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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 March 31, 2005
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.
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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
------- ------
The number of common shares outstanding on April 29, 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 March 31, 2005 (Unaudited),
June 30, 2004 (Audited) and March 31, 2004 (Unaudited) 3
Statements of Operations (Unaudited) for the Three and Nine Months Ended
March 31, 2005 and 2004 4
Condensed Statements of Cash Flows (Unaudited) for the
Nine Months Ended March 31, 2005 and 2004 5 - 6
Notes to Condensed Unaudited Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 6. Exhibits 21
Signatures 21
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,
2005 2004* 2004
--------------- ------------ ----------------
(Unaudited) (Unaudited)
Assets
Current Assets
Cash $ 435 $ 2,527 $ 2,836
Receivables, net 9,278 7,577 7,376
Inventory 7,132 5,938 7,476
Deferred income taxes 1,781 2,571 2,152
Prepaid expenses and other current assets 812 588 424
------- ------- -------
Total current assets 19,438 19,201 20,264
Property, plant and equipment, net 1,012 1,021 1,018
Deferred income taxes 1,542 148 50
Goodwill 537 - -
Other assets 445 409 370
------- ------- -------
Total assets $22,974 $20,779 $21,702
======= ======= =======
Liabilities and Shareholders' Equity
Current Liabilities
Note payable $3,763 $ - $ -
Accounts payable and accrued expenses 2,109 2,658 3,296
------- ------- -------
Total current liabilities 5,872 2,658 3,296
------- ------- -------
Long-term liabilities 388 374 359
------- ------- -------
Commitments and Contingencies - - -
Shareholders' equity
Common stock, $.01 par value - authorized 30,000,000 shares; issued 17,637,000
shares at March 31, 2005,
17,617,000 shares at June 30, 2004 and
17,617,000 shares at March 31, 2004 176 176 176
Additional paid-in capital 4,729 4,706 4,500
Retained earnings 15,417 16,483 16,989
Accumulated other comprehensive income 10 - -
Treasury stock, at cost--2,017,000 shares (3,618) (3,618) (3,618)
------- ------- -------
Total shareholders' equity 16,714 17,747 18,047
------- ------- -------
Total liabilities and shareholders' equity $22,974 $20,779 $21,702
======= ======= =======
* 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,
--------------------------- -------------------------------
2005 2004 2005 2004
------------- ------------- ------------- ----------------
Net sales $14,659 $12,175 $50,479 $43,167
Cost of sales 11,186 8,344 38,146 29,777
------ ------ ------ ------
Gross profit 3,473 3,831 12,333 13,390
Selling, general and administrative expenses 4,666 4,893 13,877 12,267
------ ------ ------ ------
(Loss) income from operations (1,193) (1,062) (1,544) 1,123
Interest income - (4) (1) (5)
Interest expense 76 2 234 72
------ ------ ------ ------
(Loss) income before income taxes (1,269) (1,060) (1,777) 1,056
Income taxes (508) (424) (711) 422
------ ------ ------ ------
Net (loss) income $ (761) $ (636) $ (1,066) $ 634
====== ====== ======== =====
BASIC NET (LOSS) INCOME PER SHARE $ (.05) $ (.04) $ (.07) $ .04
====== ====== ======== =====
DILUTED NET (LOSS) INCOME PER SHARE $(.05) $(.04) $(.07) $.04
====== ====== ======== =====
Basic weighted average number of shares outstanding 15,620 15,600 15,619 15,565
====== ====== ====== ======
Diluted weighted average number of shares outstanding 15,620 15,600 15,619 16,224
====== ====== ====== ======
See notes to condensed unaudited financial statements.
4
MOVIE STAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
----------------------------------
2005 2004
---------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,066) $ 634
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 300 330
Provision for sales allowances and doubtful accounts 82 340
Deferred income taxes (602) 359
Deferred lease liability 24 44
(Increase) decrease in operating assets, net of effect of acquisition of
business:
Receivables (1,782) 1,276
Inventory 1,679 2,916
Prepaid expenses and other current assets (222) (42)
Other assets (57) (16)
Decrease in operating liabilities:
Accounts payable and accrued expenses (557) (910)
------ -----
Net cash (used in) provided by operating activities (2,201) 4,931
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (226) (143)
Acquisition of Sidney Bernstein & Son business (3,456) -
------ -----
Net cash used in investing activities (3,682) (143)
------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations - (27)
Proceeds from (repayments of) revolving line of credit, net 3,763 (2,277)
Proceeds from exercise of employee stock options 23 133
------ -----
Net cash provided by (used in) financing activities 3,786 (2,171)
------ -----
Effect of exchange rate changes on cash 5 -
------ -----
NET (DECREASE) INCREASE IN CASH (2,092) 2,617
CASH, beginning of period 2,527 219
------ -----
CASH, end of period $ 435 $ 2,836
===== =======
(Cont'd)
5
MOVIE STAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
2005 2004
------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $234 $72
===== ===
Income taxes $ 47 $310
==== ====
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Tax benefit from exercise of employee stock options $ - $ 16
==== ====
(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 Company's financial
position as of March 31, 2005 and the results of operations for the
interim periods presented and cash flows for the nine months ended March
31, 2005 and 2004, 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 nine months ended
March 31, 2005 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 (loss) income,
and basic and diluted net (loss) income per share would have been as
follows:
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- -----------------------
2005 2004 2005 2004
------------ ----------- ---------- ---------
Net (loss) income, as reported $(761) $(636) $(1,066) $634
Deduct stock-based employee cost, net of taxes (6) (4) (33) (11)
----- ----- ----- ----
Pro forma net (loss) income $(767) $640 $(1,099) $623
===== ==== ======= ====
Basic net (loss) income per share, as reported $(.05) $(.04) $(.07) $.04
Deduct stock-based employee cost per share - - - -
----- ----- ----- ----
Pro forma basic net (loss) income per share $(.05) $(.04) $(.07) $.04
===== ====== ====== ====
Diluted net (loss) income per share, as reported $(.05) $(.04) $(.07) $.04
Deduct stock-based employee cost per share - - - -
----- ----- ----- ----
Pro forma diluted (loss) net income per share $(.05) $(.04) $(.07) $.04
===== ====== ======= ====
7
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 beginning of
the Company's next fiscal year. 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 March 31, 2005 is disclosed in Note 2.
8
4. INVENTORY
The inventory consists of the following (in thousands):
March 31, June 30, March 31,
2005 2004 2004
--------- -------- ---------
Raw materials $ 997 $1,166 $ 628
Work-in process 218 323 488
Finished goods 5,917 4,449 6,360
------- ------ ------
$7,132 $5,938 $7,476
======= ====== ======
5. NOTE PAYABLE
Effective July 1, 2004, the Company entered into a secured line of credit
with an international bank. 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 March 31, 2005, the Company
had outstanding borrowings of $3,763,000 under the facility and had
approximately $4,711,000 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 March 31,
2005, 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 (5.0 percent as of March 31, 2005).
This line of credit matures on June 30, 2005. The Company has had
preliminary discussions regarding the renewal of its line of credit and
believes that it will be renewed for an additional one-year period in the
ordinary course of business. The Company believes with this renewal, the
available borrowing under this agreement, along with anticipated
internally generated funds, will be sufficient to cover its working
capital requirements through June 30, 2006.
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 Nine Months Ended
March 31, March 31,
--------------------------- ----------------------
2005 2004 2005 2004
----------- ----------- --------- ------
BASIC:
-----
Net (loss) income $(761) $(636) $(1,066) $634
===== ===== ======= ====
Basic weighted average number of shares outstanding 15,620 15,600 15,619 15,565
====== ====== ====== ======
Basic net (loss) income per share $(.05) $(.04) $(.07) $.04
===== ===== ===== ====
9
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ----------------------
2005 2004 2005 2004
----------- ----------- --------- ------
DILUTED:
-------
Net (loss) income $(761) $(636) $(1,066) $634
===== ===== ======= ====
Weighted average number of shares outstanding 15,620 15,600 15,619 15,565
Shares issuable upon conversion of stock options - - - 621
Shares issuable upon conversion of warrants - - - 38
------ ------ ------ ------
Total average number of equivalent shares outstanding 15,620 15,600 15,619 16,224
====== ====== ====== ======
Diluted net (loss) income per share $(.05) $(.04) $(.07) $.04
===== ===== ===== ====
Options and warrants to purchase 417,000, 463,000 and 591,000 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 nine-month periods ended March 31, 2005 and the three-month
period ended March 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. The payment is also subject
to other conditions.
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:
10
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
===========
11
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
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.
12
For the nine months ended March 31, 2005, approximately 44 % of our sales were
made to mass merchandisers, 10% to national chains, and 11% 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. Sales
declined to $53,691,000 in fiscal 2004 from $64,916,000 in fiscal 2003. This
reduction was primarily the result of receiving fewer orders from some of our
larger customers. For the nine months of fiscal 2005 (ended March 31, 2005)
absent the SB&S division, sales for the remaining Movie Star business were lower
by $3,555,000. These sales include one order for approximately $7,800,000 that
was at a significantly lower gross margin than the regular Movie Star business.
Without this low margin order, the Movie Star business would have been lower by
approximately $11,355,000. 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 and we have declined to bid on this order for fiscal 2006.
Looking at our current open order position and shipments to date for the fourth
quarter, we expect the continued softness in our core Movie Star business to
continue into the fourth quarter. As a result of the lower sales, we expect to
record a loss in the fourth quarter.
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.
13
Inventory - Inventory is carried at the lower of cost or market on a first-in,
first-out basis. Management writes down inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Allowance for Doubtful Accounts/Sales Discounts - 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 Nine Months Ended
March 31, March 31,
---------------------------------------- ---------------------------------------------
2005 2004 2005 2004
------------------ ------------------ --------------------- --------------------
% % % %
Net sales $14,659 100.0 $12,175 100.0 $50,479 100.0 $43,167 100.0
Cost of sales 11,186 76.3 8,344 68.5 38,146 75.6 29,777 69.0
------ ------- ---------- ----- ---------- -------- -------- -------
Gross profit 3,473 23.7 3,831 31.5 12,333 24.4 13,390 31.0
Operating Expenses:
Selling, general and
administrative expenses 4,666 31.8 4,893 40.2 13,877 27.5 12,267 28.4
------ ------- ---------- ----- ---------- -------- -------- -------
Operating (loss) income (1,193) (8.1) (1,062) (8.7) (1,544) (3.1) 1,123 2.6
Interest income - - (4) - (1) - (5) -
Interest expense 76 0.5 2 - 234 0.5 72 0.2
------ ------- --------- ----- ---------- -------- -------- -------
(Loss) income before income
taxes (1,269) (8.7) (1,060) (8.7) (1,777) (3.5) 1,056 2.4
Income taxes (508) (3.5) (424) (3.5) (711) (1.4) 422 1.0
------ ------- --------- ----- ---------- --------- ------- -------
Net (loss) income $ (761) (5.2) $ (636) (5.2) $ (1,066) (2.1) $ 634 1.5
====== ======= ======== ===== ========== ======== ======= =======
Percent amounts may not add due to rounding.
RESULTS OF OPERATIONS
- ---------------------
14
Net sales for the three months ended March 31, 2005 increased $2,484,000 to
$14,659,000 from $12,175,000 in the comparable period in 2004. Net sales for the
nine months ended March 31, 2005 increased $7,312,000 to $50,479,000 from
$43,167,000 in the comparable period in 2004. The SB&S division accounted for
$3,648,000 and $10,867,000 of the sales for the three and nine months ended
March 31, 2005, respectively. Absent the sales for the SB&S division, the sales
for the remaining Movie Star business decreased $1,164,000 and $3,555,000 for
the three and nine months ended March 31, 2005, respectively. The decrease in
net sales for the Movie Star division for the three and nine months was
primarily 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 and third quarters, of which approximately
$7,150,000 was shipped in the second quarter and $650,000 was shipped in the
third quarter.
The large low margin order that we shipped in the second and third quarters of
fiscal 2005 was approximately $7,800,000. 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. We have declined to bid on this order for fiscal
2006.
Looking at our current open order position and shipments to date for the fourth
quarter, we expect the continued softness in our core Movie Star business to
continue into the fourth quarter. As a result of the lower sales, we expect to
record a loss in the fourth quarter.
The gross profit percentage decreased to 23.7% and 24.4% for the three and nine
months ended March 31, 2005 from 31.5% and 31.0% in the similar periods in 2004,
respectively. The lower overall margin resulted from the addition of the SB&S
division, which operated at a 20.5% (which was lower than the anticipated margin
due to the sale of closeouts) and 23.6% gross margin (which was approximately
the anticipated margin for this division) for the three and nine months ended
March 31, 2005, the large low margin order that was shipped in the second and
third quarters, the higher sale of closeouts for the third quarter and the mix
of product. Also contributing to the reduction in gross margins were the
additional costs to exit the Dominican Republic as a source of production and
move the production of the product being produced there to El Salvador. The
Movie Star division operated at a 24.8% and 24.6% gross margin for the three and
nine months ended March 31, 2005. 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 $4,666,000, or 31.8% of net
sales for the three months ended March 31, 2005, as compared to $4,893,000, or
40.2% of net sales for the similar period in 2004. This decrease of $227,000
resulted primarily from a one-time expense of $1,084,000 related to a lump sum
payment to the Company's Chief Executive Officer, Melvyn Knigin, in the prior
year, partially offset by an increase in other salary expense and salary related
costs of $367,000, samples and design related cost of $153,000, shipping expense
and shipping related costs of $128,000, commissions of
15
$78,000, royalties of $33,000 and a net increase in other general overhead
expenses. The payment to Mr. Knigin 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. The increase in salaries was primarily the
result of additional personnel for the SB&S division. The increase in samples
and design related cost was the result of the addition of the SB&S division and
the new Maidenform line. The increase in shipping expense is the result of the
addition of the SB&S division and the increased use of a West Coast public
warehouse. The increase in commissions was the result of commissions paid on the
SB&S division's sales and an increase in commissionable sales in the remaining
business. The royalty expense is related to the Maidenform licensing agreement.
Selling, general and administrative expenses were $13,877,000, or 27.5% of net
sales for the nine months ended March 31, 2005, as compared to $12,267,000, or
28.4% of net sales for the similar period in 2004. This increase of $1,610,000,
absent the one-time expense of $1,084,000 in the prior year discussed above,
would have been $2,694,000. This increase is a result of an increase in salary
expense and salary related costs of $953,000, shipping expense and shipping
related costs of $584,000, samples and design related cost of $295,000, outbound
freight expense of $197,000, commissions of $160,000, a greater recovery of bad
debt in the prior year of $204,000 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 the result
of the addition of the SB&S division, unanticipated costs for the large order
that was shipped at a low margin and the increased use of a West Coast public
warehouse. 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. We discontinued using the
SB&S distribution center in January 2005. The increase in samples and design
related cost was the result of the addition of the SB&S division and the new
Maidenform line. The increase in outbound freight expense was due to the
expediting of the large order discussed earlier. The increase in commissions was
the result of commissions paid on the SB&S division's sales and an increase in
commissionable sales in the remaining business. The recovery of bad debts in the
prior year resulted primarily from one customer in bankruptcy that resolved our
claim more favorably than we had anticipated.
We had a loss from operations of $1,193,000 and $1,544,000 for the three and
nine months ended March 31, 2005 as compared to a loss from operations of
$1,062,000 and income from operations of $1,123,000 for the comparable three and
nine-month periods in the prior year. The increased loss for the three-month
period was due to lower gross margins, partially offset by higher sales and
lower selling, general and administrative expenses. The decrease for the
nine-month period was due to lower gross margins and higher selling, general and
administrative expenses, partially offset by higher sales.
Interest expense for the three and nine months ended March 31, 2005 increased to
$76,000 and $234,000 as compared to $2,000 and $72,000 in the comparable period
in 2004, respectively. These increases were due primarily to higher borrowing
levels, which was the result of the acquisition of the SB&S division and higher
sales, which required higher inventories and accounts receivable.
We provided for an income tax benefit of $508,000 and $711,000 for the three and
nine months ended March 31, 2005, as compared to an income tax benefit of
$424,000 and a provision for income taxes of $422,000 for the similar periods in
2004, respectively. We utilized an estimated income tax rate of 40% in all
periods.
NET (LOSS) INCOME
- -----------------
16
We had a net loss of $761,000 and $1,066,000 for the three and nine months ended
March 31, 2005 as compared to a net loss of $636,000 and net income of $634,000
for the similar periods in 2004, respectively. The increase in the net loss for
the three-month period was due to lower gross margins, an increase in net
interest expense, partially offset by higher sales, lower selling, general and
administrative expenses and a larger income tax benefit. The decrease for the
nine-month period was due to lower gross margins, an increase in selling,
general and administrative expenses and an increase in interest expense,
partially offset by higher sales 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 March 31, 2005 (in thousands):
Payments Due by Period
--------------------------------------------------
Within After 5
Total 1 Year 2-3 Years 4-5 Years Years
------------ ----------- --------- --------- -------
Contractual Obligations
Credit Facility $3,763 $ 3,763 $ - $ - $ -
Licensing Agreement 400 98 302 - -
Operating Leases 6,894 1,212 2,352 2,401 929
Consulting Agreements 558 277 281 - -
Employment Contracts 2,820 1,357 1,463 - -
------- ------- ------- ------- ------
Total Contractual Obligations $14,435 $6,707 $4,398 $2,401 $929
======= ====== ====== ====== ====
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 $4,711 $4,711 $ - $ - $ -
------ ------ ---- ---- ----
Total Commercial Commitments $4,711 $4,711 $ - $ - $ -
====== ====== ==== ==== ====
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 nine months ended March 31, 2005, our working capital decreased by
$2,977,000 to $13,566,000, primarily due to the acquisition of the SB&S division
and the loss from operations.
During the nine months ended March 31, 2005, cash decreased by $2,092,000. We
used cash of $2,201,000 in our operations, $226,000 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
17
proceeds from short-term borrowings of $3,763,000, the exercise of employee
stock options of $23,000 and the decrease in cash primarily funded these
activities.
Receivables, net of allowances, at March 31, 2005 increased by $1,701,000 to
$9,278,000 from $7,577,000 at June 30, 2004. This increase was due to higher
sales for the three months ended March 31, 2005 as compared to the three months
ended June 30, 2004.
Inventory at March 31, 2005 increased by $1,194,000 to $7,132,000 from
$5,938,000 at June 30, 2004. This increase was primarily due to 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. 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 March 31, 2005. This line of credit is secured by
substantially all of our assets. This line of credit expires June 30, 2005. We
have had preliminary discussions regarding the renewal of our line of credit and
believe that it will be renewed for an additional one-year period in the
ordinary course of business.
We believe the available borrowing under our secured revolving line of credit,
which we believe will be renewed for a new one-year term, along with anticipated
internally generated funds, will be sufficient to cover our working capital
requirements through June 30, 2006.
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.
18
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 beginning of
the Company's next fiscal year. 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 March 31,
2005 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 nine months ended
March 31, 2005, borrowings peaked during the period at $13,410,000 and the
average amount of borrowings was $7,270,000.
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.
19
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the Company's disclosure controls and
procedures as of March 31, 2005 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.
20
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 - 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 11, 2005
21