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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
( ) 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: 1-14208
MOSSIMO, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0684524
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
2016 BROADWAY
SANTA MONICA, CALIFORNIA 90404
(Address of principal (Zip Code)
executive offices)
(310) 460-0040
(Registrant's telephone number, including area code)
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 any 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 the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, par value 15,444,042
$.001 per share (Outstanding on August 1, 2002)
(Class)
Exhibit Index on Page 19
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MOSSIMO, INC.
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - Financial Statements:
Condensed balance sheets as of June 30, 2002 and December 31, 2001
(unaudited)................................................................2
Condensed statements of earnings for the three and six months
ended June 30, 2002 and 2001 (unaudited) ..................................3
Condensed statements of cash flows for the six months
ended June 30, 2002 and 2001 (unaudited) ..................................4
Notes to condensed financial statements .......................................5
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................9
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk ...........15
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings ...................................................16
ITEM 4 - Submission of Matters to a Vote of Security Holders .................16
ITEM 6 - Exhibits and Reports on Form 8-K ....................................16
SIGNATURES ...................................................................18
INDEX TO EXHIBITS ............................................................19
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOSSIMO, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ............................................................... $ 6,063 $ 3,182
Accounts receivable................................................. 4,258 1,958
Deferred taxes...................................................... 1,776 1,776
Prepaid expenses and other current assets........................... 362 118
----------- -----------
Total current assets.............................................. 12,459 7,034
PROPERTY AND EQUIPMENT, net........................................... 227 251
DEFERRED FINANCING COSTS, net......................................... 103 151
DEFERRED TAXES........................................................ 1,821 1,821
OTHER ASSETS.......................................................... 37 37
----------- -----------
$ 14,647 $ 9,294
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUTY (DEFICENCY)
CURRENT LIABILITIES:
Loan payable........................................................ $ 2,995 $ 4,000
Accounts payable.................................................... 1,232 2,755
Accrued liabilities................................................. 448 762
Accrued commission ................................................. 1,727 246
Accrued bonuses..................................................... 1,454 613
----------- -----------
Total current liabilities........................................ 7,856 8,376
LOAN PAYABLE, net of current portion.................................. -- 817
LONG-TERM ACCOUNTS PAYABLE, net of current portion.................... 417 779
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICENCY):
Preferred stock, par value $.001; authorized shares 3,000,000;
no shares issued or outstanding................................... -- --
Common stock, par value $.001; authorized shares 30,000,000;
issued and outstanding 15,424,042 - June 30, 2002
and 15,330,042 - December 31, 2001................................ 15 15
Additional paid-in capital.......................................... 38,660 38,304
Accumulated deficency............................................... (32,301) (38,997)
----------- -----------
Net stockholders' equity (deficency).............................. 6,374 (678)
----------- -----------
$ 14,647 $ 9,294
=========== ===========
See accompanying notes to condensed financial statements.
2
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MOSSIMO, INC.
CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
2002 2001 2002 2001
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
REVENUE FROM LICENSE ROYALTIES
AND DESIGN SERVICE FEES ............... $ 7,404 $ 5,118 $12,994 $10,157
OPERATING EXPENSES:
Selling, general and administrative ... 3,652 3,433 6,079 5,933
-------- -------- -------- --------
Operating earnings ........................ 3,752 1,685 6,915 4,224
OTHER EXPENSE:
Interest expense, net ................. 98 177 219 393
-------- -------- -------- --------
Earnings before income taxes .............. 3,654 1,508 6,696 3,831
Provision for income taxes ................ -- -- -- --
-------- -------- -------- --------
Net earnings .............................. $ 3,654 $ 1,508 $ 6,696 $ 3,831
======== ======== ======== ========
Earnings per share:
Basic ................................. $ 0.24 $ 0.10 $ 0.44 $ 0.25
======== ======== ======== ========
Diluted ............................... $ 0.23 $ 0.10 $ 0.43 $ 0.25
======== ======== ======== ========
Weighted average common shares outstanding:
Basic ................................. 15,380 15,241 15,360 15,198
======== ======== ======== ========
Diluted ............................... 15,743 15,402 15,655 15,235
======== ======== ======== ========
See accompanying notes to condensed financial statements.
3
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MOSSIMO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE SIX MONTHS
ENDED JUNE 30,
2002 2001
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .............................................. $ 6,696 $ 3,831
Adjustment to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization ......................... 105 130
Changes in:
Accounts receivable ............................... (2,300) (1,067)
Prepaid expenses and other current assets ......... (244) (265)
Other assets ...................................... -- 10
Accounts payable and long-term accounts payables .. (1,885) (613)
Accrued liabilities ............................... (314) (36)
Accrued bonuses ................................... 841 626
Deferred compensation ............................. -- (564)
Accrued commission ................................ 1,481 356
-------- --------
Net cash provided by operating activities ......... 4,380 2,408
-------- --------
CASH FLOWS FROM INVESTING ACTIVITITES:
Payments for acquisition of property and equipment ........ (33) (34)
-------- --------
Net cash used in investing activities ............. (33) (34)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of loan payable .................................. (1,822) 32
Proceeds from issuance of common stock .................... 356 471
-------- --------
Net cash provided by (used in) financing activities (1,466) 503
-------- --------
NET INCREASE IN CASH ...................................... 2,881 2,877
CASH, beginning of period ................................. 3,182 50
-------- --------
CASH, end of period ....................................... $ 6,063 $ 2,927
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest .............. $ 178 $ 377
======== ========
See accompanying notes to condensed financial statements.
4
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MOSSIMO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed financial statements presented herein have not been audited
by independent public accountants, but include all material adjustments
(consisting of normal recurring adjustments), which are, in the opinion of
management, necessary for a fair statement of the financial condition, results
of operations and cash flows for the periods presented. However, these results
are not necessarily indicative of results for any other interim period or for
the full year. The condensed balance sheet data presented herein for December
31, 2001 was derived from the Company's audited financial statements for the
year then ended, but does not include all disclosures required by generally
accepted accounting principles. The preparation of financial statements in
accordance with generally accepted accounting principles requires the Company to
make certain estimates and assumptions for the reporting periods covered by the
financial statements. These estimates and assumptions affect the reported
amounts of assets, liabilities, revenues and expenses. Actual amounts could
differ from these estimates.
Certain information and footnote disclosures normally included in annual
financial statements in accordance with generally accepted accounting principles
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes the disclosures included in the
accompanying interim condensed financial statements and notes thereto are
adequate to make the information not misleading, but should be read in
conjunction with the financial statements and notes thereto included in our Form
10-K for the year ended December 31, 2001.
Certain reclassifications have been made in the 2001 condensed financial
statements to conform to the 2002 presentation.
2. DESCRIPTION OF BUSINESS
In March 2000, Mossimo, Inc. ("Mossimo" or the "Company") entered into a
multi-year licensing and design services agreement with Target Corporation
("Target"), subsequently amended in April 2002, herein after referred to as the
"Target Agreement". Under the terms of the Target Agreement, Target has the
exclusive license, for production and distribution through Target stores, of
substantially all Mossimo products sold in the United States, other than those
covered under other existing Mossimo licensing arrangements at the time the
Company entered into the Target Agreement.
Under the Target Agreement the Company provides design services and has
approval rights for product design and marketing and advertising materials.
Target collaborates on design and is responsible for product development,
sourcing, quality control and inventory management with respect to the Target
licensed product line. Target is obligated to pay the Company design service
fees and license royalty fees, with 55 percent of total fees representing
license royalty fees. Total fees payable by Target are based upon a percentage
of Target's net sales of Mossimo brand products, with minimum total guaranteed
fees of approximately $8.5 million, $9.6 million and $9.6 million payable in
each of the contract years ending January 31, 2002, 2003 and 2004, respectively.
Target fees are based on net sales achieved multiplied by a rate, as defined in
the Target Agreement. The Company pays 15 percent of certain payments received
from Target to a third party who assisted the Company in connection with
entering into the initial agreement with Target. The Target Agreement is subject
to early termination under certain circumstances. If Target is current with
payments of its obligations under the Target Agreement, Target has the right to
renew the Target Agreement, on the same terms and conditions, for additional
terms of two years each.
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In addition to the Target Agreement, the Company also licenses its
trademarks and provides design services outside of the United States to third
parties, and also licenses its trademarks for use in collections of eyewear and
women's swimwear and body-wear sold in Target stores in the United States.
3. REVENUE RECOGNITION
Design service fees and license royalties under the Target Agreement are
recognized as Target records sales of the Company's products, and the Company's
fees and royalties are earned. Fees earned are payable on a quarterly basis at
rates ranging from four percent to one percent of Target's net sales of Mossimo
brand product. The Target Agreement provides for a declining fee and royalty
rate structure upon Target achieving certain levels of retail sales of Mossimo
branded products during each contract year (i.e. each twelve month period
beginning February 1). As a result, the Company's design service fees and
license royalty revenues from Target as a percentage of Target's retail sales of
Mossimo branded products will be highest at the beginning of each contract year
and decrease throughout each contract year as Target reaches certain retail
sales thresholds. Therefore, the amount of design service fees and license
royalty revenues recognized by the Company under the Target Agreement in any
reporting period is dependent not only on retail sales of branded products in
such period, but also on the cumulative level of retail sales for the contract
year, and the applicable rate, or combination of rates, during the reporting
period. As a result, revenue and net earnings derived from this agreement will
be significantly lower in the third and fourth quarter of the year.
Royalty revenues from the Company's other licensees are recognized as those
licensees achieve sales of the Company's products. Royalty payments are due on a
quarterly basis and range from two percent to seven percent of net sales.
During the three and six months ended June 30, fees from Target represented
approximately 93 percent of the Company's total revenue in 2002 and 2001.
4. EARNINGS PER SHARE
Earnings per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share includes the effect of dilutive stock options, using
the treasury stock method. Stock options excluded from diluted weighted average
shares outstanding because they were anti-dilutive were approximately 41,000 and
67,000 for the three and six months ended June 30, 2002, respectively, and
approximately 211,000 and 815,000 for the three and six months ended June 30,
2001, respectively.
The reconciliation between net earnings and weighted average shares
outstanding for basic and diluted earnings per share is as follows (all amounts
in thousands, except per share data):
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
2002 2001 2002 2001
------ ------ ------ ------
Net earnings ................................ $ 3,654 $ 1,508 $ 6,696 $ 3,831
Weighted average shares outstanding - Basic . 15,380 15,241 15,360 15,198
Basic earnings per share .................... $ 0.24 $ 0.10 $ 0.44 $ 0.25
Add: Dilutive effect of stock options ....... 363 161 295 37
Weighted average shares outstanding - Diluted 15,743 15,402 15,655 15,235
Diluted earnings per share .................. $ 0.23 $ 0.10 $ 0.43 $ 0.25
6
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5. LOAN PAYABLE
The Company has a loan payable with a bank, which is collateralized by
substantially all of the Company's assets and is also secured by a personal
guaranty provided by the Company's Chairman of the Board and Chief Executive
Officer. The amount outstanding under the loan payable bears interest at the
bank's prime rate plus 1.5 percent. Payments on the loan are $1 million per
quarter through June 2003. The personal guaranty provided by the Company's
Chairman of the Board and Chief Executive Officer is reduced by $500,000 per
quarter as payments are made by the Company, and was $2.5 million at June 30,
2002. The outstanding balance of the loan at June 30, 2002 was approximately
$3.0 million.
6. LONG-TERM ACCOUNTS PAYABLE
In 2000, due to cash shortages and the anticipated changes in the Company's
business resulting from entering into the Target Agreement, the Company
negotiated payment plans with unsecured creditors, and has been making payments
generally in accordance with the payment plans. The remaining outstanding
amounts are payable $651,000 in the twelve months ending June 30, 2003, and
$417,000 in the twelve month period ending June 30, 2004.
7. TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109.
Deferred taxes result from temporary differences between the reporting of income
and losses for financial and tax reporting purposes and are provided for using
the liability method as prescribed by SFAS No. 109.
The Company recorded no tax provision on its pre-tax income in the three
and six months ended June 30, 2002, as any current tax component of the
provision is offset by an equal deferred tax benefit necessary following the
Company's reevaluation of its forecasted operating results and resultant taxable
income during the remaining term of the Target Agreement, and the consequent
utilization of available net operating losses during the remaining term of the
Target Agreement.
The Company recorded no tax expense in the three and six months ended June
30, 2001 as a result of the Company having approximately $39 million and $25
million of federal and state net operating loss carry-forwards, respectively, at
December 31, 2000 and a full valuation allowance on the Company's deferred tax
assets at that date due to uncertainty regarding their realization.
Any tax expense on the Company's pre-tax income in the three and six months
ended June 30, 2002 and 2001 is offset by an equivalent reduction in the
Company's valuation allowance on its deferred tax assets.
The Company was classified as a "personal holding company" in fiscal 2001.
Personal holding company status results from more than 50 percent of the value
of outstanding stock being owned directly or indirectly by five or fewer
individuals, and more than 60 percent of the Company's income being derived from
license royalties. Personal holding companies are subject to an additional
federal tax at the highest personal income tax rate (38.6 percent for 2002) on
undistributed after tax earnings. A personal holding company is able to use its
net operating loss, if any, for the immediately preceding year to offset its
income subject to the personal holding company tax. Consequently the Company had
no liability for personal holding company tax in 2001 as a result of its net
operating loss for 2000 being in excess of its undistributed after tax earnings
in 2001.
The Company is implementing strategies to avoid being classified as a
personal holding company in 2002 and beyond. No provision has been made in the
condensed financial statements for the personal holding company tax.
7
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The Company amended the Mossimo Giannulli Bonus Plan in July 2002 to
provide for quarterly discretionary bonuses to be determined by the Compensation
Committee of the Board of Directors, and subject to approval by the Board of
Directors. The discretionary bonuses are not to exceed the amounts that would
have been payable under the previous bonus formula. The July 2002 amendment is
subject to shareholder vote before it can qualify under the tax deduction
provisions of IRC Section 162(m). To the extent that Mr. Giannulli receives
compensation over $1 million in any calendar year under compensation programs
not qualified under IRC Section 162(m), the amount in excess of $1 million would
not be deductible for tax purposes.
8. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible
Assets", and SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS
No. 141 addresses financial accounting and reporting for business combinations
and is effective for all business combinations after June 30, 2001. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and is effective for fiscal years beginning after December 15,
2001. SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after June
15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
is effective for fiscal years beginning after December 15, 2001.
The Company adopted SFAS No.'s 142 and 144 on January 1, 2002. The adoption
of these standards did not have a material impact on the Company's financial
position or results of operations.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes the operations of Mossimo, Inc. for each
of the periods discussed. This discussion and analysis should be read in
conjunction with the Company's financial statements for the year ended December
31, 2001 on Form 10-K.
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
In March 2000, Mossimo, Inc. ("Mossimo" or the "Company") entered into a
multi-year licensing and design services agreement with Target Corporation
("Target"), subsequently amended in April 2002, herein after referred to as the
"Target Agreement". Under the terms of the Target Agreement, Target has the
exclusive license, for production and distribution through Target stores, of
substantially all Mossimo products sold in the United States, other than those
covered under other existing Mossimo licensing arrangements at the time the
Company entered into the Target Agreement.
Under the Target Agreement the Company provides design services and has
approval rights for product design and marketing and advertising materials.
Target collaborates on design and is responsible for product development,
sourcing, quality control and inventory management with respect to the Target
licensed product line. Target is obligated to pay the Company design service
fees and license royalty fees, with 55 percent of total fees representing
license royalty fees. Total fees payable by Target are based upon a percentage
of Target's net sales of Mossimo brand products, with minimum total guaranteed
fees of approximately $8.5 million, $9.6 million and $9.6 million payable in
each of the contract years ending January 31, 2002, 2003 and 2004, respectively.
Target fees are based on net sales achieved multiplied by a rate, as defined in
the Target Agreement. The Company pays 15 percent of certain payments received
from Target to a third party who assisted the Company in connection with
entering into the initial agreement with Target. The Target Agreement is subject
to early termination under certain circumstances. If Target is current with
payments of its obligations under the Target Agreement, Target has the right to
renew the Target Agreement, on the same terms and conditions, for additional
terms of two years each.
In addition to the Target Agreement, the Company also licenses its
trademarks and provides design services outside of the United States to third
parties, and also licenses its trademarks for use in collections of eyewear and
women's swimwear and body-wear sold in Target stores in the United States.
In May 2002, the Company entered into an agreement with Hudson's Bay
Company whereby the Company will provide product design services, and has
licensed the Mossimo trademark to Hudson's Bay Company in Canada, in return for
license royalties and design fees. Hudson's Bay Company will collaborate on
product design, and will be responsible for manufacturing, importing, marketing,
advertising, selling and distributing merchandise bearing the Mossimo trademark.
The initial term of the licensing agreement is three years beginning in May
2002, with a five-year extension option.
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES
Design service fees and license royalties under the Target Agreement are
recognized as Target records sales of the Company's products, and the Company's
fees and royalties are earned. Fees and royalties earned are payable on a
quarterly basis at rates ranging from four percent to one percent of Target's
net sales of Mossimo brand product. The Target Agreement provides for a
declining fee rate structure upon Target achieving certain levels of retail
9
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sales of Mossimo branded products during each contract year (i.e. each twelve
month period beginning February 1). As a result, the Company's design service
fees and license royalty revenues from Target as a percentage of Target's retail
sales of Mossimo branded products will be highest at the beginning of each
contract year and decrease throughout each contract year as Target reaches
certain retail sales thresholds. Therefore, the amount of design service fees
and license royalty revenues recognized by the Company under the Target
Agreement in any reporting period is dependent not only on retail sales of
branded products in such period, but also on the cumulative level of retail
sales for the contract year, and the applicable rate, or combination of rates,
during the reporting period. As a result, revenue and net earnings derived from
this agreement will be significantly lower in the third and fourth quarter of
the year.
Royalty revenues from the Company's other licensees are recognized as those
licensees achieve sales of the Company's products. Royalty payments are due on a
quarterly basis and range from two percent to seven percent of net sales.
Total revenue from license royalties and design service fees in the second
quarter of 2002 was approximately $7.4 million compared to approximately $5.1
million in the second quarter of 2001.
Design service fees and license royalties recognized under the Target
Agreement were approximately $6.9 million in the second quarter of 2002 as
compared to approximately $4.8 million in the second quarter of 2001, and
included approximately $1.5 million of revenue recognized in 2002 which had been
deferred during the initial contract period ended January 31, 2002 pending the
results of a royalty audit, the reconciliation and settlement of accounts
between the Company and Target, and the assessment of the underlying deferred
revenue reserves, all of which was completed during the second quarter of 2002.
The provisions that resulted in the deferral of revenue by the Company are not
expected to recur. The increase of approximately $600,000 in normal business
between the second quarter of 2002 and the comparable period in the prior year
represents approximately a 13 percent increase due to the growth of Target sales
of Mossimo branded product.
Royalties from licensees other than Target increased to approximately
$474,000 in the second quarter of 2002 from approximately $356,000 in the second
quarter of 2001, primarily due to approximately $90,000 earned on the execution
of a new agreement in Asia, and an increase of approximately $20,000 in
royalties from other international licensees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total operating expenses, comprising selling, general and administrative
expenses, increased to approximately $3.7 million in the first quarter of 2002
from approximately $3.4 million in the first quarter of 2001.
The Company's aggregate payroll costs decreased to approximately $1.7
million in the second quarter of 2002 from approximately $2.2 million in the
second quarter of 2001. The decrease was primarily due to a reduction in the
bonus due to the Company's Chief Executive Officer in the second quarter of 2002
under the new bonus plan, as further discussed below, offset by an increase in
payroll incurred as a result of the addition of new personnel in 2002.
Effective in February 2002, the Company and Mossimo Giannulli, the
Company's Chairman of the Board of Directors and Chief Executive Officer, agreed
to modify Mr. Giannulli's bonus plan and significantly reduce the bonus based on
the Target business. In April, 2002, the Company formally entered into an
amended and restated employment agreement (the "Amended and Restated Employment
Agreement") with Mr. Giannulli. The Amended and Restated Employment Agreement
amended Mr. Giannulli's previous employment agreement by, among other things,
modifying Mr. Giannulli's bonus compensation arrangements. Under the previous
agreement, Mr. Giannulli was entitled to receive a bonus equal to 50 percent of
the Company's annual net fees in excess of the Company's guaranteed minimum net
fees under the Target Agreement. The new plan provides for the award of an
annual bonus to Mr. Giannulli for the accomplishment of specific pre-established
financial performance objectives by the Company, based on certain objective
business criteria. In April, 2002, the Compensation Committee of the Board of
Directors determined that the performance objectives and objective bonus
formulas with respect to the new plan commencing on February 1, 2002 would be 29
percent of the excess, if any, of the license royalty fees paid to the Company
under the Target Agreement, over the minimum license royalty fees for such
contract year. The new plan was approved at the Company's 2002 Annual Meeting of
10
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Stockholders. In July 2002, the Committee and Mr. Giannulli further agreed to
amend the Plan to provide for quarterly discretionary bonuses instead of the
previous formula based bonus, to be determined by the Committee, and subject to
approval by the Board of Directors. The discretionary bonuses are not to exceed
the amounts that would have been payable under the 29 percent bonus formula
established in April 2002. The July 2002 amendment is subject to shareholder
vote before it can qualify under the tax deduction provisions of IRC Section
162(m). To the extent that Mr. Giannulli receives compensation over $1 million
in any calendar year under compensation programs not qualified under IRC Section
162(m), the amount in excess of $1 million would not be deductible for tax
purposes.
The Company and Edwin Lewis, Vice Chairman of the Board of Directors and
President of the Company, entered into an agreement that provides a Bonus Plan
for Mr. Lewis. Bonuses would be payable to Mr. Lewis under the plan for the
accomplishment of specific pre-established financial performance objectives by
the Company, based on certain objective business criteria. In April, 2002, the
Compensation Committee of the Board of Directors determined that the performance
objectives and objective bonus formulas with respect to the plan commencing on
February 1, 2002 would be approximately 10 percent of the excess, if any, of the
license royalty fees paid to the Company under the Target Agreement, over the
minimum license royalty fees for such contract year. In July 2002, the Committee
and Mr. Lewis further agreed to amend the Plan to provide for quarterly
discretionary bonuses instead of the previous formula based bonus of
approximately 10 percent established in April 2002, to be determined by the
Committee, and subject to approval by the Board of Directors. The discretionary
bonuses are not to exceed the amounts that would have been payable under the
previous bonus formula established in April 2002.
The discretionary bonuses payable to Mr. Giannulli and Mr. Lewis will be
determined on a quarterly basis by the Compensation Committee of the Board of
Directors and charged to operating expenses in the period in which they are
determined by the Committee, and approved by the Board of Directors. The
discretionary bonuses will vary from period to period.
As of June 30, 2002, the Company accrued bonuses in an aggregate amount of
approximately $1.5 million. Bonus expense of approximately $951,000 was
recognized in the three months ended June 30, 2002, and bonus expense of
approximately $1.5 million was recognized in the six months ended June 30, 2002.
Total bonus expense of $1.6 million was recognized in the three months ended
June 30, 2001, and bonus expense of approximately $2.4 million was recognized in
the six months ended June 30, 2001.
Selling expenses increased to approximately $1.0 million in the second
quarter of 2002 from approximately $718,000 in the second quarter of 2001.
Selling expenses comprise obligations due to a third party who assisted the
Company in connection with entering into the Target Agreement and who receives
15 percent of certain payments received by the Company from Target. The increase
over the prior year is directly related to the increase in revenue associated
with Target.
Travel expenses increased to approximately $190,000 in the second quarter
of 2002 from approximately $50,000 in the second quarter of 2001. The increase
was due to additional travel activity in connection with the Target business,
the initial travel requirements to begin the implementation of the Company's new
design services and license agreement with Hudson's Bay Company in Canada, and
additional travel required by other business development activities.
Additionally, general and administrative expenses increased by
approximately $104,000 in the second quarter of 2002 as compared to the second
quarter of 2001, primarily due to legal, professional and filing fees incurred
during 2002, including the cost of initiating the Company's listing on NASDAQ in
April 2002.
INTEREST EXPENSE, NET
The Company incurred interest expense of approximately $98,000 in the
second quarter of 2002 compared to interest expense of approximately $177,000 in
the second quarter of 2001. The decrease was due primarily to a reduction of the
applicable variable interest rate, and reductions of the outstanding balance on
the loan payable to a bank.
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INCOME TAXES
The Company recorded no tax provision on its pre-tax income in the three
and six months ended June 30, 2002, as any current tax component of the
provision is offset by an equal deferred tax benefit necessary following the
Company's reevaluation of its forecasted operating results and resultant taxable
income during the remaining term of the Target Agreement, and the consequent
utilization of available net operating losses during the remaining term of the
Target Agreement.
The Company was classified as a "personal holding company" in fiscal 2001.
Personal holding company status results from more than 50 percent of the value
of outstanding stock being owned directly or indirectly by five or fewer
individuals, and more than 60 percent of the Company's income being derived from
license royalties. Personal holding companies are subject to an additional
federal tax at the highest personal income tax rate (38.6 percent for 2002) on
undistributed after tax earnings. A personal holding company is able to use its
net operating loss, if any, for the immediately preceding year to offset its
income subject to the personal holding company tax. Consequently the Company had
no liability for personal holding company tax in 2001 as a result of its net
operating loss for 2000 being in excess of its undistributed after tax earnings
in 2001.
The Company is implementing strategies to avoid being classified as a
personal holding company in 2002 and beyond. No provision has been made in the
condensed financial statements for the personal holding company tax.
The Company recorded no tax expense in the three and six months ended June
30, 2001 as a result of the Company having approximately $39 million and
approximately $25 million of federal and state net operating loss
carry-forwards, respectively, at December 31, 2000 and a full valuation
allowance on the Company's deferred tax assets at that date due to uncertainty
regarding their realization.
Any tax expense on the Company's pre-tax income in the three and six month
period ended June 30, 2002 and 2001 is offset by an equivalent reduction in the
Company's valuation allowance on its deferred tax assets.
NET EARNINGS
The Company's net earnings for the second quarter of 2002 were
approximately $3.7 million compared to net earnings of approximately $1.5
million for the second quarter of 2001 due to all of the factors discussed
above. In the second quarter of 2002, the Company recognized approximately $1.5
of revenue which had been previously deferred, as further discussed above. The
recognition of the deferred revenue resulted in an increase of approximately
$600,000 to net earnings in the second quarter of 2002. This item is not
expected to recur.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES
Total revenue from license royalties and design service fees for the six
months ended June 30, 2002 were approximately $13.0 million compared to
approximately $10.2 million in the same period of 2001.
Design service fees and license royalties recognized under the Target
Agreement were approximately $12.1 million in 2002 as compared to approximately
$9.5 million in 2001, and included approximately $1.5 million of revenue
recognized in 2002 which had been deferred during the initial contract period
ended January 31, 2001 pending the results of a royalty audit, the
reconciliation and settlement of accounts between the Company and Target, and
the assessment of the underlying deferred revenue reserves, all of which was
completed during the second quarter of 2002. The provisions that resulted in the
deferral of revenue by the Company are not expected to recur. The increase of
approximately $1.1 million in normal business between 2002 and 2001 represents
approximately a 12 percent increase due to the growth of Target sales of Mossimo
branded product.
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Royalties from licensees other than Target increased to approximately
$900,000 in 2002 from approximately $700,000 in 2001, primarily due to
approximately $90,000 earned on the execution of a new agreement in Asia, and an
increase of approximately $110,000 in royalties from other licensees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total operating expenses, comprising selling, general and administrative
expenses, increased to approximately $6.1 million in the six months ended 2002
from approximately $5.9 million in 2001.
The Company's aggregate payroll costs decreased to approximately $2.8
million in 2002 from approximately $3.4 million in 2001. The decrease was
primarily due to a reduction in the bonus due to the Company's Chief Executive
Officer in 2002 under the new bonus plan, as further discussed above, partially
offset by an increase in payroll incurred as a result of the addition of new
personnel in 2002.
Selling expenses increased to approximately $1.8 million in 2002 from
approximately $1.4 million in 2001. Selling expenses comprise obligations due to
a third party who assisted the Company in connection with entering into the
Target Agreement and who receives 15 percent of certain payments received by the
Company from Target. The increase over the prior year in directly related to the
increase in the Company's business with Target.
Travel expenses increased to approximately $286,000 in 2002 from
approximately $87,000 in 2001. The increase was due to additional travel
activity in connection with the Target business, the initial travel requirements
to begin the implementation of the Company's new design services and license
agreement with Hudson's Bay Company in Canada, and additional travel required by
other business development activities.
Additionally, general and administrative expenses increased by
approximately $87,000 in 2002 as compared to 2001, primarily due to legal,
professional and filing fees incurred during 2002, including the cost of
initiating the company's listing on NASDAQ in April 2002.
INTEREST EXPENSE, NET
The Company incurred interest expense of approximately $219,000 in 2002
compared to interest expense of approximately $393,000 in 2001. The decrease was
due primarily to a reduction in the applicable variable interest rate, and
reductions of the outstanding balance of the loan payable to a bank.
INCOME TAXES
The Company recorded no tax provision on its pre-tax income in the three
and six months ended June 30, 2002, as any current tax component of the
provision is offset by an equal deferred tax benefit necessary following the
Company's reevaluation of its forecasted operating results and resultant taxable
income during the remaining term of the Target Agreement, and the consequent
utilization of available net operating losses during the remaining term of the
Target Agreement.
The Company was classified as a "personal holding company" in fiscal 2001,
and the Company is implementing strategies to avoid being classified as a
personal holding company in 2002 and beyond. No provision has been made in the
condensed financial statements for the personal holding company tax, as further
discussed above.
The Company recorded no tax expense in the three and six months ended June
30, 2001 as a result of the Company having approximately $39 million and
approximately $25 million of federal and state net operating loss
carry-forwards, respectively, at December 31, 2000 and a full valuation
allowance on the Company's deferred tax assets at that date due to uncertainty
regarding their realization.
Any tax expense on the Company's pre-tax income in the three and six month
period ended June 30, 2002 and 2001 is offset by an equivalent reduction in the
Company's valuation allowance on its deferred tax assets.
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NET EARNINGS
The Company's net earnings for the six months ended 2002 were approximately
$6.7 million compared to net earnings of approximately $3.8 million for 2001 due
to all of the factors discussed above. In the second quarter of 2002, the
Company recognized approximately $1.5 of revenue which had been previously
deferred as further discussed above. The recognition of the deferred revenue
resulted in an increase of approximately $600,000 in net earnings for the six
months ended 2002. This item is not expected to recur.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $4.4 million
for the six months ended June 30, 2002 as compared to $2.4 million for the six
month ended June 30, 2001. Cash provided by operating activities primarily
includes net earnings of approximately $6.7 million and an increase in accrued
commissions of approximately $1.5 million, offset by an increase in accounts
receivable of approximately $2.3 million, and a decrease in accounts payable of
approximately $1.9 million. At June 30, 2002, positive working capital was
approximately $4.6 million, compared to negative working capital of
approximately $1.3 million at December 31, 2001. The increase in working capital
is primarily due to increases in cash balances and accounts receivable, as well
as reductions of bank debt and accounts payable balances, partially offset by an
increase in accrued commission and accrued bonuses.
Net cash used in investing activities was approximately $33,000 for the six
months ended June 30, 2002 and was all used for the acquisition of property and
equipment.
Net cash used in financing activities was approximately $1.5 million for
the six months ended June 30, 2002, and was primarily used to repay the loan
payable to a bank, partially offset by proceeds from the sale of common stock
upon the exercise of stock options.
In 2000, due to cash shortages and the anticipated changes in the Company's
business resulting from entering into the Target Agreement, the Company
negotiated payment plans with unsecured creditors, and has been making payments
generally in accordance with the payment plans. The remaining outstanding
payments due to the unsecured creditors as of June 30, 2002 are approximately
$1.1 million, of which approximately $651,000 are due in the twelve month period
ending June 30, 2003.
In August, 2000, the Company entered into a lease agreement for its
principal facility in Santa Monica, California. Rent obligations under the lease
agreement are approximately $10,000 per month for an initial term of three
years.
The Company expects that its principal source of liquidity during the
remaining term of the Target Agreement will be its net operating cash flows. The
Company believes that its available cash balances at June 30, 2002 and its
expected net operating cash flows during the remaining term of the Target
Agreement will be adequate to meet the Company's currently anticipated liquidity
needs through January 31, 2004, at which time the initial term of the Target
Agreement expires. If Target is current with payments of its obligations under
the Target Agreement, Target has the right to renew the Target Agreement, on the
same terms and conditions, for additional terms of two years each by giving the
Company a one year notice of renewal. The first notice of renewal is due in
January 2003.
From time to time, the Company also considers a number of different
financing alternatives, including the issuance of equity securities, debt
instruments and equity-linked securities, as sources of liquidity.
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FORWARD LOOKING INFORMATION
This report on Form 10-Q contains certain forward-looking statements within
the meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on the beliefs of
the Company's management as well as assumptions made by and information
currently available to the Company's management. The words "anticipate",
"believe", "may", "estimate", "plan", "expect", "future", "intend", "will",
"should", "continue" and similar expressions, variations of such terms or the
negative of such terms as they relate to the Company or its management when used
in this document, are intended to identify such forward-looking statements. Such
statements are based on management's current expectations and are subject to
certain risks, uncertainties and assumptions. Should one or more risks or
uncertainties materialize, or should underlying assumptions prove incorrect, the
Company's actual results, performance or achievements could differ materially
from those expressed in, or implied by such forward-looking statements. The
Company's future operations, financial performance, business and share price may
be affected by a number of factors, including a termination or adverse
modification of the Company's license relationships, especially its relationship
with Target and performance under the Target licensing and design services
agreement, changes in consumer demands and preferences, competition from other
lines, risks generally associated with product introductions and shifting trends
in the overall retail and apparel retailing markets and the other factors
described in "Business-Risk Factors." in the Company's Form 10-K for the year
ended December 31, 2001. Accordingly, undue reliance should not be placed on
these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in variable
interest rates on its loan payable to a bank. Changes in interest rates for
variable rate debt generally do not influence fair market value, but do affect
future earnings and cash flows. Holding the variable rate debt balance constant,
a one percent increase in interest rates occurring on July 1, 2002 would result
in an increase in interest expense for the following twelve months of
approximately $30,000.
The Company does not use interest rate swaps, futures contracts or options
on futures, or other types of derivative financial instruments. The Company does
not believe that future market risks arising from holdings of its financial
instruments will have a material impact on its financial position or results of
operations.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In May 2002, the Company made a demand for arbitration in connection with a
claim for overpayment of fees paid to a third party who assisted the Company in
connection with entering into the initial agreement with Target. The claim is
disputed by the third party. If the Company prevails, it may be entitled to
recover from the third party certain fees paid, and reduce fees payable in the
future. The Company has recognized expenses and has accrued the related
liability to the third party in accordance with the terms of the existing
agreement and consistent with prior periods. However, the Company is withholding
payment of any amounts due to the third party pending the results of the
arbitration. The third party has a counter demand in the arbitration proceeding
against the Company for what they claim are the sums due and owing under the
agreement.
The Company is involved in certain other legal and administrative
proceedings and threatened legal and administrative proceedings arising in the
normal course of its business. While the outcome of such proceedings and
threatened proceedings cannot be predicted with certainty, in the opinion of
management, the ultimate resolution of these matters individually or in the
aggregate will not have a material adverse effect on the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting:
The 2002 Annual Meeting of stockholders of Mossimo, Inc. was held on
June 3, 2002.
(b) Not applicable.
(c) The Mossimo Giannulli Bonus Plan was approved at the 2002 Annual
Meeting of stockholders by 11,079,027 votes in favor and 73,092 votes
against.
(d) Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
The Edwin Lewis Bonus Plan, dated April 17, 2002
Amendment Number One to the Mossimo Giannulli Bonus Plan, dated July
1, 2002
Amendment Number One to the Edwin Lewis Bonus Plan, dated July 1, 2002
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002
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(b) Reports on Form 8-K
The Registrant filed a current report on Form 8-K on August 5, 2002
that related to changes in the registrant's certifying accountant.
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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 on the 8th day of August 2002.
MOSSIMO, INC.
/s/ MOSSIMO GIANNULLI
---------------------------------------------
Mossimo Giannulli
President and Chief Executive Officer
/s/ Manuel Marrero
---------------------------------------------
Manuel Marrero
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
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10.1 The Edwin Lewis Bonus Plan, dated April 17, 2002
10.2 Amendment Number One to the Mossimo Giannulli Bonus Plan,
dated July 1, 2002
10.3 Amendment Number One to the Edwin Lewis Bonus Plan, dated July
1, 2002
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
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