U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2002
--------------------------------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------- ---------------------------------------
Commission File Number 1-8912
--------------------------------------------------------------------------------
STAR STRUCK, LTD.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 36-1805030
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1865 Palmer Avenue
Larchmont, NY 10538
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (914) 833-0649
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Check whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of
each of the issuer's classes of common equity, as of the latest practicable
date: $1.00 par value - 2,025,899 shares at May 9, 2002.
-------------------------------------------------
STAR STRUCK, LTD.
-----------------
FORM 10-QSB
-----------
INDEX
-----
MARCH 31, 2002
--------------
PART I. FINANCIAL INFORMATION Page No.
-------
ITEM 1.
Consolidated Balance Sheets-
March 31, 2002 (unaudited) and
December 31, 2001 (audited) 1 & 2
Consolidated Statements of Operations-unaudited
Three Months Ended March 31, 2002 and 2001 3
Consolidated Statements of Cash Flows-unaudited
Three Months Ended March 31, 2002 and 2001 4
Notes to Consolidated Financial Statements-
March 31, 2002 5 - 7
ITEM 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 9
STAR STRUCK, LTD.
-----------------
CONSOLIDATED BALANCE SHEETS
---------------------------
MARCH 31, 2002 AND DECEMBER 31, 2001
------------------------------------
A S S E T S
-----------
2002 2001
----------- ---------
(Unaudited) (Audited)
CURRENT ASSETS:
--------------
Cash $ 15,000 $ 63,000
Accounts receivable, less allowance for doubtful
accounts of $82,000 in 2002 and 2001 770,000 1,146,000
Inventories 2,983,000 2,359,000
Prepaid expenses and other current assets 460,000 604,000
----------- ----------
TOTAL CURRENT ASSETS 4,228,000 4,172,000
-------------------- ----------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
--------------------------------------
Land, building and improvements 1,242,000 1,235,000
Machinery and equipment 843,000 841,000
----------- ----------
2,085,000 2,076,000
Less: accumulated depreciation and amortization 909,000 877,000
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 1,176,000 1,199,000
---------------------------------- ----------- ---------
INTANGIBLE ASSETS AND GOODWILL, NET 473,000 272,000
----------------------------------- ----------- ----------
TOTAL ASSETS $ 5,877,000 $5,643,000
------------ =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
- 1 -
STAR STRUCK, LTD.
-----------------
CONSOLIDATED BALANCE SHEETS (Continued)
--------------------------------------
MARCH 31, 2002 AND DECEMBER 31, 2001
------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
2002 2001
----------- ---------
(Unaudited) (Audited)
CURRENT LIABILITIES:
-------------------
Accounts payable and accrued expenses $1,087,000 $ 1,325,000
Borrowings under line of credit 1,101,000 1,276,000
Current portion of long-term debt 35,000 40,000
----------- ------------
TOTAL CURRENT LIABILITIES 2,223,000 2,641,000
------------------------- ----------- ---------
OTHER LIABILITIES:
-----------------
Notes payable - shareholders 892,000 872,000
Long-term debt, less current portion 557,000 549,000
----------- ----------
TOTAL LIABILITIES 3,672,000 4,062,000
----------------- ----------- ---------
NONCONTROLLING INTEREST 423,000 --
----------------------- ---------- ------
COMMITMENTS AND CONTINGENCIES -- --
-----------------------------
SHAREHOLDERS' EQUITY:
--------------------
Preferred shares, $1 par value-500,000 shares
authorized; none issued and outstanding -- --
Common shares, $1 par value-5,000,000 shares
authorized; issued and outstanding-
2,026,000 shares 2,026,000 2,026,000
Paid-in capital 4,584,000 4,584,000
Accumulated deficit (4,828,000) (5,029,000)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,782,000 1,581,000
-------------------------- ---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,877,000 $ 5,643,000
------------------------------------------ ========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
- 2 -
STAR STRUCK, LTD.
-----------------
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
-------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
--------------------------------------------------
2002 2001
---- ----
NET SALES $ 2,172,000 $ 2,494,000
---------
COST OF SALES 861,000 1,236,000
------------- ----------- ------------
GROSS PROFIT ON SALES 1,311,000 1,258,000
---------------------
OPERATING EXPENSES:
------------------
Selling, general and administrative 1,059,000 1,105,000
Depreciation and amortization 106,000 102,000
----------- ------------
TOTAL OPERATING EXPENSES 1,165,000 1,207,000
------------------------ ----------- ------------
OPERATING PROFIT 146,000 51,000
-----------------
OTHER INCOME (EXPENSE), net:
---------------------------
List rental income 74,000 5,000
Interest expense, net (53,000) (96,000)
----------- -----------
Income (loss) before provision for income taxes
and noncontrolling interest 167,000 (40,000)
PROVISION FOR INCOME TAXES -- --
--------------------------
NONCONTROLLING INTEREST IN LOSS OF SUBSIDIARY 34,000 --
--------------------------------------------- ----------- ------------
NET INCOME (LOSS) $ 201,000 $ (40,000)
----------------- =========== ============
PER SHARE (Note 1)
---------
Basic and diluted loss per common share:
Net income (loss) per common share $ .10 $ (.02)
=========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
----------------------------------------
Basic and diluted 2,026,000 2,026,000
========= ============
The accompanying notes are an integral part of these consolidated
financial statements.
- 3 -
STAR STRUCK, LTD.
-----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
-------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
--------------------------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 201,000 $ (40,000)
--------- --------
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 106,000 102,000
Amortization of debt discount 20,000 20,000
Noncontrolling interest in loss of subsidiary (34,000)
Changes in operating assets and liabilities:
Accounts receivable 376,000 (237,000)
Prepaid expenses and other current assets 144,000 (23,000)
Deferred contract fees (10,000) (17,000)
Inventories (135,000) 226,000
Accounts payable and accrued expenses (288,000) 71,000
----------- ---------
Total Adjustments 179,000 142,000
---------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 380,000 102,000
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (10,000) (20,000)
Net cash paid for business acquired (232,000) -----
---------- ------------
NET CASH USED IN INVESTING ACTIVITIES (242,000) (20,000)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 550,000 --
Proceeds from note payable-officer -- 25,000
Deferred financing costs (14,000) -----
Payments on line of credit, net (175,000) (167,000)
Repayments of long-term debt (547,000) (18,000)
----------- ------
NET CASH USED IN FINANCING ACTIVITIES (186,000) (160,000)
---------- -------
NET DECREASE IN CASH (48,000) (78,000)
CASH AT BEGINNING OF PERIOD 63,000 78,000
----------- --------
CASH AT END OF PERIOD $ 15,000 $ --
----------- ------------
Cash paid for business acquired is comprised of:
Fair value of assets acquired $ 739,000 $ --
Liabilities assumed -- --
-------------- ------------
Purchased price, net of cash received 739,000 --
Note payable issued for business acquired (50,000) --
Common stock issued for business acquired (457,000) --
----------- ------------
Net cash paid for business acquired $ (232,000) $ --
=========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
- 4 -
STAR STRUCK, LTD.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MARCH 31, 2002
--------------
(1) Basis of Presentation
---------------------
The consolidated financial statements heretofore presented have been prepared by
Star Struck, Ltd., ("the Company" or "SSL"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. SSL is a
holding company whose 100% owned operating subsidiary Star Struck, Inc. ("SSI")
is primarily engaged in the distribution of watch batteries and related
products. In 2001, SSI formed a subsidiary, Star Struck/ProTeam, Inc. ("SSPT"),
for the purpose of operating SSI's sports apparel segment and acquiring certain
assets of ProTeam.com,Inc. (ProTeam) (see Note 2).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting
principles have been omitted pursuant to such rules and regulations. Although
the Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest annual report on Form 10-KSB
for the year ended December 31, 2001. The interim figures presented are
unaudited and are subject to any adjustments which may result from the year-end
audit of the Company's consolidated financial statements. However, in the
opinion of management, the information furnished reflects all adjustments
necessary to fairly state the consolidated financial statements for the interim
periods presented.
Net income (loss) per common share is computed based on the weighted average
number of shares outstanding during each period. The weighted average number of
shares used in the computation of earnings per share was 2,026,000 for 2002 and
2001.
The profit and loss information for the interim periods presented are not
necessarily indicative of results to be expected for the entire fiscal year.
(2) Acquisition
-----------
On January 7, 2002, SSI transferred its sports apparel business, including its
sports apparel inventory, to its newly formed subsidiary, SSPT for eighty
percent of the shares of SSPT. On that same date, SSPT acquired from ProTeam,
its sports apparel business, including its sports apparel inventory and a
related customer list. In consideration of the acquisition, ProTeam received
twenty-percent of the shares of SSPT, a payment of $300,000 and a $50,000
promissory note. SSPT intends to continue using the assets acquired in the
sports apparel distribution business. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets purchased based upon their fair values at the date of
acquisition.
The purchase price was allocated to the assets acquired (no liabilities were
assumed) based upon their estimated fair values as follows:
Inventory $ 489,000
Mailing list 250,000
----------
Total assets purchased 739,000
Accrued liabilities assumed --
----------
Total purchase price $ 739,000
==========
(3) Inventories
-----------
Inventories, with the exception of gold, are stated at the lower of cost
(first-in, first-out) or market. Gold inventory (approximately $65,000 at March
31, 2002) is valued at market. Inventories consist principally of finished
goods.
- 5 -
STAR STRUCK, LTD.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
MARCH 31, 2002
--------------
(4) Business Segments
-----------------
The Company's operations by business segment for the periods ended March 31,
2002 and 2001 were as follows:
Battery
& Watch Strap Sports Apparel
2002 Distribution Distribution Total
---- ------------ ------------ -----
Net Sales $ 1,773,000 $ 399,000 $ 2,172,000
Operating Profit/(Loss) $ 376,000 $ (230,000) $ 146,000
Battery
& Watch Strap Sports Apparel
2001 Distribution Distribution Total
---- ------------ ------------ -----
Net Sales $ 2,095,000 $ 399,000 $ 2,494,000
Operating Profit/(Loss) $ 155,000 $ (104,000) $ 51,000
(5) Bank Debt
---------
The Company has a $1,500,000 line of credit agreement with one of its banks, as
amended. Availability under this line is based on the Borrowing Base, as defined
in the agreement with the bank. The remaining amount available under the
Borrowing Base was approximately $212,000 at March 31, 2002. This agreement
extends through June 2002 and bears interest at the prime rate plus one percent
(5.5% at March 31, 2002). The Company's accounts receivable and a portion of its
inventory have been pledged as collateral for this line of credit. The agreement
contains certain financial covenants, including the requirement for the Company
to maintain a minimum tangible net worth. The Company did not comply with this
covenant at March 31, 2002 and was in default of the line of credit agreement.
The Company is currently negotiating the extension of the current agreement, as
well as a new agreement. As of March 31, 2002, the Company had $1,101,000
outstanding under this line of credit, all of which is included in current
liabilities on the accompanying consolidated balance sheets.
The Company refinanced its mortgage note payable in March 2002. The mortgage
note has a balance of $550,000 at March 31, 2002, a maturity date of March 2017
and interest at a fixed rate of 7.95% for the first five years which is subject
to restatement on the fifth and tenth year anniversary dates based on the most
recent published Federal Home Bank of Boston Classic Credit Five-Year Loan
Advance Rate plus two and one-half percent. The Company's building has been
pledged as collateral.
(6) Related Party Notes Payable
---------------------------
In August 2000, the Company entered into promissory notes, (the "Notes") with
three of the Company's shareholders, two of which are members of the Company's
management, for an aggregate of $1,000,000. Each note bears interest at 10%, due
quarterly, and the principal amount matures in August 2003. In connection with
these notes, the Company issued warrants for the purchase of 500,000 shares of
the Company's common stock at an exercise price of $1.50 per share exercisable
through July 31, 2005. The fair value of these warrants of $240,000 has been
recorded as original issue discount, resulting in a reduction in the carrying
value of this debt. The original issue discount will be amortized into interest
expense over the period of the notes. For each of the quarters ended March 31,
2002 and 2001, $20,000, has been accreted and is included in interest expense in
the accompanying consolidated statements of operations. These notes are
subordinate to the Company's borrowings under the line of credit.
- 6 -
STAR STRUCK, LTD.
-----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
MARCH 31, 2002
--------------
(7) Recent Accounting Pronouncements
--------------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which replaces SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-lived
Assets to Be Disposed Of ". The accounting model for long-lived assets to be
disposed of by sale applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business", for the disposal of segments of a business. SFAS 144 establishes a
single accounting model for long-lived assets to be disposed of by sale and
resolves significant implementation issues relating to impairment of long-lived
assets to be held and used or disposed of other than by sale. SFAS 144 requires
that those long-lived assets to be disposed by sale be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS 144 is effective for fiscal
years beginning after December 15, 2001 and, generally, is to be applied
prospectively. The adoption of this standard did not have a material impact on
the Company's consolidated financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
requires entities to recognize the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset at the discounted value of the asset retirement obligation.
SFAS 143 is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The Company does not believe that adoption of
SFAS 143 will have a material impact on its consolidated financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires
goodwill and certain intangible assets with indefinite useful lives to be
subject to an annual review for impairment, and written off when impaired,
rather than being amortized as previous standards required. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS 142 eliminates the Company's amortization expense relating to goodwill of
approximately $3,100 for the quarter ended March 31, 2002.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141"). SFAS 141 changes the accounting for
business combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting. SFAS 141 is effective for all business
combinations consummated after June 30, 2001. The adoption of SFAS 141 did not
have a material effect on the Company's operating results or financial
condition.
- 7 -
STAR STRUCK, LTD.
-----------------
ITEM 2, MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
--------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2002
---------------------------------
COMPARED TO
-----------
THREE MONTHS ENDED MARCH 31, 2001
---------------------------------
SALES. Sales decreased $322,000, or 12.9%, to $2,172,000 for the first quarter
of 2002. Sports apparel sales from 2002's first quarter's sales were flat
compared to 2001's first quarter's sales. This was combined with a decrease in
battery and watch strap sales of $322,000, or 15.4%, from $2,095,000 to
$1,773,000 in the first three months of 2002.
GROSS PROFIT. Gross profit increased by $53,000 to $1,311,000 in the first
quarter of 2002. Gross margin increased 9.8% to 60.3% for the first quarter of
2002 compared to 50.5% for the same period in 2001. For the first three months
of 2002, sports apparel sales, which represented 18.4% of total revenue, had a
gross margin of 54.9%. This is an increase from 2001's first quarter's gross
margin of 44.0%. Gross margin on battery and watch strap sales was 61.6% for the
first three months of 2002 compared to 51.8% for the same period in 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $46,000 to $1,059,000 in the first quarter of
2002. As a percentage of sales, selling, general and administrative expenses
increased by 4.5% to 48.8% in the first quarter of 2002 compared to 44.3% for
the same period in 2001.
OPERATING PROFIT/(LOSS). Operating profit increased $95,000 resulting in a
profit of $146,000 for the first quarter of 2002. The battery and watch strap
distribution segment showed an operating profit of $376,000 for the first
quarter of 2002. This is an increase of $221,000 from 2001's first quarter's
operating profit of $155,000. The operating loss for sports apparel distribution
increased $126,000 from 2001's operating loss of $104,000 to show a loss of
$230,000 for the first quarter of 2002.
INTEREST EXPENSE. Net interest expense was $53,000 for the first quarter of 2002
versus $96,000 for the same period in 2001. Approximately $18,000 in interest
expense related to the borrowing on the Company's outstanding line of credit
compared to $37,000 in 2001. Interest on a mortgage totaled approximately $8,000
in the first quarter of 2002. Interest expense for notes payable to shareholders
totaled $45,000 for the quarter ended March 31, 2002. Included in this amount is
$20,000 of amortized debt discount.
NET INCOME. Net income for the first quarter of 2002 increased $241,000 from
2001's loss of $40,000 to show net income of $201,000.
LIQUIDITY AND CAPITAL RESOURCES. The Company has a $1,500,000 line of credit
agreement with one of its banks, as amended. Availability under this line is
based on the Borrowing Base, as defined in the agreement with the bank. The
remaining amount available under the Borrowing Base was approximately $212,000
at March 31, 2002. This agreement extends through June 2002 and bears interest
at the prime rate plus one percent (5.5% at March 31, 2002). The Company's
accounts receivable and a portion of its inventory have been pledged as
collateral for this line of credit. The agreement contains certain financial
covenants, including the requirement for Star Struck, Inc. to maintain a minimum
tangible net worth. The Company did not comply with this covenant at March 31,
2002 and was in default of the line of credit agreement. The Company is
currently negotiating the extension of the current agreement, as well as a new
agreement. As of March 31, 2002, the Company had $1,101,000 outstanding under
this line of credit, all of which is included in current liabilities on the
accompanying consolidated balance sheet.
At March 31, 2002 net working capital was $2,005,000.
- 8 -
PART II - OTHER INFORMATION
---------------------------
STAR STRUCK, LTD.
-----------------
MARCH 31, 2002
--------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Form 8-K on January 7, 2002 relating to an Acquisition of
Assets.
No other Form 8-K's were filed for the quarter ended March 31, 2002.
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 thereunto duly authorized.
STAR STRUCK, LTD.
Date: May 9, 2002 By: /s/ Kenneth Karlan
-----------------------------------------
Kenneth Karlan, President
Date: May 9, 2002 By: /s/ Keith Sessler
-----------------------------------------
Keith Sessler, Vice President
- 9 -