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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities
X Exchange Act of 1934
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For the quarter ended March 31, 2004
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For the transition period from to
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Commission File Number 1-5893
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MOVIE STAR, INC.
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(Exact name of Registrant as specified in its charter)
New York 13-5651322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1115 Broadway, New York, N.Y. 10010
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(Address of principal executive offices) (Zip Code)
(212) 684-3400
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(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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The number of common shares outstanding on April 30, 2004 was 15,599,975.
MOVIE STAR, INC.
FORM 10-Q QUARTERLY REPORT
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 2004 (Unaudited),
June 30, 2003 and March 31, 2003 (Unaudited) 3
Statements of Operations (Unaudited) for the Three and Nine Months Ended
March 31, 2004 and 2003 4
Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended
March 31, 2004 and 2003 5-6
Notes to Condensed Unaudited Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16-17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Certifications
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOVIE STAR, INC.
CONDENSED BALANCE SHEETS
(In Thousands, Except Share Information)
March 31, June 30, March 31,
2004 2003* 2003
------------- ------------- -------------
(Unaudited) (Unaudited)
Assets
Current Assets
Cash $ 2,836 $ 219 $ 160
Receivables, net 7,376 8,992 11,421
Inventory 7,476 10,392 11,075
Deferred income taxes 2,152 2,511 492
Prepaid expenses and other current assets 424 365 102
------------- ------------- -------------
Total current assets 20,264 22,479 23,250
Property, plant and equipment, net 1,018 1,153 1,216
Deferred income taxes 50 50 2,662
Other assets 370 407 354
------------- ------------- -------------
Total assets $ 21,702 $ 24,089 $ 27,482
============= ============= =============
Liabilities and Shareholders' Equity
Current Liabilities
Note payable $ - $ 2,277 $ 6,604
Current maturities of capital lease obligations - 27 37
Accounts payable and other current liabilities 3,296 4,196 4,536
------------- ------------- -------------
Total current liabilities 3,296 6,500 11,177
------------- ------------- -------------
Long-term liabilities 359 325 299
------------- ------------- -------------
Commitments and Contingencies - - -
Shareholders' equity
Common stock, $.01 par value - authorized 30,000,000 shares;
issued 17,617,000 shares in March 2004, 17,412,000 in June
2003 and 17,102,000 in March 2003 176 174 171
Additional paid-in capital 4,500 4,353 4,147
Retained earnings 16,989 16,355 15,306
------------- ------------- -------------
21,665 20,882 19,624
Less: Treasury stock, at cost - 2,017,000 shares 3,618 3,618 3,618
------------- ------------- -------------
Total shareholders' equity 18,047 17,264 16,006
------------- ------------- -------------
Total liabilities and shareholders' equity $ 21,702 $ 24,089 $ 27,482
============= ============= =============
* Derived from audited financial statements.
See notes to condensed unaudited financial statements.
3
MOVIE STAR, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $ 12,175 $ 16,934 $ 43,167 $ 49,403
Cost of sales 8,344 11,317 29,777 33,837
-------- -------- -------- --------
Gross profit 3,831 5,617 13,390 15,566
Selling, general and administrative expenses 4,893 3,950 12,267 11,312
-------- -------- -------- --------
Income (loss) from operations (1,062) 1,667 1,123 4,254
Interest income (4) (1) (5) (3)
Interest expense 2 66 72 287
-------- -------- -------- --------
Income (loss) before income taxes (1,060) 1,602 1,056 3,970
Income taxes (424) 641 422 1,588
-------- -------- -------- --------
Net income (loss) $ (636) $ 961 $ 634 $ 2,382
======== ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE $ (.04) $ .06 $ .04 $ .16
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ (.04) $ .06 $ .04 $ .16
======== ======== ======== ========
Basic weighted average number of shares outstanding 15,600 15,085 15,565 15,085
======== ======== ======== ========
Diluted weighted average number of shares outstanding 15,600 15,476 16,224 15,217
======== ======== ======== ========
See notes to condensed unaudited financial statements.
4
MOVIE STAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 634 $ 2,382
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 330 313
Provision for sales allowances and doubtful accounts 340 385
Deferred income taxes 359 1,350
Deferred lease liability 44 82
Loss on disposal of fixed assets - 18
Decrease (increase) in operating assets:
Receivables 1,276 (4,805)
Inventory 2,916 (2,278)
Prepaid expenses and other current assets (42) 100
Other assets (16) (41)
(Decrease) increase in operating liabilities:
Accounts payable and other current liabilities (910) 170
-------- --------
Net cash provided by (used in) operating activities 4,931 (2,324)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (143) (173)
-------- --------
Net cash used in investing activities (143) (173)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (27) (33)
(Repayments of) proceeds from revolving line of credit, net (2,277) 2,475
Proceeds from exercise of employee stock options 133 -
-------- --------
Net cash (used in) provided by financing activities (2,171) 2,442
-------- --------
NET INCREASE (DECREASE) IN CASH 2,617 (55)
CASH, beginning of period 219 215
-------- --------
CASH, end of period $ 2,836 $ 160
======== ========
(Cont'd)
5
MOVIE STAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
----------------------
2004 2003
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 72 $ 295
======== ========
Income taxes $ 310 $ 43
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Tax benefit from exercise of employee stock options $ 16 $ -
======== ========
(Concluded)
See notes to consolidated condensed unaudited financial statements.
6
MOVIE STAR, INC.
NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying condensed unaudited
financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position as
of March 31, 2004 and the results of operations for the interim periods
presented and cash flows for the nine months ended March 31, 2004 and 2003,
respectively.
The condensed financial statements and notes are presented as required by
Form 10-Q and do not contain certain information included in the Company's
year-end financial statements. The June 30, 2003 condensed balance sheet
was derived from the Company's audited financial statements. The results of
operations for the three and nine months ended March 31, 2004 are not
necessarily indicative of the results to be expected for the full year.
This Form 10-Q should be read in conjunction with the Company's financial
statements and notes included in the 2003 Annual Report on Form 10-K.
2. 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
share and diluted net income per share would have been as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss), as reported $ (636) $ 961 $ 634 $ 2,382
Add (deduct) net stock-based forfeitures (cost),
net of taxes (4) 205 (11) 166
---------- ---------- ---------- ----------
Pro forma net income (loss) $ (640) $ 1,166 $ 623 $ 2,548
========== ========== ========== ==========
Basic net income (loss) per share, as reported $ (.04) $ .06 $ .04 $ .16
Add (deduct) net stock-based forfeitures (cost),
net of taxes - .02 - .01
---------- ---------- ---------- ----------
Pro forma basic net income (loss) per share $(.04) $ .08 $ .04 $ .17
========== ========== ========== ==========
Diluted net income (loss) per share, as reported $ (.04) $ .06 $ .04 $ .16
Add (deduct) net stock-based forfeitures (cost),
net of taxes - .02 - .01
---------- ---------- ---------- ----------
Pro forma diluted net income (loss) per share $ (.04) $ .08 $ .04 $ .17
========== ========== ========== ==========
7
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the 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
will 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.
4. INVENTORY
The inventory consists of the following (in thousands):
March 31, June 30, March 31,
2004 2003 2003
---------- ---------- ----------
Raw materials $ 628 $ 1,470 $ 2,256
Work-in process 488 655 531
Finished goods 6,360 8,267 8,288
---------- ---------- ----------
$ 7,476 $ 10,392 $ 11,075
========== ========== ==========
5. NOTE PAYABLE
In June 2001, the Company renegotiated its revolving credit facility to
provide borrowings of up to $30,000,000 until its maturity date, July 1,
2004. Due to an amendment, effective November 7, 2002, the interest on
outstanding borrowings is payable at the prime rate, but not less than
4.25% per annum. As of March 31, 2004, the Company had no borrowings
outstanding under the credit facility and had approximately $1,294,000 of
outstanding letters of credit. Under the terms of the revolving credit
facility, the Company is required to meet certain financial covenants, of
which the Company is in compliance at March 31, 2004. Availability, as of
March 31, 2004, was approximately $11,081,000. Under the terms of this
financing, the Company agreed to pledge substantially all of its assets
except for the Company's real property.
8
The Company expects to extend its current revolving credit agreement for a
period of no less than one year or negotiate a new line of credit with
another lending institution for a term of not less than one year with terms
no less favorable than the expiring terms.
6. COMMITMENTS AND CONTINGENCIES
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 March 31, 2004, the remaining financial liability of this
agreement is $1,775,000. 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 Melvyn 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 Agreement - 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 to the Company and will receive annual
consulting fees of $225,000 through June 30, 2007 plus the reimbursement of
expenses in connection with those services in an amount not to exceed
$50,000 per year.
7. RELATED PARTY
Upon the retirement of its 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 March 31, 2004, June 30, 2003
and March 31, 2003, the current portion, included in "Accounts payable and
other current liabilities," amounted to $13,000, $12,000 and $10,000,
respectively and the long-term portion, included in "Long-term
liabilities," amounted to $91,000, $101,000 and $77,000, respectively.
9
8. NET INCOME (LOSS) PER SHARE
Net Income (Loss) Per Share - The Company's calculation of basic and
diluted net income (loss) per share is as follows (in thousands, except per
share amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
BASIC:
-----
Net income (loss) $ (636) $ 961 $ 634 $ 2,382
======== ======== ======== ========
Basic weighted average number of shares outstanding 15,600 15,085 15,565 15,085
======== ======== ======== ========
Basic net income (loss) per share $ (.04) $ .06 $ .04 $ .16
======== ======== ======== ========
DILUTED:
-------
Net income (loss) $ (636) $ 961 $ 634 $ 2,382
======== ======== ======== ========
Weighted average number of shares outstanding 15,600 15,085 15,565 15,085
Shares Issuable Upon Conversion of Stock Options - 366 621 122
Shares Issuable Upon Conversion of Warrants - 25 38 10
-------- -------- -------- --------
Total average number of equivalent shares outstanding 15,600 15,476 16,224 15,217
======== ======== ======== ========
Diluted net income (loss) per share $ (.04) $ .06 $ .04 $ .16
======== ======== ======== ========
Options and warrants to purchase 1,055,000 shares of common stock at prices
ranging from $.4375 to $1.125 per share for the three months ended March
31, 2004 and options to purchase 160,000 shares of common stock at prices
ranging from $1.0625 to $1.125 per share for the three month and nine
months ended March 31, 2003, were not included in the computation of
diluted net income per share since they would be considered antidilutive.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain forward-looking statements with
respect to anticipated results, which are subject to a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are: business conditions and growth in our 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 our
customers; and the risk factors listed from time to time in our SEC reports.
OVERVIEW AND NEW BUSINESS DEVELOPMENTS
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.
In fiscal 2003, approximately 45% of our sales were made to mass merchandisers,
19% to national chains, and 18% to department stores. The balance of our sales
were unevenly distributed among discount, specialty, regional chain stores and
direct mail catalog marketers.
For the nine months ended March 31, 2004, approximately 45% of our sales were
made to mass merchandisers, 19% to national chains, and 14% to department
stores. The balance of our sales were unevenly distributed among discount,
specialty, regional chain stores and direct mail catalog marketers.
In February 2004, we entered into a licensing agreement with Maidenform Inc.
Under the agreement, we will produce a new line of ladies' sleepwear and robes
to be introduced under the Maidenform(R) name. We will begin shipping our
Maidenform Collection in January 2005. It will be available in department
stores, chains and high-end specialty stores nationally. We will also introduce
a new line of sleepwear, robes and daywear under the Maidenform(R) trademarks
Sweet Nothings(R), Self Expressions(R) and Rendezvous(R) to be distributed at
select mass merchandisers and national chains in early 2005.
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.
We believe 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, we have found the application of
our accounting policies to be appropriate, and actual results generally have not
materially differed from those determined using the necessary estimates.
Our accounting policies are more fully described in Note 1 to the financial
statements located in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2003 filed with the Securities and Exchange Commission. We have
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. We write 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 us, additional inventory write-downs may be required.
Allowance for doubtful accounts/Sales discounts - We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our
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. We also estimate expenses for
customer discounts and incentive offerings. If market conditions were to
decline, we may take actions to increase customer incentive offerings possibly
resulting in an incremental expense at the time the incentive is offered.
Long-lived assets - In the evaluation of the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated undiscounted future
net cash flows of the related long-lived assets. If the carrying value of the
related asset exceeds the undiscounted cash flows, the carrying value is reduced
to its fair value. Various factors including future sales growth and profit
margins are included in this analysis. To the extent these future projections or
our strategies change, the conclusion regarding impairment may differ from the
current estimates.
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 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.
RESULTS OF OPERATIONS
12
Net sales for the three months ended March 31, 2004 decreased $4,759,000 to
$12,175,000 from $16,934,000 in the comparable period in 2003. Net sales for the
nine months ended March 31, 2004 decreased $6,236,000 to $43,167,000 from
$49,403,000 in the comparable period in 2003. The decrease in sales was due
primarily to a poor holiday season in intimate apparel at retail and an initial
set up order for replenishment business for a large account shipped in the March
quarter last year. The poor holiday season in intimate apparel at retail caused
the retailers to have excess inventory of replenishment goods resulting in lower
orders for the March quarter.
The retailers are continuing to refocus their spring and summer purchasing plans
and, to date, the orders we have received for the April through June period are
significantly lower than we had at the same time last year. Accordingly, we
anticipate that we will experience a significant reduction in sales and net
income for the fourth quarter, which ends on June 30, 2004 as compared to the
same period in the prior year. However, we have just begun to show our fall line
and early indications from our customers have been very positive. As a result,
we are optimistic that fiscal 2005 will show improved financial results.
The gross profit percentage decreased to 31.5% for the three months ended March
31, 2004 from 33.2% in the similar period in 2003. The gross profit percentage
decreased to 31.0% for the nine months ended March 31, 2004 from 31.5% in the
similar period in 2003. The lower margins for the three and nine-month periods
resulted primarily from a poor retail environment, which resulted in higher
markdowns in the current year, partially offset by the addition of the Dominican
Republic as a new source for contract labor (which resulted in reduced labor
costs).
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 comparable. 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 $4,893,000, or 40.2% of net
sales for the three months ended March 31, 2004, as compared to $3,950,000, or
23.3% of net sales for the similar period in 2003. This increase of $943,000
resulted primarily from a special charge of $1,084,000 related to a lump sum
payment to, President and Chief Executive Officer, Mel Knigin. This payment
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 of the Company owed to Mr. Knigin under his
employment contract, which, in accordance with its terms, expires on June 30,
2007. This increase was partially offset by a decrease in shipping expense of
$24,000, commissions of $62,000 and a net general overall decrease in other
general and administrative expenses. The lower shipping and commission expenses
were due to the lower sales in the period.
Selling, general and administrative expenses were $12,267,000, or 28.4% of net
sales for the nine months ended March 31, 2004, as compared to $11,312,000, or
22.9% of net sales for the similar period in 2003. This increase of $955,000
resulted primarily from the special charge discussed above and an increase in
salary expense and salary related costs of $237,000 as a result of higher
compensation levels and a net overall increase in general and administrative
expenses, partially offset by a more favorable than expected recovery of bad
debts in the current year of $253,000 and a reduction in shipping and commission
expense of $86,000 and $152,000, respectively, which resulted from lower sales.
The recovery of bad debts resulted primarily from one customer that resolved our
bankruptcy claim more favorably than we had anticipated.
13
We had a loss from operations of $1,062,000 for the three months ended March 31,
2004 compared to income from operations of $1,667,000 for the similar period in
2003. This reduction was due to lower sales and gross margins and higher
selling, general and administrative expenses.
We had income from operations of $1,123,000 for the nine months ended March 31,
2004 as compared to $4,254,000 for the similar period in 2003. This reduction
was due to lower sales and gross margins and higher selling, general and
administrative expenses.
Interest income for the three and nine months ended March 31, 2004 was $4,000
and $5,000 respectively, as compared to $1,000 and $3,000 for the similar
periods in 2003.
Interest expense for the three and nine months ended March 31, 2004 was $2,000
and $72,000 respectively, as compared to $66,000 and $287,000 for the similar
periods in 2003. This reduction was due primarily to lower borrowing levels as a
result of increased cash flow from our operations.
We recorded a benefit from taxes of $424,000 for the three months ended March
31, 2004 compared to income taxes of $641,000 for the similar period in 2003 and
provided for income taxes of $422,000 and $1,588,000 for the nine months ended
March 31, 2004 and 2003, respectively. We utilized an estimated income tax rate
of 40% in all of the periods.
We had a net loss of $636,000 for the three months ended March 31, 2004 compared
to net income of $961,000 for the similar period in 2003. The decrease for the
three months was due to lower sales and gross margins, higher selling, general
and administrative expenses, partially offset by lower net interest costs and a
tax benefit in the current year as compared to a tax provision in the prior
year.
We had net income of $634,000 for the nine months ended March 31, 2004 compared
to $2,382,000 for the similar period in 2003. The decrease for the nine months
was due to lower sales and gross margins, higher selling, general and
administrative expenses, partially offset by lower net interest costs and a
lower tax provision in the current year.
As discussed above, as a result of the reduced amount of orders on hand, we
believe that sales and net income for the remainder of the fiscal year will be
significantly lower than they were 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 March 31, 2004 (in thousands):
Payments Due by Period
---------------------------------------------------
Within After 5
Total 1 Year 2-3 Years 4-5 Years Years
---------- ---------- ----------- ----------- -----------
Contractual Obligations
-----------------------
Operating leases $ 8,020 $ 1,168 $ 2,365 $ 2,343 $ 2,144
License Agreement 420 20 258 142 -
Consulting agreement 731 225 450 56 -
Employment contract 1,775 519 1,113 143 -
---------- ---------- ----------- ----------- -----------
Total contractual obligations $ 10,946 $ 1,932 $ 4,186 $ 2,684 $ 2,144
========== ========== =========== =========== ===========
14
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 $ 1,294 $ 1,294 $ - $ - $ -
---------- ---------- ----------- ----------- -----------
Total commercial commitments $ 1,294 $ 1,294 $ - $ - $ -
========== ========== =========== =========== ===========
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 2004, our working capital increased by
$989,000 to $16,968,000, primarily from profitable operations.
During the nine months ended March 31, 2004, cash increased by $2,617,000. We
generated cash of $4,931,000 from operating activities and $133,000 from the
exercise of employee stock options. We used cash of $2,277,000 for the payment
of our short-term borrowings, $143,000 for the purchase of fixed assets and
$27,000 for the payment of capital lease obligations.
Subsequent to the end of the quarter, on April 8, 2004, we made the lump sum
payment of $1,084,000 to Mr. Knigin that was required as a result of the
previously discussed transaction (see Note 6 to the financial statements).
Receivables, net of allowances, at March 31, 2004 decreased by $1,616,000 to
$7,376,000 from $8,992,000 at June 30, 2003. This decrease is due to lower sales
for the quarter ending March 31, 2004 as compared to the quarter ending June 30,
2003.
Inventory at March 31, 2004 decreased by $2,916,000 to $7,476,000 from
$10,392,000 at June 30, 2003. This decrease is in both raw material and finished
products. The reduction is primarily due to the expected decrease in business
for the April through June 2004 period. The decrease, in raw materials, is also
due to a lower volume of cut, make and trim production that requires the
purchase of raw materials.
We have a secured revolving line of credit of up to $30,000,000 that expires
July 1, 2004. Direct borrowings under this line bear interest at the prime rate
of JP Morgan Chase Bank but not less than 4.25% per annum. Availability under
the line of credit is subject to our compliance with certain agreed upon
financial formulas, of which we are in compliance as of March 31, 2004. The
amount of availability under the line of credit is based upon certain formulas
and, as of March 31, 2004, there was approximately $11,081,000 available. Under
the terms of this financing, we agreed to pledge substantially all of our assets
except for our real property. At May 3, 2004, we had no borrowings outstanding
and had a cash balance of approximately $539,000.
We believe the available borrowing under our secured revolving line of credit,
along with anticipated internally generated funds, will be sufficient to cover
our working capital requirements through July 1, 2004. We expect to extend our
current revolving credit agreement for a period of no less than one year or
negotiate a new line of credit with another lending institution for a term of
not less than one year with terms no less favorable than the expiring terms. We
believe this extension or new line of credit will be sufficient to cover our
working capital requirements for the extended period.
We anticipate that capital expenditures for fiscal 2004 will be less than
$300,000.
EFFECT OF NEW ACCOUNTING STANDARDS
15
In January 2003, the 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 will 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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to changes in the prime rate based on the Federal Reserve actions
and general market interest fluctuations. We believe that moderate interest rate
increases will not have a material adverse impact on our results of operations,
or financial position, in the foreseeable future. For the fiscal year ended June
30, 2003, borrowings peaked during the year at $10,055,000 and the average
amount of borrowings was $6,352,000.
IMPORTS
Transactions with our foreign manufacturers and suppliers are subject to the
risks of doing business abroad. Our import and offshore operations are subject
to constraints imposed by agreements between the United States and a number of
foreign countries in which we do 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. Our imported products
are also subject to United States customs duties and, in the ordinary course of
business, we are, 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 our 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 our
operations and our ability to continue to import products at current or
increased levels. We cannot predict the likelihood or frequency of any such
events occurring.
16
ITEM 4.
CONTROLS AND PROCEDURES
An evaluation of the effectiveness of our disclosure controls and procedures as
of March 31, 2004 was made under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief Financial
Officer. Based on that evaluation, the CEO and CFO concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit 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 were no significant changes in
our internal controls over financial reporting that have materially affected, or
is reasonably likely to materially affect, our internal control over our
financial reporting.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES
LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Report on Form 10-Q
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which involve certain risks and uncertainties.
The Company's actual results or outcomes may differ materially from those
anticipated. Important factors that the Company believes might cause differences
are discussed in the cautionary statement under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-Q. In assessing forward-looking statements contained herein,
readers are urged to carefully read those statements.
17
PART II OTHER INFORMATION
Item 1 - Legal proceedings - Not Applicable
Item 2 - Changes in Securities - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders - None
Item 5 - Other Information - None
Item 6 - (a) Exhibits
31.1 Certification by Chief Executive Officer.
31.2 Certification by Principal Financial and Accounting
Officer.
32 Section 1350 Certification.
(b) Form 8-K Reports
Date Items Financial Statements
February 9, 2004 7, 12 None
February 11, 2004 7, 9 None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MOVIE STAR, INC.
By: /s/ Melvyn Knigin
----------------------------------
MELVYN KNIGIN
President; Chief Executive Officer
By: /s/ Thomas Rende
----------------------------------
THOMAS RENDE
Chief Financial Officer
(Principal Financial and
Accounting Officer)
May 13, 2004
18