<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, 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 January 31, 1996 was 13,959,650.
<PAGE> 2
MOVIE STAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
Dec. 31, June 30,
1996 1996*
--------- -------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash $ 3,820 $ 2,283
Receivables, net of allowances 7,405 7,415
Inventory (note 3) 11,583 14,247
Deferred income taxes 3,158 3,158
Prepaid expenses and other
current assets 197 108
------- -------
Total current assets 26,163 27,211
Property, plant and equipment (net) 4,328 4,569
Other assets 1,855 1,979
Deferred income taxes 851 851
------- -------
Total assets $33,197 $34,610
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ - $ -
Current maturities of long-term debt 47 45
Accounts payable and accrued expenses 6,266 7,760
------- -------
Total current liabilities 6,313 7,805
------- -------
Long-term debt 22,245 23,383
------- -------
Commitments and contingencies
Stockholders' equity
Common stock 160 160
Additional paid-in capital 3,731 3,731
Retained earnings 4,366 3,149
------- -------
8,257 7,040
Less: Treasury stock, at cost 3,618 3,618
------- -------
Total stockholders' equity 4,639 3,422
------- -------
Total liabilities and stockholders'
equity $33,197 $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 Six Months Ended
December 31, December 31,
----------------- -----------------
1996 1995 1996 1995
------- -------- ------- ------
<S> <C> <C> <C> <C>
Net sales $22,133 $32,721 $35,027 $57,648
Cost of sales (note 3) 16,388 26,506 25,997 46,663
------- ------- ------- ------
Gross profit 5,745 6,215 9,030 10,985
------- ------- ------- ------
Selling, general and administrative
expenses 3,693 5,066 6,864 9,760
Gain on purchase of subordinated debentures
(Note 4) - - (560) -
Estimated loss on abandonment of
leased premises (note 5) - 1,170 - 1,170
Interest expense 772 1,196 1,509 2,375
------- ------ ------ ------
4,465 7,432 7,813 13,305
------- ------ ------ ------
Income (loss) before provision for income taxes 1,280 (1,217) 1,217 (2,320)
Provision for income taxes - - - -
------- ------- ------ ------
Net income (loss) $ 1,280 $(1,217) $ 1,217 $(2,320)
======= ======= ======= =======
Net income (loss) per share $ .09 $ (.09) $ .09 $ (.17)
======= ======= ======= =======
Weighted average number of shares
outstanding 13,960 13,960 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>
Six Months Ended December 31,
------------------------
1996 1995
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,217 $ (2,320)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 369 417
Gain on purchase of subordinated debentures (560) -
Loss on sale/abandonment of fixed assets 43 301
Changes in operating assets and liabilities:
Receivables 10 (5,900)
Inventory 2,664 20,620
Prepaid expenses and other current assets (89) (353)
Other assets 35 (34)
Accounts payable and accrued expenses (1,494) (1,597)
------- --------
Net cash provided by operating activities 2,195 11,202
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for fixed assets (82) (109)
Proceeds from sale of property plant and equipment - 664
------- --------
Net cash (used in) provided by
investing activities (82) 555
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable - (10,991)
Payment of long-term debt obligations (576) (20)
------- --------
Net cash used in financing activities (576) (11,011)
------- --------
NET INCREASE IN CASH 1,537 746
CASH, beginning of period 2,283 103
------- --------
CASH, end of period $ 3,820 $ 714
------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during period for:
Interest $ 1,064 $ 2,381
======= ========
Income taxes (net of refunds received) $ (13) $ (310)
======= ========
</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, 1996 and the results of
operations for the three and six months ended December 31, 1996 and
1995 and cash flows for the six months ended December 31, 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 and six months ended December
31, 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>
Dec. 30, June 30,
1996 1996
------- -------
<S> <C> <C>
Raw materials $ 3,221 $ 3,816
Work-in-process 1,568 1,950
Finished goods 6,794 8,481
------- -------
$11,583 $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.
5. 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 in the
second quarter of fiscal 1996 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. In August 1996, the Company terminated and settled its
remaining leasehold obligations with respect to the aforementioned
abandoned floors for $800,000.
<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; the
loss of key personnel; product development; competition; foreign government
regulations; fluctuations in foreign currency exchange rates; rising costs of
raw materials and the unavailability of sources of supply; the timing of orders
placed by the Company's customers; and the risk factors listed from time to time
in the Company's SEC reports.
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 insufficient
reductions in its overhead.
The Company had income from operations for the six months ended December 31,
1996.
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 that division was
substantially completed in fiscal 1996.
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 a single operating unit thereby reducing costs and creating 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 reduced the Company's cash interest payment
requirements and eliminates, until October 1999, the requirement to make sinking
fund payments in cash. Also, in April 1996, the Company entered into 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 described in the Liquidity and
<PAGE> 7
Capital Resources section below. Management believes these agreements 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 continue
to improve its overall financial and operational performance.
Results of Operations
Net sales for the three months ended December 31, 1996 decreased by $10,588,000
(32%) to $22,133,000 compared to the similar period in 1995. The decrease in
sales resulted primarily from the elimination of the men's work and leisure
shirt division and lower sales in the intimate apparel division of
approximately $7,747,000 and $2,636,000, respectively. 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.
Net sales for the six months ended December 31, 1996 decreased by $22,621,000
(39%) to $35,027,000 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 $16,213,000
and $6,442,000, respectively. 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 to 26% for the three months ended December
31, 1996 from 19% in the similar period in 1995. The gross profit percentage
increased to 25.8% for the six months ended December 31, 1996 from 19.1% in the
similar period in 1995. 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 as compared to the same periods last
year. The higher margins in the Company's intimate apparel product lines
resulted primarily from the Company's efforts to address all components of its
finished goods costs, including the countries in which goods are manufactured,
the sources of its piece goods and the overall management of its costs.
The Company has not fully resolved its sourcing problems. However, in an attempt
to correct these problems, the Company has shifted a portion of its production
from the Caribbean and Central America to manufacturers located in close
proximity to Mexico City, Mexico. This allows the Company to take advantage of
lower duty rates that result from the North America Free Trade Agreement and the
availability of piece goods in Mexico. Also this enables 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.
Selling, general and administrative expenses decreased by $1,373,000 to
$3,693,000 for the three months ended December 31, 1996 as compared to 1995.
This decrease was primarily due to the Company's consolidation and realignment
and lower sales volume. Specifically, the decrease resulted from reductions in
salary expense and related payroll taxes of approximately $422,000, sales
related expenses of approximately $217,000, which includes reductions of
shipping costs of approximately $215,000, and rent expense of approximately
$210,000 along with other general overhead expenses.
<PAGE> 8
Selling, general and administrative expenses decreased by $2,896,000 to
$6,864,000 for the six months ended December 31, 1996 as compared to 1995. This
decrease was primarily due to the Company's consolidation and realignment and
lower sales volume. Specifically, the decrease resulted from reductions in
salary expense and related payroll taxes of approximately $1,170,000, sales
related expenses of approximately $439,000 which included reductions of shipping
costs of approximately $406,000, and rent expense of approximately $442,000
along with other general overhead expenses.
In 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.
In fiscal 1996, the Company abandoned two floors of its New York City offices in
connection with the Company's consolidation and realignment of its operations.
The Company provided a reserve of $900,000 for estimated costs in connection
with the abandonment of the two floors, and wrote-off the net remaining book
value of related leasehold improvements of $270,000. In August of 1996, the
Company terminated and settled its remaining leasehold obligations with respect
to the aforementioned abandoned floors for $800,000.
Interest expense for the three and six months ended December 31, 1996 decreased
by $424,000 and $866,000 respectively from the comparable periods in 1995 due to
lower borrowing needs coupled with the effect of the negotiated lower rate of
interest on a portion of the Company's long-term debt.
The Company's results reflect income from operations of $1,280,000 and
$1,217,000 for the three and six months ended December 31, 1996 as compared to
losses from operations of $1,217,000 and $2,320,000 for the same periods in
1995. This improvement was due to higher margins, lower selling, general and
administrative expenses, lower interest costs, a gain on the Company's purchase
of its subordinated debentures and one time charges taken in the prior year,
offset partially by lower sales volume.
No income tax provision or benefit was provided by the Company for the three
and six months ended December 31, 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 4.1:1 as of December 31, 1996 as
compared to 1.9:1 and 2.4:1 as of June 30, 1995 and December 31, 1995,
respectively.
For the six months ended December 31, 1996, the Company's working capital
increased by $444,000 to $19,850,000, principally from profitable operations,
partially offset by a purchase of some of the Company's 12.875% subordinated
debentures.
During the six months ended December 31, 1996, cash increased by $1,537,000. The
Company provided $2,195,000 from its operations. The Company used cash for the
purchase of fixed assets of $82,000 and the payment of long-term obligations of
$576,000.
Inventory at December 31, 1996 decreased by $3,882,000 to $11,583,000 from
$15,465,000 at December 31, 1995 due primarily to reductions in the intimate
apparel division.
<PAGE> 9
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) and
October 1, 1996 (approximately $433,000). The Company paid the interest due on
the remaining 12.875% debentures. The holders of the Restructured Bonds have
accepted New Senior Notes in exchange for the April 1, 1996 and the October 1,
1996 deferred interest related to the Restructured Bonds. 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 December 31,1996 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.
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
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.
<PAGE> 10
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 has informed the Company that it will continue to
review the Company's eligibility for continued listing on the Exchange.
<PAGE> 11
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> 12
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
- ------ ------- ----------------
10.5.8 Amendment dated Filed herewith.
November 20, 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
February 14, 1997
<PAGE> 13
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit
- ------ -------
10.5.8 Amendment dated November 20, 1996 to Financing Agreement
dated as of April 24, 1996 between Rosenthal & Rosenthal,
Inc. and the Registrant.
27 Financial Data Schedule
<PAGE> 1
November 20, 1996
MOVIE STAR, INC.
136 Madison Avenue
New York, NY 10016
RE: FINANCING AGREEMENT
DATED: April 24, 1996
It is mutually agreed that the above mentioned agreement between us shall be
amended as hereinafter provided:
Effective only for the period commencing April 24, 1996 through April 30, 1997
the following shall apply:
- The minimum charges for interest and Letter of Credit charges
specified in the third sentence of Section 9.1 is hereby
reduced to $200,000.00.
The foregoing amendment shall be effective as of November 19, 1996.
In all other respects the terms and conditions of the aforesaid agreement, as
the same may have heretofore been amended, shall remain unchanged.
ROSENTHAL & ROSENTHAL, INC.
By: /s/ Sheldon Kaye
------------------------------
Sheldon Kaye, Sr. VP
THE FOREGOING IS ACKNOWLEDGED &
AGREED TO:
MOVIE STAR, INC.
By: /s/ Saul Pomerantz
---------------------------
Saul Pomerantz, Sr. VP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,820
<SECURITIES> 0
<RECEIVABLES> 10,021
<ALLOWANCES> 2,616
<INVENTORY> 11,583
<CURRENT-ASSETS> 26,163
<PP&E> 10,673
<DEPRECIATION> 6,345
<TOTAL-ASSETS> 33,197
<CURRENT-LIABILITIES> 6,313
<BONDS> 22,245
0
0
<COMMON> 160
<OTHER-SE> 4,479
<TOTAL-LIABILITY-AND-EQUITY> 33,197
<SALES> 35,027
<TOTAL-REVENUES> 35,027
<CGS> 25,997
<TOTAL-COSTS> 25,997
<OTHER-EXPENSES> 6,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,509
<INCOME-PRETAX> 1,217
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,217
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
