10-Q 1 movie10q_33103.txt MOVIE STAR, INC. FORM 10-Q 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, 2003 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) 1115 Broadway, New York, N.Y. 10010 -------------------------------------------------------------------------- (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 ----- ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- The number of common shares outstanding on April 30, 2003 was 15,084,975. MOVIE STAR, INC. FORM 10-Q QUARTERLY REPORT INDEX Page PART I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets at March 31, 2003 (unaudited), June 30, 2002 and March 31, 2002 (unaudited) 3 Consolidated Condensed Statements of Income (unaudited) for the Three and Nine Months Ended March 31, 2003 and 2002 4 Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended March 31, 2003 and 2002 5 - 6 Notes to Consolidated Condensed Unaudited Financial Statements 7 - 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 - 18 Item 4. Controls and Procedures 18 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 20 Signatures 20 Certifications 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MOVIE STAR, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands, Except Share Information)

March 31, June 30, March 31, 2003 2002* 2002 ------------ ------------ ----------- (Unaudited) (Unaudited) Assets Current Assets Cash $ 160 $ 215 $ 258 Receivables, net 11,421 7,001 8,035 Inventory 11,075 8,797 7,911 Deferred income taxes 492 1,842 2,226 Prepaid expenses and other current assets 102 202 57 ----------- ------------ ----------- Total current assets 23,250 18,057 18,487 Property, plant and equipment, net 1,216 1,350 1,321 Deferred income taxes 2,662 2,662 2,660 Other assets 354 337 329 ----------- ------------ ----------- Total assets $ 27,482 $ 22,406 $ 22,797 =========== ============ =========== Liabilities and Shareholders' Equity Current Liabilities Note payable $ 6,604 $ 4,129 $ 5,107 Current maturity of long-term liabilities 37 40 32 Accounts payable and accrued expenses 4,536 4,359 3,458 ----------- ------------ ----------- Total current liabilities 11,177 8,528 8,597 ----------- ------------ ----------- Long-term liabilities 299 254 247 ----------- ------------ ----------- Commitments and Contingencies - - - Shareholders' equity Common stock, $.01 par value - authorized 30,000,000 shares; issued 17,102,000 shares in March 2003, June 2002 and March 2002 171 171 171 Additional paid-in capital 4,147 4,147 4,147 Retained earnings 15,306 12,924 13,253 ----------- ------------ ----------- 19,624 17,242 17,571 Less: Treasury stock, at cost - 2,017,000 shares 3,618 3,618 3,618 ----------- ------------ ----------- Total shareholders' equity 16,006 13,624 13,953 ----------- ------------ ----------- Total liabilities and shareholders' equity $ 27,482 $ 22,406 $ 22,797 =========== ============ ===========

* Derived from audited financial statements. See notes to consolidated condensed unaudited financial statements. 3 MOVIE STAR, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (In Thousands, Except Per Share Amounts)

Three Months Ended Nine Months Ended March 31, March 31, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ---------- ----------- ---------- Net sales $ 16,934 $ 13,528 $ 49,403 $ 43,649 Cost of sales 11,317 9,747 33,837 31,257 ----------- ---------- ----------- ---------- Gross profit 5,617 3,781 15,566 12,392 Selling, general and administrative expenses 3,950 3,365 11,312 10,390 ----------- ---------- ----------- ---------- Operating income from continuing operations 1,667 416 4,254 2,002 Interest income (1) - (3) (2) Interest expense 66 115 287 616 ----------- ---------- ----------- ---------- Income from continuing operations before income taxes 1,602 301 3,970 1,388 Income taxes 641 121 1,588 555 ----------- ---------- ----------- ---------- Income from continuing operations 961 180 2,382 833 Income from discontinued operations, net of income taxes - - - 43 ----------- ---------- ----------- ---------- Net income $ 961 $ 180 $ 2,382 $ 876 =========== ========== =========== ========== BASIC NET INCOME PER SHARE From continuing operations $ .06 $ .01 $ .16 $ .06 From discontinued operations - - - - ----------- ---------- ----------- ---------- Net income per share $ .06 $ .01 $ .16 $ .06 =========== ========== =========== ========== DILUTED NET INCOME PER SHARE From continuing operations $ .06 $ .01 $ .16 $ .06 From discontinued operations - - - - ----------- ---------- ----------- ---------- Net income per share $ .06 $ .01 $ .16 $ .06 =========== ========== =========== ========== Basic weighted average number of shares outstanding 15,085 15,085 15,085 15,085 =========== ========== =========== ========== Diluted weighted average number of shares outstanding 15,476 15,087 15,217 15,118 =========== ========== =========== ==========

See notes to consolidated condensed unaudited financial statements. 4 MOVIE STAR, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)

Nine Months Ended March 31, ---------------------------------------- 2003 2002 ---------------- -------------- CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: Net income $ 2,382 $ 876 Adjustments to reconcile net income to net cash (used in) provided by continuing operating activities: Depreciation and amortization 313 288 Provision for allowance for doubtful accounts and sales discount 385 (9) Deferred income taxes 1,350 29 Deferred lease liability 82 82 Loss on disposal of fixed assets 18 - Gain on discontinued operations - (43) (Increase) decrease in operating assets: Receivables (4,805) (167) Inventory (2,278) 4,036 Prepaid expenses and other current assets 100 261 Other assets (41) (56) Decrease (increase) in operating liabilities: Accounts payable and accrued expenses 170 (748) ---------------- -------------- Net cash (used in) provided by continuing operating activities (2,324) 4,549 ---------------- -------------- CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES: Purchases of equipment (173) (119) Proceeds from sale of property - 729 ---------------- -------------- Net cash (used in) provided by continuing investing activities (173) 610 ---------------- -------------- CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES: Repayments of long-term debt and capital lease obligations (33) (6,525) Proceeds from revolving line of credit, net 2,475 1,373 ---------------- -------------- Net cash provided by (used in) continuing financing activities 2,442 (5,152) ---------------- -------------- Cash used by discontinued operations - (10) ---------------- -------------- NET DECREASE IN CASH (55) (3) CASH, beginning of period 215 261 ---------------- -------------- CASH, end of period $ 160 $ 258 ================ ============== (Cont'd)

5 MOVIE STAR, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)

Nine Months Ended March 31, ---------------------------------------- 2003 2002 ---------------- -------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during period for: Interest $ 295 $ 791 ================ ============== Income taxes (net of refunds received) $ 43 $ 19 ================ ============== SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES: Conversion of long-term debt for common stock $ - $ (56) Issuance of common stock - 56 ---------------- -------------- $ - $ - ================ ============== (Concluded)

See notes to consolidated condensed unaudited financial statements. 6 MOVIE STAR, INC. NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS 1. Interim Financial Statements In the opinion of the Company, the accompanying consolidated condensed unaudited financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position as of March 31, 2003 and the results of operations for the interim periods presented and cash flows for the nine months ended March 31, 2003 and 2002, respectively. The consolidated condensed 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 June 30, 2002 consolidated condensed balance sheet was derived from the Company's audited financial statements. The results of operations for the three and nine months ended March 31, 2003 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 2002 Annual Report on Form 10-K. Reclassification - Certain items in the prior year in specific captions of the accompanying consolidated condensed unaudited financial statements and notes to consolidated condensed unaudited financial statements have been reclassified for comparative purposes. 2. Recently Issued Accounting Standards In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds the provisions of SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Rescissions of SFAS No. 4 and SFAS No. 64 are effective for fiscal years beginning after May 15, 2002. Rescissions for SFAS No. 13 are effective for transactions entered into after May 15, 2002. All other provisions are effective for financial statements issued after May 15, 2002. The adoption of SFAS No. 145 has not and is not expected to have a material impact on the Company's financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Examples of costs covered by the Standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit 7 or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 has not and is not expected to have a material impact on the Company's financial position. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. Generally, FIN 45 applies to certain types of financial guarantees that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements under FIN 45 are effective for financial statements for periods ending after December 15, 2002 and are applicable to all guarantees issued by the guarantor subject to FIN 45's scope, including guarantees issued prior to FIN 45. We have evaluated the accounting provisions of the interpretations and there was no material impact on our financial condition, results of operations or cash flows for the period ended March 31, 2003. Accordingly, the Company has no guarantees as defined by FIN 45. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure" which became effective in 2002. The standard provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. SFAS is effective for fiscal years ending after December 31, 2002. The Company has not yet determined the effect of the adoption of this statement on the Company's financial position or results of operations. The Company adopted the disclosure provisions of SFAS 148, as of December 31, 2002. 3. Inventory The inventory consists of the following (in thousands): March 31, June 30, March 31, 2003 2002 2002 ---------- -------- --------- Raw materials $ 2,256 $ 1,499 $ 890 Work-in process 531 640 514 Finished goods 8,288 6,658 6,507 ---------- -------- --------- $ 11,075 $ 8,797 $ 7,911 ========== ======== ========= 4. Note Payable In June 2001, the Company renegotiated its revolving credit facility to provide borrowings of up to $30,000,000 until its maturity date, July 1, 2004. Due to a recent amendment, effective November 7, 2002, the interest 8 on outstanding borrowings is payable at the prime rate, but not less than 4.25% per annum. As of March 31, 2003, the Company had borrowings of $6,604,000 outstanding under the credit facility and also had approximately $3,599,000 of outstanding letters of credit. Availability under the line of credit is subject to the Company's compliance with certain agreed upon financial formulas. Availability, as of March 31, 2003, was approximately $7,300,000. Under the terms of this financing, the Company has agreed to pledge substantially all of its assets, except the Company's real property. 5. Long-Term Debt On September 4, 2001, the Company paid its 8% Senior Notes of $2,284,000 at maturity and its 12.875% Subordinated Debentures of $4,180,000 one-month early utilizing its three-year credit facility. Additionally, in July 2001, holders of $55,500 in principal amount of the 8% Convertible Senior Notes converted their Notes into approximately 148,000 shares of the Company's common stock. 6. Commitments and Contingencies Employment Agreement - In January 2003, the Company and Mr. Knigin, the Company's CEO and President, finalized their negotiations regarding an extension of Mr. Knigin's employment agreement, which was to expire on June 30, 2004. Under the terms of the extended agreement, Mr. Knigin is to receive total base compensation of $2,625,000 over the five-year term of the agreement, effective as of July 1, 2002 and continuing through June 30, 2007. Mr. Knigin may also be entitled to certain severance payments at the conclusion of the term of his agreement, provided the Company attains specified financial performance goals. On January 28, 2003, Mr. Knigin voluntarily surrendered and forfeited his options to purchase 1,000,000 shares of the Company's common stock, par value $.01 and relinquished any further rights he may have had under the existing option agreements, which have now been terminated. 7. Related Party As of January 1, 2003, the Company and Mark M. David, Chairman of the Board, have renegotiated Mr. David's consulting agreement with the Company that was to expire on June 30, 2004. The new agreement is with Mr. David's consulting firm. Under the terms of the new agreement, Mr. David's consulting firm will provide the consulting services of Mr. David to the Company and will receive annual consulting fees of $225,000 through June 30, 2007. 9 8. 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):

Three Months Ended Nine Months Ended March 31, March 31, ------------------- ------------------- 2003 2002 2003 2002 ------- ------- ------- ------- BASIC: Income from continuing operations $961 $ 180 $ 2,382 $ 833 Income from discontinued operations - - - 43 ------- ------- ------- ------- Net income $ 961 $ 180 $ 2,382 $ 876 ======= ======= ======= ======= Basic weighted average number of shares outstanding 15,085 15,085 15,085 15,085 ======= ======= ======= ======= Basic net income per share: From continuing operations $ .06 $ .01 $ .16 $ .06 From discontinued operations - - - - ------- ------- ------- ------- Basic net income per share $ .06 $ .01 $ .16 $ .06 ======= ======= ======= ======= DILUTED: Income from continuing operations $ 961 $ 180 $ 2,382 $ 833 Income from discontinued operations - - - 43 ------- ------- ------- ------- Adjusted net income $ 961 $ 180 $ 2,382 $ 876 ======= ======= ======= ======= Weighted average number of shares outstanding 15,085 15,085 15,085 15,085 Plus: Shares issuable upon conversion of stock options 366 - 122 23 Shares issuable upon conversion of warrants 25 2 10 10 ------- ------- ------- ------- Total average number of equivalent shares outstanding 15,476 15,087 15,217 15,118 ======= ======= ======= ======= Diluted net income per share: From continuing operations $ .06 $ .01 $ .16 $ .06 From discontinued operations - - - - ------- ------- ------- ------- Diluted net income per share $ .06 $ .01 $ .16 $ .06 ======= ======= ======= =======

For the three months ended March 31, 2003 and 2002, options for 160,000 and 2,470,000 shares, respectively, were not included in the computation of diluted net income per share since they would be considered antidilutive. For the nine months ended March 31, 2003 and 2002, options for 160,000 and 610,000 shares, respectively, were not included. 9. Stock Options Pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," the Company accounts for stock-based employee compensation arrangements using the intrinsic value method. Accordingly, no compensation expense has been recorded in the consolidated condensed 10 financial statements with respect to option grants. The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," an amendment of SFAS No. 123. Had the Company elected to recognize compensation expense for stock-based compensation using the fair value method net income, basic net income per common share and net income per diluted common share would have been as follows

Three Months Ended Nine Months Ended March 31, March 31, ------------------- ------------------- 2003 2002 2003 2002 ------- ------- ------- ------- Net Income, as reported $ 961 $ 180 $ 2,382 $ 876 Pro forma stock-based employee cost, net of taxes (47) 15 (141) 45 ------- ------- ------- ------- Pro forma net income $ 1,008 $ 165 $ 2,523 $ 831 ======= ======= ======= ======= Basic net income per share, as reported $ .06 $ .01 $ .16 $ .06 Pro forma stock-based employee cost per share .01 - .01 - ------- ------- ------- ------- Pro forma basic net income per share $ .07 $ .01 $ .17 $ .06 ======= ======= ======= ======= Diluted net income per share, as reported $ .06 $ .01 $ .16 $ .06 Pro forma stock-based employee cost per share .01 - .01 - ------- ------- ------- ------- Pro forma diluted net income per share $ .07 $ .01 $ .17 $ .06 ======= ======= ======= =======

10. Loss on Closing of Distribution Facility During fiscal 2001, the Company closed its remaining distribution facility located in Lebanon, Virginia. In September 2001, the Company sold its two non-operating facilities for $729,000. No gain or loss was recognized during the period. As of March 31, 2002, there were no remaining accruals relating to severance and other employee benefits and exit costs. 11. Discontinued Operations In December 2000, the Company decided to shutdown the retail segment and discontinued all operations in March 2001. Accordingly, the operating results of this segment are classified as discontinued operations. Operating results of discontinued operations are as follows (in thousands):

Three Months Ended Nine Months Ended March 31, March 31, ------------------- ------------------- 2003 2002 2003 2002 ------- ------- ------- ------- Costs and expenses, net of other income $ - $ - $ - $ (72) Income taxes - - - 29 ------- ------- ------- ------- Net income from discontinued operations $ - $ - $ - $ 43 ======= ======= ======= =======

11 The net assets and liabilities of discontinued operations included in the accompanying consolidated balance sheets are as follows (in thousands):

March 31, June 30, March 31, 2003 2002 2002 ---------- -------- --------- Other assets $ - $ 160 $ 189 ---------- -------- --------- Total assets of discontinued operations $ - $ 160 $ 189 ========== ======== ========= Accounts payable and accrued expenses $ - $ 6 $ 68 ---------- -------- --------- Total liabilities of discontinued operations $ - $ 6 $ 68 ========== ======== =========

12 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 . Critical Accounting Policies and Estimates ------------------------------------------ The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements. Management believes the application of accounting policies, and the estimates inherently required by the policies, are reasonable. These accounting policies and estimates are constantly re-evaluated, and adjustments are made when facts and circumstances dictate a change. Historically, management has found the application of its accounting policies to be appropriate, and actual results generally have not materially differed from those determined using the necessary estimates. Our accounting policies are more fully described in Note 1 to the consolidated financial statements, located in the 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Management has identified certain critical accounting policies that are described below. Inventory - Inventory is carried on a first-in, first-out basis at the lower of cost or market. Management writes down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Allowance for doubtful accounts/sales discounts and sales returns - The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company also estimates expenses for customer discounts, programs and incentive offerings. If market conditions were to decline, the Company may take actions to increase customer incentive offerings possibly resulting in an incremental expense at the time the incentive is offered. Long-lived assets - In the evaluation of the fair value and future benefits of long-lived assets, management performs an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from the current estimates. 13 Deferred tax valuation allowance - In assessing the need for a deferred tax valuation allowance, we consider future taxable income and ongoing prudent and feasible tax planning strategies. Since we were able to determine that we would be able to realize our deferred tax assets in the future, in excess of its recorded amount, an adjustment to the deferred tax asset was not deemed necessary. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Results of Continuing Operations -------------------------------- Net sales for the three months ended March 31, 2003 increased $3,406,000 to $16,934,000 from $13,528,000 in the comparable period in 2002. Net sales for the nine months ended March 31, 2003 increased $5,754,000 to $49,403,000 from $43,649,000 in the comparable period in 2002. The increase in sales was due primarily to an increase in programs with certain customers. The gross profit percentage increased to 33.2% for the three months ended March 31, 2003 from 27.9% in the similar period in 2002. The gross profit percentage increased to 31.5% for the nine months ended March 31, 2003 from 28.4% in the similar period in 2002. The higher margins resulted primarily from better sourcing and greater efficiencies. Selling, general and administrative expenses were $3,950,000, or 23.3% of net sales for the three months ended March 31, 2003, as compared to $3,365,000, or 24.9% of net sales for the similar period in 2002. This increase of $585,000 resulted from an increase in salary related expenses of $320,000, merchandising design and sample expenses of $50,000, travel expenses of $40,000 and by a general overall net increase in other selling, general and administrative expenses. Selling, general and administrative expenses were $11,312,000, or 22.9% of net sales for the nine months ended March 31, 2003, as compared to $10,390,000, or 23.8% of net sales for the similar period in 2002. This increase of $922,000 resulted from an increase in salary related expenses of $387,000, merchandising design and sample expenses of $217,000, travel expenses of $79,000, rent expense of $63,000 and by a general overall net increase in other selling, general and administrative expenses. Income from continuing operations increased to $1,667,000 and $4,254,000 for the three and nine months ended March 31, 2003, as compared to $416,000 and $2,002,000 for the similar periods in 2002. This increase was due to higher sales and margins partially offset by higher selling, general and administrative expenses. Net interest costs for the three and nine months ended March 31, 2003 was $65,000 and $284,000 respectively, as compared to $115,000 and $614,000 for the similar periods in 2002. These reductions were due to lower borrowing levels and interest rates. The Company provided for income taxes of $641,000 and $1,588,000 for the three and nine months ended March 31, 2003, as compared to income taxes of $121,000 and $555,000 for the similar periods in 2002. The Company utilized an estimated income tax rate of 40% in all of the periods. 14 Results of Discontinued Operations ---------------------------------- In December 2000, the Company decided to dispose of the majority of the assets of its retail division. Accordingly, the operating results of this division are classified as discontinued operations. The discontinued operation had no activity for the three months ended March 31, 2003 and 2002. There was no activity for the nine months ended March 31, 2003 as compared to income from discontinued operations of $43,000 for the nine months ended March 31, 2002. The income in the 2002 period relates to the sale of certain assets that were fully depreciated. Net Income ---------- The Company had net income of $961,000 and $2,382,000 for the three and nine months ended March 31, 2003 respectively, as compared to $180,000 and $876,000 for the similar periods in 2002. These increases were due to higher sales and gross margins and lower interest costs partially offset by higher selling general and administrative expenses and a larger provision for income taxes in the current year. Contractual Obligations and Commercial Commitments -------------------------------------------------- To facilitate an understanding of our contractual obligations and commercial commitments, the following data is provided as of March 31, 2003 (in thousands):

Payments Due by Period ---------------------------------------------------- Within After 5 Total 1 Year 2-3 Years 4-5 Years Years ----------- ----------- ----------- ----------- --------- Contractual Obligations ----------------------- Credit facility $ 6,604 $ 6,604 $ - $ - $ - Capital leases 37 37 - - - Operating leases 8,300 1,187 2,427 2,286 2,400 Consulting agreement 1,006 225 500 281 - Employment contract 2,269 494 1,063 712 - ----------- ----------- ----------- ----------- --------- Total contractual obligations $ 18,216 $ 8,547 $ 3,990 $ 3,279 $ 2,400 =========== =========== =========== =========== ========= Amount of Commitment Expiration Per Period ------------------------------------------ Total Amounts Within After 5 Committed 1 Year 2-3 Years 4-5 Years Years ----------- ----------- ----------- ----------- --------- Other Commercial Commitments ---------------------------- Letters of credit $ 3,599 $ 3,599 $ - $ - $ - ----------- ----------- ----------- ----------- --------- Total commercial commitments $ 3,599 $ 3,599 $ - $ - $ - =========== =========== =========== =========== =========

Liquidity and Capital Resources ------------------------------- For the nine months ended March 31, 2003, the Company's working capital increased by $2,544,000 to $12,073,000, primarily from profitable operations. 15 During the nine months ended March 31, 2003, cash decreased by $55,000. The Company used cash of $2,324,000 in its operations, $173,000 for the purchase of fixed assets and $33,000 for the payment of capital lease obligations. The net proceeds from short-term borrowings of $2,475,000 funded these activities. Receivables at March 31, 2003 increased by $4,420,000 to $11,421,000 from $7,001,000 at June 30, 2002. This increase is due to higher sales for the quarter ended March 31, 2003 as compared to the quarter ended June 30, 2002. Inventory at March 31, 2003 increased by $2,278,000 to $11,075,000 from $8,797,000 at June 30, 2002. This increase is due to an increase in the volume of cut, make and trim production, which requires the purchase of raw materials, an increase of finished goods which are required for additional replenishment business and the earlier receipt of finished goods to fulfill customer orders in the fourth quarter. The Company has a secured revolving line of credit of up to $30,000,000. The revolving line of credit expires July 1, 2004 and is sufficient for the Company's projected needs for operating capital and letters of credit to fund the purchase of imported goods through July 1, 2004. Due to an amendment, effective November 7, 2002, direct borrowings under this line bear interest at the prime rate of Chase Manhattan Bank, but not less than 4.25% per annum. Availability under the line of credit is subject to the Company's compliance with certain agreed upon financial formulas. Under the terms of this financing, the Company has agreed to pledge substantially all of its assets, except the Company's real property. At April 24, 2003, the Company had $5,598,000 in borrowings outstanding. Management believes the available borrowing under its secured revolving line of credit, along with anticipated internally generated funds, will be sufficient to cover its working capital requirements through July 1, 2004. The Company anticipates that capital expenditures for fiscal 2003 will be less than $300,000. Recently Issued Accounting Standards ------------------------------------ In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds the provisions of SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Rescissions of SFAS No. 4 and SFAS No. 64 are effective for fiscal years beginning after May 15, 2002. Rescissions for SFAS No. 13 are effective for transactions entered into after May 15, 2002. All other provisions are effective for financial statements issued after May 15, 2002. The adoption of SFAS No. 145 has not and is not expected to have a material impact on the Company's financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires companies to recognize costs associated with exit or disposal activities when they are 16 incurred rather than at the date of commitment to an exit or disposal plan. Examples of costs covered by the Standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 has not and is not expected to have a material impact on the Company's financial position. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. Generally, FIN 45 applies to certain types of financial guarantees that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements under FIN 45 are effective for financial statements for periods ending after December 15, 2002 and are applicable to all guarantees issued by the guarantor subject to FIN 45's scope, including guarantees issued prior to FIN 45. We have evaluated the accounting provisions of the interpretations and there was no material impact on our financial condition, results of operations or cash flows for the period ended March 31, 2003. Accordingly, the Company has no guarantees as defined by FIN 45. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure" which became effective in 2002. The standard provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. SFAS is effective for fiscal years ending after December 31, 2002. The Company has not yet determined the effect of the adoption of this statement on the Company's financial position or results of operations. . The Company adopted the disclosure provisions of SFAS 148, as of December 31, 2002. Inflation --------- The Company does not believe that its operating results have been materially affected by inflation during the preceding three years. There can be no assurance, however, that the Company's operating results will not be affected by inflation in the future. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- The Company is subject to changes in the prime rate based on the Federal Reserve actions and general market interest fluctuations. The Company believes that moderate interest rate increases will not have a material adverse impact on its results of operations, or financial position, in the foreseeable future. For the fiscal year ended June 30, 2002, borrowings peaked during the year at $15,783,000 and the average amount of borrowings was $7,806,000. 17 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. Item 4. Controls and Procedures ----------------------- Within the 90-day period prior to the filing of this report, an evaluation of the effectiveness of the Company's disclosure controls and procedures was made under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 18 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. 19 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 Date Items Financial Statements ---- ----- -------------------- May 7, 2003 7, 9 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 President; Chief Executive Officer By: /s/ Thomas Rende -------------------- THOMAS RENDE Chief Financial Officer May 9, 2003 20 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Movie Star, Inc.(the "Company") on Form 10-Q for the period ended March 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Dated: May 9, 2003 /s/ Melvyn Knigin ----------------------------- Name: Melvyn Knigin Title: Chief Executive Officer Dated: May 9, 2003 /s/ Thomas Rende ----------------------------- Name: Thomas Rende Title: Chief Financial Officer (Principal Financial and Accounting Officer) FORM OF SECTION 302 CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED CERTIFICATION I, Melvyn Knigin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Movie Star, Inc.; 2. based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. the registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. the registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 9, 2003 /s/ Melvyn Knigin ----------------------------- Name: Melvyn Knigin Title: Chief Executive Officer FORM OF SECTION 302 CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED CERTIFICATION I, Thomas Rende, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Movie Star, Inc.; 2. based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. the registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. the registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 9, 2003 /s/ Thomas Rende ----------------------------- Name: Thomas Rende Title: Chief Financial Officer (Principal Financial and Accounting Officer)