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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
X Securities Exchange Act of 1934
---
For the quarter ended December 31, 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 January 31, 2005 was
15,619,975.
MOVIE STAR, INC.
FORM 10-Q QUARTERLY REPORT
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at December 31, 2004 (Unaudited),
June 30, 2004 (Audited) and December 31, 2003 (Unaudited) 3
Statements of Operations (Unaudited) for the Three and
Six Months Ended December 31, 2004 and 2003 4
Condensed Statements of Cash Flows (Unaudited) for the
Six Months Ended December 31, 2004 and 2003 5
Notes to Condensed Unaudited Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and Procedures 18 - 19
PART II. OTHER INFORMATION
Item 2. Sales of Unregistered Securities 20
Item 4. Submission of Matters to a Vote of
Security Holders 20 - 21
Signatures 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOVIE STAR, INC.
CONDENSED BALANCE SHEETS
(In Thousands, Except Share Information)
December 31, June 30, December 31,
2004 2004* 2003
----------- ---------- ------------
(Unaudited) (Unaudited)
Assets
Current Assets
Cash $ 761 $ 2,527 $ 1,245
Receivables, net 15,435 7,577 8,141
Inventory 9,837 5,938 8,362
Deferred income taxes 2,744 2,571 1,792
Prepaid expenses and other current assets 688 588 305
--------- ------ ------
Total current assets 29,465 19,201 19,845
Property, plant and equipment, net 1,048 1,021 1,047
Deferred income taxes 148 148 50
Goodwill 537 - -
Other assets 457 409 407
--------- ------ ------
Total assets $31,655 $20,779 $21,349
========= ======= =======
Liabilities and Shareholders' Equity
Current Liabilities
Note payable $11,460 $ - $ -
Current maturity of capital lease obligation - - 6
Accounts payable and accrued expenses 2,343 2,658 2,330
--------- ------ ------
Total current liabilities 13,803 2,658 2,336
--------- ------ ------
Long-term liabilities 377 374 347
--------- ------ ------
Commitments and Contingencies - - -
Shareholders' equity
Common stock, $.01 par value - authorized 30,000,000 shares;
issued 17,637,000 shares at December 31, 2004,
17,617,000 shares at June 30, 2004 and
17,617,000 shares at December 31, 2003 176 176 176
Additional paid-in capital 4,729 4,706 4,484
Retained earnings 16,178 16,483 17,624
Accumulated other comprehensive income 10 - -
Treasury stock, at cost--2,017,000 shares (3,618) (3,618) (3,618)
--------- ------ ------
Total shareholders' equity 17,475 17,747 18,666
--------- ------ ------
Total liabilities and shareholders' equity $31,655 $20,779 $21,349
========= ======= =======
* 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 Six Months Ended
December 31, December 31,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net sales $22,990 $14,166 $35,820 $30,992
Cost of sales 17,960 9,889 26,960 21,433
-------- ------- ------- -------
Gross profit 5,030 4,277 8,860 9,559
Selling, general and administrative expenses 5,030 3,554 9,211 7,374
-------- ------- ------- -------
(Loss) income from operations - 723 (351) 2,185
Interest income (1) - (1) -
Interest expense 125 28 158 70
-------- ------- ------- -------
(Loss) income before income taxes (124) 695 (508) 2,115
Income taxes (49) 278 (203) 846
-------- ------- ------- -------
Net (loss) income $ (75) $ 417 $ (305) $ 1,269
========= ====== ======== =======
BASIC NET (LOSS) INCOME PER SHARE $ - $.03 $(.02) $.08
=== ===== ====== ====
DILUTED NET (LOSS) INCOME PER SHARE $ - $.03 $(.02) $.08
=== ==== ===== ====
Basic weighted average number of shares outstanding 15,620 15,596 15,619 15,548
====== ======= ====== ======
Diluted weighted average number of shares outstanding 15,620 16,274 15,619 16,241
====== ======= ====== ======
See notes to condensed unaudited financial statements.
4
MOVIE STAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
December 31,
-------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (305) $ 1,269
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation and amortization 199 202
Provision for sales allowances and doubtful accounts 370 373
Deferred income taxes (173) 719
Deferred lease liability 16 29
(Increase) decrease in operating assets, net of effect of acquisition of business:
Receivables (8,228) 478
Inventory (1,026) 2,030
Prepaid expenses and other current assets (98) 60
Other assets (51) (16)
Decrease in operating liabilities:
Accounts payable and accrued expenses (321) (1,873)
------- -------
Net cash (used in) provided by operating activities (9,617) 3,271
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (182) (80)
Acquisition of Sidney Bernstein & Son business (3,456) -
------- -------
Net cash used in investing activities (3,638) (80)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations - (21)
Proceeds from (repayments of) revolving line of credit, net 11,460 (2,277)
Proceeds from exercise of employee stock options 23 133
------- -------
Net cash provided by (used in) financing activities 11,483 (2,165)
------- -------
Effect of exchange rate changes on cash 6 -
------- -------
NET (DECREASE) INCREASE IN CASH (1,766) 1,026
CASH, beginning of period 2,527 219
------- -------
CASH, end of period $ 761 $1,245
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $159 $70
===== ===
Income taxes $35 $277
=== ====
See notes to condensed unaudited financial statements.
5
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 Company's financial
position as of December 31, 2004 and the results of operations for the
interim periods presented and cash flows for the six months ended December
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, 2004 condensed balance sheet
was derived from the Company's audited financial statements. The results of
operations for the three and six months ended December 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 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, since the options were granted at/or above market
value. 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 Six Months Ended
December 31, December 31,
---------------------- -------------------
2004 2003 2004 2003
-------- -------- ------- -------
Net (loss) income, as reported $(75) $417 $(305) $1,269
Deduct stock-based employee cost, net of taxes (23) (4) (27) (7)
----- ----- ----- ------
Pro forma net (loss) income $(98) $413 $(332) $1,262
==== ==== ===== ======
Basic net (loss) income per share, as reported $ - $.03 $(.02) $.08
Deduct stock-based employee cost per share - - - -
----- ----- ----- ------
Pro forma basic net (loss) income per share $(.01) $.03 $(.02) $.08
===== ==== ====== ====
Diluted net (loss) income per share, as reported $ - $.03 $(.02) $.08
Deduct stock-based employee cost per share - - - -
----- ----- ----- ------
Pro forma diluted (loss) net income per share $(.01) $.03 $(.02) $.08
===== ==== ====== ====
Per share amounts may not add due to rounding.
6
During the quarter ended December 31, 2004, the Company granted options to
purchase 125,000 shares of common stock under the 1988 Stock Option Plan at
an exercise price of $1.45 per share. The Company also granted options to
purchase 48,000 shares of common stock under the 2000 Performance Equity
Plan at an exercise price of $1.36 per share. The fair value of the
options-pricing model was calculated with the following weighted-average
assumptions used for the grant: risk-free interest rate 4%; expected life 7
years; expected volatility 36%. 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. RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 retains the general
principle of ARB 43, Chapter 4, "Inventory Pricing (AC Section I78)," that
inventories are presumed to be stated at cost; however, it amends ARB 43 to
clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production
overheads to inventories based on the normal capacity of the production
facilities. The guidance is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after
November 23, 2004. The Company has evaluated SFAS No. 151 and it does not
anticipate that the adoption of SFAS No. 151 will have a significant impact
on the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 20, Accounting for Nonmonetary
Transactions." The amendments made by SFAS No. 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. Further, the amendments eliminate
the narrow exception for nonmonetary exchanges of similar productive assets
and replace it with a broader exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This statement shall be
applied prospectively and is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after the date of issuance. The Company does not
anticipate that the adoption of SFAS No. 153 will have a significant impact
on the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment." SFAS 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The
amount of compensation cost will be measured based on the grant-date fair
value of the equity or liability instruments issued. SFAS 123(R) covers a
wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS 123(R)
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
This statement is effective as of the first interim or annual reporting
period that begins after June 15, 2005. The Company is required to
implement this new standard in the quarter ending September 30, 2005. The
impact of this new standard, if it had been in effect, on the net earnings
and related per share amounts of our fiscal years ended in June 2004, 2003
and 2002 were disclosed in Note 1, Summary of Significant Accounting
Policies, Stock Options of our Financial Statements included in our Form
10-k for the fiscal year ended June 30, 2004. The impact of this new
standard, if it had been in effect, on the
7
net earnings and related per share amounts of our fiscal quarter ended
December 31, 2004 is disclosed in Note 2.
4. INVENTORY
The inventory consists of the following (in thousands):
December 31, June 30, December 31,
2004 2004 2003
------------- --------- -------------
Raw materials $1,058 $1,166 $ 606
Work-in process 206 323 616
Finished goods 8,573 4,449 7,140
------ ------ ------
$9,837 $5,938 $8,362
====== ====== ======
5. NOTE PAYABLE
Effective July 1, 2004, the Company entered into a secured line of credit
with an international bank. This line of credit matures on June 30, 2005.
Under the terms of this line of credit, the Company may borrow up to
$24,000,000, in the aggregate, including revolving loans and letters of
credit. As of December 31, 2004, the Company had outstanding borrowings of
$11,460,000 under the facility and had approximately $4,299,000 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. As of December 31, 2004, the Company was in
compliance. Pursuant to the terms of the agreement, the Company pledged
substantially all of it assets. Interest on outstanding borrowings is
payable at a variable rate per annum, equal to the prime rate less 0.75
percent (4.50 percent as of December 31, 2004).
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 Six Months Ended
December 31, December 31,
------------------------ ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
BASIC:
------
Net (loss) income $(75) $417 $(305) $1,269
==== ===== ===== ======
Basic weighted average number of shares outstanding 15,620 15,596 15,619 15,548
====== ====== ====== ======
Basic net (loss) income per share $ - $.03 $(.02) $.08
=== ===== ===== ====
8
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
DILUTED:
--------
Net (loss) income $(75) $417 $(305) $1,269
==== ===== ===== ======
Weighted average number of shares outstanding 15,620 15,596 15,619 15,548
Shares issuable upon conversion of stock options - 639 - 654
Shares issuable upon conversion of warrants - 39 - 39
-------- ------- -------- -------
Total average number of equivalent shares outstanding 15,620 16,274 15,619 16,241
======== ======= ======== =======
Diluted net (loss) income per share $- $.03 $(.02) $.08
== ===== ===== ====
Options and warrants to purchase 475,000 and 406,000 shares of common stock
at prices ranging from $.4375 to $1.0625 per share were not included in the
computation of diluted net (loss) income per share for the three and
six-month periods ended December 31, 2004, respectively, since they would
be considered antidilutive.
7. ACQUISITION
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 transaction allows the Company to expand its product
offerings, as well as diversify and broaden its sales distribution.
The 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 former owners of SB&S, 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 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:
9
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
Securities and Exchange 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 department stores, specialty stores and
regional chains is divided into five selling seasons per 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
11
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.
For the first six months of fiscal 2005, approximately 46% of our sales were
made to mass merchandisers, 13% 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.
On August 3, 2004, we completed the 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 accessories. This
transaction allows us to expand our product offerings, as well as diversify and
broaden our sales distribution.
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 half of fiscal 2005, absent the SB&S division, sales
for the remaining Movie Star business were lower by $2,391,000. These sales
include one order for approximately $7,150,000 that was at a lower gross margin
than the regular Movie Star business. Without this low margin order, the Movie
Star business would have been lower by approximately $9,541,000. In connection
with this low margin order, we also incurred significantly more costs than
anticipated to deliver this order to our customer. This low margin order was not
from one of our major customers in fiscal 2004.
Although we did not receive 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.
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 in our June 30, 2004 Form 10-K. 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
12
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 - 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 Six Months Ended
December 31, December 31,
------------------------------------------- ---------------------------------------
2004 2003 2004 2003
----------------- ------------------- ---------------- ------------------
% % % %
Net sales $22,990 100.0 $14,166 100.0 $35,820 100.0 $30,992 100.0
Cost of sales 17,960 78.1 9,889 69.8 26,960 75.3 21,433 69.2
------- ------- -------- ------- ------- ------ ------- -----
Gross profit 5,030 21.9 4,277 30.2 8,860 24.7 9,559 30.8
Operating Expenses:
Selling, general and
administrative expenses 5,030 21.9 3,554 25.1 9,211 25.7 7,374 23.8
------- ------- -------- ------- ------- ------ ------- -----
Operating (loss) income - - 723 5.1 (351) (1.0) 2,185 7.1
Interest income (1) - - - (1) - - -
Interest expense 0.5 .2 0.4 0.2
125 28 158 70
------- ------- -------- ------- ------- ------ ------- -----
(Loss) income before income
taxes (124) (0.5) 695 4.9 (508) (1.4) 2,115 6.8
Income taxes (49) (0.2) 278 2.0 (203) (0.6) 846 2.7
------- ------- -------- ------- ------- ------ ------- -----
Net (loss) income $ (75) (0.3) $ 417 2.9 $ (305) (0.9) $1,269 4.1
======= ======= ======= ======= ======= ====== ======= =====
Percent amounts may not add due to rounding.
13
RESULTS OF OPERATIONS
- ---------------------
Net sales for the three months ended December 31, 2004 increased $8,824,000 to
$22,990,000 from $14,166,000 in the comparable period in 2003. Net sales for the
six months ended December 31, 2004 increased $4,828,000 to $35,820,000 from
$30,992,000 in the comparable period in 2003. The SB&S division accounted for
$4,100,000 and $7,219,000 of the sales for the three and six months ended
December 31, 2004, respectively. Absent the sales for the SB&S division, the
sales for the remaining Movie Star business increased $4,724,000 for the three
months ended December 31, 2004 and decreased $2,391,000 for the six months ended
December 31, 2004. The increase in net sales for the Movie Star division for the
three months was due primarily to a shift in orders from the first quarter to
the second quarter. The decrease in net sales for the Movie Star division for
the six months was due to receiving fewer orders from some of our larger
customers, partially offset by the large low margin order that we received from
one customer and delivered in the second quarter.
The large low margin order that we shipped in the second quarter of fiscal 2005
was approximately $7,150,000. This order was for one major retailer and the
expected gross margin was considerably lower than Movie Star's regular business.
The costs to prepare this order for shipment were significantly higher than we
originally estimated. In addition, a significant portion of the merchandise
arrived late at our distribution centers from India and, in some cases, to meet
the delivery dates of our customer, goods were shipped via air at a much higher
cost and we also incurred additional costs to prepare the goods for shipment to
our customer.
The gross profit percentage decreased to 21.9% and 24.7% for the three and six
months ended December 31, 2004 from 30.2% and 30.8% in the similar periods in
2003, respectively. The lower overall margin resulted from the addition of the
SB&S division, which operated at a 25.3% gross margin (which was the anticipated
margin for this division) and the large low margin order that was shipped in the
second quarter. The Movie Star division operated at a 21.1% and 24.6% gross
margin for the three and six months ended December 31, 2004. 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.
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, outbound freight 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 $5,030,000, or 21.9% of net
sales for the three months ended December 31, 2004, as compared to $3,554,000,
or 25.1% of net sales for the similar period in 2003. This increase of
$1,476,000 resulted from an increase in salary expense and salary related costs
of $362,000, shipping expense and shipping related costs of $309,000, outbound
freight expense of $184,000, a greater recovery of bad debt in the prior year of
$201,000 and a net increase 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 the quarter and unanticipated costs for the large order
that was shipped at a low margin. Utilizing the SB&S distribution center created
excess shipping capacity and as of January 2005, we began shipping the SB&S
orders from our distribution centers in Mississippi and Pennsylvania. Also, as
of January 2005, we are no longer utilizing the SB&S distribution center. The
increase in outbound freight expense was due to the expediting of the large
order discussed earlier. The recovery of bad debts
14
in the prior year resulted primarily from one customer in bankruptcy that
resolved our claim more favorably than we had anticipated.
Selling, general and administrative expenses were $9,211,000, or 25.7% of net
sales for the six months ended December 31, 2004, as compared to $7,374,000, or
23.8% of net sales for the similar period in 2003. This increase of $1,837,000
resulted from an increase in salary expense and salary related costs of
$585,000, shipping expense and shipping related costs of $457,000, outbound
freight expense of $187,000, a greater recovery of bad debt in the prior year of
$201,000 and a net increase in other general overhead expenses. These increases
were for the same reasons described above.
We recorded a breakeven from operations for the three months ended December 31,
2004 as compared to income from operations of $723,000 for the similar period in
2003. We recorded a loss from operations of $351,000 for the six months ended
December 31, 2004 as compared to income from operations of $2,185,000 for the
similar period in 2003. These decreases were due to lower gross margins and
higher selling, general and administrative expenses, partially offset by higher
sales.
Interest expense for the three and six months ended December 31, 2004 increased
to $125,000 and $158,000 as compared to $28,000 and $70,000 in the comparable
period in 2003, respectively. These increases were due primarily to higher
borrowing levels, which was the result of the acquisition of the SB&S division
and higher shipments in the second quarter, which required higher inventories
and accounts receivable.
We provided for an income tax benefit of $49,000 and $203,000 for the three and
six months ended December 31, 2004, as compared to an income tax provision of
$278,000 and $846,000 for the similar periods in 2003, respectively. We utilized
an estimated income tax rate of 40% in all periods.
NET INCOME
- ----------
We had a net loss of $75,000 and $305,000 for the three and six months ended
December 31, 2004 and net income of $417,000 and $1,269,000 for the similar
periods in 2003, respectively. These decreases were due to lower gross margins,
an increase in selling, general and administrative expenses and an increase in
interest expense, partially offset by an income tax benefit in the current
period as compared to a provision for income taxes in the similar period last
year.
15
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
- --------------------------------------------------
To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided as of December 31, 2004 (in
thousands):
Payments Due by Period
------------------------------------------------
Within After 5
Total 1 Year 2-3 Years 4-5 Years Years
-------- -------- --------- --------- -------
Contractual Obligations
-----------------------
Credit Facility $ 11,460 $11,460 $ - $ - $ -
Licensing Agreement 420 80 340 - -
Operating Leases 7,185 1,229 2,332 2,387 1,237
Consulting Agreements 646 308 338 - -
Employment Contracts 3,154 1,348 1,806 - -
-------- -------- ------- ------- -------
Total Contractual Obligations $22,865 $14,425 $4,816 $2,387 $1,237
======= ======= ====== ====== ======
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 $4,299 $4,299 $ - $ - $ -
------ ------ ---- ---- ----
Total Commercial Commitments $4,299 $4,299 $ - $ - $ -
====== ====== ==== ==== ====
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 six months ended December 31, 2004, our working capital decreased by
$881,000 to $15,662,000, primarily due to the acquisition of the SB&S division
and the loss from operations.
During the six months ended December 31, 2004, cash decreased by $1,766,000. We
used cash of $9,617,000 in our operations, $182,000 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 $11,460,000 and the exercise of employee stock options of $23,000
primarily funded these activities.
Receivables, net of allowances, at December 31, 2004 increased by $7,858,000 to
$15,435,000 from $7,577,000 at June 30, 2004. This increase was 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 of fiscal 2004.
16
Inventory at December 31, 2004 increased by $3,899,000 to $9,837,000 from
$5,938,000 at June 30, 2004. This increase was primarily due to the addition of
the SB&S division and the earlier receipt of finished goods.
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
December 31, 2004. Under the terms of this financing, we have agreed to pledge
substantially all of our assets. We believe the available borrowing under our
secured revolving line of credit, which generally can be rolled over for a new
one-year term, 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
- ----------------------------------
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." SFAS No. 151 retains the general principle of ARB 43,
Chapter 4, "Inventory Pricing (AC Section I78)," that inventories are presumed
to be stated at cost; however, it amends ARB 43 to clarify that abnormal amounts
of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventories based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company has evaluated SFAS No. 151 and it
does not anticipate that the adoption of SFAS No. 151 will have a significant
impact on the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 20, Accounting for Nonmonetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement shall be applied prospectively and is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Earlier application is permitted for nonmonetary asset exchanges
occurring in fiscal periods beginning after the date of issuance. The Company
does not anticipate that the adoption of SFAS No. 153 will have a significant
impact on the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment." SFAS 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. SFAS 123(R) covers a wide range
of share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights, and employee
share purchase plans. SFAS 123(R) replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
17
Stock Issued to Employees." This statement is effective as of the first interim
or annual reporting period that begins after June 15, 2005. The Company is
required to implement this new standard in the quarter ending September 30,
2005. The impact of this new standard, if it had been in effect, on the net
earnings and related per share amounts of our fiscal years ended in June 2004,
2003 and 2002 were disclosed in Note 1, Summary of Significant Accounting
Policies, Stock Options of our Financial Statements included in our Form 10-k
for the fiscal year ended June 30, 2004. The impact of this new standard, if it
had been in effect, on the net earnings and related per share amounts of our
fiscal quarter ended December 31, 2004 is disclosed in Note 2, included
elsewhere in this Quarterly Report on Form 10-Q.
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 six months ended
December 31, 2004, borrowings peaked during the period at $13,410,000 and the
average amount of borrowings was $7,676,000.
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.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the Company's disclosure controls and
procedures as of December 31, 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
18
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.
19
PART II OTHER INFORMATION
------------------
Item 2 - Sales of Unregistered Securities
================ ====================== ================= =========================== =============== =====================
CONSIDERATION RECEIVED
AND DESCRIPTION OF IF OPTION, WARRANT
UNDERWRITING OR EXEMPTION OR CONVERTIBLE
OTHER DISCOUNTS TO FROM SECURITY, TERMS OF
MARKET PRICE AFFORDED REGISTRATION EXERCISE OR
DATE OF SALE TITLE OF SECURITY NUMBER SOLD TO PURCHASERS CLAIMED CONVERSION
- ---------------- ---------------------- ----------------- --------------------------- --------------- ---------------------
8/3/04 Options to purchase 75,000 Options granted under the 4(2) Exercisable in five
Common Stock 2000 Performance Equity equal annual
Plan - no cash installments
consideration received by commencing on first
the Company. anniversary of
grant date and
expiring 8/3/2014,
at an exercise
price of $1.40 per
share.
- ---------------- ---------------------- ----------------- --------------------------- --------------- ---------------------
12/6/04 Options to purchase 48,000 Options granted under the 4(2) Fully exercisable
Common Stock 2000 Performance Equity on date of grant
Plan - no cash for a period of 10
consideration received by years from date of
the Company. grant, at an
exercise price of
$1.36 per share.
- ---------------- ---------------------- ----------------- --------------------------- --------------- ---------------------
12/10/04 Options to purchase 125,000 Options granted under the 4(2) Exercisable in five
Common Stock 1988 Key Employee Stock equal annual
Option Plan - no cash installments
consideration received by commencing on first
the Company. anniversary of
grant date and
expiring
12/10/2014, at an
exercise price of
$1.45 per share.
- ---------------- ---------------------- ----------------- --------------------------- --------------- ---------------------
Item 4 - Submission of Matters to a Vote of Security Holders - On December 6,
2004, the Company held its Annual Meeting of Shareholders in New York City. The
following individuals were elected as directors of the Company to serve from one
year until their successors are elected and qualified:
Votes Against or
Name Votes For Withheld
Melvyn Knigin 13,367,261 795,079
Saul Pomerantz 13,848,373 313,967
Thomas Rende 13,873,773 288,567
Joel M. Simon 13,873,604 288,736
Michael A. Salberg 13,873,994 288,346
Peter Cole 13,867,816 294,524
John L. Eisel 13,867,816 294,524
20
The shareholders also considered the ratification of the selection of Mahoney
Cohen & Company, CPA, P.C. as the Company's auditors for the fiscal year ending
June 30, 2005. The results of the vote to ratify the selection of Mahoney Cohen
& Company, CPA, P.C. as the Company's auditors were as follows:
Votes Against or Abstentions &
Votes For Withheld Broker Non-votes
14,087,192 64,918 10,230
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
---- ----- --------------------
December 6, 2004 1.01, 9.01 None
December 10, 2004 1.01, 3.02, 9.01 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)
February 10, 2005
21