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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
COMMISSION FILE NUMBER: 1-14208
MOSSIMO, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0684524
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
2016 BROADWAY
SANTA MONICA, CALIFORNIA 90404
(Address of principal (Zip Code)
executive offices)
(310) 460-0040
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for any shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as determined by Exchange Act Rule 12b-2). Yes [ ] No [X]
As of April 30, 2003, 15,493,442 shares of the registrant's Common
Stock, $0.001 par value, were outstanding.
MOSSIMO, INC. AND SUBSIDIARY
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - Financial Statements (Unaudited):
Condensed balance sheets as of March 31, 2003 and December 31, 2002.......... 2
Condensed statements of earnings for the three months
ended March 31, 2003 and 2002............................................ 3
Condensed statements of cash flows for the three months
ended March 31, 2003 and 2002............................................ 4
Notes to condensed financial statements ..................................... 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 11
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk .......... 16
ITEM 4 - Controls and Procedures ............................................ 16
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings .................................................. 17
ITEM 6 - Exhibits and Reports on Form 8-K ................................... 17
SIGNATURES .................................................................. 18
CERTIFICATIONS .............................................................. 19
INDEX TO EXHIBITS ........................................................... 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOSSIMO, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
UNAUDITED
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 5,674 $ 7,786
Accounts receivable .......................................... 5,209 1,926
Deferred income taxes ........................................ 3,000 3,000
Prepaid expenses and other current assets .................... 479 124
------------ ------------
Total current assets ....................................... 14,362 12,836
PROPERTY AND EQUIPMENT, net .................................... 589 608
DEFERRED INCOME TAXES .......................................... 6,070 7,000
OTHER ASSETS ................................................... 68 92
------------ ------------
$ 21,089 $ 20,536
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable ................................................. $ 93 $ 1,066
Accounts payable ............................................. 802 741
Accrued liabilities .......................................... 1,033 1,332
Accrued commission ........................................... 3,444 2,661
Accrued bonuses .............................................. 736 1,065
------------ ------------
Total current liabilities .................................. 6,108 6,865
------------ ------------
LONG-TERM ACCOUNTS PAYABLE, net of current portion ............. 76 191
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
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 15,493,442 at March 31, 2003
and 15,488,042 at December 31, 2002 ........................ 15 15
Additional paid-in capital ................................... 38,824 38,797
Accumulated deficit .......................................... (23,934) (25,332)
------------ ------------
Net stockholders' equity ................................... 14,905 13,480
------------ ------------
$ 21,089 $ 20,536
============ ============
See accompanying notes to condensed financial statements.
2
MOSSIMO, INC.
CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
FOR THE THREE MONTHS
ENDED MARCH 31,
2003 2002
---------- ----------
REVENUE FROM LICENSE ROYALTIES AND
DESIGN SERVICE FEES ......................... $ 5,868 $ 5,590
OPERATING EXPENSES:
Selling, general and administrative .......... 3,526 2,427
---------- ----------
Operating earnings ............................... 2,342 3,163
OTHER EXPENSE:
Interest expense, net ........................ 14 121
---------- ----------
Earnings before income taxes ..................... 2,328 3,042
Provision for income taxes ....................... 930 --
---------- ----------
Net earnings ..................................... $ 1,398 $ 3,042
========== ==========
Net earnings per common share:
Basic ........................................ $ 0.09 $ 0.20
========== ==========
Diluted ...................................... $ 0.09 $ 0.20
========== ==========
Weighted average common shares outstanding:
Basic ........................................ 15,491 15,339
========== ==========
Diluted ...................................... 15,657 15,567
========== ==========
See accompanying notes to condensed financial statements.
3
MOSSIMO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ................................................................. $ 1,398 $ 3,042
Adjustment to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization ............................................ 74 52
Deferred income taxes .................................................... 930 --
Changes in:
Accounts receivable .................................................. (3,283) (3,087)
Prepaid expenses and other current assets ............................ (355) (295)
Other assets ......................................................... 24 (13)
Accounts payable and long-term accounts payable ...................... (54) (268)
Accrued liabilities .................................................. (299) (155)
Accrued commission ................................................... 783 446
Accrued bonuses ...................................................... (329) (110)
------------ ------------
Net cash used in operating activities ................................ (1,111) (388)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition of property and equipment ........................... (55) (5)
------------ ------------
Net cash used in investing activities ................................ (55) (5)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of loan payable ..................................................... (973) (929)
Proceeds from issuance of common stock ....................................... 27 56
------------ ------------
Net cash used in financing activities ................................ (946) (873)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................... (2,112) (1,266)
CASH and CASH EQUIVALENTS, beginning of period ............................... 7,786 3,182
------------ ------------
CASH and CASH EQUIVALENTS, end of period ..................................... $ 5,674 $ 1,916
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ................................. $ 27 $ 95
============ ============
See accompanying notes to condensed financial statements.
4
MOSSIMO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The condensed financial statements presented herein have not been
audited by independent public accountants, but include all material adjustments
(consisting of normal recurring adjustments), which are, in the opinion of
management, necessary for a fair presentation of the financial condition,
results of operations and cash flows for the periods presented. However, these
results are not necessarily indicative of results for any other interim period
or for the full fiscal year. The condensed balance sheet data presented herein
for December 31, 2002 was derived from the Company's audited financial
statements for the year then ended, but does not include all disclosures
required by generally accepted accounting principles.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the Company to make certain estimates
and assumptions for the reporting periods covered by the financial statements.
These estimates and assumptions affect the reported amounts of assets,
liabilities, revenues and expenses. Actual amounts could differ from these
estimates.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting principles
have been omitted pursuant to the Regulations of the Securities and Exchange
Commission. The Company believes the disclosures included in the accompanying
interim condensed financial statements and notes thereto are adequate to make
the information not misleading, but should be read in conjunction with the
financial statements and notes thereto included in our Form 10-K for the fiscal
year ended December 31, 2002.
2. DESCRIPTION OF BUSINESS
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 and in
February 2003, 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. 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 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.
5
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 collaborates
on product design, and is 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. Hudson's Bay Company
fully launched the Mossimo product in mid-March 2003 for distribution through
its Zellers stores in Canada.
3. 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. During the periods presented herein, a substantial
amount of the Company's revenue from license royalties and design fees were
generated under the Target Agreement under a rate that declines as the contract
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 beginning on February 1. Revenue
recognized in the first and second quarters of the Company's calendar year in
connection with the Target Agreement is significantly higher than in the third
and fourth quarters of the Company's calendar year due to the declining rates in
the Target Agreement. 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.
4. BONUS PLANS
The Company has bonus plans covering two executive officers which are
administered by the Compensation Committee of the Board of Directors, and that
provide for discretionary bonuses based on the Company's overall performance,
with the total amount of the bonuses not to exceed a percent of the excess over
the minimum total guaranteed fees, if any, of license royalties paid to the
Company under the Target Agreement, and as defined in each of the respective
bonus plans. The Company has accrued approximately $571,000 and $556,000 under
these agreements for the three month periods ended March 31, 2003 and 2002,
respectively.
6
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 personal
guaranty from the Company's Chief Executive Officer, and bears interest at the
bank's prime rate plus 1.5 percent. The outstanding balance of the loan at March
31, 2003 was approximately $93,000, which represents the remaining accrued
interest due in June 2003.
6. 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.
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 and, 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.
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 beginning in 2003, which expire in various years
through 2020. The Company recorded a provision for income taxes of $930,000 for
the three month period ended March 31, 2003, which approximates the Company's
combined statutory tax rate for federal taxes and California state taxes, and
reduced its deferred tax asset accordingly. At March 31, 2003, the total
deferred tax asset was approximately $9 million, with $3 million classified as
current in the accompanying balance sheet.
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 it is anticipated that in 2003, no more than 60
percent of the Company's income, as defined, would be derived from license
royalties. Accordingly, at this time the Company is not anticipated to be
classified as a personal holding company at the end of 2003. The Company intends
to continue to take appropriate measures to avoid being classified as a personal
holding company at the end of 2003 and beyond. However, there can be no
assurance that the Company will be successful in its efforts to avoid
classification as a personal holding company at the end of 2003 or in future
years.
7
7. EARNINGS PER SHARE AND STOCK OPTION PLANS
The Company calculates net earnings per share in accordance with SFAS
No. 128, "Earnings Per Share". This statement requires the presentation of both
basic and diluted net earnings per share. Basic net earnings per share is
computed by dividing net earnings 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. Stock options excluded from
diluted weighted average shares outstanding for the three months ended March
31, 2003 and 2002 were 601,000 and 92,000, respectively, as they were
antidilutive.
The reconciliation between net earnings and weighted average shares
outstanding for basic and diluted earnings per share is as follows (amounts in
thousands, except per share data):
For the Three Months
Ended March 31,
-----------------------
2003 2002
---------- ----------
Net earnings......................................... $ 1,398 $ 3,042
Weighted average shares outstanding - Basic.......... 15,491 15,339
Basic earnings per share............................. $ 0.09 $ 0.20
Add: Dilutive effect of stock options................ 166 228
Weighted average shares outstanding - Diluted........ 15,657 15,567
Diluted earnings per share........................... $ 0.09 $ 0.20
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. In addition, the Company
adopted a Non-Employee Directors Stock Option Plan (the "Directors Plan") that
provides for the grant of stock options to non-employee directors.
The fair value of each option grant was estimated as of the grant date
using the Black-Scholes option-pricing model for the periods ended March 31,
2003 and 2002, assuming risk-free interest rates in the range of approximately
4.0 to 6.5 percent; volatility in the range of approximately 80 to 202 percent;
zero dividend yield; and expected lives of five years. 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.
8
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 and net earnings per share would have resulted in the approximate pro
forma amounts indicated below for the three month periods ended March 31, 2003,
and 2002 (in thousands, except per share data):
2003 2002
---------- ----------
Actual net earnings............................... $ 1,398 $ 3,042
Less: Total compensation as if the fair value
method was used, net of tax effect............. (130) (327)
---------- ----------
Pro forma net earnings............................ $ 1,268 $ 2,715
========== ==========
Net earnings per share:
Basic - as reported ......................... $ 0.09 $ 0.20
Basic - pro forma............................ $ 0.08 $ 0.18
Diluted - as reported........................ $ 0.09 $ 0.20
Diluted - pro forma.......................... $ 0.08 $ 0.17
8. 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.
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 a material impact on the Company's financial
position or results of operations.
9
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 No. 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 to the fair value method of
accounting, and has made the required disclosures of the pro-forma effect for
the periods presented herein.
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 prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003, and management anticipates that its application
will not have a material impact on the Company's financial position and results
of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes the operations of Mossimo, Inc. for
each of the periods discussed. This discussion and analysis should be read in
conjunction with the Company's financial statements for the year ended December
31, 2002 on our annual report on Form 10-K.
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
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 and in
February 2003, 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. 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 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 collaborates
on product design, and is 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. Hudson's Bay Company
fully launched the Mossimo product in mid-March 2003 for distribution through
its Zellers stores in Canada.
11
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
REVENUES
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 the period presented herein, a substantial amount
of the Company's revenue from license royalties and design fees were generated
under the Target Agreement under a rate that declines as the contract 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 beginning on February 1. Revenue recognized in
the first and second quarters of the Company's calendar year in connection with
the Target Agreement is significantly higher than in the third and fourth
quarters of the Company's calendar year due to the declining rates in the Target
Agreement. 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.
Total revenue from license royalties and design service fees in the
first quarter of 2003 were $5.9 million compared to $5.6 million in the first
quarter of 2002.
Design service fees and royalties recognized under the Target Agreement
were $5.2 million in the first quarter of 2003 compared to $5.1 million in the
first quarter of 2002. The two percent increase reflects modest growth of Target
sales of Mossimo branded product. Royalties and design service fees from
customers other than Target increased to $651,000 in the first quarter of 2003
from $442,000 in the first quarter of 2002. The increase was primarily due to
the full launch of the Mossimo product in Canada in mid-March 2003, under the
agreement with Hudson's Bay Company for distribution thru Zellers stores, and
increased royalties from a licensee in Asia. The Company's revenues generated
under the Target Agreement are expected to increase as Target adds new stores
and the Company continues to maximize its opportunities with Target, and the new
Zellers business in Canada is also expected to increase revenues as the Company
begins to maximize its opportunities with Zellers, having recently completed the
full launch of its product line.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total operating expenses, comprising primarily of selling, general and
administrative expenses, increased to $3.5 million in the first quarter of 2003
from $2.4 million in the first quarter of 2002. Selling, general and
administrative expenses were approximately 60 percent of total revenues in 2003,
as compared to approximately 43 percent of total revenues in 2002. Operating
expenses as a percent of revenues is expected to decrease in the future, as the
Company's revenues generated under the Target Agreement are expected to increase
as Target adds new stores and the Company continues to maximize its
opportunities with Target, and the new Zellers business in Canada is also
expected to increase revenues as the Company begins to maximize its
opportunities with Zellers, having recently completed the full launch of its
product line in mid-March 2003.
Selling expenses, comprised of commissions due to a third party who
assisted the Company in connection with entering into the initial agreement with
Target, increased to approximately $783,000 in 2003 from approximately $769,000
in 2002, due to the increase in revenue from Target.
12
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. The aggregate payroll costs increased by
approximately $650,000 in 2003, primarily due to increases in design personnel.
The aggregate payroll costs include accrued bonuses of $571,000 in 2003, and
$556,000 in 2002, which are payable under bonus plans covering two executive
officers of the Company. Facility expenses also increased by approximately
$80,000 to accommodate the additional personnel. At the beginning of 2003 the
Company had 21 employees, as compared to 8 employees at approximately the same
time in the previous year. The added personnel is expected to better service the
Target business, while also implementing the new Zellers business in Canada,
maximizing the potential of each of the respective businesses, as well as
strengthening the Company's infrastructure for the future.
Expenses for travel, purchased services, and artwork incurred in
connection with the design process increased by approximately $225,000 in 2003,
primarily due to increased activity in connection with the Target business, as
well as the implementation of the new Zellers business in Canada.
Operating expenses in 2003 also include approximately $74,000 of
accrued costs in connection with a legal dispute pending final resolution. There
were no expenses incurred in connection with this legal dispute during first
quarter of 2002. At March 31, 2003, the Company has expensed and accrued all
commissions due under the agreement in dispute, as well as legal fees and
interest awarded to the third party in arbitration, plus additional interest
that might be due and payable on the past due amounts in the event the
arbitrators' award and the related amounts are confirmed by the courts. The
Company has also deposited approximately $3 million into a separate Company bank
account as of March 31, 2003, pending a final resolution of this legal dispute
which is further discussed in Part II, Item I - Legal Proceedings in this
quarterly report.
INTEREST EXPENSE, NET
The Company incurred net interest expense in 2003 of $14,000, compared
to $121,000 in 2002. The decrease was due to a reduction in the Company's
outstanding balance of a loan payable to a bank and increases in interest
income.
INCOME TAXES
The Company recorded no tax provision on its pre-tax earnings in the
first quarter of 2002, as any current tax component of the provision would have
been offset by an equal deferred tax benefit, pending the Company's reevaluation
of the allowance for its deferred tax asset. As of December 31, 2002, the
Company completed the reevaluation, and reported a total deferred tax asset of
$10 million. In the first quarter of 2003, the Company recorded a provision for
income taxes of $930,000, which approximates the Company's combined statutory
tax rate for federal and California state taxes, and reduced its deferred tax
asset accordingly.
The Company has approximately $28 million, and $18 million of federal
and state income tax net operating loss carry-forwards, respectively, available
to offset taxable income beginning in 2003, which expire in various years
through 2020. At March 31, 2003, the total deferred tax asset was approximately
$9 million, with $3 million classified with current assets. The Company expects
that taxable income will be offset in the near-term, for the most part, by its
net operating tax loss carry-forwards.
13
NET EARNINGS
The Company's net earnings for the first quarter of 2003 was $1.4
million, or $0.09 per diluted share, compared to net earnings of $3.0 million,
or $0.20 per diluted share for the first quarter of 2002 due to the factors
discussed above. Comparable pre-tax net earnings per diluted share were $0.15 in
2003, and $0.20 in 2002. As further discussed above, the Company's effective tax
rate for the first quarter of 2002 was zero which is not comparable to the
effective tax rate of 40 percent in the first quarter of 2003. As a result, the
incremental tax expense recorded in the first quarter of 2003 was $930,000, or
$0.06 per diluted share. The Company's taxable income is expected to be offset
in the near-term, for the most part, by its net operating tax loss
carry-forwards.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $1.1 million
for the first quarter of 2003. Cash used in operating activities primarily
includes $1.4 million provided by net earnings, plus deferred income taxes of
$930,000 and increases in accrued commission of $783,000; net of increases in
accounts receivable of approximately $3.3 million and net changes in various
other assets and liabilities in an aggregate amount of approximately $900,000.
At March 31, 2003, the cash balance was approximately $5.7 million, as compared
to $7.8 million at December 31, 2002. The decrease of approximately $2.1
million is primarily due to the normal lag in the collection of accounts
receivable, while the payment of operating expenses is relatively fixed during
the year. At March 31, 2003, working capital was approximately $8.3 million, as
compared to approximately $6.0 million at December 31, 2002. The increase in
working capital is primarily due to the impact of pre-tax net earnings
recognized in the first quarter of 2003.
Net cash used in investing activities was $55,000 in the first quarter
of 2003 and was principally used to complete the facilities accommodating
additional staff.
Net cash used in financing activities was $946,000 in the first quarter
of 2003, and was primarily due to payments made on the loan payable to a bank,
partially offset by proceeds from the sale of common stock upon the exercise of
stock options. The Company anticipates paying in full the loan payable to a bank
in June 2003.
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 March 31, 2003
and its expected net operating cash flows from operations during 2003 will be
adequate to meet the Company's anticipated liquidity needs in 2003, including
settlement payments that may be required upon the final resolution of an award
for a claim of approximately $3 million, plus additional accrued commissions,
interest, and other costs, as further described under Part II, Item 1 - Legal
Proceedings in this quarterly report.
14
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 or as consideration for potential
acquisitions.
FORWARD LOOKING INFORMATION
This report on Form 10-Q contains certain forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. The words
"anticipate", "believe", "may", "estimate", "plan", "expect", "future",
"intend", "will", "should", "continue" and similar expressions, variations of
such terms or the negative of such terms as they relate to the Company or its
management when used in this document, are intended to identify such
forward-looking statements. Such statements are based on management's current
expectations and are subject to certain risks, uncertainties and assumptions.
Should one or more risks or uncertainties materialize, or should underlying
assumptions prove incorrect, the Company's actual results, performance or
achievements could differ materially from those expressed in, or implied by such
forward-looking statements. The Company's future operations, financial
performance, business and share price may be affected by a number of factors,
including a termination or adverse modification of the Company's relationships
under its licensing and design service agreements, especially its relationship
with Target and performance under the Target licensing and design services
agreement, changes in consumer demands and preferences, competition from other
lines, risks generally associated with product introductions and shifting trends
in the overall retail and apparel retailing markets, and the other factors
described in "Business-Risk Factors." in the Company's Form 10-K filing for the
year ending December 31, 2002. Accordingly, undue reliance should not be placed
on these forward-looking statements.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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.
ITEM 4. 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-Q quarterly 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.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2002, the Company made a demand for arbitration in connection
with a claim for overpayment of 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. In January 2003, the Company deposited the total
amount of $2,934,688 due under the award into a separate Company bank account,
and 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. The Company continues to accrue
estimated commissions and interest that may be payable to the third party until
this matter comes to a final resolution.
The Company is involved in certain other legal and administrative
proceedings and threatened legal and administrative proceedings from time to
time in the normal course of business. While the outcome of such proceedings and
threatened proceedings can not be predicted with certainty, in the opinion of
management, the ultimate resolution of these matters individually or in the
aggregate are not expected to have a material adverse effect on the Company's
business as a whole.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
10.1 - Amendment No. Two dated March 18, 2002 to Amended and
Restated Employment Agreement Between Mossimo Giannulli and
Mossimo, Inc.
10.2 - Consent to Assignment and Amendment Dated February 2, 2003
Between Mossimo, Inc. and Target Stores Pertaining to the
License Agreement Dated as of March 28, 2000.
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.
(b) Reports on Form 8-K
Not applicable.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 14th day of May 2003.
MOSSIMO, INC.
/s/ MOSSIMO GIANNULLI
------------------------------------
Mossimo Giannulli
Chairman and Chief Executive Officer
/s/ MANUEL MARRERO
------------------------------------
Manuel Marrero
Chief Financial Officer
18
CERTIFICATIONS
I, Mossimo Giannulli, Chairman and Chief Executive Officer of the Company,
certify that:
(1) I have reviewed this quarterly report of Mossimo, Inc. on Form
10-Q (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 registrant'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 registrant'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
May 14, 2003
19
I, Manuel Marrero, Chief Financial Officer of the Company, certify that:
(1) I have reviewed this quarterly report of Mossimo, Inc. on Form
10-Q (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 registrant'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 registrant'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
May 14, 2003
20
INDEX TO EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.1 Amendment No. Two dated March 18, 2002 to Amended and Restated
Employment Agreement Between Mossimo Giannulli and Mossimo,
Inc.
10.2 Consent to Assignment and Amendment Dated February 2, 2003
Between Mossimo Inc. and Target Stores Pertaining to the
License Agreement Dated as of March 28, 2000.
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.
21