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 March 31, 1999
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 April 30, 1999 was 14,869,644.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
March 31, June 30,
1999 1998*
---------- --------
(Unaudited)
Assets
Current Assets
Cash $ 6,346 $ 546
Receivables, net 9,111 6,330
Inventory 13,576 20,945
Deferred income taxes 2,291 2,200
Prepaid expenses and other current assets 355 456
---- ----
Total current assets 31,679 30,477
Property, plant and equipment, net 3,538 3,551
Other assets 831 906
Deferred income taxes 1,718 1,809
---- ----
Total assets $ 37,766 $ 36,743
====== ======
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ - $ 328
Current maturities of long-term debt and
capital lease obligations 44 40
Accounts payable and accrued expenses 7,808 10,193
---- ----
Total current liabilities 7,852 10,561
---- ----
Long-term debt and capital lease
obligations 20,715 20,980
---- ----
Commitments and Contingencies - -
Stockholders' equity
Common stock 169 161
Additional paid-in capital 4,066 3,789
Retained earnings 8,582 4,870
---- ----
12,817 8,820
Less: Treasury stock, at cost 3,618 3,618
---- ----
Total stockholders' equity 9,199 5,202
---- ----
Total liabilities and stockholders'
equity $ 37,766 $ 36,743
======= =======
* Derived from audited financial statements.
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- ---------------------
1999 1998 1999 1998
----- ----- ---- ----
<S> <C> <C> <C> <C>
Net sales $14,715 $12,918 $59,462 $50,857
Cost of sales 10,334 9,134 42,038 36,300
---- ---- ---- ----
Gross profit 4,381 3,784 17,424 14,557
Selling, general and administrative
Expenses 3,637 3,465 11,588 11,075
---- ---- ---- ----
Income from operations 744 319 5,836 3,482
Gain on purchases of subordinated debentures
And senior notes - (59) - (157)
Interest income (56) (65) (59) (108)
Interest expense 594 566 2,104 2,045
---- ---- ---- ----
Income (loss) before provision for income
Taxes 206 (123) 3,791 1,702
Provision for income taxes 4 - 76 -
---- ---- ---- ----
Net income (loss) $ 202 $ (123) $ 3,715 $ 1,702
======= ======= ======= ======
Basic net income (loss) per share $ .01 $ (.01) $ .26 $ .12
======= ======= ======= ======
Diluted net income (loss) per share $ .01 $ (.01) $ .24 $ .11
======= ======= ======= ======
Basic weighted average number of shares
Outstanding 14,131 14,117 14,122 14,029
======= ======= ======= ======
Diluted weighted average number of shares
Outstanding 16,326 14,117 15,639 15,512
======= ======= ======= ======
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
--------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,715 $ 1,702
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 428 467
Gain on purchases of subordinated debentures
and senior notes - (157)
Loss on sale of property, plant and equipment 2 -
(Increase) decrease in operating assets:
Receivables (2,781) (2,831)
Inventory 7,369 2,559
Prepaid expenses and other current assets 101 (198)
Other assets (28) (63)
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses (2,388) 1,037
----- ----
Net cash provided by operating activities 6,418 2,516
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (458) (107)
Proceeds from sale of property, plant
and equipment 200 500
Proceeds from sale of other assets (interest
in building) - 619
---- ----
Net cash (used in) provided by
investing activities (258) 1,012
---- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on and purchases of long-term debt
and Capital lease obligations (39) (1,138)
Net(repayment of) proceeds from revolving
line of credit (328) -
Issuance of common stock under stock option plan 7 -
---- ----
Net cash used in financing activities (360) (1,138)
---- ----
NET INCREASE IN CASH 5,800 2,390
CASH, beginning of period 546 3,035
---- ----
CASH, end of period $ 6,346 $ 5,425
===== =====
(Cont'd)
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
March 31,
-------------------------
1999 1998
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $1,495 $1,478
===== =====
Income taxes (net of refunds received) $ 16 $ 13
===== =====
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES:
Acquisition of equipment through assumption
of capital lease obligation $ 56 $ -
===== =====
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
ACTIVITIES:
Conversion of long-term debt for common stock $ (278) $ (59)
Issuance of common stock 278 59
---- ----
$ - $ -
===== =====
(Concluded)
See notes to consolidated condensed financial statements.
<PAGE>
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
normal recurring accruals) necessary to present fairly the financial
position as of March 31, 1999 and the results of operations for the
interim periods presented and cash flows for the nine months ended
March 31, 1999 and 1998, 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. The results
of operations for the three and nine months ended March 31, 1999 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
consolidated financial statements and notes included in the 1998
Annual Report on Form 10-K.
2. 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 at the end of each fiscal year.
The breakdown of the inventory in thousands is as follows:
March 31, June 30,
1999 1998
--------- --------
Raw materials $ 3,932 $ 8,762
Work-in process 1,128 2,431
Finished goods 8,516 9,752
---- ----
$ 13,576 $ 20,945
========= ========
3. In October 1997, the Company purchased $500,000 in principal amount
of its 12.875% subordinated debentures. As a result of the
transaction, the Company recorded a pre-tax gain of $94,000, net of
related costs, in the second quarter of fiscal 1998. The Company will
further reduce its mandatory sinking fund requirement due in October
1999 with these debentures.
In November 1997, the Company purchased $300,000 in principal
amount of its 8% convertible senior notes. These notes entitled the
previous holders to convert the principal amount into 800,000 shares
of the Company's common stock. Also in the second quarter of fiscal
1998, certain individuals affiliated with the Company purchased
$278,500 in principal amount of the 8% convertible senior notes due
September 1, 2001. The purchasing affiliates converted the notes on
March 31, 1999 into 742,662 shares of the Company's common stock, par
value $.01.
In February 1998 and March 1998, the Company purchased $156,000
and $300,000 in principal amount of its 12.875% subordinated
debentures, respectively. As a result of these transactions, the
<PAGE>
Company recorded a pre-tax gain of $59,000, net of related costs, in
the third quarter of fiscal 1998. These debentures, along with
previously acquired debentures, will be applied to the mandatory
sinking fund requirement through October 1999 and will reduce the
October 2000 requirement by $13,000.
In December 1997, non-affiliated holders of $59,000 in principal
amount of the 8% convertible senior notes converted their notes into
approximately 157,000 shares of common stock.
4. During the second quarter of fiscal 1999, the Company sold a
non-operating manufacturing facility located in Mississippi and a
vacant parcel of land located in Georgia for approximately $195,000.
The Company did not recognize a gain or loss on these transactions.
During the second quarter of fiscal 1998, the Company sold two
non-operating manufacturing facilities located in Georgia for an
aggregate of $500,000. The Company did not recognize a gain or loss
on these transactions.
In March 1998, the Company sold its interest in a building located
in Georgia for approximately $619,000. The Company did not recognize
a gain or loss on this transaction.
5. The following sets forth the Company's calculation of Basic and
Diluted Net Income (Loss) Per Share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Net Income (Loss) Per Share:
----------------------------------
Net Income (Loss) to Common Stockholders $ 202 $ (123) $ 3,715 $ 1,702
Basic Weighted Average Shares Outstanding 14,131 14,117 14,122 14,029
Basic Net Income (Loss) Per Share $ .01 $ (.01) $ .26 $ .12
===== ===== ===== =====
Diluted Net Income (Loss) Per Share:
------------------------------------
Net Income (Loss) to Common Stockholders $ 202 $ (123) $ 3,715 $ 1,702
Plus: Interest Expense on 8% Convertible
Senior Notes 7 (a) 21 31
---- ---- ---- ----
Adjusted Net Income (Loss) $ 209 $ (123) $ 3,736 $ 1,733
===== ===== ===== =====
Weighted Average Shares Outstanding 14,131 14,117 14,122 14,029
Plus: Shares Issuable Upon Conversion
of 8% Convertible Senior Notes 943 (a) 948 1,483
Shares Issuable Upon Conversion
of Stock Options 1,252 - 569 -
---- ---- ---- ----
Diluted Weighted Average Shares
Outstanding 16,326 14,117 15,639 15,512
===== ===== ===== =====
Diluted Net Income (Loss) Per Share $ .01 $ (.01) $ .24 $ .11
===== ===== ===== =====
</TABLE>
(a) These dilutive securities have been excluded because their
effect, if included, would have been antidilutive.
Not all shares of potential exercisable stock options are included in
the Diluted Net Income (Loss) Per Share calculation because they are
considered antidilutive.
6. In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related
Information," which is effective for the Company for the year ended
June 30, 1999 (fiscal 1999). SFAS No. 131 requires disclosure about
<PAGE>
operating segments in complete sets of financial statements and in
condensed financial statements of interim periods issued to
shareholders. The new standard also requires that the Company report
certain information about their products and services, the geographic
areas in which they operate, and major customers. The Company has not
yet determined the impact of the adoption of SFAS No. 131.
<PAGE>
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 Registrant'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 Registrant's customers; and the risk factors listed from time to
time in the Company's SEC reports .
Results of Operations
Net sales for the three months ended March 31, 1999 increased by 13.9% to
$14,715,000 from $12,918,000 in the comparable period in 1998. The increase in
sales resulted from higher sales in the intimate apparel division of
approximately $2,009,000 offset partially by a decrease in sales for the retail
division of approximately $212,000. Net sales in the intimate apparel division
increased to $13,024,000 due to the retailers' positive acceptance of the
Company's moderately priced fashion forward products. Net sales in the Company's
retail division decreased to $1,691,000 primarily due to the continuing poor
weather patterns in the geographic areas in which the stores are located,
resulting in lower sales due to fewer customers.
Net sales for the nine months ended March 31, 1999 increased by 16.9% to
$59,462,000 from $50,857,000 in the comparable period in 1998. The increase in
sales resulted from higher sales in the intimate apparel division of
approximately $9,476,000, offset partially by a decrease in sales for the retail
division of approximately $862,000. Net sales in the intimate apparel division
increased to $52,021,000 as a result of the same factors for the three months
discussed above. Net sales in the Company's retail division decreased to
$7,441,000 due to the above-mentioned poor weather patterns and hurricanes in
the geographic areas in which the stores are located which resulted in fewer
customers.
The Company's gross profit percentage increased to 29.8% for the three months
ended March 31, 1999 from 29.3% in the similar period in 1998. The gross margin
in the Company's intimate apparel division increased to 29.1% for the three
months ended March 31, 1999 from 28.9% in the similar period in 1998. The gross
margin for the retail division increased to 35.0% for the three months ended
March 31,1999 as compared to 31.4% in the similar period in 1998. The higher
margins in the retail division resulted primarily due to a better merchandise
mix in the current three-month period as compared to the same period in the
prior year.
The Company's gross profit percentage increased to 29.3% for the nine months
ended March 31, 1999 from 28.6% in the similar period in 1998. The gross margin
in the Company's intimate apparel division increased to 28.8 % for the nine
months ended March 31, 1999 from 27.8% in the similar period in 1998. The higher
<PAGE>
margins in the intimate apparel division resulted primarily from the Company's
shift of production to Mexico-based contractors, operational efficiencies and a
more favorable sales mix. The gross margin for the retail division decreased to
32.8% for the nine months ended March 31, 1999 as compared to 32.9% in the
similar period in 1998.
Certain of the raw materials used in the production of the Company's products in
Mexico are subject to export limitations under the North American Free Trade
Agreement, called Tariff Protection Levels ("TPL"), that are similar to quotas.
TPL is assigned annually to various categories of textiles and is available on a
"first-come first-served" basis to U.S. companies exporting products from Mexico
containing the textiles subject to the TPL. In September 1998, for the first
time since 1996, when the Company began its efforts to increase production in
Mexico, certain of the raw textile materials used in the Company's products
reached the maximum annual TPL. As a result, the rate of duty for this category
of products shipped from Mexico to the United States in the last four months of
calendar year 1998 increased from 2.8% of the value of the finished product to
16.6% of that value. The Company is investigating various strategies to minimize
the impact of this increase in the future. These strategies include purchasing
more raw materials that originate in Mexico that will not be subject to TPL
limitations and investigating other locations for manufacturing.
Selling, general and administrative expenses were $3,637,000, or 24.7% of sales,
for the three months ended March 31, 1999 as compared to $3,465,000, or 26.8% of
sales, for the similar period in 1998. This increase resulted from an increase
in salary and salary costs of $329,000 and a net increase in other general
overhead expenses, partially offset by a decrease in commissions of $171,000.
Selling, general and administrative expenses were $11,588,000, or 19.5% of
sales, for the nine months ended March 31, 1999 as compared to $11,075,000, or
21.8% of sales, for the similar period in 1998. This increase resulted from an
increase in salary and salary costs of $636,000, shipping costs of $163,000 and
other general overhead expenses, partially offset by a decrease in commissions
of $440,000 and advertising costs of $114,000.
Income from operations increased to $744,000 and $5,836,000 for the three and
nine months ended March 31, 1999, respectively as compared to $319,000 and
$3,482,000 for the similar periods in 1998. These increases were due to higher
sales and margins, partially offset by an increase in selling, general and
administrative expenses.
The Company's retail division had a loss from operations of $46,000 and income
from operations of $351,000 for the three and nine months ended March 31, 1999
as compared to a loss from operations of $38,000 and income from operations of
$606,000 for the similar periods in the prior year. These decreases were
primarily due to lower sales. The operational results for the retail division
are based on direct operating expenses and do not include any indirect corporate
overhead.
In February 1998 and March 1998, the Company purchased $156,000 and $300,000 in
principal amount of its 12.875% subordinated debentures, respectively. As a
<PAGE>
result of these transactions, the Company recorded a pre-tax gain of $59,000,
net of related costs, in the third quarter of fiscal 1998.
In October 1997, the Company purchased $500,000 in principal amount of its
12.875% subordinated debentures and in November 1997, the Company purchased
$300,000 in principal amount of its 8% Convertible Senior Notes. As a result of
these transactions, the Company recorded a pre-tax gain of $98,000, net of
related costs, in the second quarter of fiscal 1998.
Interest income for the three and nine months ended March 31, 1999 was $56,000
and $59,000, respectively, as compared to $65,000 and $108,000 for the similar
periods in 1998.
Interest expense for the three and nine months ended March 31, 1999 was $594,000
and $2,104,000, respectively, as compared to $566,000 and $2,045,000 for the
similar periods in 1998.
The Company provided for an alternative minimum tax of $4,000 and $76,000 for
the three and nine months ended March 31, 1999, respectively, as compared to no
income tax provision or benefit for the same periods in 1998.
The Company had net income of $202,000 and $3,715,000 for the three and nine
months ended March 31, 1999, respectively, as compared to a net loss of $123,000
and net income of $1,702,000 for the similar periods in 1998. These improvements
were due to higher sales and margins, offset partially by an increase in
selling, general and administrative expenses, net interest costs, income taxes
and a gain on the purchase of subordinated debentures in the prior year.
Liquidity and Capital Resources
For the nine months ended March 31, 1999, the Company's working capital
increased by $ 3,911,000 to $23,827,000, principally from operating profits.
During the nine months ended March 31, 1999, cash increased by $5,800,000. The
Company used cash of $458,000 for the purchase of fixed assets, $328,000 for the
repayment of short-term borrowings and $39,000 for the payment of capital lease
obligations. These activities were funded with cash generated from profitable
operations of $6,418,000, the sale of certain non-operating assets of $200,000
and the exercise of stock options of $7,000.
Receivables at March 31, 1999 increased by $2,781,000 to $9,111,000 from
$6,330,000 at June 30, 1998. This increase is due to normal seasonal shipping
fluctuations within the period in the Company's intimate apparel division.
Inventory at March 31, 1999 decreased by $7,369,000 to $13,576,000 from
$20,945,000 at June 30, 1998. This decrease, in both the intimate apparel and
<PAGE>
retail division inventories, resulted from the normal fluctuation in sales
during the July through March period.
During the second quarter of fiscal 1999, the Company sold a non-operating
manufacturing facility located in Mississippi and a vacant parcel of land
located in Georgia for an aggregate of $195,000. The Company did not recognize a
gain or loss on these transactions.
In March 1998, the Company sold its interest in a building located in Georgia
for approximately $619,000. The Company did not recognize a gain or loss on this
transaction.
During the second quarter of fiscal 1998, the Company sold two non-operating
manufacturing facilities located in Georgia for an aggregate of $500,000. The
Company did not recognize a gain or loss on these transactions.
In November 1997, the Company purchased $300,000 in principal amount of its 8%
Convertible Senior Notes due September 1, 2001. These Notes entitled the
previous holders to convert the principal amount into 800,000 shares of the
Company's common stock, par value $.01. Also in the second quarter of fiscal
1998, certain individuals affiliated with the Company purchased $278,500 in
principal amount of the 8% Convertible Senior Notes due September 1, 2001. The
purchasing affiliates converted the Notes on March 31, 1999 into 742,662 shares
of the Company's common stock, par value $.01. The affiliates have agreed to
certain restrictions on the circumstances under which they will be permitted to
sell the shares into which the Notes were converted. The purchasers have also
granted the Company the right to purchase the shares at a price equal to 90% of
the market price at the time any purchaser is permitted under the agreement to
sell the shares in the open market and wishes to do so.
In December 1997, non-affiliated holders of $59,000 in principal amount of the
8% Convertible Senior Notes converted their Notes into approximately 157,000
shares of the Company's common stock, par value $.01.
In October 1997, the Company purchased $500,000 in principal amount of its
12.875% subordinated debentures. As a result of the transaction, the Company
recorded a pre-tax gain of $94,000, net of related costs, in the second quarter
of fiscal 1998.
The Company has $20,615,000 remaining in long-term debt and a secured revolving
line of credit of up to $13,500,000. The long-term debt consists of $9,987,000
of 12.875% Subordinated Debentures, $10,550,000 8% Senior Notes, and $78,000 8%
Convertible Senior Notes. The remaining sinking fund requirement for the 12.875%
Subordinated Debentures is $3,737,000 due on October 1, 2000 and the balance of
the principal in the amount of $6,250,000 is due on October 1, 2001. The 8%
Senior Notes and the 8% Convertible Senior Notes do not require any amortization
<PAGE>
and mature on September 1, 2001. The $78,000 8% Convertible Senior Notes are
convertible into the Company's common stock, at any time prior to maturity, at a
price of $0.375 per share.
The Company's secured revolving line of credit is in effect until June 30, 1999
and, by its terms, shall be renewed from year to year thereafter, unless sooner
terminated or renegotiated by the Company and its lender. This line of credit
covers 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 2.0% 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. The Company is presently negotiating with its current lender to
renew its credit facility on more favorable terms.
The Company does not anticipate capital expenditures for fiscal 1999 to be more
than $700,000.
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. Management is also currently exploring
alternatives for refinancing the long-term debt.
Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
The statement requires that public enterprises report certain information about
operating segments in complete sets of financial statements of an enterprise and
in condensed financial statements of interim periods issued to stockholders. It
also requires that public enterprises report certain information about their
products and services, geographic areas in which they operate, and major
customers.
The Company is required to adopt SFAS No. 131 in fiscal 1999 and the Company's
year end consolidated financial statements will reflect the appropriate
disclosures.
YEAR 2000
Overview
The Year 2000 issue is primarily the result of computer programs only accepting
a two-digit date code, as opposed to four digits, to indicate the year.
Beginning in the Year 2000, and in certain instances prior to the Year 2000,
these date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, the Company's date
<PAGE>
critical functions may be adversely affected unless these computer systems and
software products are, or become, able to accept four-digit entries.
Internal Systems and Equipment
The Company has substantially completed its comprehensive program consisting of
identifying, assessing and, if necessary, upgrading and/or replacing its systems
and equipment that were vulnerable to Year 2000 problems. The Company is in the
process of testing its entire system for Year 2000 compliance and plans to
complete its testing by June 1999.
Third Party Relationships
The Company has been formally communicating with its significant suppliers and
customers to determine if those parties have appropriate plans to remedy Year
2000 issues when their systems interface with the Company's systems or may
otherwise impact the operations of the Company. The Company has substantially
completed its review and believes that its major customers and suppliers have
addressed their Year 2000 issues. However, there can be no assurance, that the
systems of other companies on which the Company's processes rely will be timely
converted, or that a failure to successfully convert by another company, or a
conversion that is incompatible with the Company's systems, would not have an
impact on the Company's operations.
Contingency Plans
Based on the assessment efforts to date, the Company has focused on three
separate contingency plans (1) if the Company's systems are non-compliant (2) if
the Company's customers are non-compliant and (3) if the Company's suppliers are
non-compliant. The Company is continuously developing these plans to minimize
the impact of a potential failure. However, there can be no assurance that the
Company will be able to have a contingency plan in place for a significant
supplier and/or customer that does not become Year 2000 compliant.
Costs/Risks
Management currently estimates that the cost, in connection with bringing its
own systems and equipment into compliance, was less than $50,000 for fiscal 1998
and less than $100,000 through the third quarter of fiscal 1999. Management does
not expect the additional cost to exceed $50,000. Although the Company is not
aware of any material operational issues or costs associated with preparing its
internal systems for the Year 2000, there can be no assurance that there will
not be a delay in, or increased costs associated with, the implementation of the
necessary systems and changes to address the Year 2000.
Potential sources of risk include but are not limited to (a) the inability of
principal suppliers to be Year 2000 compliant, which could result in delays in
<PAGE>
product deliveries from such suppliers, (b) the inability of our customers to
become compliant, which could result in them not accepting our product in a
timely manner causing the Company to be in an over inventoried position
resulting in a disruption of its cash flow, and (c) disruption of the
distribution channel, including ports and transportation vendors as a result of
general failure of systems and necessary infrastructure such as electrical
supply.
<PAGE>
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>
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 - 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/ MELVYN KNIGIN
------------------
MELVYN KNIGIN
Chief Executive Officer;
President
By: /s/ THOMAS RENDE
------------------
THOMAS RENDE
Chief Financial Officer
May 13, 1999
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