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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 90404
SANTA MONICA, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(310) 460-0040
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock, par
value $.001 per share
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference and Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
determined by Exchange Act Rule 12b-2). Yes [_] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at February 20, 2003 was approximately $29,159,312.
The registrant had 15,493,442 shares of common stock, par value $.001 per share
outstanding at February 20, 2003.
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference information from the
Registrant's Proxy Statement for the 2003 Annual Meeting of Stockholders to be
held on June 3, 2003.
1
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ITEM 1 - BUSINESS
GENERAL
Mossimo, Inc. is a Delaware corporation formed in November 1995, to
succeed the assets and liabilities of Mossimo, Inc., a California corporation,
which was organized in 1988, to continue the business founded by Mossimo
Giannulli in 1987, as a sole proprietorship. References herein to the "Company"
and "Mossimo" refer to Mossimo, Inc.
In 2000 the Company changed its business operating strategy from a
traditional apparel and related products wholesale company, to a designer and
licensor of apparel and related products. In connection therewith, the Company
entered into a multi-year licensing and design services agreement with Target
Corporation ("Target") in March 2000, 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, 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 and 45 percent representing design services 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 $9.6 million
payable in each of the contract years after January 31, 2002. Target fees are
based on net sales of Mossimo brand product multiplied by a variable descending
rate, up to a minimum rate, that decreases as Target reaches certain specified
sales levels. In 2002, Target reached the minimum rate during the third quarter
of the Company's calendar year. If Target sales of Mossimo branded products
increase in the future, as a result of opening new stores or otherwise, the
minimum rate of fees may apply earlier in the Company's future calendar years.
The Company pays a 15 percent commission based on certain fees 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 January 2003, Target exercised its first renewal option extending
the Target Agreement through January 31, 2006.
The Company 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 addition to the Target Agreement, the Company also licenses its
trademarks and provides design services outside of the United States. In May
2002, the Company entered into an agreement with Hudson's Bay Company whereby
the Company provides product design services, and has licensed the Mossimo
trademark to Hudson's Bay Company exclusively in Canada, in return for license
royalties and design service 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
in Canada. The initial term of the agreement is three years beginning in May
2002, with a five-year extension at the option of Hudson's Bay Company. Hudson's
Bay Company is expected to fully launch the Mossimo product in Spring 2003 for
distribution through its Zellers stores in Canada.
As a result of entering into the Target Agreement, beginning in 2001
substantially all of the Company's revenue has been derived from Target. License
royalties and design service fees from Target represented approximately 92
percent of total revenue in 2002 and 2001, and 24 percent of total revenue in
2000.
DESIGN AND MERCHANDISING
The cornerstone of the Company's business is its ability to design
products which embody the Mossimo image of a contemporary, active, and youthful
lifestyle. The Company's designs are inspired by subtle changes in culture and
society including such areas as music, television, cinema, architecture and
other forms of artistic expression, and appeal to the contemporary consumer. The
work of the Company's extensive design staff reflects the Company's fashion
conscious consumer as they consistently monitor changes in fashion, style,
culture and society, and develop designs that interpret such trends considering
the targeted consumer group. The Company's product design and merchandising
services provided to licensees, along with the right to approve design,
advertising, and promotional materials are an important aspect for continuity of
product quality, maintaining and enhancing the Company's distinctive image and
the value of its trademark.
2
PRODUCTS
Prior to 2001, and prior to entering into the Target Agreement, the
Company's primary line of business was designing, sourcing, distributing, and
marketing a lifestyle collection of designer men's and women's sportswear and
active wear. The products were distributed to a diversified account base,
including department stores, specialty retailers, and sports and active wear
stores located throughout the United States, as well as one company operated
exclusive signature retail store and one company operated exclusive outlet store
located in Southern California. In connection with the Target Agreement and its
ongoing business strategy, the Company restructured its operations and currently
operates as a designer and licensor only, and does not manufacture, source,
market, distribute, or retail its products.
MEN'S AND WOMEN'S APPAREL. In 2000 the Company derived approximately 97
percent of it's revenue from the sale of Mossimo branded men's and women's
apparel, which encompassed a variety of products, including: knit and woven tops
(including polo shirts and collared, button-down shirts); outerwear, including
sweaters and jackets; denim and related products, including jeans, shirts and
jackets; dresses; pants; screenprinted and embroidered sweatshirts and
tee-shirts; and shorts. In March 2000, the Company entered into the Target
Agreement under which it licensed to Target the right to produce and distribute
substantially all of its Mossimo branded products in the United States. The
initial Target licensed product lines were launched in Target's stores in the
Fall of 2000 and, in addition to men's and women's apparel, include boy's and
girl's apparel and footwear, cosmetics and other fashion accessories such as
jewelry, watches, handbags, belts, neckwear and gloves.
In May 2002, the Company entered into an agreement with Hudson's Bay
Company under which it licensed to Hudson's Bay Company the right to produce and
distribute substantially all of its Mossimo branded products exclusively in
Canada. The product line includes men's and women's apparel, boy's and girl's
apparel, footwear, cosmetics and other fashion accessories such as jewelry,
watches, handbags, belts, neckwear and gloves. In addition, the product line
will be expanded to home products such as towels and sheets, as well as a
complete line of kitchen, bedroom and bath soft good products and accessories.
Hudson's Bay Company is expected to fully launch the Mossimo branded products by
Spring 2003, for distribution through its Zellers stores in Canada.
OPTICS LINE. The Company has an exclusive license agreement with the
Marcolin Group for the production and distribution of the Mossimo line of
eyewear, including sunglasses, sport glasses and optical frames. Marcolin sells
Mossimo branded eyewear through specialty retail stores such as opticians,
optical chains and specialty eyeglass and sunglass stores. This agreement,
however, permits Target to sell Mossimo branded eyewear in Target stores. The
license agreement extends through December 31, 2003, and is renewable annually.
WOMEN'S SWIMWEAR AND BODYWEAR. The Mossimo line of women's swimwear and
bodywear is manufactured and distributed through Target stores in the United
States under an exclusive license agreement with The Lunada Bay Corporation. The
high quality Mossimo swimwear products include one-piece and two-piece swimsuits
which are fashion-oriented and targeted towards youthful-minded, body-conscious
women. The Mossimo line of women's body wear is a collection of fashionable
fitness active wear which is designed and manufactured using materials such as
lycra, tactel and flexcel nylon that stretch and compensate for body movements
during strenuous exercise. The license agreement extends through September 30,
2003, and is renewable annually.
The Company operates in one principal business segment across domestic
and international markets. International sales are primarily made through the
Company's licensees in their respective territories.
SOURCING, MANUFACTURING, AND DISTRIBUTION
Substantially all Mossimo products are sold in the United States
through Target. The Target Agreement provides that Target is responsible for
product development, sourcing, manufacturing, quality control, distribution, and
inventory management.
The agreement with Hudson's Bay Company in Canada includes sourcing,
manufacturing, distribution, and inventory management provisions similar to the
Target Agreement.
The Company believes that these functions can be executed more
effectively by large retailers due to significant economies of scale and
vertical integration, and the Company has no intentions of sourcing,
manufacturing or distributing its products in the future.
3
MARKETING AND ADVERTISING
The Company has developed a distinctive image of a contemporary,
active, and youthful lifestyle and strives to maintain consistency through the
coordination of product merchandising, advertising, and marketing promotions. As
a result of the Target Agreement, the Company primarily relies on its licensees
to advertise the Mossimo brand and intends to continue to promote a positive
brand image through licensee-sponsored advertising and marketing promotions.
Under the terms of the Target Agreement, the Company has approval rights for
marketing and advertising materials.
The agreement with Hudson's Bay Company in Canada includes provisions
for licensee-sponsored advertising and marketing promotions with Company
approval rights similar to the Target Agreement.
LICENSING
Through the Target Agreement, the Company has licensed to Target the
exclusive right to manufacture and distribute substantially all Mossimo products
sold in the United States. The original term of the agreement extends through
January 31, 2004, and is subject to renewal by Target for additional terms of
two years each, if Target is current with its payments of the minimum guaranteed
royalty amount. In January 2003, Target exercised its first renewal option
extending the Target Agreement through January 31, 2006.
The Target Agreement is subject to early termination under certain
circumstances, including a material failure by Mossimo Giannulli to perform
certain services or the termination of employment, death or permanent disability
of Mr. Giannulli or a material change in his ownership or control of the Company
which is deemed to materially affect the Company's ability to perform its
obligations under the Target Agreement.
Prior to entering into the Target Agreement, the Company entered into
licensing agreements for certain products and geographical territories when the
Company believed such arrangements would provide more effective manufacturing,
distribution or marketing of such products than could otherwise be achieved "in
house". The Company generally maintains substantial control over the design,
advertising, and marketing of its licensed products, and maintains a policy of
evaluating its licensing arrangements to ensure consistent presentation of the
Mossimo image.
The Company has licensed the exclusive right to manufacture and
distribute eyewear bearing its trademarks through specialty retail stores such
as opticians, optical chains and specialty eyeglass and sunglass stores pursuant
to a license agreement with the Marcolin Group. This agreement extends through
December 31, 2003, and is renewable annually.
The Company has licensed the exclusive right to manufacture and
distribute women's swimwear and bodywear bearing its trademarks through Target
stores in the United States pursuant to a license agreement with The Lunada Bay
Corporation. This agreement extends through September 30, 2003, and is renewable
annually.
The Company has additional license agreements pursuant to which third
party licensees have the exclusive right to manufacture and distribute certain
products bearing the Company's trademarks according to designs furnished or
approved by the Company in specified territories outside of 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
exclusively licensed the Mossimo trademark to Hudson's Bay Company exclusively
in Canada, in return for license royalties and design service fees. Hudson's Bay
Company will collaborate on product design, and will be responsible for
manufacturing, sourcing, importing, marketing, advertising, selling and
distributing merchandise bearing the Mossimo trademark in Canada. The initial
term of the agreement is three years beginning in May 2002, with a five-year
extension at the option of Hudson's Bay Company. Hudson's Bay Company is
expected to launch the Mossimo product in Spring 2003 for distribution through
its Zellers stores in Canada.
Under all license agreements, Mossimo retains approval rights with
respect to the design of products, advertising, and marketing. All payments
under the Target agreement are due on a quarterly basis and range from one to
four percent depending on the net sales achieved in each contract year. Under
all other license agreements, royalty payments are due generally on a quarterly
basis and range from approximately two to seven percent of the licensee's net
sales.
4
TRADEMARKS
The Company utilizes a variety of trademarks, including the script
Mossimo (signature), MOSS, MOSSIMO (in block lettering), Baby Moss and Mossimo
Giannulli trademarks. Currently, the Company has 16 registrations and 6 pending
applications for its trademarks in the United States, and approximately 350
trademark registrations and applications in over 70 other countries. The Company
regards its trademarks and other proprietary rights as valuable assets and
believes they have significant value in the sales and marketing of its products.
The Company vigorously protects its trademarks against infringement by using,
among other things, cease-and-desist letters, administrative proceedings, and
applicable legal action.
COMPETITION
Competition in the contemporary apparel and related fashion accessories
industry is extensive. Mossimo brand products are subject to competition from
designer and non-designer lines sold in a wide variety of retail stores,
including Target stores, many of which have increased in recent years the amount
of sportswear and activewear manufactured specifically for them and sold under
their own private labels.
The Company's products compete based on factors including brand appeal,
design, style and color selection, quality and price. Increased competition by
existing and future competitors could result in reductions in retail sales and
reductions in revenues to the Company, or reduction of prices of Mossimo
products that could have a material adverse effect on the Company's revenues,
financial condition, and results of operations.
The Company expects that its products will continue to face significant
competition in the future, in particular as other companies with established
trademarks enter into licensing arrangements with retailers.
PERSONNEL
The Company currently employs twenty full time employees, and also
employs temporary personnel on an as needed basis. A substantial number of the
Company's personnel and resources are dedicated to providing design services.
The Company believes that it is able to recruit and retain the high level of
creative personnel to continue to provide the necessary design services to
maintain the continuity of product quality, the Company's distinctive image, and
the value of its trademarks. None of the Company's employees are covered by
collective bargaining agreements. The Company considers its relations with its
employees to be satisfactory.
RISK FACTORS
In addition to the other information contained herein or incorporated
by reference, the risks and uncertainties and other factors described below
could have a material adverse effect on our business, financial condition,
results of operations and share price and could also cause our future business,
financial condition and results of operations to differ materially from the
results contemplated by any forward-looking statement we may make herein, in any
other document we file with the Securities Exchange Commission, or in any press
release or other written or oral statement we may make.
DEPENDENCE ON CERTAIN LICENSEES
The Company's revenues under the Target Agreement commenced in November
2000, and represented 92 percent of total revenues in 2001 and 2002. The Company
expects that its revenues under the Target Agreement will continue to represent
a significant portion of the Company's total revenues during the remaining term
of the Target Agreement, which has been extended through January 2006, and is
subject to future extension. Because the amount of the Company's revenues under
the Target Agreement are dependent, in part, on the sales of Mossimo brand
products in Target stores, the Company's revenue potential is impacted by the
number of Target stores and the patronage at these stores. Termination or
non-extension of the Target Agreement, or a material adverse change in the
business of Target stores, could have a material adverse effect on the Company's
financial condition and results of operations.
5
CHANGES IN FASHION TRENDS
The apparel industry is subject to rapidly changing consumer demands
and preferences, which may adversely affect companies which misjudge such
demands and preferences. The Company believes that its success depends on its
ability to anticipate, gauge and respond in a timely manner to changing consumer
demands and fashion trends. There can be no assurance that the Company will be
successful in this regard. If fashion trends shift away from the Company's
products, or if the Company otherwise misjudges the market for its product
lines, resulting in a decline in sell-through rates at retail, the Company may
be faced with conditions which could have a material adverse effect on the
Company's financial condition and results of operations. Decisions with respect
to product designs often need to be made several months in advance of the time
when consumer acceptance of such products is known. In addition, any failure by
the Company to identify and respond to changing demands and trends could
adversely affect consumer acceptance of the Mossimo brand name, which may have
an adverse effect on the Company's business and prospects.
NEW PRODUCT INTRODUCTIONS
The Company's success is dependent upon its ability to create and
develop new product designs and new product lines. As is typical with new
products, demand for and market acceptance of new designs and products
introduced by the Company is subject to uncertainty. There can be no assurance
that the Company's efforts will be successful. In addition, the failure of new
product designs or new product lines to gain sufficient market acceptance could
adversely affect the image of the Mossimo brand name and consumers' demand for
other Mossimo products.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is largely dependent on the efforts and
abilities of its design staff, which includes Mossimo Giannulli, the Company's
founder and Chief Executive Officer. The Company has only twenty employees, and
Mr. Giannulli's leadership and experience in the apparel licensing industry is
critical to the successful implementation of our business and marketing
strategy. The Company has key person life insurance covering Mr. Giannulli. The
Target Agreement is subject to early termination under certain circumstances,
including a material failure by Mr. Giannulli to perform certain services or the
termination of employment, death or permanent disability of Mr. Giannulli, or a
material change in his ownership or control of the Company which is deemed to
materially affect the Company's ability to perform its obligations under the
Target Agreement. In April 2002, the Company entered into an amended and
restated employment agreement with Mr. Giannulli, which was amended in July
2002, and extends through January 2004.
UNCERTAINTIES IN APPAREL RETAILING; GENERAL ECONOMIC CONDITIONS
The apparel industry historically has been subject to substantial
economic cyclical variations. Economic observers have commented that the United
States is in an economic recession and that weak general economic conditions
will continue through 2003. As the economy struggles the Company is concerned
that consumers may become apprehensive about the economy and reduce their level
of discretionary spending. When discretionary spending is reduced, purchases of
apparel and related products tend to decline. Additionally, the continued
military responses to the terrorist attacks on the United States, possible
future terrorist attacks and growing threat of war may exacerbate current
economic conditions and lead to further weakening in the economy. Adverse
economic conditions and any related decreases in discretionary spending by
consumers could have a material adverse effect on the Company's results of
operations.
FUTURE CHANGES IN FINANCIAL ACCOUNTING STANDARDS MAY CAUSE ADVERSE
UNEXPECTED OPERATING RESULTS AND AFFECT THE COMPANY'S REPORTED RESULTS OF
OPERATIONS.
A change in accounting standards can have a significant effect on the
Company's reported results and may affect the Company's reporting of
transactions completed before the change is effective. As an example, any
changes requiring that the Company record compensation expense in the statement
of operations for employee stock options using the fair market value method
could have a significant negative effect on our reported results. Changes to
existing rules or the questioning of current practices may adversely affect our
reported financial results.
6
PROTECTION OF TRADEMARKS
The Company believes that its trademarks and other proprietary rights
are important to its success and its competitive position. Accordingly, the
Company devotes substantial resources to the establishment and protection of its
trademarks on a worldwide basis. There can be no assurance that the actions
taken by the Company to establish and protect its trademarks and other
proprietary rights will be adequate to prevent imitation of its products by
others or to prevent others from seeking to block sales of the Company's
products as violative of the trademarks and proprietary rights of others. No
assurance can be given that others will not assert rights in, and ownership of,
trademarks and other proprietary rights of the Company. In addition, the laws of
certain foreign countries do not protect proprietary rights to the same extent
as do the laws of the United States.
CONTROL BY PRINCIPAL STOCKHOLDERS
Mossimo Giannulli has majority control of the Company and the ability
to control the election of directors and the results of other matters submitted
to a vote of stockholders. Such concentration of ownership, together with the
anti-takeover effects of certain provisions in the Delaware General Corporation
Law and in the Company's Certificate of Incorporation and Bylaws, may have the
effect of delaying or preventing a change in control of the Company.
CERTAIN FEDERAL TAX CONSEQUENCES
In addition to the Company's taxable income being subject to federal,
state and local income taxes, the Company may be classified as a "personal
holding company" from time to time. 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, as defined, being derived from royalties. Personal holding
companies are subject to an additional federal tax at the highest personal
income tax rate on undistributed after tax earnings.
Over 50 percent of the value of the Company's outstanding stock is
owned by one stockholder, and in 2001 and 2002, more than 60 percent of the
Company's income, as defined, was derived from license royalties. Accordingly,
the Company was classified as a personal holding company in 2001 and 2002.
However, no personal holding company taxes were due in 2001 because the Company
was able to use its tax operating loss carry forward to offset the taxable
income subject to personal holding company tax in 2001. In addition, no personal
holding company tax was due in 2002 because the Company recognized certain
expenses for tax purposes in 2002 that had been recognized in previous years for
financial reporting purposes, and which offset the taxable income subject to
personal holding company tax in 2002.
The Company intends to take appropriate measures to avoid being
classified as a personal holding company in future years. However, there can be
no assurance that the Company will be successful in its efforts to avoid
classification as a personal holding company in the future, or avoid personal
holding company taxes that might be due.
7
ITEM 2 - PROPERTIES
The Company's current corporate headquarters are located in Santa
Monica, California and consist of a leased building totaling approximately 6,000
square feet of space.
ITEM 3 - LEGAL PROCEEDINGS
In May 2002, the Company made a demand for arbitration in connection
with a claim for overpayment of commissions paid to a third party who assisted
the Company in connection with entering into the initial agreement with Target.
The arbitration hearing was completed in October 2002. In November 2002, the
arbitration hearing panel issued a preliminary award in favor of the third
party, which became final in January 2003 and awarded the third party interest
on the amounts due which had been withheld by the Company, and the recovery of
the third party's legal fees. The Company has sequestered the total amount of
$2,934,688 due under the award, and has filed a petition to vacate the award,
including commissions, third party legal fees, and interest, on the basis that
the evidence received during the arbitration hearing demonstrates that the
finder's agreement between the Company and the third party is illegal under
certain applicable California law. The Company could be liable for additional
legal fees and interest payable to the third party if the arbitration award is
not vacated. There can be no assurance that the award will be confirmed or
vacated.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2002.
8
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR SECURITIES
The Company's common stock, par value $.001 per share (common stock),
began trading in February 1996 on the New York Stock Exchange ("NYSE") upon
completion of the Company's initial public offering (trading symbol "MGX"). In
May 2000, trading of the Company's common stock was suspended by the NYSE, the
Company's common stock was subsequently delisted, and the Company's common stock
commenced trading on the National Association of Securities Dealers
Over-the-Counter Bulletin Board under the symbol MGXO.OB. In April 2002 the
Company became listed and initiated trading on NASDAQ Small Cap (trading symbol
"MOSS").
On February 20, 2003, the closing bid price of the Company's common
stock was $5.60 per share. The high and low trades of the Company's common stock
reported by the applicable quotation system (NASDAQ - April to December 2002;
Over-the-Counter Bulletin Board - January 2001 thru March 2002) were as follows:
2001
--------------------
HIGH LOW
---- ---
First Quarter............................................ $ 4.56 $ 2.00
Second Quarter........................................... $ 4.16 $ 2.10
Third Quarter............................................ $ 3.80 $ 1.50
Fourth Quarter........................................... $ 3.60 $ 1.75
2002
--------------------
HIGH LOW
---- ---
First Quarter............................................ $ 8.10 $ 3.46
Second Quarter........................................... $ 13.19 $ 7.70
Third Quarter............................................ $ 9.49 $ 5.30
Fourth Quarter........................................... $ 7.85 $ 5.50
The high and low trades of our common stock reported by the
Over-the-Counter Bulletin Board reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
As of February 20, 2003, the Company had 196 stockholders of record.
This does not include beneficial owners whose shares may be held of record by
brokerage firms and clearing agencies.
DIVIDENDS
Since its initial public offering, the Company has not paid a dividend
on its common stock. Any future determination as to the payment of dividends
will be at the discretion of the Company's Board of Directors and will depend
upon the Company's results of operations, financial condition, contractual
restrictions, and changes in the tax laws, and other factors deemed relevant by
the Board of Directors.
9
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data
regarding the Company which is qualified by reference to, and should be read in
conjunction with, the financial statements and notes thereto (see "Index to
Financial Statements") and "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations." The statement of operations and
balance sheet data presented below has been derived from the Company's financial
statements.
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales of apparel and related products .................... $ -- $ -- $ 24,150 $ 47,393 $ 45,310
Revenue from license royalties and design service fees ....... 19,881 16,666 3,475 3,686 3,214
--------- --------- --------- --------- ---------
Total revenues ........................................... 19,881 16,666 27,625 51,079 48,524
Cost of sales of apparel and related products ................ -- -- 20,730 37,069 35,994
--------- --------- --------- --------- ---------
19,881 16,666 6,895 14,010 12,530
Operating expenses ........................................... 12,525 10,455 19,017 26,101 25,469
--------- --------- --------- --------- ---------
Operating earnings (loss) .................................... 7,356 6,211 (12,122) (12,091) (12,939)
Other income (expense), net .................................. 181 536 760 (3) (140)
Interest expense, net ........................................ (276) (864) (923) (834) (612)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes .......................... 7,261 5,883 (12,285) (12,928) (13,691)
Income tax expense (benefit) - Note (a) ...................... (6,404) (3,153) 3 13 107
--------- --------- --------- --------- ---------
Net earnings (loss) .......................................... $ 13,665 $ 9,036 $(12,288) $(12,941) $(13,798)
========= ========= ========= ========= =========
Earnings (loss) per common share:
Basic .................................................... $ 0.89 $ 0.59 $ (0.81) $ (0.86) $ (0.92)
========= ========= ========= ========= =========
Diluted .................................................. $ 0.87 $ 0.59 $ (0.81) $ (0.86) $ (0.92)
========= ========= ========= ========= =========
Weighted average common shares outstanding:
Basic .................................................... 15,409 15,254 15,080 15,050 15,010
========= ========= ========= ========= =========
Diluted .................................................. 15,648 15,290 15,080 15,050 15,010
========= ========= ========= ========= =========
Note (a): Reflects the reductions of the valuation against certain components of deferred tax assets.
DECEMBER 31,
------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ................................. $ 5,971 $ (1,342) $ (5,423) $ (680) $ 4,532
Total assets .................................... $ 20,536 $ 9,294 $ 1,964 $ 10,736 $ 17,359
Long-term debt .................................. $ -- $ -- $ -- $ 3 $ 10
Other long-term liabilities ..................... $ 191 $ 1,596 $ 5,676 $ -- $ --
Stockholders' equity (deficit) .................. $ 13,480 $ (678) $(10,458) $ 2,396 $ 8,639
10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto set forth in this Form
10-K commencing on page F-1.
RESTRUCTURING
In 2000 the Company changed its business operating strategy from a
traditional apparel and related products wholesale company, to a designer and
licensor of apparel and related products. In connection therewith, the Company
entered into the Target Agreement, as further described herein. In addition to
the Target Agreement, the Company also licenses its trademarks and provides
design services outside of the United States, 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.
During 2000, the Company restructured its business operations to align
its resources in accordance with its new business operating strategy, and to
implement the design services required under the Target Agreement. Management
implemented several changes during 2000. The most significant changes included a
personnel reduction of approximately 90 percent of all employees, closure of the
Company's showrooms, its signature retail store and its outlet store;
termination of all sourcing, production and sales operations; and termination of
relationships with substantially all its customers and suppliers.
The Company now operates as a designer and licensor of apparel and
related products only and no longer manufactures, sources, distributes, or
directly markets its products.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Total revenue from license royalties and design service fees for 2002
were approximately $19.9 million compared to approximately $16.7 million in
2001.
Design service fees and license royalties recognized under the Target
Agreement were approximately $18.3 million in 2002 as compared to approximately
$15.3 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 were
completed during 2002. The provisions that resulted in the deferral of revenue
by the Company are not expected to recur. The increase of approximately $1.5
million in normal business between 2002 and 2001 represents approximately a 10
percent increase due to the growth of Target sales of Mossimo branded product.
Target fees are based on net sales of Mossimo brand product multiplied
by a variable descending rate, up to a minimum rate, that decreases as Target
reaches certain specified sales levels. In 2002, Target reached the minimum
rate during the third quarter of the Company's calendar year. If Target sales
of Mossimo branded products increase in the future, as a result of opening new
stores or otherwise, the minimum rate of fees may apply earlier in the
Company's future calendar years.
Royalties from licensees other than Target increased approximately
$200,000 in 2002 as compared to 2001, primarily due to improved sales of
swimwear and body wear products leading to higher royalties for the Company
under the related license agreement.
Total operating expenses, comprising principally of selling, general
and administrative expenses, increased to approximately $12.5 million in 2002
from approximately $10.5 million in 2001. Selling, general and administrative
expenses were approximately 60 percent of total revenues in 2002, compared to
approximately 63 percent in 2001. Selling expenses increased to approximately
$2.7 million in 2002 from approximately $2.3 million in 2001. Selling expenses
are limited to commissions due to a third party who assisted the Company in
connection with entering into the Target Agreement. The increase over the prior
year is directly related to the total increase in the Company's fees from
Target. General and Administrative expenses include payroll for the Company
officers and its design staff, travel, facilities, insurance, legal and
professional fees, and other design related expenses for purchased services and
artwork used in the design process. Selling, general and administrative
expenses are expected to decrease as a percent of total revenues as revenues
increase.
11
The Company's aggregate payroll costs decreased by approximately
$400,000 in 2002, primarily due to a reduction in the bonuses to the Company's
Chief Executive Officer in 2002, in accordance with the new discretionary bonus
plan, partially offset by an increase in payroll incurred as a result of the
addition of new personnel and increased employee bonuses in 2002. The bonus plan
covering the Company's Chief Executive Officer was changed in 2002 to a
discretionary plan, not to exceed a formula based amount, from strictly a
formula based plan in 2001. During 2002, the discretionary bonuses, not to
exceed the 2002 formula, were lower than those calculated under the 2001
formula. The Company's total personnel increased from eight employees at the
beginning of 2002 to twenty employees by the end of 2002.
Travel expenses increased to approximately $632,000 in 2002 from
approximately $172,000 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 $250,000 in 2002 as compared to 2001, primarily due to
expenditures directly related to increased design activities, as well as
increased legal, professional and filing fees incurred during 2002, including
the cost of initiating the company's listing on NASDAQ in April 2002.
The Company recognized $600,000 of expenses incurred in connection with
the arbitration claim against the third party that receives a commission in
connection with the Target Agreement. In May 2002, the Company made the demand
for arbitration, the arbitration hearing was completed in October 2002, and in
November 2002, the arbitration hearing panel issued a preliminary award in favor
of the third party, which became final in January 2003, and awarded the third
party interest on the past due commissions which had been withheld by the
Company, and the recovery of the third party's legal fees. The commission
expense due the third party has been classified with selling, general and
administrative expenses. No amounts have been paid to the third party as of
December 31, 2002, the total amount of approximately $2.9 million due under the
arbitration award has been fully expensed in 2002, and is included as part of
total current liabilities in the Company's balance sheet as of December 31,
2002. The cash available for payment of the $2.9 million is not legally
restricted, but has been segregated from operating funds in a separate escrow
account, and included as part of the total cash, and cash equivalents balance in
the Company's balance sheet as of December 31, 2002. In January 2003, the
Company filed a petition to vacate the arbitration panel's award, and continues
to withhold payment from the third party.
The Company incurred net interest expense of approximately $276,000 in
2002 compared to net interest expense of approximately $864,000 in 2001. The
decrease was due primarily to a reduction in the applicable variable interest
rate, reductions of the outstanding balance of the loan payable to a bank, and
additional interest income earned in 2002.
At December 31, 2002, the Company recorded a benefit for income taxes
of approximately $6.4 million, further reducing the related valuation allowance
for its deferred tax asset, as a result of the extension of the Target Agreement
through January 31, 2006, and the reevaluation of its forecasted operating
results and resultant taxable income during the extended term of the Target
Agreement, and the consequent estimated utilization of available net operating
losses during the extended term of the Target Agreement. As compared to December
31, 2001, when the Company recorded a deferred benefit for income taxes of
approximately $3.6 million, reducing the related valuation of its allowance for
its deferred tax asset, as a result of the reevaluation of its forecasted
operating results and resultant taxable income which was limited to the initial
term and the annual guaranteed minimum fees due under the Target Agreement, and
the consequent utilization of available net operating losses only during the
initial term of the Target Agreement.
The Company's net earnings for 2002 were approximately $13.7 million
compared to net earnings of approximately $9.0 million for 2001 due to all of
the factors discussed above, including the recognition of approximately $1.5
million of deferred revenue in 2002, as further discussed above, which resulted
in an increase of approximately $600,000 in net earnings for 2002. This item is
not expected to recur.
12
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Total revenues in the year ended December 31, 2001 were $16.7 million
compared to $27.6 million in the prior year. As a result of changing its
business strategy and entering into the Target Agreement, the Company made no
sales of apparel and related products in 2001. Net sales of apparel and related
products in 2000 were $24.2 million. Revenue from license royalties and design
service fees increased to $16.7 million in 2001 from $3.5 million in 2000.
Revenue recognized as license royalties and design service fees under the Target
Agreement were $15.3 million in 2001 compared to $835,000 in 2000, because 2001
was the first full year of operations under the Target agreement, after the
initial launch of the Company's product at Target in the Fall of 2000. Revenues
from licensees other than Target decreased to $1.4 million in 2001 from $2.7
million in 2000, primarily due to decreased royalties from the women's swimwear
and body wear licensee, on amendment of the license agreement lowering the fee
from six percent to two percent of net sales, which was done in connection with
the changes brought about by the Target Agreement. In addition, the Company
recognized revenue of $363,000 in 2000 from two license agreements that
terminated in 2000.
Total operating expenses decreased to $10.5 million in 2001 from $19
million in 2000. The Company's aggregate payroll costs increased to $6.1 million
in 2001 from $3.4 million in 2000. The increase was primarily due to a bonus to
the Company's Chief Executive Officer of $3.3 million, and bonuses to other
employees of $613,000 incurred in 2001, with no bonuses incurred in 2000. The
Company's Chief Executive Officer received a formula based bonus, under the
terms of an employment agreement, based on 50 percent of the Company's total
fees due under the Target Agreement, in excess of the minimum guaranteed
royalties due under the Target Agreement, and after deduction of the 15 percent
commission payable under a finders agreement with a third party that assisted
the Company with the Target Agreement. The increases due to the bonuses were
offset by a decrease in base payroll costs to $2.2 million in 2001 from $3.4
million in 2000, as a result of the reduction in personnel during the
restructuring in 2000.
Selling expenses increased to $2.3 million in 2001 from $187,000 in
2000 as a result of commissions payable under a finders agreement with a third
party that assisted the Company with the Target Agreement, which were $2.3
million in 2001 compared to $125,000 in 2000.
As a result of the Company's change in operating strategy and related
restructuring in 2000, the Company's merchandising, travel, and distribution and
office facilities expenses decreased to $549,000 in 2001 from $2.5 million in
2000.
The Company incurred no marketing expenses in 2001 compared to $4
million in 2000. Upon entering into the Target Agreement all marketing
activities ceased, including the elimination of $2.6 million of endorsement
expenses incurred in 2000 in connection with an agreement with a PGA
professional. The Company now relies on its licensees for advertising and
marketing promotions of the Mossimo brand.
Additionally, general and administrative expenses decreased to $1.3
million in 2001 from $6.5 million in 2000, primarily due to provisions made in
2000 of $3.2 million for doubtful trade accounts receivable, the elimination of
factor expense of $208,000 in 2000, a decrease in legal and professional fees to
$444,000 in 2001 from $1.6 million in 2000, and a decrease in depreciation to
$199,000 in 2001 from $503,000 in 2000, all of which were related to the
Company's change in operating strategy, the operating restructuring, and the
implementation of the Target Agreement.
During 2000, the Company recorded a restructuring charge of
approximately $3.5 million as a result of the changes to the Company's business
operating strategy and related restructuring activities. This charge included
(i) impairment related to property and equipment of approximately $2.3 million;
(ii) an accrual for lease obligations of approximately $592,000 for abandoned
facilities; (iii) severance expense of approximately $531,000 incurred in
connection with the reduction in personnel; (iv) $93,000 of legal and
professional service fees; (v) a write-off of security deposits of $61,000 and
(vi) a gain on disposal of property and equipment of $154,000. The restructuring
activities were completed by the end of 2000, and no restructuring charges were
incurred in 2001.
During 2000, the Company completed a creditor payment plan providing
for payments to certain of its unsecured vendors, some of which accepted a
discount in exchange for immediate payment and others that accepted a long-term
payment plan. In connection therewith, the Company recorded income from net
vendor discounts of $407,000 in 2000.
In 2000, the Company's Chief Executive Officer and principal
stockholder was personally assigned a refund by the Company in respect of the
excess insurance coverage previously purchased by him for the benefit of the
Company in 1999. Accordingly, one-time, non-cash earnings of $713,000 are
included as a reduction of operating expenses in 2000 with an offsetting charge
to stockholders' equity (deficit). The one-time, non-cash earnings do not impact
the Company's cash flows or total stockholders' equity (deficit) position.
13
Other income of $536,000 in 2001 was primarily as a result of the
collection of disputed receivables. Other income of $760,000 in 2000 was
primarily as a result of additional royalties received in connection with the
early termination of a license agreement.
The Company had net interest expense of $864,000 in 2001 compared to
net interest expense of $923,000 in 2000. The decrease was primarily due to a
decrease in interest and facility fees due under the Company's credit facility
to $696,000 in 2001 from $909,000 in 2000, as a result of lower interest rates
and lower average borrowings in 2001, and an increase in interest income to
$74,000 in 2001 from $27,000 in 2000. These amounts were partially offset by
interest of $72,000 incurred in 2001 on the outstanding amount due under the
Company's endorsement agreement with a PGA professional, which was terminated in
2000, $74,000 of interest incurred in 2001 on certain tax obligations, and by
$96,000 incurred in 2001, compared to $40,000 in 2000, for amortization of
deferred financing costs, associated with continuing the Company's credit
facility after entering into the Target Agreement.
The Company recorded a deferred tax benefit in 2001 of $3.6 million, as
a result of the reevaluation of its forecasted operating results and the
resultant taxable income during the initial term of the Target Agreement,
assuming the Company would receive the annual guaranteed minimum fees due under
the Target Agreement, and the consequent utilization of available net operating
losses during the initial term of the Target Agreement. The Company also
recorded a $400,000 current tax expense related to the alternative minimum tax.
As compared to 2000, when the Company recorded no tax benefit, due to the
uncertainty regarding the realization of the related deferred tax assets at that
time.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $8.3
million for 2002 as compared to $4.7 million for 2001. Cash provided by
operating activities primarily includes net earnings of approximately $13.7
million, net of the non-cash income tax benefit and deferred royalty income of
$6.4 million and $1.5, respectively; and the increase in total accrued
liabilities of approximately $3.4 million, offset by an increase in accounts
payable of approximately $1.1 million. At December 31, 2002, working capital was
approximately $6.0 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 earnings, as well as reductions of bank debt
and accounts payable balances, partially offset by an increase in accrued
commission and accrued bonuses, all of which were driven by increased revenues,
profitability and cash flow.
Net cash used in investing activities was approximately $487,000 for
2002 and was all used for the expansion of the Company's facilities to
accommodate increased staff.
Net cash used in financing activities was approximately $3.3 million
for 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.
The Company is approached from time to time by parties seeking to sell
their brands and related trademarks. Should an established marketable brand
become available on favorable terms, the Company may be interested in pursuing
such an acquisition and may elect to fund such acquisition, in whole or in part,
with available cash.
In August, 2000, the Company entered into a lease agreement for its
principal facility in Santa Monica, California, which was subsequently amended
in June 2002. Future rent obligations under the lease agreement are
approximately $20,000 per month for a term of three years which expires in July
2005.
The Company believes that its available cash balances at December 31,
2002 and its expected net operating cash flows from operations during 2003 will
be adequate to meet the Company's anticipated liquidity needs in 2003.
In January 2003, Target exercised its first option to renew the Target
Agreement through January 2006.
From time to time, the Company also considers a number of different
financing alternatives, including the issuance of equity securities, and debt
instruments as sources of liquidity.
14
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from license royalties and design service fees are recognized
in accordance with the terms of the underlying agreements, which is generally
after the design services are performed, and as the licensee achieves sales of
the Company's products. Revenue from license royalties and design service fees
are generally collected on a quarterly basis, and they range from one percent to
seven percent of sales, as defined in the respective agreements. A substantial
amount of the Company's revenue are generated under the Target Agreement, under
a declining rate as the year progresses and Target achieves certain levels of
retail sales. Accordingly, the Company's revenues from Target decrease as the
year progresses. The declining rate is reset each contract year on February 1.
In 2002, Target reached the minimum rate during the third quarter of the
Company's calendar year. If Target sales of Mossimo branded products increase in
the future, as a result of opening new stores or otherwise, the minimum rate of
fees may apply earlier in the Company's future calendar years, shifting
additional revenue recognition to the first half of the year, and potentially
reducing the revenue recognition in the second half of the year. A decrease of
Target sales of Mossimo branded product in the future could have a material
impact on the Company's total revenues and its results of operations.
DEFERRED TAX ASSET VALUATION
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred taxes result from the recognition of the
income tax benefit to be derived from the Company's net operating loss carry
forward for income taxes purposes. As of December 31, 2002, the Company has
approximately $28 million, and $18 million of federal and state income tax net
operating loss carry-forwards, respectively, available to offset future taxable
income, which expire in various years through 2020. At December 31, 2002, the
Company had recorded a deferred income tax asset of approximately $10 million,
upon reducing the related valuation allowance for its deferred income tax asset,
as a result of the extension of the Target Agreement through January 31, 2006,
and the reevaluation of its forecasted operating results and resultant taxable
income during the extended term of the Target Agreement, and the consequent
expected utilization of available net operating losses during the extended term
of the Target Agreement. The Company has considered the statutory minimum
royalties included in the extended Target Agreement in its estimate of deferred
tax asset recoverability. Beginning in 2003, the Company expects to record a
provision for income taxes to reflect the statutory tax rate applicable to
pre-tax earnings, and to reduce the corresponding deferred income tax asset as
it is realized.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation experienced in the United States over the last three years have had a
significant effect on its operations. Since the Company's future revenues are
based on a percentage of sales of licensed products by licensees, the Company
does not anticipate that inflation will have a material impact on future
operations.
EXCHANGE RATES
The Company receives United States dollars for substantially all of its
revenue from license royalties and design service fees. During the last three
fiscal years, exchange rate fluctuations have not had a material impact on the
Company's operating results. The Company does not engage in hedging activities
with respect to exchange rate risk.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities". This interpretation and clarifies the application of
Accounting Research Bulletin No. 51 ("ARB 51"), "Consolidated Financial
Statements", and requires companies to evaluate variable interest entities for
specific characteristics to determine whether additional consolidation and
disclosure requirements apply. This interpretation is immediately applicable for
variable interest entities created after January 31, 2003, and applies to fiscal
periods beginning after June 15, 2003 for variable interest entities acquired
prior to February 1, 2003. This interpretation also requires extensive
disclosures, including disclosures that are applicable to December 31, 2002
financial statements. The Company does not expect that the adoption of this
interpretation will have a material impact on its financial position or results
of operations.
15
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". This interpretation
clarifies the requirements of a guarantor in accounting for and disclosing
certain guarantees issued and outstanding. This interpretation is effective for
fiscal years ending after December 15, 2002. The Company does not expect the
adoption of this interpretation to have a material impact on the Company's
financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Furthermore, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 is effective for financial
statements for fiscal years ending after December 15, 2002. The Company has
elected not to implement this voluntary change for the year ended December 31,
2002.
In July 2001, the EITF issued EITF Issue No. 00.21 "Accounting for
Revenue Arrangements with Multiple Deliverables". EITF 00.21 provides guidance
on how to allocate revenue streams to multiple deliverables being provided by
the Company. The Company currently provides design and licensing services. This
issue is effective for the Company beginning July 1, 2003 and management is
currently evaluating its impact upon the financial statements.
16
ITEM 7A - 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 January 1, 2003
would result in an increase in interest expense for the following twelve months
of approximately $10,000.
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.
FORWARD LOOKING INFORMATION
This report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward
looking statements relate to matters such as the Company's future operating
results, the success and longevity of its licensing program with Target and
other licensees, the Company's ability to meet its liquidity needs, and the
outcome of the Company's legal proceedings. 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,
including those described in "Business - Risk Factors". 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, 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." Accordingly, undue reliance should not be placed on these
forward-looking statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed hereunder are set forth
on pages F-1 through F-15 of this report.
17
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the
Company's Proxy Statement for its 2003 Annual Stockholders Meeting to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2002 and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item will be contained in the
Company's Proxy Statement for its 2003 Annual Stockholders Meeting to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2002 and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item will be contained in the
Company's Proxy Statement for its 2003 Annual Stockholders Meeting to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2002 and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the
Company's Proxy Statement for its 2003 Annual Stockholders Meeting to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2002 and is incorporated herein by reference.
ITEM 14 - CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer have
evaluated the Company's system of disclosure controls and procedures within
ninety days of the date of this report, and based on such evaluation have
determined that they are effective in connection with the preparation of this
Form 10-K annual report. There have been no significant changes to the system of
internal controls or in other factors that affect internal controls subsequent
to the date of their evaluation.
18
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
(1) List of Financial Statements - see Index to Financial
Statements on page 24.
(2) List of Financial Statement Schedules - None
(b) The Registrant did not file any reports on Form 8-K during the last
quarter of its fiscal year ended December 31, 2002.
(c) List of Exhibits
The exhibits listed in the accompanying Index of Exhibits are
filed as part of this Form 10-K.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of Registrant (1)
3.2 Bylaws of the Registrant (1)
4.1 Specimen certificate of shares of Common Stock of the Registrant (1)
10.1* Registrant's 1995 Stock Plan (1)
10.2* Registrant's 1995 Directors Stock Option Plan (1)
10.3* Form of Indemnification Agreement between the Registrant and its directors and
officers (1)
10.4 Financing Agreement, dated July 15, 1997, by and between the Registrant and The
CIT Group/Commercial Services, Inc. (2)
10.4.1 Amendment to the Financing Agreement dated April 1, 1998 (3)
10.4.2 Amendment to the Financing Agreement dated March 22, 1999 (4)
10.4.3 Amendment to the Financing Agreement dated July 25, 2000 (5)
10.4.4 Amendment to the Financing Agreement by letter dated December 3, 2002
10.5 Mossimo License Agreement, dated as of March 28, 2000, between Mossimo, Inc. and
Target Stores, a division of Target Corporation (6)
10.5.1 Amendment to License and Design Services Agreement, dated February 1, 2002
10.6 Cherokee-Mossimo Finders Agreement dated March 27, 2000 between Mossimo, Inc. and
Cherokee Inc. (6)
10.7 Lease, dated June 29, 2000, between the Registrant and Lexington-Broadway Place, LLC (7)
10.7.1 First Amendment to Office Lease dated June 26, 2002
10.8 Sunglasses Agreement, dated as of December 1, 2000, between Mossimo, Inc., Marcolin
S.P.A. and Target Stores (8)
10.9* Amended and Restated Employment Agreement between the Registrant and Mossimo Giannulli
dated February 1, 2002
10.9.1* Amendment Number One to the Mossimo Giannulli Employment Agreement, dated September 23,
2002 (10)
10.10* The Mossimo Giannulli Bonus Plan, dated February 1, 2002, between the Registrant and
Mossimo Giannulli
10.10.1* Amendment Number One to the Mossimo Giannulli Bonus Plan, dated July 1, 2002 (9)
10.11* The Edwin Lewis Bonus Plan, dated April 17, 2002, between the Registrant and Edwin Lewis
(9)
10.11.1* Amendment Number One to the Edwin Lewis Bonus Plan, dated July 1, 2002 (9)
10.11.2* Amendment Number Two to the Edwin Lewis Bonus Plan, dated September 23, 2002 (10)
23.1 Consent of Independent Auditors- KPMG LLP
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
19
NOTES:
(1) Incorporated by reference from the Registrant's Registration
Statement on Form S-1 (No. 33-80597), as amended, which became
effective February 22, 1996.
(2) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1997.
(3) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1998.
(4) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1999.
(5) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 2000
(6) Incorporated by reference from the Registrant's Current Report
on Form 8-K, dated March 28, 2000.
(7) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2000.
(8) Incorporated by reference from the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2000.
(9) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 2002.
(10) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2002.
* Indicates a management contract or compensatory plan or arrangement
(b) Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K
during the three months ended December 31, 2002.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 5th day of
March 2003.
MOSSIMO, INC.
By: /s/ MOSSIMO GIANNULLI
-----------------------------------
Mossimo Giannulli
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 5th day of March 2003.
/s/ MOSSIMO GIANNULLI Chairman of the Board and Chief
- ------------------------------------------- Executive Officer
Mossimo Giannulli
/s/ EDWIN LEWIS Vice Chairman and President
- -------------------------------------------
Edwin Lewis
/s/ MANUEL MARRERO Chief Financial Officer
- -------------------------------------------
Manuel Marrero
/s/ ROBERT MARTINI Director
- -------------------------------------------
Robert Martini
/s/ WILLIAM HALFORD Director
- -------------------------------------------
William Halford
/s/ BRETT WHITE Director
- -------------------------------------------
Brett White
21
CERTIFICATIONS
I, Mossimo Giannulli, Chairman and Chief Executive Officer of the Company,
certify that:
(1) I have reviewed this annual report of Mossimo, Inc. on Form
10-K (the Report);
(2) Based on my knowledge, the Report does not contain any untrue
statements 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 the Report;
(3) Based on my knowledge, the financial statements, and other
financial information included in the Report, fairly present
in all material respect the financial condition, results of
operations and cash flows of the Company as of, and for, the
periods presented in the Report;
(4) The Company's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and
15b-14) for the Company and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
Company is made known to us by others in the Company
particularly during the period in which the Report is
being prepared;
b. Evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of the Report
(the "Evaluation Date"); and
c. Presented in the Report our conclusions about the
effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
(5) The Company's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the Audit Committee of the Company's Board of Directors:
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize, and report financial data and have
identified for the Company'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 Company's internal controls; and
(6) The Company's other certifying officer and I have indicated in
the Report whether or not 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.
/s/ Mossimo Giannulli
- --------------------------
Mossimo Giannulli
Chairman and Chief Executive Officer
March 5, 2003
22
I, Manuel Marrero, Chief Financial Officer of the Company, certify that:
(1) I have reviewed this annual report of Mossimo, Inc. on Form
10-K (the Report);
(2) Based on my knowledge, the Report does not contain any untrue
statements 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 the Report;
(3) Based on my knowledge, the financial statements, and other
financial information included in the Report, fairly present
in all material respect the financial condition, results of
operations and cash flows of the Company as of, and for, the
periods presented in the Report;
(4) The Company's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and
15b-14) for the Company and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
Company is made known to us by others in the Company
particularly during the period in which the Report is
being prepared;
b. Evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of the Report
(the "Evaluation Date"); and
c. Presented in the Report our conclusions about the
effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
(5) The Company's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the Audit Committee of the Company's Board of Directors:
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize, and report financial data and have
identified for the Company'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 Company's internal controls; and
(6) The Company's other certifying officer and I have indicated in
the Report whether or not 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.
/s/ Manuel Marrero
- -----------------------
Manuel Marrero
Chief Financial Officer
March 5, 2003
23
MOSSIMO, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORTS......................................... F-1
FINANCIAL STATEMENTS:
Balance sheets as of December 31, 2002 and 2001....................... F-3
Statements of operations for the years ended
December 31, 2002, 2001 and 2000.................................... F-4
Statements of stockholders' equity (deficit) for the years
ended December 31, 2002, 2001 and 2000.............................. F-5
Statements of cash flows for the years ended December 31, 2002,
2001 and 2000....................................................... F-6
Notes to financial statements......................................... F-7
24
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Mossimo, Inc.:
We have audited the accompanying balance sheet of Mossimo, Inc. (a Delaware
corporation) as of December 31, 2002, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Mossimo, Inc. as of
December 31, 2001, and for the years ended December 31, 2001 and 2000 were
audited by other auditors who have ceased operations. These auditors expressed
an unqualified opinion on those financial statements in their report dated
February 27, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mossimo, Inc. as of December
31, 2002, and the results of it's operations and it's cash flows for the year
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Los Angeles, California
February 7, 2003
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders of Mossimo, Inc.:
We have audited the accompanying consolidated balance sheets of Mossimo, Inc. (a
Delaware corporation) and subsidiary as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' (deficit) equity
and cash flows for the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mossimo, Inc. and subsidiary as
of December 31, 2001 and 2000, and the results of their operations and their
cash flows for the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/S/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Orange County, California
February 27, 2002
Notes:
(1) This report is a copy of the previously issued report.
(2) The predecessor auditor has not reissued this report.
F-2
MOSSIMO, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------------
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash, and cash equivalents ......................................... $ 7,786 $ 3,182
Accounts receivable, net of allowance for bad debt of $6,436 in 2001 1,926 1,958
Deferred income taxes (Note 6) ..................................... 3,000 1,776
Prepaid expenses and other current assets .......................... 124 118
------------ ------------
Total current assets ............................................ 12,836 7,034
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation and amortization (Note 7) ............................. 608 251
DEFERRED INCOME TAXES (Note 6) ....................................... 7,000 1,821
OTHER ASSETS ......................................................... 92 188
------------ ------------
$ 20,536 $ 9,294
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Loan payable (Note 5) .............................................. $ 1,066 $ 4,000
Accounts payable ................................................... 741 2,755
Accrued liabilities ................................................ 1,332 762
Accrued commissions ................................................ 2,661 246
Accrued bonuses .................................................... 1,065 613
------------ ------------
Total current liabilities ........................................ 6,865 8,376
------------ ------------
LOAN PAYABLE, net of current portion (Note 5) ........................ -- 817
------------ ------------
LONG-TERM ACCOUNTS PAYABLE, net of current portion ................... 191 779
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 10):
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 15,488,042 in 2002, and 15,330,042 in 2001 15 15
Additional paid-in capital ......................................... 38,797 38,304
Accumulated deficit ................................................ (25,332) (38,997)
------------ ------------
Net stockholders' equity (deficit) ............................... 13,480 (678)
------------ ------------
$ 20,536 $ 9,294
============ ============
See accompanying notes to financial statements
F-3
MOSSIMO, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net sales of apparel and related products ............ $ -- $ -- $ 24,150
Revenue from license royalties and design service fees 19,881 16,666 3,475
------------- ------------- -------------
Total revenues (Note 4) .......................... 19,881 16,666 27,625
Cost of sales of apparel and related products ........ -- -- 20,730
------------- ------------- -------------
19,881 16,666 6,895
------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative (Note 9) ..... 11,925 10,455 16,677
Settlement costs of disputed commissions ......... 600 -- --
Non-cash insurance premium refund (Note 3) ....... -- -- (713)
Restructuring charges (Note 2) ................... -- -- 3,460
Vendor discounts, net (Note 2) ................... -- -- (407)
------------- ------------- -------------
Total operating expenses ................. 12,525 10,455 19,017
------------- ------------- -------------
Operating earnings (loss) ............................ 7,356 6,211 (12,122)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Other, net ....................................... 181 536 760
Interest, net .................................... (276) (864) (923)
------------- ------------- -------------
Other expense, net ........................... (95) (328) (163)
------------- ------------- -------------
Earnings (loss) before income taxes .................. 7,261 5,883 (12,285)
(Benefit) provision for income taxes (Note 6) ........ (6,404) (3,153) 3
------------- ------------- -------------
Net earnings (loss) .................................. $ 13,665 $ 9,036 $ (12,288)
============= ============= =============
Net earnings (loss) per common share:
Basic ............................................ $ 0.89 $ 0.59 $ (0.81)
============= ============= =============
Diluted .......................................... $ 0.87 $ 0.59 $ (0.81)
============= ============= =============
Weighted average common shares outstanding:
Basic ............................................ 15,409 15,254 15,080
============= ============= =============
Diluted .......................................... 15,648 15,290 15,080
============= ============= =============
See accompanying notes to financial statements
F-4
MOSSIMO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1999 .......... 15,077 $ 15 $ 38,126 $ (35,745) $ 2,396
Issuance of common stock ........ 3 -- 22 -- 22
Non-cash compensation ........... -- -- 125 -- 125
Non-cash insurance premium refund -- -- (713) -- (713)
Net loss ........................ -- -- -- (12,288) (12,288)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2000 .......... 15,080 15 37,560 (48,033) (10,458)
Issuance of common stock ........ 250 -- 744 -- 744
Net earnings .................... -- -- -- 9,036 9,036
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2001 .......... 15,330 15 38,304 (38,997) (678)
Issuance of common stock ........ 158 -- 493 -- 493
Net earnings .................... -- -- -- 13,665 13,665
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2002 .......... 15,488 $ 15 $ 38,797 $ (25,332) $ 13,480
=========== =========== =========== =========== ===========
See accompanying notes to financial statements
F-5
MOSSIMO, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .................................................. $ 13,665 $ 9,036 $(12,288)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................................ 227 295 545
Provisions against property and equipment ............................ -- -- 2,331
Gain on disposition of property and equipment ........................ -- -- (154)
Provisions for doubtful accounts receivable .......................... -- -- (380)
Restructuring expenses ............................................... -- -- 61
Vendor discounts, net ................................................ -- -- (407)
Deferred royalty income .............................................. (1,483) -- (213)
Deferred taxes ....................................................... (6,404) (3,597) --
Non-cash compensation expense ........................................ -- -- 125
Non-cash insurance premium refund .................................... -- -- (713)
Changes in:
Accounts receivable, net ......................................... 32 (749) (42)
Inventories ...................................................... -- -- 5,682
Prepaid expenses and other current assets ........................ (6) (54) 438
Other assets ..................................................... -- 11 (201)
Due to factor, net ............................................... -- (19) (1,267)
Accounts payable and long-term accounts payable .................. (1,119) (421) 1,184
Accrued liabilities .............................................. 570 249 (664)
Accrued commissions ............................................ 2,415 121 --
Accrued bonuses .................................................. 452 613 --
Deferred compensation ............................................ -- (564) 564
S corporation distribution note .................................. -- (255) --
--------- --------- ---------
Net cash provided by (used in) operating activities .......... 8,349 4,666 (5,399)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ......................... -- -- 329
Payments for acquisition of property and equipment ................... (487) (104) (220)
--------- --------- ---------
Net cash (used in) provided by investing activities .......... (487) (104) 109
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of loan payable ............................................. (3,751) (2,171) 4,853
Proceeds from issuance of common stock ............................... 493 744 22
Payments of long-term debt ........................................... -- (3) (8)
--------- --------- ---------
Net cash (used in) provided by financing activities .......... (3,258) (1,430) 4,867
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. 4,604 3,132 (423)
CASH, AND CASH EQUIVALENTS, beginning of year ........................ 3,182 50 473
--------- --------- ---------
CASH, AND CASH EQUIVALENTS, end of year .............................. $ 7,786 $ 3,182 $ 50
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ........................... $ 249 $ 743 $ 943
========= ========= =========
Cash paid during the year for income taxes ....................... $ -- $ 203 $ 13
========= ========= =========
Reclassification of accounts payable to long-term accounts payable $ -- $ -- $ 1,688
========= ========= =========
Non-cash acquisition of property and equipment ................... $ -- $ -- $ 40
========= ========= =========
See accompanying notes to financial statements
F-6
MOSSIMO, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Mossimo, Inc. is a Delaware corporation formed in November 1995, to
succeed the assets and liabilities of Mossimo, Inc., a California corporation,
which was organized in 1988, to continue the business founded by Mossimo
Giannulli in 1987, as a sole proprietorship. References herein to the "Company"
and "Mossimo" refer to Mossimo, Inc.
In 2000 the Company changed its business operating strategy from a
traditional apparel and related products wholesale company, to a designer and
licensor of apparel and related products. In connection therewith, the Company
entered into a multi-year licensing and design services agreement with Target
Corporation ("Target") in March 2000, 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.
LICENSING AGREEMENTS
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 and 45 percent representing design services 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 $9.6
million payable in each of the contract years after January 31, 2002. Target
fees are based on net sales achieved multiplied by a rate, as defined in the
Target Agreement. The Company pays a 15 percent commission, based on certain
fees 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 January 2003, Target exercised its
first renewal option extending the Target Agreement through January 31, 2006.
In addition to the Target Agreement, the Company also licenses its
trademarks and provides design services outside of the United States, 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 provides product design services, and has licensed
the Mossimo trademark to Hudson's Bay Company exclusively in Canada, in return
for license royalties and design service 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 agreement is three years
beginning in May 2002, with a five-year extension at the option of Hudson's Bay
Company. The Company has not recognized any material revenue from this agreement
in 2002. Hudson's Bay Company is expected to fully launch the Mossimo product in
Spring 2003 for distribution through its Zellers stores in Canada.
Prior to 2001, and prior to entering into the Target Agreement, the
Company's primary line of business was designing, sourcing, distributing, and
marketing a lifestyle collection of designer men's and women's sportswear and
active wear. The products were distributed to a diversified account base,
including department stores, specialty retailers, and sports and active wear
stores located throughout the United States, as well as one company operated
exclusive signature retail store and one company operated exclusive outlet store
located in Southern California. In connection with the Target Agreement and its
ongoing business strategy, the Company completed the restructuring of its
operations during 2000, and currently operates as a designer and licensor only,
and does not manufacture, source, market, distribute, or retail its products.
The Company believes that these functions can be executed more effectively by
large retailers due to significant economies of scale and vertical integration.
F-7
REVENUE RECOGNITION
Net sales of apparel and related products prior to 2001, were
recognized when merchandise was shipped to a customer, with provisions for
estimated returns and allowances made at the time of shipment, based upon
management's estimates and the Company's historical experience.
Revenue from license royalties and design service fees are recognized
in accordance with the terms of the underlying agreements, which is generally
after the design services are performed, and as the licensee achieves sales of
the Company's products. During 2002 and 2001, a substantial amount of the
Company's revenue from license royalties and design fees were generated under
the Target Agreement under a declining rate as the year progresses and Target
achieves certain levels of retail sales. Accordingly, the Company's revenues
from Target decrease as the year progresses. The declining rate is reset each
contract year on February 1. Revenue from license royalties and design service
fees are generally collected on a quarterly basis, and they range from one
percent to seven percent of sales, as defined in the respective agreements.
CASH EQUIVALENTS
Cash and cash equivalents include temporary investment of cash on hand
in liquid interest bearing accounts and marketable securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful life of the asset, which is
generally three to ten years for furniture, fixtures, and equipment.
Amortization of leasehold improvements is calculated using the straight line
method over the remaining term of the lease. The Company evaluates the
impairment of long-lived assets when certain triggering events occur. If such
assets are determined to be impaired, a write-down of their fair market value is
recorded.
SEGMENTS
The Company operates in one principal business segment across domestic
and international markets. International sales are primarily made through the
Company's licensees in their respective territories.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred taxes result from the recognition of the
income tax benefit to be derived from the Company's net operating loss carry
forward for income taxes purposes.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. The Company follows the pro forma
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation", which require presentation of the pro forma effect of the fair
value based method on net earnings (loss) and net earnings (loss) per share in
the financial statement footnotes.
F-8
COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. There are no items required to be reported by the Company
under this standard.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's balance sheets include the following financial
instruments: cash and cash equivalents, accounts receivable, loan payable,
accounts payable, and long term accounts payable. The Company considers the
carrying value of these instruments to approximate fair value for these
instruments because of the relatively short period of time between origination
and their expected realization or settlement, and applicable interest rates
reflect comparable rates currently available to the Company on obligations under
similar terms.
EARNINGS (LOSS) PER SHARE
The Company calculates net earnings (loss) per share in accordance
with SFAS No. 128, "Earnings Per Share". This statement requires the
presentation of both basic and diluted net earnings (loss) per share. Basic net
earnings (loss) per share is computed by dividing net earnings (loss) available
to common stockholders by the weighted average number of common shares
outstanding. Diluted net earnings per share includes the effect of potential
shares outstanding, including dilutive stock options, using the treasury stock
method.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform to the 2002 presentation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities". This interpretation and clarifies the application of
Accounting Research Bulletin No. 51 ("ARB 51"), "Consolidated Financial
Statements", and requires companies to evaluate variable interest entities for
specific characteristics to determine whether additional consolidation and
disclosure requirements apply. This interpretation is immediately applicable for
variable interest entities created after January 31, 2003, and applies to fiscal
periods beginning after June 15, 2003 for variable interest entities acquired
prior to February 1, 2003. This interpretation also requires extensive
disclosures, including disclosures that are applicable to December 31, 2002
financial statements. The Company does not expect that the adoption of this
interpretation will have a material impact on its financial position or results
of operations.
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". This interpretation
clarifies the requirements of a guarantor in accounting for and disclosing
certain guarantees issued and outstanding. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued after December 31, 2002. The adoption of this
interpretation did not have any impact on the Company's financial position or
results of operations in 2002.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Furthermore, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 is effective for financial
statements for fiscal years ending after December 15, 2002. The Company has
elected not to implement this voluntary change for the year ended December 31,
2002.
In July 2001, the EITF issued EITF Issue No. 00.21 "Accounting for
Revenue Arrangements with Multiple Deliverables". EITF 00.21 provides guidance
on how to allocate revenue streams to multiple deliverables being provided by
the Company. The Company currently provides design and licensing services. This
issue is effective for the Company beginning July 1, 2003 and management is
currently evaluating its impact upon the financial statements.
F-9
2. RESTRUCTURING
In 2000 the Company changed its business operating strategy from a
traditional apparel and related products wholesale company, to a designer and
licensor of apparel and related products. In connection therewith, the Company
entered into the Target Agreement, as further described herein. In addition to
the Target Agreement, the Company also licenses its trademarks and provides
design services outside of the United States, 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.
During 2000, the Company restructured its business operations to align
its resources in accordance with its new business operating strategy, and to
implement the design services required under the Target Agreement. Management
implemented several changes during 2000. The most significant changes included a
personnel reduction of approximately 90 percent of all employees, closure of the
Company's showrooms, its signature retail store and its outlet store;
termination of all sourcing, production and sales operations; and termination of
relationships with substantially all its customers and suppliers. The
restructuring resulted in operating expenses of approximately $3.5 million for
the year ended December 31, 2000. The restructuring activities were completed by
the end of 2000, and no restructuring charges were incurred in 2001.
During 2000, the Company completed a creditor payment plan providing
for payments to certain of its unsecured vendors, some of which accepted a
discount in exchange for immediate payment, and others accepted a long-term
payment plan. In connection therewith, the Company recognized income from net
vendor discounts of $407,000 in 2000. As of December 31, 2002, the outstanding
balance remaining under the long-term vendor payment plans was $647,000, of
which $191,000 has been classified as long-term accounts payable.
3. NON-CASH INSURANCE PREMIUM REFUND
In 2000, the Company's Chief Executive Officer and principal
stockholder was personally assigned a refund by the Company for the excess
insurance coverage personally purchased by him in 1999 for the benefit of the
Company. Accordingly, a one-time, non-cash earnings of $713,000 was recognized
as a reduction of operating expenses in 2000 with an offsetting reduction to
stockholders' equity (deficit), which has the effect of partially reversing the
accounting for the full amount of the premium recorded in 1999. This transaction
had no impact on the Company's cash flows or net stockholders' equity (deficit)
balance.
4. MAJOR CUSTOMER
As a result of entering into the Target Agreement, beginning in 2001
substantially all of the Company's revenue and accounts receivable have been
derived from Target. The accounts receivable are held without collateral, and
are subject to normal credit risk assumed by the Company. License royalties and
design service fees from Target represented approximately 92 percent in 2002 and
2001, and 24 percent in 2000.
5. LOAN PAYABLE
The Company has a loan payable to a bank, which is collateralized by
substantially all of the Company's assets and is also secured by a $500,000
personal guaranty from the Company's 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, including
interest, through June 2003. The outstanding balance of the loan at December 31,
2002 was approximately $1 million. In 2000 deferred financing costs associated
with continuing the financing agreement underlying the loan payable were
capitalized, and are being amortized on the effective interest method over the
term of the loan. Amortization expense was $96,000 in 2002 and 2001, and $40,000
in 2000.
F-10
6. INCOME TAXES
The (benefit) provision for income taxes consists of the following for
the years ended December 31:
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Current:
Federal .......................................... $ -- $ 391 $ --
State ............................................ -- 53 3
-------- -------- --------
-- 444 3
-------- -------- --------
Deferred:
Federal .......................................... (5,444) (3,058) --
State ............................................ (960) (539) --
-------- -------- --------
(6,404) (3,597) --
-------- -------- --------
Total (benefit) provision for income taxes $(6,404) $(3,153) $ 3
======== ======== ========
The (benefit) provision for income taxes differs from the amount of tax
determined by applying the federal statutory rate to pretax earnings (loss). The
components of this difference consist of the following for the years ended
December 31:
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Provision (benefit) on earnings (loss) at federal statutory tax rate $ 2,460 $ 2,000 $(4,301)
State tax provision (benefit), net of federal tax effect ........... 430 343 (706)
(Decrease) increase in valuation allowance ......................... (6,404) (8,065) 5,729
Alternative minimum tax ............................................ -- 441 --
Timing differences on deductible expenses .......................... (2,890) 1,299 --
Other .............................................................. -- 829 (719)
-------- -------- --------
Total (benefit) provision for income taxes ............ $(6,404) $(3,153) $ 3
======== ======== ========
Deferred taxes result from the recognition of the income tax benefit to
be derived from the Company's net operating loss carry-forward for income tax
purposes. Significant components of the Company's deferred income taxes are as
follows as of December 31:
2002 2001
--------- ---------
(IN THOUSANDS)
Deferred income tax assets:
Provisions not currently deductible $ -- $ 2,890
State income taxes ..................... -- 1,130
Net operating loss carry forward .. 11,107 10,996
Other ............................. -- 340
--------- ---------
Net deferred tax assets ................ 11,107 15,356
Valuation allowance .................... (1,107) (11,759)
--------- ---------
Total net deferred tax asset ......... 10,000 3,597
Less: current portion ................ 3,000 1,776
--------- ---------
Long-term portion .................... $ 7,000 $ 1,821
========= =========
F-11
The Company recorded a benefit for income taxes at December 31, 2002 of
approximately $6.4 million, further reducing the related valuation allowance for
its deferred tax asset, as a result of the extension of the Target Agreement
through January 31, 2006, and the reevaluation of its forecasted operating
results and resultant taxable income during the extended term of the Target
Agreement, and the consequent expected utilization of available net operating
losses during the extended term of the Target Agreement. Based upon management's
discussion with Target prior to December 31, 2002, management considered it more
likely than not that Target would extend the agreement, as a result, the Company
has considered the projected taxable income from the Target Agreement and other
agreements in its estimate of deferred tax asset recoverability. As compared to
December 31, 2001, when the Company recorded a deferred benefit for income taxes
of approximately $3.6 million, reducing the related valuation of its allowance
for its deferred tax asset, as a result of the reevaluation of its forecasted
operating results and resultant taxable income which was limited to the initial
term and the estimated taxable income derived principally from the Target
Agreement, and the consequent utilization of available net operating losses only
during the initial term of the Target Agreement.
Management has concluded that future tax benefits beyond the extended
term of the Target Agreement are not considered to be "more likely than not" and
have therefore been reserved for in the Company's valuation allowance.
As of December 31, 2002, the Company has approximately $28 million, and
$18 million of federal and state income tax net operating loss carryforwards,
respectively, available to offset future taxable income, which expire in various
years through 2020.
In accordance with the Tax Reform Act of 1986, the benefits from net
operating losses carried forward may be impaired or limited in certain
circumstances. Events which may cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to a cumulative ownership change of more than 50 percent over a three-year
period. The impact of limitations, if any that may be imposed upon future
issuances of equity securities can not be determined at this time.
In addition to the Company's taxable income being subject to federal,
state and local income taxes, the Company may be classified as a "personal
holding company" from time to time. 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, as defined, being derived from royalties. Personal holding
companies are subject to an additional federal tax at the highest personal
income tax rate on undistributed after tax earnings.
Over 50 percent of the value of the Company's outstanding stock is
owned by one stockholder, and in 2002 and 2001, more than 60 percent of the
Company's income, as defined, was derived from license royalties. Accordingly,
the Company was classified as a personal holding company in 2002 and 2001.
However, no personal holding company tax was due in 2002 because the Company
recognized certain expenses for tax purposes in 2002 that had been recognized in
previous years for financial reporting purposes, and which offset the taxable
income subject to personal holding company tax in 2002. In addition, no personal
holding company taxes were due in 2001 because the Company was able to use its
tax operating loss carry forward to offset the taxable income subject to
personal holding company tax in 2001.
The Company intends to take appropriate measures to avoid being
classified as a personal holding company in future years. However, there can be
no assurance that the Company will be successful in its efforts to avoid
classification as a personal holding company in the future.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2002 2001
-------- --------
(IN THOUSANDS)
Furniture and fixtures .................. $ 294 $ 139
Leasehold improvements .................. 575 302
Equipment ............................... 160 782
-------- --------
1,029 1,223
Accumulated depreciation and amortization (421) (972)
-------- --------
$ 608 $ 251
======== ========
F-12
8. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering all full-time employees, and providing for
matching contributions by the Company, as defined in the plan. Contributions
made to the plan for the years ended December 31, 2002, 2001 and 2000 were
$3,100, $2,000, and $12,000, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its office and design studio under an operating
lease agreement effective through July 2005, providing for annual lease payments
of approximately $210,000 in 2003, $220,000 in 2004, and $130,000 in 2005. Prior
to 2001, the Company occupied larger facilities under a lease agreement that has
been terminated. Rent expense for the years ended December 31, 2002, 2001 and
2000 was $155,000, $105,000, and $731,000, respectively.
The Company has paid bonuses to substantially all employees in 2002 and
2001. The Company estimates and records the bonus amounts on a quarterly basis,
and bonuses are paid annually. All bonuses are discretionary and are principally
based on a combination of individual employee performance and the Company's
operating performance. The bonuses payable to the Chief Executive Officer and
the President are determined at the discretion of the Compensation Committee of
the Board of Directors, are subject to approval by the Board of Directors, and
can not exceed a formula based on a percentage of fees paid by Target to the
Company, as defined in the respective bonus plans of these two officers.
In May 2002, the Company made a demand for arbitration in connection
with a claim for overpayment of commissions paid to a third party who assisted
the Company in connection with entering into the initial agreement with Target.
The arbitration hearing was completed in October 2002. In November 2002, the
arbitration hearing panel issued a preliminary award in favor of the third
party, which became final in January 2003, and awarded the third party interest
on the past due commissions which had been withheld by the Company, and the
recovery of the third party's legal fees.
In accordance with the terms of the finder's agreement, the Company
recognized commission expense in the years ended December 31, 2002, 2001, and
2000 of approximately $2.7 million, $2.3 million, and $125,000, respectively. In
the fourth quarter of 2002, the Company recognized additional expenses in
connection with the cost of arbitration of approximately $600,000, which include
the accrued interest and legal fees awarded by the arbitrators to the third
party. No amounts have been paid to the third party as of December 31, 2002, the
total amount of approximately $2.9 million due under the arbitration award, has
been fully expensed in 2002, and is included as part of total current
liabilities in the accompanying balance sheet as of December 31, 2002. The cash
available for payment of the $2.9 million is not restricted, but has been
segregated from operating funds in a separate escrow account, and included as
part of the total cash, and cash equivalents balance in the accompanying balance
sheet as of December 31, 2002.
In January 2003, the Company filed a petition to vacate the award on
the basis that the evidence received during the arbitration hearing demonstrates
that the finder's agreement between the Company and the third party is illegal
under certain applicable California law. The Company could be liable for
additional legal fees and interest payable to the third party if the arbitration
award is not vacated. There can be no assurance that the award will be confirmed
or vacated.
10. STOCKHOLDERS' EQUITY (DEFICIT)
The Company adopted the Mossimo, Inc. 1995 Stock Option Plan (the "1995
Plan"), which provides for the grant of stock options, stock appreciation rights
and other stock awards to certain officers and key employees of the Company and
to certain advisors or consultants to the Company. A total of 1,500,000 shares
have been reserved for issuance under the 1995 Plan. The exercise price of
options granted under this plan, are based on the fair market value of the
common stock on the date of grant. Options granted under this plan vest and
terminate over various periods as defined by each option grant, and in
accordance with the plan, as amended. During 2002 the Company granted options
for 470,000 shares, with a weighted average fair value of $6.18 per share.
During the years ended December 31, 2002, 2001, and 2000 options for 125,000,
250,000, and 3,000 shares were exercised, respectively, at a weighted average
price of $3.74, $2.98, and $7.33 per share, respectively, with net proceeds to
the Company of $467,000, $744,000, and $22,000, respectively. As of December 31,
2002 there were options granted and outstanding for 847,000 shares, with an
exercise price in the range of $2.50 to $18.00 per share, of which options for
431,000 were fully vested and exercisable through 2012; and 278,000 shares were
available for future grants under the plan.
F-13
The Company's Non-Employee Directors Stock Option Plan (the "Directors
Plan") provides for the automatic grant to each of the Company's non-employee
directors of (i) an option to purchase 30,000 shares of common stock on the date
of such director's initial election or appointment to the Board of Directors and
(ii) an option to purchase 3,000 shares of common stock on each anniversary
thereof on which the director remains on the Board of Directors. A total of
250,000 shares have been reserved under the Directors Plan. The exercise price
of options granted under this plan, are based on the fair market value of the
common stock on the date of grant. During 2002, the Company granted options for
39,000 shares, with a weighted average fair value of $6.18 per share. During the
years ended December 31, 2002, options for 33,000 shares were exercised at a
weighted average price of $0.79 for net proceeds to the Company of $26,000. As
of December 31, 2002 there were options granted and outstanding for 145,000
shares, with an exercise price in the range of $0.88 to $25.38 per share, of
which options for 139,000 were fully vested and exercisable through 2012; and
69,000 shares were available for future grants under the plan.
The fair value of each option grant was estimated as of the grant date
using the Black-Scholes option-pricing model for the years ended December 31,
2002, 2001 and 2000, assuming risk-free interest rates of approximately 3.9
percent, 4.9 percent, and 6.55 percent, respectively; volatility of
approximately 80 percent, 125 percent, and 202 percent, respectively; zero
dividend yield; and expected lives of five years for all periods. In accordance
with APB Opinion No. 25, no compensation expense has been recognized related to
stock options granted with an option price at or above the fair market value of
the Company's stock.
If compensation expense was determined based on the fair value method
beginning with grants in the year ended December 31, 1996, the Company's net
earnings (loss) and net earnings (loss) per share would have resulted in the
approximate pro forma amounts indicated below for the years ended December 31,
2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
Actual net earnings (loss) ............. $ 13,665 $ 9,036 $ (12,288)
Less: Total compensation as if the
fair value method was used, net of
tax effect ........................... (1,788) (1,199) (1,178)
----------- ------------ -----------
Pro forma net earnings (loss) .......... $ 11,877 $ 7,837 $ (13,466)
=========== ============ ===========
Net earnings (loss) per share:
Basic - as reported ............... $ 0.89 $ 0.59 $ (0.81)
Basic - pro forma ................. $ 0.77 $ 0.51 $ (0.89)
Diluted - as reported ............. $ 0.87 $ 0.59 $ (0.81)
Diluted - pro forma ............... $ 0.76 $ 0.51 $ (0.89)
Outstanding stock options under the both Company plans are common stock
equivalents for the calculation of earnings per share. The reconciliation
between net earnings (loss) and weighted average shares outstanding for basic
and diluted earnings (loss) per share is as follows (all amounts in thousands,
except per share data):
2002 2001 2000
---- ---- ----
Net earnings (loss) ......................... $ 13,665 $ 9,036 $(12,288)
Weighted average shares outstanding - Basic . 15,409 15,254 15,080
Basic earnings (loss) per share ............. $ 0.89 $ 0.59 $ (0.81)
Add: Dilutive effect of stock options ....... 239 36 --
Weighted average shares outstanding - Diluted 15,648 15,290 15,080
Diluted earnings (loss) per share ........... $ 0.87 $ 0.59 $ (0.81)
For the year ended December 31, 2000, there was no dilution from
outstanding options due to net losses reported in 2000. Stock options excluded
from diluted weighted average shares outstanding for the years ended December
31, 2002, 2001 and 2000 were approximately 531,000, 557,000, and 1,120,000,
respectively, as they were antidilutive.
F-14
11. VALUATION AND QUALIFYING ACCOUNTS
Changes in the allowances for doubtful accounts, and for sales returns
and markdowns were as follows:
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- -------- ---------- ---------
Year ended December 31, 2002 - Note (a):
Allowance for doubtful accounts ......... $ 207 $ -- $ (207) $ --
Allowance for sales returns and markdowns 6,229 -- (6,229) --
Year ended December 31, 2001:
Allowance for doubtful accounts ......... $ 207 $ -- $ -- $ 207
Allowance for sales returns and markdowns 7,383 -- (1,154) 6,229
Year ended December 31, 2000:
Allowance for doubtful accounts ......... $ 587 $ -- $ (380) $ 207
Allowance for sales returns and markdowns 9,363 -- (1,980) 7,383
Note (a): Deductions reflect the write-off of accounts previously reserved.
12. UNAUDITED INTERIM FINANCIAL INFORMATION
The following tables set forth certain selected interim financial data
for the Company by quarter for the years ended December 31, 2002 and 2001.
YEAR ENDED DECEMBER 31, 2002
----------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues ............. $ 5,590 $ 7,404 $ 4,287 $ 2,600 $ 19,881
Earnings before income taxes 3,042 3,654 1,615 (1,050) 7,261
Benefit for income taxes ... -- -- -- (6,404) (6,404)
Net earnings ............... 3,042 3,654 1,615 5,354 13,665
Net earnings per share:
Basic .................. $ 0.20 $ 0.24 $ 0.10 $ 0.35 $ 0.89
Diluted ................ 0.20 0.23 0.10 0.34 0.87
YEAR ENDED DECEMBER 31, 2001
----------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues ............. $ 5,039 $ 5,118 $ 3,919 $ 2,590 $ 16,666
Earnings before income taxes 2,323 1,508 1,653 399 5,883
Benefit for income taxes ... -- -- -- (3,153) (3,153)
Net earnings ............... 2,323 1,508 1,653 3,552 9,036
Net earnings per share:
Basic and diluted ...... $ 0.15 $ 0.10 $ 0.11 $ 0.23 $ 0.59
F-15