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 December 31, 2003
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
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 January 30, 2004 was 15,599,975.
MOVIE STAR, INC.
FORM 10-Q QUARTERLY REPORT
INDEX
PART I. Financial Information Page
Item 1. Financial Statements
Condensed Balance Sheets at December 31, 2003 (Unaudited),
June 30, 2003 (Audited) and December 31, 2002 (Unaudited) 3
Statements of Income (Unaudited) for the Three and Six Months
Ended December 31, 2003 and 2002 4
Statements of Cash Flows (Unaudited) for the
Six Months Ended December 31, 2003 and 2002 5 - 6
Notes to Condensed Unaudited Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 17
PART II. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications
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,
2003 2003* 2002
------------- ---------- -----------
(Unaudited) (Unaudited)
Assets
Current Assets
Cash $ 1,245 $ 219 $ 168
Receivables, net 8,141 8,992 10,420
Inventory 8,362 10,392 9,688
Deferred income taxes 1,792 2,511 1,037
Prepaid expenses and other current assets 305 365 176
-------- ------- -------
Total current assets 19,845 22,479 21,489
Property, plant and equipment, net 1,047 1,153 1,292
Deferred income taxes 50 50 2,662
Other assets 407 407 373
-------- ------- -------
Total assets $21,349 $24,089 $25,816
======== ======= ========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ - $2,277 $ 6,155
Current maturity of long-term liabilities 6 27 38
Accounts payable and accrued expenses 2,330 4,196 4,296
-------- ------- -------
Total current liabilities 2,336 6,500 10,489
-------- ------- -------
Long-term liabilities 347 325 282
-------- ------- -------
Commitments and Contingencies - - -
Shareholders' equity
Common stock, $.01 par value - authorized 30,000,000 shares; issued 17,617,000
shares in December 2003, 17,412,000 in June 2003
and 17,102,000 in December 2002 176 174 171
Additional paid-in capital 4,484 4,353 4,147
Retained earnings 17,624 16,355 14,345
-------- ------- -------
22,284 20,882 18,663
Less: Treasury stock, at cost - 2,017,000 shares 3,618 3,618 3,618
-------- ------- -------
Total shareholders' equity 18,666 17,264 15,045
-------- ------- -------
Total liabilities and shareholders' equity $21,349 $24,089 $25,816
======== ======= ========
* Derived from audited financial statements.
See notes to condensed unaudited financial statements.
3
MOVIE STAR, INC.
STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
December 31 December 31,
------------------- ------------------
2003 2002 2003 2002
------ ----- ------ ------
Net sales $14,166 $16,689 $30,992 $32,469
Cost of sales 9,889 11,426 21,433 22,520
------- ------- ------- --------
Gross profit 4,277 5,263 9,559 9,949
Selling, general and administrative expenses 3,554 3,893 7,374 7,362
------- ------- ------- --------
Income from operations 723 1,370 2,185 2,587
Interest income - (1) - (2)
Interest expense 28 119 70 221
------- ------- ------- --------
Income before income taxes 695 1,252 2,115 2,368
Income taxes 278 501 846 947
------- ------- ------- --------
Net income $ 417 $ 751 $1,269 $1,421
======= ======= ======= =======
BASIC NET INCOME PER SHARE $.03 $.05 $.08 $.09
======= ======= ======= =======
DILUTED NET INCOME PER SHARE $.03 $.05 $.08 $.09
======= ======= ======= =======
Basic weighted average number of shares outstanding 15,596 15,085 15,548 15,085
======= ======= ======= =======
Diluted weighted average number of shares outstanding 16,274 15,089 16,241 15,087
======= ======= ======= =======
See notes to condensed unaudited financial statements.
4
MOVIE STAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
December 31,
-------------------------
2003 2002
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,269 $ 1,421
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 202 204
Provision for sales allowances and doubtful accounts 373 435
Deferred income taxes 719 805
Deferred lease liability 29 54
(Increase) decrease in operating assets:
Receivables 478 (3,854)
Inventory 2,030 (891)
Prepaid expenses and other current assets 60 26
Other assets (16) (46)
Decrease in operating liabilities:
Accounts payable and accrued expenses (1,873) (68)
-------- -------
Net cash provided by (used in) operating activities 3,271 (1,914)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (80) (136)
-------- -------
Net cash used in investing activities (80) (136)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capital lease obligations (21) (23)
(Repayments of) proceeds from revolving line of credit, net (2,277) 2,026
Proceeds from exercise of employee stock options 133 -
-------- -------
Net cash (used in) provided by financing activities (2,165) 2,003
-------- -------
NET INCREASE (DECREASE) IN CASH 1,026 (47)
CASH, beginning of period 219 215
-------- -------
CASH, end of period $1,245 $ 168
======== =======
(Cont'd)
5
MOVIE STAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
December 31,
2003 2002
------ ------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $70 $214
===== =====
Income taxes $277 $14
===== =====
(Concluded)
See notes to condensed unaudited financial statements.
6
MOVIE STAR, INC.
NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS
1. Interim Financial Statements
In the opinion of the Company, the accompanying condensed unaudited
financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position as
of December 31, 2003 and the results of operations for the interim periods
presented and cash flows for the three and six months ended December 31,
2003 and 2002, respectively.
The condensed financial statements and notes are presented as required by
Form 10-Q and do not contain certain information included in the Company's
year-end financial statements. The June 30, 2003 condensed balance sheet
was derived from the Company's audited financial statements. The results of
operations for the three and six months ended December 31, 2003 are not
necessarily indicative of the results to be expected for the full year.
This Form 10-Q should be read in conjunction with the Company's financial
statements and notes included in the 2003 Annual Report on Form 10-K.
2. Stock Options
Pursuant to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," the Company accounts for stock-based employee
compensation arrangements using the intrinsic value method. Accordingly, no
compensation expense has been recorded in the financial statements with
respect to option grants. The Company has adopted the disclosure provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of SFAS No. 123."
Had the Company elected to recognize compensation expense for stock-based
compensation using the fair value method net income, basic net income per
share and diluted net income per share would have been as follows:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -----------------
2003 2002 2003 2002
-------- -------- -------- --------
Net Income, as reported $417 $751 $1,269 $1,421
Deduct stock-based employee cost, net of taxes (4) (19) (7) (39)
------ ------ ------ -------
Pro forma net income $413 $732 $1,262 $1,382
====== ====== ====== =======
Basic net income per share, as reported $.03 $.05 $.08 $.09
Deduct stock-based employee cost per share - - - -
------ ------ ------ -------
Pro forma basic net income per share $.03 $.05 $.08 $.09
====== ======= ====== =======
Diluted net income per share, as reported $.03 $.05 $.08 $.09
Deduct stock-based employee cost per share - - - -
------ ------ ------ -------
Pro forma diluted net income per share $.03 $.05 $.08 $.09
======= ======= ====== =======
7
3. Recently Issued Accounting Standards
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123."
The standard provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. SFAS
No. 148 is effective for fiscal years ending after December 15, 2002. The
Company does not plan to change to the fair value based method of
accounting for stock-based employee compensation and has included the
disclosure requirements of SFAS No. 148 in the accompanying financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). FIN 46 requires that a variable
interest entity be consolidated by a company if that company is subject to
a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements apply to the first fiscal
year or interim period ending after March 31, 2004. The adoption of FIN 46
will not have a material effect on the results of operations or financial
position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." This statement
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after June 30, 2003, except as for provisions that
relate to SFAS No. 133 implementation issues that have been effective for
fiscal quarters that began prior to June 15, 2003, which should continue to
be applied in accordance with their respective dates. The adoption of this
pronouncement does not have a material effect on the results of operations
or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This statement requires that certain financial instruments that, under
previous guidance, issuers could account for as equity, be classified as
liabilities in statements of financial position. Most of the guidance in
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of
this pronouncement does not have a material effect on the results of
operations or financial position.
4. Inventory
The inventory consists of the following (in thousands):
December 31, June 30, December 31,
2003 2003 2002
------------ ------- -----------
Raw materials $ 606 $1,470 $1,880
Work-in process 616 655 921
Finished goods 7,140 8,267 $6,887
------- -------- ------
$ 8,362 $10,392 $9,688
======= ======== ======
8
5. Note Payable
In June 2001, the Company renegotiated its revolving credit facility to
provide borrowings of up to $30,000,000 until its maturity date, July 1,
2004. Due to an amendment, effective November 7, 2002, the interest on
outstanding borrowings is payable at the prime rate, but not less than
4.25% per annum. As of December 31, 2003, the Company had no borrowings
outstanding under the credit facility and had approximately $3,402,000 of
outstanding letters of credit. Under the terms of the revolving credit
facility, the Company is required to meet certain financial covenants, of
which the Company is in compliance at December 31, 2003. Availability, as
of December 31, 2003, was approximately $10,500,000. Under the terms of
this financing, the Company agreed to pledge substantially all of its
assets except for the Company's real property.
6. Commitments and Contingencies
Employment Agreement - In January 2003, the Company and Mr. Knigin, the
Company's CEO and President, finalized their negotiations regarding an
extension of Mr. Knigin's employment agreement, which was to expire on June
30, 2004. Under the terms of the extended agreement, Mr. Knigin is to
receive total base compensation of $2,625,000 over the five-year term of
the agreement, effective as of July 1, 2002 and continuing through June 30,
2007. As of December 31, 2003, the remaining financial liability of this
agreement is $1,900,000. Mr. Knigin may also be entitled to certain
severance payments at the conclusion of the term of his agreement, provided
the Company attains specified financial performance goals or if the David
family sells substantially all of their shares of the Company's common
stock.
On January 28, 2003, Mr. Knigin voluntarily surrendered and forfeited his
options to purchase 1,000,000 shares of the Company's common stock, par
value $.01 and relinquished any further rights he may have had under the
existing option agreements, which have now been terminated.
Consulting Agreement - As of January 1, 2003, the Company and Mark M.
David, Chairman of the Board, have renegotiated Mr. David's consulting
agreement with the Company that was to expire on June 30, 2004. The new
agreement is with Mr. David's consulting firm. Under the terms of the new
agreement, Mr. David's consulting firm will provide the consulting services
of Mr. David to the Company and will receive annual consulting fees of
$225,000 through June 30, 2007 plus the reimbursement of expenses in an
amount not to exceed $50,000 per year.
7. Related Party
Upon the retirement of its Chief Executive Officer, Mark M. David, in July
1999, the Company entered into an agreement, expiring in October 2011, to
provide for future medical benefits. As of December 31, 2003 and 2002, the
current portion, included in "Accounts payable and other current
liabilities," amounted to $13,000 and $11,000, respectively and the
long-term portion, included in "Long-term liabilities," amounted to $94,000
and $79,000, respectively.
9
8. Net Income Per Share
Net Income Per Share - The Company's calculation of basic and diluted net
income per share are as follows (in thousands, except per share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------
2003 2002 2003 2002
-------- --------- ---------- ------
BASIC:
Net income $ 417 $751 $1,269 $1,421
======== ====== ====== ======
Basic weighted average number of shares outstanding 15,596 15,085 15,548 15,085
======== ====== ====== ======
Basic net income per share $ .03 $.05 $.08 $.09
======== ====== ====== ======
DILUTED:
Net income $ 417 $751 $1,269 $1,421
======== ====== ====== ======
Weighted average number of shares outstanding 15,596 15,085 15,548 15,085
Shares Issuable Upon Conversion of Stock Options 639 - 654 -
Shares Issuable Upon Conversion of Warrants 39 4 39 2
-------- ------- ------- ------
Total average number of equivalent shares outstanding 16,274 15,089 16,241 15,087
======== ====== ====== ======
Diluted net income per share $ .03 $.05 $.08 $.09
======== ====== ====== ======
Options to purchase 2,520,000 shares of common stock at prices ranging from
$.50 to $1.125 per share were outstanding as of December 31, 2002, but were
not included in the computation of diluted net income per share since they
would be considered antidilutive.
9. Subsequent Event
On February 10, 2004, Mark M. David, the Company's Chairman, and members of
his family, entered into an agreement to sell all of their shares of common
stock of the Company, an aggregate of 3,532,644 shares, or approximately
22.7% of the total shares outstanding, to TTG Apparel, LLC, for a purchase
price of $1.70 per share. At the request of the purchaser, the purchase of
the shares was approved by the Company's Board of Directors. Upon the
closing of the transaction, Mark M. David and Gary W. Krat will resign from
the Company's Board of Directors. The transaction is expected to close
shortly after the filing of this Quarterly Report. This transaction will
activate a provision under the Company's employment agreement with Melvyn
Knigin, its Chief Executive Officer, which requires the Company to make a
lump sum payment to Mr. Knigin of approximately $1,070,000 within 90 days.
The Company will incur an expense in the third quarter for this amount.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements with
respect to anticipated results, which are subject to a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are: business conditions and growth in our industry; general economic
conditions; the addition or loss of significant customers; the loss of key
personnel; product development; competition; foreign government regulations;
fluctuations in foreign currency exchange rates; rising costs of raw materials
and the unavailability of sources of supply; the timing of orders placed by our
customers; and the risk factors listed from time to time in our SEC reports.
Overview
The intimate apparel business is a highly competitive industry. The industry is
characterized by a large number of small companies selling unbranded
merchandise, and by several large companies that have developed widespread
consumer recognition of the brand names associated with merchandise sold by
these companies. In addition, retailers to whom we sell our products have sought
to expand the development and marketing of their own brands and to obtain
intimate apparel products directly from the same sources from which we obtain
our products.
The intimate apparel business for the department stores, specialty stores and
regional chains is broken down into five selling seasons a year. We create a new
line of products that represent our own brand name "Cinema Etoile" for each
selling season. Our brand name does not have widespread consumer recognition,
although it is well known by our customers. We sell our brand name products
primarily during these selling seasons. We also develop specific products for
some of our larger accounts, mass merchandisers and national chains, and make
between five and eight presentations throughout the year to these accounts. We
do not have long-term contracts with any of our customers and therefore our
business is subject to unpredictable increases and decreases in sales depending
upon the size and number of orders that we receive each time we present our
products to our customers.
In fiscal 2003, approximately 45% of our sales were made to mass merchandisers,
19% to national chains, and 18% to department stores. The balance of our sales
were unevenly distributed among discount, specialty, regional chain stores and
direct mail catalog marketers.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require estimates and
assumptions about future events and their impact on amounts reported in the
financial statements and related notes. Since future events and their impact
cannot be determined with certainty, the actual results will inevitably differ
from our estimates. Such differences could be material to the financial
statements.
We believe the application of accounting policies, and the estimates inherently
required by the policies, are reasonable. These accounting policies and
estimates are constantly re-evaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, we have found the application of
our accounting policies to be appropriate, and actual results generally have not
materially differed from those determined using the necessary estimates.
11
Our accounting policies are more fully described in Note 1 to the financial
statements located in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2003 filed with the Securities and Exchange Commission. We have
identified certain critical accounting policies that are described below.
Inventory - Inventory is carried at the lower of cost or market on a first-in,
first-out basis. We write down inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by us, additional inventory write-downs may be required.
Allowance for doubtful accounts/Sales discounts - We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. We also estimate expenses for
customer discounts and incentive offerings. If market conditions were to
decline, we may take actions to increase customer incentive offerings possibly
resulting in an incremental expense at the time the incentive is offered.
Long-lived assets - In the evaluation of the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated undiscounted future
net cash flows of the related long-lived assets. If the carrying value of the
related asset exceeds the undiscounted cash flows, the carrying value is reduced
to its fair value. Various factors including future sales growth and profit
margins are included in this analysis. To the extent these future projections or
our strategies change, the conclusion regarding impairment may differ from the
current estimates.
Deferred tax valuation allowance - In assessing the need for a deferred tax
valuation allowance, we consider future taxable income and ongoing prudent and
feasible tax planning strategies. Since we were able to determine that we would
be able to realize our deferred tax assets in the future, in excess of its
recorded amount, an adjustment to the deferred tax asset was not deemed
necessary. Likewise, should we determine that we would not be able to realize
all or part of our net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such determination
was made.
Results of Operations
Net sales for the three months ended December 31, 2003 decreased $2,523,000 to
$14,166,000 from $16,689,000 in the comparable period in 2002. Net sales for the
six months ended December 31, 2003 decreased $1,477,000 to $30,992,000 from
$32,469,000 in the comparable period in 2002. The decrease in sales was due
primarily to an overall extremely poor holiday season in intimate apparel at
retail, which resulted in lower orders from most of our customers.
As a result of the poor holiday season in intimate apparel at retail, the
retailers are refocusing their spring and summer purchasing plans and to date
the orders we have received for the January through June period are
significantly lower than we had at the same time last year. Accordingly, we
anticipate that we will experience a significant reduction in sales and net
income for the remainder of our fiscal year, which ends on June 30, 2004 as
compared to the January through June period in the prior year.
The gross profit percentage decreased to 30.2% for the three months ended
December 31, 2003 from 31.5% in the similar period in 2002. The gross profit
percentage increased to 30.8% for the six months ended December 31, 2003 from
30.6% in the similar period in 2002. The lower margins for the three-month
period resulted primarily from a poor retail environment, which resulted in
higher markdowns in the current year's quarter. The higher margins for the six
months resulted primarily from the addition of the Dominican Republic as a new
source for contract labor (which resulted in reduced labor costs), greater
efficiencies in the overall production cycle and improved customer compliance
(which reduced customer deductions), partially offset by the higher markdowns in
the second quarter.
12
As a result of differences between the accounting policies of companies in the
industry relating to whether certain items of expense are included in cost of
sales rather than recorded as selling expenses, the reported gross profits of
different companies, including our own, may not be directly compared. For
example, we record the costs of preparing merchandise for sale, including
warehousing costs and shipping and handling costs, as a selling expense, rather
than a cost of sale. Therefore, our gross profit is higher than it would be if
such costs were included in cost of sales.
Selling, general and administrative expenses were $3,554,000, or 25.1% of net
sales for the three months ended December 31, 2003, as compared to $3,893,000,
or 23.3% of net sales for the similar period in 2002. This decrease of $339,000
resulted primarily from a more favorable than expected recovery of bad debts in
the current year of approximately $249,000, a decrease in shipping expense of
$69,000, commissions of $47, 000 and a net general overall decrease in other
general and administrative expenses, partially offset by an increase in salary
expense and salary related costs of $72,000. The recovery of bad debts resulted
primarily from one customer that resolved our bankruptcy claim more favorably
than we had anticipated. The lower shipping and commissions expense were due to
the lower sales in the period. The higher salary expense was the result of
higher compensation levels and an increased number of personnel.
Selling, general and administrative expenses were $7,374,000, or 23.8% of net
sales for the six months ended December 31, 2003, as compared to $7,362,000, or
22.7% of net sales for the similar period in 2002. This increase of $12,000
resulted primarily from an increase in salary expense and salary related costs
of $234,000 as a result of higher compensation levels and an increased number of
personnel and a net increase in general overhead expenses. This increase was
partially offset by a reduction in shipping and commission expense of $62,000
and $90,000, respectively, which resulted from lower sales and the more
favorable recovery of bad debts discussed above.
Income from operations decreased to $723,000 and $2,185,000 for the three and
six months ended December 31, 2003, as compared to $1,370,000 and $2,587,000 for
the similar periods in 2002. The decrease for the three months was due to lower
sales and gross margins, partially offset by lower selling, general and
administrative expenses. The decrease for the six months was due to lower sales
and higher selling, general and administrative expenses, partially offset by an
increase in gross margins.
Interest expense for the three and six months ended December 31, 2003 was
$28,000 and $70,000 respectively, as compared to $119,000 and $221,000 for the
similar periods in 2002. This reduction was due to lower borrowing levels as a
result of increased cash flow from our operations and lower interest rates.
We provided for income taxes of $278,000 and $846,000 for the three and six
months ended December 31, 2003, as compared to income taxes of $501,000 and
$947,000 for the similar periods in 2002. We utilized an estimated income tax
rate of 40% in all of the periods.
We had net income of $417,000 and $1,269,000 for the three and six months ended
December 31, 2003 respectively, as compared to $751,000 and $1,421,000 for the
similar periods in 2002. The decrease for the three months was due to lower
sales and gross margins, partially offset by lower selling, general and
administrative expenses, lower interest expense and a lower tax provision in the
current year. The decrease for the six months was due to lower sales and higher
selling, general and administrative expenses, partially offset by an increase in
gross margins, lower interest expense and a lower tax provision in the current
year.
13
As discussed above, as a result of the poor holiday season in intimate apparel
at retail and the reduced amount of orders on hand, we believe that sales and
net income for the remainder of the fiscal year will be significantly reduced.
Net income will be further impacted by the approximate $1,070,000 payment that
we expect to pay to our Chief Executive Officer under his employment agreement
as discussed in Note 9 to the financial statements.
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, 2003 (in
thousands):
Payments Due by Period
---------------------------------------
Within After 5
Total 1 Year 2-3 Years 4-5 Years Years
----- ------ --------- --------- --------
Contractual Obligations
Capital leases $ 6 $ 6 $ - $ - $ -
Operating leases 8,349 1,209 2,365 2,329 2,446
Consulting agreement 788 225 450 113 -
Employment contract 1,900 513 1,100 287 -
------ ------- -------- ------- -------
Total contractual obligations $11,043 $1,953 $3,915 $2,729 $2,446
======= ====== ====== ====== ======
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 $ 3,402 $3,402 $ - $ - $ -
------- ------ ---- ---- ----
Total commercial commitments $ 3,402 $3,402 $ - $ - $ -
======= ====== ==== ==== ====
Liquidity and Capital Resources
For the six months ended December 31, 2003, our working capital increased by
$1,530,000 to $17,509,000, primarily from profitable operations.
During the six months ended December 31, 2003, cash increased by $1,026,000. We
generated cash of $3,271,000 from operating activities and $133,000 from the
exercise of employee stock options. We used cash of $2,277,000 for the payment
of our short-term borrowings, $80,000 for the purchase of fixed assets and
$21,000 for the payment of capital lease obligations.
14
Receivables at December 31, 2003 decreased by $851,000 to $8,141,000 from
$8,992,000 at June 30, 2003. This decrease is due to lower sales for the quarter
ending December 31, 2003 as compared to the quarter ending June 30, 2003.
Inventory at December 31, 2003 decreased by $2,030,000 to $8,362,000 from
$10,392,000 at June 30, 2003. This decrease is in both raw material and finished
products. The reduction is primarily due to the expected decrease in business
for the January through June 2004 period. The decrease, in raw materials, is
also due to a lower volume of cut, make and trim production that requires the
purchase of raw materials.
We have a secured revolving line of credit of up to $30,000,000. The revolving
line of credit expires July 1, 2004 and is sufficient for our projected needs
for operating capital and letters of credit to fund the purchase of imported
goods through July 1, 2004. Direct borrowings under this line bear interest at
the prime rate of JP Morgan Chase Bank but not less than 4.25% per annum.
Availability under the line of credit is subject to our compliance with certain
agreed upon financial formulas, of which we are in compliance as of December 31,
2003. Under the terms of this financing, we agreed to pledge substantially all
of our assets except for our real property. At February 5, 2004, we had no
borrowings outstanding and had a cash balance of approximately $3,500,000.
As discussed in Note 9 to the financial statements, upon the closing of the sale
of common stock by Mark M. David and members of his family, we will be obligated
to pay our Chief Executive Office under his employment agreement, a lump-sum
payment of approximately $1,070,000 within 90 days of closing.
We believe the available borrowing under our secured revolving line of credit,
along with anticipated internally generated funds, will be sufficient to cover
our working capital requirements through July 1, 2004. We expect to extend our
current revolving credit agreement for a period of no less than one year or
negotiate a new line of credit with another lending institution for a term of
not less than one year with terms no less favorable than the expiring terms.
We anticipate that capital expenditures for fiscal 2004 will be less than
$300,000.
Effect of New Accounting Standards
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123." The
standard provides alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. SFAS No. 148 is effective for
fiscal years ending after December 15, 2002. We do not plan to change to the
fair value based method of accounting for stock-based employee compensation and
have included the disclosure requirements of SFAS No. 148 in the accompanying
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that a variable interest
entity be consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The consolidation
requirements apply to the first fiscal year or interim period ending after March
31, 2004. The adoption of FIN 46 will not have a material effect on the results
of operations or financial position.
15
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This statement is effective for contracts entered into or modified
after June 30, 2003, except as for provisions that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, which should continue to be applied in accordance with
their respective dates. The adoption of this pronouncement does not have a
material effect on the results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
requires that certain financial instruments that, under previous guidance,
issuers could account for as equity, be classified as liabilities in statements
of financial position. Most of the guidance in SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of this pronouncement does not have a material effect on
the results of operations or financial position.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are subject to changes in the prime rate based on the Federal Reserve actions
and general market interest fluctuations. We believe that moderate interest rate
increases will not have a material adverse impact on our results of operations,
or financial position, in the foreseeable future. For the fiscal year ended June
30, 2003, borrowings peaked during the year at $10,055,000 and the average
amount of borrowings was $6,352,000.
Imports
Transactions with our foreign manufacturers and suppliers are subject to
the risks of doing business abroad. Our import and offshore operations are
subject to constraints imposed by agreements between the United States and a
number of foreign countries in which we do business. These agreements impose
quotas on the amount and type of goods that can be imported into the United
States from these countries. Such agreements also allow the United States to
impose, at any time, restraints on the importation of categories of merchandise
that, under the terms of the agreements, are not subject to specified limits.
Our imported products are also subject to United States customs duties and, in
the ordinary course of business, we are, from time to time, subject to claims by
the United States Customs Service for duties and other charges. The United
States and other countries in which our products are manufactured may, from time
to time, impose new quotas, duties, tariffs or other restrictions, or adversely
adjust presently prevailing quotas, duty or tariff levels, which could adversely
affect our operations and our ability to continue to import products at current
or increased levels. We cannot predict the likelihood or frequency of any such
events occurring.
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Item 4.
Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures as
of December 31, 2003 was made under the supervision and with the participation
of the our management, including the Chief Executive Officer and Chief Financial
Officer. Based on that evaluation, the CEO and CFO concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. During
the most recently completed fiscal quarter, there were no significant changes in
our internal controls over financial reporting that has materially affected, or
is reasonably likely to materially affect, our internal control over our
financial reporting.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES
LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Report on Form 10-Q
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which involve certain risks and uncertainties.
The Company's actual results or outcomes may differ materially from those
anticipated. Important factors that the Company believes might cause differences
are discussed in the cautionary statement under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-Q. In assessing forward-looking statements contained herein,
readers are urged to carefully read those statements.
17
PART II Other Information
Item 4 - Submission of Matters to a Vote of Security Holders - On November 20,
2003, the Company held its Annual Meeting of Shareholders in New York City. The
following individuals were elected as directors of the Company:
Votes Against or
Name Votes For Withheld
Mark M. David 13,947,481 257,156
Melvyn Knigin 13,935,185 269,452
Saul Pomerantz 13,947,483 257,154
Gary W. Krat 13,948,185 256,452
Joel M. Simon 13,948,185 256,452
Michael Salberg 13,946,555 258,082
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, 2004. 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 & Broker
Votes For Withheld Non-votes
13,969,206 164,757 70,674
Item 6 - (a) Exhibits
31.1 Rule 13a-14/15d-14 Certification by Chief Executive
Officer.
31.2 Rule 13a-14/15d-14 Certification by Principal
Financial and Accounting Officer.
32 Section 1350 Certification.
(b) Form 8-K Report
Date Items Financial Statements
------- ------------ --------------------
November 3, 2003 7, 12 None
18
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 11, 2004
19