<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 September 30, 1996
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) 684-3400
(Registrant's telephone number, including area code)
(Former name, former address, and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The number of common shares outstanding on October 31, 1996 was 13,959,650.
<PAGE> 2
MOVIE STAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
Sept. 30, June 30,
1996 1996*
---- ----
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash $ 618 $ 2,283
Receivables, net of allowances 8,045 7,415
Inventory (note 3) 16,136 14,247
Deferred income taxes 3,158 3,158
Prepaid expenses and other
current assets 232 108
------- -------
Total current assets 28,189 27,211
Property, plant and equipment (net) 4,473 4,569
Other assets 1,937 1,979
Deferred income taxes 851 851
------- -------
Total assets $35,450 $34,610
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Notes payable - bank $ 1,458 $ --
Current maturities of long-term debt 46 45
Accounts payable and accrued expenses 8,321 7,760
------- -------
Total current liabilities 9,825 7,805
------- -------
Long-term debt 22,266 23,383
------- -------
Stockholders' equity
Common stock 160 160
Additional paid-in capital 3,731 3,731
Retained earnings 3,086 3,149
------- -------
6,977 7,040
Less: Treasury stock, at cost 3,618 3,618
------- -------
Total stockholders' equity 3,359 3,422
------- -------
Total liabilities and stockholders'
equity $35,450 $34,610
======= =======
</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
September 30,
--------------------
1996 1995
---- ----
<S> <C> <C>
Net sales $ 12,894 $ 24,927
Cost of sales (note 3) 9,609 20,157
-------- --------
Gross profit 3,285 4,770
-------- --------
Selling, general and administrative
expenses 3,171 4,694
Gain on purchase of subordinated debentures (note 4) (560) --
Interest expense 737 1,179
-------- --------
3,348 5,873
-------- --------
Net loss $ (63) $ (1,103)
-------- --------
Net loss per share $ -- $ (.08)
-------- --------
Weighted average number of shares
outstanding 13,960 13,960
-------- --------
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 4
MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
----------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (63) $(1,103)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 180 294
Gain on purchase of subordinated debentures (560) --
Other 6 --
Changes in operating assets and liabilities:
Receivables (630) (9,764)
Inventory (1,889) 4,182
Prepaid expenses and other current assets (124) (108)
Other assets (14) (26)
Accounts payable and accrued expenses 778 634
------- -------
Net cash used in operating activities (2,316) (5,891)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for fixed assets (50) (27)
------- -------
Net cash used in investing activities (50) (27)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term obligations 1,458 6,015
Payment of long-term debt obligations (757) (15)
------- -------
Net cash provided by financing activities 701 6,000
------- -------
NET (DECREASE ) INCREASE IN CASH (1,665) 82
CASH, beginning of period 2,283 103
------- -------
CASH, end of period $ 618 $ 185
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during period for:
Interest $ 170 $ 443
======= =======
Income taxes (net of refunds received) $ (17) $ (289)
======= =======
</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 September 30, 1996 and the results of
operations for the three months ended September 30, 1996 and 1995 and
cash flows for the three months ended September 30, 1996 and 1995,
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 1996 Annual Report on
Form 10-K.
2. The results of operations for the three months ended September 30,
1996 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>
Sept. 30, June 30,
1996 1996
---- ----
<S> <C> <C>
Raw materials $ 3,069 $ 3,816
Work-in-process 2,966 1,950
Finished goods 10,101 8,481
------- -------
$16,136 $14,247
======= =======
</TABLE>
4. During September 1996, the Company purchased $1,320,000 in principal
amount of its 12.875% subordinated debentures. As a result of the
transaction, the Company recorded a gain of $560,000, net of related
costs, in the first quarter of fiscal 1997. The Company reduced its
mandatory sinking fund requirements due in October 1996 with these
debentures.
<PAGE> 6
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 the Company's industry;
general economic conditions; the addition or loss of significant customers;
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.
Overview
The Company incurred substantial losses for the three years ended June 30, 1996.
These losses arose primarily from the Company's inability to maintain sufficient
gross profits due to a more competitive market, the weak retail climate for the
Company's products, difficulties in sourcing its goods offshore and the Company
not sufficiently reducing its overhead.
The Company has also incurred a loss from operations in the three months ended
September 30, 1996. However, due to the steps taken in fiscal 1996 described
below, the Company anticipates that operating results will improve in fiscal
1997.
In September 1995, the Company decided to eliminate its low margin men's work
and leisure shirt division to focus on its core intimate apparel business. This
action was designed to alleviate certain pressures associated with that
division's operations namely, high inventory and capital requirements and poor
return on capital. The liquidation of the assets of this division was
substantially completed in fiscal 1996.
The Company implemented a strategic plan to consolidate and realign the
operations of its core intimate apparel business from independent divisions into
one cohesive unit to reduce costs and create an organizational structure that is
designed to be more productive, effective and efficient. Also, in order to
further reduce expenses and improve operating efficiencies, the Company vacated
two floors of its New York City offices, separately leased to the Company, and
combined its operations into another floor leased by the Company in the same
building. In August of 1996, the Company terminated and settled its remaining
leasehold obligations with respect to the aforementioned vacated floors.
As a result of the corporate consolidation and realignment, the renegotiation of
the lease for the space the Company continues to occupy, the settlements on the
obligations for the vacated floors and reductions of personnel, the Company will
realize annualized overhead savings in excess of $2,500,000 and is in a better
position to capitalize upon the strengths of its management team and the
organization as a whole.
In October 1996, the Company consummated an agreement with holders of
$10,187,000 of the Company's outstanding 12.875% unsecured subordinated
debentures. The agreement reduces the Company's cash interest payment
requirements and eliminates, until October 1999, the requirement to begin making
sinking fund payments. Also, in April 1996, the Company
consummated an agreement with Rosenthal & Rosenthal, a financial institution,
providing for a secured revolving line of credit of up to $13,500,000 for a
period of two years. These agreements are more fully
<PAGE> 7
described in the Liquidity and Capital Resources section below. Management
believes that these financings will provide the Company with the necessary
working capital to operate its business and enable management to focus its
efforts on improving operations.
As a result of these actions, the Company is now better positioned to improve
its overall financial and operational performance.
Results of Operations
Net sales for the three months ended September 30, 1996 decreased by $12,033,000
(48%) to $12,894,000 compared to the similar period in 1995. The decrease in
sales resulted from the elimination of the men's work and leisure shirt division
and lower sales in the intimate apparel division of approximately $8,500,000 and
$3,800,000, respectively, partially offset by an increase in sales of other
divisions. The lower sales in the intimate apparel division resulted primarily
from the weak retail climate for the Company's popular priced products and the
Company's efforts to eliminate low margin business.
The gross profit percentage increased from 19.1% in 1995 to 25.5% in 1996. The
increase was due primarily to the elimination of the low margin men's work and
leisure shirt division and higher margins in the Company's intimate apparel
product lines in the current three-month period as compared to the same period
last year. The higher margins in the Company's intimate apparel product lines
resulted primarily from the Company's efforts to reduce low margin business.
The Company has not fully resolved its sourcing problems, which will have a
further negative impact on financial results in fiscal 1997. However, in an
attempt to correct the Company's sourcing problems, the Company has begun to
shift a portion of its production from the Caribbean and Central America to
manufacturers located in close proximity to Mexico City, Mexico. This will
enable the Company's senior management to more closely monitor the production
of these products. The Company has also hired an employee located in Mexico
to monitor the production of its products. The Company also believes that the
availability of piece goods in Mexico and the North America Free Trade
Agreement will allow the Company to take advantage of lower duty rates.
Selling, general and administrative expenses decreased by $1,523,000 to
$3,171,000 for the three months ended September 30, 1996 as compared to 1995.
This decrease was due to the Company's consolidation and realignment and lower
sales volume. Specifically, this decrease resulted from reductions in salary
expense and related payroll taxes of approximately $748,000, sales related
expenses of approximately $221,000, which includes reductions of shipping costs
of approximately $191,000 and commissions of approximately $31,000, and rent
expense of approximately $232,000 along with other general overhead expenses.
Interest expense for the three months ended September 30, 1996 decreased by
$442,000 to $737,000 compared to the similar period in 1995 due to lower
borrowing needs coupled with the effect of a lower rate on part of the Company's
long-term debt.
During September 1996, the Company purchased $1,320,000 in principal amount of
its 12.875% subordinated debentures to meet a sinking fund payment due in
October 1996. As a result of the transaction, the Company recorded a gain of
$560,000, net of related costs, in the first quarter of fiscal 1997.
The Company had a loss from operations of $63,000 for the three months ended
September 30, 1996, compared to a loss from operations of $1,103,000 for the
same period in 1995. This improvement was
<PAGE> 8
due principally to higher margins, lower selling, general and administrative
expenses, lower interest costs and a gain on the Company's purchase of its
subordinated debentures, offset partially by lower sales volume.
No income tax benefit was provided by the Company for the three months ended
September 30, 1996 and 1995.
Liquidity and Capital Resources
As a result of the aforementioned initiatives, the Company's current ratio
improved to 3.5:1 as of June 30, 1996 and 2.9:1 as of September 30, 1996, as
compared to 1.9:1 and 1.7:1 as of June 30, 1995 and September 30, 1995,
respectively.
For the three months ended September 30, 1996, the Company's working capital
decreased by $1,042,000 to $18,364,000, principally from the purchase of the
Company's 12.875% subordinated debentures and operating losses.
During the three months ended September 30, 1996, cash decreased by $1,665,000.
The Company used $2,316,000 in its operations. In addition, it used cash for the
purchase of fixed assets of $50,000 and the payment of long-term obligations of
$757,000. These activities were funded in part by an increase in short-term
borrowings of $1,458,000.
Inventory at September 30, 1996 decreased by $15,767,000 to $16,136,000 from
$31,903,000 at September 30, 1995 due primarily to the elimination of the men's
work and leisure shirt division and reductions in the intimate apparel division
of $7,978,000 (51%) and $7,316,000 (46%), respectively.
In October 1996, the Company consummated an agreement with holders of
$10,187,000 of the Company's outstanding 12.875% unsecured subordinated
debentures ("Restructured Bonds"). The holders of the Restructured Bonds
exchanged such bonds for the issuance of an equivalent principal amount of a new
series of notes bearing interest at a rate of 8% per annum, payable
semi-annually (April 1 and October 1) which are senior to the 12.875% debentures
("New Senior Notes"). Additionally, the holders of the Restructured Bonds
deferred the receipt of interest due April 1, 1996 (approximately $656,000). The
Company paid the interest due on the remaining 12.875% debentures. The holders
of the Restructured Bonds have also accepted New Senior Notes in exchange for
the April 1, 1996 deferred interest related to the Restructured Bonds and for
the October 1996 interest payment under the New Senior Notes. The aggregate
principal amount of the New Senior Notes approximate $11,276,000. The New Senior
Notes do not provide for any amortization of principal and mature in September
2001. As a result of the exchange, the Company will apply the entire principal
amount of the Restructured Bonds acquired by the Company of $10,187,000 to its
mandatory annual sinking fund payments through October 1999. The Company's
obligation to make mandatory sinking fund payments on the 12.875% debentures
will resume in October 1999 and continue until they mature in October 2001. The
aggregate principal indebtedness of the New Senior Notes and the 12.875%
subordinated debentures at September 30,1996 is $22,220,000.
The New Senior Notes carry the right to convert up to approximately $716,000 of
the notes into 1,908,000 shares of the Company's common stock at a price of
$0.375 per share. In addition, the holders of the New Senior Notes have the
right to designate a representative to attend all meetings of the Company's
Board of Directors and Compensation Committee.
<PAGE> 9
During September 1996, the Company purchased $1,320,000 in principal amount of
its 12.875% subordinated debentures. As a result of the transaction, the Company
recorded a gain of $560,000, net of related costs, in the first quarter of
fiscal 1997. The Company partially satisfied its mandatory sinking fund
requirements with these debentures.
In September 1996, the Company delivered $3,750,000 of its 12.875% debentures,
that it had previously acquired, to the Indenture Trustee, in lieu of making the
mandatory sinking fund payment due October 1, 1996 in cash.
The Company does not anticipate any future significant purchases of its stock or
debentures and anticipates that capital expenditures for fiscal 1997 will be
less than $400,000. However, depending on price and the availability of funds,
the Company may seek to take advantage of opportunities to purchase its
debentures.
The Company has a secured revolving line of credit of up to $13,500,000, through
April 1998, to cover the Company's projected needs for operating capital and
letters of credit to fund the purchase of imported goods. Direct borrowings
under this line bear interest at the annual rate of 2.5% above the prime rate
of Chase Manhattan Bank. Availability under the line of credit is subject to
certain agreed upon formulas. Under the terms of this financing, the Company
has agreed to pledge substantially all of its assets, except the Company's
domestic inventory and real property.
Management believes its available borrowing under its secured revolving line of
credit, along with anticipated internally generated funds, will be sufficient to
cover its working capital requirements.
Continued Stock Exchange Listing
The Company has been advised by the American Stock Exchange that, in view of the
Company's recent financial performance and the low price of its stock, the
Company has fallen below certain of its continued listing guidelines. Due to
these factors, the Exchange is reviewing the Company's eligibility for continued
listing on the Exchange.
<PAGE> 10
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.
<PAGE> 11
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 - None
Item 5 - Other Information - None
Item 6 - (a) Exhibits -
Exhibit
Number Exhibit Method of Filing
------- ------- ----------------
10.5.7 Amendment dated Filed herewith.
October 28, 1996
to Financing Agreement
dated as of
April 24, 1996
between Rosenthal
& Rosenthal, Inc. and
the Registrant.
(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/ MARK M. DAVID
--------------------
MARK M. DAVID
Chairman of the Board;
Chief Executive Officer
By: /s/ SAUL POMERANTZ
------------------
SAUL POMERANTZ
Senior Vice President;
Chief Financial Officer
November 14, 1996
<PAGE> 12
EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
<PAGE> 1
MOVIE STAR, INC.
136 Madison Avenue
New York, NY 10016
Gentlemen:
We hereby agree that the Financing Agreement between us dated April 24,
1996 be and the same is hereby amended by:
Amending the affirmative Financial Covenants in Paragraph 6.9 to read as
follows:
Affirmative Financial Covenants. Borrower shall until payment in full of
all Obligations to Lender and termination of this Agreement (a) cause to be
maintained at the end of each fiscal quarter (i.e., December, March, June and
September), Tangible Net Worth in an amount not less than $1,500,000; and (b)
cause to be maintained at the end of each fiscal quarter, Working Capital of
not less than $12,500,000.
The foregoing amendment shall be effective as of September 27, 1996. In all
other respects, the terms and conditions of the aforesaid agreement as the same
may heretofore been amended, shall remain unchanged.
ROSENTHAL & ROSENTHAL, INC.
By: /s/ Jerry Sandak
-----------------------------
Jerry Sandak, Exec. V.P.
10/24/96
THE FOREGOING IS ACKNOWLEDGED &
AGREED TO
MOVIE STAR, INC.
By: /s/ Saul Pomerantz
-------------------------------
Saul Pomerantz, Sr. V.P.
10/28/96
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 618
<SECURITIES> 0
<RECEIVABLES> 10,661
<ALLOWANCES> 2,616
<INVENTORY> 16,136
<CURRENT-ASSETS> 28,189
<PP&E> 10,678
<DEPRECIATION> 6,205
<TOTAL-ASSETS> 35,450
<CURRENT-LIABILITIES> 9,825
<BONDS> 22,266
0
0
<COMMON> 160
<OTHER-SE> 3,199
<TOTAL-LIABILITY-AND-EQUITY> 35,450
<SALES> 12,894
<TOTAL-REVENUES> 12,894
<CGS> 9,609
<TOTAL-COSTS> 9,609
<OTHER-EXPENSES> 2,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 737
<INCOME-PRETAX> (63)
<INCOME-TAX> 0
<INCOME-CONTINUING> (63)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
