24) $ .16 ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Note 1f) 13,960 14,031 14,185 ========= ========= =========
See notes to consolidated financial statements. F-3 29 MOVIE STAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1995, 1994 AND 1993 (IN THOUSANDS)
ADDITIONAL COMMON STOCK PAID-IN RETAINED TREASURY STOCK SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL BALANCE, JULY 1, 1992 15,977 $160 $3,731 $14,495 1,679 $(2,973) $15,413 Net income -- -- -- 2,285 -- -- 2,285 Purchase of treasury stock -- -- -- -- 171 (286) (286) ------ ---- ------ ------- ----- ------- ------- BALANCE, JUNE 30, 1993 15,977 160 3,731 16,780 1,850 (3,259) 17,412 Net (loss) -- -- -- (3,324) -- -- (3,324) Purchase of treasury stock -- -- -- -- 167 (359) (359) ------ ---- ------ ------- ----- ------- ------- BALANCE, JUNE 30, 1994 15,977 160 3,731 13,456 2,017 (3,618) 13,729 Net (loss) -- -- -- (5,029) -- -- (5,029) ------ ---- ------ ------- ----- ------- ------- BALANCE, JUNE 30, 1995 15,977 $160 $3,731 $ 8,427 2,017 $(3,618) $ 8,700 ====== ==== ====== ======= ===== ======= =======
See notes to consolidated financial statements. F-4 30 MOVIE STAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1995, 1994, AND 1993 (IN THOUSANDS)
1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: (Loss) income before cumulative effect of accounting change $(5,029) $(4,185) $ 2,285 Adjustments to reconcile (loss) income before cumulative effect of accounting change to net cash provided by (used in) operating activities: Depreciation and amortization 1,319 1,386 1,396 Deferred income taxes -- (2,783) 14 Gain on sale of plant facilities -- (984) (908) Loss on plant closing 750 -- -- Other -- -- (46) Changes in operating assets and liabilities: Receivables 1,302 2,883 (486) Inventory 8,727 1,584 (2,948) Prepaid expenses and other current assets (55) 503 316 Other assets 51 (43) 118 Accounts payable (2,433) (910) 397 Accrued expenses and other current liabilities (1,312) (424) (120) ------- ------- ------- Net cash provided by (used in) operating activities 3,320 (2,973) 18 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant and equipment (311) (954) (884) Proceeds from sale of property and equipment -- 110 1,279 Decrease (increase) in notes receivable -- 670 (731) ------- ------- ------- Net cash used in investing activities (311) (174) (336) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payment of) proceeds from short-term obligations (3,706) 3,179 3,972 Payment of long-term obligations (122) (539) (601) Purchase of subordinated debentures -- -- (1,454) Purchase of treasury stock -- (359) (286) ------- ------- ------- Net cash (used in) provided by financing activities (3,828) 2,281 1,631 ------- ------- ------- NET (DECREASE) INCREASE IN CASH (819) (866) 1,313 CASH, BEGINNING OF YEAR 922 1,788 475 ------- ------- ------- CASH, END OF YEAR $ 103 $ 922 $ 1,788 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during year for: Interest $ 4,515 $ 4,074 $ 3,983 ======= ======= ======= Income taxes, net of refunds $ 68 $ 14 $ 130 ======= ======= =======
See notes to consolidated financial statements. F-5 31 MOVIE STAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1995, 1994 AND 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation - The consolidated financial statements include the accounts of Movie Star, Inc. and its subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. b. Inventory - Inventory is valued at lower of cost (first-in, first-out) or market. c. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation is computed principally by the straight-line method at rates adequate to allocate the cost of applicable assets over their expected useful lives. d. 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. The Company provides for such returns and allowances as they become known or anticipated. e. Income Taxes - Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" (see Note 7). f. (Loss) Income Per Share - (Loss) income per share is based on the net (loss) income 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, 1995. g. Amortization of Debt Issuance Cost - Legal and accounting fees, printing costs and other expenses associated with the issuance of subordinated debentures are being amortized over the term of the debentures. Annual amortization of debt issuance costs included in interest expense is $96,000. 2. INVENTORY Inventory consists of the following:
JUNE 30, 1995 1994 (IN THOUSANDS) Raw materials $ 6,870 $13,506 Work-in-process 5,354 5,673 Finished goods 23,861 25,633 ------- ------- $36,085 $44,812 ======= =======
F-6 32 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment (at cost) consists of the following:
JUNE 30, 1995 1994 (IN THOUSANDS) Land, buildings and improvements $ 8,522 $ 8,479 Machinery and equipment 2,597 3,486 Office furniture and equipment 2,212 2,555 Leasehold improvements 1,286 1,283 -------- -------- 14,617 15,803 Less accumulated depreciation and amortization (8,564) (8,106) -------- -------- $ 6,053 $ 7,697 ======== ========
At June 30, 1995, the Company held property, plant and equipment with a net book value of approximately $1,745,000 for sale or lease. 4. 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 are collateralized by accounts receivable and finished goods inventory imported pursuant to letters of credit. Interest on the outstanding notes is payable monthly at up to 1 percent above the prime rate (such rate being 10 percent at June 30, 1995). On October 13, 1995, the Company entered into new agreements with the same banks ("New Agreements"). The New Agreements expire June 30, 1996 and contain certain financial covenants (as defined). Persuant to the New Agreements, all borrowings will continue to be collateralized by accounts receivable and finished goods inventory imported pursuant to letters of credit with interest on outstanding borrowings being payable monthly at 1.25 percent above the prime rate. Borrowings under the New Agreements are subject to monthly borrowing limitations as follows (in thousands): October 1995 $26,266 November 1995 21,766 December 1995 11,832 January 1996 4,957 February 1996 2,146 March 1996 2,907 April 1996 4,183 May 1996 2,718 June 1996 2,547 F-7 33 5. LONG-TERM DEBT Long-term debt consists of purchase money mortgages with varying interest rates of between 4 percent and 9.85 percent, collateralized by land, buildings and improvements. The maturities of long-term debt at June 30, 1995, including current maturities, are as follows (in thousands):
YEAR AMOUNT 1996 $29 1997 23 1998 23 --- $75
=== 6. SUBORDINATED DEBENTURES On October 10, 1986, the Company sold $25,000,000 of 12-7/8% Subordinated Debentures due October 1, 2001 (the "Debentures"). Interest payments on the outstanding Debentures are due semi-annually on October 1 and April 1. 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, 1995 were $2,550,000. 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, 1995, the Company is prohibited from paying dividends and making stock purchases. 7. INCOME TAXES The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective July 1, 1993. This Statement supersedes SFAS No. 96, "Accounting for Income Taxes," which was adopted by the Company in 1989. The cumulative effect of adopting SFAS No. 109 on the Company's financial statements was to increase income by $861,000 ($.06 per share) for the year ended June 30, 1994. 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:
JUNE 30, 1995 1994 (IN THOUSANDS) Deferred tax liabilities: Differences between book and tax basis of property, plant and equipment $ 661 $ 779 Difference between book and tax basis of gain on sale of property, plant and equipment 288 308 ------ ------ 949 1,087 ------ ------
F-8 34 Deferred tax assets: Difference between book and tax basis of inventory 440 275 Reserves not currently deductible 3,258 2,050 Operating loss carryforwards 3,094 2,718 Other 2 53 ------ ------ 6,794 5,096 ------ ------ Valuation allowance 1,836 -- ------ ------ Net deferred tax asset $4,009 $4,009 ====== ======
The net change in the valuation allowance for the deferred tax asset was an increase of $1,836,000 in the year ended June 30, 1995 principally related to the operating loss arising in that year. The provision for income taxes is comprised as follows:
YEAR ENDED JUNE 30, 1995 1994 1993 (IN THOUSANDS) Current: Federal $ (270) $ -- $ 61 State and local 24 11 142 Deferred -- (2,783) 14 ------- ------- ---- $ (246) $(2,772) $217 ======= ======= ====
Reconciliation of the U.S. statutory rate with the Company's effective tax rate is summarized as follows:
YEAR ENDED JUNE 30, 1995 1994 1993 Federal statutory rate (34.0)% (34.0)% 34.0% Increase (decrease) in tax resulting from: Valuation allowance 34.8 -- -- Utilization of net operating losses related to an acquisition -- -- (9.7) Capital loss carryforwards utilized -- -- (9.8) State income taxes (net of Federal tax benefits) (6.0) (6.0) 3.7 Tax benefits previously unrecognized -- -- (9.8) Other .5 .2 .3 ----- ----- ----- Effective rate (4.7)% (39.8)% 8.7% ===== ===== =====
As of June 30, 1995, the Company has net operating loss carryforwards of approximately $7,734,000 for income tax purposes that expire between the years 2002 and 2009. 8. COMMITMENTS AND CONTINGENT LIABILITIES a. The Company was contingently liable for outstanding letters of credit in the amount of approximately $5,500,000 at June 30, 1995. F-9 35 b. The Company has operating leases expiring through 2002, which include, in addition to fixed rentals, escalation clauses that require the Company to pay a percentage of increases in occupancy expenses. Future minimum payments under these leases at June 30, 1995 are as follows (in thousands): 1996 1,104 1997 1,019 1998 929 1999 819 2000 273 Thereafter 432 -------- Total $ 4,576 ========
Rental expense for 1995, 1994 and 1993 was approximately $1,863,000, $1,721,000, and $1,839,000, respectively. 9. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company's customers are not concentrated in any specific geographic region but are concentrated in the retail industry. One customer accounted for 22, 22, and 23 percent of the Company's net sales in fiscal 1995, 1994 and 1993, 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. 10. STOCK PLANS, OPTIONS AND WARRANT a. Employee Stock Ownership Plan - The Company has an Employee Stock Ownership and Capital Accumulation Plan and Trust covering substantially all of its employees, pursuant to which it can elect to make contributions to the Trust in such amounts as may be determined by the Board of Directors. No contribution was made for the three year period ended June 30, 1995. During fiscal 1994, in connection with plant closings, the Company acquired 157,071 shares of its common stock from the plan for $336,000 to enable cash payments to be made to the participants. b. Stock Options - The Company has an Incentive Stock Option Plan ("1983 ISOP"), pursuant to which the Company has reserved 86,000 shares at June 30, 1995. This plan expired by its terms on June 30, 1993, but 86,000 previous grants remained outstanding at June 30, 1995, of which 83,000 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. During fiscal 1995, 780,000 options outstanding under this plan were canceled, of which 726,000 options were replaced with options under the new Incentive Stock Option Plan discussed below. On July 15, 1994, the Company's compensation committee approved a new Incentive Stock Option Plan ("1994 ISOP") to replace the 1983 ISOP discussed above. Options granted, pursuant F-10 36 to the plan, will not be subject to a uniform vesting schedule. The 1994 ISOP received stockholders' approval on December 8, 1994. The plan permits the issuance of options to employees to purchase common stock of the Company at a price not less than fair market value on the date of the option grant. The plan reserves 2,000,000 shares of common stock for grant and provides that the term of each award be determined by the Compensation Committee with all awards made within the ten-year period following the effective date. During 1995, there were approximately 1,382,000 options granted. The Company also has a Key Employee Stock Option Plan covering the issuance of up to 1,667,000 shares of the Company's common stock. Options to purchase 333,000 shares at an exercise price of $2.19 per share are outstanding at June 30, 1995. During fiscal 1995, 444,000 options under this plan were canceled and replaced with options in the 1994 ISOP. All options granted are presently exercisable. The Company has also granted nonqualified options to certain nonemployee sales representatives, one of whom later became an employee, to purchase an aggregate of 225,000 shares at exercise prices of $1.67 to $2.36. Information with respect to stock options is as follows:
NUMBER OF SHARES 1995 1994 1993 Outstanding - beginning of year 1,868,000 2,035,000 2,075,000 Granted 1,382,000 -- -- Exercised -- -- -- Canceled (1,224,000) (167,000) (40,000) ---------- ---------- ---------- Outstanding - end of year 2,026,000 1,868,000 2,035,000 ========== ========== ========== Exercisable - end of year 991,000 1,629,000 1,551,000 ========== ========== ========== Available for grant - end of year 1,952,000 1,553,000 1,553,000 ========== ========== ==========
Options outstanding at year-end have exercise prices of $1.125 to $2.36. Exercisable options at June 30, 1995 have exercise prices of $1.125 to $2.36. The unexercisable options at June 30, 1995, become exercisable as follows:
YEAR NUMBER 1996 120,000 1997 250,000 1998 251,000 1999 235,000 2000 179,000 --------- 1,035,000 ---------
Total number of shares reserved for issuance of stock options is 3,753,000 at June 30, 1995. F-11 37 c. 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. 11. SALE OF CHILDREN'S READY-TO-WEAR DIVISION On June 30, 1993, the Company sold its children's ready-to-wear division for notes receivable of $670,000, which was collected in fiscal 1994. The Company recognized a loss of approximately $150,000 on the sale. During 1993, sales of children's ready-to-wear accounted for approximately 3.7 percent of total sales. 12. SPECIAL CHARGE During fiscal 1995, the Company recorded a special 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 and property, plant and equipment. In fiscal 1994, the Company recorded a special charge of $3,800,000 for costs associated with the restructuring of its popular-priced intimate apparel division. This charge consisted of the write-down of certain inventory of this division to its estimated realizable value. 13. DISPOSAL OF PLANT FACILITIES During fiscal 1993, the Company sold a plant facility for a gain of $621,000, of which $548,000 was deferred at June 30, 1993. During fiscal 1994, the Company realized the remaining gain of $548,000 on such sale. Additionally, during fiscal 1994, the Company sold another plant facility, which was connected to the facility discussed above, for which a gain of $436,000 was recognized. During fiscal 1993, the Company sold certain plant facilities for which cash proceeds of $1,200,000 were received and recognized a gain on such sales of approximately $835,000. 14. RELATED PARTY TRANSACTIONS As of June 30, 1993, certain directors of the Company owned a majority interest in a privately held computer service company, which provided services and equipment to the Company amounting to $37,000 in fiscal 1993. F-12 38 15. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
QUARTER FIRST SECOND THIRD FOURTH (IN THOUSANDS, EXCEPT PER SHARE) YEAR ENDED JUNE 30, 1995 Net sales $32,440 $35,997 $ 17,327 $ 16,182 Gross profit 7,052 8,365 3,998 3,520 Net income (loss) 607 944 (1,316) (5,264)(a) Income (loss) per share .04 .07 (.09) (.38)
QUARTER FIRST SECOND THIRD FOURTH (IN THOUSANDS, EXCEPT PER SHARE) YEAR ENDED JUNE 30, 1994 Net sales $29,922 $35,020 $ 20,750 $ 17,413 Gross profit 6,718 7,040 4,508 2,481 Net income (loss) 1,190 782 (3,361)(b) (1,935) Income (loss) per share .08 .06 (.24) (.14)
QUARTER FIRST SECOND THIRD FOURTH (IN THOUSANDS, EXCEPT PER SHARE) YEAR ENDED JUNE 30, 1993 Net sales $31,551 $37,606 $ 29,541 $ 21,553 Gross profit 7,304 8,208 6,666 5,967 Net income (loss) 746 1,202 402 (65) Income per share .05 .08 .03 --
(a) Amount includes a special charge of $3,000,000 associated with the divestiture of the Company's men's work and leisure shirt division. (b) Amount includes a special charge of $3,800,000 for costs associated with the restructuring of the Company's popular-priced intimate apparel division. * * * * * * F-13 39 SCHEDULE II MOVIE STAR, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD FISCAL YEAR ENDED JUNE 30, 1995: Allowance for doubtful accounts $ 965 $ 676 $ (433)(a) $1,208 Allowance for sales allowances 660 2,792 (2,792) 660 ------ ------- ------- ------ $1,625 $ 3,468 $ 3,225 $1,868 ====== ======= ======= ====== FISCAL YEAR ENDED JUNE 30, 1994: Allowance for doubtful accounts $ 943 $ 45 $ (23)(a) $ 965 Allowance for sales allowances 716 4,409 (4,465) 660 ------ ------- ------- ------ $1,659 $ 4,454 $(4,488) $1,625 ====== ======= ======= ====== FISCAL YEAR ENDED JUNE 30, 1993: Allowance for doubtful accounts $1,668 $ (120) $ (605)(a) $ 943 Allowance for sales allowances 716 4,818 (4,818) 716 ------ ------- ------- ------ $2,384 $ 4,698 $(5,423) $1,659 ====== ======= ======= ======
(a) Uncollectible accounts written off. S-1 40 (a) 3. EXHIBITS
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 3.1 Certificate of Incorporation Incorporated by reference to Form 10-K for fiscal year ended June 30, 1988 and filed on October 13, 1988. 3.1.1 Amended Certificate of Incorporated by reference to Form 10-K for Incorporation fiscal year ended June 30, 1992 and filed on September 25, 1992. 3.1.2 Amended Certificate of Incorporated by reference to Form 8 Incorporation Amendment to Form 10-K for fiscal year ended June 30, 1992 and filed on January 19, 1993. 3.2 By-Laws Incorporated by reference to Form 10-K for fiscal year ended June 30, 1988 and filed on October 13, 1988. 4.1 Instruments defining the rights of security Incorporated by reference to Exhibits to holders including indentures Registration Statement on Form S-2 (No. 33-7837) filed October 10, 1986. 4.2 Plan of Merger dated November 18, 1980, Incorporated by reference to Exhibits to between Stardust Inc. and Sanmark Industries Registration Statement on Form S-14 Inc. whereby Sanmark Industries Inc. was (Registration No. 2-70365) filed by merged into Stardust Inc. Registrant's predecessor corporation, Stardust Inc. on February 12, 1981. 10
IV-2 41
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 10.1 Agreement of Sale dated December 12, 1983, as Incorporated by reference to Exhibits to amended January 31, 1984, among Industrial Registration Statement Form S-2 (No. 33- Development Authority of Russell County 7837) filed October 10, 1986. (Virginia), the Registrant and the Bankers Trust Company, with attendant Deed and Bill of Sale, Deed of Trust, Assignment, and Promissory Note in the sum of $3,000,000. 10.2 Employee Stock Ownership and Capital Incorporated by reference to Exhibits to Accumulation Plan dated April 17, 1984 as Registration Statement Form S-2 (No. 33- amended on July 1, 1984 between Republic 7837) filed October 10, 1986. National Bank of New York, as trustee, and the Registrant. 10.3 Incentive Stock Option Plan Agreement dated Incorporated by reference to Exhibits to June 28, 1983, as amended on January 13, 1986. Registration Statement Form S-2 (No. 33-7837) filed October 10, 1986. 10.3.1 1994 Incentive Stock Option Plan. Incorporated by reference to Form 10-K for fiscal year ended June 30, 1994 and filed on October 12, 1994. 10.4 Form of Non-Qualified Stock Option granted to Incorporated by reference to Exhibits to several persons who are manufacturer's Registration Statement Form S-2 (No. 33- representatives for the Registrant. 7837) filed October 10, 1986. 10.5 Demand Grid Promissory Note dated as of April Incorporated by reference to Form 10-K for 26, 1994 in the sum of $20,400,000 between fiscal year ended June 30, 1994 and filed Republic National Bank of New York and on October 12, 1994. Registrant.
IV-3 42
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 10.5.1 Continuing General Security Agreement dated Incorporated by reference to Form 10-K for May 19, 1993 from the Registrant to Republic fiscal year ended June 30, 1993 and filed National Bank of New York. on September 28, 1993. 10.5.2 Letter Agreement dated April 26, 1994 Incorporated by reference to Form 10-K for between Republic National Bank of New fiscal year ended June 30, 1994 and filed York and the Registrant confirming terms on October 12, 1994. of credit facility. 10.5.3 Letter Agreement dated October 7, 1994 Incorporated by reference to Form between Republic National Bank of 10-K for fiscal year ended June 30, 1994 New York and the Registrant confirming and filed on October 12, 1994. extension of terms of credit facility. 10.5.4 Credit and Security Agreement dated September Filed herewith. 14, 1995 among Republic National Bank of New York, NatWest Bank N.A. and the Registrant. 10.5.5 Lock Box Service Agreement dated September 14, Filed herewith. 1995 among NatWest Bank N.A., Republic National Bank of New York and the Registrant. 10.5.6 Secured Promissory Note dated September 14, Filed herewith. 1995 in the principal sum of $16,224,000 in favor of Republic National Bank of New York. 10.5.7 Participation Agreement dated September 1995 Filed herewith. between Republic National Bank of New York and NatWest Bank N.A. 10.6 Interest Bearing Grid Note dated as of May 31, Incorporated by reference to Form 10-K for 1994 in the sum of $13,000,000 between fiscal year ended June 30, 1994 and filed National Westminster Bank USA and the on October 12, 1994. Registrant.
IV-4 43
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 10.6.1 Continuing General Security Agreement dated Incorporated by reference to Form 10-K for July 26, 1993 from the Registrant to National fiscal year ended June 30, 1993 and filed Westminster Bank USA. on September 28, 1993. 10.6.2 Continuing Agreement dated July 16, 1993 Incorporated by reference to Form for Irrevocable Commercial Letters 10-K for fiscal year ended June 30, of Credit, Reimbursement Agreement and Security 1993 and filed on September 28, 1993. Agreement between National Westminster Bank USA and the Registrant. 10.6.3 Letter Agreement dated May 31, 1994 Incorporated by reference to Form between National Westminister Bank USA 10-K for fiscal year ended June 30, 1994 and the Registrant confirming terms of and filed on October 12, 1994. credit facility. 10.6.4 Letter dated October 7, 1994 from National Incorporated by reference to Form 10-K for Westminister Bank USA to the Registrant fiscal year ended June 30, 1994 and filed confirming extension of terms of credit on October 12, 1994. facility. 10.6.5 Secured Promissory Note dated September Filed herewith. 14, 1995 in the principal sum of $10,816,000 in favor of NatWest Bank N.A.
IV-5 44
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 10.7 1988 Non-Qualified Stock Incorporated by reference to Form 10-K for Option Plan. fiscal year ended June 30, 1989 and filed on September 27, 1989. 10.8 License Agreement dated Incorporated by reference to Form 8 July 26, 1990 between PGH Company, Licensor Amendment to Form 10-K for fiscal year and Sanmark-Stardust Inc. Licensee. ended June 30, 1992 and filed on January 19, 1993. 10.9 License Agreement dated November 14, 1991 Incorporated by reference to Form 8 between BonJour Group, Ltd., Licensor and Amendment to Form 10-K for fiscal year Sanmark-Stardust Inc., Licensee. ended June 30, 1992 and Filed on January 19, 1993. 10.10 Prototype of Contract of Purchase Incorporated by reference to periodically entered into between the From 10-K for fiscal year ended Registrant and Sears Roebuck and June 30, 1993 and filed Company. on September 28, 1993. 22 Subsidiaries of the Registrant. Filed herewith. 28.1 Tender Offer Statement and Rule 13E-3 Incorporated by reference to Schedule 14D- Transaction Statement with respect to Movie 1 and Rule 13E-3 Transaction Statement Star, Inc. Acquisition. (No. 1-4585) filed December 18, 1987.
(a) 4. Report on Form 8-K NONE IV-6 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this document to be signed on its behalf by the undersigned, thereunto duly authorized. October 13, 1995 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 Registrant and in the capacities and as of the date indicated. /s/ Mark M. David Chairman of the Board October 13, 1995 - --------------------- MARK M. DAVID /s/ Clayton E. Medley President; Chief October 13, 1995 - --------------------- Operating Officer CLAYTON E. MEDLEY & Director /s/ Saul Pomerantz Senior Vice President; October 13, 1995 - --------------------- Secretary & Director; SAUL POMERANTZ Principal Financial & Accounting Officer /s/ Helen Samuels Vice President; October 13, 1995 - --------------------- Treasurer; Director HELEN SAMUELS
IV-7 46 EXHIBIT INDEX -------------
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 3.1 Certificate of Incorporation Incorporated by reference to Form 10-K for fiscal year ended June 30, 1988 and filed on October 13, 1988. 3.1.1 Amended Certificate of Incorporated by reference to Form 10-K for Incorporation fiscal year ended June 30, 1992 and filed on September 25, 1992. 3.1.2 Amended Certificate of Incorporated by reference to Form 8 Incorporation Amendment to Form 10-K for fiscal year ended June 30, 1992 and filed on January 19, 1993. 3.2 By-Laws Incorporated by reference to Form 10-K for fiscal year ended June 30, 1988 and filed on October 13, 1988. 4.1 Instruments defining the rights of security Incorporated by reference to Exhibits to holders including indentures Registration Statement on Form S-2 (No. 33-7837) filed October 10, 1986. 4.2 Plan of Merger dated November 18, 1980, Incorporated by reference to Exhibits to between Stardust Inc. and Sanmark Industries Registration Statement on Form S-14 Inc. whereby Sanmark Industries Inc. was (Registration No. 2-70365) filed by merged into Stardust Inc. Registrant's predecessor corporation, Stardust Inc. on February 12, 1981. 10
47
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 10.1 Agreement of Sale dated December 12, 1983, as Incorporated by reference to Exhibits to amended January 31, 1984, among Industrial Registration Statement Form S-2 (No. 33- Development Authority of Russell County 7837) filed October 10, 1986. (Virginia), the Registrant and the Bankers Trust Company, with attendant Deed and Bill of Sale, Deed of Trust, Assignment, and Promissory Note in the sum of $3,000,000. 10.2 Employee Stock Ownership and Capital Incorporated by reference to Exhibits to Accumulation Plan dated April 17, 1984 as Registration Statement Form S-2 (No. 33- amended on July 1, 1984 between Republic 7837) filed October 10, 1986. National Bank of New York, as trustee, and the Registrant. 10.3 Incentive Stock Option Plan Agreement dated Incorporated by reference to Exhibits to June 28, 1983, as amended on January 13, 1986. Registration Statement Form S-2 (No. 33-7837) filed October 10, 1986. 10.3.1 1994 Incentive Stock Option Plan. Incorporated by reference to Form 10-K for fiscal year ended June 30, 1994 and filed on October 12, 1994. 10.4 Form of Non-Qualified Stock Option granted to Incorporated by reference to Exhibits to several persons who are manufacturer's Registration Statement Form S-2 (No. 33- representatives for the Registrant. 7837) filed October 10, 1986. 10.5 Demand Grid Promissory Note dated as of April Incorporated by reference to Form 10-K for 26, 1994 in the sum of $20,400,000 between fiscal year ended June 30, 1994 and filed Republic National Bank of New York and on October 12, 1994. Registrant.
48
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 10.5.1 Continuing General Security Agreement dated Incorporated by reference to Form 10-K for May 19, 1993 from the Registrant to Republic fiscal year ended June 30, 1993 and filed National Bank of New York. on September 28, 1993. 10.5.2 Letter Agreement dated April 26, 1994 Incorporated by reference to Form 10-K for between Republic National Bank of New fiscal year ended June 30, 1994 and filed York and the Registrant confirming terms on October 12, 1994. of credit facility. 10.5.3 Letter Agreement dated October 7, 1994 Incorporated by reference to Form between Republic National Bank of 10-K for fiscal year ended June 30, 1994 New York and the Registrant confirming and filed on October 12, 1994. extension of terms of credit facility. 10.5.4 Credit and Security Agreement dated September Filed herewith. 14, 1995 among Republic National Bank of New York, NatWest Bank N.A. and the Registrant. 10.5.5 Lock Box Service Agreement dated September 14, Filed herewith. 1995 among NatWest Bank N.A., Republic National Bank of New York and the Registrant. 10.5.6 Secured Promissory Note dated September 14, Filed herewith. 1995 in the principal sum of $16,224,000 in favor of Republic National Bank of New York. 10.5.7 Participation Agreement dated September 1995 Filed herewith. between Republic National Bank of New York and NatWest Bank N.A. 10.6 Interest Bearing Grid Note dated as of May 31, Incorporated by reference to Form 10-K for 1994 in the sum of $13,000,000 between fiscal year ended June 30, 1994 and filed National Westminster Bank USA and the on October 12, 1994. Registrant.
49
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 10.6.1 Continuing General Security Agreement dated Incorporated by reference to Form 10-K for July 26, 1993 from the Registrant to National fiscal year ended June 30, 1993 and filed Westminster Bank USA. on September 28, 1993. 10.6.2 Continuing Agreement dated July 16, 1993 Incorporated by reference to Form for Irrevocable Commercial Letters 10-K for fiscal year ended June 30, of Credit, Reimbursement Agreement and Security 1993 and filed on September 28, 1993. Agreement between National Westminster Bank USA and the Registrant. 10.6.3 Letter Agreement dated May 31, 1994 Incorporated by reference to Form between National Westminister Bank USA 10-K for fiscal year ended June 30, 1994 and the Registrant confirming terms of and filed on October 12, 1994. credit facility. 10.6.4 Letter dated October 7, 1994 from National Incorporated by reference to Form 10-K for Westminister Bank USA to the Registrant fiscal year ended June 30, 1994 and filed confirming extension of terms of credit on October 12, 1994. facility. 10.6.5 Secured Promissory Note dated September Filed herewith. 14, 1995 in the principal sum of $10,816,000 in favor of NatWest Bank N.A.
50
Exhibit Number Exhibit Method of Filing ------- ------- ---------------- 10.7 1988 Non-Qualified Stock Incorporated by reference to Form 10-K for Option Plan. fiscal year ended June 30, 1989 and filed on September 27, 1989. 10.8 License Agreement dated Incorporated by reference to Form 8 July 26, 1990 between PGH Company, Licensor Amendment to Form 10-K for fiscal year and Sanmark-Stardust Inc. Licensee. ended June 30, 1992 and filed on January 19, 1993. 10.9 License Agreement dated November 14, 1991 Incorporated by reference to Form 8 between BonJour Group, Ltd., Licensor and Amendment to Form 10-K for fiscal year Sanmark-Stardust Inc., Licensee. ended June 30, 1992 and Filed on January 19, 1993. 10.10 Prototype of Contract of Purchase Incorporated by reference to periodically entered into between the From 10-K for fiscal year ended Registrant and Sears Roebuck and June 30, 1993 and filed Company. on September 28, 1993. 22 Subsidiaries of the Registrant. Filed herewith. 28.1 Tender Offer Statement and Rule 13E-3 Incorporated by reference to Schedule 14D- Transaction Statement with respect to Movie 1 and Rule 13E-3 Transaction Statement Star, Inc. Acquisition. (No. 1-4585) filed December 18, 1987.
EX-10.5.4 2 CREDIT AND SECURITY AGREEMENT DATES 9/14/1995 1 CREDIT AND SECURITY AGREEMENT AMONG REPUBLIC NATIONAL BANK OF NEW YORK, INDIVIDUALLY AND AS AGENT 452 FIFTH AVENUE NEW YORK, NEW YORK 10018 NATWEST BANK N.A. 1133 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10036 AND MOVIE STAR, INC. Republic National Bank of New York, September 14, 1995 Individually and as Agent 452 Fifth Avenue New York, New York 10018 NatWest Bank N.A. 1133 Avenue of the Americas New York, New York 10036 Ladies and Gentlemen: This Agreement states the terms and conditions upon which, effective as of the date of acceptance hereof by each of you, we may obtain loans and other financial accommodations through the Agent from Republic National Bank of New York ("RNB") and NatWest Bank N.A. ("NatWest"), on a several basis, for our general corporate and business purposes upon the security referred to herein. 2 Section 1. DEFINITIONS. 1.1 All terms used herein which are defined in Article 1 or Article 9 of the Uniform Commercial Code of the State of New York ("UCC") shall have the meanings given therein, unless otherwise defined in this Agreement, and all references to the plural herein shall also mean the singular. All accounting terms used herein shall have the meaning assigned to them by generally accepted accounting principles, unless otherwise defined. 1.2 "Accessions" shall have the meaning ascribed to it in the UCC, as amended. 1.3 "Accounts" shall mean all of our present and future accounts, general intangibles, chattel paper, documents and instruments, as such terms are defined in the UCC, and all of our contract rights, including, without limitation, all obligations for the payment of money arising out of our sale, lease or other disposition of goods or other property or rendition of services. 1.4 "Account Debtor" shall mean each debtor or obligor in any way obligated on or in connection with any Account. 1.5 "Accounts Advance Percentage" shall have the meaning set forth in Section 2.2 hereof. 1.6 "Actual Letter of Credit Exposure" shall mean the aggregate amount, at any one time, of the amounts outstanding under all Letters of Credit, except Existing RNB Standby Letters of Credit and shall include, without limitation, the amounts outstanding under the Existing RNB Letters of Credit and the Existing NatWest Letters of Credit. 1.7 "Actual Total Line Outstanding" shall mean the aggregate amount, at any one time, of (x) the unpaid principal amounts of the Loans outstanding, (y) the Actual Letter of Credit Exposure and (z) Existing RNB Standby Letter of Credit. 1.8 "Affiliate" of a party shall mean any entity controlling, controlled by or under common control with, the party. 1.9 "Agent" shall have the meaning set forth in Section 10 hereof. 1.10 "Application" shall have the meaning set forth in Section 2.4 hereof. 1.11 "Bank" shall mean either RNB or NatWest. 1.12 "Business Day" shall mean a day on which the Agent, RNB and NatWest are each open for the regular transaction of business in New York, New York. -2- 3 1.13 "NatWest Note" shall have the meaning set forth in Section 2.3 hereof. 1.14 "Closing Date" shall mean the date this Agreement is accepted by both Banks. 1.15 "Collateral" shall have the meaning set forth in Section 4.1 hereof. 1.16 "Control" shall mean the power to direct the affairs of a person or entity, including, without limitation, through the ownership of a majority of the voting power of a party. 1.17 "Due Date" shall mean December 31, 1995. 1.18 "Eligible Accounts" shall mean Accounts created by us in the ordinary course of business arising out of our sale and delivery of goods or rendition of services, which are and at all times shall continue to be deemed eligible hereunder by the Agent, in all respects in the Agent's sole and absolute discretion. Standards of and criteria for eligibility may be established, supplemented and revised from time to time solely by the Agent in its exclusive judgment, exercised reasonably and in good faith. In determining eligibility, the Agent may, but need not, rely on agings or reports and schedules of Accounts furnished by us, but reliance by the Agent, RNB or NatWest thereon from time to time shall not be deemed to limit the Agent's right to revise standards of eligibility at any time as to both our present and future Accounts. Without limiting the generality of the foregoing, in any event, an Account shall not be deemed eligible unless: (a) the Account Debtor on such Account, based on financial condition, relative amount of credit extended, payment history and otherwise, is and continues to be acceptable to the Agent in its sole and absolute discretion, (b) such Account complies in all respects with the representations, covenants and warranties hereinafter set forth, (c) delivery of the goods or rendition of the services has been completed and accepted by the Account Debtor, (d) such Account is not subject to any agreement under which any deduction, discount, credit or allowance of any kind may be granted or allowed, and (e) no more than ninety (90) days have elapsed since the invoice date of such Account or (60) days past the due date provided such due date is not more than 90 days from shipment. 1.19 "Events of Default" shall have the meaning set forth in Section 8.1 hereof. 1.20 "Existing NatWest Letters of Credit" shall mean the commercial letters of credit issued by NatWest for our account prior to the Closing Date and currently outstanding, as listed on Schedule B hereto together with any Steamship Guaranty or Air Release issued by NatWest. 1.21 "Existing RNB Standby Letters of Credit shall mean the standby letters of credit listed on Schedule C. -3- 4 1.22 "Existing RNB Letters of Credit" shall mean the commercial letters of credit issued by RNB for our account prior to the Closing Date and currently outstanding, as listed on Schedule C hereto together with any Steamship Guaranty or Air Release issued by RNB. 1.23 "Inventory" shall mean all imported inventory and all documents (including, without limitation, all documents of title, transport or otherwise) and all Records, other property and general intangibles at any time relating to such inventory, whether now or hereafter existing or acquired and wherever located, all products and proceeds (including, but not limited to, all "proceeds," "products," "offspring," "rents," or "profits," as such terms are used in the United States Bankruptcy Code, as amended), and all insurance proceeds of such property wherever located and in whatever form. As used herein, the term "imported inventory" means all inventory of the Debtor of finished goods imported from outside of the United States for which any bank has issued a letter of credit. 1.24 "Letter of Credit" shall mean a letter of credit issued by the Agent for our account under this Agreement together with any Steamship Guaranty or Air Release. 1.25 "Loan Account" shall have the meaning set forth in Section 2.3 hereof. 1.26 "Maximum Credit Amount" shall have the meaning set forth in Section 2.2 hereof. 1.27 "Maximum Rate" shall have the meaning set forth in Section 3.4 hereof. 1.28 "Net Amount of Eligible Accounts" shall mean the gross amount of Eligible Accounts, less sales, excise or similar taxes, and less returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed. 1.29 "Obligations" shall mean any and all Loans, indebtedness, liabilities and obligations of any kind owing by us or any Affiliate of ours to RNB, NatWest or the Agent, however evidenced, whether as principal, guarantor or otherwise, whether arising under this Agreement (including, without limitation, all Loans or extensions of credit made to us by either of you hereunder, whether or not in excess, at any time, of the Maximum Credit Amount, any supplement hereto, or otherwise, including, without limitation, any liability of ours to any of you relating to issuance by RNB, NatWest or the Agent of letters of credit for our account or the payment by any of you under any such letters of credit of any unreimbursed draws, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended, and whether arising directly or acquired from others by purchase, negotiation, discount, assignment or otherwise (including, without limitation, any participations or interests of RNB or NatWest in our obligations to others and all amounts owing by us to any of you by reason of purchases made by us from other concerns financed or factored by any of you) and including, without limitation, interest, fees, commissions, -4- 5 expenses and costs chargeable by any of you to us or reimbursable by us to any of you in connection with all of the foregoing. 1.30 "Old NatWest Notes" shall mean Interest Bearing Grid Note dated July 31, 1995 in the amount of $10,000,000. 1.31 "Old Republic Notes" shall mean Demand Grid Note dated January 31, 1992 in the amount of $20,000,000. 1.32 "Projected Letter of Credit Exposure" shall mean, at any one time, the aggregate amount projected to be outstanding under all Letters of Credit (including the amounts projected to be outstanding under the Existing RNB Letters of Credit, and the Existing NatWest Letters of Credit) at such time, as set forth in the Projections. 1.33 "Projected Total Line Outstanding" shall mean, at any one time, the sum of (x) the aggregate unpaid principal amounts of the Loans projected to be outstanding at such time, (y) the Projected Letter of Credit Exposure at such time and (z) Existing RNB Standby Letters of Credit. 1.34 "Projections" shall mean our financial projections dated August 9, 1995 provided by us to RNB and NatWest, a copy of which is attached hereto as Exhibit A, or revised financial projections, if any, accepted in writing by both RNB and NatWest, in their sole and absolute discretion, as constituting the "Projections" for all purposes of this Agreement. 1.35 "Records" shall have the meaning set forth in Section 4.1(h) hereof. 1.36 "Shortfall Amount" shall mean, for any month, the amount specified in the Projections for such month by which the aggregate unpaid principal amounts of the Loans and Existing RNB Standby Letters of Credit projected to be outstanding for such month exceeds 80% of the projected Net Amount of Eligible Accounts for such month. Section 2. EXTENSIONS OF CREDIT. 2.1 Loans and Letters of Credit. Subject to the terms and conditions hereof, provided there is no Event of Default, at our request the Agent shall, from time to time until one (1) day prior to Due Date, acting severally on behalf of RNB and NatWest, make loans to us (each, a "Loan"), and (ii) issue Letters of Credit on behalf of RNB and NatWest (each, a "Letter of Credit"), and such Loans may be repaid and re-borrowed hereunder provided, however, that the Actual Total Line Outstanding shall not exceed the Maximum Credit Amount and provided that there is no Event of Default. The extension of any credit to us hereunder in excess of the Maximum Credit Amount or after an Event of Default shall not be deemed to modify such amount or create any obligation to make any further extension of credit in excess of such amount or after an Event of Default. 2.2 Maximum Credit Amount -5- 6 (a) The Maximum Credit Amount shall be, at any one time, (before taking into account the deviances from the Projections expressly permitted under subsections (b) and (c) of this Section 2.2) the lesser of (i) $27,040,000.00 or (ii) the sum of (x) eighty percent (80%) (or such greater or lesser percentage thereof as the Agent, in its sole and absolute discretion, determine from time to time (such percentage in effect from time to time, the "Accounts Advance Percentage")) of the Net Amount of Eligible Accounts which have been validly assigned to the Agent and in which the Agent holds a security interest pursuant to the terms hereof ranking prior to and free and clear of the interests, claims and rights of others, (y) the Shortfall Amount, and (z) the Projected Letter of Credit Exposure. (b) The Agent may, in its sole and absolute discretion, deem the Shortfall Amount to be increased by an amount of up to $2,000,000 at any time during any month (excluding the last day of such month). (c) The Agent may, in its sole and absolute discretion, allow the Maximum Credit Amount to be increased by an amount of up to $2,000,000 at any time during any month (excluding the last day of such month). -6- 7 2.3 Loans. (a) Loan Accounts. All Loans made to us and other amounts due from us hereunder shall be charged to a loan account in our name on the Agent's books (the "Loan Account"), and the amount of such Loan Account shall be allocated on the Agent's books, by notation by the Agent, indicating what portion of such Loan or other amount due is due to the Agent on behalf of RNB (the "RNB Loan Account") or NatWest (the "NatWest Loan Account"), as the case may be. The Agent shall render to us each month a statement of the Loan Account for the previous month, which shall indicate the amount in the RNB Loan Account and in the NatWest Loan Account, which statement shall be considered correct and deemed accepted by and conclusively binding upon us as an account stated, except to the extent that the Agent receives a written notice of any specific exceptions by us thereto within five (5) days (or such longer minimum period as may be required by applicable law) after the date of such statement. Subject to the foregoing, the Agent may, at its option, maintain one or more separate accounts for us with respect to any and all Loans, fees, commissions, expenses and costs chargeable to us hereunder. Maintaining the Loan Account, the RNB Loan Account, the NatWest Loan Account and other separate accounts shall not affect the nature or extent of any security interests in Collateral granted by us to the Agent, RNB or NatWest in that any and all Loans or other Obligations are secured by any and all security interests in Collateral heretofore, now or hereafter granted to the Agent, RNB or NatWest. The debit balance of the Loan Account at any time shall reflect the aggregate amount of our indebtedness to RNB and NatWest hereunder and the related debit balance of the RNB Loan Account or NatWest Loan Account at any time shall reflect that portion of such indebtedness owed to RNB or NatWest, as the case may be. (b) Promissory Notes. (i) On the Closing Date, we shall execute and deliver (i) to RNB a Secured Promissory Note in the principal amount of $16,224,000 maturing on the Due Date in form and substance satisfactory to RNB (the "RNB Note"), and (ii) to NatWest a Secured Promissory Note in the principal amount of $10,816,000, maturing on the Due Date in form and substance satisfactory to NatWest (the "NatWest Note"). The RNB Note and the NatWest Note shall evidence the Loans made to us hereunder on behalf of RNB and NatWest, respectively. We hereby unconditionally and irrevocably authorize each Bank (and any holder of such Bank's Note) to make notations on its books and records of (i) the date and amount of the portion of each Loan allocable to such Bank, (ii) the dates and amounts of all principal payments thereon, and (iii) the remaining unpaid principal amounts thereof, in each case consistent with the amount set forth on the Agent's books and records as the respective amounts of the RNB Loan Account and the NatWest Loan Account. The information entered on such Bank's books and records shall be binding upon us in absence of manifest error; provided, however, to the extent there is any discrepancy between the amount set forth on such Bank's books and records and the amount of the NatWest Loan Account or the RNB Loan Account, the amount of such Loan Account shall govern. Notwithstanding the foregoing, any failure by a Bank (or the holder of such Bank's Note), to make notations on its respective books and records shall in no way mitigate or discharge our obligation to repay any Loans actually made. (ii) All unpaid principal amounts outstanding pursuant to the Old RNB Notes -7- 8 and the Old NatWest Notes shall be deemed Loans under this Agreement, as of the Closing Date, and shall be allocated to the Loan Account, and the RNB Loan Account or the NatWest Loan Account, as the case may be, and shall be evidenced by and repayable in accordance with the RNB Note or the NatWest Note, as the case may be, and this Agreement, with appropriate notations made with respect to such Notes on the books and records of each Bank. Such amounts shall be deemed included within the terms "Loans" and "Obligations" for all purposes of this Agreement, including, without limitation, calculating the Actual Total Line Outstanding. All unpaid interest amounts owing pursuant to the RNB Old Notes and the NatWest Old Notes, as of the Closing Date, shall be paid by us in cash on the Closing Date to RNB or NatWest, as the case may be, or, if not so paid, the full amount thereof shall be deemed to be a Loan hereunder made as of the Closing Date, and shall be charged to the Loan Account accordingly, and the Agent shall use the proceeds of such Loan to pay to RNB and NatWest, on the Closing Date, the amount of such interest due to each of them. 2.4 Letters of Credit. (a) Each Letter of Credit shall be issued pursuant to RNB's standard form of application and reimbursement agreement for a commercial letter of credit (the "Application"), and shall expire on a date no later than 180 days from the date of issuance or April 30, 1996, (except Existing RNB Standby Letters of Credit,) whichever is earlier. We shall pay RNB's standard fixed fees, as established from time to time, for opening and amending any Letter of Credit, payable at the time of such opening or amendment. We shall also pay, for each sight draft presented to the Agent in accordance with the terms of any Letter of Credit, a negotiation fee equal to 1/4% of the face amount of such sight draft. Such negotiation fee shall be payable when such draft is presented to and honored by the Agent, all as more fully set forth in the Application. (b) The Existing RNB Letters of Credit and Existing RNB Standby Letters of Credit, shall be deemed, from and after the Closing Date, to be Letters of Credit issued by the Agent under this Agreement and the related application and reimbursement agreements shall be deemed, from and after the Closing Date, to run to the Agent for the benefit of RNB and NatWest. The fixed and negotiation fees payable in respect of the Existing RNB Letters of Credit shall be as set forth in subsection (a) of this Section 2.4. The Existing NatWest Letters of Credit shall continue as letters of credit issued by NatWest, and the fees in respect thereof shall be as set forth in the related application and reimbursement agreements between us and NatWest. (c) The outstanding amounts of the Existing RNB Letters of Credit and the Existing NatWest Letters of Credit shall be included for all purposes in calculating the Actual Letter of Credit Exposure, and such amounts shall be deemed included in the term Obligations, for all purposes of this Agreement and the Existing RNB Standby Letter of Credit shall be deemed for purposes of this Agreement to be included in the term Obligations. -8- 9 2.5 At the Agent's option, all principal, interest, fees, commissions, expenses and costs (including, without limitation, field examination fees) chargeable by the Agent, RNB or NatWest to us or reimbursable by us to such party in connection with this Agreement, or any supplement hereto (all of which shall be cumulative and not exclusive) shall be due and payable on demand, and, at the Agent's option, all such fees, commissions, expenses and costs may be charged by the Agent directly to the Loan Account and allocated to the RNB Loan Account and NatWest Loan Account, by the Agent. 2.6 All Loans shall be payable at the Agent's office specified above or at such other place as the Agent may hereafter designate from time to time. Section 3. INTEREST AND FEES. 3.1 Interest shall be payable by us to the Agent, for the account of RNB and NatWest, as the case may be, on the last day of each month upon the closing daily balances in the Loan Account for each day during such month, at a rate equal to one percent (1%) per annum in excess of the rate from time to time established by the Agent at its principal domestic office as its reference rate for domestic commercial loans, whether or not such established reference rate is the best rate available from the Agent for commercial loans. The rate charged hereunder shall increase or decrease by an amount equal to each increase or decrease, respectively, in said reference rate, effective on the first day of the month after any change in said reference rate based on the reference rate in effect on the last day of the month in which any such change occurs. The rate of interest in effect hereunder on the date hereof in accordance with the foregoing, expressed in terms of simple interest, is nine and three quarters percent (9 3/4%) per annum. Notwithstanding the foregoing, in no event shall the interest rate payable under this Section 3.1 be less than six percent (6%) per annum. 3.2 On and after the date of any Event of Default (and so long as such Event of Default is continuing) interest on all outstanding unpaid Loans shall accrue at a rate equal to two percent (2%) per annum above the rate that would otherwise apply from the date of such Event of Default or termination, and all interest accruing hereunder shall thereafter be payable on demand. 3.3 Interest shall be calculated on the basis of a 360-day year and the actual number of days elapsed, and shall be included in each monthly statement of the Loan Account. The Agent shall have the right, at its option, to charge all interest to the Loan Account, and allocate it to the RNB Loan Account and the NatWest Loan Account on the first day of each month, and such interest shall be deemed to be paid by the first amounts subsequently credited thereto. 3.4 Notwithstanding any provision herein or in any related document, neither the Agent, RNB nor NatWest shall ever be entitled to receive, collect, or apply, as interest on the Loan Account, any amount in excess of the maximum rate of interest ("Maximum Rate") permitted to by charged from time to time by applicable law (if such law imposes any -9- 10 maximum rate), and in the event the Agent, RNB or NatWest ever receives, collects, or applies as interest any amount in excess of the Maximum Rate, such amount shall be deemed and treated as a partial prepayment of the principal of the Loan Account; and, if the principal of the Loan Account and all other of your charges other than interest are paid in full, any remaining excess shall forthwith be paid to us. In determining whether or not the interest paid or payable under any specified contingency exceeds the Maximum Rate, we shall, to the extent permitted under applicable law, spread the total amount of interest throughout the longer of: (a) the entire contemplated term hereof or (b) the term during which this Agreement has been in effect; provided, however, that if the Loan Account is paid in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence hereof exceeds the maximum lawful rate under applicable law, the Agent shall refund to us the amount of such excess or credit the amount of such excess against the principal of the Loan Account and, in such event, neither the Agent nor RNB or NatWest shall be subject to any penalties provided by any laws for contracting for, charging, or receiving interest in excess of the maximum lawful rate. 3.5 We shall pay the Agent monthly a loan management fee of 1/4 of 1% per annum on the last day of each month upon the average daily balances in the Loan Accounts for such month. Said payment to the Agent is solely for the account of the Agent. Section 4. SECURITY INTEREST. 4.1 As security for the prompt performance, observance and payment in full of all Obligations, we hereby grant to the Agent on behalf of itself, RNB and NatWest, a continuing security interest in, a lien upon and a right of setoff against, and we hereby assign, transfer, pledge and set over to the Agent on behalf of itself, RNB and NatWest, all of our right, title and interest in and to the following (which together with any of our other property in which you may now or at any time hereafter have a security interest or lien, whether pursuant to any security or other agreement previously executed by us in favor of RNB or NatWest, or any supplement hereto, or otherwise, are herein collectively referred to as the "Collateral"): All present and future (a) Accounts; (b) Inventory; (c) moneys, securities and other property and the proceeds thereof, now or hereafter held or received by, or in transit to, the Agent, RNB or NatWest from or for us, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of our deposits (general or special), balances, sums and credits with you or any other party at any time existing; (d) all of our rights, remedies, security and liens, in, to and in respect of the Accounts, Inventory, and other Collateral described herein, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, all proceeds of any letter of credit naming us as beneficiary, guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any Account Debtor, and credit and other insurance; (e) all goods relating to, or which by sale have resulted in, Accounts, including, without limitation, all goods described in invoices, documents, contracts or instruments, including, without limitation, promissory notes, with respect to, or otherwise representing or evidencing, any Accounts or other Collateral, including without limitation, all -10- 11 returned, reclaimed or repossessed goods; (f) all additional amounts due to us from any Account Debtor; (g) all books, records, ledger cards, computer programs, tapes and related data processing software, and other property of any kind or nature, whether general intangibles or otherwise, recording, evidencing or relating to the Accounts, Inventory, any other above-mentioned Collateral or any Account Debtor, together with the file cabinets or containers in which the foregoing are stored ("Records"); (h) all other general intangibles of every kind and description, whether or not arising out of the sale, leasing or other disposition of goods or the rendition of services, including, without limitation, causes of action, reversions from pension plans, trade names, trade styles, trademarks and the goodwill of the business symbolized thereby, patents, copyrights, licenses and Federal, State and local tax refunds and claims of all kinds; and (i) all proceeds of the foregoing, in any form, including, without limitation, cash, non- cash items, checks, notes, drafts and other instruments for the payment of money, insurance proceeds, and any claims against third parties for loss or damage to or destruction of any or all of the foregoing. Such general assignment, pledge and security interest (i) shall continue during the term of this Agreement and thereafter until payment in full of the Obligations, whether or not this Agreement shall have sooner terminated, and (ii) shall be in addition to and cumulative with any and all assignments, pledges and security interests heretofore made or granted by us in favor of RNB or NatWest pursuant to any security or other agreement previously executed by us in favor of RNB or NatWest. 4.2 We shall keep and maintain, at our cost and expense, satisfactory and complete books and records of all Accounts, all payments received or credits granted thereon, and all other dealings therewith. At such times as the Agent may request, in its sole and absolute discretion, we shall mark our ledger cards, books of account and other records relating to Accounts with appropriate notations satisfactory to the Agent in its sole and absolute discretion, disclosing that such Accounts have been assigned to it. We shall not assign, or attempt to assign, or otherwise grant any rights in or otherwise encumber any of our Accounts to or in favor of any party other than the Agent. At such time as the Agent may request, in its sole and absolute discretion, we shall deliver to the Agent all original documents evidencing the sale, lease or other disposition of goods or the rendition of services which created any Accounts, including, but not limited to, all original contracts, orders, invoices, bills of lading, warehouse receipts, delivery tickets and shipping receipts, together with schedules describing the Accounts and/or written confirmatory assignments to the Agent of each Account, in form and substance satisfactory to the Agent, RNB and NatWest and duly executed by us, together with such other information as the Agent may request. In no event shall the making or the failure to make, or the content of, any schedule or assignment or our failure to comply with the provisions hereof be deemed or construed as a waiver, limitation or modification of the Agent's security interest in, lien upon and assignment of the Collateral or our representations, warranties or covenants under this Agreement or any supplement hereto. Section 5. COLLECTION AND ADMINISTRATION. 5.1 Until our authority to do so is curtailed or terminated at any time by notice from the Agent (which the Agent may give at any time in its sole and absolute discretion), we -11- 12 shall, at our expense and on the Agent's behalf, collect, as the Agent's property, on behalf of the Agent, RNB and NatWest, and in trust for the Agent, RNB and NatWest, all remittances and all amounts unpaid on Accounts, and we shall not commingle such collections with our own funds. We shall on the day received remit all such collections to the Agent in the form received duly endorsed by us for deposit with the Agent, unless you shall direct us otherwise. All amounts collected on Accounts when received by the Agent (including all prepayments in respect thereof or otherwise by Account Debtors) shall be credited to the Loan Account, and further credited by allocation made by the Agent, in its sole discretion, to the RNB Loan Account and the NatWest Loan Account, as the case may be, after adding two (2) Business Days for collection, clearance and transfer of remittances, conditional upon final payment to the Agent. 5.2 All Records shall be kept in appropriate containers in safe places, bearing suitable legends identifying them as being under the Agent's dominion and control. The Agent, RNB and NatWest, or their representatives, shall at all times have free access to and right of inspection of the Collateral and have full access to and the right to examine and make copies of our Records, to confirm and verify all Accounts, to perform general audits and to do whatever else any of you deem necessary to protect any of your interests. The Agent may at any time remove from our premises or require us or any accountants and auditors employed by us to deliver to the Agent, RNB or NatWest any Records and the Agent may, without cost or expense to the Agent, RNB or NatWest, use such of our personnel, supplies, computer equipment and space at our places of business as may be reasonably necessary for the handling of collections. 5.3 We shall promptly upon obtaining knowledge thereof report to the Agent all reclaimed, repossessed or returned goods, Account Debtor claims and any other matter affecting the value, enforceability or collectibility of Accounts. At the Agent's request, any goods reclaimed or repossessed by or returned to us will be set aside, marked with the Agent's name and held by us for the Agent's account and subject to your security interest. All claims and disputes relating to Accounts are to be promptly adjusted within a reasonable time, at our own cost and expense. The Agent may, at your option, settle, adjust or compromise claims and disputes relating to Accounts which are not adjusted by us within a reasonable time. 5.4 We shall, in the manner requested by the Agent from time to time, direct that all proceeds of Accounts, letters of credit, bankers' acceptances and other proceeds of Collateral shall be paid to a lock box or post office box designated by the Agent and under the Agent's control and/or deposited into a blocked account under the Agent's control and/or deposited into an account maintained in the Agent's name and under the Agent's control and in connection therewith shall execute such lock box, blocked account or other agreement as the Agent in its sole and absolute discretion shall specify. Section 6. REPRESENTATIONS, WARRANTIES AND COVENANTS. -12- 13 We hereby represent, warrant and covenant to each of the Agent, RNB and NatWest the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which, or compliance with, being a continuing condition of the making of Loans and the issuance of Letters of Credit by the Agent on behalf of each of RNB and NatWest, severally, hereunder or under any supplement hereto: 6.1 We are, and shall be, with respect to all Collateral now existing or hereafter acquired, the owner of such Collateral free from any lien, security interest, claim or encumbrance of any kind, except in the Agent's favor and as otherwise consented to in writing by the Agent, and we shall defend the same against the claims of all persons. 6.2 The only location of any Collateral hereunder are those addresses listed on Schedule A annexed hereto and made a part hereof. Schedule A sets forth the owner and/or operator of the premises at such addresses for all locations which we do not own and operate, and all mortgages, if any, with respect to such premises. We shall not remove any such Collateral from such locations or sell, lease, transfer, assign or otherwise dispose of any Inventory, and we have not, and shall not consign any Inventory with any party, or store any Inventory with any bailee, warehouseman or similar party, without (a) ten (10) business days' prior written notice to the Agent, RNB and NatWest and the Agent's written consent, and (b) first making all arrangements and delivering or causing to be delivered to the Agent, RNB and NatWest such agreements and other documentation requested by you for the protection and preservation of the Agent's security interests and liens, in form and substance satisfactory to the Agent, in its sole and absolute discretion, except for sales of Inventory in the ordinary course of our business. 6.3 We shall at all times maintain, with financially sound and reputable insurers, casualty and hazard insurance with respect to the Inventory for not less than its full market value and against all risks to which it may be exposed. All such insurance policies shall be in such form, substance and coverage as may be satisfactory to the Agent in its sole and absolute discretion and shall provide for thirty (30) days' minimum prior cancellation notice in writing to the Agent. The Agent may act as attorney-in-fact for us in obtaining, adjusting, settling, amending and canceling such insurance without liability to us. We shall promptly (a) obtain endorsements to all existing and future insurance policies with respect to the Inventory specifying that the proceeds of such insurance shall be payable to the Agent, on behalf of RNB and NatWest, and us as their and our interests may appear and further specifying that the Agent shall be paid regardless of any act, omission or breach of warranty by us, (b) deliver to the Agent an original executed copy of, or executed certificate of the insurance carrier with respect to, such endorsement and, at the Agent's request, the original or a certified duplicate copy of the underlying insurance policy, and (c) deliver to the Agent such other evidence which is satisfactory to the Agent in its sole and absolute discretion of compliance with the provisions hereof. 6.4 We shall promptly notify the Agent, RNB and NatWest in writing of the details of any loss, damage, investigation, action, suit, proceeding or claim relating to the -13- 14 Inventory or which would result in any material adverse change in our business, properties, assets, goodwill or condition, financial or otherwise. 6.5 At the Agent's option, it may apply insurance monies received at any time to the cost of repairs to or replacement of the Inventory and/or to payment of any of the Obligations, whether or not due, in any order and in such manner as the Agent, in its sole and absolute discretion, may determine. 6.6 Upon the request of the Agent, RNB or NatWest, at any time and from time to time, we shall, at our sole cost and expense, execute and deliver to the Agent, RNB and NatWest written reports or appraisals as to the Inventory listing all items and categories thereof, describing the condition of the same and setting forth the value thereof (the lower of cost or market value), in such form as is satisfactory to the Agent in its sole and absolute discretion. We shall at all times during normal business hours allow the Agent, RNB or NatWest, or their agents, to examine and inspect the Inventory, as well as our Records relating thereto, and to make extracts and copies of such Records. 6.7 We shall (a) use, store and maintain the Inventory with all reasonable care and caution, and (b) use the Inventory for lawful purposes only and in conformity with applicable laws, ordinances and regulations. 6.8 All Inventory shall be produced in accordance with the requirements of the Federal Fair Labor Standards Act of 1938, as amended, and all rules, regulations and orders related thereto. 6.9 The Inventory is and shall be used in our business and not for personal, family, household or farming use. 6.10 We assume all responsibility and liability arising from or relating to the use, sale or other disposition of the Inventory. 6.11 We shall pay when due all taxes, license fees and assessments relating to the Inventory. 6.12 We shall not directly or indirectly sell, lease, transfer, abandon or otherwise dispose of all or any substantial portion of our property or assets or consolidate or merge with or into any other entity or permit any other entity to consolidate or merge with or into us. We have not previously changed our corporate name, been the surviving entity in a merger or acquired any business except as disclosed to the Agent, RNB and NatWest in writing. We will at all times preserve, renew and keep in full force and effect our existence as a corporation and the rights and franchises with respect thereto and continue to engage in business of the same type as we are engaged in as of the date hereof. We utilize no trade names in the conduct of our business except as set forth on Schedule D annexed hereto and made a part hereof. We shall give the Agent, RNB and NatWest thirty (30) days prior written notice of any -14- 15 proposed change in our corporate name, or the intended use of any other trade name, which notice shall set forth the new name, and, prior to making any such change, we agree to execute any additional financing statements or other documents or notices which the Agent may require in its sole and absolute discretion. 6.13 Our Records and chief executive office are maintained at the address referred to below and have been so on a continuous basis for at least six (6) months. We shall not change such location without the Agent's prior written consent and, prior to making any such change, we agree to execute any additional financing statements or other documents or notices which the Agent may require in its sole and absolute discretion. 6.14 (a) We shall maintain our shipping forms, invoices and other related documents in a form satisfactory to the Agent and shall maintain our books, records and accounts in accordance with generally accepted accounting principles consistently applied. We agree to furnish the Agent, RNB and NatWest, on a daily basis, with a schedule of accounts and assignments, a schedule of credits and adjustments and debit assignments, and a lockbox collection report, and, on a weekly basis, with a report of agings of accounts and an inventory report (including breakdowns of inventory by location and according to whether such inventory constitutes raw materials, work in process, or finished goods). All such schedules and reports shall be on RNB's standard forms or on forms otherwise satisfactory to the Agent, RNB and NatWest. (b) We shall furnish the Agent, RNB and NatWest with audited financial statements for each fiscal year, within 90 days of the end of such year, certified by independent public accountants selected by us and acceptable to the Agent, RNB and NatWest, in such scope and detail as the Agent, RNB and NatWest may require in such party's sole and absolute discretion. All such statements and information shall fairly present our financial condition as of the dates and the results of our operations for the periods for which the same are furnished. (c) We shall furnish the Agent, RNB and NatWest with copies of each 10-K Report and 10-Q Report filed by us with the Securities and Exchange Commission (the "SEC"), at the same time as such Reports are filed with the SEC. (d) We also agree to furnish the Agent, RNB and NatWest, at any time or from time to time with such other information and reports regarding our business affairs and financial condition, in such scope and detail, and such other financial statements, certified, reviewed or prepared by such accountants or our personnel, as the Agent or such bank may require in its sole and absolute discretion, including, without limitation, balance sheets, statements of profit and loss, financial statements, cash flow and other projections, earnings forecasts, schedules, agings and reports. (e) We hereby irrevocably authorize and direct all accountants, auditors or other third parties to deliver to the Agent, RNB and NatWest, at our expense, copies of our financial statements, management letters, papers related thereto, and other accounting records of any -15- 16 nature relating to us in their possession and to disclose to the Agent, RNB and NatWest any information they may have regarding our business affairs and financial condition. (f) All such information furnished by us under this Section 6.14 shall be, at the time the same is so furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to give the Agent, RNB and NatWest a true and accurate knowledge of the subject matter thereof. Any documents, schedules, invoices or other papers delivered to the Agent, RNB and NatWest may be destroyed or otherwise disposed of by such party one (1) year after the date the same are delivered to such party, unless we make written request therefor and pay all expenses attendant to their return, in which event such party shall return same when its actual or anticipated need therefor has ceased. 6.15 Each Eligible Account represents a valid and legally enforceable indebtedness based upon an actual and bona fide sale and delivery of goods or rendition of services in the ordinary course of our business which has been finally accepted by the Account Debtor and for which the Account Debtor is unconditionally liable to make payment of the amount stated in each invoice, document or instrument evidencing the Eligible Account in accordance with the terms thereof, without offset, defense, counterclaim, discount or allowance, and will be paid in full at maturity, and no agreement under which any deduction, discount, credit or allowance of any kind may be granted or allowed shall have been or shall thereafter be made by us with any Account Debtor. We shall accept no promissory note representing the indebtedness in respect of any Account without the Agent's prior written approval, and any such note shall immediately be endorsed by us to the Agent with recourse and delivered to it. 6.16 All statements made and all unpaid balances appearing in the invoices, documents and instruments evidencing each Eligible Account are true and correct and are in all respects what they purport to be and all signatures and endorsements that appear thereon are genuine and all signatories and endorsers have full capacity to contract therefor. We are not and shall not be entitled to pledge the credit of the Agent, RNB or NatWest on any purchase or for any purpose whatsoever. None of the transactions underlying or giving rise to any Eligible Account shall violate any state or federal laws or regulations, and all documents relating to the Eligible Accounts shall be legally sufficient under such laws or regulations and shall be legally enforceable in accordance with their terms and all recording, filing and other requirements of giving public notice under any applicable law have been duly complied with. 6.17 We shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against us or our properties or assets or otherwise due from us, including FICA and withholding taxes, prior to the date on which penalties attach thereto. The Agent, RNB or NatWest shall be entitled to pay any such taxes, assessments, contributions and charges for our account and the Agent may charge any such payment to the Loan Account. We shall be liable for any tax or penalty imposed upon any transaction under this Agreement or any supplement hereto or giving rise to the Accounts or any other Collateral or which the Agent, RNB or NatWest may be required to withhold or pay for any -16- 17 reason and we agree to indemnify and hold the Agent, RNB and NatWest harmless with respect thereto, and to repay to the Agent, RNB or NatWest, as the case may be, on demand the amount thereof, and until paid by us such amount shall be added to and deemed part of the Loans under this Agreement. 6.18 Except as otherwise disclosed to the Agent in writing, there is no present investigation by any governmental agency pending or threatened against us and there is no action, suit, proceeding or claim pending or threatened against us or our business, assets or goodwill, or affecting any transactions contemplated by this Agreement, or any supplement hereto, or any agreements, instruments or documents delivered in connection herewith or therewith before any court, arbitrator, or governmental or administrative body or agency which if adversely determined with respect to us would result in any material adverse change in our business, assets, goodwill, or condition, financial or otherwise, or adversely affect any of the Collateral or the rights of the Agent, RNB or NatWest therein. 6.19 We are a corporation duly organized and validly existing and in good standing under the laws of the state of incorporation listed on the signature page below, and are duly qualified and existing and in good standing in every other state or other jurisdiction in which the nature of our business or the location of our assets requires us to be so qualified. 6.20 The execution, delivery and performance of the Agreement, any supplement hereto, or any agreements, instruments and documents executed and delivered in connection herewith, are within our corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of law or the terms of our Certificate of Incorporation, By-Laws or other governing documents, or of any indenture, agreement or undertaking to which we are a party or by which we or any of our properties are bound, and each of them is our binding act and deed, enforceable against us in accordance with its respective terms. We are, and shall remain, solvent at all times while this Agreement is in effect or any Obligation remains unpaid. 6.21 We shall, at our expense, duly execute and deliver, or shall cause to be duly executed and delivered, such further agreements, instruments and documents, including, without limitation, additional security agreements, mortgages, deeds of trust, deeds to secure debt, collateral assignments, UCC financing statements or amendments or continuations thereof, landlord's or mortgagee's waivers of liens and consents to the exercise by the Agent, RNB and NatWest of all such party's rights and remedies hereunder, under any supplement hereto or applicable law with respect to the Collateral, and shall do or cause to be done such further acts and shall observe such other formalities as may be necessary or proper in the sole and absolute discretion of the Agent, RNB or NatWest to evidence, perfect, maintain and enforce the Agent's security interest and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any supplement hereto. Where permitted by law, we hereby authorize the Agent to execute and file one or more UCC financing statements evidencing its rights in the Collateral signed only by the Agent. -17- 18 6.22 All Loans requested by us under this Agreement shall be used for our general corporate and business purposes and shall in no event be requested or used by us for the specific purpose of: (a) making payments to Affiliates of any nature whatsoever, except in the ordinary course of business; (b) purchasing or carrying of any "margin security"; or (c) otherwise in violation of Regulation U or Regulation X promulgated by the Board of Governors of the Federal Reserve System or any other Federal, State or local law or regulation. 6.23 We shall at all times remain in compliance with each and every item set forth in the Projections (including, without limitation, all amounts set forth therein for working capital, tangible net worth, quarterly profit or loss, and monthly cash flows), subject only to the deviances from the Projections expressly permitted pursuant to Section 2.2 hereof. 6.24 We shall not expend for salaries, bonuses, or other compensation for our executive officers more than the amounts payable as of the date hereof. 6.25 We shall permit the Agent, RNB and NatWest to conduct field examinations at our offices and at each location where any of the Collateral is located, at any time and from time to time as the Agent, RNB and NatWest, in their sole and absolute discretion, deem necessary, and we shall pay on demand all expenses of the Agent, RNB and NatWest related thereto. You have advised us that it is anticipated that no additional field examinations will be conducted during the term of this Agreement. Section 7. SPECIFIC POWERS. 7.1 We hereby constitute the Agent and its agents and designees as our attorneys-in-fact, at our own cost and expense, to exercise at any time all or any of the following powers at such time or from time to time, as the Agent may determine, in its sole and absolute discretion, which, being coupled with an interest, shall be irrevocable until all Obligations have been paid in full: (a) to receive, take, endorse, assign, deliver, accept and deposit, in the Agent's or our name, any and all checks, notes, drafts, remittances and other instruments and documents relating to the Collateral; (b) to receive, open and dispose of all mail addressed to us and to notify postal authorities to change the address for delivery thereof to such address as the Agent may designate; (c) to transmit to Account Debtors notice in the Agent's or our name of the Agent's interest therein and to request from such Account Debtors at any time, in the Agent's or our name or that of your designee, information concerning the Accounts and the amounts owing thereon; (d) to notify in the Agent's or our name Account Debtors to make payment directly to the Agent; (e) to take or bring, in the Agent's or our name, all steps, actions, suits or proceedings deemed by you necessary or desirable to effect collection of the Collateral; and (f) to the extent permitted by applicable law, to execute in our name and on our behalf any UCC financing statements or amendments thereto naming us as debtor and the Agent as secured party and describing the Collateral evidencing your rights in the Collateral. Without limiting the generality of the foregoing, the Agent is hereby authorized to accept and to deposit all collections (including prepayments) in any form relating to Accounts received from or for the account of Account Debtors (whether such collections -18- 19 are remitted directly to you or are forwarded to you by us), including remittances which may reflect deductions taken by Account Debtors, regardless of amount, the Loan Account to be credited only with amounts actually collected on Accounts in accordance with Section 5.1. We hereby release: (a) any bank, trust company or other firm receiving or accepting such collections in any form, and (b) the Agent, RNB and NatWest and their respective officers, employees and designees, from any liability arising from any act or acts hereunder in furtherance hereof, whether of omission or commission, and whether based upon any error of judgment or mistake of law or fact. 7.2 Nothing herein contained shall be construed to constitute us as the agent for the Agent, RNB or NatWest for any purpose whatsoever. Neither the Agent, RNB nor NatWest shall be responsible or liable for any shortage, discrepancy, damage, loss or destruction of any Collateral wherever the same may be located and regardless of the cause thereof. Neither the Agent, RNB nor NatWest shall, under any circumstances or in any event whatsoever, have any liability for any error or omission or delay of any kind occurring in the settlement, collection or payment of any of the Accounts or any instrument received in payment thereof or for any damage resulting therefrom. The Agent may, without notice to or consent from us, sue upon or otherwise collect, extend the time of payment of, or compromise or settle for cash, credit or otherwise upon any terms, any of the Accounts or any securities, instruments or insurance applicable thereto and release the Account Debtor thereon. The Agent is authorized and empowered to accept the return of the goods represented by any of the Accounts, without notice to or consent by us, all without discharging or in any way affecting our liability hereunder. Neither the Agent, RNB nor NatWest, by anything herein or in any assignment or otherwise, assumes any of our obligations under any contract or agreement assigned to any such party, and you shall not be responsible in any way for the performance by us of any of the terms and conditions thereof. Section 8. DEMAND, EVENTS OF DEFAULT AND REMEDIES. 8.1 All Obligations shall be, at the Agent's option, exercisable in the Agent's sole and absolute discretion, immediately due and payable, and any provision of this Agreement or any supplement hereto, as to future Loans and Letters of Credit shall, at the Agent's option, exercisable in such party's sole and absolute discretion, terminate forthwith upon: (a) the occurrence of any one or more of the following ("Events of Default"): (i) if we shall fail to pay when due any amounts owing under any Obligation, or shall fail to perform or shall otherwise breach any of the terms, covenants, conditions or provisions of this Agreement, any supplement hereto or any other agreement given by us in favor of the Agent, RNB or NatWest; (ii) if any representation, warranty, or statement of fact made to any of you at any time by us or on our behalf is false or misleading in any material respect; (iii) if we, or any guarantor, endorser or other person liable on the Obligations, shall become insolvent, fail to meet our or their debts as they mature, call a meeting of creditors or have a creditors' committee appointed, make an assignment for the benefit of creditors, commence or have commenced against us or them any action or proceeding for relief under any bankruptcy, insolvency, moratorium or similar law, or if a final and non-appealable judgment in excess of -19- 20 $100,000.00 not covered by insurance is rendered against us or them, or if we or they suspend or discontinue doing business for any reason, or if a receiver, custodian or trustee of any kind is appointed for us or them or any of our or their respective properties; (iv) if there is any change in our control or ownership; (v) if there shall be a material adverse change in our business, assets or condition (financial or otherwise) from the date hereof; or (vi) if at any time any of you shall, in such party's sole discretion, consider the Obligations insecure or any part of the Collateral unsafe, insecure or insufficient. 8.2 Upon the occurrence of any Event of Default and at any time thereafter, the Agent shall have the right (in addition to any other rights the Agent may have under this Agreement, any supplement hereto or otherwise) without further notice to us, to appropriate, set off and apply to the payment of any or all of the Obligations, any or all Collateral, in such manner as such party shall in its sole and absolute discretion determine, to enforce payment of any Collateral, to settle, compromise or release in whole or in part, any amounts owing on the Collateral, to prosecute any action, suit or proceeding with respect to the Collateral, to extend the time of payment of any and all Collateral, to make allowances and adjustments with respect thereto, to issue credits in the Agent's or our name, to enter upon any premises on or in which any of the Inventory may be located and, without resistance or interference by us, take possession of the Inventory; to complete processing, manufacturing and repair of all or any portion of the Inventory; to sell, foreclose or otherwise dispose of any part or all of the Inventory on or in any of our premises or premises of any other party, in connection with which we hereby waive any and all notices of any such sale or other intended disposition if said Inventory is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market; to require us, at our expense, to assemble and make available to the Agent any part or all of the Inventory at any place and time designated by the Agent; to remove any or all of the Inventory from any premises on or in which the same may be located, for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose; to sell, assign and deliver the Collateral (or any part thereof), at public or private sale, at broker's board, for cash, upon credit or otherwise, at the Agent's sole option and discretion, and may bid or become purchaser at any such sale, if public, free from any right of redemption, which is hereby expressly waived. 8.3 In the event the Agent seeks to take possession of all or any portion of the Collateral by judicial process, we irrevocably waive: (a) the posting of any bond, surety or security with respect thereto which might otherwise be required, (b) any demand for possession prior to the commencement of any suit or action to recover the Collateral, and (c) any requirement that you retain possession and not dispose of any Collateral until after trial or final judgment. 8.4 We agree that neither the Agent, nor RNB or NatWest shall have any obligation to give us notice of any proposed sale, or the place or time thereof, of any Collateral for which there is a recognized market and a readily ascertainable market price, and that with respect to other Collateral, the giving of five (5) days notice by any of you, sent by ordinary mail, postage prepaid, to our address set forth below, designating the place and time of any -20- 21 public sale or of such time after which any private sale or other intended disposition of the Collateral is to be made, shall be deemed to be reasonable notice thereof, and we waive any other notice with respect thereto. 8.5 The net cash proceeds resulting from the exercise of any of the foregoing rights or remedies shall be applied by the Agent to the payment of the Obligations in ratio to the RNB Loan Account and the NatWest Loan Account and we shall remain liable for any deficiency. Without limiting the generality of the foregoing, if the Agent enters into any credit transaction, directly or indirectly, in connection with the disposition of any Collateral, the Agent shall have the option, at any time, in its sole and absolute discretion, to reduce the Obligations by the principal amount of such credit transaction or to defer the reduction thereof until actual receipt by such party of cash or other immediately available funds in connection therewith. 8.6 We shall be liable to each of the Agent, RNB and NatWest for any expenditures made by such party for the maintenance and preservation of the Collateral hereunder, including for taxes, levies, insurance and repairs, removal of liens and satisfaction of charges and claims, including, but not limited to any of the foregoing relating to warehouse charges, dyeing, finishing and processing charges, or landlord claims, and for the repossession, holding, preparation and sale or other disposition of such Collateral (including reasonable attorneys' and accountants' fees and legal expenses), as well as all damages for any breach of warranty, misrepresentation, or breach of covenant by us, and all such liabilities shall be added to and included as part of the Obligations and shall be payable upon demand. 8.7 Neither the Agent, nor RNB or NatWest, shall be liable for the safekeeping of any of the Inventory or for any loss, damage or diminution in the value thereof or for any act or default of any warehouseman, carrier or other person dealing in or with said Inventory, whether as your agent or otherwise, or for the collection of any proceeds thereof, and the same shall at all times be at our sole risk. 8.8 Each of the Agent, RNB and NatWest is hereby authorized at any time and from time to time, without notice to us (any such notice being expressly waived by us) to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such party to or for our credit or our account against any and all of the Obligations, irrespective of whether or not such party shall have made any demand thereon. 8.9 The enumeration of the foregoing rights and remedies is not intended to be exclusive or exhaustive, and such rights and remedies are in addition to and not by way of limitation of any other rights or remedies each of you may have under the UCC or other applicable law. The Agent shall have the right, in its sole and absolute discretion, to determine which rights and remedies, and in which order any of the same, are to be exercised, and to determine which Collateral is to be proceeded against and in which order, and the exercise of any right or remedy shall not preclude the exercise of any others, all of which shall be cumulative, and may be exercised concurrently or seriatim. -21- 22 8.10 No act, failure or delay by you shall constitute a waiver of any of the rights and remedies of the Agent, RNB or NatWest. No single or partial waiver by the Agent, RNB or NatWest of any provision of this Agreement or any supplement hereto, or breach or default thereunder, or of any right or remedy which it may have shall operate as a waiver of any other provision, breach, default, right or remedy, or of the same provision, breach, default, right or remedy on a future occasion. 8.11 We waive presentment, notice of dishonor, protest and notice of protest of all instruments included in or evidencing any of the Obligations or the Collateral and any and all notices or demands whatsoever (except as expressly provided herein). Any of you may, at all times, proceed directly against us to enforce payment of the Obligations and shall not be required to take any action of any kind to preserve, collect or protect your or our rights in the Collateral. Section 9. EFFECTIVE DATE; TERMINATION; COSTS. 9.1 This Agreement shall become effective upon acceptance by each of you and shall continue in full force and effect for a term ending on December 31, 1995, unless sooner terminated pursuant to the terms hereof. No termination of this Agreement, however, whether pursuant to this Section 9.1 or upon demand or the occurrence of an Event of Default in accordance with Section 8.1 shall relieve or discharge us of our duties, obligations and covenants hereunder until all Obligations have been indefeasibly paid in full, and the continuing security interest of the Agent, RNB and NatWest in the Collateral shall remain in effect until such Obligations have been fully and finally discharged and notwithstanding the fact that at any time or from time to time the Loan Account may be temporarily in a credit position. 9.2 This Agreement, any supplement hereto, and any agreements, instruments or documents delivered or to be delivered in connection herewith represent our entire agreement and understanding concerning the Loans contemplated to be made and the Letters of Credit contemplated to be issued hereunder, and supersede all other prior and contemporaneous agreements, understandings, negotiations and discussions, representations, warranties, commitments, offers, contracts, whether oral or written with respect to such Loans and Letters of Credit; provided, however, that any security or other agreements granting to RNB or NatWest security interests in any of the Collateral shall continue in full force and effect, and provided, further, that this Section 9.2 shall in no respect terminate, cancel, reduce, or otherwise limit our liability to the Agent, RNB or NatWest in respect of any Obligations, if any, other than such Loans and Letters and Credit, existing on and as of the date hereof, or otherwise arising after the date hereof. 9.3 Neither this Agreement, nor any provision hereof shall be waived, terminated (except as expressly provided herein) or changed, modified or amended orally or by course of conduct except by a written instrument expressly referring hereto signed by us and each of you. Any of you may assign your rights in and to this Agreement, the Collateral, -22- 23 or any interest herein or therein, including, without limitation, through the sale of one or more participations to other lenders, and the benefits hereof and thereof shall inure to the benefit of any such assignee. 9.4 Upon your request we shall pay to the Agent, RNB or NatWest, as the case may be, or reimburse any of you for, all sums, costs and expenses which such party may pay or incur in connection with or related to the administration and enforcement of this Agreement, any supplement hereto, and all other agreements, instruments and documents in connection herewith and therewith, and the transactions contemplated hereunder and thereunder, together with any amendments, supplements, consents or modifications which may be hereafter made or entered into in respect hereof or thereof, and all efforts made to defend, protect or enforce the security interest granted herein or therein or in enforcing payment of the Obligations, including, without limitation, in actions or proceedings which may involve any person asserting a claim or priority with respect to the Collateral, and including without limitation, appraisal fees, stenographers charges, filing fees and taxes, title insurance premiums, recording taxes, expenses for title, lien and other searches and examination thereof, expenses heretofore incurred by such party and from time to time hereafter incurred during the course of periodic field examinations of the Collateral after December 31, 1995 and our operations, wire transfer fees, check dishonor fees, the fees and disbursements of counsel to each or any of you in connection with any of the foregoing or otherwise related to this Agreement and the transactions contemplated hereby, including without limitation, for rendering opinion letters, the fees and commissions of collection agencies, all fees and expenses for the service and filing of papers, premiums or bonds and undertakings, fees of marshals, sheriffs, custodians, auctioneers and others, travel expenses and all court costs and collection charges, all of which shall be part of the Obligations and shall accrue interest after demand therefor at a rate equal to the highest rate then payable on any of the Obligations. Section 10. THE AGENT. 10.1 Appointment of Agent. RNB and NatWest each hereby designates RNB, as Agent (the "Agent") to act as specified herein, including with respect to the Collateral. RNB and NatWest each hereby irrevocably authorizes the Agent to take such action on its behalf under the provisions of this Agreement and any other loan and security documents and any other instruments and agreements referred to herein or related thereto and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its agents or employees. 10.2 Nature of Duties of Agent. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement. Neither the Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by it as such hereunder or in connection herewith, unless caused by its or their gross negligence or willful misconduct. -23- 24 10.3 Certain Rights of the Agent. If the Agent shall request instructions from RNB or NatWest or both with respect to any act or action (including the failure to act) in connection with this Agreement or any of the other related loan and security documents, the Agent shall be entitled to refrain from such act or taking such or any action unless and until the Agent shall have received instructions from RNB or NatWest or both, as the Agent in its sole discretion shall determine, and the Agent shall not incur liability to any person by reason of so refraining. 10.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, order or other documentary, teletransmission or telephone message believed by it to be genuine and correct and to have been signed, set or made by the proper Person. The Agent may consult with legal counsel (including our counsel or counsel to any guarantor), independent public accountants (including those retained by us or any guarantor) and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. 10.5 Agent in its Individual Capacity. RNB, in its individual capacity and not as Agent, shall have the same rights and powers hereunder as the other lender hereunder and may exercise the same as though it were not performing the duties specified herein, as Agent. 10.6 Successor Agent. (a) The Agent may resign at any time by giving written notice thereof to RNB, NatWest and us. Upon any such resignation RNB and NatWest shall have the right to jointly appoint a successor Agent. If no successor Agent shall have been so appointed, and shall have accepted such appointment, within thirty (30) days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of RNB and NatWest, appoint a successor Agent, which shall be a bank which maintains an office in the United States of America, or a commercial bank organized under the laws of the United States of America or of any State thereof, or any affiliate of such bank, having a combined capital and surplus of at least $2,000,000.00. (b) Upon the acceptance of any appointment as Agent hereunder by a successor agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agents shall be discharged from its duties and obligations under this Agreement and the other related loan and security documents. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Agreement relating to the Agent shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other related loan and security documents. -24- 25 Section 11. NOTICES. 11.1 Except as expressly otherwise provided herein, all notices, requests and demands to or upon the respective parties hereto shall be given or made only by hand, Federal Express, Express Mail or other recognized overnight delivery service or by certified or registered mail, and shall be deemed to have been duly given or made: if by hand, immediately upon delivery; if by Federal Express, Express Mail or overnight delivery service, one (1) day after dispatch; and if mailed by certified or registered mail, return receipt requested, five (5) days after mailing. All notices, requests and demands are to be given or made to the respective parties at the address (or to such other addresses as either party may designate by notice in accordance with the provisions of this paragraph) set forth herein. Section 12. JURISDICTION; CHOICE OF LAW; WAIVER OF JURY TRIAL. 12.1 In any action or proceeding of any kind arising out of or relating to this Agreement, any supplement hereto, the Obligations, the Collateral or any such other transaction, we waive personal service of any summons, complaint or other process and agree that service thereof may be made by certified or registered mail directed to us at our address set forth below. Within thirty (30) days after such mailing, we shall appear in answer to such summons, complaint or other process, failing which we shall be deemed in default and judgment may be entered by you against us for the amount of the claim and other relief requested therein. 12.2 This Agreement and all transactions hereunder shall be deemed to be consummated in the State of New York and shall be governed by and interpreted in accordance with the laws of that State without giving effect to principles governing conflicts of laws. If any part or provision of this Agreement is invalid or in contravention of any applicable law or regulation, such part or provision shall be severable without affecting the validity of any other part or provision of this Agreement. 12.3 WE AND EACH OF YOU HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY SUPPLEMENT HERETO, THE OBLIGATIONS, THE COLLATERAL OR ANY SUCH OTHER TRANSACTION. We hereby waive the right to interpose any defense and all rights of setoff and all rights to interpose counterclaims in the event of any litigation with respect to any matter connected with this Agreement, any supplement hereto, the Obligations, the Collateral or any other transaction between the parties, and we hereby irrevocably consent and submit to the jurisdiction of the Supreme Court of the State of New York and the United States District Court for the Southern District of New York in connection with any action or -25- 26 proceeding of any kind arising out of or relating to this Agreement, any supplement hereto, the Obligations, the Collateral or any such other transaction. Very truly yours, MOVIE STAR, INC. a NY corporation -- By: /s/ Mark M. David ------------------ Title: Chairman ---------- Address: 136 Madison Avenue New York, New York 10016 Accepted and Agreed to at New York, New York on Sept. 14, 1995: ----- -- REPUBLIC NATIONAL BANK OF NEW YORK, individually and as Agent By: /s/ Joel Burbank ----------------- Title: Sr. VP ----------- NATWEST BANK N.A. By: /s/ Cynthia Sachs ------------------ Title: VP --- -26- EX-10.5.5 3 LOCK BOX SERVICE AGREEMENT DATED 9/14/1995 1 LOCK BOX SERVICE AGREEMENT LOCK BOX SERVICE AGREEMENT, dated as of September 14, 1995, among MOVIE STAR, INC. (the "Company"), a corporation organized under the laws of the State of New York, NATWEST BANK N.A., a New York banking corporation ("NatWest"), REPUBLIC NATIONAL BANK OF NEW YORK, a national banking association, individually ("RNB") and as agent for itself and NatWest (the "Agent"). WHEREAS, in connection with the Credit and Security Agreement of even date herewith (the "Credit Agreement") among the Company, RNB, NatWest and the Agent, the parties desire to enter into a lock box service arrangement for the Company, so that, from and after the date hereof, all payments in respect of the accounts receivable of the Company shall be remitted to a post office box to be opened and maintained by the Agent pursuant to this Agreement; NOW, THEREFORE, the parties hereby agree as follows: 1. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Credit Agreement. 2. The Company hereby appoints the Agent as its agent and authorizes the Agent to rent, service, and have sole access to a post offices box, with Zip Code [______], located at the Church Street Station Post Office, New York, New York, (the "Post Office Box,") and to collect all mail deposited therein at regular intervals. 3. The Agent shall, as soon as practicable after opening the Post Office Box, notify the Company of the number thereof, and promptly thereafter, the Company shall notify all of its customers and obligors on any accounts payable to the Company which, in the ordinary course of the Company's business, would be paid by checks or other instruments made payable to or to the order of Movie Star, Inc., to remit payment in respect of such accounts directly to the Post Office Box. 4. Except as specifically provided herein, the Agent shall, and is hereby authorized by the Company to, endorse all checks, drafts, money orders and all other negotiable instruments of payment (hereinafter referred to as "items") contained in the mail collected from the Post Office Box in the following manner: "CREDIT TO ACCOUNT OF WITHIN NAMED PAYEE AT REPUBLIC NATIONAL BANK OF NEW YORK NEW YORK, NEW YORK" provided that all items are made payable to or to the order of "Movie Star, Inc.", or any close resemblance thereto, or any trade name or trade style used by the Company. Items made payable to any name other than those referred to above shall be forwarded by the Agent unprocessed to the Company, and the Company shall, promptly upon receipt thereof, endorse such items and return them to the Agent for processing in accordance with this Agreement. 5. The Agent shall process each item received, and shall, on the third Business Day after receipt of such item, credit the amount thereof first to (i) amounts outstanding under the Loan Account, as such term is defined in the Credit Agreement, and any other amounts payable by the Company to the Agent, RNB or NatWest under the Credit Agreement, and then to (ii) any account maintained by the Company with RNB. For purposes of this paragraph 5, (i) items shall be deemed received by the Agent on the Business Day on which they are collected from the Post Office Box, and (ii) the third Business Day after receipt of an item shall be determined without counting the Business Day of receipt of such item. 2 6. Any items bearing discrepancies between the written and numerical amounts shall be credited for the written amount. 7. The Agent shall use due care to attempt to inspect and discover items which bear a phrase to the effect that such items represent "Payment in Full" (or words of similar import) and to forward them to the Company for disposition; provided, however, that the Agent shall have no liability to the Company if it processes any item that bears such language. 8. Post-dated items shall be either processed by the Agent, or forwarded to the Company, in the Agent's sole discretion. 9. The Agent shall have the right to debit the Loan Account, as such term is defined in the Credit Agreement, in the amount of all returned items. All returned items shall be handled by the Agent in the following manner: (i) all dishonored items returned the first time shall be re-presented a second time, and (ii) all dishonored items returned the second time shall be charged back and returned to the Company. 10. The Agent shall not process items received which do not bear a signature. 11. All items which are made payable in foreign funds, or made payable in U.S. funds drawn on a foreign bank, shall be processed for collection and the Company shall pay to the Agent the collection charges for such items comparable to the charges that RNB customarily imposes for the collection of like items. 12. The Agent shall provide to the Company, NatWest and RNB, each Business Day, a lockbox collection report listing the items collected from the Post Office Box on the immediately preceding Business Day. Such lockbox collection report may, at the Agent's option, be provided by telecopier or by any of the methods specified in paragraph 20 hereof. The Agent shall endeavor to maintain, for a period of one (1) year, a microfilm record of all items collected from the Post Office Box; provided, however, the Agent shall have no liability to the Company for any failure to maintain such a record. 13. The Company shall instruct all of its customers not to send any returned merchandise to the Post Office Box. The Agent shall not be liable for any returned merchandise received at the Post Office Box, but shall attempt to forward said merchandise to the Company at the risk and expense of the Company. Any expenses incurred by the Agent in connection with such forwarding shall be paid by the Company to the Agent, on demand, and if not so paid may be charged, as a Loan, to the Loan Account. 14. Annual rent on the Post Office Box, as assessed by the U.S. Postal Service, shall be paid by the Company to the Agent, on demand, and if not so paid may be charged, as a Loan, to the Loan Account. 15. The Company agrees to pay the Agent fees for the services herein described, computed in accordance with RNB's schedule of fees for lock box services, as in effect from time to time. 16. The Company hereby irrevocably appoints the Agent its agent under this Agreement and authorizes the Agent to take such action and to exercise such powers as are specifically delegated to it herein, together with such powers as the Agent, in the reasonable exercise of its discretion, deems incidental thereto. The Agent shall exercise the same degree of care and shall give the same attention to the performance of its obligations under this Agreement as if the services were being provided for the Agent itself; provided, however, that neither the Agent nor any of its directors, officers, employees or other agents shall be liable for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their -2- 3 gross negligence or willful misconduct. The Company agrees to indemnify the Agent, RNB and NatWest, and their directors, officers, employees and other agents and save them harmless from any loss, damage, liability or expense (including reasonable legal fees and expenses) incurred as a result of any claim asserted against them in connection with any transactions related hereto, unless such loss, damage, liability or expense is solely the result of their gross negligence or willful misconduct. 17. Any other terms herein to the contrary notwithstanding, this Agreement shall be deemed to be amended automatically, without notice to either party, to comply with any statute, regulation, or ruling of any government agency, including any regulations or rulings of the U.S. Postal Service, to whose jurisdiction the Agent is subject. 18. This Agreement may not be modified or terminated orally. 19. This Agreement may be terminated by the Agent at any time upon at least fifteen (15) days written notice. Upon receipt of such notice, the Company shall notify its customers to discontinue use of the Post Office Box. After the effective date of termination, the Agent shall have no responsibility for any items received in the Post Office Box except to forward such items by regular mail and at the Company's expense, for a period of thirty (30) days after such termination, to the Company's address contained in the Agent's records. Such termination shall have no effect on the rights or responsibilities of the parties hereto with respect to items processed prior to the effective date of termination. 20. Except as otherwise expressly provided herein, all notices, requests and demands to or upon the parties hereto shall be given or made only by hand, Federal Express, Express Mail or other recognized overnight delivery service or by certified or registered mail, or by telecopier, and shall be deemed to have been duly given or made: if by hand, immediately upon delivery; if by Federal Express, Express Mail or overnight delivery service, one (1) Business Day after dispatch; if mailed by certified or registered mail, return receipt requested, five (5) days after mailing; and if by telecopier, upon receipt by the sending party of confirmation of transmission. All notices, requests and demands sent by telecopier shall be followed by the original thereof, sent as otherwise provided above, and all notices, requests and demands are to be given or made to a party at its address set forth below (or to such other address as such party may designate by notice in accordance with the provisions of this paragraph). Agent: Republic National Bank of New York 452 Fifth Avenue New York, New York 10018 Attn: Joel W. Burbank Company: Movie Star, Inc. 136 Madison Avenue New York, New York 10016 Attn: Saul Pomerantz NatWest: NatWest Bank N.A. 1133 Avenue of the Americas 39th Floor New York, New York 10036 Attn: Cynthia Sachs -3- 4 RNB: Republic National Bank of New York 452 Fifth Avenue New York, New York 10018 Attn: 21. The Company agrees to take such further action and to execute and deliver such further documents and agreements, including any forms, documents or applications for delivery to the U.S. Postal Service, as the Agent, in its sole discretion, deems appropriate. 22. Waiver by any party of any provision of this Agreement shall not constitute a waiver of or prejudice such party's right otherwise to demand strict compliance with that provision or any other provision hereof. 23. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed wholly within that state. If any provision of this Agreement is held to be illegal or unenforceable for any reason whatsoever, such illegality or unenforceability shall not affect the validity of any other provision hereof. 24. The Company agrees that any action, suit or proceeding in respect of or arising out of this Agreement may be initiated and prosecuted in the state or federal courts, as the case may be, located in New York County, New York. The Company consents to and submits to the exercise of jurisdiction over its person by any such court having jurisdiction over the subject matter, waives personal service of any and all process upon it and consents that all such service of process be made by registered mail directed to the Company at its address set forth herein or to any other address as may appear in the Agent's records as the address of the Company. IN ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS NOTE, EACH OF THE COMPANY, RNB, NATWEST AND THE AGENT WAIVES TRIAL BY JURY, AND THE COMPANY ALSO WAIVES (I) THE RIGHT TO INTERPOSE ANY SET-OFF OR COUNTERCLAIM OF ANY NATURE OR DESCRIPTION, (II) ANY OBJECTION BASED ON FORUM NON CONVENIENS OR VENUE, AND (III) ANY CLAIM FOR CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES. MOVIE STAR, INC. By: Mark M. David ------------------------------- Title: Chairman REPUBLIC NATIONAL BANK OF NEW YORK individually and as Agent for itself and NatWest Bank N.A. By: Joel Burbank ------------------------------- Title: Senior Vice President NATWEST BANK N.A. By: Cynthia E. Sachs ------------------------------- Title: Vice President -4- EX-10.5.6 4 SECURED PROMISSORY NOTE DATED 9/14/95 1 SECURED PROMISSORY NOTE New York, New York $16,224,000 September 14, 1995 ON December 31, 1995, for value received, the undersigned, MOVIE STAR, INC. (the "Company"), a New York Corporation, promises to pay to the order of REPUBLIC NATIONAL BANK OF NEW YORK, a national banking association (the "Bank"), the principal sum of SIXTEEN MILLION TWO HUNDRED TWENTY FOUR DOLLARS ($16,224,000), or so much thereof as may constitute the aggregate unpaid principal amount of all Loans made by the Agent, on behalf of the Bank, to the Company under or pursuant to the Credit Agreement. All such Loans and all payments made on account of the principal thereof and the interest thereon shall be recorded by the Agent and by the Bank or other holder hereof in their respective books and records. The information entered on such books and records shall be binding upon the Company in absence of manifest error. Not- withstanding the foregoing, any failure by the Agent or the Bank or other holder hereof to make notations on its books and records shall in no way mitigate or discharge the Company's obligation to repay any Loans actually made. The Company further promises to pay interest (computed on the basis of a 360-day year and the actual number of days elapsed) on the unpaid principal amount hereof from time to time outstanding from the date hereof until the date on which this Note is paid in full, at a variable rate per annum equal to one percent (1%) above the Bank's reference rate (hereinafter defined), payable monthly in arrears on the last day of each month and on the date of payment in full of this Note, commencing on August 31, 1995, any change in said variable rate to become effective on the first day of the month after any such change in said reference rate, as provided in the Credit Agreement. From and after the earlier of (i) December 31, 1995, (ii) the occurrence of any Event of Default (and for so long as such Event of Default is continuing), or (iii) the termination of the Credit Agreement, the rate of interest on the unpaid principal amount hereof at all times shall be two percent (2%) above the rate which would otherwise apply. Interest accruing after any of the events specified in the foregoing sentence shall be payable on demand. The term "reference rate", as used herein, means the interest rate established by the Bank from time to time at its principal office in New York City as its reference rate for domestic commercial loans, whether or not such established reference rate is the best rate available from the Bank for commercial loans. Both the principal hereof and the interest hereon are payable in lawful money of the United States of America and in immediately available funds at the office of the Agent at 452 Fifth Avenue, New York, New York 10018, or at such other place as the Agent may specify in writing. Any payment hereunder which is required to be paid on a day which is not a Business Day shall be payable on the next succeeding Business Day and such additional time shall be included in the computation of interest. To the extent permitted by applicable law, the Company waives presentment, notice of dishonor, protest and notice of protest, and any and all other notices or demands in connection with the delivery, acceptance, performance or default of this Note. This Note is one of the Notes referred to in the Credit and Security Agreement dated September 14, 1995, (as amended or otherwise modified, the "Credit Agreement") by and among the Company, the Bank, NatWest Bank N.A. and the Agent, and is entitled to all of the benefits set forth therein. All capitalized terms used herein and not defined shall have the meanings ascribed to them in the Credit Agreement. This 2 Note is secured by the Collateral under the Credit Agreement and by any other property in which a lien or security interest has previously been granted to the Bank by the Company under any security or other agreement previously executed by the Company in favor of the Bank. In case any principal of or interest on this Note is not paid when due, the Company shall be liable for all costs of enforcement and collection of this Note incurred by the Agent and the Bank or other holder of this Note, including but not limited to reasonable attorneys' fees, disbursements and court costs. The liability of the Company hereunder shall be unconditional and shall not be in any manner affected by any indulgence granted or consented to by the Agent, the Bank or other holder hereof including, without limitation, any extension of time, renewal, waiver or other modification. Any failure of the Agent, the Bank or other holder hereof to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time and from time to time thereafter. The Agent, the Bank or other holder hereof may accept late payments or partial payments, even though marked "payment in full" or containing words of similar import or other conditions, without waiving any of its rights. No amendment, modification or waiver of any provision of this Note nor consent to any departure by the Company therefrom shall be effective, irrespective of any course of dealing, unless the same shall be in writing and signed by the Agent and the Bank or other holder hereof, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. This Note cannot be changed or terminated orally or by estoppel or waiver or by any alleged oral modification regardless of any claimed partial performance referable thereto. This Note shall be governed by and construed in accordance with the laws of the State of New York applicable to instruments made and to be performed wholly within that State. If any provision of this Note is held to be illegal or unenforceable for any reason whatsoever, such illegality or unenforceability shall not affect the validity of any other provisions hereof. THE COMPANY AGREES THAT ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS NOTE MAY BE INITIATED AND PROSECUTED IN THE STATE OR FEDERAL COURTS, AS THE CASE MAY BE, LOCATED IN NEW YORK COUNTY, NEW YORK. THE COMPANY CONSENTS TO AND SUBMITS TO THE EXERCISE OF JURISDICTION OVER ITS PERSON BY ANY SUCH COURT HAVING JURISDICTION OVER THE SUBJECT MATTER, WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY REGISTERED MAIL DIRECTED TO THE COMPANY AT ITS ADDRESS SET FORTH BELOW OR TO ANY OTHER ADDRESS AS MAY APPEAR IN THE BANK'S RECORDS AS THE ADDRESS OF THE COMPANY. IN ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS NOTE, EACH OF THE COMPANY, THE AGENT AND THE BANK WAIVES TRIAL BY JURY, AND THE COMPANY ALSO WAIVES (I) THE RIGHT TO INTERPOSE ANY SET-OFF OR COUNTERCLAIM OF ANY NATURE OR DESCRIPTION, (II) ANY OBJECTION BASED ON FORUM NON CONVENIENS OR VENUE, AND (III) ANY CLAIM FOR CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES. MOVIE STAR, INC. a New York Corporation By:/s/ Mark M. David ------------------- Title: Chairman ------------- -2- EX-10.5.7 5 PARTICIPATION AGREEMENT DATED SEPT. 1995 1 PARTICIPATION AGREEMENT BETWEEN NATWEST BANK N.A. AND REPUBLIC NATIONAL BANK OF NEW YORK PARTICIPATION AGREEMENT, dated as of September __, 1995, between NATWEST BANK N.A. ("the Bank" or "NatWest ") and REPUBLIC NATIONAL BANK OF NEW YORK ("the Participant" or "RNB"). WHEREAS, concurrently with the execution hereof, RNB, NatWest, Movie Star, Inc. ("Movie Star") and RNB, as Agent, are entering into the Credit and Security Agreement (the "Credit Agreement") which agreement restructures the obligations of Movie Star to RNB and NatWest previously incurred under separate credit facilities extended to Movie Star by RNB and NatWest; WHEREAS, the Credit Agreement contemplates that RNB shall purchase a sixty percent (60%) participation in certain documentary letters of credit issued by NatWest for the account of Movie Star under the credit facility previously extended to Movie Star by NatWest , and indemnify NatWest for sixty percent (60%) of any amounts NatWest may be liable for under any outstanding steamship guaranties and airway releases made by NatWest in connection with such documentary letters of credit to the extent not reimbursed by the Applicant therefor; NOW, THEREFORE, the parties hereby agree as follows: Section 1. Definitions. When used in this Agreement, the terms defined below shall have the meanings specified, such meanings being equally applicable to the singular and plural forms of such terms. Section 1.1 "Agent" shall mean RNB, in its capacity as Agent under the Credit Agreement and related agreements and documents. Section 1.2 "Airway Release" shall mean any airway release issued or made by NatWest in connection with a Letter of Credit. 2 Section 1.3 "Applicant" means, with respect to any Letter of Credit, any party which has applied for such Letter of Credit, whether as applicant or account party, and owes an Obligation with respect thereto. Section 1.4 "Beneficiary" means, with respect to any Letter of Credit, the person who is entitled by the terms of such Letter of Credit to draw or demand payment thereunder. Section 1.5 "Business Day" shall mean a day on which the Agent, RNB and NatWest are each open for the regular transaction of business in New York, New York. Section 1.6 "Collateral" shall mean any property securing the Obligations, and shall include the Collateral, as such term is defined in the Credit Agreement. Section 1.7 "Credit Agreement" shall have the meaning set forth in the first "Whereas" clause hereof. Section 1.8 "Credit Documents" shall mean each of the following, as amended from time to time: each Letter of Credit, the application therefor or similar agreement pursuant to which such Letter of Credit was issued and/or which evidences the Obligations with respect to such Letter of Credit, and any guarantee, security or similar agreement evidencing or providing for any guarantee, collateral or other similar support for such Obligations, each Steamship Guaranty and each Airway Release. Section 1.9 "Effective Federal Funds Rate" shall mean, for any day, a rate per annum equal to the weighted average of the rate on overnight Federal funds transactions, with members of the Federal Reserve System, arranged by Federal funds brokers, as published for such day by the Federal Reserve Bank of New York. Section 1.10 "Intercreditor Agreement" shall mean the Intercreditor Agreement, dated the date hereof, by and among the Bank, the Participant and the Agent, as such agreement may be amended from time to time. Section 1.11 "Letter of Credit" shall mean those letters of credit issued by the Bank listed on Exhibit A hereto. Section 1.12 "Obligations" means, with respect to any Letter of Credit, (i) the related Reimbursement Obligation; and (ii) if provided in the related Credit Documents, the obligation of an Applicant to pay to the Bank fees and any other amounts owing thereunder. Section 1.13 "Participation" shall have the meaning set forth in Section 2.1 hereof. -2- 3 Section 1.14 "Reimbursement Obligation" shall mean, with respect to any Letter of Credit, the obligation of an Applicant to reimburse the Bank in the amount of each payment to the Beneficiary by the Bank thereunder, and with respect to such Letter of Credit, the obligation of an Applicant to reimburse the Bank in the amount of any payments made in connection with any Steamship Guaranty or Airway Release, together with interest thereon to the extent provided in the related Credit Documents. Section 1.15 "Steamship Guaranty" shall mean any steamship guaranty issued or made by NatWest in connection with a Letter of Credit. Section 1.16 Capitalized terms used herein but not defined shall have the meanings ascribed to them in the Intercreditor Agreement. Section 2. Purchase and Sale of Participation. Section 2.1 Subject to the terms and conditions of this Agreement, the Bank hereby sells and assigns to the Participant, without recourse, and the Participant hereby purchases from the Bank an undivided sixty percent (60%) participation interest in the Letters of Credit and the related Reimbursement Obligations (the "Participation") . Section 2.2 If at any time the Bank shall make a payment to the Beneficiary in respect of a drawing or demand under a Letter of Credit made in substantial compliance with the terms and conditions thereof, or shall make a payment in respect of any Airway Release or Steamship Guaranty, the Bank shall give written notice (which may be by telecopier) of such payment to the Participant. The Participant shall pay to the Bank, not later than the Business Day following the Business Day on which the Participant receives such written notice, in immediately available funds by wire transfer to the account of the Bank set forth on Exhibit B hereto, sixty percent (60%) of the amount of such drawing. The payment of such amount shall constitute payment of the purchase price for the Participation of the Participant in the related Letter of Credit and Reimbursement Obligation, or, in the event there remain outstanding undrawn amounts under such Letter of Credit, such payment shall constitute partial payment of such purchase price. In the event that the Participant does not make such payment in such manner on such Business Day, the Bank shall be entitled to recover from the Participant interest on the amount of such payment at the Effective Federal Funds Rate for the period commencing on (and including) such Business Day and ending on (and excluding) the Business Day on which such payment, together with interest as provided herein, shall be made by the Participant to the Bank in such immediately available funds; provided, however, that notwithstanding any provision hereof to the contrary, during any period in which the Participant is legally prohibited or enjoined from making to the Bank hereunder any payment on which interest is accruing, such interest shall accrue at the Effective Federal Funds Rate. In the event that the Applicant shall have paid, prior to a -3- 4 drawing under a Letter of Credit, any portion of such drawing, the Bank shall reduce the amount payable to the Bank by the Participant hereunder by the Participant's pro rata share of the amount so paid by the Applicant. Section 3. The Participation purchased by the Participant hereunder shall be without recourse to the Bank and for the Participant's own account and risk, and the Bank makes no representation or warranty as to, and shall have no responsibility for: the due authorization, execution or delivery by the Applicant of any Credit Documents or any drafts or other documents presented in connection with drawings under any Letter of Credit or payments made in connection with any Airway Release or Steamship Guaranty; the legality, validity, sufficiency, enforceability or collectibility of any Credit Documents or such drafts or other documents; the title to, the value of, or the validity, perfection or priority of any security interest in, any collateral or other support for any Obligations; any representation or warranty made by, or any information provided by the Applicant; the performance or observance by the Applicant of any of the provisions of any Credit Documents; the financial condition of the Applicant; or (except as other expressly provided herein) any other matter relating to the Applicant, any Letter of Credit or the related Credit Documents, and any Obligations or any collateral or other support for such Obligations. Section 4. Payments and Remittances. Section 4.1 (a) So long as the Participant has made all payments required to be made by it under the terms of this Agreement, and subject to the remaining terms of Section 4 hereof, the Bank shall, within one Business Day following receipt thereof, remit to the Participant in immediately available funds to the account of the Participant identified on Exhibit B hereto the Participant's share (determined in accordance with clauses (ii) and (iii) of Section 4.1(e) hereof) of any payment made to the Bank in respect of the Letters of Credit and the Obligations. The Participant shall not be entitled to receive any interest in respect of any Reimbursement Obligation which accrued prior to the date that the Participant paid, in accordance with Section 2.2 hereof, the purchase price for its Participation in such Reimbursement Obligation and the related Letter of Credit. (b) The Bank shall maintain for and in the name of the Participant one or more accounts established by the Bank in respect of the Participation which shall reflect the interest of the Participant from time to time in the Letters of Credit and the Obligations. The Bank shall render to the Participant not less frequently than once per month a statement as to receipts of payments and accruals of interest during the preceding month in respect of the Letters of Credit and the Obligations. (c) This Agreement and the Bank's books and records marked to indicate the Participation will serve to document the Participant's Participation in the Letters of Credit and the Obligations. The failure of the Bank to mark any such -4- 5 records shall not affect or impair any of any Participant's rights or obligations hereunder. (d) In the event that the Bank incurs costs and expenses relating to the enforcement of its rights under the Credit Documents and the collection of amounts owing thereunder, then all amounts paid to or realized by the Bank in respect of the Obligations, or from the Collateral securing the same, or otherwise in respect of the Credit Documents, shall be applied, subject to any contrary provision of the Intercreditor Agreement, (i) first, to the costs and expenses of the Bank including, without limitation, reasonable attorney's fees and expenses, incurred in obtaining such payment or realization and otherwise incurred by the Bank in connection with the Obligations or in protecting, preserving, selling or otherwise disposing of such Collateral (other than ordinary and customary loan administration costs), (ii) second, to accrued and unpaid interest in respect of the Obligations, to be shared between the Bank and the Participant in accordance with their respective interests in accrued and unpaid interest thereon, and (iii) third, to the outstanding principal of the Obligations, pro rata between the Bank and the Participant. (e) If the Bank determines at any time that any amount received or collected by the Bank in respect of any Letter of Credit or Reimbursement Obligation must be returned to the Applicant or paid to any other person or entity pursuant to any insolvency law or otherwise, then, notwithstanding any other provision of this Agreement, the Bank shall not be required to distribute any portion thereof to the Participant, and the Participant shall promptly on demand by the Bank repay any portion thereof that the Bank shall have distributed to the Participant, together with interest thereon at the Effective Federal Funds Rate for the period beginning on the earlier to occur of the date that the Bank makes any such payment to the Applicant or other person or entity or the date that the Bank becomes obligated to pay interest (on the amount to be paid) to the Applicant or other person or entity, and ending on the date that the Participant makes payment in full to the Bank under this Section 4.1(e). Section 4.2 The Participant shall be entitled to receive from the Bank a sixty percent (60%) share of the amount of all fees payable in respect of any Letter of Credit and any drawings thereunder which are (x) calculated based on a percentage of the face amount of such Letter of Credit or the amount of any drawing thereunder, and (y) become due and are actually paid to the Bank after the date hereof. The Participant shall not be entitled to receive from the Bank any fixed fees payable in respect of any Letter of Credit, which fees may be kept by the Bank for its own account. Section 4.3 Each payment by the Bank under Sections 4.1 or 4.2 hereof shall be made by the Bank within one Business Day following receipt by the Bank of the funds, amounts or proceeds from which any such payment is to be made, and the Bank shall pay to the Participant interest on any such payment for the period -5- 6 beginning on (and including) the second Business Day following the Business Day on which such funds, amounts or proceeds were received by the Bank and ending on (but excluding) the date on which the Bank makes payment in accordance with Sections 4.1 or 4.2 hereof, as the case may be, to the Participant, at the Effective Federal Funds Rate; provided, however, that notwithstanding any provision hereof to the contrary, during any period in which the Bank is legally prohibited or enjoined from making any such payment, such interest shall accrue at the Effective Federal Funds Rate. Section 5. Bank's Discretion; Amendments to Letters of Credit. Section 5.1 The Bank: (i) shall not be deemed to be a trustee or agent for the Participant in connection with the Letters of Credit, the Obligations, the Credit Documents, the Collateral or the Participation; (ii) may, except as otherwise provided in Section 5.2, use its sole discretion with respect to exercising or refraining from exercising any rights, or taking or refraining from taking any action, which the Bank may be entitled to exercise or take under or in respect of the Letters of Credit, the Obligations, the Credit Documents or the Collateral, including, without limitation, rights and actions relating to any waiver or amendment of any term thereof and rights, powers and remedies upon a default or event of default; (iii) may reasonably rely upon the advice of legal counsel, accountants and other experts and upon any written communication or any telephone conversation which the Bank believes to be genuine and correct or to have been signed, sent or made by the proper person or entity; and (iv) shall have no obligation to make any claim against, or assert any lien upon, any property (not constituting Collateral) held by the Bank or assert any offset thereagainst. Section 5.2 Without the prior written consent of the Participant, the Bank will not agree to any waiver or amendment of the terms of any Letter of Credit, or any Credit Document that would: (i) increase the amount of any Letter of Credit; (ii) extend the expiration date of any Letter of Credit or change the demand nature of any Obligation; -6- 7 (iii) reduce the rate of interest payable on any Obligation or release or compromise the obligation of the Applicant with respect to the payment of any principal of or interest on any Obligation; or (iv) release any Collateral (except as may be expressly provided in the Credit Documents relating to such Collateral); provided, however, that the restrictions contained in this Section 5.2 shall not apply in respect of any such waiver or amendment required or imposed pursuant to or in connection with any bankruptcy, insolvency, moratorium or other similar law or event affecting the Applicant, or if required by any other applicable law, rule, regulation, order or decree of any governmental authority. Section 6. Credit Analysis. Section 6.1 The Participant hereby acknowledges that the Bank has made available to the Participant copies of the Letters of Credit and the Credit Documents relating thereto. The Participant represents and warrants to the Bank that it has made, independently and without reliance on the Bank, its own credit analysis of the Applicant, and its own investigation of the risks involved in the transactions contemplated by this Agreement, and that it is not relying on any statement or representation with respect thereto made by the Bank. Section 7. Indemnification. Section 7.1 Except to the extent recovered by the Bank from the Applicant promptly following demand therefore, the Participant will pay to the Bank an amount equal to sixty percent (60%) of any and all costs, expenses, claims, losses and liabilities (including reasonable attorneys' fees) incurred by the Bank at any time after the date hereof, in connection with the Letters of Credit, the Reimbursement Obligations, the Credit Documents or the Collateral, except for those incurred by reason of the Bank's gross negligence or willful misconduct. Section 8. Assignments. Section 8.1 The Participant shall not, without the prior written consent of the Bank, sell, assign, subparticipate or otherwise transfer its rights under this Agreement. Section 8.2 The Bank shall not, without the prior written consent of the Participant, sell, assign, or otherwise transfer its rights under the Letters of Credit, the Obligations, the Credit Documents or the Collateral. -7- 8 Section 8.3 Subject to the foregoing, all of the terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the successors and permitted assigns of the Bank and the Participant. Section 9. Miscellaneous. Section 9.1 Except as otherwise provided in the Intercreditor Agreement, the Participant shall not have or assert or seek to exercise, any right of legal redress against the Applicant or any Collateral in respect of the Letters of Credit, the Obligations, or the Credit Documents. The Participant agrees that, except as otherwise provided in the Intercreditor Agreement, the Bank may take such legal action to enforce or protect the Bank, the Participant and/or the interests of the Bank and the Participant in respect of the Letters of Credit, the Obligations and the Credit Documents as the Bank may determine necessary or appropriate in its sole discretion. Section 9.2 This Agreement constitutes the entire agreement of the Bank and the Participant with respect to the subject matter hereof and may not be modified, amended or changed in any respect except by the written agreement of the Bank and the Participant. Section 9.3 The Bank and the Participant shall disclose to the other promptly upon obtaining actual knowledge thereof any information concerning the occurrence of any material adverse change in the financial condition of the Applicant or of any material damage to or destruction of any Collateral; provided, however, that neither the Bank nor the Participant shall have any liability for its failure to make such disclosure unless such failure was occasioned by its gross negligence or willful misconduct. Section 9.4 Except as expressly otherwise provided herein, all notices, requests and demands to or upon the respective parties hereto shall be given or made only by hand, Federal Express, Express Mail or other recognized overnight delivery service or by certified or registered mail, or by telecopier to the fax numbers listed below, and shall be deemed to have been duly given or made: if by hand, immediately upon delivery; if by Federal Express, Express Mail or overnight delivery service, one (1) Business Day after dispatch; if mailed by certified or registered mail, return receipt requested, five (5) days after mailing; and if by telecopier, upon receipt by the sending party of confirmation of transmission. All notices, requests and demands sent by telecopier shall be followed by the original thereof, sent as otherwise provided above, and all notices, requests and demands are to be given or made to the respective parties at the address (or to such other addresses as either party may designate by notice in accordance with the provisions of this paragraph) set forth herein. -8- 9 Section 9.5 This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 9.6 This Agreement shall inure solely to the benefit of the Bank and the Participant, and their successors and permitted assigns, and no third party (including, without limitation, the Applicant) shall have any rights hereunder as a third-party beneficiary or otherwise. Section 9.7 The Bank and the Participant each irrevocably consents to the non-exclusive jurisdiction of the courts of the State of New York and of the Federal Courts located in the City of New York in any action or proceeding arising under or in connection with this Agreement, the Letters of Credit, the Obligations, the Credit Documents, and the Collateral. -9- 10 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized officer as of the day and year first set forth above. BANK: NATWEST BANK N.A. By: --------------------------------- Name: Title: Address: 1133 Avenue of the Americas New York, New York 10036 Fax No: (212) 703-1574 Attention: PARTICIPANT: REPUBLIC NATIONAL BANK OF NEW YORK By: --------------------------------- Name: Joel Burbank Title: Senior Vice President Address: 452 Fifth Avenue New York, New York 10018 Fax No: (212) 525-5676 Attention: Mr. Joel Burbank -10- 11
EXHIBIT A --------- L/C Number Issuance Date Expiration Date $ Amount Remaining Undrawn - ---------- ------------- --------------- --------------------------
-11- 12 EXHIBIT B Wire Transfer Instructions NatWest Bank N.A. All wires to be sent to: NatWest Bank N.A. 1133 Avenue of the Americas New York, New York 10036 ABA # ____________________ Attention: ____________________________________ Republic National Bank of New York All wires to be sent to: Republic National Bank of New York 452 Fifth Avenue New York, New York 10018 ABA # 021004823 Attention: Mr. Joel Burbank -12- EX-10.6.5 6 SECURED PROMISSORY NOTE DATED SEPT. 14, 1995 1 SECURED PROMISSORY NOTE New York, New York $10,816,000 September 14, 1995 ON December 31, 1995, for value received, the undersigned, MOVIE STAR, INC. (the "Company"), a New York Corporation, promises to pay to the order of NATWEST BANK N.A., a national banking association (the "Bank"), the principal sum of TEN MILLION EIGHT HUNDRED SIXTEEN DOLLARS ($10,816,000), or so much thereof as may constitute the aggregate unpaid principal amount of all Loans made by the Agent, on behalf of the Bank, to the Company under or pursuant to the Credit Agreement. All such Loans and all payments made on account of the principal thereof and the interest thereon shall be recorded by the Agent and by the Bank or other holder hereof in their respective books and records. The information entered on such books and records shall be binding upon the Company in absence of manifest error. Notwithstanding the foregoing, any failure by the Agent or the Bank or other holder hereof to make notations on its books and records shall in no way mitigate or discharge the Company's obligation to repay any Loans actually made. The Company further promises to pay interest (computed on the basis of a 360-day year and the actual number of days elapsed) on the unpaid principal amount hereof from time to time outstanding from the date hereof until the date on which this Note is paid in full, at a variable rate per annum equal to one percent (1%) above the Bank's reference rate (hereinafter defined), payable monthly in arrears on the last day of each month and on the date of payment in full of this Note, commencing on August 31, 1995, any change in said variable rate to become effective on the first day of the month after any such change in said reference rate, as provided in the Credit Agreement. From and after the earlier of (i) December 31, 1995, (ii) the occurrence of any Event of Default (and for so long as such Event of Default is continuing), or (iii) the termination of the Credit Agreement, the rate of interest on the unpaid principal amount hereof at all times shall be two percent (2%) above the rate which would otherwise apply. Interest accruing after any of the events specified in the foregoing sentence shall be payable on demand. The term "reference rate", as used herein, means the interest rate established by the Bank from time to time at its principal office in New York City as its reference rate for domestic commercial loans, whether or not such established reference rate is the best rate available from the Bank for commercial loans. Both the principal hereof and the interest hereon are payable in lawful money of the United States of America and in immediately available funds at the office of the Agent at 452 Fifth Avenue, New York, New York 10018, or at such other place as the Agent may specify in writing. Any payment hereunder which is required to be paid on a day which is not a Business Day shall be payable on the next succeeding Business Day and such additional time shall be included in the computation of interest. To the extent permitted by applicable law, the Company waives presentment, notice of dishonor, protest and notice of protest, and any and all other notices or demands in connection with the delivery, acceptance, performance or default of this Note. This Note is one of the Notes referred to in the Credit and Security Agreement dated September 14 1995, (as amended or otherwise modified, the "Credit Agreement") by and among the Company, the Bank, NatWest Bank N.A. and the Agent, and is entitled to all of the benefits set forth therein. All capitalized terms used herein and not defined shall have the meanings ascribed to them in the Credit Agreement. This 2 Note is secured by the Collateral under the Credit Agreement and by any other property in which a lien or security interest has previously been granted to the Bank by the Company under any security or other agreement previously executed by the Company in favor of the Bank. In case any principal of or interest on this Note is not paid when due, the Company shall be liable for all costs of enforcement and collection of this Note incurred by the Agent and the Bank or other holder of this Note, including but not limited to reasonable attorneys' fees, disbursements and court costs. The liability of the Company hereunder shall be unconditional and shall not be in any manner affected by any indulgence granted or consented to by the Agent, the Bank or other holder hereof including, without limitation, any extension of time, renewal, waiver or other modification. Any failure of the Agent, the Bank or other holder hereof to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time and from time to time thereafter. The Agent, the Bank or other holder hereof may accept late payments or partial payments, even though marked "payment in full" or containing words of similar import or other conditions, without waiving any of its rights. No amendment, modification or waiver of any provision of this Note nor consent to any departure by the Company therefrom shall be effective, irrespective of any course of dealing, unless the same shall be in writing and signed by the Agent and the Bank or other holder hereof, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. This Note cannot be changed or terminated orally or by estoppel or waiver or by any alleged oral modification regardless of any claimed partial performance referable thereto. This Note shall be governed by and construed in accordance with the laws of the State of New York applicable to instruments made and to be performed wholly within that State. If any provision of this Note is held to be illegal or unenforceable for any reason whatsoever, such illegality or unenforceability shall not affect the validity of any other provisions hereof. THE COMPANY AGREES THAT ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS NOTE MAY BE INITIATED AND PROSECUTED IN THE STATE OR FEDERAL COURTS, AS THE CASE MAY BE, LOCATED IN NEW YORK COUNTY, NEW YORK. THE COMPANY CONSENTS TO AND SUBMITS TO THE EXERCISE OF JURISDICTION OVER ITS PERSON BY ANY SUCH COURT HAVING JURISDICTION OVER THE SUBJECT MATTER, WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY REGISTERED MAIL DIRECTED TO THE COMPANY AT ITS ADDRESS SET FORTH BELOW OR TO ANY OTHER ADDRESS AS MAY APPEAR IN THE BANK'S RECORDS AS THE ADDRESS OF THE COMPANY. IN ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS NOTE, EACH OF THE COMPANY, THE AGENT AND THE BANK WAIVES TRIAL BY JURY, AND THE COMPANY ALSO WAIVES (I) THE RIGHT TO INTERPOSE ANY SET-OFF OR COUNTERCLAIM OF ANY NATURE OR DESCRIPTION, (II) ANY OBJECTION BASED ON FORUM NON CONVENIENS OR VENUE, AND (III) ANY CLAIM FOR CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES. MOVIE STAR, INC. a New York Corporation By:/s/ Mark M. David ------------------- Title: Chairman ------------- -2- EX-22 7 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 22 MOVIE STAR, INC. AND SUBSIDIARIES Registrant owns 100% of the voting securities of its subsidiaries, which are included in the consolidated financial statements.
Name of Subsidiary Ownership State of Incorporation ------------------ --------- ---------------------- Sanmark International Taiwan, Inc. 100% Delaware P.J. San Sebastian, Inc. 100% Delaware Cuteslumber Inc. 100% New York Sanmark de Mexico S.A. de C.V. 100% Mexico
IV-8 EX-27 8 FINANCIAL DATA SCHEDULE
5 1000 YEAR JUN-30-1995 JUL-1-1994 JUN-30-1995 103 0 10,658 1,869 36,085 48,656 14,617 8,564 57,204 26,008 22,496 160 0 0 8,540 57,204 101,946 101,946 79,011 79,011 23,541 0 4,669 (5,275) (246) (5,275) 0 0 0 (5,029) (.36) (.36)
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