<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
X Securities Exchange Act of 1934
- ---
For the quarter ended December 31, 1995
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.
(Exact name of registrant as specified in its charter)
New York 13-5651322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Madison Avenue, New York, N.Y. 10016
(Address of principal executive offices) (Zip Code)
(212) 679-7260
(Registrant's telephone number, including area code)
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of common shares outstanding on January 31, 1996 was 13,959,650.
<PAGE> 2
MOVIE STAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
Dec. 31, June 30,
1995 1995*
-------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 849 $ 103
Receivables, net of allowances 14,689 8,789
Inventory (note 3) 15,465 36,085
Deferred income taxes 3,298 3,298
Prepaid expenses and other
current assets 734 381
------- -------
Total current assets 35,035 48,656
Property, plant and equipment (net) 4,832 6,053
Other assets 1,698 1,784
Deferred income taxes 711 711
------- -------
Total assets $42,276 $57,204
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 4,812 $15,803
Current maturities of long-term debt 1,223 29
Accounts payable and accrued expenses 8,579 10,176
------- -------
Total current liabilities 14,614 26,008
------- -------
Long-term debt 21,282 22,496
------- -------
Commitments and contingencies (note 5)
Stockholders' equity
Common stock 160 160
Additional paid-in capital 3,731 3,731
Retained earnings 6,107 8,427
------- -------
9,998 12,318
Less: Treasury stock, at cost 3,618 3,618
------- -------
Total stockholders' equity 6,380 8,700
------- -------
Total liabilities and stockholders'
equity $42,276 $57,204
======= =======
</TABLE>
* Derived from audited financial statements.
See notes to consolidated condensed financial statements.
<PAGE> 3
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $32,721 $35,997 $57,648 $68,437
Cost of sales (note 3) 26,506 27,632 46,663 53,020
------- ------- ------- -------
Gross profit 6,215 8,365 10,985 15,417
------- ------- ------- -------
Selling, general and administrative
expenses 5,066 5,509 9,760 10,283
Estimated loss on abandonment of
leased premises (note 4) 1,170 -- 1,170 --
Interest expense 1,196 1,282 2,375 2,549
------- ------- ------- -------
7,432 6,791 13,305 12,832
------- ------- ------- -------
(Loss) income before provision for income taxes (1,217) 1,574 (2,320) 2,585
Provision for income taxes -- 630 -- 1,034
------- ------- ------- -------
Net (loss) income $(1,217) $ 944 $(2,320) $ 1,551
======= ======= ======= =======
Net (loss) income per share $(.09) $.07 $(.17) $.11
===== ==== ===== ====
Weighted average number of shares
outstanding 13,959 13,959 13,959 13,959
====== ====== ====== ======
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 4
MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1995 1994
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,320) $ 1,551
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Depreciation and amortization 417 648
Deferred income taxes -- 1,034
Loss on sale/abandonment of fixed assets 301
Changes in operating assets and liabilities:
Receivables (5,900) (8,177)
Inventory 20,620 17,205
Prepaid expenses and other current assets (353) (702)
Other assets 34 (33)
Accounts payable and accrued expenses (1,597) (4,084)
-------- -------
Net cash provided by operating
activities 11,202 7,442
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for fixed assets (109) (155)
Proceeds from sale of property plant and equipment 664 --
-------- -------
Net cash provided by (used in)
investing activities 555 (155)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable (10,991) (7,402)
Payment of long-term debt obligations (20) (93)
-------- -------
Net cash used in financing activities (11,011) (7,495)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 746 (208)
CASH AND CASH EQUIVALENTS, beginning of period 103 922
-------- -------
CASH AND CASH EQUIVALENTS, end of period $ 849 $ 714
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during period for:
Interest $ 2,381 $ 2,423
======== =======
Income taxes (net of refunds received) $ (310) $ 7
======== =======
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 5
MOVIE STAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying consolidated
condensed financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the
financial position as of December 31, 1995 and the results of
operations for the three and six months ended December 31, 1995 and
1994 and cash flows for the six months ended December 31, 1995 and
1994, respectively.
The condensed consolidated 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 consolidated financial
statements. The year-end condensed consolidated balance sheet was
derived from the Company's audited financial statements. This Form
10-Q should be read in conjunction with the Company's consolidated
financial statements and notes included in the 1995 Annual Report on
Form 10-K.
2. The results of operations for the six months ended December 31, 1995
are not necessarily indicative of the results to be expected for the
full year.
3. Certain items included in these statements are based upon estimates.
The cost of sales is determined utilizing estimated gross profit
rates. The calculation of the actual cost of sales is predicated
upon a physical inventory taken only at the end of each fiscal year.
An approximate breakdown of the inventory in thousands is as
follows:
<TABLE>
<CAPTION>
Dec. 31, June 30,
1995 1995
-------- --------
<S> <C> <C>
Raw materials $ 3,506 $ 6,870
Work-in-process 1,984 5,354
Finished goods 9,975 23,861
------- -------
$15,465 $36,085
======= =======
</TABLE>
4. The Company abandoned certain leased premises and combined its
divisions in an existing leased premise to reduce overhead and
improve operating efficiencies. The Company provided a reserve for
estimated costs in connection with the abandonment of those leased
premises of $900,000 and wrote-off the remaining net book value of
related leasehold improvements of $270,000.
5. The Company presently subleases two floors and has a direct lease with
the landlord of the building for a third floor in the building it
occupies as its New York headquarters. In connection with the Company's
consolidation and realignment of its operations, during December 1995
and January 1996, the Company ceased occupying two of the three floors
it had leased for general office use in New York. The Company has not
paid rent to the lessor of one of those floors since approximately July
1995 and has not paid rent to the other lessor since November 1995. The
lessor of one of the floors (the landlord of the building) has applied
the leasehold security deposit to the Company's past due obligations.
The security deposit will satisfy the Company's monthly obligation to
this lessor through approximately April 1996. If the Company cannot
reach an acceptable settlement of its future rent obligations with this
lessor, the lessor has a potential claim against the Company of
approximately $2,400,000, representing the aggregate rent obligation,
including estimated rent escalations, for the balance of the lease
term. The lessor of the other floor formerly occupied by the Company
has a potential claim against the Company for approximately $1,900,000,
representing the past due unpaid rent and future rent obligations,
including estimated rent escalations, under the lease. The Company has
commenced an action in the Supreme Court of the State of New York
against the lessors of the two abandoned floors and the lessor of the
remaining floor currently occupied by the Company seeking to recover
approximately $250,000, representing overcharges paid by the Company
for electric service under its subleases for two of the floors it
occupied. The landlord of the building has moved to dismiss this action
against it. This motion has not yet been decided by the Court.
The Company also has not paid rent to the lessor of the remaining floor
it occupies since approximately July 1995. The past due unpaid rent is
approximately $337,000. This lessor has applied the leasehold security
deposit to the past due obligation and has demanded that the Company
pay the entire past due obligation and replenish the security deposit.
The Company is presently negotiating with this lessor to settle the
claim.
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General Overview
The Company has incurred losses for the two years ended June 30, 1995 and
the six months ended December 31, 1995 and, as previously disclosed,
expects to continue to suffer losses in fiscal 1996. These losses are
primarily due to the Company's difficulties in sourcing its goods
offshore, a more competitive market, the weak retail climate for the
Company's products and the Company's past inability to cut overhead
sufficiently.
In August 1995, the Company hired Barbara Khouri as its Chief Executive
Officer. The Company anticipates that Ms. Khouri's extensive senior
management experience in the intimate apparel industry will assist the
Company in returning to profitability. The Company has consolidated and
realigned its operations to reduce costs and create an organizational
structure that is more productive, effective and efficient. The Company
has also implemented better controls over its import operations and
offshore manufacturing and is attempting to improve gross profit margins
and better respond to the changing needs of the Company's customers on a
short and long-term basis. Accordingly, the Company is developing a plan
to further close and consolidate domestic manufacturing facilities.
Additionally, in September 1995, the Company announced its plans to divest
itself of its men's work and leisure shirt division to focus on its core
intimate apparel business. This divestiture has been substantially
completed as of December 31, 1995.
Results of Operations
Net sales for the three months ended December 31, 1995 decreased by
$3,276,000 (9%) to $32,721,000 compared to the similar period in 1994.
The decrease in sales resulted primarily from lower sales of approximately
$5,000,000 in the popular-priced intimate apparel product line, offset
partially by an increase in retail sales of approximately $1,400,000 by
the Company's outlet stores. The lower sales in the popular-priced
intimate apparel product line resulted from the elimination of that
product line's trade business, the weak retail climate for the Company's
products and the inability of the Company to source effectively. The
increase in sales by the Company's outlet stores was due to the sales
relating to the divestiture of the Company's men's work and leisure shirt
division.
Net sales for the six months ended December 31, 1995 decreased by
$10,789,000 (16%) to $57,648,000 compared to the similar period in 1994.
The decrease in sales resulted primarily from lower sales in the
popular-priced intimate apparel product line. The lower sales in the
popular-priced intimate apparel product line resulted from the elimination
of that product line's trade business, the weak retail climate for the
Company's products and the inability of the Company to source effectively.
The gross profit percentage decreased to 19.0% for the three months ended
December 31, 1995 from 23.2% for the similar period in 1994. The gross
profit percentage decreased to 19.1% for the six months ended December
31,1995 from 22.5% in the similar period in 1994. The decrease was due
primarily to lower margins in the Company's popular-priced intimate
apparel product line. The lower margins in the Company's popular-priced
intimate apparel product line resulted primarily from a more competitive
market, the weak retail climate for the Company's products, the inability
of the Company to source effectively and the Company's effort to sell off
discontinued inventory and reduce inventory levels.
<PAGE> 7
The Company's inability to source effectively resulted in the receipt and
acceptance of poor quality goods, unanticipated and costly air shipments
and the inability, in certain instances, to make timely delivery of our
finished product to our customers. As a result, certain customers either
canceled orders, returned goods or took deductions.
Selling, general and administrative expenses decreased by $443,000 to
$5,066,000 for the three months ended December 31, 1995 as compared to
1994. This decrease was principally from a reduction in salary expense of
$145,000 and sales related expenses of $451,000, which included reductions
in shipping costs of $194,000, commissions of $130,000 and sample making
of $124,000, offset partially by a net increase in other general overhead
expenses.
Selling, general and administrative expenses decreased by $523,000 to
$9,760,000 for the six months ended December 31, 1995 as compared to 1994.
This decrease was principally from a reduction in salary expense of
$146,000 and sales related expenses of $631,000, which included reductions
in shipping costs of $235,000, commissions of $106,000 and sample making
of $201,000, offset partially by a net increase in other general overhead
expenses.
In connection with the Company's consolidation and realignment of its
operations, the Company abandoned certain leased premises and combined its
divisions in an existing leased premise to reduce overhead and improve
operating efficiencies. The Company provided a reserve for estimated costs
in connection with the abandonment of those leased premises of $900,000 and
wrote-off the remaining net book value of related leasehold improvements of
$270,000.
It is anticipated that the realignment of the Company's operations during
the second quarter will reduce selling, general and administrative costs by
approximately $2,000,000 annually, effective January 1, 1996. In addition,
this realignment will allow the Company to capitalize upon the strengths of
its management team and the organization as a whole.
Interest expense for the three and six month periods ended December 31,
1995 decreased by $86,000 and $174,000 respectively from the comparable
periods in 1994 due to lower borrowing needs during those periods.
The Company had a loss from operations of $1,217,000 for the three months
ended December 31, 1995, which included one-time charges of $1,270,000
related to the abandonment of leased premises and $100,000
related to severance pay, compared to income from operations of
$1,574,000 for the same period in 1994. The Company had a loss from
operations of $2,320,000 for the six months ended December 31,1995, which
included one-time charges of $1,420,000 consisting of $1,170,00 related
to the abandonment of leased premises and $250,000 related to severance
pay, compared to income from operations of $2,585,000 for the same period
in 1994. These decreases were due principally to lower sales and margins,
and the estimated loss on leased premises, offset partially by lower
selling, general and administrative expenses and lower interest expense.
No income tax benefit was provided by the Company for the three and six
months ended December 31, 1995 compared to a provision for income taxes of
$630,000 and $1,034,000 for the three and six months ended December 31,
1994.
As a result of the above factors, the financial results reflect net losses
from operations of $1,217,000 and $2,320,000 for the three and six months
ended December 31,1995 compared to net income of $944,000 and $1,551,000
for the comparable periods in 1994.
Liquidity and Capital Resources
For the six months ended December 31, 1995, the Company's working capital
decreased by $2,027,000 to $20,621,000, principally from operating losses
and the reclassification of $1,200,000 of the Company's
<PAGE> 8
subordinated debentures due in October 1996 as a current liability, offset
partially by proceeds from the sale of property, plant and equipment.
During the six months ended December 31, 1995, cash and cash equivalents
increased by $746,000. The Company used cash for the purchase of fixed
assets of $109,000 and the payment of notes payable of $10,991,000. These
activities were principally funded by cash generated by operating
activities of $11,202,000 and proceeds from the sale of property, plant and
equipment of $664,000.
Inventory at December 31, 1995, decreased by $12,142,000 to $15,465,000
from $27,607,000 at December 31, 1994 primarily as a result of the
divestiture of the men's work and leisure shirt division, which accounted
for $8,199,000 or 68%, of the decrease. In addition, through a concerted
effort to sell discontinued inventory and to reduce inventory
levels, the Company successfully reduced the inventory of its other
divisions by $3,943,000 from the prior year's levels.
The Company intends to reduce the required sinking fund payment of
$3,750,000 due in 1996 on its outstanding subordinated debentures by the
$2,550,000 of debentures previously purchased by the Company. Based upon
the Company's recent financial results and the anticipated loss in fiscal
1996, the Company does not presently anticipate that its earnings will be
sufficient to pay the interest due on April 1, 1996 or the balance of the
payment due in October 1996. In addition, management believes it is
unlikely that future sinking fund requirements in each year after 1996 can
be made from earnings. If the Company does not refinance its debentures
prior to October 1996, it will have to rely on other sources of financing
to make the balance of the payment due in October 1996. There can be no
assurance that the Company will have sufficient availability under its
short-term line of credit for the purpose of making the payment of
interest due on April 1, 1996 or the required sinking fund payment in
October 1996, or that if available, the Company's financing sources will
allow it to utilize the short-term line of credit for such purpose. The
Company does not anticipate any future significant purchases of its stock
or debentures and anticipates that capital expenditures for fiscal 1996
will be less than $300,000. However, depending on price and the
availability of funds, the Company may seek to take advantage of
opportunities to purchase its debentures to further reduce its October
1996 sinking fund requirements. The Company is actively exploring
alternative sources of financing for its long-term and short-term
obligations.
The Company's lines of credit with its two banks expire on June 30, 1996.
The lines of credit are subject to monthly borrowing limitations based on
the Company's anticipated working capital requirements. The credit lines
bear interest of up to 1.25% above the banks' prime rate. As collateral
for such lines, the Company has pledged all of its accounts receivable and
its finished goods inventory imported pursuant to letters of credit issued
under such lines. The Company's borrowing needs are projected to average
$3,000,000 in the second half of fiscal 1996 compared to average borrowing
under the same lines of credit in the second half of fiscal 1995 of
$12,000,000. This reduction in borrowing needs is primarily due to the
Company's decision to divest itself of its men's work and leisure shirt
division and to liquidate the inventory of that division.
In December 1995 and January 1996, the Company exceeded the monthly
borrowing limitations under its lines of credit with its banks. The
excess was attributable to the Company's increased needs for letters of
credit to finance the purchase of higher margin imported finished goods.
To date, the Company's banks have continued to issue letters of credit in
amounts that exceed the Company's monthly borrowing limitations and, in
some cases, expire beyond June 30, 1996. There can be no assurance that
the Company's banks will continue to issue letters of credit in amounts
that exceed the existing monthly borrowing limitations. The Company is
presently negotiating with its banks to amend the existing loan
agreements to accommodate the Company's increased needs for letters of
credit and to extend the lines of credit beyond June 30, 1996. There can
be no assurance that the Company will obtain the appropriate amendments or
an extension of its lines of credit from its current banks.
<PAGE> 9
Even though the Company suffered losses in fiscal 1995 and the first half
of fiscal 1996 and expects to continue to suffer losses in fiscal 1996,
anticipated working capital needs will be substantially lower in the
second half of fiscal 1996 due to the Company's decision to divest itself
of its men's work and leisure shirt product line. With the elimination of
this product line, the Company can focus the attention of its personnel
and financial resources on its core intimate apparel business.
As a result, management believes its available borrowing under these lines
of credit through June 30, 1996, along with anticipated internally
generated funds, may not be sufficient to cover its working capital
requirements.
The Company presently subleases two floors and has a direct lease with the
landlord of the building for a third floor in the building it occupies as
its New York headquarters. In connection with the Company's consolidation
and realignment of its operations, during December 1995 and January 1996,
the Company ceased occupying two of the three floors it had leased for
general office use in New York. The Company has not paid rent to the
lessor of one of those floors since approximately July 1995 and has not
paid rent to the other lessor since November 1995. The lessor of one of
the floors (the landlord of the building) has applied the leasehold
security deposit to the Company's past due obligations. The security
deposit will satisfy the Company's monthly obligation to this lessor
through approximately April 1996. If the Company cannot reach an
acceptable settlement of its future rent obligations with this lessor, the
lessor has a potential claim against the Company of approximately
$2,400,000, representing the aggregate rent obligation, including estimated
rent escalations, for the balance of the lease term. The lessor of the
other floor formerly occupied by the Company has a potential claim against
the Company for approximately $1,900,000, representing the past due unpaid
rent and future rent obligations, including estimated rent escalations,
under the lease. The Company has commenced an action in the Supreme Court
of the State of New York against the lessors of the two abandoned floors
and the lessor of the remaining floor currently occupied by the Company
seeking to recover approximately $250,000, representing overcharges paid by
the Company for electric service under its subleases for two of the floors
it occupied. The landlord of the building has moved to dismiss this action
against it. This motion has not yet been decided by the Court.
The Company also has not paid rent to the lessor of the remaining
floor it occupies since approximately July 1995. The past due unpaid rent
is approximately $337,000. This lessor has applied the leasehold security
deposit to the past due obligation and has demanded that the Company pay
the entire past due obligation and replenish the security deposit. The
Company is presently negotiating with this lessor to settle the claim.
<PAGE> 10
PART II Other Information
Item 1 - Legal proceedings - Not Applicable
Item 2 - Changes in Securities - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 5 - Other Information - None
Item 6 - (a) Exhibits - None
(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/ CLAYTON E. MEDLEY
--------------------------------
CLAYTON E. MEDLEY
President
By: /s/ SAUL POMERANTZ
--------------------------------
SAUL POMERANTZ
Senior Vice President;
Chief Financial Officer
February 14, 1996
<PAGE> 11
EXHIBIT INDEX
Exhibit 27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 849
<SECURITIES> 0
<RECEIVABLES> 16,666
<ALLOWANCES> 1,913
<INVENTORY> 15,465
<CURRENT-ASSETS> 35,035
<PP&E> 11,209
<DEPRECIATION> 6,377
<TOTAL-ASSETS> 42,276
<CURRENT-LIABILITIES> 14,614
<BONDS> 21,282
0
0
<COMMON> 160
<OTHER-SE> 6,420
<TOTAL-LIABILITY-AND-EQUITY> 42,276
<SALES> 57,648
<TOTAL-REVENUES> 57,648
<CGS> 46,663
<TOTAL-COSTS> 46,663
<OTHER-EXPENSES> 9,760
<LOSS-PROVISION> 1,170
<INTEREST-EXPENSE> 2,375
<INCOME-PRETAX> (2,320)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,320)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,320)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
