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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
For the fiscal year ended June 30, 2004 or
[ ] Transition report pursuant to Section 13 or 15(d) of Securities Exchange
Act of 1934
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.)
1115 Broadway, New York, NY 10010
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number including area code (212) 684-3400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value American Stock Exchange
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
1
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Yes X No
------ ------
As of December 31, 2003 (the last business day of the registrant's most recently
completed second fiscal quarter), the aggregate market value of the registrant's
common stock (based on its reported last sale price on the American Stock
Exchange of $1.50, held by non-affiliates of the registrant, was $17,612,708.
As of August 27, 2004, there were 15,619,975 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III by Items 10, 11, 12, 13 and 14 is
incorporated by reference to the registrant's proxy statement in connection with
the 2004 Annual Meeting of Shareholders, which will be filed by the registrant
within 120 days after the close of its fiscal year.
See Item 15 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.
2
MOVIE STAR, INC.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
NO.
Item 1 Business............................................................4
Item 2 Properties..........................................................8
Item 3 Legal Proceedings...................................................8
Item 4 Submission of Matters to a
Vote of Shareholders................................................8
PART II
Item 5 Market for Company's Common Stock and
Related Shareholder Matters.........................................9
Item 6 Selected Financial Data............................................10
Item 7 Management's Discussion and Analysis
of Financial Condition and
Results of Operations..............................................11
Item 7A Quantitative and Qualitative Disclosures
About Market Risk .................................................16
Item 8 Financial Statements and
Supplementary Data................................................F-1
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................40
Item 9A Controls and Procedures ...........................................40
PART III
Item 10 Executive Officers and Directors of the Company ..................41
Item 11 Executive Compensation.............................................41
Item 12 Security Ownership of Certain Beneficial Owners and Management.....41
Item 13 Certain Relationships and Related Transactions.....................41
Item 14 Principal Accounting Fees and Services.............................41
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K....42
3
PART I
ITEM 1. BUSINESS
Movie Star, Inc. ("the Company"), a New York corporation organized in 1935,
designs, manufactures, markets and sells an extensive line of ladies' intimate
apparel which includes sleepwear, robes, leisurewear, loungewear, panties and
daywear. During fiscal 2001, the Company discontinued its retail operations.
The Company's products consist of ladies' pajamas, nightgowns, baby dolls,
nightshirts, dusters, shifts, caftans, sundresses, rompers, short sets,
beachwear, peignoir ensembles, robes, leisurewear, panties, and daywear
consisting of bodysuits, soft bras, slips, half-slips, teddies, camisoles and
cami top sets. These products are manufactured in various fabrics, designs,
colors and styles depending upon seasonal requirements, changes in fashion and
customer demand. The Company maintains an in-house design staff, which affords
it the flexibility to work with merchandise buyers on fashion design and price
points.
On August 3, 2004, the Company completed its acquisition of certain assets of
Sidney Bernstein & Son Lingerie, Inc. ("SB&S"), a company engaged in the design,
marketing and sale of women's lingerie and related apparel and accessories.
The acquired assets were purchased for an aggregate price of $3,387,000 and
included, among other assets, $2,873,000 of inventory and $500,000 of intangible
assets. The Company also assumed $3,012,000 of SB&S' open purchase orders and
received $7,408,000 of open customer orders. Pursuant to the Asset Purchase
Agreement, the Company also agreed to pay up to an additional $1,000,000 in the
aggregate based upon certain gross profit levels generated by the Company's
newly-established Sidney Bernstein & Son Division during the next three fiscal
years. In connection with the asset purchase, Daniel Bernstein and Irwin
Bernstein, the two owners of SB&S have joined the Company as President and Vice
President, respectively, of the new division.
SB&S had sales of approximately $18,724,000 for calendar year 2003 and the
Company expects to benefit from synergies in sourcing and distribution beginning
in calendar 2005.
The Company's products are sold to discount, specialty, national and regional
chain, mass merchandise and department stores and direct mail catalog marketers
throughout the United States. The prices to consumers for the Company's products
range from approximately $6.00 for certain of its products, such as panties, to
approximately $85.00 for certain other products, such as peignoir sets. The
Company's products are sold by in-house sales personnel and outside
manufacturer's representatives. Approximately 41% of the Company's sales are
made to mass merchandisers, 21% to national chains, and 16% to department
stores; the balance of the Company's sales are unevenly distributed among
discount, specialty, regional chain stores and direct mail catalog marketers.
The Company's gross profit on its sales for each of the fiscal years ended June
30, 2004, 2003, and 2002 was approximately 30.0%, 31.7% and 28.0%, respectively.
The Company has historically 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 connection with the Company's
Maidenform lines, the Company will advertise its Maidenform collection to its
retail customer and directly to the consumer.
The Company utilizes a large variety of fabrics made from natural and man-made
fibers including, among others, polyester, cotton, broadcloth, stretch terry,
brushed terry, flannel, brushed flannel, nylon, spun polyester, velour, satins,
tricot, jersey, fleece, jacquards, lace, stretch lace, charmeuse, chambray,
micro fibers, spandex and various knit fabrics.
These materials are available from a variety of both domestic and foreign
sources. The sources are highly competitive in a world market. The Company
expects these competitive conditions to continue in the foreseeable future.
Generally, the Company has long-standing relationships with its domestic and
foreign suppliers and purchases its raw materials in anticipation of orders or
as a result of need based on orders received. Purchase of raw materials in high
volume provides the Company with the opportunity to buy at relatively low
prices. In turn, the Company is able to take advantage of these lower prices in
the pricing of its finished goods.
The Company has historically produced its products either at one of its domestic
facilities or by purchasing them from a finished package manufacturer or by
contracting for their assembly from a cut, make and trim manufacturer
4
("CMT"). Due to the Company's strategic decision to take advantage of lower
labor costs by purchasing more of its finished goods offshore, the Company has
eliminated its domestic production and increased its finished package purchases.
Domestic production decreased from 2.5% of total production in fiscal 2001 to
less than 1% in fiscal 2002 and no products were produced domestically in fiscal
2003 and 2004. The purchase of finished packages increased from 49.5% of total
production in fiscal 2001 to 70% in fiscal 2002, 71% in fiscal 2003 and 76% in
fiscal 2004. CMT production was 48% of total production in fiscal 2001, 30.0% in
fiscal 2002, 29% in fiscal 2003 and 24% in fiscal 2004.
The following table sets forth a list of the countries from which the Company
has purchased finished goods and in which the Company has contracted for the
assembly of its products, including the approximate percentage of the Company's
total cost of production allocable to each country:
2004 2003
---- ----
CMT FG Purchased Total CMT FG Purchased Total
---- ------------ ----- ---- ------------ -----
Bangladesh - % 7% 7% - % 15% 15%
Cambodia - 10 10 - 13 13
China - 7 7 - 3 3
Dominican Republic 18 - 18 10 - 10
India - 7 7 - 2 2
Mexico 4 4 8 10 5 15
Pakistan - 7 7 - 9 9
Philippines 2 31 33 9 23 32
Other - 3 3 - 1 1
--- --- ---- --- --- ----
Total Production 24% 76% 100% 29% 71% 100%
=== === ==== === === ====
Currently, the Company has three independent representatives' in Bangladesh, one
employee and three independent representatives' in the Dominican Republic and
eight employees in the Philippines supervising the production of finished
products purchased by the Company or assembled for the Company by CMT
manufacturers in those countries. These employees and representatives assist in
maintaining quality and on-time delivery. Management personnel travel to the
Dominican Republic and Asia throughout the year to monitor the performance of
the Company's offshore manufacturers and contractors.
In order to facilitate the coordination of its production in the Philippines,
which was 28% of total production in 2001, 38% of total production in 2002, 32%
of total production in 2003 and 33% of total production in 2004, the Company
opened a representative office in the Philippines in 2002. The office is being
utilized primarily for administrative and manufacturing support functions, as
well as sample making and pattern making.
The Company's transactions with its foreign manufacturers and suppliers are
subject to the risks of doing business abroad. The Company's import and offshore
operations are subject to constraints imposed by agreements between the United
States and a number of foreign countries in which the Company does business.
These agreements impose quotas on the amount and type of goods that can be
imported into the United States from these countries. Such agreements also allow
the United States to impose, at any time, restraints on the importation of
categories of merchandise that, under the terms of the agreements, are not
subject to specified limits. The Company's imported products are also subject to
United States customs duties and, in the ordinary course of business, the
Company is from time to time subject to claims by the United States Customs
Service for duties and other charges. The United States and other countries in
which the Company's products are manufactured may, from time to time, impose new
quotas, duties, tariffs or other restrictions, or adversely adjust presently
prevailing quotas, duty or tariff levels, which could adversely affect the
Company's operations and its ability to continue to import products at current
or increased levels. The Company cannot predict the likelihood or frequency of
any such events occurring.
The Company believes it maintains adequate inventories to cover the needs of its
customers.
The Company has several registered trademarks, of which "Movie Star", "Movie
Star Loungewear", "Cinema Etoile", "Seductive Wear", "Meant To Be", "Cine Jour",
"Private Property", "Heather Nicole" and "Night Magic"
5
are material to the marketing by the Company of its products. There is no
litigation with respect to patents, licenses and trademarks
The Company entered into a licensing agreement with Maidenform Inc. Under this
agreement, the Company will produce a new line of ladies' sleepwear and robes to
be introduced under the Maidenform(R) name. The Company's Maidenform Collection
will be available to department stores, chains and high-end specialty stores
nationally beginning in calendar 2005. The Company will also introduce a new
line of sleepwear, robes and daywear under the trademarks Sweet Nothings(R),
Self Expressions(R) and Rendezvous(R) to be available to select mass
merchandisers and national chains in calendar 2005.
The Company manufactures a wide variety of intimate apparel in many different
styles and sizes and for use in all seasons and climates in the United States.
Because of its product mix, it is subject to certain seasonal variations in
sales. Historically, more than 50% of the Company's sales have been made in the
first six months of its fiscal year, except in fiscal 2003 when the Company's
sales were evenly distributed between the first and second half of the year.
All sales are outright sales. Terms are generally net 10 days E.O.M. or net 30
days from the date the goods are shipped which, depending on date of shipment,
can be due from as short a period as twenty-one days or as long as fifty days.
It has become industry practice to extend payment terms up to an additional
thirty days for certain customers. Although sales are made without the right of
return, in certain instances the Company may accept returns or agree to
allowances. The Company maintains sufficient inventories of raw materials and
finished goods to meet its production requirements and the delivery demands of
its customers. As a result, the Company relies on its short-term line of credit
to supplement internally generated funds to fulfill its working capital needs.
Wal-Mart accounted for 38% of sales for fiscal 2004, 42% of sales for fiscal
2003 and 32% of sales for fiscal 2002. Sears, Roebuck and Company accounted for
10% of sales for fiscal 2004 and 2003 and 13% of sales for fiscal 2002.
Purchasing decisions by the Company's customers with respect to each group of
the Company's products and, in some instances, products within a group,
generally are made by different buyers and purchasing departments. The Company
believes that the loss of orders from any one buyer or purchasing department
would not necessarily result in the loss of sales to other buyers or purchasing
departments of those customers.
The backlog of orders was approximately $27,145,000 as of June 30, 2004,
$27,420,000 as of June 30, 2003 and $32,561,000 as of June 30, 2002. Orders are
booked upon receipt. When the Company completed its acquisition of certain
assets of Sidney Bernstein & Son Lingerie, Inc. on August 3, 2004 it also
acquired $7,408,000 of open customer orders. The Company believes that the
current backlog is firm and will be filled by the end of the current fiscal
year.
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.
The intimate apparel business is fragmented and highly competitive. The industry
is characterized by a large number of small companies manufacturing and selling
unbranded merchandise, and by several large companies which have developed
widespread consumer recognition of the brand names associated with merchandise
manufactured and sold by these companies. In addition, certain of the larger
retailers to whom the Company has historically sold its products have sought to
expand the development and marketing of their own brands and to obtain intimate
apparel products directly from similar sources as the Company.
The intimate apparel industry is further characterized by competition on the
basis of price, quality, efficient service and prompt delivery. Because of this
competitive pressure, the Company no longer relies on domestic manufacturing and
relies entirely on offshore manufacturers and contractors. Accordingly, changes
in import quotas, currency valuations and political conditions in the countries
from which the Company imports products could adversely affect the Company's
business.
6
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.
There are no costs relating to complying with environmental regulations in the
fiscal year just completed or over future periods of which the Company is aware.
As of August 31, 2004, the Company had 283 full-time and 10 part-time employees.
Approximately 28 are executive, design and sales personnel, 92 are
administrative personnel, and the balance are in distribution, warehousing and
offshore support.
The Company has never experienced an interruption of its operations because of a
work stoppage. Even though the Company is subject to certain seasonal variations
in sales, significant seasonal layoffs are rare.
Employees have an interest in the Company's Common Stock through the Company's
ESOP. The Company deems its relationship with its employees to be good. The
Company is not a party to any collective bargaining agreement with any union.
7
ITEM 2. PROPERTIES
The following table sets forth all of the facilities owned or leased by
the Company as of June 30, 2004, except for the New Holland, PA distribution
center which became available at the close of the SB&S transaction on August 3,
2004.
OWNED OR BLDG. AREA EXPIRATION
LOCATION USE LEASED (SQ. FT.) OF LEASE
- -------- --- ------ -------- --------
1115 Broadway, Executive and Administrative offices; Leased 31,000 12/10
New York, NY Divisional Sales Office and Showroom
180 Madison Ave., Sales Office and Showroom Leased 3,000 3/06
New York, NY
New Holland, PA Distribution Center for SB&S (1) 43,000 N/A
Petersburg, PA Warehousing for finished Owned 140,000 N/A
goods; Distribution Center
South Mississippi 1 Mfg. Support/ Dist./Warehouse; 1 Leased 212,000 11/20
Warehouse Owned 29,000 N/A
Philippines Administrative and Mfg. Support; Leased 3,800 4/05
Sample and Pattern Making
- -------------------------------
(1) Pursuant to the Asset Purchase Agreement with SB&S, the Company will have
full access to the distribution center in New Holland, PA and the personnel to
operate the distribution center. This distribution center will be provided to
the Company through December 31, 2004 at the actual cost to operate the
facility.
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.)
- -------- -------- -------
1115 Broadway and 180 Madison Avenue Corporate Offices; 11,000
New York, New York Divisional Sales Offices and Showrooms; 11,000
Production Staff and Design 12,000
New Holland, Pennsylvania Warehousing and Distribution; 40,000
Offices 3,000
Petersburg, Pennsylvania Warehousing and Distribution; 137,000
Offices 3,000
Mississippi Manufacturing Support; 24,000
Warehousing and Distribution; 199,000
Offices 18,000
Philippines Administrative and Mfg. Support; 3,800
Sample and Pattern Making
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending which are material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
NONE.
8
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK
AND RELATED SHAREHOLDER 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.
YEAR ENDED JUNE 30, 2004 HIGH LOW
---- ---
First Quarter.................................. $2.49 $1.58
Second Quarter................................. 2.75 1.33
Third Quarter.................................. 1.82 1.20
Fourth Quarter................................. 1.59 1.26
YEAR ENDED JUNE 30, 2003
First Quarter ................................. $.50 $.32
Second Quarter ................................ .60 .36
Third Quarter.................................. 1.20 .51
Fourth Quarter................................. 1.94 .91
As of August 27, 2004, there were approximately 2,717 holders of record of the
Common Stock.
The Company presently intends to retain all earnings for the Company's growth.
Depending upon the Company's capital resources and needs, the Company may pay
cash dividends in the future. The payment of dividends, if any, in the future is
within the discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements and financial condition, and other
relevant factors.
The following sets forth certain information as of June 30, 2004 concerning the
Company's equity compensation plans:
NUMBER OF SHARES TO BE WEIGHTED-AVERAGE NUMBER OF SHARES REMAINING
ISSUED UPON EXERCISE OF EXERCISE PRICE OF AVAILABLE FOR FUTURE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, ISSUANCE UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
------------- ------------------- ------------------- ------------------
Plans approved by shareholders
1988 Non-Qualified Stock
Option Plan 75,000 $ .63 1,591,666
1994 Incentive Stock
Option Plan 640,000 .66 825,000(1)
2000 Performance Equity
Plan 290,000 .83 460,000
----------- ------- ---------
1,005,000 .71 2,876,666
Plans not approved by
shareholders
Warrant 50,000 .44 -
----------- ------- ---------
Total 1,055,000 $ .70 2,876,666
========= ===== =========
- ----------------------
(1) Effective July 15, 2004, options can no longer be granted under the 1994
Incentive Stock Option Plan.
9
MOVIE STAR, INC.
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: FISCAL YEARS ENDED JUNE 30,
2004 2003 2002 2001 2000
Net sales $ 53,691 64,916 $ 54,359 $ 62,462 $ 62,483
-------- ------- -------- -------- --------
Cost of sales 37,581 44,345 39,157 44,072 44,783
Selling, general and administrative expenses 15,824 14,623 13,689 14,869 13,797
Loss on closing of distribution facility - - - 1,188 -
-------- ------- -------- -------- --------
53,405 58,968 52,846 60,129 58,580
-------- ------- -------- -------- --------
Operating income from continuing operations 286 5,948 1,513 2,333 3,903
Gain on purchases of subordinated debentures and senior notes - - - (482) (565)
Interest income (12) (4) (3) (6) (145)
Interest expense 76 351 695 1,476 1,856
-------- ------- -------- -------- --------
Income from continuing operations before income taxes 222 5,601 821 1,345 2,757
Income taxes (benefit) 94 2,170 360 (695) 35
-------- ------- -------- -------- --------
Income from continuing operations 128 3,431 461 2,040 2,722
Income (loss) from discontinued operations - - 86 (326) 398
-------- ------- -------- -------- --------
Net income $ 128 $ 3,431 $ 547 $ 1,714 $ 3,120
======== ======= ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE:
From continuing operations $.01 $.23 $.03 $ .14 $.18
From discontinued operations - - .01 (.02) .03
-------- ------- -------- -------- --------
Net income $.01 $.23 $.04 $ .12 $.21
==== ==== ==== ===== ====
DILUTED NET INCOME (LOSS) PER SHARE:
From continuing operations $.01 $.22 $.03 $ .13 $.17
From discontinued operations - - .01 (.02) .03
-------- ------- -------- -------- --------
Net income $.01 $.22 $.04 $ .11 $.20
==== ==== ==== ===== ====
Basic weighted average number of shares outstanding 15,574 15,133 15,085 14,899 14,889
====== ====== ====== ====== ======
Diluted weighted average number of shares outstanding 16,199 15,407 15,112 15,301 15,928
====== ====== ====== ====== ======
BALANCE SHEET DATA: AT JUNE 30,
2004 2003 2002 2001 2000
WORKING CAPITAL $16,543 $15,979 $ 9,529 $ 8,016 $17,345
======= ======= ======= ======= =======
TOTAL ASSETS $20,779 $24,089 $22,406 $27,799 $31,627
======= ======= ======= ======= =======
SHORT-TERM DEBT - Including current maturities
Of long-term debt and capital lease obligations $ - $ 2,304 $ 4,169 $10,327 $ 1,773
======= ======= ======= ======= =======
LONG-TERM DEBT - Including deferred lease
and other long-term liabilities $ 374 $ 325 $ 254 $ 183 $12,222
======= ======= ======= ======= =======
SHAREHOLDERS' EQUITY $17,747 $17,264 $13,624 $13,021 $11,292
======= ======= ======= ======= =======
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
When used in this Form 10-K and in future filings by the Company with the
Commission, the words or phrases "will likely result," "management expects" or
"the Company expects," "will continue," "is anticipated," "estimated" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. . The Company has no obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks are included in "Item 1: Business," "Item
7: Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this Form 10-K. In assessing forward-looking statements
contained herein, readers are urged to carefully read those statements.
Among the factors that could cause actual results to differ materially are:
business conditions and growth in the Company's industry; general economic
conditions; the addition or loss of significant customers; the loss of key
personnel; product development; competition; foreign government regulations;
fluctuations in foreign currency exchange rates; rising costs of raw materials
and the unavailability of sources of supply; the timing of orders placed by the
Company's customers; and the risk factors listed from time to time in the
Company's SEC reports. We urge you to carefully read the following discussion in
conjunction with these factors.
OVERVIEW
- --------
The intimate apparel business is a highly competitive industry. The industry is
characterized by a large number of small companies selling unbranded
merchandise, and by several large companies that have developed widespread
consumer recognition of the brand names associated with merchandise sold by
these companies. In addition, retailers to whom we sell our products have sought
to expand the development and marketing of their own brands and to obtain
intimate apparel products directly from the same sources from which we obtain
our products.
The intimate apparel business for the department stores, specialty stores and
regional chains is broken down into five selling seasons a year. We create a new
line of products that represent our own brand name "Cinema Etoile" for each
selling season. Our brand name does not have widespread consumer recognition,
although it is well known by our customers. We sell our brand name products
primarily during these selling seasons. We also develop specific products for
some of our larger accounts, mass merchandisers and national chains, and make
between five and eight presentations throughout the year to these accounts. We
do not have long-term contracts with any of our customers and therefore our
business is subject to unpredictable increases and decreases in sales depending
upon the size and number of orders that we receive each time we present our
products to our customers.
During fiscal 2004, we experienced a significant reduction in sales that was
primarily the result of receiving fewer orders from some of our larger
customers. However, we do not believe that this is a permanent trend and these
larger customers continue to welcome us to present our products to them. If it
were not for the customer orders of the Sidney Bernstein & Son Division , the
dollar volume of orders received for the first half of fiscal 2005 would be
comparable to those received for the first half of fiscal 2004. However, they
are from different customers than in fiscal 2004 and some of the orders are at a
considerably lower gross margin. In a continued effort to improve the overall
profitability of the Company, we have (i) signed a licensing agreement with
Maidenform Inc. and the Maidenform line is scheduled for its first delivery in
the beginning of calendar 2005, (ii) acquired the inventory and certain other
assets of Sidney Bernstein & Son Lingerie, Inc. along with $7,408,000 in open
customer orders and (iii) hired a representative in Canada to begin selling to
the Canadian market, which we began shipping in the first quarter of fiscal
2005.
In fiscal 2004, approximately 41% of our sales were made to mass merchandisers,
21% to national chains, and 16% to department stores. The balance of our sales
was unevenly distributed among discount, specialty, regional chain stores and
direct mail catalog marketers.
11
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require estimates and
assumptions about future events and their impact on amounts reported in the
financial statements and related notes. Since future events and their impact
cannot be determined with certainty, the actual results will inevitably differ
from our estimates. Such differences could be material to the financial
statements.
Management believes the application of accounting policies, and the estimates
inherently required by the policies, are reasonable. These accounting policies
and estimates are constantly re-evaluated, and adjustments are made when facts
and circumstances dictate a change. Historically, management has found the
application of accounting policies to be appropriate, and actual results
generally do not differ materially from those determined using necessary
estimates.
Our accounting policies are more fully described in Note 1 to the consolidated
financial statements. Management has identified certain critical accounting
policies that are described below.
Inventory - Inventory is carried at the lower of cost or market on a first-in,
first-out basis. Management writes down inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Allowance for Doubtful Accounts/Sales Discounts - The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. The Company
also estimates allowances for customer discounts, orders and incentive
offerings. If market conditions were to decline, the Company may take actions to
increase customer incentive offerings possibly resulting in an incremental
allowance at the time the incentive is offered.
Deferred Tax Valuation Allowance - In assessing the need for a deferred tax
valuation allowance, we consider future taxable income and ongoing prudent and
feasible tax planning strategies. Since we were able to determine that we should
be able to realize our deferred tax assets in the future, in excess of its
recorded amount, a deferred tax asset valuation allowance was not deemed
necessary. Likewise, should we determine that we would not be able to realize
all or part of our net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such determination
was made.
The following table shows each specified item as a dollar amount and as a
percentage of net sales in each fiscal period, and should be read in conjunction
with the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K:
Years Ended June 30,
2004 2003 2002
------------------- ----------------- -------------------
Net sales $53,691 100.0% $64,916 100.0% $54,359 100.0%
Cost of sales 37,581 70.0% 44,345 68.3% 39,157 72.0%
------- ----- ------- ----- ------- -----
Gross profit 16,110 30.0% 20,571 31.7% 15,202 28.0%
Operating Expenses:
Selling, general and administrative expenses 15,824 29.5% 14.623 22.5% 13,689 25.2%
------- ----- ------- ----- ------- -----
Operating income from continuing operations 286 .5% 5,948 9.2% 1,513 2.8%
Interest income (12) - (4) - (3) -
Interest expense 76 .1% 351 .6% 695 1.3%
------- ----- ------- ----- ------- -----
Income from continuing operations 222 .4% 5,601 8.6% 821 1.5%
before income taxes
Income taxes 94 .2% 2,170 3.3% 360 .7%
------- ----- ------- ----- ------- -----
Income from continuing operations 128 .2% 3,431 5.3% 461 .8%
Discontinued operations:
Gain on disposal of discontinued retail stores - - - - 86 .2%
------- ----- ------- ----- ------- -----
Net income $ 128 .2% $ 3,431 5.3% $ 547 1.0%
======= ===== ======= ===== ======= =====
12
FISCAL 2004 COMPARED TO FISCAL 2003
- -----------------------------------
Results of Continuing Operations
Net sales for the year ended June 30, 2004 were $53,691,000 as compared to
$64,916,000 in the comparable period in 2003. The decrease in sales was due
primarily to a decrease in orders with our primary customer (which accounted for
approximately 46% of the decrease), an initial set-up replenishment order for
our primary customer being shipped in fiscal 2003 (which accounted for
approximately 11% of the decrease) and a poor holiday season in intimate apparel
at retail. The poor holiday season intimate apparel at retail caused the
retailers to have excess inventory of replenishment goods resulting in lower
orders following the holiday season.
The gross profit percentage was 30.0% for the year ended June 30, 2004 as
compared to 31.7% for the year ended June 30, 2003. The lower margins resulted
primarily from lower margins in the fourth quarter. We had a 25.8% gross margin
in the fiscal 2004 fourth quarter as compared to a 32.3% gross margin in the
same quarter in the prior year. The lower margin in the fourth quarter was the
result of a large program to our primary customer, which was at a full margin,
in the fourth quarter last year that we did not have in the current year, lower
sales in the fourth quarter of this year that caused closeout sales to be a
higher percentage of total sales and higher markdown allowances to our customers
in the current year.
As a result of differences between the accounting policies of companies in the
industry relating to whether certain items of expense are included in cost of
sales rather than recorded as selling expenses, the reported gross profits of
different companies, including our own, may not be directly compared. For
example, we record the costs of preparing merchandise for sale, including
warehousing costs and shipping and handling costs, as a selling expense, rather
than a cost of sale. Therefore, our gross profit is higher than it would be if
such costs were included in cost of sales.
Selling, general and administrative expenses were $15,824,000, or 29.5% of net
sales, for the year ended June 30, 2004 as compared to $14,623,000, or 22.5% of
net sales, for the similar period in 2003. This increase of $1,201,000 resulted
primarily from a one-time expense of $1,084,000 related to a lump sum payment to
President and Chief Executive Officer, Mel Knigin. This occurred as a result of
a stock ownership sale by the former Chairman of the Company, which activated a
provision in Mr. Knigin's employment agreement. Under the terms of the agreement
with Mr. Knigin, this payment is to be applied against any severance obligations
owed to Mr. Knigin under his employment contract, which, in accordance with its
terms, expires on June 30, 2007. In addition to the above one-time expense, we
had increases in salaries and salary related expenses of approximately $398,000,
business insurance expense of $139,000 and medical insurance expense of $79,000
as well as a net overall increase in other selling, general and administrative
expenses. These increases were partially offset by a reduction in commission
expense of $175,000 and officers' bonuses of $291,000. We also had a more
favorable than expected recovery of bad debts in the current year of $350,000
that was primarily related to the Montgomery Ward bankruptcy.
Operating income from continuing operations decreased to $286,000 for the year
ended June 30, 2004, from $5,948,000 for the similar period in 2003. This
decrease was due to lower sales and gross margins, as well as higher selling,
general and administrative expenses.
Interest income for the year ended June 30, 2004 was $12,000 as compared to
$4,000 for 2003.
Interest expense for the year ended June 30, 2004 was $76,000 as compared to
$351,000 for 2003. This reduction was due primarily to lower borrowing levels
and, to a lesser extent, lower interest rates.
We provided for income taxes of $94,000 for the year ended June 30, 2004, as
compared to $2,170,000 for the similar period in 2003. This decrease was
primarily the result of lower income.
We recorded net income from continuing operations for the year ended June 30,
2004 of $128,000 as compared to $3,431,000 for the same period in 2003. This
decrease was due to lower sales and gross margins as well as higher selling,
general and administrative expenses, partially offset by lower net interest
costs and a smaller provision for income taxes in the current year.
13
FISCAL 2003 COMPARED TO FISCAL 2002
- -----------------------------------
Results of Continuing Operations
Net sales for the year ended June 30, 2003 were $64,916,000 as compared to
$54,359,000 in the comparable period in 2002. The increase in sales was due
primarily to an increase in orders from the Company's primary customer (which
alone accounted for 89% of the overall increase and which represented a 53%
increase in orders from that customer in the prior year) and an overall net
increase in orders with the remaining customer base (with some customers placing
larger orders and others placing smaller orders).
The gross profit percentage was 31.7% for the year ended June 30, 2003 as
compared to 28.0% for the year ended June 30, 2002. The higher margins resulted
primarily from the addition of the Dominican Republic as a new source for
contract labor (which resulted in reduced labor costs), greater efficiencies in
the overall production cycle and improved customer compliance (which reduced
customer deductions).
As a result of differences between the accounting policies of companies in the
industry relating to whether certain items of expense are included in cost of
sales rather than recorded as selling expenses, the reported gross profits of
different companies, including the Company's, may not be directly compared. For
example, the Company records the costs of preparing merchandise for sale,
including warehousing costs and shipping and handling costs, as a selling
expense, rather than a cost of sale. Therefore, the Company's gross profit is
higher than it would be if such costs were included in costs of sales.
Selling, general and administrative expenses were $14,623,000, or 22.5% of net
sales, for the year ended June 30, 2003 as compared to $13,689,000, or 25.2% of
net sales, for the similar period in 2002. This increase of $934,000 resulted
primarily from increases in salary expense and salary related costs of $713,000
(both from increased compensation resulting from bonuses paid to employees and
an increased number of personnel), merchandising, design and sample expenses of
$184,000 (resulting primarily from the addition of knitwear to the product line)
and a $200,000 overall net increase in general overhead expenses, partially
offset by a decrease in bad debt expense of $162,000.
Operating income from continuing operations increased to $5,948,000 for the year
ended June 30, 2003, from $1,513,000 for the similar period in 2002. This
increase was due to higher sales and gross margins partially offset by higher
selling, general and administrative expenses as discussed above.
Interest income for the year ended June 30, 2003 was $4,000 as compared to
$3,000 for 2002.
Interest expense for the year ended June 30, 2003 was $351,000 as compared to
$695,000 for 2002. This reduction was due to lower borrowing levels as a result
of increased cash flow from the Company's operations and lower interest rates.
We provided for income taxes of $2,170,000 for the year ended June 30, 2003, as
compared to $360,000 for the similar period in 2002. This increase was primarily
the result of higher income.
We recorded net income from continuing operations for the year ended June 30,
2003 of $3,431,000 as compared to $461,000 for the same period in 2002. This
increase was due to higher sales and gross margins and lower interest costs
partially offset by higher selling, general and administrative expenses and a
larger provision for income taxes in the current year.
Results of Discontinued Operations
In December 2000, we decided to dispose of the majority of the assets of its
retail division. Accordingly, the operating results of this division are
classified as discontinued operations.
There was no activity for the year ended June 30, 2003 as compared to income
from discontinued operations of $86,000, net of income taxes for the similar
period in 2002. The income in fiscal 2002 relates to the sale of certain assets
that were fully depreciated.
14
Net Income
We had net income of $3,431,000 for the year ended June 30, 2003 as compared to
$547,000 for the similar period in 2002. This increase was due to higher sales
and gross margins and lower interest costs partially offset by higher selling,
general and administrative expenses and a larger provision for income taxes in
the current year, partially offset by income from discontinued operations in the
prior year.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
- --------------------------------------------------
To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided as of June 30, 2004 (in thousands):
Payments Due by Period
---------------------------------------------------
Within After 5
Total 1 Year 2-3 Years 4-5 Years Years
--------- ----------- ------------- ----------- ---------
Contractual Obligations
Licensing Agreement 420 40 285 95 -
Operating Leases 7,788 1,220 2,366 2,360 1,842
Consulting Agreements 821 350 471 - -
Employment Contract 1,650 525 1,125 - -
------- ------ ------ ------ ------
Total Contractual Obligations $10,679 $2,135 $4,247 $2,455 $1,842
======= ====== ====== ====== ======
Amount of Commitment Expiration Per Period
------------------------------------------
Total
Amounts Within After 5
Committed 1 Year 2-3 Years 4-5 Years Years
--------- ------- --------- --------- --------
Other Commercial Commitments
Letters of Credit $ 9,485 $9,485 $ - $ - $ -
------- ------ ---- ---- ----
Total Commercial Commitments $ 9,485 $9,485 $ - $ - $ -
======= ====== ==== ==== ====
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
We have not created, and are not party to, any special-purpose or off-balance
sheet entities for the purpose of raising capital, incurring debt or operating
our business. We do not have any arrangements or relationships with entities
that are not consolidated into our financial statements that are reasonably
likely to materially affect our liquidity or the availability of capital
resources.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the year ended June 30, 2004, working capital increased by $564,000 to
$16,543,000, primarily from profitable operations.
During the fiscal year ended June 30, 2004, cash increased by $2,308,000. The
Company used cash of $2,277,000 for the net reduction of its short-term
borrowings, $27,000 for the payment of capital lease obligations and $209,000
for the purchase of fixed assets. These activities were funded by cash generated
from operating activities of $4,688,000 and the exercise of employee stock
options of $133,000.
Receivables, net of allowances, at June 30, 2004 decreased by $1,415,000 to
$7,577,000 from $8,992,000 at June 30, 2003. This decrease is due to lower sales
in the fourth quarter of 2004 as compared to the prior year.
Inventory at June 30, 2004 decreased by $4,454,000 to $5,938,000 from
$10,392,000 at June 30, 2003. The decrease is primarily due to a decrease in
finished goods. The decrease in finished goods is the result of producing a
greater amount of goods specifically for customer orders, the quicker reduction
of closeout goods and the timing of receipts as compared to the prior year.
Effective July 1, 2004, we obtained a new revolving line of credit of up to
$24,000,000. The revolving line of credit expires June 30, 2005 and is
sufficient for the Company's projected needs for operating capital and letters
of credit to fund the purchase of imported goods through July 1, 2005. Direct
borrowings under this line bear interest at the prime rate less three quarters
of one percent per annum. Availability under the line of credit is subject to
the
15
Company's compliance with certain agreed upon financial formulas. We were in
compliance with our prior lender at June 30, 2004 and the Company would have
been in compliance with its current line if it were in effect at June 30, 2004.
Under the terms of this financing, the Company has agreed to pledge
substantially all of our assets, except the Company's real property.
We believe the available borrowing under its secured revolving line of credit,
along with anticipated internally generated funds, will be sufficient to cover
its working capital requirements through July 1, 2005.
We anticipate that capital expenditures for fiscal 2005 will be less than
$500,000.
EFFECT OF NEW ACCOUNTING STANDARDS
- ----------------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires that a variable interest entity be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements apply to the first
fiscal year or interim period ending after March 31, 2004. The adoption of FIN
46 does not have a material effect on the results of operations or financial
position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This statement is effective for contracts entered into or modified
after June 30, 2003, except as for provisions that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, which should continue to be applied in accordance with
their respective dates. The adoption of this pronouncement does not have a
material effect on the results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
requires that certain financial instruments that, under previous guidance,
issuers could account for as equity, be classified as liabilities in statements
of financial position. Most of the guidance in SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of this pronouncement does not have a material effect on
the results of operations or financial position.
INFLATION
- ---------
The Company does not believe that its operating results have been materially
affected by inflation during the preceding three years. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to changes in the prime rate based on the Federal Reserve
actions and general market interest fluctuations. The Company believes that
moderate interest rate increases will not have a material adverse impact on its
results of operations, or financial position, in the foreseeable future. For the
fiscal year ended June 30, 2004, borrowings peaked during the year at $5,021,000
and the average amount of borrowings was $1,275,000.
IMPORTS
- -------
The Company's transactions with its foreign manufacturers and suppliers
are subject to the risks of doing business abroad. The Company's import and
offshore operations are subject to constraints imposed by agreements between the
United States and a number of foreign countries in which the Company does
business. These agreements impose quotas on the amount and type of goods that
can be imported into the United States from these countries. Such agreements
also allow the United States to impose, at any time, restraints on the
importation of categories of merchandise that, under the terms of the
agreements, are not subject to specified limits. The Company's imported products
are also subject to United States customs duties and, in the ordinary course of
business, the Company is from time to time subject to claims by the United
States Customs Service for duties and other charges. The United States
16
and other countries in which the Company's products are manufactured may, from
time to time, impose new quotas, duties, tariffs or other restrictions, or
adversely adjust presently prevailing quotas, duty or tariff levels, which could
adversely affect the Company's operations and its ability to continue to import
products at current or increased levels. The Company cannot predict the
likelihood or frequency of any such events occurring.
17
ITEM 8. FINANCIAL STATEMENTS.
PAGE
INDEX TO CONSOLIDATED STATEMENTS AND SUPPLEMENTARY DATA
Reports of Independent Registered Public Accounting Firms F-1 - F-2
Consolidated Balance Sheets at June 30, 2004 and 2003 F-3
Consolidated Statements of Income for the fiscal
Years ended June 30, 2004, 2003 and 2002 F-4
Consolidated Statements of Shareholders' Equity for
the fiscal years ended June 30, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the
Fiscal years ended June 30, 2004, 2003 and 2002 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-20
SCHEDULE
For the fiscal years ended June 30, 2004, 2003 and 2002:
II - Valuation and Qualifying Accounts S-1
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Movie Star, Inc.:
We have audited the accompanying consolidated balance sheets of Movie Star, Inc.
and subsidiary as of June 30, 2004 and 2003, and the related consolidated
statements of income, shareholders' equity and cash flows for the years then
ended. Our audits also included the financial statement schedule listed in the
index at Item 15(a)(2) for the years ended June 30, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Movie Star, Inc.
and subsidiary as of June 30, 2004 and 2003, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
August 9, 2004
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Movie Star, Inc.:
We have audited the accompanying statements of income, shareholders' equity and
cash flows of Movie Star, Inc. for the year ended June 30, 2002. Our audit also
included the financial statement schedule listed in the index at Item 15(a)(2)
for the year ended June 30, 2002. 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 audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Movie Star, Inc. for the
year ended June 30, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 20, 2002
F-2
MOVIE STAR, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
- ------------------------------------------------------------------------------------------------------------------------
ASSETS 2004 2003
CURRENT ASSETS:
Cash $2,527 $ 219
Receivables, net 7,577 8,992
Inventory 5,938 10,392
Deferred income taxes 2,571 2,511
Prepaid expenses and other current assets 588 365
------- -------
Total current assets 19,201 22,479
PROPERTY, PLANT AND EQUIPMENT - Net 1,021 1,153
DEFERRED INCOME TAXES 148 50
OTHER ASSETS 409 407
------- -------
TOTAL ASSETS $20,779 $24,089
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ - $2,277
Current maturities of capital lease obligations - 27
Accounts payable 1,937 2,888
Accrued expenses and other current liabilities 721 1,308
------- -------
Total current liabilities 2,658 6,500
------- -------
DEFERRED LEASE LIABILITY 283 224
------- -------
OTHER LONG-TERM LIABILITY 91 101
------- -------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value - authorized, 30,000,000 shares;
issued 17,617,000 shares in 2004 and 17,412,000 shares in 2003 176 174
Additional paid-in capital 4,706 4,353
Retained earnings 16,483 16,355
------- -------
21,365 20,882
Less treasury stock, at cost - 2,017,000 shares 3,618 3,618
------- -------
Total shareholders' equity 17,747 17,264
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,779 $24,089
======= =======
See notes to consolidated financial statements.
F-3
MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
Net sales $53,691 $64,916 $54,359
Cost of sales 37,581 44,345 39,157
------- ------- -------
Gross profit 16,110 20,571 15,202
Operating Expenses:
Selling, general and administrative expenses 15,824 14.623 13,689
------- ------- -------
Operating income from continuing operations 286 5,948 1,513
Interest income (12) (4) (3)
Interest expense 76 351 695
------- ------- -------
Income from continuing operations before income taxes 222 5,601 821
Income taxes 94 2,170 360
------- ------- -------
Income from continuing operations 128 3,431 461
Discontinued operations:
Gain on disposal of discontinued retail stores, including provision for
operating losses during phase-out period, net of income taxes
- - 86
------- ------- -------
Net income $ 128 $ 3,431 $ 547
======= ======= =======
BASIC NET INCOME PER SHARE:
From continuing operations $.01 $.23 $.03
From discontinued operations - - .01
---- ---- ----
Net income per share $.01 $.23 $.04
==== ==== ====
DILUTED NET INCOME PER SHARE:
From continuing operations $.01 $.22 $.03
From discontinued operations - - .01
---- ---- ----
Net income per share $.01 $.22 $.04
==== ==== ====
Basic weighted average number of shares outstanding 15,574 15,133 15,085
======= ======= ======
Diluted weighted average number of shares outstanding 16,199 15,407 15,112
======= ======= ======
See notes to consolidated financial statements.
F-4
MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN RETAINED TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
BALANCE, JUNE 30, 2001 16,954 $ 170 $4,092 $ 12,377 2,017 $(3,618) $13,021
Net income - - - 547 - - 547
Conversion of long-term debt
for common stock 148 1 55 - - - 56
------ ----- ------ -------- ----- ------- -------
BALANCE, JUNE 30, 2002 17,102 171 4,147 12,924 2,017 (3,618) 13,624
Net income - - - 3,431 - - 3,431
Exercise of stock options 310 3 206 - - - 209
------ ----- ------ -------- ----- ------- -------
BALANCE, JUNE 30, 2003 17,412 174 4,353 16,355 2,017 (3,618) 17,264
Net income - - - 128 - - 128
Exercise of stock options 205 2 131 - - - 133
Tax benefit from exercise of
stock options - - 222 - - - 222
------ ----- ------ -------- ----- ------- -------
BALANCE, JUNE 30, 2004 17,617 $176 $4,706 $16,483 2,017 $(3,618) $17,747
====== ==== ====== ======= ===== ======= =======
See notes to consolidated financial statements.
F-5
MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003, AND 2002
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 128 $3,431 $ 547
Adjustments to reconcile net income to net cash
provided by continuing operating activities
Depreciation and amortization 410 403 356
Provision for sales allowances and doubtful accounts 316 69 (67)
Deferred income taxes 64 1,943 411
Deferred lease liability 59 84 110
Gain on discontinued operations - - (86)
Loss on disposal of property, plant and equipment - 19 -
(Increase) decrease in operating assets:
Receivables 1,099 (2,060) 925
Inventory 4,454 (1,595) 3,150
Prepaid expenses and other current assets (223) (163) 116
Other assets (71) (114) (75)
Increase (decrease) in operating liabilities:
Accounts payable (951) (467) 503
Accrued expenses and other liabilities (597) 321 (288)
------ ----- -----
Net cash provided by operating activities 4,688 1,871 5,602
------ ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (209) (181) (205)
Proceeds from sale of property, plant and equipment - - 737
------ ----- -----
Net cash (used in) provided by investing activities (209) (181) 532
------ ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments and purchases of long-term debt and
capital lease obligations (27) (43) (6,537)
Net (repayment) proceeds from revolving line of credit (2,277) (1,852) 395
Proceeds from exercise of employee stock options 133 209 -
------ ----- -----
Net cash used in financing activities (2,171) (1,686) (6,142)
------ ----- -----
Net cash used in discontinued operations - - (38)
------ ----- -----
NET INCREASE (DECREASE) IN CASH 2,308 4 (46)
CASH, BEGINNING OF YEAR 219 215 261
------ ----- -----
CASH, END OF YEAR $2,527 $ 219 $ 215
====== ====== =====
(Continued)
F-6
MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003, AND 2002
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------
2004 2003 2002
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during period for:
Interest $ 76 $ 358 $ 863
====== ======= =====
Income taxes (net of refunds received) $ 343 $ 43 $ (51)
====== ====== =====
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Conversion of long-term debt for common stock $ - $ - $ 56
====== ====== =====
Tax benefit from exercise of employee stock options $ 222 $ - $ -
====== ====== =====
(Concluded)
See notes to consolidated financial statements.
F-7
MOVIE STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Movie Star, Inc. is a New York corporation organized in 1935,
which designs, manufactures, markets and sells an extensive line of
ladies' sleepwear, robes, leisurewear, loungewear, panties and daywear.
In May 2004, Movie Star, Inc. formed a wholly-owned subsidiary, Cinejour
Lingerie, Inc., in Montreal, Canada which will market and sell Movie
Star's products throughout Canada beginning in fiscal 2005.
Principles of Consolidation - The consolidated financial statements
include the accounts of Movie Star, Inc. and its wholly-owned
subsidiary, Cinejour Lingerie, Inc. (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated
in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America also requires management to make estimates and
assumptions that affect the disclosures of contingent assets and
liabilities at the date of the financial statements. Significant
estimates include provision for inventory obsolescence, deferred tax
assets, allowances for doubtful accounts and sales discounts. Actual
results could differ from those estimates.
Allowances for Doubtful Accounts/Sales Discounts - The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. If the financial
condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances
may be required. The Company also estimates allowances for customer
discounts, orders and incentive offerings. If market conditions were to
decline, the Company may take actions to increase customer incentive
offerings possibly resulting in an incremental allowance at the time the
incentive is offered.
Inventory - Inventory is valued at lower of cost (first-in, first-out)
or market. The Company writes down inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about
future demand and market conditions.
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Depreciation and amortization are provided by the straight-line
method over the following estimated useful lives:
Buildings and improvements 15 - 30 years
Machinery & Equipment 5 years
Office furniture and equipment 3 - 5 years
Leasehold improvements Lesser of life of the asset or life of lease
Impairment of Long-lived Assets - The Company follows Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets, including property and equipment, be reviewed for
F-8
impairment whenever events or changes in circumstances indicate that
their carrying amount may not be recoverable. The Company assesses its
assets for impairment based on the estimated future undiscounted cash
flows expected to result from the use of the asset and records
impairment losses when this amount is less than the carrying amount.
Impairment losses are recorded for the excess of the assets' carrying
amount over their fair value, which is generally determined based on the
estimated future discounted cash flows over the remaining useful life of
the asset using a discount rate determined by management at the date of
the impairment review. Management believes at this time that the
carrying value and useful life of long-lived assets continue to be
appropriate.
Deferred Rent - The Company accounts for scheduled rent increases
contained in its leases on a straight-line basis over the non-cancelable
lease term.
Stock Options - Pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," the Company accounts for
stock-based employee compensation arrangements using the intrinsic value
method. Accordingly, no compensation expense has been recorded in the
financial statements with respect to option grants. The Company has
adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of
SFAS No. 123."
Had the Company elected to recognize compensation expense for
stock-based compensation using the fair value method net income, basic
net income per common share and net income per diluted common share
would have been as follows:
YEARS ENDED JUNE 30,
2004 2003 2002
Net Income, as reported $128 $3,431 $547
Add (deduct) net stock-based employee forfeitures (cost),
net of taxes (15) 146 (68)
---- ------ ----
Pro forma net income $113 $3,577 $479
==== ====== ====
Basic net income per share, as reported $.01 $.23 $.04
Add (deduct) net stock-based employee forfeitures (cost)
per share - .01 (.01)
---- ---- ----
Pro forma basic net income per share $.01 $.24 $.03
==== ==== =====
Diluted net income per share, as reported $.01 $.22 $.04
Add (deduct) net stock-based employee forfeitures (cost)
per share - .01 (.01)
---- ---- ----
Pro forma diluted net income per share $.01 $.23 $.03
==== ==== =====
The fair value of each option-pricing model was calculated with the
following weighted-average assumptions used for grants in 2003 and 2002,
respectively; risk-free interest rate 4.0%; expected life 7 years;
expected volatility of 69.99% and 69.22%. The fair values generated by
the Black-Scholes model may not be indicative of the future benefit, if
any, that may be received by the option holder.
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. Sales returns,
discounts and allowances are recorded as a component of net sales in the
period in which the related sales are recognized. The customer takes
title and assumes the risks and rewards of ownership of the products
when
F-9
the merchandise leaves the Company's warehouse. The Company expenses
the costs of advertising to customers under cooperative advertising as
a reduction of revenue and component of net sales. Cooperative
advertising amounted to $160,000, $176,000 and $276,000 for the years
ended June 30, 2004, 2003 and 2002, respectively.
Cost of Sales and Selling Costs - Cost of sales includes the expenses
incurred to acquire and produce inventory for sale, including product
costs, freight-in, inspection costs, labor associated with quality
repairs, internal transfer costs, purchasing and receiving costs, and
travel and entertainment related to product sourcing."
Selling costs include the costs of selling the merchandise, including
preparing the merchandise for sale, picking and packing costs, and
shipping and handling costs, such as warehousing, freight-out and other
direct costs to deliver inventory to customers. Shipping and handling
costs aggregated approximately $1,869,000 in 2004, $1,917,000 in 2003
and $1,984,000 in 2002. In addition, selling costs include the costs for
apparel design and development activities, including sample designs and
patterns. The Company expenses these costs as incurred. Selling costs
are a component of selling, general and administrative expenses.
Income Taxes - The Company follows SFAS No. 109, "Accounting for Income
Taxes."
Deferred tax valuation allowance - In assessing the need for a deferred
tax valuation allowance, the Company considers future taxable income and
ongoing prudent and feasible tax planning strategies. Since the Company
was able to determine that it should be able to realize its deferred tax
assets in the future, in excess of its recorded amount, a deferred tax
valuation allowance was not deemed necessary. Likewise, should the
Company determine that it would not be able to realize all or part of
our net deferred tax asset in the future, an adjustment to the deferred
tax asset would be charged to income in the period such determination
was made.
Net Income Per Share - Basic income per share is computed by dividing
net income by the weighted average number of common shares outstanding
for the period. Diluted income per share also includes the dilutive
effect of potential common shares outstanding during the period.
EFFECT OF NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"). FIN 46 requires that a variable interest entity
be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or
both. The consolidation requirements apply to the first fiscal year or
interim period ending after March 31, 2004. The adoption of FIN 46
does not have a material effect on the results of operations or
financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities." This
statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities under SFAS No. 133. This statement is
effective for contracts entered into or modified after June 30, 2003,
except as for provisions that relate to SFAS No. 133 implementation
issues that have been effective for fiscal quarters that began prior
to June 15, 2003, which should continue to be applied in accordance
with their respective dates. The adoption of this pronouncement does
not have a material effect on the results of operations or financial
position.
F-10
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This statement requires that certain financial instruments
that, under previous guidance, issuers could account for as equity, be
classified as liabilities in statements of financial position. Most of
the guidance in SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this pronouncement does not have a
material effect on the results of operations or financial position.
2. INVENTORY
Inventory consists of the following:
JUNE 30,
2004 2003
(IN THOUSANDS)
Raw materials $1,166 $1,470
Work-in process 323 655
Finished goods 4,449 8,267
------ -------
$5,938 $10,392
====== =======
3. RECEIVABLES
Receivables are comprised of the following:
JUNE 30,
2004 2003
(IN THOUSANDS)
Trade $ 9,272 $10,377
Other 10 5
------- -------
9,282 10,382
Less allowance for doubtful accounts and sales discounts (1,705) (1,390)
------- -------
$ 7,577 $ 8,992
======= =======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JUNE 30,
2004 2003
(IN THOUSANDS)
Land, buildings and improvements $ 1,951 $ 1,891
Machinery and equipment 527 466
Office furniture and equipment 1,036 955
Leasehold improvements 265 264
------- -------
3,779 3,576
Less accumulated depreciation and amortization (2,758) (2,423)
------- -------
$ 1,021 $ 1,153
======= =======
F-11
In fiscal 2002, the Company sold its two non-operating facilities
located in Virginia and a retail store from discontinued operations
for $729,000 and $52,000, respectively.
Depreciation expense of $340,000, $359,000 and $336,000 was recorded in
fiscal 2004, 2003 and 2002, respectively.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
JUNE 30,
2004 2003
(IN THOUSANDS)
Insurance $ 170 $ 335
Salary, commissions and employee benefits 380 655
Other 171 318
----- ------
$ 721 $1,308
===== ======
6. NOTE PAYABLE
The Company amended and restated its credit agreement (the "Amended
Credit Agreement"), effective June 30, 2001. The Amended Credit
Agreement matured on July 1, 2004 (see below). Under the agreement, the
Company could borrow, in the aggregate, revolving loans and letters of
credit, up to $30,000,000. Availability under the line of credit was
subject to the Company's compliance based on financial formulas as
outlined in the agreement. As of June 30, 2004 and 2003, the Company was
in compliance with respect to the various financial and other covenants
of the agreement. Pursuant to the terms of the agreement, the Company
had pledged substantially all of its assets, except the Company's real
property. Interest on outstanding borrowings was payable at the prime
rate, but not less than 4.25 percent per annum.
For the fiscal year ended June 30, 2004, under the credit agreement, the
borrowings peaked at $5,021,000 and the average amount of borrowings was
$1,275,000, with the weighted average interest rate of 4.25 percent. For
the fiscal year ended June 30, 2003, under the credit agreement, the
borrowings peaked at $10,055,000 and the average amount of borrowings
was $6,352,000, with the weighted average interest rate of 4.84 percent.
At June 30, 2004, the Company had no borrowings outstanding under this
line of credit and had approximately $9,485,000 of outstanding letters
of credit.
At June 30, 2003, the Company had borrowings of $2,277,000 outstanding
under this line of credit at an interest rate of 4.25 percent and also
had approximately $6,165,000 of outstanding letters of credit.
Effective July 1, 2004, the Company secured a line of credit with
another financial institution. This line of credit matures on June 30,
2005. Under this line of credit, the Company may borrow in the
aggregate, revolving loans and letters of credit, up to $24,000,000.
Availability under this line of credit is subject to the Company's
compliance with certain financial formulas as outlined in the agreement.
Pursuant to the terms of this line of credit, the Company pledged
substantially all of its assets, except the Company's real property.
F-12
Interest on outstanding borrowings is payable at a variable rate per
annum equal to the prime rate less .75 percent (3.5 percent as of July
1, 2004).
7. LONG-TERM DEBT
At June 30, 2003, long-term debt consisted entirely of capitalized lease
obligations due within the year.
12.875% Subordinated Debentures - In fiscal 2002, the Company paid the
remaining balance on its 12.875% Subordinated Debentures of $4,180,000
one-month early utilizing its Amended Credit Agreement.
8% Senior Notes - In fiscal 2002, holders of $55,500 in principal amount
of the 8% Convertible Senior Notes converted their Notes into
approximately 148,000 shares of the Company's common stock and the
Company paid the remaining balance on the Notes of $2,284,000 at
maturity utilizing its Amended Credit Agreement.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company, using available
market information and appropriate valuation methodologies.
Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and Other
Current Liabilities - The carrying value of these items approximates
fair value, based on the short-term maturities of these instruments.
Note Payable, Capital Lease Obligations and Other Long-term Liabilities
- The fair value of these securities are estimated based on quoted
market prices. If no market quotes are available, interest rates that
are currently available to the Company for issuance of the debt with
similar terms and remaining maturities are used to estimate fair value
of debt issues. The carrying value approximates the fair value.
The fair value estimates are based on pertinent information available to
management as of June 30, 2004 and 2003. Although management is not
aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since those respective dates, and
current estimates of fair value may differ significantly from the
amounts presented herein. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize
in a current market exchange.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss carry forwards.
F-13
The income tax effects of significant items, comprising the Company's
net deferred tax assets and liabilities, are as follows:
JUNE 30,
2004 2003
(IN THOUSANDS)
Deferred tax liabilities:
Differences between book and tax basis of property,
plant and equipment $ - $ 40
------ ------
Deferred tax assets:
Difference between book and tax basis of inventory 544 880
Reserves not currently deductible 832 730
Operating loss carry forwards 1,083 888
Other 260 103
------ ------
2,719 2,601
------ ------
Net deferred tax asset $2,719 $2,561
====== ======
The provision for (benefit from) income taxes on continuing
operations is comprised as follows:
YEARS ENDED JUNE 30,
2004 2003 2002
(IN THOUSANDS)
Current:
Federal $(12) $ 126 $ (15)
State and local 42 101 22
---- ------ -----
30 227 7
---- ------ -----
Deferred
Federal 54 1,652 300
State and local 10 291 53
---- ------ -----
64 1,943 353
---- ------ -----
$94 $2,170 $360
=== ====== ====
A tax provision of $58,000 was allocated to discontinued operations for
the year ended June 30, 2002.
Reconciliation of the U.S. statutory rate with the Company's effective
tax rate is summarized as follows:
YEARS ENDED JUNE 30,
2004 2003 2002
(IN THOUSANDS)
Federal statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
State income taxes (net of federal tax benefits) 17.6 4.6 6.4
Other (9.3) .1 2.2
---- ----- ----
Effective rate 42.3% 38.7% 42.6%
==== ==== ====
As of June 30, 2004, the Company has net operating loss carry forwards
of approximately $2,707,000 for federal income tax purposes that expire
between the years 2011 and 2024 and credit carry forwards of
approximately $216,000.
F-14
10. COMMITMENTS AND CONTINGENCIES
Operating Leases --The Company has operating leases expiring in various
years through fiscal 2011.
Future minimum payments under these leases at June 30, 2004 are as
follows (in thousands):
FISCAL YEAR AMOUNT
2005 $ 1,220
2006 1,211
2007 1,155
2008 1,167
2009 1,193
Thereafter 1,842
-------
$ 7,788
=======
Rental expense for 2004, 2003 and 2002 was approximately $1,255,000,
$1,240,000 and $1,210,000, respectively.
Employment Agreement - In January 2003, the Company and Mr. Knigin, the
Company's CEO and President, finalized their negotiations regarding an
extension of Mr. Knigin's employment agreement, which was to expire on
June 30, 2004. Under the terms of the extended agreement, Mr. Knigin is
to receive total base compensation of $2,625,000 over the five-year term
of the agreement, effective as of July 1, 2002 and continuing through
June 30, 2007. As of June 30, 2004, the remaining financial liability of
this agreement is $1,650,000. Mr. Knigin may also be entitled to certain
severance payments at the conclusion of the term of his agreement,
provided the Company attains specified financial performance goals. The
severance obligations of the Company, if any, will be reduced by the
lump sum payment paid to Mr. Knigin in connection with the sale, by the
David family, of its shares of the Company's common stock, as discussed
below.
On January 28, 2003, Mr. Knigin voluntarily surrendered and forfeited
his options to purchase 1,000,000 shares of the Company's common stock,
par value $.01 and relinquished any further rights he may have had under
the existing option agreements, which have now been terminated.
On February 10, 2004, Mark M. David, the Company's then Chairman, and
members of his family, entered into an agreement to sell all of their
shares of common stock of the Company, an aggregate of 3,532,644 shares,
or approximately 22.7% of the total shares outstanding, to TTG Apparel,
LLC, for a purchase price of $1.70 per share. At the request of the
purchaser, the purchase of the shares was approved by the Company's
Board of Directors. Upon the closing of the transaction, Mark M. David
and Gary W. Krat resigned from the Company's Board of Directors. This
transaction closed on February 17, 2004. This transaction activated a
provision under the Company's employment agreement with Mr. Knigin,
which required the Company to make a lump sum payment to Mr. Knigin. As
a result, a special charge of approximately $1,084,000 was recorded in
the third quarter of fiscal 2004. Under the terms of the agreement with
Mr. Knigin, the payment is to be applied against any severance
obligations of the Company owed to Mr. Knigin under his employment
contract, which, in accordance with its terms, expires on June 30, 2007.
The payment was made on April 8, 2004.
Consulting Agreements - As of January 1, 2003, the Company and Mark M.
David, the Company's then Chairman of the Board, have renegotiated Mr.
David's consulting agreement with the Company that was to expire on June
30, 2004. The new agreement is with Mr. David's consulting firm. Under
the terms of the new agreement, Mr. David's consulting firm will provide
the consulting services of Mr. David and will receive annual consulting
fees of $225,000 through June 30, 2007.
F-15
As of May 3, 2004, the Company and LLI, Inc. ("LLI"), a corporation
organized under the law of the Province of Quebec, Canada, entered into
a consulting agreement whereby LLI will provide the sales representation
for the Company in Canada and supervise the operations of the Company's
office in Montreal. The agreement expires on August 31, 2005 and will be
automatically renewed in one year increments provided that LLI meets
certain net sales, as defined in the agreement. LLI will receive annual
consulting fees of $125,000 through August 31, 2005, plus additional
consulting fees for sales in excess of targets, as defined in the
agreement.
Licensing Agreement - In February 2004, the Company entered into a
licensing agreement with Maidenform Inc. Pursuant to the agreement, the
Company is obligated to pay licensing fees, based upon a percentage of
net sales, subject to an annual minimum guaranteed royalty. Future
minimum guaranteed royalty payments under the non-cancelable agreement
as of June 30, 2004 are as follows (in thousands):
FISCAL YEAR AMOUNT
2005 $ 40
2006 115
2007 170
2008 95
-----
$ 420
=====
Guarantees - The Company has not provided any financial guarantees as of
June 30, 2004.
11. RELATED PARTY
Upon the retirement of its then Chief Executive Officer, Mark M. David,
in July 1999, the Company entered into an agreement, expiring in October
2011, to provide for future medical benefits. As of June 30, 2004 and
2003, the current portion, included in "Accrued expenses and other
current liabilities," amounted to $13,000 and $12,000, respectively and
the long-term portion, classified as "Other long-term liability,"
amounted to $91,000 and $101,000, respectively.
12. 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 primarily located throughout the
United States and are not concentrated in any specific geographic region
but are concentrated in the retail industry. One customer accounted for
38%, 42% and 32% of the Company's net sales in fiscal 2004, 2003, and
2002, respectively. Another customer accounted for 10%, 10% and 13% of
the Company's net sales in fiscal 2004, 2003 and 2002, 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.
13. STOCK PLANS, OPTIONS AND WARRANT
Stock Options - On December 8, 1994, the Company's shareholders approved
a new Incentive Stock Option Plan (the "1994 ISOP") to replace the 1983
ISOP. Options granted, pursuant to the plan, are not subject to a
uniform vesting schedule. The plan permits the issuance of options to
employees to purchase common stock of the Company at a price not less
than fair market value on the date of the option grant. The plan
reserves 2,000,000 shares of common stock for grant and provides that
the term of each award be determined by the Compensation Committee with
all awards made within the ten-year period following the effective date.
Options to purchase 640,000 shares at an exercise price ranging from
$.625 to $1.125 per share are outstanding at June 30, 2004. Of the total
options granted, 628,000 are presently exercisable. Options to
F-16
purchase 535,000 shares have been exercised under this plan through
June 30, 2004. Effective July 15, 2004, options can no longer be
granted under the 1994 ISOP.
On February 21, 2000, the Committee adopted a new Performance Equity
Plan (including a new Incentive Stock Option Plan) (the "2000 Plan") and
on November 28, 2000, the Company's shareholders approved the plan. The
2000 Plan authorizes the Company to grant qualified and non-qualified
options to participants for the purchase of up to an additional 750,000
shares of the Company's common stock and to grant other stock-based
awards to eligible employees of the Company. Options to purchase 290,000
shares at an exercise price ranging from $.625 to $1.0625 per share are
outstanding at June 30, 2004. Of the total options granted, 242,000 are
presently exercisable.
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 75,000 shares at an exercise price of $.625 per
share are outstanding and exercisable at June 30, 2004.
The options typically vest over five years.
Information with respect to stock options is as follows (shares in
thousands):
2004 2003 2002
------------------------ ----------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding - beginning of year 1,210 $.70 2,420 $. 68 2,560 $.69
Granted - - 100 .54 100 .50
Exercised (205) .65 (310) .67 - -
Canceled - - (1,000) .65 (240) .78
----- ----- ------ ----- ----- ----
Outstanding - end of year 1,005 $.71 1,210 $.70 2,420 $.68
===== ===== ===== ===== ===== ====
Exercisable - end of year 945 $.71 1,043 $.69 1,866 $.68
===== ===== ===== ===== ===== ====
Weighted-average fair value of
options granted during the year $ - $.28 $.22
=== ==== ====
The following table summarizes information about the Company's stock
options outstanding at June 30, 2004 (options in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------ ------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED- WEIGHTED-
RANGE OF OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES JUNE 30, 2004 LIFE IN YRS EXERCISE PRICE JUNE 30, 2003 EXERCISE PRICE
--------------- ----------------- ------------- -------------- ----------------- --------------
$.625 - $.6875 785 3.64 $.63 745 $.63
$.875 - $1.125 220 5.08 .98 200 .99
----- ---- ---- --- ----
1,005 3.95 $.71 945 $.71
===== ==== ==== === ====
F-17
Warrant - In October 1998, in connection with an agreement with a
financial consulting firm, the Company granted a warrant to purchase
50,000 shares of its common stock at $.4375 per share to the
consultants. The warrant is exercisable at anytime within ninety days
following written notice from the Company of the Company's intention to
file a Registration Statement other than on Form S-4 and S-8, under the
Securities Act of 1933, as amended.
In 1983, the Company adopted an Employee Stock Ownership and Capital
Accumulation Plan (the "Plan"). The Plan covers the Company's
employees who meet the minimum credited service requirements of the
Plan. The Plan is funded solely from employer contributions and income
from investments. The Company has made no contributions to the Plan
since July 1996 and at that time all employees became 100% vested in
their shares. Upon an employee's termination, or in certain other
limited circumstances, the employee's shares are distributed to the
employee according to his or her direction and the applicable Plan
rules. As of June 30, 2004 and 2003, the Plan owned 459,091 and
525,467 shares of common stock of the Company, respectively. The
amount of shares eligible for distribution at June 30, 2004 and 2003
were 193,089 and 244,618, respectively.
14. NET INCOME PER SHARE
The Company's calculation of Basic and Diluted Net Income Per Share are
as follows (in thousands, except per share amounts):
YEARS ENDED JUNE 30,
2004 2003 2002
(IN THOUSANDS, EXCEPT PER SHARE)
BASIC:
Income from continuing operations $ 128 $3,431 $ 461
Income from discontinued operations - - 86
------ ------ -----
Net income $ 128 $3,431 $ 547
====== ====== ======
Weighted average number of shares outstanding 15,574 15,133 15,085
====== ====== ======
Basic net income per share:
From continuing operations $.01 $.23 $.03
From discontinued operations - - .01
---- ---- ----
Basic net income per share $.01 $.23 $.04
==== ==== ====
DILUTED:
Income from continuing operations $ 128 $ 3,431 $ 461
Income from discontinued operations - - 86
------ ------- ------
Net income $ 128 $ 3,431 $ 547
====== ======= ======
Weighted average number of shares outstanding 15,574 15,133 15,085
Shares Issuable Upon Conversion of Stock Options 588 258 18
Shares Issuable Upon Conversion of Warrants 37 16 9
------ ------ ------
Total average number of equivalent shares outstanding 16,199 15,407 15,112
====== ====== ======
Diluted net income per share:
From continuing operations $.01 $.22 $.03
From discontinued operations - - .01
---- ---- ----
Diluted net income per share $.01 $.22 $.04
==== ==== ====
F-18
15. CLOSING OF DISTRIBUTION FACILITY
In fiscal 2002, the Company sold its distribution facility located in
Lebanon, Virginia for $630,000 and paid all of the remaining exit and
severance costs relating to its closing.
16. DISCONTINUED OPERATIONS
In December 2000, management authorized the shutdown of the retail
segment and ceased all operations in March 2001. Accordingly, the
operating results of this segment, for the year ended June 30, 2002,
have been reclassified as income from discontinued operations.
In fiscal 2002, the Company recorded income on the disposal of its
discontinued operations of $144,000 less income taxes of $58,000. This
related primarily to the sale of a retail store in excess of its
estimated realizable value and the favorable negotiation on its lease
terminations.
17. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
QUARTER
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE)
FISCAL YEAR ENDED JUNE 30, 2004
Net sales $16,826 $14,166 $12,175 $10,524
Gross profit 5,282 4,277 3,831 2,720
Net income (loss) 853 417 (636) (506)
Basic net income (loss) per share (a) .06 .03 (.04) (.03)
Diluted net income (loss) per share (a) .05 .03 (.04) (.03)
FISCAL YEAR ENDED JUNE 30, 2003
Net sales $15,780 $16,689 $16,934 $15,513
Gross profit 4,686 5,263 5,617 5,005
Net income 670 751 961 1,049
Basic net income per share (a) .04 .05 .06 .07
Diluted net income per share (a) .04 .05 .06 .07
(a) Quarterly net income (loss) per share amounts may not add to the
total for the full year amount, due to rounding.
18. ACQUISITION
In expanding the Company's product offerings, as well as diversifying
and broadening its sales distribution, on August 3, 2004, the Company
completed its acquisition of certain assets of Sidney Bernstein & Son
Lingerie, Inc. ("SB&S"), a New York based company engaged in the
design, marketing and sale of women's lingerie and related apparel
accessories, pursuant to an Asset Purchase Agreement, dated as of July
28, 2004.
The acquired assets were purchased for an aggregate price of
$3,387,000 and included, among other assets, $2,873,000 of inventory
and $500,000 of intangible assets. The Company also assumed $3,012,000
of SB&S' open purchase orders and received $7,408,000 of open customer
orders. Pursuant to the Asset Purchase Agreement, the Company also
agreed to pay up to an additional $1,000,000 in the aggregate based
upon certain gross profit levels generated by the Company's
newly-established Sidney Bernstein & Son Division during the next
three fiscal years. In connection with the asset purchase, Daniel
Bernstein and Irwin Bernstein, the two owners of SB&S have joined
F-19
the Company as President and Vice President, respectively, of the new
division. Unaudited pro forma results of operations are not presented
since they are deemed not material.
On August 3, 2004, the Company entered into an employment agreement
with Daniel Bernstein expiring on June 30, 2007. Pursuant to the
agreement, Mr. Bernstein is to receive a base compensation of $350,000
annually plus commission based on formulas, as defined, in the
agreement. Under the terms of the agreement, the Company is to issue
Mr. Bernstein options to purchase 75,000 shares of common stock under
the Company's 2000 Performance Equity Plan in both fiscal 2005 and
2006.
* * * * * *
F-20
SCHEDULE II
MOVIE STAR, INC.
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, 2004:
Allowance for doubtful accounts $ 339 $ - $ (91)(a)
(248)(b) $ -
Allowance for sales discounts and allowances 1,051 5,759 (5,105) 1,705
------ ------ ------- ------
$1,390 $5,759 $(5,444) $1,705
====== ====== ======= ======
FISCAL YEAR ENDED JUNE 30, 2003:
Allowance for doubtful accounts $ 406 $ - $ (26)(a)
(41)(b) $ 339
Allowance for sales discounts and allowances 915 4,698 (4,562) 1,051
------ ------ ------- ------
$1,321 $4,698 $(4,629) $1,390
====== ====== ======= ======
FISCAL YEAR ENDED JUNE 30, 2002:
Allowance for doubtful accounts $ 284 $ 122 $ - $ 406
Allowance for sales discounts and allowances 1,103 3,565 (3,753) 915
------ ------ ------- ------
$1,387 $3,687 $(3,753) $1,321
====== ====== ======= ======
(a) Uncollectible accounts written off.
(b) Reduction in allowance.
S-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the Company's disclosure controls and
procedures as of June 30, 2004 was made under the supervision and with the
participation of the Company's management, including the chief executive officer
and chief financial officer. Based on that evaluation, they concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. During the most recently completed fiscal
quarter, there has been no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
40
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTOR OF THE COMPANY
See Item 14.
ITEM 11. EXECUTIVE COMPENSATION
See Item 14.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 14.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 14
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Items 10, 11, 12, 13 and 14 is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the 2004 Annual Meeting of Shareholders.
41
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included in Part II, Item 8 of this report:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at June 30, 2004 and 2003
Consolidated Statements of Income for the fiscal
Years ended June 30, 2004, 2003 and 2002
Consolidated Statements of Shareholders' Equity for the
fiscal years ended June 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the
Fiscal years ended June 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
2. SCHEDULE
For the fiscal years ended June 30, 2004, 2003 and 2002:
II - Valuation and Qualifying Accounts
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.
3. EXHIBITS
EXHIBIT
NUMBER EXHIBIT METHOD OF FILING
------ ------- ----------------
2.1 Asset Purchase Agreement dated July 28, Incorporated by reference as Exhibit 2.1
2004, among the Company, Sidney to Form 8-K for the quarter ended
Bernstein & Son Lingerie, Inc., Irwin September 30, 2004 and filed on August 6,
Bernstein and Daniel Bernstein. 2004
3.1 Certificate of Incorporation Incorporated by reference as Exhibit 3.1
to Form 10-K for fiscal year ended June
30, 1988 and filed on October 13, 1988.
3.2 Amended Certificate of Incorporated by reference as
Incorporation Exhibit 3.1.1 to Form 10-K for fiscal
year ended June 30, 1992
and filed on September 25,
1992.
3.3 Amended Certificate of Incorporated by reference as Exhibit
Incorporation 3.1.2 to Form 8 Amendment to Form 10-K
for fiscal year ended June 30, 1992 and
filed on January 19, 1993.
42
EXHIBIT
NUMBER EXHIBIT METHOD OF FILING
------ ------- ----------------
3.4 By-Laws Incorporated by reference as Exhibit 3.2
to Form 10-K for fiscal year ended June 30,
1988 and filed on October 13, 1988.
10.1 1994 Incentive Stock Option Incorporated by reference as Exhibit
Plan. 10.3.1 to Form 10-K for fiscal year ended
June 30, 1994 and filed on October 12,
1994.
10.2 1988 Non-Qualified Stock Incorporated by reference as Exhibit 10.7
Option Plan. to Form 10-K for fiscal year ended June
30, 1989 and filed on September 27, 1989.
10.3 Agreement dated as of July 1, 1999 Incorporated by reference as
between Mark M. David and the Company Exhibit 10.11 to Form 10-K for fiscal
providing for retirement benefits to Mr. year ended June 30, 1999 and filed on
David. September 28, 1999.
10.4 Agreement regarding severance benefits Incorporated by reference as Exhibit
dated as of July 1, 2001 between Saul 10.15 to Form 10-K for fiscal year ended
Pomerantz and the Company. June 30, 2001 and filed on September 26,
2001.
10.5 Agreement dated as of January 1, 2003 Incorporated by reference as Exhibit
between BENJAM Consulting LLC and the 10.17 to Form 10-Q for the quarter ended
Company replacing the Agreement dated as December 31, 2002 and filed on February
of July 1, 1999 between Mark M. David and 13, 2003.
the Company for Mr. David's consulting
services.
10.6 Employment Agreement dated as of July 1, Incorporated by reference as Exhibit
2002 between Melvyn Knigin and the 10.18 to Form 10-Q for the quarter ended
Company replacing the Agreement dated as December 31, 2002 and filed on February
of February 22, 2000. 13, 2003.
10.7 Letter dated January 28, 2003 from Melvyn Incorporated by reference as Exhibit
Knigin to the Company for the surrender 10.19 to Form 10-Q for the quarter ended
and forfeiture of Mr. Knigin's stock December 31, 2002 and filed on February
options. 13, 2003.
43
EXHIBIT
NUMBER EXHIBIT METHOD OF FILING
------ ------- ----------------
10.8 Line of Credit Agreement effective Filed Herewith.
July 1, 2004 between HSBC Bank USA
and the Company.
10.9 LIBOR Revolving Demand Note Filed herewith.
effective July 1, 2004
between HSBC Bank USA
and the Company.
10.10 Demand Grid Note effective July 1, Filed Herewith.
2004 between HSBC Bank
USA and the Company.
10.11 Continuing Letter of Credit Agreement Filed Herewith.
effective July 1, 2004 between HSBC
Bank USA and the Company.
10.12 Continuing General Security Filed Herewith.
Agreement effective July 1, 2004
between HSBC Bank USA and the Company.
21 Subsidiary of the Company. Filed herewith.
23 Consents of Independent Registered Filed herewith.
Public Accounting Firms
31.1 Certification by Chief Executive Officer. Filed herewith.
31.2 Certification by Principal Financial and Filed herewith.
Accounting Officer.
32 Section 1350 Certification. Filed herewith.
(b) REPORT ON FORM 8-K
Date Items Financial Statements
---- ----- --------------------
April 14, 2004 7, 9 None
May 11, 2004 7, 12 None
August 6, 2004 2, 7 None
August 25, 2004 2, 9 None
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this document to be signed on
its behalf by the undersigned, thereunto duly authorized.
September 23, 2004
MOVIE STAR, INC.
By: /s/ MELVYN KNIGIN
------------------
MELVYN KNIGIN
Interim Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and as of the date indicated.
/s/MELVYN KNIGIN Interim Chairman of the Board; September 23, 2004
----------------- President; Chief Executive
MELVYN KNIGIN Officer
/s/ SAUL POMERANTZ Executive Vice President; September 23, 2004
------------------ Chief Operating Officer;
SAUL POMERANTZ Secretary & Director
/s/ THOMAS RENDE Chief Financial Officer (Principal September 23, 2004
---------------- Financial & Accounting Officer);
THOMAS RENDE Director
/s/ JOEL M. SIMON Director September 23, 2004
-----------------
JOEL M. SIMON
/s/ MICHAEL A. SALBERG Director September 23, 2004
----------------------
MICHAEL A. SALBERG
/s/ PETER COLE Director September 23, 2004
--------------
PETER COLE
/s/ JOHN L. EISEL Director September 23, 2004
-----------------
JOHN L. EISEL