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, 1999
Transition Report Pursuant to Section 13 or 15(d) of the
X Securities Exchange Act of 1934
For the transition period from _______________ to __________________
Commission File Number 1-5893
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MOVIE STAR, INC.
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(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
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(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, 2000 was
14,896,977.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
December 31, June 30,
1999 1999*
---------- -------
(Unaudited)
Assets
Current Assets
Cash $ 2,801 $ 4,597
Receivables, net 10,012 6,864
Inventory 11,046 16,460
Prepaid expenses and other
current assets 2,336 2,585
------- -------
Total current assets 26,195 30,506
Property, plant and equipment, net 3,349 3,495
Other assets 2,758 2,758
------- -------
Total assets $32,302 $36,759
======= =======
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of capital
lease obligations $ 51 $ 45
Accounts payable and accrued
expenses 6,172 7,845
------- --------
Total current liabilities 6,223 7,890
------- --------
Long-term debt and capital lease
obligations 15,073 20,703
------- --------
Commitments and Contingencies -- --
Stockholders' equity
Common stock, $.01 par value -
authorized 30,000,000 shares;
issued 16,897,000 shares 169 169
Additional paid-in capital 4,072 4,072
Retained earnings 10,383 7,543
------- --------
14,624 11,784
Less: Treasury stock, at cost -
2,017,000 shares 3,618 3,618
------- --------
Total stockholders' equity 11,006 8,166
------- --------
Total liabilities and stockholders'
equity $ 32,302 $36,759
======== =======
* Derived from audited financial statements.
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ------------------------
1999 1998 1999 1998
------ ------- ------- --------
<S> <C> <C> <C> <C>
Net sales $23,354 $25,789 $42,573 $44,747
Cost of sales 16,478 18,403 30,387 31,704
------- ------- ------ ------
Gross profit 6,876 7,386 12,186 13,043
Selling, general and administrative
expenses 4,499 4,233 8,528 7,951
------- ------- ------ ------
Income from operations 2,377 3,153 3,658 5,092
Gain on purchases of subordinated debentures
and senior notes (50) - (164) -
Interest income (2) (2) (20) (3)
Interest expense 538 777 1,097 1,510
------- ------- ------ ------
Income before provision for income taxes
and extraordinary gain 1,891 2,378 2,745 3,585
Provision for income taxes 38 48 55 72
------- ------- ------ ------
Income before extraordinary gain 1,853 2,330 2,690 3,513
Extraordinary gain on purchases of
subordinated debentures (150) - (150) -
------- ------- ------ ------
Net income $ 2,003 $ 2,330 $ 2,840 $ 3,513
======= ======= ====== ======
BASIC
Income before extraordinary gain per share $.12 $.17 $.18 $.25
Extraordinary gain per share .01 - .01 -
------- ------- ------ ------
Net income per share $.13 $.17 $.19 $.25
======= ====== ====== ======
DILUTED
Income before extraordinary gain per share $.12 $.15 $.17 $.23
Extraordinary gain per share .01 - .01 -
------- ------- ------ ------
Net income per share $.13 $.15 $.18 $.23
====== ====== ====== ======
Basic weighted average number of shares
outstanding 14,880 14,117 14,880 14,117
======= ====== ====== ======
Diluted weighted average number of shares
outstanding 15,964 15,523 16,159 15,295
======= ======= ====== =======
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
Six Months Ended
December 31,
------------------------
1999 1998
-------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,690 $ 3,513
Adjustments to reconcile income before extraordinary gain
to net cash provided by operating activities:
Depreciation and amortization 309 290
Gain on purchases of subordinated debentures and
senior notes (164) -
Loss on sale of property, plant and equipment 37 2
(Increase) decrease in operating assets:
Receivables (3,148) (3,684)
Inventory 5,414 6,626
Prepaid expenses and other current assets 249 136
Other assets (90) (21)
Decrease in operating liabilities:
Accounts payable and accrued expenses (1,676) (3,691)
------ ------
Net cash provided by operating activities 3,621 3,171
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (114) (260)
Proceeds from sale of property, plant and equipment - 180
------ ------
Net cash used in investing activities (114) (80)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on and purchases of long-term debt and
capital lease obligations (5,303) (28)
Repayment of revolving line of credit, net - (328)
------ ------
Net cash used in financing activities (5,303) (356)
------ ------
NET (DECREASE) INCREASE IN CASH (1,796) 2,735
CASH, beginning of period 4,597 546
------ ------
CASH, end of period $ 2,801 $ 3,281
======= =======
</TABLE>
(Cont'd)
<PAGE>
MOVIE STAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
Six Months Ended
December 31,
-------------------------
1999 1998
-------- ------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $1,238 $1,486
======= ======
Income taxes (net of refunds received) $ - $ 16
======= ======
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Acquisition of equipment through assumption of capital
lease obligation $ 18 $56
======= ======
</TABLE>
(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 unaudited consolidated
condensed financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial
position as of December 31, 1999 and the results of operations for the
interim periods presented and cash flows for the six months ended December
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 six
months ended December 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 1999 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.
An approximate breakdown of the inventory in thousands is as follows:
December 31, June 30,
1999 1999
------------ ---------
Raw materials $ 2,870 $ 5,513
Work-in process 486 2,121
Finished goods 7,690 8,826
------- -------
$11,046 $16,460
======= =======
3. During the second quarter ending December 31, 1999, the Company purchased
$2,786,000 in principal amount of its 12.875% subordinated debentures.
Using previously acquired debentures and 903,000 of these debentures, the
Company will satisfy its sinking fund requirement due October 1, 2000. As a
result of the purchase of these $903,000 of debentures, the Company
recorded a pre-tax gain of $50,000, net of related costs. The remaining
$1,883,000 of repurchased debentures will be applied to the final payment
due on October 1, 2001. As a result of the purchase of these $1,883,000 of
debentures, the Company recorded an extraordinary gain of $150,000, net of
related costs and income taxes.
4. In the first quarter of fiscal 2000, the Company purchased $2,834,000 in
principal amount of its 12.875% subordinated debentures and recorded a
pre-tax gain of $114,000, net of related costs. The Company will use these
debentures to reduce its mandatory sinking fund requirement due on October
1, 2000.
<PAGE>
5. Net Income Per Share - The Company's calculation of Basic and Diluted Net
Income Per Share are as follows (in thousands, except per share amounts):
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------------
1999 1998 1999 1998
------ ----- -------- -----
<S> <C> <C> <C> <C>
Basic Income Before Extraordinary Gain Per Share:
------------------------------------------------
Income Before Extraordinary Gain
to Common Stockholders $1,853 $2,330 $ 2,690 $3,513
Basic Weighted Average Shares Outstanding 14,880 14,117 14,880 14,117
Basic Income Before Extraordinary Gain Per Share $.12 $.17 $.18 $.25
==== ==== ==== ====
Diluted Income Before Extraordinary Gain Per Share:
--------------------------------------------------
Income Before Extraordinary Gain
to Common Stockholders $1,853 $2,330 $2,690 $ 3,513
Plus: Interest Expense on 8% Convertible Senior Notes 2 7 3 14
------ ------ ------ -------
$1,855 $2,337 $2,693 $ 3,527
====== ====== ====== =======
Adjusted Income Before Extraordinary Gain
Weighted Average Shares Outstanding 14,880 14,117 14,880 14,117
Plus: Shares Issuable Upon Conversion of
8% Convertible Senior Notes 208 951 208 951
Shares Issuable Upon Conversion of
Stock Options 846 455 1,038 227
Shares Issuable Upon Conversion of Warrants 30 - 33 -
------ ------ ------ -------
Diluted Weighted Average Shares Outstanding 15,964 15,523 16,159 15,295
======= ======= ======= =======
Diluted Income Before Extraordinary Gain Per Share $.12 $.15 $.17 $.23
==== ==== ==== ====
</TABLE>
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------------
1999 1998 1999 1998
------ ---- -------- ----
<S> <C> <C> <C> <C>
Basic Extraordinary Gain Per Share:
----------------------------------
Extraordinary Gain to Common Stockholders $ 150 $ 150
Basic Weighted Average Shares Outstanding 14,880 14,880
Basic Extraordinary Gain Per Share $.01 $.01
==== ====
Diluted Extraordinary Gain Per Share:
------------------------------------
Extraordinary Gain to Common Stockholders $ 150 $ 150
Plus: Interest Expense on 8% Convertible Senior Notes 2 3
----- ------
Adjusted Extraordinary Gain $ 152 $ 153
===== ======
Weighted Average Shares Outstanding 14,880 14,880
Plus: Shares Issuable Upon Conversion of
8% Convertible Senior Notes 208 208
Shares Issuable Upon Conversion of
Stock Options 846 1,038
Shares Issuable Upon Conversion of Warrants 30 33
------- ------
Diluted Weighted Average Shares Outstanding 15,964 16,159
======= ======
Diluted Extraordinary Gain Per Share $.01 $.01
==== ====
</TABLE>
<PAGE>
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------------
1999 1998 1999 1998
------ ----- -------- ----
<S> <C> <C> <C> <C>
Basic Net Income Per Share:
--------------------------
Net Income to Common Stockholders $2,003 $2,330 $2,840 $3,513
Basic Weighted Average Shares Outstanding 14,880 14,117 14,880 14,117
Basic Net Income Per Share $.13 $.17 $.19 $.25
==== ==== ==== ====
Diluted Net Income Per Share:
----------------------------
Net Income to Common Stockholders $2,003 $2,330 $2,840 $ 3,513
Plus: Interest Expense on 8% Convertible Senior Notes 2 7 3 14
-------- ------- ------- --------
$2,005 $2,337 $2,843 $ 3,527
======= ======= ======= =======
Adjusted Net Income
Weighted Average Shares Outstanding 14,880 14,117 14,880 14,117
Plus: Shares Issuable Upon Conversion of
8% Convertible Senior Notes 208 951 208 951
Shares Issuable Upon Conversion of
Stock Options 846 455 1,038 227
Shares Issuable Upon Conversion of Warrants 30 - 33 -
-------- ------- ------- --------
Diluted Weighted Average Shares Outstanding 15,964 15,523 16,159 15,295
======= ======= ======= ======
Diluted Net Income Per Share $.13 $.15 $.18 $.23
==== ==== ==== ====
</TABLE>
Options to purchase 125,000 shares of common stock at prices ranging from
$1.125 to $1.75 per share were outstanding as of December 31, 1999, but
were not included in the computation of diluted net income per share since
they would be considered antidilutive.
<PAGE>
6. SEGMENT-RELATED INFORMATION
The Company has two reportable business segments: intimate apparel and
retail. The Company's reportable segments are individual business units
that offer different products and services. They are managed separately
because each segment requires different strategic initiatives, marketing,
and advertising based on its own positioning in the market. Additionally,
these segments reflect the reporting basis used internally by senior
management to evaluate performance and the allocation of resources.
The Company's intimate apparel segment designs, sources, manufactures,
markets and sells an extensive line of ladies' intimate apparel. This
segment primarily sells to discount, specialty, national and regional
chain, mass merchandise and department stores and direct mail catalog
marketers throughout the United States, as well as its Company-owned retail
stores.
The retail segment sells apparel products purchased primarily from external
suppliers, as well as from the Company's intimate apparel segment.
Intersegment sales and transfers are recorded at cost and treated as a
transfer of inventory. Senior management does not consider these sales when
evaluating segment performance. The Company's senior management evaluates
each segment's performance based upon income or loss from operations before
interest, nonrecurring gains and losses and income taxes. The operational
results for the retail division are based on direct operating expenses and
do not include any indirect corporate overhead.
The Company's net sales and income from operations for each segment for the
three and six months ended December 31, 1999 and 1998 and total assets for
each segment as of December 31, 1999 and June 30, 1999 were as follows:
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- -------------------
1999 1998 1999 1998
----- ----- ----- ----
<S> <C> <C> <C> <C>
Net Sales:
Intimate Apparel $20,192 $21,843 $37,720 $38,997
Retail 3,162 3,946 4,853 5,750
------- ------- ------- -------
$23,354 $25,789 $42,573 $44,747
======= ======= ======= =======
Income (Loss) From Operations:
Intimate Apparel $ 2,039 $2,678 $ 3,437 $4,695
Retail 338 475 221 397
------- ------- ------- -------
$ 2,377 $ 3,153 $ 3,658 $ 5,092
======= ======= ======= =======
</TABLE>
December 31, June 30,
1999 1999
----------- ---------
Segment Assets:
Intimate Apparel $ 29,529 $33,547
Retail 2,773 3,212
-------- -------
$ 32,302 $36,759
======== =======
<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 December 31, 1999 decreased by 9.4% to
$23,354,000 from $25,789,000 in the comparable period in 1998. The decrease in
sales resulted from lower sales in both the intimate apparel division and the
retail division of approximately $1,651,000 and $784,000, respectively. Net
sales in the intimate apparel division decreased to $20,192,000 due to programs
with certain customers being discontinued or reduced which were partially offset
by new programs. Net sales in the Company's retail division decreased to
$3,162,000 due to a reduction in the number of customers that visited our
stores.
Net sales for the six months ended December 31, 1999 decreased by 4.9% to
$42,573,000 from $44,747,000 in the comparable period in 1998. The decrease in
sales resulted from lower sales in both the intimate apparel division and the
retail division of approximately $1,277,000 and $897,000, respectively. Net
sales in the intimate apparel division and the retail division decreased to
$37,720,000 and $4,853,000, respectively, due to the same reason as for the
three months above.
The gross profit percentage increased to 29.4% for the three months ended
December 31, 1999 from 28.6% in the similar period in 1998. The gross margin in
the Company's intimate apparel division increased to 28.3% for the three months
ended December 31, 1999 from 27.9% in the similar period in 1998. The gross
margin for the retail division increased to 36.5% for the three months ended
December 31, 1999 as compared to 33.0% in the similar period in 1998. The higher
margins in the retail division resulted from lower markdowns taken in the
current three-month period as compared to the same period in the prior year.
The gross profit percentage decreased to 28.6% for the six months ended December
31, 1999 from 29.1% in the similar period in 1998. The gross margin in the
Company's intimate apparel division decreased to 27.9% for the six months ended
December 31, 1999 from 28.7% in the similar period in 1998. The lower margins in
the intimate apparel division resulted primarily from the sale of excess
inventory at discounted prices, additional duties on the Company's finished
<PAGE>
products and operational inefficiencies at the Company's remaining domestic
manufacturing facility. The additional duties were imposed on finished goods
manufactured in Mexico as a result of the Tariff Preference Levels ("TPL") on
certain of the raw materials used in the Company's products expiring nearly four
months earlier in calendar year 1999 as compared to 1998. Operational
inefficiencies were due to the Company's increased reliance on offshore
production which caused an uneven flow of production at the Company's remaining
domestic manufacturing facility.
At the end of January 2000, the Company completed the elimination of the sewing
operation at its manufacturing facility in Virginia. This action was taken to
correct the operational inefficiencies the Company experienced in the six months
ended December 31, 1999 at its Virginia manufacturing facility and to lower
overall manufacturing costs. The Company now operates three domestic
distribution facilities and has a minimal amount of domestic production to
accommodate small customer orders or orders with short lead times.
The gross margin for the retail division increased to 34.4% for the six months
ended December 31,1999 as compared to 32.1% in the similar period in 1998. The
higher margins in the retail division resulted from lower markdowns taken in the
current six-month period as compared to the same period in the prior year.
Selling, general and administrative expenses increased to $4,499,000, or 19.3%
of sales, for the three months ended December 31, 1999 as compared to
$4,233,000, or 16.4% of sales, for the similar period in 1998.
Selling, general and administrative expenses attributable to the Company's
intimate apparel division were $3,684,000, or 18.2% of net sales for the three
months ended December 31, 1999, as compared to $3,409,000, or 15.6% of net sales
for the similar period in 1998. This increase of $275,000 resulted primarily
from start-up costs associated with the development of our new line, Meant To
Be, and the Flora Nikrooz Intimates line which has been discontinued. The
increase in percentage was due to start-up costs associated with these two lines
and no offsetting revenue along with a decrease in revenues from our existing
lines.
The Company's retail division had selling, general and administrative expenses
of $815,000 or 25.8% of net sales for the three months ended December 31, 1999,
as compared to $824,000, or 20.9% of net sales for the similar period in 1998.
This increase in percentage was primarily due to lower sales for the division.
Selling, general and administrative expenses increased to $8,528,000 or 20.0% of
sales, for the six months ended December 31, 1999 as compared to $7,951,000, or
17.8% of sales, for the similar period in 1998.
Selling, general and administrative expenses attributable to the Company's
intimate apparel division were $7,079,000 or 18.8% of net sales for the six
months ended December 31, 1999, as compared to $ 6,502,000 or 16.7% of net sales
for the similar period in 1998. This increase of $577,000 resulted primarily
<PAGE>
from start-up costs associated with the development of our new line, Meant To
Be, and the Flora Nikrooz Intimates line which has been discontinued. The
increase in percentage was due to start-up costs associated with these two lines
and no offsetting revenue along with a decrease in revenues from our existing
lines.
The Company's retail division had selling, general and administrative expenses
of $1,449,000, or 29.9% of net sales for the six months ended December 31, 1999,
as compared to $1,449,000, or 25.2% of net sales for the similar period in 1998.
This increase in percentage was due to lower sales for the division.
Income from operations decreased to $2,377,000 and $3,658,000 for the three and
six months ended December 31, 1999, from $3,153,000 and $5,092,000 for the
similar periods in 1998. The decrease for the three months was due to lower
sales and an increase in selling, general and administrative expenses partially
offset by an increase in gross margins. The decrease for the six months was due
to lower sales and gross margins and an increase in selling, general and
administrative expenses.
The Company's intimate apparel division had income from operations of $2,039,000
and $3,437,000 for the three and six months ended December 31, 1999 as compared
to income from operations of $2,678,000 and $4,695,000 for the similar periods
in 1998. The decrease for the three months was due to lower sales and an
increase in selling, general and administrative expenses partially offset by an
increase in gross margins. The decrease for the six months was due to lower
sales and gross margins and an increase in selling, general and administrative
expenses.
The Company's retail division had income from operations of $338,000 and
$221,000 for the three and six months ended December 31, 1999 as compared to
income from operations of $475,000 and $397,000 for the similar periods in 1998.
These decreases were due to lower sales partially offset by an increase in gross
margins. The operational results for the retail division are based on direct
operating expenses and do not include any indirect corporate overhead.
During the second quarter ended December 31, 1999, the Company purchased
$2,786,000 in principal amount of its 12.875% subordinated debentures. Using
previously acquired debentures and $903,000 of these debentures, the Company
will satisfy its sinking fund requirement due October 1, 2000. As a result of
the purchase of these $903,000 of debentures, the Company recorded a pre-tax
gain of $50,000, net of related costs. The remaining $1,883,000 of repurchased
debentures will be applied to the final payment due on October 1, 2001. As a
result of the purchase of these $1,883,000 of debentures, the Company recorded
an extraordinary gain of $150,000, net of related costs and income taxes.
In the first quarter of fiscal 2000, the Company purchased $2,834,000 in
principal amount of its 12.875% subordinated debentures and recorded a pre-tax
gain of $114,000, net of related costs. The Company will use these debentures to
reduce its mandatory sinking fund requirement due on October 1, 2000.
<PAGE>
Interest income for the three and six months ended December 31, 1999 was $2,000
and $20,000, respectively, as compared to $2,000 and $3,000 for the similar
periods in 1998.
Interest expense for the three and six months ended December 31, 1999 was
$538,000 and $1,097,000, respectively, as compared to $777,000 and $1,510,000
for the similar periods in 1998. These reductions were due to reduced borrowing
needs; a lower interest rate on the Company's revolving line of credit and the
reduced outstanding amount of its 12.875% subordinated debentures.
The Company provided for an alternative minimum tax of $38,000 and $55,000 for
the three and six months ended December 31, 1999, respectively, as compared to
$48,000 and $72,000 for the similar periods in 1998.
The Company had net income of $2,003,000 and $2,840,000 for the three and six
months ended December 31, 1999, respectively, as compared to $2,330,000 and
$3,513,000 for the similar periods in 1998. The reduction for the three months
was due to lower sales, an increase in selling, general and administrative
expenses offset partially by an increase in gross margins, a gain on the
purchase of the Company's 12.875% subordinated debentures, lower net interest
costs and a lower provision for income taxes. The reduction for the six months
was due to lower sales and gross margins, an increase in selling, general and
administrative expenses offset partially by a gain on the purchase of the
Company's 12.875% subordinated debentures, lower net interest costs and a lower
provision for income taxes.
Liquidity and Capital Resources
For the six months ended December 31, 1999, the Company's working capital
decreased by $2,644,000 to $19,972,000, principally from the purchases of
long-term debt, partially offset by operating profits.
During the six months ended December 31, 1999, cash decreased by $1,796,000. The
Company used cash of $114,000 for the purchase of fixed assets, and $5,303,000
for the repayments on and purchases of long-term debt. Cash generated from
profitable operations of $3,621,000 funded these activities.
Receivables at December 31, 1999 increased by $3,148,000 to $10,012,000 from
$6,864,000 at June 30, 1999. This increase is due to normal seasonal shipping
fluctuations within the period in the Company's intimate apparel division.
Inventory at December 31, 1999 decreased by $5,414,000 to $11,046,000 from
$16,460,000 at June 30, 1999. This decrease, was reflected in both the intimate
apparel and retail division inventories. The decrease in the intimate apparel
division was the result of normal fluctuations in sales and the Company's
decision to purchase more finished good packages in fiscal 2000, thereby
reducing the Company's need to purchase and maintain an inventory of the raw
<PAGE>
materials associated with those finished goods. Also, the Company has continued
to reduce the level of excess and closeout finished goods on hand. The inventory
for the retail division decreased due to normal fluctuations in sales during the
July through December period and the decision to carry a lower inventory in an
effort to minimize markdowns.
During the second quarter ended December 31, 1999, the Company purchased
$2,786,000 in principal amount of its 12.875% subordinated debentures. Using
previously acquired debentures and $903,000 of these
debentures, the Company will satisfy its sinking fund requirement due October 1,
2000. As a result of the purchase of these $903,000 of debentures, the Company
recorded a pre-tax gain of $50,000, net of related costs. The remaining
$1,883,000 of repurchased debentures will be applied to the final payment due on
October 1, 2001. As a result of the purchase of these $1,883,000 of debentures,
the Company recorded an extraordinary gain of $150,000, net of related costs and
income taxes.
In the first quarter of fiscal 2000, the Company purchased $2,834,000 in
principal amount of its 12.875% subordinated debentures and recorded a pre-tax
gain of $114,000, net of related costs. The Company will use these debentures to
reduce its mandatory sinking fund requirement due on October 1, 2000.
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.
The Company does not anticipate making any purchases of its stock and
anticipates that capital expenditures for fiscal 2000 will be less than
$700,000.
Following the first and second quarter purchases of the Company's 12.875%
subordinated debentures the Company has $14,995,000 in long-term debt and a
secured revolving line of credit of up to $13,500,000. The long-term debt
consists of $4,367,000 of 12.875% Subordinated Debentures, $10,550,000 8% Senior
Notes, and $78,000 8% Convertible Senior Notes. The remaining balance of
$4,367,000 of the 12.875% Subordinated Debentures is due on October 1, 2001. The
8% Senior Notes and the 8% Convertible Senior Notes do not require any
amortization 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 does not expire until July 1,
2001 and is sufficient for 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 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.
<PAGE>
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
Recently Issued Accounting Standard - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires the
recognition of all derivatives as either assets or liabilities in the statement
of financial position and measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative is dependent upon the
intended use of the derivative. SFAS No. 133 will be effective in the Company's
first quarter of the fiscal year ending June 30, 2001 and retroactive
application is not permitted. The Company has not yet determined whether the
application of SFAS No. 133 will have a material impact on its financial
position or results of operations.
Imports
The Company's transactions with its foreign manufacturers and suppliers are
subject to the risks of doing business abroad. The Company's import and offshore
operations are subject to constraints imposed by agreements between the United
States and a number of foreign countries in which the Company does business.
These agreements impose quotas on the amount and type of goods that can be
imported into the United States from these countries. Such agreements also allow
the United States to impose, at any time, restraints on the importation of
categories of merchandise that, under the terms of the agreements, are not
subject to specified limits. The Company's imported products are also subject to
United States customs duties and, in the ordinary course of business, the
Company is from time to time subject to claims by the United States Customs
Service for duties and other charges. The United States and other countries in
which the Company's products are manufactured may, from time to time, impose new
quotas, duties, tariffs or other restrictions, or adversely adjust presently
prevailing quotas, duty or tariff levels, which could adversely affect the
Company's operations and its ability to continue to import products at current
or increased levels. The Company cannot predict the likelihood or frequency of
any such events occurring.
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 needed to accept four digit entries to distinguish 21st
century dates from 20th century dates.
<PAGE>
Internal Systems and Equipment
The Company completed its comprehensive program of identifying, assessing and,
when necessary, upgrading and/or replacing its systems and equipment that were
vulnerable to Year 2000 problems. The Company has also successfully tested,
implemented and installed all new systems and equipment that were required to
make the Company's systems and equipment Year 2000 compliant.
Third Party Relationships
The Company formally communicated with its significant suppliers and customers
to determine if those parties had 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 substantially completed its review
and believes that its major customers and suppliers have addressed their Year
2000 issues. The Company has been successfully interfacing with its customers
and suppliers and has not encountered any Year 2000 issues to date. However,
there can be no assurance, that the Company has interfaced with all of its
significant suppliers and customers or that the systems of other companies on
which the Company's processes rely have been 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
in the future.
Costs
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, less than $150,000 for fiscal 1999 and less than $50,000 for fiscal 2000.
<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
Principal Financial &
Accounting Officer
February , 2000
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