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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 SEPTEMBER 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
COMMISSION FILE NUMBER: 1-14208
MOSSIMO, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0684524
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
2016 BROADWAY
SANTA MONICA, CALIFORNIA 90404
(Address of principal (Zip Code)
executive offices)
(310) 460-0040
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for any shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, par value 15,477,042
$.001 per share (Outstanding on October 28, 2002)
(Class)
Exhibit Index on Page 19
MOSSIMO, INC.
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - Financial Statements (Unaudited):
Condensed balance sheets as of September 30, 2002 and December 31, 2001....... 2
Condensed statements of earnings for the three and nine months
ended September 30, 2002 and 2001......................................... 3
Condensed statements of cash flows for the nine months
ended September 30, 2002 and 2001......................................... 4
Notes to condensed financial statements ...................................... 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 9
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk ...........14
ITEM 4 - Controls and Procedures .............................................14
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - Legal Proceedings ...................................................15
ITEM 4 - Submission of Matters to a Vote of Security Holders .................15
ITEM 6 - Exhibits and Reports on Form 8-K ....................................15
SIGNATURES ...................................................................16
CERTIFICATIONS ...............................................................17
INDEX TO EXHIBITS ............................................................19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOSSIMO, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
UNAUDITED
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash, and cash equivalents ................................... $ 8,360 $ 3,182
Accounts receivable .......................................... 2,657 1,958
Deferred taxes ............................................... 1,776 1,776
Prepaid expenses and other current assets .................... 295 118
------------ ------------
Total current assets ....................................... 13,088 7,034
PROPERTY AND EQUIPMENT, net .................................... 245 251
DEFERRED FINANCING COSTS, net .................................. 79 151
DEFERRED TAXES ................................................. 1,821 1,821
OTHER ASSETS ................................................... 48 37
------------ ------------
$ 15,281 $ 9,294
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Loan payable ................................................. $ 2,039 $ 4,000
Accounts payable ............................................. 754 2,755
Accrued liabilities .......................................... 450 762
Accrued commission ........................................... 2,308 246
Accrued bonuses .............................................. 1,343 613
------------ ------------
Total current liabilities ................................. 6,894 8,376
LOAN PAYABLE, net of current portion ........................... -- 817
LONG-TERM ACCOUNTS PAYABLE, net of current portion ............. 305 779
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
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 15,477,042 at September 30, 2002
and 15,330,042 at December 31, 2001 ........................ 15 15
Additional paid-in capital ................................... 38,753 38,304
Accumulated deficit .......................................... (30,686) (38,997)
------------ ------------
Net stockholders' equity (deficit) ......................... 8,082 (678)
------------ ------------
$ 15,281 $ 9,294
============ ============
See accompanying notes to condensed financial statements.
2
MOSSIMO, INC.
CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUE FROM LICENSE ROYALTIES
AND DESIGN SERVICE FEES ............... $ 4,287 $ 3,919 $ 17,281 $ 14,076
OPERATING EXPENSES:
Selling, general and administrative ... 2,797 2,541 8,890 8,474
--------- --------- --------- ---------
Operating earnings ........................ 1,490 1,378 8,391 5,602
OTHER INCOME (EXPENSE):
Other income, net ........................ 195 515 219 515
Interest expense, net .................... (70) (240) (299) (633)
--------- --------- --------- ---------
Earnings before income taxes .............. 1,615 1,653 8,311 5,484
Provision for income taxes ................ -- -- -- --
--------- --------- --------- ---------
Net earnings .............................. $ 1,615 $ 1,653 $ 8,311 $ 5,484
========= ========= ========= =========
Earnings per share:
Basic ................................. $ 0.10 $ 0.11 $ 0.54 $ 0.36
========= ========= ========= =========
Diluted ............................... $ 0.10 $ 0.11 $ 0.53 $ 0.36
========= ========= ========= =========
Weighted average common shares outstanding:
Basic ................................. 15,450 15,297 15,403 15,231
========= ========= ========= =========
Diluted ............................... 15,666 15,343 15,619 15,256
========= ========= ========= =========
See accompanying notes to condensed financial statements.
3
MOSSIMO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................... $ 8,311 $ 5,484
Adjustment to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization .......................... 161 195
Changes in:
Accounts receivable ................................ (699) (665)
Prepaid expenses and other current assets .......... (177) (660)
Other assets ....................................... (11) (55)
Accounts payable and long-term accounts payables ... (2,475) (1,232)
Accrued liabilities ................................ (312) (124)
Accrued bonuses .................................... 730 446
Deferred compensation .............................. -- (564)
Accrued commission ................................. 2,062 227
-------- --------
Net cash provided by operating activities ......... 7,590 3,052
-------- --------
CASH FLOWS FROM INVESTING ACTIVITITES:
Payments for acquisition of property and equipment ......... (83) (38)
-------- --------
Net cash used in investing activities .............. (83) (38)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of loan payable ................................... (2,778) (774)
Proceeds from issuance of common stock ..................... 449 744
-------- --------
Net cash used in financing activities ............... (2,329) (30)
-------- --------
NET INCREASE IN CASH ....................................... 5,178 2,984
CASH and CASH EQUIVALENTS, beginning of period ............. 3,182 50
-------- --------
CASH and CASH EQUIVALENTS, end of period ................... $ 8,360 $ 3,034
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............... $ 39 $ 619
======== ========
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 statement of the financial condition, results
of operations and cash flows for the periods presented. However, these results
are not necessarily indicative of results for any other interim period or for
the full year. The condensed balance sheet data presented herein for December
31, 2001 was derived from the Company's audited financial statements for the
year then ended, but does not include all disclosures required by generally
accepted accounting principles.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the Company to make certain estimates
and assumptions for the reporting periods covered by the financial statements.
These estimates and assumptions affect the reported amounts of assets,
liabilities, revenues and expenses. Actual amounts could differ from these
estimates.
Certain information and footnote disclosures normally included in annual
financial statements in accordance with generally accepted accounting principles
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes the disclosures included in the
accompanying interim condensed financial statements and notes thereto are
adequate to make the information not misleading, but should be read in
conjunction with the financial statements and notes thereto included in our
annual report on Form 10-K for the year ended December 31, 2001.
Certain reclassifications have been made in the 2001 condensed financial
statements to conform to the 2002 presentation.
2. DESCRIPTION OF BUSINESS
In March 2000, Mossimo, Inc. ("Mossimo" or the "Company") entered into a
multi-year licensing and design services agreement with Target Corporation
("Target"), subsequently amended in April 2002, herein after referred to as the
"Target Agreement". Under the terms of the Target Agreement, Target has the
exclusive license, for production and distribution through Target stores, of
substantially all Mossimo products sold in the United States, other than those
covered under other existing Mossimo licensing arrangements at the time the
Company entered into the Target Agreement.
Under the Target Agreement the Company provides design services and has
approval rights for product design and marketing and advertising materials.
Target collaborates on design and is responsible for product development,
sourcing, quality control and inventory management with respect to the Target
licensed product line. Target is obligated to pay the Company design service
fees and license royalty fees, with 55 percent of total fees representing
license royalty fees. Total fees payable by Target are based upon a percentage
of Target's net sales of Mossimo brand products, with minimum total guaranteed
fees of approximately $8.5 million, $9.6 million and $9.6 million payable in
each of the contract years ending January 31, 2002, 2003 and 2004, respectively.
Target fees are based on net sales achieved multiplied by a rate, as defined in
the Target Agreement. The Company pays 15 percent of certain payments received
from Target to a third party who assisted the Company in connection with
entering into the initial agreement with Target. The Target Agreement is subject
to early termination under certain circumstances. If Target is current with
payments of its obligations under the Target Agreement, Target has the right to
renew the Target Agreement, on the same terms and conditions, for additional
terms of two years each.
5
In addition to the Target Agreement, the Company also licenses its
trademarks and provides design services outside of the United States to third
parties, and also licenses its trademarks for use in collections of eyewear and
women's swimwear and body-wear sold in Target stores in the United States.
3. REVENUE RECOGNITION
Design service fees and license royalties under the Target Agreement are
recognized as Target records sales of the Company's products, and the Company's
fees and royalties are earned. Fees earned are payable on a quarterly basis at
rates ranging from four percent to one percent of Target's net sales of Mossimo
brand product. The Target Agreement provides for a declining fee and royalty
rate structure upon Target achieving certain levels of retail sales of Mossimo
branded products during each contract year (i.e. each twelve month period
beginning February 1). As a result, the Company's design service fees and
license royalty revenues from Target as a percentage of Target's retail sales of
Mossimo branded products will be highest at the beginning of each contract year
and decrease throughout each contract year as Target reaches certain retail
sales thresholds. Therefore, the amount of design service fees and license
royalty revenues recognized by the Company under the Target Agreement in any
reporting period is dependent not only on retail sales of branded products in
such period, but also on the cumulative level of retail sales for the contract
year, and the applicable rate, or combination of rates, during the reporting
period. As a result, revenue and net earnings derived from this agreement will
be significantly lower in the third and fourth quarter of the year.
Royalty revenues from other licensees are recognized as those licensees
achieve sales of the Company's products. Royalty payments are due on a quarterly
basis and range from two percent to seven percent of net sales.
During the three and nine months ended September 30, 2002 fees from Target
represented approximately 91 percent and 92 percent of the Company's total
revenue, respectively. During the three and nine months ended September 30, 2001
fees from Target represented approximately 92 percent and 93 percent of the
Company's total revenue, respectively.
4. EARNINGS PER SHARE
Earnings per share are computed by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share includes the effect of dilutive stock options, using
the treasury stock method. Stock options excluded from diluted weighted average
shares outstanding because they were anti-dilutive were approximately 551,000
for the three and nine months ended September 30, 2002, and approximately
492,000 and 562,000 for the three and nine months ended September 30, 2001,
respectively.
The reconciliation between net earnings and weighted average shares
outstanding for basic and diluted earnings per share is as follows (all amounts
in thousands, except share and per share data):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net earnings....................................... $ 1,615 $ 1,653 $ 8,311 $ 5,484
Weighted average shares outstanding - Basic........ 15,450 15,297 15,403 15,231
Basic earnings per share.......................... $ 0.10 $ 0.11 $ 0.54 $ 0.36
Add: Dilutive effect of stock options.............. 216 46 216 25
Weighted average shares outstanding - Diluted...... 15,666 15,343 15,619 15,256
Diluted earnings per share........................ $ 0.10 $ 0.11 $ 0.53 $ 0.36
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 $1 million
personal guaranty provided by the Company's Chairman of the Board and Chief
Executive Officer. The amount outstanding under the loan payable bears interest
at the bank's prime rate plus 1.5 percent. Payments on the loan are $1 million
per quarter through June 2003. The outstanding balance of the loan at September
30, 2002 was approximately $2 million.
6. TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109.
Deferred taxes result from temporary differences between the reporting of income
and losses for financial and tax reporting purposes and are provided for using
the liability method as prescribed by SFAS No. 109.
The Company recorded no tax provision on its pre-tax income in the three
and nine months ended September 30, 2002, as the current tax component of the
provision is offset by an equal reduction in the valuation allowance against
deferred tax benefits following the Company's reevaluation of its forecasted
operating results and resultant taxable income during the remaining term of the
Target Agreement, and the consequent utilization of available net operating
losses during the remaining term of the Target Agreement.
The Company recorded no tax expense in the three and nine months ended
September 30, 2001 as a result of the Company having available federal and state
net operating loss carry-forwards, and a full valuation allowance on the
Company's deferred tax assets at that date due to uncertainty regarding their
realization.
The Company was classified as a "personal holding company" in fiscal 2001.
Personal holding company status results from more than 50 percent of the value
of outstanding stock being owned directly or indirectly by five or fewer
individuals, and more than 60 percent of the Company's income being derived from
license royalties. Personal holding companies are subject to an additional
federal tax at the highest personal income tax rate (38.6 percent for 2002) on
undistributed after tax earnings. A personal holding company is able to use its
net operating loss, if any, for the immediately preceding year to offset its
income subject to the personal holding company tax. Consequently the Company had
no liability for personal holding company tax in 2001 as a result of its net
operating loss for 2000 being in excess of its undistributed after tax earnings
in 2001.
The Company is implementing strategies to avoid being classified as a
personal holding company in 2002 and beyond. No provision has been made in the
condensed financial statements for the personal holding company tax reflecting
the Company's position that it is more likely than not that it will not be
classified as a personal holding company in 2002.
The Company amended the Mossimo Giannulli Bonus Plan in July 2002 to
provide for quarterly discretionary bonuses to be determined by the Compensation
Committee of the Board of Directors, and subject to approval by the Board of
Directors. The discretionary bonuses are not to exceed the amounts that would
have been payable under the previous bonus formula. The July 2002 amendment was
approved by written consent of the Company's shareholders in October 2002. To
the extent that Mr. Giannulli receives compensation over $1 million in any
calendar year under the existing programs, the amount in excess of $1 million
would be deductible for tax purposes.
7
7. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible
Assets", and SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS
No. 141 addresses financial accounting and reporting for business combinations
and is effective for all business combinations after June 30, 2001. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and is effective for fiscal years beginning after December 15,
2001. SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after June
15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
is effective for fiscal years beginning after December 15, 2001.
The Company adopted SFAS No.'s 142 and 144 on January 1, 2002. The adoption
of these standards did not have a material impact on the Company's financial
position or results of operations.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes the operations of Mossimo, Inc. for each
of the periods discussed. This discussion and analysis should be read in
conjunction with the Company's financial statements for the year ended December
31, 2001 on our annual report on Form 10-K.
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
In March 2000, Mossimo, Inc. ("Mossimo" or the "Company") entered into a
multi-year licensing and design services agreement with Target Corporation
("Target"), subsequently amended in April 2002, herein after referred to as the
"Target Agreement". Under the terms of the Target Agreement, Target has the
exclusive license, for production and distribution through Target stores, of
substantially all Mossimo products sold in the United States, other than those
covered under other existing Mossimo licensing arrangements at the time the
Company entered into the Target Agreement.
Under the Target Agreement the Company provides design services and has
approval rights for product design and marketing and advertising materials.
Target collaborates on design and is responsible for product development,
sourcing, quality control and inventory management with respect to the Target
licensed product line. Target is obligated to pay the Company design service
fees and license royalty fees, with 55 percent of total fees representing
license royalty fees. Total fees payable by Target are based upon a percentage
of Target's net sales of Mossimo brand products, with minimum total guaranteed
fees of approximately $8.5 million, $9.6 million and $9.6 million payable in
each of the contract years ending January 31, 2002, 2003 and 2004, respectively.
Target fees are based on net sales achieved multiplied by a rate, as defined in
the Target Agreement. The Company pays 15 percent of certain payments received
from Target to a third party who assisted the Company in connection with
entering into the initial agreement with Target. The Target Agreement is subject
to early termination under certain circumstances. If Target is current with
payments of its obligations under the Target Agreement, Target has the right to
renew the Target Agreement, on the same terms and conditions, for additional
terms of two years each.
In addition to the Target Agreement, the Company licenses its trademarks
and provides design services outside of the United States to third parties, and
also licenses its trademarks for use in collections of eyewear and women's
swimwear and body-wear sold in Target stores in the United States.
In May 2002, the Company entered into an agreement with Hudson's Bay
Company whereby the Company will provide product design services, and has
licensed the Mossimo trademark to Hudson's Bay Company in Canada, in return for
license royalties and design fees. Hudson's Bay Company will collaborate on
product design, and will be responsible for manufacturing, importing, marketing,
advertising, selling and distributing merchandise bearing the Mossimo trademark.
The initial term of the licensing agreement is three years beginning in May
2002, with a five-year extension option. The Company is not anticipating to
recognize any material revenue from this agreement until 2003.
9
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
REVENUES
Design service fees and license royalties under the Target Agreement are
recognized as Target records sales of the Company's products, and the Company's
fees and royalties are earned. Fees and royalties earned are payable on a
quarterly basis at rates ranging from four percent to one percent of Target's
net sales of Mossimo brand product. The Target Agreement provides for a
declining fee rate structure upon Target achieving certain levels of retail
sales of Mossimo branded products during each contract year (i.e. each twelve
month period beginning February 1). As a result, the Company's design service
fees and license royalty revenues from Target as a percentage of Target's retail
sales of Mossimo branded products will be highest at the beginning of each
contract year and decrease throughout each contract year as Target reaches
certain retail sales thresholds. Therefore, the amount of design service fees
and license royalty revenues recognized by the Company under the Target
Agreement in any reporting period is dependent not only on retail sales of
branded products in such period, but also on the cumulative level of retail
sales for the contract year, and the applicable rate, or combination of rates,
during the reporting period. As a result, revenue and net earnings derived from
this agreement will be significantly lower in the third and fourth quarter of
the year.
Royalty revenues from the Company's other licensees are recognized as those
licensees achieve sales of the Company's products. Royalty payments are due on a
quarterly basis and range from two percent to seven percent of net sales.
Total revenue from license royalties and design service fees in the third
quarter of 2002 was approximately $4.3 million compared to approximately $3.9
million in the third quarter of 2001.
Design service fees and license royalties recognized under the Target
Agreement were approximately $3.9 million in the third quarter of 2002 as
compared to approximately $3.6 million in the third quarter of 2001, which
represents approximately an eight percent increase due principally to higher
sales at Target.
Royalties from licensees other than Target increased to approximately
$400,000 in the third quarter of 2002 from approximately $300,000 in the third
quarter of 2001, primarily due to approximately $90,000 earned on the execution
of a new agreement in Asia.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total operating expenses, comprising selling, general and administrative
expenses, increased to approximately $2.8 million in the third quarter of 2002
from approximately $2.5 million in the third quarter of 2001.
The Company's aggregate payroll costs were generally the same in the third
quarter of 2002 when compared to the third quarter of 2001. The reduction in the
bonus due to the Company's Chief Executive Officer in the third quarter of 2002
under the new discretionary bonus plan was offset by an increase in payroll
incurred as a result of the addition of new personnel and accrued employee
bonuses in 2002.
As of September 30, 2002, the Company had accrued unpaid bonuses in an
aggregate amount of approximately $1.3 million. Bonus expense of approximately
$713,000 was recognized in the three months ended September 30, 2002, and bonus
expense of approximately $2.2 million was recognized in the nine months ended
September 30, 2002. Total bonus expense of $821,000 was recognized in the three
months ended September 30, 2001, and bonus expense of approximately $3.2 million
was recognized in the nine months ended September 30, 2001.
Selling expenses increased to approximately $580,000 in the third
quarter of 2002 from approximately $544,000 in the third quarter of 2001.
Selling expenses comprise obligations due to a third party who assisted the
Company in connection with entering into the Target Agreement and who receives
15 percent of certain payments received by the Company from Target. The increase
over the prior year is directly related to the increase in revenue associated
with Target.
10
Travel expenses increased to approximately $225,000 in the third quarter of
2002 from approximately $40,000 in the third quarter of 2001. The increase was
due to additional travel activity in connection with the Target business, the
initial travel requirements to begin the implementation of the Company's new
design services and license agreement with Hudson's Bay Company in Canada, and
additional travel required by other business development activities.
Additionally, general and administrative expenses increased by
approximately $110,000 in the third quarter of 2002 as compared to the third
quarter of 2001, primarily due to expenditures directly related to increased
design activities, as well as legal and professional fees incurred during 2002.
OTHER INCOME, NET
The Company recorded other income of approximately $195,000 in the third
quarter of 2002, primarily from certain prepaid tax refund claims. The Company
recorded other income of approximately $515,000 in the third quarter of 2001,
primarily from the collection of disputed receivables.
INTEREST EXPENSE, NET
The Company incurred interest expense of approximately $70,000 in the third
quarter of 2002 compared to interest expense of approximately $240,000 in the
third quarter of 2001. The decrease was due primarily to a reduction of the
applicable variable interest rate, and reductions of the outstanding balance on
the loan payable to a bank.
INCOME TAXES
The Company recorded no tax provision on its pre-tax income in the three
months ended September 30, 2002, as the current tax component of the provision
is offset by an equal reduction in the valuation allowance against deferred tax
benefits following the Company's reevaluation of its forecasted operating
results and resultant taxable income during the remaining term of the Target
Agreement, and the consequent utilization of available net operating losses
during the remaining term of the Target Agreement.
The Company was classified as a "personal holding company" in fiscal 2001.
Personal holding company status results from more than 50 percent of the value
of outstanding stock being owned directly or indirectly by five or fewer
individuals, and more than 60 percent of the Company's income being derived from
license royalties. Personal holding companies are subject to an additional
federal tax at the highest personal income tax rate (38.6 percent for 2002) on
undistributed after tax earnings. A personal holding company is able to use its
net operating loss, if any, for the immediately preceding year to offset its
income subject to the personal holding company tax. Consequently the Company had
no liability for personal holding company tax in 2001 as a result of its net
operating loss for 2000 being in excess of its undistributed after tax earnings
in 2001.
The Company is implementing strategies to avoid being classified as a
personal holding company in 2002 and beyond. No provision has been made in the
condensed financial statements for the personal holding company tax reflecting
the Company's position that it is more likely than not that it will not be
classified as a personal holding company in 2002 .
The Company recorded no tax expense in the three months ended September 30,
2001 as a result of the Company having available federal and state net operating
loss carry-forwards and a full valuation allowance on the Company's deferred tax
assets at that date due to uncertainty regarding their realization.
NET EARNINGS
The Company's net earnings for the third quarter of 2002 were approximately
$1.6 million compared to net earnings of approximately $1.7 million for the
third quarter of 2001 due to all of the factors discussed above.
11
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
REVENUES
Total revenue from license royalties and design service fees for the nine
months ended September 30, 2002 were approximately $17.3 million compared to
approximately $14.1 million in the same period of 2001.
Design service fees and license royalties recognized under the Target
Agreement were approximately $16 million in 2002 as compared to approximately
$13 million in 2001, and included approximately $1.5 million of revenue
recognized in 2002 which had been deferred during the initial contract period
ended January 31, 2001 pending the results of a royalty audit, the
reconciliation and settlement of accounts between the Company and Target, and
the assessment of the underlying deferred revenue reserves, all of which was
completed during the second quarter of 2002. The provisions that resulted in the
deferral of revenue by the Company are not expected to recur. The increase of
approximately $1.5 million in normal business between 2002 and 2001 represents
approximately a eleven percent increase due to the growth of Target sales of
Mossimo branded product.
Royalties from licensees other than Target increased to approximately $1.3
million in 2002 from approximately $1.1 million in 2001, primarily due to
approximately $180,000 earned on the execution of new agreements in Asia.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total operating expenses, comprising selling, general and administrative
expenses, increased to approximately $8.9 million in the nine months ended 2002
from approximately $8.5 million in 2001.
The Company's aggregate payroll costs decreased to approximately $4 million
in 2002 from approximately $4.7 million in 2001. The decrease was primarily due
to a reduction in the bonus due to the Company's Chief Executive Officer in 2002
under the new discretionary bonus plan, partially offset by an increase in
payroll incurred as a result of the addition of new personnel and accrued
employee bonuses in 2002.
Selling expenses increased to approximately $2.4 million in 2002 from
approximately $2 million in 2001. Selling expenses comprise obligations due to a
third party who assisted the Company in connection with entering into the Target
Agreement and who receives 15 percent of certain payments received by the
Company from Target. The increase over the prior year in directly related to the
increase in the Company's business with Target.
Travel expenses increased to approximately $511,000 in 2002 from
approximately $127,000 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 $325,000 in 2002 as compared to 2001, primarily due to
expenditures directly related to increased design activities, as well as legal,
professional and filing fees incurred during 2002, including the cost of
initiating the company's listing on NASDAQ in April 2002.
OTHER INCOME, NET
The Company recorded other income of approximately $219,000 in the nine
month period ended September 30, 2002, composed primarily of certain prepaid tax
refund claims recognized in the third quarter of 2002. The Company recorded
other income of approximately $515,000 in the nine month period ended September
30, 2001, which was composed of the collection of disputed receivables
recognized in third quarter 2001.
INTEREST EXPENSE, NET
The Company incurred interest expense of approximately $299,000 in 2002
compared to interest expense of approximately $633,000 in 2001. The decrease was
due primarily to a reduction in the applicable variable interest rate, and
reductions of the outstanding balance of the loan payable to a bank.
12
INCOME TAXES
The Company recorded no tax provision on its pre-tax income in the nine
months ended September 30, 2002, as available current tax component of the
provision is offset by an equal deferred tax benefit necessary following the
Company's reevaluation of its forecasted operating results and resultant taxable
income during the remaining term of the Target Agreement, and the consequent
utilization of available net operating losses during the remaining term of the
Target Agreement.
The Company was classified as a "personal holding company" in fiscal 2001,
and the Company is implementing strategies to avoid being classified as a
personal holding company in 2002 and beyond. No provision has been made in the
condensed financial statements for the personal holding company tax, as further
discussed above.
The Company recorded no tax expense in the nine months ended September 30,
2001 as a result of the Company having available federal and state net operating
loss carry-forwards and a full valuation allowance on the Company's deferred tax
assets at that date due to uncertainty regarding their realization.
NET EARNINGS
The Company's net earnings for the nine months ended 2002 were
approximately $8.3 million compared to net earnings of approximately $5.5
million for 2001 due to all of the factors discussed above. In the second
quarter of 2002, the Company recognized approximately $1.5 of revenue which had
been previously deferred as further discussed above. The recognition of the
deferred revenue resulted in an increase of approximately $600,000 in net
earnings for the nine months ended 2002. This item is not expected to recur.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $7.6 million
for the nine months ended September 30, 2002 as compared to $3.1 million for the
nine month ended September 30, 2001. Cash provided by operating activities
primarily includes net earnings of approximately $8.3 million and an increase in
accrued commissions of approximately $2 million, offset by an increase in
accounts receivable of approximately $700,000, and a combined net decrease in
accounts payable and accrued liabilities and bonuses of approximately $2.1
million. At September 30, 2002, working capital was approximately $6.2 million,
compared to negative working capital of approximately $1.3 million at December
31, 2001. The increase in working capital is primarily due to increases in cash
balances and accounts receivable, as well as reductions of bank debt and
accounts payable balances, partially offset by an increase in accrued commission
and accrued bonuses, all of which were driven by increased revenues,
profitability and cash flow.
Net cash used in investing activities was approximately $83,000 for the
nine months ended September 30, 2002 and was all used for the acquisition of
property and equipment.
Net cash used in financing activities was approximately $2.3 million
for the nine months ended September 30, 2002, and was primarily used to repay
the loan payable to a bank, partially offset by proceeds from the sale of common
stock upon the exercise of stock options.
In 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 an initial term of three years which expires
in July 2005.
The Company expects that its principal source of liquidity during the
remaining term of the Target Agreement will be its net operating cash flows. The
Company believes that its available cash balances at September 30, 2002 and its
expected net operating cash flows during the remaining term of the Target
Agreement will be adequate to meet the Company's currently anticipated liquidity
needs through January 31, 2004, at which time the initial term of the Target
Agreement expires. If Target is current with payments of its obligations under
the Target Agreement, Target has the right to renew the Target Agreement, on the
same terms and conditions, for additional terms of two years each by giving the
Company a one year notice of renewal. The first notice of renewal is due in
January 2003.
From time to time, the Company also considers a number of different
financing alternatives, including the issuance of equity securities, debt
instruments and equity securities, as sources of liquidity.
13
FORWARD LOOKING INFORMATION
This report on Form 10-Q contains certain forward-looking statements within
the meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on the beliefs of
the Company's management as well as assumptions made by and information
currently available to the Company's management. The words "anticipate",
"believe", "may", "estimate", "plan", "expect", "future", "intend", "will",
"should", "continue" and similar expressions, variations of such terms or the
negative of such terms as they relate to the Company or its management when used
in this document, are intended to identify such forward-looking statements. Such
statements are based on management's current expectations and are subject to
certain risks, uncertainties and assumptions. Should one or more risks or
uncertainties materialize, or should underlying assumptions prove incorrect, the
Company's actual results, performance or achievements could differ materially
from those expressed in, or implied by such forward-looking statements. The
Company's future operations, financial performance, business and share price may
be affected by a number of factors, including a termination or adverse
modification of the Company's license relationships, especially its relationship
with Target and performance under the Target licensing and design services
agreement, changes in consumer demands and preferences, competition from other
lines, risks generally associated with product introductions and shifting trends
in the overall retail and apparel retailing markets and the other factors
described in "Business-Risk Factors." in the Company's annual report on Form
10-K for the year ended December 31, 2001. Accordingly, undue reliance should
not be placed on these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in variable
interest rates on its loan payable to a bank. Changes in interest rates for
variable rate debt generally do not influence fair market value, but do affect
future earnings and cash flows. Holding the variable rate debt balance constant,
a one percent increase in interest rates occurring on October 1, 2002 would
result in an increase in interest expense for the following twelve months of
approximately $20,000.
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.
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 satisfactory in connection with the preparation of this 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.
14
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In May 2002, the Company made a demand for arbitration in connection with
a claim for overpayment of fees paid to a third party who assisted the Company
in connection with entering into the initial agreement with Target. The claim is
disputed by the third party. If the Company prevails, it may be entitled to
recover from the third party certain fees paid, and reduce fees payable in the
future. The Company has recognized expenses and has accrued the related
liability to the third party in accordance with the terms of the existing
agreement and consistent with prior periods. However, the Company is withholding
payment of any amounts due to the third party pending the results of the
arbitration. The third party has a counter demand in the arbitration proceeding
against the Company for what they claim are the sums due and owing under the
agreement. The arbitration hearing was completed in October 2002, and the
parties are awaiting a decision from the arbitration hearing panel.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not applicable.
(b) Not applicable.
(c) Amendment No. 1 to the Mossimo Giannulli Bonus Plan was approved
on September 30, 2002 by a consent of stockholders representing
10,372,222 shares, or 75 percent of the total voting shares as of
September 15, 2002, the record date.
(d) Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Amendment Number One to the Mossimo Giannulli Employment
Agreement, dated September 23, 2002
Amendment Number Two to the Edwin Lewis Bonus Plan, dated
September 23, 2002
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act
Of 2002
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act
Of 2002
(b) Reports on Form 8-K
Not applicable.
15
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 30th day of October 2002.
MOSSIMO, INC.
/s/ Mossimo Giannulli
-------------------------------------
Mossimo Giannulli
President and Chief Executive Officer
/s/ Manuel Marrero
-------------------------------------
Manuel Marrero
Chief Financial Officer
16
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
October 30, 2002
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
October 30, 2002
INDEX TO EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.1 Amendment Number One to the Mossimo Giannulli Employment Agreement,
dated September 23, 2002
10.2 Amendment Number Two to the Edwin Lewis Bonus Plan, dated September 23,
2002
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