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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
- --- of 1934
For the quarter ended September 30, 2004
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from to
------------------------ -------------------
Commission File Number 1-5893
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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 Number)
1115 Broadway, New York, N.Y. 10010
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 684-3400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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
------- ------
The number of common shares outstanding on October 29, 2004 was 15,619,975.
MOVIE STAR, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2004 (Unaudited),
June 30, 2004 (Audited) and September 30, 2003 (Unaudited) 3
Statements of Income (Unaudited) for the Three Months Ended
September 30, 2004 and 2003 4
Condensed Statements of Cash Flows (Unaudited) for the
Three Months Ended September 30, 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
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION 18
Signatures 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOVIE STAR, INC.
CONDENSED BALANCE SHEETS
(In Thousands, Except Number of Shares)
September 30, June 30, September 30,
2004 2004* 2003
------------- --------- -------------
(Unaudited) (Unaudited)
Assets
Current Assets
Cash $ 354 $ 2,527 $ 228
Receivables, net 10,642 7,577 12,068
Inventory 14,381 5,938 9,505
Deferred income taxes 2,702 2,571 2,028
Prepaid expenses and other current assets 631 588 426
-------- -------- --------
Total current assets 28,710 19,201 24,255
Property, plant and equipment, net 1,093 1,021 1,094
Deferred income taxes 148 148 50
Goodwill 537 -- --
Other assets 440 409 403
-------- -------- --------
Total assets $ 30,928 $ 20,779 $ 25,802
======== ======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 10,142 $ -- $ 4,020
Current maturities of capital lease obligations -- -- 17
Accounts payable and other current liabilities 2,864 2,658 3,194
-------- -------- --------
Total current liabilities 13,006 2,658 7,231
-------- -------- --------
Long-term liabilities 379 374 337
-------- -------- --------
Commitments and Contingencies -- -- --
Shareholders' equity
Common stock, $.01 par value - authorized 30,000,000 shares;
issued 17,637,000 shares in September 2004, 17,617,000 in
June 2004 and 17,592,000 in September 2003 176 176 176
Additional paid-in capital 4,729 4,706 4,468
Retained earnings 16,253 16,483 17,208
Accumulated other comprehensive income 3 -- --
Treasury stock, at cost--2,017,000 shares (3,618) (3,618) (3,618)
-------- -------- --------
Total shareholders' equity 17,543 17,747 18,234
-------- -------- --------
Total liabilities and shareholders' equity $ 30,928 $ 20,779 $ 25,802
======== ======== ========
* 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
September 30,
--------------------
2004 2003
-------- --------
Net sales $ 12,830 $ 16,826
Cost of sales 9,000 11,544
-------- --------
Gross profit 3,830 5,282
Selling, general and administrative expenses 4,181 3,819
-------- --------
(Loss) income from operations (351) 1,463
Interest expense 33 42
-------- --------
(Loss) income before income taxes (384) 1,421
Income taxes (154) 568
-------- --------
Net (loss) income $ (230) $ 853
======== ========
BASIC NET (LOSS) INCOME PER SHARE $(.01) $.06
===== ====
DILUTED NET (LOSS) INCOME PER SHARE $(.01) $.05
===== ====
Basic weighted average number of shares outstanding 15,617 15,502
====== ======
Diluted weighted average number of shares outstanding 15,617 16,211
====== ======
See notes to condensed unaudited financial statements.
4
MOVIE STAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
September 30,
--------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (230) $ 853
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 96 106
Provision for sales allowances and doubtful accounts (736) 338
Deferred income taxes (131) 483
Deferred lease liability 8 15
(Increase) decrease in operating assets, net of effect of acquisition of
business:
Receivables (2,329) (3,414)
Inventory (5,570) 887
Prepaid expenses and other current assets (41) (61)
Other assets (8) (9)
Increase (decrease) in operating liabilities:
Accounts payable and other current liabilities 203 (1,005)
-------- --------
Net cash used in operating activities (8,738) (1,807)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (147) (34)
Acquisition of business (3,456) --
-------- --------
Net cash used in investing activities (3,603) (34)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations -- (10)
Proceeds from revolving line of credit, net 10,142 1,743
Proceeds from exercise of employee stock options 23 117
-------- --------
Net cash provided by financing activities 10,165 1,850
-------- --------
Effect of exchange rate changes on cash 3 --
-------- --------
NET (DECREASE) INCREASE IN CASH (2,173) 9
CASH, beginning of period 2,527 219
-------- --------
CASH, end of period $ 354 $ 228
======== ========
(Cont'd)
5
MOVIE STAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
September 30,
--------------------
2004 2003
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $10 $ 42
=== ====
Income taxes $13 $155
=== ====
(Concluded)
See notes to 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 September 30, 2004 and the results of operations for the interim periods
presented and cash flows for the three months ended September 30, 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, 2004 condensed balance sheet
was derived from the Company's audited financial statements. The results of
operations for the three months ended September 30, 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 2004 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 Statement of Financial Accounting Standards ("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
September 30,
--------------------
2004 2003
---- ----
Net (loss) income, as reported $(230) $853
Deduct stock-based employee cost, net of taxes (4) (4)
----- ----
Pro forma net (loss) income $(234) $849
===== ====
Basic net (loss) income per share, as reported $(.01) $.06
Deduct stock-based employee cost per share - -
----- ----
Pro forma basic net (loss) income per share $(.01) $.05
===== ====
Diluted net (loss) income per share, as reported $(.01) $.05
Deduct stock-based employee cost per share - -
----- ----
Pro forma diluted net (loss) income per share $(.01) $.05
===== ====
Per share amounts may not add due to rounding.
7
During the quarter ended September 30, 2004, the Company granted options to
purchase 75,000 shares of common stock under the 2000 Performance Equity
Plan at an exercise price of $1.40. The fair value of the options-pricing
model was calculated with the following weighted-average assumptions used
for the grant: risk-free interest rate 3.5%; expected life 7 years;
expected volatility 63.23%. The fair value generated by the Black-Scholes
model may not be indicative of the future benefit, if any, that may be
received by the option holder.
3. INVENTORY
The inventory consists of the following (in thousands):
September 30, June 30, September 30,
2004 2004 2003
------- ------- -------
Raw materials $ 1,285 $ 1,166 $ 1,620
Work-in process 252 323 447
Finished goods 12,844 4,449 7,438
------- ------- -------
$14,381 $ 5,938 $ 9,505
======= ======= =======
4. NOTE PAYABLE
Effective July 1, 2004, the Company secured a line of credit with an
international bank. 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. As of September 30, 2004,
the Company had borrowings of $10,142,000 outstanding under the credit
facility and also had approximately $7,295,000 of outstanding letters of
credit. Availability under this line of credit is subject to the Company's
compliance with certain financial formulas as outlined in the agreement.
The Company was in compliance as of September 30, 2004. Pursuant to the
terms of this line of credit, the Company pledged substantially all of its
assets, except the Company's real property. Interest on outstanding
borrowings is payable at a variable rate per annum, equal to the prime rate
less 0.75 percent (4.0 percent as of September 30, 2004).
5. COMMITMENTS AND CONTINGENCIES
Employment Agreement - Effective as of July 1, 2002, the Company entered
into an employment agreement with Melvyn Knigin, the Company's CEO and
President, which expires on June 30, 2007. As of September 30, 2004, the
remaining financial liability of this agreement is $1,519,000. 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
which occurred in February 2004.
8
6. NET (LOSS) INCOME PER SHARE
Net (Loss) Income Per Share - The Company's calculation of basic and
diluted net (loss) income per share is as follows (in thousands, except per
share amounts):
Three Months Ended
September 30,
-------------------
2004 2003
------- ------
BASIC:
-----
Net (loss) income $(230) $853
===== =====
Basic weighted average number of shares outstanding 15,617 15,502
====== ======
Basic net (loss) income per share $(.01) $.06
====== ======
DILUTED:
-------
Net (loss) income $(230) $853
===== ====
Weighted average number of shares outstanding 15,617 15,502
Shares Issuable Upon Conversion of Stock Options - 670
Shares Issuable Upon Conversion of Warrants - 39
------ ------
Total average number of equivalent shares outstanding 15,617 16,211
====== ======
Diluted net (loss) income per share $(.01) $.05
===== ====
Options and warrants to purchase 495,000 shares of common stock at prices
ranging from $.4375 to $1.0625 per share, as of September 30, 2004, were
not included in the computation of diluted net income per share since they
would be considered antidilutive.
7. 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 $3,379,000.
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, one of the owners of SB&S has joined the Company as President of
the new division.
The acquisition was accounted for by the purchase method of accounting and
the acquisition consideration was allocated among the tangible and
intangible assets in accordance with their estimated fair value on the date
of acquisition. In accordance with SFAS No. 142, goodwill will be subject
to impairment testing at least annually. The results of operations of SB&S
since August 3, 2004, are included in the Company's consolidated statement
of operations. The total amount of
9
goodwill is expected to be deductible for income tax purposes. The
acquisition consideration and allocation of that consideration, which does
not include any future purchase price adjustments based on subsequent
performance thresholds, are as follows:
ACQUISITION CONSIDERATION:
Cash consideration paid $ 3,379,000
Transaction related fees 77,000
-----------
Total acquisition consideration $ 3,456,000
===========
ALLOCATION OF ACQUISITION CONSIDERATION:
Inventory $2,873,000
Goodwill related to acquisition 537,000
Covenant not to compete 40,000
Property and equipment 4,000
Other current assets 2,000
-----------
Total $ 3,456,000
===========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q 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 the Company's June 30, 2004 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.
11
For the first quarter of fiscal 2005, approximately 50% of our sales were made
to mass merchandisers, 9% to national chains, and 12% to department stores. The
balance of our sales were unevenly distributed among discount, specialty,
regional chain stores and direct mail catalog marketers.
For the fiscal year 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 were unevenly distributed among discount, specialty, regional chain
stores and direct mail catalog marketers.
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. For the first quarter of fiscal 2005, we experienced a continued
decline in sales that was primarily the result of a shift in orders from the
first quarter to the second quarter. Due to this shift in orders, shipments for
the second quarter of fiscal 2005 will be significantly higher than the
corresponding period last year. However, some of the larger orders to be shipped
in the second quarter of fiscal 2005 are at a considerably lower gross margin.
Also, if it were not for the customer orders of the Sidney Bernstein & Son
("SB&S") division, the expected dollar volume of orders to be shipped for the
first half of fiscal 2005 would be roughly comparable to those shipped for the
first half of fiscal 2004. Although we did not receive customer orders with
respect to certain customer programs for which we presented our products and for
which we have received orders in the past, we are still a vendor source for
those customers and we will be able to continue to present our products to those
customers in upcoming seasons.
In a continued effort to improve the top line growth, as well as our overall
profitability, we have (i) acquired the inventory and certain other assets of
Sidney Bernstein & Son Lingerie, Inc., (ii) signed a licensing agreement with
Maidenform Inc. which is scheduled for its first delivery in the beginning of
calendar 2005 and (iii) hired a representative in Canada to begin selling to the
Canadian market, which we began shipping in this fiscal quarter.
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.
12
Allowance for Doubtful Accounts/Sales Discounts - Management 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. Management also
estimates expenses for customer discounts, programs and incentive offerings. If
market conditions were to decline, management may take actions to increase
customer incentive offerings possibly resulting in an incremental expense 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, 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 Quarterly
Report on Form 10-Q (in thousands, except for percentages):
Three Months ended
September 30,
2004 2003
------------------ -------------------
Net sales $ 12,830 100.0% $ 16,826 100.0%
Cost of sales 9,000 70.1% 11,544 68.6%
-------- ------- -------- -----
Gross profit 3,830 29.9% 5,282 31.4%
Operating Expenses:
Selling, general and administrative expenses 4,181 32.6% 3,819 22.7%
-------- ------- -------- -----
Operating (loss) income (351) (2.7)% 1,463 8.7%
Interest expense 33 .3% 42 .2%
-------- ------- -------- -----
(Loss) income before income taxes (384) 3.0)% 1,421 8.5%
Income taxes (154) (1.2)% 568 3.4%
-------- ------- -------- -----
Net (loss) income $ (230) (1.8)% $ 853 5.1%
======== ===== ======== =====
RESULTS OF OPERATIONS
Net sales for the three months ended September 30, 2004 decreased $3,996,000, or
23.7% to $12,830,000 from $16,826,000 in the comparable period in 2003. The SB&S
division accounted for $3,119,000 of the sales in the quarter. Absent these
sales by this new division, the decrease in sales for the remaining Movie Star
company was $7,115,000, or 42.3%. This was due primarily to a shift in orders
from the first quarter to the second quarter. Due to this shift in orders,
shipments for the second quarter of fiscal 2005 will be significantly higher
than the corresponding period last year. However, some of the larger orders to
be shipped in the second quarter of fiscal 2005 are at a considerably lower
gross margin. Also, if it were not for the customer orders of the SB&S division,
the expected dollar volume of orders to be shipped for the first half of fiscal
2005 would be roughly comparable to those shipped for the first half of fiscal
2004.
13
The gross profit percentage decreased to 29.9% for the three months ended
September 30, 2004 from 31.4% in the similar period in 2003. The lower overall
margin resulted from the addition of the SB&S division, which operated at a
25.2% gross margin (which was the anticipated margin for this division) while
the remaining Movie Star company operated at a 31.3% margin.
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 $4,181,000, or 32.6% of net
sales for the three months ended September 30, 2004, as compared to $3,819,000,
or 22.7% of net sales for the similar period in 2003. This increase of $362,000
resulted from an increase in salary expense and salary related costs of $223,000
and an increase in shipping expense of $148,000, partially offset by a net
decrease in other general overhead expenses. The increase in salaries was
primarily the result of additional personnel for the SB&S division. The increase
in shipping expense is primarily the result of utilizing the SB&S distribution
center for August and September. Utilizing the SB&S distribution center creates
excess shipping capacity, which will continue until December 31, 2004. Beginning
in January 2005, we expect to begin shipping the SB&S orders from our
distribution center in Mississippi.
We recorded a loss from operations of $351,000 for the three months ended
September 30, 2004 as compared to income from operations of $1,463,000 for the
similar period in 2003. This decrease was due to lower sales and margins and
higher selling, general and administrative expenses.
Interest expense for the three months ended September 30, 2004 decreased by
$9,000 to $33,000 from $42,000 in the comparable period in 2003, due primarily
to lower interest rates.
We provided for an income tax benefit of $154,000 for the three months ended
September 30, 2004, as compared to an income tax provision of $568,000 for the
same period in 2003. We utilized an estimated income tax rate of 40% in both
periods.
NET INCOME
We had a net loss of $230,000 for the three months ended September 30, 2004 and
net income of $853,000 for the similar period in 2003. The decrease was due to
lower sales and gross margins and an increase in selling, general and
administrative expenses, partially offset by a reduction in interest expense and
an income tax benefit in the current period as compared to a provision for
income taxes in the similar period last year.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided as of September 30, 2004 (in
thousands):
14
Payments Due by Period
----------------------
Within After 5
Total 1 Year 2-3 Years 4-5 Years Years
------- ------- --------- --------- --------
Contractual Obligations
- -----------------------
Credit Facility $10,142 $10,142 $ -- $ -- $ --
Licensing Agreement 420 60 313 47 --
Operating Leases 7,518 1,229 2,361 2,381 1,547
Consulting Agreements 734 340 394 -- --
Employment Contracts 2,481 881 1,600 -- --
------- ------- ------- ------- -------
Total Contractual Obligations $21,295 $12,652 $ 4,668 $ 2,428 $ 1,547
======= ======= ======= ======= =======
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 $ 7,295 $ 7,295 $ -- $ -- $ --
------- ------- ------- ------- -------
Total Commercial Commitments $ 7,295 $ 7,295 $ -- $ -- $ --
======= ======= ======= ======= =======
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 three months ended September 30, 2004, our working capital decreased by
$839,000 to $15,704,000, primarily due to the goodwill paid for the SB&S
division and the loss from operations.
During the three months ended September 30, 2004, cash decreased by $2,173,000.
We used cash of $8,738,000 in our operations, $147,000 for the purchase of fixed
assets and $3,456,000 for the acquisition of the inventory and certain other
assets of Sidney Bernstein & Son Lingerie, Inc. The net proceeds from short-term
borrowings of $10,142,000 and the exercise of employee stock options of $23,000
primarily funded these activities.
Receivables, net of allowances, at September 30, 2004 increased by $3,065,000 to
$10,642,000 from $7,577,000 at June 30, 2004. This increase is due to higher
sales in the two months prior to the end of the quarter as compared to the two
months prior to the end of the fourth quarter.
Inventory at September 30, 2004 increased by $8,443,000 to $14,381,000 from
$5,938,000 at June 30, 2004. This increase is due to the receipt of goods in
September that are due to ship in the second quarter, an increase in the volume
of in-transit inventory at the end of September and the addition of the SB&S
division.
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 our 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 our
compliance with certain agreed upon financial formulas. We were in compliance at
September 30, 2004. Under the terms of this financing, we have agreed to pledge
substantially all of our assets, except our real property.
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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, 2005.
We anticipate that capital expenditures for fiscal 2005 will be less than
$500,000.
EFFECT OF NEW ACCOUNTING STANDARDS
There were no recently issued accounting standards that we believe will have a
material effect on our financial position, results of operations or cash flows.
INFLATION
We do not believe that our operating results have been materially affected by
inflation during the preceding three years. There can be no assurance, however,
that our operating results will not be affected by inflation in the future.
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 three months ended
September 30, 2004, borrowings peaked during the period at $10,142,000 and the
average amount of borrowings was $3,038,000.
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.
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ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the Company's disclosure controls and
procedures as of September 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.
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PART II. OTHER INFORMATION
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 Report
Date Items Financial Statements
---- ----- --------------------
August 6, 2004 2, 7 None
August 25, 2004 2, 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)
November 10, 2004
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