Body Drama Saga Includes Tinge of Financial Intrigue

Body Drama Inc., a Los Angeles-based lingerie maker, has gone from riches to rags in the rag trade since 1991. Now its shareholders are being offered a way out of their misery--but some smell a bad deal.

Body Drama’s majority-owner, San Diego-based women’s sportswear maker Beeba’s Creations, has effectively decided to buy up the 49% of Body Drama it doesn’t own. That amounts to 1.58 million shares, for which Beeba’s is offering $2.93 a piece.

That’s a two-thirds decline from the $8.50-a-share price that Body Drama shareholders paid in the initial stock offering in 1991, when the firm was spun off from Beeba’s--netting Beeba’s $3 million for its own coffers.

Body Drama’s Chairman, Steven P. Wyandt, insists that the buyout price is fair and that folding Body Drama back into Beeba’s is the best way for both businesses to cope with the slumping clothing market. But Wyandt also is chief executive of parent Beeba’s, so his response is hardly a surprise.

And therein lies the key controversy that has dogged Body Drama in its brief life as a public firm. Some shareholders say that Beeba’s and Body Drama’s management and finances were so inter-linked that it was difficult or impossible to say how well--or not--Body Drama’s business was going.

If nothing else, this saga offers a reminder of the risks in owning shares of a firm that is more than 50% controlled by another entity. You are always at the mercy of the majority owner.

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The Body Drama case has attracted enough attention to draw in San Diego attorney William S. Lerach, who is famous for filing class-action suits. In a suit filed in Superior Court in San Diego County last week, Lerach client (and Body Drama shareholder) Cheng T. Lau alleges that Body Drama/Beeba’s management:

* Depressed (Body Drama’s) reported earnings “by making discretionary accounting adjustments against revenues and earnings, and (by) manipulating the management-services agreement between Body Drama and Beeba’s.”

* “Intends to gain complete control of the company by taking it private at an inadequate price and on terms unfairly beneficial to them . . . and without encouraging or permitting the company to be shopped to other bidders.”

In so many words, Lerach and his clients are accusing Beeba’s of having bled Body Drama, and now stealing it back from minority shareholders. The suit centers on Body Drama’s contractual reliance on Beeba’s for executive management, information services, payroll processing, warehousing and other services.

When Body Drama was spun off by Beeba’s in 1991, the former had annual sales of $27.2 million versus Beeba’s $132 million. Body Drama was the brainchild of 43-year-old Cecelia Post, whose hot concept for “sportswear-inspired intimate apparel” found a willing financier in Beeba’s Chairman Arjun C. Waney in 1985.

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Body Drama operated as a division of Beeba’s from 1985 to 1991, in which time Body Drama’s annual sales rose tenfold. The firm’s sales continued to rise in 1992 and 1993, but its profitability--and stock price--began to falter soon after the October, 1991, stock offering.

By 1993, Body Drama was in the red, losing $647,000, or 20 cents a share for the year. And in the first nine months of the current fiscal year, the company says it lost $2.35 million, or 73 cents a share, on sales of $23.9 million.

What went wrong? Post, who resigned last winter and now works for rival apparel firm Kellwood Co., won’t comment, but people familiar with Body Drama say she was never given financial control of the company. That power was retained by Waney and Wyandt, at Beeba’s.

Wyandt says Body Drama’s troubles, and Beeba’s, are “a factor of the deflation in the clothing industry” since 1992. Sales have been weak, and “the consumer is putting the squeeze on retailers and on us to bring prices down,” he says.

But Body Drama also experienced an explosion in expenses over the past three years, far exceeding its sales growth. Between 1991 and 1993, the firm’s “selling, general and administrative expenses” rocketed from $2.95 million to $7.77 million--a 163% increase--while revenue rose just 17%, from $27.2 million to $31.8 million.

Because Body Drama contracted with Beeba’s to provide much of its overhead, a significant amount of Body Drama’s expenses would have been determined by--and paid to--Beeba’s. In his lawsuit, Lerach’s client contends that management set about last year to boost Body Drama’s expenses so as to artificially depress earnings, crush the stock and thus set the stage for Beeba’s to take Body Drama private again at a cheap price.

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Wyandt flatly denies that Beeba’s manipulated Body Drama’s numbers, blaming the rise in expenses on an ill-timed expansion, higher cotton prices and an acquisition Body Drama made in ’93.

Though Beeba’s and Body Drama shared certain board members, Wyandt says the management-services contract between the two “has been tested . . . it has been reviewed by the independent members of the board.” The contract “is not the ‘smoking gun’ that it’s purported to be” in the suit, Wyandt says.

And why didn’t Beeba’s put Body Drama up for auction, rather than simply taking it private? Wyandt concedes “we really didn’t consider that.” But he says Body Drama received a “fairness” opinion on the buyout offer from Los Angeles brokerage Wedbush Morgan Securities, and that “they contacted people in the industry to look for interest. So it was shopped from that standpoint.”

Wyandt also denies industry rumors that an investor group offered $5 a share for Body Drama last fall, only to be rebuffed.

Beeba’s is taking Body Drama private again, Wyandt says, because management decided Body Drama can’t support “a growth or return rate that would allow it to be a public company” any longer.

But if Body Drama can’t stand alone, Beeba’s shareholders--whose own shares have plunged as well in recent years as the company’s sales have slumped--may question why the lingerie business’ assets are worth buying out for $4.6 million.

Tattered shares

How stocks of Beba’s Creations and its 51%-owned subsidiary, Body Drama, have fared since January, 1993. Monthly closes on Nasdaq, except latest:

Beeba’s Creations: 3.75 Body Drama: 2.59 Source: Los Angeles Times